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.

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

<p>In our previous note <a href="https://www.smartkarma.com/insights/china-adrs-kanzhun-full-truck-and-didi-regulators-sending-a-message" target="_blank" rel="noopener">China ADRs - Kanzhun, Full Truck and Didi - Regulators Sending a Message,</a> we spoke about the recent crackdown on the three US listed firms. Since then more news has been coming in along the same theme of a general crackdown on overseas listings for Chinese companies. </p>
<div>
<p>We have looked at the ADRs in the past, in our previous notes:</p>
</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>
<li>In <a href="https://www.smartkarma.com/insights/china-adrs-a-new-act-aims-to-put-an-end-to-china-adr-ipos" target="_blank" rel="noopener">China ADRs - A New Act Aims to Put an End to China ADR IPOs</a>, we spoke about the No IPOs for Unaccountable Actors Act, which aims to prohibit IPO on U.S. exchanges for Chinese companies. </li>
</ul>
</div>
<div>
<p>In this note, we'll talk about the implications of the recent China regulatory announcements.</p>
</div>

In our previous note China ADRs - Kanzhun, Full Truck and Didi - Regulators Sending a Message, we spoke about the recent crackdown on the three US listed firms. Since then more news has been coming in along the same theme of a general crackdown on overseas listings for Chinese companies. 

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 China ADRs - A New Act Aims to Put an End to China ADR IPOs, we spoke about the No IPOs for Unaccountable Actors Act, which aims to prohibit IPO on U.S. exchanges for Chinese companies. 



In this note, we'll talk about the implications of the recent China regulatory announcements.


China ADRs - Now the Message Is Loud and Getting Clearer

<div>
<p><a href="https://www.smartkarma.com/entities/xpeng-motors" target="_blank" data-smartkarma-citation="entities:29217:1" rel="noopener">Xpeng Motors (XPEV US)</a> raised around US$2bn via a listing in Hong Kong. In this note, we will talk about the trading dynamics and the updates since our last note, <a href="https://www.smartkarma.com/insights/xpeng-motors-hk-listing-will-probably-be-hot-given-strong-momentum-but-past-deal-didn-t-do-well" target="_blank" rel="noopener">Xpeng Motors HK Listing - Will Probably Be Hot Given Strong Momentum but past Deal Didn’t Do Well.</a></p>
</div>
<div>
<p>We have covered the IPO in:</p>
</div>
<div>
<ul style="list-style-type: disc;">
<li>
<a href="https://www.smartkarma.com/insights/xpeng-motors-pre-ipo-lots-to-like-with-solid-backing-from-investors" target="_blank" data-smartkarma-citation="insights:42126" rel="noopener">Xpeng Motors (小鹏汽车) Pre-IPO - Lots to like with Solid Backing from Investors</a> </li>
<li>
<a href="https://www.smartkarma.com/insights/xpeng-motors-visited-a-store-fairly-priced-but-with-recharging-problem" target="_blank" data-smartkarma-citation="insights:42283" rel="noopener">Xpeng Motors (小鹏汽车): Visited a Store, Fairly Priced, But with Recharging Problem</a> </li>
<li><a href="https://www.smartkarma.com/insights/xpeng-motors-pre-ipo-car-comparison-and-p7-performance-test" target="_blank" data-smartkarma-citation="insights:42386" rel="noopener">Xpeng Motors (小鹏汽车) Pre-IPO - Car Comparison and P7 Performance Test</a></li>
<li>
<a href="https://www.smartkarma.com/insights/xpeng-motors-pre-ipo-peer-comparison-and-valuation" target="_blank" data-smartkarma-citation="insights:42389" rel="noopener">Xpeng Motors (小鹏汽车) Pre-IPO - Peer Comparison and Valuation</a> </li>
<li>
<a href="https://www.smartkarma.com/insights/xpeng-ipo-riding-the-momentum" target="_blank" data-smartkarma-citation="insights:42503" rel="noopener">Xpeng Motors (小鹏汽车) IPO - Riding the Momentum</a> </li>
<li>
<a href="https://www.smartkarma.com/insights/xpeng-motors-trading-nio-leading-the-charge" target="_blank" data-smartkarma-citation="insights:42616" rel="noopener">Xpeng Motors (小鹏汽车) Trading - NIO Leading the Charge</a> </li>
</ul>
</div>
<div>
<p>And the previous placement in:</p>
</div>
<div>
<ul style="list-style-type: disc;">
<li><a href="https://www.smartkarma.com/insights/xpeng-motors-placement-level-the-playing-field" target="_blank" rel="noopener">Xpeng Motors (小鹏汽车) Placement - Level the Playing Field</a></li>
</ul>
</div>


Xpeng Motors (XPEV US) raised around US$2bn via a listing in Hong Kong. In this note, we will talk about the trading dynamics and the updates since our last note, Xpeng Motors HK Listing - Will Probably Be Hot Given Strong Momentum but past Deal Didn’t Do Well.


