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Sizing up the risks for China Macro

  Investor sentiment for Chinese equities and bonds continues to weaken,  both   offshore and onshore.  Reports of sporadic and ever more frequent lockdowns across the country, most recently in Chengdu and Shenzhen are rattling confidence and many global investors have chosen to sell amid the ongoing uncertainty. The negative sentiment among investors has been compounded by ongoing investigations by the Chinese government into internet monopolies. Coupled with ADR delisting risk (which is not over until the pcaob has completed their audits and some say they want to start with Alibaba’s papers) along with high profile reports of mortgage boycotts by purchasers of uncompleted housing projects are only compounding the sense of unease about china’s macro growth and corporate profits going forward.  Despite the nearly 20% plunge in the value of the CSI 300 index so far this year, an index composed of 300 of the largest and most liquid stocks listed onshore in Shenzhen and Shanghai, onshore
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China's Evolving Equity Capital Markets

There have been many negative media headlines recently about the collapsing stock prices of famous Chinese ADR companies and Hong Kong large caps due to a combination of regulatory uncertainty and in the case of the ADRs, potential delisting by the American authorities. Year to date the Shanghai Stock Exchange SSE 50 Index, which is an index of the fifty largest and most liquid A-share stocks listed in Shanghai, has declined 10% compared to a 20%+ increase for the SP 500. Over the past five years, the SSE 50 Index, as well as other key indices for markets in Shanghai, Hong Kong, and to a lesser extent Shenzhen, have all underperformed the S&P 500. Of major Chinese indices, the Shenzhen 100 Index (SZSE 100), which tracks the largest 100 stocks listed in Shenzhen, has evidenced some of the best performance with a return over the last five years of ~88% compared to ~105% for the S&P 500.   This chart shows the S&P 500 versus the SSE 50 over the past five years and is not adjus
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What are Automakers Saying About the Chip Shortage?

The global semiconductor shortage has been much reported on, but few of the major auto companies are able to provide a clear estimate for how much it will affect their manufacturing production in the second half of the year.  First and foremost, the Chinese EV makers, namely Nio, Li Auto, and Xpeng seem to be unaffected by the chip shortage this year. However, these companies have such small scale compared to traditional automakers that it's much easier for them to stockpile chips. In July 2021, Nio delivered 7931 vehicles, up 124% year over year. Li Auto delivered 8589 vehicles, up 251% year over year. Xpeng delivered 8054 vehicles, up 228% year over year. It's likely that these three companies won't face the kind of manufacturing constraints that major automakers are experiencing from the chip shortage, but it will be essential to listen to comments from the respective firm's executives in their upcoming Q2 conference calls.  Larger automakers however are already feel
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Global Institutions Increase Investment in China's Largest Luxury Auto Dealer

Zhongsheng Auto (HK:0881) China's largest dealer of luxury cars with approximately 8.1% market share as of the end of 2020, made three important disclosures in the last week that merit the attention of investors eyeing China's auto sector. The first was Zhongsheng's disclosure about new car sales for the second quarter of 2021 and the first half of 2021, available at this link: https://en.zs-group.com.cn/u/cms/en/202107/05094915aaxg.pdf To summarize, Zhongsheng, a major distributor of Mercedes, Lexus, BMW, Audi, and several other major luxury brands, disclosed aggregate unit sales. At the end of 2020, Zhongsheng operated 373 dealerships, of which 218 were luxury dealerships that are primarily located in tier 1 and tier 2 cities and provincial capitals.  To highlight in the second quarter 2021: Total new car sales volume was 143K, up 15% from the same period last year.  Total luxury car sales volume was 84K, up 21% from the same period last year. For the 1st half, Zhongsheng
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Tesla Isn't The First EV Maker to Initiate A China Recall

Tesla's China (and to a smaller extent US operations) have faced a surfeit of bad news recently. Multiple global and domestic media publications over the last few days have reported that Tesla will recall 285K Model 3s, most of which were domestically produced, over a fault that could cause the vehicle to unexpectedly activate its cruise control system. Tesla users won't even have to visit a dealer to fix the problem; all they need to do is download a software update. (An article about Tesla's recall from the Wall Street Journal is reposted at the bottom of this post) A few months ago, the firm faced quality complaints as well as allegations that the cameras and sensors embedded in the vehicles could be used for malicious surveillance. While these headlines certainly look bad, cumulatively these incidents are unlikely to hurt the firm's prospects in the Chinese market over the long term, unless the stream of bad news continues and damages public opinion. However, it'
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Welcome to Hong Kong Stock Observer

This website focuses on publishing insights related to Chinese equities listed in Hong Kong, Shanghai, Shenzhen, as well as ADRs. Presently the author researches China's auto market, specifically the market for luxury cars and the dealership companies that distribute them. Please refer to the Research Reports section to download the author's latest report on the Chinese auto market. 
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