Bottom-Up Equities

*One Reorganization Down, One More To Go: Tencent Holdings (700.HK) [Tencent] announced a new round of organizational and employee adjustments in its Platform and Content Group (PCG) – the largest reshuffle since it began in 2018. With Alibaba Holdings (BABA] agreeing to form a financial holding company. Tencent cannot be far behind; and  

*Earnings To Decline, Capital Requirements To Increase: For Tencent, WeChat Pay and the broader lending/deposit taking business are likely to be reined-in. At CNY 38.5 bn, FinTech represents a growing 28.8% of revenue – and are key component of Tencent’s current and future results.  No matter what spin that Tencent wants to place on its other businesses, an FHC represents significant downside risks. Earnings will compress, as capital requirements increase.

*Another Potential Default:  Again in mainland China, there have been rumblings of another credit default over the past several days. The CBIRC disclosed that China Huarong Asset Management (2799.HK) [Huarong] is actively working with its auditor to complete its annual report. The issue appears to be Huarong’s legacy exposure associated with the misdeeds of its former Chairman, which still need to be addressed post-removal in 2018; and 

*Ratings Agencies Are More Than Culpable: Wouldn’t you know it, the sleepy, fee hungry ratings agencies (Standard & Poors, Moody’s, and Fitch Ratings) finally put Huarong on review for a potential downgrade. C’mon guys, where have you been?

Recently, Jiangsu Hengrui Medicine (600276 CH)‘s share price has seen a significant pullback. Since April 9^th, 2021, the Company’s stock price had fallen for six consecutive trading days, with a cumulative decline of more than 10%, and its market value dropped by about RMB63 billion. So what happened to Hengrui? And what is the future business prospects of this Company? The following mainly included some important insights that deserve to pay attention to.

Shenzhen Expressway Co H (548 HK) announced a positive profit alert for 1Q21, indicating that its recurring profit will reach about Rmb533m, versus losses of Rmb160m a year ago as the impact of COVID-19 subsided. More importantly, such profit indication is even 10.2% higher than 1Q19, suggesting a full-recovery in traffic and toll revenue momentum.

SZ Exp contributed 44.3% of Shenzhen Intl (152 HK)‘s recurring profit (ex-Shenzhen Airlines) in the last two years. The potential acquisition of Shenzhen Investment Holdings Bay Area Development (737 HK) has received waiver from the SFC for a mandatory general offer and a successful conclusion should beef up SZ Exp’s assets. Lastly, with SZ Exp’s target of an estimated 35% increase in its EBITDA, we believe these factors will support SZ Exp’s contribution to SZ Int’s profit outlook in this year.

*Results Materially Supported By Provision Reversals and Principal Transactions: Citigroup (C.US) [Citi] reported 1Q21 bottom-line results of USD 7.6 bn, increasing USD 3.7 bn (89.0%) linked quarter. Citi reversed provisions of USD 2.1 bn – increasing 43.7x versus 4Q20. In addition to the negative provision, Citi’s results were also supported by a USD 2.0 bn (99.7%) increase in principal transaction gains;

*Credit Weaker But Coverage Strong: Net new NPLs came in about 1/3 of the previous quarter’s result came in at USD 635 mn or increasing 48.0% on an annualized basis – still far worse than JPM for the last three consecutive quarters. Citi’s loan loss reserve declined to 422% of NPLs and 325 bp of total loans – but still pretty darn good for the known and potential risk in the loan portfolio; and 

*Puzzling EM Exit: Citi also announced strategic changes in the Global Consumer Bank (GCB), where they are exiting 13 markets, of which ten are in Asia-Pacific. As rationale for the move, new CEO Jane Fraser believe that Citi “does not have the scale” to compete in those markets which account for USD 7 bn in allocated equity and USD 70 bn in loans. We await clarity on the potential restructuring costs and the capital release from these divestitures.

*Update Confirms Weak Outlook: Negative rental reversion rates persist in Hong Kong, as do negative tenant sales. We continue to await another round of negative revaluation of property due to lower rents and/or higher cap rates; and  

*No Serious Capital Management Strategy Exists: Management of Link appears hellbent on destroying shareholder value.As gearing was 19.2% at September 2020, management continues to believe that it has abundant headroom to add debt for acquisition. Instead of weighing a buyback’s return versus new investment ROI, management views share buybacks as a mechanism to defend its shares against short-selling. Maybe a re-re-review of its acquisition strategy will occur by earnings when Link’s new mainland China acquisition strategy truly flops.

Thai Beverage (THBEV SP) has deferred the earlier proposed listing of BeerCo, it’s subsidiary that holds beer assets in Vietnam and Thailand, citing current uncertain market conditions and volatile outlook, aggravated by the worsening COVID-19 pandemic in Thailand and other countries. This upends our bullish view on the stock ( Thai Beverage: Bouncy 1QFY21 Can Fire up the Stock; 20% Upside on SOTP ) as we see little upside to the stock in the near term with no catalyst to trigger a valuation upside. Recent reports of a third wave of infections in Thailand has led to Government imposing fresh restrictions including a ban on sale of alcohol in restaurants, adding further concerns on a protracted revival in tourism. 

In this insight we discuss Thai Beverage (THBEV SP) ‘s valuation to assess what is priced in the stock and discuss  investment view on the stock at current levels.

*Results Better, But Likely Unsustainable: Bank of America (BAC.US) [BAC] reported 1Q21 bottom-line results of USD 7.6 bn, increasing USD 2.4 bn (45.2%) linked quarter. Results were driven by two factors: a) a negative USD 1.9 bn, in contravention to overall credit performance; and b) a USD 2.1 bn (147.3%) increase trading activities, the sustainability of which we call into question; and

*BAC Still Needs To Focus On Credit Quality: Given the USD 774 mn in NCOs (33 bp annualized of total loans), we note that net new NPLs reversed course – increasing a a high 74.8% on an annualized basis. JPM and Citigroup each reported declines. Relative to NPLs, however, reserves – while still significant – declined 67.4% to 3.00x while declining 24 bp to 1.79% against total loans.

