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Daily Briefs

Brief Multi-Strategy: Hong Kong Connect Weekly: SMIC, Shandong Weigao, Xiaomi, Anta and more

By | Daily Briefs, Multi Strategy

In this briefing:

  1. Hong Kong Connect Weekly: SMIC, Shandong Weigao, Xiaomi, Anta
  2. SH/​SZ Connect Flow Weekly: Midea, China Intl Travel Service, Gree
  3. Smartkarma Webinar
  4. Big Apparel in Trouble: Renown Finally Goes Under

1. Hong Kong Connect Weekly: SMIC, Shandong Weigao, Xiaomi, Anta

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In our weekly HK Connect Flow series, we aim to highlight key stocks and sectors which the mainland investors traded via the southbound Hong Kong Connect, as analyzed by our proprietary data engine.

Since the opening of Hong Kong Connect scheme in 2014, southbound Chinese money started to play an increasingly important role in the Hong Kong stock market. In a Hong Kong exchange report released in July 2019, the exchange highlighted that flows from mainland China accounted for 12% of the total trading volume in the market and is ahead of the US investors’ 10% and UK investors’ 7% share respectively. 

We split the stocks eligible for the Hong Kong Connect trade into three groups: HSCEI component stocks, stocks with a market capitalization between USD 1 billion and USD 5 billion, and stocks with a market capitalization between USD 500 million and USD 1 billion.

In this insight, we will highlight inflows into Semiconductor Manufacturing (981 HK) , Shandong Weigao Group Medical Polymer Co (1066 HK), and Xiaomi Corp (1810 HK), as well as outflows from Anta Sports Products (2020 HK). We note that Shandong Weigao announced last week that it plans to list its orthopedic segment on the STAR board. 

2. SH/​SZ Connect Flow Weekly: Midea, China Intl Travel Service, Gree

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In our weekly Shanghai/Shenzhen Connect Ideas series, we aim to highlight key stocks and sectors which the mainland investors traded via the northbound Shanghai and Shenzhen Connect, as analyzed by our proprietary data engine and highlight interesting trade ideas.

In this insight, we will have an overview of the weekly inflows into the A-share market via Shanghai/Shenzhen connect, top inflow and top three outflow stocks. We will also cover inflows and holdings by sectors, after which we will highlight top five inflows and outflows on a relative basis for large-cap and mid-cap stocks: stocks with a market capitalization above $5 bn, and those between $1 bn and $5 bn.

In this insight, we will highlight inflows into Midea Group Co Ltd A (000333 CH), Beijing Oriental Yuhong A (002271 CH) , and Boe Technology Group (000725 CH) , as well as outflows from China International Travel Service (601888 CH) , and Gree Electric Appliances (000651 CH).

3. Smartkarma Webinar

In this Smartkarma Webinar, Thomas Schroeder will provide his technical outlook for markets. After the recent melt-up, markets are up against renewed concerns from: 

  • A second wave of COVID-19 cases in the US
  • Unexpected lockdowns in Beijing
  • Diminished short-base after extensive covering
  • Oversold levels on the Dollar Index (DXY) (DXY CURNCY), as well as,
  • An acceleration in new capital raising

The webinar will be held on 17 June 2020 at 1700hrs Singapore/Hong Kong time.



Thomas Schroeder starting using charts and trading in the FX markets in 1989 and entered the equities arena in 1992 with Deutsche Bank as a fundamental analyst but found himself relying more on inter-market cycles and charts. In 1994, he become the Asian head of Technical Research for UBS Securities in Hong Kong and in 1997 was charged with heading the Global Technical Research team for SG Securities. In July of 2003, Chart Partners Group Limited was formed which provides clients with timely and accurate progressive trading strategies within a truly global context.

4. Big Apparel in Trouble: Renown Finally Goes Under

Renown2

Japan’s major apparel firms are in trouble as Onward Holding (8016 JP)’s decision to slash 50% of its stores and Sanyo Shokai (8011 JP)’s fight with activist shareholders both demonstrate.

For nearly 30 years, Renown (3606 JP)  was the worst of the bunch but it has at last been forced to file for bankruptcy protection, with wider implications for the apparel and department store sectors. Other apparel firms like Sanyo Shokai also look to be in trouble.

In the end, the crisis in the big apparel firms is also a crisis for department store apparel floors. Given that 30% of department store sales come from apparel and, other than cosmetics and jewellery, what profit there is in department stores also comes from clothing, this remains a serious problem. When Onward, Renown, Sanyo Shokai and others close down so many brands in so many department stores, the buildings themselves lose even more lustre, making it harder to find new tenants or wholesale suppliers. More closures and mergers may be on the cards (for details see below).

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Brief Multi-Strategy: Li Auto IPO Initiation: On a Charge and more

By | Daily Briefs, Multi Strategy

In this briefing:

  1. Li Auto IPO Initiation: On a Charge
  2. Government Fuels Japan Cashless Payments War
  3. AREIT Pre-IPO – First Philippines REIT Listing Comes with Its Peculiarities
  4. Japan Retail: Essentials Strong in May but in June Even Discretionary Bounces Back
  5. 🇯🇵 JAPAN • Stress Tests Part 6: Currency Risk

1. Li Auto IPO Initiation: On a Charge

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Lixiang Automotive (LIX CH)/Li Auto is the first company to successfully commercialise EREVs (extended-range electric vehicle) in China, the Li ONE. Li ONE is a six-seat, large premium electric SUV which began volume production and deliveries in November 2019 and December 2019, respectively. Li Auto is backed by Meituan Dianping (3690 HK) which owns 14.5% of ordinary shares (5.8% of voting power). It is seeking to raise $500 million through a Nasdaq IPO, according to press reports. 

The IPO seems to be timed to take advantage of the surging share prices of NEV (new energy passenger vehicles) manufacturers such as Tesla Motors (TSLA US) and NIO Inc (NIO US). However, NIO’s wild share price swings suggest that investing in the China NEV sector requires nerves of steel. On balance, for investors seeking exposure to the China NEV sector, Li Auto’s fundamentals are attractive, in our view.

2. Government Fuels Japan Cashless Payments War

Cashless

In June, the government’s rebate scheme that simultaneously aimed to reduce the burden of its October 2019 tax increase while also promoting cashless payments, came to an end. But there’s more to come.

The initial scheme will be replaced in September by an entirely new one, this time to promote the My Number citizen registration system alongside, again, cashless payments.

The new scheme requires consumers to choose one provider only. This will push payment providers to compete with ever more ferocity and, by this time next year, we are likely to see just one or two winners and a whole bunch of losers.

3. AREIT Pre-IPO – First Philippines REIT Listing Comes with Its Peculiarities

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AyalaLand Reit (AREIT) (AREIT PM), a subsidiary of Ayala Land Inc (ALI PM), aims to raise up to US$270 in its Philippines listing.

AREIT will be the first REIT listing for the Philippines. It will have an initial portfolio of three commercial buildings located in Metro Manila, Philippines. In addition, it will use the proceeds from the IPO to buy another asset from the sponsor, taking its total asset count to four. Its assets are relatively new, with long term leases and step-up rental escalation, which should provide stability to rentals. 

However, there are some peculiarities with the offering starting from the lack of provision of financial operational data for most of the assets.

4. Japan Retail: Essentials Strong in May but in June Even Discretionary Bounces Back

June

Retail sales slumped again in May, but only because people are not buying clothes, visiting department stores and shopping centres, or buying their lunches at convenience stores.

Although this led to another major drop in total sales, several sectors did very well and in June there was a surge in spending at some speciality chains and a return to some semblance of normality for many.

