Category Archives: Hong Kong

linking the Hong Kong and Shanghai stock markets

November 20, 2014 By in Asian economic development, China, emerging markets, Hong Kong Tags: , , , , , , 1 Comment

restricting foreigners

Every country has restrictions on ownership of assets by foreigners.  Some of this is unofficial, like when France said yogurt maker Danone was a crown jewel that Pepsi couldn’t buy, or when New York blocked Mitsubishi Estate from buying a decrepit Rockefeller Center.  Other limits–notably restrictions on non-citizens owning media or transportation assets–are set down in law.

why?

It’s common that emerging countries restrict foreign ownership of all publicly traded locally owned corporations.  The same thing happened in Europe as it was rebuilding after WWII.  Two reasons:

–countries don’t want rich foreigners (translation:  Americans) to be able to scoop up valuable national assets for a song, thereby disenfranchising the country’s citizens and making locals into sort of tenant farmers, and

–they don’t want the potential disruption to economic activity (the currency and the money supply) caused by mad rushes in and out of local stocks by foreign portfolio investors.

two classes of stock

The most common method of controlling foreign ownership is for a country to establish two classes of stock, one to be held by locals, the other by foreigners.  The details vary widely country by country.  What makes China unusual is that, generally speaking, locals and foreigners trade shares in different venues–the letter in Hong Kong, the former on the mainland.

problems with the system

Whenever there are two different markets, and two different prices, for the same security, the party that gets the lower price is going to be unhappy.  Given that the supply of foreign portfolio capital is large and the number of foreign-designated shares is typically small, it’s almost always the local citizen who feels disadvantaged.

In addition, raising new equity capital can be awkward.  Foreigners may balk at having to pay, say, twice what a local does to buy a new share.

Invariably there’s unofficial arbitrage between the two classes.

In China’s case, it’s possible that Beijing wants inefficient state-owned enterprises to be more subject to the goad that can be provided by professional portfolio managers.

Shanghai/Hong Kong trading opened this week

This week, China opened limited foreign trading in Shanghai-listed stocks (not Shenzhen stocks, however, which make up about 40% of China’s market cap).  It is also permitting limited trading by mainland citizens in Hong Kong.  The control mechanism being used is daily limits on the cross-border flow of money in and out of both markets.  The system is called Stock Connect.

ho-hum, so far

The plan was announced a while ago–the result being that stocks identified as possible targets for fresh money in both Shanghai and Hong Kong were bid up in anticipation in recent weeks.  However, the volume of cross-border trading has been low and highly touted beneficiaries have been selling off.

For China, this initial indifference is probably the best possible outcome.  Still, this is another step in opening Chinese financial markets to the world.  And one day the ability for us to buy mainland stocks may be important.  It’s just not today.

 

 

technical analysis: double bottom

November 13, 2014 By in Casinos, counter-trend movements, earnings conference calls, Energy, Hong Kong, Macau, major changes in market direction, market bottoms, Technical Analysis Tags: , , , Leave a comment

Regular readers will know that I’m not a particular fan of technical analysis, at least as a primary tool in determining the investment attractiveness of the equity market or of individual stocks.  A hundred years ago–maybe even sixty years ago–it was the tool, because there was nothing else.  Before the SEC, company financials were a joke, and they weren’t easily available in a timely manner.  Watching the trading patterns of the “smart money” was arguably the best an average person could do.

Nowadays, the SEC’s Edgar site has all US-traded companies’ filings available for free the instant they’re made.  Most companies also have extensive libraries of their own available on their sites.  Firms now webcast their earnings conference calls for all to hear.  If you don’t feel like listening, transcripts are available for free soon afterward from Seeking Alpha.  

So it isn’t so much that technical analysis is bad per se.  It’s just that like the horse-drawn cart it’s been replaced by fundamental information that’s quantum leaps better.

support/resistance

Still, there are some aspects to technical analysis that I find useful.  One is support/resistance.  This is the idea that price levels where there has been significant past trading volume, preferably over an extended period, will act as floors to support stocks as they fall, as well as ceilings to impede their advance.  Both holding at and breaking through these levels are often significant events.  In particular…

double bottom

When the market has been declining for an extended period of time, or has dropped particularly sharply (the “magic” numbers technicians use are typically losses of 1/3, 1/2 or 2/3 of the prior advance), it often stabilizes for no apparent reason and begins a significant upward bounce (+10%?).

