Chinese companies joined stock rebound in first quarter

Declining concern about the US-China trade dispute helped shares of Chinese-listed US companies stage a first-quarter rebound.

The MSCI China All Shares Index is a comprehensive China index that includes Chinese companies listed in Hong Kong (45 percent), Shanghai and Shenzhen (38 percent) and US-listed Chinese companies (16 percent), according to Brendan Ahern, chief investment officer for Krane Funds Advisors in New York.

So far in 2019, the MSCI China All Shares' Shanghai and Shenzhen stocks were up 30.9 percent, Hong Kong 13.9 percent and the US-listed shares nearly 29 percent higher, Ahern said.

US equities just wrapped up their best quarter in a decade as the Standard & Poor's 500 Index gained 13 percent at the close of the 2019 first quarter on March 29. That followed a late December selloff that pushed the S&P 500 down almost 20 percent from last year's record. The Nasdaq 100 Index rose 17 percent, while the Dow Jones Industrial Average posted an 11 percent gain in the quarter.

"Investors shunned Chinese companies globally, mainly due to concerns over the escalating trade dispute between China and the US," said Ahern. "Starting on Jan 1, we have seen de-escalation in trade tensions, as talks (between the two countries) appear to be making progress towards a resolution."

Andrew Mattock, a portfolio manager at Matthews Asia who manages the firm's China strategy, said US-listed China stocks were down on average more than 30 percent at the end of 2018.

"We view this year's rally as a reversal of overly negative sentiment in 2018.  Ultimately, the continuation of stock market performance during 2019 will be a function of earnings and operational growth delivery and a conclusion to noise around the trade war. We view the US-listed Chinese stocks' earnings outlook as being solid, but not spectacular," he said.

"Chinese companies are differentiating themselves from other US-listed Chinese equities. In fact, Alibaba has even appreciated about 30 percent year to date. What this means is that investors are being selective. They see more potential in some firms compared to others. They are not lumping all of these companies in the same basket," noted Alejandro Ortiz, lead research analyst for SharesPost Inc.

Ahern said the top performers in the quarter among the MSCI China All Shares' US-listed stocks included New Oriental Education and Technology Group Inc (NYSE: EDU) which gained 64 percent, driven by a strong earnings release in January that greatly exceeded analyst expectations for the quarter.

"Regulatory concerns have been an overhang for EDU and their peer TAL Education Group (NYSE:TAL), though this concern dissipated during the quarter," noted Ahern.

Online travel company Ctrip.com International Ltd (Nasdaq: CTRP) gained 61 percent in the quarter, aided by strong results released in March, Ahern said.

Meanwhile, Ahern said the bottom performers included Pinduoduo Inc (NYSE:PDD). which lost 17 percent.

"The stock had gained after it was added to MSCI indices on March 1, but those gains evaporated after their March 13 earnings release, which missed analyst expectations as earnings per share came in well below expectations.

While revenue growth was very strong for the quarter, the company's desire to grow at all costs surprised many investors," Ahern said.

Online video platform company iQIYI Inc (NYSE:IQ) lost nearly 12 percent in the quarter. "The stock had gained following its inclusion in MSCI indices, though it fell after announcing a $1.05 billion convertible note, which is dilutive for current shareholders," noted Ahern.

"When coupled with the price collapse in 2018, investors now have a cheaper entry point to buy US-listed Chinese stocks than (at) any time since the start of 2018. US investors are hungry for Chinese IPOs. The reason is that these companies have enormous potential for growth — exactly what investors are seeking," Ortiz said.