5. 🇯🇵 JAPAN • Stress Tests Part 6: Currency Risk

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Source • Japan Analytics

WHAT CURRENCY RISK? – It seems rather old-fashioned to raise the topic of currency risk in relation to potential stressors on Japanese listed companies. Compared to the thirty-five years to 2015, the last five years have been a period of benign calm in the USD/JPY exchange rate, aided and abetted by the action of central banks to eliminate interest rates and the functioning of the bond markets. Most observers expect this currency stability regime to continue and COVID-19 has so far only seen one short ‘blip’ to ¥102.36 on 9th March.

Source • Japan Analytics

¥ BELOW 100 –  If we isolate only the 1,484 days in the last forty years when Yen has traded above ¥100, the average TOPIX index is 975. The three Yen ‘peaks’ we have highlighted above in 1995, 2011, and 2016 proved excellent entry points. The subsequent trough-to-peak performance was 43%, 139%, and 60%, respectively. The COVID-19-induced trough-to-peak is, so far, just 31%.

Source • Japan Analytics

KEY DRIVER – Nevertheless, for an increasingly-global Japan, the USDJPY exchange rate remains a key driver of earnings. With a lag of six months, the peaks and troughs of the USDJPY exchange rate have coincided with turning points in the earnings cycle as measured by our Results & Revision Score. The six-month lag suggests that ignoring the impact of COVID-19, the exchange rate is mildly supportive of earnings momentum for the balance of 2020.


• CORRELATION ANALYSIS •

Source • Japan Analytics

CORRELATIONS – Our analysis of the currency risk of specific companies will be in two parts. The first and simplest is to examine the long-term positive and negative correlations of each listed larger-capitalisation company against the US dollar and Euro for the split-adjusted share price. This analysis will yield some surprising results, including the positive US Dollar correlation of Nippon Express (9062 JP), while Nikon (7731 JP) is negatively correlated. 


• THE FOREIGN CURRENCY TRANSLATION ADJUSTMENT •

Source • Japan Analytics

FCTA – The second part is perhaps more abstruse, however but is a more accurate estimation of the actual currency risk embedded in the business model.  The Foreign Currency Translation Adjustment (FCTA) is part of Other Comprehensive Income and has been disclosed in Japanese GAAP-based balance sheets and income statements since 2001 and 2011, respectively to measure the extent of each company’s global business and the embedded currency risk. The correlation of the aggregate FCTA for all non-financial companies is, as would be expected, reasonably tight. As these amounts are directly deducted from Net Assets for companies adopting JGAAP and from Shareholders’ Equity for those companies reporting under SEC or IFRS standards, the impact on valuations cannot be ignored. For example, the decline in the US dollar from ¥123 to ¥101 in 2016 resulted in a six-quarter ¥53 trillion negative FCTA adjustment, 65% of the gap between Net Income and CITC over that period.

Source • Japan Analytics

CITC & NET INCOME – Comprehensive Income adds a series of adjustments to Net Income to reflect as-yet-unrealised changes from currency translations, securities valuation differences, pensions, and deferred hedges. These adjustments are subsequently ‘recycled’ as and when realisations occur. In aggregate over the last seven years, Comprehensive Income has exceeded Net Income by a cumulative ¥56 trillion or 7%. However, as Comprehensive Income is inherently a more volatile data series, it is eschewed or overlooked by most analysts despite the direct impact on Shareholders’ Equity. Nevertheless, Comprehensive Income illustrates that, as a result of increased globalisation and investments in marketable securities, the underlying earnings of Japanese corporates have become riskier than is implied by Net Income. In 2017, the FCTA resulted in an aggregate loss for Comprehensive Income to Common (CITC) and a corresponding decline in Shareholders’ Equity for non-financial Japanese companies.  In the last two reported quarters, the ‘gap’ between Net Income and CITC has begun to widen again as both Valuation Differences and the FCTA have turned negative.

Source • Japan Analytics

FCTA BY SECTOR – Two-thirds of the total absolute FCTA over the last seven years comes from seven Sectors – Autos, Wholesale, Electrical Equipment, Technology Hardware, Machinery, Other Consumer Products and Telecommunications (Softbank Group). The least-exposed Sectors are Services, IT & Internet, Multi-Industry and Restaurants.


In the DETAIL section below, we shall look at the Accumulated Balance Sheet Foreign Currency Adjustments where Eisai Co Ltd (4523 JP) and Dic Corp (4631 JP) have the most significant amounts of positive and negative Accumulated FCTA’s relative to Equity, respectively.

Source • Japan Analytics

This Part 6 concludes our Stress Test series. However, forthcoming Insights will look at the Valuation Differences component of Other Comprehensive Income and those companies with the most substantial CITC/Net Income ‘gaps’.

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Brief Multi-Strategy: The Week that Was in [email protected] – PAP Retains Power, Rising Sea Ltd, and Cratering Credit Risk and more

By | Daily Briefs, Multi Strategy

In this briefing:

  1. The Week that Was in [email protected] – PAP Retains Power, Rising Sea Ltd, and Cratering Credit Risk
  2. ME2ZEN IPO: Absence of Local Pension Funds Vs. Market Friendly Pricing
  3. Chinese Airlines and Airports: Industry Loss Narrowed 10.1% QoQ in 2Q20 as Traffic Resumed
  4. CTG Duty Free Corp (601888 CH): Encouraging Initial Jul Duty Free Figures from New Hainan Policy
  5. SPX Buy Summer Weakness – 3,220 and 3,080 Direction Break Points – 3,200 Short Target

1. The Week that Was in [email protected] – PAP Retains Power, Rising Sea Ltd, and Cratering Credit Risk

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This past week’s offering of Insights across [email protected] is filled with another eclectic mix of differentiated, substantive and actionable insights from across South East Asia and includes macro, top-down and thematic pieces, as well as actionable equity bottom-up and credit insights.

Please find a brief summary below, with a fuller write up in the detailed section. We also include in the detailed section the past week’s relevant discussions in [email protected]

Macro Insights

In PAP Retains Power, but Faces the Largest Opposition Contingent Since Independence, Cross ASEAN Cheif Economist Prasenjit K. Basu comments on last week’s election in Singapore. 

In Singapore’s Twin Surpluses: How Much Is Too Much?, CrossASEAN’s Cheif Economist Prasenjit K. Basu comments on Singapore’s standout current account and fiscal surpluses. 

Equity Bottom-Up Insights

In Sea Ltd (SE US) – Gaming Its Way to the Top, Crossasean insight Provider Angus Mackintosh zeros in on South East Asia’s leading e-commerce and gaming player as the company continues to hit new highs. 

In BCA – Most ROA to Claw Back, banking specialist Daniel Tabbush revisits Indonesia’s leading private bank and assesses the impact of COVID-19 so far with a focus on Bank Central Asia (BBCA IJ) versus its local and regional peers. 

In Company Visits: KTC, Taokaenoi (Treading Water),Athaporn Arayasantiparb, CFA provides feedback from recent company visits to Krungthai Card (KTC TB) and Taokaenoi Food & Marketing (TKN TB).

In EPG: One of the Most Solid Polymer Convertor in the Downstream Sector, our friends at Country Group zero in on Eastern Polymer Group (EPG TB).

In DOHOME: Fastest Growing Home-Improvement Player in Thailand,Country Group initiate coverage on Dohome PCL (DOHOME TB) with a HOLD rating based on a target price of Bt12.5. 

In RBF: Recent Jump in Share Price Leads to OvervaluationDr Andrew Stotz, CFA initiates coverage on RBF with a SELL recommendation based on a target price of Bt8.70, implying a downside of 13% from the current price. 

In Valuation Is Approaching an Expensive Zone our friends at Country Group downgrade Com7 PCL (COM7 TB) to a HOLD rating after rolling over 2021E target price to Bt29.30.

In TFG: Weak 2Q20E but Strong Outlook in Medium to Long Term,Country Group maintain a BUY rating on Thai Foods Group Public Company (TFG TB) with a new 2021E target price at Bt5.95.

