China

In this briefing:

1. Maoyan Entertainment (猫眼娱乐) IPO: Lackluster Demand but CNY Blockbusters Could Be a Catalyst
2. Big Flows in China Bonds as Bloomberg Barclays Global Aggregate Index Adds
3. Huawei/Trade Talks/ Foreign Investment/Profit Warnings/QFII & RQFII
4. Follow The Money
5. Quick Take: Asian LNG Spot Prices Fall Below the UK NBP Gas Price

1. Maoyan Entertainment (猫眼娱乐) IPO: Lackluster Demand but CNY Blockbusters Could Be a Catalyst

Maoyan Entertainment was priced at HKD 14.8/share and will start trading today. We summarize the latest information with updates on our valuation in this short note, prior to the trading debut. Our recent studies on the movies slotted to launch during the Chinese New Year period suggest that the box office during the CNY period could be a positive catalyst to Maoyan, which lists right before the CNY. 

2. Big Flows in China Bonds as Bloomberg Barclays Global Aggregate Index Adds

On 31 January 2019, Bloomberg confirmed that local Chinese RMB bonds would be included in the Bloomberg Barclays Global Aggregate Index (methodology) (and the Global Treasury Index and EM Local Currency Government Bond Index), which covers roughly US$54 trillion of outstanding bonds. RMB would become the fourth largest weighted currency in the index after USD, euro, and JPY with a pro-forma 6.03% weighting as measured a week ago against a total basket of elibible securities of roughly US$3.26trln. 

The inclusion will start in April 2019 and will take 20 months, as described in the original March 2018 press release. At that time, there was still work to be done to improve the infrastructure, including implementation of delivery vs. payment settlement, ability to allocate block trades across portfolios, and clarification on tax collection policies. 

The phase-in period will include a scaling factor of 5% to be implemented incrementally over the 20 months trough December 2020. 

Bloomberg will create ex-China versions of all three indices starting in April for investors who wish to continue without China exposure in the benchmark. 

This creates flows. And I like to look at flows.

The basic flows are easy enough to calculate. But those flows aren’t the only flows to consider. Flows beget flows, and the universe of bonds is not static.

Are you prepared for US$30bn a month of foreign inflows by end 2020?

3. Huawei/Trade Talks/ Foreign Investment/Profit Warnings/QFII & RQFII

China News That Matters

• Caught red-handed? US charges Huawei
• DC talks await leaders’ summit
• Still lovin’ it? Beijing serves new law for foreign investors 
• Slowdown sparks profit warnings
• Luring foreign lolly with combined schemes

4. Follow The Money

• January data on investor positioning show a big improvement in risk appetite for Emerging Markets
• Two-year ahead returns from risk assets likely to be sizeable and positive
• However, not clear that we are yet definitely at the ‘bottom’
• Strongest convictions are to favour EM over US and China over India

5. Quick Take: Asian LNG Spot Prices Fall Below the UK NBP Gas Price

Asian LNG spot prices have dropped for a short time below the UK NBP gas price, reversing the established trend that sees Asian LNG offering a premium to the European LNG price benchmarks. This note takes a look at the latest trends in the LNG markets and the renewed plans unveiled by Qatar to challenge its competitors, in particular, those from the US.

In this briefing:

1. ECM Weekly (2 February 2019) – Maoyan, China Tower, Dexin, Chalet Hotels, Bharat Hotels, Wingarc1st
2. Semiconductor Memory Business Shrinking Fast
3. Netmarble Games + Tencent = The Most Likely Consortium to Acquire NXC Corp/Nexon?
4. The Dollar Is Already Dead

1. ECM Weekly (2 February 2019) – Maoyan, China Tower, Dexin, Chalet Hotels, Bharat Hotels, Wingarc1st

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.

Accuracy Rate:

Our overall accuracy rate is 72% for IPOs and 63.8% for Placements 

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

New IPO filings

• Edvantage Group (Hong Kong, ~US$100m)
• Koolearn (Hong Kong, re-filed)
• Shangde Qizhi Education Group (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.

