Short activity in the HK-China region has been very active as the Hang Seng is down almost -2.0% in September. Total short interest in the HK-China region is $104 billion and we have seen +$2.03 billion of new net short selling over the last month and +$716 million worth of new net short selling over the last week.
The names of the largest shorts in the region have not changed much since the beginning of the year besides Tencent Holdings (700 HK) replacing Xiaomi Corp (1810 HK) in the top five. Alibaba group ADR (BABA US) is the most shorted security in the region with its local shares, 9988 HK, now also in the top ten. Between the two listings there has been $2.18 billion of new short selling in the Alibaba which means that new short selling and new short covering over the last month in all the other names in the HK-China region are relatively flat – increased short selling in one name offset by increased short covering in another.
Besides Alibaba (BABA US & 9988 HK), JD.Com (JD US) was the only stock with over $500 million of new short activity over the last month. After hitting its year-to-date high on September 2nd, JD’s stock price is having a bit of a pullback and is down -9.8% since that high. Shorts may be looking for the stock to give back a larger piece of its year-to-date gains and consolidate before resuming its upward march. Shorts are also active in the broader Xtrackers Harvest CSI 300 China A ETF (ASHR US) with shares shorted almost doubling its short interest over the last month.
Ping An Insurance (2318 HK) continues to see its short interest decline as the price weakness we have seen since early July is starting to disappear and the stock price has risen slightly with price stability over the last two weeks. We are also seeing some short covering in the iShares China Large Cap ETF (FXI US) as shorts move away from the concentrated FTSE China 50 of the FXI ETF to the broader CSI 300 index of the ASHI ETF for short market exposure.
The Hang Seng Index is down -12.29% for the year and down -1.79% for the month of September, but for short selling, as well as most business activities, timing is everything. Shorts in the HK-China market are down -17.55% for the year and only up +0.90% in September. The reason for the discrepancy between the performance of the index and the performance of the short positions is the timing of incremental short selling and short covering throughout the year.
In the first three months of 2020 the Hang Seng was down -16.27% and hit its year-to-date low in late March, but short sellers only added +$689 million of additional short positions to their holdings. The Hang Seng index rallied after the 1st quarter, up +4.75% from April to September 16th, and during this rally, short sellers added $4.7 billion in new net shares shorted to their holdings.
Minimal short selling during the Hang Seng’s market decline and increased short selling during its rebound caused short sellers to underperform the market significantly. HK-China short sellers are down -$15.98 billion in mark-to-market losses for the year but are up +$935 million in September mark-to-market profits as the Hang Seng retreated -1.79%.
For the year, HK-China short sellers were highly profitable in several stocks. Luckin Coffee ADR (LKNCY US) is of course high on the list due to its fraud scandal and its ultimate delisting, as is Ping An Insurance (2318 HK) due to Covid-19 related insurance loss risks. Two banks round out the HK-China stocks with over $200 million of year-to-date mark-to-market profits, HSBC Holdings (5 HK) and Hang Seng Bank (11 HK) were also Covid-19 related under-performers and therefore short side winners.
On the downside, short sellers are down over $1 billion in year-to-date mark-to-market losses in seven stocks. The $ billion dollar losers consist of six internet related stocks (BABA US, GSX US, PDD US, JD US, 3690 HK and 700 HK) and one electric vehicle car manufacturer (NIO US).
Short sellers have made back some of their mark-to-market losses in Alibaba (BABA US & 9988 HK), up +$443 million in both securities for the month of September, but shorts are still down -$2.8 billion in mark-to-market losses for the year in both securities.
GSX Techedu ADR (GSX US) short sellers continue to be unprofitable, they are down -$363 million in September mark-to-market losses which increases year-to-date mark-to-market losses to -$2.5 billion.
There are several sectors which are seeing increased short selling activity in the HK-China Region led by online, e-commerce, internet stocks like Alibaba (BABA US & 9988 HK), Meitun Dianping (3690 HK), Pinduoduo (PDD US), JD.Com (JD US), Tencent (700 HK) and HengTen Networks (136 HK). Other rising short sectors include mobile and communication equipment stocks like Xiami Corp (1810 HK) and AAC Technologies (2018 HK); real estate stocks such as Country Garden Services (6098 HK) and Wharf Real Estate (1997 HK); healthcare stocks such as Ping An Healthcare & Tech (1833 HK) and Sino Biopharma (1177 HK); and automotive stocks such as BYD Co (1211 HK) and China Evergrande New Energy Vehicle Group (708 HK).
Looking at short selling trends over time provides insight into overall market sentiment as well as the strength of bearish conviction in individual equities. Our Blacklight SaaS platform and Black APP provides an up to date view of short selling and short covering on an equity, sector, index, or country-wide basis allowing investors\traders to better manage their existing long and short positions.
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.