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China Infrastructure Deep Dive: Gas Utilities H & A Shares

By | Smartkarma Originals

China’s Gas Utilities sector will continue to present a high growth story for investors, despite their significant outperformance over the last few years, in our view. The government may accelerate the push for natural gas development in its next five-year plan as an added driver for economic growth, complementing the persistent quest for environmental improvement. Meanwhile, there are challenges from margin squeeze and rise in competition, particularly induced by the change in operating landscape following the formation of China Oil & Gas Pipeline Network Corporation (PipeChina).

The sector is highly fragmented and we analyse the individual companies by looking at the opportunities, risks, Environmental, Social and Governance (ESG), financial strength, profitability and valuation to find the winners of the game. We conclude our analysis with a ranking of our preference on the stocks in the following order: ENN Energy (2688 HK), China Resources Gas (1193 HK), China Gas Holdings (384 HK), Kunlun Energy (135 HK), Shenzhen Gas Corp Ltd A (601139 CH) and Bestsun Energy Co (600681 CH)

What’s Original?

This Smartkarma Original takes a deep look into the key revenue and margin drivers of the Chinese gas utilities companies and compares their respective strengths and weaknesses, in addition to the discussion of the key drivers and challenges of the sector’s outlook. We also analyse the impact of PipeChina on the sector and how individual companies will be affected. 

We attempt to assess the ESG performance of the gas utilities companies, given its rising importance in today’s investment decisions, and see how they are doing. Besides the Hong Kong-listed gas companies, we investigate the fundamentals and investment thesis of two A-shares, namely, Shenzhen Gas Corp Ltd A (601139 CH) and Bestsun Energy Co (600681 CH). We will also briefly discuss ENN Ecological Holdings (600803 CH), an A-share listed in Shanghai currently under a proposed transaction to acquire a controlling 32.83% stake in ENN Energy (2688 HK)

• China Analyst – Onshore Credit, Equity Long-Short • (Opens in a new window) ⧉

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In-Depth Analysis: Digital Banking Strategies Across Asia

By | Smartkarma Originals

Overview of Digital Banking in Asia

Digital banking is at a tipping point in Asia as many countries are issuing or will in the future issue virtual banking licenses to promote innovation in the financial sector. Many incumbent traditional banks are also making significant strides to try and prevent being disrupted by technology.

In developed markets with established banking services, digital banks can offer hyper-personalized value propositions such as instant-approved loans and lifestyle products through intensive data collection and analysis of purchasing behaviors. Meanwhile, in developing markets, digital banks have the opportunity to introduce the unbanked to formal financial services as the dual catalysts of smartphone and internet penetration rise over time. In both markets, digital banking can not only deliver better products to customers but is also dramatically more efficient in terms of operational costs. 

What’s Original in this Insight?

In this report, we highlight major digital banking players across both developed and developing markets in  Asia and identify their strategies. Four of the major digital banking strategies across Asia are 1) banking the unbanked, 2) shifting traditional banking to digital, 3) banking-as-a-service, and 4) super-app strategies.

Beyond analyzing upcoming digital banking tech companies, we also look at the strategies of some incumbent banks adapting to the coming changes. Broadly speaking, we see more opportunities for partnerships and collaboration than outright competition. While traditional banks lack technology as a core competency, innovative tech players equally need the domain expertise, regulatory cover, and well-established customer footprints of traditional financial institutions.

We’ve included our table of contents below to guide you through this report.

Table of Contents

The Current Landscape of Digital Banking in Asia

  1. Digital banking in Asian developed markets
  2. Digital banking in Asian developing markets
  3. Incumbent banks digitization strategy
  4. Tech entering banking

Digital Banking Overview

  1. What is digital banking
  2. Benefits of digital banking
  3. Catalysts driving adoption

Individual Country Snapshots

  1. Singapore
  2. Hong Kong
  3. Taiwan
  4. South Korea
  5. Japan
  6. China
  7. India
  8. Vietnam
  9. Thailand
  10. Philippines
  11. Indonesia

Conclusion: Winners and Losers

Clearsight Systems • • (Opens in a new window) ⧉

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China Auto Parts A Shares: Parts Of The Future

