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Yujing Liu

Deb Price

Good day, traders.
Markets in China were up, boosted by a sudden passion for rare earth-linked stocks, but Hong Kong struggled. 
Catch up on the day's action below, including the eye-watering 108 per cent gain by Hong Kong-traded China Rare Earth Holdings. Please send any questions you have to deb.price@scmp.com .
-- Yujing Liu and Deb Price in Hong Kong


Stocks Blog: China markets gain while Hong Kong slides in trade war storm 

Photo: Shutterstock

A pedestrian walks past the Bund Bull statue in Shanghai on October 24, 2018. Photo: Bloomberg 


China’s Xiaomi pushes global smartphone expansion as it monitors US trade ban on Huawei

Business

Markets

Economy

Shoppers try Xiaomi smartphones at its flagship retail store in Santiago, Chile. Photo: Xinhua

A customer uses the first Mi Express Kiosk in Bangalore, India, on May 17, 2019. Photo: Xinhua

Report of 5G commercial use launch in October pushes up ZTE, telecom sector
Hong Kong investors chase after rare-earth highflyer


Rare earth stock defies gravity in Hong Kong -- closes up 108 per cent


Stocks

China stock market

Hong Kong Stock Exchange

China economy

Live

Here's what we are watching this morning:
Overnight markets/ What futures foretell
-- Overnight in US markets, The S&P 500 fell 0.7 per cent, The Nasdaq Composite declined 1.5 per cent, and the Dow Jones Industrial Average was 0.3 per cent lower. Chipmakers and Chinese companies listed in the US led the decline, weighed down by the Trump administration’s restrictions on Chinese telecom giant Huawei Technologies.
-- Hong Kong futures are down 0.6 per cent at 27,450, while the China A50 futures dropped 0.8 per cent to 12572.5.
IPO debuts:
--Trading of Medialink Group (2230 HK), which licenses overseas animation and movies to stream in Hong Kong, will start today.
--  Xi’an Triangle Defense (300775 SZ), a producer of aviation and aerospace equipment parts, will trade for the first time in Shenzhen.
Economic statistics/Central Bank action:
 
The inaugural session of the International Forum on Free Trade Zones Development will convene today and tomorrow in Haikou, Hainan province in southern China. Hosted by the Hainan government and a national trade-promoting group, the conference aims to explore how China could better develop free-trade zones.
Corporate events: earnings, meetings, news conferences:
 
Shijiazhuang Pharma Group (1093 HK) will release first-quarter results.
Good reads: Xiaomi on Monday after market close reported a net profit of 3.2 billion yuan (US$462 million) in the quarter ended March, rebounding from a 7 billion yuan loss in the same period last year, on the back of steady handset shipment growth overseas as well as increased sales at its internet of things (IoT) and lifestyle business, reports Yingzhi Yang. Chinese state-owned developer Beijing Capital Land (2868 HK) reported a 70.6 per cent surge in cumulative contracted sales to 18.8 billion yuan (US$2.7 billion) for the first four months of 2019, on the back of a switch to a strategy of fast turnovers, reports Lam Ka-sing.
 


Morning guidance 

Xiaomi (1810 HK) on Monday reported a net profit of 3.2 billion yuan (US$462 million) in the quarter ended March, rebounding from a 7 billion yuan loss in the same period last year, on the back of steady handset shipment growth overseas as well as increased sales at its internet of things (IoT) and lifestyle business, reports Yingzhi Yang.
The Hong Kong-listed company posted better-than-expected revenue in the first quarter, up 27.2 per cent to 43.8 billion yuan from 34.4 billion yuan a year ago. That beat analysts’ consensus estimate of 42 billion yuan.
Its shares were down 2.6 per cent to HK$9.89 at the close of trading on Monday, representing about a 40 per cent decline from the price of its initial public offering in June last year.
Full story here.
 


