Asian Equities Analyst, Logistics & Transport, Tracking Traffic

Daniel Hellberg

Asian Equities Analyst, Logistics & Transport

Tracking Traffic

Focusing on Asian logistics, transportation, and travel companies

Equity Bottom-Up

Tongcheng Travel Holdings  / Equity Bottom-Up

Not surprisingly, online travel agency (OTA) <a href="https://www.smartkarma.com/entities/tongcheng-elong-holdings-ltd" target="_blank" data-smartkarma-citation="entities:27363:1" rel="noopener">Tongcheng-Elong Holdings Ltd (780 HK)</a> reported substantial YoY declines in revenue and earnings in Q220, though market conditions and results were better than in Q120, when Covid19 and the government's response brought travel to a halt.
Tongcheng-ELong's revenue mix has changed as a result of the pandemic, in both positive and negative ways. While it's positive to see increased revenue from advertising and continued strength in its position in smaller cities, we believe the cessation of international travel hurts profitability. In addition, high fixed operating expenses also hit earnings in the second quarter.
As domestic travel normalized in the months following the peak of the pandemic in China, Tongcheng-ELong's shares have rallied by over 60%. Given the moderating pace of the recovery in Chinese travel demand, and stubbornly high operating expenses, we do not expect Tongcheng-ELong's earnings to suddenly 'snap back' in H220.

Not surprisingly, online travel agency (OTA) Tongcheng-Elong Holdings Ltd (780 HK) reported substantial YoY declines in revenue and earnings in Q220, though market conditions and results were better than in Q120, when Covid19 and the government's response brought travel to a halt.
Tongcheng-ELong's revenue mix has changed as a result of the pandemic, in both positive and negative ways. While it's positive to see increased revenue from advertising and continued strength in its position in smaller cities, we believe the cessation of international travel hurts profitability. In addition, high fixed operating expenses also hit earnings in the second quarter.
As domestic travel normalized in the months following the peak of the pandemic in China, Tongcheng-ELong's shares have rallied by over 60%. Given the moderating pace of the recovery in Chinese travel demand, and stubbornly high operating expenses, we do not expect Tongcheng-ELong's earnings to suddenly 'snap back' in H220.

Tongcheng-ELong (780 HK) Q2 Results Reflect Changing Travel Patterns, Stubbornly High OpEx

