Pan-Asia Catalysts/Events, Quiddity Advisors

David Blennerhassett

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

Has there ever been so much disinformation, speculation and conjecture for a takeover of, ostensibly, a straightforward asset?
From the onset, the <a href="https://www.smartkarma.com/entities/soho-china-ltd" target="_blank" data-smartkarma-citation="entities:4123:1" rel="noopener">SOHO China Ltd (410 HK)</a> deal traded wide on concerns the transaction could turn political on account of the company's founder's son allegedly making salacious comments aimed at China's PLA around the time India and China engaged in skirmishes along the Sino-Indian border last year. 
A vacuum of any positive news and continued speculation reached a helm on the 29 July, following a vague media article suggesting the deal faced regulatory "obstacles." The shares cratered, falling 31% at one point, before "recovering" to $3.02/share, around the undisturbed price and ~40% adrift of the $5.00/share offer price.
Five days later a sister publication of the one behind the "obstacle" article, issued a note that several banks had obtained internal approvals for underwriting some of Blackstone Group’s loans to fund the Offer. Shares consequently popped.
But it appears there was considerably more substance behind that pop in price. 
Last Friday afternoon, after the close of market, SOHO announced that on 3 August 2021, Blackstone received a <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2021/0806/2021080600685.pdf" target="_blank" rel="noopener">notice</a> from SAMR dated 2 August that the case concerning its notification under the PRC Anti-Monopoly Law had been formally accepted by SAMR for review. 
Formal acceptance should be viewed as a major positive.  Less positive is that the application does not appear to a "simple procedure" review.  
More below the fold. 
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Has there ever been so much disinformation, speculation and conjecture for a takeover of, ostensibly, a straightforward asset?
From the onset, the SOHO China Ltd (410 HK) deal traded wide on concerns the transaction could turn political on account of the company's founder's son allegedly making salacious comments aimed at China's PLA around the time India and China engaged in skirmishes along the Sino-Indian border last year. 
A vacuum of any positive news and continued speculation reached a helm on the 29 July, following a vague media article suggesting the deal faced regulatory "obstacles." The shares cratered, falling 31% at one point, before "recovering" to $3.02/share, around the undisturbed price and ~40% adrift of the $5.00/share offer price.
Five days later a sister publication of the one behind the "obstacle" article, issued a note that several banks had obtained internal approvals for underwriting some of Blackstone Group’s loans to fund the Offer. Shares consequently popped.
But it appears there was considerably more substance behind that pop in price. 
Last Friday afternoon, after the close of market, SOHO announced that on 3 August 2021, Blackstone received a notice from SAMR dated 2 August that the case concerning its notification under the PRC Anti-Monopoly Law had been formally accepted by SAMR for review. 
Formal acceptance should be viewed as a major positive.  Less positive is that the application does not appear to a "simple procedure" review.  
More below the fold. 




IPOs and Catalysts/Events, Global Equity Research Ltd

Arun George

IPOs and Catalysts/Events

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.

Equity Capital Markets

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<a href="https://www.smartkarma.com/entities/cloud-village-inc" target="_blank" data-smartkarma-citation="entities:33412:1" rel="noopener">Cloud Village (CLV HK)</a> is the second-largest online music platform after <a href="https://www.smartkarma.com/entities/tencent-music-entertainment" target="_blank" data-smartkarma-citation="entities:27255:1" rel="noopener">Tencent Music (TME US)</a> as measured by users and revenue in China. The cornerstone product is NetEase Cloud Music that delivers diverse music and music-inspired content and provides interactive community features. Cloud Village is braving the moribund Chinese IPO market by pre-marketing an HKEx IPO to raise around $1 billion, according to press reports. 
In <a href="https://www.smartkarma.com/insights/cloud-village-netease-music-ipo-initiation-musical-shares" target="_blank" data-smartkarma-citation="insights:52266" rel="noopener">Cloud Village (NetEase Music) IPO Initiation: Musical Shares</a>, we stated that at first sight, Cloud Village performance seems poor as its high growth has come at the cost of negative gross margin and cash burn. However, Cloud Village is on the cusp of turning around its performance due to a fundamental change in its cost structure. We concluded that Cloud Village has the potential to shed its underdog status vs the much larger Tencent Music.  
In <a href="https://www.smartkarma.com/insights/cloud-village-netease-music-ipo-play-list" target="_blank" data-smartkarma-citation="insights:55506" rel="noopener">Cloud Village (NetEase Music) IPO: Play List</a>, we examined the 1Q21 results and the recent developments disclosed in the PHIP. We noted that while Cloud Village expects to remain unprofitable over the next three years, the 1Q21 results and the recent SAMR ruling on Tencent Music support our view that Cloud Village is on track to combine its high growth with an improving cost structure. 
</div><div><div><div class="content-highlight">In this note, we present our forecasts and take the first look at Cloud Village's potential valuation range. </div></div></div>