Xiaomi beats estimates, with Q1 net profit of US$462 million 

Analysts are taking a fresh look at AAC Technologies (2018 HK). 
HSBC upgraded the Shenzhen-based miniaturised components maker to hold from reduce, and boosted the price target to HK$37.40 from $33.70.
Bocom International raised it to neutral from sell, with a price target of HK$45.
Meanwhile, Jefferies raised it to buy from hold, with a price target of HK$56, up from HK$45.
On Friday, AAC reported its first quarter revenue fell 19.1 per cent year-on-year to 3.75 billion yuan, while net profit dropped 61.6 per cent year-on-year to 432 million yuan.
Bloomberg Intelligence notes that AAC's profit recovery may be curbed by the US move to blacklist Huawei, a major AAC customer. 
"Huawei's potential loss of access to popular applications such as Google Play and Gmail could hurt its smartphone shipments, especially in the higher end segment, which AAC focuses on supplying," BI wrote in a note Monday. "The biggest earnings growth driver for AAC could be stepper motor modules for pop-up cameras."
Of analysts covering the stock, 15 have a buy on it, 14 a hold and eight a sell. The consensus 12-month target price is HK$48.59, or 12.6 per cent from its Monday close. 
-- Deb Price 


AAC Technologies sees upgrades 

Chinese oil and natural gas giant Cnooc (883 HK) has been reinstated at Daiwa Securities with an outperform rating.
Daiwai set the price target at HK$15.70, which would be 15 per cent above its Monday close.
Of analysts tracked by Bloomberg, 18 call it a buy, seven a hold and none a sell. The consensus price target is HK$16.20, or 18.5 per cent above Monday's close.
-- Deb Price 
 


Cnooc to outperform, says Daiwa Securities

Chinese oil and natural gas producer and supplier Kunlun Energy (135 HK) is a new buy at BOCOM International Holdings.
Its price target was set at HK10.40, or 41 per cent above its last close. 
Of analysts tracked by Bloomberg, 17 call it a buy, three a hold and one a sell, with a consensus target price of HK$10.24, or 38 per cent above its last close.
-- Deb Price 
 


Kunlun Energy new buy at BOCOM

Xinyi Glass Holdings (868 HK) is a new hold at Hua Tai Securities.
The Chinese company is a leader in glass production for automobiles, construction and households. Hua Tai gave it a price target of HK$8.80. 
Xinyi is potentially a long-term winner in the glass industry, Hua Tai wrote in a note Monday. But its growth will be hindered by "a deteriorating glass industry supply-demand dynamic coupled with US-China trade dispute." 
Risks include weaker-than-expected home sales and stricter-than-expected environmental policy, the note said. 
-- Deb Price
 


Xinyi Glass new hold at Hua Tai Securities 

Ren Zhengfei, the chief executive and founder of Huawei Technologies, said the 90-day delay of some restrictions imposed by the US government “doesn’t mean much” to the telecom giant because it “was already prepared”, the state broadcaster reported.
In a latest interview after the US Department of Commerce temporarily allowed Huawei to purchase American-made goods to maintain existing services, Ren said, “the US politicians have underestimated our power”.“Huawei’s 5G plans will be absolutely unaffected, because other companies won’t be able to catch up on 5G technology in at least to two three years,” the state broadcaster quoted him as saying.
-- Yujing Liu 


Huawei’s 5G development will not be affected by US restrictions, founder says

Chinese smartphone and home appliance maker Xiaomi Corp (1810 HK) jumped as much as 3.7 per cent in early trading, after it posted better-than-expected earnings for the first quarter.
Xiaomi’s net profit increased 22 per cent year-on-year to 2.1 billion yuan (US$303 million), and total revenue surged 27 per cent to 43.8 billion yuan.
Xiaomi’s smartphone shipment ranked the fourth in the world during the first quarter, according to market research firm Canalys.
-- Yujing Liu 


Xiaomi jumps on upbeat first-quarter results

Companies that make magnetic materials from rare earth elements surged in early trading, extending their gains from yesterday, as a company visit by President Xi Jinping brought the critical industry back into the spotlight.
China is the world’s largest producer and consumer of rare earths, and its exports supply about 80 per cent of the global demand. Rare earths are a group of 17 elements that are crucial to the production of hi-tech products. Rare-earth magnets are used in electric cars, earphones, and hard drives in computers, among other things.
Xi visited yesterday JL Mag Rare-Earth (300748 SZ), a producer based in the southeastern province of Jiangxi, which stoked speculation that China may consider cutting its rare earth exports to the US as a way to retaliate in the trade war.
When asked about it, China’s foreign ministry spokesman Lu Kang said it was common for state leaders to go on site visits and the public shouldn’t “overthink” about it.
A gauge tracking 38 companies related to rare earths rose 1.5 per cent. JL Mag and Taiyuan Twin Tower Aluminum Oxide (000795 SZ) jumped by the daily limit of 10 per cent for a second day today.
-- Yujing Liu


