China

In this briefing:

1. Weekly Oil Views: OPEC Shrugs off Trump’s “Take It Easy” Tweet, but Crude Complies
2. 58.com (WUBA): Weak Membership Growth Suggests More Volatile Performance, 17% Downside
3. Sea Ltd: Follow-On Public Offering an Opportunistic Fundraising?
4. Trade Talks/Huawei/National People’s Congress/Deleveraging/Stocks

1. Weekly Oil Views: OPEC Shrugs off Trump’s “Take It Easy” Tweet, but Crude Complies

As stock-market watchers begin to pick “resistance levels” for benchmark equity indexes that have been steadily heading north amid optimism over a US-China trade deal, we wonder if Trump and his tweets are the barrier point for crude’s rally.

And if they are, what might the US president’s “pain threshold” be? For his latest shot across OPEC’s bow, it appeared to be Brent touching a three-month high just above $67/barrel.

OPEC shrugged off Trump’s gentle warning. Saudi Energy Minister and de facto leader of the oil exporters’ group, Khalid al-Falih, appeared smiling and relaxed when asked about Trump’s tweet in a CNBC interview. OPEC was indeed “taking it easy,” he said. The group and its non-OPEC collaborators were determined to rebalance the markets, but with a “very slow and measured approach,” Al-Falih said.

We believe OPEC will be careful not to over-tighten the market this time around. Perhaps Trump was being over-cautious. If a US-China trade deal is signed in the next few weeks (that may happen on March 27, The Wall Street Journal reported on Monday), global stock markets could rally further. But they will not take crude along for the entire ride.

Our Chart of the Week shows that the rebound of the past two months in global equities has already left crude’s recovery far behind. The divergence should not come as a surprise. Crude may have already priced in most of the economic impetus of a US-China trade rapprochement. Unlike the MSCI global stock market index, which is closing in on its early-October levels (before the start of the financial markets turmoil), crude is highly unlikely to get within sight of the four-year highs it touched on October 3, shortly before it hit the skids.

2. 58.com (WUBA): Weak Membership Growth Suggests More Volatile Performance, 17% Downside

* We believe that the stagnancy in membership was due to the new competitor Ke.com and will make total revenues more volatile in the future.

* We assume total revenues will slow down, but the operating margin will be stable in 2019.

* We compare WUBA’s expected P/E for 2019 with other vertical platforms in China and conclude 17% downside.

3. Sea Ltd: Follow-On Public Offering an Opportunistic Fundraising?

• We evaluate the attractiveness of Sea Ltd’s (SE US) US$1 bn follow-on public offering announced last Fri.
• This offering is a typical opportunistic fundraising as its ADR price has recently surged.
• At assumed deal price of US$21, SE post deal would trade at 4.6x 2019E P/adjusted sales (excl. 1P e-commerce sales), vs. peers average of 5.2x.
• We would recommend investors to go for the deal if it is priced at US$20 or lower.

4. Trade Talks/Huawei/National People’s Congress/Deleveraging/Stocks

China News That Matters

• Getting closer… though Trump might just walk away
• The most beautiful phones in the world?
• Rubber stamps and reading between lines
• Mission accomplished for deleveraging?
• Sitting on a volcano

In this briefing:

1. China’s New Semiconductor Thrust – Part 1: Why and How?
2. Qutoutiao Offering: Funding a Costly Battle
3. Notes from the Silk Road: Xtep Int’l Holdings (1368 HK): Time to Run (Away) For Now
4. Angang Steel: PMI Recovery to Support Shares: Close Short
5. QTT Placement: Liquidity Warrants a Quick Trade

1. China’s New Semiconductor Thrust – Part 1: Why and How?

China’s current efforts to gain prominence in the semiconductor market targets memory chips – large commodities.  This three-part series of insights examines how China determined its strategy and explains which companies are the most threatened by it.

In the first part of this series we will see what motivated China to enter the market and how it plans to do so.

2. Qutoutiao Offering: Funding a Costly Battle

On Friday, Qutoutiao Inc (QTT US) unveiled plans to raise around $11 million (based on the closing price of $11.45 per ADS) through a public offering of 1.1 million ADS. Also, certain selling shareholders will offer 7.5 ADS in the offering. The public offering comes hot on the heels of the announcement of a $171.1 million convertible loan from Alibaba Group Holding (BABA US) on 28 March.

