Global TMT analyst with Asia ex-Japan focus.

Mitchell Kim

Equity Bottom-Up

Coupang's share price fell 8% in the first-day trading session after the company's 2Q21 results were announced.  Does this present an entry opportunity?  No, I believe there is still a downside to Coupang's story. I believe the results validated my concerns highlighted in my previous two reports ( <a href="https://www.smartkarma.com/insights/coupang-cpng-us-crack-in-the-armor" target="_blank" data-smartkarma-citation="insights:51455" rel="noopener">Coupang (CPNG US): Crack in the Armor</a> and <a href="https://www.smartkarma.com/insights/coupang-cpng-us-going-mano-e-mano-with-jd-com" target="_blank" data-smartkarma-citation="insights:49065" rel="noopener">Coupang (CPNG US): Going Mano E Mano with JD.com</a>): <ol>
<li>
Coupang's revenue growth is sharply decelerating towards 60% in 2H21.  In my "Mano e Mano" report, I highlight what happened to high-growth stocks when their growth slowed to 50% - 60% (e.g.,<a href="https://www.smartkarma.com/entities/jd-com-inc-adr" target="_blank" data-smartkarma-citation="entities:446:1" rel="noopener">JD.com Inc (ADR) (JD US)</a>, <a href="https://www.smartkarma.com/entities/vipshop-holdings-ltd-adr" target="_blank" data-smartkarma-citation="entities:1088:1" rel="noopener">Vipshop Holdings (VIPS US)</a>).</li>
<li>
Operating leverage has not been reached yet. In fact, operating losses still doubled even after excluding costs associated with the FC Fire as losses from Eats and Rocket Fresh grocery delivery continues.  </li>
<li>
 Adding new customers is key as revenue per customer growth continues to decelerate. </li>
</ol>Valuations remain uncompelling. Coupang trades at a significant premium to JD.com on EV/revenue and EV/Gross Profit even after considering the difference in growth. The key upside risk is if investors rotate from Chinese platforms to Coupang to mitigate Chinese regulatory risk.  I would note though that Coupang also faces regulatory risk and poor public perception as highlighted in my previous report, <a href="https://www.smartkarma.com/insights/coupang-cpng-us-under-the-regulator-s-microscope" target="_blank" data-smartkarma-citation="insights:54103" rel="noopener">Coupang (CPNG US): Under the Regulator's Microscope.</a>

Coupang's share price fell 8% in the first-day trading session after the company's 2Q21 results were announced.  Does this present an entry opportunity?  No, I believe there is still a downside to Coupang's story. I believe the results validated my concerns highlighted in my previous two reports ( Coupang (CPNG US): Crack in the Armor and Coupang (CPNG US): Going Mano E Mano with JD.com): 

Coupang's revenue growth is sharply decelerating towards 60% in 2H21.  In my "Mano e Mano" report, I highlight what happened to high-growth stocks when their growth slowed to 50% - 60% (e.g.,JD.com Inc (ADR) (JD US), Vipshop Holdings (VIPS US)).

Operating leverage has not been reached yet. In fact, operating losses still doubled even after excluding costs associated with the FC Fire as losses from Eats and Rocket Fresh grocery delivery continues.  

 Adding new customers is key as revenue per customer growth continues to decelerate. 
Valuations remain uncompelling. Coupang trades at a significant premium to JD.com on EV/revenue and EV/Gross Profit even after considering the difference in growth. The key upside risk is if investors rotate from Chinese platforms to Coupang to mitigate Chinese regulatory risk.  I would note though that Coupang also faces regulatory risk and poor public perception as highlighted in my previous report, Coupang (CPNG US): Under the Regulator's Microscope.

Coupang (CPNG US): Heavier Bleeding Takes the Wind Out of Coupang's Sails

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

Thematic (Sector/Industry)

