Category

Consumer Sector

Brief Consumer: SATS: Traffic -99.5% in April and May; How Much Worse Can It Get? and more

By | Consumer Sector, Daily Briefs

In this briefing:

  1. SATS: Traffic -99.5% in April and May; How Much Worse Can It Get?
  2. China Internet Weekly (8Jun2020): AMD Said Not to Buy AMD on Pinduoduo.

1. SATS: Traffic -99.5% in April and May; How Much Worse Can It Get?

Image 3026459941591588183053

SATS Ltd (SATS SP) is a Singapore travel monopoly that has rarely been cheap given its great dividend track record. SATS controls 80% of flight service operations around Changi Airport, one of the top-20 airports in the world. Its most important client Singapore Airlines (SIA SP) has been saved by Temasek and retail shareholders.

According to IATA data Changi flight operations were down -99.5% in April. We expect the same in May. June will see some improvement with travel lines re-opening between China/SG and Singapore Airlines (SIA SP) starting more routes globally next week.

While we continue to wait for FY20 earnings (FY ends 31/3/20) all bad news might be priced in already. With Singapore elections approaching in July and pressure from other global capitals which are re-opening, Singapore can’t afford to have its air-links closed for much longer. Things are set to get incrementally better from here, not worse.

Timing a bottom is always difficult but risk/reward on a long-term basis could be attractive even after a 25% rally from the recent 2.6 SGD low in the past ten days. Read below for more details.

2. China Internet Weekly (8Jun2020): AMD Said Not to Buy AMD on Pinduoduo.

Image 635823921591503929930

  • AMD (AMD) claimed they had not authorized Pinduoduo (PDD) to sell any of their products.
  • Kuaishou, the second largest short video app in China, will promote JD.com (JD) instead of Alibaba (BABA) and Pinduoduo (PDD).
  • The State Post Bureau of China expected home delivery orders to increase by 39.6% YoY in May.

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Brief Consumer: Niu: 2Q Volumes Soar as COVID Accelerates Shift to EV Micromobility, Raise FV to US$31.4 (+42%) and more

By | Consumer Sector, Daily Briefs

In this briefing:

  1. Niu: 2Q Volumes Soar as COVID Accelerates Shift to EV Micromobility, Raise FV to US$31.4 (+42%)
  2. Japanese Cosmetics Industry Statistics- May 2020: China Recovers While Domestic Demand Deteriorates
  3. Future Retail + Reliance – To Be, or Not to Be…
  4. Pop Mart IPO: Molly and Other Self-Developed IPs Fuel Strong Growth
  5. Yihai Kerry IPO: Shifting Consumer Purchasing Patterns Make Yihai Kerry An Enticing Long-Term Play

1. Niu: 2Q Volumes Soar as COVID Accelerates Shift to EV Micromobility, Raise FV to US$31.4 (+42%)

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Niu shares have soared by ~170% since we initiated coverage on the Company in January 2020. We believe that COVID-19 has validated Niu’s value proposition and is accelerating the shift towards EV micromobility as consumers realize the convenience and increased safety of personal mobility solutions in a post-COVID world.

Despite the major run-up in Niu’s prices, we see 6 trends that can continue accelerating Niu’s growth:

  1. Shift away from public transportation towards personal mobility
  2. Urbanization requiring more energy & space-efficient mobility 
  3. Launch of more affordable entry-level scooters
  4. Higher-margin accessory upsells
  5. Operating leverage and economies of scale
  6. Virtual stores and e-comm live streaming as a more cost-efficient channel

We chose to value Niu at 4x its 2022 sales and brought this to present value at a discount rate of 30%. Our 2022 sales forecast assumes that the Company successfully captures 5.5% of the world’s lithium-ion 2-wheeler market (10% in China, 3% in Europe, 1% in Southeast Asia, 1% in India).

We believe these assumptions are fair given that COVID catalyzed faster adoption for Niu’s products and that the business has been significantly de-risked since our initial valuation.

2. Japanese Cosmetics Industry Statistics- May 2020: China Recovers While Domestic Demand Deteriorates

Image 59210774031594134696896

  • Cosmetics is one of the industries, worst hit by the coronavirus pandemic. The industry was struggling for growth even before COVID-19. Due to the consumption tax increase, Japan’s domestic cosmetics market declined 0.6% year-on-year on average during Oct-2019 to Jan-2020. The rate of decline accelerated to 26% by April 2020 due to COVID-19.
  • However, the situation is much better outside of Japan. Total cosmetics exports grew 8% year-on-year in May 2020 as exports to China increased 49.8% year-on-year.
  • Below we analyse, Japan’s cosmetics industry using the monthly data released by the Ministry of Economy, Trade and Industry (METI) and the Ministry of Finance.

3. Future Retail + Reliance – To Be, or Not to Be…

Image 53198965821594102462590

There has been substantial news-flow regarding the possibility of a deal between Future Retail (FRETAIL IN) and Reliance Industries (RIL IN) .  We feel that the news reports are credible. We also present our thoughts on potential hurdles facing the deal and recommend booking profits on the FRETAI 5.6% bonds due ’23 at current levels (69).

Fundamental credit research focused on Asian high yield, including coverage of areas which are generally overlooked such as Indian finance companies and non-USD denominated credit (SGD).  Sector agnostic. Research process consists of rigorous bottom-up company analysis combined with spotting market dislocations to provide trade ideas.

4. Pop Mart IPO: Molly and Other Self-Developed IPs Fuel Strong Growth

Image 80852086121594093136151

  • POP MART (POP HK) , the largest and fastest-growing pop toy company in China, has filed for an IPO in the Hong Kong Stock Exchange. The company has not yet issued details of the IPO such as the price per share or the number of shares, however, the company is expected to raise about US$500m from its IPO.
  • Despite operating in a fast-growing market where Pop Mart is the leader with a market share of 8.5%, China’s pop toy market is highly fragmented with the top five players having a combined market share of only c. 22.8%. The second largest player trails closely behind with a market share of 7.7%.
  • However, the company has some strong licensing relationships with global content providers including Disney and Universal Studios which help the company recreate and further monetise their IPs in addition to having its own proprietary IPs.
  • Pop Mart’s revenue and operating profits have grown significantly over the past three years and  we expect the company’s earnings to  continue to grow driven by strong demand for pop toys in China coupled with the company’s expanding distribution channels and product portfolio.
  • The company’s Molly series of toys (accounted for about 30% of revenues in 2019) and other self-developed products have helped the company achieve explosive growth in revenue and margins.
  • In this insight, we take a look at the company’s business, the pop toy market in China and outlook, company financials and future prospects. We plan to cover the company’s valuation in a follow-up insight once we have more details such as the indicative IPO price range, no. of shares, etc.