Rare earth stocks soar for a second day as talks of trade retaliation emerge after Xi’s trip

Amid surging enthusiasm and speculation on rare earth stocks, one Hong Kong-listed company stood out.
China Rare Earth (0769 HK) skyrocketed by 30 per cent to HK$0.48 in the latest trading. Shares listed in Hong Kong are not subjective to a cap on the daily maximum percentage movement like those listed in mainland China are.
-- Yujing Liu 


Hong Kong investors chase after rare-earth highflyer

Major mainland Chinese benchmarks rebounded in early trading after opening lower.
The Shanghai Composite Index rose 0.5 per cent to 2884.54 in latest trading, while the Shenzhen Component Index was up 0.7 per cent. The ChiNext Index also increased 0.7 per cent.
A surge in rare earth stocks led the advance, while poultry stocks also surged as investors bet on rising prices of chicken, which is a substitute for pork. China is experiencing an unprecedented pork shortage caused by the African swine flu.
In Hong Kong, the Hang Seng Index fell 0.4 per cent to 27,670.28, tracking the steep losses recorded in the overnight US markets.
-- Yujing Liu


China stocks gain while Hong Kong continues to slip in early trading

The Shenzhen Stock Exchange asked Shenzhen MYS Environmental Protection & Technology (002303 SZ), a producer of packaging, to clarify its recent plan to set up a joint venture to invest in industrial hemp cultivation. It made the request in an inquiry letter issued today.
Shenzhen MYS announced last week it was prepared to partner with a farming company to invest 500 million yuan (US$72 million) in growing industrial hemp in the southern province of Yunnan. The liberalisation of hemp cannabis cultivation has become one of the hottest concepts for Chinese investors to speculate on this year, leading to massive share price surges and frequent inquiries from stock exchanges.
The Shenzhen Stock Exchange asked the company to clarify the potential risk of the plan and its legality. It also asked whether the company intended to inflate stock prices, after its largest and the second-largest shareholders announced plans to reduce stakes last month.
Shares of Shenzhen MYS rose 1.4 per cent to 5.76 yuan in the latest trading.
-- Yujing Liu 


Another company draws regulators’ attention with plans to expand into industrial hemp farming

China is the innovator to watch, as the government pushes research and development, writes  Stephen Dover, head of equities at Franklin Templeton.
He notes that its rapid improvements in production of lithium-ion batteries have rocketed China into the world's largest electric vehicle market. And government policies favouring the development of novel drugs over generics are a boost to the pharmaceutical sector.
"[Such policies] have encouraged local companies to scale up R&D expenditures. This could sow the seed for a pipeline of groundbreaking treatments from Chinese drug makers," he wrote in a note emailed out today.
Given the escalation in the US-China trade war, which even if resolved will leave long-term geo-political tensions, he recommends that investors take a longer term view on China.
"Notwithstanding the tough line that the Trump administration is taking on trade, we think the outlook for China may be more positive than markets are suggesting.
"While many observers fear a slowdown in China’s rate of economic growth, it’s important to keep in mind just how big its economy is, and how many tools the government there has to stimulate it," he writes.
"Already this year there have been signs that the trade tensions with the United States were helping to focus the minds of policymakers and corporate leaders in China, prompting tax cuts and other fiscal liberalisation measures," he added.
He recommends that investors continue to buy equities because corporate and economic fundamentals are generally strong.
"We view market volatility as a buying opportunity because we take a long-term view as investors," he writes.
-- Deb Price 
 
 


