China and US Equity Analyst

Roger Xie

Thematic (Sector/Industry)

<ul>
<li>China digital Yuan has made a splash to expand its pioneer program to 10 cities since the initial launch in May 2020. So far, more than 750,000 early recipients have already spent digital Yuan and total transaction has exceed RMB 1 billion. China digital Yuan will likely form a disruptive payment system given its advantage over other app-based payments such as Alipay and WeChat. It is widely believed that China government will raise the amount of digital currency in the future and lower physical cash in circulation. </li>
<li>Compared with cryptocurrency, China digital Yuan has a couple of distinctions: 1) China Digital Currency/Electronic Payment (DC/EP) system will feature two-tier issuance, with the PBOC issuing digital currency for both commercial banks and customers; (2) controllable anonymity, with DC/EP wallets independent of bank accounts for smaller transactions; and (3) centralized processing instead of a distributed ledger.</li>
<li>Digital economy has accounted 36% in China and pandemic has accelerated its acceptance. The rising of China Digital Currency/Electronic Payment (DC/EP) system could be disruptive to financial system. We believe it will lead the changes in payment, risk control, user data and credit history etc. in financial system.  Not only tech giant such as <a href="https://www.smartkarma.com/entities/alibaba-group-holding-ltd" target="_blank" data-smartkarma-citation="entities:787:1" rel="noopener">Alibaba Group (BABA US)</a> and <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>but Chinese banks need to renovate their infrastructure for digital transformation. </li>
</ul>


China digital Yuan has made a splash to expand its pioneer program to 10 cities since the initial launch in May 2020. So far, more than 750,000 early recipients have already spent digital Yuan and total transaction has exceed RMB 1 billion. China digital Yuan will likely form a disruptive payment system given its advantage over other app-based payments such as Alipay and WeChat. It is widely believed that China government will raise the amount of digital currency in the future and lower physical cash in circulation. 
Compared with cryptocurrency, China digital Yuan has a couple of distinctions: 1) China Digital Currency/Electronic Payment (DC/EP) system will feature two-tier issuance, with the PBOC issuing digital currency for both commercial banks and customers; (2) controllable anonymity, with DC/EP wallets independent of bank accounts for smaller transactions; and (3) centralized processing instead of a distributed ledger.
Digital economy has accounted 36% in China and pandemic has accelerated its acceptance. The rising of China Digital Currency/Electronic Payment (DC/EP) system could be disruptive to financial system. We believe it will lead the changes in payment, risk control, user data and credit history etc. in financial system.  Not only tech giant such as Alibaba Group (BABA US) and Tencent Holdings (700 HK), but Chinese banks need to renovate their infrastructure for digital transformation. 


China Digital Currency: Leading the Innovation in Financial System

Equity Analyst, LightStream Research

Shifara Samsudeen, FCMA, CGMA

Equity Analyst

Long-Short Analysis on Japan, Asia and the World

LightStream Research

LightStream conducts quantitatively rigorous and data-driven analysis with a focus on Japan and Asia.

We consistently cover the Tech, Consumer and Industrial sectors, and provide ECM and Events coverage more broadly.

We supplement traditional qualitative insights from company relationships with a robust quantitative foundation that examines as much historical data as is available.
We further refine the accuracy of our insights and calls through the use of alternative data to flesh out current trends, and through a valuation framework that emphasises non-superficial peer group selection and a proper attempt to understand the metrics and changes that have driven security valuations in the past.

<div class="content-highlight"><p><strong>This report was commissioned by the next-generation investment platform iSTOX, which puts previously out-of-reach opportunities like private equity, hedge funds and private debt in the hands of more investors. To learn more, go to istox.com.</strong></p></div><div>The alternative finance market in South East Asia (SEA) is relatively underpenetrated, accounting for less than 1% of global transaction volume. Alternative lending refers to any form of lending that takes place outside a traditional banking institution. Indonesia, despite being the largest alternative finance market in the region, has a per capita alternative finance transaction volume of only $5 compared to $155 and $187 respectively in China and the USA. The penetration is even lower in other SEA markets, except in Singapore, where business lending takes precedence.</div><div></div><div>Despite the relatively low penetration, there is a significant opportunity for the alternative lending industry in the SEA region, particularly in markets such as Indonesia, the Philippines, and Vietnam. Strong growth in consumer spending coupled with relatively low banking penetration and the tendency to borrow from informal sources (such as credit from friends, relatives, moneylenders, landlords, etc.) bode well for the alternative lending industry in these markets. There is also a significant opportunity for the alternative lending industry to bridge the financing gap for SMEs in the region. SMEs are a big part of SEA economies accounting for around 30%-50% of GDP; however, poor access to finance is one of the top issues for SMEs in the region.</div><div></div><div>Singapore and Indonesia are the only SEA countries that currently have specific regulatory frameworks for the alternative lending industry. However, more than 80% of the alternative financing platforms in Singapore, the Philippines, and Malaysia believe that regulations are adequate and appropriate. The regulatory environment in Indonesia seems somewhat restrictive given that only around 64% of the alternative financing platforms deem that the regulations are favourable.</div><div></div><div><div>The alternative lending market in SEA is highly fragmented with the presence of a large number of small players. Nevertheless, a few notable established players also exist. Akulaku (Indonesia), FinAccel (Singapore), and Funding Societies (Singapore) are the largest alternative lending companies in the region in terms of funds raised.</div></div>

