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.

Event-Driven

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<a href="https://www.smartkarma.com/entities/tencent-holdings-ltd" target="_blank" data-smartkarma-citation="entities:26:1" rel="noopener">Tencent (700 HK)</a>  shares closed at HK$528 per share as at the end of Thursday’s trading, only 5.2% higher than the company’s 12-month low of HK$502 per share. The company’s shares have been on a downward trend on the back of increased regulatory scrutiny over Chinese internet stocks. As Chinese regulators have broadened their crackdown on the country’s internet tech platforms during the past few days, Tencent’s shares dropped almost 10% over the last one week (since the beginning of July).</div><div></div><div><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/217/580/original/image_22041245221625797905092.png?1625797914" class="editor-image img-responsive" data-smartkarma-image-id="217580"></figure></div><div>There is no sign that China is slowing down with its antitrust crackdown on the country’s tech platforms, rather the regulators have broadened their investigation to include cybersecurity violations such as on the recently listed <a href="https://www.smartkarma.com/entities/didi-chuxing-inc" target="_blank" data-smartkarma-citation="entities:27467:1" rel="noopener">DiDi Chuxing (DIDI US)</a> , <a href="https://www.smartkarma.com/entities/kanzhun-ltd" target="_blank" data-smartkarma-citation="entities:33368:1" rel="noopener">Kanzhun (BZ US)</a> and <a href="https://www.smartkarma.com/entities/full-truck-alliance" target="_blank" data-smartkarma-citation="entities:33429:1" rel="noopener">Full Truck Alliance (YMM US)</a> .</div><div></div><div>According to the CNN, the People’s Bank of China has said that it would further regulate the countries’ payments companies after its massive overhaul of Ant Group. The Chinese online payment market is largely dominated by Alipay and WeChat Pay.</div>


Tencent (700 HK)  shares closed at HK$528 per share as at the end of Thursday’s trading, only 5.2% higher than the company’s 12-month low of HK$502 per share. The company’s shares have been on a downward trend on the back of increased regulatory scrutiny over Chinese internet stocks. As Chinese regulators have broadened their crackdown on the country’s internet tech platforms during the past few days, Tencent’s shares dropped almost 10% over the last one week (since the beginning of July).There is no sign that China is slowing down with its antitrust crackdown on the country’s tech platforms, rather the regulators have broadened their investigation to include cybersecurity violations such as on the recently listed DiDi Chuxing (DIDI US) , Kanzhun (BZ US) and Full Truck Alliance (YMM US) .According to the CNN, the People’s Bank of China has said that it would further regulate the countries’ payments companies after its massive overhaul of Ant Group. The Chinese online payment market is largely dominated by Alipay and WeChat Pay.

Korea/Asia, Events, IPOs, Douglas Research Advisory

Douglas Kim

Korea/Asia, Events, IPOs

Private Capital Markets

<p>Shein is a monster e-commerce company based in China. Shein is the fastest growing e-commerce company in the world. The company generated nearly $10 billion in revenues in 2020, up nearly 250% YoY. Shein could realistically overtake Zara in terms of revenues by 2022. </p><p>Shein's core business model is to sell clothing (mostly women's apparel) online to the younger generation consumers in the US, Europe, and other parts of the world. <a href="https://techcrunch.com/2021/06/22/why-amazon-should-pay-attention-to-shein/" target="_blank" rel="noopener">Shein</a> is especially popular among the budget conscious younger generation in the Americas, Europe, and Asia (excluding China). </p><p>The following are the key competitive advantages of Shein:</p><ul>
<li><strong>Superb execution of "art of trend setting" in apparel products</strong></li>
<li><strong>Extremely attractive pricing</strong></li>
<li><strong>Faster adoption of new fashion styles</strong></li>
<li><strong>Aggressive promotions through influencers and discount codes</strong></li>
<li><strong>Effective use of data analytics and technology</strong></li>
<li><strong>Capitalize on the tax loop holes between the US and China</strong></li>
</ul><p>The tremendous growth of Shein and other pure-play fashion companies have had major negative impact on some of the largest apparel companies with signficant brick and mortar operations such as <a href="https://www.smartkarma.com/entities/fast-retailing-co-ltd" target="_blank" data-smartkarma-citation="entities:751:1" rel="noopener">Fast Retailing (9983 JP)</a>, <a href="https://www.smartkarma.com/entities/gap-inc-the" target="_blank" data-smartkarma-citation="entities:7941:1" rel="noopener">Gap Inc/The (GPS US)</a>, and <a href="https://www.smartkarma.com/entities/industria-de-diseno-textil-sa" target="_blank" data-smartkarma-citation="entities:21278:1" rel="noopener">Industria De Diseno Textil Sa (ITX SM)</a>.</p>