News on Upcoming IPOs

• China’s Sinochem Energy lets Hong Kong IPO application lapse
• India’s Cleartrip eyes IPO as it plans Gulf expansion
• Blackstone set to IPO inaugural $1 billion Reit before March
• Bursa Malaysia’s outgoing CEO says IPO pipeline for 2019 looks strong
• China to Scrap Price, Debut Gain Limits to Entice Tech IPOs

Smartkarma Community’s this week Analysis on Upcoming IPO

• Ebang IPO Preview: Balance Sheet Indicators Point to a Significant Slowdown
• Chalet Hotels IPO Review – Backed up into a Corner
• CStone Pharma IPO Preview: Mixed Prospects of Late-Stage Clinical Drug Candidates
• IPO Radar: KTB Securities, the Only Korean Broker in Thailand
• Shanghai Henlius (复宏汉霖) IPO: Not an Impressive Biosimilar Portfolio
• Dreamtech: Trying for an IPO Again at a Lower Price
• Bharat Hotels Pre-IPO – Catching up with Peers
• China Tower Corp: Trading Idea Before Lock-Up Expiry
• Dexin China (德信中国) Pre-IPO – Related Party Transactions and Partial Asset Listing

List of pre-IPO Coverage on Smartkarma

2. Semiconductor Memory Business Shrinking Fast

Earnings have been announced for Intel, Samsung, SK hynix, and Western Digital, and the memory business is clearly undermining all of these companies’ earnings.  In this Insight I review each of the  companies to show where they are, and will explain what the future holds for them as today’s oversupply unfolds.

3. Netmarble Games + Tencent = The Most Likely Consortium to Acquire NXC Corp/Nexon?

Netmarble Games (251270 KS) officially announced on January 31st that it is interested in buying Nexon/NXC Corp. We believe that there is a growing likelihood of a potential consortium which includes Tencent and Netmarble Games to acquire NXC Corp/Nexon. Three major reasons why Tencent may want to partner with Netmarble Games to acquire NXC Corp/Nexon include the following:

• Avoid the cultural backlash from Korean gamers
• Among all the companies that Tencent has invested in Korea, Netmarble Games has become the biggest in amount. 
• Netmarble Games is more focused on games and has a stronger balance sheet than Kakao Corp, which has also shown interest in acquiring NXC Corp/Nexon. 

4. The Dollar Is Already Dead

The past year has all been about dollar strength. That is an accepted wisdom. But the truth of the matter is that the dollar averaged 93.6 on the DXY in 2018 (3 January 2018 to 31 December 2018) and, as we write, stands at 95.5. From 1 January 2015 to 1 July 2017 the DXY averaged 97.2. The dollar is not strong, even by recent history standards. Moreover, it is no longer as important as it once was in policy making terms – and neither is the Federal Reserve.

In this briefing:

1. ECM Weekly (2 February 2019) – Maoyan, China Tower, Dexin, Chalet Hotels, Bharat Hotels, Wingarc1st
2. Semiconductor Memory Business Shrinking Fast
3. Netmarble Games + Tencent = The Most Likely Consortium to Acquire NXC Corp/Nexon?
4. The Dollar Is Already Dead

1. ECM Weekly (2 February 2019) – Maoyan, China Tower, Dexin, Chalet Hotels, Bharat Hotels, Wingarc1st

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.

Accuracy Rate:

Our overall accuracy rate is 72% for IPOs and 63.8% for Placements 

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

New IPO filings

• Edvantage Group (Hong Kong, ~US$100m)
• Koolearn (Hong Kong, re-filed)
• Shangde Qizhi Education Group (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.

News on Upcoming IPOs

• China’s Sinochem Energy lets Hong Kong IPO application lapse
• India’s Cleartrip eyes IPO as it plans Gulf expansion
• Blackstone set to IPO inaugural $1 billion Reit before March
• Bursa Malaysia’s outgoing CEO says IPO pipeline for 2019 looks strong
• China to Scrap Price, Debut Gain Limits to Entice Tech IPOs

Smartkarma Community’s this week Analysis on Upcoming IPO

• Ebang IPO Preview: Balance Sheet Indicators Point to a Significant Slowdown
• Chalet Hotels IPO Review – Backed up into a Corner
• CStone Pharma IPO Preview: Mixed Prospects of Late-Stage Clinical Drug Candidates
• IPO Radar: KTB Securities, the Only Korean Broker in Thailand
• Shanghai Henlius (复宏汉霖) IPO: Not an Impressive Biosimilar Portfolio
• Dreamtech: Trying for an IPO Again at a Lower Price
• Bharat Hotels Pre-IPO – Catching up with Peers
• China Tower Corp: Trading Idea Before Lock-Up Expiry
• Dexin China (德信中国) Pre-IPO – Related Party Transactions and Partial Asset Listing

List of pre-IPO Coverage on Smartkarma

2. Semiconductor Memory Business Shrinking Fast

Earnings have been announced for Intel, Samsung, SK hynix, and Western Digital, and the memory business is clearly undermining all of these companies’ earnings.  In this Insight I review each of the  companies to show where they are, and will explain what the future holds for them as today’s oversupply unfolds.