This report was commissioned by the next-generation investment platform iSTOX, which puts previously out-of-reach opportunities like private equity, hedge funds and private debt in the hands of more investors. To learn more, go to istox.com.The alternative finance market in South East Asia (SEA) is relatively underpenetrated, accounting for less than 1% of global transaction volume. Alternative lending refers to any form of lending that takes place outside a traditional banking institution. Indonesia, despite being the largest alternative finance market in the region, has a per capita alternative finance transaction volume of only $5 compared to $155 and $187 respectively in China and the USA. The penetration is even lower in other SEA markets, except in Singapore, where business lending takes precedence.Despite the relatively low penetration, there is a significant opportunity for the alternative lending industry in the SEA region, particularly in markets such as Indonesia, the Philippines, and Vietnam. Strong growth in consumer spending coupled with relatively low banking penetration and the tendency to borrow from informal sources (such as credit from friends, relatives, moneylenders, landlords, etc.) bode well for the alternative lending industry in these markets. There is also a significant opportunity for the alternative lending industry to bridge the financing gap for SMEs in the region. SMEs are a big part of SEA economies accounting for around 30%-50% of GDP; however, poor access to finance is one of the top issues for SMEs in the region.Singapore and Indonesia are the only SEA countries that currently have specific regulatory frameworks for the alternative lending industry. However, more than 80% of the alternative financing platforms in Singapore, the Philippines, and Malaysia believe that regulations are adequate and appropriate. The regulatory environment in Indonesia seems somewhat restrictive given that only around 64% of the alternative financing platforms deem that the regulations are favourable.The alternative lending market in SEA is highly fragmented with the presence of a large number of small players. Nevertheless, a few notable established players also exist. Akulaku (Indonesia), FinAccel (Singapore), and Funding Societies (Singapore) are the largest alternative lending companies in the region in terms of funds raised.

Reaching Out to the Underbanked: The Alternative Lending Opportunity in South East Asia

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

<p><strong><em>*Yongcheng Coal Default: </em></strong>According to Shanghai Clearing House, Yongcheng Coal and Electricity (YCE) in Henan Province failed to repay a CNY 1 bn (USD 151 mn) short-term bond despite being given the highest rating by one of mainland China’s awful domestic credit ratings agencies; and</p><p><strong><em>*Watch Your Banks: </em></strong>The yield on benchmark five-year “AAA” rated mainland Chinese corporates was 3.99% - up over 100 bp from their April 2020 low. Investor flight is pushing financing costs higher and squeezing local corporate funding in a market which is just barely recovering from the COVID-19 pandemic. Concerns remain over higher problem loans as debt service risk is heightened over higher rates, unreliable financial statements and ratings agency reports, and now an inability to refinance public debt with a number of bond sales being canceled. Further, the degradation of corporate bond values is limiting their usage as collateral.</p>

*Yongcheng Coal Default: According to Shanghai Clearing House, Yongcheng Coal and Electricity (YCE) in Henan Province failed to repay a CNY 1 bn (USD 151 mn) short-term bond despite being given the highest rating by one of mainland China’s awful domestic credit ratings agencies; and*Watch Your Banks: The yield on benchmark five-year “AAA” rated mainland Chinese corporates was 3.99% - up over 100 bp from their April 2020 low. Investor flight is pushing financing costs higher and squeezing local corporate funding in a market which is just barely recovering from the COVID-19 pandemic. Concerns remain over higher problem loans as debt service risk is heightened over higher rates, unreliable financial statements and ratings agency reports, and now an inability to refinance public debt with a number of bond sales being canceled. Further, the degradation of corporate bond values is limiting their usage as collateral.

<p><strong><em>*High Court Ruling: </em></strong>The United Kingdom High Court ruled on a test case brought forth by the Financial Conduct Authority (FCA) indicates that the "COVID-19 pandemic and the government and public response were a single cause of the covered loss, which is a key requirement for claims to be paid even if the policy provides cover". The decision on th Business Interruption (BI) case against the insurance industry is mostly in favorable to policyholders; and</p><p> <strong><em>*Asia-Pac To Follow: </em></strong>As many countries in Asia-Pacific are Common Law nations, High Court rulings such as this have a tendency to set precedent. It also wouldn’t be a surprise to see significant capital raises given the challenges to solvency.  </p>

*High Court Ruling: The United Kingdom High Court ruled on a test case brought forth by the Financial Conduct Authority (FCA) indicates that the "COVID-19 pandemic and the government and public response were a single cause of the covered loss, which is a key requirement for claims to be paid even if the policy provides cover". The decision on th Business Interruption (BI) case against the insurance industry is mostly in favorable to policyholders; and *Asia-Pac To Follow: As many countries in Asia-Pacific are Common Law nations, High Court rulings such as this have a tendency to set precedent. It also wouldn’t be a surprise to see significant capital raises given the challenges to solvency.  

Asian Insurers – High Court Ruling A Harbinger For Region

Equity Bottom-Up

<p><strong><em>* Solid Result:</em></strong> 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;  </p><p><strong><em>*Asian Launch Underway: </em></strong>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</p><p><em><strong>*Magic Fairy Dust:</strong></em> 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. </p>

* 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. 

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Alipay (ALI HK)

China Digital Currency: Leading the Innovation in Financial System

The rising of China Digital Yuan system could be disruptive to financial system. We believe it will lead the changes in payment, risk control, user...

Roger Xie

Reaching Out to the Underbanked: The Alternative Lending Opportunity in South East Asia

We deep dive the alternative finance market (including the drivers, demand and supply) in SEA, with a particular focus on Indonesia. We have...

Shifara Samsudeen, FCMA, CGMA

Another Day, Another Default

MAINLAND CHINA DEFAULT: Yongcheng Coal Defaulted On Its Debt, Leading To Concerns About The Credibility Of AAA Rated Corporates In Mainland China...

Thomas J. Monaco

Asian Insurers – High Court Ruling A Harbinger For Region

*High Court Ruling: The United Kingdom High Court ruled on a test case brought forth by the Financial Conduct Authority (FCA) indicates that the...

Thomas J. Monaco

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

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