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China

China: Cloud Village, China Communications Construction, Eyebright Medical Technology Beijing, Shui On Land and more

By | China, Daily Briefs

In today’s briefing:

  • ECM Weekly (1st August 2021) – Cloud Village, Li Auto HK, Asymchem, Acotec, Devyani, Del Monte PH
  • China Comm Const (1800 HK): Well Placed for an Upturn
  • Eyebright Medical Technology (688050. CH) – A Good Company but The Valuation Is Too High
  • Morning Views Asia: Evergrande Real Estate Group, Shui On Land, Tata Motors ADR

ECM Weekly (1st August 2021) – Cloud Village, Li Auto HK, Asymchem, Acotec, Devyani, Del Monte PH

By Zhen Zhou, Toh

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

It’s another week of regulatory crackdown in China. This time, Meituan’s share price declined 21% since the start of the week after China issued regulations to tighten oversight of the food delivery sector by asking food delivery operators to respect the rights of delivery staff and to ensure that delivery workers earn at least the local minimum income. 

Then regulators published a statement on Friday afternoon stating that they will look to step up oversight on the property industry and specifically, poor practices like property management fees not being explicitly revealed, or more fees collected than originally stated, will be banned.

In the U.S, it was reported that the SEC has stopped processing registrations of U.S. IPOs and other sales of securities by Chinese companies. This came after CNBC reported on Thursday that China will continue to allow Chinese companies to go public in the U.S. as long as they meet listing requirements, according to people familiar with the matter.

For ongoing IPO coverage, in Hong Kong, we compared Cloud Village (NetEase Music) to peers, mainly Tencent Music, and discussed the impact of the recent regulatory action on Tencent Music. The company is planning to start pre-marketing next week.

Ke Yan continued his coverage of Acotec Scientific with a discussion of assumptions and valuation.

In the U.S, PropertyGuru and Bridgetown 2 announced that they have entered into a business combination agreement which will see PropertyGuru go public at an EV of US$1.35bn and equity value of US$1.78bn.

For A/H-share listings, we took an early look at Shenzhen-listed Asymchem Labs, which is aiming to raise US$1 – 1.5bn. We also shared our thoughts on Li Auto’s Hong Kong dual primary listing which was approved earlier this week and was looking to raise up to US$1.5bn.

In India, Devyani International’s IPO terms were launched. The company is looking to raise US$242m and anchor books will open on 3rd August while the bookbuild for other investors will be open from 4th – 6th August. We have already looked at valuation this week in:

In the Philippines, Del Monte Philippines ended its pre-marketing this week. We looked at peer comparison and shared our thoughts on assumptions and valuation. We also looked at potential proxy trade via Del Monte Pacific.

For placements this week, we covered PointsBet 1 for 9 accelerated, pro rata renouncement entitlement offer and institutional placement that was expected to raise about A$400m. Shares will resume trading on Monday with the company reporting that its institutional offer was well supported by new and existing local and international institutional investors.

Accuracy Rate:

Our overall accuracy rate is 73.8% for IPOs and 67.4% for Placements 

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

New IPO filings this week

  • Imeik Technology  (Hong Kong, US$3bn)
  • Biel Crystal (Hong Kong, US$2bn)
  • HeMo Bioengineering (Hong Kong, >US$100m)
  • ESAF SFB (India, re-file)
  • SJS Enterprise (India, US$108m)

News on Upcoming IPOs

Hong Kong/China

US/China ADRs

India

Japan/Korea

Others

Analysis on Upcoming IPOs

NameInsight
Hong Kong
Anjuke

Anjuke Pre-IPO – Mixed (Positive and Negative) Developments 

Betta Pharma

Betta Pharma (贝达医药) A+H: Tier 2 Player Struggled to Break Out 

Broncus

Broncus (堃博医疗) Pre-IPO: Big Potential to Be Tested 

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 

ByteDance

ByteDance (字节跳动) Pre-IPO: Global Ambition Meets Regulatory Challenges 

Dida

Dida Pre-IPO – Making Hay While Big Brother Retreats 

Dida

Dida Pre-IPO – Earnings Forecast and First Stab at Valuation 

Dida

Dida Pre-IPO – Peer Comparison – Lagging in Scale, Leading in Profitability 

Edding Grp

Edding Group (亿腾医药) Pre-IPO: Notes from Latest Financials and Its Related Party 

Edding Grp

Edding Group (亿腾医药) Pre-IPO: Notes from Latest Financials and Its Related Party 

Hanyu

Shanghai Hanyu (捍宇医疗) Pre-IPO: Not a Straight-A but Listing at Right Time 

Intco Med

Intco Medical (英科医疗) A+H: From China No.1 to Global No. 1 

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 

Novotech

Novotech Pre-IPO: Biotech Focused CRO at Hefty Pre-IPO Valuation 

RemeGen RemeGen (荣昌生物) Pre-IPO: Thoughts on Valuation of RC18 and RC48 
SH Bio-heart Shanghai Bio-Heart (上海百心安) Pre-IPO: Needs a Long Runway 
Toplist Toplist China Pre-IPO – Overwhelmingly More Negatives than Positives 
Tasly Tasly Biopharm (天士力生物) IPO: Visible Growth from Approved Drug but Lacks Blockbusters 
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 
WeDoctor We Doctor (微医) Pre-IPO – Peer Comparison – Picking Its Battles Wisely 
WeDoctor We Doctor (微医) Pre-IPO – Forecasts, Early Thoughts on Valuation, and Acquisition Gripes 
Weilong Weilong Delicious Global Pre-IPO – The Positives – Fast Growth, Strong Backers 
Weilong Weilong Delicious Global Pre-IPO – The Negatives – Spicy Valuation 
WM Tech WM Tech Pre-IPO – Digitalization Efforts Coming Through but Not Well Substantiated 
WM Tech WM Tech Pre-IPO – Peer Comparison and Pre-IPO Valuation – Some Signs of Advantage 
India
Aadhar Housing Aadhar Housing Finance Pre-IPO – Decent past Growth but Comes with Weird Disclosures 
ASK ASK Investment Managers Pre-IPO – Riding on a Wave of Wealth 
Anmol IndAnmol Industries Pre-IPO Quick Take – No Growth, Generous Payments to Founders
Bharat Hotel

Bharat Hotels Pre-IPO – Catching up with Peers 

Bajaj En

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

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 
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 
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

LIC

Life Insurance Corporation of India Pre-IPO – Early Take on India’s Largest IPO 
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
QSRQSR Brands Pre-IPO – As Healthy as Fast Food

China Comm Const (1800 HK): Well Placed for an Upturn

By Osbert Tang, CFA

China Communications Construction (1800 HK) has a fruitful 1H21 as reflected by impressive new contract growth and profit recovery. Driven by the strength at the domestic market, overall new contract addition reached Rmb685.1bn, a good 28.5% YoY growth. Such pace is the fastest when compared with the annual growth rate since FY15, and this solid project pipeline will translate into positive profit momentum over the next three years.

CCCC has also issued positive profit alert for 1H21, guiding for between 109.70% and 139.01% YoY growth in net profit. For 2Q21 standalone, the YoY growth should reach an even higher 1.4-2.1x. We see limited regulatory risks for CCCC given the infrastructure construction industry landscape and its centrally-owned SOE status. In our view, its ROE of 6.9% for FY21F and 7.5% for FY22F highly justify a re-rating in its P/B multiple which currently stands at 0.19x on a 12-month forward basis. 


Eyebright Medical Technology (688050. CH) – A Good Company but The Valuation Is Too High

By Xinyao (Criss) Wang

The field of high-value ophthalmic consumables has always been one of the focus of investors. Among them, Eyebright Medical Technology Beijing (688050 CH), which is committed to the R&D, production and commercialization of intraocular lens (IOL) and orthokeratology lens (OK lens) as its core products, attracts continuous attention. Since its listing in July 2020, the stock price of Eyebright had once been as high as RMB398.86/share. As of July 30, 2021, the share price of Eyebright was closed at RMB274.1/share, up about 717% compared with the issue price of RMB33.55/share, with the market value of RMB28.8 billion and P/E ratio of 200.66. So could Eyebright continue to support its high valuation? This insight mainly analyzed the industry characteristics, the business, and thoughts on valuation of Eyebright.


Morning Views Asia: Evergrande Real Estate Group, Shui On Land, Tata Motors ADR

By Charles Macgregor

Lucror Analytics Morning Views comprise our fundamental credit analysis, opinions and trade recommendations on high yield issuers in the region, based on key company-specific developments in the past 24 hours. Our Morning Views include a section with a brief market commentary, key market indicators and a macroeconomic and corporate event calendar.


Before it’s here, it’s on Smartkarma

China: Soho China Ltd, Cloud Village, Beijing Huafeng Test & Control Technology-A and more

By | China, Daily Briefs

In today’s briefing:

  • Last Week in Event SPACE: SOHO China, Invesco Office, Iress, WH Group, PCCW
  • Cloud Village (NetEase Music) Pre-IPO – Initial Thoughts on Valuation
  • Index Rebalance & ETF Flow Recap: MSCI, LQ45, STAR50, Li Auto, Intouch, Krafton, Kakao Bank

Last Week in Event SPACE: SOHO China, Invesco Office, Iress, WH Group, PCCW

By David Blennerhassett

Last Week in Event SPACE …

  •  SOHO China Ltd (410 HK)‘s shares were utterly cremated, ostensibly in response to a media report the pre-conditional Offer from the Blackstone Group faces regulatory obstacles. Yet that media article was vague in context, and ultimately stopped short of saying the deal would be blocked. 
  • The Invesco Office J Reit (3298 JP) deal is done. The bidders have 65.07%. This is close enough to win an EGM to consolidate. The bidders could buy more shares on market to get to just under two-thirds, or perhaps even go much higher. There will be index sells first though.
  • The bidding for Australia’s tech companies continues as Iress Ltd (IRE AU) receives an indicative proposal from EQT Fund Management.
  • The Seven Group Holdings (SVW AU) Offer for Boral Ltd (BLD AU) closed late this past week with Seven gaining 69.6%. This prompted some movement on the Board and the close of the Offer will lead to index changes.  
  • The MBO for Sakai Ovex (3408 JP) launched in February and failed in March has now been re-launched, with the activist who effectively blocked the old deal at ¥3000/share now participating in the buyout at ¥3810. It was far from fair the first time around and it is far from fair this time (the activist isn’t selling).
  • WH Group (288 HK)‘s Offer Doc is out. There are things to do here for hedge funds and arbitrageurs. There are things to do here for long-only funds who love the stock. 
  • PCCW Ltd (8 HK) further slims down after entering into a SPA with DigitalBridge Group (DBRG US) to sell its Hong Kong and Malaysian data center businesses for US$750mn. 
  • The Allcargo Logistics (AGLL IN) Delisting Proposal is now “re-initiated” after a SEBI Delistings Regulation change which went into effect last month, not grandfathering in the promoters’ pre-existing Delisting Proposal process. The stock has rallied hard on that news.
  • Plus, other events, CCASS movements, and Mood Spins.

(This insight covers specific insights & comments involving Stubs, Pairs, Arbitrage, share Classifications, and Events – or SPACE – in the past week)

M&A – ASIA

Soho China Ltd (410 HK) (Mkt Cap: $2.0bn; Liquidity: $7mn)

Following a media article, shares were down 31% at one stage, or 48% adrift of the $5.00/share offer price, and 13% below the undisturbed price, before recovering to close at $3.02/share. The article mentions the SOHO China/Blackstone deal has the attention of the Chinese government and is unlikely to face a smooth regulatory approval process in China. In addition, “the deal is expected to face obstacles in obtaining approval, but the issues relate more to the founders, than the deal itself.” The source of the article is understood to be “familiar with the situation”, not working on the deal. For context, I’m familiar with the situation.

  • Apparently, according to the article, Zhang Xin and Pan Shiyi are in the US. We don’t know for how long, or whether this is a recent development. Moreover, there is a question as to whether they need to be in China to be “interviewed” for the deal to complete. One interpretation of this article is the founders need to offer up “something” to get this deal over the line.
  • The current environment is unquestionably one of general risk aversion given all that has happened with Chinese regulators and internet names. SOHO China is a crowded trade and short-term investors are being stopped out, further exacerbating a difficult situation. And being month-end, this is awful timing for many players.
  • Short interest is my biggest concern on the deal. Aggregate short interest on the 9th July was 98.5m shares, with Bloomberg, implying at the time, an additional ~35m short sold since then, or an increase of 35% in the last 2 weeks.  Short sell volume, as a % of total volume, appeared to be ~20-40%. You don’t short something which could be 30% (before yesterday’s move) in your face instantly unless you are certain. Or know something. 
  • This is adding up to one of those “circumstantial evidence” issues. The whole lot could be a circular reference – rumour begets rumour etc. But on balance, this deal should get up. There was clear adding/buying on the big fall day on the pretext this article was weak. The downside to a deal break is now less hairy. If this deal was blocked, for whatever reason, the downside is unlikely to be the undisturbed price, but probably closer to $2.30-ish or 24% down, compared to 66% up to the Offer price. That suggests a 2.75 upside:downside ratio, though where “downside” is can be tricky.

(link to my insight: SOHO China (410 HK): In For a Penny …. )

Invesco Office J Reit (3298 JP) (Mkt Cap: $1.8bn; Liquidity: $24mn)

The bid by the Invesco parent company (Invesco Real Estate and affiliates) for Invesco Office turned out successful, and the bidders gained 5,727,676 units out of the 8,802,650 units out in the float. They now own 65.07% (having started with 6%) so this will end up going to an EGM. Travis Lundy expect cash-out will be received sometime between early December 2021 and late January 2022 but there are weird things which happen. There could be a short squeeze. 