HDFC Bank, reported its Q4FY21 results today. With the Supreme Court lifting the stay on NPA classification, all eyes were on the asset quality of the Bank. Covid seems to have impacted the Retail book more, for HDFC bank as it resorted to resolution of personal loans and also dipped into contingent provisions, thereby keeping the NPA’s at bay.  All other parameters were largely steady

On April 15, the Nikkei reported that Japan’s Ministry of Economy, Trade and Industry and Organization for Cross-regional Coordination of Transmission Operators have drawn up plans to double the nation’s interregional power grid capacity by linking the northern and southern islands of Hokkaido and Kyushu to the main island of Honshu and expanding connections between other regions. Details are expected to be announced later this month.

This should provide long-term support for Nissin Electric and other makers of electric power equipment. In the meantime, Nissin’s power equipment, ion implant and other businesses are rebounding from the COVID downturn. 

Projected valuations indicate 30% potential upside.

Some of the key infant formula related stocks that could benefit from the Chinese government allowing three or more children include A2 Milk Co Ltd (A2M AU), Beingmate Baby & Child Food (002570 CH), and China Mengniu Dairy Co (2319 HK).

Launched on April 15th, Geely’s highly anticipated EV model, Zeekr 001, beat market expectations by offering reasonable prices and attractive features.

Market feedback shows that it’s gaining interest from potential buyers who initially target to NIO, Xpeng, BYD Han and Tesla. Please see the details in the note. As a result, it’s very likely that Zeekr 001 would become one of the most popular local brand EV models in China market.

We believe Geely’s valuation re-rating would be triggered. Compared to BYD which trades at 75.8x P/E 2021E due to market’s preference on BYD’s EV future, Geely trades at 18.7x P/E 2021E based on Bloomberg consensus.

Furthermore, Geely and its parent company are seeking for IPO opportunities for Lotus and Zeekr (owned by Geely), and Polestar and Volvo Car (owned by Geely’s parent company). These could become Geely’s valuation re-rating triggers as well.

We initiate coverage of CKP with a HOLD rating, based on a target price of Bt5.3, derived from a discounted cash flow valuation (WACC of 8.0% and TG assumption of 1%). Our valuation implies 25x PE’22, or a 1.9x PEG in line with its global peers.

The story:

• Absence of capacity expansion to hinder growth.
• Earnings surge in 2021 from better hydro operation
• High lead time for new project COD leaves upside in doldrums.
• Valuation seems to have factored in present business performance

Risks: 

• Foreign exchange rate fluctuation
• Drought
• Delays to new projects

Background: CKP engages in electricity generation and sales with various national regulatory bodies and Industrial users, both domestically and internationally, with 8 power plants, totaling 2.17GW installed capacity (1.0GWe, 6th largest listed power producer in Thailand). The company operates 5 projects directly (460MWe) and holds minority stakes in the remaining ones (550MWe). CKP is one of the major hydropower plant developers in Laos (PPA with EGAT), which is home to the bulk of CKP’s portfolio (829MWe, 82%), with the remaining plants spread across cogeneration and solar power facilities in Thailand. The company is a subsidiary of CK Group (CK TB), and is headquartered in Bangkok.

We initiate coverage of CKP with a HOLD rating, based on a target price of Bt5.3, derived from a discounted cash flow valuation (WACC of 8.0% and TG assumption of 1%). Our valuation implies 25x PE’22, or a 1.9x PEG in line with its global peers.

The story:.

Risks: 

Though not in the same league as top markets such as Pakistan, Turkey, or Egypt, Philippine banks are commanding better than average VFM Scores (Valuation, Fundamentals, Momentum). The market in general is not expensive versus long-term valuations, at least on a CAPE basis. (Trading at a 25% discount to average CAPE). We highlighted recently the merits of CHIB and add Rizal to our list of candidates for a small-cap GEM portfolio.

Rizal dedicates itself to mainly corporate credit (69% of Loan book) and to a lesser extent consumer segments (31% of credit), backed by source of funding balanced by Savings-heavy CASA (56% of Deposits) and by time deposits (43%).

FY20/19 results show robust fundamental trends. There were improvements in NIM/Spread, in Efficiency, in Capital Adequacy, in Liquidity, and in Provisioning. There was though deterioration in headline Asset Quality, characteristic of the System in general, while Profitability saw only lightweight erosion. The bottom-line was supported by firm “Core Income” growth, rooted in much lower Interest Expenses, combining with Margin and Efficiency gains, and with a steady contribution from non-core streams, which together more than offset a jump in LLPs which reduced Comprehensive Income growth to 78% YoY. Earnings Quality remains subpar at Rizal with its dependence on trading gains. However, progress on Efficiency, Capital Adequacy and Liquidity is highly encouraging. The bank’s toxic exposures are covered by loss-absorption buffers.

Expropriation.

Not the word Hong Kong property developers, sitting on millions of square feet of farmland, wish to hear. And the newish Bauhinia Party (just) stops short of suggesting such an approach.

But a recent internal discussion paper, authored by an executive committee member of the Bauhinia Party, refers to the housing issue in Hong Kong, wherein the gap between the rich and poor is widening, causing social unrest to the point of “threatening the security of one country“. The paper indicates the Central government has the right to coordinate the supply of land in Hong Kong.

The Bauhinia party, established by mainland Chinese executives, is a pro-Beijing political party with close links to Beijing’s authorities. I would not be so quick to dismiss such commentary and the potential knock-on effect to local property developers.

More below the fold.

JD.com Inc. (9618 HK) has been a shining example of what can be achieved through both Operating- and Financial leverage as a business scales up. This has been a commendable performance by its management team over the past nearly a decade, balancing gains from operating and financial leverage, whilst prudently, yet aggressively, investing in growth. Over the past 8 years it has delivered expansion at the Gross margin level (through mix change to advertising revenue and scale in 1P), the Operating margin level (lower losses in 3P), and the net margin level (cash generation and lower losses from associates). 

