Making a list, checking it twice

05/28/20
  • Chinese stocks recently retreated amid potential delisting threat
  • New bill seeks more US oversight of US-listed Chinese equities
  • Well-established stocks could rebound if threat de-escalates

A global pandemic isn’t enough of a challenge?

Although equities have rebounded remarkably from the February–March sell-off, shares of many Chinese companies traded in the US have recently dipped as “coronavirus blame” has strained US-China relations to the point that some analysts see a renewed trade war as a potential stumbling block for the global economic recovery.1

Case in point: The US Senate’s Holding Foreign Companies Accountable Act, which is widely expected to pass in the House of Representatives and be signed into law by the White House. The bill, which would essentially require Chinese companies that list their shares in America to comply with US accounting and reporting standards, comes in the wake of Chinese coffee chain Luckin Coffee’s (LK) 83% implosion last month amid revelations of financial fraud, and is seen by many as a threat to delist Chinese stocks.2

Short-term traders may see “delisting anxiety” pullbacks in established Chinese stocks as potential long plays.

While that may initially sound like a cue to dump or short Chinese shares, there’s an opposite case to be made: That the legislation may, in fact, motivate more transparency in US-traded Chinese companies—which, after all, reap huge benefits from their access to US capital markets. In other words, as the situation cools, the future may be less about delisting than negotiation to resolve differences and maintain current trading regimes.3

Also, while LK was a relative market newcomer—part of the 2019 IPO frenzy—some traders may see “delisting anxiety” pullbacks in more-established Chinese stocks as potential long-side opportunities. That list would likely include Chinese e-commerce giants JD.com (JD) and Alibaba (BABA), both of which have fallen 10% or more in recent days:

Chart 1: JD.com (ATVI) and Alibaba (BABA), 3/12/20–5/26/20. Chinese e-commerce titans retreat.

Source: Power E*TRADE


While BABA’s rebound since March has been less than spectacular, the stock also didn’t suffer as much as many others in the February–March sell-off. JD, by contrast, hit several new record highs the past couple of weeks (most recently on May 19) before pulling back.

Although ZTO Express’s (ZTO) market resume is a little shorter than BABA’s or JD’s (it began trading in the US in 2016), the Chinese delivery and logistics company fell only a modest 17% in the coronavirus sell-off—but rallied 55% off its March lows in hitting its own record high on May 19:

Chart 2: ZTO Express (ZTO), 3/5/20–5/26/20. Pulled back to support.

Source: Power E*TRADE


The stock’s recent decline had, as of yesterday, stalled around the possible support level of its late-April highs around $30.

Investing in Chinese equities comes with extra risk, as the Luckin episode illustrates. But if the current political climate is exaggerating that risk, disciplined traders may find opportunities in stocks others may be overlooking.

Market Mover Update: As tech (and especially stay-at-home) stocks continued their recent retrenchment yesterday, Activision Blizzard (ATVI) dropped nearly 5% intraday—below its early-May breakout level—before rallying furiously to close up on the day (see “Games people play”).

Today’s numbers: Durable Goods Orders 8:30 a.m.), GDP (8:30 a.m.), Weekly Jobless Claims (8:30 a.m.), Corporate Profits (8:30 a.m.), Pending Home Sales Index (10 a.m.), EIA Natural Gas Report (10:30 a.m.), EIA Petroleum Status Report (11 a.m.).

Today’s earnings include: Ulta Beauty (ULTA), Burlington Stores (BURL), Dollar General (DG), Costco (COST), Dell Technologies (DELL), Dollar Tree (DLTR), Marvell Technology (MRVL), Williams-Sonoma (WSM), Nordstrom (JWN), Zscaler (ZS), Okta (OKTA), Salesforce.Com (CRM), VMware (VMW).

 

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1 CNN.com. A US-China trade war is the last thing the world economy needs now. 5/19/20.

2 CNBC.com. Bill to delist Chinese stocks moving at ‘warp speed’ as a crackdown gains bipartisan support. 5/21/20.

3 MarketWatch.com. Opinion: America’s threat to delist Chinese companies could make everybody better off. 5/26/20.

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