Tag Archives: Hang seng

Hong Kong Indexes in Free Fall

While US markets turned positive yesterday, Hong Kong did not follow but diverged as its major indexes and constituents continued a sequential decline.

Hong Kong Indexes

The Hang Seng, HSI, has had 5 straight days of decline.  The Hang Seng Enterprises Index, declining for 3 days, has entered correction territory at over 10% below its recent high.

The 10 stocks showing the worst weekly drop in the Hang Seng, from 9.7% to 17.24% stocks come from a wide range of sectors, but were dominated by mainland developers including Country Garden, 2007 hk, China Resource Land, 1109 hk and China Overseas, 688 hk. The fall was felt in all sectors, however, as 41 of its 50 members declined at the last close.

Hang Seng Decliners


data source: AAstocks

The Hang Seng Enterprises, which has now corrected with an over 10% drop, has been dominated by securities companies and banks.  However, the pain was widespread as the last close saw 39 of its 40 members decline.

HSCEI decliners

data source: AA stocks

In the U.S., the increased volatility and major Monday drop was generally blamed on inflation fears and rate increase expectations.  In the past, Asian markets have often followed the U.S.  However, as China has grown as an economic power, ranked just behind the U.S., the decline may be more indicative of potential weakness in China growth versus reactions to the U.S. market.

Up until this week, both the Hang Seng and the Hang Seng Enterprises Index had been among the best performers year to date.  This made them ripe for  a correction.  Whether there are other reasons under this decline, remains to be seen.  Slowing car sales, slowing cellphone sales, financial crackdowns, pollution enforcement, heavy debt loads, slowing residential construction, may finally be negatively impacting the economy despite continued projections of growth of over 6% by the government.


Hang Seng Enterprise Index Expanding, Adding Tencent.

The Hang Seng Enterprises Index, or HSCEI, will be dramatically growing from 40 to 50 stocks; eliminating one while adding 11 others.  Since the additions include red-chips, and P-chips, it will shed its H-share index moniker.  This is the first increase since 2010.

Red chips are mainland-based companies incorporated internationally and listed in Hong Kong, while P-chips are private Chinese enterprises controlled by mainland individuals.

While the number of stocks will increase by only 25%, the market cap combined holdings will more than double, based on the last share closing prices.  The large increase is primarily due to Tencent, 700hk and China Mobile, 941hk.

HSCEI Changes

The additions will diversify the finance-heavy index, with technology company Tencent representing the largest by market cap for the reformed index.

The HSCEI dropped over 5% today, along with most Asian indexes, following the US widespread record-breaking market drop on Monday.  Both the HSCEI and the HSI, have been among the top international index performers over the last 12 months.

HSI HSCEI Performance

The additions are to be phased in, starting March 5, 2018, as announced earlier.

HSCEI phase-in

Per the announcement,  a A Hang Seng H-Share Index will be launched covering the 40 H shares in the HSCEI to cater for market interest in such a benchmark.




Li Ka-Shing Digging Down Under

Three of 88 year old billionaires Li Ka-Shing’s companies approved a Joint Venture to buy Australia’s energy utility company, Duet, DUE ASX for $7.4 AUD ($5.5 USD).   The purchase, originally announced in November with a price rise in December, had already been approved by the Duet board but still has to get past Australian regulators. The involved companies are as follows: CKPH, 1113 HK, CKI, 1038 HK, PAH, 6 HK and Duet, DUE ASX.

Li Ka Shing Duet

Although Li Ka-Shing, his son and trust ownership had to abstain, given the percentage owned it’s not surprising the vote passed close to 100% for all three.

Li Ka Shing Ownership

Source: HK filing

The December 2016 offer of 3.00 AUD per share,  quickly bumped up the stock from its prior close of $2.35 to $2.71 and eventually to a peak of $2.92, but has since slid downward, with its year to date performance lagging that of the ASX 200.

Despite Li Ka-Shing’s assertions that the deal will pass the Foreign Investment Review Board, FIRB, his recent rejection to purchase a majority share in Ausgrid, owned by the New South Wales government, weighs on the stock price of DUE.

duet DUE stock

Stock Symbol DUE; Bloomberg

As to the Hong Kong stocks involved, only CKPH, the property holding stock, has come close to matching the Hang Seng’s rise.  For an interesting take on this, read the Bloomberg gadfly article.

Hong Kong and Mainland Stocks Continue to Rise

Thanks to Morgan Stanley and Goldman Sachs bullish notes on China, the Hang Seng and Shanghai composite continued their positive runs.  Goldman cited China economic growth as well as Xi’s incentive to keep things going well prior to the  19th Communist Party Congress in the fourth quarter of 2017.