With lingering concerns around short-term margin expansion, as the group invests more aggressively in group purchasing aimed at the fresh food segment, in this insight, I analyse the potential for long-term margin expansion and what that implies for current valuation levels for China’s largest direct retailer.

• NSG’s share price has rebounded to its pre-COVID level but is still 44% below its 2018 high.
• Demand for architectural, automotive and speciality glass is on the rebound. Year-on-year sales and operating profit comparisons have turned or are turning positive.
• As business returns to normal, projected valuations suggest 30% to 50% potential upside.

ZOZO Inc (3092 JP) is accelerating category expansion and last month unveiled a new luxury/designer section alongside its new cosmetics space. Zozo Villa will help Zozo increase sales as well as raise margins through higher average shipment values.

Arteria Networks is a facilities-based provider of fixed telecom services that stands out for having the fourth-largest fiber network in Japan whilst it is also a major provider of ISP services to condominiums. Its main business is the provision of Internet and network services to Enterprise customers and the company is well positioned to grow, especially as a coronavirus-driven demand shift expands the market. We initiate coverage at Buy supported by a ¥2,380 target price for FY21-end implying 48% potential upside.  

We consider Internet Initiative Japan (IIJ) to be a core holding in the Japan telecom space, supported by exposure to faster growth corporate revenue buoyed by a track record of success in bringing new products and services to market. The company has generally operated at the leading edge of service offerings being among the first to offer cloud services and MVNO mobile, followed more recently by network tools like security and IoT solutions. This progression of adding services to sell into a receptive enterprise user base has helped generate consistent top-line growth for over 20 years with margin improvement and free cash flow generation now ramping up. We value IIJ at ¥3,270/share and with 25% potential upside we are initiating coverage at Buy.  

*Results Should Only Get Better: JP Morgan Chase & Co (JPM.US) [JPM] reported 1Q21 bottom-line results of USD 13.9 bn, increasing USD 2.2 bn (18.4%) linked quarter. Results were essentially driven by two factors: a) revenue growth at the Corporate & Investment Bank (CIB) of USD 3.3 bn (28.7%) due primarily to principal transactions which increased USD 3.0 bn (103%); and b) a reserve reversal of USD 4.2 bn – increasing USD 2.3 bn (120%) over 4Q20’s provision reversal. The strength of the bottom-line, should allow larger capital returns in 2Q21 predicated on the Federal Reserve Board’s (FRB) dividend payout ratio test; and

*Credit Improvement: JPM’s net new NPLs linked quarter amounted to just USD 638 mn or a 22.2% increase on an annualized basis – which is incredibly good. Given the current risk profile of JPM’s loan portfolio that the company remains over-provided for and that we will continue to see loss provision reversals until loan growth returns in some meaningful way.

Seijo Ishii is Japan’s largest upscale supermarket chain and is owned by Lawson Inc (2651 JP) (and thus in turn, Mitsubishi Corp (8058 JP)). Last year, as people stayed at home and looked for higher quality foods  to replace dining out, the chain outperformed. Selling fresh food and its own range of exclusive deli and many imported brands, it is an excellent partner for overseas firms.

Seijo now has one of the highest margins of any supermarket in Japan.

Tata Consultancy Svcs (TCS IN) reported its Q4FY21 earnings. Optically, it reported strong growth but the devil lies in the details. There is not much to cheer about! Adjusted for TCS’ inorganic captive acquisitions, the growth appears to be moderate. All that is there to cheer about, is already priced in. While the Digital Transformation and Cloud Services segments no doubt present a long runway for growth, the current valuation seems to be already pricing this in. 

While the Mar traffic figures continued to show that Air China Ltd (H) (753 HK) is still lagging behind China Southern Airlines (1055 HK) in many areas, there is no doubt that such underperformance is reducing sequentially. The latest figures show that Air China is narrowing its gap on passenger load factor, seeing rebound in international passenger traffic, registering better cargo and mail strengths and catching up on freight and overall load factors.

We believe many of these attributes fit well into our arguments for a reversal of CSA’s outperformance against Air China in this year as we written in 2021 High Conviction: Pair Trade – Long Air China (753 HK), Short China Southern (1055 HK). The relative valuation also suggests CSA is richly valued against Air China. For details, please refer to our attached update presentation file on the trade. 

The irony.

China Huarong Asset Management (2799 HK) was originally set up in 1999 by Beijing, in response to the Asian financial crisis,  to bail out a State-owned bank – ICBC – before listing. Rumours abound the State may resort to bailing out Huarong or risk a domino effect of losses at other (state-owned) entities which have lent to Huarong.

The bailer becomes the bailee?

Huarong’s woes are not new. Its chairman, Lai Xiaomin was placed under investigation for graft in April 2018, following which he resigned for “personal reasons“. 

Shortly after, Hong Kong’s SFC froze HK$10.17bn of assets in three brokers – this amount is the loss incurred by Huarong. In the SFC’s words, a certain person “orchestrated fraudulent schemes by colluding with certain personnel of the management of a listed company [Huarong] or its subsidiaries in 2 suspicious transactions stemming from a loan facility indirectly granted to the Person by the listed company”.

Fast forward to the 29 January this year wherein Lai Xiaomin was executed in what Bloomberg (perhaps) sardonically concluded was an unusually harsh sentence for a bribery conviction. 

Huarong has been suspended since the 1 April 2021 after failing to despatch its 2020 annual report. In Hong Kong, companies are afforded three months from year-end to do so.

Huarong is not alone – at least 50 Hong Kong-listed companies have failed to report earnings on the March 31 deadline. Last year, 384 Hong Kong companies did not publish annual results by March 31, but were able to continue trading after the exchange and markets regulator relaxed the rules due to the pandemic. This year there was no such arrangement.

But Huarong has come under pressure following a commentary from Caixin Media of a possible bankruptcy. In a commentary dated on Monday, Ling Huawei, managing editor of Caixin Media and Caixin Weekly, discussed the possibility of a China Huarong bankruptcy. “As of mid-2020, Huarong had 160 billion yuan [$20 billion] in net assets, and more than 30 billion yuan in loan-loss provisions,” she wrote “Huarong needs to be thoroughly recapitalised and have the value of its nonperforming assets correctly recalculated. It needs to take a big bath.”