By | Smartkarma Originals

China has been the fastest growing auto market in the world. Over the last 2-3 years China’s auto component industry is going through a tumultuous period – not only due to the volatility in demand (due to the auto downturn last year and corona-related lockdowns this year), but also due to two mega-trends that are providing risks and opportunities to the industry – NEVs and autonomous driving. In addition, there are 3 other less-discussed drivers of change in the industry   (emerging localization requirements, junior JV partners becoming leaders in their own right, international expansion). We look at the key A-share (MSCI A-share) listed players in the industry through the lens of these five trends/drivers of change. 

We prefer Passenger vehicle(PV) part suppliers over commercial vehicle (CV)part suppliers.  Among PV parts suppliers, our top buy is Changzhou Xingyu (601799.CH), followed by Ningbo Joyson Electronic(600699.CH),Fuyao Glass (600660.CH/3606.HK) and Huayu Auto (600741.CH). Our main underweight Wanfeng Auto Wheel (002085.CH). In Commercial vehicle (CV) part segment, we prefer Wanxiang Qianchao (000559.CH) and Linglong Tyre (601966.CH). We suggest investors to avoid  Weifu High-Tech (000581.CH).

What’s Original?

The recent tumult in the auto sector creates significant opportunities and risks for the companies involved – however companies/equities that are driving these trends are largely listed in the A-share market.  Lack of market communication, limited financial and operational disclosure and low breadth of analyst coverage in these markets has meant that there are quite a few underappreciated companies in these markets which have been overlooked by international investors.

While companies like Ningbo Joyson and Fuyao Glass enjoy some international investor recognition, we believe under-appreciated stocks like Wanxiang Qianchao and Linglong tyres are not well-covered by the market and this report provides a rationale for investors to look further into those names. We also highlight the risks to (relatively) popular names like Weifu Hi-tech (due to structural issues in the industry) and Wanfeng Auto wheel (due to management pursuing non-core acquisitions).

Note that in this report, we do not include the possible impact from Coronavirus on the industry and companies. This is because 1) it’s difficult to quantify the impact at current moment; 2) even if coronavirus impact might last for months, it’s still a relative short period compared to the 5-year time horizon we focus on. In addition, once coronavirus is gone, market demand on autos and auto parts would rebound quickly. 

• China specialist, Auto and Industrial specialist • (Opens in a new window) ⧉

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The Month the World Stood Still – A Novice Small Business Guide to Shutdown and Avoiding a Long Recession

The Month the World Stood Still – A Novice Small Business Guide to Avoiding a Long Recession

By | General

As COVID-19 spreads around the globe, several governments find themselves at a crossroads, having to weigh between public health and the economic costs of a total shutdown. In this guest post, Smartkarma Insight Provider Sumeet Singh shares his own suggestion of a shutdown that could reduce infection risk for people without crippling the global economy – in other words, some financial pain now to avoid financial agony later.


 

With COVID-19 and stimulus packages being in the news day in and day out, here are my two cents on what policy makers need to do to get over this relatively quickly and with as little pain to the common man as possible.

Whether it’s possible to do so or not is a different story.

Why It’s Not Like 08/09

Having been in Lehman Brothers in September 2008, in the London office’s Equity team, the only main location not totally taken over by some other bank (Barclays took over New York while Nomura took most of APAC), I got to see 08/09 first-hand, including six months of doing nothing in London, i.e. being unemployed!

I’m not going to rant about 08/09 as most of us who are old enough know that it was essentially a crisis cooked by wannabe finance wizards and it didn’t impact the common man outside of the US to such a large extent, apart from the overall slowdown from the drop in US consumption.

COVID-19 is the reverse, where finance is but a bystander and the common man bears the brunt of the pain. However, the common man’s pain has the scope of quickly becoming finance wizards’ pain, not because of the crashing market but more because of the much higher leverage around the world.

COVID-19 Shutdown and Impact

So far we have seen every country fend for itself, with all countries announcing their own lockdowns. This might work to limit the spread of the disease but it won’t work to get the economy up and running again if your neighbour and other trade partners are still in their own trade lockdowns.

