Stocks suffered a disappointing week following the commencement of 10 new IPOs. Fears surrounding credit growth led to shares taking losses on Monday. Small cap stocks led losses on Tuesday, as fears over new share sales gathered strength.
Technology and auto stocks led gains on Wednesday, following three successive days of losses. Today, the benchmark index slumped to its lowest level since Aug 8 as six companies began marketing new shares. China Petroleum and Chemical Corp. (SNP), or Sinopec’s first-half 2014 net income increased while Qihoo 360’s (QIHU) second-quarter 2014 earnings missed estimates.
Last Week’s Developments
Stocks gained last Friday, with the Shanghai Composite completing a sixth consecutive week of gains. This is the longest series of gains since Mar 2012. Gains were led by power, media and household appliance stocks. China is contemplating extending subsidies on energy-saving appliances. Both the Shanghai Composite Index and CSI 300 increased 0.5%. The Hang Seng China Enterprises Index gained 1.1%. The Bloomberg China-US Equity Index gained 0.2%.
The benchmark index gained 0.6% over the week and had gained 12% at that point since mid-March. Speculation increased that state-owned companies will move toward mixed ownership in the days ahead. Additionally, the possibility that a stock-trading link between the Shanghai and Hong Kong exchanges would increase fund inflows gave rise to optimism. These factors combined to propel stocks higher.
Markets and the Economy This Week
The Shanghai Composite Index slipped 0.5% on Monday, marking its largest loss since Aug 14. Fears that new bank lending was failing to pick up negated gains in airline stocks. According to a report in the China Business Journal, a consortium of airport, airlines companies and certain funds have created a civil aviation investment fund. In its first phase, the fund plans to raise 20 billion yuan.
However, loan data released this month had fuelled investor concerns that China will fail to meet its growth target without further monetary easing. The CSI 300 dropped 1% while the Hang Seng China Enterprises Index gained 0.5%. The H-share index was propelled higher by a 4.3% increase in Sinopec’s stock after the refiner reported profits. The Bloomberg China-US Equity Index gained 1%.
Stocks declined once again on Tuesday with small-cap stocks leading losses. The decline was the largest in two weeks, following concerns that IPOs may lure funds away from older stocks. The Shanghai Composite Index declined 1%, recording its largest loss since Aug 7. The ChiNext fell 2.3% ahead of the launch of new IPOs from 10 companies this week. Analysts were of the opinion that the economic situation was a cause for concern. Additionally, new share sales will place a strain on market liquidity.
This is because such IPOs have gained 94% on an average over their issue price this year. This is seven times more than the global average and strikes a stark contrast with low demand for existing shares. This would result in the market taking a breather and looking to consolidate for a while. The CSI 300 lost 0.8%. The Hang Seng China Enterprises Index gained 0.1%. The Bloomberg China-US Equity Index gained 0.2%.
Gains in technology and auto stocks helped markets move up on Wednesday after three days of losses. These gains negated concerns arising out of new share sales. Auto stocks gained following reports that China may provide $16 billion in funds to create more facilities to charge electric cars. Meanwhile, Apple Inc. (AAPL) suppliers are preparing to produce the largest ever iPad. The Shanghai Composite Index increased 0.1% after Wednesday’s decline.
Analysts took the view that markets would face pressure this week as IPOs lured funds away from existing stocks. They reiterated the view that markets were undergoing a correction and would experience minor rebounds in this phase. The CSI 300 gained 0.2% while the Hang Seng China Enterprises Index dipped 0.5%. The Bloomberg China-US Equity Index declined 0.2%.
The Shanghai Composite Index slipped 0.6% on Thursday to close at its lowest level since Aug 8. The one day repurchase rate on the Shanghai Stock Exchange shot up by 45%, triggered by fears that IPOs will lure funds away from older shares. Six companies began selling new shares starting today. According to the Shanghai Securities News, the 10 IPOs taken together will account for $130 billion.
The CSI 300 declined 0.7% while the ChiNext lost 1.2%. A sub-index of materials stocks within the CSI 300 lost 1.3%, the largest among the 10 industry groups. Chinese real estate firms took losses in Hong Kong. These losses were triggered by fears that they will be unable to achieve annual sales targets. The Hang Seng China Enterprises Index slumped, losing 1.3%.
Stocks in the News
China Petroleum and Chemical Corporation, also known as Sinopec, reported first-half 2014 net income of 32.54 billion yuan (US$5.30 billion), up 7.5% from the prior-year quarter. Earnings per share of 0.277 yuan ($3.55 per ADS) rose 12.6% year over year. This was mainly due to rise in crude oil and gas production. Revenues in the first half of 2014 fell 4.2% to 1,356.17 billion yuan (US$220.78 billion).