5. Yihai Kerry IPO: Shifting Consumer Purchasing Patterns Make Yihai Kerry An Enticing Long-Term Play

Image 487148955141594011970044

  • Months after the initial announcement, 99.99%-owned subsidiary of Singapore’s Wilmar International (WIL SP), Yihai Kerry Arawana Holdings Co Ltd (YKA CH), filed for an IPO to list on the Shenzhen Stock Exchange’s ChiNext Board. The company expects to raise RMB 13.78bn ($1.95bn) through selling up to 542m new shares (10% post-IPO shares of Yihai Kerry). 
  • Yihai Kerry is one of China’s largest processors and distributors of agricultural and consumer products. The company has around 29,000 employees, more than 70 production bases and over 100 production enterprises in China.
  • The company is mainly involved in industries such as oil seed crushing, edible oil refining, speciality fats, oleochemicals, processing of corn, wheat and soybean, sustainable multi-stage processing of rice, food and beverage, and grain and oil technology R&D.
  • Its products include edible oil, rice, flour, fine dried noodles, rice noodles, soy milk, special grains and oils, food raw and supplementary materials, oleochemicals and sells them under famous brand names such as “Arawana”, “Olivoila”, “Orchid”, “Wonder Farm”, “Neptune”, “Fengyuan”, “Golden Delicious”, “Reyland”, and “Jiejin 100”.
Source: Company Disclosures
  • According to Nielsen, Yihai Kerry is ranked No. 1 in China’s packed edible oil, rice, and flour markets.
Source: Company Disclosures
  • The company is also ranks high in the feed raw materials and oil and fat technology industry. In addition, Yihai Kerry is actively developing new products, and has made great progress in the field of noodles, condiments, cosmetics, and other sub-products.

Use of IPO Proceeds

Project Category

Use of Proceeds (In RMB bn)

Comprehensive Projects -Kitchen Food

5.91

Edible Oil Projects – Kitchen Food

3.78

Flour Projects – Kitchen Food

1.96

Other items – Kitchen Food

2.22

 Source: Company Disclosures

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Brief Consumer: China Internet Weekly (8Jun2020): AMD Said Not to Buy AMD on Pinduoduo. and more

By | Consumer Sector, Daily Briefs

In this briefing:

  1. China Internet Weekly (8Jun2020): AMD Said Not to Buy AMD on Pinduoduo.

1. China Internet Weekly (8Jun2020): AMD Said Not to Buy AMD on Pinduoduo.

Image 635823921591503929930

  • AMD (AMD) claimed they had not authorized Pinduoduo (PDD) to sell any of their products.
  • Kuaishou, the second largest short video app in China, will promote JD.com (JD) instead of Alibaba (BABA) and Pinduoduo (PDD).
  • The State Post Bureau of China expected home delivery orders to increase by 39.6% YoY in May.

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Brief Consumer: Japanese Cosmetics Industry Statistics- May 2020: China Recovers While Domestic Demand Deteriorates and more

By | Consumer Sector, Daily Briefs

In this briefing:

  1. Japanese Cosmetics Industry Statistics- May 2020: China Recovers While Domestic Demand Deteriorates
  2. Future Retail + Reliance – To Be, or Not to Be…
  3. Pop Mart IPO: Molly and Other Self-Developed IPs Fuel Strong Growth
  4. Yihai Kerry IPO: Shifting Consumer Purchasing Patterns Make Yihai Kerry An Enticing Long-Term Play
  5. Beyond Meat (BYND US): Index Inclusion Corrodes Short Interest. Upbeat Times.

1. Japanese Cosmetics Industry Statistics- May 2020: China Recovers While Domestic Demand Deteriorates

Image 93743386221594134659866

  • Cosmetics is one of the industries, worst hit by the coronavirus pandemic. The industry was struggling for growth even before COVID-19. Due to the consumption tax increase, Japan’s domestic cosmetics market declined 0.6% year-on-year on average during Oct-2019 to Jan-2020. The rate of decline accelerated to 26% by April 2020 due to COVID-19.
  • However, the situation is much better outside of Japan. Total cosmetics exports grew 8% year-on-year in May 2020 as exports to China increased 49.8% year-on-year.
  • Below we analyse, Japan’s cosmetics industry using the monthly data released by the Ministry of Economy, Trade and Industry (METI) and the Ministry of Finance.

2. Future Retail + Reliance – To Be, or Not to Be…

Image 53198965821594102462590

There has been substantial news-flow regarding the possibility of a deal between Future Retail (FRETAIL IN) and Reliance Industries (RIL IN) .  We feel that the news reports are credible. We also present our thoughts on potential hurdles facing the deal and recommend booking profits on the FRETAI 5.6% bonds due ’23 at current levels (69).

Fundamental credit research focused on Asian high yield, including coverage of areas which are generally overlooked such as Indian finance companies and non-USD denominated credit (SGD).  Sector agnostic. Research process consists of rigorous bottom-up company analysis combined with spotting market dislocations to provide trade ideas.

3. Pop Mart IPO: Molly and Other Self-Developed IPs Fuel Strong Growth

Image 69202641141594092438582

  • POP MART (POP HK) , the largest and fastest-growing pop toy company in China, has filed for an IPO in the Hong Kong Stock Exchange. The company has not yet issued details of the IPO such as the price per share or the number of shares, however, the company is expected to raise about US$500m from its IPO.
  • Despite operating in a fast-growing market where Pop Mart is the leader with a market share of 8.5%, China’s pop toy market is highly fragmented with the top five players having a combined market share of only c. 22.8%. The second largest player trails closely behind with a market share of 7.7%.
  • However, the company has some strong licensing relationships with global content providers including Disney and Universal Studios which help the company recreate and further monetise their IPs in addition to having its own proprietary IPs.
  • Pop Mart’s revenue and operating profits have grown significantly over the past three years and  we expect the company’s earnings to  continue to grow driven by strong demand for pop toys in China coupled with the company’s expanding distribution channels and product portfolio.
  • The company’s Molly series of toys (accounted for about 30% of revenues in 2019) and other self-developed products have helped the company achieve explosive growth in revenue and margins.
  • In this insight, we take a look at the company’s business, the pop toy market in China and outlook, company financials and future prospects. We plan to cover the company’s valuation in a follow-up insight once we have more details such as the indicative IPO price range, no. of shares, etc.