The main businesses, apart from tourism and travel, that feel the brunt of a lockdown are the small businesses since they still need to pay salaries, rent, and interest costs, along with other expenses. While bigger businesses have various means of funding, smaller ones are limited to being self-funded or by friends and family or by the neighbourhood bank.

In other words, for most small businesses, funding options are limited. Quite a few can ride out one or two months. However, the longer the shutdown runs, the slower the demand for most goods and services (apart from essentials), and the sooner the businesses will start to cut costs, starting from the most easily expendable: employees. This goes on to create a vicious cycle which someone needs to step in to break.

If governments around the world keep taking a piecemeal, fend-for-yourself approach with non-overlapping shutdowns, then the virus, which has gone from an animal market in Wuhan to the upper echelons of power around the world in less than two months, will not stop.

What is needed is a coordinated global shutdown for at least 30 days. Why 30 and not 14? Because if the incubation period of the virus is 14 days for one individual, even a shutdown that keeps families locked up for 14 days might not work if the virus jumps from member A of the family to member B, say, on day 5 of the lockdown and neither shows any symptoms. Then, on day 14, member B will still be shedding the virus, without symptoms, and we will be back to square one!

So I’m using 30 days as a benchmark but it should probably be more like 45 to 60 days.

So How Will It Work?

If the revenue for all businesses goes to zero, so must the costs. How can this be done?

For the entire duration of the shutdown there will be no salary, no rents, no interest, no capital repayments. The banks won’t earn any interest and they won’t pay any interest either. The bonds won’t earn any interest and they won’t pay any interest either. The landlords won’t earn rent, but they won’t pay any interest and won’t pay for electricity or any other associated costs.

So no school fees, no Bloomberg payments (this can go on even after the shutdown, they make too much money!), no mortgage payments for the entire duration of the shutdown. Theoretically, the world’s GDP goes to zero for the period of the shutdown!

But what about lost income? Well if you aren’t doing much apart from sitting at home, the only income anyone needs is for groceries. Governments need to provide this for free, along with electricity, water, medicine, and the internet (beaming workout and cooking videos). The trick is to make sure they work out how to distribute essentials. Grocery stores, pharmacies, and any other services deemed to be essential are allowed to remain open.

The army and the police need to still be deployed to make sure people abide by the shutdown. All governments declare an emergency giving the police and army the right to arrest anyone who violates the law, i.e. the shutdown.

At times of war most countries ask their citizens to volunteer – the same can be done now. Quite a few people will gladly help rather than sit on their asses for a month. I know I would. Volunteers will be used to make deliveries of groceries to each household on a weekly basis. These volunteers will not be allowed to stay at their homes, just like most front-line medical staff aren’t doing so right now. These volunteers will go into self-isolation when the rest of the population comes out of it.

It sounds like an episode out of Black Mirror. However, with a vaccine more than a year away at the minimum, and the hopes of summer killing the virus fast eroding (look at the number of cases being reported in tropical countries), just one country going into shutdown won’t work until all the countries have been in one (and freed themselves of the virus). Borders won’t open, supply chains won’t work, and trade and commerce won’t get back to normal. Even if a country saves itself, it won’t save a lot of jobs if it has to keep shutting down due to imported cases.

As I am writing this Insight, I have been told by my wife that Bill Ackman has tweeted a similar idea but just for the US. He is wrong because just one country doing it won’t work. As long as the virus is raging in some corner of the world, there will still be a risk of it coming back, as is starting to happen in China and here in Singapore. Both countries now have more imported cases each day, with most of them imported.

As someone on Twitter put it aptly, our grandparents were called upon to fight the war, the least we can do is to sit at home for a month!

If the piecemeal approach keeps going on, the eventual cost in terms of human lives and employment will be a lot higher than foregone GDP for a month or two!

Read Sumeet Singh’s follow-up Insights on this topic:

Lead image by Anna Shvets on Pexel

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Alternatively, sign up for a free Investor Preview Pass to see how institutional investors engage with the research produced by Insight Providers in the Smartkarma network.

Sign up for a free Press Pass to deep-dive into independent and differentiated analysis, discover new ideas, and stay in touch with analysts for original commentary.

China Onshore Convertible Bond Market: A Wealth of Opportunities

By | Smartkarma Originals

This Smartkarma Original is a follow-up to our first Smartkarma Original on China’s onshore bond market – Investing into China’s Growing Onshore Bond Market – with special focus on the rapidly growing onshore convertible bond (CB) market. This Original covers the key areas of China’s onshore CB market that are essential for global institutional investors interested in capturing the opportunity in this interesting bond market segment. We suggest readers to read this Original in conjunction with Investing into China’s Growing Onshore Bond Market in order to get the full picture on China’s onshore CB market.

What’s Original?

This Original is the first comprehensive Insight dedicated purely to the onshore CB market in China. Although outstanding onshore CBs only amount to 0.4% of China’s total onshore bond market, foreign investors are very keen to invest in this segment, as reflected by the heavy trading by the Qualified Foreign Institutional Investors (QFII). 

In this Original, we explain the history of China’s onshore CB market, the unique market structure and features, key development outlook and opportunities and the basic need-to-knows for the foreign investors. This Original comes with very detailed figures specifically focused on the onshore CB market and reveals the very important trends currently taking place. 

We believe the CB market is one of the fastest growing segments in the onshore bond market in China. Despite the inherent high volatility characteristic of onshore CBs, the long-term trend is that it will gain further significance in China and among foreign investors’ portfolio, in our view.  

• China Analyst – Onshore Credit, Equity Long-Short • (Opens in a new window) ⧉

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Asian E-Wallets Plant Their Flags: An In-Depth Analysis of the Top-10 Players

By | Smartkarma Originals

Digital payments in Southeast Asia are expected to grow in the double-digit range per year, exceeding $1 trillion in gross transaction value (GTV) by 2025, based on Google-Temasek’s eConomy SEA 2019 report. Within this pie, e-wallets GTV has the potential to increase more than fivefold, from $22 billion to $114 billion. In India, digital payments are expected to grow 20.2% CAGR between 2019 to 2023, based on a projection by KPMG. 

In this piece, we explore 10 e-wallets that are emerging in Southeast Asia and India due to their phenomenal growth and picked them for in-depth discussions due to their unique ecosystems that can support their GTV growth. We will discuss their original vertical, features, growth plans, and hurdles to their growth, before picking out the potential winners.

Sections:

  1. An introduction to major e-wallets in Asia, and definitions
  2. Driving forces that led to wallet ecosystems 
  3. Summary of the wallets’ strategic roadmap, growth, and hurdles
  4. Common hurdles faced by e-wallets
  5. Medium-term catalysts  
  6. Conclusions

• Asia Ex-J Consumer/ Transport analyst • (Opens in a new window) ⧉

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Entities 28601-28700

By | Entity Directory
Entity
Insights
Analytics
News
Discussion
Filings
Reports

A Potential Asian LBO Screening System

By | Smartkarma Originals

With a relatively full slate of large value takeovers in Developed Asia in the past year – often by parents but also by buyout funds – and the availability of significant credit to finance such takeovers, this Smartkarma Original insight looks at what constitutes an attractive target for takeover, and seeks to construct a framework for screening and filtering companies for further study. 

The filtering is conducted across two basic measures which seek to answer two basic questions:

  1. What might supply look like?
  2. What might demand look like?

The first basic problem with creating such filters is that on the Supply side, using databases to determine whether a controlling shareholder wants to sell is almost a lost cause from the beginning. But the exercise throws up some interesting case studies, and it is important to understand why such screening could lead to interesting results. 

On the demand side, it is a difficult and complicated exercise because financial data moves around, shifting through time and relative price because competitors also shift in time and price. A clear example of a company which might have been “relatively” attractive vs peers a month ago might not be after the market ructions at the end of February 2020 when this was written. Prices were, of course, lower, which means that a good screening process is dynamic, both in relative and absolute measures. It is also somewhat difficult to create a one-size-fits-all screen for attractive targets because in certain countries, certain industries (telecom, airlines, social infrastructure, defence) are covered by foreign ownership limits, other industries (banks, brokers, insurers) rarely see leveraged buyouts, and takeovers in other industries (Chinese homebuilders) are, for lack of a better word, simply off the table at certain times.