During the six-month period ending Jun 30, 2014, Sinopec’s crude oil production grew 7.5% year over year to 177.88 million barrels, while natural gas volumes rose 9.5% to 354.8 billion cubic feet. Domestic crude oil production edged up 0.3% year over year to 154.15 million barrels, while overseas volumes increased 101.4% year over year to 23.73 million barrels.
Total oil and gas production rose 8.0% to 237.01 million barrels of oil equivalent.
Qihoo 360 reported second-quarter 2014 earnings per ADS of 30 cents, missing the Zacks Consensus Estimate of 33 cents due to higher operating expenses. Earnings per ADS include the interest expense of convertible senior notes and share-based compensation expenses.
Qihoo’s total revenue was $317.9 million, up 19.9% sequentially and 109.6% year over year. Reported revenues were above management’s expected range of $300 to $305 million and beat the Zacks Consensus Estimate of $295 million.
Continued momentum in both online advertising and Internet value-added services boosted results. Additionally, better-than-expected ramp-up in search and mobile monetization aided revenue growth.
Online advertising revenues were $171.3 million, up 22.3% sequentially and 89% from the year-ago quarter. Internet value-added service revenues were $146.2 million, up 17.2% sequentially and a significant 140% year over year.
Non-GAAP net income attributable to Qihoo 360 was $43.45 million or 30 cents per ADS, compared with $49.1 million or 37 cents in the prior quarter.
For the third quarter of 2014, Qihoo expects revenues between $360 million and $365 million, representing an increase of 92–94% year over year and 13–15% sequentially.
Cninsure Inc. (CISG) posted net income of 18 cents per share in the second quarter 2014, which surpassed the Zacks Consensus Estimate by 80% and significantly improved from the year-ago net income of 7 cents per share.
Cninsure generated total revenue of $82 million in the reported quarter, marking year-over-year growth of 19.5%. This was driven by solid growth across all the business segments with insurance brokerage business and claims adjusting business being the major contributors.
Adjusted earnings before interest, tax, depreciation and amortization (:EBITDA) reported in the second quarter was $7.3 million, up 55% year over year. Adjusted EBITDA margin rose 210 basis points to 8.9%.
Interest income increased 6.1% year over year to $3.5 million in the quarter, driven by increase in other receivables.
Cninsure projects third-quarter 2014 total net revenue to increase 15% year over year.
Yingli Green Energy Holding Company Limited (YGE), or Yingli Solar, reported an operating loss of 25 cents per American Depositary Share (ADS) or RMB 1.58 per ordinary share in the second quarter 2014 compared with a loss of 33 cents per ADS (RMB 2.05) in the year-ago quarter.
Yingli Solar’s loss per share in the reported quarter was wider than the Zacks Consensus Estimate of a loss of 17 cents. As a result, the shares shed nearly 5% to close at $3.38 yesterday.
Total net revenues were $ 549.5 million (RMB 3,408.9 million), down a marginal 0.2% to $550.4 million (RMB 3,378.3 million) in the second quarter of 2013. The decline was due to lower contribution from the PV modules segment. Yingli Solar’s revenue also fell short of the Zacks Consensus Estimate of $567 million.
Yingli Solar revised its 2014 shipment volumes downwards expecting lower solar panel demand worldwide. The company now expects PV shipment volumes in the range of 3.6GW to 3.8GW (including 400–600MW shipment for PV systems) for 2014, down from the previous expectation of 4.0GW to 4.2GW (including 400–600MW shipment for PV systems).
Trina Solar Limited (TSL) reported second-quarter 2014 earnings of 14 cents per diluted ADS, in line with the Zacks Consensus Estimate. Net quarterly income came in at $10.3 million, compared to year-ago net loss of $33.7 million. Revenues increased 18% to $519 million, compared to the Zacks Consensus Estimate of $582 million.
During the quarter, Trina Solar accrued foreign exchange gains of $3.3 million. Solar module shipments increased from first quarter numbers of 558 megawatts to 943.3 megawatts in the second quarter. Gross margin increased from 11.6% to 15.4%. The company had cash, cash equivalents and restricted gas of $562.7 million, as of Jun 30, 2014.
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.
Last 5 Day’s Performance
Next Week’s Outlook:
Stocks have had a disappointing week as fears of new share sales luring away funds from older stocks gather strength. Analysts believe that markets are in correction mode and are taking a breather. Recent economic data has also been disappointing, adding to investors’ woes.
Next week features the release of crucial manufacturing numbers, both official and private. The tone of such reports has been disappointing in recent times. Any good news on this front would provide a much needed fillip to stocks. In their absence, it is likely that the effects of new share sales would guide markets in the days ahead.
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