4. Yihai Kerry IPO: Shifting Consumer Purchasing Patterns Make Yihai Kerry An Enticing Long-Term Play

Image 444342121101594011854835

  • Months after the initial announcement, 99.99%-owned subsidiary of Singapore’s Wilmar International (WIL SP), Yihai Kerry Arawana Holdings Co Ltd (YKA CH), filed for an IPO to list on the Shenzhen Stock Exchange’s ChiNext Board. The company expects to raise RMB 13.78bn ($1.95bn) through selling up to 542m new shares (10% post-IPO shares of Yihai Kerry). 
  • Yihai Kerry is one of China’s largest processors and distributors of agricultural and consumer products. The company has around 29,000 employees, more than 70 production bases and over 100 production enterprises in China.
  • The company is mainly involved in industries such as oil seed crushing, edible oil refining, speciality fats, oleochemicals, processing of corn, wheat and soybean, sustainable multi-stage processing of rice, food and beverage, and grain and oil technology R&D.
  • Its products include edible oil, rice, flour, fine dried noodles, rice noodles, soy milk, special grains and oils, food raw and supplementary materials, oleochemicals and sells them under famous brand names such as “Arawana”, “Olivoila”, “Orchid”, “Wonder Farm”, “Neptune”, “Fengyuan”, “Golden Delicious”, “Reyland”, and “Jiejin 100”.
Source: Company Disclosures
  • According to Nielsen, Yihai Kerry is ranked No. 1 in China’s packed edible oil, rice, and flour markets.
Source: Company Disclosures
  • The company is also ranks high in the feed raw materials and oil and fat technology industry. In addition, Yihai Kerry is actively developing new products, and has made great progress in the field of noodles, condiments, cosmetics, and other sub-products.

Use of IPO Proceeds

Project Category

Use of Proceeds (In RMB bn)

Comprehensive Projects -Kitchen Food

5.91

Edible Oil Projects – Kitchen Food

3.78

Flour Projects – Kitchen Food

1.96

Other items – Kitchen Food

2.22

 Source: Company Disclosures

5. Beyond Meat (BYND US): Index Inclusion Corrodes Short Interest. Upbeat Times.

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Beyond Meat Inc (BYND US) was included in the FTSE Russell indexes, most notably the Russell 3000 Index (RAY INDEX) and the Russell 1000 Index last week. With few large-sized ETFs from Blackrock Inc (BLK US) and Vanguard tracking these indices, Beyond Meat Inc (BYND US) will likely see buying support in the near term as it gets added to these portfolios. Unsurprisingly, the short interest level at the counter is at its lowest now. The stock has been a strong outperformer after COVID-led fall in the broader market in end-March.  Widespread COVID infections at several of the US meat processing facilities had disrupted the meat market temporarily and turned the focus on Plant-based Meat producers like Beyond Meat Inc (BYND US). Additionally, it announced plans to retail it’s Beyond Burger in 50 Freshippo stores ( Alibaba Group (BABA US) ‘s futuristic retail stores) in Shanghai starting this weekend. Starbucks Corp (SBUX US) has however tied up with Impossible Foods Inc (1249597D US) to offer breakfast items with plant-based protein this summer. Management has guided towards a fall in margins and volumes in the upcoming quarterly results.

In the note below, we discuss our investment view on the stock based on the short and longer-term impact of the above-mentioned updates.

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Brief Consumer: Future Retail + Reliance – To Be, or Not to Be… and more

By | Consumer Sector, Daily Briefs

In this briefing:

  1. Future Retail + Reliance – To Be, or Not to Be…
  2. Pop Mart IPO: Molly and Other Self-Developed IPs Fuel Strong Growth
  3. Yihai Kerry IPO: Shifting Consumer Purchasing Patterns Make Yihai Kerry An Enticing Long-Term Play
  4. Beyond Meat (BYND US): Index Inclusion Corrodes Short Interest. Upbeat Times.
  5. Cathay Media & Education IPO: Valuation Insights

1. Future Retail + Reliance – To Be, or Not to Be…

Image 53198965821594102462590

There has been substantial news-flow regarding the possibility of a deal between Future Retail (FRETAIL IN) and Reliance Industries (RIL IN) .  We feel that the news reports are credible. We also present our thoughts on potential hurdles facing the deal and recommend booking profits on the FRETAI 5.6% bonds due ’23 at current levels (69).

Fundamental credit research focused on Asian high yield, including coverage of areas which are generally overlooked such as Indian finance companies and non-USD denominated credit (SGD).  Sector agnostic. Research process consists of rigorous bottom-up company analysis combined with spotting market dislocations to provide trade ideas.

2. Pop Mart IPO: Molly and Other Self-Developed IPs Fuel Strong Growth

Image 509845102151594093446153

  • POP MART (POP HK) , the largest and fastest-growing pop toy company in China, has filed for an IPO in the Hong Kong Stock Exchange. The company has not yet issued details of the IPO such as the price per share or the number of shares, however, the company is expected to raise about US$500m from its IPO.
  • Despite operating in a fast-growing market where Pop Mart is the leader with a market share of 8.5%, China’s pop toy market is highly fragmented with the top five players having a combined market share of only c. 22.8%. The second largest player trails closely behind with a market share of 7.7%.
  • However, the company has some strong licensing relationships with global content providers including Disney and Universal Studios which help the company recreate and further monetise their IPs in addition to having its own proprietary IPs.
  • Pop Mart’s revenue and operating profits have grown significantly over the past three years and  we expect the company’s earnings to  continue to grow driven by strong demand for pop toys in China coupled with the company’s expanding distribution channels and product portfolio.
  • The company’s Molly series of toys (accounted for about 30% of revenues in 2019) and other self-developed products have helped the company achieve explosive growth in revenue and margins.
  • In this insight, we take a look at the company’s business, the pop toy market in China and outlook, company financials and future prospects. We plan to cover the company’s valuation in a follow-up insight once we have more details such as the indicative IPO price range, no. of shares, etc.

