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.

Equity Bottom-Up

<ul>
<li>Game revenue, accounting for 74% of total revenue, grew by 20% in 3Q20.</li>
<li>The subsidiary, Youdao (DAO), spent more sale and marketing expense than its total revenue.</li>
<li>According to the P/S ratios of US game developers in 2021, we believe NTES will have an upside of 35%.</li>
<li>Please note that one ADS represents 5 shares now, compared to 25 shares in the last quarter.</li>
</ul>


Game revenue, accounting for 74% of total revenue, grew by 20% in 3Q20.
The subsidiary, Youdao (DAO), spent more sale and marketing expense than its total revenue.
According to the P/S ratios of US game developers in 2021, we believe NTES will have an upside of 35%.
Please note that one ADS represents 5 shares now, compared to 25 shares in the last quarter.


NetEase (NTES): In 3Q20, Rapid Growth, Weak Earnings Due to Minor Businesses

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

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Event-Driven

<p>On Friday evening, the Stock Exchange of Hong Kong Limited (SEHK), a wholly-owned subsidiary of <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>, <a href="https://www.hkex.com.hk/News/Regulatory-Announcements/2020/201030news?sc_lang=en" target="_blank" rel="noopener">published</a> the conclusions to its consultation on the Corporate WVR beneficiaries.</p><p>The SEHK will treat Greater China issuers that are controlled by corporate Weighted Voting Rights (WVRR) beneficiaries and have a primary listing on a Qualifying Exchange in the same manner as current grandfathered Greater China issuers. The cut-off date for the grandfathered issues is 30 October 2020.</p><p>Qualifying corporate WVR issuers will need to meet the following requirements:</p><ul>
<li>a minimum market cap threshold of at least HK$40bn, or a market cap of at least HK$10bn and revenue of at least HK$1bn in its most recent audited financial year.</li>
<li>be an 'innovative company' as part of the suitability for listing</li>
<li>demonstrate that the laws, rules and regulations provide certain shareholder protection standards</li>
</ul><p>The secondary listing applicant would also need to demonstrate that it is controlled by a single corporate WVR beneficiary, or a group of corporate beneficiaries acting in concert, controlling at least 30% of the total shareholder votes.</p><p>This paves the way for <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/iqiyi-inc" target="_blank" data-smartkarma-citation="entities:26755:1" rel="noopener">iQIYI Inc (IQ US)</a>, among others, to pursue a secondary listing on the <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>. </p>

On Friday evening, the Stock Exchange of Hong Kong Limited (SEHK), a wholly-owned subsidiary of HKEX (388 HK), published the conclusions to its consultation on the Corporate WVR beneficiaries.The SEHK will treat Greater China issuers that are controlled by corporate Weighted Voting Rights (WVRR) beneficiaries and have a primary listing on a Qualifying Exchange in the same manner as current grandfathered Greater China issuers. The cut-off date for the grandfathered issues is 30 October 2020.Qualifying corporate WVR issuers will need to meet the following requirements:
a minimum market cap threshold of at least HK$40bn, or a market cap of at least HK$10bn and revenue of at least HK$1bn in its most recent audited financial year.
be an 'innovative company' as part of the suitability for listing
demonstrate that the laws, rules and regulations provide certain shareholder protection standards
The secondary listing applicant would also need to demonstrate that it is controlled by a single corporate WVR beneficiary, or a group of corporate beneficiaries acting in concert, controlling at least 30% of the total shareholder votes.This paves the way for Tencent Music (TME US) and iQIYI Inc (IQ US), among others, to pursue a secondary listing on the HKEX (388 HK). 

Conclusions of the Corporate WVR Consultation: Small Changes for Now

Managing Director, Zero One, Zero One

Vincent Fernando, CFA

Managing Director, Zero One

Zero One

Founded in 2015, Zero One produces independent investment research and provides corporate finance advisory services with a focus on both listed and private technology companies. Founder Vincent Fernando has over 20 years of experience in US and Asia capital markets.