Sector and Thematic Insights

In this thematic insight, Banks – Credit Risk, Cratering, banking specialist Daniel Tabbush zeros in on credit risk for banks across the region. 

2. ME2ZEN IPO: Absence of Local Pension Funds Vs. Market Friendly Pricing

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First, here is an overview of ME2ZEN’s second IPO attempt.

It plans to offer 3.2M shares (52% primary and 48% secondary). The total offering represents 28.74% of the total shares at a 14.94% capital increase rate.

Mirae is working as a sole banker with a firm commitment.

The indicative price band is at ₩21,000~27,000, which gives an implied market cap of ₩289.9~372.7bil.

July 30~31 will be for book-building, followed by the allotment on August 4. The following day will be a subscription. The payment date is August 7.

Once again, the float will be tight on this one. A total of 72.48% shares will be in a lock-up for one month to three years. Of those, 65.26% is for more than six months.

3. Chinese Airlines and Airports: Industry Loss Narrowed 10.1% QoQ in 2Q20 as Traffic Resumed

The Civil Aviation Administration of China (CAAC) announced that the overall loss of the aviation industry was Rmb34.3bn in 2Q20, a reduction of Rmb3.8bn, or 10.1%, QoQ. Since the record loss of Rmb24.6bn for the industry in Feb, the monthly loss has reduced for every consecutive month.  For Jun, the loss was Rmb7.6bn, a reduction of Rmb3.8bn or 33.3%, MoM. We take the loss reduction positively as this indicated the continued recovery of the airlines industry – losses for airlines have trimmed by Rmb1.5bn MoM in Jun. 

Our key takeaways are: 1.) the continued MoM trimming of loss is encouraging, and with the peak seasons in Jul and Aug, we believe financial performance will further improve; 2.) the COVID-19 cases related to the Xinfadi Agricultural Trading Market in Beijing since 11-Jun have limited impact on the traffic and profitability nationally; 3.) solid freighter traffic will stay as a partial mitigation to lower passenger traffic in the near term. We uphold our preference for China Southern Airlines (1055 HK) among the Chinese airlines due to its domestic exposure and for Shanghai International Airport Co, Ltd. (600009 CH) among the Chinese airports, partly due to its good exposure to cargo traffic.  

4. CTG Duty Free Corp (601888 CH): Encouraging Initial Jul Duty Free Figures from New Hainan Policy

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The average of Rmb64m daily duty free sales in Hainan Island for 1-7 Jul, as released by the China Customs, is 72% higher than the daily sales of the Hainan outlets of China Tourism Group Duty Free Corp Ltd (601888 CH) (CTGDF) in FY19. In our view, this is a positive reflection of the outlook of the company’s duty free business as driven by the favourable duty free policy put into effect on 1 Jul. The increase in the number of categories of high-valued duty free items will also have positive impact to CTGDF’s margin going forward.

Our forecasts suggested that CTGDF’s core EPS will reach a CAGR of 26% between FY19 and FY22. We believe that such projections, as based on the 1-7 Jul figures, are likely to be conservative as during such period: 1.) visitors from Beijing are still significantly affected by travel restriction due to the capital’s COVID-19 cases; 2.) most schools have not yet started the summer vacation; and 3.) the average spending of ~Rmb10,000 is still far from the new quota of Rmb100,000 annually.

5. SPX Buy Summer Weakness – 3,220 and 3,080 Direction Break Points – 3,200 Short Target

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S&P 500 (SPX INDEX) is teetering on a more bullish break point that will define a wave 5 thrust higher or secondary pullback within the summer flat corrective range with support near 2,950.

3,220 and 3,080 will act as key break points for a continued rally or second part of a summer pullback cycle (the later is the favored sequence for a pullback from 3,200).

July cycle peak should align with increased virus cases/concerns and overshadow liquidity over the summer.

ISM, demand and growth data spikes have come off of low bases but due to deteriorate as US re opening faces significant speed bumps.

Macro remains bullish on weakness until liquidly support fades.

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Brief Growth Ideas: Blue Moon IPO: Product Innovation and Online Channels Are the Secrets to a Gentle Clean and more

By | Daily Briefs, Growth Ideas

In this briefing:

  1. Blue Moon IPO: Product Innovation and Online Channels Are the Secrets to a Gentle Clean
  2. PSL: Another Opportunity at the Bottom of Dry Bulk Cycle
  3. China Internet Weekly (13Jul2020): Alibaba’s Freshippo and Ele.me Exploring Cities and Businesses
  4. Another Top Executive Leaves HDFC Bank, But Don’t Try Finding the News in the Media
  5. FMCG Is the Next Big Growth Driver & Battleground for China E-Commerce; Big Tech Moves In Force

1. Blue Moon IPO: Product Innovation and Online Channels Are the Secrets to a Gentle Clean

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  • Blue Moon, a leading consumer household care company in China has filed for an IPO to list its shares on the Hong Kong Stock Exchange. According to the news media outlets, the company is seeking to raise about US$1bn through its public offering.
  • The company offers a wide range of products under three segments fabric care, personal hygiene products and home care products. Our analysis of the company financials reveals that despite a slowdown in the company’s revenue growth, its margins have been significantly improving.
  • The company has been the first to launch several new products such as liquid detergent and liquid soap to the Chinese market and the first mover advantage has helped the company grow its revenues and market share.
  • Blue Moon has effectively utilised the growing e-commerce penetration in China which has helped the company generate a majority of its revenues through online retail channels.
  • Though declining revenue growth remains a concern, we believe strong growth prospects attached to the Chinese household care market should help Blue Moon to generate stable revenues.

2. PSL: Another Opportunity at the Bottom of Dry Bulk Cycle

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We initiate coverage of PSL with a BUY rating, based on a target price of Bt7.10, which is derived from 1.0xPBV’21E, its 10-year average.

The Story:

• Solid position in bloodied industry
• Expected TC rate recovery in 2021
• Effective cost management is its core competency

Risks:

• Charter rate fluctuation
• Exchange rate fluctuation
• Outcome of arbitration with Chinese shipyard

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

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  • 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.

4. Another Top Executive Leaves HDFC Bank, But Don’t Try Finding the News in the Media

Munishquittweet10july2020

It is the season for long serving business head verticals to exit HDFC Bank (HDFCB IN). Following the abrupt departures  of Abhay Aima (former Group Head – private banking) and Ashok Khanna (ex-Group Head – automobile loans) comes news of Munish Mittal (Group Head – Information Technology and Chief Information Officer [CIO]) quitting the bank on July 10, 2020.

In the true tradition of recent senior-level departures at HDFC Bank, the bank’s highly visible and active communications department did not bother to inform stakeholders or even its own staff. Instead it was left to an anonymous source to tweet that Munish Mittal’s last date was July 10, 2020, as was the case for one of his deputies in the department. The business media as usual did not consider the departure of the CIO at India’s number 1 bank by market capitalisation (one which prides itself on its digital strategy) to be newsworthy, or found it too onerous to verify by querying the bank. Responding to a query by this writer, HDFC Bank said that the 51-year old Mittal, who joined the bank on August 1996 and rose to be the CIO, had decided to take a break, and wanted to enrol for a 2-year course at a foreign university.

There is something fundamentally wrong in the system when a prominent bank does not disclose senior level management exits, and it is left to anonymous sources or whistleblowers to inform the market. The business media, which exist to report such news, refuse to do elementary journalism and decline even to contact the bank to verify the news. In HDFC Bank it is all the more worrying as Aditya Puri, the CEO since the bank’s inception, is finally stepping down in October 2020, and the successor is not yet known to the market. In this situation, it adds to the uncertainty when we find heads of important verticals suddenly leaving.