3. Yihai Kerry IPO: Shifting Consumer Purchasing Patterns Make Yihai Kerry An Enticing Long-Term Play

Image 521590657191594028741876

  • Months after the initial announcement, 99.99%-owned subsidiary of Singapore’s Wilmar International (WIL SP), Yihai Kerry Arawana Holdings Co Ltd (YKA CH), filed for an IPO to list on the Shenzhen Stock Exchange’s ChiNext Board. The company expects to raise RMB 13.78bn ($1.95bn) through selling up to 542m new shares (10% post-IPO shares of Yihai Kerry). 
  • Yihai Kerry is one of China’s largest processors and distributors of agricultural and consumer products. The company has around 29,000 employees, more than 70 production bases and over 100 production enterprises in China.
  • The company is mainly involved in industries such as oil seed crushing, edible oil refining, speciality fats, oleochemicals, processing of corn, wheat and soybean, sustainable multi-stage processing of rice, food and beverage, and grain and oil technology R&D.
  • Its products include edible oil, rice, flour, fine dried noodles, rice noodles, soy milk, special grains and oils, food raw and supplementary materials, oleochemicals and sells them under famous brand names such as “Arawana”, “Olivoila”, “Orchid”, “Wonder Farm”, “Neptune”, “Fengyuan”, “Golden Delicious”, “Reyland”, and “Jiejin 100”.
Source: Company Disclosures
  • According to Nielsen, Yihai Kerry is ranked No. 1 in China’s packed edible oil, rice, and flour markets.
Source: Company Disclosures
  • The company is also ranks high in the feed raw materials and oil and fat technology industry. In addition, Yihai Kerry is actively developing new products, and has made great progress in the field of noodles, condiments, cosmetics, and other sub-products.

Use of IPO Proceeds

Project Category

Use of Proceeds (In RMB bn)

Comprehensive Projects -Kitchen Food

5.91

Edible Oil Projects – Kitchen Food

3.78

Flour Projects – Kitchen Food

1.96

Other items – Kitchen Food

2.22

 Source: Company Disclosures

4. Beyond Meat (BYND US): Index Inclusion Corrodes Short Interest. Upbeat Times.

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Beyond Meat Inc (BYND US) was included in the FTSE Russell indexes, most notably the Russell 3000 Index (RAY INDEX) and the Russell 1000 Index last week. With few large-sized ETFs from Blackrock Inc (BLK US) and Vanguard tracking these indices, Beyond Meat Inc (BYND US) will likely see buying support in the near term as it gets added to these portfolios. Unsurprisingly, the short interest level at the counter is at its lowest now. The stock has been a strong outperformer after COVID-led fall in the broader market in end-March.  Widespread COVID infections at several of the US meat processing facilities had disrupted the meat market temporarily and turned the focus on Plant-based Meat producers like Beyond Meat Inc (BYND US). Additionally, it announced plans to retail it’s Beyond Burger in 50 Freshippo stores ( Alibaba Group (BABA US) ‘s futuristic retail stores) in Shanghai starting this weekend. Starbucks Corp (SBUX US) has however tied up with Impossible Foods Inc (1249597D US) to offer breakfast items with plant-based protein this summer. Management has guided towards a fall in margins and volumes in the upcoming quarterly results.

In the note below, we discuss our investment view on the stock based on the short and longer-term impact of the above-mentioned updates.

5. Cathay Media & Education IPO: Valuation Insights

Forecasts

Cathay Media and Education (1981 HK) is a media group, built on twin pillars of a leading TV/film production business and a higher education business focused on media and arts. It has launched a Hong Kong IPO to raise net proceeds of HK$1,103.5 million ($142 million) at the mid-point of the IPO price range of HK$2.86-3.10 per share.

In our initiation note, we stated that Cathay is an attractive play for investors seeking exposure to the relatively faster-growing China media sector but with a lower risk profile due to the relatively stable revenue and cash generation from the higher education business. Our valuation analysis suggests that the price range is attractive. 

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Brief Consumer: JD.com: A Quick Look at Fundamentals Ahead of the HKEX Listing and more

By | Consumer Sector, Daily Briefs

In this briefing:

  1. JD.com: A Quick Look at Fundamentals Ahead of the HKEX Listing
  2. Smartkarma Webinar
  3. SATS: Traffic -99.5% in April and May; How Much Worse Can It Get?
  4. China Internet Weekly (8Jun2020): AMD Said Not to Buy AMD on Pinduoduo.

1. JD.com: A Quick Look at Fundamentals Ahead of the HKEX Listing

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Despite the recent rally in the share price, we believe it is still worth participating in JD.com Inc (ADR) (JD US)’s secondary listing at a reasonable discount. We continue to prefer JD over other Chinese e-commerce names. Alibaba Group (BABA US)’s domestic e-commerce business seems to have hit maturity, while Pinduoduo (PDD US), despite its stronger growth, looks expensive to us. We believe further upside for JD is likely in the medium term as the company continues to expand into lower-tier cities and once the benefits from internalising the logistics network start showing at the OP level.  

2. Smartkarma Webinar

The webinar will be held on 10 June 2020 at 1700hrs Singapore/Hong Kong time.



Ankit Agrawal, CFA is the founder and CIO of Yellowstone Equity, a firm providing unbiased and independent research on Indian equities. He was previously on the buyside with Howe & Rusling and Investcorp. 

3. SATS: Traffic -99.5% in April and May; How Much Worse Can It Get?

Image 3026459941591588183053

SATS Ltd (SATS SP) is a Singapore travel monopoly that has rarely been cheap given its great dividend track record. SATS controls 80% of flight service operations around Changi Airport, one of the top-20 airports in the world. Its most important client Singapore Airlines (SIA SP) has been saved by Temasek and retail shareholders.

According to IATA data Changi flight operations were down -99.5% in April. We expect the same in May. June will see some improvement with travel lines re-opening between China/SG and Singapore Airlines (SIA SP) starting more routes globally next week.