Independent Investment Research

Thematic (Sector/Industry)

<div class="content-highlight"><h2>Huya Merger News Propels Stock Upwards; Tencent Gains Subdued from Rising US-China Tensions</h2></div><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/153/594/original/China%20Portfolio%20Performance.png?1597832603" class="editor-image img-responsive" data-smartkarma-image-id="153594"></figure><p>The months of July and August saw a broad level rise in prices across our entire China tech portfolio. While companies like Huya and Niu outperformed the MSCI China and NASDAQ indices, companies like Tencent remained relatively subdued given rising US-China tensions on mobile app bans.</p><p>We observe that China Tech companies appear to be looking inwards for growth - focusing more on domestic opportunities while the international regulatory outlook remains uncertain.</p><p>We provide updated views on each of our portfolio companies below:</p>

Huya Merger News Propels Stock Upwards; Tencent Gains Subdued from Rising US-China TensionsThe months of July and August saw a broad level rise in prices across our entire China tech portfolio. While companies like Huya and Niu outperformed the MSCI China and NASDAQ indices, companies like Tencent remained relatively subdued given rising US-China tensions on mobile app bans.We observe that China Tech companies appear to be looking inwards for growth - focusing more on domestic opportunities while the international regulatory outlook remains uncertain.We provide updated views on each of our portfolio companies below:

Our Tech Portfolio Update: Capitalizing on Domestic Opportunities Amidst Heightened US-China Tension

<ul>
<li>The growth rates of total revenue and game revenue continued to accelerate in 2Q20. Minor businesses as a whole grew by 44% YoY, even more rapidly than 21% YoY for game.</li>
<li>We expect total revenue will grow by 22% in 2020 versus 3% in 2019 (Exhibit 3). </li>
<li>We believe the operating margin decline were due to the losses from minor businesses, while the game operating margin was healthy.</li>
<li>Based on US game operators’ P/E ratios, we set an upside of 19% and a price target of US$566.</li>
</ul>


The growth rates of total revenue and game revenue continued to accelerate in 2Q20. Minor businesses as a whole grew by 44% YoY, even more rapidly than 21% YoY for game.
We expect total revenue will grow by 22% in 2020 versus 3% in 2019 (Exhibit 3). 
We believe the operating margin decline were due to the losses from minor businesses, while the game operating margin was healthy.
Based on US game operators’ P/E ratios, we set an upside of 19% and a price target of US$566.


NetEase (NTES): Better Growth in 2Q20, Margin Down, But Not in Game

<ul class="">
<li>Alibaba (BABA)’s Freshippo opened two “Freshippo-mini” stores in Beijing.</li>
<li>Alibaba (BABA)’s Ele.me began to deliver goods other than cooked food.</li>
<li>The smart phone shipment decreased by 16.6% YoY in June, worse than 11.8% YoY in May.</li>
</ul>


Alibaba (BABA)’s Freshippo opened two “Freshippo-mini” stores in Beijing.
Alibaba (BABA)’s Ele.me began to deliver goods other than cooked food.
The smart phone shipment decreased by 16.6% YoY in June, worse than 11.8% YoY in May.


China Internet Weekly (13Jul2020): Alibaba’s Freshippo and Ele.me Exploring Cities and Businesses

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 (NTES): In 3Q20, Rapid Growth, Weak Earnings Due to Minor Businesses

Game revenue grew by 20% in 3Q20. The subsidiary, Youdao (DAO), spent more sale and marketing expense than its total revenue. An upside of 35%.

Ming Lu

Conclusions of the Corporate WVR Consultation: Small Changes for Now

The HKEX has published the conclusions of the consultation on corporate WVR beneficiaries. There are no major changes, but the proposed changes...

Brian Freitas

Our Tech Portfolio Update: Capitalizing on Domestic Opportunities Amidst Heightened US-China Tension

Huya Merger News Propels Stock Upwards; Tencent Gains Subdued from Rising US-China TensionsThe months of July and August saw a broad level rise in...

Vincent Fernando, CFA

NetEase (NTES): Better Growth in 2Q20, Margin Down, But Not in Game

The growth rates of total revenue and game revenue continued to accelerate in 2Q20. Minor businesses as a whole grew by 44% YoY, even more rapidly...

Ming Lu

China Internet Weekly (13Jul2020): Alibaba’s Freshippo and Ele.me Exploring Cities and Businesses

Alibaba (BABA)’s Freshippo opened two “Freshippo-mini” stores in Beijing. Alibaba (BABA)’s Ele.me began to deliver goods other than cooked...

Ming Lu

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