The yield on Huarong’s US$300mn 3.375% bond due May 2022 has blown out to 23%. 

This has all the hallmarks of the Evergrande Real Estate Group (3333 HK) situation in September last year covered by Travis Lundy in Evergrande May Be Facing a Funding Squeeze.

The equity here, as might be expected, is the riskier option if the company goes bust. Yet a systematic restructuring process is a more likely outcome here.

Creditors are also often protected but this situation will test both state support of an SOE and how keepwell agreements are treated. The offshore bonds at ~70c look interesting.

The fact is that Toshiba is now in play for privatisation with the CEO out and one of the more prominent activists citing their position and desired starting valuation. However, this is likely to be far from a linear trajectory to its end chapter. It will likely remain a fast-moving situation – as we write this note, the landscape has evolved almost on an hourly basis – and we do not expect it to slow in the next few weeks. As we stand at the time of publishing, there are several summary points to consider, particularly as we leave the Introduction phase of this story and proceed to embark on Chapter One of our fourth theme in 2021’s activist landscape. 

The PBOC, CBIRC, CSRC, and SAFE summoned Ant Group for a second joint meeting, ordering the fintech giant to rectify its business operations so that it is compliant with regulations and law. This also includes serving the real economy and supporting national development strategies.

For our next Smartkarma Corporate Webinar, we are glad to welcome the Management and IR team of Prodia Widyahusada (PRDA IJ). The speakers include:

• Dewi Muliaty – President Director 
• Liana Kuswandi – Finance Director
• Magdalena Vandry – Head of IR 
• Stephanie Setiawan – IR 

The Prodia team will share a short company presentation and have a fireside chat with Smartkarma Insight Provider Angus Mackintosh, followed by a live Q&A session.

The Corporate Webinar will be hosted on Tuesday, 20 April 2021, 17:00 SGT / 16:00 JKT.

Corporate Webinars by Smartkarma Corporate Solutions feature discussions with IROs and Executives, discussing their companies, the challenges they face, and the opportunities in their sectors and markets.

• Ant Financial Services Group (6688 HK) is restructuring its business holdings, with at its core the setting up of a financial holding company
• In addition, Ant will return to its roots in the payments division, it will set up a personal credit reporting company as well as establishing a consumer finance company
• The official press release does not mention the investmentech arm that includes Ant’s in-house asset manager, but there is financial press speculation that it may be required to shrink its asset base
• In essence, the new structure and more intrusive regulation will limit Ant’s ability to extract synergies from its – previously – tight knit financial eco-system, which can only hurt its potential develop further economies of scale and deliver premium revenue and earnings growth
• It is also likely that in its consumer credit business it will need to retain a higher proportion of loans originated, thereby necessitating higher capital levels; the personal credit reporting company will also provide PBoC with access to Ant’s “big data” on payments, credit and other financial products
• Despite the need for further clarity on the regulatory structure going forward, as well as the lack of any updated Ant financials to December 2020, we have arrived at a revised valuation range for Ant, based on our pre-money SOTP, of USD122-144bn
• The regulator’s focus on big FinTech in China and especially Ant is constructive for the prospects of other less dominant non-bank financial companies (NBFCs) in China, such as Lexinfintech Holdings (LX US) and Lufax Holdings (LU US), as well as retail focused banks like Postal Savings Bank of China (1658 HK) 
• Risks to our cautious view on Ant include an ability for management to navigate the climate of tighter regulatory constraints and to deliver better than expected premium growth and returns from its digital financial platform

PT Surya Citra Media Tbk (SCMA IJ) released results last week, which were striking in how well the company coped with months of not being able to produce new content due to COVID-19 restrictions. This year should see a recovery in its FTA TV advertising revenues but an increasingly positive impact from its digital business.

The company managed to maintain its number 1 & 2  position in terms of audience share in 2020, despite playing re-runs, demonstrating the strength of its drama content.

Competitor Media Nusantara Citra (MNCN IJ) surged ahead with the success of its drama series Iketan Cinta, which dented PT Surya Citra Media Tbk (SCMA IJ) year-end rankings but it has started to regain share in 1Q2021. 

PT Surya Citra Media Tbk (SCMA IJ plans to produce 300 hours of high-quality drama content in 2021 versus 110 hours in 2020, which should help to secure audience share along with more sponsored events such as concerts. 

Vidio.com continues to gain ground in terms of paying subscribers and already ranks as the number three player in terms of paying subs in Indonesia. 

The company is ahead of the curve in terms of progress in the move from analog to digital, with parallel broadcasts already being trialed.

PT Surya Citra Media Tbk (SCMA IJ) trades on 19.0x FY21E and 15.7x FY22E PER, versus its 5-year average of 18.6x forward PER, making it look relatively attractive.

The two weeks nightlife ban has been put in place by the Thai government and possible further extension if this third wave is not resolved soon enough as the increase in the daily community cases have reached the second wave level. If things do not go under control soon enough, we should expect a stricter measure from the Thai government which means a further extension of the nightlife ban.

Since 6 months ago, Thai Beverage (THBEV SP) has been trading at a discount compared to the peers due to the bigger exposure in domestic tourism. With the reinstatement of the nightlife ban, Thai Bev is likely to trade at discount to the peers until the third wave pandemic is solved and vaccination has started to take place.

As of last week, the Nikkei Newspaper reported The US$20 billion buyout offer for Toshiba by U.K. investment firm CVC Capital Partners. This confirmed our view that we shall see an increasing number of Private Equity Managers start to use its dry powder in more significant ways to create and lobby for corporate change, thereby assuming their activism role. We discuss valuation, the key items which must occur for traditional activists to accept this transaction as well as the chances of a competing bid amongst other items. We specifically examine why management is going to have to declare their position and interests, in the coming days to ensure a clear and efficient. Failure to do so is likely to see them out of office ahead of this transaction even having the chance to be successful.

