Global Emerging Market Equities, Propitious Research

Wium Malan, CFA

Global Emerging Market Equities

Equity Bottom-Up

<a href="https://www.smartkarma.com/entities/baidu-inc" target="_blank" data-smartkarma-citation="entities:179:1" rel="noopener">Baidu (BIDU US)</a>, and the rest of the Chinese Online Search industry, has consistently been losing market share to the likes of <a href="https://www.smartkarma.com/entities/alibaba-group" target="_blank" data-smartkarma-citation="entities:28434:1" rel="noopener">Alibaba Group (9988 HK)</a>, <a href="https://www.smartkarma.com/entities/bytedance-technology" target="_blank" data-smartkarma-citation="entities:27936:1" rel="noopener">ByteDance (1460967D CH)</a>, <a href="https://www.smartkarma.com/entities/tencent-holdings-ltd" target="_blank" data-smartkarma-citation="entities:26:1" rel="noopener">Tencent Holdings (700 HK)</a>, <a href="https://www.smartkarma.com/entities/pinduoduo-inc" target="_blank" data-smartkarma-citation="entities:27250:1" rel="noopener">Pinduoduo (PDD US)</a> and <a href="https://www.smartkarma.com/entities/meituan-dianping" target="_blank" data-smartkarma-citation="entities:26970:1" rel="noopener">Meituan Dianping (3690 HK)</a> over the past two years. Although I still believe there is significant long term growth left for the Chinese digital advertising market, it can easily be argued that this growth will be heavily skewed and that the “pure” Search market is in effect an “industry in decline”. 
In his book “Competitive Strategy: Techniques for Analysing Industries and Competitors”, Michael Porter expands on four key strategies which firms could successfully follow when they find themselves in a declining industry. In this insight, I analyse Baidu’s current strategy against these offered strategies to assess if there is indeed value left in the company (or at least the core search business). 
Baidu should be able to continue to produce significant cash flow from its core search business as long as it sticks to the “leadership” strategy – given their dominant share of search queries, the low penetration they have in the SME market, the suitability to Search advertising for certain industry verticals and their superior profitability. I estimate Baidu’s fair value at US$168/ADS based on a SOTP valuation. The values used in my SOTP for <a href="https://www.smartkarma.com/entities/iqiyi-inc" target="_blank" data-smartkarma-citation="entities:26755:1" rel="noopener">iQIYI Inc (IQ US)</a>, <a href="https://www.smartkarma.com/entities/trip-com-group-ltd" target="_blank" data-smartkarma-citation="entities:180:1" rel="noopener">Trip.com (TCOM US)</a> (market value), Net Cash and Other investments (book value) would imply that Baidu’s core operations are currently valued at only $10.4bn ex-cash, which equates to only 9.1x 2021F PE (only 3.9x PE ex-cash).

Baidu (BIDU US), and the rest of the Chinese Online Search industry, has consistently been losing market share to the likes of Alibaba Group (9988 HK), ByteDance (1460967D CH), Tencent Holdings (700 HK), Pinduoduo (PDD US) and Meituan Dianping (3690 HK) over the past two years. Although I still believe there is significant long term growth left for the Chinese digital advertising market, it can easily be argued that this growth will be heavily skewed and that the “pure” Search market is in effect an “industry in decline”. 
In his book “Competitive Strategy: Techniques for Analysing Industries and Competitors”, Michael Porter expands on four key strategies which firms could successfully follow when they find themselves in a declining industry. In this insight, I analyse Baidu’s current strategy against these offered strategies to assess if there is indeed value left in the company (or at least the core search business). 
Baidu should be able to continue to produce significant cash flow from its core search business as long as it sticks to the “leadership” strategy – given their dominant share of search queries, the low penetration they have in the SME market, the suitability to Search advertising for certain industry verticals and their superior profitability. I estimate Baidu’s fair value at US$168/ADS based on a SOTP valuation. The values used in my SOTP for iQIYI Inc (IQ US), Trip.com (TCOM US) (market value), Net Cash and Other investments (book value) would imply that Baidu’s core operations are currently valued at only $10.4bn ex-cash, which equates to only 9.1x 2021F PE (only 3.9x PE ex-cash).

