The Zacks Analyst Blog Highlights: Alibaba Group Holding, JD.com, Vipshop Holdings, SouFun Holdings and Baidu

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Nov 12, 2014, 09:30 ET

CHICAGO, Nov. 12, 2014 /PRNewswire/ -- Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include the Alibaba Group Holding Ltd. (NYSE:BABA-Free Report), JD.com, Inc. (Nasdaq:JD-Free Report), Vipshop Holdings Ltd. (NYSE:VIPS-Free Report), SouFun Holdings Ltd. (NYSE:SFUN-Free Report) and Baidu (Nasdaq:BIDU-Free Report).

Today, Zacks is promoting its ''Buy'' stock recommendations. Get #1Stock of the Day pick for free.

Here are highlights from Tuesday's Analyst Blog:

China ADRs Rise on Hong Kong-Shanghai Exchange Link

Chinese regulators have finally provided a date for the commencement of the Shanghai-Hong Kong exchange link. Daily cross-border purchases of 23.5 billion yuan ($3.8 billion) will start on Nov 17. The date was announced by regulators on Monday following weeks of investor speculation on the subject.

Providing Greater Access

The linkup between the Shanghai and Hong Kong exchanges will allow greater access to Chinese shares. As of now, there are only two methods of investing in shares listed on the Shanghai exchange. Securities can be purchased through the $64 billion Qualified Foreign Institutional Investor program, which began in 2002. The other option is to use a similar system based on offshore yuan which started in 2011.

But now all that will be required is a brokerage account in Hong Kong. Stocks listed in Shanghai are set for the highest yearly gains since 2009. The Hang Seng China Enterprises Index, which comprises mainland companies listed in Hong Kong, has lost 1.9% this year. In contrast, the Shanghai Composite Index has gained 17% in 2014 to date.

Chinese ADRs Gain

According to the BNY Mellon Asia ADR Index, Asian ADRs as whole gained 0.3% on Monday. This was a direct result of the date announced for the start of the exchange link. Chinese stocks led from the front with the likes of Alibaba Group Holding Ltd. (NYSE:BABA-Free Report), JD.com, Inc. (Nasdaq:JD-Free Report) and Vipshop Holdings Ltd. (NYSE:VIPS-Free Report) gaining 1.7%, 6.9% and 3% respectively. SouFun Holdings Ltd. (NYSE:SFUN-Free Report) moved up 3.3%. Baidu (Nasdaq:BIDU-Free Report) gained 2.9%.

According to BofA and Templeton Emerging Markets Group, a similar link with the Shenzhen exchange will come into being within two years. Last week, the CEO of Osaka Exchange Inc. had said that Japan would also like to join the Hong Kong-Shanghai trading link.

Opening Up the Capital Account

Market watchers believe that the trading link will go a long way in helping China open up its capital account. It will also increase usage of the yuan as a currency and help to increase Shanghai's importance in the realm of international finance. Further, foreign investors will now have easier access to companies listed on the mainland.

Many of these companies have linkages to China's considerably large consumer market. Chinese President Xi Jinping is banking on greater investment in this area as a method of reducing the country's dependence on infrastructure spending and exports.

Analysts believe that this is only the first step in opening up the country to the world of international finance. At the same time, they recognize its importance and are happy that a date for the start of operations has been announced.

Ironing Out Kinks

Some niggles will continue to bother investors in the days ahead. One of them is how tax will be levied on international investors. According to current rules, the tax rate applicable in this case would be 10%. However, PricewaterhouseCoopers says the government has not collected such taxes ever. Meanwhile, Chinese officials have said taxation norms will be announced before the link begins operating.

Another factor which needs some consideration is that the link places a limit on the total value of trading which can be conducted. An "aggregate quota balance" will be calculated at the close of each trading session. Officials will ascertain whether total net foreign investment is greater than 300 billion yuan.

In case this limit is exceeded, foreign investors will be unable to buy more A-shares. However, they can continue to sell such shares until holdings fall below the limit. Similarly, buying will be suspended if net trading is higher than 13 billion yuan on a particular trading day.

Greater Transparency, Better Integration

Hong Kong will be the immediate gainer after the link is opened up. In 1993, companies listed on Hong Kong's exchanges also went through this process. With a fully convertible currency and a better regulatory environment it stands to gain in the near term.

Over time, the idea is that the link will give rise to a higher degree of transparency. Better financial reporting will lead to the cessation of many of the problems foreign investors have had with Chinese companies. A higher degree of integration with global financial markets and greater fund flows will be hugely advantageous to the country's corporates.

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