From the Securities Lending Trading Desk

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Demand has been strong for ZTO Express Inc. following a 33% decrease in share price in the 6 months since its IPO.  In Asia, we have seen strong lending demand for Toshiba Corp following the announcement of losses at its Westinghouse Electric nuclear business. Borrowers are also seeking shares of Tullow Oil amid its rights issue. 

Below please find April 18’s 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

Market recalls are driving fee levels for SunPower Corp. (SPWR) as borrowers maintain their short positions. The renewable energy sector, and specifically SPWR, has been a long term focus of bearish sentiment. In general, the alternative energy industry has been in focus as the Trump administration seeks to scale back regulations and increase drilling activity. In turn, oil prices are expected to be more competitive than alternative energy, potentially placing pressure on individual companies in the sector. Additionally, federal tax incentives for the industry may be at risk under a president who has historically not been a major supporter of alternative energy. As bears look to maintain their short positions, fee levels have been trending higher while market recalls put pressure on liquidity.

There has been strong directional demand for ZTO Express Inc. which debuted on the New York Stock Exchange in October, as the share price has fallen as much as 33% since their listing. The Chinese delivery service derives, which most of its business from Alibaba Holding Group Ltd, has been a focus of bearish sentiment amid concerns of competition in the delivery industry and a tightening Chinese labor market. Also a factor is the fact that ZTO, unlike their peers in China, did not list via reverse merger; a decision that has some investors concerned that the more onerous reporting standards will be a huge distraction for the company in the future. ZTO’s competitors, SF Express and YTO Express have already received approval to list via reverse merger (a method largely frowned upon in the US) by the China Securities Regulatory Commission.

Asia Pacific

Toshiba Corp warned that it might not be able to continue operations amid growing concerns around its losses at its Westinghouse Electric nuclear business. The announcement came after the company released its earnings statement without the approval of auditors. The earnings statement revealed Toshiba’s losses at the nuclear unit left it with negative shareholder equity of 225 billion yen (USD 2.1 billion) in Q3 2016. If shareholder equity remains negative for the 4th quarter, which investors speculate is likely, the company could potentially lose its Topix listing. Toshiba Corp later announced plans to sell its memory-chip business in a bid to generate cash. We have seen strong lending demand for Toshiba Corp following the announcement of its Westinghouse Electric loss.

Intensifying competition and slower sales growth are placing pressure on one of China’s leading automakers. Mounting cost pressure as a result of excess production, and aggressive sales strategies which in turn have led to steep discounts being offered to buyers, are resulting in reduced earnings. In recent weeks, we have witnessed increased securities lending demand for Great Wall Motor, a manufacturer of pickup trucks and SUVs, which is one of the few Chinese automakers with a foreign brand, without a joint venture. The company is facing stiff competition from both domestic and foreign rivals for its SUVs and may have to ramp up its marketing costs when it launches its new entry-level luxury brand, WEY, which is likely to result in further pressure on operating margins.

Europe

Deja Vu hits Apple suppliers. Apple suppliers, recent subjects of increased focus for short sellers, continued that trend last week. British supplier Dialog Semiconductor, which is listed on the German exchange, lost almost one third of its value during trading on Tuesday. This comes after Bankhaus Lampe KG analysts suggested there was strong evidence that Apple was making its own chips for use in their iPhone. The report highlighted that they could not be sure when or if the move from outsourcing the iPhone component would take place but, nevertheless, investors panicked due to 70% of the firm’s sales being represented by the US technology giant.

Tullow Oil rights started trading last week. UK based Tullow Oil Plc announced that it was undertaking a $70million rights issue in March to shore up its balance sheet. The spread between the ordinary shares and the rights line has been trading negative since the period started and the desk has seen demand for both lines. Demand from borrowers for the ordinary shares has been heavily linked to the long-term short in the firm due to the pressure on oil prices and heavy capital spending Tullow has experienced. In terms of the rights line, there has been demand to take advantage of the spread by going short the rights line and long the ordinary shares. The trading period closes on the 24th of April.