While we continue to wait for FY20 earnings (FY ends 31/3/20) all bad news might be priced in already. With Singapore elections approaching in July and pressure from other global capitals which are re-opening, Singapore can’t afford to have its air-links closed for much longer. Things are set to get incrementally better from here, not worse.

Timing a bottom is always difficult but risk/reward on a long-term basis could be attractive even after a 25% rally from the recent 2.6 SGD low in the past ten days. Read below for more details.

4. China Internet Weekly (8Jun2020): AMD Said Not to Buy AMD on Pinduoduo.

Image 635823921591503929930

  • AMD (AMD) claimed they had not authorized Pinduoduo (PDD) to sell any of their products.
  • Kuaishou, the second largest short video app in China, will promote JD.com (JD) instead of Alibaba (BABA) and Pinduoduo (PDD).
  • The State Post Bureau of China expected home delivery orders to increase by 39.6% YoY in May.

You are currently reading Executive Summaries of Smartkarma Insights.

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Brief Consumer: Pop Mart IPO: Molly and Other Self-Developed IPs Fuel Strong Growth and more

By | Consumer Sector, Daily Briefs

In this briefing:

  1. Pop Mart IPO: Molly and Other Self-Developed IPs Fuel Strong Growth
  2. Yihai Kerry IPO: Shifting Consumer Purchasing Patterns Make Yihai Kerry An Enticing Long-Term Play
  3. Beyond Meat (BYND US): Index Inclusion Corrodes Short Interest. Upbeat Times.
  4. Cathay Media & Education IPO: Valuation Insights
  5. Major Accordia Golf Trust Shareholder Has Issues With Price & Process

1. Pop Mart IPO: Molly and Other Self-Developed IPs Fuel Strong Growth

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  • POP MART (POP HK) , the largest and fastest-growing pop toy company in China, has filed for an IPO in the Hong Kong Stock Exchange. The company has not yet issued details of the IPO such as the price per share or the number of shares, however, the company is expected to raise about US$500m from its IPO.
  • Despite operating in a fast-growing market where Pop Mart is the leader with a market share of 8.5%, China’s pop toy market is highly fragmented with the top five players having a combined market share of only c. 22.8%. The second largest player trails closely behind with a market share of 7.7%.
  • However, the company has some strong licensing relationships with global content providers including Disney and Universal Studios which help the company recreate and further monetise their IPs in addition to having its own proprietary IPs.
  • Pop Mart’s revenue and operating profits have grown significantly over the past three years and  we expect the company’s earnings to  continue to grow driven by strong demand for pop toys in China coupled with the company’s expanding distribution channels and product portfolio.
  • The company’s Molly series of toys (accounted for about 30% of revenues in 2019) and other self-developed products have helped the company achieve explosive growth in revenue and margins.
  • In this insight, we take a look at the company’s business, the pop toy market in China and outlook, company financials and future prospects. We plan to cover the company’s valuation in a follow-up insight once we have more details such as the indicative IPO price range, no. of shares, etc.

2. Yihai Kerry IPO: Shifting Consumer Purchasing Patterns Make Yihai Kerry An Enticing Long-Term Play

Image 564899349171594011970045

  • Months after the initial announcement, 99.99%-owned subsidiary of Singapore’s Wilmar International (WIL SP), Yihai Kerry Arawana Holdings Co Ltd (YKA CH), filed for an IPO to list on the Shenzhen Stock Exchange’s ChiNext Board. The company expects to raise RMB 13.78bn ($1.95bn) through selling up to 542m new shares (10% post-IPO shares of Yihai Kerry). 
  • Yihai Kerry is one of China’s largest processors and distributors of agricultural and consumer products. The company has around 29,000 employees, more than 70 production bases and over 100 production enterprises in China.
  • The company is mainly involved in industries such as oil seed crushing, edible oil refining, speciality fats, oleochemicals, processing of corn, wheat and soybean, sustainable multi-stage processing of rice, food and beverage, and grain and oil technology R&D.
  • Its products include edible oil, rice, flour, fine dried noodles, rice noodles, soy milk, special grains and oils, food raw and supplementary materials, oleochemicals and sells them under famous brand names such as “Arawana”, “Olivoila”, “Orchid”, “Wonder Farm”, “Neptune”, “Fengyuan”, “Golden Delicious”, “Reyland”, and “Jiejin 100”.
Source: Company Disclosures
  • According to Nielsen, Yihai Kerry is ranked No. 1 in China’s packed edible oil, rice, and flour markets.
Source: Company Disclosures
  • The company is also ranks high in the feed raw materials and oil and fat technology industry. In addition, Yihai Kerry is actively developing new products, and has made great progress in the field of noodles, condiments, cosmetics, and other sub-products.

Use of IPO Proceeds

Project Category

Use of Proceeds (In RMB bn)

Comprehensive Projects -Kitchen Food

5.91

Edible Oil Projects – Kitchen Food

3.78

Flour Projects – Kitchen Food

1.96

Other items – Kitchen Food

2.22

 Source: Company Disclosures

3. Beyond Meat (BYND US): Index Inclusion Corrodes Short Interest. Upbeat Times.

Us%20beef%20price

Beyond Meat Inc (BYND US) was included in the FTSE Russell indexes, most notably the Russell 3000 Index (RAY INDEX) and the Russell 1000 Index last week. With few large-sized ETFs from Blackrock Inc (BLK US) and Vanguard tracking these indices, Beyond Meat Inc (BYND US) will likely see buying support in the near term as it gets added to these portfolios. Unsurprisingly, the short interest level at the counter is at its lowest now. The stock has been a strong outperformer after COVID-led fall in the broader market in end-March.  Widespread COVID infections at several of the US meat processing facilities had disrupted the meat market temporarily and turned the focus on Plant-based Meat producers like Beyond Meat Inc (BYND US). Additionally, it announced plans to retail it’s Beyond Burger in 50 Freshippo stores ( Alibaba Group (BABA US) ‘s futuristic retail stores) in Shanghai starting this weekend. Starbucks Corp (SBUX US) has however tied up with Impossible Foods Inc (1249597D US) to offer breakfast items with plant-based protein this summer. Management has guided towards a fall in margins and volumes in the upcoming quarterly results.