The war between Softbank Corp (9434 JP)/Z Holdings (4689 JP) and Rakuten for leadership in digital ecosystems has seen Z Holdings acquire new partners and subsidiaries, and take leadership in cashless payments and then messaging through its merger with LINE Corp (3938 JP).

Now Rakuten Inc (4755 JP) is fighting back with a truly game changing deal with Japan Post Holdings (6178 JP) that could provide the reach and finance to develop new synergies in e-commerce, logistics, cashless payments and points, banking, insurance and mobile.

This is a major reset in the rivalry in digital commerce, making Rakuten almost like a state-backed enterprise – with all the benefits that implies. Z Holdings should be worried.

Building on our previous insight Bandhan Bank (BANDHAN IN) | On Ground Narrative from Assam and West Bengal, we again speak to 20 DSC (Door Step Center) managers of Bandhan Bank (BANDHAN IN) across Assam and West Bengal (both together are 60% of the EEB portfolio) with an objective to understand the current situation post-Q4 and the recently concluded state elections. 

Just days after Alibaba Group (9988 HK) was hit with a record US$2.8bn fine for breaching China’s antitrust regulations, The People’s Bank of China announced yesterday that Alibaba affiliate, Ant Financial Services Group (6688 HK) has agreed to restructure its business lines and become a financial holding company with regulatory oversight from PBOC and minimum capital requirements.

The settlement of these two issues signals an end to most of Alibaba’s regulatory overhang that resulted in Alibaba’s underperformance compared to its peers since November 2020. Having said that, we feel Jack Ma Vs Xi saga is nowhere near the end (Last month the government asked Alibaba to dispose its media assets) and Xi and the Communist Party will continue to curtail the power of Chinese tech companies at every chance they get.

*Solid March Trading Result: Singapore Exchange (SGX.SP) [SGX] reported strong FY 3Q21 securities and derivatives volumes due to improving market caps and velocity. Securities value traded and average daily trading vale (ADTV) increased 50% and 24% MOM in March, respectively. Derivative volumes also improved 31% MOM to 23.2 mn contracts, reaching a new peak since July 2020; and 

*A Wrench Thrown Into SGX’s SPAC Plan:  The U.S. Securities and Exchange Commission (SEC) issued accounting guidance for SPACs, calling warrant issuance by SPACs liabilities rather than equity instruments. This could disrupt new SPAC filings, and certainly throw a wrench into SGX’s SPAC plans.

• Tencent raised its online TV subscription fees by 17%~50%.
• The fundamental cause is the loss in online TV, but the direct cause is competitor iQiyi raised the fees last November.
• We believe Tencent’s operating margin will improve slightly in 2021.
• We also believe the stock price will have an upside of 19% by the end of 2021.

Our previous coverage on Tencent:

• Tencent (700 HK): Q4, Promising in All Businesses, Price Down, Upgrade to Buy Again
• 2021 High Conviction: Long Tencent as All Competitors Are in Trouble

Bandhan Bank, the largest player in the micro-finance space released its Q4FY21 Business update. What makes this doubly interesting is that Bandhan is the largest player in the Indian micro-finance space and also the market leader in Assam and West Bengal – the 2 states which are currently at the center of the election frenzy. Initial trends point to solid loan growth and improved collections, despite the election overhang in these key states 

PC Partner (1263 HK) reported solid 2020 results but last week’s earnings call provided a mixed outlook. 

On the one hand, there is great demand for GPU’s and this is likely to continue into 2H21. On the other hand, the companies’ two main suppliers Advanced Micro Devices (AMD US) and NVIDIA Corp (NVDA US) can not deliver GPUs fast enough. On the positive side, this is leading to increased ASP (+15%) but on the negative side, volumes are dropping (-20/-30%) while costs (labor, logistics, memory) are rising.

Clearly, this is an industry-wide issue and not Pc Partner specific but it does mean that 1H21 will still be stronger than 1H20 but weaker vs 2H20. Fortunately, Pc Partner remains cheap and it will pay a 0.22 HKD dividend (6.4% dividend yield) by mid-July. Investors can also look forward to an interim dividend in August. The downside in the stock is limited but the upside is capped until supply issues at Nvidia and AMD are resolved. 

We lower our Fair Value estimate to 4 HKD (based on 6x 0.67 HKD FY21 EPS vs 0.75 HKD prior estimate), which leaves another 17% upside. Since IPO the company has traded on a multiple of 4x (low end)-6x (high-end). 

China Tourism Group Duty Free Corp Ltd (601888 CH) expects recurring net profit of Rmb2.834bn for 1Q21, compared with a loss of Rmb120m in 1Q20. On a QoQ basis, this is down by a marginal 3.8% with a retreat in operating margin. Despite so, we still see this set of result as decent, and it represents about 25% of the full-year consensus forecasts.

Share price of CTG Duty Free was off 10% yesterday before the earnings announcement, with various concerns including border-opening in Hong Kong, anti-trust risk and clamp down of duty free grey-market, among others. We, however, think that fundamentals stay solid and these concerns are overplayed. With share price already fallen by 34% from the peak, value starts to emerge for this duty free leader in China, in our view.  

Due to the worsening COVID-19 conditions in Thailand, investors may sell off Airport of Thailand’s share in the coming months although the long-term prospect remains solid; global inoculation is on the way and governments around the world keep tinkering with the travel bubble that helps to provide more ideas on how to restart travel, mainly in safe entry and quarantine protocols. 

PBoC (People’s Bank of China) said on Monday that a “comprehensive, viable rectification plan” for Ant Group had been agreed to and Ant Group will overhaul its business in compliance with higher regulations for Internet finance platform companies.  As a result, Ant Group will apply to become a financial holding company. 

Similar to the AML fine on Alibaba, we believe this directive will now allow Ant Group to move forward possibly with a slightly lower valuation but share overhang lifted.  At the same time, I believe the market will be relieved to hear the regulator’s carefully crafted supportive tone towards the Internet platforms.   