Data Source: Bloomberg

Practically all sectors were go for the Hang Seng, from banks to developers to consumer stocks.  The top 20 were as follows:


Data Source:  aastocks.com

Most Hang Seng stocks were up, with only 5 of the bottom 10 performers in negative territory.


Data source: aastocks.com


Index Changes HSI and HSCEI: In with the New, Out with the Old

Old Timers Li & Fung, 494 HK and Tsingtao Brewery, 168 HK  will be booted out of Hong Kong Indexes due to poor performance and or international dealings.  They’ll be replaced by home-grown Geely, 175 HK,  and infant IPO Postal Savings Bank, 1658 HK, favoring made in China and SOE investments, respectively.  The stock performance and market caps give a clue to the underlying reason but don’t explain it all.


Data Source: Bloomberg

The mature, 50-member Hang Seng Index, HSI, loses Li & Fung, a member since 2000, as its profits and core earnings continue to drop.  It’s last reported interim statement showed a gross revenue drop of 6.4% and a core profit drop of 14.2%.  Li and Fung, a Wal-Mart and Marks and Spencer supplier, most recently reported getting 62% of its sales coming from the US.  It’s being replaced by Made In China and Sold in China: Geely Auto.  As Li and Fung’s stock has dropped, Geely has shot upwards, helping it achieve a market cap 3 times the size of veteran Li and Fung.  Geely’s sales climbed 50% in 2016, fueled by a 50% drop in the sales tax on cars with less than 1.6 liter engines.  While Geely’s annual sales climbed 50%, it reported on January 6, 2017 a preliminary profit climb of over 100%.


Geely has apparently kept the pedal to the metal with January year on year sales reported at an   annual increase of 71% although down 5.15% from December.  This increase is astounding, with the Lunar New Year starting in 2017 on Jan. 28 vs. 2016 in Feb. and Ford and GM both reporting yoy China drops of 24% and 32%, respectively, from HK filings.


As Home town Geely replaces exporter Li and Fung; Tsingtao Brewery, the first China incorporated  H-listed stock in history, is being removed from the younger Hang Seng China Enterprises Index, HSCEI; to be replaced by recent IPO Postal Savings Bank.  Tsingtao has faced declining sales; its last reported revenue drop of 5.3%.  However, perhaps more importantly, it has also been hit by rumors that Asahi Breweries of Japan is hoping to dump its 19.99% ownership interest. (The majority-holder of Tsingtao is Qingdao SASAC).  An index removal could reflect the  dissatisfaction of the effects of outside interests on Chinese companies.

The possible rationale for replacing Tsingtao  with Postal Savings Bank is more difficult  to explain than Geely replacing Li and Fung.  While Geely has been climbing, Postal Savings Bank has actually declined in price since its September IPO.  It’s first half report for 2016 was uninspiring, with loans increasing but net interest margin dropping significantly and a low core ratio.  It’s non-performing loan ratio of .78 is difficult to believe as world behemoth China’s Industrial and Commercial Bank,  1398 HK, ICBC, reported a npl ratio of 1.55 for the first ½ of 2016.  In the first half, ICBC had a capital adequacy ratio of 13.11 vs.  Postal Savings Bank’s first half CAR of 10.04% .

Postal Savings Bank had a less than spectacular IPO, heavily dependent upon its mostly majority state-owned cornerstone investors, which purchased over 75% of the offering.

Postal Cornerstone.PNG



Source: HK filings

*Acquisition Loans “may be” financed by SOE China Banks: China Construction Bank, 939 hk, Bank of Communications, 3328 hk, and Agricultural Bank of China, 1288 HK.
**One of 4 asset management firms set up in the 1990’s to deal with bad debt, related to the big 4 banks.  China Great Wall was linked with Agricultural Bank of China.

Rather than a strictly index-related move, the inclusion of Postal Bank could be more to the aid of those cornerstone investors,  which would face an expiration of their 6-month lock-up period close to the time of the index inclusion.  Whether this will give Postal the boost it needs remains to be seen.






Tingyi Profit Plunges: Worst in Class

Tingyi Profit

Noodles and beverage seller Tingyi, 322 hk, reported a whopping 67% decline in net profit for the 1st half of 2016.  Other consumer food and beverage companies posted declines but none as extreme as Tingyi and the 2nd quarter looked even worse.

Tingyi 1st half 2nd q

Tingyi blamed the decline on overall China weakness and severe flooding.  Tingyi was expected to benefit from Shanghai Disney’s opening in June thanks to its exclusive Pepsi relationship there.  Since the opening was mid June, it’s too soon to know the impact.  However, it would take an enormous contribution to reverse the declining trends in revenue and profits from its beverage division.

