Wall Street Lunch: China Evergrande Slumps In Hong Kong Return

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Property developer China Evergrande loses 80% of its value as it resumes trading. (0:15) Under Armour (UAA) gets a vote of confidence. (2:05) Danaher to pay $5.7B for UK’s Abcam. (2:56)

This is an abridged transcript of the podcast.

Our top story so far –

Shares of property developer China Evergrande plunged on its first day of trading on the Hong Kong Exchange in 17 months.

The stock was down nearly 90% before paring some losses and ending the day off nearly 80%.

The developer has been struggling to service its debt after the Chinese government cracked down on property speculation in 2021. Earlier this month, the company filed for Chapter 15 bankruptcy protection in the U.S. as it restructures $32 billion of offshore debt.

The resumption of trading came as Evergrande posted an operating loss of RMB 11.7 billion (US$1.60B) in the first six months of 2023, compared with a loss of RMB 39.4 billion in the first half of 2022.

First-half 2023 revenue increased to RMB 128.2 billion from RMB 89.3 billion in the year-earlier period.

In today’s trading –

Stocks are stronger out of the gate today after futures gained traction in the final hour of the premarket.

The S&P (SP500) is up +0.7%, the Nasdaq (COMP.IND) is up +0.8% and the Dow is up +1%.

Company-specific moves are driving trading, with little on the macro front. All 11 S&P sectors are higher, with Energy (XLE) and Materials (XLB) up top and Healthcare (XLV) trailing.

Goldman derivatives strategist Scott Rubner says we are currently in “a no rules market.”

He says there “is a supply and demand mismatch and… dip buyers are already ‘very full,’ adding that the U.S. equity market “has been trading, ‘Escalator up, Elevator down.'”

But corporate “repurchase demand may return in a big way in September, at the time when extreme CTA selling will have been completed,” he adds.

Rates are mixed. The 10-year Treasury yield (US10Y) is down around 4.2% again. And oil (CL1:COM) is up by +1%.

Among active stocks –

Argus reiterated its Buy rating on Under Armour (UAA). Analyst Kristina Ruggeri noted the athletic apparel company has strengthened marketing, launched a rewards program, and lowered costs since the pandemic. She also said that UAA has focused on younger athletes and introduced a new casual clothing line in a bid to boost sales.

VMware (VMW) was downgraded by investment firm Monness, Crespi, and Hardt as the deal to be acquired by Broadcom (AVGO) looks to be in the “home stretch”. Analyst Brian White moved his rating to Neutral from Buy, noting that the deal received final approval from the U.K.’s antitrust regulator and the U.S. has not challenged the deal.

Citi says MongoDB (MDB) is still seeing weak sentiment amongst investors, but the firm expects “more impressive” results than its competitors. Analyst Tyler Radke, who has a Buy rating, said he has seen “favorable” intra-quarter inputs, along with new customer additions that have been “resilient.”

In other news of note –

Danaher (DHR) agreed to buy biomedical equipment vendor Abcam (OTCPK:ABMC) for $24 a share in cash, or $5.7 billion including assumed debt and net of acquired cash.

The deal for UK-based Abcam is expected to close in mid-2024. Danaher expects to fund the acquisition using cash on hand and proceeds from the issuance of commercial paper.

Kimco Realty (KIM) agreed to acquire RPT Realty (RPT), an operator of open-air shopping centers principally located in top U.S. markets. The deal is an all-stock transaction valued at around $2 billion, including the assumption of debt and preferred stock.

Kimco expects the acquisition to immediately add to funds from operations, net operating income, and to its position in key Coastal and Sun Belt properties.

In the Wall Street Research Corner –

Goldman Sachs is out with its quarterly analysis of where hedge funds and mutual funds are deploying more than $5 trillion in capital.

Bond types of funds raised and broadened market exposure in the second quarter.

Equity strategist David Kostin says the market is now more micro- than macro-driven, which has “typically been associated with more opportunity for stock pickers to capture alpha.”

Funds rotated into cyclicals and away from tech as the rally broadened.

Only a handful of stocks overlapped in Goldman’s list of significant long holdings and mutual fund overweights. Cigna (CI) was the only new name for Q2, joining Fiserv (FI), Mastercard (MA), Visa (V), Uber (UBER), and Workday (WDAY).

Among the many stocks that hit both the hedge fund shorts list and the mutual funds underweights were Disney (DIS), Chevron (CVX), AT&T (T), and McDonald’s (MCD).

You can see the full list of those out-of-favor stocks, as well as the lists where hedge funds and mutual funds diverge, at Seeking Alpha. I’ll put a link at the top of the Show Notes.

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