The fact that prices are now going up isn’t enough by itself to establish they have reached an important low.  In almost all cases (March 2009 was, on the surface at least, a significant exception–see below), stocks begin falling again within a few weeks and find themselves approaching the previous low.  If the market touches–or almost touches–the previous low but begins to rebound again (in the US, the market may briefly trade lower than the previous low–we’re daredevils, after all), this is often a strong sign that resistance is forming at the old low.  This revisiting of the low is the necessary second part of the double bottom.

There can be a triple bottom, too.  More often, in my experience, the market begins a new, upward pattern of higher highs and higher lows after the second bottom.

Fundamental conditions must also be in place for this bottoming to happen.  Stocks have to be cheap; investor pessimism must be high; the downtrend must be protracted enough for at least some investors to think that conditions won’t get worse.

In essence, what the double bottom tells us is that intense negative emotion that has been driving prices sharply (often irrationally) lower has begun to play itself out.

current examples

Double bottoms happen with individual stocks and stock groups, too.

Look at the Macau casinos traded in Hong Kong.  Some, like Galaxy Entertainment, have lost half their value over the past ten months.  But the group appears to have bottomed in late September-early October.   The stocks bounced off their lows, returned near them several weeks later and appear since then to have established a new upward pattern.

I haven’t looked carefully at energy stocks–but the oils are a group where I’d be looking for similar behavior.

the March 2009 case

The S&P 500 appeared to me to be bottoming in early 2009.  As is usual during recessions, government programs were being put in place to stop the economic bleeding.  Anticipating this, investors had pretty much stopped selling.  However, in late March investors were horrified to hear that Congress failed to pass the proposed bank bailout bill/  Some (Republican) Representatives were even saying they would prefer a rerun of the Great Depression to a bank bailout.  The S&P fell more than 7% on the news, but recovered all its losses when the bill was passed the following day.  If we erase those two trading days, early 2009 exhibits a “normal” bottoming process.

 

 

October Macau gambling results

November 4, 2014 By in Asian economic development, Casinos, China, emerging markets, Entertainment, Hong Kong, Industry Analysis, Macau Tags: , , , , , , , , , , , , Leave a comment

Just at midnight, New York time, the Macau Gaming Coordination and Inspection Bureau (DICJ) posted its report of aggregate casino win for the SAR during October.  The win, that is, the amount gamblers lost in the SAR, was MOP 28.0 billion (US$3.5 billion).  That’s up by 9.8% month-on-month, but down 23.2% year-on-year.

The result had been widely anticipated–and heavily publicized by the companies themselves, the government of the SAR and Hong Kong-based securities analysts.  Consensus estimates of the decline seem to me to have centered around -21% yoy.

The Hong Kong casino stocks were up a couple of percent in midday trading today when the DICJ report appeared.  Despite the wide publicity, the stocks immediately lost all their morning gains.  They drifted lower throughout the afternoon, ending down by around 3% for the day.

How could  stocks drop 5% on news that had arguably so fully anticipated?

I don’t think it’s that win was down 23% instead of 21%.  Both are equally weak.  More likely, in my view, is that short-term traders used the DICJ report to take profits after the stocks’ 15% gains in recent weeks.  It’s also possible that the market hadn’t grasped the current Macau casino situation as fully as I had thought.  It could be, as well, that the discounting mechanism for stocks nowadays in Hong Kong works more like the bond market in the US (reacting to strongly to current news as it hits the media) than the stock market.  (I doubt this last, but it has been a while since I devoted a serious chunk of my time to studying the Hong Kong market.)

my take

I’m not in a huge rush to buy, partly because I already have a pretty full weighting, both through the Hong Kong stocks and through WYNN and LVS.

My working hypothesis is that cyclical lows–10%+ below today’s close–have already been made.

Could the stocks drop another 5% from here–i.e., get halfway back to the lows of September?   …maybe, especially since the market upturn I anticipate will likely be in the spring or summer of 2015.  But it would take at least that much to get me interested again.  For now, I’m content to watch.

overnight rally in Macau casino stocks

October 29, 2014 By in Casinos, Entertainment, Hong Kong, Industry Analysis, Macau, Stock ideas Tags: , , , , , , , , , Leave a comment

In trading today, the Hong Kong stock market was up by around 1.3%.  But the Macau casino stocks traded there all rose by 5% or more.  One exception–the former monopoly casino operation, SJM (I’m not a fan), which rose by “only” 2.5%.