Today, the largest bank by market capitalisation, in a country where the index has a significant weightage towards banking and the financial sector, declines to provide market sensitive information; the media  chose to report only information which the company itself officially releases, and deliberately avoid reporting any information which may embarrass the company. The market is treading on dangerous ground when HDFC Bank is yet to officially acknowledge the controversial exits of Aima and Khanna, and the media has only just reported Khanna’s unceremonious exit; but nobody seems concerned that the market is deprived of market sensitive information by the institutions tasked with the universal disbursal of such information.

5. FMCG Is the Next Big Growth Driver & Battleground for China E-Commerce; Big Tech Moves In Force

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FMCG E-Comm is China Tech’s Next Big Growth Driver & Battleground

At a time when overall retail e-commerce in China has already reached 44% penetration, e-commerce penetration for fast-moving consumer goods (“FMCG”) still lags behind tremendously. According to Euromonitor International, only 6.3% of fresh foods and 8.8% of alcoholic beverages were purchased online in 2019.

This gap represents a major growth opportunity as consumers, having grown accustomed to the convenience and safety of ordering FMCG products online, are now permanently shifting purchasing behaviors.

Already, Chinese Tech giants such as Alibaba and JD.com have moved in force – doubling down on their FMCG investments via Freshippo and JD Supermarket. Tencent is also making its own moves – investing in grocery startup Xingsheng Youxuan and valuing it at US$3bn.

Investors have taken note of this upcoming structural trend and have also moved in size. As seen in the chart below, companies with exposure to FMCG e-commerce have handily beat the broader market with names like Pinduoduo and Meituan Dianping doubling in value in just two months. Dada Nexus, an online grocery firm backed by JD.com, also chose to IPO in early June despite the COVID backdrop – its stock price has since soared by 100%+.

Source: Capital IQ, Zero One. Note: Dada Nexus return calculated based on IPO date (June 5, 2020).

Read our previous FMCG E-Commerce Insights:

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Brief Technical Analysis: Smartkarma Webinar and more

By | Daily Briefs, Technical Analysis

In this briefing:

  1. Smartkarma Webinar

1. Smartkarma Webinar

In this Smartkarma Webinar, Thomas Schroeder will provide his technical outlook for markets. After the recent melt-up, markets are up against renewed concerns from: 

  • A second wave of COVID-19 cases in the US
  • Unexpected lockdowns in Beijing
  • Diminished short-base after extensive covering
  • Oversold levels on the Dollar Index (DXY) (DXY CURNCY), as well as,
  • An acceleration in new capital raising

The webinar will be held on 17 June 2020 at 1700hrs Singapore/Hong Kong time.



Thomas Schroeder starting using charts and trading in the FX markets in 1989 and entered the equities arena in 1992 with Deutsche Bank as a fundamental analyst but found himself relying more on inter-market cycles and charts. In 1994, he become the Asian head of Technical Research for UBS Securities in Hong Kong and in 1997 was charged with heading the Global Technical Research team for SG Securities. In July of 2003, Chart Partners Group Limited was formed which provides clients with timely and accurate progressive trading strategies within a truly global context.

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Brief Technical Analysis: WTI Turn Inflection for Demand Downturn and more

By | Daily Briefs, Technical Analysis

In this briefing:

  1. WTI Turn Inflection for Demand Downturn
  2. SPX Buy Summer Weakness – 3,220 and 3,080 Direction Break Points – 3,200 Short Target
  3. Softbank Reverse from Long to Short Target
  4. U.S. Equity Strategy: Buy The Dips
  5. Ping An Rally Fuel to Challenge the 95 Macro Hurdle

1. WTI Turn Inflection for Demand Downturn

Wti%20d

Crude Oil (CRUDE OIL COMDTY) rise off the April low with June new highs are are not being confirmed by the RSI for a case of bear divergence as the overlapping price has formed a rising wedge. Wedge patterns have a 70% probability of breaking lower with odds increasing on the back of divergence.

Divergence forms when momentum, buy volume and conviction deteriorate.

As virus cases climb, questions linked to demand will resurface.

42 resistance is a pivotal level; a rejection would set in motion a pullback to test and break the 38 near support and lower wedge level that will open up the downside.

2. SPX Buy Summer Weakness – 3,220 and 3,080 Direction Break Points – 3,200 Short Target

Spx%20d

S&P 500 (SPX INDEX) is teetering on a more bullish break point that will define a wave 5 thrust higher or secondary pullback within the summer flat corrective range with support near 2,950.

3,220 and 3,080 will act as key break points for a continued rally or second part of a summer pullback cycle (the later is the favored sequence for a pullback from 3,200).

July cycle peak should align with increased virus cases/concerns and overshadow liquidity over the summer.

ISM, demand and growth data spikes have come off of low bases but due to deteriorate as US re opening faces significant speed bumps.

Macro remains bullish on weakness until liquidly support fades.

3. Softbank Reverse from Long to Short Target

Softbank%20for%20sk

Softbank Group (9984 JP) has witnessed a sharp rise from our recent 4,400 long entry and nearing the ideal 6,600 target representing the top end of the intermediate expanding wedge range. We made a bull call near lower wedge support at 2,800.

Recent breakout point at 5,900 will act as pivot support that will induce a reaction back upward.

RSI shows synergy with dual tops in this zone to mark key cycle tops which fits with a top near 6,600. RSI is also forming a rising wedge that has a better than 70% probability of breaking down amid bear divergence.

Macro pivots are 6,800 and 4,900 as the expanding wedge defines a clear range (6,800 and 2,500).

4. U.S. Equity Strategy: Buy The Dips

Image 78750340521594299424779

New developments outlined in today’s report are of the bullish variety. The way we see it, the positives continue to heavily outweigh the negatives. With positive new developments and essentially nothing new to be worried about, our view remains bullish. Buy the dips. In today’s report we highlight attractive Groups and stocks within Consumer Discretionary and Materials: CD-46 Retailers, Home Improvement, CD-30 Internet Retailers, CD-55 Lawn & Garden, and MA-27 Gold, Western Hemisphere, Small-Cap.

5. Ping An Rally Fuel to Challenge the 95 Macro Hurdle

Ping%20an%20for%20sk

Ping An Insurance (H) (2318 HK) has exploded higher off of the strong 70 macro base line support. We see a fresh rally opportunity after a July give back to pocket support (83) to challenge the bigger 95 macro barrier with longer term scope to finally break the 70 to 95 range that has held Ping An captive since late 2017.

Given the breakout in A shares and H shares, attention now turns to tier two names that show catch up potential behind the likes of BABA and Tencent.

Macro base support is now firm at the 70 level that will hold up in coming years.

MACD is attempting to clear noted trendline resistance and may need more than one attempt for a successful breakout.

The buy volumes spike is supportive looking forward but does run the risk of a sharp give back in price and a pullback we want to buy.

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Brief Consumer: ECM Weekly (14 June 2020) – JD, Burning Rock, Kangji Med, Hygeia Healthcare, Pop Mart, Bohai Bank and more

By | Consumer Sector, Daily Briefs

In this briefing:

  1. ECM Weekly (14 June 2020) – JD, Burning Rock, Kangji Med, Hygeia Healthcare, Pop Mart, Bohai Bank
  2. Jinmao Hotel (6139 HK): Priced To Check Out
  3. Meiji Holdings: Considering a Stock Split
  4. Big Apparel in Trouble: Renown Finally Goes Under

1. ECM Weekly (14 June 2020) – JD, Burning Rock, Kangji Med, Hygeia Healthcare, Pop Mart, Bohai Bank

Image 45872613331592116692211

Aequitas Research puts out a weekly update on the deals that have been covered by the team recently along with updates for upcoming IPOs.

Markets were a little shaky this week after the big one-day drop in the U.S. on Thursday. A handful of placements broke their respective deal prices but overall, IPO pipeline and bookbuilds are still moving along well as far as we hearing.