Other companies concentrated in China and Hong Kong beverages and foods have seen drops in revenue and profit, but nothing as severe as Tingyi.  Swire Pacific,19 HK, with Coke manufacturing facilities in China, Hong Kong and Taiwan showed a profit decline in these areas of 14% with a combined profit decline of 37%.  As seen below, mainland China was the hardest hit.  Swire doesn’t see a turnaround in that market in the near future.

Tingyi Swire Pac 1st half

While Swire shared a major decline in beverages, Want Want, 151 HK and  Uni-President 220, hk were much less hard hit. Despite the drop in revenue in beverages, Want Want eked out a profit increase thanks to lower input costs.  90% of Want Want’s beverage business is from “Hot Kid Milk”, which had a 17% revenue decline but was helped by a decline in powdered milk.  The company stated that besides market weakness, consumers were switching to options such as room temperature yogurt drinks.

Tingyi Want Want 1st Half

Tingyi Uni Pres

Uni-President saw  a much lower decline in revenues from beverages than Tingyi and also managed a profit increase in that segment.  In total contrast to Tingyi, its noodle sales saw a revenue and profit increase.

While China consumer food and beverage stocks are reflecting demand weakness, Tingyi’s latest earnings show a much greater decline than the market warrants.  Although the stock performance has reflected this, the downward trends are flashing a strong warning sign.  Tingyi management needs to change its direction quickly.

Tingyi Stock


Short Sellers Were Right, Tech Pro Sales Down 50%, Bleeding Cash


After numerous negative reports on Tech Pro, 3823 hk, the company finally proved them right.  After giving a vague profit warning on August 5, its newly-released first half financials showed another big loss.  On the balance sheet, its cash dropped by 46.8 million rmb taking it down to 81.7 million rmb.

tech pro first half


On the surface, the revenue drop is marginal. Digging deeper, from the segment breakdown, the predictions of the downsizing of the LED business are proven true with a drop of 50%. Despite the drop in sales, there is an outsize increase in administration costs. The company attributed this primarily to an 81 million rmb increase in pro-team expenses. (The team, Sochaux-Montbéliard SA, (FCSM), was acquired in July 0f 2015. It has a listed asset value of 132.9 million rmb against liabilities of 53.3 million rmb. It was acquired for 7 million euros or about 52.5 million rmb.)

tech pro segments

The company gives little explanation for the marked decline in LED sales.  It hopes to improve that segment by attending exhibitions in Europe.

Rental JV Uncertainty

As Glaucus reported in August, the company’s 50% JV interest in Shanghai Fuchao represented a sub-lessor in a building in Shanghai called Universal Mansion.  The building was owned by the Logistics Department of the Chinese People’s Armed Police Force.  In the first half report, Tech Pro stated:

On 30 May 2016, the Group announced that the Central Military Commission (“CMC”) of the PRC issued a notice (the “Notice”) on 27 March 2016 on the stopping of all paid services of the People’s Liberation Army (“PLA”) and the People’s Armed Police Force (“APF”) (關於軍隊和武警部隊全面停止有償 服務活動的通知), pursuant to which, the PLA and the APF are set to stop providing all paid services, which is expected to be completed in three years. The Group has been carrying out study on the impact of the Notice on the business and operations of the sub-leasing services business. The Group has consulted its PRC legal advisers and was advised that since the CMC has not yet specified on how to deal with existing contracts regarding real estates of the military, there are uncertainties as to when and how the rental arrangement under the leasing agreements would be affected by the Notice.

The Group expects that the property market in the PRC remains favorable. As the location of the premise that the Group operates the sub-leasing business is at the prime area in Shanghai, the vacancy rate is low and the rent is stable. It has less sensitive to the volatility in the PRC economic situation.

It’s interesting to note that the company was informed in May in 2016, but has continued its proposed the buyout of the other 50% of the JV despite this glaring uncertainty.

To recap the bellwethers of Tech Pro’s Fall:


The Wall Street Journal noted the strange trading movement at end of day plus the tripling in stock value in 2 years despite repeated, declining losses.



  • The LED business is deteriorating with poor margins
  • Revenue growth in the LED business is suspect
  • The soccer team will need big investments
  • It will continue to need debt or equity financing to fund its operations



Strong sell, no value

Accused of fraudulently over-reporting transactions and income.  Stock dropped over 90% in one day on that announcement; dropped all the way to .14 but has since recovered to .25. (Was 2.27 before the fall).