Cloud Village (CLV HK) is the second-largest online music platform after Tencent Music (TME US) as measured by users and revenue in China. The cornerstone product is NetEase Cloud Music that delivers diverse music and music-inspired content and provides interactive community features. Cloud Village is braving the moribund Chinese IPO market by pre-marketing an HKEx IPO to raise around $1 billion, according to press reports. 
In Cloud Village (NetEase Music) IPO Initiation: Musical Shares, we stated that at first sight, Cloud Village performance seems poor as its high growth has come at the cost of negative gross margin and cash burn. However, Cloud Village is on the cusp of turning around its performance due to a fundamental change in its cost structure. We concluded that Cloud Village has the potential to shed its underdog status vs the much larger Tencent Music.  
In Cloud Village (NetEase Music) IPO: Play List, we examined the 1Q21 results and the recent developments disclosed in the PHIP. We noted that while Cloud Village expects to remain unprofitable over the next three years, the 1Q21 results and the recent SAMR ruling on Tencent Music support our view that Cloud Village is on track to combine its high growth with an improving cost structure. 
In this note, we present our forecasts and take the first look at Cloud Village's potential valuation range. 

Cloud Village (NetEase Music) IPO: Valuation First-Look

Head of Research, IPOs & Placements, Aequitas Research

Sumeet Singh

Head of Research, IPOs & Placements

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.

Cloud Village Inc. (CVI), also known as NetEase Music, plans to raise around US$1bn in its Hong Kong IPO. The company has also obtained investments from Baidu and Alibaba, along with other investors.As of Mar 21, it had 183m online music MAUs, 24m online music services monthly paying users, 438,000 social entertainment services monthly paying users. It had over 60m music tracks, of which more than 1m were created by registered independent artists. Its daily active users on average spent 76mins daily listening to music. CVI’s revenue has grown 4.3x over FY18-20, to RMB4.9bn. There have been no signs of slowdown as its revenue increased by 102% in FY19 and was up another 111% in FY20. Both online music services and social entertainment services revenue have shown strong growth. Online music services revenue grew by 73% in 2019 and another 47.6% in 2020. Social entertainment services revenue was the largest driver of growth, as it grew by 344% in 2019 and was up another 320% in 2020. However, it remains a distant second player in the market and has yet to make a profit.We covered various aspects of the deal in our previous notes, <a href="https://www.smartkarma.com/insights/cloud-village-netease-music-pre-ipo-was-in-the-slow-stream-playing-catch-up" target="_blank" rel="noopener">Cloud Village (NetEase Music) Pre-IPO - Was in the slow stream, playing catch-up ,</a> <a href="https://www.smartkarma.com/insights/cloud-village-netease-music-pre-ipo-tencent-music-peer-comp-regulatory-impact" target="_blank" rel="noopener">Cloud Village (NetEase Music) Pre-IPO - Tencent Music Peer Comp, Regulatory Impact </a>and <a href="https://www.smartkarma.com/insights/cloud-village-netease-music-pre-ipo-initial-thoughts-on-valuation" target="_blank" rel="noopener">Cloud Village (NetEase Music) Pre-IPO - Initial Thoughts on Valuation</a>.In this note, we will talk about the PHIP updates.

