In addition to the daily COVID-19 headlines from China, news of a possible accounting fraud in Luckin Coffee Inc (LK US) hit the newswire on Thursday. Allegations that COO Jian Liu and some of his staff fabricated 76% of LK’s first three quarters of revenues, CNY 2.2 billion ($310MM) of CNY 2.9 billion ($409 MM) drove LK’s stock price down over 75%.
LK short interest is $240 million, 37.92% of its float, and shorts are up $1.14 billion in net-of-financing mark-to-market profits in 2020. Shorts were up +$687 million in mark-to-market profits on yesterday’s price drop, or 60% of their yearly profits in just one day.
Looking at the HK\Chinese market in total, our Blacklight SaaS platform and Black App shows us total short interest of $71.8 billion with aggregate short covering over the last month. We saw $666 billion of short covering over the last month with almost half, $294 billion, occurring over the last week. Short selling and covering activity were fairly even across the over 1,800 stocks with short interest that we follow with 27% of the stocks seeing an increase in short selling, 29% an increase in short covering and 44% with no change in shares shorted.
Ping An Insurance, Alibaba, Tencent, Pinduoduo and JD.com continue to lead the league tables as both short portfolio hedges and short Alpha plays in the HK\Chinese market.
The largest shorts in the HK\China region are:
The average Short Interest % Float the HK\Chinese market is 6.74%. Luckin Coffee has the largest SI % of Float in the HK\Chinese market as there is quite a bit of retail holders in the stock which are not normally in the stock lending market or using margin which allow brokers to rehypothecate and lend their shares. LK’s is 5.6 times the market’s average. Even with increased short selling demand, LK’s number should not increase dramatically as there is not a significant number of shares left available to borrow – shares shorted should not change much no matter how profitable the trade may be in the future.
The largest Short Interest % of Float in the HK\ China region are:
Along with having the largest Short Interest % Float, LK also has the highest stock borrow fee. As expected, increased short selling demand and a spike of long shareholder selling is drastically reducing the lendable amount of LK shares on the street. We are seeing stock borrow fees nearing 100% fee in the stock loan market today.
The largest Stock Borrow Fees in the HK\China region are:
Short sellers in the HK\Chinese region are paying $1.97 million in stock borrow financing costs per day, equating to $710 billion of financing expenses per year. LK short sellers make up 9.24% of the total stock borrow expenses in the HK\Chinese market. With LK’s stock loan rates climbing, LK short seller’s will be paying 20% of the overall street’s stock borrow expenses within the month.
The largest daily Stock Borrow expense in the HK\China region are:
The largest new short over the last month was AIA Group which issues life insurance and manages retirement planning, both business models that will see negative COVID-19 revenue pressure. E-commerce platform Pinduoduo’s increase in short selling is in response to a recent over-bought sentiment as it outperformed the Hang Seng Index since mid-March. Alibaba continues to be a major portfolio hedge and we’ve seen hedging activity in both its local and ADR shares.
The largest increase in Shares Shorted over the last 30 days in the HK\Chinese region are:
We are seeing short covering in short positions like Ping An Insurance, HSBC and Galaxy Entertainment as their short performance has been very profitable in March\April, up +14%, +29% and +22% respectively. Short sellers are covering their exposure in order to realize some of their profits and that buying activity is helping stabilize stock prices.
The largest decrease in Shares Shorted over the last 30 days in the HK\China region are:
We are seeing continued short selling in the following stocks, short selling in early March followed by continued short selling into April.
HK\China region short selling in the first three weeks of March and continued short selling recently:
We are seeing a reversal of short selling in the following stocks, short selling in early March followed by short covering into April.
HK\Chinese region stocks short selling in the first three weeks of March but short covering recently:
We are seeing continued short covering in the following stocks, short covering in early March followed by more short covering into April.
HK\Chinese region stocks short covering in the first three weeks of March and continued short covering recently:
We are seeing a reversal of short covering in the following stocks, short covering in early March followed by short selling into April.
HK\Chinese region stocks short covering in the first three weeks of March but new short selling in the 4th week:
Short selling activity can vary dramatically among the various sectors and change direction rapidly. Analyzing and incorporating short selling and short covering trends enhances both hedging efficiencies and Alpha (profit) generation. Using our analytical platforms allows investors and traders to gain insight into a side of the market which is usually invisible to most of the market and gain a market advantage over their competition.
Want deeper insight into the above analysis?
Contact: Ihor.Dusaniwsky@S3Partners.com
Managing Director Predictive Analytics, S3 Partners, LLC
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The information herein (some of which has been obtained from third party sources without verification) is believed by S3 Partners, LLC (“S3 Partners”) to be reliable and accurate. Neither S3 Partners nor any of its affiliates makes any representation as to the accuracy or completeness of the information herein or accepts liability arising from its use. Prior to making any decisions based on the information herein, you should determine, without reliance upon S3 Partners, the economic risks and merits, as well as the legal, tax, accounting and investment consequences, of such decisions.