We have covered the IPO in:




Xpeng Motors (小鹏汽车) Pre-IPO - Lots to like with Solid Backing from Investors 

Xpeng Motors (小鹏汽车): Visited a Store, Fairly Priced, But with Recharging Problem 
Xpeng Motors (小鹏汽车) Pre-IPO - Car Comparison and P7 Performance Test

Xpeng Motors (小鹏汽车) Pre-IPO - Peer Comparison and Valuation 

Xpeng Motors (小鹏汽车) IPO - Riding the Momentum 

Xpeng Motors (小鹏汽车) Trading - NIO Leading the Charge 



And the previous placement in:



Xpeng Motors (小鹏汽车) Placement - Level the Playing Field



Xpeng Motors HK Trading - More Hot with Instis that Retail

<p>NIO's 1H21 unit sales doubled (+200.4% YoY) but its shares declined by as much as 4.66% during the day to dip below the 10-day EMA before recovering to $50.40 (-0.98%) at close on Friday. Here is our initial take:</p><ul>
<li>On a 3 month moving average basis, sales growth has been decelerating, but this is to be expected given low base effect from COVID-related demand weakness in the 3 month period between February '20 and April '20.</li>
<li>Next fundamental signal should come from NIO's 2Q earnings release which will show whether operating leverage could allow the company to achieve operating profitability.</li>
<li>Fundamentally, NIO's planned Norwegian entry in September should continue to provide thematic tailwind in the market, so long as domestic sales momentum and/or market liquidity does not lose steam in the coming months.</li>
<li>
<strong>Short term Bullish scenario: </strong>NIO's shares failed to break above its 23.6% Fibonacci retracement level of $56.18 on July 1, and Friday saw a steep corrective pullback before the shares stabilized towards close. The U.S. market is closed on Monday for Fourth of July holiday observations, but when trading resumes on Tuesday, investors should monitor to see whether NIO can manage to close above the 23.6% retracement level. Clearing this hurdle could potentially fuel an acceleration to $60 in our view. </li>
<li>
<strong>Short term Bearish scenario: </strong>While Friday's strong close kept NIO in its ascending channel, it should be noted that the save happened on low volumes. Investors should watch carefully to see if NIO breaks below the 38.2% Fibonacci retracement level at $49.49. If the shares drop further to below its 10-day EMA, then a potential drop to the $46-47 zone could become possible based on our observation.</li>
</ul><p>At this point, the corrective pullback should be seen as a healthy one in our view. Investors should await to see how margins fare in NIO's 2Q earnings release to assess whether the shares' bullish run continues.</p><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/216/794/original/Screen+Shot+2021-07-04+at+9.55.15+PM.png?1625460934" class="editor-image img-responsive" data-smartkarma-image-id="216794"></figure></section><div class="content-caption">Sources: Company Data, CEIC</div>

NIO's 1H21 unit sales doubled (+200.4% YoY) but its shares declined by as much as 4.66% during the day to dip below the 10-day EMA before recovering to $50.40 (-0.98%) at close on Friday. Here is our initial take:
On a 3 month moving average basis, sales growth has been decelerating, but this is to be expected given low base effect from COVID-related demand weakness in the 3 month period between February '20 and April '20.
Next fundamental signal should come from NIO's 2Q earnings release which will show whether operating leverage could allow the company to achieve operating profitability.
Fundamentally, NIO's planned Norwegian entry in September should continue to provide thematic tailwind in the market, so long as domestic sales momentum and/or market liquidity does not lose steam in the coming months.

Short term Bullish scenario: NIO's shares failed to break above its 23.6% Fibonacci retracement level of $56.18 on July 1, and Friday saw a steep corrective pullback before the shares stabilized towards close. The U.S. market is closed on Monday for Fourth of July holiday observations, but when trading resumes on Tuesday, investors should monitor to see whether NIO can manage to close above the 23.6% retracement level. Clearing this hurdle could potentially fuel an acceleration to $60 in our view. 

