Global Emerging Market Equities, Propitious Research

Wium Malan, CFA

Global Emerging Market Equities

Independent, Fundamental Quantitative Research

Propitious Research

Fully independent, fundamental and quantitative equity research, focused on companies in the Telecommunication, Media, Technology, Internet and Healthcare sectors in the Global Emerging Markets. Idea generation focused on Quality stocks, trading below their intrinsic Value, with sound Corporate Governance.

Equity Bottom-Up

<a href="https://www.smartkarma.com/entities/jd-com-inc" target="_blank" data-smartkarma-citation="entities:29043:1" rel="noopener">JD.com Inc. (9618 HK)</a> has been a shining example of what can be achieved through both Operating- and Financial leverage as a business scales up. This has been a commendable performance by its management team over the past nearly a decade, balancing gains from operating and financial leverage, whilst prudently, yet aggressively, investing in growth. Over the past 8 years it has delivered expansion at the Gross margin level (through mix change to advertising revenue and scale in 1P), the Operating margin level (lower losses in 3P), and the net margin level (cash generation and lower losses from associates). With lingering concerns around short-term margin expansion, as the group invests more aggressively in group purchasing aimed at the fresh food segment, in this insight, I analyse the potential for long-term margin expansion and what that implies for current valuation levels for China’s largest direct retailer.

JD.com Inc. (9618 HK) has been a shining example of what can be achieved through both Operating- and Financial leverage as a business scales up. This has been a commendable performance by its management team over the past nearly a decade, balancing gains from operating and financial leverage, whilst prudently, yet aggressively, investing in growth. Over the past 8 years it has delivered expansion at the Gross margin level (through mix change to advertising revenue and scale in 1P), the Operating margin level (lower losses in 3P), and the net margin level (cash generation and lower losses from associates). With lingering concerns around short-term margin expansion, as the group invests more aggressively in group purchasing aimed at the fresh food segment, in this insight, I analyse the potential for long-term margin expansion and what that implies for current valuation levels for China’s largest direct retailer.

JD.com: A Detailed Look at Long-Term Margins and Valuation

Global TMT analyst with Asia ex-Japan focus.

Mitchell Kim

PBoC (People's Bank of China) said on Monday that a "comprehensive, viable rectification plan" for Ant Group had been agreed to and Ant Group will overhaul its business in compliance with higher regulations for Internet finance platform companies.  As a result, Ant Group will apply to become a financial holding company. Similar to the AML fine on Alibaba, we believe this directive will now allow Ant Group to move forward possibly with a slightly lower valuation but share overhang lifted.  At the same time, I believe the market will be relieved to hear the regulator's carefully crafted supportive tone towards the Internet platforms.   Impact: <ul>
<li>The impact on <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> is nominal, in my view.  Alibaba owns 33% of Ant Group.  With the market already having priced-in a bear case scenario, we believe this news has minimal impact on Alibaba's valuation.  </li>
<li>I believe the market already valued Ant Group at USD170-180 billion after the failed IPO.  This news does not change the valuation significantly.  </li>
</ul>Implications: <ul>
<li>As a holding company, Ant will be subject to higher capital requirements.  But the market is well aware of this already.  (Please see our report, <a href="https://www.smartkarma.com/insights/alibaba-baba-us-ant-group-woes-overly-priced-in" target="_blank" data-smartkarma-citation="insights:48648" rel="noopener">Alibaba (BABA US): Ant Group Woes Overly Priced-In</a>, dated 27 February 2021)
</li>
<li> Ant will have to reduce the liquidity risks of its investment products including the InsureTech products and specifically rein-in the AUM of Yue'bao, its money-market mutual fund.  This was broader than expected.  It is difficult to imagine how to stop consumers from selecting an investment product.  </li>
<li>Set up a consumer credit reporting company and strengthen the protection of personal information.  </li>
</ul>

PBoC (People's Bank of China) said on Monday that a "comprehensive, viable rectification plan" for Ant Group had been agreed to and Ant Group will overhaul its business in compliance with higher regulations for Internet finance platform companies.  As a result, Ant Group will apply to become a financial holding company. Similar to the AML fine on Alibaba, we believe this directive will now allow Ant Group to move forward possibly with a slightly lower valuation but share overhang lifted.  At the same time, I believe the market will be relieved to hear the regulator's carefully crafted supportive tone towards the Internet platforms.   Impact: 
The impact on Alibaba Group (BABA US) is nominal, in my view.  Alibaba owns 33% of Ant Group.  With the market already having priced-in a bear case scenario, we believe this news has minimal impact on Alibaba's valuation.  
I believe the market already valued Ant Group at USD170-180 billion after the failed IPO.  This news does not change the valuation significantly.  
Implications: 
As a holding company, Ant will be subject to higher capital requirements.  But the market is well aware of this already.  (Please see our report, Alibaba (BABA US): Ant Group Woes Overly Priced-In, dated 27 February 2021)

 Ant will have to reduce the liquidity risks of its investment products including the InsureTech products and specifically rein-in the AUM of Yue'bao, its money-market mutual fund.  This was broader than expected.  It is difficult to imagine how to stop consumers from selecting an investment product.  
Set up a consumer credit reporting company and strengthen the protection of personal information.  


Alibaba (BABA US): Ant Group - Pay, Get Out, Move Forward

Overseas Chinese Equities, Aequitas Research

Ming Lu

Overseas Chinese Equities

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.

<ul>
<li>State Administration for Market Regulation (SAMR) fined Alibaba RMB18 billion.</li>
<li>Alibaba had forced retailers to leave competitors via an “either-or” choice since 2015.</li>
<li>The penalty amount is not significant to Alibaba.</li>
<li>We believe that the penalty is just part of SAMR’s action after the new law, but not especially against Alibaba.</li>
<li>We do not believe the penalty will impact Alibaba’s long-term value.</li>
<li>We set an upside of 37% and a price target of USD$306 according to the 3-year P/E average.</li>
</ul>
Our previous coverage on Alibaba:
<a href="https://www.smartkarma.com/insights/alibaba-baba-many-positive-signals-in-december-quarter-27-upside" target="_blank" data-smartkarma-citation="insights:47726" rel="noopener">Alibaba (BABA): Many Positive Signals in December Quarter, 27% Upside</a>
<a href="https://www.smartkarma.com/insights/alibaba-baba-this-online-antitrust-wave-a-risk-but-not-a-massacre" target="_blank" data-smartkarma-citation="insights:46377" rel="noopener">Alibaba (BABA): This Online Antitrust Wave, A Risk, But Not A Massacre</a>


State Administration for Market Regulation (SAMR) fined Alibaba RMB18 billion.
Alibaba had forced retailers to leave competitors via an “either-or” choice since 2015.
The penalty amount is not significant to Alibaba.
We believe that the penalty is just part of SAMR’s action after the new law, but not especially against Alibaba.
We do not believe the penalty will impact Alibaba’s long-term value.
We set an upside of 37% and a price target of USD$306 according to the 3-year P/E average.

Our previous coverage on Alibaba:
Alibaba (BABA): Many Positive Signals in December Quarter, 27% Upside
Alibaba (BABA): This Online Antitrust Wave, A Risk, But Not A Massacre 

Alibaba (BABA): Fined $2.78 Billion for “Either Or”, But Impact Is Neither Big Nor Long Term

Chinese regulators announced a record fine for <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> amounting to USD2.75 billion for violations related to antitrust regulations.  While the final amount for the fine was previously unknown, the fine itself is not a surprise.  We believe this is a positive outcome for Alibaba: <ol>
<li>
We did not see any hint of additional rectifications related to AML (Anti-monopoly law) other than the penalty amount. (Alibaba has already pledged to modify its "exclusivity" practice to allow for merchants to have greater freedom to list their products on multiple platforms. Share overhang related to this issue should dissipate. 
</li>
<li>
Alibaba could have been penalized more severely (as much as 10% of its revenues for antitrust violations).  The penalty amount represents only about 3.5% of Alibaba's FY20 revenues (4% of CY2019 revenues).</li>
<li>The lower-than-expected fine amount appears to signal that the regulators are not trying to excessively debilitate the industry.  </li>
</ol>We have highlighted the AML and the consumer lending regulation risks to be key share overhang on the BABA shares in our February report, <a href="https://www.smartkarma.com/insights/alibaba-baba-us-ant-group-woes-overly-priced-in" target="_blank" data-smartkarma-citation="insights:48648" rel="noopener">Alibaba (BABA US): Ant Group Woes Overly Priced-In</a>.   We believe BABA shares are undervalued due to the overhang.  The latest regulatory announcement signals the lifting of share overhang related to AML, in our view.

Chinese regulators announced a record fine for Alibaba Group (BABA US) amounting to USD2.75 billion for violations related to antitrust regulations.  While the final amount for the fine was previously unknown, the fine itself is not a surprise.  We believe this is a positive outcome for Alibaba: 

We did not see any hint of additional rectifications related to AML (Anti-monopoly law) other than the penalty amount. (Alibaba has already pledged to modify its "exclusivity" practice to allow for merchants to have greater freedom to list their products on multiple platforms. Share overhang related to this issue should dissipate. 


Alibaba could have been penalized more severely (as much as 10% of its revenues for antitrust violations).  The penalty amount represents only about 3.5% of Alibaba's FY20 revenues (4% of CY2019 revenues).
The lower-than-expected fine amount appears to signal that the regulators are not trying to excessively debilitate the industry.  
We have highlighted the AML and the consumer lending regulation risks to be key share overhang on the BABA shares in our February report, Alibaba (BABA US): Ant Group Woes Overly Priced-In.   We believe BABA shares are undervalued due to the overhang.  The latest regulatory announcement signals the lifting of share overhang related to AML, in our view.  

Alibaba (BABA US): Record Fine - Grin and Bear It as Better Days Are Ahead

Equity Analyst, LightStream Research

Shifara Samsudeen, FCMA, CGMA

Equity Analyst

Long-Short Analysis on Japan, Asia and the World

LightStream Research

LightStream conducts quantitatively rigorous and data-driven analysis with a focus on Japan and Asia.

We consistently cover the Tech, Consumer and Industrial sectors, and provide ECM and Events coverage more broadly.

We supplement traditional qualitative insights from company relationships with a robust quantitative foundation that examines as much historical data as is available.
We further refine the accuracy of our insights and calls through the use of alternative data to flesh out current trends, and through a valuation framework that emphasises non-superficial peer group selection and a proper attempt to understand the metrics and changes that have driven security valuations in the past.

Equity Capital Markets

Hong Kong Stock Exchange has become the beneficiary of tightening listing requirements and accounting rules for foreign companies by the US regulatory authorities. Chinese companies that are listed in the US are forced to comply with US accounting standards and as a result, a large number of US-listed Chinese companies have sought secondary listings on the Hong Kong Stock Exchange over the last two years.Autohome, Baidu and Bilibili conducted secondary listings earlier this year and several other companies including <a href="https://www.smartkarma.com/entities/trip-com-group-ltd" target="_blank" data-smartkarma-citation="entities:180:1" rel="noopener">Trip.com (TCOM US)</a> , <a href="https://www.smartkarma.com/entities/tencent-music-entertainment" target="_blank" data-smartkarma-citation="entities:27255:1" rel="noopener">Tencent Music (TME US)</a> and <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>  are said to be in the process of securing secondary listings in Hong Kong due to the fear of being delisted from the US Exchange.As these companies rush for secondary listings in Hong Kong, in a series of reports, we analyse 10 of the secondary listings on the Hong Kong Stock Exchange over the last 2-years. These 10 companies include <a href="https://www.smartkarma.com/entities/autohome-inc-adr" target="_blank" data-smartkarma-citation="entities:20234:1" rel="noopener">Autohome Inc (Adr) (ATHM US)</a> , <a href="https://www.smartkarma.com/entities/gds-holdings-adr" target="_blank" data-smartkarma-citation="entities:23649:1" rel="noopener">GDS Holdings (ADR) (GDS US)</a> , <a href="https://www.smartkarma.com/entities/zai-lab-ltd" target="_blank" data-smartkarma-citation="entities:25877:1" rel="noopener">Zai Lab Ltd (ZLAB US)</a> , <a href="https://www.smartkarma.com/entities/baozun-inc" target="_blank" data-smartkarma-citation="entities:24184:1" rel="noopener">Baozun Inc. (BZUN US)</a> , <a href="https://www.smartkarma.com/entities/zto-express" target="_blank" data-smartkarma-citation="entities:23628:1" rel="noopener">ZTO Express (ZTO US)</a> , <a href="https://www.smartkarma.com/entities/huazhu-group-ltd" target="_blank" data-smartkarma-citation="entities:17527:1" rel="noopener">Huazhu Group (HTHT 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/netease-inc-adr" target="_blank" data-smartkarma-citation="entities:17203:1" rel="noopener">NetEase Inc (NTES US)</a> , <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> and <a href="https://www.smartkarma.com/entities/beigene" target="_blank" data-smartkarma-citation="entities:23712:1" rel="noopener">BeiGene (BGNE US)</a> .

Hong Kong Stock Exchange has become the beneficiary of tightening listing requirements and accounting rules for foreign companies by the US regulatory authorities. Chinese companies that are listed in the US are forced to comply with US accounting standards and as a result, a large number of US-listed Chinese companies have sought secondary listings on the Hong Kong Stock Exchange over the last two years.Autohome, Baidu and Bilibili conducted secondary listings earlier this year and several other companies including Trip.com (TCOM US) , Tencent Music (TME US) and Vipshop Holdings (VIPS US)  are said to be in the process of securing secondary listings in Hong Kong due to the fear of being delisted from the US Exchange.As these companies rush for secondary listings in Hong Kong, in a series of reports, we analyse 10 of the secondary listings on the Hong Kong Stock Exchange over the last 2-years. These 10 companies include Autohome Inc (Adr) (ATHM US) , GDS Holdings (ADR) (GDS US) , Zai Lab Ltd (ZLAB US) , Baozun Inc. (BZUN US) , ZTO Express (ZTO US) , Huazhu Group (HTHT US) , JD.com Inc (ADR) (JD US) , NetEase Inc (NTES US) , Alibaba Group (BABA US) and BeiGene (BGNE US) .

ADR/HKEX Analysis: Lower Trading Volumes on HKEX Show Limited Liquidity Compared to the US

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)

JD.com: A Detailed Look at Long-Term Margins and Valuation

In this insight, I analyse the potential for long-term margin expansion and what that implies for current valuation levels for China’s largest...

Wium Malan, CFA

Alibaba (BABA US): Ant Group - Pay, Get Out, Move Forward

Ant Group announced its restructuring plans on Monday. Find out what is the actual impact on Ant Group and Alibaba and how Ant Group's valuations...

Mitchell Kim

Alibaba (BABA): Fined $2.78 Billion for “Either Or”, But Impact Is Neither Big Nor Long Term

The penalty amount is not significant to Alibaba. We believe the penalty is just part of authorities’ action after the new law, but not especially...

Ming Lu

Alibaba (BABA US): Record Fine - Grin and Bear It as Better Days Are Ahead

A record-setting fine related to the antitrust violations was imposed on Alibaba on Friday. Find out why we think this is a positive outcome for...

Mitchell Kim

ADR/HKEX Analysis: Lower Trading Volumes on HKEX Show Limited Liquidity Compared to the US

Given relatively lower levels of trading volumes in HK compared to the US Exchanges, it is questionable whether the ADR/HKEX listed companies are...

Shifara Samsudeen, FCMA, CGMA

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