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.

Equity Capital Markets

<div>
On 27th May 2021, U.S. Senators Marco Rubio and Bob Casey introduced the No IPOs for Unaccountable Actors Act, which aims to prohibit IPO on U.S. exchanges for Chinese companies. 
The act is a follow up on the Holding Foreign Companies Accountable Act which was signed by Trump on 18th Dec 2020 and which seeks to stop China ADRs from being traded on the US exchanges.
</div><div>We have looked at the ADRs in the past, in our previous notes:</div><div>
<ul style="list-style-type: disc;">
<li>
<a href="https://www.smartkarma.com/insights/china-adrs-secondary-listing-deep-dive-yin-and-yang" target="_blank" rel="noopener">China ADRs Secondary Listing Deep-Dive: Yin and Yang,</a> published in Feb 2020,  we looked at the background and rules around undertaking a secondary listing in Hong Kong and then came up with a short-list of companies that might undertake a secondary listing. </li>
<li>
<a href="https://www.smartkarma.com/insights/china-adrs-secondary-listing-covid-19-has-increased-the-tension-but-narrowed-the-short-list" target="_blank" rel="noopener">In China ADRs Secondary Listing: COVID-19 Has Increased the Tension but Narrowed the Short List</a> published in May 2020, we looked at the recent developments and provided an revised short-list</li>
<li>In <a href="https://www.smartkarma.com/insights/china-adrs-secondary-listing-holding-foreign-companies-accountable-act-i-m-coming-home" target="_blank" rel="noopener">China ADRs Secondary Listing - Holding Foreign Companies Accountable Act - I’m Coming Home</a>, published in May 2020, we spoke about the implication of the act which had made its way through the senate.</li>
<li>In <a href="https://www.smartkarma.com/insights/china-adrs-secondary-listing-pipeline-looks-rich-have-three-years-to-move" target="_blank" rel="noopener">China ADRs Secondary Listing - Pipeline Looks Rich, Have Three Years to Move</a>, published in Feb 2021 we looked at the ADR pipeline and spoke about the updates from the Holding Foreign Companies Accountable Act becoming law and the updates at Hong Kong end as well. </li>
<li>In <a href="https://www.smartkarma.com/insights/china-adrs-sec-notice-instead-of-three-probably-have-four-years-till-2025-correction-overdone" target="_blank" rel="noopener">China ADRs - SEC Notice - Instead of Three, Probably Have Four Years till 2025 - Correction Overdone, </a> we spoke about the new SEC notice and its implications. </li>
</ul>
In this note, we'll talk about the new act and its possible timelines and implications.
</div>


On 27th May 2021, U.S. Senators Marco Rubio and Bob Casey introduced the No IPOs for Unaccountable Actors Act, which aims to prohibit IPO on U.S. exchanges for Chinese companies. 
The act is a follow up on the Holding Foreign Companies Accountable Act which was signed by Trump on 18th Dec 2020 and which seeks to stop China ADRs from being traded on the US exchanges.
We have looked at the ADRs in the past, in our previous notes:


China ADRs Secondary Listing Deep-Dive: Yin and Yang, published in Feb 2020,  we looked at the background and rules around undertaking a secondary listing in Hong Kong and then came up with a short-list of companies that might undertake a secondary listing. 

In China ADRs Secondary Listing: COVID-19 Has Increased the Tension but Narrowed the Short List published in May 2020, we looked at the recent developments and provided an revised short-list
In China ADRs Secondary Listing - Holding Foreign Companies Accountable Act - I’m Coming Home, published in May 2020, we spoke about the implication of the act which had made its way through the senate.
In China ADRs Secondary Listing - Pipeline Looks Rich, Have Three Years to Move, published in Feb 2021 we looked at the ADR pipeline and spoke about the updates from the Holding Foreign Companies Accountable Act becoming law and the updates at Hong Kong end as well. 
In China ADRs - SEC Notice - Instead of Three, Probably Have Four Years till 2025 - Correction Overdone,  we spoke about the new SEC notice and its implications. 

In this note, we'll talk about the new act and its possible timelines and implications.


China ADRs - A New Act Aims to Put an End to China ADR IPOs

Chief Economist & Political Strategist, CrossASEAN Research

Prasenjit K. Basu

Chief Economist & Political Strategist

CrossASEAN Research

At CrossASEAN Research we strive to produce unbiased and differentiated on the ground insights on companies across South East Asia. Our Research is produced for the most part after face to face meetings and conversations with company management to dig deep into the long term vision and strategy of the companies we cover. We seek to deliver investable and actionable themes on sectors and markets across SE Asia, often in collaboration with other Insight Providers across the region, pooling the vast experience of the analysts within the Smartkarma Ecosystem. We also offer bespoke work and tailor made trips for our clients. 

