Category

China

Brief China: Belt and Road/Plan Plans/US & PRC/Huawei/Economy and more

By | China, Daily Briefs

In this briefing:

  1. Belt and Road/Plan Plans/US & PRC/Huawei/Economy
  2. Vietnam’s Big Investment Secret: Foreign Inflows Surge
  3. ECM Weekly (27 April 2019) – Luckin, Duiba, Leong Hup, ARA US Hosp, Douyu, So-Young, Yunji
  4. Buy Cyclicals? US Fed Hijacked By Big Jump In Global Capital Flows

1. Belt and Road/Plan Plans/US & PRC/Huawei/Economy

China News That Matters

  • BARF II in Beijing throws up new opportunities worldwide
  • The smog of war: Xi hosts huge naval display
  • Trade talks: delegations pack as Trump says he’ll soon host Xi
  • Huawei secures UK support despite multiple concerns
  • Growth stabilises in first quarter

In my weekly digest China News That Matters, I will give you selected summaries, sourced from a variety of local Chinese-language and international news outlets, and highlight why I think the news is significant. These posts are meant to neither be bullish nor bearish, but help you separate the signal from the noise.

2. Vietnam’s Big Investment Secret: Foreign Inflows Surge

Smartk2

  • March saw another strong month of cross-border capital inflows into Vietnam financial assets
  • Underlying flow index shows strong momentum hits value 76.9 (range 0-100)
  • Vietnam flows are moving with similar cross-border flow cycle as China and Asian EM

3. ECM Weekly (27 April 2019) – Luckin, Duiba, Leong Hup, ARA US Hosp, Douyu, So-Young, Yunji

2019 total deals 2019 accuracy rate  chartbuilder

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

Placements took a back seat this week and IPO activity came roaring back to life.

Starting in the US, the two highly anticipated IPOs, Luckin Coffee (LK US) and Douyu (DOYU US), filed their prospectus with the SEC. We have already shared our early thoughts on the companies. Look out for more insights as we crunch through the numbers in the following weeks leading up to its IPO launch.

Yunji Inc. (YJ US) and So-Young (SY US) opened their IPOs for bookbuild. We covered their valuation in:

Back in Hong Kong, Shenwan Hongyuan Group (H) (6806 HK) plunged 12% on its debut on Friday. As per Ke Yan, CFA, FRM‘s insight, risk-reward after the plunge implies that Shenwan is trading at a deeper discount to its A-share than it deserves. Considering that there had already been a big potion of adjusted free-float traded, stabilization can easily support the share price from here back to its IPO price.

Duiba Group (1753 HK) also opened its IPO for bookbuild this week. We heard that books are covered as of Friday. Valuation leaned on the expensive side as bankers probably took advantage of the strong rally in advertising peers to offer it at a higher valuation. We think that the IPO will only offer upside from the bottom end of the price range.

Activity is also picking up for Singapore and Malaysia after a long lull. ARA US Hospitality Trust (HOTEL SP) and Eagle Hospitality REIT filed their prospectus with MAS while ARA US Hospitality’s IPO is already taking orders for bookbuild. Sumeet Singh penned his thoughts on the REIT and its valuation in:

Malaysia’s Leong Hup International (LEHUP MK) finally launched its IPO after initial delays. 

Accuracy Rate:

Our overall accuracy rate is 72.1% for IPOs and 64% for Placements 

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

New IPO filings

  • Ascentage Pharma (Hong Kong, re-filed)

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

Source: Aequitas Research, Smartkarma

News on Upcoming IPOs

Analysis on Upcoming IPO

NameInsight
Hong Kong
AB InbevAb InBev Asia Pre-IPO – A Brief History of the Asia Pacific Operations – Eeking Out Growth in China
AscentageAscentage Pharma (亚盛医药) IPO: Too Early for an IPO
Ant FinancialAnt Financial IPO Early Thought: Understand Fintech Empire, Growth & Risk Factors
CIMC VehCIMC Vehicle (中集车辆): Market Leader of Semi-Trailers but Little Growth Ahead
ClarityClarity Medical (清晰医疗) IPO: Proxy to HK SMILE Surgery Demand
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) IPO: Tiktok the No.1 Short Video App for a Good Reason (Part 2)

East EduChina East Education (中国东方教育) Pre-IPO – The Company Known for Its Culinary School
China TobacChina Tobacco International (IPO): The Monopolist Will Not Recover
China TobacChina Tobacco Intl (HK) IPO: Proxy For the Chinese Cigarette Consumption
ESRESR Cayman Pre-IPO – A Giant in the Making
ESR

ESR Cayman Pre-IPO – Earnings and Segment Analysis 

ESR

ESR Cayman Pre-IPO- First Stab at Valuation

Frontage

Frontage (方达控股) IPO: More Disclosure Needed to Understand Moat and Growth Prospect

Frontage

Frontage (方达控股) IPO: Updates from 2018 Numbers

Haitong

Haitong UniTrust Intl Leasing Pre-IPO – Shape Shifting

Hujiang Edu

Hujiang Education (沪江教育) Pre-IPO – Spending More than It Earns

Hut Chi-Med

Hutchison-China Meditech (和黄医药) H-Share Listing: MNC Partnerships Endorsed Its R&D Capabilities

Jinxin

Jinxin Fertility (锦欣生殖) Pre-IPO: Strong Foothold in Sichuan but Weak Sentiment for Sector

MicuRxMicuRx Pharma (盟科医药) IPO: Betting on Single Drug in the Not so Attractive Antibiotic Segment
MabPharmMabPharma (迈博医药) IPO: Assembled for a Trade?
MabPharmMabPharm (迈博医药) IPO: Thoughts on Valuation (Part 2)
SH Henlius

Shanghai Henlius (复宏汉霖) IPO: Not an Impressive Biosimilar Portfolio 

TubatuTubatu Group Pre-IPO – Performing Better than Qeeka but Growing Much Slower, US$1bn a Stretch
TubatuTubatu Group Pre-IPO – Online -> Online + Offline -> Online -> ?
South Korea
KMH ShillaKMH Shilla Leisure IPO Preview (Part 1) – Highly Profitable Operator of Public Golf Courses in Korea
KMH ShillaKMH Shilla Leisure IPO Preview (Part 2) – Valuation Analysis
Plakor

Plakor IPO Preview (Part 1)

ZinusZinus IPO Preview (Part 1) – An Amazing Comeback Story (#1 Mattress Brand on Amazon)
India
Anmol IndAnmol Industries Pre-IPO Quick Take – No Growth, Generous Payments to Founders
Bharat Hotels

Bharat Hotels Pre-IPO – Catching up with Peers 

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
Flemingo Flemingo Travel Retail Pre-IPO – Its a Different Business in Every Country
NSENSE IPO Preview- Not Only Fast..its Risky and Expensive
NSENational Stock Exchange Pre-IPO Review – Bigger, Better, Stronger but a Little Too Fast for Some
MazagonMazagon Dock IPO Preview: A Monopoly Submarine Yard in India with Captive Navy Spending
Mrs. BectorMrs. Bectors Food Specialities Pre-IPO Quick Take – Sales for Its Main Segment Have Been Sta

Lodha

Lodha Developers Pre-IPO – Second Time Lucky but Not Really that Much Affordable
LodhaLodha Developers IPO: Presence in Affordable Segment Saves Lodha the Blushes in a Sluggish Mkt
IndiaMartIndiaMART Pre-IPO – Getting and Retaining Subscribers Seems to Be Difficult
PNB MetPNB Metlife Pre-IPO Quick Take – Doesn’t Stack up Well Versus Its Larger Peers
Malaysia
QSRQSR Brands Pre-IPO – As Healthy as Fast Food
The U.S
DouyuDouyu (斗鱼直播) IPO: Leader At a Cost
LuckinLuckin Coffee (瑞幸咖啡) Early Thoughts – Caffeine Rush
LuckinLuckin Coffee (瑞幸咖啡) App Walk-Through and Channel Checks

4. Buy Cyclicals? US Fed Hijacked By Big Jump In Global Capital Flows

Cbfgdp

  • World (gross) cross-border flows have rebounded strongly
  • Global Liquidity and World Business cycle are increasing driven by cross-border flows
  • Strong cross-border flows drive outperformance of cyclicals and non-US markets

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Brief China: Last Week in Event SPACE: Nexon, Netmarble, Nissan/Renault, Lynas, Harbin, Kosaido, Circor, Ayala and more

By | China, Daily Briefs

In this briefing:

