Mainland Chinese investors buy as Alibaba ramps up share buyback on weakness

Key news

Alibaba on Thursday sold the news that the State Administration for Market Regulation (SAMR) was investigating the e-commerce company for monopolistic practices. As we mentioned on Thursday, merchants have to choose between selling products on Alibaba and in the ecosystem of archrival Tencent, which includes JD.com and Pinduoduo. If you choose Alibaba, you won’t be able to sell on your rivals’ platforms. This is going to change. Also, Tencent’s WePay mobile payment service is not accepted in the Alibaba ecosystem. This is going to change. These changes are unlikely to have a material effect on Alibaba as the network effect the company has generated will continue to attract and keep merchants.

Also weighing on Alibaba is the declining value of Ant Group based on talks with regulators. Ant Group’s meeting with regulators focused on the company’s expansion beyond mobile payments towards insurance, wealth management and loans due to its higher margins. The company’s immense growth potential in these areas means that regulators must figure out how to treat online banking.

Nonetheless, Alibaba’s fourth quarter financial results will be announced in February and analysts are expecting revenue growth of + 34% YoY.

The regulatory situation of Alibaba and Ant Group reminds me of Baidu’s

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medical advertising scandal and Tencent’s previous difficulties in securing approval for new content-based games. In both cases, company stocks were negatively affected in the short term. Our experience several years ago with Baidu and Tencent has reaffirmed our basket approach. While Alibaba has become quite inexpensive from a valuation perspective, the market seems to believe that others, like Pindouduo, could benefit from Alibaba’s investigation.

Alibaba has increased its share buyback program to $ 10 billion from $ 4 billion, as the company believes its shares are cheap.

Ultimately, the Internet and e-commerce opportunity in China will not go away. The size of the pie could be redistributed among the largest companies, but there is nothing to indicate that the overall opportunity has diminished. It should be noted that mainland Chinese investors continue to purchase Hong Kong-listed internet and e-commerce names through Southbound Connect. While foreign investors may be spooked by the headlines, local investors appear to be buying the drop.

Asian equities were mostly higher, except in the Philippines, which experienced an earthquake at Christmas. Hong Kong was a bit out of place, although the real story was weakness in growth stocks, as volume leaders Tencent -6.65%, Alibaba HK -7.98%, Meituan -6.88%, Xiomi -4.01%, JD HK -8.02%, Geely Auto + 4.9%, Alibaba Health -13.11%, Ping An + 1.31%, ICBC + 4.85%, BYD + 0.2%, China Construction Bank + 2.11% and JD.com HK -2.15%.

Value sectors held up better as health care performed better. I think foreign investors could be moving from growth to value using the Alibaba situation as a catalyst as volumes were high in Hong Kong. The problem is that there are few buyers as many mutual funds and hedge funds have closed their books for the year. This is likely to have exacerbated the price movement. Tencent and Meituan saw net purchases from mainland Chinese investors through Southbound Connect and the former showed very strong purchases.

Shanghai and Shenzhen were basically flat as industrial gains were strong, + 15.5% yoy for December, although slower than + 28% yoy in November. Alcohol stocks had a strong day along with many drinking plays. The CNY moved slightly against the dollar while bonds rose.

I mentioned that JD Health was added to Southbound Stock Connect last week. For reference, Tencent and Meituan have 4.29% and 6.26% of the shares held by mainland investors through Southbound Connect, respectively. JD Health will likely see a similar distribution.

H-Share update

The Hang Seng was down -0.27% / – 71 index points to close at 26,314. Volume was high + 94% from Thursday’s mid-day session, which is + 50% higher than the 1-year average, while amplitude was positive with 36 advances and 15 declines. The 204 Chinese companies listed in Hong Kong and within the MSCI

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The index of all China stocks fell -1.64% led by finance + 1.92%, energy + 1.74%, utilities +1.12 and materials + 1.1%. Meanwhile, communication -5.7%, technology -2.6% and discretionary -2.17%. Southbound Stock Connect volumes increased as mainland Chinese investors bought $ 1.084 billion worth of Hong Kong shares and southbound trading accounted for 14.4% of Hong Kong turnover.

A-Share update

Shanghai and Shenzhen were basically unchanged, + 0.02% and -0.04% to close at 3,397 and 2,273, respectively. Volume is up + 11.4% from Friday, which is + 3% above the 1-year average. Meanwhile, the amplitude narrowed with 1,034 advances and 2,780 descents. The 521 mainland Chinese stocks within the MSCI China All Shares Index rose + 0.21% led by Commodities + 2.58%, Discretionary + 0.77% and Finance + 0.34%. On the other hand, health care -1.4%, communication -1.13% and technology -1.13%. Northbound Stock Connect volumes were subdued as foreign investors sold – $ 62 million worth of mainland China shares today and Northbound Connect trading accounted for 7.2% of mainland China turnover.

Exchange rates and yields last night

• CNY / USD 6.54 versus 6.54 on Friday
• CNY / EUR 7.99 vs. 7.97 on Friday
• Yield on 1-day government bonds 0.40% vs. 0.45% on Friday
• Yield on 10-year government bonds 3.16% vs. 3.19% on Friday
• Yield on 10-year China Development Bank bonds 3.58% vs. 3.59% on Friday

About KraneShares

Krane Funds Advisors, LLC is the investment manager for KraneShares ETFs. Our suite of China-centric ETFs offer investors solutions to grasp the importance of China as an essential element of a well-designed investment portfolio. We strive to offer innovative, first-to-market strategies that have been developed based on our strong partnerships and deep investment knowledge. We help investors stay up-to-date on global market trends and aim to provide significant diversification. Krane Funds Advisors, LLC is majority owned by China International Capital Corporation (CICC).