Insights across South East Asia

Macroeconomics

China has been the biggest beneficiary of the global glut of central bank liquidity created since the Global Financial Crisis of Sept 2008 -- which was multiplied further in 2020 with renewed central bank aggression amid the Covid pandemic. In 2007, China already had massive industrial over-capacity. But China rode the tide of global liquidity since 4Q 2008, with China's M2 money supply expanding from US$6.56 trillion in August 2008 to US$34.96 trillion in April 2021 (more than a 5-fold increase in 13 years) -- while US M2 expanded from US$7.75 trillion to US$20.11 trillion over the same period (a 2.5-fold increase).  Now, with US core CPI inflation at 3% and the core PCE deflator up 3.1% YoY in April 2021, it will be impossible for the Fed to keep adding US$120 billion of assets to its balance sheet monthly. Global liquidity conditions are bound to tighten. China will find it difficult to export its overcapacity, as the world has become more wary of allowing China to dump (i.e., export production below cost), especially as production ramps up in the rest of the world amid the full reopening from the pandemic. We recommend staying cautious on the China market, avoiding its tech titans particularly, as they run into political challenges from Xi Jinping.

China has been the biggest beneficiary of the global glut of central bank liquidity created since the Global Financial Crisis of Sept 2008 -- which was multiplied further in 2020 with renewed central bank aggression amid the Covid pandemic. In 2007, China already had massive industrial over-capacity. But China rode the tide of global liquidity since 4Q 2008, with China's M2 money supply expanding from US$6.56 trillion in August 2008 to US$34.96 trillion in April 2021 (more than a 5-fold increase in 13 years) -- while US M2 expanded from US$7.75 trillion to US$20.11 trillion over the same period (a 2.5-fold increase).  Now, with US core CPI inflation at 3% and the core PCE deflator up 3.1% YoY in April 2021, it will be impossible for the Fed to keep adding US$120 billion of assets to its balance sheet monthly. Global liquidity conditions are bound to tighten. China will find it difficult to export its overcapacity, as the world has become more wary of allowing China to dump (i.e., export production below cost), especially as production ramps up in the rest of the world amid the full reopening from the pandemic. We recommend staying cautious on the China market, avoiding its tech titans particularly, as they run into political challenges from Xi Jinping. 

China Has Been the Global Winner from the Liquidity Glut of 2008-21; Now Comes Pain

China has had a spectacular 1Q 2021, with exports and industrial output soaring relative to the low base in Jan-Feb 2020 (the one quarter in which China's economy shrank last year), but also growing at a good clip relative to 2019 (+33% for exports and +1.9% for industrial output); imports were up 17.3% in Jan-Feb 2021 relative to 2 years ago. This suggests that real GDP should grow about 12% YoY in 1Q 2021, or expand 4.7% relative to 1Q 2019.   While the current account surplus widened to 1.8% of GDP in 2020 (the largest in dollar terms globally at US$301 billion), and the surplus for April-December 2020 was US$335 billion, foreign reserves only increased by US$156 billion during that 9 month period. So net capital outflows were substantial, at US$179 billion in April-December 2020, at a time when the RMB was appreciating, and China should normally have attracted net capital inflows. Chinese residents continue to find ways of taking capital out of China. During Jan-Feb 2021, net services and capital outflows were US$115 billion (with foreign reserves down US$12billion). Despite massive overcapacity across most industrial sectors, China did not shed its addiction to fixed asset investment (FAI), which increased by 2.9% in 2020, even as the rest of the world was in recession. In Jan-Feb 2021, FAI surged by a further 35.1% YoY -- thus expanding 16.9% relative to its level in Jan-Feb 2019. The surge in FAI is adding more capacity to industries already burdened by overcapacity, at a time when external demand is set to weaken as the rest of the world's economies gradually reopen, reducing demand for China's exports. With external and domestic demand likely to slow (the latter weakened by capital flight), the rest of 2021 will be increasingly difficult for China's economy.

China has had a spectacular 1Q 2021, with exports and industrial output soaring relative to the low base in Jan-Feb 2020 (the one quarter in which China's economy shrank last year), but also growing at a good clip relative to 2019 (+33% for exports and +1.9% for industrial output); imports were up 17.3% in Jan-Feb 2021 relative to 2 years ago. This suggests that real GDP should grow about 12% YoY in 1Q 2021, or expand 4.7% relative to 1Q 2019.   While the current account surplus widened to 1.8% of GDP in 2020 (the largest in dollar terms globally at US$301 billion), and the surplus for April-December 2020 was US$335 billion, foreign reserves only increased by US$156 billion during that 9 month period. So net capital outflows were substantial, at US$179 billion in April-December 2020, at a time when the RMB was appreciating, and China should normally have attracted net capital inflows. Chinese residents continue to find ways of taking capital out of China. During Jan-Feb 2021, net services and capital outflows were US$115 billion (with foreign reserves down US$12billion). Despite massive overcapacity across most industrial sectors, China did not shed its addiction to fixed asset investment (FAI), which increased by 2.9% in 2020, even as the rest of the world was in recession. In Jan-Feb 2021, FAI surged by a further 35.1% YoY -- thus expanding 16.9% relative to its level in Jan-Feb 2019. The surge in FAI is adding more capacity to industries already burdened by overcapacity, at a time when external demand is set to weaken as the rest of the world's economies gradually reopen, reducing demand for China's exports. With external and domestic demand likely to slow (the latter weakened by capital flight), the rest of 2021 will be increasingly difficult for China's economy. 