In addition, there are lots of ways in which companies might present themselves as attractive targets. If someone controls a company, and wants to sell it cheaply, there are lots of potential buyers who will fall all over themselves to get in line to buy it. But companies can be attractive targets because of the potential for changing profit metrics and multiples through restructuring, asset reorganisation, industry reorganisation, or simply waiting for the cycle to change. 

Using valuation metrics with a cutoff line can be challenging because common multiples such as PER, PCFR, PBR, EV/EBITDA may ignore significant value available from longer-term securities holdings, non-operating real estate assets which are not managed in optimal fashion, etc. 

In short, screening can only go so far. But we try.

At the end, we take a brief look at 10 companies from Developed Asia which show up as a result of our screening efforts. The resulting list is dominated by Japanese companies because some of the companies which show up from other countries fit the “no-go” categories above (airlines, financial companies, defence technology subject to foreign ownership limits, Chinese homebuilders subject to skepticism, etc.). Some are also clearly Emerging Asia businesses with Developed Asia listings. Screening for Emerging Asia got a few companies which are high on anyone’s target list, including one which saw an unsolicited takeover approach earlier this week (end-Feb 2020), and another which has been in acquisition mode for years. 

We find the thinking process and screening technology has thrown up some previously less-than-obvious candidates which deserve further work.

Quiddity Advisors • Pan-Asia Catalysts/Events • (Opens in a new window) ⧉

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A Forensic Analysis Tool for Detecting Accounting Red Flags: Focus on Developed Asia

By | Smartkarma Originals

In this Smartkarma Original, we bring to you a forensic analysis tool that scores companies across Developed Asia on their accounting risk. We use 25+ accounting parameters in our framework to come up with an accounting risk score. Our tool is based in Excel and is linked dynamically to Capital IQ for fetching latest data.

Insight Flow

  1. Forensic Analysis Framework
  2. Excel Model
    1. How to Download and Use the Tool
    2. Steps to Run the Model
  3. Target Universe
  4. Companies with Highest Accounting Risk 
  5. Summary Statistics from our Analysis
  6. Key Model Limitations and Risks
  7. Appendix
    1. List of Companies in our Target Universe with Accounting Risk Score >= 8
    2. Glossary
    3. Snapshot of Capital IQ Screener Used for Filtering Universe
    4. Switch Formula Calculation Option in Excel
    5. Refresh Worksheet Option in Capital IQ Plugin

What’s Original?

Over time with experience and taking cues from past financial shenanigans, we have developed a proprietary quantitative framework for identifying accounting irregularities. This framework comprises of 25+ accounting parameters and takes into account 10 years of historical data to assess the quality of accounting.

• India Focused Equity Analyst • (Opens in a new window) ⧉

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Bank M&A in Asia – a Decade in Review

By | Smartkarma Originals

Several countries are pushing for more M&A in Asian banking as a way to ameliorate risks (India) or to possibly compete more regionally (Malaysia), with even some rumours resurfacing of further activity in Australia. We have reviewed all major banking transactions in the Asia Pacific region over the past 10 years which involved consolidation and we summarise our findings below.

Summary findings

We find that most banks lose market share after a merger when we consider total assets.  This is usually due to depositors moving to reduce concentration risk and loan rationalisation by the merged entity. 

Overlapping banks allow for more synergies and there tends to be better performance, especially if management is able to achieve the synergistic gains quickly.  Mergers aimed more at revenue synergies or entering new markets appear to have lukewarm benefits.

A long drawn out merger process with unambitious long term synergistic benefits are penalised by markets.  Delays can be cultural, labour union led, government led or legal.

Clearly the lead in any transaction tends to impose their will on the combined entity.  We find that performance suggests that investors are better owing targets rather than acquirers.

Inteqres • • (Opens in a new window) ⧉

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