3. Netmarble Games + Tencent = The Most Likely Consortium to Acquire NXC Corp/Nexon?

Netmarble Games (251270 KS) officially announced on January 31st that it is interested in buying Nexon/NXC Corp. We believe that there is a growing likelihood of a potential consortium which includes Tencent and Netmarble Games to acquire NXC Corp/Nexon. Three major reasons why Tencent may want to partner with Netmarble Games to acquire NXC Corp/Nexon include the following:

• Avoid the cultural backlash from Korean gamers
• Among all the companies that Tencent has invested in Korea, Netmarble Games has become the biggest in amount. 
• Netmarble Games is more focused on games and has a stronger balance sheet than Kakao Corp, which has also shown interest in acquiring NXC Corp/Nexon. 

4. The Dollar Is Already Dead

The past year has all been about dollar strength. That is an accepted wisdom. But the truth of the matter is that the dollar averaged 93.6 on the DXY in 2018 (3 January 2018 to 31 December 2018) and, as we write, stands at 95.5. From 1 January 2015 to 1 July 2017 the DXY averaged 97.2. The dollar is not strong, even by recent history standards. Moreover, it is no longer as important as it once was in policy making terms – and neither is the Federal Reserve.

In this briefing:

1. Maoyan Entertainment (猫眼娱乐) IPO: Lackluster Demand but CNY Blockbusters Could Be a Catalyst
2. Big Flows in China Bonds as Bloomberg Barclays Global Aggregate Index Adds
3. Huawei/Trade Talks/ Foreign Investment/Profit Warnings/QFII & RQFII
4. Follow The Money
5. Quick Take: Asian LNG Spot Prices Fall Below the UK NBP Gas Price

1. Maoyan Entertainment (猫眼娱乐) IPO: Lackluster Demand but CNY Blockbusters Could Be a Catalyst

Maoyan Entertainment was priced at HKD 14.8/share and will start trading today. We summarize the latest information with updates on our valuation in this short note, prior to the trading debut. Our recent studies on the movies slotted to launch during the Chinese New Year period suggest that the box office during the CNY period could be a positive catalyst to Maoyan, which lists right before the CNY. 

2. Big Flows in China Bonds as Bloomberg Barclays Global Aggregate Index Adds

On 31 January 2019, Bloomberg confirmed that local Chinese RMB bonds would be included in the Bloomberg Barclays Global Aggregate Index (methodology) (and the Global Treasury Index and EM Local Currency Government Bond Index), which covers roughly US$54 trillion of outstanding bonds. RMB would become the fourth largest weighted currency in the index after USD, euro, and JPY with a pro-forma 6.03% weighting as measured a week ago against a total basket of elibible securities of roughly US$3.26trln. 

The inclusion will start in April 2019 and will take 20 months, as described in the original March 2018 press release. At that time, there was still work to be done to improve the infrastructure, including implementation of delivery vs. payment settlement, ability to allocate block trades across portfolios, and clarification on tax collection policies. 

The phase-in period will include a scaling factor of 5% to be implemented incrementally over the 20 months trough December 2020. 

Bloomberg will create ex-China versions of all three indices starting in April for investors who wish to continue without China exposure in the benchmark. 

This creates flows. And I like to look at flows.

The basic flows are easy enough to calculate. But those flows aren’t the only flows to consider. Flows beget flows, and the universe of bonds is not static.

Are you prepared for US$30bn a month of foreign inflows by end 2020?

