China Stock Roundup: Alibaba Misses, Mindray Meets Estimates

Markets experienced another largely positive week, indicating that the economy is responding positively to the government’s reform agenda. The benchmark index moved upward on Monday, indicating that the pace of reform of state-owned companies has increased.

However, the Shanghai Composite Index gained only marginally on Tuesday even as the H-share index clocked up substantial gains. Stocks declined on Wednesday following concerns that recent gains have been excessive in nature. The Shanghai Composite Index rebounded today, gaining 0.3% after the government provided approval to additional investment spending to boost economic growth.

Alibaba Group Holding Ltd. (BABA) reported second-quarter fiscal 2015 (ended Sep 30, 2014) earnings of 25 cents per share, missing the Zacks Consensus Estimate of 37 cents. Meanwhile, Mindray Medical International Ltd. (MR) posted adjusted earnings of 43 cents per share in third quarter 2014, in line with the Zacks Consensus Estimate.

Last Week’s Developments

Last Friday, the Shanghai Composite Index increased 1.2% due to two major factors. The benchmark index increased 2.4% in October after the Chinese government directed state-owned companies to adjust prices in keeping with market conditions. This was its sixth successive monthly increase. Additionally, fund flows into Chinese equity increased ahead of the beginning of the exchange link with Hong Kong.

The CSI 300 gained 1.6% to reach its highest point since Jun 2013. A sub-index of financial stocks within the index gained 3.2%, the highest amongst the 10 industry groups. Hong Kong’s Hang Seng index gained 1.3% while the Hang Seng China Enterprises Index increased 1.2%. The H-share index advanced 4.3% over the month of October.

A sub-index of utility companies increased 5.1% over the month. This was the highest gain among the industry groups. Meanwhile, a sub-index of industrials within the CSI 300 moved up 3.9%. This group was the third highest gainer for the month.

Markets and the Economy This Week

Stocks gained for the fifth successive day on Monday, indicating that the pace of reform of state-owned companies has increased. The Shanghai Composite Index increased 0.4% to touch its highest level since Feb 2013. The CSI 300 moved up 0.2% while the Hang Seng declined 0.3%. The Hang Seng China Enterprises Index declined 0.9%.

Official data indicated that the nation’s manufacturing sector cooled during October. The official index of the services sector declined to its lowest level in nine months. Meanwhile, HSBC PMI came in at 50.4 for October, unchanged from the initial estimate. This was also higher than the final September reading of 50.2.

The Shanghai Composite Index was nearly unchanged on Tuesday, gaining less than 0.1%. The CSI 300 was also flat after declines in consumer staples stocks negated gains made by industrials. The Hang Seng lost 0.3%, following losses by casino operators. However, the Hang Seng China Enterprises Index increased 0.6%, reducing yearly losses to 0.8%.

Industrials led gains for the H-share index following speculation that the Chinese government was planning to set up a $16.3 billion fund to finance infrastructure construction along the ancient Silk Road trading route. The New Silk Road plan envisages an economic cooperation bloc extend to the Mediterranean that revives the ancient Silk Road.

Stocks declined on Wednesday for the first time in the seven days. Transport and construction stocks took losses following concerns that recent gains have been excessive in nature. Additionally, the HSBC services PMI declined to 52.9 in October from the reading of 53.5 recorded in September. The CSI 300 lost 0.4% while the Hang Seng declined 0.6%. The Hang Seng China Enterprises Index retreated 1%.

The benchmark index increased 5.6% during the six successive days of gains. Funds are flowing into Chinese stocks ahead of the exchange link with Hong Kong. A gauge of industrial stocks within the CSI 300 gained 6.8% in October, the highest among the 10 industry groups. Analysts opined that infrastructure stocks were taking a breather following the gains accumulated recently.

The Shanghai Composite Index rebounded today, gaining 0.3%. Railway and software companies clocked up gains after the government provided approval to additional investment spending to boost economic growth. The National Development and Reform Commission provided approval to feasibility reports for six railway projects which amount to a total investment of $30.2 billion.

The Hang Seng Index dipped 0.2% while the Hang Seng China Enterprises Index declined 0.5%. The CSI 300 gained 0.1%. A sub-index of utility stocks declined 0.7%, emerging as the biggest loser among the industry groups.