  1. Last Week in Event SPACE: Nexon, Netmarble, Nissan/Renault, Lynas, Harbin, Kosaido, Circor, Ayala
  2. Huawei Investment & Holding– In the Eye of the Storm (Part I)
  3. ECM Weekly (25 May 2019) – ESR Cayman, Hansoh Pharma, Tai Hing, China East Edu, Haitong UniTrust
  4. Meten International Edu (美联国际教育) Early Thoughts – Unclear Strategies
  5. China Housing: Highlights From the ‘Baywatch’ Report On The Greater Bay Area (GBA)

1. Last Week in Event SPACE: Nexon, Netmarble, Nissan/Renault, Lynas, Harbin, Kosaido, Circor, Ayala

Got

Last Week in Event SPACE …

  • As Nexon Co Ltd (3659 JP)‘s soap opera-esque “updates” on the control-change plod on, the “certainty” on this situation is less than great.
  • In the next six weeks, two important games (BTS World and Seven Deadly Sins) for Netmarble Games (251270 KS) will be launched; the final bidder(s) for NXC Corp/Nexon should be known plus there should be clarity on the timeline for the Netmarble Neo IPO. 
  • Trump Trade Wars provide a positive backdrop for Lynas Corp Ltd (LYC AU) in the near-medium-term.
  • From a tick-the-box perspective, Nissan Motor (7201 JP)‘s new board looks highly diverse.  If they take their jobs seriously and learn about auto manufacturing and sales, the board holds promise.
  • Harbin Electric Co Ltd H (1133 HK)‘s Offer is expected to get up after an unprecedented extension provides a last-minute reprieve.
  • The Murakami Tender Offer for Kosaido Co Ltd (7868 JP) fails. Spectacularly so.
  • Crane Co (CR US)‘s proposal for Circor International (CIR US) will fail unless it bumps and opens up a dialogue with Circor’s board.
  • Ayala Corporation (AC PM) buys back shares from Mitsubishi, removing the placement overhang.
  • Plus other events, CCASS movements and Mood Spins.

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

EVENTS

Nexon Co Ltd (3659 JP) (Mkt Cap: $14bn; Liquidity: $37mn)

A lot of the media coverage of the Nexon situation appears to be a kind of breathless updating of possible changes in situation trafficked by gossipmongers. The level of trustworthiness to the “news” is low and outlets rarely note that what is now being reported does not report with what was previously being reported as “likely.” Travis Lundy suggests the level of confidence one should have about the expectations the media is implying needs to be checked. There is simply not enough meat in the “facts” as reported to strongly inform market observers & participants about the considerations which would influence a certain kind of pricing, or bidder strength, outcome, or even whether there could be a decision by Mr Kim Jung-Ju to walk away from the current process and re-start it at some point in the future.

Delays were to be expected. and the possibility of significantly longer delays exists. The structure is convoluted – less easy than just buying Nexon outright. The structure could easily deter many buyers unless it is crystal clear that the rest of the stuff inside NXC is excluded from the sale. If delays are being implemented because major bidders can’t get the funds, that is either bad news on its own, or there is something else going on. If KJJ really wants a great premium when he decides to sell, he may turn this deal down – whoever the winning bid comes from.

  • The constant refrains about how Disney, EA, or Amazon might bid are probably misplaced. Travis Lundy doesn’t see any of them bidding. The US-China Trade War means US corporate buyers are not going to be the best buyers of game assets where 50% of revenue and 100% of profits come from China.
  • MBK/Tencent or KKR/Tencent is probably still the bidder to beat, as that consortium has been since the beginning. MBK would find it the easiest to take a sharp knife to costs. Tencent would find it easiest to buy 30-40% and then stay on the sidelines while someone else made it better. Neither Netmarble nor Kakao are likely to be the best buyers for this.
  •  This opportunity has been a great one to range-trade. In general, it has been “buy the dips, lighten up after it pops 5-10%. Rinse. Repeat.” Travis now views this as a low-quality Bullish trade. It is lower quality than it was 3-4 months ago because of reduced ability to range-trade and harvest gamma before a decision is made. The time decay is perceived to be quite strong now. That means sizing would probably be smaller now than it was at the same price or slightly lower in January. 

(link to Travis’ insight: Nexon: Continuing Question Marks)


Netmarble Games (251270 KS) (Mkt Cap: $7.9bn; Liquidity: $20mn)

The three major drivers of Netmarble’s stock price include the upcoming IPO of 80.6%-held Netmarble Neo (and the official global launch of the mobile RPG The King of Fighters Allstar game on May 9th), the launch of the BTS World game, and the eventual resolution of the NXC Corp/Nexon M&A situation. 

  • Douglas Kim believes a non-Netmarble Games entity such as MBK or Tencent Holdings (700 HK) will be the final bidder for Nexon. It was reported in early May that the Netmarble and MBK partnership broke off at the last minute as MBK determined it may not need a strategic investor to manage Nexon – key personnel in Nexon (excluding the founder Kim Jung-Joo) already play significant roles in directing and managing the company.
  • The market has been concerned about Netmarble potentially overpaying for NXC Corp with overstretched debt financing, and if Netmarble fails to be the final bidder for NXC Corp, this is probably a positive for the company. If the final bidder is MBK (only), this will also have an added positive impact on Netmarble as there have been fears that if Tencent acquires NXC Corp, this will potentially add to the competitive pressures of the gaming industry in Korea. 
  • These events, followed by an announcement of the Netmarble Neo IPO and a successful launch of the BTS World game should also positively impact Netmarble. In terms of earnings pickup, the consensus expects Netmarble to experience a turnaround starting 2Q19, with operating profit estimates of ₩46bn in 2Q19, up from ₩34bn in 1Q19. The consensus expects the company to further improve its operating profit to ₩100bn in 3Q19. 

(link to Douglas’ insight: Netmarble Games: The Upcoming Netmarble Neo IPO, Launch of BTS World Game, and the Nexon M&A)


Lynas Corp Ltd (LYC AU) (Mkt Cap: $1.1bn; Liquidity: $9mn)

Travis Lundy discusses the Lynas situation which appears to have changed dramatically this week. Lynas believes Malaysia will decide things the right way, which will mean the infamous December 4th Letter from the AELB (Atomic Energy Licensing Board) will be withdrawn, Malaysia approves the CondiSoil route for disposal of the WLP residue there now, and tthe license will get renewed with adequate transition time to enable continued buildup of WLP before sourcing of cracked and leached material exported from Australia can be arranged. This is the bet here. 

  • Travis thinks Lynas will need to create a new pricing system for its product. Its customers should be willing to pay a price which is not explicitly tied to Chinese onshore pricing with all the risk that entails. If its customers want to ensure Lynas stays in business, Lynas has to be able to charge what it needs to in order to stay in business. Western and Japanese companies with good technology to increase processing expertise to enable better product and higher margins will be happy/willing to engage with Lynas for the basic reason that Lynas is not Chinese. I’d note that they’d engage with the buyer of Lynas assets as well if Lynas went under, but the issue here is not bankruptcy but speed of increased capacity rollout.
  • This would suggest that partner companies with cash to invest should be willing to project-finance some portions of the capital and/or expansion. If Lynas needed or wanted to raise capital by issuing a convertible bond of a few hundred million dollars, Travis expects doing so would be “easy” in the near-term.
  • Travis is bullish the stock price near-term, not because of fundamentals, but due to the a) Trump Trade Wars being a good thing for product pricing and demand for access, and b) Geopolitical issues helping Malaysia come to the “right” decision regarding license renewal. He would not want to be short here anymore. Because the growth and value of long-term product pricing is so far out in the future, what constitutes “fair” for the stock is obviously tough to calculate with any confidence, so the “Bullish” label is really about covering the short.

(link to Travis’ insight: Trump Trade Means Lynas Capex Easier)


Nissan Motor (7201 JP) (Mkt Cap: $26bn; Liquidity: $115mn)

The new board of Nissan, as proposed by Nissan’s Provisional Nomination and Compensation Advisory Council established after the independent committee on governance proposed its measures in March, has 11 members, with two each nominated from Nissan and Renault SA (RNO FP) and seven coming in as independent directors.

