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Elon Musk Is a Fan of the GPIF’s Decision to Curb Short Selling. Others, Not so Much

Elon Musk Is a Fan of the GPIF’s Decision to Curb Short Selling. Others, Not so Much

By | General

When Japan’s Government Pension Investment Fund (GPIF) announced the suspension of lending foreign shares this past week, people who dislike short selling rejoiced. 

None more so than Elon Musk, which is not hard to imagine; Tesla has been the target of short sellers for almost as long as it’s been public, and Musk has waged bitter Twitter wars against them.

But the GPIF’s move isn’t likely to make that much of an impact – certainly not the kind that Tesla’s chief exec might be hoping for.

Playing It Safe

The premise of the GPIF’s decision seems based more towards enabling a move towards ESG (Environmental, Social, and Governance) principles and less on valid concerns about short selling and its impact on stock prices.

The GPIF has justified its decision via two main points: 

  • The ownership transfer of lent shares create a “gap” in the period the GPIF holds the stock, which implies the GPIF is not being a good steward of the stock
  • There is no transparency in terms of who ultimately borrows the stock and for what purpose

Both are valid points, although they raise questions. On the first point, Travis Lundy notes that, according to Japan’s Corporate Governance Code and Japanese law, the practice of lending stocks does not result in loss of ownership.

Brian Freitas adds that “prudent lenders will not lend more than half their position so they do not have to recall borrowers in case they need to sell some of their stock,” or there’s an important issue they need to vote on.

Read Travis Lundy’s full Insight: GPIF World’s Largest Fund To Suspend Global Stock Lending

The second point is “a valid argument and more difficult to solve for,” Freitas writes. According to him, it’s not so much about who borrows stock as much as the ultimate purpose of borrowing.

“Stock lending should be permitted as long as the external managers conduct their stock lending activity in compliance with tax laws, do not explicitly lend stock to borrowers to arbitrage dividend tax laws (especially not with a view to share the profits of the enterprise), or to borrowers who are looking to borrow shares solely for voting rights,” he concludes.

Lundy notes that most markets do not require reporting of trades under a certain threshold anyway. “Furthermore, the GPIF clearly does not want to advertise what it will do before it does it or as it does it,” he writes. “It would seem odd that the GPIF requires the transparency of intent of other people in the market while not showing transparency of its own intent.”

Read Brian Freitas’s full Insight: Elon Musk Has a New Friend in the GPIF

Impact

GPIF CIO Hiro Mizuno has strived to establish himself as a proponent and implementer of ESG principles. This creates a risk that observers will interpret the GPIF’s current stance as indicating that short selling is not compliant with ESG tenets. 

As risky as that is, Freitas doesn’t think that’s likely. “Most large asset managers recognise the importance of short selling to promote efficient capital markets and of generating returns for the portfolio,” he writes.

And anyway, Lundy doesn’t think this is what the GPIF is going for. “It would likely be impossible to show empirically that a lack of short selling increases the ability of company management to manage their company appropriately, and increases overall returns,” he points out.

One point of caution is what happens to shares the GPIF has already lent out. Freitas estimates that the fund has lent out around US$20 billion of stock from its portfolio, of which US$5-7 billion is in emerging markets. “If this stock is recalled, there could be some big moves in smaller stocks. If this stock is not recalled, there will be minimal impact of the suspension,” he says.

Freitas believes the GPIF will likely reverse this decision eventually. Lundy, meanwhile, doesn’t think other global pension funds will take a similar route, “though some influence cannot be ruled out.”

Lead image by Aleksandar Pasaric from Pexels

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The New Year’s Message for Corporate IR Engaging the Buy-Side for Corporate Access: Keep Talking

The New Year’s Message for Corporate IR Engaging the Buy-Side: Keep Talking

By | Corporates

“With the technology at our disposal, the possibilities are unbounded,” said Stephen Hawking in 1994. “All we need to do is make sure we keep talking.”

Although the brilliant scientist recorded the (otherwise very inspirational) quote for the purposes of a British Telecom commercial, the spirit holds true for corporates and their market partners. 

Corporate access has come a long way in the last decade, especially after sweeping changes brought about by regulations like MiFID II. 

The legislation unbundled costs for research and for corporate access from trading fees at big investment banks. This resulted in increased costs and reduced effectiveness in a lot of IR professionals’ day-to-day.

Surveys and research this past year showed that a strong majority of Investor Relations Officers (IROs) views MiFID II as a net negative when it comes to them engaging investors. Much like on the research side, the changes seem to have impacted small- and mid-cap companies the most. 

Larger firms can afford to continue working with large banks, and they do, because they know they can connect to certain investors and analysts that way. Smaller issuers, on the other hand, have to deal with the added costs and red tape, and seek out ways to get noticed by the buy-side as well as attract analyst coverage.

At the recent IR Magazine Awards – South East Asia 2019 event in Singapore, attendees noted that corporate IR departments need to get more proactive in contacting the buy-side. This is especially important for smaller companies who can’t count on investment banks to connect them like they used to.

The buy-side, which similarly expresses difficulties in connecting with corporate IR teams, has looked for ways to fill that gap. For example, certain buy-side firms set up internal corporate access teams to help drive their outreach, where in the past they relied on such teams within investment banks.

The Answer Is Online

But even that doesn’t necessarily solve the discoverability problem. There are a lot of companies out there, especially in the small- and mid-cap circles, and even dedicated buy-side corporate access teams can’t reasonably be expected to discover your company all by themselves.

This is where Professor Hawking talking about technology comes into the picture. Online networks have brought professionals and companies together in unprecedented ways, allowing for connections that would have previously been either too expensive or too time-consuming to establish.

At Smartkarma, we created just such a network for bringing together investors, analysts, and corporate IR teams. There is a range of online tools and features at an IRO’s disposal 24/7, in a network where analysts (or Insight Providers, as we call them) have already published over 25,000 pieces of research, and where institutional investors visit daily to read research and interact with the platform. 

It’s an all-in-one solution for IROs to initiate, establish, and cultivate relationships with the buy-side as well as analysts. This is possible thanks to in-platform messaging capabilities, seamless collaboration between platform and email, and comprehensive directories and investor-targeting features that help IROs make the right connections.

We also wrote an entire guide for IROs who want to get full mileage out of their corporate access strategy.

Read our eBook: The Cost-Effective Guide to Expanding Corporate Access

Such streamlining of communication avenues is particularly important as 2019 comes to a close. This year, markets started coming to terms with MiFID II’s impact and the European Union announced it will revisit certain aspects of the legislation. What’s coming in 2020 is far from certain – which is why it’s important, as Dr. Hawking insisted, to keep talking.

Find out what else Smartkarma Corporate Solutions can do for your company. Learn more by signing up for a FREE account and experience a brand-new range of services for C-Suite and Investor Relations personnel of listed companies, designed to help IR professionals establish and maintain valuable connections to the investment and analyst communities.

Lead image by Antoine Barrès on Unsplash

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Entities 28201-28300

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South Korea-Japan Tensions, Shinzo_Abe,_Moon_Jae-in,_Pence_in_Pyeongchang (1)

How the South Korea-Japan Summit Could Ease Market Tensions in the Region

By | General

The trade spat between China and the US and its fallout has dominated news headlines and the markets for more than a year now. But there are other, smaller conflicts happening in Asia that can have significant impact on stocks and investors. The Hong Kong protests is one; the South Korea-Japan conflict is another.

We won’t go into the details of the conflict’s roots and history as it goes back decades, all the way to World War II – Reuters has a good explainer. But for now, suffice to say South Korea-Japan relations have always been rocky, and every now and then, things come to a head. This is one of those times.

The spat has led to a trade war that has seen multiple industries affected in both countries, including food & beverage, automotive, and electronics. On top of that, South Korea threatened to pull out of GSOMIA, the General Security of Military Information Agreement, although President Moon Jae-in ultimately stepped back from the brink.

Now the stage is set for a South Korea-Japan summit in Chengdu, China in December, where President Moon will sit down with Prime Minister Shinzo Abe and the two sides will try and heal the rift between them. What comes out of the summit is anyone’s guess at this point, which is why Douglas Kim ventured a few possible scenarios in a recent Insight on Smartkarma.

Read Douglas Kim’s full Insight: Five Scenarios Post Moon & Abe’s Meeting at a Summit in China Next Month

In Talks

Kim went through the past history of the two countries and explored factors that can potentially affect the outcome, such as South Korea’s upcoming National Assembly elections and the role of China.

Based on that, he outlined five potential outcomes:

  • Abe and Moon make up and drop hostilities
  • Abe and Moon make no progress in South Korea-Japan relations and the current rift continues
  • The opposition Liberty Party of Korea (LPK) wins the upcoming election and compels President Moon to scale back the hostile stance against Japan
  • The governing Democratic Party of Korea wins the election and restores good South Korea-Japan relations
  • LPK wins the election and maintains the current dynamic of hostility

Regardless of what ends up happening, Kim is optimistic that the ice is thawing between the two governments. “The political rhetoric between them has softened now as compared to the July/August period, when political hostility between the two countries [was at its most extreme],” he says.

This should be good news for several Korean and Japanese companies whose stocks have been affected by the crisis. Kim lists some of the most important ones in his Insight: The Korean side includes names like Samsung Electronics, SK Hynix, Naver, Lotte Holdings, and Hotel Shilla. On the Japanese side, he lists, among others, Panasonic Corp, Asahi Group Holdings, Canon Electronics, Honda, and Japan Airlines.

Kim notes that his analysis leans towards the South Korea-Japan rift slowly healing by early summer of 2020, right before the Tokyo Olympics, which should be a boon to all those stocks.

Hotel Shilla: a Stock that Could Benefit from Easing Tensions

As an example, Kim uses Hotel Shilla to illustrate the impact of the situation on the firm, but also the opportunity therein. Despite what the name suggests, the firm generates the vast bulk of its sales via its duty-free shop business, being the second largest operator of such outlets in Korea and the third-largest globally. The rest of its sales come from its hotel chains, Hotel Shilla and Shilla Stay.

Read Douglas Kim’s full Insight: Hotel Shilla – A Beneficiary of the Thawing Relationship Between Japan & South Korea

Kim is bullish on the stock, as the firm’s operating margin on its hotel and leisure business unit “improved materially to 5.0 percent in the first nine months of 2019, up from 2.7 percent in the first nine months of 2018,” he writes. The growth came from a strong influx of overseas tourists into South Korea, as well as domestic tourists opting for the Shilla brand.

Much of the tourist traffic comes from China, as the Chinese government started allowing its citizens to travel to South Korea again after a rocky period between the neighbouring countries in 2016-2018. An easing of the South Korea-Japan tensions could have a similar effect to tourism from Japan.

If trends like current industry consolidation in Korea’s duty free shop market and tourism recovery continue, Kim sees a potential upside of more than 30 percent over the next six to 12 months. While the stock is almost 35 percent down from its mid-2018 heights, he believes it’s because it’s oversold due to political risks like the South Korea-Japan tensions and the Hong Kong protests, as well as excessive marketing costs to attract Chinese tourists.

Lead image by S. Herman (Voice of America)

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ESG Investors and Initiatives Find Unlikely Allies in Exchanges and Banks

ESG Investors and Initiatives Find Unlikely Allies in Exchanges and Banks

By | General

ESG is turning into a real bad penny in the investment industry. It shows up everywhere and no one seems quite sure what to do with it.

There’s no denying it’s increasingly important, as climate change becomes a more pressing issue and business leaders emphasise the value of social impact and lasting value beyond just shareholders.

On the other hand, someone forgot to send the memo to the markets. The unfortunate truth, as Insight Provider Kyle Rudden demonstrated in a recent Insight on Smartkarma, is that ESG concerns don’t really move stock prices. 

“By definition as non-financial data, ESG is always one or more degrees of separation from what really matters. ESG must impact financial metrics before manifesting, indirectly in prices,” he wrote.

Read Kyle Rudden’s full Insight: ESG and Stock Prices: Fat-Tail Events

For example, Rudden looked at the stock performance of six major pharmaceuticals that were involved in the US opioid crisis – which costs the US economy around US$100 billion annually. The impact to stocks like Johnson & Johnson was negligible, even though the company and others like it faced lawsuits and condemnation over their role in the situation.

Despite this, investors might have good reason to pay more attention. A recent report by sustainable investing advocate Ceres found that around 73 major US companies’ earnings took hits due to extreme weather events and supply-chain disruptions related to climate change increased by 29 percent. 

A different study by the same company estimated that climate change-related factors could put almost US$1 trillion at risk.

ESG-changes

Whether or not ESG-minded investing can have an impact in modern business and investment, there are key players in global markets that take it seriously. And while one might not expect exchanges to lead the charge on this, a survey by the World Federation of Exchanges begs to differ. 

Among other findings, the survey noted that a majority of exchanges report some ESG activity (and most of those through some formal initiative), take steps to improve ESG reporting by issuers for investors, focus on their own ESG disclosures, and cite global sustainability concerns as their motivation.

Kyle Rudden wanted to go deeper, so he analysed 22 financial exchange stocks across 33 countries, totalling US$69.1 trillion in aggregate issuer market capitalisation. 

To carry out his analysis, he measured each exchange on its proactiveness in facilitating ESG disclosure for its listed companies, and its own ESG performance. This gave him a total “ESG’ness” score.

ESG Investors and Initiatives Find Unlikely Allies in Exchanges and Banks

Chart by Kyle Rudden

He wrote up his findings in this comprehensive Insight. The whole thing is a great read to get the full picture, but it’s worth noting a couple of findings: 

For one, Asia-Pacific exchanges seem to be leading the charge in ESG, with five out of the top 10 exchanges being based in Asia. HKEX topped the list, which also included Singapore Exchange, Bursa Malaysia, Japan Exchange Group, and BSE.

Read Kyle Rudden’s full Insight: Asia Exchanges Lead in ESG: HKEX, JPX, SGX

This contrasts nicely with the consensus back when Rudden first started looking into ESG investing (when it wasn’t even called ESG yet): that it was led by Europe, was set to grow in the US, and would never catch on in Asia. “I am ecstatic to see how wrong that view was, and how far the region has come. Not just ESG acceptance, but ESG leadership,” he writes.

Another interesting finding was that size of the exchanges didn’t really matter in this analysis. “The average market capitalisation of the top 10 stocks (the exchange market cap this time) is in line with the average (US$14.6 billion vs. US$15 billion), and the largest of the large didn’t make the top ten,” Rudden notes.

European Banks Drive Change

Despite any scepticism one might have about the virtues of ESG principles, the above analysis shows that several major financial institutions are taking them very seriously. And they’re not the only ones.

Last week, the European Investment Bank (EIB) made waves with its announcement that it would no longer fund fossil fuel projects from the end of 2021 onwards. Regardless of where one stands on this issue, there’s no denying the weight of this decision. EIB is one of the biggest public lenders in the world, having loaned US$61.9 billion in 2018, according to DW.

In the vein of his previous analysis, Rudden took the opportunity to score major global banks on how they approach fossil financing. He acknowledges that this type of investment still matters, and will continue to matter, from a purely economic standpoint – especially since fossil financing is not limited to just one sector or industry. 

Nevertheless, he found that European banks are particularly well-behaved in this regard – unsurprising, since Europe has always been more climate-progressive than other regions. 

Read Kyle Rudden’s full Insight: European Banks: Exemplars of Climate Finance

US banks were, equally predictably, some of the worst performers in the analysis. “In the three years since the Paris Climate Agreement, the world has financed US$2.0 trillion worth of fossil projects. Of that, 54.8 percent was by North American banks and 37.1 percent by US banks,” Rudden notes.

APAC banks take a fairly middle-of-the-road approach here, unlike their exchange compatriots.

Considering this data and global trends and developments, Rudden says it would be wise for investors to “avoid the worst financiers of global warming, and for other stocks to emphasise reductions in fossil activity and adoption of environmentally-proactive policies.”

Lead image from Pixabay on Pexels.com

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Beyond the Annual Report: How to Make the Most of Your Company’s Communications

Beyond the Annual Report: How to Make the Most of Your Company’s Communications

By | Corporates

For years, a company’s annual report has been more than a regulatory obligation. It has grown into a veritable event, a chance for the company to shine a spotlight on itself and, dressed in its best, tell its story to the world.

But the practice is a little out of step with today’s world. For one, the blockbuster, printed out book format of the annual report is on its way out. A recent survey by Austrian firm Nexxar showed that in Europe, where the survey was conducted, far fewer companies are putting out printed reports compared to 10 years ago.

Reports published online, in PDF or other digital formats, are taking the printed report’s place. It isn’t just more environmentally friendly, it’s also in keeping with how we consume information nowadays. 

But there’s another important point: In an always-on world where companies have to fight for eyeballs as well as customers, and where information is constantly streaming in, and from, all directions, is it enough to release your annual report once a year and leave it at that?

In Nexxar’s survey, most respondents do exactly that. Only 36.8 percent of them said they send out content from their reports in the weeks and months after publishing. 

“Companies are investing loads of working hours and big sums of money in project parts such as planning, editing, and design but forget about the report communication after publication, contrary to all other communication products,” the firm writes.

Beyond the Annual Report: How to Make the Most of Your Company’s CommunicationsModern Times, Modern Tools

The incongruity is clear: As this kind of information publishing goes digital, the thinking behind the distribution and communication of it remains very much analogue. 

The insights contained in your annual report have a longer shelf life than you think. Facts, stats, figures, and lessons can be plucked, designed, and spun off into fresh pieces of content that you can distribute for weeks and months afterwards. This includes slide decks, PDF leaflets, infographics, videos, and more.

These days, your stakeholders are everywhere all the time, be it shareholders, investors, analysts, or clients. They receive information on their phones, they look for insights on social and professional networks, and they get up-to-the-minute updates on their business and personal interests. 

Most companies that do employ modern-day communication avenues tend to pick the usual ones: LinkedIn, Twitter, EDMs, and so on. While this is absolutely advisable, you might not be getting the most out of your communication potential through these platforms.

Ideally, you’d want a platform where you can share that information and be positive it will reach the right people that can bring value to your company.

An All-in-One Solution

Through Corporate Solutions, Smartkarma enables listed companies to participate in a network where hundreds of independent analysts and institutional investors are already connected. Among many other features, Smartkarma Corporate Solutions makes it easy for your company to publish and share anything from annual reports to analyst presentations and news announcements.

In your dedicated company page, there is space for you to post:

  • Presentations – Annual reports, analyst and investor presentations, earnings results presentations, etc.
  • FAQs – anything you want to communicate or clarify
  • News updates – any developments or announcements you want to highlight
  • Events announcements – share any events you are putting together to draw attention to the company, such as investor and analyst days, earnings briefings, and so on
  • Reports – post reports others have written about your company, based on the information you have shared

This ensures that stakeholders can find a trove of information that you handpicked, all in one place, which you can share with your intended audiences.

The Middle East Investor Relations Association puts it very well in its newsletter: “Given all the hard work behind these key investor sources of information on your company and its business, make the most of your content… if it’s not easy to find, useful, and engaging, why would anyone bother?”

Why indeed?

There is a lot more that Smartkarma Corporate Solutions can do for your company. Learn more by signing up for a FREE account and experience a brand-new range of services for C-Suite and Investor Relations personnel of listed companies, designed to help IR professionals establish and maintain valuable connections to the investment and analyst communities.

Lead image by Antonios Doumas at Pixabay

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Smartkarma Appoints Pierre-Michel Dumesnil and Ashutosh Sinha to Its Advisory Council

By | Press Release

SINGAPORE, 15 NOVEMBER 2019: Smartkarma is excited to announce the two latest appointments to the Smartkarma Advisory Council. Pierre-Michel Dumesnil and Ashutosh Sinha have over 40 years of capital market experience between them, in a variety of sell-side and buy-side roles at Goldman Sachs, Credit Suisse, Morgan Stanley, and more.

Pierre-Michel Dumesnil has over 20 years of experience in equities within leading investment banks in New-York, Hong Kong, London, and Paris. He has been a Director at ABN AMRO Bank NV, Vice President at Goldman Sachs, and Head of Sales Cash Equity at Credit Suisse, where he was involved in numerous “One Bank” projects, such as developing a platform to service private banking family offices and provide them with the best of CS equity franchise. He is currently based in Singapore, where he is involved in education as a guest speaker at Essec Business School and part of the executive committee of Lycée Français de Singapour.

Ashutosh Sinha is a Senior Portfolio Manager covering emerging markets at Morgan Stanley Investment Management in Singapore. He is also the CEO of MSIM Co., Singapore. He has over 25 years experience as a fund manager covering Asian and Emerging Markets. Previously, he founded and served as Managing Partner of Amoeba Capital Partners, a money management firm focused on Asia long-short equity investing. Ashutosh holds a B.Tech Degree in Electrical Engineering from the Indian Institute of Technology (IIT) of Kanpur and an MBA from the Indian Institute of Management (IIM) of Kolkata.

The Smartkarma Advisory Council is comprised of individuals with substantial industry experience and expertise in global capital markets and the investment industry, in which Smartkarma operates. The Advisory Council plays a key role in supporting the activities and direction of the company. Advisory Council members graciously offer their time and experience to provide advice and feedback, and offer specific guidance on designated business areas, helping Smartkarma advance its mission of uniting all stakeholders within the investment ecosystem.

— ENDS —

 

Media contact:

Smartkarma

Michael Tegos

Tel: +65 6715 1480

Email: [email protected], [email protected]

About Smartkarma

Smartkarma is a global investment research network that brings together independent Insight Providers, institutional investors, and corporate investor relations professionals and management. Smartkarma reinvents Equity and Credit Research by providing differentiated, independent analysis on companies, markets, and industries across the world. This includes areas under-reported by mainstream market coverage, including Event-Driven, IPOs & placements, and small/mid-cap equities. Smartkarma’s online platform enables corporate and buy-side clients to streamline their communication and data reporting, and allows them to set their own real-time alerts, customise their reading lists, directly contact Insight Providers, and remain MiFID II-compliant as unbundling regulations change the investment research industry. For more information, visit www.smartkarma.com.

Singles’ Day Isn’t the Only Reason Why Alibaba’s Hong Kong Listing Is Timely

Singles’ Day Isn’t the Only Reason Why Alibaba’s Hong Kong Listing Is Timely

By | General

Alibaba’s Singles’ Day was a brilliant idea.

Pick a relatively minor “holiday” that’s memorable and people are familiar with. Offer massive discounts. Associate your business with said day. Eventually take over said day and make it part of your overall brand. Profit.

Singles’ Day has been many things for Chinese internet giant Alibaba. It’s been a massive publicity stunt, a driver of massive sales numbers, and a powerful flex to the rest of the world. In the last few years, Singles’ Day has traveled far beyond China’s borders as a signal of Alibaba’s huge scale compared to US rival Amazon.

This latest Single’s Day was no exception, drawing in a record US$38 billion worth of sales – although the day’s annual sales growth continued slowing as it has done for the past years and disappointed co-founder Jack Ma.

On the back of (a still pretty successful) Singles’ Day, NYSE-listed Alibaba has moved closer to its long-awaited secondary listing in Hong Kong. The company is now set to start trading in Hong Kong on 26 November, to raise US$13.4 billion. 

Strong Sales, Healthy Fundamentals

Other than the publicity momentum that Singles’ Day always gives the company, why would it go ahead with this listing now? 

Insight Providers on Smartkarma, including Sumeet Singh and Arun George, point out that Alibaba is in a good enough position financially not to need the extra cash. “With strong cash generation metrics and net cash of US$13 billion in 2QFY20, Alibaba does not need to raise money,” writes George.

Read Arun George’s full Insight: Alibaba HK Listing Bear View: HK Raise Will Worsen the past Poor Capital Allocation

Most of the company’s fundamentals are pretty sound, as Rickin Thakrar points out in an Insight. 

The company showed significant top-line growth of around 40 percent in 2Q19/20. “While it is a step down from FY18/19 [growth] of 51 percent, this remains robust in our view, especially given the macro environment as well as continued robust competition in both commerce and cloud,” Thakrar writes. Unlike competitor Tencent, Alibaba reports its interest and revaluation income below the EBIT line, he adds, which means Alibaba has a clearer line in terms of operating results.

Read Rickin Thakrar’s full Insight: Alibaba HK Listing: Do the Fundamentals Stack Up?

Sumeet Singh singles out the lack of a price range as particularly strange. “The lack of a price range might mean that the ADRs continue to languish,” he notes. “In my view, the company is trying to do all it can to protect the ADR from being impacted. However, […] the ADR was always going to go down as people would look to pocket whatever discount was being offered for the Hong Kong listing.” 

The ADR still dropped 2.4 percent on the day this Insight was published (14 November), while Alibaba finally set a price of no more than HK$188 per share. “It doesn’t really tell you anything about the company’s willingness to give on pricing apart from the fact that they don’t want to give a sizeable discount. To sum it up in one word, I would call it cheeky,” Singh adds in a subsequent discussion.

Read Sumeet Singh’s full Insight: Alibaba IPO/​​​Secondary Listing –  Not Good for the ADR, Should Have Put a Price Range to It

The most prominent reason for the secondary listing is that investors in Hong Kong and China have been hotly anticipating the move. The Hong Kong listing finally gives the local retail investment community (and loyal consumer base) an inroad into the firm. 

Plus, thanks to Stock Connect rules that allow HKSE-listed stocks to trade in the exchanges of Shanghai and Shenzhen, investors from China can take part in one of their country’s most successful companies.

The US Factor

The other reason is a common denominator for a lot of international market developments over the past couple of years: The trade war between the US and China has generated a lot of mistrust and bad blood for Chinese companies operating and/or listed in the US. Brands like ByteDance’s TikTok and Huawei are synonymous with national security threats to many American legislators.

In a recent Insight, Travis Lundy draws attention to a proposed bill in the US Senate that seeks to prevent the US federal pension fund from investing in Chinese-listed shares. This ties into a broader conflict between US regulators and China over transparency in auditing Chinese companies listed in the US. 

Taken far enough, such moves by US politicians “could mean that the same politicians would wish for companies listed on US exchanges, which are not able to have their audit work or subsidiary audit work fully inspected, to have their right of US listing removed,” Lundy writes.

Read Travis Lundy’s full Insight: Anticipating the Alibaba HK Listing

In such an event, “companies like Alibaba would want to have another listing where US-listed ADRs would be fungible to trading on a different venue,” he adds. This is especially important for Alibaba given its top position: “If successful, Alibaba will be the largest company to have a secondary listing in Hong Kong with a primary listing in the US,” writes Arun George.

Whatever the case, with the Hong Kong listing going ahead, Alibaba is set for another public market record (its 2014 NYSE listing, raising US$25 billion, is still the world’s largest at the moment). The secondary listing is still expected to be the biggest of the year, almost double that of Uber’s US$8.1 billion flotation… at least until Saudi Aramco’s IPO gets going.

Lead image by Foundations World Economic Forum / Ben Hider

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Ace Hardware (ACES IJ) – Lifestyle Express Train

By | Smartkarma Originals

In a Smartkarma Originals Series of Insights on ASEAN Retail, we seek to determine which retail formats are winning out in the battle for consumer attention. The third company we look at is Indonesia’s home improvement and lifestyle retailer Ace Hardware Indonesia (ACES IJ), which is now the biggest market cap listed retailer at over US$2bn. This insight entailed multiple visits and conversations with management, as well as a number of store visits. 

ACES has a strong historical track record but continues to expand its network by +10-15 stores a year, with a long way to go before Indonesia reaches anything like saturation point. It already had 187 stores across Indonesia but does not see any problem reaching 300 stores in the medium term.

The company has a well-balanced product mix between home improvement and lifestyle products, with the latter growing marginally faster and yielding slightly higher margins. 

The company has also started to open strategically located smaller sized Ace Xpress stores to cater to consumers needs for faster moving products closer to home. A visit to one of these stores revealed a wide selection of products across 17 departments, with 8,500 SKUs versus a normal store which sells around 32,000 SKUs.

The company continues to reduce the total number of SKUs, with a target of 60,000 in total by end 2019 and a focus on faster moving products. It holds around 80% of its inventory on display at the store level, with only 20% held in its distribution centres at any one time. It holds regular monthly promotions and BOOM sales to keep its inventory levels in check.

Ace Hardware Indonesia (ACES IJ) commands one of the highest PE multiples in the sector, trading on 26x FY20E PER, given a strong track record in terms of SSSG and profitability. Management tends to guide conservatively, which means it has consistently beaten its own guidance. The company has demonstrated a strong corporate governance record over the past few years. Ace Hardware Indonesia (ACES IJ) trades on a forward FY20 PER of 26x versus Mitra Adiperkasa (MAPI IJ), which trades on 16x FY20E PER. Mitra Adiperkasa (MAPI IJ) is forecast to see FY19E-21E EPS CAGR of +20.5% versus Ace Hardware Indonesia (ACES IJ), which is forecast to see FY19E-21E EPS CAGR of +9.1% but this difference is growth is compensated for by a strong corporate governance track record, its pure retail status, and a good record on the company’s guidance for investors. Mitra Adiperkasa (MAPI IJ) is also seeing some holding company discount, given it has been selling stakes in its various business to private equity investors.

At current levels, the stock looks fairly valued but should be bought on weakness, given its strong track record.  The recent inclusion in the MSCI Emerging Markets Index will create support for the share price. Our forecasts are below consensus as we have adjusted sales lower for next year following recent more cautious management guidance. Home Product Center (HMPRO TB) in Thailand trades on higher valuations of 30x FY20E PER, with similar growth rates, making Ace Hardware Indonesia (ACES IJ) look attractive from a regional perspective. 

CrossASEAN Research • ASEAN Insight Provider • (Opens in a new window) ⧉

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