Baidu: Strategies for Operating in an Industry in Decline

Silver Point

Thomas J. Monaco

Silver Point is a boutique research firm that focuses on the broader financial services sector, with a particular focus on troubled institutions globally. 

Asia Ex Japan

* Solid Result: Despite the net transaction loss increase of AUD 20.6 mn (93%), we note particular improvement in Afterpay’s fundamental metrics: sales improved AUD 5.9 bn (112%) YOY to AUD 11.1 bn in FY 2020; gross losses to sales declined 20 bp (24%) to 0.9%; EBITDA improved AUD 18.7 mn (73%) to AUD 44.4 mn; active customers increased 5.3 mn (116%) to 9.9 mn; and active merchants increased 23.1 thousand (72%) 55.4 thousand;  *Asian Launch Underway: The earnings announcement was also chock full of recent positive developments as well, which include its Asia expansion. Afterpay is set to acquire a Singapore’s, Empatkali, which is a small buy now pay later provider in Indonesia and will be used as Afterpay’s Asia launching pad with Tencent (700.HK) providing further regional expansion guidance; and*Magic Fairy Dust: While no transaction particulars were disclosed, we calculate an average share purchase price of AUD 22.47 per share for the 5% stake or a hefty 6.8x P/BV for a company which is loss-making and where Tencent hasn’t control. Tencent has already earned 146% on this stake.

* Solid Result: Despite the net transaction loss increase of AUD 20.6 mn (93%), we note particular improvement in Afterpay’s fundamental metrics: sales improved AUD 5.9 bn (112%) YOY to AUD 11.1 bn in FY 2020; gross losses to sales declined 20 bp (24%) to 0.9%; EBITDA improved AUD 18.7 mn (73%) to AUD 44.4 mn; active customers increased 5.3 mn (116%) to 9.9 mn; and active merchants increased 23.1 thousand (72%) 55.4 thousand;  *Asian Launch Underway: The earnings announcement was also chock full of recent positive developments as well, which include its Asia expansion. Afterpay is set to acquire a Singapore’s, Empatkali, which is a small buy now pay later provider in Indonesia and will be used as Afterpay’s Asia launching pad with Tencent (700.HK) providing further regional expansion guidance; and*Magic Fairy Dust: While no transaction particulars were disclosed, we calculate an average share purchase price of AUD 22.47 per share for the 5% stake or a hefty 6.8x P/BV for a company which is loss-making and where Tencent hasn’t control. Tencent has already earned 146% on this stake. 

Overseas Chinese Equities, Aequitas Research

Ming Lu

Overseas Chinese Equities

IPOs and Placements coverage across Asia Pacific

Aequitas Research

We cover all listing across the Asia Pacific along with follow-up placements. As of Dec 2020, our team had covered 539 IPOs with a hit rate of 73.5% and 685 placements with a hit rate of 66.8%.

We combine fundamental bottom-up views with our proprietary quantitative framework to provide a holistic coverage across new listings and placements. Our coverage includes pre-IPO notes before the deal is launched, follow-up analysis once the deal is live and post-listing trading analysis as well.

<ul class="">
<li>Alibaba (BABA)’s Taobao inflated audience for live broadcast.</li>
<li>SEC is investigating iQiyi for revenue inflation.</li>
<li>The merger of DouYu (DOYU) and Huya (HUYA) will come true as we had expected in April.</li>
<li>Baidu (BIDU), China Literature (772), and Sohu (SOHU) released 2Q20 results.</li>
</ul>


Alibaba (BABA)’s Taobao inflated audience for live broadcast.
SEC is investigating iQiyi for revenue inflation.
The merger of DouYu (DOYU) and Huya (HUYA) will come true as we had expected in April.
Baidu (BIDU), China Literature (772), and Sohu (SOHU) released 2Q20 results.


China Internet Weekly (17Aug2020): Top Broadcaster Said Taobao Lied, Probe and Rumor on IQ

IPO and L/S equity, 2015 Starmine top stock picker, Global Equity Research Ltd

Rickin Thakrar

IPO and L/S equity, 2015 Starmine top stock picker

Uncompromised, Independent, Conflict-Free Research

Global Equity Research Ltd

Global Equity Research was started in 2017 by a group of experienced research professionals. It was founded on a passionate belief in the importance and the need for uncompromised, independent, conflict-free research. We aim to provide differentiated and actionable primary and bottom up fundamental research.