3. Notes from the Silk Road: Xtep Int’l Holdings (1368 HK): Time to Run (Away) For Now

Xtep International (1368 HK) has announced a placing and top-up subscription of new shares event, creating a capital base which is 9% larger. 

XTEP states that they have considered various ways of raising funds and consider that it would be in their best interests to raise equity funding through the placing and the subscription. 

With the share price down 16% since the placement, we examine what this means for the company’s fundamentals and shareholders. We believe the results will prove to be mixed for management and shareholders alike. We highlight how we expect the stock ranking to react, given we the placement was only a few days back and this is yet to reflect. This special situation analysis may surprise you with the conclusions.

4. Angang Steel: PMI Recovery to Support Shares: Close Short

INVESTMENT VIEW:
The recovery in China’s March PMI index to 50.8 shows an unexpected expansion in economic activity.  Historically, there is a strong correlation between the PMI and Chinese steel prices as well as Angang’s share price. 

We close our short on Angang Steel Co Ltd (H) (347 HK) shares. 

5. QTT Placement: Liquidity Warrants a Quick Trade

Qutoutiao Inc (QTT US) announced a USD 100 million share sales by the company and its shareholders, slightly more than two weeks after the lock-up expiration on March 13th.  In this insight, we will provide our quick thought on the deal. 

In this briefing:

1. 58.com (WUBA): Weak Membership Growth Suggests More Volatile Performance, 17% Downside
2. Sea Ltd: Follow-On Public Offering an Opportunistic Fundraising?
3. Trade Talks/Huawei/National People’s Congress/Deleveraging/Stocks

1. 58.com (WUBA): Weak Membership Growth Suggests More Volatile Performance, 17% Downside

* We believe that the stagnancy in membership was due to the new competitor Ke.com and will make total revenues more volatile in the future.

* We assume total revenues will slow down, but the operating margin will be stable in 2019.

* We compare WUBA’s expected P/E for 2019 with other vertical platforms in China and conclude 17% downside.

2. Sea Ltd: Follow-On Public Offering an Opportunistic Fundraising?

• We evaluate the attractiveness of Sea Ltd’s (SE US) US$1 bn follow-on public offering announced last Fri.
• This offering is a typical opportunistic fundraising as its ADR price has recently surged.
• At assumed deal price of US$21, SE post deal would trade at 4.6x 2019E P/adjusted sales (excl. 1P e-commerce sales), vs. peers average of 5.2x.
• We would recommend investors to go for the deal if it is priced at US$20 or lower.

3. Trade Talks/Huawei/National People’s Congress/Deleveraging/Stocks

China News That Matters

• Getting closer… though Trump might just walk away
• The most beautiful phones in the world?
• Rubber stamps and reading between lines
• Mission accomplished for deleveraging?
• Sitting on a volcano

In this briefing:

1. Qutoutiao Offering: Funding a Costly Battle
2. Notes from the Silk Road: Xtep Int’l Holdings (1368 HK): Time to Run (Away) For Now
3. Angang Steel: PMI Recovery to Support Shares: Close Short
4. QTT Placement: Liquidity Warrants a Quick Trade
5. Zhongliang (中梁地产) Pre-IPO Review – Incredible Growth Bogged Down by Related Party Transactions

1. Qutoutiao Offering: Funding a Costly Battle

On Friday, Qutoutiao Inc (QTT US) unveiled plans to raise around $11 million (based on the closing price of $11.45 per ADS) through a public offering of 1.1 million ADS. Also, certain selling shareholders will offer 7.5 ADS in the offering. The public offering comes hot on the heels of the announcement of a $171.1 million convertible loan from Alibaba Group Holding (BABA US) on 28 March.

2. Notes from the Silk Road: Xtep Int’l Holdings (1368 HK): Time to Run (Away) For Now

Xtep International (1368 HK) has announced a placing and top-up subscription of new shares event, creating a capital base which is 9% larger. 

XTEP states that they have considered various ways of raising funds and consider that it would be in their best interests to raise equity funding through the placing and the subscription. 