  • There will be index deletions of MSCI, FTSE, and S&P DJI Global in the next several trading days. That should mean a sale of say $180-250mm of stock, though some of it will already be sold in the tender. Some announcements may show up tonight.  There will be a TSEREIT Index deletion which could be US$350-500mm which will happen at the close of the third business day after the EGM decides to consolidate units and delist. 
  • When the deletions happen, there will be buying of the other names in their respective indices.  For the international indices, it is diverse, and non-impactful. For the TSEREIT Index, it should be $350-500mm to buy at the close, which is about 0.7-1.0x ADV of the collective constituents. 
  • Now that this is done, Travis expects the “right” trade is to buy the shares at a decent spread expecting to be able to get one’s JPY 22,750/unit by end of year or early January.  I would want to see a wider spread than where we closed, because there are lots of very wide spreads right now in Asia and risk capital can be better allocated elsewhere.
  • UPDATE:  the TSE announced a hybrid treatment whereby the weight in the TSE REIT Index would be lowered as the FFW dropped from 1.0 to 0.35, effective 31 August 2021. This means a likely index tracking sell of 1.1-1.4mm units at the close of 30 August 2021. The FTSE released their treatment of the downweight which is for unchanged shares in issue total of 8,802,650 and a decreased investability weighting from 97.52559% to 32.4579569576774%. That is a float reduction of 5.73mm shares. That selldown will take place 2 August at the close.

(link to Ttavis insight: Invesco Real Estate Deal for Invesco Office (3298) Successful – Now For the Aftermath)

Iress Ltd (IRE AU) (Mkt Cap: $2.0bn; Liquidity: $6mn)

Trading and wealth management software provider Iress announced it had received a confidential, unsolicited, non-binding, and indicative proposal from Swedish PE outfit EQT Fund Management via a Scheme of Arrangement at a price range of between A$15.30 and A$15.50 cash per share. EQT had previously fielded an Offer of A$14.80/share on the 18 June. Iress’ board unanimously concluded that the Proposal was “conditional and did not represent compelling value for Iress shareholders”. But the board was “prepared to provide it with access to limited non-public information so EQT can develop a proposal that is capable of being recommended to shareholders.”

  • After announcing on the 10 June it had not received any direct approaches, the following day Iress (unprompted it appeared at the time) announced a strategic review, including the divestment of its British mortgage and sales origination business, or MSO; accelerating earnings through M&A, and taking on more debt to buy back shares.  The forward target. In a more detailed strategic review announced today, Iress forecasts an NPAT of ~A$120mn by FY25, up from A$59.1mn in FY20, via “building scale in large addressable market with a focus on the UK, superannuation and investment infrastructure”. 
  • The offer is pitched at a forward EV/EBITDA of 22.4x. This compares to Iress’ five-year forward EV/EBITDA average of 17x. The five-year opener average is 11x, and Iress has traded at a 54% premium to peers over the past five years. 
  • Although the board concluded EQT’s offer did not represent compelling value, it remains engaged with EQT and has provided limited DD.  What price? Roger Sharp took over as Chairman in February and he is known to be a canny dealmaker and wants to leave behind a legacy, and he and the board have a clear intention to building out the business. But a A$17/share bid – 10% above the high-end of EQT’s range – probably garners board support. Even 5% – ~A$16.30 – may get the job done. As it is, EQT’s proposal is already at a life-time high. 

(link to my insight: Iress (ASX AU) Bats Away EQT – For Now)

WH Group (288 HK) (Mkt Cap: $11.8bn; Liquidity: $34mn)

On 6 June 2021, WH Group (288 HK) announced a proposal for a Voluntary Buyback Offer. The company decided it had enough cash and excess capital given its investment requirements and decided to return the excess to shareholders by buying up to 13% of shares outstanding. Then peers fell. DRAMATICALLY. The 7 names in a HK- or China-listed basket of peers have fallen 23% as live hog prices have fallen and the hog/feed ratio has also fallen, indicating hog producers are making even less than before (or, according to the NDRC, losing more than before).

  • WH Group has now released its Offer Document whereby it launches the Conditional Voluntary Cash Offer for 13% of its own shares at HK$7.80/share.  This will need to be approved by Shareholders – both the Offer and the Whitewash Waiver.  The Record Date for the EGM is 19 August 2021, the EGM is 16 August, and if approved, the Offer will become Unconditional on 16 August and will close on 30 August. Cheques will be sent no later than 8 Sep. Shares not bought back will be returned no later than 9 Sep.  The minimum pro-ration is 19.7%. This remains an interesting situation. 
  • Travis is bullish, but too strong a jump post the Offer doc would be a good reason to unwind unless you are VERY bullish the back end vs Peers. 10% higher and the stock is still reasonable to peers on an accretion-adjusted basis, but Peers have fallen a LONG way and they are volatile.  If you are short Peers against WH and hog prices start to go up, then watch out! The Peers came down faster, they can go up faster.  Long-Only investors who like WH Group at the current level should buy 25-30% “extra” of their position using cash and own 125-130% of their position size. At yesterday’s close, that extra 25% position will earn 26%.
  • At the then current price (HK$6.21) Travis liked it outright long and against a Global Basket of Peers. He would shrink the size of the hedge against HK/CH-listed Peers. He would track the Implied Participation Rate levels.  If you are LONG ONLY and you like the stock, there is a great trade to do here. If you are a delta-neutral ARB with no borrow, there is another 5-8% in outperformance before this starts becoming substantially less interesting. If you are a delta-neutral ARB who has oodles of GTNA borrow, you should already be in this with both feet, and you should not get out until the stock goes up a lot.

(link to Travis’ insight: WH Group Offer Doc Out – This Little Piggy Went To Market)

Spark Infrastructure (SKI AU)  (Mkt Cap: $3.5bn; Liquidity: $7mn)

After rejecting two take-private proposals from PR outfit firm KKR and Ontario Teachers’ Pension Plan Board (OTPPB), Aussie poles and wires company Spark has ostensibly supported the Consortium’s improved tilt of $2.95/share. The Consortium (KKR/OTPPB)’s latest proposal, up from the initial Offer of $2.70/share, was considered by Spark’s board to be in the interest of its shareholders to engage further. As such, Spark has provided the Consortium with due diligence on a non-exclusive basis. This Offer remains pre-conditional, and is subject to satisfactory DD, together with board approval from both KKR and OTPPB. A firm Offer, should one unfold, would be subject to FIRB approval, and the approval from Spark’s shareholders at a Scheme Meeting. Yet this looks like a full (er) Offer than the one rejected on the 15 July.

  • The assets held by Spark are regulated. You could go further and say Spark simply collects dividends from its minority stakes. Electricity assets are designated critical assets by the FIRB-affiliate Critical Infrastructure Center. But these minority holdings should help facilitate the FIRB application. The trickier aspect of the application is that 100% of SA Power/Victoria Power Networks would be controlled by foreign investors if this deal get up.
  •  The Offer is pitched at ~1.6x regulatory asset base. The RAB multiple for the failed APA Group (APA AU) tilt from CK Infrastructure Holdings (1038 HK) was also estimated at 1.6x. DUET Group (DUE AU) was taken out by CKI in 2017 at ~1.4x.
  • An interloper is possible. . APA remains close with CKI, despite the failed bid in 2018. Plus, this would keep the minority interest stakes in Australian hands.  But again, given Spark’s minority stakes, any successful suitor will not have unfettered control over these utilities.

Sakai Ovex (3408 JP)  (Mkt Cap: $0.2bn; Liquidity: $1mn)

In early February 2021, the CEO of Sakai Ovex (3408 JP), who owned very few shares, and an activist investor decided to launch an MBO for the company at ¥2,850/share.  The stock had been trading cheap, and the price was “high” but the price was wrong. It needed to be 40% higher – at a minimum – in my opinion. Not long after that, the bidders offered a very weak bump to ¥3,000/share, discussed in Savai Ovex MBO – A Very Weak Bump. This was not enough. The shares traded above terms and revised terms, only falling below when the Tender Offer went ex-. 

  • The Bidders are back. And now City Index Eleventh is joining them. It pays to be the fulcrum investor.  And now they are bidding ¥3,810. Which is still cheap.  The president, who holds almost no shares, and a value/activist investor have proposed to take the company private at a discount to book, with considerable non-operating assets and earnings.  There is a lot of value hidden in the details.  This deal was short by probably ¥1,200/share the first time which would have taken it to ¥4,000/share. I personally think it is still short. Perhaps another ¥800-1000/share would be better. 
  • The insiders have about 50% of the shares locked up with Murakami-san. They need about a third of the rest.  This will be incrementally tougher to block, but those who do more digging and decide they too would like to become an equity partner in the takeout, there is actually a possible role for you.
  • Travis would buy at or just below tender offer price. He thinks this gets done. If someone shows up BIGLY there could still be a small bump.

(link to Travis’ insight: Sakai Ovex MBO Reloaded – Up 27% from Last Weak Bump But Still Cheap)

After wood flooring manufacturer Nature Home Holding Company (2083 HK) was suspended on the 19 July, in Nature Home (2083 HK): Possible Takeover Target I concluded if an Offer was to be tabled, it would likely be via a Scheme and at ~HK$1.70/share. And this is exactly what transpired. Nature Home announced an Offer from its founding shareholders, by way of a Scheme, at HK$1.70/share. The Offer Price will not be increased. Dehua Tb New Decoration A (002043 CH) has given an irrevocable rollover undertaking for its 19.6% stake. Standard Scheme conditions apply. On account of the Rollover Agreement, Dehua does not form part of the independent shareholders who will vote on the merits of the Scheme. This Offer looks done. Link to my insight: Nature Home (2083 HK)’s Full Offer.

Advantest Corp (6857 JP) had a good Q1 and revised up its full year. The company also announced a buyback of up to 10mm shares and up to ¥70bn through March next year. Given the current share price, that would only get ~7 million shares bought back but while that is only 3.5% of shares out ex-Treasury, it is 10+% of Real World Float. In Breaking Down Advantest’s Big Buyback, Travis expects that this buyback will contribute to positive/better/high-quality momentum (price and outperformance) on a stock which already has decent momentum both on stock price and fundamentals. 

On the 30 April, aged-care Australian listed operator Japara Healthcare (JHC AU) announced it had received an unsolicited, indicative, conditional, and non-binding Offer from Little Company of Mary Health Care – otherwise known as Calvary – by way of a Scheme, at A$1.04/share. On the 5 June, Calvary increased the indicative Offer price to A$1.20/share.  On the 15 June, the Bolton Clarke Group made a conditional, non-binding indicative proposal by way of a Scheme, at A$1.22/share. JHC has now announced that it has entered into a Scheme Implementation Deed (SID) with Calvary, by way of a Scheme at A$1.40/share. The consideration will be reduced by any dividends paid.  JHC’s board of directors have unanimously recommended the Scheme, in the absence of a superior proposal and subject to an independent expert concluding the Scheme is fair & reasonable. This looks done. Link to my insight: Japara Healthcare (JHC): Calvary Takes Charge.

India-based integrated logistics company Allcargo Logistics (AGLL IN) received a “Delisting Proposal” from its Promoter Group (Shashi Kiran Shetty and Talentos Entertainment Private Limited) in August 2020. Since then, the stock has gained more than 70%. Despite the rally since the Initial Delisting Proposal, Allcargo is not too expensive strictly from a fundamental angle. Going by LTM numbers, Allcargo is trading at a EV/EBITDA of 9.5x which looks cheap when considering that EBITDA CAGR for FY21A-FY23E is ~26% according to Capital IQ consensus.  In Allcargo (AGLL IN): Process Reinitiated! 70%+ Up Now. Should You Still Chase?. Read more: https://skr.ma/xDxmq, Janaghan Jeyakumar expects the Deal to complete. He would be cautious about chasing. However, he would expect dips are good to be bought.  

On the 18 May, Yue Xiu (the investment arm of the Guangzhou municipal government) made an Offer, by way of a Scheme, for Chong Hing Bank (1111 HK) shares not owned, at HK$20.80/share, a 51.2% premium to last close, and a 97% premium to the day preceding the last trading day. The Cancellation Price, which was a 10.1% discount to the NAV, would NOT be increased. Standard Scheme conditions apply. Chong Hing is Hong Kong incorporated, therefore there is no headcount test. The Scheme Document is now out.  The Scheme Meeting will be held on the 30 August with expected payment (assuming the Scheme resolutions are approved by independent shareholders) on the 7 October. The IFA considers the Offer to be fair and reasonable, although that report covered the bare minimum. Link to my insight: Chong Hing Bank (1111 HK): Scheme Doc Out. IFA Says Fair.

STUBS

PCCW Ltd (8 HK) / HKT Ltd (6823 HK) 

At the time of my insight, I had the discount to NAV at ~23%, compared to the 12-month average of 17%. The implied stub of (HK$1.20/share) compares to the (HK$1.05/share) average since PCCW reduced its take in HKT back in February 2017.  The simple ratio (PCCW/HKT) of 0.4x compares to the 0.42x average since the February 2017 reduction. 

  • PCCW Solutions operates 9 data center locations in Hong Kong, China, and Malaysia. The portfolio comprises ~75+ megawatts of power capacity, across 1.3mn sqft of GFA.  This portfolio of data centers made a net profit of US$2.6mn in FY20, up from US$0.02mn in FY19. Net assets are ~US$258.3mn, therefore DigitalBridge is paying  288x trailing earnings, and 2.9x book. PCCW appears to have paid 1.9x P/B for the Malaysian ops last year.
  • I think one of two events will ultimately transpire from hereon – either HKT is taken over – not by PCCW – but by a PRC telecommunication company such as China United Network A (600050 CH), which already holds 18.5% – HK media assets have gradually been snapped up by PRC buyers; or Richard Li attempts another privatisation of PCCW.
  • That’s not to say Richard wants to continue in his dad’s footsteps by holding or acquiring telco assets. I think he wants the cash from the sale of PCCW’s stake in HKT. Following the sale of the data centers, PCCW would be net cash, or thereabouts, at the parent level. Richard has been in the news lately concerning Southeast Asian online realty company PropertyGuru agreeing to go public through a merger with a blank-check firm backed by Richard and Peter Thiel. But Richard’s passion in recent years appears to evolve around insurance, especially the soon (expected)-to-be listed FWD.
  • I would be inclined to be invested where Richard is – and therefore be Long PCCW, short HKT here. I expect the NAV discount to narrow towards its one-year average. 

(link to my insight: StubWorld: The Trimming Of PCCW

Zhen Zhou, Toh is not particularly excited about Del Monte Philippines (1575316D PM)’s business because revenue growth will likely taper off as COVID-19 situation eases and further margin expansion too seems unlikely. In Del Monte Pacific HoldCo Trade Update – A Better Play for Del Monte PH IPO, he thinks that the better way to trade the IPO is to buy DMPL with the expectation that the IPO will go through. And even though liquidity isn’t great, which could mean that Del Monte Pacific (DELM SP) will trade at a deeper holdco discount, there is still potential upside to be realized at those levels.