Stocks in the News

Alibaba Group reported second-quarter fiscal 2015 (ended Sep 30, 2014) earnings of 25 cents per share, missing the Zacks Consensus Estimate of 37 cents due to increased investments in mobile, marketing and other new ventures. The adjusted earnings per share exclude one-time items but include stock-based compensation expense.

Alibaba reported revenues of RMB16.8 billion (US$2.742 billion as reported by the company) in the second quarter, up 53.7% from the year-ago period. Second-quarter revenues also beat the Zacks Consensus Estimate of $2.597 billion. The increase was mainly driven by the continuing rapid growth of China commerce retail business.

Revenues from total China commerce business in the second quarter were RMB13.6 billion. Revenues from total International commerce business in the second quarter were RMB1.6 billion.

On a GAAP basis, Alibaba generated net income of RMB3.0 billion (US$494 million) compared with RMB4.9 billion in the same quarter last year. Alibaba generated adjusted net profit of RMB3.0 billion (US$619 million) compared with RMB3.9 billion in the year-ago quarter.

Mindray Medical International Ltd. posted adjusted earnings of 43 cents per share in third quarter 2014, in line with the Zacks Consensus Estimate. However, earnings fell 4.4% on a year-over-year basis.

Third-quarter net revenue came in at $324.6 million, up 9.6% on a year-over-year basis. Meanwhile, China revenues grew 18% year over year to $155.7 million, representing 48% of the company's total net revenue while international revenues grew 2.8% to $168.9 million.

The company expects below 10% year-on-year net revenue increase in 2014, lower than the earlier growth guidance of at least 10%. The Zacks Consensus Estimate for the same is currently pegged at $1,349 million. The company projects 2014 adjusted net income to decrease by mid-single digits over 2013.

Changyou.com Ltd. (CYOU) posted third-quarter earnings per ADR of 6 cents, contrary to the Zacks Consensus Estimate of a loss of 5 cents.

Revenues for the third quarter came in at $180.8 million. This is 1% lower on a year-over-year basis and $5.2 million lower than company guidance. However, revenues were 2% higher than the preceding quarter and in line with the company guidance.

Online advertising revenue increased 13% sequentially to $16.7 million and 2% over last year’s numbers. Online game revenues declined 2% on a quarterly basis and 7% year-over-year to $150.3 million. These numbers were also lower than the company’s guidance of $7.7 million.

The company expects fourth quarter revenues to come in the range of $188-198 million. Changyou.com’s online gaming revenues are expected to come in the range of $155-165 million. Online advertising revenues are forecasted in the range of $20-21 million.

NetEase, Inc. (NTES) has said that it will shut down its micro-blogging service. The front page of NetEase Weibo carried a message asking users to switch to the Tumblr-like LOFTER, launched by NetEase in 2011. This announcement comes after Tencent, another major Weibo (WB) player lost out to Sina Weibo in China’s micro-blogging stakes.

According to analysts, NetEase had made efforts to gain the advantage in this area by utilising its substantial number of email users. In May 2012, NetEase had said 120 million users were subscribing to its micro-blogging platform. Reportedly, only public accounts are active as of now.

China Mobile Ltd. (CHL) has emerged as the dominant player in China’s 4G mobile services market. The company now has 40 million mobile subscribers and 500,000 4G base stations, according to a report in Shanghai's China Business. Additionally, China Mobile has expanded its 4G mobile network into more remote areas.

The telecom major reported 10 million 4G user additions for the months of August and September, exceeding that of the other two dominant players. The company has also built 500,000 plus TD-LTE base stations. This exceeds the number of TD-LTE and LTE-FDD base stations built by the other two telecom giants by 300,000.

Performance of Most Actively Traded US-Listed Chinese Stocks

The table given below shows the price movements of 10 Chinese companies with the highest three-month average trading volume on U.S. exchanges. Price movements over the last five days and during the last six months have been included.

Next Week’s Outlook:

Stocks posted gains on most days of the week, but for Wednesday. Even these losses were a result of markets taking a breather following concerns that recent gains were excessive in nature. However, markets have responded positively to the series of steps taken by the government to boost economic growth. Industrials, railways have emerged as the largest gainers, benefiting directly from government policy.

Economic data released this week has been largely disappointing. Several important economic reports are slated for release in the days ahead. This includes trade data to be released tomorrow and inflation rate numbers to be released on Sunday. Data on loans, retail sales, industrial production and FDI are also slated for release next week. Going forward, stocks could move even higher, if most of these reports are encouraging.

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