China Stock Roundup: Baidu Acquires Uber Stake, China Telecom, Unicom Expand Hybrid LTE Trials - Analyst Blog

Markets had a largely positive week with stocks gaining significantly on every trading day but for today. Construction and railway stocks moved upward on Monday, following speculation that the government will take steps to support economic growth.

These speculations continued to boost the benchmark index over the next two days. The Shanghai Composite Index moved past the 3,000 mark on Tuesday while the benchmark reached its highest point in four years on Wednesday. Stocks slipped today following a surge in money market rates which was caused by the start of the year's largest new share sales.

Baidu Inc. (BIDU) confirmed on Wednesday that the Chinese search engine giant had acquired a stake in car-hailing app Uber Technologies Inc. China Unicom (Hong Kong) Ltd. (CHU) and China Telecom Corp. Ltd. (CHA) will expand their hybrid LTE network trials to 15 more cities after receiving approval from the country's ministry of industry and information technology.

Last Week's Developments

Last Friday, the Shanghai Composite added 0.4% at the end of a trading session when it changed direction around 10 times. A less than expected increase in factory production raised expectations of further measures from the government to boost the economy. Factory production increased 7.2% during November, the slowest pace in three months. Closure of factories has intensified a slump in manufacturing.

Analysts were of the view that dismal economic data has increased speculation of further rate cuts in 2015. They also felt recent gains were excessive and a phase of consolidation would follow as investors turn risk averse.

The CSI increased by 0.3%. However the Hang Seng and Hang Seng China Enterprises Index lost 0.3% and 0.2%, respectively. A sub-index of industrial stocks within the CSI 300 advanced 10% over the week, the highest among the 10 industry groups. The benchmark index increased less than 0.1% over last week.

Markets and the Economy This Week

The Shanghai Composite Index gained 0.5% on Monday, negating losses of around 1.6% at the close. Gains were led by construction and railway stocks. Analysts were of the view that a bullish sentiment about Chinese stocks continued to prevail. Construction and railway related stocks had emerged as the top performers because investors believe that more targeted economic measures were in the offing, they opined.

The CSI 300 added 0.8% while the Hang Seng declined 1%. The Hang Seng China Enterprises Index lost 0.2% following a slump in industrial stocks. In contrast, a gauge of industrial stocks within the CSI 300 gained 2.7%, the highest among the ten industry groups. Small-cap stocks also registered gains with the ChiNext increasing 2.1%.

The benchmark index moved past the 3,000 mark on Tuesday. Weak manufacturing data sparked speculation that the government will ease monetary conditions further to boost the economy. The HSBC/Markit China Flash PMI declined to 49.5 from the final figure of 50 in November. A level below 50 signifies contraction and this was the first such reading in seven months.

The Shanghai Composite Index gained 2.3% to close at its highest point since Apr 2011. In contrast, the Hang Seng China Enterprises Index lost 0.7%. The Hang Seng also declined, by 1.6%. However the CSI 300 added 2.7%. A sub-index of financial stocks advanced 6.3%, the highest among the 10 industry groups. Eight of the top 10 gainers were brokerage stocks. 

The Shanghai Composite Index jumped to its highest point in four years on Wednesday, gaining 1.3%. Speculation that the government will ease monetary conditions and reduce capital requirements, which will enable brokerages to increase margin lending, was responsible for the day's gains. Analysts were of the view that brokerage stocks had good fundamentals and would emerge as the largest beneficiaries of the bull market.

The CSI 300 increased 1.7%. The Hang Seng lost 0.4%, following a slump in casino stocks. However, the Hang Seng China Enterprises Index advanced 1.2%. A gauge of financial stocks within the CSI 300 increased 5.3%, the highest among the 10 industry groups.

According to media reports, the country's market regulator was looking for an opportunity to introduce new regulations regarding the management of risk control indicators for brokerages. Revised rules would allow brokerages to reduce the limit on the net capital to net asset ratio.

Stocks slipped today and the Shanghai Composite Index lost 0.1%. These losses were a result of a surge in money market rates which increased because of the beginning of the year's largest new share sales. A slump in shares of electric car manufacturer BYD Co. also contributed to the day's losses. The company is backed by Warren Buffett's Berkshire Hathaway Inc. (BRK.A) (BRK.B).

Analysts believe investors will possibly allocate around 3 trillion yuan ($483 billion) towards orders for 12 IPOs to be introduced from today til Dec 25. They opined that even though this has resulted in higher pressure on liquidity, a correction was unlikely in the near future.