Burning Rock Biotech (BNR US) launched its bookbuild on earlier this week and will list this coming Monday. Ke Yan, CFA, FRM covered it in:

In Hong Kong, NetEase (9999 HK)‘s secondary listing held up well above its pricing of HK$123 per share on the back of strong ADR trading of late which should bode well for JD.com Inc (ADR) (JD US)‘s listing next week.

We are also preparing for a handful of upcoming Hong Kong IPOs, starting with Hygeia Healthcare Group (1702613D CH) and Kangji Medical (1498779D CH) which was said to be premarketing its IPO. We also shared more on-the-ground research and early thoughts on recently filed, Nongfu Spring (NON HK), POP MART (POP HK), and China Bohai Bank (BOHAIBZ HK) . 

Hong Kong IPO pipeline still looks promising. Simcere Pharma filed its draft prospectus with the Hong Kong Exchange this week while WeDoctor and Jiangxiaobai (a competitor to Moutai but targeting the younger crowd) are preparing for their respective IPO on the Hong Kong Exchange. Zhenro Services (ZS HK) and Smoore International (0959165D CH) were also reported to have sought for approval. We covered this IPOs in:

Other research on upcoming IPOs, placements and lock-up expiry:

 Accuracy Rate:

Our overall accuracy rate is 73.3% for IPOs and 65.5% for Placements 

(Performance measurement criteria is explained at the end of the note)

New IPO filings this week

  • Simscere (Hong Kong, ~US$1bn)
  • Happiest Minds (India, US$100m)

Below is a snippet of our IPO tool showing upcoming events for the next week. The IPO tool is designed to provide readers with timely information on all IPO related events (Book open/closing, listing, initiation, lock-up expiry, etc) for all the deals that we have worked on. You can access the tool here or through the tools menu.

News on Upcoming IPOs

NameInsight
Hong Kong
Archosaur Archosaur (祖龙娱乐) Pre-IPO – Short Life Cycle, Volatile Revenue, but It May Look Different Soon 
Ant FinancialAnt Financial IPO Early Thought: Understand Fintech Empire, Growth & Risk Factors
ByteDance

ByteDance (字节跳动) IPO: How Jinri Toutiao Paves The Way for a Bigger Empire (Part 1)

ByteDance

ByteDance (字节跳动) Pre-IPO: Why Facebook Should Worry About TikTok 

ByteDance

ByteDance (字节跳动) IPO: Tiktok the No.1 Short Video App for a Good Reason (Part 2)

ByteDance

ByteDance (字节跳动) Pre-IPO: How Has It Done in 1H? 

ByteDance

ByteDance: The Unlisted Company’s Video Apps Leading the Market and Threatening Internet Giants 

ByteDance

ByteDance (字节跳动) Pre-IPO: Why Facebook Should Worry About TikTok 

ByteDance

ByteDance (字节跳动) Pre-IPO – Globally the Most Downloaded App for Jan 2020 Driven by India 

GTMH

GreenTown Mgt (绿城管理) Pre-IPO – Sacrificed Margins in Pursuit of Growth, Muddled by JVs 

Helenbergh

Helenbergh (海伦堡) Early Thoughts – The Usual Red Flag – Related Party Transactions

Hepalink

Shenzhen Hepalink (海瑞普) A+H: A Heparin-API King but Nothing Too Exciting 

Hepalink

Shenzhen Hepalink (海瑞普) A+H: FY2019 Results Snippet and Valuation Update 

Kangji

Kangji Medical (康基医疗) Pre-IPO: Track Record of Growth but Products Too Concentrated 

Kangji

Kangji Medical (康基医疗) Pre-IPO: Superior Financial Metrics, Warrants a Premium 

Kilcoy

Kilcoy Global Foods Pre-IPO – Rapid Earnings Growth on the Back of Margin Improvement 

Kilcoy

Kilcoy Global Foods Pre-IPO – A Lot of Things Still Remain Unexplained 

Megvii Megvii (旷视) Pre-IPO – Remarkable Growth (Part 1) 
Megvii Megvii (旷视) Pre-IPO – A Bet on the Future – Segments, Revenue Drivers and Growth Potential 
Megvii Megvii (旷视) Pre-IPO – The Real Race Is in Research – Founders’ Profile and Talent 
Megvii Megvii (旷视) Pre-IPO – Competitive Landscape and Peer Analysis 
Megvii Megvii (旷视) Pre-IPO –  Initial Thoughts on Valuation 
Nongfu Nongfu Spring Pre-IPO – The Positives – Leaves One Thirsty for More 
Nongfu Nongfu Spring Pre-IPO – The Negatives – Doesn’t Need to List or Expand Production Facilities 
Nongfu Nongfu Spring Pre-IPO – Peer Comparison – Superior Margins and Growth 
Nongfu Nongfu Spring (农夫山泉) IPO: Beverage for the Young, In-Store Photos 
Smoore

Smoore Tech (麦克韦尔) IPO: Hidden E-Cigarette Player Behind the FEELM Technology 

Smoore

Smoore Tech (麦克韦尔) Pre-IPO: 6Y and 1H2019 Financials Show Technology Driven Growth 

Smoore

Smoore Intl (思摩尔国际) Pre-IPO: Tripling Capacity in Three Years 

Smoore

Smoore Intl (思摩尔国际) Pre-IPO: Thoughts on E-Cig Regulation 

Tasly Tasly Biopharm (天士力生物) IPO: Visible Growth from Approved Drug but Lacks Blockbusters 
Zhenro Svc Zhenro Services (正荣服务) Pre-IPO – Diversifying Away from Zhenro Property Group 
Zhenro Svc Zhenro Services (正荣服务) Pre-IPO – Peer Comparison and Thoughts on Valuation 
WeDoctor WeDoctor (微医) Pre-IPO -App Walk Through – The Online Medical Directory and More 
WeDoctor WeDoctor (微医) Pre-IPO – A More Focused Online Medical Svc Provider than Ping An Good Doctor 
India
ASK ASK Investment Managers Pre-IPO – Riding on a Wave of Wealth 
Aakash EduAakash Education Pre-IPO – Fast Growth in an Attractive Sector
Anmol IndAnmol Industries Pre-IPO Quick Take – No Growth, Generous Payments to Founders
Bharat Hotel

Bharat Hotels Pre-IPO – Catching up with Peers 

Burger King

Burger King India Pre-IPO – Has Been Growing Fast and Plans to Grow Even Faster 

Burger King

Burger King India Pre-IPO – Peer Comparison Yields Interesting Nuggets on Profitability and Capex 

Bajaj En

Bajaj Energy Pre-IPO – Supposed to Deliver Steady Performance if Only Its Sole Client Would Let It 

CAMS CAMS Pre-IPO – Quasi Monopoly Status Muddled by Inconsistent Performance 
CMS InfoCMS Info Systems Pre-IPO – When a PE Sells to Another PE… Only One Gets the Timing Right
Crystal CropCrystal Crop Protection Pre-IPO – DRHP Raises More Questions than in Answers
ESAF SFB ESAF Small Finance Bank Pre-IPO – Growing Fast but Remains Highly Dependant on a Related Party 
Equitas SFB Equitas Small Finance Bank Pre-IPO – Another Forced Small Finance Bank Listing 
Equitas SFB Equitas Small Finance Bank Pre-IPO – Another Forced Small Finance Bank Listing 
Flemingo Flemingo Travel Retail Pre-IPO – Its a Different Business in Every Country
Emami Cem Emami Cement Pre-IPO – Still in Ramp Up Phase but Shares Pledge Might Lead to an Early IPO 
IRFC Indian Railway Finance Pre-IPO – Low Risk, Low Margin Business 
NSENSE IPO Preview- Not Only Fast..its Risky and Expensive
NSENational Stock Exchange Pre-IPO Review – Bigger, Better, Stronger but a Little Too Fast for Some
MazagonMazagon Dock IPO Preview: A Monopoly Submarine Yard in India with Captive Navy Spending
Mindspace Mindspace Business Parks REIT Pre-IPO – Decent Growth but Not All Assets Are Equal 
Mrs. BectorMrs. Bectors Food Specialities Pre-IPO Quick Take – Sales for Its Main Segment Have Been Sta

