Pan-Asia Index Rebalances/ Events/ Delta One, Periscope Analytics

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Index Rebalance

The Hang Seng Indexes Company Limited (HSIL) announced the results of its review of the Hang Seng Family of Indexes post market close on 26 February. The constituent changes will be effective after the close of trading on 12 March.For the Hang Seng Composite Index (HSCI) there are 36 inclusions and 29 deletions, taking the number of index constituents up to 500.Although there are almost no assets indexed to the HSCI, the index forms the basis of stocks that are eligible for Southbound Stock Connect. Stocks that are included in the HSCI and subsequently included in the Stock Connect program get inflows from mainland investors. Secondary Listings are not eligible for inclusion in the Stock Connect program.Of the 36 inclusions, 4 are already a part of Stock Connect by virtue of having listed A-shares, 2 are Secondary listings and will not be included in Stock Connect, 9 will be added to Shanghai and Shenzhen Stock Connect, while 21 stocks will only be added to Shenzhen Stock Connect.Of the 29 index deletions, 13 are not a part of Stock Connect, 7 will continue to remain a part of Stock Connect by virtue of having listed A-shares, while 9 will be deleted from the Stock Connect program.We identify 4 stocks that could sell off ahead of their removal from the Stock Connect Buy list, while Biotech stocks could be in focus ahead of their inclusion in the Stock Connect Buy and Sell list.

The Hang Seng Indexes Company Limited (HSIL) announced the results of its review of the Hang Seng Family of Indexes post market close on 26 February. The constituent changes will be effective after the close of trading on 12 March.For the Hang Seng Composite Index (HSCI) there are 36 inclusions and 29 deletions, taking the number of index constituents up to 500.Although there are almost no assets indexed to the HSCI, the index forms the basis of stocks that are eligible for Southbound Stock Connect. Stocks that are included in the HSCI and subsequently included in the Stock Connect program get inflows from mainland investors. Secondary Listings are not eligible for inclusion in the Stock Connect program.Of the 36 inclusions, 4 are already a part of Stock Connect by virtue of having listed A-shares, 2 are Secondary listings and will not be included in Stock Connect, 9 will be added to Shanghai and Shenzhen Stock Connect, while 21 stocks will only be added to Shenzhen Stock Connect.Of the 29 index deletions, 13 are not a part of Stock Connect, 7 will continue to remain a part of Stock Connect by virtue of having listed A-shares, while 9 will be deleted from the Stock Connect program.We identify 4 stocks that could sell off ahead of their removal from the Stock Connect Buy list, while Biotech stocks could be in focus ahead of their inclusion in the Stock Connect Buy and Sell list.

HSCI Index Rebalance & Stock Connect: Inclusions & Exclusions

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.

Event-Driven

China Traditional Chinese Medicine / Event-Driven

China Traditional Chinese Medicine (570 HK)

On Friday after market close, <a href="https://www.smartkarma.com/entities/china-traditional-chinese-medicine" target="_blank" data-smartkarma-citation="entities:351:1" rel="noopener">China Traditional Chinese Medicine (570 HK)</a>/CTCM announced that Sinopharm Hongkong, the controlling shareholder with a 32.46% stake, is currently exploring a proposal to privatise CTCM. The announcement was in response to <a href="https://www.reuters.com/article/us-sinopharm-m-a-china-tcm-exclusive-idUSKBN29W0J5" target="_blank" rel="noopener">a Reuters article</a> on 27 January that Sinopharm is leading a consortium to privatise CTCM. The rumoured privatisation price of HK$5.10 per share is a 26.6% premium to the unaffected price of HK$4.03 per share (26 January) and an 18.6% premium to the last close of HK$4.30 per share (27 January prior to the trading halt). <div class="content-highlight">We believe that the privatisation will be likely done through a scheme of arrangement. As a Hong Kong incorporated company, the key condition precedent is the scheme approved by at least 75% disinterested shareholders (&lt;10% disinterested shareholders rejection). Overall, we think that at the last close price, the downside risk is low (trading close to break price) with a good probability of upside (announcement of a formal proposal).  </div>

On Friday after market close, China Traditional Chinese Medicine (570 HK)/CTCM announced that Sinopharm Hongkong, the controlling shareholder with a 32.46% stake, is currently exploring a proposal to privatise CTCM. The announcement was in response to a Reuters article on 27 January that Sinopharm is leading a consortium to privatise CTCM. The rumoured privatisation price of HK$5.10 per share is a 26.6% premium to the unaffected price of HK$4.03 per share (26 January) and an 18.6% premium to the last close of HK$4.30 per share (27 January prior to the trading halt). We believe that the privatisation will be likely done through a scheme of arrangement. As a Hong Kong incorporated company, the key condition precedent is the scheme approved by at least 75% disinterested shareholders (&lt;10% disinterested shareholders rejection). Overall, we think that at the last close price, the downside risk is low (trading close to break price) with a good probability of upside (announcement of a formal proposal).  

