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BABA: Language Barrier (F1Q16)

Takeaway: Mgmt is having difficultly communicating with the street; something it can't afford given the fundamental headwinds across its business

KEY POINTS

  1. F1Q16 = LANGUAGE BARRIER: Mgmt failed to properly flag the financial impact of the suspension of its lottery business and the transfer of its SME business to Ant Financial.  Collectively, these headwinds hampered total revenue growth by 8 percentage points, leading to F1Q16 revenue growth of 28% vs. consensus expectations of 33%.  Note that we were also taken by surprise (covered Short) since we didn't understand the financial impact of the suspended lottery business either.  These lapses in communication could become a recurring issue since BABA is a foreign company (less stringent reporting requirements) that doesn't provide financial guidance.
  2. FUNDAMENTALS STILL SOFT REGARDLESS: China Retail revenue growth still decelerated to 29% (ex lottery); below street expectations of 31% that we thought were light heading into the print.  That compares to 32% and 39% in F3Q15 and F4Q15, respectively.  GMV continued to slow, growing 36% y/y (ex lottery) vs. 40% and 49% in in F3Q15 and F4Q15, respectively.  Take-rates also inflected lower on a y/y basis, with desktop take-rates declining at its sharpest y/y rate in BABA's reported history.  
  3. MOBILE OR DESKTOP, NOT BOTH: We're referring to the mobile debate.  The bull case is that mobile take-rates will ascend to desktop levels.  Our bear case is that one grows at the expense of the other, and the two will most likely converge rather than meet up top since we believe that traffic mix is predominant driver of each (see note below for detail).  We suspect mobile take-rates may start topping out with mobile traffic mix already at or above 85% (our estimate).

 

BABA: Language Barrier (F1Q16) - BABA   Ad take rates

BABA: Language Barrier (F1Q16) - BABA   Mobile Mix

 

 

Let us know If you have any questions or would like to discuss in more detail.

 

Hesham Shaaban, CFA

@HedgeyeInternet

 

 

BABA: Tactical Cover

07/16/15 08:46 AM EDT

[click here]

 

 

BABA: The Mobile Debate

03/04/15 10:34 AM EST

[click here]

 


Devaluation Nation: Thoughts on China’s Currency Move

Editor’s Note: Below is a transcript of Hedgeye CEO Keith McCullough’s remarks on The Macro Show yesterday morning following the big news out of Beijing. If you would like to subscribe to our live, interactive show where we take subscriber questions click here.

*  *  *  *  *

Devaluation Nation: Thoughts on China’s Currency Move - z china

 

Today’s top three things:

 

  1. China
  2. China
  3. China

 

You wake up to these non-linear, central-planning surprises, but you also wake up to something that is proactively predictable within the non-linearity. What do I mean by that? It’s non-linear because it’s a surprise. This of course is the biggest move in 20 years by the Chinese. But it’s a 2% move, so some will say, “Oh ho-hum. It’s not that much on an absolute basis.” But again, history will tell you that when a country starts to move down the slippery slope of an ideological path which is the proactively predictable point, it’s the first of many.

 

It’s the first of many.

 

So the Chinese have done effectively, they’ve tried almost everything that America has taught them… and Japan has taught them… and Europe has taught them… But now they are going to go to the wood and going to start to devalue their currency.

 

Every country in modern human history has tried this. You’ll note that it hasn’t worked. Maybe they don’t have to be beholden to that reality because they are a communist country? But again, it is what it is this morning.

 

The Chinese stock market—get this—is down one basis point on the news. One basis point on the news. So they’re centrally puppeteering this whole thing at this point.

 

It’s also telling you that the GDP number that they had allegedly in the second quarter (which they reported within a week of the second quarter ending, which was just magnificent) is not a 7.0. The 7.0 is just not a 7.0. With exports down -9%, what they’re doing now is panicking. They’re panicking. They’re making moves that they didn’t think they’d have to make this quickly. Again, trying to centrally plan a stock market and at this point devalue the currency should sound very familiar to countries that have panicked in the past.

 

It is what it is.

 

Devaluation Nation: Thoughts on China’s Currency Move - China cartoon 08.11.2015

 

The regional fallout on that—Thailand, Taiwan, Indonesia, Singapore—big, big places, at least in terms of what has mattered historically to Asian asset allocation, Asian foreign currency asset allocations, equity markets. These markets are down 4-6% in the last month. If you didn’t know why, now you know.