  • The board is now set up to be Team Renault, Team Nissan, and seven (theoretically) independents. The important angle here is to try to understand where the chips might fall if push comes to shove, because the Revised Alliance Master Agreement requires that Renault not propose measures to the shareholders which are not supported by the Nissan board, and not vote against measures which are proposed by the board. Doing so would breach the RAMA and would allow Nissan to buy more Renault shares.
  • Only at the end of June – assuming all goes to plan – will the seven new members of the new Board take their seats. Renault pushing hard now when the majority of current board members will change in June seems to be insensitive to the nature of boards and board members’ responsibilities.  Should there be a strong dispute between Renault and Nissan about the process and timing of discussing deeper capital ties, Travis expects the ball to fall in the court of “Not Now” and “Not Yet.”
  • At 0.57x book on Nissan, it is difficult to be bearish. And it seemed pretty clear from the earnings meeting that Saikawa-san and others thought that the low forecast for FY19 (to March 2020) was reasonably conservative and was designed to flush out all the bad news. Nissan has decided to shrink its volume presence in the US to raise profitability per vehicle, and it is clear that there have been measures to reduce costs through redundancies. 
  • Travis remained inclined to think that RNO is the right trade to be long here compared to Nissan but is surprised that Renault is now down to such a low PBR. He was inclined to think that the significant slowdown in the Chinese market is a net headwind to both Nissan and Renault, but expects that the heightening of trade friction between China and the US could favour Japanese brands at the expense of US brands.

(link to Travis’ insight: Nissan’s New Board and Management Developments)


Briefly …

One Equity placed out 6.5mn shares of Celltrion Healthcare (091990 KS) at a final price of ₩60,100, an 8% discount to last close, similar to the discount back in September last year. There is a 90-day lockup on One Equity’s remaining 10% stake and it is possible Ion will reload. (link to Sanghyun Park‘s insight: Celltrion H Block Deals Priced at Floor: More Short Entry Points Should Be On the Way

M&A – ASIA-PAC

Harbin Electric Co Ltd H (1133 HK) (Mkt Cap: $991mn; Liquidity: $3.5mn)

With acceptances totaling 85.84% of shares out as at the Closing Date (20 May), just short of the 90% acceptance condition, in an unprecedented move, the SFC granted an extension for Harbin’s Offer until the 19 July (Second Closing Date). If you’re going to set a precedent, then make it a bold one. Two months of additional time provides ample room to source, locate, and encourage shares not tendered (4.16% of shares out) to tender.

  • The withdrawal clause (Rule 17 of the Code) has now been clarified on the HKEx – the right-of-withdrawal of acceptances is triggered 21 days after the Closing Date (i.e. shares tendered are not irrevocable through to 19 July, as previously speculated in this insight). This is a voluntary right to withdraw – not compulsory – and assumes the Offer does not become unconditional before the expiry of the 21 days.
  • ~28mn shares are required to be tendered for the Offer to get up and 27.5mn have changed hands since the extension announcement.  The acceptance condition is likely to be satisfied shortly. An additional 5.7mn shares or 0.84% of shares out tendered on Friday.

(link to my insight: Harbin Electric: This Could Get Squeezy After Unprecedented Offer Extension)


Kosaido Co Ltd (7868 JP) (Mkt Cap: $164mn; Liquidity: $1.5mn)

The long extended close of the Tender Offer for Kosaido by renowned Japanese activist Yoshiaki Murakami and his affiliate companies, ended in failure. Travis had been bearish the stock once the Tender Offer was announced and the stock popped to the ¥850 area, and the shares did not trade below ¥750 (the Offer price) for much time at all after the announcement, but even he did not expect the result of only 427,000 shares tendered. That is less than 2% of the shares they did not hold. 85% of shares out did not tender.

  • Most people who bought in the past three and a half months are now (at the time of the insight) underwater on their investment, at a 70+% premium to the undisturbed price, after worse-than-expected results. And we have no resolution.
  • It would be tough to sell the funeral parlor business for 1x book because in its best year in the past five it earned a 5% ROE. To trade at book it should be able to do a little better than that.  The rest of the business has negative equity and a dire need for restructuring, which costs money. 
  • Travis is still bearish here and would not buy the dip in near-space. Even if the stock does not drop hard, it is pretty much dead money for a while. And while the stock trades below book, and there is a significant likelihood of bootstrap restructuring, Travis is inclined to think that transparency for shareholders will be no better than it has been for the last five years, which is pretty abysmal.

(link to Travis’ insight: Murakami Group Tender for Kosaido Fails… Spectacularly)


Asiana Airlines (020560 KS) (Mkt Cap: $1bn; Liquidity: $48mn)

More than a month has passed since Asiana Airlines was officially put up for sale by the Asiana Airlines’ main creditor (KDB) and Kumho Industrial (002990 KS), the leading shareholder of Asiana. Since then, a few chaebols that were initially mentioned as potential acquirers of Asiana including SK, Hanwha, CJ, Lotte, Hanjin, and Shinsegae groups – all have been very quiet in their willingness to purchase the company. 

  • Among these chaebols, Aekyung has shown the highest initial interest. It may require nearly ₩2.0tn to ₩2.5tn to acquire Asiana Airlines, which will likely involve additional rights offering/debt financing.
  • Because of the uncertainty on timing and potential buyers wary of the high debt amount and lofty purchase price, expect Asiana to continue to trend lower in the next few weeks. There is a strong support in the low ₩5,000 level, meaning there could be a further 10-15% downside risk. 

(link to Douglas’ insight: Korea M&A Spotlight: Aekyung – The Leading Candidate to Acquire Asiana Airlines at Reduced Prices?)

M&A – US

Circor International (CIR US) (Mkt Cap: $850mn; Liquidity: $8mn)

Crane Co (CR US) announced a proposal to acquire Circor, a manufacturer of pumps, valves, regulators, actuators, and related engineered components for $45/share (cash), for a total equity value of $895mn and an EV of $1.55bn ($1.7bn if net pension liability is included). The proposal represents a 47% premium to last close. Circor rejected the proposal on the 13 May, so Crane has gone public to “make our proposal known to Circor shareholders so they can express their views directly to the Circor Board.”

  • Circor’s EBITDA margins are lower than the mean/median of the comps and are the lowest of any company in the entire group, giving credence to Crane’s criticisms of Circor’s operating performance. From Crane’s presentation, Circor is the worst performer amongst its peer group and also missed all five-year targets (set in 2014).
  • John DeMasi reckons this deal will be an uphill battle for Crane if it decides to go “hostile” with a formal offer – it would fail without a board recommendation. The next step would be to increase their proposal to give Circor’s board an opportunity to show it is not totally intransigent. A $4 bump to $49 would be a meaningful interim increase (8.9%). If that doesn’t get Circor talking, the board would come under pressure from shareholders.  Other bidders could be drawn out if it gets Circor talking.
  • Even though this is a highly speculative situation (with downside of ~29% using Friday’s close), John liked it (sized appropriately at the then-current price $41.37) because of the potential upside and confidence that an independent, competent board will listen to its shareholders if enough of them are loud enough for long enough.

(link to John’s insight: Crane Co. Proposal to Acquire CIRCOR International – Actuator Wanted)


Mellanox Technologies Ltd (MLNX US) (Mkt Cap: $850mn; Liquidity: $8mn)

The past two weeks have seen a significant widening of the merger spread to 14% amid a re-ratcheting up of trade tensions between the US and China – Nvidia Corp (NVDA US)‘s $125/share Offer is conditional on the receipt of antitrust clearance from China.  Financial media and pundits have been quick to reference Qualcomm Inc (QCOM US)‘s failed bid for  Nxp Semiconductors Nv (NXPI US) last year as why this may not bode well for the NVDA/MLNX transaction. But Robert Sassoon sets out a case as to why this deal may not be the right reference.

  • He believes the Marvell Technology Group Ltd (MRVL US)/Cavium Inc (CAVM US) deal provides a more positive perspective on the prospects for NVDA/CAVM deal completion than QCOM/NXPI. Furthermore, the merger agreement expires on December 10, 2019, which also accommodates two three-month extensions. This leaves a long runway for the deal to obtain the required regulatory approvals, and a time buffer for the current political heat to cool down either through some type of trade agreement between US and China or progress towards one. 
  • Friday’s closing price of $109.80 is only slightly above the pre-announcement price. In August-September 2018 period when speculation of a possible MLNX buy-out began, shares were trading in the $70-$80 range, at a valuation multiple of 9x-10x & 14x-16x prospective Non-GAAP 2018 EBITDA & PE.  However, consensus estimates for 2019 are projecting a ~30% increase in both EBITDA and EPS, indicating little fundamental justification for a return to that range. This suggests limited downside for the shares of a fast-growing company that is trading at below peer multiples. On balance, the risk-reward profile of MLNX looks attractive from our standpoint. 