In the note below, we discuss our investment view on the stock based on the short and longer-term impact of the above-mentioned updates.

4. Cathay Media & Education IPO: Valuation Insights

Forecasts

Cathay Media and Education (1981 HK) is a media group, built on twin pillars of a leading TV/film production business and a higher education business focused on media and arts. It has launched a Hong Kong IPO to raise net proceeds of HK$1,103.5 million ($142 million) at the mid-point of the IPO price range of HK$2.86-3.10 per share.

In our initiation note, we stated that Cathay is an attractive play for investors seeking exposure to the relatively faster-growing China media sector but with a lower risk profile due to the relatively stable revenue and cash generation from the higher education business. Our valuation analysis suggests that the price range is attractive. 

5. Major Accordia Golf Trust Shareholder Has Issues With Price & Process

Screenshot%202020 07 05%20at%201.41.04%20pm

On Friday 3 July after the close, Hibiki Path Advisors – the second largest shareholder in Accordia Golf Trust (AGT SP) and one who has been noisy on behalf of all shareholders – issued a Press Release which started noting the 29 June announcement of a Board-supported deal by saying…

We would like to publicly announce that we are disappointed with this price which is unarguably low based on our understanding. We are hoping that all independent unitholders agree that this price does not provide “reasonable” premium to fully take over a publicly traded entity generating a significantly attractive cashflow. We will be voting against the proposed divestment in the case the price is not revised higher. As the leading minority unitholder, we are also open for constructive negotiation with the bidder.    [I added the bold]

This comes after a public letter to the board from 15 June shared to fellow unit-holders more recently, and at least one earlier letter to the board. 

There are numerous issues mentioned, some of which have been noted by the Board in the deal announcement. 

It is worth a discussion. 

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Brief Consumer: ECM Weekly (4 July 2020) – Smoore, Ocumension, Zhenro Services, Archosaur Games and more

By | Consumer Sector, Daily Briefs

In this briefing:

  1. ECM Weekly (4 July 2020) – Smoore, Ocumension, Zhenro Services, Archosaur Games
  2. Last Week In Event SPACE: Keisei/Oriental Ld, Nat’l Storage, Sembcorp, Leyou, Accordia Golf, Samba
  3. Cathay Media & Education IPO Initiation: Tune In
  4. Asia HY Monthly – Framework For Discerning Fraud In Asian Companies – Lucror Analytics
  5. SISB: Resilient Business & Robust Growth Make a Defensive Play

1. ECM Weekly (4 July 2020) – Smoore, Ocumension, Zhenro Services, Archosaur Games

Image 95422442531593889846770

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

It was another week of mad IPO rush in Hong Kong. This week alone,  nine IPOs, with deal size more than US$100m, launched their bookbuilds and, out of the lot, we thought that Ocumension Therapeutics (1477 HK), Smoore International (6969 HK), Zhenro Services (6958 HK), and Archosaur Games (9990 HK) looked promising. Read more in:

Aside from IPO launches, there was also a surge of new application proofs filed with the HKEX. The list of new filings is included further below in this note. There was also news flow of other potential listings such as Hangzhou Wahaha Group, a China F&B giant, seeking US$1bn in its Hong Kong IPO and Baozun Inc. (BZUN US) was the latest US ADR to mull a Hong Kong secondary listing. 

On the other hand, US ADR listings doesn’t seem to be doing too well. DoubleDown Interactive Co Ltd (DDI US) was reported to have pulled their IPO while Royole, a China flexible display producer which was initially looking to list in the U.S, is now mulling a China listing instead.

That said, we are finally seeing some of ECM activity spill over into Southeast Asia as we get more updates on upcoming IPOs. In Philippines, Ayala Land Inc (ALI PM) has started gauging demand for its REIT IPO. Warburg Pincus-backed Converge ICT, which was expected to raise US$700m, has filed its prospectus with the Philippines securities exchange.

Whereas in Thailand, we may start to see more IPOs coming to market or reviving their plans to list after the strong performance of Sri Trang Glove’s listing. The shares closed 67% higher than its IPO price on the first day then trade well and closed the week almost 100% higher.

Placements this week:

 Accuracy Rate:

Our overall accuracy rate is 73.1% for IPOs and 66% for Placements 

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

New IPO filings this week

  • Dongguan Rural Commercial Bank (Hong Kong, ~US$1bn)
  • Blue Moon Group (Hong Kong, ~US$1bn)
  • Shimao Services Holdings (Hong Kong, ~US$600m)
  • Jinke Smart Services (Hong Kong, ~US$500m)
  • RemeGen (Hong Kong, ~US$400m)
  • UNQ (Hong Kong, ~US$150m)
  • Toplist (Hong Kong, ~US$100m)
  • Jiayuan Services (Hong Kong, ~US$100m)
  • Converge ICT (Philippines, ~US$700m)

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

NameInsight
Hong Kong
Ant FinancialAnt Financial IPO Early Thought: Understand Fintech Empire, Growth & Risk Factors
ByteDance

ByteDance (字节跳动) IPO: How Jinri Toutiao Paves The Way for a Bigger Empire (Part 1)

ByteDance

ByteDance (字节跳动) Pre-IPO: Why Facebook Should Worry About TikTok 

ByteDance

ByteDance (字节跳动) IPO: Tiktok the No.1 Short Video App for a Good Reason (Part 2)

ByteDance

ByteDance (字节跳动) Pre-IPO: How Has It Done in 1H? 