LIC

Life Insurance Corporation of India Pre-IPO – Early Take on India’s Largest IPO 

Lodha

Lodha Developers Pre-IPO – Second Time Lucky but Not Really that Much Affordable
LodhaLodha Developers IPO: Presence in Affordable Segment Saves Lodha the Blushes in a Sluggish Mkt
Penna Cem Penna Cement – Aggressive Expansion Plans Even Though Past Performance Has Been Tepid 
PNB MetPNB Metlife Pre-IPO Quick Take – Doesn’t Stack up Well Versus Its Larger Peers
Samhi Hotels Samhi Hotels Pre-IPO – Assets and Borrowings Are Growing, but Earnings Haven’t Kept Pace 
Malaysia
Mr DIY Mr D.I.Y. Pre-IPO – Largest Home Improvement Retailer in Malaysia 
Mr DIY Mr D.I.Y. Pre-IPO – Store Walk-Through and Thoughts on Value Proposition 
Mr DIY Mr D.I.Y. Pre-IPO – Peer Comparison – Small Stores with Dominant Market Share  
Mr DIY Mr D.I.Y. Pre-IPO – Assumptions and Thoughts on Valuation 
QSRQSR Brands Pre-IPO – As Healthy as Fast Food
Thailand
PTTOR PTT Oil and Retail IPO – F&B Business Is the Profit Driver 
SCGP SCGP Pre-IPO – Shift to Packaging Has Been Aiding Margins but Acquisition Drove up Leverage 
The U.S
Agora Agora Pre-IPO – Voicing Out Concerns on Data Disclosure 
CDP CDP Holdings Pre-IPO Review – Highly Reliant on Best Inc. 
CloudMindsCloudMinds Inc Early Thoughts – Still Nascent

2. Jinmao Hotel (6139 HK): Priced To Check Out

Image 60013467231592107611121

Jinmao Hotel & Jinmao (China) Hotel Investments and Management Limited (6139 HK) (Jinmao Hotel) was suspended on the 8 June “pursuant to the Code on Takeovers and Mergers“, having gained ~40% in the previous three trading days.

Funny that.

Late Friday afternoon, an Offer by way of a Scheme was announced, at an offer price of $4.80/share, a 30.4% premium to last close. The Offer price is Final. Irrevocables total 21.04%. The Offeror (China Jinmao Holdings (817 HK)) and concert parties hold 66.81%, therefore the blocking stake at the Unitholders Meeting will be 3.319% of shares out. Jinmao is Cayman incorporated, so the headcount test applies. 

$4.80 is roughly a two-year high, and ~90% above where shares were trading at the beginning of the month. Plus a 57.4% premium to NAV (Dec-19). That should be enough to get this Offer over the line.

There is also a question mark over the treatment of the final distribution of HK$0.1543/share.

3. Meiji Holdings: Considering a Stock Split

Image 27974764841592064818779

  • Japanese consumer goods company Meiji Holdings (2269 JP) issued a press release on Friday (12th June 2020) stating that the company is considering a stock split to boost liquidity and capital injection by investors.
  • The company previously conducted a two for one stock split on 1st October 2015. The share price rallied as much as 17.9% in the two days following Meiji’s announcement of its 2015 stock split.
  • We believe Meiji had genuine reasons for its previous stock split, whereas the explanation for the current considering stock split is not convincing. We explain our reasons below.

4. Big Apparel in Trouble: Renown Finally Goes Under

Renown2

Japan’s major apparel firms are in trouble as Onward Holding (8016 JP)’s decision to slash 50% of its stores and Sanyo Shokai (8011 JP)’s fight with activist shareholders both demonstrate.

For nearly 30 years, Renown (3606 JP)  was the worst of the bunch but it has at last been forced to file for bankruptcy protection, with wider implications for the apparel and department store sectors. Other apparel firms like Sanyo Shokai also look to be in trouble.

In the end, the crisis in the big apparel firms is also a crisis for department store apparel floors. Given that 30% of department store sales come from apparel and, other than cosmetics and jewellery, what profit there is in department stores also comes from clothing, this remains a serious problem. When Onward, Renown, Sanyo Shokai and others close down so many brands in so many department stores, the buildings themselves lose even more lustre, making it harder to find new tenants or wholesale suppliers. More closures and mergers may be on the cards (for details see below).

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Brief Energy: WTI Turn Inflection for Demand Downturn and more

By | Daily Briefs, Energy Sector

In this briefing:

  1. WTI Turn Inflection for Demand Downturn
  2. Revisiting Mitr Phol Group: Erawan and Banpu
  3. RockRose-Viaro Deal: Trading Close to Terms
  4. Soechi Lines – Tear Sheet – Lucror Analytics
  5. Weekly Oil Views: Crude Hits 4-Month Highs, May Get a Reality Check from Demand

1. WTI Turn Inflection for Demand Downturn

Wti%20d

Crude Oil (CRUDE OIL COMDTY) rise off the April low with June new highs are are not being confirmed by the RSI for a case of bear divergence as the overlapping price has formed a rising wedge. Wedge patterns have a 70% probability of breaking lower with odds increasing on the back of divergence.

Divergence forms when momentum, buy volume and conviction deteriorate.

As virus cases climb, questions linked to demand will resurface.

42 resistance is a pivotal level; a rejection would set in motion a pullback to test and break the 38 near support and lower wedge level that will open up the downside.

2. Revisiting Mitr Phol Group: Erawan and Banpu

Breakeven%20hotel

We visited three companies in the Mitr Phol Group, namely hotel chain Erawan, the  and Thailand’s largest coal producer Banpu. This is a quick run-down.

  • Erawan reported net loss of Bt77m in Q1’20 and EBITDA contraction of 63% to Bt224m. The company closed its Thai hotels since April and Manila-based ones since May 19.
  • Cost cutting: The company plans to cut lease payments by 20-30% and also postpone debt repayments to the banks. They also plan to cut investments by 50%.
  • Banpu Power reported healthy EBITDA of Bt1.77bn (up 10% YoY) on the back of Bt1.84bn  (+5% YoY) buoyed by stronger demand for power and steam in China needed to operate hospitals. However, its one-time core power plant BLCP contributed a loss of Bt70m due to translation losses. The hidden crown jewel is Banpu NEXT, the renewable business, which just needs time to appreciated.
  • The parent company Banpu reported an EBITDA of US$134m, down 42% YoY, and earnings of Bt55m. The coal business, just like other energy segments (oil, gas), performed poorly, but Banpu made the most of it by negotiating down the price of Barnett in the United States, a deal that will be concluded towards the end of this year.

3. RockRose-Viaro Deal: Trading Close to Terms

Company%20overview

On 6th July, UK-based independent Oil & Gas company Rockrose Energy PLC (RRE LN) made an announcement that it had agreed to be acquired by physical energy trading group Viaro Energy in a Deal that values the company at a market cap of of GBP244mn.

The Transaction will be implemented by way of a Scheme of Arrangement. The Offer Price is GBP18.50/share and the consideration will be in the form of cash.

The Deal is conditional on receiving approval from RockRose Energy shareholders and is expected to complete in August 2020. 

In this insight, we look into the details of the transaction to evaluate the likelihood of this Deal completing. 

As usual, there is more below the fold. 