3. Huawei/Trade Talks/ Foreign Investment/Profit Warnings/QFII & RQFII

China News That Matters

• Caught red-handed? US charges Huawei
• DC talks await leaders’ summit
• Still lovin’ it? Beijing serves new law for foreign investors 
• Slowdown sparks profit warnings
• Luring foreign lolly with combined schemes

4. Follow The Money

• January data on investor positioning show a big improvement in risk appetite for Emerging Markets
• Two-year ahead returns from risk assets likely to be sizeable and positive
• However, not clear that we are yet definitely at the ‘bottom’
• Strongest convictions are to favour EM over US and China over India

5. Quick Take: Asian LNG Spot Prices Fall Below the UK NBP Gas Price

Asian LNG spot prices have dropped for a short time below the UK NBP gas price, reversing the established trend that sees Asian LNG offering a premium to the European LNG price benchmarks. This note takes a look at the latest trends in the LNG markets and the renewed plans unveiled by Qatar to challenge its competitors, in particular, those from the US.

In this briefing:

1. Quick Take: Asian LNG Spot Prices Fall Below the UK NBP Gas Price
2. ECM Weekly (2 February 2019) – Maoyan, China Tower, Dexin, Chalet Hotels, Bharat Hotels, Wingarc1st
3. Semiconductor Memory Business Shrinking Fast
4. Netmarble Games + Tencent = The Most Likely Consortium to Acquire NXC Corp/Nexon?
5. The Dollar Is Already Dead

1. Quick Take: Asian LNG Spot Prices Fall Below the UK NBP Gas Price

Asian LNG spot prices have dropped for a short time below the UK NBP gas price, reversing the established trend that sees Asian LNG offering a premium to the European LNG price benchmarks. This note takes a look at the latest trends in the LNG markets and the renewed plans unveiled by Qatar to challenge its competitors, in particular, those from the US.

2. ECM Weekly (2 February 2019) – Maoyan, China Tower, Dexin, Chalet Hotels, Bharat Hotels, Wingarc1st

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.

Accuracy Rate:

Our overall accuracy rate is 72% for IPOs and 63.8% for Placements 

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

New IPO filings

• Edvantage Group (Hong Kong, ~US$100m)
• Koolearn (Hong Kong, re-filed)
• Shangde Qizhi Education Group (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.

News on Upcoming IPOs

• China’s Sinochem Energy lets Hong Kong IPO application lapse
• India’s Cleartrip eyes IPO as it plans Gulf expansion
• Blackstone set to IPO inaugural $1 billion Reit before March
• Bursa Malaysia’s outgoing CEO says IPO pipeline for 2019 looks strong
• China to Scrap Price, Debut Gain Limits to Entice Tech IPOs

Smartkarma Community’s this week Analysis on Upcoming IPO

• Ebang IPO Preview: Balance Sheet Indicators Point to a Significant Slowdown
• Chalet Hotels IPO Review – Backed up into a Corner
• CStone Pharma IPO Preview: Mixed Prospects of Late-Stage Clinical Drug Candidates
• IPO Radar: KTB Securities, the Only Korean Broker in Thailand
• Shanghai Henlius (复宏汉霖) IPO: Not an Impressive Biosimilar Portfolio
• Dreamtech: Trying for an IPO Again at a Lower Price
• Bharat Hotels Pre-IPO – Catching up with Peers
• China Tower Corp: Trading Idea Before Lock-Up Expiry
• Dexin China (德信中国) Pre-IPO – Related Party Transactions and Partial Asset Listing

List of pre-IPO Coverage on Smartkarma

3. Semiconductor Memory Business Shrinking Fast

Earnings have been announced for Intel, Samsung, SK hynix, and Western Digital, and the memory business is clearly undermining all of these companies’ earnings.  In this Insight I review each of the  companies to show where they are, and will explain what the future holds for them as today’s oversupply unfolds.

4. Netmarble Games + Tencent = The Most Likely Consortium to Acquire NXC Corp/Nexon?

Netmarble Games (251270 KS) officially announced on January 31st that it is interested in buying Nexon/NXC Corp. We believe that there is a growing likelihood of a potential consortium which includes Tencent and Netmarble Games to acquire NXC Corp/Nexon. Three major reasons why Tencent may want to partner with Netmarble Games to acquire NXC Corp/Nexon include the following:

• Avoid the cultural backlash from Korean gamers
• Among all the companies that Tencent has invested in Korea, Netmarble Games has become the biggest in amount. 
• Netmarble Games is more focused on games and has a stronger balance sheet than Kakao Corp, which has also shown interest in acquiring NXC Corp/Nexon. 