Shein is a monster e-commerce company based in China. Shein is the fastest growing e-commerce company in the world. The company generated nearly $10 billion in revenues in 2020, up nearly 250% YoY. Shein could realistically overtake Zara in terms of revenues by 2022. Shein's core business model is to sell clothing (mostly women's apparel) online to the younger generation consumers in the US, Europe, and other parts of the world. Shein is especially popular among the budget conscious younger generation in the Americas, Europe, and Asia (excluding China). The following are the key competitive advantages of Shein:
Superb execution of "art of trend setting" in apparel products
Extremely attractive pricing
Faster adoption of new fashion styles
Aggressive promotions through influencers and discount codes
Effective use of data analytics and technology
Capitalize on the tax loop holes between the US and China
The tremendous growth of Shein and other pure-play fashion companies have had major negative impact on some of the largest apparel companies with signficant brick and mortar operations such as Fast Retailing (9983 JP), Gap Inc/The (GPS US), and Industria De Diseno Textil Sa (ITX SM).

SHEIN: The Fastest Growing E-Commerce Company in the World & Ready to Overtake Zara in 2022?

Equity Capital Markets

<p><a href="https://www.smartkarma.com/entities/manycore-tech-inc-adr" target="_blank" data-smartkarma-citation="entities:33517:1" rel="noopener">Manycore Tech (KOOL US)</a>  operates a design software platform in China which offers 3D interior design, decoration and construction for residential, commercial and industrial spaces. According to iResearch, Manycore was the world’s largest platform for 3D interior design, decoration and construction in terms of the number of average monthly active users (MAUs) in 1Q2021.</p><p>The company has filed for an IPO to list its shares in the US and has a placeholder indication to raise about US$ 100m.</p><p>The interior DDC (design, decoration and construction) software market is forecasted to see rapid growth in China and in overseas markets driven by increasing trend for digital transformation and growing penetration of cloud-based software. Manycore’s revenues have continued to see strong growth over the last three years driven by increase in the number of paid subscribers, the enterprise customers in particular. The company also has expanded its operations outside of China and revenue from overseas markets have seen rapid growth. The company has not yet been able to generate any profits, however, we expect the company’s profitability to gradually improve with better pricing and stable costs.</p>

Manycore Tech (KOOL US)  operates a design software platform in China which offers 3D interior design, decoration and construction for residential, commercial and industrial spaces. According to iResearch, Manycore was the world’s largest platform for 3D interior design, decoration and construction in terms of the number of average monthly active users (MAUs) in 1Q2021.The company has filed for an IPO to list its shares in the US and has a placeholder indication to raise about US$ 100m.The interior DDC (design, decoration and construction) software market is forecasted to see rapid growth in China and in overseas markets driven by increasing trend for digital transformation and growing penetration of cloud-based software. Manycore’s revenues have continued to see strong growth over the last three years driven by increase in the number of paid subscribers, the enterprise customers in particular. The company also has expanded its operations outside of China and revenue from overseas markets have seen rapid growth. The company has not yet been able to generate any profits, however, we expect the company’s profitability to gradually improve with better pricing and stable costs.