With the share price down 16% since the placement, we examine what this means for the company’s fundamentals and shareholders. We believe the results will prove to be mixed for management and shareholders alike. We highlight how we expect the stock ranking to react, given we the placement was only a few days back and this is yet to reflect. This special situation analysis may surprise you with the conclusions.

3. Angang Steel: PMI Recovery to Support Shares: Close Short

INVESTMENT VIEW:
The recovery in China’s March PMI index to 50.8 shows an unexpected expansion in economic activity.  Historically, there is a strong correlation between the PMI and Chinese steel prices as well as Angang’s share price. 

We close our short on Angang Steel Co Ltd (H) (347 HK) shares. 

4. QTT Placement: Liquidity Warrants a Quick Trade

Qutoutiao Inc (QTT US) announced a USD 100 million share sales by the company and its shareholders, slightly more than two weeks after the lock-up expiration on March 13th.  In this insight, we will provide our quick thought on the deal. 

5. Zhongliang (中梁地产) Pre-IPO Review – Incredible Growth Bogged Down by Related Party Transactions

Zhongliang Holdings (ZLH HK) is looking to raise about US$800m in its upcoming IPO. 

ZLH is a fast-growing  real estate developer in China. Its completed projects are mostly in the Zhejiang Province but its projects under development are spread across the country.

It was highly leveraged in FY2016 as it ramped up its expansion efforts but had been able to reduce it significantly to about 260% net debt to equity levels while effective interest rates on debt has been falling every year.

In this insight, we will look at the company’s operations and financials, identify key corporate governance issues, and share our thoughts on peer valuation.

In this briefing:

1. Notes from the Silk Road: Xtep Int’l Holdings (1368 HK): Time to Run (Away) For Now
2. Angang Steel: PMI Recovery to Support Shares: Close Short
3. QTT Placement: Liquidity Warrants a Quick Trade
4. Zhongliang (中梁地产) Pre-IPO Review – Incredible Growth Bogged Down by Related Party Transactions
5. CIMC Vehicle (中集车辆): Market Leader of Semi-Trailers but Little Growth Ahead

1. Notes from the Silk Road: Xtep Int’l Holdings (1368 HK): Time to Run (Away) For Now

Xtep International (1368 HK) has announced a placing and top-up subscription of new shares event, creating a capital base which is 9% larger. 

XTEP states that they have considered various ways of raising funds and consider that it would be in their best interests to raise equity funding through the placing and the subscription. 

With the share price down 16% since the placement, we examine what this means for the company’s fundamentals and shareholders. We believe the results will prove to be mixed for management and shareholders alike. We highlight how we expect the stock ranking to react, given we the placement was only a few days back and this is yet to reflect. This special situation analysis may surprise you with the conclusions.

2. Angang Steel: PMI Recovery to Support Shares: Close Short

INVESTMENT VIEW:
The recovery in China’s March PMI index to 50.8 shows an unexpected expansion in economic activity.  Historically, there is a strong correlation between the PMI and Chinese steel prices as well as Angang’s share price. 

We close our short on Angang Steel Co Ltd (H) (347 HK) shares. 

3. QTT Placement: Liquidity Warrants a Quick Trade

Qutoutiao Inc (QTT US) announced a USD 100 million share sales by the company and its shareholders, slightly more than two weeks after the lock-up expiration on March 13th.  In this insight, we will provide our quick thought on the deal. 

4. Zhongliang (中梁地产) Pre-IPO Review – Incredible Growth Bogged Down by Related Party Transactions

Zhongliang Holdings (ZLH HK) is looking to raise about US$800m in its upcoming IPO. 

ZLH is a fast-growing  real estate developer in China. Its completed projects are mostly in the Zhejiang Province but its projects under development are spread across the country.

It was highly leveraged in FY2016 as it ramped up its expansion efforts but had been able to reduce it significantly to about 260% net debt to equity levels while effective interest rates on debt has been falling every year.

In this insight, we will look at the company’s operations and financials, identify key corporate governance issues, and share our thoughts on peer valuation.

