UBS exhausts inventory of Tencent long DLCs following China’s overnight slump

UBS AG, the designated market maker for a locally traded daily leveraged certificate (DLC) of Tencent Holdings, has sold all of its inventory in Tencent 5xLongUB241231 (TSGW), the bank said in a press statement on Tuesday (Oct 25).

TSGW is a European-style cash-settled long certificate with a daily leverage of 5x. DLCs allow investors to make short-term directional bets on a stock, and amplify their returns with leverage. A 1 per cent increase in the value of Hong Kong-listed tech conglomerate Tencent raises the value of TSGW by 5 per cent.

Shares of Tencent fell 11 per cent on Monday (Oct 24), alongside those of many other China-focused tech companies. Hong Kong-listed Alibaba Group Holding also fell 11 per cent, while Nasdaq-listed e-commerce platform JD.com tumbled 13 per cent.

Market commentators noted the slide coincided with Chinese President Xi Jinping getting an unprecedented third term, and suggested Xi’s tightened grip on power has some investors worried. The appointment was, however, expected.

Justin Tang, head of Asian research at United First Partners, noted that China’s market has a history of rebounding after each sharp sell-off, but added that things are “starkly different” this time with a Xi leadership that cannot be challenged.

“Volatility will continue to be the bedfellow of these DLC holders in the short and medium term, until we see evidence to the contrary. We have seen a few false dawns in this regard,” he said.

The Tencent 5x short DLCs, which increase in value as the value of the underlying Tencent shares falls, were among the most traded and best-performing DLCs on the Singapore Exchange on Tuesday. The long DLCs also saw high volumes as prices fell.

With no inventory, UBS said it will provide a continuous bid while making intermittent offers over the certificates until further notice. A further announcement will be put up as soon as it fully resumes making a market in the DLCs.

“The volatility means that this will be a market where the nimble and flexible macro trader will find a plethora of opportunities in either direction across different asset classes,” added Tang, who believes certain segments of the Chinese market, including tech hardware and infrastructure, will remain attractive for the long-term investor.

However, he cautioned that investors who do not have the stomach nor holding power should stay away, given the current market conditions.