 Crystal Ball: China is 'the innovator to watch,' says Stephen Dover 

Telecom stocks including equipment suppliers to Huawei Technologies surged in China, after founder Ren Zhengfei voiced confidence in the company under escalating pressure from the US.
A gauge tracking 64 companies related to Huawei rose 2.2 per cent. ArcherMind Technology (300598 SZ), a software developer that has long-term partnership with Huawei, surged by the daily limit of 10 per cent. DBG Technology Co (300735 SZ), an electronics manufacturer service provider to Huawei, climbed 7.5 per cent.
In an on-going interview with Chinese media, Ren said he had foreseen the targeting of Huawei by the US government.
“We sacrificed ourselves and our families because we have the dream of standing on the top of the world. For this dream, we will clash with the US sooner or later,” he was quoted as saying by Chinese media.
Ren said he thought in the beginning of this year that the US government’s crackdown may come in two years, and Huawei had sufficient time to prepare for it. But the arrest of his daughter Meng Wanzhou in Canada made Ren realize that the clash may have come early, he said.
-- Yujing Liu 


Confident remarks by Huawei's Ren boost telecom stocks

Telecom equipment giant ZTE Corp (000063 SZ; 0763 HK) advanced by 5.1 per cent in Shenzhen and 3.7 per cent in Hong Kong, after a media report cited its company official saying that China will start commercial use of 5G nationwide on October 1.
China Daily reported last week Michael Gao Wenhao, a senior manager at ZTE, told a conference in Hong Kong that China’s three major network operators will each deploy 30,000 to 50,000 base stations in some 40 cities. The launch of the commercial use of 5G is to celebrate the 70th anniversary of the People's Republic of China, he said.
ZTE said in a social media post on its official Weibo account that the company did not make such remarks and there was misunderstanding in communication.
Telecom stocks climbed broadly. A gauge tracking 125 telecom companies rose 2.4 per cent, with five stocks surging by the daily limit of 10 per cent, including Fujian Start Group (600734 SH) and Eastern Communications (600776 SH).
-- Yujing Liu 


Report of 5G commercial use launch in October pushes up ZTE, telecom sector

The Shanghai Composite Index extended gains by the lunch break, rising 1.5 per cent to 2914.22. The Shenzhen Component Index surged 2.1 per cent, and the ChiNext Index was up 2 per cent.
Rare earth stocks, which received a boost from a company visit by President Xi Jinping Monday, led the advance. Meanwhile, Huawei founder Ren Zhengfei’s confident remarks lifted investors’ hopes for telecom firms.
In Hong Kong, the Hang Seng Index recouped early losses and edged up 0.2 per cent to 27,848.79.
China Rare Earth (0769 HK) skyrocketed by 57 per cent to HK$0.58 in the latest trading.
-- Yujing Liu 


China markets gaining after confidence boost from Xi, Huawei

The People's Bank of China (PBOC) offered 80 billion yuan (US$11.6 billion/HK$91 billion) of seven-day funding today in a sale of reverse repos, according to a Bloomberg report, citing traders.
The injection of fresh liquidity -- the biggest single-day infusion in more than a month -- follows tightened money supply and financing in the world's second-largest economy in April, and may go some way toward quenching the thirst of companies desperate for funding to survive the US-China trade war.
So far, stocks on the Shanghai and Shenzhen exchanges are cheering the move, and Hong Kong is following suit.
-- Eugene Tang 


PBOC injects fresh liquidity, boosting markets  

Chinese insurers are benefiting from Beijing’s deleveraging drive, as a scarcity of long-term funds helps them seal commercial property deals, Zheng Yangpeng  reports.
Chinese commercial banks’ funding of the property sector has been clipped by the central government’s debt-reduction campaign, which has given insurers an upper hand when it comes to premier assets.
China Life Capital Investment, the property investment arm of insurance giant China Life Insurance, is among the beneficiaries.
“In the old days, some commercial banks used short-term funds to invest in property projects that usually required five-year or more investment cycles. The new asset-management rules [since 2018] have banned such duration mismatches. That has left insurers, specifically life insurers, as literally the only funding source without such a mismatch,” Yang Yu, China Life Capital’s managing director, said in an interview. The company has more than 75 billion yuan (US$10.8 billion) in assets under management.
Read full story here.