Pan-Asia Catalysts/Events, Quiddity Advisors

David Blennerhassett

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

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Back on the 2 April, China's <a href="https://www.smartkarma.com/entities/58-com-inc-adr" target="_blank" data-smartkarma-citation="entities:2563:1" rel="noopener">58.Com Inc (WUBA US)</a> received a preliminary, nonbinding <a href="https://sec.report/Document/0001104659-20-042699/" target="_blank" rel="noopener">proposal</a> from Ocean Link Partners, at $27.50 per Class A or Class B ordinary share, or $55/ADS, a 17.88% premium to last close. This was followed on the 20 April with 58.com <a href="http://app.quotemedia.com/data/downloadFiling?webmasterId=101533&amp;ref=114974426&amp;type=PDF&amp;symbol=WUBA&amp;companyName=58.com+Inc.+American+Depositary+Shares+each+representing+2+Class+A&amp;formType=6-K&amp;dateFiled=2020-04-30&amp;CK=1525494" target="_blank" rel="noopener">announcing</a> it had received a preliminary &amp; non-binding Offer from the Buyer Group, comprising Ocean Link Partners and Warburg Pincus Asia LLC, General Atlantic Singapore Fund, and Jinbo Yao, 58.com's chairman and chief executive officer. The indicative Offer Price remained at $55/ADS. A definitive Agreement and Plan of Merger was <a href="http://58.investorroom.com/2020-06-15-58-com-Enters-into-a-Definitive-Agreement-for-Going-Private-Transaction" target="_blank" rel="noopener">announced</a> on the 15 June, with the consideration price marginally sweetened to $56/ADS, a 19.9% premium to the undisturbed price.
Under the merger agreement, the Buyer Group has formed a new holding entity, Quantum Bloom Group Ltd (Parent).
Yao entered into a support agreement with the Parent such that Yao will roll over his stake in 58.com (42% of the voting power) into newly-issued shares of Parent. General Atlantic <a href="http://app.quotemedia.com/data/downloadFiling?webmasterId=101533&amp;ref=115087118&amp;type=PDF&amp;symbol=WUBA&amp;companyName=58.com+Inc.+American+Depositary+Shares+each+representing+2+Class+A&amp;formType=SC+13D%2FA&amp;dateFiled=2020-06-22&amp;CK=1525494" target="_blank" rel="noopener">elected</a> on June 21, 2020 not to roll over its stake (2% of the voting power), electing its shares be cancelled in exchange for the merger consideration. That bumped the financing for the merger by US$400.4mn.
Additionally, <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> entered into a rollover agreement with the parent on the <a href="http://app.quotemedia.com/data/downloadFiling?webmasterId=101533&amp;ref=115079126&amp;type=PDF&amp;symbol=WUBA&amp;companyName=58.com+Inc.+American+Depositary+Shares+each+representing+2+Class+A&amp;formType=SC+13D%2FA&amp;dateFiled=2020-06-17&amp;CK=1525494" target="_blank" rel="noopener">15 June</a>, such that Tencent will roll over its existing stake (28.3% of the voting power) into newly-issued ordinary shares of Parent.
The Merger requires the affirmative vote of two-thirds of 58.com's total voting power (present and via proxy) at an EGM. This will be held on the 7 September - this coming Monday. Yao and General Atlantic will vote their collective 44.02% voting power in favour of the merger. Tencent is not obligated to vote in a specific way under its rollover Agreement. But assuming Tencent does, its 28.3% voting power takes the total to 72.3% - exceeding the two-thirds threshold.
The low-ball offer was not lost on investors. Lawyers Halper Sadeh set up a site for assist investors to "obtain the best possible consideration".
This was followed by proxy advisors reports from both Glass Lewis and ISS recommending shareholder vote AGAINST the proposal. 
But this is a done deal. The alternative avenue is the long-dated appraisal rights route.
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As always, more below the fold.
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Back on the 2 April, China's 58.Com Inc (WUBA US) received a preliminary, nonbinding proposal from Ocean Link Partners, at $27.50 per Class A or Class B ordinary share, or $55/ADS, a 17.88% premium to last close. This was followed on the 20 April with 58.com announcing it had received a preliminary &amp; non-binding Offer from the Buyer Group, comprising Ocean Link Partners and Warburg Pincus Asia LLC, General Atlantic Singapore Fund, and Jinbo Yao, 58.com's chairman and chief executive officer. The indicative Offer Price remained at $55/ADS. A definitive Agreement and Plan of Merger was announced on the 15 June, with the consideration price marginally sweetened to $56/ADS, a 19.9% premium to the undisturbed price.
Under the merger agreement, the Buyer Group has formed a new holding entity, Quantum Bloom Group Ltd (Parent).
Yao entered into a support agreement with the Parent such that Yao will roll over his stake in 58.com (42% of the voting power) into newly-issued shares of Parent. General Atlantic elected on June 21, 2020 not to roll over its stake (2% of the voting power), electing its shares be cancelled in exchange for the merger consideration. That bumped the financing for the merger by US$400.4mn.
Additionally, Tencent Holdings (700 HK) entered into a rollover agreement with the parent on the 15 June, such that Tencent will roll over its existing stake (28.3% of the voting power) into newly-issued ordinary shares of Parent.
The Merger requires the affirmative vote of two-thirds of 58.com's total voting power (present and via proxy) at an EGM. This will be held on the 7 September - this coming Monday. Yao and General Atlantic will vote their collective 44.02% voting power in favour of the merger. Tencent is not obligated to vote in a specific way under its rollover Agreement. But assuming Tencent does, its 28.3% voting power takes the total to 72.3% - exceeding the two-thirds threshold.
The low-ball offer was not lost on investors. Lawyers Halper Sadeh set up a site for assist investors to "obtain the best possible consideration".
This was followed by proxy advisors reports from both Glass Lewis and ISS recommending shareholder vote AGAINST the proposal. 
But this is a done deal. The alternative avenue is the long-dated appraisal rights route.


As always, more below the fold.


58.com: Foregone Conclusion Amidst Proxy Advisor Pushback

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/156/498/original/BANNER-TOURISM.png?1598998817" class="editor-image img-responsive" data-smartkarma-image-id="156498"></figure>
Chinese outbound travel remained stagnant in July. We will watch closely to see if relaxed travel restrictions in a few markets result in a surge in outbound travel activity. 
Meanwhile, Chinese domestic travel demand continued to recover in July, though activity remains far below 2019 levels. There is evidence consumers are opting for cheaper modes of travel, and this appears to benefit rail, highway, and Low Cost (air) Carriers. 
Given the July numbers and our admitedly pessimistic outlook, it's difficult to get excited about shares of most Chinese travel service providers. We remain negative on Trip.com but think stocks of hotel chain Huazhu Group and the LCCs could outperform peers in the near-term.


Chinese outbound travel remained stagnant in July. We will watch closely to see if relaxed travel restrictions in a few markets result in a surge in outbound travel activity. 
Meanwhile, Chinese domestic travel demand continued to recover in July, though activity remains far below 2019 levels. There is evidence consumers are opting for cheaper modes of travel, and this appears to benefit rail, highway, and Low Cost (air) Carriers. 
Given the July numbers and our admitedly pessimistic outlook, it's difficult to get excited about shares of most Chinese travel service providers. We remain negative on Trip.com but think stocks of hotel chain Huazhu Group and the LCCs could outperform peers in the near-term. 