 

The Chinese are going to start to compete with not only their customers, but with their people. With their people, they lose purchasing power. When you devalue a currency of a person, you can try it at home. You can take a Canadian loonie and just cut it in half, and you will say, “Wow that is worth less than what it was worth yesterday.” It used to be illegal in the US to do that, its called clipping coins.

 

So again, this is what it is. This is going to have much more unintended consequences than any of us could possibly think of right here. 


How Many Market Generals Get Shot Before the Army Crumbles?

 

During this recent edition of RTA Live, Hedgeye CEO Keith McCullough pulls no punches as he walks though the rising risks in the market with macro analyst Darius Dale.

 

 

Subscribe to Real-Time Alerts today for access to this and all other editions of RTA Live. 

 

Subscribe to Hedgeye on YouTube for all of our free video content.

 


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LEISURE LETTER (08/12/2015) - MPEL, 880.HK, CCL, NCLH

TICKERS: MPEL, 880.HK, CCL, NCLH 

 

EVENTS   

 

August 28: 10:00am: PENN - Meeting with Management at Plainridge Park  

COMPANY NEWS     

MPEL - Studio City International Holdings Ltd, a joint venture in which Melco Crown Entertainment Ltd owns a 60 percent interest, said on Tuesday it is preparing  a “contingency plan” ahead of any gaming table allocation decision by the Macau government for its Studio City casino resort.  “Because of the possibility that the table allocation for Studio City’s gaming area may be lower than anticipated, Studio City International Holdings Ltd has engaged Kirkland and Ellis LLP as its counsel and Moelis and Co LLC as its investment banker to assist it with contingency planning ahead of any table allocation decision for Studio City,” the Melco Crown majority-owned unit said in its Tuesday press release. 

ARTICLE HERE

Takeaway: It's pretty clear Studio City will not get 400 tables - 150-200 is more likely.  

 

1680.HK - Construction of casino operator Macau Legend Development Ltd’s Legendale Hotel in Macau Fisherman’s Wharf may be hindered by controversy over the height of the building, according to company executive vice-president Frederick Yip Wing Fat. “We may possibly see a delay. But definitely we’re building it,” Mr Yip told reporters.

ARTICLE HERE

 

CCL - Seabourn has revealed design renderings of the luxurious all-suite, all-veranda accommodations on Seabourn Encore, the line's newest ship set to launch late 2016.  Seabourn Encore will feature 300 spacious, well-appointed suites, all of which include a private veranda. The majority of the ship's suites range from nearly 300 square feet for the standard veranda suite, plus a veranda that is up to 74 square feet, to upwards of 1,300 square feet for the Wintergarden suites, which also feature verandas of nearly 200 square feet. 

ARTICLE HERE

 

NCHL - Port of Seattle and NCLH sign 15 year deal. Norwegian Cruise Line Holdings will continue operating out of Pier 66 until at least 2030 and split with the Port of Seattle an estimated $30 million in facility upgrades. 

ARTICLE HERE

INDUSTRY NEWS 

Japan Gaming- Japan’s ruling Liberal Democratic Party has given up efforts to push through a bill to legalize casinos in the current extended session of the parliament, the Shingetsu News Agency reports.  Passage of the integrated resort bill in the current session had been looking increasingly unlikely in recent weeks, as the political power of some of the main backers of legalizing casinos in Japan waned, including that of Prime Minister Shinzo Abe.

ARTICLE HERE

 

Shanghai Cruise Port -  Shanghai, the destination of this year’s 10th China Cruise Shipping event, plans to expand its Shanghai Wusongkou International Cruise Terminal (SWICT) to accommodate increasing demand. It is building another two berths, which will mean fourth berths total. Two  spaces will be for Oasis-class vessels, while the remaining two berths can handle megaships up to 150,000 tons, according to the port.

ARTICLE HERE

 

River Cruises - A stranded cargo vessel has added further itinerary changes and cancellations to the list of delays and cancellations caused by low water levels on the Danube in recent weeks. 

ARTICLE HERE

Takeaway: It has been a tough summer for River Cruise operators. 