EVENTS

JAPAN PASSIVE: Who Owns What 2021?

Passive holdings in Japan are approximately equal to 30-34% of the “float” as calculated by index providers such as MSCI, FTSE, and the TSE float calculations (which are generally smaller than MSCI and FTSE) PLUS 28-31,000 baskets worth of Nikkei 225 holdings. Longer-term, this fluctuates in the range of 26-30 million shares. This really matters with names with low share count. But among TOPIX 1000 names which are members, it is a weighted average of just over 4%.

  • That puts Fanuc Corp (6954 JP) and Tokyo Electron Ltd (8035 JP) in the 38-45% range of float, if not a little higher. TDK Corp (6762 JP)Cyberagent Inc (4751 JP)Nissan Chemical Industries (4021 JP), and Kikkoman Corp (2801 JP) are in the 42-50+% range. Konami Holdings Corp (9766 JP) and Hitachi Construction Machinery (6305 JP) are close to or above 50%. Fast Retailing Co Ltd (9983 JP) is likely well above 70%.
  • Last year Travis said “The BOJ may change its ETF allocations.” It did. It stopped buying Nikkei 225 and JPX Nikkei 400 ETFs.
  • As the world moves more and more to passive, expect float to decrease. As companies continue buying back stock, pay attention as to whether it is being repurchased from the market or from designated non-float sellers.
  • Changes to the TSE Market Structure may introduce significant changes to index constituency impact on smallcap shares within the TSE First Section. It will likely not mean much at all for large cap shares.  Many companies are looking at optimising their shareholding structure to make it possible for them to be TSE Prime members.
  • In many cases, there are efforts to reduce cross-holdings because of increased emphasis on that factor exercised by the revised Corporate Governance Code and by new voting policies implemented this year by Glass Lewis and ISS which will recommend votes against directors where more than 10% or 20% of equity value is locked up in cross-holdings. 

(link to Travis’ insight: JAPAN PASSIVE: Who Owns What 2021?)

In China’s New After-School Tutoring Policy Is Out – The End of the Line For Many?, Travis reckons the operating businesses for after-school edcuati0n stocks are likely to be worth almost nothing. The only way they survive as economic entities is to pivot to other training, or to pivot to supporting the national cause. Spin off the teachers and the organizational structure of what they do into an Opinion-compliant construct. Provide it with a little seed capital. Then keep whatever online tech one has and make the tech a fee-earning business.  If it were him, in their shoes, he would be making plans to pivot today.  If any of these tycoons end up with any remaining wealth, that is good for them. He thinks the stocks are a really, really tough thing to own other than for break-up value. Osbert Tang also discussed this situation in China Private Education: How to Position After the Regulatory Crackdown? 

Full Circulation Of H-Shares: July 2021 Update was latest update in a series dating back to Legend’s Conversion of Domestic Shares in June 2018.

  • To date, 28 companies have sought approval to convert their domestic shares and/or unlisted foreign shares into H shares, which would then be eligible to be listed and traded on Hong Kong’s stock exchange.
  • 16 companies have now been given CSRC and Hong Kong listing approval to convert such shares. Five of those have seen various degrees of movement in the converted shares.
  • Sichuan Languang Justbon Service Group (2606 HK) received approval late last year but did not convert – and was subsequently subject to an Offer.
  • To date, two companies have withdrawn their application to convert their domestic shares.  Both of these companies –  Beijing Capital Land Ltd H (2868 HK) and Zhejiang Cangnan Instrument (1743 HK) have now been subject to Offers.

TOPIX INCLUSIONS!

In TOPIX Inclusion Trade Summary: July 2021, Janaghan took a look at the monthly performance of the trading opportunities surrounding TOPIX Index Rebalance events. During the month, we witnessed the Inclusion Events of cloud-based business accounting software company Money Forward (3994 JP), water treatment technology company Nomura Micro Science (6254 JP), and printed circuit board manufacturer Meiko Electronics (6787 JP).  Furthermore, as discussed by Travis in July TOPIX FFW Rebalancing Trade (see above), there were quarterly float adjustments for some constituents of the TOPIX Index which opened up a few trading opportunities. 

M&A – EUROPE

Naturgy Energy Group SA (NTGY SM) is awaiting the decision to be made by the Government on the partial takeover launched by the Australian fund IFM for 22.7% of the capital. The success of IFM’s partial takeover attempt is becoming increasingly difficult due to a delay in the approval of the takeover by the Spanish Government; and Criteria Caixa’s intentions to strengthen its shareholding in Naturgy. Criteria Caixa already holds 25.997%. Assuming it will still purchase up to 29.9%, that is a 3.903% stake pending, some 37.84 mn shares, i.e. approximately €826 mn (at the closing price of 29 July) almost worth the volume of 50 trading sessions (at the last three months average daily volume). Link to Jesus Rodriguez Aguilar‘s insight: IFM/Naturgy: New Developments.
Unicaja Banco SA (UNI SM) and Liberbank SA (LBK SM) will soon finalize their merger after receiving all the authorisations. On 19 July, the Spanish Government gave the green-light to the integration, which is expected to close on 30 July. Liberbank’s shares are trading at a 0.8% discount (adjusted for the merger ratio). Although liquidity is thin, in Unicaja/Liberbank: Final Stretch Jesus recommends a short UNI SM/long LBK SM. The effective merger is highly likely to happen on 30 July.
On 21 July, Bloomberg reported that Canadian Brookfield Asset Management-Cl A (BAM/A CN) was working with advisers as it considers a potential bid for alstria office reit-ag (AOX GR). In Brookfield/Alstria Office REIT: Potential Takeover, Jesus reckons a takeout price could come in at €18.68, a 10% premium over the last reported EPRA NTA and 6.4% premium to the closing price on 23 July. 

M&A – US

In SpinTalk: More Value To Be Had In Now Imminent XPO Logistics Break-Up, Robert Sassoon revisited the proposed break-up of Xpo Logistics (XPO US). This corporate event is now just a few days away and will be executed via  the tax-free spin-off of the logistics business GXO Logistics (GXO US) on August 2, 2021, effected through a 1-for-1 distribution of new GXO shares to XPO shareholders

PAIRS

Roland Corp (7944 JP) Has been shifting production away from China and Japan to concentrate most of the production activities to the Malaysian plant established in 2014 as a part of the business turnaround process that followed a vicious downward spiral in the post-global financial crisis environment. While demand for musical instruments soars across the world, COVID-19 lockdowns in Malaysia continues to affect Roland’s production capabilities. In Short Roland/Long Yamaha as Roland May Fail to Meet Demand Due to Production Shortages, Oshadhi Kumarasiri believes Roland may fail to meet demand amidst disruptions to the main production facility in Malaysia while Yamaha Corp (7951 JP) seems to be well placed to outperform the market through capturing Roland’s lost demand.

INDEX REBALS

With Gulf Energy Development Public Company (GULF TB)‘s Offer for Intouch Holdings (INTUCH TB) closing next week, in GULF/INTUCH: Nearing The End of the Offer Period; Passive Selling to Come, Brian Freitas expects FTSE and MSCI to lower Intouch’s investability weight/ FIF over the next week due to a drop in the free float and this will necessitate passive selling on the stock.

In Kakao Bank: Allocations, Lock Ups and Index Fast Entry, Brian sees KakaoBank (1349010D KS) as a high probability inclusion in the Korea Stock Exchange Kospi 200 Index (KOSPI2 INDEX) with the implementation at the close of trading on 9 September.

At the IPO price, Krafton Inc (259960 KS) should get MSCI Fast Entry if less than 30% of the institutional allocation is locked up, while the stock should get FTSE Fast Entry even with 50% of the institutional allocation locked up. If a higher percentage of shares is locked up, the stock will need to close higher on listing day to get index Fast Entry. Link to Brian’s insight: Krafton IPO: Bookbuilding Results & Index Fast Entry.

STAR50 Index Rebalance Preview. With only 2 trading days left in the review period, Brian sees Shanghai Shen Lian Biomedical (688098 CH)Piesat Information Technology (688066 CH)Guangzhou Fang Bang Electr-A (688020 CH)Shenzhen Lifotronic Techno-A (688389 CH), and Appotronics Corp Ltd (688007 CH) as high probability deletions from the index. Link to Brian’s insight: STAR50 Index Rebalance Preview: Big Turnover in a Volatile Market.

In Li Auto (LI US) Dual Primary Listing: HSCI Fast Entry; HSCEI Dec Inclusion & Div Futures Lower Brian expects Li Auto Inc. (LI US) to get Fast Entry to the Hang Seng Composite Index (HSCI) though, as a WVR security, the stock will only be eligible for Stock Connect once it has completed 6 months of listing plus 20 trading days. Li Auto could also be included in the Hang Seng China Enterprises Index (HSCEI INDEX) at the December review. This will lead to a further drop in the HSCEI 2022 dividend futures since we do not expect Li Auto Inc. (LI US) to pay dividends in the near future, while the potential deletion is a higher dividend-yielding stock.

LQ45 Index Rebalance. The IDX has announced the changes to the LQ45 Index as a part of the August review. Barito Pacific (BRPT IJ) and Timah Persero (TINS IJ) have been added to the index while Bank BTPN Syariah (BTPS IJ) and Ciputra Development (CTRA IJ) have been deleted from the index. In  LQ45 Index Rebalance: BRPT, TINS In; BTPS, CTRA Out, Brian expects the impact of passive funds (and active funds) will be quite high on Barito, Bit Digital (BTBT US), and Ciputra and significantly lower on Timah.

MSCI Aug 2021 Index Rebalance Preview. MSCI is scheduled to announce the results of the August 2021 Quarterly Index Review (QIR) on 11 August (early morning of 12 August Asia time) with the changes implemented after the close of trading on 31 August. In  MSCI Aug 2021 Index Rebalance Preview: Potential Changes After Week 1; Positioning at Work, Brian reckons potential inclusions to the MSCI Standard Index are SITC International (1308 HK)Huabao International Holdings (336 HK)Momo.Com Inc (8454 TT)Chinasoft International (354 HK)China United Network A (600050 CH)Ecopro BM Co Ltd (247540 KS)SK IE Technology (361610 KS)CRRC Corp Ltd A (601766 CH),  Beijing Wantai Biological-A (603392 CH)Beijing Kingsoft Office Software-A (688111 CH)Beijing Roborock Technology-A (688169 CH)Imeik Technology Development (300896 CH)StarPower Semiconductor Ltd (603290 CH)Advanced Micro-Fabrication Equipment-A (688012 CH)Ginlong Technologies Co Ltd (300763 CH) and China Baoan (000009 CH). Potential exclusions are Bangkok Bank PCL (BBL/F TB)Bank of East Asia (23 HK)Taiwan Business Bank (2834 TT)KMW Co Ltd (032500 KS)Perennial Energy Holdings Ltd (2798 HK)Douyu International Holdings (DOYU US) and Gaotu Techedu (GOTU US).

OTHER M&A & EVENT UPDATES

CCASS

My ongoing series flags large moves (~10%) in CCASS holdings over the past week or so, moves which are often outside normal market transactions.  These may be indicative of share pledges.  Or potential takeovers. Or simply help understand volume swings. 

Often these moves can easily be explained – the placement of new shares, rights issue, movements subsequent to a takeover, lock-up expiry, amongst others. For those mentioned below, I could not find an obvious reason for the CCASS move.   

Name

% chg

Into

Out of

Zioncom (8287 HK)30.00%LegoOutside CCASS
Sun King Power Electronics (580 HK) 12.22%CLSAOutside CCASS
China Ecotourism (1371 HK) 19.98%HSBCOutside CCASS
Sheng Ye Capital (6069 HK) 12.78%UBSSinomax
Suncity Group (1383 HK) 74.86%MortonHaitong
Weiye (1570 HK)42.95%HSBCGlory Sun
Niraku Gc Holdings (1245 HK) 31.33%ShenwanOutside CCASS
Source: HKEx

The following large movement(s) concern recently listed companies, and therefore are (likely) lock-up related.


Cloud Village (NetEase Music) Pre-IPO – Initial Thoughts on Valuation

By Sumeet Singh

Cloud Village Inc. (CVI), also known as NetEase Music, plans to raise around US$1bn in its Hong Kong IPO. The company has also obtained investments from Baidu and Alibaba, along with other investors.

As of Dec 20, it had 181m online music MAUs, 16m online music services monthly paying users, 327,000 social entertainment services monthly paying users. It had over 60m music tracks, of which more than 1m were created by registered independent artists. Its daily active users on average spent 76mins daily listening to music. 

CVI’s revenue has grown 4.3x over FY18-20, to RMB4.9bn. There have been no signs of slowdown as its revenue increased by 102% in FY19 and was up another 111% in FY20. Both online music services and social entertainment services revenue have shown strong growth. Online music services revenue grew by 73% in 2019 and another 47.6% in 2020. Social entertainment services revenue was the largest driver of growth, as it grew by 344% in 2019 and was up another 320% in 2020. However, it remains a distant second player in the market and has yet to make a profit.

In this note, we will comment on valuations.


Index Rebalance & ETF Flow Recap: MSCI, LQ45, STAR50, Li Auto, Intouch, Krafton, Kakao Bank

By Brian Freitas

In this weeks recap, we look at:

Inflows to KraneShares CSI China Internet Fund (KWEB US) ETF continue even as the constituent stocks sell-off. There have also been large inflows to the Tracker Fund of Hong Kong Ltd (2800 HK) and Hang Seng H Share Index ETF (2828 HK) ETFs.

Events This Week

Click on the link under Detail to go to the Insight

Date

Index

Detail

6 Aug
KOSPI2

Before it’s here, it’s on Smartkarma

China: Tencent, Chong Hing Bank, China Education Group, Xiaomi Corp, Soho China Ltd, ABM Investama, iShares Barclays USD Asia High Yield Bond Index ETF and more

By | China, Daily Briefs

In today’s briefing:

  • Tencent: All Bets Are Off
  • Chong Hing Bank (1111 HK): Scheme Doc Out. IFA Says Fair
  • China Edu Group 15 Fade Down to 10 Support
  • Hong Kong Buybacks: HK$200m Buyback by Xiaomi
  • Chong Hing’s Scheme Document, IFA Opinion
  • (Mostly) Asia M&A: July 2021 Roundup
  • Asia HY Trade Book – July 2021 – Lucror Analytics
  • Luso Launches $ Perp; Macro; Rating Changes; New Issues; Talking Heads; Top Gainers & Losers

Tencent: All Bets Are Off

By Shifara Samsudeen, ACMA, CGMA

Tencent (700 HK) shares have lost 18% to HK$478.80 by the end of today’s close since the beginning of July 2021 and has lost 35.0% since its peak in February this year. Tencent’s shares continue to slide over regulatory scrutiny over Chinese internet stocks. The Chinese regulators have widened their crackdown on the country’s internet sector with the latest crackdown aimed at the county’s education sector.