(link to Robert’s insight: MergerTalk: NVIDIA/Mellanox – Why We Think There Is More Opportunity Than Risk In The Widened Spread)


Briefly …

Sprint Corp (S US) has received approval from the FCC for the merger with T-Mobile to proceed following concessions. The Justice Department approval is outstanding and Sebastian Ashton, CFA believes the outcome remains uncertain. He reiterates investors should look to exit the bonds at current valuations given they are trading at a premium to par, in order to mitigate deal risk exposure. If the merger fails, the company may face liquidity issues over the medium term given their deteriorating fundamental performance and negative free cash flow. (link to Sebastian’s insight: Sprint Corp – One Regulatory Approval, Another to Go, How Likely?)

STUBS & HOLDCOS

Jardine Cycle & Carriage (JCNC SP) / Astra International (ASII IJ)

JCNC’s discount to NAV of 14.4% is around its narrowest in the past 12-months and compares to an average of ~20%.  The key trigger for JCNC’s recent outperformance appears to be the cancellation of the offer for Bank Permata (BNLI IJ).

  • Both Standard Chartered Bank and Astra hold 44.56% in BNLI, leaving minorities with 10.88%. First rumoured back in November/December, state-owned Bank Mandiri Persero (BMRI IJ) was understood to be the frontrunner to acquire the stakes held by Astra and St Chart. 
  • The speculated price sought by BNLI was 1.8x P/B, dropping to 1.6x, then 1.4x, before talks were allegedly abandoned last week. There has been no official announcement/comment (and in my own correspondence with the IR) from Astra on this sale. Astra’s stake in BNLI accounts for 3.6% of its market cap – not a material %.  
  • JCNC is prodding its narrowest discount to NAV in the past year, having all-but reversed its 4Q18 lows. There may be further upside for JCNC, but it appears limited. BNLI is for sale and is currently trading at 1.0x P/B. I would not be surprised to see further dialogue initiated on a proposed sale.

Ayala Corporation (AC PM) / Ayala Land Inc (ALI PM)

Ayala Corp’s discount (at the time of my insight) to NAV had bounced off a 12-month low but still traded 2Stdevs+ from the average, and below the 12.9% level when I previously discussed this Holdco in greater detail in late April. ACs 1Q19 figures released on the 10 May did not endear investors to the stub ops.  

  • Mitsubishi’s 6.58% stake remains an overhang – however, there appears no urgency for another placement with AC trading a YTD lows. On the assumption these share placements bolster full-year results (March year-end), Mitsubishi can afford to wait for a recovery in the share price.  However, this assumes there is a near-term recovery with respect to this placement.
  • This recent set of quarterly results at the parent level is not positive. Expect the discount to NAV to drift sideways, if not lower without the benefit of any positive newsflow at the stub ops – or on the placement – until 1H results announced around mid-August clarify the earnings direction for 2019. 
  • If Mitsubishi is indifferent to selling as its in-cost is a fraction of the current price, the spectre of declining (& a protracted decline in) stub earnings may tilt them to place shares earlier.
    • UPDATE: AC announced it had bought back 3.8m shares from Mitsubishi Corp at PHP 838, a 1.5% discount to the prior day’s close. “This transaction completes their portfolio rebalancing exercise with regard to their Ayala holdings, which now stands and will remain at around six percent (6%).”  Positive news for Ayala and a nice bounce – it closed the week at 11.5% discount to NAV against a 12-month low of 16% on the 21 May.

(link to my insight: StubWorld: JCNC In Unwind Territory As Astra’s Bank Stake Stalls; Poor Stub Results Send Ayala Lower)

SPIN-OFFS – HONG KONG

A number of Hong Kong spin-offs, including  Haitong UniTrust International Leasing Co Ltd (1905 HK) (HUIL) and Xinyi Energy Holdings Ltd (3868 HK), have been announced recently. Legend Holdings Corp H (3396 HK), Kerry Logistics Network (636 HK) and Tianneng Power Intl (819 HK) have also made announcements to spin-off certain divisions, although these remain subject to Exchange approvals and market conditions. Using available information from the prospectus/red herrings and various HKEx announcements, it is also possible to back out a rudimentary implied stub value of the unlisted parent’s operations ahead of these spin-offs.

  • Haitong Securities Co Ltd (H) (6837 HK)‘s implied stub ops appear slightly expensive versus peers. Haitong Sec has underperformed both its peers and HSI since the initial spin-off announcement back in March 2017. However, stub income halved in FY18 compared to a 28% decline on average for peers. At ~15% of market cap, this is a weak Holdco/subsidiary relationship. HUIL is expected to commence trading on the 3 June. 
  • Xinyi Solar Holdings (968 HK)‘s performance and valuation (with reference to its stubs ops) relative to peers, appears overextended, notably for operations with declining growth and net margins. The implied stub is near a 52-week high. At between 35-45% of market cap, this will be a new Holdco/subsidiary relationship to follow, depending on XEH’s volume. XEH is expected to commence trading on the 28 May.
  • Legend Holdings Corp H (3396 HK)‘s proposed spin-off of Zhengqi Financial has all the hallmarks of being a weak Holdco/subsidiary relationship; as does Kerry Logistics Network (636 HK)‘s proposed spin-off and separate listing of Kerry Express (Thailand) on the stock exchange of Thailand. Tianneng Power Intl (819 HK)‘s spin-off of its battery manufacturer may result in a stub to watch, however financial details of the spin-off are minimal, it still requires PRC approval, and the spin-off was previously attempted back in 2015.

links to insights:
SPINOFF: Haitong Securities Spinoff of Haitong UniTrust Int’l Leasing
SPINOFF: Xinyi Solar Spinoff of Xinyi Energy

SPINOFF: Three Announced but Unconfirmed HK Spinoffs: Legend, Kerry Logistics, Tianneng Power

OTHER M&A 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, amongst others. For those mentioned below, I could not find an obvious reason for the CCASS move.   

Name

% chg

Into

Out of

19.81%
GS
Core Pac
17.14%
Anue
Kim Eng
Zhongchang (859 HK)
74.98%
Cinda
Bocom
TUS International
19.41%
China Sec
Outside CCASS
26.75%
China Ind
Outside CCASS
Source: HKEx

2. Huawei Investment & Holding– In the Eye of the Storm (Part I)

Huawei%20operations%20dec%202018

Huawei Investment and Holding Co. Ltd. (“Huawei”), a parent of Huawei Technology (40978Z CH) , has been in the news on the Sino-US trade war from the arrest of the group’s chairman’s daughter in Canada to the accusation of Huawei on spying and dealing with Iran. The recent ban on Google’s future business with Huawei is unfortunate, and we see Huawei as a tool used by the Trump Administration to muster over China on the trade war.

We believe the trade war reflects a lack of trust between the US and China which, for sure, did not originate from Mr. Trump, but has been brewing for a long time. We expect the trade war to last a while at least until the next Presidential election in 2020. Huawei as a major competitor to Apple, and one of the forefront leaders in the 5G technology, will inevitably be in the eye of the storm. We advise bond investors to take a deep breath and look beyond this tit-for-tat war of rhetoric between the US and China, and focus on the long-term to determine Huawei’s ability to repay its bonds.

In a series of reports, we start by looking into the events that have led to the current situation, how the Huawei corporate body is structured, and how important Huawei is to China. Next, we look into how Huawei bonds have been trading versus peers, and how financial metrics determine Huawei’s debt repayment capability. Last, we conclude with our fair value of HUAWEI bonds. We expect declining profit margins in the near term but we believe the key to bondholders is the Chinese government support of the group.

The HUAWEI complex (HUAWEI 22s, 25s, 26s, and 27s), all guaranteed by Huawei, has dropped 2-3 points across the board to the mid 90 cents on a dollar since 17-May when the first news of Google’s ban broke. We expect more negative news on Huawei this year and expect asymmetric downside risk on the bonds. The fact that Google issued a statement on 20-May to continue its business with Huawei leads us to believe the dust has not settled. That said, we put our recommendation on all HUAWEI complex under “EVOLVING”. Any further sell-off on HUAWEI bonds will lead us to reconsider our recommendation.