5. The Dollar Is Already Dead

The past year has all been about dollar strength. That is an accepted wisdom. But the truth of the matter is that the dollar averaged 93.6 on the DXY in 2018 (3 January 2018 to 31 December 2018) and, as we write, stands at 95.5. From 1 January 2015 to 1 July 2017 the DXY averaged 97.2. The dollar is not strong, even by recent history standards. Moreover, it is no longer as important as it once was in policy making terms – and neither is the Federal Reserve.

In this briefing:

1. Shanghai/Shenzhen Connect – $8.5 Bn of Inflow in January (Kweichow Moutai, Gree, Midea)
2. 2019 Semiconductors: 5%+ Decline
3. HK Connect Discovery – January Snapshot

1. Shanghai/Shenzhen Connect – $8.5 Bn of Inflow in January (Kweichow Moutai, Gree, Midea)

In our Discover SZ/SH Connect series, we aim to help our investors understand the flow of northbound trades via the Shanghai Connect and Shenzhen Connect, as analyzed by our proprietary data engine. We will discuss the stocks that experienced the most inflow and outflow by offshore investors in the past seven days.

We split the stocks eligible for the northbound trade into three groups: those with a market capitalization of above USD 5 billion, and those with a market capitalization between USD 1 billion and USD 5 billion.

We note that offshore investors were buying all GICS sectors, and had a strong preference for Consumer Staples, Financials and Consumer Discretionary names. We estimate that total inflow into A-share market via northbound trade amounted to USD 8.5 bn in January.

Stocks with strong inflows (by quantum) were Kweichow Moutai Co Ltd A (600519 CH), Gree Electric Appliances Inc Of Zhuhai (000651 CH), and Midea Group Co Ltd A (000333 CH). Please read this note together with our coverage for December flow and our coverage for January northbound flow. 

2. 2019 Semiconductors: 5%+ Decline

An earlier post outlined the general direction of the Objective Analysis 2019 forecast but didn’t provide any numbers.  In this post I explain the 5%+ decrease in revenues that the market will experience and how and why various elements play into that number.

3. HK Connect Discovery – January Snapshot

This is a monthly version of our HK Connect Weekly note, in which I highlight Hong Kong-listed companies leading the southbound flow weekly. Over the past month, we have seen the flow turning from outflow to inflow. Our previous insights published in Jan can be found in the links below. In this insight, we will focus on the month flow to get a bigger picture vs the weekly flow.

Our January Coverage of Hong Kong Connect southbound flow

• HK Connect Discovery Weekly: CR Beer, Great Wall Motors, and Kingsoft (2019-01-07)
• HK Connect Discovery Weekly: China Tower, Tencent, New China Life (2019-01-11)
• HK Connect Discovery Weekly: Tencent, Kingsoft, and Yichang HEC (2019-01-18)
• HK Connect Discovery Weekly: CRRC, Car Inc/ UCar (2019-01-25)

In this briefing:

1. China Housing: Cities Without Tiers – An Alternative Data Cut With Illuminating Patterns
2. Alibaba (BABA): For Dec. Quarter, Focus on Profit Improvement, But Not Revenue Growth, 40% Upside

1. China Housing: Cities Without Tiers – An Alternative Data Cut With Illuminating Patterns

Beyond the aggregate figures, most investors interested in China housing markets would look at the breakdown by Tier. We introduce a few alternative ways to cut the house price growth data, illustrating some consistent patterns that could be more meaningful for any investment thesis than the simple by-tier.

2. Alibaba (BABA): For Dec. Quarter, Focus on Profit Improvement, But Not Revenue Growth, 40% Upside

• For the December quarter results, the market is focusing on the slowdown of the revenue growth, but we notice that the growth rate of operating profits recovered.
• In two of our previous reports, we mentioned BABA’s efforts on cost control in the second half of 2018. Now we can see the results.
• We believe the most important risk is the significant operating losses in the minor business “digital media”.
• The P/E band suggests that the stock price has an upside of 40%.