Tencent has been making into headlines over the past few days with its music streaming arm Tencent Music (TME US) being ordered to give up exclusive music licensing rights alongside a fine, its investments in online education and tutoring platforms such as Yuanfudao being targeted by Beijing regulators and the company suspending new user registrations on WeChat.

As we have discussed in our previous insights, there is no sign that the Chinese regulators are slowing down with its antitrust crackdown on the country’s tech platforms and though the ongoing regulatory crackdown has already been priced into Tencent’s share price, we would strongly recommend being on the side lines as the ongoing probe could have a material impact on the company’s future earnings.


Chong Hing Bank (1111 HK): Scheme Doc Out. IFA Says Fair

By David Blennerhassett

On the 18 May, Yue Xiu (the investment arm of the Guangzhou municipal government) made an Offer, by way of a Scheme, for Chong Hing Bank (1111 HK) shares not owned, at HK$20.80/share, a 51.2% premium to last close, and a 97% premium to the day preceding the last trading day. The Cancellation Price, which was a 10.1% discount to the NAV, would NOT be increased.

Standard Scheme conditions apply. Chong Hing is Hong Kong incorporated, therefore there is no headcount test.

The Scheme Document is now out.  The Scheme Meeting will be held on the 30 August with expected payment (assuming the Scheme resolutions are approved by independent shareholders) on the 7 October.

The IFA considers the Offer to be fair and reasonable, although that report covered the bare minimum. 

More below the fold.


China Edu Group 15 Fade Down to 10 Support

By Thomas Schroeder

China Education Group (839 HK) near resistance at 15 is the tactical area to sell/short or reduce CEG with support attracting at the 9-10 spiked low zone and the first viable long area just above the 10.40 handle.

The immediate trade is to short to press on/below 13.60 near support is the pivot that will take CEG lower.

15/16 represents intermediate resistance as the hurdle to clear looking forward into October.


Hong Kong Buybacks: HK$200m Buyback by Xiaomi

By Ke Yan, CFA, FRM

Hong Kong Exchange publishes share repurchases by listed companies on a daily basis. In our weekly note, we will provide statistics on top repurchases over one week, one month, one quarter and one year periods ended on Jul 30.

In the past 7 days, the top 3 companies that repurchased the most shares from the market were  Xiaomi Corp (1810 HK) (HKD 196.9 million worth of buybacks), New World Development (17 HK) (HKD 170.2 million worth of buybacks), China Gas Holdings (384 HK) (HKD 86.6 million worth of buybacks).


Chong Hing’s Scheme Document, IFA Opinion

By Arun George

Chong Hing Bank (1111 HK)/CHB has despatched the scheme document in relation to a privatisation offer from Yuexiu Holdings, the largest shareholder who holds 74.97% of outstanding shares. The offeror will offer HK$20.80 per scheme share.

Unsurprisingly, the IFA considers the offer to be fair and reasonable. We broadly agree with the IFA analysis with the exception that the privatisation precedent comparison could be improved. 

The key condition is the scheme approved by at least 75% disinterested shareholders (<10% disinterested shareholders rejection). With no shareholder holding a blocking stake, we continue to believe that the substantial premium of the offer price to long-term average share prices and P/B multiples, makes it likely that the offer gains approval at the court meeting on 30 August (cheques dispatched on or before 7 October). At the current price of HK$20.45 per share, the gross spread to the offer price stands at 1.7%.


(Mostly) Asia M&A: July 2021 Roundup

By David Blennerhassett

For the month of July, 13 new deals (firm and non-binding) were discussed on Smartkarma with an overall announced deal size of ~US$34bn.

  • Clicking on the company name in the table below will take you to the entity page where you can read the initial insight(s) written by Smartkarma contributors on these new deals and follow-up discussions, or simply click on the insight link(s) below the name.

New Deals

Industry

Size (US$bn)

Type

Premium

Australia

5G Networks Ltd/Australia (5GN AU) /
Webcentral (WCG AU) 
Telco0.1Schemen.a.
Webcentral – 5GN Merger: A Small-Cap Merger Aimed at ASX300 Status
Australian Pharmaceutical Industries (API AU) Healthcare0.5Scheme20.5%
API AU: The Hunter Turns The Hunted As Wesfarmers Makes A Move
Empired Ltd (EPD AU) Systems0.2Scheme64.6%
Empired (EPD AU): Capgemini’s Full Offer
iCar Asia Ltd (ICQ AU) Auto portal0.2Scheme83%
ICar (ICQ AU): Carsome & Catcha Carpool
Iress Ltd (IRE AU) Software2.3Scheme23%
Iress (ASX AU) Bats Away EQT – For Now
Oil Search Ltd (OSH AU) O&G7.1Scheme12.3%
Santos/Oil Search: Getting Facts Straight
Rhipe Ltd (RHP AU) Software0.1Scheme20%
Rhipe (RHP AU): Crayon Sees Silver in Them Thar Clouds
Spark Infrastructure (SKI AU) Utility3.9Scheme26%

Spark Infra (SKI AU): KKR & OTPPB’s Tilts Falls Short

Spark Infrastructure (SKI AU): KKR & OTPPB Pay Up

Sydney Airport (SYD AU) Airports17.0Scheme42%
Sydney Airports (SYD AU): Opportunistic Tilt Amid Cloudy Future
Youfoodz Holdings (YFZ AU) Home delivery0.1Scheme82.4%
Youfoodz (YFZ AU): HelloFresh’s Lowball Takeover Offer Difficult to Block But Not UnBumbable

Hong Kong

Beijing Capital Land Ltd H (2868 HK) Real Estate0.4Merger by Absorption62.8%
Beijing Capital Land (2868 HK): Delisting Offer From Parent
Nature Home Holding Company (2083 HK) Floorboarding0.1Scheme17.2%
Nature Home (2083 HK): Possible Takeover Target
Nature Home (2083 HK)’s Full Offer

South Korea

Green Cross Cell (031390 KS) / Green Cross LabCell (144510 KS) Biopharmaceutical1.5Mergern.a.
GC Cell – GC LabCell: Korean Biopharma Merger Trading Tight
Source: Smartkarma Insights

The average premium for the new deals announced (or first discussed) in July was ~41%, with a year-to-date average of ~34% (102 deals & total deal size of US$195bn). This compares to the average premium for all deals in 2020 (158 deals) and 2019 (145 deals) of 31% and 31.5% respectively. 

Offer Premium Summary

2019

2020

2021 YTD

Australia33.0%32.4%35.2%
Hong Kong25.2%34.7%34.5%
Japan44.0%35.2%28.5%
ROW29.1%24.2%35.3%
Average31.5%31.1%33.5%
Source: Smartkarma Insights

Summary of News in July of Arb Situations On Smartkarma’s Radar

(Again, click on the company names to take to you to the insights and/or discussion posts for a more comprehensive read-through on each situation)

Australia

Comments (with links to announcements & insights)

20-Jul: Autodesk Inc (ADSK US)‘s early June Offer for Altium Ltd (ALU AU) was terminated.

27-Jul: All resolutions passed at the Scheme Meeting

13-Jul: All resolutions passed at the Scheme Meeting

14-Jul:  Boral’s Bump Earned, Likely to Extend, but THEN WHAT?
19-Jul: Boral (BLD AU): Index Impact from Seven’s Offer
22-Jul: Boral Ltd: Seven’s Done Deal. What Happens Next?

29-Jul: The Seven Group Holdings (SVW AU) Offer for Boral Ltd (BLD AU) was not extended (as announced on 28 Sep). The deal closed yesterday. The resulting ownership is now 69.6%. 

22-Jul: Star Entertainment Group (SGR AU) walks away from its proposal for Crown Resorts (CWN AU). That’s not a good look. 

7-Jul: Scheme Booklet dispatched. The Scheme Meeting will be held on the 6 August.

16-Jul: Co-operation agreement entered into

No July update

No July update

Hong Kong

Comments (with links to announcements & insights)

16-Jul: Scheme Doc pushed out to the 31 August. 

9-Jul: In its monthly update regarding a potential Offer, China Traditional Chinese Medicine (570 HK) says there is no update.

15-Jul: In its monthly update, China Youzan (8083 HK) said in its monthly update, that there is no update.

20-Jul: Kerry Logistics Network (636 HK) announced approval by the Independent Shareholders in respect of the Special Deal Agreements and the Framework Services Agreement had been obtained.

23-Jul: Scheme approved

15-Jul: Desliting conditions met. Last day of trading is the 9 August. 

India

Comments (with links to insights)

23- Jul: After going limit up today, to INR 101.80/share, Adani Power (ADANI IN) is now back above INR 100/share after having fallen from INR 160. The 1-year deadline to file the Delisting Offer to the Exchange is 23 July. The Exchange would respond within 5 business days if they file. 

No July update

No July update

Japan

Comments (with links to announcements & insights)

No July update
9-Jul: The bidder for EPS Holdings (4282 JP) now has 86.97%. This will lead us to an EGM and a squeezeout. 

No July update

14-Jul: City Index Eleventh has raised its bid from ¥960/share to ¥970/share. That forces an extension from expected end date tomorrow to the 30th of July. That’s why it was raised. He doesn’t have enough shares to do what he wants yet. But in raising it, he has gotten the board to agree to recommend his offer, which is something pretty special. 
9-Jul: Kufu (4399 JP) confirmed on 7th July 2021 that shareholders have voted in favour of the Deal. Locoguide (4497 JP) shareholder vote (which was quite straightforward as the top shareholder held more than two-thirds) was also confirmed on 25th June 2021. Both stocks are expected to be delisted on 29th September 2021. The combined NewCo will be listed on 1st October 2021. 
No July update
No July update
No July update

No July update

No July update

Malaysia

Comments 

No July update
No July update
14-Jul: the Offeror has granted the Company an extension of time to no later than 5.00pm on 30 August 2021 for the Company to respond to the Offeror with its decision as to whether or not to implement and to recommend the Proposed SCR to the Entitled Shareholders for their consideration, based on the terms set out in the SCR Offer Letter.

New Zealand

Comments (& link to insight)

15-Jul: At the Scheme Meeting,  shareholders representing 91.84% of all Tilt Renewables’ shares on issue, voted by proxy or at the meeting. Over 75% of the votes of shareholders in each interest class who were entitled to vote and who voted, were cast in favour of the Scheme. Further, of all the votes cast, 99.94% of votes were in favour of the Scheme.

Singapore

Comments (& link to insight)

15-Jul: Offer price revised to $0.435/share. Offer closes on the 2 August.


Asia HY Trade Book – July 2021 – Lucror Analytics

By Charles Macgregor

The Asia HY Trade Book for the month of July includes a summary of our recommendations, as well as our high-conviction ideas. The report also features relative-value charts and lists of the bonds in the Lucror Asia HY index.


Luso Launches $ Perp; Macro; Rating Changes; New Issues; Talking Heads; Top Gainers & Losers

By BondEvalue

US markets closed higher in the wake of dovish Fed comments. S&P closed 0.4% higher after scaling another record and Nasdaq gained 0.1%. Financials, Energy and Consumer Discretionary pushed the markets higher by ~1% while Communication Services, down 0.9%, pulled them lower. Amazon posted a revenues of over $100bn for a third straight quarter, but fell short of expectations (details below). BNP Paribas will be reporting earnings today. FTSE, DAX and CAC were up 0.9%, 0.5% and 0.4% respectively. Saudi TASI and UAE’s ADX were up 0.7% and 1% respectively. Brazil’s Bovespa was down 0.5%. Asia Pacific stocks were down – Nikkei and HSI are down over 1.5%, Singapore’s STI is broadly flat and Shanghai is down ~0.5%.

Before it’s here, it’s on Smartkarma

China: Alibaba Group, Jinxin Fertility Co Ltd, Soho China Ltd, Cloud Village, WH Group, CNY, China Huarong Asset Management, HNA Group, Boeing Co and more

By | China, Daily Briefs

In today’s briefing:

  • Alibaba (BABA): Over Impacted Before Quarter Result
  • Jinxin Fertility: Signs of Policy Tailwind and Valuation Dislocation
  • SOHO China (410 HK): In For a Penny …
  • Cloud Village (NetEase Music) Pre-IPO – Tencent Music Peer Comp, Regulatory Impact
  • WH Group Offer Doc Out – This Little Piggy Went To Market
  • FX Dashboard: Will Asian Currencies Continue to Underperform?
  • China Huarong Asset Management – Preventing Another Daisy Chain
  • The China Credit Chronicle:  Hazardous National Anecdote
  • India Cleantech Launches $ Bond; Macro; Rating Changes; New Issues; Talking Heads; Top Gainers an…

Alibaba (BABA): Over Impacted Before Quarter Result

By Ming Lu

  • The stock price has plunged since October 2020.
  • Over the past few days, BABA became a casualty of the policy against tutoring companies.
  • However, we believe the China online retail has been recovering.
  • We also believe the stock has an upside of 27% in nine months.

Jinxin Fertility: Signs of Policy Tailwind and Valuation Dislocation

By Ke Yan, CFA, FRM

We have discussed in our previous note that Jinxin Fertility will be a beneficiary for the China’s promotional policy for the third child. With the recent share price weakness and development on the policy front, we provide updates on the company and continue to believe that it is a name to hold for more favorable policy tailwinds to come. 


SOHO China (410 HK): In For a Penny …

By David Blennerhassett

Yesterday, SOHO China Ltd (410 HK)‘s shares were utterly cremated, ostensibly in response to a media report the pre-conditional Offer from the Blackstone Group faces regulatory obstacles.

At one stage, shares were down 31%, or 48% adrift of the $5.00/share offer price, and 13% below the undisturbed price, before recovering to close at $3.02/share.

Yet that media article was vague in context, and ultimately stopped short of saying the deal would be blocked. 

As they say, “In for a penny, in for a pound.”

More thoughts below the fold.