 

Nepal Gaming - The development of Nepal’s casino gaming industry potentially offers investors access to gaming assets that are not dependent on Chinese players, says a new report from Union Gaming Securities Asia Ltd.  

  • The institution added that the key target market for Nepal’s casinos is middle class Indians – many of whom are already familiar with a number of forms of gambling, and are significantly under served domestically in terms of casino venues. Union Gaming estimates India today generates as much as US$10 billion per year in gross gaming revenue (GGR). This includes legal and non-legal types of gambling, and casino and non-casino gambling, it added.
  • “We would highlight that there are more than 300 million persons living in the three Indian states immediately adjacent to Nepal and approximately 400 million when including the state of West Bengal…Granted, like most of India the majority are too poor to be considered target customers, but this still leaves many millions of individuals who are, indeed, potential casino customers,” stated the Union Gaming analyst.

ARTICLE HERE

 

Regional Gaming Revenues

 

Iowa - July GGR (SSS): +1.7% YoY 

Detroit - July GGR (SSS): +3.1% YoY 

MACRO

China - PBoC followed up on yesterday's 1.9% yuan devaluation with a 1.6% devaluation today. 



Purchase Apps | ↓ WoW, ↓QoQ, ↑ YoY,

Takeaway: Purchase Apps slide to start August. Retreat in Rates builds as an emergent tailwind. July Permits data (next tues) set for steep decline

Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume.

 

Purchase Apps | ↓ WoW, ↓QoQ, ↑ YoY,  - Compendium 081215

 

The last few weeks of high frequency purchase data have been largely uneventful with activity oscillating above and below the 200-level on the index. 

 

Demand Retreat:  Purchase demand retraced last week’s gain, declining -3.5% WoW while decelerating -300bps sequentially to +19.8% year-over-year.   On a quarter-over-quarter basis, 3Q is currently tracking down -1.1%.   As we highlighted last week, the rate-of-change setup for purchase demand is showing a marginal shift. 

Both sequential and year-over-year acceleration in purchase activity characterized the first half of the year, but now, with the data cresting on an absolute basis, sequential growth in 3Q is tracking negative while year-over-year growth is accelerating against trough 4Q comps.  

 

Rate Retreat:  Rates, which remain the lead ST swing factor, held flat at 4.13% in the latest week but should see downward pressure on a lag to the step function retreat in treasury yields over the past week.      

 

Lower rates, stemming mostly from OUS turmoil can provide transient benefit. 

 

Global Macro tumult is insidious, but usually manifests on a lag domestically so, in the nearer term, ↓rates =  ↑ affordability = ↑ room for prices to rise = ↑ housing.  It wasn’t particularly surprising to see Housing green yesterday alongside the decline in rates.

 

Boringness Retreat:  In contrast to the stagnant purchase demand trend, next week’s Starts and Permits data may be more interesting. 

 

To Review:  The +295% YoY growth in MF permits in the Northeast ahead of the impending NYC tax exemption expiry helped augment the Total Starts figures for a second month in June and drove MF share of total up to a 42-year high.  Indeed, after rising a resounding +385% YoY in May, permits in NY state went vertical to +632% YoY in June.   A reversal of that pull forward sets the stage for a retreat in the reported July data reported next tuesday.  For context, a decline back to the TTM average in permits in the Northeast implies a -12-13% sequential decline, taking the total back below 1.2 MM from the post-crisis high of 1.34 MM recorded last month. 

 

We’ve highlighted this potentiality for the last month and consensus has recently ratcheted down Permit expectations to 1217K so that idiosyncratic dynamic has seen some discounting.  The risk may still to the downside but, in any case, it will be the first steep decline in housing data we’ve seen in some time.  