Chinese insurers sealing property deals amid deleveraging drive 

Enthusiasm in a certain rare earth stock in Hong Kong is going wild.
Gains in China Rare Earth (0769 HK), which produces and sells rare earth oxides, widened to a jaw-dropping 130 per cent in afternoon trading, boosting its market value to HK$1.9 billion. Shares were traded at HK$0.85 the latest.
The company posted a net loss of HK$5.4 million during last year, narrowing from HK$82 million in the year before.
Universal Star Holdings (2346 HK), a producer of rare-earth magnets, also surged 24 per cent.
Rare earth stocks were also shooting up on the mainland.
A gauge tracking 38 rare earth-related stocks in mainland China rose 7 per cent.
As many as 13 rare-earth stocks listed in Shanghai and Shenzhen advanced by the daily limit of 10 per cent.

 
-- Yujing Liu 
 


Rare earth stock defies gravity in Hong Kong -- up 130 per cent

Medialink Group (2230), which licenses overseas animation to stream in Hong Kong, dropped 20 per cent to HK$0.36 from its initial public offering price of HK$0.45 in the latest trading.
Meanwhile, Xi’an Triangle Defense (300775 SZ), a producer of aviation and aerospace equipment parts, surged 44 per cent to trade at 8.51 yuan from its IPO price of 5.91 yuan.
-- Yujing Liu 


Xi'an Triangle surges while Medialink Group drops in trading debuts 

CSPC Pharmaceutical Group (1093 HK), a Chinese drug maker based in the northern province of Hebei, fell 0.6 per cent after its first-quarter earnings fell short of market expectations.

Net income rose 29 per cent to HK$1.11 billion, slightly below the consensus estimate of HK$1.13, according to a Reuters poll.
-- Yujing Liu 


CSPC drops on weak 1Q results

Rare earth elements could be a point of leverage that China may deploy against the United States as the trade war between the world’s two largest economies escalates, Chad Bray reports.
The Trump administration has threatened to place tariffs on the imports of Chinese-produced rare earths several times in the past year, but has so far left them off any tariff lists, given their uses from Apple iPhones to hi-tech missile guidance systems.
The US was the world’s largest producer of rare earths for decades, until the 1980s. Since the Chinese government undertook a concerted effort to exploit the country’s reserves of rare earths - mined and processed in Inner Mongolia, Jiangxi, Shandong, Sichuan, Guangdong, Fujian, Hunan, Yunnan and Guangxi - China has accounted for more than 90 per cent of the world’s production, according to the US Geological Survey.
China is, by far, the largest exporter to the US, the source of 59 per cent of the US$155 million in rare earths that America imported last year, according to the US International Trade Commission’s data.
Read full Explainer here. 
 
 


Does China’s dominance in rare earths hold potential leverage in trade war?

Chinese stocks maintained their gains by the market close, powered by a rapid advance in rare earth stocks.
The Shanghai Composite Index rose 1.2 per cent to 2905.97. The Shenzhen Component Index climbed 1.9 per cent, and the ChiNext Index was up 1.7 per cent. The CSI 300 of large companies increased 1.4 per cent.
Trading volume reached 480 billion yuan (US$69 billion), slightly higher than the 462 billion yuan achieved on Monday.
Foreign funds recorded net outflow for a fourth straight session, as investors sold a net 3.4 billion yuan worth of shares through the Stock Connect programme.
(Read an explainer on rare earths here.)
-- Yujing Liu 


Rare earth stocks lift China markets

The cautious and risk-averse sentiment in Hong Kong’s market is likely to make the Hang Seng Index swing within the range of 27,000 and 29,000 for the coming weeks, said Kevin Leung, executive director of investment strategy at Haitong International Securities.
“It really depends on how long [the deadlock in the US-China trade negotiation] continues,” he said, adding that Hong Kong and China stocks remain attractive in terms of their valuation levels.
The Hang Seng Index closed 0.5 per cent lower at 27,657.24 today. Gains in the mainland Chinese markets failed to push up Hong Kong stocks, as A-share trading was more driven by momentum instead of fundamentals, Leung said.
The Hong Kong benchmark has lost 8 per cent since an April high. But, despite recent losses, it is up 7 per cent in 2019. 
-- Yujing Liu 