China Traditional Chinese Medicine Possible Privatisation

Quality-first, Business-perspective, Long-term, Urbem (HK) Limited

Urbem Capital

Quality-first, Business-perspective, Long-term

Equity Bottom-Up

Beijing Tong Ren Tang Chinese Medicine / Equity Bottom-Up

Beijing Tong Ren Tang Chinese Medicine (3613 HK)

<ul>
<li>We tend to avoid turnarounds as they seldom turn;</li>
<li>But Beijing Tong Ren Tang Chinese Medicine can be a rare case in our opinion;</li>
<li>We see the company as being a wide-moat compounding machine, highly hopeful of delivering superior returns on capital when its business condition normalizes (sooner or later);</li>
<li>Simultaneously, the valuation of the share makes sense for alpha-seeking investors with a double-digit hurdle rate.</li>
</ul>


We tend to avoid turnarounds as they seldom turn;
But Beijing Tong Ren Tang Chinese Medicine can be a rare case in our opinion;
We see the company as being a wide-moat compounding machine, highly hopeful of delivering superior returns on capital when its business condition normalizes (sooner or later);
Simultaneously, the valuation of the share makes sense for alpha-seeking investors with a double-digit hurdle rate.


Beijing Tong Ren Tang Chinese Medicine: A Turnaround Worth A Look

Founder

Kemp Dolliver, CFA

Cherrystone Hill Research

China Traditional Chinese Medicine / Equity Bottom-Up

We want to highlight some recent pieces of information that suggest that the company (and stock) should perform better from here. First, some of the drags on 2015's performance look transient in nature. Second, the company has repurchased shares in the open market during the last few trading days.Management went on an NDR with UOB in Shanghai recently, and mentioned the following details relative to 2015's performance:<ol><li>Bi Yan Kang's (6% of 2015 revenue/9% of 2014 revenue) channel inventories were…</li></ol>

We want to highlight some recent pieces of information that suggest that the company (and stock) should perform better from here. First, some of the drags on 2015's performance look transient in nature. Second, the company has repurchased shares in the open market during the last few trading days.Management went on an NDR with UOB in Shanghai recently, and mentioned the following details relative to 2015's performance:Bi Yan Kang's (6% of 2015 revenue/9% of 2014 revenue) channel inventories were…

China TCM's 2015 results met expectations (operating profit +56%/EPS +3%), but the shares have declined by roughly 11% in response to very tepid (+3% revenue/+2% operating income) organic growth. Despite the near standstill in organic growth, 2016 and 2017 EPS estimates remain stable.  In addition, recent tender results in Guangxi and Tianjin were better than in prior tenders, suggesting that pricing may have stabilized.The shares now trade at less than 12x 2016E EPS of RMB0.28, and are very attractive at these levels.

China TCM's 2015 results met expectations (operating profit +56%/EPS +3%), but the shares have declined by roughly 11% in response to very tepid (+3% revenue/+2% operating income) organic growth. Despite the near standstill in organic growth, 2016 and 2017 EPS estimates remain stable.  In addition, recent tender results in Guangxi and Tianjin were better than in prior tenders, suggesting that pricing may have stabilized.The shares now trade at less than 12x 2016E EPS of RMB0.28, and are very attractive at these levels.  

China

Tong Ren Tang Technologies produces and distributes a wide range of traditional Chinese medicine products, healthcare products, and other related goods. The company also engages in the cultivation and processing of medicinal raw materials, provides medical consultations, and offers research and development services. It is headquartered in Beijing, China, and traces its origins back to the founding of the Tong Ren Tang brand in 1669.

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Tong Ren Tang Technologies (1666 HK)

HSCI Index Rebalance & Stock Connect: Inclusions & Exclusions

There are 36 inclusions/ 29 exclusions for the Hang Seng Composite Index. 9 stocks will be deleted from the Stock Connect Buy list & there are a...

Brian Freitas

China Traditional Chinese Medicine Possible Privatisation

Sinopharm Hongkong, the controlling shareholder, is currently exploring a privatisation proposal. At the last close price, the downside risk is low...

Arun George

Beijing Tong Ren Tang Chinese Medicine: A Turnaround Worth A Look

Beijing Tong Ren Tang Chinese Medicine can be a rare turnaround case in our opinion, thanks to its wide moat and compounding capability.

Urbem Capital

Positive Tidbits to Consider

We want to highlight some recent pieces of information that suggest that the company (and stock) should perform better from here. First, some of...

Kemp Dolliver, CFA

Results In Line, But Weak Organic Growth

China TCM's 2015 results met expectations (operating profit +56%/EPS +3%), but the shares have declined by roughly 11% in response to very tepid...

Kemp Dolliver, CFA

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