ByteDance

ByteDance: The Unlisted Company’s Video Apps Leading the Market and Threatening Internet Giants 

ByteDance

ByteDance (字节跳动) Pre-IPO: Why Facebook Should Worry About TikTok 

ByteDance

ByteDance (字节跳动) Pre-IPO – Globally the Most Downloaded App for Jan 2020 Driven by India 

Kilcoy

Kilcoy Global Foods Pre-IPO – Rapid Earnings Growth on the Back of Margin Improvement 

Kilcoy

Kilcoy Global Foods Pre-IPO – A Lot of Things Still Remain Unexplained 

Megvii Megvii (旷视) Pre-IPO – Remarkable Growth (Part 1) 
Megvii Megvii (旷视) Pre-IPO – A Bet on the Future – Segments, Revenue Drivers and Growth Potential 
Megvii Megvii (旷视) Pre-IPO – The Real Race Is in Research – Founders’ Profile and Talent 
Megvii Megvii (旷视) Pre-IPO – Competitive Landscape and Peer Analysis 
Megvii Megvii (旷视) Pre-IPO –  Initial Thoughts on Valuation 
Nongfu Nongfu Spring Pre-IPO – The Positives – Leaves One Thirsty for More 
Nongfu Nongfu Spring Pre-IPO – The Negatives – Doesn’t Need to List or Expand Production Facilities 
Nongfu Nongfu Spring Pre-IPO – Peer Comparison – Superior Margins and Growth 
Nongfu Nongfu Spring (农夫山泉) IPO: Beverage for the Young, In-Store Photos 
Ocumension Ocumension (欧康维视) Pre-IPO: All Ready for a Great Listing Except a Block Buster 
Pop Mart Pop Mart Pre-IPO – The Negatives – Is It a Brand Owner or Just a Retailer? 
Pop Mart Pop Mart Pre-IPO – The Positives – Expanding Portfolio+Wider Distribution= Explosive Earnings Growth 
Tasly Tasly Biopharm (天士力生物) IPO: Visible Growth from Approved Drug but Lacks Blockbusters 
WeDoctor WeDoctor (微医) Pre-IPO -App Walk Through – The Online Medical Directory and More 
WeDoctor WeDoctor (微医) Pre-IPO – A More Focused Online Medical Svc Provider than Ping An Good Doctor 
India
ASK ASK Investment Managers Pre-IPO – Riding on a Wave of Wealth 
Anmol IndAnmol Industries Pre-IPO Quick Take – No Growth, Generous Payments to Founders
Bharat Hotel

Bharat Hotels Pre-IPO – Catching up with Peers 

Burger King

Burger King India Pre-IPO – Has Been Growing Fast and Plans to Grow Even Faster 

Burger King

Burger King India Pre-IPO – Peer Comparison Yields Interesting Nuggets on Profitability and Capex 

Bajaj En

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

CAMS CAMS Pre-IPO – Quasi Monopoly Status Muddled by Inconsistent Performance 
CMS InfoCMS Info Systems Pre-IPO – When a PE Sells to Another PE… Only One Gets the Timing Right
Crystal CropCrystal Crop Protection Pre-IPO – DRHP Raises More Questions than in Answers
ESAF SFB ESAF Small Finance Bank Pre-IPO – Growing Fast but Remains Highly Dependant on a Related Party 
Equitas SFB Equitas Small Finance Bank Pre-IPO – Another Forced Small Finance Bank Listing 
Equitas SFB Equitas Small Finance Bank Pre-IPO – Another Forced Small Finance Bank Listing 
Flemingo Flemingo Travel Retail Pre-IPO – Its a Different Business in Every Country
Emami Cem Emami Cement Pre-IPO – Still in Ramp Up Phase but Shares Pledge Might Lead to an Early IPO 
IRFC Indian Railway Finance Pre-IPO – Low Risk, Low Margin Business 
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
Mindspace Mindspace Business Parks REIT Pre-IPO – Decent Growth but Not All Assets Are Equal 
Mrs. BectorMrs. Bectors Food Specialities Pre-IPO Quick Take – Sales for Its Main Segment Have Been Sta

LIC

Life Insurance Corporation of India Pre-IPO – Early Take on India’s Largest IPO 

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
Penna Cem Penna Cement – Aggressive Expansion Plans Even Though Past Performance Has Been Tepid 
PNB MetPNB Metlife Pre-IPO Quick Take – Doesn’t Stack up Well Versus Its Larger Peers
Samhi Hotels Samhi Hotels Pre-IPO – Assets and Borrowings Are Growing, but Earnings Haven’t Kept Pace 
UTI AMC

UTI Asset Management Company Pre-IPO – Well past Its Remote Glory Days 

Malaysia
Mr DIY Mr D.I.Y. Pre-IPO – Largest Home Improvement Retailer in Malaysia 
Mr DIY Mr D.I.Y. Pre-IPO – Store Walk-Through and Thoughts on Value Proposition 
Mr DIY Mr D.I.Y. Pre-IPO – Peer Comparison – Small Stores with Dominant Market Share  
Mr DIY Mr D.I.Y. Pre-IPO – Assumptions and Thoughts on Valuation 
QSRQSR Brands Pre-IPO – As Healthy as Fast Food
Thailand
PTTOR PTT Oil and Retail IPO – F&B Business Is the Profit Driver 
SCGP SCGP Pre-IPO – Shift to Packaging Has Been Aiding Margins but Acquisition Drove up Leverage 
The U.S
CDP CDP Holdings Pre-IPO Review – Highly Reliant on Best Inc. 
CloudMindsCloudMinds Inc Early Thoughts – Still Nascent

2. Last Week In Event SPACE: Keisei/Oriental Ld, Nat’l Storage, Sembcorp, Leyou, Accordia Golf, Samba

Image 75613050621593820238947

Last Week in Event SPACE …

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

STUBS

From its March low, Oriental Land has gained 18%. I see the FY21E PER at 250x, which looks disproportionate, but the stock is at a (little) more measured 48x FY22E PER, factoring in a return to “normalcy”. FY22E EV/EBITDA of 23x is, however, pretty hefty.
  • Oriental Land’s peripheral businesses such as hotels, restaurants and rail connections, which are heavily reliant on park visitors, will be challenged. And consensus forecasts have historically had a tendency to be overly optimistic on forward earnings. There is a high degree of optimism baked into the share price, and although shares have come off 9% (at the time of the insight) from its recent high on the 11 June, pricing appears elevated. 
  • An alternative to a Long Keisei, Short Oriental trade, is to go long Keisei against a basket of more expensive peers. Being at the eastern edge of the Tokyo conurbation, Keisei is a beneficiary of Tokyo’s positive demographics versus Japan-wide peers, a key factor in driving growth (or lack of de-growth) over the longer-term.