 

Purchase Apps | ↓ WoW, ↓QoQ, ↑ YoY,  - NY Permits

 

Purchase Apps | ↓ WoW, ↓QoQ, ↑ YoY,  - NE Permits

 

Purchase Apps | ↓ WoW, ↓QoQ, ↑ YoY,  - Purchase 2013v14v15

 

Purchase Apps | ↓ WoW, ↓QoQ, ↑ YoY,  - Purchase YoY

 

Purchase Apps | ↓ WoW, ↓QoQ, ↑ YoY,  - Purchase Index   YoY Qtrly

 

Purchase Apps | ↓ WoW, ↓QoQ, ↑ YoY,  - Purchase   Refi YoY

 

Purchase Apps | ↓ WoW, ↓QoQ, ↑ YoY,  - Purchase LT

 

Purchase Apps | ↓ WoW, ↓QoQ, ↑ YoY,  - 30Y FRM

 

 

About MBA Mortgage Applications:

The Mortgage Bankers’ Association’s mortgage applications index covers more than 75% of mortgage applications originated through retail and consumer direct channels. It does not include loans delivered through wholesale broker and correspondent channels. The MBA mortgage purchase applications index is considered a leading indicator of single-family home sales and construction. Moreover, it is the only housing index that is released on a weekly basis. 

 

Frequency:

The MBA Purchase Apps index is released every Wednesday morning at 7 am EST.

 

 

Joshua Steiner, CFA

 

Christian B. Drake

 


FINANCIALS SENTIMENT SCOREBOARD - First American (FAF) and Federated Investors (FII)

Takeaway: We are flagging First American (FAF - Score: 17) and Federated Investors (FII - Score:13) as longs on sentiment and short interest.

This morning we are publishing our updated Hedgeye Financials Sentiment Scoreboard in conjunction with the release of the latest short interest data last night. Our Scoreboard now evaluates over 300 companies across the Financials complex.

 

The Scoreboard combines buyside and sell-side sentiment measures. It standardizes those measures to an index of 0-100, where 100 is the best possible sentiment ranking and 0 is the worst. Our analysis shows that a contrarian strategy can be employed successfully by taking the other side of stocks with extreme readings in sentiment, either bullish or bearish. Once sentiment reaches these extreme levels, it becomes a very asymmetric setup wherein expectations become too high or too low.  

 

We’ve quantified the tipping points for high and low sentiment. Specifically, we've found that scores of 20 or lower have a positive, average expected return while scores of 90 or greater are more likely to underperform.

 

Specifically, our backtest of 10,400 observations over a 10-year period found that stocks with scores of 0-10 went on to produce an average absolute return of +23.9% over the following 12-month period. Scores of 10-20 produced an average absolute return of +11.9%. At the other end of the spectrum, stocks with sentiment scores of 90-100 produced average negative absolute returns of -10.3% over the following 12-months.

 

The first table below breaks the 300 companies into a few major categories and ranks all the components on a relative basis. The second table breaks the group into smaller subsectors and again gives them relative rankings within those subsectors. 

 

This week we're flagging First American (FAF - Score: 17) as a long as our 3Q15 call to "hide out" in Housing favors the title insurers. We are also highlighting Federated Investors (FII - Score: 13) as screening well from both a sentiment/short interest and a fundamental research standpoint (see our latest FII research HERE). FII stock is one of the few asset management stocks that is up year-to-date in 2015.

 

FINANCIALS SENTIMENT SCOREBOARD - First American (FAF) and Federated Investors (FII) - SI 1

 

FINANCIALS SENTIMENT SCOREBOARD - First American (FAF) and Federated Investors (FII) - SI 2

 

FINANCIALS SENTIMENT SCOREBOARD - First American (FAF) and Federated Investors (FII) - SI 3

 

The following is an excerpt from our 90 page black book entitled “Betting Against the Herd: Generating Alpha From Sentiment Extremes Across Financials.”

 

Let us know if you would like to receive a copy of our black book, which explains this system and its applications.

 

BUYS / LONGS: Financials with extremely low sentiment readings of 20 and below on our index (0-100) show strong average outperformance in absolute and relative terms across 3, 6 and 12 month subsequent durations.  Stocks with sentiment ratings of 20 or lower rise an average of +15.1% over the next 12 months in absolute terms.   

 

SELLS / SHORTS: Financials with extremely high sentiment readings of 90 and above on our proprietary sentiment index (0-100) demonstrate a marked tendency to underperform in absolute and relative terms across 3, 6 and 12 month subsequent durations.  Stocks with sentiment ratings of 90 or greater fall in value an average of -10.3% over the next 12 months in absolute terms. 

 

 

FINANCIALS SENTIMENT SCOREBOARD - First American (FAF) and Federated Investors (FII) - Absolute 12 mo

 

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.33%
  • SHORT SIGNALS 78.51%
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