China: Large Net Capital Outflows Presage Trouble as Excess Capacity Begins to Bite

Asset Allocation & Fund Positioning, Copley Fund Research

Steven Holden

Asset Allocation & Fund Positioning

Copley Fund Research

Copley Fund Research provide research and data on asset allocation among Global and Emerging Market equity funds.  The analysis details absolute and relative positioning across countries, sectors and industries together with highly granular data on single stock and single fund allocations.  The data is updated monthly with time series going back to January 2011.

Global Research - Analysis of 165 prominent Global equity funds, combined AUM $335bn
GEM Research - Analysis of 127 prominent global EM equity funds, combined AUM $250bn

Asset Allocation - Global and GEM Equity

Quantitative Analysis

A negative feedback loop of poor sentiment, managers selling down positions leading to big underperformance has caused allocations in China banks to more than halve over the past 2-years.  An exodus out of the four major state banks has occurred across GEM, Asia Ex-Japan and China managers as the narrative has focused on growth over value.  From an ownership perspective, there are signs that this is bottoming out.  Underweights are being closed, funds are moving back in and weights are moving higher.  Whilst inflows remain skewed towards the higher growth and premium valuation stocks of <a href="https://www.smartkarma.com/entities/ping-an-bank-co-ltd-a" target="_blank" data-smartkarma-citation="entities:681:1" rel="noopener">Ping An Bank Co Ltd A (000001 CH)</a> and <a href="https://www.smartkarma.com/entities/china-merchants-bank-co-ltd-3388a037-4214-4997-b45d-520518cfdb57" target="_blank" data-smartkarma-citation="entities:10987:1" rel="noopener">China Merchants Bank H (3968 HK)</a> , ownership levels have moderated in the big four state banks.Against a backdrop of huge underperformance and low ownership levels, the majority of the active managers in our analysis are still positioned underweight in the China banks.  If the growth over value narrative does change, China Banks are one of the places you want to be.Analysis taken from our China fund universe, covering 114 active strategies with combined AUM of $62bn.

A negative feedback loop of poor sentiment, managers selling down positions leading to big underperformance has caused allocations in China banks to more than halve over the past 2-years.  An exodus out of the four major state banks has occurred across GEM, Asia Ex-Japan and China managers as the narrative has focused on growth over value.  From an ownership perspective, there are signs that this is bottoming out.  Underweights are being closed, funds are moving back in and weights are moving higher.  Whilst inflows remain skewed towards the higher growth and premium valuation stocks of Ping An Bank Co Ltd A (000001 CH) and China Merchants Bank H (3968 HK) , ownership levels have moderated in the big four state banks.Against a backdrop of huge underperformance and low ownership levels, the majority of the active managers in our analysis are still positioned underweight in the China banks.  If the growth over value narrative does change, China Banks are one of the places you want to be.Analysis taken from our China fund universe, covering 114 active strategies with combined AUM of $62bn.