5. CIMC Vehicle (中集车辆): Market Leader of Semi-Trailers but Little Growth Ahead

CIMC Vehicle, the largest manufacturer of semi-trailers in the world and a subsidiary of CIMC, will start to pre-market its USD300-500 million IPO in Hong Kong, as per media reports. In this insight, we will cover the following topics:

• Company background
• Semi-trailer and truck body industry
• Shareholders and pre-IPO investors
• Our thoughts on valuation

In this briefing:

1. Sea Ltd: Follow-On Public Offering an Opportunistic Fundraising?
2. Trade Talks/Huawei/National People’s Congress/Deleveraging/Stocks

1. Sea Ltd: Follow-On Public Offering an Opportunistic Fundraising?

• We evaluate the attractiveness of Sea Ltd’s (SE US) US$1 bn follow-on public offering announced last Fri.
• This offering is a typical opportunistic fundraising as its ADR price has recently surged.
• At assumed deal price of US$21, SE post deal would trade at 4.6x 2019E P/adjusted sales (excl. 1P e-commerce sales), vs. peers average of 5.2x.
• We would recommend investors to go for the deal if it is priced at US$20 or lower.

2. Trade Talks/Huawei/National People’s Congress/Deleveraging/Stocks

China News That Matters

• Getting closer… though Trump might just walk away
• The most beautiful phones in the world?
• Rubber stamps and reading between lines
• Mission accomplished for deleveraging?
• Sitting on a volcano

In this briefing:

1. Trade Talks/Huawei/National People’s Congress/Deleveraging/Stocks

1. Trade Talks/Huawei/National People’s Congress/Deleveraging/Stocks

China News That Matters

• Getting closer… though Trump might just walk away
• The most beautiful phones in the world?
• Rubber stamps and reading between lines
• Mission accomplished for deleveraging?
• Sitting on a volcano

In this briefing:

1. Trade Talks/Huawei/National People’s Congress/Deleveraging/Stocks
2. China Auto: Rate of Decline Moderating but Too Early to Call a Recovery

1. Trade Talks/Huawei/National People’s Congress/Deleveraging/Stocks

China News That Matters

• Getting closer… though Trump might just walk away
• The most beautiful phones in the world?
• Rubber stamps and reading between lines
• Mission accomplished for deleveraging?
• Sitting on a volcano

2. China Auto: Rate of Decline Moderating but Too Early to Call a Recovery

The  uptrend in China’s PV retail sales yoy rates has spilled over into the Chinese auto stocks. However we think it’s too early to conclude that China’s auto demand is recovering. yoy rate of retail sales in Dec 2018 was extremely low partly due to the distortion of China APT rate change. In Jan 2019, China’s PV retail sales remained weak with a 4% yoy decrease. Weekly data in Feb rebounded strongly because of distortion of Chinese New Year holidays. Industry experts estimate a 15% yoy decline on China’s PV retail sales in Feb, which indicates a 8% yoy decline in 2M2019. While the rate of decline has moderated it is too early to conclude China’s PV demand is recovering.

In this briefing:

1. Angang Steel: PMI Recovery to Support Shares: Close Short
2. QTT Placement: Liquidity Warrants a Quick Trade
3. Zhongliang (中梁地产) Pre-IPO Review – Incredible Growth Bogged Down by Related Party Transactions
4. CIMC Vehicle (中集车辆): Market Leader of Semi-Trailers but Little Growth Ahead
5. Market Wrinkles Ahead of a US/China Deal Spike

1. Angang Steel: PMI Recovery to Support Shares: Close Short

INVESTMENT VIEW:
The recovery in China’s March PMI index to 50.8 shows an unexpected expansion in economic activity.  Historically, there is a strong correlation between the PMI and Chinese steel prices as well as Angang’s share price. 

We close our short on Angang Steel Co Ltd (H) (347 HK) shares. 

2. QTT Placement: Liquidity Warrants a Quick Trade

Qutoutiao Inc (QTT US) announced a USD 100 million share sales by the company and its shareholders, slightly more than two weeks after the lock-up expiration on March 13th.  In this insight, we will provide our quick thought on the deal. 

3. Zhongliang (中梁地产) Pre-IPO Review – Incredible Growth Bogged Down by Related Party Transactions

Zhongliang Holdings (ZLH HK) is looking to raise about US$800m in its upcoming IPO. 

ZLH is a fast-growing  real estate developer in China. Its completed projects are mostly in the Zhejiang Province but its projects under development are spread across the country.

