M UpdateChina Quantitative Strategy | Asia PacificChinese ADRs – Short Interest and US OwnershipChinese ADRs have outperformed MSCI China by more than 2% MTD, as hedge funds have been covering shorts into year-end, while long-only managers were mainly selling H-shares to fund the redemptions. Still, such outperformance is not driven by the comeback in long-term investors. Morgan Stanley Asia Limited+Gilbert Wong, CFAQuantitative Strategist Gilbert.Wong@morganstanley.com +852 2848-7102 Jason Ng, CFAQuantitative Strategist Jason.Dl.Ng@morganstanley.com +852 2848-8845 Laura WangEquity Strategist Laura.Wang@morganstanley.com +852 2848-6853 Morgan Stanley appreciates your support in the 2024 Institutional Investor All-Asia Research Team Survey. Voting will open early January 2024. Exhibit 1 : Monthly net inflows (US$m) of all Chinese ADRs from US-based long-only and hedge fund managers (15,000) (10,000) (5,000) - 5,000 10,000 15,000Jan-20Apr-20Jul-20Oct-20Jan-21Apr-21Jul-21Oct-21Jan-22Apr-22Jul-22Oct-22Jan-23Apr-23Jul-23Oct-23Monthly US Institutional Investors In/Outflows on Chinese ADRs (US$m) US Long-OnlyUS Hedge FundsTotal ($m) Source: FactSet, EPFR, MorningStar, Morgan Stanley Research; data as of December 28, 2023 2023 will finish with a pause in long selling from long-only managers on Chinese ADRs, and hedge funds unwinding what they added in 2022:• Our Chinese ADRs flows tracker shows that the selling pressure from US long-only managers on Chinese ADRs was largely muted in 2023 (net outflows of US$0.35bn), taking a pause from the significant selling in 2021 and 2022 with outflows of US$21.4bn and US$6.8bn, respectively ( Exhibit 1 ). • Among the large-cap ADRs, Pinduoduo, KE Holdings and New Oriental Education were net bought the most by long-only managers YTD, while XPeng, Trip.com, Li Auto, Baidu and H World were net sold the most.• For US hedge funds, their long selling were led by XPeng, Li Auto, NIO, BeiGene and New Oriental Education among the large cap, while some mid-cap ADRs also suffered, e.g., Kanzhun, TAL Education, iQIYI and JOYY.For short interest flows, December is a typical month of short covering as hedge funds de-leverage into year-end:• According to IHS Markit data, outstanding shorts on both H-shares and ADRs were reduced in December MTD, with covering flows estimated to be US$0.4bn and US$1.4bn, respectively ( Exhibit 2 ).• Mega cap ADRs, e.g., Pinduoduo, Alibaba, were covered the most MTD, while Yum China, H World, KE Holdings and BeiGene were added shorts (Exhibit 4).Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in making their investment decision.For analyst ...