In this briefing:

1. Shanghai/Shenzhen Connect – $8.5 Bn of Inflow in January (Kweichow Moutai, Gree, Midea)
2. 2019 Semiconductors: 5%+ Decline
3. HK Connect Discovery – January Snapshot
4. China Economics: The Bubble that Bursts the Demand
5. Share Classifications: Jan 2019 Month-End Snapshot

1. Shanghai/Shenzhen Connect – $8.5 Bn of Inflow in January (Kweichow Moutai, Gree, Midea)

In our Discover SZ/SH Connect series, we aim to help our investors understand the flow of northbound trades via the Shanghai Connect and Shenzhen Connect, as analyzed by our proprietary data engine. We will discuss the stocks that experienced the most inflow and outflow by offshore investors in the past seven days.

We split the stocks eligible for the northbound trade into three groups: those with a market capitalization of above USD 5 billion, and those with a market capitalization between USD 1 billion and USD 5 billion.

We note that offshore investors were buying all GICS sectors, and had a strong preference for Consumer Staples, Financials and Consumer Discretionary names. We estimate that total inflow into A-share market via northbound trade amounted to USD 8.5 bn in January.

Stocks with strong inflows (by quantum) were Kweichow Moutai Co Ltd A (600519 CH), Gree Electric Appliances Inc Of Zhuhai (000651 CH), and Midea Group Co Ltd A (000333 CH). Please read this note together with our coverage for December flow and our coverage for January northbound flow. 

2. 2019 Semiconductors: 5%+ Decline

An earlier post outlined the general direction of the Objective Analysis 2019 forecast but didn’t provide any numbers.  In this post I explain the 5%+ decrease in revenues that the market will experience and how and why various elements play into that number.

3. HK Connect Discovery – January Snapshot

This is a monthly version of our HK Connect Weekly note, in which I highlight Hong Kong-listed companies leading the southbound flow weekly. Over the past month, we have seen the flow turning from outflow to inflow. Our previous insights published in Jan can be found in the links below. In this insight, we will focus on the month flow to get a bigger picture vs the weekly flow.

Our January Coverage of Hong Kong Connect southbound flow

• HK Connect Discovery Weekly: CR Beer, Great Wall Motors, and Kingsoft (2019-01-07)
• HK Connect Discovery Weekly: China Tower, Tencent, New China Life (2019-01-11)
• HK Connect Discovery Weekly: Tencent, Kingsoft, and Yichang HEC (2019-01-18)
• HK Connect Discovery Weekly: CRRC, Car Inc/ UCar (2019-01-25)

4. China Economics: The Bubble that Bursts the Demand

China’s 4Q GDP grew just 6.4% in Q4, 2018, the lowest since the Global Financial Crisis (GFC). We do not believe the number matched the market expectation, however. Since the GFC, every rebound of the Chinese economy has been accompanied with the rebound of the real estate sector (such as in 2009, in 2012 and in 2016). However, this time is different, in our view. The real estate sector only grew 2% in Q4, 2018, the lowest in 4 years.

If the Chinese government had relaxed its regulation on this sector, China would have grown higher, but that would be at the expense of bigger bubble-driven growth, in our judgment. As we argued before, the consumption growth is closely-corelated with the wealth effect from real estate market. Accordingly, as to the questions such as why the Chinese economy has slowed down, and why Chinese consumption has declined, we believe the answer lies in the real estate sector. As a result, this has become a matter of real estate bubble versus consumption, the debacle we believe will last at least this year.

In addition, the industrial-value added growth, infrastructure investment, electricity generation and retail sales as well, have all marginally rebounded in December. China’s growth may finally rebound in the second quarter of 2019.

5. Share Classifications: Jan 2019 Month-End Snapshot

This month-end share class summary is a companion insight to Travis Lundy‘s H/A Spread & Southbound Monitors and Ke Yan‘s HK Connect Discovery Weeklies.

This share class monitor provides a snapshot of the premium/discounts for various share classifications around the region, and comprises four sets of data:

1.  82 ADRs 
2.  104 Korean Prefs 
3.  22 Regional Dual Classes
4.  7 Foreign/Local Thai shares 

The average premium/discount for each set over a one-year period is graphed below.

Source: CapIQ

For a granular breakdown of each data set, PDFs are attached at the bottom of this insight.