The CSI 300 declined 0.4%. In contrast, the Fed's statement on the timing of an interest rate hike resulted in gains for shares in Hong Kong. The Hang Seng advanced 1.1% while the Hang Seng China Enterprises Index added 0.5%.

Stocks in the News

Baidu Inc. confirmed on Wednesday that the Chinese search engine giant had acquired a stake in car-hailing app Uber Technologies Inc. 

At a joint press conference held in Beijing on Wednesday Baidu's founder Robin Li said, “The car hailing industry is still in the early stage of development. It's a huge market and has a lot of potential.”

The announcement follows media speculations that Baidu was looking to make an investment of up to $600 million. Uber is expected to get cash and non-cash assets including Baidu's online resources as owner of China's biggest Internet search engine. This is nearly 50% of the $1.2 billion raised earlier this month through a new round of funding.

Baidu's investment in Uber will enable it to further strengthen its offerings in the space against China's biggest e-commerce operators, Alibaba (BABA) and Tencent Holdings.

China Unicom (Hong Kong) Ltd. and China Telecom Corp. Ltd. will expand their hybrid LTE network trials to 15 more cities. The country's ministry of industry and information technology approved requests from the two companies to expand trials to more cities. China Telecom and China Unicom have been awarded licenses to operate FF-LTE services across 56 markets.

This move will help the two companies compete more effectively with the leader in the 4G segment, China Mobile Ltd. (CHL). The world's largest telecom operator already offers commercial TDD-LTE services in the country. Last month, China Mobile said that it has 50 million 4G connections.

The company already has 570,000 4G base stations. These are expected to increase to 700,000 by end-2014. In comparison, China Unicom had 2.7 million 4G connections at the end of September. China Telecom had 1.3 million 4G connections at the same point.

Qihoo 360 Technology Co. (QIHU) announced that it will form a joint venture with Coolpad Group Ltd. to manufacture mobile devices for the local market.

Qihoo will shell out $409.05 million and acquire a 45% stake in the new entity. The new entity will focus on building handsets that will mostly be distributed online.

Qihoo will be the provider of key mobile services for Coolpad's smartphones. Per the agreement, this will include security, app store and search.

The smartphones will be marketed under Coolpad's existing brand, Dazen. Recently, Chinese pop star Han Geng uploaded a photo of a Coolpad Dazen X7 smartphone on his official Weibo account. The most startling thing about the smartphone was that it seemed to be made out of glass entirely. According to reports, this handset will be rolled out in 2015 with a price tag of around $807.

The JV will bring together Qihoo's strong competence in mobile app development, online marketing and Coolpad's extensive knowhow in smartphone design, production, supply chain management and after-market services.

JinkoSolar Holding Co., Ltd. (JKS) declared that it has supplied solar photovoltaic (“PV”) modules with a capacity of 80 megawatts (“MW”) to China General Nuclear Power Group. The PV modules will be used for a solar project in the Neihuang County of Henan Province.

The solar panels will be mounted on the rooftops of traditional agriculture greenhouses of the region and is expected to be connected to the grid by 2014-end.

Neihuang County is an agricultural region that witnesses continually rising demand for electricity. This agricultural solar project will not only occupy less space but also generate clean power from alternative sources of energy.

CNOOC Ltd. (CEO) started production at the Liuhua 34-2 gas field located in the South China Sea. The gas field is part of the Liwan Gas Project which is made up of three natural gas fields. These are: Liuhua 29-1, Liwan 3-1 and Liuhua 34-2. CNOOC has a 51% stake in the project and operates the onshore Gaolan Terminal and shallow water facilities.

The remaining 49% is held by Husky Energy which operates deepwater infrastructure. The Lihua 34-2 gas field has a water depth of 850-1250 meters. It has one producing well which has an output of around 30 million cubic feet per day. In March, another gas field Liwan 3-1 began operations.

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 have registered some of the highest gains in nearly 4 years this week. Markets moved upward for most of the week following speculation about further monetary easing as well as targeted reform measures.

The possibility of a reduction in capital requirements have also contributed to gains for stocks. Economic data has been largely dismal in nature, but has lifted stocks since such reports have increased speculation that the government will take additional steps to boost the economy.

Next week is completely devoid of any important economic data. Stocks slipped today following a rise in money market rates caused by the beginning of a series of new share sales. This is expected to create a liquidity crunch but analysts believe a correction is unlikely in the near future. Given the prevailing market sentiment, China's stocks are likely to move upward in the days ahead.

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