Manycore IPO: Overshadowed by the Chinese Regulatory Crackdown

Consumer Discretionary / Industrials

Henry Kwon

Equity Bottom-Up

<p>NIO closed down at $46.03 (-8.47%), breaking through both its 10-day EMA ($48.51) and 21-day EMA ($46.64). The 38.2% Fibonacci Retracement ($49.49) which used to be support, has now become resistance. In the wake of the Cyberspace Administration of China's removal order to app stores of the Didi Chuxing app citing issues with Didi's personal information collection and usage, U.S.-listed China stocks have been showing weakness following the 4th of July holiday weekend. We see three major market concerns as they specifically apply to NIO at this point:</p><ul>
<li>
<strong>VIE Structure Risk</strong>: NIO is, strictly speaking, a Cayman Islands offshore entity with ADS listed in the U.S. having a VIE structure in China. The market could be concerned that the listed shares of NIO in the U.S. are not actually shares in the operational entities in China, and legal loopholes that have allowed this structure to persist in the past may be addressed by the Chinese government in the near future. <em><strong>Historically we do not believe this was a potential risk that was priced into NIO's shares.</strong></em>
</li>
<li>
<strong>U.S. Regulatory Risk</strong>: The SEC has already adopted measures to require stricter disclosure for U.S.-listed Chinese firms under the Holding Foreign Companies Accountable Act enacted during the Trump Administration (<a href="https://www.sec.gov/news/press-release/2021-53" target="_blank" rel="noopener">https://www.sec.gov/news/press-release/2021-53</a>). The Biden Administration has not backtracked on the Trump Administration's basic policy direction and the June 3 Executive Order that goes into effect on August 2 will prohibit U.S. investors from investing in 59 Chinese companies "in a targeted manner - U.S. investments in Chinese companies that undermine the security or democratic values of the United States and our allies."(<a href="https://www.whitehouse.gov/briefing-room/statements-releases/2021/06/03/fact-sheet-executive-order-addressing-the-threat-from-securities-investments-that-finance-certain-companies-of-the-peoples-republic-of-china/" target="_blank" rel="noopener">https://www.whitehouse.gov/briefing-room/statements-releases/2021/06/03/fact-sheet-executive-order-addressing-the-threat-from-securities-investments-that-finance-certain-companies-of-the-peoples-republic-of-china/</a>). As U.S.-listed Chinese stocks now seem like they are caught between a rock and a hard place, investors may become wary about bottom fishing so long as the de-listing risk theme is alive in the market.</li>
<li>
<strong>Concerns about June Auto Demand in China and what it may imply for 2H21</strong>: According to media reports, CAAM expects to see 1.93m units of vehicle sales (-9.3% MoM, -16.1% YoY) in June (see <a href="https://www.reuters.com/business/autos-transportation/chinas-auto-sales-likely-fall-16-june-trade-body-says-2021-07-05/" target="_blank" rel="noopener">https://www.reuters.com/business/autos-transportation/chinas-auto-sales-likely-fall-16-june-trade-body-says-2021-07-05/</a>). The figures refer to combined PV and CV sales based on the expected YoY drop, which implies that we are likely to see June SAAR falling to 24.4m units (-15.6% MoM, -18.2% YoY). If June sales comes in at the 1.93m units that media reports have attributed to CAAM, then it would suggest that China demand may be showing decline, not just decelerating growth.</li>
</ul><p>NIO's ascending channel was broken today. The 50% Fibonacci Retracement level sits at $44.08 while the 200 DMA currently sits at $42.29. With RSI at 51 as of close, there is still technical room for a further drop based on our observation. If the 50% Fibonacci Retracement level holds, then first resistance would likely come in at the $46-48 zone.</p>

NIO closed down at $46.03 (-8.47%), breaking through both its 10-day EMA ($48.51) and 21-day EMA ($46.64). The 38.2% Fibonacci Retracement ($49.49) which used to be support, has now become resistance. In the wake of the Cyberspace Administration of China's removal order to app stores of the Didi Chuxing app citing issues with Didi's personal information collection and usage, U.S.-listed China stocks have been showing weakness following the 4th of July holiday weekend. We see three major market concerns as they specifically apply to NIO at this point:

VIE Structure Risk: NIO is, strictly speaking, a Cayman Islands offshore entity with ADS listed in the U.S. having a VIE structure in China. The market could be concerned that the listed shares of NIO in the U.S. are not actually shares in the operational entities in China, and legal loopholes that have allowed this structure to persist in the past may be addressed by the Chinese government in the near future. Historically we do not believe this was a potential risk that was priced into NIO's shares.