3. ECM Weekly (25 May 2019) – ESR Cayman, Hansoh Pharma, Tai Hing, China East Edu, Haitong UniTrust

Total deals since inception accuracy rate since inception  chartbuilder%20%285%29

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

This will be the third week in a row we are saying: there are more IPOs coming in Hong Kong!Momentum seems to be holding up as we head into the end of Q2. First off, there will be 4 IPOs starting to trade throughout next week. Mulsanne Group Holding Ltd (1817 HK) will debut first on Monday.

This would be interesting to watch because the IPO utilized the new pricing mechanism in Hong Kong to price its IPO below the bottom end of its indicated price range rather than withdraw and refile. This mechanism reminds us of the pricing flexibility of US IPOs wherein companies could price below its indicative price range to ensure that it performs well on its debut despite poor demand during bookbuild. Xinyi Energy Holdings Ltd (3868 HK), Frontage Holdings (1521 HK), and MabPharm (2181 HK) will trade on Tuesday, Thursday, and Friday respectively.

For upcoming bookbuilds, Tai Hing (1719303D HK) and China Tobacco International (GHALPZ CH) have filed their PHIP this week and will be likely be opening their books next week. We are also hearing that CSSC Hong Kong Shipping Co Ltd (0931049D CH) and China East Education (EASTEDU HK) will open books on Monday while Hansoh Pharmaceutical (HANSOH HK) will be on Tuesday.

IPO activity in other countries have been fairly muted. Eagle Hospitality Trust (EAGLEHT SP)  finally started trading in Singapore. Its share price closed 6% down as the IPO was undersubscribed. We will leave the updates on the IPO to Sumeet Singh on Monday.

In the U.S, GSX Techedu (GSX US) will launch its book next week while Meten (MEDU US) which just filed its US$100m IPO with the SEC will be premarketing next week.

Accuracy Rate:

Our overall accuracy rate is 72.4% for IPOs and 63.9% for Placements 

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

New IPO filings

  • Sinic Holdings (Hong Kong, >US$100m)
  • Meten International Edu (the U.S, US$100m)

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

Source: Aequitas Research, Smartkarma

News on Upcoming IPOs

Analysis on Upcoming IPOs

NameInsight
Hong Kong
AB InbevAb InBev Asia Pre-IPO – A Brief History of the Asia Pacific Operations – Eeking Out Growth in China
AB InbevAb InBev Asia Pre-IPO – Quick Note – More like CR Beer Rather than Tsingtao
AB InbevAb InBev Asia Pre-IPO – On Its Way to Potentially Being the Biggest HK IPO This Year
AB Inbev

Budweiser Brewing APAC Pre-IPO – It Will Be a US$5bn+ Raise Owing to Its Clean Balance Sheet

AscentageAscentage Pharma (亚盛医药) IPO: Too Early for an IPO
Ant FinancialAnt Financial IPO Early Thought: Understand Fintech Empire, Growth & Risk Factors
CIMC VehCIMC Vehicle (中集车辆): Market Leader of Semi-Trailers but Little Growth Ahead
ClarityClarity Medical (清晰医疗) IPO: Proxy to HK SMILE Surgery Demand
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) IPO: Tiktok the No.1 Short Video App for a Good Reason (Part 2)

East EduChina East Education (中国东方教育) Pre-IPO – The Company Known for Its Culinary School
China TobacChina Tobacco International (IPO): The Monopolist Will Not Recover
China TobacChina Tobacco Intl (HK) IPO: Proxy For the Chinese Cigarette Consumption
CSSCCSSC (HK) Shipping IPO: A Cyclical Business Masked as an Income Stock
ESRESR Cayman Pre-IPO – A Giant in the Making
ESR

ESR Cayman Pre-IPO – Earnings and Segment Analysis 

ESR

ESR Cayman Pre-IPO- First Stab at Valuation

ESR

ESR Cayman Pre-IPO – Updates from PHIP – Growth Remains on Track 

ESR

ESR Cayman Pre-IPO – Updated Valuation and Key Risks

ESR

ESR Cayman Pre-IPO – Peer Comparison Quick Take – Bigger than Some, Much Smaller than Others 

Hansoh

Hansoh Pharma (翰森制药) IPO: New Numbers, Pre-IPO Dividend and Boyu Investment (Part 3)

Hansoh

Hansoh Pharma (翰森制药) IPO: Thoughts on Valuation

Hansoh

Hansoh Pharma (翰森制药) IPO: Competitive Landscape of HS-10296

Helenbergh

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

Hut Chi-Med

Hutchison-China Med (和黄医药) H-Share Listing: MNC Partnerships Endorsed Its R&D Capabilities

Jinxin

Jinxin Fertility (锦欣生殖) Pre-IPO: Strong Foothold in Sichuan but Weak Sentiment for Sector

MicuRxMicuRx Pharma (盟科医药) IPO: Betting on Single Drug in the Not so Attractive Antibiotic Segment
MabPharmMabPharma (迈博医药) IPO: Assembled for a Trade?
MabPharmMabPharm (迈博医药) IPO: Thoughts on Valuation (Part 2)
SH Henlius

Shanghai Henlius (复宏汉霖) IPO: Not an Impressive Biosimilar Portfolio 

TubatuTubatu Group Pre-IPO – Performing Better than Qeeka but Growing Much Slower, US$1bn a Stretch
TubatuTubatu Group Pre-IPO – Online -> Online + Offline -> Online -> ?
South Korea
KMH ShillaKMH Shilla Leisure IPO Preview (Part 1) – Highly Profitable Operator of Public Golf Courses in Korea
KMH ShillaKMH Shilla Leisure IPO Preview (Part 2) – Valuation Analysis
Plakor

Plakor IPO Preview (Part 1)

ZinusZinus IPO Preview (Part 1) – An Amazing Comeback Story (#1 Mattress Brand on Amazon)
India
Aakash EduAakash Education Pre-IPO – Fast Growth in an Attractive Sector
Anmol IndAnmol Industries Pre-IPO Quick Take – No Growth, Generous Payments to Founders
Bharat Hotels

Bharat Hotels Pre-IPO – Catching up with Peers 

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
Flemingo Flemingo Travel Retail Pre-IPO – Its a Different Business in Every Country
NSENSE IPO Preview- Not Only Fast..its Risky and Expensive
NSENational Stock Exchange Pre-IPO Review – Bigger, Better, Stronger but a Little Too Fast for Some
MazagonMazagon Dock IPO Preview: A Monopoly Submarine Yard in India with Captive Navy Spending
Mrs. BectorMrs. Bectors Food Specialities Pre-IPO Quick Take – Sales for Its Main Segment Have Been Sta

Lodha

Lodha Developers Pre-IPO – Second Time Lucky but Not Really that Much Affordable
LodhaLodha Developers IPO: Presence in Affordable Segment Saves Lodha the Blushes in a Sluggish Mkt
IndiaMartIndiaMART Pre-IPO – Getting and Retaining Subscribers Seems to Be Difficult
PNB MetPNB Metlife Pre-IPO Quick Take – Doesn’t Stack up Well Versus Its Larger Peers
Malaysia
QSRQSR Brands Pre-IPO – As Healthy as Fast Food
The U.S
DouyuDouyu (斗鱼直播) IPO: Leader At a Cost
DouyuDouyu (斗鱼直播) IPO: Comparison with Huya (Part 2)
GSXGSX Techedu (跟谁学) IPO Early Thoughts – Successful Pivot Away from Marketplace Model
MetenMeten International Edu (美联国际教育) Early Thoughts – Unclear Strategies

4. Meten International Edu (美联国际教育) Early Thoughts – Unclear Strategies

Number of self operated centers vs franchised centers no of self operated centers no of franchised centers chartbuilder

Meten (MEDU US) recently filed for a US listing and is looking to raise US$100m.

Meten is a general English language training (ELT) service provider in China. It has grown its revenue at a decent 25.7% CAGR between FY2016 to FY2018 while margins made modest improvements.

However, its 1Q 2019 results signals near-term weakness across its major segments as the company seemed to be making strategic changes to its operations. The F-1 filing indicated that existing shareholders will sell in the IPO, suggesting their intention to exit or, at least, partially monetize their stake which could potentially affect sentiment going into the IPO.

