Zhitong Hong Kong Stock Analysis | Resilience Amid U.S. Stock Adjustments, Mergers and Acquisitions in Pharmaceuticals Lead the Way

[Market Dissection]

Over the weekend, several major negative news items emerged from the U.S. stock market, suggesting that adjustments may be forthcoming. Against this backdrop, both markets demonstrated resilience, with the Hong Kong stock market opening lower but closing slightly down by 0.05%.

On May 17th, Eastern Time, Moody's downgraded the U.S. credit rating from Aaa to Aa1. Previously, Fitch had downgraded it in 2023, and S&P had done so in 2011. With this, all three major rating agencies have completed the downgrade of the U.S. credit rating, resulting in the loss of the last AAA rating. Moody's cited the enormous fiscal deficit and rising interest costs as reasons for the downgrade. Additionally, according to data from the U.S. Treasury, China reduced its holdings of U.S. Treasury bonds by $18.9 billion by the end of March compared to the end of February, bringing its total to $765.4 billion. It has now fallen to the third-largest holder of U.S. debt after Japan and the UK. The situation for April remains unknown, but it is expected to be pessimistic. With a massive amount of U.S. debt maturing in June, it is uncertain how this will be resolved. During Trump's recent trip to the Middle East, there were no commitments from Gulf countries to purchase more U.S. Treasury bonds, which poses a significant risk.

The immediate consequence was a massive sell-off in the U.S. Treasury market on Monday, with the 30-year Treasury yield climbing approximately 10 basis points, surpassing the psychological threshold of 5% in the afternoon, reaching its highest level since mid-2007, matching the peak level of November 2023. The 10-year Treasury yield also rose above 4.5%, reflecting investor concerns about the long-term fiscal health of the U.S. Meanwhile, gold rebounded after recording its largest weekly drop in six months, as concerns about the U.S. economic outlook and budget deficit heightened demand for safe-haven assets. Spot gold rose by 1.3% during early Asian trading, approaching $3,245 per ounce. Chifeng Jilong Gold Mining (06693) and Lingbao Gold (03330) both rose over 3%.

Apple is currently facing some troubles, as Trump has been urging the company to shift its supply chain to the U.S., which is a difficult decision, and previous exemptions were seen as a favor. Additionally, media reports indicate that U.S. White House and congressional officials have been reviewing Apple's AI collaboration plan with Alibaba over the past few months, as Apple aims to introduce its AI, Apple Intelligence, into China, with Alibaba being one of the partners. U.S. authorities are concerned that this collaboration could assist Chinese companies in enhancing their AI capabilities, expanding the influence of Chinese chatbots, and increasing Apple's legal risk exposure regarding scrutiny and data sharing in Beijing. Today, Alibaba (09988) fell over 3%. If Apple's AI efforts are hindered, the supply chain will also be affected, leading to adjustments in related stocks.

Xiaomi Group Chairman and CEO Lei Jun announced on Weibo that the Xiaomi strategic new product launch event is scheduled for May 22nd at 7 PM. Lei Jun stated that this event will feature many significant new products, including the Xiaomi SoC chip Xiaomi Xuanjie O1, Xiaomi 15S Pro, Xiaomi Pad 7 Ultra, and the first SUV, Xiaomi YU7. It is reported that the Xiaomi Xuanjie O1 uses a 3nm flagship processor, marking a milestone in Xiaomi's 11-year journey in chip research and development. According to CCTV News, this represents a breakthrough in 3nm chip design in mainland China, closely following international advanced levels. Xiaomi will become the fourth company globally to release a self-developed 3nm process mobile processor chip, following Apple, Qualcomm, and MediaTek Recently, there have been some negative rumors regarding Xiaomi's automotive direction, but it hasn't changed the market's enthusiasm for it. With multiple strategies in play, there needs to be a degree of tolerance, and today it rose by 2.65%. On the afternoon of May 19, Huawei officially launched its first personal computer using the Harmony operating system in Chengdu, marking an important breakthrough for domestic operating systems in the personal computer field. With the rise of domestic software, there is also a stimulus for the hardware side, with Hua Hong Semiconductor (01347) and SMIC (00981) rising over 3% and nearly 2%, respectively.

The China Securities Regulatory Commission (CSRC) issued a decision on amending the "Administrative Measures for Major Asset Restructuring of Listed Companies," encouraging private equity funds to participate in mergers and reorganizations of listed companies. This policy is quite powerful: first, the review efficiency has greatly increased, with the review period compressed from an average of 3 months to as fast as 12 days. The exchange will accept applications within 2 working days, and the CSRC will complete registration within 5 working days, completely breaking the traditional "marathon" approval model for restructuring. Second, the requirements for financial conditions have been significantly relaxed; third, private equity funds have been introduced, and the lock-up period has been reduced by 50%. For private equity funds with an investment period of 48 months, the third-party transaction lock-up period has been reduced from 12 months to 6 months, and the lock-up period for shareholders other than major shareholders has been reduced from 24 months to 12 months. The A-share market reacted very strongly to this favorable news, with many restructuring-related stocks hitting the daily limit.