Cloud Village Inc. (CVI), also known as NetEase Music, plans to raise around US$1bn in its Hong Kong IPO. The company has also obtained investments from Baidu and Alibaba, along with other investors.As of Mar 21, it had 183m online music MAUs, 24m online music services monthly paying users, 438,000 social entertainment services monthly paying users. It had over 60m music tracks, of which more than 1m were created by registered independent artists. Its daily active users on average spent 76mins daily listening to music. CVI’s revenue has grown 4.3x over FY18-20, to RMB4.9bn. There have been no signs of slowdown as its revenue increased by 102% in FY19 and was up another 111% in FY20. Both online music services and social entertainment services revenue have shown strong growth. Online music services revenue grew by 73% in 2019 and another 47.6% in 2020. Social entertainment services revenue was the largest driver of growth, as it grew by 344% in 2019 and was up another 320% in 2020. However, it remains a distant second player in the market and has yet to make a profit.We covered various aspects of the deal in our previous notes, Cloud Village (NetEase Music) Pre-IPO - Was in the slow stream, playing catch-up , Cloud Village (NetEase Music) Pre-IPO - Tencent Music Peer Comp, Regulatory Impact and Cloud Village (NetEase Music) Pre-IPO - Initial Thoughts on Valuation.In this note, we will talk about the PHIP updates.

Cloud Village (NetEase Music) Pre-IPO - Mixed PHIP Update, Updated Thoughts on Valuation

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.

<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 have lost 18% to HK$478.80 by the end of today’s close since the beginning of July 2021 and has lost 35.0% since its peak in February this year. Tencent’s shares continue to slide over regulatory scrutiny over Chinese internet stocks. The Chinese regulators have widened their crackdown on the country’s internet sector with the latest crackdown aimed at the county’s education sector.Tencent has been making into headlines over the past few days with its music streaming arm <a href="https://www.smartkarma.com/entities/tencent-music-entertainment" target="_blank" data-smartkarma-citation="entities:27255:1" rel="noopener">Tencent Music (TME US)</a> being ordered to give up exclusive music licensing rights alongside a fine, its investments in online education and tutoring platforms such as Yuanfudao being targeted by Beijing regulators and the company suspending new user registrations on WeChat.As we have discussed in our previous insights, there is no sign that the Chinese regulators are slowing down with its antitrust crackdown on the country’s tech platforms and though the ongoing regulatory crackdown has already been priced into Tencent’s share price, we would strongly recommend being on the side lines as the ongoing probe could have a material impact on the company’s future earnings.

Tencent (700 HK) shares have lost 18% to HK$478.80 by the end of today’s close since the beginning of July 2021 and has lost 35.0% since its peak in February this year. Tencent’s shares continue to slide over regulatory scrutiny over Chinese internet stocks. The Chinese regulators have widened their crackdown on the country’s internet sector with the latest crackdown aimed at the county’s education sector.Tencent has been making into headlines over the past few days with its music streaming arm Tencent Music (TME US) being ordered to give up exclusive music licensing rights alongside a fine, its investments in online education and tutoring platforms such as Yuanfudao being targeted by Beijing regulators and the company suspending new user registrations on WeChat.As we have discussed in our previous insights, there is no sign that the Chinese regulators are slowing down with its antitrust crackdown on the country’s tech platforms and though the ongoing regulatory crackdown has already been priced into Tencent’s share price, we would strongly recommend being on the side lines as the ongoing probe could have a material impact on the company’s future earnings.

Global TMT analyst with Asia ex-Japan focus.