In this briefing:

1. Tesla – Shanghai Surprise
2. Uncertain Global Economic Outlook Produces Corporate Profit Expectations of Varying Credibility
3. Baidu (BIDU): The Change Amounts to Business Suicide, Disappointing Existing Users and Clients

1. Tesla – Shanghai Surprise

Tesla Motors (TSLA US) stock is in a tailspin, again. Closing at $297 today, the stock is down 11% ytd, well off its high last August at $379 and trailing even 2018’s comparatively tepid average of $316. Tesla bondholders have remained wary, with the benchmark 5.3% senior notes still hovering near 86 where they’ve traded since last September after plunging more than 10 points versus the beginning of 2018.

Investors are spooked as more Wall Street analysts have slashed their formerly ambitious estimates for Tesla’s fourth-quarter and 2019 revenue, profit, and cash flow primarily due to what they now identify as lower than expected demand and profitability for Model 3. The thing is, Tesla has been signaling escalating troubles for months as I have warned in “Great Magic Trick Tesla; Now Do It Again” which digested Tesla’s “miracle” third quarter and “Tesla: Down to the Wire” which reviewed the frantic close of the fourth quarter). 

So while it’s interesting that market estimates are collapsing toward my previously below-consensus estimates–and even I lowered my already cautious 2019 numbers–I’m concerned about other potentially quake-worthy news affecting performance for 2019 and beyond which we are not getting from Tesla.

With little more notice than a tweet,CEO Elon Musk popped into Shanghai, China, in early January for a showy groundbreaking ceremony to launch Tesla’s new multi-billion dollar Gigafactory 3 which reportedly will be capable of doubling Tesla’s current production capacity. Even more surprising, Musk projected Model 3 production will begin there before the end of this year–less than eleven months from now.

Yet three weeks later we still have no idea how much this mega-plant will cost, or whether Tesla has “funding secured” to pay for it–and these may not even be most troubling facts investors don’t have.

Whatare Musk, and Tesla, and Tesla’s banks, and Musk’s China-based financiers not telling us about Shanghai Giga 3? I suspect the answers may come with potentially nasty surprises.

Read more for Bond Angle analysis.

2. Uncertain Global Economic Outlook Produces Corporate Profit Expectations of Varying Credibility

Despite elevated uncertainty and lowered growth expectations for 2019, the International Monetary Fund (IMF) still expects continued global economic expansion, thereby potentially placing it at variance with the expectations embedded in financial markets.

The remaining efficacy of monetary policy in the Eurozone is being undermined by the conspicuous absence of an interest rate buffer that could ultimately be detrimental to any future attempts to support aggregate demand.

Meanwhile, the Bank of Japan will continue its ultra-accommodative policy stance due to downside risks to medium and long-term inflationary expectations, but low corporate profits growth expectations limit downside equity market risks.

Current expectations for corporate profits growth in the Eurozone and China require downgrading due to their respective economic outlooks, implying downward pressure on equity prices.

Crucially, US corporate profit expectations have been scaled back to match revenue expansion, thereby indicating that analysts have finally embraced a more realistic approach towards the future path of operating margins.

3. Baidu (BIDU): The Change Amounts to Business Suicide, Disappointing Existing Users and Clients

• Baidu’s new methodology directs the large majority of search results to its in-house functions, especially to its blog function BJH (百家号).
• Baidu began to hide websites of search results after the change above was widely criticized. However, as a result, users can hardly find authoritative websites.
• Because of these changes, it is hard for users to find useful content.
• We believe Baidu is giving up its existing advantages for users and clients.
• We also believe that users will choose to leave if the platform tries to choose content for them. If users leave Baidu, advertisers will follow them.

In this briefing:

1. China Housing: 2019 Forecast
2. China Tower Corp: Trading Idea Before Lock-Up Expiry
3. Real Numbers on China’s Real Estate
4. India’s Paper Industry Ready for a Hangover?
5. Teasing Updates on CaiNiao Network & Ele.me Out of Alibaba’s Q3 Results

1. China Housing: 2019 Forecast

We expect a gradual slowdown for prices and volumes – ending the year slightly negative year-on-year, off a high base, with the selective easing and relatively low land supply cushioning the impact of a cyclical downturn otherwise driven by financing conditions for developers, increased supply of new homes at the time of slowing sales off record volumes in 2018, and broader economic slowdown due to macro factors.