TRACKING TRAFFIC/Chinese Tourism: Outbound Still Stagnant | Domestic Rebound Suggests Wary Consumer

Meituan-Dianping's headline Q2 numbers (out Friday August 21st) looked good, with reported Operating Profit rising 96% YoY on Covid19-hit Revenue growth of just 9%. These numbers suggest extremely strong operating leverage in the period.
However, adjusting Q2 OP for non-cash and non-recurring items reveals lackluster operating leverage for the entity as a whole.
Besides analyzing the company's operating leverage, we also identified several unusual items and trends in the period, some of them positive, some negative. 
Finally, we identify three areas to watch in coming quarters. We believe these areas will largely determine the pace of earnings growth over the next few quarters.

Meituan-Dianping's headline Q2 numbers (out Friday August 21st) looked good, with reported Operating Profit rising 96% YoY on Covid19-hit Revenue growth of just 9%. These numbers suggest extremely strong operating leverage in the period.
However, adjusting Q2 OP for non-cash and non-recurring items reveals lackluster operating leverage for the entity as a whole.
Besides analyzing the company's operating leverage, we also identified several unusual items and trends in the period, some of them positive, some negative. 
Finally, we identify three areas to watch in coming quarters. We believe these areas will largely determine the pace of earnings growth over the next few quarters. 

Meituan-Dianping: Cleaning up Q2 Results Reveals Lackluster Operating Leverage, Other Challenges

Managing Director, Zero One, Zero One

Vincent Fernando, CFA

Managing Director, Zero One

Zero One

Founded in 2015, Zero One produces independent investment research and provides corporate finance advisory services with a focus on both listed and private technology companies. Founder Vincent Fernando has over 20 years of experience in US and Asia capital markets.

Independent Investment Research

Thematic (Sector/Industry)

<div class="content-highlight"><h2>Huya Merger News Propels Stock Upwards; Tencent Gains Subdued from Rising US-China Tensions</h2></div><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/153/594/original/China%20Portfolio%20Performance.png?1597832603" class="editor-image img-responsive" data-smartkarma-image-id="153594"></figure>The months of July and August saw a broad level rise in prices across our entire China tech portfolio. While companies like Huya and Niu outperformed the MSCI China and NASDAQ indices, companies like Tencent remained relatively subdued given rising US-China tensions on mobile app bans.We observe that China Tech companies appear to be looking inwards for growth - focusing more on domestic opportunities while the international regulatory outlook remains uncertain.We provide updated views on each of our portfolio companies below:

Huya Merger News Propels Stock Upwards; Tencent Gains Subdued from Rising US-China TensionsThe months of July and August saw a broad level rise in prices across our entire China tech portfolio. While companies like Huya and Niu outperformed the MSCI China and NASDAQ indices, companies like Tencent remained relatively subdued given rising US-China tensions on mobile app bans.We observe that China Tech companies appear to be looking inwards for growth - focusing more on domestic opportunities while the international regulatory outlook remains uncertain.We provide updated views on each of our portfolio companies below:

Our Tech Portfolio Update: Capitalizing on Domestic Opportunities Amidst Heightened US-China Tension

China

Trip.com Group Ltd. provides online travel agency services. The Company offers mobile applications, hotel reservations, flight ticketing, package tours, corporate travel management, and train ticketing services.

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Trip.com (TCOM US)

Tongcheng-ELong (780 HK) Q2 Results Reflect Changing Travel Patterns, Stubbornly High OpEx

point 1 point 2 point 3 conclusions

Tracking Traffic

58.com: Foregone Conclusion Amidst Proxy Advisor Pushback

On the 2 April, China's 58.Com Inc (WUBA US) received a preliminary, nonbinding proposal from Ocean Link Partners, at $27.50 per Class A or Class...

David Blennerhassett

TRACKING TRAFFIC/Chinese Tourism: Outbound Still Stagnant | Domestic Rebound Suggests Wary Consumer

Chinese outbound travel remained stagnant in July. We will watch closely to see if relaxed travel restrictions in a few markets result in a surge...

Tracking Traffic

Meituan-Dianping: Cleaning up Q2 Results Reveals Lackluster Operating Leverage, Other Challenges

Meituan-Dianping's headline Q2 numbers (out Friday August 21st) looked good, with reported Operating Profit rising 96% YoY on Covid19-hit Revenue...

Tracking Traffic

Our Tech Portfolio Update: Capitalizing on Domestic Opportunities Amidst Heightened US-China Tension

Huya Merger News Propels Stock Upwards; Tencent Gains Subdued from Rising US-China TensionsThe months of July and August saw a broad level rise in...

Vincent Fernando, CFA

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