Mitchell Kim

Equity Bottom-Up

Investors' concerns over increasingly expanding regulatory restrictions and the potential market intervention led to a rout of Chinese tech and education stocks over the last several trading sessions. The select 9 Chinese tech stocks I follow collectively lost USD320 billion in value over 20 July to 27 July.  While some of the regulatory risks were known from March 2021, ramifications of the potential value-destroying restrictions on the education companies, termination of <a href="https://www.smartkarma.com/entities/tencent-music-entertainment" target="_blank" data-smartkarma-citation="entities:27255:1" rel="noopener">Tencent Music (TME US)'s</a> exclusive rights, and the suspension of new user registration for <a href="https://www.smartkarma.com/entities/tencent-holdings-ltd" target="_blank" data-smartkarma-citation="entities:26:1" rel="noopener">Tencent (700 HK)</a>'s Wechat spook the market. Tencent's market cap has declined 19% during the seven-day period, which cannot be fully explained by the potential value lost from the recently announced regulatory measures, in my view.  Back in April (see <a href="https://www.smartkarma.com/insights/tencent-700-hk-fintech-risk-is-lurking" target="_blank" data-smartkarma-citation="insights:50512" rel="noopener">Tencent (700 HK): Fintech Risk Is Lurking</a>) I pointed out that Tencent shares could be overvalued by 20% on fintech risk alone.  The shares are down nearly 30% since then. I now believe the shares could be undervalued by 10%, notwithstanding the undefined regulatory risks ahead.  Having said that, catching a falling knife is not for the faint-hearted. These stocks rebounded on the US Wednesday trading session, possibly reflecting the sentiment "enough is enough." Bloomberg reported that the securities regulator assured select investment bankers that the education policies are not to be for other industries.     In this report, I summarize the announced regulatory events this year to date and share my thoughts on why the market may be over discounting Tencent's value by looking at the potential value impact of Tencent's fintech value (a reiteration from the April report) and the impact of the value decline of <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> and Tencent Music.

Investors' concerns over increasingly expanding regulatory restrictions and the potential market intervention led to a rout of Chinese tech and education stocks over the last several trading sessions. The select 9 Chinese tech stocks I follow collectively lost USD320 billion in value over 20 July to 27 July.  While some of the regulatory risks were known from March 2021, ramifications of the potential value-destroying restrictions on the education companies, termination of Tencent Music (TME US)'s exclusive rights, and the suspension of new user registration for Tencent (700 HK)'s Wechat spook the market. Tencent's market cap has declined 19% during the seven-day period, which cannot be fully explained by the potential value lost from the recently announced regulatory measures, in my view.  Back in April (see Tencent (700 HK): Fintech Risk Is Lurking) I pointed out that Tencent shares could be overvalued by 20% on fintech risk alone.  The shares are down nearly 30% since then. I now believe the shares could be undervalued by 10%, notwithstanding the undefined regulatory risks ahead.  Having said that, catching a falling knife is not for the faint-hearted. These stocks rebounded on the US Wednesday trading session, possibly reflecting the sentiment "enough is enough." Bloomberg reported that the securities regulator assured select investment bankers that the education policies are not to be for other industries.     In this report, I summarize the announced regulatory events this year to date and share my thoughts on why the market may be over discounting Tencent's value by looking at the potential value impact of Tencent's fintech value (a reiteration from the April report) and the impact of the value decline of DiDi Chuxing (DIDI US) and Tencent Music.          

Tencent (700 HK): When to Catch a Falling Knife

United States

HUYA Inc. operates as a game live streaming platform. The Company offers interactive video broadcast services including e-sports, music, reality show, entertainment genres, talent shows, and anime and outdoor activities. HUYA serves customers in China.

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HUYA (HUYA US)

SOHO China (410 HK): Time To Buy

Formal acceptance for review is a big positive development. Most deals in China are simply not accepted for review if they are a no-go - and the...

David Blennerhassett

Cloud Village (NetEase Music) IPO: Valuation First-Look

Cloud Village is braving the moribund Chinese IPO market by pre-marketing an HKEx IPO to raise around $1 bn. In this note, we present our forecasts...

Arun George

Cloud Village (NetEase Music) Pre-IPO - Mixed PHIP Update, Updated Thoughts on Valuation

Cloud Village Inc. (CVI), also known as NetEase Music, plans to raise around US$1bn in its Hong Kong IPO. The company has also obtained investments...

Sumeet Singh

Tencent: All Bets Are Off

Tencent’s shares went down quickly where it dropped 13.0% over the last few days and were oversold as investors reacted harshly to the ongoing...

Shifara Samsudeen, FCMA, CGMA

Tencent (700 HK): When to Catch a Falling Knife

Chinese tech stocks are reeling from the latest regulatory announcements. Tencent fell 19% in 7 days. Is the time ripe to catch a falling knife?...

Mitchell Kim

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