Impact: 

• The impact on Alibaba Group (BABA US) is nominal, in my view.  Alibaba owns 33% of Ant Group.  With the market already having priced-in a bear case scenario, we believe this news has minimal impact on Alibaba’s valuation.  
• I believe the market already valued Ant Group at USD170-180 billion after the failed IPO.  This news does not change the valuation significantly.  

Implications: 

• As a holding company, Ant will be subject to higher capital requirements.  But the market is well aware of this already.  (Please see our report, Alibaba (BABA US): Ant Group Woes Overly Priced-In, dated 27 February 2021)
•  Ant will have to reduce the liquidity risks of its investment products including the InsureTech products and specifically rein-in the AUM of Yue’bao, its money-market mutual fund.  This was broader than expected.  It is difficult to imagine how to stop consumers from selecting an investment product.  
• Set up a consumer credit reporting company and strengthen the protection of personal information.  

Fast Retailing (9983 JP) delivered 2QFY21 results on 9^th April 2021 with revenue and operating profit falling behind consensus estimates by ¥21.5bn (4%) and ¥6.7bn (11%) respectively. However, the company raised its FY21 consolidated revenue and operating income guidance by ¥10.0bn each to ¥2,210bn and ¥255.0bn respectively.

Even following a 20% decline in the share price in the last couple of months, Fast Retailing’s valuation remains extremely expensive. Thus, we would not rush to buy this dip.

The presentation today would mainly include the following parts:

• 2020 and 2021Q1 financial results
• Market potential 
• Business analysis 
• Financial Analysis (Topchoice Medical (600763 CH) vs Aier Eye Hospital Group (300015 CH))
• Summary
• Risk disclosure

Credit Access Grameen Limited, the largest microfinance NBFC in India, released its Q4FY21 Business update. As a leading player in the micro-finance space, its performance is largely indicative of the underlying trends in the micro-credit space. While improved collection efficiency and rising disbursements augur well , exposure to Maharashtra remains a pain point with the State being most impacted than others

Times Neighborhood (9928 HK) has corrected sharply over the last 6 months despite showing stellar results. We believe that the correction in the stock is due to: 

• A small probability of the parent ( Times China (1233 HK) ) breaching the three red lines.
• Tightening by the Chinese government in the property sector.
• IPO fatigue in the sector. 2020 featured the listing of several property management companies that raised lots of cash, casting doubt on the companies ability to make acquisitions at good prices to fuel its future growth.
• Pivot by the company from a more acquisitive to a third party strategy + expansion of community VAS services.

Source: Bloomberg

Why do we like Times Neighborhood (9928 HK)?

• We believe that with the current valuation of 12.4x FY21/8.6x FY22 and 5.8x FY23 implying >50% CAGR EPS growth from FY21-23,  Times Neighborhood (9928 HK) could potentially be an acquisition target for larger groups like Country Garden Services Holdings (6098 HK), China Resources Mixc Lifestyle Services (1209 HK), A-Living Services (3319 HK) or Sunac Services Holdings (1516 HK) that are targeting aggressive growth over the next 2-3 years. We admit that we don’t know if the controlling shareholders of Times Neighborhood (9928 HK) desire to sell out. Recently though, with the Sichuan Languang Justbon Service Group (2606 HK) founders having sold out to Country Garden Services Holdings (6098 HK), we believe this may be the first step towards increased M&A activity in the listed company space. We believe this acquisition’s consummation will lead to a rerating of the cheaper companies like Aoyuan Healthy Life Group (3662 HK), Central China New Life (9983 HK), and Times Neighborhood (9928 HK).
• Times Neighborhood (9928 HK)  has demonstrated good execution in its short time period as a listed company. 

We believe that Times Neighborhood (9928 HK) could double from here, trading up to 25x FY21 with a target PEG of 0.6x.

*Despite Cost Growth, Bank of Ningbo Pulls One Out: Bank of Ningbo (002142.CH) [Ningbo] reported 4Q20 bottom-line results of CNY 3.8 bn, increasing CNY 304 mn or 8.8% linked quarter. The linked quarter results improvement at Ningbo was driven by several factors: a) revenue improvement of CNY 571 mn (5.6%) and likely driven by loan growth of CNY 32.4 bn (5.0%); b) a CNY 752 mn (31.5%) reduction in loss provisioning; and c) a 6.3% reduction in Ningbo’s tax rate to 7.3%; and

*Credit On Solid Footing: Despite the continued accelerated level of net new NPL growth at 83.4% on an annualized, Ninbo has a low base of NPLs.  It’s a good thing that Ningbo remains well-reserved and that credit risk appears quite manageable because capital levels remain somewhat challenged with a CET1 of just 9.5%.  

Following the cancelled Ant IPO in November of last year, sentiment towards Alibaba Group (BABA US) turned negative.  Average weights in EM portfolios fell from 6.57% in October to 3.82% today, the percentage of funds holding Alibaba Group (BABA US) fell from 83.4% to 81.7%, the percentage of funds overweight Alibaba Group (BABA US) fell from 41.1% to 30.3% and for the first time since 2018, the there was an excess of sellers over buyers.

With the regulatory overhang seen largely as done for now, we present 4 reasons why we believe EM managers will be incentivized to increase allocations from here.

Chinese regulators announced a record fine for Alibaba Group (BABA US) amounting to USD2.75 billion for violations related to antitrust regulations.  While the final amount for the fine was previously unknown, the fine itself is not a surprise.  

We believe this is a positive outcome for Alibaba: 

1. We did not see any hint of additional rectifications related to AML (Anti-monopoly law) other than the penalty amount. (Alibaba has already pledged to modify its “exclusivity” practice to allow for merchants to have greater freedom to list their products on multiple platforms. Share overhang related to this issue should dissipate. 
2. Alibaba could have been penalized more severely (as much as 10% of its revenues for antitrust violations).  The penalty amount represents only about 3.5% of Alibaba’s FY20 revenues (4% of CY2019 revenues).
3. The lower-than-expected fine amount appears to signal that the regulators are not trying to excessively debilitate the industry.  

