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Mar 2, 2017

S3 BLACKLIGHT: Hong Kong/China February Short Interest Recap

Short interest in the Hong Kong/China Region has decreased by $631 million in February, with total short interest at $58.1 billion.

Alibaba Grp (BABA US), Ping An Insurance (2318 HK) and Tencent Hldgs (700 HK) continue their strangle hold on the top three spots in the Hong Kong/China region with China Construction Bank (939 HK) and Baidu.com (BIDU US) both moving up several spots on the leader board.

Short sellers have piled into China Construction Bank (939 HK) as it hit a YTD high on February 23rd and is up 10% for the month. China has increased the amount of available credit in the markets and CCB. The second largest lender in China, is poised to increase gross revenues and hopefully margins on a resurgence of new loans. Short sellers see this 10% move as too aggressive, especially since most state financed banks tend to front load lending activity in the beginning of the year and suffer declines in activity by year end.

Short selling in the largest equity short in the world, Alibaba Group (BABA US), has been declining since late January with the stock up 17% for the year. Potential growth in its Cloud computing business and the Indian e-commerce space may spur revenues even higher. While the vast majority of short sellers are holding firm, over $900 million have bought to cover.

While short sellers were closing out BABA positions, they were increasing their short bets in internet search provider Baidu, Inc. (BIDU US). Their growth has been slowing and competition may further eat into their market share. BIDU Short interest has been declining since mid-year 2016, but we’ve seen a significant uptick since mid-February.

Lenovo Group (992 HK) share price tumbled as it reported a miss in 3rd quarter net income which came in at $98 million versus estimates of $145.9 million. Lenovo’s share price fell 7% on the news and is down 11% since reporting earnings. Shorts quickly jumped into the trade and began accumulating positions throughout the rest of February and they have been rewarded by being up $65 million for the month.

Short sellers in Ping An Insurance (2318 HK) felt the pain of over $255 million of losses in February as Chinese bond yields look to rise which would help increase margins on insurance products. Ping An Insurance’s longer duration insurance policies would benefit from a positive move in China’s yield curve. In the meantime, a 10 bp increase in short term repo rates will help boost near term revenues. Ping An Insurance’s stock price was up almost 3% in February.

Short sellers in 58.com, Inc. (WUBA US) built up their positions through all of 2016 as WUBA’s stock price declined 57% for the year. Short interest average $380 million and net of financing mark to market P/L was $260.4 million, a profit of 68.7% for the year. WUBA’s stock price rebounded in 2017, up 30% for the year, and short sellers gave back some of their profits. Short interests averaged $390 million and produced a loss of $116.4 million, or down 29.8%. Shorts are looking to close out their positions and realize some of their 2016 profits; look for P/L related short covering if WUBA’s stock continues to climb.

For more information on the above analysis, please contact:
Ihor Dusaniwsky, Head of Research, S3 Partners, LLC     Ihor.Dusaniwsky@S3Partners.net
The information herein (some of which has been obtained from third party sources without verification) is believed by S3 Partners, LLC ('S3 Partners') to be reliable and accurate. Neither S3 Partners nor any of its affiliates makes any representation as to the accuracy or completeness of the information herein or accepts liability arising from its use. Prior to making any decisions based on the information herein, you should determine, without reliance upon S3 Partners, the economic risks and merits, as well as the legal, tax, accounting and investment consequences, of such decision.

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