A Look at the FXI and the HSI Indices

by: L. Desjardins

The FT/Xinhua A 50 Index (NYSEARCA:FXI) has been stuck in a narrow range for the past 5 weeks hovering above the 9000 mark. Interim results for the main constituents have been generally good (see below) but expectations for the next six months are more subdued. Similarly the FXI is at the bottom of a 12 weeks trading range. For its part, the Hang Seng Index (HSI) has dropped 5.8% since August 9.

The HSI may get a boost from the better performance of the S&P 500 on Friday, but expectations remains for a weak market overall. Now that most of the interim results are out, the market will trade even more on the global economy outlook and the ups and downs of Wall Street. In Shanghai, the indices will remain at the mercy of rumours particularly in regard to restrictions for the property market. For instance on Friday, property developers listed in Shanghai dropped on speculation the government will introduce a property tax. Such a tax have already been announced but no time frame has been given. Speculation is now on when will the tax be implemented.

INDICES 1 week 4 weeks YTD
Hang Seng Index -1.8% -2.1% -5.8%
HS China Enterprises -3.3% -4.3% -10.9%
FTSE/Xinhua A50 -1.8% -2.4% -24.9%
Shanghai Composite -1.2% -1.0% -20.3%
CSI 300 -1.4% -0.5% -19.7%
EWH -0.1% 1.3% 0.5%
FXI -1.4% -3.1% -7.4%
PGJ -1.7% -2.3% -4.7%
Click to enlarge

The weakness comes largely from financials which have dropped 4.4% in the past 4 weeks. Results for the main Chinese and Hong Kong banks have been good, but concerns of bad loans on China banks books along with restrictions on new mortgages and risks of a slowdown in the economy have lowered expectations.

SECTORS – CHINA 1 week 4 weeks YTD
CSI300 Energy -3.0% -1.7% -29.8%
CSI300 Materials -0.9% 2.8% -22.6%
CSI300 Industrials -1.0% 0.5% -13.1%
CSI300 Cons. Discretionary 0.9% 5.6% -9.6%
CSI300 Cons. Staples 1.4% 6.9% -5.1%
CSI300 Healthcare 2.5% 5.6% 8.0%
CSI300 Financials -2.7% -4.4% -26.2%
CSI300 Technology -0.4% 1.1% 7.2%
CSI300 Telecom -0.1% -3.2% -26.2%
CSI300 Utilities -2.2% -2.9% -17.7%
SECTORS – HONG KONG 1 week 4 weeks YTD
HS Financials -2.1% -4.4% -10.6%
HS Utilities 0.5% -0.1% 9.8%
HS Property -0.7% -0.8% -4.3%
HS Commerce & Industry -2.1% 0.3% -1.5%
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Interim results from FXI constituents:

China Construction Bank (OTCPK:CICHY): On August 22, Reuters reported that the bank posted a 20 percent rise in second-quarter profit, which beat analysts' expectations.

Aluminum Corp of China (NYSE:ACH) (Chalco): On August 23, on its website, the company reports first half net profits of Yuan 530.6 million without a comparison to last year's profits. For the period revenues were Yuan 59.8 billion. On the same day Bloomberg notes: “(Chalco) had a net loss of 96 million yuan for the three months ended June 30, based on figures from the Chinese aluminum maker’s first-half earnings statement.”

China Petroleum and Chemical Corp.(NYSE:SNP) (Sinopec): On August 23, on its website, the company announced:In accordance with the International Financial Reporting Standards [IFRS], in the first half of 2010, the Company’s turnover, other operating revenues and other income amounted to RMB 936.5 billion, up 75.4% from the same period in 2009. Net profit attributable to equity holders of the Company was RMB 35.5 billion, up 6.7% over the same period of last year. Basic earnings per share was RMB 0.409, up 6.7% over the same period of last year.”

Ping An Insurance (OTCPK:PNGAY): On August 24, Bloomberg writes: “Ping An Insurance, China’s second-biggest insurer, said first-half profit climbed 29 percent as premiums expanded and its property-insurance unit made money. Net income rose to 9.61 billion yuan ($1.4 billion), or 1.3 yuan a share, from a restated 7.48 billion yuan, or 1.02 yuan, a year earlier, the Shenzhen-based company said in a Hong Kong stock exchange filing today, citing International Financial Reporting Standards.” It further writes: “A 43 percent increase in net premiums earned helped Chairman Ma Mingzhe defy the impact of a stock-market rout on investment returns. Ping An expects profit to be “stable” this year after 2009’s almost 10-fold jump, as equities will only see a “gradual recovery” rather than sharp gains, President Louis Cheung said in an interview April 19.”