The near-term situation for the Macau casinos isn’t good.  Francis Tam, the SAR’s finance minister, has recently said that October will be a particularly weak month for casino win and that he doesn’t expect recovery until the second half of next year.

The reasons for the slump are also clear:  the mainland crackdown on corruption in general and conspicuous consumption in particular; protests in Hong; and, for October, the difficulty in matching the mammoth month (second-best in history) the casinos had this time a year ago.

Why the rally?

Two reasons, I think:

–the Macau casino stocks have been beaten down this year, are relatively cheap, and enjoy considerable support from their above-average dividend yields.  The group, ex SJM, had been up by 10% or so from its lows in late September – early October, even before today.

–the third-quarter earnings report from Wynn Resorts (WYNN), which contains information about its subsidiary Wynn Macau (HK: 1128), shows that the situation isn’t quite as bad as the consensus had been expecting.

what the WYNN report brings home

WYNN is a high-roller specialist.  In theory, then, 1128 should be hurt the most of all the casinos in Macau by the current slow contraction of the VIP gambler business.  Nevertheless, the Wynn Macau EBITDA (earnings before interest, taxes, depreciation and amortization–more or less, its cash generation) was basically flat with 3Q13!

Two reasons for this favorable outcome:

–the replacement of high rollers in Macau by the mass affluent (read:middle class, upper middle class) gamblers, who are much more profitable

–gamblers gravitating toward the better casino operators.  When the market was very hot a year ago, gamblers had trouble just locating a place to stay, so they ended up wherever they could find a bed and a seat at the table.  Now they have choices–and the market is sorting itself out into relative winners and losers.  In my view, this benefits the operators with Las Vegas experience.

what to do

For some time, I’ve been writing that I’ve been nibbling at Wynn Macau and Sands China–I already own a lot of Galaxy.  October win figures will likely be poor.  I’d use any weakness to add to those three.

 

recalling Tiananmen Square

October 3, 2014 By in Asian economic development, China, emerging markets, Hong Kong, Tiananmen Square Tags: , , , , , , , 1 Comment

I was fast asleep at home in the US in early June 1989 when a Hong Kong broker woke me up to tell me troops had opened fire on the crowds that had been occupying Tiananmen Square in Beijing.  That should let you know that I observed what was going on fback then from afar–as well as through the lens of a stock market investor.

Although I think there’s always the possibility of a mistaken escalation of the student demonstrations now under way in Hong Kong into Tiananmen-like violence, I see a number of important differences between the two situations.  Among them:

–Tiananmen Square took place in the heart of China’s capital, not in a politically marginal SAR

–1989 was a time of considerable political/economic unrest in China, with the economy unable to create jobs and, in consequence, hundreds of thousands of unemployed workers roaming around the countryside looking for work.  This was very scary for Communist Party leaders.

–during the months it took the Tiananmen situation to come to a head, many of the students who had originally occupied the square left, and were replaced by older unemployed workers, whose motives were less political and more economic.

–local units of the Peoples Liberation Army (PLA) were ordered to use violence on demonstrators to remove them from the square.  They refused–and were replaced by units from distant areas that had few cultural and ethnic ties with the demonstrators

–the careers of the soldiers–especially the commanders–who obeyed the orders to fire on the crowd were ruined

–world outrage at Tiananmen resulted in significant diplomatic and economic sanctions against China.  Private companies reallocated their capital away from China; highly skilled foreign workers, a key source of potential technology transfer, rethought their plans as well.

 

In sum:  I think media suggestions that the current student pro-democracy demonstrations in Hong Kong are the new Tiananmen are way off base.

I can see potential worries, though.  Clearly, Tiananmen taught the authorities not to use violence against demonstrators.  However, teenage student leaders may genuinely not realize where they live–that, just as there’s no crying in baseball, there’s no democracy in China.  It may also be that opponents of the current administration in Beijing would regard a political incident in Hong Kong as a way of derailing its anti-corruption campaign.  So there is a non-zero chance of a tragic accident.

What I’m doing:  I’ve found myself buying odds and ends on the Hong Kong stock market over the past few days, since the Hang Seng is down almost 10% from its pre-demonstration high.  I may nibble a bit more.  Ultimately, though, while I believe the current situation is very un-Tiananmen-like, I’m not going to bet the farm on my (limited) ability to analyze political events.  So I’m going to make up a shopping list, but wait for clear signs that the situation is being defused before doing much more.