Alpha-Centric ESG Research

Kyle Rudden

Well, that sure escalated quickly.Early last week, in the Insight <a href="https://www.smartkarma.com/insights/pre-ipo-esg-analysis-didi-s-exemplary-esg-achievements-eclipsed-by-regulatory-risks-and-uncertainty" target="_blank" data-smartkarma-citation="insights:53687" rel="noopener">Pre-IPO ESG Analysis: DiDi's Exemplary ESG Achievements Eclipsed By Regulatory Risks and Uncertainty</a>, I juxtaposed <a href="https://www.smartkarma.com/entities/didi-chuxing-inc" target="_blank" data-smartkarma-citation="entities:27467:1" rel="noopener">DiDi's (DIDI US)</a> relatively strong ESG results in areas under its control with serious concerns about regulatory risk outside of its direct control.Late last week, days after DiDi's successful US$4.4 billion initial public offering, Chinese regulators ordered the removal of DiDi's business-critical ride-hailing apps from online app markets, until the company rectifies "serious violations" pertaining to collection and use of customer data.DiDi is down 5.3% so far (delayed open today).Regulatory risk was central to my thesis in the first Insight. I hardly anticipated this, but I referred to regulatory risk as real, near-term, tangible investment risk; not just some fuzzy ESG risk. Given that, I felt obliged to follow up. At the same time, however, this news is covered ad nauseam.No sense in beating a dead horse with a broken record.So, I decided to do something different. That statement about regulatory risk being a real tangible investment risk is primarily based on anecdotal evidence – i.e., when regulators flex their muscle, stocks go down, not up. But "anecdotal" isn't good enough.Which is why I took this opportunity to quantify the impacts of adverse regulatory events in China. Specifically, with event studies measuring abnormal returns around major regulatory events across four broad categories. That's what most of this Insight is about. But back to DiDi for a moment.Regulatory risk and uncertainty for DiDi is much worse today than it was last week. Typically, the opposite would be true; a negative event out in the open is better than a possible event lurking in the shadows. But not this time. Barring an immediate change of heart by the PRC, this is bad.Therefore, downgrading to bearish.

Well, that sure escalated quickly.Early last week, in the Insight Pre-IPO ESG Analysis: DiDi's Exemplary ESG Achievements Eclipsed By Regulatory Risks and Uncertainty, I juxtaposed DiDi's (DIDI US) relatively strong ESG results in areas under its control with serious concerns about regulatory risk outside of its direct control.Late last week, days after DiDi's successful US$4.4 billion initial public offering, Chinese regulators ordered the removal of DiDi's business-critical ride-hailing apps from online app markets, until the company rectifies "serious violations" pertaining to collection and use of customer data.DiDi is down 5.3% so far (delayed open today).Regulatory risk was central to my thesis in the first Insight. I hardly anticipated this, but I referred to regulatory risk as real, near-term, tangible investment risk; not just some fuzzy ESG risk. Given that, I felt obliged to follow up. At the same time, however, this news is covered ad nauseam.No sense in beating a dead horse with a broken record.So, I decided to do something different. That statement about regulatory risk being a real tangible investment risk is primarily based on anecdotal evidence – i.e., when regulators flex their muscle, stocks go down, not up. But "anecdotal" isn't good enough.Which is why I took this opportunity to quantify the impacts of adverse regulatory events in China. Specifically, with event studies measuring abnormal returns around major regulatory events across four broad categories. That's what most of this Insight is about. But back to DiDi for a moment.Regulatory risk and uncertainty for DiDi is much worse today than it was last week. Typically, the opposite would be true; a negative event out in the open is better than a possible event lurking in the shadows. But not this time. Barring an immediate change of heart by the PRC, this is bad.Therefore, downgrading to bearish.

PRC Shows DiDi Who's Boss: An Analysis of Adverse Regulatory Events on Stock Prices

Research and consultancy, Tabbush Report

Daniel Tabbush

Research and consultancy

Tabbush Report

We provide research and consultancy on Asian banks. Our focus is on what we call “Asian bank research, without the noise.” We are interested in the most critical swing-factors for banks, the NPL and credit cycle, and where we believe there is a gap between perception and reality. We often focus on the less studied components of bank financial statements.  Our research is highly thematic, sometimes examining unlisted banks and companies as a window on mainstream banks. 

Being independent allows us to look at smaller banks, often overlooked by others. Analysis of BIS bank guidelines in the context of Asia, is also a focal point, while we also analyze global banks operating in the region. We use what we believe is the most comprehensive, reliable financials database, SNL Financial. S&P Capital IQ augments our database, with corporate data and CEIC, with economics. 

Asian bank research, without the noise.