U.S. Regulatory Risk: The SEC has already adopted measures to require stricter disclosure for U.S.-listed Chinese firms under the Holding Foreign Companies Accountable Act enacted during the Trump Administration (https://www.sec.gov/news/press-release/2021-53). The Biden Administration has not backtracked on the Trump Administration's basic policy direction and the June 3 Executive Order that goes into effect on August 2 will prohibit U.S. investors from investing in 59 Chinese companies "in a targeted manner - U.S. investments in Chinese companies that undermine the security or democratic values of the United States and our allies."(https://www.whitehouse.gov/briefing-room/statements-releases/2021/06/03/fact-sheet-executive-order-addressing-the-threat-from-securities-investments-that-finance-certain-companies-of-the-peoples-republic-of-china/). As U.S.-listed Chinese stocks now seem like they are caught between a rock and a hard place, investors may become wary about bottom fishing so long as the de-listing risk theme is alive in the market.

Concerns about June Auto Demand in China and what it may imply for 2H21: According to media reports, CAAM expects to see 1.93m units of vehicle sales (-9.3% MoM, -16.1% YoY) in June (see https://www.reuters.com/business/autos-transportation/chinas-auto-sales-likely-fall-16-june-trade-body-says-2021-07-05/). The figures refer to combined PV and CV sales based on the expected YoY drop, which implies that we are likely to see June SAAR falling to 24.4m units (-15.6% MoM, -18.2% YoY). If June sales comes in at the 1.93m units that media reports have attributed to CAAM, then it would suggest that China demand may be showing decline, not just decelerating growth.
NIO's ascending channel was broken today. The 50% Fibonacci Retracement level sits at $44.08 while the 200 DMA currently sits at $42.29. With RSI at 51 as of close, there is still technical room for a further drop based on our observation. If the 50% Fibonacci Retracement level holds, then first resistance would likely come in at the $46-48 zone.

Forensic Analyst

Jason Yap, CFA

Forensic Accounting

<p>On 6 July 2021, Chinese regulators introduces guidelines for a crackdown on capital markets misconduct including, amongst others, data security lapses and financial fraud.  This article focuses on the financial fraud aspects of the latest guidelines, including how the <a href="https://www.smartkarma.com/entities/luckin-coffee-inc" target="_blank" data-smartkarma-citation="entities:28046:1" rel="noopener">Luckin Coffee (LKNCY US)</a> incident might have been an impetus for the introduction of these guidelines, what the Chinese regulators' attitude had been, and how future developments might unfold.</p>

On 6 July 2021, Chinese regulators introduces guidelines for a crackdown on capital markets misconduct including, amongst others, data security lapses and financial fraud.  This article focuses on the financial fraud aspects of the latest guidelines, including how the Luckin Coffee (LKNCY US) incident might have been an impetus for the introduction of these guidelines, what the Chinese regulators' attitude had been, and how future developments might unfold.

Tougher Chinese Regulatory Oversight of Foreign Listed Chinese Companies (With Caveats)

China

DiDi Chuxing Inc operates passenger transportation platforms. The Company provides mobility solutions, cloud computing, and other application based services. DiDi Chuxing serves customers worldwide.

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DiDi Global (DIDIY US)

Tencent: Are We There Yet?

Compared to Alibaba, it has only been bits and pieces for Tencent so far when comes to regulatory crackdown. It seems obvious that Tencent will...

Shifara Samsudeen, FCMA, CGMA

SHEIN: The Fastest Growing E-Commerce Company in the World & Ready to Overtake Zara in 2022?

Shein is the fastest growing e-commerce company in the world. The company generated nearly $10 billion in revenues in 2020, up nearly 250% YoY....

Douglas Kim

Manycore IPO: Overshadowed by the Chinese Regulatory Crackdown

The ongoing cybersecurity and antitrust crackdown will make it more difficult for Chinese companies to list in the US and is a warning signal to...

Shifara Samsudeen, FCMA, CGMA

NIO: Market Waking Up to VIE Risk?

NIO's ascending channel was broken as regulatory risks mount against U.S. listed Chinese stocks. If June industry sales figures fall to 1.93m units...

Henry Kwon

Tougher Chinese Regulatory Oversight of Foreign Listed Chinese Companies (With Caveats)

Chinese regulators just introduced guidelines for crackdown on capital markets misconduct, the latest one-two punch following the Didi debacle. ...

Jason Yap, CFA

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