2. China Tower Corp: Trading Idea Before Lock-Up Expiry

China Tower Corp, the owner and operator and telecommunication tower network in China, listed on August 8th last year. Over the past six months, the stock has returned 35% with the addition of a number of global investors to its share registry.

• As it heads into lock-up expiry in Feb, in this insight we would like to examine China Tower’s performance since listing.
• We note that China Tower has delivered a decent set of results for 3Q2018 and it will be a key beneficiary of China’s push into 5G built-up with little uncertainty.
• The current valuation of the company was still lower than international tower providers.
• With the improving operating metrics and stable income, we believe there are still upsides for China Tower Corp post-lock-up expiry. 

Our previous coverage on China Tower Corp

• China Tower Corp IPO: An Elephant Still Growing
• China Tower Corp (中国铁塔) IPO: Fairly Valued For One Doing National Service
• China Tower Corp (中国铁塔) Post-IPO: Lacklustre Trading Interest but Looking Forward to 1H Results

3. Real Numbers on China’s Real Estate

Discussing real estate in China offers important insight into China economy. There is a lot of granular data that when examined can give us a solid picture what of if going on China’s economy on a macro level. To that end today’s newsletter has more graphs than we typically include, but we wanted to really cohesively lay out the Chinese real estate market. Some graphs we have included with commentary, others without comment.

4. India’s Paper Industry Ready for a Hangover?

We recently met a second-generation entrepreneur, operating in the paper industry for over two decades dealing with companies in India, UAE, China, Egypt, Turkey, Europe, South Korea & African countries.  The discussion was aimed at understanding the key trends that have shaped the paper Industry in India and China for the last two years in order to answer the question: will the dream run in stock prices continue? Our discussions are focused on Jk Paper Ltd (CPM IN) , West Coast Paper Mills (WCPM IN) & International Paper Appm (IPAP IN) along with possible implications for Nine Dragons Paper (2689 HK) covered by David Lepper & Nicolas Van Broekhoven. 

We maintain a cautious to negative view on the sector, we shall review our stance on the Industry post Q3 earnings releases. We would like to endorse the long view on Nine Dragons Paper (2689 HK)

5. Teasing Updates on CaiNiao Network & Ele.me Out of Alibaba’s Q3 Results

A set of generally solid Q3FY19 earnings results from Chinese e-commerce giant Alibaba Group Holding (BABA US) also yielded some interesting insights into the company’s two main logistics-related ventures (CaiNiao Network and on-demand food delivery specialist ele.me).

Unfortunately, the information we can glean from BABA’s Q3FY19 results suggests CaiNiao and ele.me are either growing slower or generating significant losses — or both.

In our view, the main logistics takeaways from BABA’s results are:

1. Alibaba’s ‘Core Commerce’ revenues continue to grow faster than express delivery. For the seventh consecutive quarter, Alibaba’s ‘core commerce’ grew much faster than China’s parcel delivery market, outgrowing parcel volume by 8% and parcel delivery revenue by almost 18%. At the margins, China’s express delivery firms are being bypassed by new modes of fulfillment, in our view. 
2. CaiNiao Network’s 15% growth in Q3FY19 is disappointing. Revenue at Alibaba’s CaiNiao Network grew by just 15% Y/Y in the December quarter, to 4.5 bn RMB. In other words, CaiNiao grew even slower than overall Chinese express delivery revenue in the December quarter (+17% Y/Y). That’s disappointing for a company that enjoyed an equity valuation of US$20 bn when Alibaba upped its stake to 51% in late 2017.
3. The reporting segment that includes ele.me barely grew from Q2FY19 to Q3FY19. Alibaba’s ‘Local Consumer Services’ segment had revenue of 5.2 bn RMB in Q3FY19, representing Q/Q growth of just 2.7%. It’s unclear how much local services venture Koubei contributed to this, as Alibaba only began consolidating its revenues some time in December.
4. It looks like losses from CaiNiao & ele.me continued to pile up in Q3FY19. Although it’s not an ‘apples-to-apples’ comparison, EBITA losses from the group of companies that includes CaiNiao and ele.me expanded from 5.8 bn RMB in Q2FY19 to over 8.2 bn RMB in Q3FY19.  This suggests the deep losses from this group (which were equivalent to about 15% of BABA’s core ‘marketplace’ EBITA in Q2FY19) aren’t going away soon.