5. China Housing: Highlights From the ‘Baywatch’ Report On The Greater Bay Area (GBA)

Screen%20shot%202019 05 23%20at%2019.14.39

Following on from our original note on the Guangdong – Hong Kong – Macau Greater Bay Area (GBA) from the day of the blueprint announcement on February 18, we are presenting the highlights from our inaugural ‘Baywatch’ report focused on the housing markets on the mainland of the GBA. For the essentials on the GBA, see Bondcritic’s China’s Greater Bay Area: The Essential

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Brief China: Spring Seasonality and Commodities and more

By | China, Daily Briefs

In this briefing:

  1. Spring Seasonality and Commodities
  2. Iron Ore and the Inventory Mystery

1. Spring Seasonality and Commodities

Slide7

We have not taken a good look at seasonality in a few months. In light of the GDP rates last week and other first quarter data we are taking a look at seasonal commodities. Copper is lower in comparison to 2018 and 2017. In February 2019 copper rates actually crosses 2017 more than 2018 in recent trading. In recent trading copper pricing is a relatively flat and has in fact shifted very little. Copper had a difficult late 2018 due to a strong dollar and that appears to still be the case. There is clear pressure on copper that is not giving up anytime soon.

2. Iron Ore and the Inventory Mystery

Slide1

Just days after China makes a big push to keep supporting the economy, iron ore prices ticked upward. Even though GDP beat expectations, the fact that China is still pushing the support the domestic economy feels a little bit like the Wizard of Oz, as in don’t look behind the curtain. Today we are looking at iron ore from a few different angles in order to give a good look at what Beijing is looking to support and ultimately maintain.

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Brief China: Spring Seasonality and Commodities and more

By | China, Daily Briefs

In this briefing:

  1. Spring Seasonality and Commodities
  2. Iron Ore and the Inventory Mystery
  3. Luckin Coffee IPO: Wake up and Smell the Coffee

1. Spring Seasonality and Commodities

Slide7

We have not taken a good look at seasonality in a few months. In light of the GDP rates last week and other first quarter data we are taking a look at seasonal commodities. Copper is lower in comparison to 2018 and 2017. In February 2019 copper rates actually crosses 2017 more than 2018 in recent trading. In recent trading copper pricing is a relatively flat and has in fact shifted very little. Copper had a difficult late 2018 due to a strong dollar and that appears to still be the case. There is clear pressure on copper that is not giving up anytime soon.

2. Iron Ore and the Inventory Mystery

Slide1

Just days after China makes a big push to keep supporting the economy, iron ore prices ticked upward. Even though GDP beat expectations, the fact that China is still pushing the support the domestic economy feels a little bit like the Wizard of Oz, as in don’t look behind the curtain. Today we are looking at iron ore from a few different angles in order to give a good look at what Beijing is looking to support and ultimately maintain.

3. Luckin Coffee IPO: Wake up and Smell the Coffee

Luckin%20response

Luckin Coffee (LK US), a high growth coffee chain in China, has filed for an IPO to raise 800mn USD (Source: Reuters).  We note the following points. 

Intro to Luckin IPO

Slowing exit rate and high cash burn amidst financials in our view

A great growth market beset by tough competition

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Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.



Brief China: Spring Seasonality and Commodities and more

By | China, Daily Briefs

In this briefing:

  1. Spring Seasonality and Commodities
  2. Iron Ore and the Inventory Mystery
  3. Luckin Coffee IPO: Wake up and Smell the Coffee
  4. The Red Flag

1. Spring Seasonality and Commodities

Slide7

We have not taken a good look at seasonality in a few months. In light of the GDP rates last week and other first quarter data we are taking a look at seasonal commodities. Copper is lower in comparison to 2018 and 2017. In February 2019 copper rates actually crosses 2017 more than 2018 in recent trading. In recent trading copper pricing is a relatively flat and has in fact shifted very little. Copper had a difficult late 2018 due to a strong dollar and that appears to still be the case. There is clear pressure on copper that is not giving up anytime soon.

2. Iron Ore and the Inventory Mystery

Slide1

Just days after China makes a big push to keep supporting the economy, iron ore prices ticked upward. Even though GDP beat expectations, the fact that China is still pushing the support the domestic economy feels a little bit like the Wizard of Oz, as in don’t look behind the curtain. Today we are looking at iron ore from a few different angles in order to give a good look at what Beijing is looking to support and ultimately maintain.

3. Luckin Coffee IPO: Wake up and Smell the Coffee

Luckin%20response

Luckin Coffee (LK US), a high growth coffee chain in China, has filed for an IPO to raise 800mn USD (Source: Reuters).  We note the following points. 

Intro to Luckin IPO

Slowing exit rate and high cash burn amidst financials in our view

A great growth market beset by tough competition

4. The Red Flag

Lyft facing class action lawsuits. Luckin Coffee just filed to go public on NASDAQ and raised a $150M Series B round. USDA pilots online grocery program for SNAP recipients in NY.

  • Lyft: The red flag we raised about Lyft’s market share is playing out as it is facing two class-action lawsuits from investors claiming it exaggerated its U.S. market share at 39% in its S-1.
  • Starbucks: Luckin Coffee just filed to go public on the NASDAQ and raised a $150M Series B+ round, raising the threat this disruptive new entrant poses to Starbucks’ China growth story.
  • U.S. Dollar Stores: The fortress surrounding U.S. dollar stores could start to crumble as the USDA just launched a two-year pilot program to enable SNAP recipients in New York to buy groceries online from Amazon and Walmart. 

One of the red flags that totally scared me off drinking Lyft’s Kool-Aid was the discrepancy I discovered with its reported U.S. market share. It turns out the skepticism I shared with you in my March 25 research report was warranted as Lyft is now facing two class-action lawsuits from investors claiming it exaggerated its U.S. market share at 39% in its prospectus. It will be interesting to see what happens, especially since Uber disclosed in its April 11 S-1 filing that it currently has over 65% of the ride-sharing category in the U.S. and Canada. But most red flags take much longer to play out. For example, back on January 15, I warned about the threat of the new disruptive entrant Luckin Coffee to Starbucks’ China growth story – but Starbucks’ stock has continued to climb since then, up 18.6% versus the 15.6% gain in NASDAQ. And the red flag just flashed brighter as in the past week, Luckin has raised a $150M Series B+ round, on top of the $200M it raised in December – and even more significantly, filed to IPO on NASDAQ. So it will be interesting to see whether its Starbucks’ China growth story comes under scrutiny from analysts when it reports its Q219 results today after market close. And a new red flag just developed for the U.S. dollar stores as the USDA has launched a two-year pilot program in New York state to enable SNAP recipients to buy groceries online from Amazon and Walmart.

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Brief China: Starbucks (SBUX): Luckin (LK) Not a Concern Anymore According to Its IPO Form and more

By | China, Daily Briefs

In this briefing:

  1. Starbucks (SBUX): Luckin (LK) Not a Concern Anymore According to Its IPO Form

1. Starbucks (SBUX): Luckin (LK) Not a Concern Anymore According to Its IPO Form

Pic%205

  • Luckin Coffee (LK US) reaped Starbucks’ growth strategy in China in 2018; however, after reading Luckin’s IPO files, we believe Luckin will not be a threat to Starbucks China after two years.
  • We believe Luckin’s cash balance after IPO will be used up in 3 years as maximum at current speed.
  • We believe Luckin will accelerate its usage of cash with the IPO funds.
  • We also believe it is hard for Luckin to control its costs or raise its product prices.

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Brief China: Starbucks (SBUX): Luckin (LK) Not a Concern Anymore According to Its IPO Form and more

By | China, Daily Briefs

In this briefing:

  1. Starbucks (SBUX): Luckin (LK) Not a Concern Anymore According to Its IPO Form
  2. Viva Biotech IPO: Just About Supporting the Low-End IPO Price Range
  3. Hutchison-China Meditech (和黄医药) H-Share Listing: MNC Partnerships Endorsed Its R&D Capabilities

1. Starbucks (SBUX): Luckin (LK) Not a Concern Anymore According to Its IPO Form

Pic%205

  • Luckin Coffee (LK US) reaped Starbucks’ growth strategy in China in 2018; however, after reading Luckin’s IPO files, we believe Luckin will not be a threat to Starbucks China after two years.
  • We believe Luckin’s cash balance after IPO will be used up in 3 years as maximum at current speed.
  • We believe Luckin will accelerate its usage of cash with the IPO funds.
  • We also believe it is hard for Luckin to control its costs or raise its product prices.

2. Viva Biotech IPO: Just About Supporting the Low-End IPO Price Range

Viva Biotech Holdings (1873 HK) is a leading global contract research organisation (CRO). It has launched its IPO to raise net proceeds of HK$1,232 million ($157 million), at the mid-point of the IPO price range.