It was highly leveraged in FY2016 as it ramped up its expansion efforts but had been able to reduce it significantly to about 260% net debt to equity levels while effective interest rates on debt has been falling every year.

In this insight, we will look at the company’s operations and financials, identify key corporate governance issues, and share our thoughts on peer valuation.

4. CIMC Vehicle (中集车辆): Market Leader of Semi-Trailers but Little Growth Ahead

CIMC Vehicle, the largest manufacturer of semi-trailers in the world and a subsidiary of CIMC, will start to pre-market its USD300-500 million IPO in Hong Kong, as per media reports. In this insight, we will cover the following topics:

• Company background
• Semi-trailer and truck body industry
• Shareholders and pre-IPO investors
• Our thoughts on valuation

5. Market Wrinkles Ahead of a US/China Deal Spike

Ftse China A50 Index (XIN9I INDEX) has been our top long bet in Asia from early January (10,800), outperforming both the HSCEI and HSI. 

Key chart points that suggest the A share rise will be getting ahead of itself after the next rally phase out of bullish triangulation. Once this breakout terminates we see evidence of a harder decline unfolding ahead of a trade deal. This window allows for a pullback ahead of a trade deal spike that will put in place a key cycle peak just under shanghai composite resistance that goes back to highs from 2009, 2016 and 2018.

Keep in mind that China’s cycle exhibits a series of rally and fade cycles that form a multi-year basing process. The Shanghai composite longer term chart outlined rally and basing cycle correlations.

In this briefing:

1. QTT Placement: Liquidity Warrants a Quick Trade
2. Zhongliang (中梁地产) Pre-IPO Review – Incredible Growth Bogged Down by Related Party Transactions
3. CIMC Vehicle (中集车辆): Market Leader of Semi-Trailers but Little Growth Ahead
4. Market Wrinkles Ahead of a US/China Deal Spike
5. Buy or Sell/Europe/Trade War/Huawei/Financial Services

1. QTT Placement: Liquidity Warrants a Quick Trade

Qutoutiao Inc (QTT US) announced a USD 100 million share sales by the company and its shareholders, slightly more than two weeks after the lock-up expiration on March 13th.  In this insight, we will provide our quick thought on the deal. 

2. Zhongliang (中梁地产) Pre-IPO Review – Incredible Growth Bogged Down by Related Party Transactions

Zhongliang Holdings (ZLH HK) is looking to raise about US$800m in its upcoming IPO. 

ZLH is a fast-growing  real estate developer in China. Its completed projects are mostly in the Zhejiang Province but its projects under development are spread across the country.

It was highly leveraged in FY2016 as it ramped up its expansion efforts but had been able to reduce it significantly to about 260% net debt to equity levels while effective interest rates on debt has been falling every year.

In this insight, we will look at the company’s operations and financials, identify key corporate governance issues, and share our thoughts on peer valuation.

3. CIMC Vehicle (中集车辆): Market Leader of Semi-Trailers but Little Growth Ahead

CIMC Vehicle, the largest manufacturer of semi-trailers in the world and a subsidiary of CIMC, will start to pre-market its USD300-500 million IPO in Hong Kong, as per media reports. In this insight, we will cover the following topics:

• Company background
• Semi-trailer and truck body industry
• Shareholders and pre-IPO investors
• Our thoughts on valuation

4. Market Wrinkles Ahead of a US/China Deal Spike

Ftse China A50 Index (XIN9I INDEX) has been our top long bet in Asia from early January (10,800), outperforming both the HSCEI and HSI. 

Key chart points that suggest the A share rise will be getting ahead of itself after the next rally phase out of bullish triangulation. Once this breakout terminates we see evidence of a harder decline unfolding ahead of a trade deal. This window allows for a pullback ahead of a trade deal spike that will put in place a key cycle peak just under shanghai composite resistance that goes back to highs from 2009, 2016 and 2018.

Keep in mind that China’s cycle exhibits a series of rally and fade cycles that form a multi-year basing process. The Shanghai composite longer term chart outlined rally and basing cycle correlations.

5. Buy or Sell/Europe/Trade War/Huawei/Financial Services

China News That Matters

• Ride that A-Share wave. Until you can’t
• Europe looks East
• Change, China! You’ll thank us for it
• We’ll buy your gear – but please try and behave
• Scots take aim at Chinese pension insurance