On the Hong Kong stock market, the speculation around restructuring is not very obvious, but the heat is mainly concentrated in the pharmaceutical sector. On one hand, there was mention last Friday of the virus outbreak. According to a report from Hong Kong Radio on May 17, the activity level of the COVID-19 virus in Hong Kong is at a high level, with an increase in severe cases among children and adults. Xiansheng Pharmaceutical (02096): Xianuo Xin is the first domestically approved oral antiviral drug for COVID-19. This drug, which has independent intellectual property rights, was conditionally approved for domestic listing on January 28, 2023, and has since been included in the national medical insurance reimbursement catalog. Today it rose over 8%. Additionally, Sanofi (01530), which has achieved good clinical results, surged over 13%; and the Pyrrolidine tablets developed by Xuanzhu Bio, a subsidiary of Sihuan Pharmaceutical (00460), were approved for both monotherapy and combination therapy for breast cancer, becoming the only CDK4/6 inhibitor in China with a monotherapy indication. It also surged over 16%.

Moreover, there is the concept of spin-off listings in the pharmaceutical sector with Kangzhe Pharmaceutical (00867): the company announced that it plans to spin off Demai Pharmaceutical Co., Ltd. and independently list it on the main board of the Hong Kong Stock Exchange. The company holds 90.8% of Demai Health, with the remaining 9.2% held by two employee incentive platforms. Today it rose over 4%.

From the perspective of mergers and acquisitions, it is common practice for large pharmaceutical companies to acquire some mature pipelines. Potential acquisition targets include Innovent Biologics (01801), CSPC Pharmaceutical Group (01093), and China Biologic Products Holdings (01177), as well as Fuhong Hanlin (02696), which has previously undergone privatization actions.

Last Friday, it was mentioned that the Hang Seng Index is undergoing a new round of adjustments, with the Hong Kong Hang Seng Index adding Midea Group (00300) and ZTO Express (02057). BYD (01211) will be added to the Hong Kong Hang Seng Tech Index, while Tencent Music Entertainment (00772) will be removed. The Hong Kong Hang Seng Composite Index will add Brilliance China Automotive (00325), Gu Ming (01364), and Mixue Ice City (02097) The mentioned varieties have all risen, especially the last three with an increase of over 6%. This good demonstration effect highlights the market's strong pursuit of new consumption formats. The old leader Pop Mart (09992) surged again today, rising 5.77%, setting a new historical high. Cha Bai Dao (02555): Since April, Cha Bai Dao has seen double-digit growth in same-store sales, achieving a year-on-year growth of over 20% from May 1 to 14. Today, it also surged over 13%.

【Sector Focus】

According to Guojin Transportation: The increase in full ticket prices has expanded, and the oil exchange factors are favorable, reiterating the call for the airline sector.

Domestic ticket prices have increased year-on-year, with growth accelerating month-on-month. Last week (05/12-05/18), the domestic bare ticket price for the entire industry increased by 8.7% year-on-year, compared to -8.2% in 2019; the domestic full ticket price increased by 1.2% year-on-year, compared to -5.4% in 2019, with business line ticket prices down 4.1% year-on-year, compared to -12.8% in 2019. Overall ticket prices are better than business lines due to strong demand for private travel.

International oil prices remain low, which will reduce airline costs. In May, the domestic aviation fuel ex-factory price was 5,445 yuan/ton, a year-on-year decrease of 19%. Airlines are highly sensitive to fuel prices; for every 1% decrease in oil prices, the three major airlines' fuel costs will decrease by 400-500 million yuan.

The appreciation of the RMB against the USD will increase airline profits. On May 16, the USD to RMB spot exchange rate closed at 7.2037, with the RMB appreciating 0.6% compared to last week and 1.3% since the beginning of the year. Airlines are highly sensitive to exchange rates; for every 1% appreciation of the RMB against the USD, the profits of the three major airlines can increase by 200-300 million yuan.

Main varieties: Air China (00753), China Southern Airlines (01055), China Eastern Airlines (00670), Cathay Pacific Airways (00293).

【Stock Picking】

Air China (00753): Airline profitability is expected to improve, and civil aviation's summer transportation performance is promising.

Recently, China Southern Airlines, Air China, and China Eastern Airlines released their operational data for April. The three major airlines, along with Spring Airlines and Juneyao Airlines, saw a supply increase of 7.8% (1Q25 was 4.8%). Among them, Air China’s passenger capacity input in April increased by 5.3% year-on-year, and passenger turnover increased by 8.6% year-on-year. The three major airlines collectively reported losses in the first quarter.

Comment: The revenue level of airlines in 1Q25 remains weak, but profitability is expected to improve. Expanding tourism consumption is likely to stimulate demand for regional airlines. During the five-day May Day holiday, 314 million domestic trips were made nationwide, a year-on-year increase of 6.4%; total spending by domestic tourists reached 180.269 billion yuan, a year-on-year increase of 8.0%. The inbound and outbound tourism market is heating up, with inbound tourism continuing to recover. China's civil aviation grew by 12.5%, exceeding pre-holiday expectations and performing well. The company, based primarily at Beijing Capital International Airport, has a globally covering route network, with a comprehensive international route network and significant advantages in routes to Europe and the United States, providing direct flight services connecting major cities around the world to meet diverse passenger needs. In the winter-spring season of 2024-2025, it plans to operate 445 routes, including 105 international passenger routes, 13 regional routes, and 327 domestic routes. It will continue to open and increase multiple international routes, and domestic routes will also be optimized and intensified, fully enjoying the benefits of the national visa-free policy Investment income: Holding 29.99% of Cathay Pacific's shares, Cathay Pacific can continuously contribute significant investment income to Air China. Leasing business: The demand for air travel in China is growing, with more than half of civil aircraft relying on leasing. As a large airline, Air China is involved in a substantial amount of aircraft leasing business. The recovery rate of international flights in the first three days before the holiday has risen to 91%, and the performance of civil aviation during the summer travel season is promising