Overall, with the caveat that Viva’s valuation is highly dependent on fair value gains (from its portfolio companies), we believe that Viva can just about justify the low-end of IPO price range

3. Hutchison-China Meditech (和黄医药) H-Share Listing: MNC Partnerships Endorsed Its R&D Capabilities

Fruquintinib%20 %20crc

Hutchison-China Meditech, China-based AIM and NASDAQ dual listed pharmaceutical company, is seeking to raise up to USD 500 million via a Hong Kong listing. In this insight, we will discuss the following topics:

  • Company background
  • Progress of clinical trials of its three key drug candidates
  • Key licensing agreements
  • Key takeaways from its financials
  • Shareholders of the company

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Brief China: Starbucks (SBUX): Luckin (LK) Not a Concern Anymore According to Its IPO Form and more

By | China, Daily Briefs

In this briefing:

  1. Starbucks (SBUX): Luckin (LK) Not a Concern Anymore According to Its IPO Form
  2. Viva Biotech IPO: Just About Supporting the Low-End IPO Price Range
  3. Hutchison-China Meditech (和黄医药) H-Share Listing: MNC Partnerships Endorsed Its R&D Capabilities
  4. Duiba (兑吧) IPO Review – Interactive Ad Leader

1. Starbucks (SBUX): Luckin (LK) Not a Concern Anymore According to Its IPO Form

Pic%205

  • Luckin Coffee (LK US) reaped Starbucks’ growth strategy in China in 2018; however, after reading Luckin’s IPO files, we believe Luckin will not be a threat to Starbucks China after two years.
  • We believe Luckin’s cash balance after IPO will be used up in 3 years as maximum at current speed.
  • We believe Luckin will accelerate its usage of cash with the IPO funds.
  • We also believe it is hard for Luckin to control its costs or raise its product prices.

2. Viva Biotech IPO: Just About Supporting the Low-End IPO Price Range

Viva Biotech Holdings (1873 HK) is a leading global contract research organisation (CRO). It has launched its IPO to raise net proceeds of HK$1,232 million ($157 million), at the mid-point of the IPO price range.

Overall, with the caveat that Viva’s valuation is highly dependent on fair value gains (from its portfolio companies), we believe that Viva can just about justify the low-end of IPO price range

3. Hutchison-China Meditech (和黄医药) H-Share Listing: MNC Partnerships Endorsed Its R&D Capabilities

Fruquintinib%20 %20crc

Hutchison-China Meditech, China-based AIM and NASDAQ dual listed pharmaceutical company, is seeking to raise up to USD 500 million via a Hong Kong listing. In this insight, we will discuss the following topics:

  • Company background
  • Progress of clinical trials of its three key drug candidates
  • Key licensing agreements
  • Key takeaways from its financials
  • Shareholders of the company

4. Duiba (兑吧) IPO Review – Interactive Ad Leader

Series%20c%20investors

Duiba Group (1753 HK) is looking to raise up to US$115m in its upcoming IPO. We have covered the fundamentals of the company in Duiba (兑吧) Pre-IPO Review – A Case of Successful Pivot – Gamification of Ads

In this insight, we will look at the company’s valuation and how it compares to recently-listed advertising peers and the deal dynamics, and run the deal through our IPO framework.

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Brief China: Huawei Investment & Holding– In the Eye of the Storm (Part I) and more

By | China, Daily Briefs

In this briefing:

  1. Huawei Investment & Holding– In the Eye of the Storm (Part I)
  2. ECM Weekly (25 May 2019) – ESR Cayman, Hansoh Pharma, Tai Hing, China East Edu, Haitong UniTrust
  3. Meten International Edu (美联国际教育) Early Thoughts – Unclear Strategies
  4. China Housing: Highlights From the ‘Baywatch’ Report On The Greater Bay Area (GBA)
  5. GEM Positioning Monthly:  Indonesian Financials, Food & Beverages, Lenovo Sentiment Reversal

1. Huawei Investment & Holding– In the Eye of the Storm (Part I)

Huawei%20operations%20dec%202018

Huawei Investment and Holding Co. Ltd. (“Huawei”), a parent of Huawei Technology (40978Z CH) , has been in the news on the Sino-US trade war from the arrest of the group’s chairman’s daughter in Canada to the accusation of Huawei on spying and dealing with Iran. The recent ban on Google’s future business with Huawei is unfortunate, and we see Huawei as a tool used by the Trump Administration to muster over China on the trade war.

We believe the trade war reflects a lack of trust between the US and China which, for sure, did not originate from Mr. Trump, but has been brewing for a long time. We expect the trade war to last a while at least until the next Presidential election in 2020. Huawei as a major competitor to Apple, and one of the forefront leaders in the 5G technology, will inevitably be in the eye of the storm. We advise bond investors to take a deep breath and look beyond this tit-for-tat war of rhetoric between the US and China, and focus on the long-term to determine Huawei’s ability to repay its bonds.

In a series of reports, we start by looking into the events that have led to the current situation, how the Huawei corporate body is structured, and how important Huawei is to China. Next, we look into how Huawei bonds have been trading versus peers, and how financial metrics determine Huawei’s debt repayment capability. Last, we conclude with our fair value of HUAWEI bonds. We expect declining profit margins in the near term but we believe the key to bondholders is the Chinese government support of the group.

The HUAWEI complex (HUAWEI 22s, 25s, 26s, and 27s), all guaranteed by Huawei, has dropped 2-3 points across the board to the mid 90 cents on a dollar since 17-May when the first news of Google’s ban broke. We expect more negative news on Huawei this year and expect asymmetric downside risk on the bonds. The fact that Google issued a statement on 20-May to continue its business with Huawei leads us to believe the dust has not settled. That said, we put our recommendation on all HUAWEI complex under “EVOLVING”. Any further sell-off on HUAWEI bonds will lead us to reconsider our recommendation.

2. ECM Weekly (25 May 2019) – ESR Cayman, Hansoh Pharma, Tai Hing, China East Edu, Haitong UniTrust

Upcoming

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

This will be the third week in a row we are saying: there are more IPOs coming in Hong Kong!Momentum seems to be holding up as we head into the end of Q2. First off, there will be 4 IPOs starting to trade throughout next week. Mulsanne Group Holding Ltd (1817 HK) will debut first on Monday.

This would be interesting to watch because the IPO utilized the new pricing mechanism in Hong Kong to price its IPO below the bottom end of its indicated price range rather than withdraw and refile. This mechanism reminds us of the pricing flexibility of US IPOs wherein companies could price below its indicative price range to ensure that it performs well on its debut despite poor demand during bookbuild. Xinyi Energy Holdings Ltd (3868 HK), Frontage Holdings (1521 HK), and MabPharm (2181 HK) will trade on Tuesday, Thursday, and Friday respectively.

For upcoming bookbuilds, Tai Hing (1719303D HK) and China Tobacco International (GHALPZ CH) have filed their PHIP this week and will be likely be opening their books next week. We are also hearing that CSSC Hong Kong Shipping Co Ltd (0931049D CH) and China East Education (EASTEDU HK) will open books on Monday while Hansoh Pharmaceutical (HANSOH HK) will be on Tuesday.

IPO activity in other countries have been fairly muted. Eagle Hospitality Trust (EAGLEHT SP)  finally started trading in Singapore. Its share price closed 6% down as the IPO was undersubscribed. We will leave the updates on the IPO to Sumeet Singh on Monday.

In the U.S, GSX Techedu (GSX US) will launch its book next week while Meten (MEDU US) which just filed its US$100m IPO with the SEC will be premarketing next week.