We have highlighted the AML and the consumer lending regulation risks to be key share overhang on the BABA shares in our February report, Alibaba (BABA US): Ant Group Woes Overly Priced-In.   We believe BABA shares are undervalued due to the overhang.  The latest regulatory announcement signals the lifting of share overhang related to AML, in our view.  

Alibaba Group (9988 HK) has come under intense scrutiny from Chinese regulators since Jack Ma’s public criticism of China’s regulatory systems. The latest episode of Jack Ma Vs Xi & The Communist Party ended yesterday with The State Administration for Market Regulation (SAMR) imposing a fine of RMB 18.2bn for violating anti-monopoly rules.

Alibaba Group (9988 HK) received an 18 billion yuan (2.75bn USD) fine over the weekend after a 4-month anti-monopoly probe into the company. The fine represents 4% of Alibaba’s 2020 sales and 20% of its 2020 consolidated operating profit. We note that Alibaba has a net cash position of 195bn RMB excluding investments on its balance sheet as of FY20 suggesting that Alibaba does have the resources to pay this fine. We dig into the implications of this fine below as well as give our updated thoughts on the stock and current consensus.

Our previous research highlighting potential flaws in consensus forecasts which we believe remains a medium-term risk can be found here: 

Alibaba – Potential Flaws in Consensus Forecasts? 

Alibaba – Is There a Problem in Core-Commerce? 

• SAMR’s RMB18.2bn fine for abuse of market dominance could potentially be seen as a watershed marking that the worst of regulatory risk is past
• In terms of Alibaba’s relative share performance, since the start of November 2020, it has clearly underperformed Tencent as well as Meituan and Pinduoduo
• Relative to these peers, Alibaba Group (BABA US) trades at a discount on the core valuation metrics; versus its closest competitor Tencent Holdings (700 HK) , Alibaba trades at a 28% discount to 2022E PE multiple and at a 21% discount to 2022E EV/EBITDA ratio
• Nonetheless, in terms of long term growth potential, Alibaba’s PEG ratio discount of 5% to Tencent is low
• In our view, Alibaba’s outlook, especially relating to regulatory risks, remain unclear, especially with regard to the future of Ant Financial Services Group (6688 HK), its value and its potential IPO
• Risks to our bearish view on Alibaba include a better than expected performance versus its core competitors and a fast resolution to regulatory risks with SAMR

*Focus On Positives: Given the scrutiny that Tencent Holdings (700.HK) [Tencent] has come under, it comes as no surprise that Tencent wanted to highlight its positive developments such as international expansion and tailwinds in gaming, potential ad load expansion in Video Accounts, and Mini Programs enrichment; and

*Elephant In The Room: Over time, it is our belief that Tencent likely will be required to create a financial holding company for all of its banking, insurance, and payment services businesses – and be regulated along the lines of the banking sector. For Tencent, WeChat Pay and the broader lending/deposit taking business are likely to be reined-in. No matter what spin that Tencent wants to place on its other businesses, an FHC represents significant downside risks.

• State Administration for Market Regulation (SAMR) fined Alibaba RMB18 billion.
• Alibaba had forced retailers to leave competitors via an “either-or” choice since 2015.
• The penalty amount is not significant to Alibaba.
• We believe that the penalty is just part of SAMR’s action after the new law, but not especially against Alibaba.
• We do not believe the penalty will impact Alibaba’s long-term value.
• We set an upside of 37% and a price target of USD$306 according to the 3-year P/E average.

Our previous coverage on Alibaba:

Alibaba (BABA): Many Positive Signals in December Quarter, 27% Upside

Alibaba (BABA): This Online Antitrust Wave, A Risk, But Not A Massacre 

BYD’s battery business has always been less meaningful compared to the automobile and mobile handset business (which investors can access through BYD Electronics (285 HK)), but the long-term prospect has always been exciting. The recent BYD’s Blade battery perks a positive rumor that the company will be able to sell in-vehicle batteries to other EV makers, increasing the group’s EBITDA by almost 40% depending on the various scenarios. Investors should be even more excited at the prospect that BYD’s battery business can finally contribute to the group’s more meaningfully. 

• HKEx is rising as a global trading venue as secondary-listing Chinese companies are moving to swap their US ADRs to Hong Kong shares. Since Alibaba Group (BABA US) pioneered the secondary listing scheme in Hong Kong in 2018, the share fungibility has opened the door for swapping its US ADR to Hong Kong. We estimated that 20% of outstanding shares of Alibaba have been moved to Hong Kong.
• Some top institutional investors, such as Temasek, Baillie Gifford, and Matthews Asia, are among the major shareholders that have swapped stakes in Alibaba Group (BABA US) US ADRs. This has reflected some strategic consideration to  avoid US sanction and delisting of Chinese tech companies. We expect this trend will likely accelerate in the future. For current 13 dual-listing Chinese ADRs, we expect 30% of total trading volume will be shifted to Hong Kong from US in next 2 years. This is a significant jump from around 18% of trading volume at Hong Kong now. Dual-listing Chinese ADRs at Hong Kong will likely accelerate as well. 
• HKEX (388 HK)  serves as the only offshore gateway to China capital market. HKEx has consistently enjoyed the superior margin and profitability, given that it can charge higher trading fee rates than other bourses. We forecast Securities ADT of HK$240bn in FY 21 (Hong Kong and Stock Connect Northbound). Given the acceleration of US ADRs conversion, there is risk to the upside of the Securities ADT forecast. We continue to favor HKEX (388 HK) and reiterate HKEx TP HKD 550. 