Short term Bearish scenario: While Friday's strong close kept NIO in its ascending channel, it should be noted that the save happened on low volumes. Investors should watch carefully to see if NIO breaks below the 38.2% Fibonacci retracement level at $49.49. If the shares drop further to below its 10-day EMA, then a potential drop to the $46-47 zone could become possible based on our observation.
At this point, the corrective pullback should be seen as a healthy one in our view. Investors should await to see how margins fare in NIO's 2Q earnings release to assess whether the shares' bullish run continues.Sources: Company Data, CEIC

<div><p><a href="https://www.smartkarma.com/entities/xpeng-motors" target="_blank" data-smartkarma-citation="entities:29217:1" rel="noopener">Xpeng Motors (XPEV US)</a> is looking to raise about US$1.7bn via a listing in Hong Kong. We have covered the stocks since IPO, including its previous deal. In this note, we will talk about the updates since then and the deal dynamics.</p></div><div><p>We have covered the IPO in:</p></div><div>
<ul style="list-style-type: disc;">
<li>
<a href="https://www.smartkarma.com/insights/xpeng-motors-pre-ipo-lots-to-like-with-solid-backing-from-investors" target="_blank" data-smartkarma-citation="insights:42126" rel="noopener">Xpeng Motors (小鹏汽车) Pre-IPO - Lots to like with Solid Backing from Investors</a> </li>
<li>
<a href="https://www.smartkarma.com/insights/xpeng-motors-visited-a-store-fairly-priced-but-with-recharging-problem" target="_blank" data-smartkarma-citation="insights:42283" rel="noopener">Xpeng Motors (小鹏汽车): Visited a Store, Fairly Priced, But with Recharging Problem</a> </li>
<li><a href="https://www.smartkarma.com/insights/xpeng-motors-pre-ipo-car-comparison-and-p7-performance-test" target="_blank" data-smartkarma-citation="insights:42386" rel="noopener">Xpeng Motors (小鹏汽车) Pre-IPO - Car Comparison and P7 Performance Test</a></li>
<li>
<a href="https://www.smartkarma.com/insights/xpeng-motors-pre-ipo-peer-comparison-and-valuation" target="_blank" data-smartkarma-citation="insights:42389" rel="noopener">Xpeng Motors (小鹏汽车) Pre-IPO - Peer Comparison and Valuation</a> </li>
<li>
<a href="https://www.smartkarma.com/insights/xpeng-ipo-riding-the-momentum" target="_blank" data-smartkarma-citation="insights:42503" rel="noopener">Xpeng Motors (小鹏汽车) IPO - Riding the Momentum</a> </li>
<li>
<a href="https://www.smartkarma.com/insights/xpeng-motors-trading-nio-leading-the-charge" target="_blank" data-smartkarma-citation="insights:42616" rel="noopener">Xpeng Motors (小鹏汽车) Trading - NIO Leading the Charge</a> </li>
</ul>
<p>And the previous placement in:</p>
<ul style="list-style-type: disc;"><li><a href="https://www.smartkarma.com/insights/xpeng-motors-placement-level-the-playing-field" target="_blank" rel="noopener">Xpeng Motors (小鹏汽车) Placement - Level the Playing Field</a></li></ul>
</div>

Xpeng Motors (XPEV US) is looking to raise about US$1.7bn via a listing in Hong Kong. We have covered the stocks since IPO, including its previous deal. In this note, we will talk about the updates since then and the deal dynamics.We have covered the IPO in:


Xpeng Motors (小鹏汽车) Pre-IPO - Lots to like with Solid Backing from Investors 

Xpeng Motors (小鹏汽车): Visited a Store, Fairly Priced, But with Recharging Problem 
Xpeng Motors (小鹏汽车) Pre-IPO - Car Comparison and P7 Performance Test

Xpeng Motors (小鹏汽车) Pre-IPO - Peer Comparison and Valuation 

Xpeng Motors (小鹏汽车) IPO - Riding the Momentum 

Xpeng Motors (小鹏汽车) Trading - NIO Leading the Charge 

And the previous placement in:
Xpeng Motors (小鹏汽车) Placement - Level the Playing Field


Xpeng Motors HK Listing - Will Probably Be Hot Given Strong Momentum but past Deal Didn’t Do Well

China

NIO Inc. manufactures and sells automobiles. The Company offers electric vehicles and parts, as well as provides battery charging services. NIO serves customers worldwide.

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NIO (NIO US)

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

China ADRs - Now the Message Is Loud and Getting Clearer

In our previous note we spoke about the recent crackdown on the three US listed firms. Since then more news has been coming in along the same theme...

Sumeet Singh

Xpeng Motors HK Trading - More Hot with Instis that Retail

Xpeng Motors (XPEV US) raised around US$2bn via a listing in Hong Kong. In this note, we will talk about the trading dynamics and the updates since...

Sumeet Singh

NIO: What to Do?

Monthly sales growth deceleration should be expected given low base effect from Feb-April, and fundamental tailwinds remain in place. 2Q earnings...

Henry Kwon

Xpeng Motors HK Listing - Will Probably Be Hot Given Strong Momentum but past Deal Didn’t Do Well

Xpeng Motors (XPEV US) is looking to raise about US$1.7bn via a listing in Hong Kong. We have the IPO and its previous deal. In this note, we will...

Sumeet Singh

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