<a href="https://www.smartkarma.com/entities/iqiyi-inc" target="_blank" data-smartkarma-citation="entities:26755:1" rel="noopener">iQIYI Inc (IQ US)</a> shares dropped 12% post the close of the US market (parent <a href="https://www.smartkarma.com/entities/baidu-inc" target="_blank" data-smartkarma-citation="entities:179:1" rel="noopener">Baidu (BIDU US)</a> down 7%) after the iQIYI made an announcement at its 2Q20 results that it is currently being investigated by the SEC and it is demanding that iQIYI produce financial and operating records that were identified in a short-seller report by Wolfpack research (<a href="https://wolfpackresearch.com/research/iq-netflix-of-china-good-luckin/" target="_blank" rel="noopener">note is here</a>). Iqiyi noted it was co-operating with the SEC and could not predict the timing, outcome, or consequences of an SEC investigation.In addition, iQIYI provided a fairly dismal outlook in relation to its sales guidance. More details below the fold.

iQIYI Inc (IQ US) shares dropped 12% post the close of the US market (parent Baidu (BIDU US) down 7%) after the iQIYI made an announcement at its 2Q20 results that it is currently being investigated by the SEC and it is demanding that iQIYI produce financial and operating records that were identified in a short-seller report by Wolfpack research (note is here). Iqiyi noted it was co-operating with the SEC and could not predict the timing, outcome, or consequences of an SEC investigation.In addition, iQIYI provided a fairly dismal outlook in relation to its sales guidance. More details below the fold.

IQIYI Reveals SEC Investigation Amidst Poor Sales Outlook

*Implications of Executive Order: On August 6, 2020, the Trump administration issued a pair of executive orders directed at mainland Chinese technology companies, banning US transactions with the companies after a deadline of September 20, 2020. The executive order imposes a ban on any transaction which is related to WeChat by any person, or with respect to any property subject to the jurisdiction of the United States, with Tencent; and*Tencent Ownership Can Be A Share Overhang Now: Any business with a Tencent ownership stake is potentially implicated since an abrupt departure of Tencent from the market could be problematic to the affiliates financial condition. The sheer scope of Tencent’s investments shows how ugly things could get for a number of American companies, which include the National Basketball Association.

*Implications of Executive Order: On August 6, 2020, the Trump administration issued a pair of executive orders directed at mainland Chinese technology companies, banning US transactions with the companies after a deadline of September 20, 2020. The executive order imposes a ban on any transaction which is related to WeChat by any person, or with respect to any property subject to the jurisdiction of the United States, with Tencent; and*Tencent Ownership Can Be A Share Overhang Now: Any business with a Tencent ownership stake is potentially implicated since an abrupt departure of Tencent from the market could be problematic to the affiliates financial condition. The sheer scope of Tencent’s investments shows how ugly things could get for a number of American companies, which include the National Basketball Association.

China

Baidu, Inc. operates an Internet search engine. The Company offers algorithmic search, enterprise search, news, MP3, and image searches, voice assistance, online storage, and navigation services. Baidu serves clients globally.

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Baidu (BIDU US)

Baidu: Strategies for Operating in an Industry in Decline

Baidu, and the rest of the Chinese Online Search industry, has consistently been losing market share to the likes of Alibaba, ByteDance, Tencent,...

Wium Malan, CFA

Tencent - We’re Down With APT

* Solid Result: Despite the net transaction loss increase of AUD 20.6 mn (93%), we note particular improvement in Afterpay’s fundamental metrics:...

Thomas J. Monaco

China Internet Weekly (17Aug2020): Top Broadcaster Said Taobao Lied, Probe and Rumor on IQ

Alibaba (BABA)’s Taobao inflated audience for live broadcast. SEC is investigating iQiyi for revenue inflation. The merger of DouYu (DOYU) and...

Ming Lu

IQIYI Reveals SEC Investigation Amidst Poor Sales Outlook

iQIYI Inc (IQ US) shares dropped 12% post the close of the US market (parent Baidu (BIDU US) down 7%) after the iQIYI made an announcement at its...

Rickin Thakrar

Tencent - Untangling Trump

*Implications of Executive Order: On August 6, 2020, the Trump administration issued a pair of executive orders directed at mainland Chinese...

Thomas J. Monaco

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