Growth Dragons Weekly: China Explosive Bond Demand and ADR Dividend Boosts
What happened in China this week:
Investors Rush to Buy China Bonds
China ADRs: Douyu’s 78% Dividend Yield and Lufax Special Dividend
Tencent Closes E-Learning Platform with 400 Million Users
Zhihu Introduces AI for Quick User-Generated Answers and Near Breakeven
Hainan Airlines Rescued by American Aviation
#1 Investors Rush to Buy China Bonds
There is a growing demand for Chinese assets, particularly government bonds. This surge has driven bond prices up and yields down. The demand is so high that the People's Bank of China (PBOC) has announced plans to borrow treasury bonds to sell them in the secondary market to meet this demand. This move aims to stabilize bond yields and prices. While China has been cutting interest rates, it is undesirable for yields to fall faster than intended. Such a scenario could divert capital from other productive assets, potentially leading to an economic slowdown and increasing deflationary pressures.
The high demand for bonds stems from a risk-off mentality among investors. With the once-favored real estate investment option losing appeal and a lackluster stock market, investors are increasingly turning to bonds. The capital-guaranteed nature of bonds can assuage investor fears, indicating a pessimistic outlook on the Chinese economy.
China’s PMI index also gives mixed signals. The Caixin China Manufacturing index was 51.8, up slightly from 51.7 in May, while the Caixin composite PMI dropped 1.3 percentage points to 52.8 due to a slowdown in the Caixin services PMI. This differs from China's official manufacturing PMI, which remained contractionary at 49.5 for June, according to the National Bureau of Statistics. Its composite PMI output index has been on a four-month downtrend, now at 50.5, due to a drop in the China non-manufacturing PMI. The Caixin China PMI tracks smaller, export-oriented businesses, while China’s official PMI tracks larger businesses.
Within the Chinese official manufacturing PMI, the employment index remained at the contractionary level of 48.1%, and the new order index decreased by 0.2 percentage points to 50.6%. In the official non-manufacturing index, the employment index dropped by 0.4 percentage points to 45.8%, and the new order index dropped by 0.2 percentage points to 46.7%.
Overall, this suggests that Chinese businesses are maintaining their expansion pace without accelerating. The economy's demand remains weak, driving increased demand for bonds, considered safer investments. Selling more bonds in the secondary market is a temporary measure to manage yields, but it must be coupled with other policies to stimulate the economy and restore confidence among the populace.
#2 China ADRs: Douyu’s 78% Dividend Yield and Lufax Special Dividend
Since the onset of the US-China trade war and the rising threat of delisting China ADRs traded on American exchanges, these shares have seen their prices plummet to record lows.
Recently, the tide has started to turn as Chinese owners of these ADRs have begun taking matters into their own hands. Douyu (DOYU), for instance, distributed a tantalizing 78% dividend yield due to holding nearly US$1 billion in cash. Even after this substantial dividend, Douyu continues to trade below its cash value. Read more here.
Similarly, Lufax (LU), a subsidiary of Ping An Insurance and an ADR traded on US exchanges, has struggled with both its fundamentals and share price performance. The app-based wealth management platform remains loss-making, with its share price down more than 50% since its IPO.
Like Douyu, Lufax is distributing a special dividend in shares instead of cash. This move will increase Ping An Insurance's stake from about 41% to nearly 57%. Consequently, it has triggered a mandatory cash offer of $2.254 per American Depositary Share (ADS).
However, this offer is merely to fulfill legal requirements. Given that the prevailing share price is over US$11 at the time of writing, it is unlikely that shareholders will sell their ADS at such low prices.
While these two incidents are independent of each other, they may signal a broader trend. ADRs could be starting to see value-unlocking events, potentially providing investors with opportunities to realize their investments in the foreseeable future.
We have compiled a list of China ADRs that are currently trading below their cash values. You can download the list using the link below: