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

Following a period of exceptionally strong performance, driven by the stay-at-home culture during the onset of the COVID-19 pandemic in 2020, the Chinese online games market is again experiencing significant headwinds, not only from very tough comps but from a resurgence in regulatory pressure. Although this forms part of wider scrutiny on various facets of the Chinese tech industry (including online education, payment platforms, ridesharing, etc.) recent regulatory efforts have included a further tightening of regulation limiting youth gamers’ online access which has also now led to a delay in new games approvals. This is very similar to what we saw in 2018 when, after an exceptionally strong 2017 revenue growth period, the Chinese government stepped up regulatory scrutiny specifically targeting youth gamers which ultimately led to a suspension of new games approvals from March 2018 until December 2018. Given the material impact that recent regulatory approvals should have on revenue generation 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> and <a href="https://www.smartkarma.com/entities/netease" target="_blank" data-smartkarma-citation="entities:29030:1" rel="noopener">NetEase (9999 HK)</a>, in this insight, I analyse the potential for negative revenue growth surprises, and further sell-side earnings downgrades, by comparing the current situation to that faced in 2018.

Following a period of exceptionally strong performance, driven by the stay-at-home culture during the onset of the COVID-19 pandemic in 2020, the Chinese online games market is again experiencing significant headwinds, not only from very tough comps but from a resurgence in regulatory pressure. Although this forms part of wider scrutiny on various facets of the Chinese tech industry (including online education, payment platforms, ridesharing, etc.) recent regulatory efforts have included a further tightening of regulation limiting youth gamers’ online access which has also now led to a delay in new games approvals. This is very similar to what we saw in 2018 when, after an exceptionally strong 2017 revenue growth period, the Chinese government stepped up regulatory scrutiny specifically targeting youth gamers which ultimately led to a suspension of new games approvals from March 2018 until December 2018. Given the material impact that recent regulatory approvals should have on revenue generation for Tencent (700 HK) and NetEase (9999 HK), in this insight, I analyse the potential for negative revenue growth surprises, and further sell-side earnings downgrades, by comparing the current situation to that faced in 2018.

NetEase, Tencent: Risk of Negative Games Revenue Surprises Skewed to Tencent, Rather than NetEase

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>The lower growth rate in 2Q21 was due to the high comparison base last year.</li>
<li>The new rule of time limit is not a concern.</li>
<li>The pandemic will pull players back to their mobile phones.</li>
<li>Our concern is expense in minor businesses.</li>
<li>We conclude an upside of 7.6%.</li>
</ul>


The lower growth rate in 2Q21 was due to the high comparison base last year.
The new rule of time limit is not a concern.
The pandemic will pull players back to their mobile phones.
Our concern is expense in minor businesses.
We conclude an upside of 7.6%.


NetEase (NTES): Slower in 2Q21, But Do Not Short It

China and US Equity Analyst

Roger Xie

Cross Asset Strategy

<ul>
<li>China’s tech sector has been in the spotlight in recent days. Beijing has released a series of rules aiming to remake private education and tech sectors. to curb cost pressure and better serve ordinary people.  we believe the magnitude of policy change on private education sector is unprecedent, which could surprise investors. This negative sentiments further spurs the fear of  anti-trust and unfair competition scrutiny on China Internet sector. It has led to capital flight from China tech sector. <a href="https://www.smartkarma.com/entities/hang-seng-tech-index" target="_blank" data-smartkarma-citation="entities:31367:1" rel="noopener">Hang Seng Tech Index (HSTECH INDEX)</a> has declined 40% from its high in February this year.</li>
<li>In the newly released policy, the State Council banned foreign capital from investing in education institutions through any approach, including VIE (Variable Interest Entity) structure. This has led to investor concerns whether the ban on foreign investments through VIE will be extended to other sectors. VIE is considered to be the foundation of offshore China ADR listing structure. Our assessment shows that the VIE structure will remain to stay, but the new oversea listings could face more scrutiny from regulators. The paradigm shift could fundamentally benefit <a href="https://www.smartkarma.com/entities/hong-kong-exchanges-clearing" target="_blank" data-smartkarma-citation="entities:490:1" rel="noopener">HKEX (388 HK)</a> as the preferred listing venue for offshore China ADR. And the dual-listing status for many China tech giants will remain. </li>
<li>China central bank lowered bank reserve requirement ratio early this month and free up US$154bn from the system. The benchmark 10-year treasury  yield hovered around 2.9%  past few weeks indicating plenty of liquidity. Investors have been speculating that LPR (Loan Prime Rate) might be cut further to stimulate the growth. We believe structural monetary policy operations will continue. Likely, more support will be provided toward green energy, innovations and industry upgrade, but it might remain tightening for property and overcapacity sectors. The upcoming Politburo Meeting in end of July could give more hints about monetary policy stance. More than 40% of China A-share companies have released their 1H earning preview, which delivered 120% year-over-year growth (due to low base by pandemic in 2020). We remain sanguine on China equity market outlook in 2H 2021, but would recommend more clarity on policy for China tech giants.</li>
</ul>


China’s tech sector has been in the spotlight in recent days. Beijing has released a series of rules aiming to remake private education and tech sectors. to curb cost pressure and better serve ordinary people.  we believe the magnitude of policy change on private education sector is unprecedent, which could surprise investors. This negative sentiments further spurs the fear of  anti-trust and unfair competition scrutiny on China Internet sector. It has led to capital flight from China tech sector. Hang Seng Tech Index (HSTECH INDEX) has declined 40% from its high in February this year.
In the newly released policy, the State Council banned foreign capital from investing in education institutions through any approach, including VIE (Variable Interest Entity) structure. This has led to investor concerns whether the ban on foreign investments through VIE will be extended to other sectors. VIE is considered to be the foundation of offshore China ADR listing structure. Our assessment shows that the VIE structure will remain to stay, but the new oversea listings could face more scrutiny from regulators. The paradigm shift could fundamentally benefit HKEX (388 HK) as the preferred listing venue for offshore China ADR. And the dual-listing status for many China tech giants will remain. 
China central bank lowered bank reserve requirement ratio early this month and free up US$154bn from the system. The benchmark 10-year treasury  yield hovered around 2.9%  past few weeks indicating plenty of liquidity. Investors have been speculating that LPR (Loan Prime Rate) might be cut further to stimulate the growth. We believe structural monetary policy operations will continue. Likely, more support will be provided toward green energy, innovations and industry upgrade, but it might remain tightening for property and overcapacity sectors. The upcoming Politburo Meeting in end of July could give more hints about monetary policy stance. More than 40% of China A-share companies have released their 1H earning preview, which delivered 120% year-over-year growth (due to low base by pandemic in 2020). We remain sanguine on China equity market outlook in 2H 2021, but would recommend more clarity on policy for China tech giants.


China Equity Strategy: Tug of War, Policy Uncertainty and Plenty Liquidity

Research on Tech Companies

Evelyn Zhang

Thematic (Sector/Industry)

A series of recent Chinese policies promoting vocational schools instead of traditional secondary education, and efforts to eliminate after-class cramming makes me to recommend short K12 education related stocks and long vocational training related stocks.

A series of recent Chinese policies promoting vocational schools instead of traditional secondary education, and efforts to eliminate after-class cramming makes me to recommend short K12 education related stocks and long vocational training related stocks.

A Twist of Fate – China’s Suppression of Secondary Education in Favor of Vocational Education

<ul>
<li>The main business, game, continued to slow down in 1Q20.</li>
<li>We believe NTES is losing brand advantage, because the game industry has changed.</li>
<li>We believe the operating margin will decline when non-game businesses account for a larger proportion of total revenues.</li>
<li>We set a downside of 17%.</li>
</ul>


The main business, game, continued to slow down in 1Q20.
We believe NTES is losing brand advantage, because the game industry has changed.
We believe the operating margin will decline when non-game businesses account for a larger proportion of total revenues.
We set a downside of 17%.


NetEase (NTES): 1Q21, Game Slowing Down as Game Industry Has Changed

China

Youdao, Inc. develops and markets mobile internet applications. The Company provides language translation applications, personal cloud applications, e-commerce shopping applications, and other related products. Youdao also develops investment related applications.

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Youdao, Inc. (DAO US)

NetEase, Tencent: Risk of Negative Games Revenue Surprises Skewed to Tencent, Rather than NetEase

In this insight, I analyse the potential for negative revenue growth surprises, and further earnings downgrades, for NetEase and Tencent, by...

Wium Malan, CFA

NetEase (NTES): Slower in 2Q21, But Do Not Short It

The lower growth rate in 2Q21 was due to the high comparison base last year. The new rule of time limit is not a concern. The pandemic will pull...

Ming Lu

China Equity Strategy: Tug of War, Policy Uncertainty and Plenty Liquidity

We remain sanguine on China equity market outlook in 2H 2021 given the earning growth and plenty liquidity, but would wait for more clarity on...

Roger Xie

A Twist of Fate – China’s Suppression of Secondary Education in Favor of Vocational Education

Change is afoot in one of China's main social mobility mechanism, the education system. The country is promoting vocational education in an effort...

Evelyn Zhang

NetEase (NTES): 1Q21, Game Slowing Down as Game Industry Has Changed

The main business, game, continued to slow down in 1Q20. We believe NTES is losing brand advantage, because the game industry has changed.

Ming Lu

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52-week Range

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