Accuracy Rate:

Our overall accuracy rate is 72.4% for IPOs and 63.9% for Placements 

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

New IPO filings

  • Sinic Holdings (Hong Kong, >US$100m)
  • Meten International Edu (the U.S, US$100m)

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

Source: Aequitas Research, Smartkarma

News on Upcoming IPOs

Analysis on Upcoming IPOs

NameInsight
Hong Kong
AB InbevAb InBev Asia Pre-IPO – A Brief History of the Asia Pacific Operations – Eeking Out Growth in China
AB InbevAb InBev Asia Pre-IPO – Quick Note – More like CR Beer Rather than Tsingtao
AB InbevAb InBev Asia Pre-IPO – On Its Way to Potentially Being the Biggest HK IPO This Year
AB Inbev

Budweiser Brewing APAC Pre-IPO – It Will Be a US$5bn+ Raise Owing to Its Clean Balance Sheet

AscentageAscentage Pharma (亚盛医药) IPO: Too Early for an IPO
Ant FinancialAnt Financial IPO Early Thought: Understand Fintech Empire, Growth & Risk Factors
CIMC VehCIMC Vehicle (中集车辆): Market Leader of Semi-Trailers but Little Growth Ahead
ClarityClarity Medical (清晰医疗) IPO: Proxy to HK SMILE Surgery Demand
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) IPO: Tiktok the No.1 Short Video App for a Good Reason (Part 2)

East EduChina East Education (中国东方教育) Pre-IPO – The Company Known for Its Culinary School
China TobacChina Tobacco International (IPO): The Monopolist Will Not Recover
China TobacChina Tobacco Intl (HK) IPO: Proxy For the Chinese Cigarette Consumption
CSSCCSSC (HK) Shipping IPO: A Cyclical Business Masked as an Income Stock
ESRESR Cayman Pre-IPO – A Giant in the Making
ESR

ESR Cayman Pre-IPO – Earnings and Segment Analysis 

ESR

ESR Cayman Pre-IPO- First Stab at Valuation

ESR

ESR Cayman Pre-IPO – Updates from PHIP – Growth Remains on Track 

ESR

ESR Cayman Pre-IPO – Updated Valuation and Key Risks

ESR

ESR Cayman Pre-IPO – Peer Comparison Quick Take – Bigger than Some, Much Smaller than Others 

Hansoh

Hansoh Pharma (翰森制药) IPO: New Numbers, Pre-IPO Dividend and Boyu Investment (Part 3)

Hansoh

Hansoh Pharma (翰森制药) IPO: Thoughts on Valuation

Hansoh

Hansoh Pharma (翰森制药) IPO: Competitive Landscape of HS-10296

Helenbergh

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

Hut Chi-Med

Hutchison-China Med (和黄医药) H-Share Listing: MNC Partnerships Endorsed Its R&D Capabilities

Jinxin

Jinxin Fertility (锦欣生殖) Pre-IPO: Strong Foothold in Sichuan but Weak Sentiment for Sector

MicuRxMicuRx Pharma (盟科医药) IPO: Betting on Single Drug in the Not so Attractive Antibiotic Segment
MabPharmMabPharma (迈博医药) IPO: Assembled for a Trade?
MabPharmMabPharm (迈博医药) IPO: Thoughts on Valuation (Part 2)
SH Henlius

Shanghai Henlius (复宏汉霖) IPO: Not an Impressive Biosimilar Portfolio 

TubatuTubatu Group Pre-IPO – Performing Better than Qeeka but Growing Much Slower, US$1bn a Stretch
TubatuTubatu Group Pre-IPO – Online -> Online + Offline -> Online -> ?
South Korea
KMH ShillaKMH Shilla Leisure IPO Preview (Part 1) – Highly Profitable Operator of Public Golf Courses in Korea
KMH ShillaKMH Shilla Leisure IPO Preview (Part 2) – Valuation Analysis
Plakor

Plakor IPO Preview (Part 1)

ZinusZinus IPO Preview (Part 1) – An Amazing Comeback Story (#1 Mattress Brand on Amazon)
India
Aakash EduAakash Education Pre-IPO – Fast Growth in an Attractive Sector
Anmol IndAnmol Industries Pre-IPO Quick Take – No Growth, Generous Payments to Founders
Bharat Hotels

Bharat Hotels Pre-IPO – Catching up with Peers 

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
Flemingo Flemingo Travel Retail Pre-IPO – Its a Different Business in Every Country
NSENSE IPO Preview- Not Only Fast..its Risky and Expensive
NSENational Stock Exchange Pre-IPO Review – Bigger, Better, Stronger but a Little Too Fast for Some
MazagonMazagon Dock IPO Preview: A Monopoly Submarine Yard in India with Captive Navy Spending
Mrs. BectorMrs. Bectors Food Specialities Pre-IPO Quick Take – Sales for Its Main Segment Have Been Sta

Lodha

Lodha Developers Pre-IPO – Second Time Lucky but Not Really that Much Affordable
LodhaLodha Developers IPO: Presence in Affordable Segment Saves Lodha the Blushes in a Sluggish Mkt
IndiaMartIndiaMART Pre-IPO – Getting and Retaining Subscribers Seems to Be Difficult
PNB MetPNB Metlife Pre-IPO Quick Take – Doesn’t Stack up Well Versus Its Larger Peers
Malaysia
QSRQSR Brands Pre-IPO – As Healthy as Fast Food
The U.S
DouyuDouyu (斗鱼直播) IPO: Leader At a Cost
DouyuDouyu (斗鱼直播) IPO: Comparison with Huya (Part 2)
GSXGSX Techedu (跟谁学) IPO Early Thoughts – Successful Pivot Away from Marketplace Model
MetenMeten International Edu (美联国际教育) Early Thoughts – Unclear Strategies

3. Meten International Edu (美联国际教育) Early Thoughts – Unclear Strategies

Gross margin by segments general adult eng overseas training online eng training junior eng training chartbuilder

Meten (MEDU US) recently filed for a US listing and is looking to raise US$100m.

Meten is a general English language training (ELT) service provider in China. It has grown its revenue at a decent 25.7% CAGR between FY2016 to FY2018 while margins made modest improvements.

However, its 1Q 2019 results signals near-term weakness across its major segments as the company seemed to be making strategic changes to its operations. The F-1 filing indicated that existing shareholders will sell in the IPO, suggesting their intention to exit or, at least, partially monetize their stake which could potentially affect sentiment going into the IPO.

4. China Housing: Highlights From the ‘Baywatch’ Report On The Greater Bay Area (GBA)

Screen%20shot%202019 05 23%20at%2019.06.38

Following on from our original note on the Guangdong – Hong Kong – Macau Greater Bay Area (GBA) from the day of the blueprint announcement on February 18, we are presenting the highlights from our inaugural ‘Baywatch’ report focused on the housing markets on the mainland of the GBA. For the essentials on the GBA, see Bondcritic’s China’s Greater Bay Area: The Essential

5. GEM Positioning Monthly:  Indonesian Financials, Food & Beverages, Lenovo Sentiment Reversal

Highlights11

Copley Fund Research analyse the holdings of long-only equity funds.  This analysis is taken from our GEM research product, covering 189 global emerging market funds with a combined AUM of $350bn. 

In this month’s Positioning Monthly, we highlight an increasing exposure towards Indonesian Financial stocks, with Bank Rakyat Indonesia Perser (BBRI IJ) and Bank Central Asia (BBCA IJ) the key overweight positions.  We analyse holdings in the food and beverages industry groups as ownership reaches peak levels in both.  Finally, we explore the sharp reversal in Lenovo (992 HK) sentiment as more and more GEM funds buy into the stock.

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Brief China: Viva Biotech IPO: Just About Supporting the Low-End IPO Price Range and more

By | China, Daily Briefs

In this briefing:

  1. Viva Biotech IPO: Just About Supporting the Low-End IPO Price Range
  2. Hutchison-China Meditech (和黄医药) H-Share Listing: MNC Partnerships Endorsed Its R&D Capabilities
  3. Duiba (兑吧) IPO Review – Interactive Ad Leader

1. Viva Biotech IPO: Just About Supporting the Low-End IPO Price Range

Viva Biotech Holdings (1873 HK) is a leading global contract research organisation (CRO). It has launched its IPO to raise net proceeds of HK$1,232 million ($157 million), at the mid-point of the IPO price range.

Overall, with the caveat that Viva’s valuation is highly dependent on fair value gains (from its portfolio companies), we believe that Viva can just about justify the low-end of IPO price range

2. Hutchison-China Meditech (和黄医药) H-Share Listing: MNC Partnerships Endorsed Its R&D Capabilities

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Hutchison-China Meditech, China-based AIM and NASDAQ dual listed pharmaceutical company, is seeking to raise up to USD 500 million via a Hong Kong listing. In this insight, we will discuss the following topics:

  • Company background
  • Progress of clinical trials of its three key drug candidates
  • Key licensing agreements
  • Key takeaways from its financials
  • Shareholders of the company

3. Duiba (兑吧) IPO Review – Interactive Ad Leader

Series%20c%20investors

Duiba Group (1753 HK) is looking to raise up to US$115m in its upcoming IPO. We have covered the fundamentals of the company in Duiba (兑吧) Pre-IPO Review – A Case of Successful Pivot – Gamification of Ads

In this insight, we will look at the company’s valuation and how it compares to recently-listed advertising peers and the deal dynamics, and run the deal through our IPO framework.

Get Straight to the Source on Smartkarma

Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.