From the Securities Lending Trading Desk

new taiwan china

We’ve seen growing broker demand in the US for Chinese ADRs as stocks decline amid slowing CPI. There was also an uptick in lending demand for ZTE Corp, China’s largest listed telecommunications company, as it agreed to  pay the US government a USD $892 million fine.  In Europe, nuclear power is fueling demand for EDF’s rights issue.

Below please find the March 14 edition of From the Trading Desk, which provides timely commentary about top security earners, revenue drivers and other factors influencing the securities lending market from the BBH Securities Lending Trading Team.

Americas

Broker demand grows in the US for Chinese ADRs as stocks decline amid slowing CPI. Interest has picked up for many Chinese ADRs across different sectors including 500.com Ltd, Yirendai Ltd., JinkoSolar Holding Company Limited and Weibo Corp. According to Bloomberg, the Hang Seng Index and Shanghai Composite Index both fell the most this month, while a gauge of Chinese stocks traded in Hong Kong had the steepest drop since mid-January. Poor consumer inflation numbers appear to be to blame for the declines. On 3/9, China’s National Bureau of Statistics reported that the country’s consumer-price index (CPI) increased by only 0.8% in February, which was lower than the 2.5% gain from the previous month. Also concerning to investors is that this marked its slowest pace since January 2015.

Bearish sentiment increases on Credit Acceptance Corporation (CACC) as U.S. authorities focus on sub-prime auto lending. CACC and competitor, DriveTime Automotive Group, were both contacted by the Federal Trade Commission for their investigation of debt collection practices of subprime auto lenders. With heightened scrutiny regarding their practices, we are seeing greater bearish sentiment on CACC. These practices have likely become of greater concern as these types of loans grow. Bloomberg reports that “total car loans outstanding in December were $1.16 trillion, up more than 45 percent since the fourth quarter of 2008, when the financial crisis was at its peak. About 20 percent of car loans made in recent years have gone to subprime borrowers, according to data compiled by the Federal Reserve Bank of New York”. CACC is down roughly 11% from the start of the year when the stock closed at $220.62.

Asia Pacific

Reports that China is seeking to curb tourism to South Korea led to sharp declines in Korean travel-related shares. The steepest decliner was Hotel Shilla Co which lost as much as 13% in Seoul trading. Reports that China ordered travel agencies to stop selling travel packages into Korea in retaliation for the US deployment of the Thaad missile shield sent shockwaves through the market. Volatility was compounded when North Korea later fired four missiles. We are seeing lending demand for Hotel Shilla Co Ltd, Lotte Shopping Co Ltd, Paradise Co Ltd and Amorepacific Corp.

China’s largest listed telecommunications company, ZTE Corp, wiped out seven months of income by agreeing to pay the US government a USD $892 million fine. The record fine was imposed as settlement after ZTE Corp violated trade sanctions against Iran and North Korea. The share price of ZTE Corp rallied on the news due to investors’ relief that there would be no long term consequences for ZTE Corp trading in the American market. We saw an uptick in lending demand following the announcement which subsided as the share price rallied.

Europe

Nuclear power is fueling EDF’s Rights Issue. Last week saw the long awaited details of the EDF FP rights issue being announced. Holders of the French utility company were offered the chance to buy 3 new shares for every 10 held, in a capital raise being used for the highly controversial Hinkley Point nuclear project and partial acquisition of Areva. The trading period for the rights runs from the 8th to the 17th of March, with holders benefiting from the potential uplift of being able to buy common stock at a discount to the current market price. Another aspect of this particular rights issue is the over-sub option that would allow holders of the ordinary stock to subscribe to more shares than their original allotment if other investors don’t take up that option.

Platinum price levels lead to infrastructure investment in South Africa. The South African mineral exploration company Royal Bafokeng Platinum Ltd announced last week that it will sell 1.2 billion rand ($92 million USD) of convertible bonds. The issue is focused on the development of its Styldrift mine that had been delayed in 2015 due to the fall in platinum prices, but with the resurgence of prices the company believes it can finish the project by 2018. The bonds will pay 6.5 -7% per annum with maturity expected in spring 2022. The issue can be converted into common stock if the stock price climbs 30-35 percent higher than the 8th March average share price.