Cloud Village (NetEase Music) Pre-IPO – Tencent Music Peer Comp, Regulatory Impact

By Sumeet Singh

Cloud Village Inc. (CVI), also known as NetEase Music, plans to raise around US$1bn in its Hong Kong IPO. The company has also obtained investments from Baidu and Alibaba, along with other investors.

As of Dec 20, it had 181m online music MAUs, 16m online music services monthly paying users, 327,000 social entertainment services monthly paying users. It had over 60m music tracks, of which more than 1m were created by registered independent artists. Its daily active users on average spent 76mins daily listening to music. 

CVI’s revenue has grown 4.3x over FY18-20, to RMB4.9bn. There have been no signs of slowdown as its revenue increased by 102% in FY19 and was up another 111% in FY20. Both online music services and social entertainment services revenue have shown strong growth. Online music services revenue grew by 73% in 2019 and another 47.6% in 2020. Social entertainment services revenue was the largest driver of growth, as it grew by 344% in 2019 and was up another 320% in 2020. However, it remains a distant second player in the market and has yet to make a profit.

We covered various aspects of the deal in our previous note, Cloud Village (NetEase Music) Pre-IPO – Was in the slow stream, playing catch-up.

In this note, we compare CVI with its main peer Tencent Music Entertainment (TME) and comment on the recent regulatory announcement with respect to TME.


WH Group Offer Doc Out – This Little Piggy Went To Market

By Travis Lundy

On 6 June 2021, WH Group (288 HK) announced a proposal for a Voluntary Buyback Offer. The company decided it had enough cash and excess capital given its investment requirements and decided to return the excess to shareholders by buying up to 13% of shares outstanding. The Controlling Group would not tender, so they would see their stake increase and the minimum pro-ration would reach nearly 20%. 

The shares popped, then fell. Then they kept on falling. Yesterday and today they hit the level which has been a low point in the oscillator cycle for the last few years at HK$6.00/share.

I wrote about the situation that very day in WH Group Buyback Offer Announced – Strong Accretion Creates Accretion Risk. I wrote that based on then-current pricing, expectations, and the trading levels of its peers, it would not be considered expensive at prices higher than the previous close (which had, to be fair, seen a nice pop on news). 

But markets gonna market. 

The peers fell. DRAMATICALLY. The 7 names in a HK- or China-listed basket of peers have fallen 23% as live hog prices have fallen and the hog/feed ratio has also fallen, indicating hog producers are making even less than before (or, according to the NDRC, losing more than before).

The NEW News – The Offer Doc is Out

Last night, late-ish, WH Group (288 HK) released its Offer Document whereby it launches the Conditional Voluntary Cash Offer for 13% of its own shares at HK$7.80/share. 

  • This will need to be approved by Shareholders – both the Offer and the Whitewash Waiver (the Executive has indicated its intention to approve the WW subject to 50+% of Independent Shareholder votes cast supporting the Offer and 75% of Independent Shareholder votes). 
  • The Record Date for the EGM is 19 August 2021, the EGM is 16 August, and if approved, the Offer will become Unconditional on 16 August and will close on 30 August.
  • Cheques will be sent no later than 8 Sep. Shares not bought back will be returned no later than 9 Sep. 
  • Minimum pro-ration is 19.7%. 

There are things to do here for hedge funds and arbitrageurs.

There are things to do here for long-only funds who love the stock. 

This remains an interesting situation. 

Read on below.


FX Dashboard: Will Asian Currencies Continue to Underperform?

By Gautam Jain, PhD, CFA

As a group, Asian currencies have underperformed the broad EM complex this year. Several factors are behind this underperformance: delay in the economic recovery due to the slow pace of vaccination, differences in monetary policy stances with much of the rest of EM already raising rates, and aggressive FX interventions. With these factors still broadly applicable, we see no reason for Asian currencies to outperform in the near term. Instead, we find differentiation among countries in Asia providing relative-value opportunities.

Separately, the attached file is a snapshot of the EM currency market in which we seek to identify the leaders and laggards among currencies by comparing the performance of each to its history as well as to other currencies based on their respective betas to an EM currency index.


China Huarong Asset Management – Preventing Another Daisy Chain

By Thomas J. Monaco

*Stress All Around: China Huarong Asset Management (2799.HK) [Huarong] still continues to teeter on the edge of insolvency and ongoing silence from Beijing has materially impacted funding costs. The USD 23.3 bn in Huarong debt, however, still risks crippling the USD credit market in mainland China. As Huarong is one of mainland China’s largest issuers in offshore markets, this would be by far the largest credit default to date of an important state-owned company. Potential contagion risks via higher a cost of funding for offshore borrowing are occurring;  and 

*Evergrande Harbinger: Mainland Chinese authorities are going to great lengths to prevent a systemic daisy chain impact of a China Evergrande Group (3333.HK) [Evergrande] default on the mainland Chinese financial system. Given the systemic risks also posed by Huarong, we believe the mainland Chinese will construct some form of bailout. Distressed investors should consider picking away at Huarong’s debt; we’ll believe it when see Beijing imposing losses SOEs.


The China Credit Chronicle:  Hazardous National Anecdote

By Warut Promboon

Since our last China Credit Chronicle (CCC) on 28-April, the sentiment on high-yield credits in China has not improved, to say the least. The “3 Red Lines” requirements on Chinese property developers are proven to be a bit too draconian, in our view. The strict rule forced Chinese property developers to cut prices and may have incentivized a few to manipulate their balance sheets to lower their debt levels, in our judgment. The latest spotlight is on Evergrande Real Estate Group (3333 HK) (China Evergrande Group) of which we are working on the updated report to capture additional information once the information from the group is sufficient to form a judgment.

In this flash note, we update recent events of HNA Group (HNAGRZ CH)(HNA) on its on-going bankruptcy procedure. HNA-related bonds have not been active of late on a lack of liquidity and recent updates from the group. We believe it is impossible at this stage to gauge the recovery rate of the HNA complex on its hidden liabilities and potential frauds evidenced by the embezzlement cases this year.

At 29 cents on the dollar (ask), we are not confident to recommend a Buy on the maturing SANYPH 10/21s without additional knowledge on the restructuring plan, but we believe the market prices HNA’s recovery around 12 cents on the dollar, based on HONAIR Perp’s bid price.

At the end of the day, HNA shows us that these Chinese mega corporates (i.e. China Huarong Asset Management (HUAZ CH) and China Evergrande Group) have enticed international investors (and perhaps rating agencies) to ignore credit fundamentals and believe they will be supported by the local and/or central government when necessary. Liquidity of these companies are all about credit facilities with Chinese banks, many of which are state-owned. Once the state support wanes, we believe the local bank credit facilities will be reduced and that could lead to an eventual default, in our view. We believe the fall of HNA and others to come is a necessary step of the learning curve for investors in Chinese credits although we do not believe the fallout will turn into a contagion for all Chinese high-yield credits.

That said, we believe investors need to learn how to price Chinese credits on a stand-alone basis properly, and rating agencies, especially Chinese rating agencies, need to adjust their rating models. In our opinion, wishful ratings at the issuances, followed by multiple and rush downgrades simply do not work and have left investors unprepared to sell bonds.


India Cleantech Launches $ Bond; Macro; Rating Changes; New Issues; Talking Heads; Top Gainers an…

By BondEvalue

US markets shed the risk-off sentiment with the S&P broadly flat while the tech heavy Nasdaq gained 0.7%. The upside was supported by Energy and Healthcare up 1% and 0.4% respectively while the indices were dragged down by Consumer Staples and Real Estate, down 0.9% and 0.6% respectively. Facebook and Boeing (detailed below) beat expectations while Paypal reported a drop in profits. Amazon is set to report earnings later today. European stocks reversed some of the losses – the CAC was up 1.2% and DAX and FTSE were up 0.3% each. Saudi TASI and UAE’s ADX were up 0.2% and 1% respectively. Asia Pacific stocks were up – the HSI led, up 2%, followed by Shanghai, Singapore’s STI and Nikkei up 0.9%, 0.5% and 0.4% respectively.

Before it’s here, it’s on Smartkarma

China: Tencent, Nature Home Holding Company, Alibaba Group, Beijing Huafeng Test & Control Technology-A, Kunlun Energy, iShares Barclays USD Asia High Yield Bond Index ETF, Hong Kong Hang Seng Index, Evergrande Real Estate Group, Beijing Airdoc Technology and more

By | China, Daily Briefs

In today’s briefing:

  • Tencent/NetEase: July Game Approval Analysis
  • Nature Home (2083 HK)’s Full Offer
  • Few Points to Consider Before Bottom Fishing Chinese Tech
  • Tencent (700 HK): When to Catch a Falling Knife
  • STAR50 Index Rebalance Preview: Big Turnover in a Volatile Market
  • Kunlun Energy (135 HK): Positive Takeaways from Discussion with Company
  • ESR REIT Launches S$ 5Y; Macro; Rating Changes; New Issues; Talking Heads; Top Gainers & Losers
  • China/HK Short and Support Points
  • Morning Views Asia: Evergrande Real Estate Group
  • Pre-IPO Beijing Airdoc Technology – The Strength and the Concerns

Tencent/NetEase: July Game Approval Analysis

By Ke Yan, CFA, FRM

Recently the Chinese regulator National Press and Publication Administration (NPPA) announced the July batch of approvals for domestic games. 

In this insight, we will have a close look at the trend of domestic game approval for both Tencent and its key competitor, Netease. We will also have a review of domestic games approved in 2021 YTD. 

We are of the view that Netease Inc (Adr) (NTES US) has done better than Tencent Holdings (700 HK) in terms of games approved. 


Nature Home (2083 HK)’s Full Offer

By David Blennerhassett

After wood flooring manufacturer Nature Home Holding Company (2083 HK) was suspendedpursuant to the Code of Takeovers and Mergers” on the 19 July, in Nature Home (2083 HK): Possible Takeover Target I concluded if an Offer was to be tabled, it would likely be via a Scheme and at ~HK$1.70/share.

And this is exactly what transpired. 

Late last night, Nature Home announced an Offer from its founding shareholders, by way of a Scheme, at HK$1.70/share. The Offer Price will not be increased. Nature Home does not intend to declare any dividends during the Offer period. 

Dehua Tb New Decoration A (002043 CH) has given an irrevocable rollover undertaking for its 19.6% stake. 

Standard Scheme conditions apply. On account of the Rollover Agreement, Dehua does not form part of the independent shareholders who will vote on the merits of the Scheme.

This Offer looks done.

More below the fold.


Few Points to Consider Before Bottom Fishing Chinese Tech

By Oshadhi Kumarasiri

After trading sideways during May/June 2021, bulls got excited as Alibaba Group (9988 HK) rallied by 10% in the last week of June to $229.4 per share. Unfortunately, the joy was cut short, as Xi Jinping’s government went back on the offence with a broadened crackdown on tech platforms, especially the US-listed Chinese tech companies like the recent ride-sharing IPO DiDi Chuxing (DIDI US). As a result, Alibaba’s share price dropped 15% to a new 52 week low. Before the dust settled the Chinese government introduced reforms to private education companies, preventing them from making profits from the after-school tutoring businesses.

We believe all of these interventions are messages about the direction of the government policy over the next few years and the government’s effort to bring equality through preventing monopolistic behaviour and address cybersecurity, data collection and privacy concerns could be broader policies of Xi Jinping’s government as the Chinese economy enters a new era of growth.

New economy stocks like Alibaba, Tencent, Vipshop and JD.com have never gone through a period of time that’s even remotely similar to the time frame it is about to go through in the next few years.

Therefore, we think bottom fishing Chinese e-commerce stocks during this regulatory crackdown and economic policy transition could be of high risk unless they get to a point where they are bargains on price to book multiples.

In this insight, we discuss some important points to make a note of, if you are considering bottom fishing Alibaba, one of the safest Chinese tech stocks in the market.


Tencent (700 HK): When to Catch a Falling Knife

By Mitchell Kim

Investors’ concerns over increasingly expanding regulatory restrictions and the potential market intervention led to a rout of Chinese tech and education stocks over the last several trading sessions. The select 9 Chinese tech stocks I follow collectively lost USD320 billion in value over 20 July to 27 July.  While some of the regulatory risks were known from March 2021, ramifications of the potential value-destroying restrictions on the education companies, termination of Tencent Music (TME US)’s exclusive rights, and the suspension of new user registration for Tencent (700 HK)‘s Wechat spook the market. 

Tencent’s market cap has declined 19% during the seven-day period, which cannot be fully explained by the potential value lost from the recently announced regulatory measures, in my view.  Back in April (see Tencent (700 HK): Fintech Risk Is Lurking) I pointed out that Tencent shares could be overvalued by 20% on fintech risk alone.  The shares are down nearly 30% since then. I now believe the shares could be undervalued by 10%, notwithstanding the undefined regulatory risks ahead.  Having said that, catching a falling knife is not for the faint-hearted. 

These stocks rebounded on the US Wednesday trading session, possibly reflecting the sentiment “enough is enough.” Bloomberg reported that the securities regulator assured select investment bankers that the education policies are not to be for other industries.     

In this report, I summarize the announced regulatory events this year to date and share my thoughts on why the market may be over discounting Tencent’s value by looking at the potential value impact of Tencent’s fintech value (a reiteration from the April report) and the impact of the value decline of DiDi Chuxing (DIDI US) and Tencent Music.          


STAR50 Index Rebalance Preview: Big Turnover in a Volatile Market

By Brian Freitas

The SSE STAR 50 (STAR50 INDEX) is a free float market cap weighted and is made up of the 50 largest stocks based on full market cap that are listed on the STAR Market.

The review period for the September rebalance ends on 31 July, the results of the rebalance will be announced towards the end of August and the changes will be implemented at the close of trading on 10 September.

With only 2 trading days left in the review period, we see Shanghai Shen Lian Biomedical (688098 CH)Piesat Information Technology (688066 CH)Guangzhou Fang Bang Electr-A (688020 CH)Shenzhen Lifotronic Techno-A (688389 CH) and Appotronics Corp Ltd (688007 CH) as high probability deletions from the index.

Coming up with a definitive list of inclusions is tougher given the subjectivity of the index rules for this review. The subjectivity comes from the whether the index committee uses a minimum listing history period of 12 months or 6 months.