Thematic (Sector/Industry)

Where so many of us are focused on the impact of China slowdown on its banks, it is worth highlighting the risks to Hong Kong’s banks. But what we are focused on here is their domestic lending, not the stuff booked locally but for use in China. For most, the perception is that Hong Kong banks have little risk due to a strong emphasis on mortgage lending, but we are not convinced this is holding up, and we believe it will worsen.  Of course, the new marginally higher interest costs in Hong Kong…

Where so many of us are focused on the impact of China slowdown on its banks, it is worth highlighting the risks to Hong Kong’s banks. But what we are focused on here is their domestic lending, not the stuff booked locally but for use in China. For most, the perception is that Hong Kong banks have little risk due to a strong emphasis on mortgage lending, but we are not convinced this is holding up, and we believe it will worsen.  Of course, the new marginally higher interest costs in Hong Kong…

Domestic NPLs in Hong Kong Can Surprise – Not Just Those in Neighboring China

Leading Independent Investment Research, Morningstar, Inc.

Morningstar

Leading Independent Investment Research

Morningstar, Inc.

Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. We offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors. 

Morningstar provides data on more than 500,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 16 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries, with more than $180 billion in assets under advisement or management as of June 30, 2015. We have operations in 27 countries.

Download the Morningstar Fact Sheet : http://corporate.morningstar.com/US/documents/MarketingFactSheets/AboutMorningstarFactsheet.pdf

While the share price appreciation for the Singapore and Hong Kong banks was not as strong as its U.S. and Japan peers in the post-U.S. election rally, banks in Singapore and Hong Kong saw moderate increases in their share prices. Banks in Singapore and Hong Kong will not benefit directly from long-term positive in a more favorable financial regulatory environment in the U.S. The U.S banks should see a general reduction in regulatory oversight and rules, lower compliance costs and capital requirements and the risk of a break-up of the big U.S. banks. Singapore banks have a regional reach in Asia while Hong Kong banks are limited to domestic operations and those in Greater China.U.S. dollar interbank rates were steady post the election. Similarly, the three months and 12 months Singapore Interbank Offered Rates, or SIBOR, were largely flat at 0.87% and 1.31%, respectively. Likewise in Hong Kong, the Hong Kong Interbank Offered Rates, or HIBOR, were also unchanged. With political uncertainty post the election, a delay in the increase in the federal-funds rate could see net interest margins, or NIM, for the banks to continue to be pressured in the near term. We maintain our NIMs assumption for the Singapore and Hong Kong banks, factoring in largely steady margins for the next two years before increases from fiscal 2018. Over the past 12 months, SIBOR have eased off in the second half of 2016, pressuring asset yields for the Singapore banks, while high liquidity in Hong Kong and weak loan demand saw rising competition in Hong Kong, also leading to weaker asset yields.Analyst: Michael Wu, CAIA

While the share price appreciation for the Singapore and Hong Kong banks was not as strong as its U.S. and Japan peers in the post-U.S. election rally, banks in Singapore and Hong Kong saw moderate increases in their share prices. Banks in Singapore and Hong Kong will not benefit directly from long-term positive in a more favorable financial regulatory environment in the U.S. The U.S banks should see a general reduction in regulatory oversight and rules, lower compliance costs and capital requirements and the risk of a break-up of the big U.S. banks. Singapore banks have a regional reach in Asia while Hong Kong banks are limited to domestic operations and those in Greater China.U.S. dollar interbank rates were steady post the election. Similarly, the three months and 12 months Singapore Interbank Offered Rates, or SIBOR, were largely flat at 0.87% and 1.31%, respectively. Likewise in Hong Kong, the Hong Kong Interbank Offered Rates, or HIBOR, were also unchanged. With political uncertainty post the election, a delay in the increase in the federal-funds rate could see net interest margins, or NIM, for the banks to continue to be pressured in the near term. We maintain our NIMs assumption for the Singapore and Hong Kong banks, factoring in largely steady margins for the next two years before increases from fiscal 2018. Over the past 12 months, SIBOR have eased off in the second half of 2016, pressuring asset yields for the Singapore banks, while high liquidity in Hong Kong and weak loan demand saw rising competition in Hong Kong, also leading to weaker asset yields.Analyst: Michael Wu, CAIA

Singapore and Hong Kong Banks Sound Post U.S. Election; Interbank Rates Steady

Asia Pac IPO & Placement Research, China biotech, Aequitas Research

Ke Yan, CFA, FRM

Asia Pac IPO & Placement Research, China biotech

Smartkarma

Smartkarma unites the fragmented investment industry, connecting institutional investors, independent research providers, and corporates within a single network.

Research Reinvented

I talked about 3 structural bears for Hong Kong's tourism <a href="http://www.smartkarma.com/insights/hong-kong-s-future-3-structural-bears-for-retailer-tourism" target="_blank">earlier this year</a> in February:1. How Hong Kong is losing its attractiveness as tourist spot as China develops. 2. How loosening Visa requirement by other countries draws tourist crowds away from Hong Kong. 3. How Hong Kong is losing its shopping destination halo for mainland Chinese.I re-iterate my bearish view on Hong Kong's tourism and provide updates from touristm data reported around the world which paints a clear picture of where the herd of Chinese tourist are heading.Our data shows that Japan and Thailand are the most sought after tourist destination this year, with arrivals from China growing by 117% and 107% respectively YTD. We also provide interesting media references of Chinese shopping in Japan just two days into one-week long Chinese National Day holiday.