4. Soechi Lines – Tear Sheet – Lucror Analytics

We view Soechi Lines as “Very High Risk” on the LARA scale. This reflects the risks associated with: [1] its shipyard business, with reported delays in deliveries, low visibility of new contracts and weak cash flow; and [2] high capex for acquiring new vessels. Soechi’s FCF generation is poor. Moreover, there are event risks associated with vessel accidents and a breakdown in its relationship with Pertamina.

Positively, Soechi is the largest independent vessel owner/operator in Indonesia, behind the SOE Pertamina (rated Baa2/BBB). Pertamina is Soechi’s largest customer and accounts for c. 70% of its revenues. This customer concentration risk is somewhat mitigated by their four-decade-long symbiotic relationship. The shipping business is mainly conducted through long-term time charters, which provides some stability and visibility in terms of cash flow.

Our Credit Bias on Soechi is “Negative”, owing to its weaker than expected operating performance and high leverage. We expect FCF generation to be minimal. Moreover, we deem management to have a poor track record of communication.

We view Soechi’s corporate governance as “Weak” on the LAGA scale, mainly due to the: [1] family control (83% ownership) and family members (four brothers and two sisters) running the company; [2] ongoing related-party transactions; and [3] poor track record of investor communication and guidance.

5. Weekly Oil Views: Crude Hits 4-Month Highs, May Get a Reality Check from Demand

Crude’s ascent to four-month highs appears to have disregarded the chances of US oil demand recovery easing or even stalling as the coronavirus tightens its grip over large swathes of the country. 

The pandemic has been accelerating in at least 37 of the 50 US states, prompting many to roll back or put on hold some of their reopening measures.

It is still a “light touch” approach by most state governors and far removed from the “lockdowns” imposed earlier by the hard-hit countries in Europe and Asia. But that could result in the situation in the US festering for much longer.

Meanwhile, the pace of demand recovery in China and India, the second- and third-largest oil consumers after the US, is also poised to ease. 

A combination of slowing global oil demand recovery and OPEC+ readying to put more than 2 million b/d back in the market starting next month could stall supply-demand rebalancing. 

That would strain an already fragile OPEC/non-OPEC alliance. What if it breaks down again? We look at this and some other WILD CARDS in the oil market.

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Brief Consumer: Blue Moon IPO: Product Innovation and Online Channels Are the Secrets to a Gentle Clean and more

By | Consumer Sector, Daily Briefs

In this briefing:

  1. Blue Moon IPO: Product Innovation and Online Channels Are the Secrets to a Gentle Clean
  2. Li Auto IPO Initiation: On a Charge
  3. CTG Duty Free Corp (601888 CH): Encouraging Initial Jul Duty Free Figures from New Hainan Policy
  4. Tencent’s Turn To Run A Ruler Over Leyou
  5. Colowide Partial Tender for Ootoya Is a Sell

1. Blue Moon IPO: Product Innovation and Online Channels Are the Secrets to a Gentle Clean

Image 45703811121594624540051

  • Blue Moon, a leading consumer household care company in China has filed for an IPO to list its shares on the Hong Kong Stock Exchange. According to the news media outlets, the company is seeking to raise about US$1bn through its public offering.
  • The company offers a wide range of products under three segments fabric care, personal hygiene products and home care products. Our analysis of the company financials reveals that despite a slowdown in the company’s revenue growth, its margins have been significantly improving.
  • The company has been the first to launch several new products such as liquid detergent and liquid soap to the Chinese market and the first mover advantage has helped the company grow its revenues and market share.
  • Blue Moon has effectively utilised the growing e-commerce penetration in China which has helped the company generate a majority of its revenues through online retail channels.
  • Though declining revenue growth remains a concern, we believe strong growth prospects attached to the Chinese household care market should help Blue Moon to generate stable revenues.

2. Li Auto IPO Initiation: On a Charge

Margin%202

Lixiang Automotive (LIX CH)/Li Auto is the first company to successfully commercialise EREVs (extended-range electric vehicle) in China, the Li ONE. Li ONE is a six-seat, large premium electric SUV which began volume production and deliveries in November 2019 and December 2019, respectively. Li Auto is backed by Meituan Dianping (3690 HK) which owns 14.5% of ordinary shares (5.8% of voting power). It is seeking to raise $500 million through a Nasdaq IPO, according to press reports. 

The IPO seems to be timed to take advantage of the surging share prices of NEV (new energy passenger vehicles) manufacturers such as Tesla Motors (TSLA US) and NIO Inc (NIO US). However, NIO’s wild share price swings suggest that investing in the China NEV sector requires nerves of steel. On balance, for investors seeking exposure to the China NEV sector, Li Auto’s fundamentals are attractive, in our view.

3. CTG Duty Free Corp (601888 CH): Encouraging Initial Jul Duty Free Figures from New Hainan Policy

Product%20categories

The average of Rmb64m daily duty free sales in Hainan Island for 1-7 Jul, as released by the China Customs, is 72% higher than the daily sales of the Hainan outlets of China Tourism Group Duty Free Corp Ltd (601888 CH) (CTGDF) in FY19. In our view, this is a positive reflection of the outlook of the company’s duty free business as driven by the favourable duty free policy put into effect on 1 Jul. The increase in the number of categories of high-valued duty free items will also have positive impact to CTGDF’s margin going forward.

Our forecasts suggested that CTGDF’s core EPS will reach a CAGR of 26% between FY19 and FY22. We believe that such projections, as based on the 1-7 Jul figures, are likely to be conservative as during such period: 1.) visitors from Beijing are still significantly affected by travel restriction due to the capital’s COVID-19 cases; 2.) most schools have not yet started the summer vacation; and 3.) the average spending of ~Rmb10,000 is still far from the new quota of Rmb100,000 annually.

4. Tencent’s Turn To Run A Ruler Over Leyou

Image 41526617121594529113654

A Brief Background

There appears to be no shortage of interest in online game operator Leyou Technologies (1089 HK).

Back on the 20 September 2019, Leyou announced it was in preliminary discussions with various independent potential investors in connection with either a possible share disposal from its major shareholder (Yuk Kwok Cheung Charles) holding 52.37% (at the time), or a possible acquisition of a substantial part of the business. The potential buyer, rumoured to be Tencent Holdings (700 HK)-backed iDreamsky Technology Limited (1119 HK), was confirmed on the 9 December. No price was mentioned.

Fast forward to the 5 May this year, and Leyou announced Yuk and Zhejiang Century Huatong (002602 CH) (“ZCH”) had entered into an MOU for Yuk’s 69.2% stake in Leyou. It was the intention of Yuk and Centaury Huatong to enter into a formal agreement within 90 days from the announcement of the MOU. On the 19 May, Leyou announced Yuk had received the “Earnest Money” of US$80mn from ZCH.  No price was mentioned in the announcements. ZCH also counts Tencent as a shareholder.

On the 2 July, Bloomberg reported that Sony Corp (6758 JP) was “weighing a bid” for Leyou. Leyou shares closed up 9.8% to $2.80 on that rumour, its highest close since September 2018, but below the indicative/rumoured (but still not formally announced) Offer price of $3.11/share under iDreamsky’s proposal. ZCH’s tentative Offer price was believed to be higher than iDreamsky’s. 

The New News

After going into a trading halt before the start of last Friday’s trading session, Leyou announced Yuk had entered into a privatisation exclusivity agreement with Tencent Holdings (700 HK).

Again, no price is mentioned.

As always, more below the fold.

5. Colowide Partial Tender for Ootoya Is a Sell

Screenshot%202020 07 12%20at%202.38.03%20pm

Japanese Restaurant Chain Amalgamator Colowide Co Ltd (7616 JP) purchased stakes in OOTOYA Holdings (2705 JP) last autumn from two founding family members who wanted to sell. They they purchased a small number of shares in the market. That got them to just over 19%. 