Higher probability inclusions (if a 12 month minimum listing history is used) are Eyebright Medical Technology Beijing (688050 CH), Sinocelltech Group (688520 CH), Beijing Huafeng Test & Control Technology-A (688200 CH), Zhejiang Orient Gene Biotech-A (688298 CH) and Tinavi Medical Technologies (688277 CH).

Lower probability inclusions (if a 6 month minimum listing history is used) are Zhejiang Supcon Technology (688777 CH), Tianneng Battery Group (688819 CH), Bestechnic Shanghai (688608 CH), 3peak (688536 CH) and Pylon Technologies Co Ltd (688063 CH).

The inclusions, exclusions and capping changes will result in a one-way turnover of 8.45% and result in a one-way trade of CNY3.3bn.


Kunlun Energy (135 HK): Positive Takeaways from Discussion with Company

By Osbert Tang, CFA

Kunlun Energy (135 HK) should have a decent operating performance in 1H21, with good growth achieved for natural gas sales, LPG sales, LNG terminal and also the exploration and production segment. Their performance all look to be ahead of the full-year guidance put forward in FY20 result announcement in Mar 2021 – this is encouraging.

Gas project M&A momentum stays decent and, with IRRs of 10-12%, the returns are ahead of the hurdle level of 8%. Following China Gas Holdings’ (384 HK)  Shiyan gas explosion, local governments now prefer large SOEs to invest in projects given their more stringent safety standards, and this is an advantage of Kunlun. The gas industry also entails less regulatory risks amid government’s heightened regulatory measures towards various industries lately. The recent pull-back has made valuations even more appealing, in our view.  


ESR REIT Launches S$ 5Y; Macro; Rating Changes; New Issues; Talking Heads; Top Gainers & Losers

By BondEvalue

US markets broke the winning streak on a risk-off sentiment. S&P and Nasdaq were both down 0.5% and 1.2%. The fall was led by Consumer Discretionary, IT, Energy and Communication Services, down more than 1%. Real Estate and Healthcare, up 0.8% and 0.4% respectively, provided support to the markets. Apple, Microsoft and Alphabet’s earnings beat Wall Street expectations (details below). Facebook, Paypal and Boeing earnings are due today alongside the FOMC decision. US 10Y Treasury yields eased 4bp to 1.24%. US IG CDS and HY spreads widened 1bp and 5.8bp respectively. European stocks also ended ~0.5% lower – the CAC, DAX and FTSE were down 0.7%, 0.6% and 0.4% respectively. EU Main and Crossover spreads widened 0.6bp and 3.8bp respectively. Brazil’s Bovespa was down 1.1%. Saudi TASI was up 0.2% while UAE’s ADX was flat. Asia Pacific stocks started mixed – the Nikkei and Singapore’s STI were down 1.2% and 0.3% respectively, while Shanghai was broadly flat and HSI was up 0.8%. Asia ex-Japan CDS spreads were 4.6bp wider.

China/HK Short and Support Points

By Thomas Schroeder

China A50 break below 16,500 important support now becomes fresh resistance. HSI below 27,000 represents the fresh pivot level and H shares 10,000. These were important floors that were broken and shifts the trading range lower.

HSI has been a top short in Asia from back at 30k and the A50 break of critical support at 16,500 unleashed selling pressure and an impulsive decline that will set up a fresh short.

Let’s see if the short covering bounce can extend.


Morning Views Asia: Evergrande Real Estate Group

By Charles Macgregor

Lucror Analytics Morning Views comprise our fundamental credit analysis, opinions and trade recommendations on high yield issuers in the region, based on key company-specific developments in the past 24 hours. Our Morning Views include a section with a brief market commentary, key market indicators and a macroeconomic and corporate event calendar.


Pre-IPO Beijing Airdoc Technology – The Strength and the Concerns

By Xinyao (Criss) Wang

In recent years, the value of AI medical imaging has become increasingly prominent. For example, the application of CT for diagnosis in COVID-19 pandemic has strengthened the importance of imaging and played an immeasurable role in the prevention and treatment of COVID-19. In this context, many players in this industry have planned to start IPO in the capital market. On June 21, Beijing Airdoc Technology (BAT HK) filed its prospectus with the HKEX and officially started its IPO process. Airdoc is a global market leader and pioneer in providing AI-empowered retina-based early detection, diagnosis and health risk assessment solutions. This insight mainly analyzed the business, the financial position and concerns of the Company.


Before it’s here, it’s on Smartkarma

China: Tencent, Hansoh Pharmaceutical, Li Auto Inc., Alibaba Group, PCCW Ltd, Asymchem Laboratories, Meituan, Nature Home Holding Company, Lockheed Martin, Yonghe Medical Group and more

By | China, Daily Briefs

In today’s briefing:

  • Tencent Holdings – Only The Beginning
  • As The Dust Settles – Potential Index Changes to the FTSE China 50/A50 & HSCEI
  • Li Auto (LI US) Dual Primary Listing: HSCI Fast Entry; HSCEI Dec Inclusion & Div Futures Lower
  • Alibaba (BABA US) – Looking for a Reprieve from Regulatory Headwinds
  • StubWorld: The Trimming Of PCCW
  • Asymchem Labs A/H Listing Early Look – Fast Growing, Relatively Insulated
  • Meituan Sell Levels on a Bounce
  • Nature Home’s Privatisation Bid
  • AVIC Launches € Bond; Macro; Rating Changes; New Issues; Talking Heads; Top Gainers & Losers
  • Pre-IPO Yonghe Medical Group – Here Are the Concerns

Tencent Holdings – Only The Beginning

By Thomas J. Monaco

*What’s Up With WeChat: Mainland China appears to have taken additional action against Tencent Holdings (700.HK) [Tencent], following Monday’s regulatory edict. Tencent is suspending new user registrations for its WeChat services, as it is undergoing a “security technical upgrade” in accordance with relevant laws and regulations. WeChat is Tencent’s most important business, and dominates mainland Chinese social media; and 

*Pain Trade Coming:Tencent is widely expected pay a large fine. In addition, Tencent may have to give up its exclusive music rights and possibly dispose of Kuwo and Kugou. Further, we have no doubt that Tencent will also follow Alibaba Group (BABA.US) [Alibaba] in their formation of a financial holding company. For Tencent, WeChat Pay and the broader lending/deposit taking business are likely to be reined-in. At CNY 38.5 bn for full year 2020, FinTech represents a growing 28.8% of revenue – and is a key and growing 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.


As The Dust Settles – Potential Index Changes to the FTSE China 50/A50 & HSCEI

By Brian Freitas

As regulations have changed in China, and as the market positions for regulations that could be changed in China, the fallout has resulted in markets selling off with a few sectors firmly in the crosshairs.

What started off with the ‘three red lines’ for real estate companies, the pulled IPO of Ant Financial Services Group (6688 HK) in November 2020 and regulating monopolies in big-tech has spread to the online education industry, food delivery industry, property service companies and the market is bracing for regulation of the medical and pharmaceutical industry.

The rampant selling of stocks that are affected by the regulations or could be affected will have an impact on the upcoming September index rebalances for the FTSE China 50 Index and FTSE China A50 Index (XIN9I INDEX) and the December rebalance for the Hang Seng China Enterprises Index (HSCEI INDEX).

In addition, there will be a lot more mainland China companies that will list in Hong Kong since they will not need to (or will find it easier to) get approval from the Cyberspace Administration of China. That will also have implications for these indices.

In this Insight, we look at the potential changes to the FTSE China 50, FTSE China A50 Index (XIN9I INDEX) and Hang Seng China Enterprises Index (HSCEI INDEX) in the upcoming reviews based on the close of trading on 27 July.


Li Auto (LI US) Dual Primary Listing: HSCI Fast Entry; HSCEI Dec Inclusion & Div Futures Lower

By Brian Freitas

Li Auto Inc. (LI US) has got approval from the HKEX (388 HK) for a dual primary listing. Media reports indicate that the company could raise between US$1bn-2bn in the offering. Based on the XPeng (9868 HK) timeline, Li Auto could list around 6-9 August.

Xpeng (XPEV US) / XPeng (9868 HK) raised US$1.8bn via a dual primary listing earlier this month and Li Auto Inc. (LI US) is following closely behind. Maybe NIO Inc (NIO US) comes next.

We expect Li Auto Inc. (LI US) to get Fast Entry to the Hang Seng Composite Index (HSCI) though, as a WVR security, the stock will only be eligible for Stock Connect once it has completed 6 months of listing plus 20 trading days.

Li Auto could also be included in the Hang Seng China Enterprises Index (HSCEI INDEX) at the December review. This will lead to a further drop in the HSCEI 2022 dividend futures since we do not expect Li Auto Inc. (LI US) to pay dividends in the near future, while the potential deletion is a higher dividend yielding stock.


Alibaba (BABA US) – Looking for a Reprieve from Regulatory Headwinds

By Victor Galliano

  • The market is looking for a signal of an easing of regulatory pressures on China BigTech
  • Alibaba Group (BABA US) is in the eye of the regulatory storm, first with the crackdown on the Ant IPO, then with the anti-trust restrictions on Big Tech and more recently with China regulatory bodies focusing on US listed China tech
  • The share price is now close to the pandemic low of March 2020, having fallen a further 20% since the end of April
  • Alibaba valuations are compelling, even versus its China BigTech peers, and, less surprisingly, compared to Amazon.com Inc (AMZN US)
  • Alibaba’s market capitalization to revenue discount to its core peers has narrowed somewhat, as Chinese regulators have extended their focus on BigTech beyond the Alibaba group, but remains elevated
  • Furthermore, Alibaba’s premium to Amazon in terms of market capitalization to revenue has totally dissipated
  • We stick with our positive view on Alibaba and we believe that, even though regulatory risks have yet to recede, the secular growth story – albeit dented – in China tech still holds and that in the case of Alibaba, its modest valuations stand out
  • Risks to our positive view on Alibaba include further regulatory hurdles, such as market share limitations and tighter controls on big data, as well as client loss as a result of these regulatory limitations

StubWorld: The Trimming Of PCCW

By David Blennerhassett

In StubWorld this week …

PCCW Ltd (8 HK) enters into an SPA with DigitalBridge Group (DBRG US) to sell its Hong Kong and Malaysian data center businesses for US$750mn. 

Preceding my comments on PCCW are the weekly setup/unwind tables for Asia-Pacific Holdcos.

These relationships trade with a minimum liquidity threshold of US$1mn on a 90-day moving average, and a % market capitalisation threshold – the $ value of the holding/opco held, over the parent’s market capitalisation, expressed in percent – of at least 20%.

As always, more below the fold.


Asymchem Labs A/H Listing Early Look – Fast Growing, Relatively Insulated

By Sumeet Singh

Asymchem Laboratories (002821 CH) (AL) aims to raise around US$1-1.5bn in its H-share listing in Hong Kong. The A-shares listed were listed in Shenzhen in 2016.

AL is a provider of outsourced pharmaceutical development and manufacturing solutions and services. AL provides process development and manufacturing services for small molecule drugs throughout the preclinical, clinical and commercial stages. According to Frost & Sullivan, it is the fifth largest drug substance contract development manufacturing organization (CDMO) globally, and the largest China-based commercial stage chemical drug CDMO, as measured by 2020 revenue.

As the A-shares are already listed and well covered, we will treat this listing more like a placement rather than an IPO. However, given the size of the listing, we will go into more details than we would for a regular placement. Hence, in this note we will briefly cover the company’s background and recent performance before touching upon the deal dynamics. 


Meituan Sell Levels on a Bounce

By Thomas Schroeder

Meituan (3690 HK) impulsive decline does warn of lower levels after a bounce with a focus on selling a near term bounce. Spike in sell volume is a negative. Oversold RSI does warn of a reaction bounce for brave traders. 

Trend resistance now lies at 280 as the forward level to clear. As long as this barrier remains intact the trend is down.


Nature Home’s Privatisation Bid

By Arun George

Nature Home Holding Company (2083 HK) manufactures and sells flooring products and customised home decoration products. After market close on Tuesday, it announced a privatisation offer by way of a scheme of arrangement from New Modern Home Limited. The offeror will offer HK$1.70 cash per scheme share. The bid represents a premium of 39.3% over the closing price of HK$1.22 per share on the last full trading day (16 July 2021 prior to the trading halt). 

The key condition precedents are the headcount test along with the scheme approved by at least 75% disinterested shareholders and <10% rejection by all disinterested shareholders. As disinterested scheme shareholders represent 292.1 million shares or 21.20% of shares outstanding, the 10% blocking stake is 29.2 million shares or 2.12% of shares outstanding. No shareholder holds a blocking stake. 

Post-privatisation, the offeror plans to re-list all or part of its businesses in the PRC which while refreshingly honest, may not sit well with some shareholders. Overall, we think the offer price is attractive and that the privatisation bid will be successful. 


AVIC Launches € Bond; Macro; Rating Changes; New Issues; Talking Heads; Top Gainers & Losers

By BondEvalue

US markets hovered around the highs ahead of the Big Tech earrings. S&P was up 0.2% and Nasdaq nudged higher 0.03% created new closing records. Energy up 2.5% and Materials, Consumer Discretionary and Communication Services up ~0.7% pulled the markets higher. Corporate earnings continued as Tesla beat expectations (detailed below) while Lockheed Martin delivered disappointing results. All eyes are now set on the earnings of Apple, Microsoft, Google and Starbucks . Meanwhile, a high level meeting between US and China ended without any material output amid escalated tensions. US 10Y Treasury yields rose 2bp to 1.28%. European stocks were mixed – CAC was up 0.2%, FTSE was flat and DAX was down 0.3%. US IG CDS spreads tightened 0.2bp and HY widened 1.8bp. EU Main and Crossover spreads widened 0.4bp and 3bp respectively. Brazil’s Bovespa was up 0.8%. Saudi TASI and UAE’s DAX were up 0.2% and 0.9% respectively. Asia Pacific stocks edged higher as mainland China stocks gained – the Nikkei, Shanghai and Singapore’s STI were up 0.3-0.5% while HSI was down ~0.7%. Asia ex-Japan CDS spreads were 1.6bp wider.

Pre-IPO Yonghe Medical Group – Here Are the Concerns

By Xinyao (Criss) Wang

Modern fast pace of life and huge work pressure make hair loss anxiety spread to all kinds of groups. As people pay more attention to hair, the awareness of hair health and management is gradually awakening, and hair transplantation is one of the solutions. On June 17, Yonghe Medical Group (YMG HK) formally submitted its prospectus to the HKEX and planned to be listed on the main board. If everything goes well, Yonghe will be the first listed company in the field of hair transplantation in China. However, despite the promising market potential, there are some concerns of the Company that deserve investors’ attention.