Cross Asset Strategy

Last month saw China allocations hit record levels across Asia Ex-Japan, Emerging Market and Global active long-only funds.  The average China weight in Asia Ex-Japan funds stands at a record 50.96%, in active GEM funds a record 37.63% and in active Global funds an all-time high of 5.33%However, these increases have come at the expense of greater concentration.  Among Global managers, the top 10 largest China stock holdings now account for 62% of total China allocations, among GEM and Asia Ex-Japan funds just under 50% - an all-time high across all 3 investor groups. Dedicated China managers, however, are more diversified.  In this analysis, we look at the differences between dedicated China funds and their regional peers.  We find that Asia, GEM and Global managers are more concentrated in the Consumer Discretionary and Communication Services sectors, whereas dedicated China managers are more diversified across Technology, Industrials and Health Care stocks.  Regional funds are also underinvested in China A-Shares compared to dedicated China managers, who are running significant overweights vs the MSCI China benchmark.We identify the next generation of Chinese stocks outside of the big index names by following the lead of dedicated managers in the region.  We provide a list of 40 stocks, identified as 'Next Generation' stocks due to their widespread investment in dedicated China funds, but that are currently underowned by Asia Ex-Japan, GEM and Global investors.The list is headed by <a href="https://www.smartkarma.com/entities/jiangsu-hengrui-medicine-co-ltd" target="_blank" data-smartkarma-citation="entities:14128:1" rel="noopener">Jiangsu Hengrui Medicine (600276 CH)</a>, one of the standout domestic holdings within the Health Care sector, followed by <a href="https://www.smartkarma.com/entities/china-tourism-group-duty-free-corp-ltd" target="_blank" data-smartkarma-citation="entities:12278:1" rel="noopener">China Tourism Group Duty Free Corp Ltd (601888 CH)</a> and <a href="https://www.smartkarma.com/entities/luxshare-precision-industry-co-ltd" target="_blank" data-smartkarma-citation="entities:12310:1" rel="noopener">Luxshare Precision Industry (002475 CH)</a> .Analysis taken from our Global, GEM, Asia Ex-Japan and China fund universes.  Global:  386 Active Funds, combined AUM $750bn                                                                                        GEM:  242 Active Funds, combined AUM $370bn                                                                                          Asia Ex-Japan: 98 Active Funds, combined AUM $70bn                                                                              China:  119 Active Funds, combined AUM $50bn

Last month saw China allocations hit record levels across Asia Ex-Japan, Emerging Market and Global active long-only funds.  The average China weight in Asia Ex-Japan funds stands at a record 50.96%, in active GEM funds a record 37.63% and in active Global funds an all-time high of 5.33%However, these increases have come at the expense of greater concentration.  Among Global managers, the top 10 largest China stock holdings now account for 62% of total China allocations, among GEM and Asia Ex-Japan funds just under 50% - an all-time high across all 3 investor groups. Dedicated China managers, however, are more diversified.  In this analysis, we look at the differences between dedicated China funds and their regional peers.  We find that Asia, GEM and Global managers are more concentrated in the Consumer Discretionary and Communication Services sectors, whereas dedicated China managers are more diversified across Technology, Industrials and Health Care stocks.  Regional funds are also underinvested in China A-Shares compared to dedicated China managers, who are running significant overweights vs the MSCI China benchmark.We identify the next generation of Chinese stocks outside of the big index names by following the lead of dedicated managers in the region.  We provide a list of 40 stocks, identified as 'Next Generation' stocks due to their widespread investment in dedicated China funds, but that are currently underowned by Asia Ex-Japan, GEM and Global investors.The list is headed by Jiangsu Hengrui Medicine (600276 CH), one of the standout domestic holdings within the Health Care sector, followed by China Tourism Group Duty Free Corp Ltd (601888 CH) and Luxshare Precision Industry (002475 CH) .Analysis taken from our Global, GEM, Asia Ex-Japan and China fund universes.  Global:  386 Active Funds, combined AUM $750bn                                                                                        GEM:  242 Active Funds, combined AUM $370bn                                                                                          Asia Ex-Japan: 98 Active Funds, combined AUM $70bn                                                                              China:  119 Active Funds, combined AUM $50bn

China's Next Generation:  Diversifying Away from Tencent and Alibaba.

China

iShares MSCI China ETF is an exchange-traded fund incorporated in the USA. The ETF seeks to track the performance of the MSCI China Index. The Index is a free float adjusted market cap weighted index designed to measure the performance of equity securities in the top 85% in market cap of Chinese equity markets, as represented by the A-Shares, H-Shares, B-Shares, Red Chips, & P-Chips.

iShares MSCI China ETF (MCHI US)

China ADRs - A New Act Aims to Put an End to China ADR IPOs

On 27th May 2021, U.S. Senators Marco Rubio and Bob Casey introduced the No IPOs for Unaccountable Actors Act, which aims to prohibit IPO on U.S....

Sumeet Singh

China Has Been the Global Winner from the Liquidity Glut of 2008-21; Now Comes Pain

China rode the global liquidity wave since 4Q 2008. Now that the tide is turning (amid soaring US core inflation), industrial overcapacity and anti...

Prasenjit K. Basu

China: Large Net Capital Outflows Presage Trouble as Excess Capacity Begins to Bite

Net capital outflows were US$179bn in Apr-Dec 2020 despite the rising RMB; in Jan-Feb 2021, outflows were $115bn. The surge in FAI is creating...

Prasenjit K. Basu

China Banks: Bottoming Out

China and HK banks have seen a large scale exodus from active China investors over the past 2 years. Managers now find themselves underweight and...

Steven Holden

China's Next Generation: Diversifying Away from Tencent and Alibaba.

China exposure is becoming more concentrated in a small number of large cap stocks. We identify the next generation of China stocks by analyzing...

Steven Holden