China Life Insurance Co (NYSE:LFC): On August 25, Bloomberg writes: “China Life Insurance, the nation’s biggest insurer, said first-half profit rose 7.4 percent as premium income rebounded after a decline last year, when adjustments to its product mix slowed sales. Net income climbed to 18 billion yuan ($2.7 billion), or 0.64 yuan a share, from a restated 16.8 billion yuan, or 0.59 yuan, a year earlier, the Beijing-based insurer said in a statement to the Hong Kong stock exchange today. Chairman Yang Chao lifted income from premiums by 12 percent through efforts to curb single-premium sales in favor of more-profitable longer-duration products. Net realized gains on investments fell almost 50 percent as China’s stock market tumbled, according to the statement.”

Air China (OTCPK:AIRYY): On August 25, Bloomberg writes: “Air China Ltd., the world’s largest carrier by market value, boosted first-half profit 60 percent on surging travel demand and fuel-hedging gains. Net income rose to 4.61 billion yuan ($679 million) from 2.88 billion yuan a year earlier, the company said in a Hong Kong stock exchange statement late yesterday. Sales rose 51 percent to 34.8 billion yuan. Profit beat the 3.9 billion yuan average of four analyst estimates compiled by Bloomberg.”

China Telecom (NYSE:CHA): On August 25, BBloomberg writes: “China Telecom, the country’s biggest fixed-line carrier, posted second-quarter profit that beat analyst estimates after the company almost doubled the number of users at its mobile-phone unit. Profit excluding gains from connection fees rose 22 percent to 4.54 billion yuan ($668 million) from 3.71 billion yuan a year earlier, the Beijing-based company said in a statement on it website today. Income was projected to be 4.24 billion yuan, according to the average estimate of six analysts surveyed by Bloomberg News.”

PetroChina (NYSE:PTR): On August 26, Bloomberg writes: “PetroChina Co. said net income for the first half ended June 30 was 65.3 billion yuan, according to a statement to the Hong Kong stock exchange today. “ In a further report, Bloomberg writes:”Profit growth a PetroChina, Asia’s biggest company by market value, slumped in the second quarter after government controls on gasoline and diesel tariffs curbed gains from higher crude oil prices. Net income rose 4 percent to 32.8 billion yuan ($4.8 billion), according to calculations made by subtracting first- quarter earnings from six-month profit reported by the company in Hong Kong today.”

Bank of China (OTCPK:BACHY): On August 26, Bloomberg writes: “Bank of China, the nation’s third-largest lender by market value, said first- half profit gained 27 percent, aided by rising demand for loans and an improvement in asset quality. Net income climbed to 52 billion yuan ($7.6 billion), or 0.20 yuan a share, from a restated 41 billion yuan, or 0.16 yuan, a year earlier, Beijing-based Bank of China said in a statement today. Profit matched the 52.3 billion yuan average estimate of 10 analysts surveyed by Bloomberg.”

Industrial and Commercial Bank of China: On August 26, Bloomberg writes: “ICBC, the world’s largest lender by market value, posted a 38 percent gain in second-quarter profit as margins widened and demand for loans and fee-based services increased. Net income climbed to a record 43 billion yuan ($6.3 billion) from 31.27 billion yuan a year earlier, based on figures released by the Beijing-based company today. Profit beat the 40.25 billion yuan average estimate of 10 analysts surveyed by Bloomberg.”

China Unicom Hong Kong (NYSE:CHU): On August 26, Bloomberg writes: “China Unicom posted a steeper-than-estimated 54 percent drop in profit after the country’s only carrier selling Apple Inc.’s iPhone offered more handset discounts and boosted marketing spending. Second-quarter net income fell to 1.4 billion yuan ($205 million), from 3.05 billion yuan a year earlier, according to figures derived from first-half earnings reported by the company today. China’s second-largest wireless operator was expected to report profit of 1.45 billion yuan, based on the median estimate of six analysts surveyed by Bloomberg News.”

FTSE Xinhua A50 is a market capitalization weighted index comprising the 50 largest “A” (domestic) shares listed in China. In Hong Kong the ETF 2823:HK tracks the index; in the US, FXI tracks a sister index including only the 25 largest mainland companies listed in Hong Kong. The Hang Seng China Enterprises Index covers 40 “H” shares issued by mainland companies listed in Hong Kong. In Hong Kong the ETF 2828:HK tracks the index. The Hang Seng Index currently covers the 43 largest Hong Kong listed companies by capitalization. These HK listed companies include a number of mainland Chinese companies. In Hong Kong the ETF 2800:HK tracks the index. In the US, EWH tracks the MSCI Hong Kong Index which is substantially different from the Hang Seng Index.

Author's Disclosure: Long FT/Xinhua A 50