Colowide approached Ootoya to see if they could join together as Colowide has by purchasing 50+% stakes in Atom Corp (7412 JP) and Kappa Create (7421 JP) and REINS International (formerly known as Rex Holdings, purchased from Advantage Partners in 2012 and 2015). 

Ootoya has a particular shtick, which is well different than other chains in Japan. This is the founding ethos and it is clear as clear can be on their homepage.

Real Food. Ootoya

Our motto is “Japanese meals”

The way our mothers and their mothers before them

who thinking of their children’s health

worked hard in the kitchen,

we take customer orders, one dish at a time,

and prepare the food right there. 

That has always been important to us.

In order for us to get closer to that feeling a mother has, preparing for her family…

We wash and prepare vegetables, at the shop

We shave the dried bonito, making soup stock, at the shop

We carefully make pickles and marinade in the shop

We grill, simmer, and cook, at the shop.

We make good food by making the effort.

Ootoya has one brand. It makes “home-cooked food”, on the spot, and that is its claim to fame. It has approximately 340 restaurants as of the end of May, across all locations, run by the company or by franchisees.

Colowide runs, or owns 50% of companies which run, a total of nearly 50 different brands across 2700 restaurants ranging from Karubi, “hamburg steak”, sushi, cooked seafood, tonkatsu, Italian, French, Spanish, pizza, yakitori, several “regional food” specialty chains, shabu shabu, Freshness Burger, Wolfgang Puck, and others. They even have a new steak grill and deli food restaurant in Tokyo called “The Dad Bod.” Colowide’s revenue is, not unexpectedly with 8x the storecount, about 10x higher than Ootoya’s. Colowide tries to run things efficiently, and so tends to run things wherever possible with centralized kitchen hubs feeding pre-prepared dishes and content to the for finishing at restaurant kitchens. 

For more on the differing natures of Ootoya and Colowide, please refer to Mio Kato, CFA‘s writeup in Ootoya – The Order May Be Delivered but It Could Leave a Bad Taste in Colowide’s Mouth. There is nothing I disagree with there. 

The Colowide model did not appeal to Ootoya management when Colowide approached the firm, so negotiations went nowhere. Colowide made overtures to Ootoya shareholders, proposing that Ootoya become a subsidiary, before the shareholder meeting starting in April, and their proposals got soundly defeated at the AGM at the end of June 2020. Crushed, in fact. 

In response, Colowide launched a hostile tender offer to go from 19.2% to 51% of shares out. 

Ootoya’s initial response said the Tender Offer was launched without warning, and proposes to make Ootoya a subsidiary despite the fact that it’s proposals suffered a resounding defeat just two weeks ago. Ootoya will separately release an official Target Opinion. This is due 10 days from the Colowide announcement. I expect it to declare opposition to this hostile Tender Offer but I do not see what Ootoya can do. 

Ootoya is being priced expensively here. And that is in the middle of a pandemic which is causing the firm to burn cash. It is not clear who might rescue Ootoya from a buyer who wants to change the entire ethos of the Ootoya brand.  

More below the fold, with charts, and of course, Ye Olde Arb Grids.

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Brief China: Blue Moon IPO: Product Innovation and Online Channels Are the Secrets to a Gentle Clean and more

By | China, Daily Briefs

In this briefing:

  1. Blue Moon IPO: Product Innovation and Online Channels Are the Secrets to a Gentle Clean
  2. Li Auto IPO Initiation: On a Charge
  3. China Internet Weekly (13Jul2020): Alibaba’s Freshippo and Ele.me Exploring Cities and Businesses
  4. FMCG Is the Next Big Growth Driver & Battleground for China E-Commerce; Big Tech Moves In Force
  5. China STAR Board – Launch of STAR50 Index and Inclusion in SSE Composite Indices

1. Blue Moon IPO: Product Innovation and Online Channels Are the Secrets to a Gentle Clean

Image 45703811121594624540051

  • Blue Moon, a leading consumer household care company in China has filed for an IPO to list its shares on the Hong Kong Stock Exchange. According to the news media outlets, the company is seeking to raise about US$1bn through its public offering.
  • The company offers a wide range of products under three segments fabric care, personal hygiene products and home care products. Our analysis of the company financials reveals that despite a slowdown in the company’s revenue growth, its margins have been significantly improving.
  • The company has been the first to launch several new products such as liquid detergent and liquid soap to the Chinese market and the first mover advantage has helped the company grow its revenues and market share.
  • Blue Moon has effectively utilised the growing e-commerce penetration in China which has helped the company generate a majority of its revenues through online retail channels.
  • Though declining revenue growth remains a concern, we believe strong growth prospects attached to the Chinese household care market should help Blue Moon to generate stable revenues.

2. Li Auto IPO Initiation: On a Charge

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Lixiang Automotive (LIX CH)/Li Auto is the first company to successfully commercialise EREVs (extended-range electric vehicle) in China, the Li ONE. Li ONE is a six-seat, large premium electric SUV which began volume production and deliveries in November 2019 and December 2019, respectively. Li Auto is backed by Meituan Dianping (3690 HK) which owns 14.5% of ordinary shares (5.8% of voting power). It is seeking to raise $500 million through a Nasdaq IPO, according to press reports. 

The IPO seems to be timed to take advantage of the surging share prices of NEV (new energy passenger vehicles) manufacturers such as Tesla Motors (TSLA US) and NIO Inc (NIO US). However, NIO’s wild share price swings suggest that investing in the China NEV sector requires nerves of steel. On balance, for investors seeking exposure to the China NEV sector, Li Auto’s fundamentals are attractive, in our view.

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

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  • 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.

4. FMCG Is the Next Big Growth Driver & Battleground for China E-Commerce; Big Tech Moves In Force

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FMCG E-Comm is China Tech’s Next Big Growth Driver & Battleground

At a time when overall retail e-commerce in China has already reached 44% penetration, e-commerce penetration for fast-moving consumer goods (“FMCG”) still lags behind tremendously. According to Euromonitor International, only 6.3% of fresh foods and 8.8% of alcoholic beverages were purchased online in 2019.

This gap represents a major growth opportunity as consumers, having grown accustomed to the convenience and safety of ordering FMCG products online, are now permanently shifting purchasing behaviors.

Already, Chinese Tech giants such as Alibaba and JD.com have moved in force – doubling down on their FMCG investments via Freshippo and JD Supermarket. Tencent is also making its own moves – investing in grocery startup Xingsheng Youxuan and valuing it at US$3bn.

Investors have taken note of this upcoming structural trend and have also moved in size. As seen in the chart below, companies with exposure to FMCG e-commerce have handily beat the broader market with names like Pinduoduo and Meituan Dianping doubling in value in just two months. Dada Nexus, an online grocery firm backed by JD.com, also chose to IPO in early June despite the COVID backdrop – its stock price has since soared by 100%+.

Source: Capital IQ, Zero One. Note: Dada Nexus return calculated based on IPO date (June 5, 2020).

Read our previous FMCG E-Commerce Insights:

5. China STAR Board – Launch of STAR50 Index and Inclusion in SSE Composite Indices

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The China STAR market (or the Science and Technology Innovation Board, or China’s reply to the NASDAQ) started trading on 22 July 2019 with 25 stocks listed. Currently, there are 123 stocks listed on the STAR Board.

Turnover has picked up over the last few months as the market moves higher and tries to reach the highs that it did in August 2019.

To celebrate its first anniversary, there have been a number of announcements made on inclusion eligibility of STAR Board stocks in the Shanghai Stock Exchange Composite index, potential inclusion of STAR Board stocks in the Stock Connect program, and the launch of the STAR 50 index. Put together, this should increase the visibility of the stocks listed on the STAR Board by improving accessibility and bringing passive index flow in to the market.

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