Rebound is around the corner for Chinese developers
Last week we discussed the scenario of Hong Kong/China equity rebound due to the political environment change in China. HSI did end up close above the May open, creating a hammer candle in the monthly chart, and stood atop the 50 days moving average. Both showed strong bullishness from the chart perspective (Last week note here: www.tradingview.com/...might-be-overturned/)
As a continuation of the rebound story, earlier there were some developments on the Chinese developers front, which there might be a distress revaluation opportunity for traders to make bets on.
Update on Chinese Developers
After almost 2 years since the Chinese government imposed “3 red lines” rules on developers, which later leaded to the Chinese high-yield bond collapse in 2021 (majority of Chinese high-yield are issued by the Chinese developer), on May-17 the Chinese government finally showed sign of relaxation on the crackdown, by supporting some developers to issue domestic bond to ease their cash insufficiency. This development is under the backdrop of Chinese economic slowdown, as well as poor monetary/fiscal policy transmission capability with weakened property market.
As of today, there are 5 non-state-backed developers that have confirmed on the domestic bonds issue:
Note that investors of the newly issued bond also have the option to get protection by purchasing the credit risk mitigation warrant (CRMW), of which China Securities Finance Corporation (state-owned) is the underwriter of the warrant. The important message here is that, in order for the Chinese government to take a “short-put” position, they must have vetted the Chinese developer names and shortlisted the above 5 companies for the most solid fundamentals (and political correctness). Essentially, the Chinese government is doing stock picking for us.
Among this batch of developers, I would recommend Longfor (HKEX:960) and Country Garden (HKEX:2007). In the sector-wide distressed situation, companies with more deployable cash or financing capability actually have the optionality to acquire and consolidate weaker developers to strengthen their future market share. Longfor and Country Garden are the largest and healthiest financials among the list.
Comparing Longfor (HKEX:960) and Country Garden (HKEX:2007), the former actually have demonstrated stronger confidence among investors as one can tell from the severeness of price decline for the passed year. Hence if you are a less active investor who wants to buy this idea, go for Longfor (HKEX:960); for those who have the bandwidth for active management, Country Garden (HKEX:2007) might have more room for trading around positions with leverage.
Trading Plan for Country Garden (HKEX:2007)
Albeit the fact that I am writing a long side execution plan, please note that the stock technically is still in a bear trend, which we still see selling pressure near 20 and 50 days moving average. Hence this is not a trend following, but reversal-plus-breakout play, where more time is needed for the turnaround and breakout from the downtrend resistant levels.
Right now the stock is flirting around the 20 days moving average. One might want to place some protective bet at current level (in case of sharp upside movement with overnight news), or wait for the following 2 key level for turnaround confirmation:
For the bearish trend to continue, the stock must go through the 2 recent troughs. According to the trader’s conviction to the rebound stock, one might choose to scale in (i.e. average down the position cost) or scale out (i.e. partial cut loss) the position at these levels:
In terms of trading vehicle selection, apart from holding the stock outright, good news is that Country Garden (HKEX:2007) also has stock options available for trade. By using call option one can be immune from sharp drawdown in case of overnight bearish news, also better cash management for the natural leveraged nature of options. Note that Hong Kong listed stock options are less liquid compared to those in the US, I would recommend to choose expiration less than 3-4 months for narrower spread and more active quotation.
As a continuation of the rebound story, earlier there were some developments on the Chinese developers front, which there might be a distress revaluation opportunity for traders to make bets on.
Update on Chinese Developers
After almost 2 years since the Chinese government imposed “3 red lines” rules on developers, which later leaded to the Chinese high-yield bond collapse in 2021 (majority of Chinese high-yield are issued by the Chinese developer), on May-17 the Chinese government finally showed sign of relaxation on the crackdown, by supporting some developers to issue domestic bond to ease their cash insufficiency. This development is under the backdrop of Chinese economic slowdown, as well as poor monetary/fiscal policy transmission capability with weakened property market.
As of today, there are 5 non-state-backed developers that have confirmed on the domestic bonds issue:
- Longfor (HKEX:960)
- Country Garden (HKEX:2007)
- Media Real Estate (HKEX:3990)
- CIFI Holding (HKEX:884)
- Seazen (HKEX:1030)
Note that investors of the newly issued bond also have the option to get protection by purchasing the credit risk mitigation warrant (CRMW), of which China Securities Finance Corporation (state-owned) is the underwriter of the warrant. The important message here is that, in order for the Chinese government to take a “short-put” position, they must have vetted the Chinese developer names and shortlisted the above 5 companies for the most solid fundamentals (and political correctness). Essentially, the Chinese government is doing stock picking for us.
Among this batch of developers, I would recommend Longfor (HKEX:960) and Country Garden (HKEX:2007). In the sector-wide distressed situation, companies with more deployable cash or financing capability actually have the optionality to acquire and consolidate weaker developers to strengthen their future market share. Longfor and Country Garden are the largest and healthiest financials among the list.
Comparing Longfor (HKEX:960) and Country Garden (HKEX:2007), the former actually have demonstrated stronger confidence among investors as one can tell from the severeness of price decline for the passed year. Hence if you are a less active investor who wants to buy this idea, go for Longfor (HKEX:960); for those who have the bandwidth for active management, Country Garden (HKEX:2007) might have more room for trading around positions with leverage.
Trading Plan for Country Garden (HKEX:2007)
Albeit the fact that I am writing a long side execution plan, please note that the stock technically is still in a bear trend, which we still see selling pressure near 20 and 50 days moving average. Hence this is not a trend following, but reversal-plus-breakout play, where more time is needed for the turnaround and breakout from the downtrend resistant levels.
Right now the stock is flirting around the 20 days moving average. One might want to place some protective bet at current level (in case of sharp upside movement with overnight news), or wait for the following 2 key level for turnaround confirmation:
- 5.4-5.8: 50 days moving average and May-3 spike
- 6.75: Rebound peak from March market plummet
For the bearish trend to continue, the stock must go through the 2 recent troughs. According to the trader’s conviction to the rebound stock, one might choose to scale in (i.e. average down the position cost) or scale out (i.e. partial cut loss) the position at these levels:
- 4.1: May-12 bottom
- 3.3: Mar-16 bottom, lowest price made in march market plummet
In terms of trading vehicle selection, apart from holding the stock outright, good news is that Country Garden (HKEX:2007) also has stock options available for trade. By using call option one can be immune from sharp drawdown in case of overnight bearish news, also better cash management for the natural leveraged nature of options. Note that Hong Kong listed stock options are less liquid compared to those in the US, I would recommend to choose expiration less than 3-4 months for narrower spread and more active quotation.