I talked about 3 structural bears for Hong Kong's tourism earlier this year in February:1. How Hong Kong is losing its attractiveness as tourist spot as China develops. 2. How loosening Visa requirement by other countries draws tourist crowds away from Hong Kong. 3. How Hong Kong is losing its shopping destination halo for mainland Chinese.I re-iterate my bearish view on Hong Kong's tourism and provide updates from touristm data reported around the world which paints a clear picture of where the herd of Chinese tourist are heading.Our data shows that Japan and Thailand are the most sought after tourist destination this year, with arrivals from China growing by 117% and 107% respectively YTD. We also provide interesting media references of Chinese shopping in Japan just two days into one-week long Chinese National Day holiday.  

(QUICK UPDATE) Tracking the herd of Chinese tourist: Japan and Thailand top the list

Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

CITIC Securities last night announced that it had formed a 'Strategic Cooperation Framework Agreement' with China's National Social Security Fund, "pursuant to which the Company and NSSF will establish comprehensive strategic business cooperations in various financial services areas." To cement the three year 'cooperation' deal, CITIC Securities is offering NSSF &gt;5% of the company at a 45% discount to the last month's average H-share price (or a 57% discount to the current A-share level). CITIC will, in turn, use the capital for the same thing they will use the prospective H-share issuance (announced and approved earlier in the year).The prospective H-Share issuance (discussed <a href="http://www.smartkarma.com/insights/quick-note-china-brokers-share-issuance-citic-secs-gets-csrc-ok-to-issue-us-6bn" target="_blank">here</a>) has been reduced in size to accommodate this placement to the NSSF.There are governance and fiduciary issues here which bear a closer look. It is not clear, from a governance perspective, that sovereign wealth funds should be making large locked-up investments in private company shares - at significantly better terms than are offered to other investors - in return for the promise of doing business with that company. Investors should look closely at the implications of the NSSF deal. They get to vote on it sometime soonish.

CITIC Securities last night announced that it had formed a 'Strategic Cooperation Framework Agreement' with China's National Social Security Fund, "pursuant to which the Company and NSSF will establish comprehensive strategic business cooperations in various financial services areas." To cement the three year 'cooperation' deal, CITIC Securities is offering NSSF &gt;5% of the company at a 45% discount to the last month's average H-share price (or a 57% discount to the current A-share level). CITIC will, in turn, use the capital for the same thing they will use the prospective H-share issuance (announced and approved earlier in the year).The prospective H-Share issuance (discussed here) has been reduced in size to accommodate this placement to the NSSF.There are governance and fiduciary issues here which bear a closer look. It is not clear, from a governance perspective, that sovereign wealth funds should be making large locked-up investments in private company shares - at significantly better terms than are offered to other investors - in return for the promise of doing business with that company. Investors should look closely at the implications of the NSSF deal. They get to vote on it sometime soonish. 

QuickNote: CITIC Secs to sell NSSF H-shares at HUGE discount - Strategic? Hmmm....

Hong Kong

Gome Finance Technology Co., Ltd. is a financial service platform company. The Company provides lending credit and debt, floatation of loans, investment management consulting, and other services.

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Sino Credit Holdings (628 HK)

PRC Shows DiDi Who's Boss: An Analysis of Adverse Regulatory Events on Stock Prices

Last week, I wrote about DiDi's regulatory risk. This week, it's worse. Hence the downgrade. But this is mostly an analysis of how regulatory...

Kyle Rudden

Domestic NPLs in Hong Kong Can Surprise – Not Just Those in Neighboring China

Where so many of us are focused on the impact of China slowdown on its banks, it is worth highlighting the risks to Hong Kong’s banks. But what we...

Daniel Tabbush

Singapore and Hong Kong Banks Sound Post U.S. Election; Interbank Rates Steady

While the share price appreciation for the Singapore and Hong Kong banks was not as strong as its U.S. and Japan peers in the post-U.S. election...

Morningstar, Inc.

(QUICK UPDATE) Tracking the herd of Chinese tourist: Japan and Thailand top the list

I talked about 3 structural bears for Hong Kong's tourism earlier this year in February:1. How Hong Kong is losing its attractiveness as tourist...

Ke Yan, CFA, FRM

QuickNote: CITIC Secs to sell NSSF H-shares at HUGE discount - Strategic? Hmmm....

CITIC Securities last night announced that it had formed a 'Strategic Cooperation Framework Agreement' with China's National Social Security Fund,...

Travis Lundy

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