Lockdown gains

In July, the downtrend resumed following the short-lived rebound in June, with the MSCI China total return index declining 9.5%. Shock waves were again sent through the market, brought on by: the resurgence of COVID in pockets around China; home buyers boycotting mortgage payments on delayed projects; and major shareholders selling down their stakes in Tencent and Alibaba.

KOMMENTAR DES FONDS
19 Aug 2022

In July, the downtrend resumed following the short-lived rebound in June, with the MSCI China total return index declining 9.5%. Shock waves were again sent through the market, brought on by: the resurgence of COVID in pockets around China; home buyers boycotting mortgage payments on delayed projects; and major shareholders selling down their stakes in Tencent and Alibaba.

The firm zero-COVID policy was reiterated by the government and the lack of further stimulus frustrated investors. Sector wise, Macau Gaming and Consumer Staples outperformed while Property, Internet and Banking sectors underperformed.

China’s Q2 GDP growth was 0.4%, below the expected 1.2%. The prolonged Shanghai lockdown was the core reason. The Chinese government suggested flexibility on the GDP growth target this year, implying China would miss the original GDP growth target of 5.5% and that any aggressive policy support was unlikely.

The recovery of the property market proved short lived again. Property sales (in floor space) fell by 29% YoY in July, versus -18% YoY in June. The nascent property recovery came to a halt following news reports of homebuyers suspending mortgage payments on stalled construction projects run by distressed property developers.

Although mortgages related to such projects account for less than 0.01% of total mortgages in the banking system, banking shares still suffered alongside property stocks. It was then reported that the PBoC was working with banks to set up a rescue fund, up to Rmb 300Bn, to help distressed developers complete projects. Details were lacking however, and the market remained skeptical.

Due to the COVID outbreak in Macau, the local government ordered most business activities, including casinos, to close for 12 days. This was the first time in more than 2 years that casinos were ordered to close. It was a blessing in disguise for the casino operators, as the government made it clear that employers were not obliged to pay workers during the lockdown.

As gaming revenue would have been near zero had casinos stayed open, the operators could at least save maintenance and staff costs by closing during this time. The Gross Gaming Revenue for July unsurprisingly ended up diving 95% YoY – reaching the lowest level since September 2020.

The US regulator put Alibaba on the watchlist for delisting. At the same time, Alibaba announced plans for a dual-primary listing in Hong Kong, which could qualify it for potential inclusion in Stock Connect to access Mainland China’s investors.

Didi was fined Rmb 8Bn (4% of its 2021 sales) for a breach of cybersecurity law by the Chinese regulator. It seems the investigation on Didi that has lasted for more than a year, is finally over and this should pave way for the relisting of the company in HK. That being said, the positive developments in the Internet industry were more than offset by news of major shareholders of Tencent and Alibaba selling down their stakes.

The Strategic China Panda Fund slightly outperformed the benchmark in July (+0.5%). Real Estate exposure was the largest value detractor, costing the Fund 4.7%. We have further reduced our exposure to this selctor on the back of deteriorating fundamentals.

As always, we invite investors and prospective investors, to contact us should they wish to understand our views on the current situation and the positions held in the portfolio. Please do not hesitate to contact us for further information.

Adam TurbervilleAdam Turberville
Director
+44 1481 742380
a.turberville@ericsturdza.com

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The views and statements contained herein are those of LBN Advisers Limited in their capacity as Investment Adviser to the Fund as of 17/08/2022 and are based on internal research and modelling. Please click on Disclaimer Page to view full disclaimers.