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A bloodbath triggered by a rumor: risks never cleared, finding sugar in broken glass.

Hello everyone, I am Dolphin Analyst!

Last week, the global market was overall quite tragic:

(1) Although the micro-level financial report season of the U.S. stock market has passed, there were not any other major macro data released besides the continued weakness in retail data. Nevertheless, the U.S. stock market still fell mostly due to the fact that in the situation where the U.S. stock market has been in repair for more than a month and subsequent power is weak, the minutes of the July meeting released last week showed that the overall attitude of the Federal Reserve is still hawkish, which depressed the market expectations.

(2) The domestic Hong Kong and A shares have entered the "there is always a worse" earnings season: it is normal for both revenue and profit to decline, and those where revenue and profit can still increase are basically scarce. Those that are expected to continue to accelerate their income and profit growth basically need to use a telescope to find.

(3) There were two major changes in the previously popular new energy sector. First, on the new energy vehicle side, the domestic vehicle production capacity began to be released, with various new car models to be launched in the second half of the year, aggravating the downward spiral of vehicle prices and causing the price of batteries to be repaired as a result. Second, for the photovoltaic sector, relying on overseas market demand, it was originally the most resistant to the impact, but silicon material giant Tongwei withered downstream, causing the entire industry chain to undergo logic changes - the market abandoned components and looked for more certain business in price-hike component and increasing installation power, such as inverter Sunshine Power, IGBT Times Electric, and so on.

(4) And all of this is not as tragic as the media’s rumor that Tencent may sell Meituan: not only did Meituan fall, but also most of the investment eco-system companies with higher Tencent stakes, such as Kuaishou, Bilibili, etc.

In the end, despite the global market decline last week, the worst decline was still the Hang Seng Tech Index and Kweb Index, which are dominated by Chinese concept stocks.

I. A bloody incident caused by a rumor

In particular, Tencent's rumored sale of Meituan through block trades was refuted through some informal channels later, but because the wording was not firm enough and Tencent had indeed expressed previously—taking JD.com as its benchmark—to take out some mature investment businesses for realization, the market was not particularly bullish on this "indirect" rumor.

However, if we look at Tencent's investment portfolio, it almost covers most of China's concept stocks. Meituan, Kuaishou, Pinduoduo, Futu, Bilibili, and others are included, and these are the targets with high equity stakes and relatively larger investment premiums. This means that if Tencent sells, the impact will be very broad, and regardless of whether the rumor is true or not, the market’s belief in it reflects the lingering concern over policy environment adjustment in 2021. Investors fear that market risks have never been completely cleared.

II. Look for sugar in glass shards: The worst is over, what else do we have to worry about? From the performance of the three major markets, last week, except for demand-driven categories, such as public utilities, energy, and necessary consumption, the vast majority of industries showed a downward trend due to the post-epidemic contraction. Optional consumption was generally bleak.

Corresponding to the north-south capital flows, under the rumor that Tencent sold Meituan, the activity of northbound capital was significantly stronger than that of southbound, with a slight net buying. However, while southbound capital reduced its trading volume, it also sold significantly.

Corresponding to the companies that were closely tracked by Dolphin Analyst last week, such as China Resources, NetEase, Tencent Music, Yuewen, SEA, Tencent, Focus, Sunwin Optical, Xiaomi, Hikvision, Geely, Ideal, etc., can generally fit into the following story line:

(1) Except for consumption related to hot weather, such as China Resources beer, Xiaomi's air conditioner and other large IoT items, the relatively optional consumption has severely collapsed. The collapse of optional internet consumption, represented by music, online literature, and games, is greater than that of the consumption itself.

(2) This is also reflected in the performance of Focus, where internet advertising has directly collapsed, and the so-called barely maintained consumer goods advertising has only collapsed to a lesser extent.

(3) The collapse of the internet is due to the lack of significant innovation in consumer electronics hardware in recent years. The hardware penetration rate, traditionally represented by mobile phones and cameras, has reached its peak. The next major consumer hardware, AR and VR, is only heard but not seen.

(4) At present, the single major optional consumer item in the market, automobiles, which is also the biggest promotion expense, although the third round of heavy vehicle purchase tax reduction is in force, the impact of such policies on the market is basically strong for one year and weak for two years. Against the backdrop of a generally corrective market in the first half of the year and the recent frequent launches of major flagship car models, marginal changes are more important from the perspective of individual stock alpha.

Although the second-quarter results were generally flat, Dolphin Analyst based on the marginal changes implied behind the financial reports of the companies covered last week, sought sugar in broken glass, and divided the companies that issued financial reports last week into two categories: those with marginal improvements and those with marginal or sustained declines. Focus will be on the companies with marginal improvements in the future.

1) Companies with marginal improvements:

(1) Tencent: low valuation provides a safety cushion; the certainty of profit release speed in the second half of the year is stronger than that of income. The only increment on the income side is the monetization of video numbers. If investment assets are sold off, shareholder value will be released.

(2) Focus: Low valuation provides safety cushion. After the worst moment of the second quarter, the low base of last year's internet and the gradual recovery of consumer goods investment may result in subsequent performance gradually improving.

