CHINA-GANSU-LANZHOU-XI JINPING-INSPECTION (CN)

Chinese President Xi Jinping claps (Wang Ye/Xinhua via Getty Images)

Mainland, painland

Chinese stocks are going wild on new stimulus measures. How long will it last?

Some Chinese equity indexes could really use the help. Others were already primed for a move higher.

9/24/24 9:30AM

Chinese policymakers have finally reached their breaking point.

Authorities in Beijing unveiled a slew of monetary and quasi-fiscal stimulus measures overnight intended to deliver a shot in the arm — if not engineer a genuine turnaround — for the nation’s sagging economy and Mainland stocks.

Here’s a non-exhaustive smattering of the policies:

Cutting mortgage rates on outstanding borrowing (by roughly 50 basis points)
Lowering the minimum downpayment on second homes from 25% to 15%
Reducing the reserve requirement ratio
Trimming its 7-day reverse repurchase rate by 20 basis points to 1.5%
800 billion yuan in “liquidity support” for the stock market

Is this suite of policies sufficient to improve an economy, and in particular, a housing market, in which the supply of credit to would-be homebuyers is a much smaller problem than the fact that around 50 million homes that have already been sold have not been completed (due to financial strains faced by many developers)?

In my mind, this is a rhetorical question. More charitably, let’s just say it’s debatable. No doubt, these will help on the margin, but marginal fixes don’t solve major problems.

For Chinese stocks, on the other hand, whether the fundamentals are that dire or actually fairly rosy depends on your point of view – or rather, which index of Chinese stocks you’re looking at.

Indexes that offer broad exposure to companies that trade on Mainland China exchanges in Shanghai and Shenzhen (known as “A Shares”) are arguably the most linked to China’s economy.

China’s aforementioned “liquidity support” for the stock market is likely to be geared towards A Shares. Frankly, that’s the group that could use the most support, based on persistently negative earnings revisions and lackluster performance. The overnight announcements have pushed an ETF that tracks the CSI 300 — the most commonly quoted gauge of A shares — out of negative territory for 2024.

Compared to the MSCI China Index or the FTSE China 50, the CSI 300 has more exposure to industrials, semiconductors, financial services (brokerages and investment banks), mining, and consumer staples companies.

And the CSI 300 doesn’t include some of China’s most well-known companies like Alibaba, Tencent, Meituan, and JD Inc. Those names are all very well-represented in the MSCI China and FTSE China 50, and are a big reason why 12-month forward earnings per share estimates have picked up more for those indexes than even the S&P 500 over the past three months.

Traders, understandably, are taking the message from Beijing at face value, sending all Chinese indexes sharply higher this morning.

But the fact that this is far from the first time in the past three years that Chinese policymakers have attempted to put a floor under the economy and stock markets — and Mainland stocks were trading at their lowest levels since 2019 — should give some cause for continued concern.

Luke Kawa3h

CoreWeave slumps after filings show top shareholder Magnetar Financial sold over $500 million in stock last week

CoreWeave is sinking after one of its earliest backers and top shareholders, Magnetar Financial, sold over $500 million in stock last week.

Filings released after the close on Friday showed the Illinois-based investment firm, its subsidiaries, and executives dumped $486 million from Wednesday through Friday, while separate statements released last Wednesday revealed $60 million in sales from earlier in the week.

After these divestments, Magnetar and its affiliated parties still own north of 72 million shares of the neocloud company.

Magnetar previously put on what looked to be a massive collar trade that protected the value of its CoreWeave position through mid-March of next year by selling calls with strike prices of $160 and $175 and buying put options with a strike price of $70. There were no derivative transactions reported along with any of last week’s sales.

In late March, Magnetar senior managing partner David Snyderman called CoreWeave “the gold standard now for AI infrastructure” and told Bloomberg that the firm had not used the IPO as an opportunity to reduce its stake. Synderman was among the Magnetar-affiliated parties that reduced their positions last week.

Matt Phillips3h

Bloom Energy rises after analyst updates

Fuel-cell-based power provider Bloom Energy jumped Monday after analysts at Bank of America and RBC Capital published somewhat contradictory commentary on the shares.

In its note, BofA said the company’s “new Brookfield partnership adds a blue-chip counterparty and reinforces its position at the center of the AI-driven power-resiliency build-out.”