*AIA Needs To Slow It Down: Until recently AIA Group (1299.HK) [AIA] operated just five mainland Chinese provincial licenses. With Hong Kong falling down, mainland China has become AIA’s largest market in 2020, contributing 35% to AIA’s VONB. Concerned about weakening organic growth, AIA has gone on a deal-making spree: Bank of East Asia’s (23.HK) [BEA] wholly-owned life insurance unit, BEA Life; an exclusive 15-year bancassurance relationship with BEA; acquisition of Blue Cross (Asia-Pacific) Insurance’s underwritten closed life insurance; a strategic digital partnership with ZhongAn Online P&C Insurance’ (6060.HK) [ZhongAn]; and and received CBIRC approval to restructure its Shanghai-based life insurance branch into a wholly-owned subsidiary; and  

*Risks Of Aggressive Mainland Push: In addition to the massive managerial distractions with so many deals at one time, there are negative tax implications for mainland Chinese subsidiaries versus branches; challenges of bogusly rated AAA mainland Chinese bonds; no end in sight with its flailing Hong Kong flagship; getting the BEA Life team on the same with AIA Hong Kong; and potential impairments its USD-based investment portfolio. 

*Trying SPACs On For Size: On March 31, 2021, the Singapore Exchange (SGX.SP) [SGX] issued a Consultation Paper on the Proposed Listing Framework for Special Purpose Acquisition Companies (SPACs). The Consultation Paper is seeking comments on policy/rule proposals to allow SPAC listings on SGX;  

*Blank Check Companies: Special Purpose Acquisition Companies (SPACs) are not new and have historically focused on the Over the Counter (OTC) pink sheet companies. SPACs are essentially known as blank check companies, essentially a shell company which raises a significant amount cash in an IPO; and

*Not A Panacea: SPACs are not the panacea which will resolve SGX’s weakened revenue stream. Keep in mind that the majority of the US-listed SPACs remain below their USD 10 per share offering price and only seven have actually returned capital to investors. As the world heads toward a zero interest rate environment coupled with the giant vortex of skittish liquidity backstopped by central banks, the SPAC frenzy looks to be just the latest in a long line of unintended consequences of risk taking.

Yaskawa kicked off earnings season for the FA segment on Friday posting revenue of ¥390bn, above consensus of ¥388bn and guidance of ¥381bn. However, OP was just ¥27.2bn, marginally below guidance and significantly below consensus of ¥28.7bn. Yaskawa’s weak margins make us bullish on future margins.

We expect sales growths of late cycle products in construction machinery remain robust this year. 2021E sales growth of excavator (the main early cycle product) might beat market expectation and be as strong as 2020 levels, vs. market expected 10% yoy. In March, China’s excavator sales grew by 60% yoy to 79,035 units, much stronger than market expected.

Zoomlion, as the leading manufacturer with dominant market shares of late cycle products, would benefit from strong market demand on concrete machines and cranes in domestic market and further market expanding in One Belt One Road regions. In excavator segment, Zoomlion is gaining market share quickly. All the above would secure the company’s earnings grow solid in 2021-2022E.

Zoomlion’s valuation remains attractive. Currently local brokers’ average expected EPS of 2021E stands at Rmb1.1, indicating 8.9x P/E 20201E, lower than its historical average. Also, better than expected excavator market demand and Zoomlion’s market share gain bring earnings upside potential. 

Hitachi Ltd.’s restructuring continues with the acquisition of Kyoto Robotics and the planned sale of Hitachi Metals. We regard both developments as positive. 

• On April 8, the Nikkei reported that Hitachi Ltd. had given preferential negotiating rights for the sale of its 53.6% stake in Hitachi Metals metals to a consortium led by Bain Capital. The price was estimated at ¥800 billion (¥7.3 billion) or more, which could pay for most of Hitachi Ltd.’s recently announced purchase of GlobalLogic for $9.6 billion.

• Also on April 8, Hitachi Ltd. announced that it had purchased 96% of Kyoto Robotics, a designer and producer of three-dimensional machine vision and AI control systems for handling robots. This gives Hitachi advanced robotics technology and expertise, enhancing its ability to provide integrated systems for logistics and factory automation.

The removal of Hitachi Metals (5486 JP) from Hitachi Ltd.’s consolidated accounts would reduce total revenues by 9% compared with FY Mar-21 guidance but have a small but positive short-term impact on operating profit.

Kind of a mediocre underwhelming analyst presentation by one of our favorite software companies, but the larger long term picture remains intact: a huge pool of legacy incumbent endpoint providers that Crowdstrike will feast on for years to come.

Coupang’s biggest story during the IPO was, undoubtedly, a dramatic turnaround in operating cash flow.

Coupang delivered a $301.6B positive operating cash flow last year. It was the first time in its 10 year history.

There was no noticeable improvement in operating margin YoY.

As repeatedly pointed out, the single most important factor to the operating cash flow improvement was a substantial increase in the already high level of account payables.

On the last yearend, A/Ps total more than $1B, +155.9% YoY, substantially outpacing sales growth.

HSBC can continue to underperform DBS for a multitude of reasons, including both structural and cyclical factors. Higher oil prices will benefit DBS more so than HSBC, where the UK giant has de-risked and where total exposures are small. 

On 9 April, Kurly also announced that it will launch a new customer acquisition strategy with interesting marketing and discount promotions lasting until the end of next month. This extreme price competition by Emart, Kurly, and others will likely drive the overall industry margins even further in the next several months.

• We screen the 4Q20 results for credit quality and value of thirty five GEM banks
• We add a new screen showing tangible book value per share growth from 2016 to 2020, and compare this to 2020 PTBV ratio
• Specifically we identify six banks that screen well on these combined factors; Grupo Financiero Banorte-O (GFNORTEO MF), Credicorp Ltd (BAP US), Banco Do Brasil Sa (BBAS3 BZ), Hana Financial (086790 KS), Postal Savings Bank of China (1658 HK) and – in the higher risk category – Commercial International Bank (COMI EY) of Egypt
• A name to watch, albeit a higher risk GEM bank on attractive valuations, is Turkiye Garanti Bankasi As (GARAN TI) in Turkey; nevertheless, the unpredictable Erdogan factor still calls for near term caution
• Private sector Indian banks trade on demanding valuations, in our view; public sector bank SBI is the deep value, but relatively high risk, name in India with its relatively low NPL coverage levels
• Risks to our positive view on these six GEM banks generally include increased political and geo-political tensions, as well as a weaker than expected GDP growth recovery leading to worsen than expected credit quality  and weak loan growth