(3) Geely Automobile: After the launch of the Lei Shi and Lynk new hybrid system vehicles, automobile sales are expected to increase, and gross automobile profit has the certainty to emerge from the worst moment. 2) Deteriorating Margins or Bottoming Out:

(1) NetEase: Due to high base from last year and limited reserve of big IPs with licenses, there is risk in license issuance, which may cause deteriorating margins in the future;

(2) Tencent Music: Live streaming is old and paid services are not growing fast enough, which leads to bottoming out;

(3) SEA: The gaming sector is old and the growth of e-commerce is also facing issues, resulting in further deteriorating margins;

(4) Li Auto: Intensified competition in the industry; the mass delivery of new cars began at the end of Q3, with existing cars already outdated, resulting in a period of low growth;

(5) Sunway: The mobile phone module has been continuously weak, but the annual guidance implies that the VR business will grow. It is worth paying attention to Goertek;

(6) Hikvision: Currently, the company's R&D expenses are relatively inflexible, and security is not the priority spending point for Hikvision's customers (government and large enterprises), under macro pressure.

Three, Alpha Dolphin Portfolio Returns:

Due to the drag from Chinese stocks last week and the structural adjustment of new energy, the Alpha Dolphin portfolio of Dolphin Analyst suffered a large decline of 2.3% in returns from 8/15 to 8/19, which outperformed the HSTECH Index, but underperformed the CSI 300 and S&P 500.

Since the portfolio's inception to last week, the absolute return was 14.5%, and the relative return compared to the S&P 500 was 18%.

Six, U.S. stocks are surging, A-share stays resilient, but only Chinese assets performed poorly

Last week, most of Dolphin's holdings and stocks of interest were mainly falling, except for SunPower and Sinexcel, which rose due to the logic of component entry at lower prices, increasing installations, benefiting from equipment, and rising inverters and IBGTs.

The internet sector performed particularly poorly, partly due to the poor performance of the industry itself, as well as rumors of Tencent selling Meituan.

Consumer stocks, such as beverages and necessities, which have relatively low valuations, showed resistance to the decline, while discretionary goods underperformed. The automotive sector also showed an obvious distribution. The formerly popular NIO struggled as a whole, while BYD relatively resisted the decline due to a high single volume, and the momentum of power battery factories slightly rebounded due to the transmission of material prices.

Regarding the stocks with significant fluctuations last week, the driving factors of Dolphin Analyst are as follows:

Last week, Dolphin Analyst paid attention to the capital flows of stocks. After Dolphin adjusted its position in BOE in a warehouse-style observation manner, the target that received the largest amount of northbound capital inflows for the past two weeks was BOE. (Dolphin recently released an in-depth report on BOE, which believes that its industry inflection point is coming soon. For details, please see Longbridge App's report by Dolphin in Longbridge.)

Although there was a major event of Tongwei entering the component market last week, the overall trend of LONGi's continued purchases remained. In addition, after Tencent's second-quarter performance turning point emerged, it also continued to be purchased, while Focus Media appeared on the sell-off list for the first time this week. At the same time, Minhua, Meituan, Kuaishou, Yangguan Power, and others were continuously sold.

VII. Portfolio Asset Distribution and Portfolio Adjustment

If we look at it from the perspective of March 1st, when internal testing began, the overall return of the Longbridge Alpha Dolphin portfolio as of last Friday was close to 14.3% (including dividend income), and the return on stock assets was close to 17%.

Last week, Dolphin adjusted LONGi's position mainly by reducing Ideal's position. The portfolio allocated a total of 32 stocks, including 10 standard configurations and 22 low configurations.

As of last weekend, the asset allocation distribution and equity asset holding weights of Alpha Dolphin are as follows:

Regarding specific adjustments, due to the damage of the Tongwei's entry logic on LONGi is too severe, Dolphin directly adjusted LONGi out and transferred it to the observation pool. In addition, although Ideal's fundamental performance is poor in the third quarter because it is a downturn period, it is worth noting that new cars will be released in the fourth quarter. We will temporarily reduce the position and continue to monitor.

VIII. This Week's Focus

This week, Chinese, Hong Kong and A-share companies are ushering in the peak season of financial reports, and the companies to focus on have been marked in red, such as JD, Kuaishou, Ningde, Meituan, Yangguang Power, etc.

In addition to the red-marked companies, companies with good prospects for performance, such as Tsingtao Brewery and Times Electric, can also be followed.

Dolphin has sorted out the core focus of the companies it covers as follows:

Please refer to Longbridge's recent weekly reports on portfolios:

["The Value for Money of American Assets is Back as the US Swings Left and China Swings Right"](https://longbridgeapp.com/topics/3321191? 《Laying off is not fast enough to pick up, the United States still has to continue its "decline"》

《The American-style "mourning but rejoicing": recession is a good thing, and the most severe interest rate hike is called negative news》

《Interest rate hikes enter the second half, "performance thunder" opens》

《The epidemic will fight back, the United States will decline, and the capital will change its mind》

《Current Chinese assets: "No news is good news" for US stocks》

《Is growth already a carnival? Is the United States definitely declining?》

《Is the United States in recession or stagnation in 2023?》

《American oil inflation, China's new energy vehicles become bigger and stronger?》

《The faster the Federal Reserve raises interest rates, the more opportunities for Chinese assets》

《The inflation of US stocks has exploded again, how far can it rebound?》 《This is How to Keep in Touch with the Most Down-to-Earth Dolphin Investment Portfolio》

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