Before it’s here, it’s on Smartkarma

China: New Oriental Education, Tencent, Gaotu Techedu, DiDi Chuxing, FTSE China A50 Index, Nongfu Spring, Li Auto Inc., TAL Education, Acotec Scientific Holdings and more

By | China, Daily Briefs

In today’s briefing:

  • China’s New After-School Tutoring Policy Is Out – The End of the Line For Many?
  • Tencent Support Break
  • As China EduTech Goes Not-For-Profit Will India’s Promising Alternatives Fill Their Wake?
  • Didi Global – Greed Is Not Always Good
  • Chinese Equity Markets: Supports Crack
  • Full Circulation Of H-Shares: July 2021 Update
  • Li Auto HK Listing – Needs to Be Done at Discount Given XPeng’s Poor Debut
  • TAL Education (TAL): In New Rule on Tutoring School, “Article 13” Harsher Than “Non-Profit”
  • Acotec (先瑞达) Pre-IPO: Thoughts on Valuation
  • Li Auto Secondary Listing: Volts Wagons

China’s New After-School Tutoring Policy Is Out – The End of the Line For Many?

By Travis Lundy

On Friday 23 July, the 21st Century Business Herald and Bloomberg followed up one stories which had come out a couple of days earlier (which suggested much more regulation on after-school tutoring businesses), suggesting that China would possibly ban for-profit businesses which tutored China’s K-12 students on school curriculum subjects. The same articles Friday suggested no listed businesses would be able to purchase or invest in such businesses, and foreign capital would not be allowed to invest in the businesses.

This was discussed pre-US open in China After School Tutoring Online Education Stocks Crushed – Investors Schooled. This seemed dramatic, and possibly dire. Stocks in the K-12 education sector in Hong Kong fell dramatically. Stocks listed in the US fell even more. A custom index of 16 names fell nearly 30%. An index of just the three major US-listed names – TAL Education (TAL US), Gaotu Techedu (GOTU US), and New Oriental Education (EDU US) – was down 60% pre-open.

That wasn’t enough as the basket closed 6% lower from there. 

It looks like even that may not have been enough.

The NEW News

On Saturday, the State Council followed up with a document“Opinions on Further Reducing the Workload of Students and The Burden of Out-of-School Training in the Compulsory Education Stage”

The Opinion is a wide-ranging polemic with instructions to local governments, school systems, educational authorities, etc to deal with the reduction of “double burden” on kids and parents of school system and after-school tutoring system on the same subjects as taught in the school system. There is lots of content suggesting significant detail on things like homework in regular school, who is to be given how much, how much they are not to do, what school administrators in the public school system should do to organise after-school and summer programs. 

There are, of course, the sections about the after-school tutoring businesses – strictly enforcing regulations, ensuring proper qualifications, and severely punishing those institutions which fall short, especially those with a profit incentive. 

If I were in that business, I would stop making a profit immediately. I would refund payments for currently in-progress classes so that the only payments related to teacher payments and bare minimum support costs are done. I would provide refunds to anyone who would take them so as to immediately cease the business. 

Some businesses may be able to pivot. Some may be liquidation candidates. Some will simply be shut down to take the loss. 

But this is a big change, and it has been out there. And it looks like when people did not see it quickly enough, it was decided Something Must Be Done. Now it is going to be done.


Tencent Support Break

By Thomas Schroeder

Tencent short call from 620 targeted 560 and the break below 560 set in motion a fresh sell signal that is showing increasing bear pressure below recent support  at 510 with 410/20 the next major support zone in our cross hairs.

Today’s gap is important if we cannot muster an uptick to close or partially close, we will head lower with higher momentum.

RSI is nearing oversold levels and due to bottom Tuesday or Wednesday and bounce into late July ahead of a more turbulent August cycle.


As China EduTech Goes Not-For-Profit Will India’s Promising Alternatives Fill Their Wake?

By Shifara Samsudeen, ACMA, CGMA

China’s new rules and regulations in private tutoring have triggered a massive sell-off in the education companies including Gaotu Techedu (GOTU US) , New Oriental Education (EDU US) and TAL Education (TAL US) . The new rules announced by Beijing include turning after-school tutoring companies (tutoring on school curriculum) into not-for-profit which would prevent online tutoring platforms from raising foreign capital and at the same time seeking public listing. After-school tutoring is in huge demand in China and soaring tuition fees have become a huge burden on parents and the government of China is attempting to reduce the cost of education in order to encourage couples to have more kids as education accounts for a large share of childcare in China.

Similarly, private tutoring in India is in huge demand as a large majority of K-12 school students in the country attend after-school tutoring. Known as tuition culture, it has been prevalent in India for decades which supplements the school education of children. In this insight, we examine the private tutoring market in India (including online) and the likelihood of similar directives (to that of China) and how it could impact the fundamentals and valuations of online education platforms in the country.


Didi Global – Greed Is Not Always Good

By Kirk Boodry

The more news that comes out, the worse it seems to get for Didi Global. A coalition of regulators descended on Didi headquarters last Friday as the company’s decision to go public despite Cyberspace Administration (CAC) admonishments it should wait have been taken as a challenge to the government. We expect management saw an opportunity to grab a high valuation with super Q1 numbers which in turn was sweetened by a lucrative options award and that may have made them complacent. We don’t know where regulators will take this but we do feel confident in saying that there are no quick fixes here – too many regulators are involved now and it will likely take months for the company to get out from under this level of scrutiny.


Chinese Equity Markets: Supports Crack

By Shyam Devani

Price action on Chinese equity markets at the start of this week now raise eyebrows as the FTSE China A50 Index shows clear risk of further losses while the Shanghai Composite is testing pivots.

Whether this translates to CNH weakness is not clear.


Full Circulation Of H-Shares: July 2021 Update

By David Blennerhassett

This is the latest update in a series dating back to Legend’s Conversion of Domestic Shares in June 2018.

To date, 28 companies have sought approval to convert their domestic shares and/or unlisted foreign shares into H shares, which would then be eligible to be listed and traded on Hong Kong’s stock exchange.

16 companies have now been given CSRC and Hong Kong listing approval to convert such shares. Five of those have seen various degrees of movement in the converted shares.

Sichuan Languang Justbon Service Group (2606 HK) received approval late last year but did not convert – and was subsequently subject to an Offer. 

To date, two companies have withdrawn their application to convert their domestic shares.  Both of these companies have now been subject to Offers.

As always, more below the fold. 



TAL Education (TAL): In New Rule on Tutoring School, “Article 13” Harsher Than “Non-Profit”

By Ming Lu

  • The new rule for tutoring school damaged the prices of Chinese education equities.
  • The market focuses on the “non-profit” requirement, but we believe “Article 13” is more important.
  • We believe the authorities try to block all the ways that a tutoring school can continue.
  • We do not believe this is a “low-price opportunity” after the stock price plunge.
  • Please also see TAL Education (TAL): Last Summer for Physical Tutoring School on June 28 before the price plunge.

Acotec (先瑞达) Pre-IPO: Thoughts on Valuation

By Ke Yan, CFA, FRM

Acotec, a leading China-based peripheral-vascular interventional device company, is looking to raise up to USD 300m via a Hong Kong listing.  

In our previous note, we looked at two core drug coated balloon products of the company, namely the AcoArt Orchid & Dhalia for the above the knee artery stenosis and AcoArt Tulip & Litos for the below the knee stenosis. Both AcoArt Orchid & Dhalia, and AcoArt Tulip & Litos reported efficacy that could be potentially better than its benchmark product. Thanks to its early mover advantage, the AcoArt Orchid & Dhalia had a dominant market share. The main growth driver of the company’s core product will be increasing penetration rate and indication expansion. Besides the DCB products, we think the company’s product pipeline is not exciting. The company has a good management team but the pre-IPO investors are overall mediocre.

In this note, we will provide our thoughts on the company’s valuation.


Li Auto Secondary Listing: Volts Wagons

By Arun George

Li Auto Inc. (LI US) is the first company to successfully commercialise EREVs (extended-range electric vehicles) 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. In 2020, Li ONE was the best-selling new energy SUV in China with a sales volume market share of 9.7%, according to CIC. 

Li Auto has received approval for an HKEx secondary listing to raise $1.0-1.5 billion, according to press reports. The secondary listing comes on the back of a listing on Nasdaq in July 2020 ($1.0 billion net raise at $11.50 per ADS) as well as a follow-on offering in December 2020 ($1.4 billion gross raise at $29.00 per ADS). The secondary listing also follows peer, Xpeng (XPEV US), which raised net proceeds of $1.8 billion on 7 July. XPeng (9868 HK) H-shares are trading -9% below the offer price largely due to the recent regulatory onslaught which has engulfed Chinese companies with exposure to the technology and education sector along with listing in the US. 

Despite rising competition from new entrants, Li Auto is delivering on its IPO promise by maintaining a market-leading share in its niche, investing in a roadmap to reduce its single model reliance, a positive gross margin and cash generation trajectory. On balance, for investors willing to brave the current regulatory-driven weak sentiment on Chinese names, Li Auto’s fundamentals and valuation are attractive, in our view. 


Before it’s here, it’s on Smartkarma

China: Chinasoft International, Tencent, BeiGene Ltd, Agung Podomoro Land and more

By | China, Daily Briefs

In today’s briefing:

  • MSCI Aug 2021 Index Rebalance Preview: Potential Changes After Week 1; Positioning at Work
  • Tencent (700 HK): Juvenile Internet Usage Will Not Decrease
  • Pre-IPO BeiGene Ltd – Concerns on Commercialization
  • Morning Views Asia: Agung Podomoro Land, Anton Oilfield, Bright Scholar Education, Future Retail Ltd

MSCI Aug 2021 Index Rebalance Preview: Potential Changes After Week 1; Positioning at Work

By Brian Freitas

MSCI is scheduled to announce the results of the August 2021 Quarterly Index Review (QIR) on 11 August (early morning of 12 August Asia time) with the changes implemented after the close of trading on 31 August.

The review period for price cut-off began on 19 July and will run through to 30 July. After the end of week 1 of the review period, most of the changes are expected in China with a few changes for Hong Kong, Taiwan, Korea and Thailand.

Most of the names appear on the add/delete list every day during the review period, while a few names appear/drop out of the list of potential changes. The final list will depend on the day that MSCI chooses. Based on historical data, there is over a 90% probability that MSCI chooses a day from week 1 to compute the market cap for the stocks that will determine the list of inclusions and exclusions.

Post week1 of the review period, potential inclusions to the MSCI Standard Index are SITC International (1308 HK)Huabao International Holdings (336 HK)Momo.Com Inc (8454 TT)Chinasoft International (354 HK)China United Network A (600050 CH)Ecopro BM Co Ltd (247540 KS), SK IE Technology (361610 KS), CRRC Corp Ltd A (601766 CH)Beijing Wantai Biological-A (603392 CH)Beijing Kingsoft Office Software-A (688111 CH)Beijing Roborock Technology-A (688169 CH)Imeik Technology Development (300896 CH)StarPower Semiconductor Ltd (603290 CH)Advanced Micro-Fabrication Equipment-A (688012 CH), Ginlong Technologies Co Ltd (300763 CH) and China Baoan (000009 CH).

Potential exclusions are Bangkok Bank PCL (BBL/F TB), Bank of East Asia (23 HK), Taiwan Business Bank (2834 TT), KMW Co Ltd (032500 KS), Perennial Energy Holdings Ltd (2798 HK), Douyu International Holdings (DOYU US) and Gaotu Techedu (GOTU US).

The August QIR will also implement tranche 2 of Sea Ltd (SE US)‘s inclusion in the MSCI indices and will result in the index inclusion factor increasing from 0.05 to 0.25.

There is also a very high probability of a 75% reduction in the  SK Telecom (017670 KS)‘s Foreign Inclusion Factor (FIF) due to a drop in the availability of foreign room on the stock.


Tencent (700 HK): Juvenile Internet Usage Will Not Decrease

By Ming Lu

  • We do not believe the juveniles will reduce internet usage in the future.
  • The authorities forbid tutoring schools so that juveniles have more time to spend on internet.
  • Parents went back to their office so they cannot stop their children from using internet.

Pre-IPO BeiGene Ltd – Concerns on Commercialization

By Xinyao (Criss) Wang

After listing on NASDAQ and HKEX, BeiGene Ltd (6160 HK) will be listed on the SSE STAR market again in the near future. Meanwhile, after successive years of losses, BeiGene finally turned profitable for the first time in the first quarter of 2021. By the end of July 23, 2021, the market value of BeiGene in HKEX and NASDAQ was about HK$226.5 billion and US$29.2 billion, respectively. It is highly probable that the market value of the BeiGene in the SSE STAR market would exceed RMB200 billion after its listing as well. Behind the successful capital operation, what challenges would BeiGene face in the future?


Morning Views Asia: Agung Podomoro Land, Anton Oilfield, Bright Scholar Education, Future Retail Ltd

By Charles Macgregor

Lucror Analytics Morning Views comprise our fundamental credit analysis, opinions and trade recommendations on high yield issuers in the region, based on key company-specific developments in the past 24 hours. Our Morning Views include a section with a brief market commentary, key market indicators and a macroeconomic and corporate event calendar.


Before it’s here, it’s on Smartkarma

China: Kuaishou Technology and more

By | China, Daily Briefs

In today’s briefing:

  • Kuaishou Lock-Up Expiry – Getting Close to IPO Price, with US$18bn+ Lock-Up. CCASS Movement as Well.

Kuaishou Lock-Up Expiry – Getting Close to IPO Price, with US$18bn+ Lock-Up. CCASS Movement as Well.

By Sumeet Singh


Before it’s here, it’s on Smartkarma

China: TAL Education, Hong Kong Hang Seng Index, APM Monaco, iShares Barclays USD Asia High Yield Bond Index ETF and more

By | China, Daily Briefs

In today’s briefing:

  • China After School Tutoring Online Education Stocks Crushed – Investors Schooled
  • Asia Long/Short Trades
  • APM Monaco Pre-IPO – China’s Resilience Shines
  • Macro; Rating Changes; New Issues; Talking Heads; Top Gainers & Losers

China After School Tutoring Online Education Stocks Crushed – Investors Schooled

By Travis Lundy

Earlier today, it was reported by the 21st Century Business Herald that China was going to ban IPOs by educational companies and platforms which tutor on subjects in the public school curriculum and ban investments in such companies by those which are already listed. 