The China National Bureau of Statistics retail sales data for June 2021 appears to show a softer YoY growth compared to an outlier growth in 1Q21, but the 2YR CAGR of 17% outpaced 1Q21's 15%. (See April and May sales tracker in the report, <a href="https://www.smartkarma.com/insights/china-online-retail-sales-tracker-april-and-may-sales-growth-slows-on-unfavorable-comps" target="_blank" data-smartkarma-citation="insights:53557" rel="noopener">China Online Retail Sales Tracker: April and May Sales Growth Slows on Unfavorable Comps</a>.)  This solid online spending growth suggests China's consumption remains robust and the Chinese e-commerce names could receive greater attention from global investors especially if a rotation from the developed market to emerging market ensues. The solid growth of online sales is positive for all online platforms including <a href="https://www.smartkarma.com/entities/alibaba-group-holding-ltd" target="_blank" data-smartkarma-citation="entities:787:1" rel="noopener">Alibaba Group (BABA US), </a><a href="https://www.smartkarma.com/entities/jd-com-inc-adr" target="_blank" data-smartkarma-citation="entities:446:1" rel="noopener">JD.com Inc (ADR) (JD US)</a><a href="https://www.smartkarma.com/entities/alibaba-group-holding-ltd" target="_blank" data-smartkarma-citation="entities:787:1" rel="noopener">,  and  </a><a href="https://www.smartkarma.com/entities/vipshop-holdings-ltd-adr" target="_blank" data-smartkarma-citation="entities:1088:1" rel="noopener">Vipshop Holdings (VIPS US).</a>I like all three names as they currently trade at attractive valuations, but VIPS stands out with its nearly single-digit forward P/E and favorable operating metrics.  I am less sanguine on <a href="https://www.smartkarma.com/entities/pinduoduo-inc" target="_blank" data-smartkarma-citation="entities:27250:1" rel="noopener">Pinduoduo (PDD US)</a> because of its high marketing cost-powered business model despite its industry-leading growth.        <h3>Key takeaways from China retail sales data: </h3><ul>
<li>
Total retail sales grew 14% YoY in 2Q21, lower than the 34% growth in 1Q21, but on a 2-year CAGR accelerated in 2Q21 to 4.8% from 3.8% in 1Q21. </li>
<li>In 2Q21, apparel and cosmetics categories (total including offline and online) grew solid 19% and 16%, while household appliances sales growth was more muted at 5%.    </li>
<li>
Online sales (physical goods) grew 9% YoY in 2Q21, lower than 24% in 1Q21, but 2YR CAGR was 17% and 15%, respectively.  Because the soft YoY comparison may not do much to thaw investor sentiment on Chinese e-commerce, but I believe the current adverse optics provides opportunities.   </li>
<li>
Online sales for apparel-related categories along with general merchandise grew 13% ( by my estimate) for 2Q21 compared to 40% and 21%, respectively, for 1Q21.  However, again, on a 2YR CAGR basis, 2Q21 growth of 10.3% outpaced 1Q21's 9.3%.   Vipshop's revenue growth outpaced online apparel growth by 11% points in 1Q21.  This trend is expected to continue in 2Q21, especially when considering the 6/18 Festival promotions. </li>
</ul>

The China National Bureau of Statistics retail sales data for June 2021 appears to show a softer YoY growth compared to an outlier growth in 1Q21, but the 2YR CAGR of 17% outpaced 1Q21's 15%. (See April and May sales tracker in the report, China Online Retail Sales Tracker: April and May Sales Growth Slows on Unfavorable Comps.)  This solid online spending growth suggests China's consumption remains robust and the Chinese e-commerce names could receive greater attention from global investors especially if a rotation from the developed market to emerging market ensues. The solid growth of online sales is positive for all online platforms including Alibaba Group (BABA US), JD.com Inc (ADR) (JD US),  and  Vipshop Holdings (VIPS US).I like all three names as they currently trade at attractive valuations, but VIPS stands out with its nearly single-digit forward P/E and favorable operating metrics.  I am less sanguine on Pinduoduo (PDD US) because of its high marketing cost-powered business model despite its industry-leading growth.        Key takeaways from China retail sales data: 

Total retail sales grew 14% YoY in 2Q21, lower than the 34% growth in 1Q21, but on a 2-year CAGR accelerated in 2Q21 to 4.8% from 3.8% in 1Q21. 
In 2Q21, apparel and cosmetics categories (total including offline and online) grew solid 19% and 16%, while household appliances sales growth was more muted at 5%.    

Online sales (physical goods) grew 9% YoY in 2Q21, lower than 24% in 1Q21, but 2YR CAGR was 17% and 15%, respectively.  Because the soft YoY comparison may not do much to thaw investor sentiment on Chinese e-commerce, but I believe the current adverse optics provides opportunities.   