But BofA analysts still rate the stock an “underperform,” citing “aggressive market assumptions” about the rate at which its recent announcements of partnerships and memorandums of understanding (MOUs) with potential data center clients, including Oracle, can be converted into actual revenue that justify the market’s assumptions about the coming years. They wrote:

“Bloom Energy would need to convert nearly all announced MOUs, accelerate project execution, and sustain 20%+ incremental margins, a steep execution curve for a company that has only recently achieved low-double-digit EBITDA margins. To reach 2030 levels, the company would need to achieve nearly double those deployments annually. The current valuation, in our view, already reflects this ‘blue sky’ scenario.”

And while BofA did raise its price target for the shares to $26 from $24, that’s roughly 80% below where the stock now trades.

Analysts at RBC, however, were much more sanguine about the prospects for the company. In a note published over the weekend, they raised their price target to $123 from $75, suggesting that the market seems to be pricing only a relatively modest part of the potential opportunity for Bloom represented by so-called behind-the-meter (BTM) data centers. (Those are data centers that have their own dedicated on-site power generation.) They wrote:

“We believe the upside opportunity continues to skew favorably on a growing BTM datacenter opportunity that we believe is still in the early stages. We acknowledge the competitive dynamics, but point to the recent partnership announcement with Brookfield as another proof point for the competitiveness of BE’s solution. We believe shares are priced for an incremental capacity increase which we think is supported by a large and growing TAM [total addressable market] opportunity.”

J. Edward Moreno4h

Grail rises after announcing $325 million raise from Hims, others

Grail, a cancer detection biotech, rose more than 20% after it announced that it raised $325 million from a slate of investors including Hims & Hers.

Grail sells a blood test that detects cancerous tumors early on. The company also announced encouraging trial results for its flagship test, Galleri, on Friday.

Grail sold 4,639,543 shares at $70.05, a discount from the $78 closing price on Friday, to a group of more than six investors. Hims did not immediately respond to questions from Sherwood News, including how much of the $325 million fundraise it contributed. Grail announced last week that it received a $110 million investment from Samsung.

Grail reported $67.4 million in revenue in the first half of this year, up from $58.6 million in the same period in 2024. Galleri is available commercially but is pending approval from the Food and Drug Administration, which could position it to be covered by major insurers.

Luke Kawa4h

AppLovin sinks amid report that multiple state regulators are looking into its data collection practices

Shares of adtech company AppLovin are on their back foot to open the week on the heels of a report from the New York Post that “state regulators, including staff from the attorneys general from Delaware, Oregon and Connecticut, have reached out to multiple short sellers, seemingly as part of a preliminary investigation.”

AppLovin told the Post that it is “not engaged in any investigations with any state attorneys general regarding its business; nor has the Company been contacted by any state attorneys general regarding any such alleged investigation.”

AppLovin got whacked earlier this month after Bloomberg reported that its data collection practices are the subject of an SEC probe. While they initially bounced after Wall Street suggested selling in response to the news was overdone, they’ve since proceeded to hit fresh lows even after AppLovin said that it had shut down software that short sellers alleged was responsible for installing apps on users’ phones without their permission.

Luke Kawa4h

Opendoor price target raised to a Wall Street high of $6 at Morgan Stanley

Morgan Stanley analysts raised their price target on Opendoor Technologies to the highest on Wall Street. However... they’re still not actually bullish on the online real estate company.

In a wide-ranging note on internet stocks as the Q3 earnings season heats up, analysts Brian Nowak and Matthew Cost (who covers Opendoor) wrote:

“While we see limited fundamental justification for OPEN’s recent outperformance, we also see the opportunity for a pivot back to home-buying (and significant operating leverage) should there be a stronger housing market recovery. Moreover, similar situations with other stocks have shown that higher valuations are not only often more sustainable than expected, but also create the opportunity for companies to raise capital and address challenges with the support of an enthusiastic shareholder base. With that in mind we mark our base case price target to market at $6.”

Morgan Stanley’s previous price target was $2. Analysts kept their “market perform” (or “hold”) rating on the company intact.

The obvious corollary here is GameStop, a company that has had a high value ascribed to the value of its cash based on the idea that CEO Ryan Cohen would be able to do a lot to transform the company with that money. Opendoor bulls are similarly enthused by the company’s turnaround prospects under its new management. Its biggest one-day gain on record came after news that cofounders Keith Rabois and Eric Wu were being added to the board of directors and that Shopify COO Kaz Nejatian was coming in to serve as CEO.

GameStop, without doing anything too revolutionary, has managed to turn around its business since its initial run as a meme stock, and has now strung together five consecutive quarters of positive operating cash flows for the first time in its history.

The sell side is pretty downbeat on Opendoor, with just one “buy” (or “buy” equivalent), five “hold,” and five “sell” ratings among analysts tracked by Bloomberg.