Bloomberg reported that China was considering asking companies that offer such tutoring – to help students pass the gaokao – the legendarily difficult college entrance exams – to turn into non-profit businesses. 

The initial story is that online education platforms would not be allowed to raise money in capital markets, sell securities, go public. The bigger picture is that they are effectively being pushed out of business. This particular news has sent education (especially school curriculum tutoring platforms) stocks dramatically lower in Hong Kong trading, and in the US pre-open market.

Drops of 30-50% are par for the course so far.

There is a possibility this kills the entire business for some platforms. 

This comes on the back of a crackdown starting earlier this spring on after-school tutoring platforms after Xi Jinping said in March at the Two Sessions that the practice was a “social problem” affecting kids social and mental health and he urged “resolute rectification.”

Right there, that should have warned everyone this story was not going to have a happy ending. 

This followed a scandal in January where four schools, including Yuanfudao, Zuoyebang, and the education unit all hired the same actress to pose as a teacher in ads for their platform, in at least one video laying the guilt on parents saying if parents didn’t sign up for the streaming courses, it could have consequences, “90% of mothers make mistakes” and “it could be parents themselves who ruin their kids [chances].” In one she was an English teacher with 35 years experience. In another she had been a math teacher all her career. It was not a good look.

The media followed Hi Jinping’s comments with polemics on predatory practices and fear-based advertising, which had gone rampant as the VC investees aimed at growth above all. This put an immediate halt to the preparations many of the mega-tech conglomerates invested in China – Alibaba Group (BABA US), Tencent (700 HK), Softbank Group (9984 JP), and others – had made to list their education-related projects such as Zuoyebang (Alibaba) which raised US$2.35bn in two rounds last year, Yuanfudao (Tencent) which raised US$3.5bn in three rounds, VIPKid (Tencent) which does English teaching, Huohua Siwei (Tencent) which specialises in STEM, and others which were either launching (like ByteDance’s newest effort Dali Education after buying Hua Luogeng math school and renaming it Qingbei Online School, and one-on-one tutoring platform GoGoKid), or preparing themselves to start on the road to IPO or at least looking at a 2022 listing. Zhangmen Education (ZME US) actually IPOed in late May at US$11.51/ADR, rising 50% on Day 1, falling back to US$9.54 yesterday and now down 26% in pre-market. 

Such companies had grown dramatically in 2020 as covid restrictions, or precautions, increased the desire for parents to keep their kids at home. Preqin says VC funding in the sector hit a record $10.5bn in 2020. The market is huge, and growing fast. Online tutoring grew 35-40% last year as covid struck according to iResearch in Shanghai, reaching RMB 257bn. Others have higher numbers. And according to Oliver Wyman and the National Institute of Educational Sciences, the overall market for after-school education was RMB 800bn in 2019, expected to rise to RMB 1.4trln in 2025.

The four major problems that regulators appear to have focussed on this spring after Xi Jinping’s comments were:

  • fast-increasing expense on families, which would restrict the incentive to have more kids and also create a significant separation between the chances for kids with well-to-do parents and kids without. The criticism in the 21 May 19th Meeting of Central Comprehensive Deepening Reform Commission, which released a flurry of Opinions* was that children faced a lower burden in school and a greater burden out of school.

*”Guiding Opinions on Improving the Evaluation Mechanism of Scientific and Technological Achievements”, “Opinions on Further Reducing the Burden of Students’ Homework and Off-campus Training in Compulsory Education”, and several others.

  • marketing free-for-all with false or damaging advertising and predatory plan pricing and structuring, including pre-charging for classes which would not be used. 
  • A lack of regulation/strict oversight of teacher/tutor licensing, ensuring proper resource allocation to teachers themselves, 
  • and a get-rich-quick mindset from what Xi Jinping thinks should be a solemn duty to educate the youth of the country. 

As Xinhua put it in reporting about that May 21 meeting…

会议强调,要全面规范管理校外培训机构,坚持从严治理,对存在不符合资质、管理混乱、借机敛财、虚假宣传、与学校勾连牟利等问题的机构,要严肃查处。要明确培训机构收费标准,加强预收费监管,严禁随意资本化运作,不能让良心的行业变成逐利的产业。要完善相关法律,依法管理校外培训机构。各级党委和政府要强化主体责任,做实做细落实方案,科学组织、务求实效,依法规范教学培训秩序,加强权益保护,确保改革稳妥实施。

The meeting emphasized that it is necessary to fully regulate the management of off-campus training institutions, adhere to strict governance, and severely investigate and deal with institutions that have problems such as non-qualification, chaotic management, taking advantage of money, false propaganda, and collusion with schools for profit. It is necessary to clarify the charging standards of training institutions, strengthen the supervision of pre-charging, and strictly prohibit arbitrary capitalization operations, and do not allow conscientious industries to become profit-seeking industries. It is necessary to improve relevant laws and manage off-campus training institutions in accordance with the law. Party committees and governments at all levels must strengthen their main responsibilities, implement the plan in detail, organize scientifically, seek practical results, standardize the order of teaching and training in accordance with the law, strengthen the protection of rights and interests, and ensure the steady implementation of reforms.

In April, the Beijing Administration for Market Regulation fined New Oriental Online RMB 500,000 for pricing violations, and false advertising. Koolearn (1797 HK), TAL Education (TAL US), were also hit.  Shifara Samsudeen, ACMA, CGMA wrote about this in GSX TechEdu: China Fines Online Tutoring Apps for Making Misleading Claims; Is GSX Next? in early May.

In late May, China decided kindergartens and private tutoring schools could no longer teach the elementary school curriculum, starting June 1, as part of a revision of the Minority Protection Law. Gaotu Techedu (GOTU US) immediately announced it was shutting down its Xiao Zao Qi Meng pre-school education business (3-8yrs). On June 1, the government fined another 15 operators a total of RMB 36.5mm for similar violations to New Oriental Online, including pre-IPO unicorns Zuoyebang and Yuanfudao, with both getting hit for RMB 2.5mm which is the maximum legal amount. New Oriental got hit again. TAL, Onesmart Education (ONE US), China BestStudy (3978 HK) and Bright Scholar Education (BEDU US) were also hit for the same reasons by SAMR. And then another 10 were hit by local regulators in Guangdong and Shanghai. It was a coordinated attack on Children’s Day.

In the first week of June, Xi Jinping made a much-touted visit to Qinghai in the southwest and it appears both he and the media talked quite a bit about lifting up the lower income areas and people, as per the 14th Five Year Plan, and also noted the problem of after school tutoring burdening students more and school burdening students less, calling it “putting the cart before the horse.”

The Ministry of Education set up a new department (the Off-Campus Education and Training Department) on 15 June to regulate the off-campus tutoring schools to “reduce students’ academic burden”, etc. It will oversee teachers and curricula. Smartkarma provider Zhen Zhou, Toh wrote about the prospects for companies going forward in late June in China Online Education – Diversified Revenue Stream Wins Here – Balance in All Things

Three weeks ago, the Beijing Municipal Education Commission and at least a half dozen other major cities across the country set up summer after-school programs for elementary school students, effectively taking the business which would normally be taken by private sector schools.

The writing has been on the wall since March. And the authorities have been writing over it in heavier and heavier marker for weeks and months.

The largest businesses out there have been under the cosh, racing against time and competitors with somewhat dodgy numbers and promises. They lose money, and now it looks like they won’t be able to raise more. 

A number of Smartkarma insight providers have published insights which have discussed the opportunities and the red flags in the sector. This includes short reports, pre-IPO reports, updates on legal and regulatory changes, and a huge report on the private education sector by Osbert Tang, CFA a few months ago, called China Private Education: This Is Where the Future Lies which has an enormous amount of detail about the sector.

Issues With the Business

The major issues for regulators appear to be…

  • criticisms of false advertising, where the benefits to such education are promised but not proven, where there are spurious claims using fake claims. 
  • criticisms of the structure of the offerings. A number of courses are offered at RMB 1 for the whole course, but then they come back to charge you for extras later. 
  • the “burden” placed on children
  • an air of get rich quick to the entire industry which is seen to be against the national interest.

For investors, many of the major issues have to do with how companies which promise growth are actually “growing.”

Gaotu, formerly called GSX Techedu, had claimed to be the leading provider of online classes from K-12, was IPOed in 2019 at a $3bn valuation, rose to 10x that, then fell. GSX had been the subject of short seller reports in the first half of 2020 accusing the company of inflating student enrolment numbers using bots, fabricating teachers, falsifying reviews, and falsifying revenues. Multiple reports (as per GMT Research’s Hall of Shame on GSX, Grizzly Research, Muddy Waters, JLWarren who wrote 30 May on Smartkarma in GSX: Minimal Market Share; ~80% Fake Enrollment and Operational Irregularities, GMT itself, and others (links at the bottom of that link) found different former teachers or others who talked about faked reviews, faked parents, faked students, bots/brushing, related party transactions to create expenses, or remove them (depending on the short seller report), boosted to remove the cash that should have been there from the fake revenue, possible fake capital raise, etc. The laundry list of accusations is long, sordid, and painfully similar to situations which have later been determined to be fraud. 

Against the pattern of companies calling out short seller research firms’ reports, GSX was often curiously quiet, and the stock rose anyway, tripling after Muddy Waters released their report from $40/share to $120/share before falling back.

The shares then rallied very sharply in January as part of a short squeeze on “meme stonks” and heavily-shorted names. Archegos apparently owned more than 10% through a variety of PB accounts. Archegos fell. GSX fell with it. And since then it has lost another two thirds of its value to get back to under US$10/share. 

Pre-market, it is apparently indicated at US$3.65/share. Down 62%. 

A Side Problem

Evelyn Zhang recently wrote about the change in attitude towards “white collar education” in A Twist of Fate – China’s Suppression of Secondary Education in Favor of Vocational Education. It is a good read. 

Her advice on 3 July was to short all Chinese online education stocks which had a K-12 offering, and go long all companies which provided vocational training.

After today, that will have been a beauty of a trade. 

Medium-term, the problem authorities will find is that parents don’t necessarily want their kids to not have access to the after-school cram services. They don’t have time to teach them themselves, and because the cutoff to continue later education is harsh and many parents don’t want their kids to go to vocational school to enter the blue collar workforce, lots of parents are actually objecting to the crackdown. They are happy to pay if it gives their kids a better chance. 

The high cost of education is one reason to not have a second (or third) child. The high cost of real estate is another. But education is status and a chance at wealth and intellectual happiness. It has been the case for hundreds of years in China. It is not clear that if the public sector takes on the education and after-school education “burden” from the private sector that it will please the wider public. It is not clear an increased number of qualified teachers will want to get paid public education system wages either. 

The Problem For Investors

Now the chickens are coming home to roost. 

Xi Jinping declared after-school education to be a “social problem” in front of the Two Sessions. Some people did not take him seriously at the time, but regulators have been taking his words seriously and have started cracking down. Legislators have made new legislation. And the Ministry of Education has a new department. 

Now it appears China wants foreign capital out of the business, and it wants those operators (already listed, or unicorns sponsored by China megatech) which have raised capital to not use it grow market share. 

It wants the entire business to support the national interest. Without profit. 

Larry Chen (founder and chairman of Gaotu), once a teacher in an impoverished little village, later become multi-billionaire, may not be able to keep his billions. And I expect this does not bother Xi Jinping.

A basket of names in HK, mainland China, and NYSE (using pre-market prices as of one minute before the open for today’s price) is shown below. It is a heavy hit.

By my count using pre-open prices and the ugly HK closes, that is $18bn in one shot on those 16 names.

More below the fold.


Asia Long/Short Trades

By Thomas Schroeder

Asia market long ideas into weakness are challenging with short themes dominating in Japan, HK and Korea (next to buckle). ASX banks tops our long list followed by bottom digging in HK tech. Taiwan is resting on bull/bear support.

A clear bear lean is noted in Asia and parts of Europe compared to the US powerhouse upcycle that is near a tactical topping zone. Our cycle work calls for a ST US top today/Monday for a dip and then upside re test in late July with August seasonality turning bearish. Asia will front run a US top.


APM Monaco Pre-IPO – China’s Resilience Shines

By Zhen Zhou, Toh

APM Monaco (1700441D MN) is looking to raise about US$300m in its upcoming Hong Kong IPO. 

APM Monaco (APM) is a contemporary fashion jewelry brand. The company designs, manufactures and sells fashion jewelry products under its APM Monaco brand which includes earrings, necklaces, rings, and bracelets. The company releases a new collection of about 30 fashion jewelry products every month.

In this note, we look at financials and operating metrics of the company.


Macro; Rating Changes; New Issues; Talking Heads; Top Gainers & Losers

By BondEvalue

US markets continued with the momentum shrugging Monday’s risk-off sentiment even as the unemployment numbers came higher than expected – the S&P and Nasdaq were up 0.2% and 0.4% respectively. The upside led by IT, Healthcare and Consumer Discretionary up ~0.5% and was offset by Financials and Energy down ~1%. Strong corporate earnings continued to flow in with Intel, American Airlines (AA), Southwest and AT&T reporting numbers. According to Refinitiv, 15% of S&P 500 companies  have reported earnings out of which 88% have beaten estimates. AA and Southwest’s profits for Q2 indicates a recovery in travel demand. In the week ending July 17, weekly jobless claims  increased 51k to 419k, vs. estimates of 350k. US 10Y Treasury yields were a tad lower at 1.28%. The ECB held monetary policy steady while committing to purchasing €1.85tn ($2.2tn) of bonds until March 2022 under their asset purchase program. European bourses were mixed – DAX and CAC were up 0.6% while FTSE was down 0.4%. US IG CDS spreads widened 0.3bp and HY tightened 0.8bp. EU Main and Crossover spreads tightened 0.5bp and 2.4bp respectively. Brazil’s Bovespa was up 0.2%. Investors are keenly monitoring Chinese tech stocks as Chinese regulatory concerns resurface after penalties were imposed on ride-provider Didi.  Asian markets opened mixed – Nikkei is up 0.6%, HSI, Shanghai and Singapore’s STI are down 0.9%, 0.4% and 0.1% . Asia ex-Japan CDS spreads were 0.6bp tighter.

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