Online sales for apparel-related categories along with general merchandise grew 13% ( by my estimate) for 2Q21 compared to 40% and 21%, respectively, for 1Q21.  However, again, on a 2YR CAGR basis, 2Q21 growth of 10.3% outpaced 1Q21's 9.3%.   Vipshop's revenue growth outpaced online apparel growth by 11% points in 1Q21.  This trend is expected to continue in 2Q21, especially when considering the 6/18 Festival promotions. 


China Online Retail Sales Tracker: Steady Recovery in June Without the Optical Illusion

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

EBeauty Holdings / Equity Capital Markets

<a href="https://www.smartkarma.com/entities/ebeauty-holdings" target="_blank" data-smartkarma-citation="entities:33505:1" rel="noopener">EBeauty Holdings (1894926D HK)</a> is the largest beauty brand e-commerce enablement service provider by GMV (gross merchandise value) facilitated or generated in China, with a market share of 13.3% in 2020, according to iResearch. eBeauty primarily executes the branding and marketing strategies that the brand partners have designed, operating their official online stores, while in some cases it provides marketing strategy advisory to brand partners to help them formulate their marketing strategies.eBeauty is pre-marketing an HKEx IPO to raise around $600 million, according to press reports. The shareholders include Genesis Capital, <a href="https://www.smartkarma.com/entities/ping-an-insurance-grp-co-of-china-ltd" target="_blank" data-smartkarma-citation="entities:12880:1" rel="noopener">Ping An Insurance (H) (2318 HK)</a>, <a href="https://www.smartkarma.com/entities/bilibili-inc" target="_blank" data-smartkarma-citation="entities:26793:1" rel="noopener">Bilibili Inc (BILI US)</a> and Mass Ave Global.eBeauty is a play on the rising complexity of China’s beauty e-commerce industry which has resulted in more brands out-sourcing their e-commerce operations to specialized brand e-commerce enablement service providers (such as eBeauty). The beauty e-commerce industry is fast-evolving, with mounting demands for personalised marketing strategy, multi-channel operation capabilities and technology solutions. These demanding requirements force a significant proportion of beauty brands to engage service providers who offer a suite of services in the e-commerce value chain.<div class="content-highlight">eBeauty is capitalising on these industry dynamics by delivering solid organic growth, rising margins and good cash generation. Overall, we believe that eBeauty is worth a closer look.</div>

EBeauty Holdings (1894926D HK) is the largest beauty brand e-commerce enablement service provider by GMV (gross merchandise value) facilitated or generated in China, with a market share of 13.3% in 2020, according to iResearch. eBeauty primarily executes the branding and marketing strategies that the brand partners have designed, operating their official online stores, while in some cases it provides marketing strategy advisory to brand partners to help them formulate their marketing strategies.eBeauty is pre-marketing an HKEx IPO to raise around $600 million, according to press reports. The shareholders include Genesis Capital, Ping An Insurance (H) (2318 HK), Bilibili Inc (BILI US) and Mass Ave Global.eBeauty is a play on the rising complexity of China’s beauty e-commerce industry which has resulted in more brands out-sourcing their e-commerce operations to specialized brand e-commerce enablement service providers (such as eBeauty). The beauty e-commerce industry is fast-evolving, with mounting demands for personalised marketing strategy, multi-channel operation capabilities and technology solutions. These demanding requirements force a significant proportion of beauty brands to engage service providers who offer a suite of services in the e-commerce value chain.eBeauty is capitalising on these industry dynamics by delivering solid organic growth, rising margins and good cash generation. Overall, we believe that eBeauty is worth a closer look.

EBeauty Holdings IPO Initiation: Attention Pays

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

China

Vipshop Holdings Ltd. retails branded products at discount over the Internet. The Company retails through flash sales, in which limited quantities of an item are sold at deep discount for a specified period of time.

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Vipshop Holdings (VIPS US)

Coupang (CPNG US): Heavier Bleeding Takes the Wind Out of Coupang's Sails

Coupang's share price fell 8% after the company's 2Q21 results were announced. Does this present an entry opportunity? I believe there is still a...

Mitchell Kim

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

China Online Retail Sales Tracker: Steady Recovery in June Without the Optical Illusion

Consensus revenue estimates for Chinese e-commerce platforms could be too conservative based on comparison to the NBS data. 2Q21 revenue and...

Mitchell Kim

EBeauty Holdings IPO Initiation: Attention Pays

eBeauty is pre-marketing an HKEx IPO to raise around $600 m. eBeauty is capitalising on favourable industry dynamics by delivering solid organic...

Arun George

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

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