(link to my insight: StubWorld: Keisei Electric And Taking The Mickey. Plus First Pac and Swire

Also in the insight link above:

  • At a ~79% discount to NAV, First Pacific Co (142 HK) has never traded wider. First Pac may be cheap, but the company only trades ~US$1mn/day, plus it’s a cross-border Holdco into the Philippines and Indonesia. Now would be a good time for the company to undertake buybacks or some other restructuring initiative to narrow the NAV discount. 
  • I see Swire Pacific (A) (19 HK)‘s discount to NAV at ~46%. The discount and the implied stub have never been wider/lower since Swire Properties (1972 HK)‘s listing in January 2012.  In Cathay Pacific’s Government Stop Gap, I viewed Swire injecting HK$5.3bn to maintain a largely similar stake in a heavily debt-laden airline, when the likelihood of necessary refinancing/rights issues possibly 2-3 years out (or earlier), did not warrant a narrowing in the discount NAV. That is being played out.  Swire is cheap on a look-through P/B of 0.22x. Only property-peer Great Eagle Holdings (41 HK), another holdco, is marginally cheaper, yet it is also illiquid. The peer basket P/B average is 0.4x. But the Cathay overhang remains – it may still be too early to set-up the stub here.

Jesus Rodriguez Aguilar revisits a number of European holdcos (Heineken NV (HEIA NA)Groupe Bruxelles Lambert Sa (GBLB BB), and Investor AB (INVEB SS)) in Selected European Holdcos and a DLC: June Report

M&A – ASIA

National Storage REIT (NSR AU) (Mkt Cap: $1.3bn; Liquidity: $11mn)

Since Gaw Partners (on the 27 Feb), Warburg Pincus (28 Feb) and Public Storage (PSA US) (18 Mar) abandoned their proposals, NSR completed an institutional placement of 191.1mn shares (24% of shares out) at $1.57/stapled security on the 6 May, raising A$300mn. Abacus Property (ABP AU) became a substantial shareholder on the 15 May, and after being excluded from the May placement, it bumped its stake in NSR to 8.09% on the 1 July from 7.09%. Abacus has been an active acquisition player in this space, and as far back as 2005 – it is unlikely to stop here.

  • Abacus raised A$250mn in July last year to ostensibly fund its portion of the AOF Offer. According to its 1H20 results (page 31), Abacus has a maximum target group gearing of up to 35%.  It was 26.8% after the settlement of 99 Walker Street (A$311mn) and A$63mn of self-storage acquisitions earlier this year. This suggests Abacus can take on a further A$450mn before breaching its gearing limit. Abacus has a market cap of $1.8bn against $1.96bn for NSR. Trading at 0.9x P/B, a scrip offer for NSR is out of the question. To take over NSR, Abacus needs to partner up. 
  • In National Storage REIT: Just Plain Nasty, I recommended buying NSR at 0.7x P/NTA. That was the right call. NSR now has a market cap, netting off the $300mn placement, almost exactly in line with its undisturbed value prior to Gaw approaching the company in January this year.  In its 1H20 results released on the 26 Feb, the NTA per stapled security was A$1.77, up 9%. Taking into account the May placement and 2H20 earnings, I estimate the NTA is roughly the same.  At ~A$1.90/share, or ~7% above my estimated NTA, NSR is looking fairly valued. But there is upside from here should a bidding situation unfold.  Gaw & Warburg tabled indicative proposals at a 24% premium to the NTA; Public Storage’s was 36%. Downside appears limited.  

(link to my insight: Renewed Takeover Talks for National Storage After Abacus’ Stake Creep)


Accordia Golf Trust (AGT SP) (Mkt Cap: $0.5bn; Liquidity: $1mn)

There is now – after 7 months – an official Divestment Proposal for a purchase consideration of ¥61.8bn for the 88 golf courses, which is 0.06% higher than the initial indicative proposal amount from ¥61.76bn to ¥61.8bn. The Consideration is effectively the same as proposed last November less the run-rate of dividends since.  It is a premium of 4-5% above NTA and NAV, and 13-18% above “value” for the TK interests. This is not an enormous premium but it is not bad. There aren’t that many golf course buyers out there and trust/REIT interests in Japanese assets are trading wide-ish.
  • Transaction costs for the divestment and winding up of the trust, which would become a cash trust for purposes of the Listing Rules, are about 3%. That means Net Consideration Per Unit is likely to be (using a SGDJPY rate of 77.00) about S$0.722/unit. That will be split into two or more payments with roughly 92% of the Divestment Consideration at the TK level (94.8% of total net consideration to unitholders) to be paid out in the 25-day period after Completion, which is expected in Q3.  JFTC approval and EGM approval are needed. The first payment could be made by end-Sep. 
  • If you own and this trades at S$0.72 or higher, and you want to be long something else, sell immediately.  If you are an arbitrageur, S$0.715 gets you 2.5-3.5% annualized. S$0.71 probably gets you 5.0-6.5% annualized if you buy now.
  • If you are a long-only investor and you want to “hide out” in something which won’t move, you could pay up to S$0715 and you probably would not lose money, but beware that you are long JPY so you’d want to hedge into SGD. The forward will cost you something because of the interest rate differential. 

(link to Travis Lundy‘s insight: Accordia Golf Trust Buyout… A Gimme But…. )


Leyou Technologies (1089 HK) (Mkt Cap: $1.1bn; Liquidity: $1mn)

Leyou has been the subject of interest from Tencent Holdings (700 HK)-backed iDreamsky Technology Limited (1119 HK) since September 2019, and  Zhejiang Century Huatong (002602 CH) since May. Bloomberg is now reporting that Sony Corp (6758 JP) was “weighing a bid” for Leyou.

  • The next-generation consoles of Sony and Microsoft are expected to be launched towards the end of 2020. According to Leyou,  the sales of PS4 and Xbox One in 2019 had both declined 20% to 30% year-on-year, and the decline was further accelerating. Existing players also showed less purchasing desire for games on current-generation consoles when expecting the launch of new ones. The two combined factors contributed to the drop of 10% to 20% yoy in sales revenue and subscription businesses of Sony and Microsoft.
  • To secure a toe-hold into China’s growing console development talent, Sony launched the China Hero Project in mid-2016, an initiative to promote and invest in PS4 games funded by Chinese developers. The feedback on PS5, notably the look, has been generally been positive. The trailer is pretty cool.  But Chinese gamers are more concerned with what games the regulator can and cannot let them access. For Sony to consolidate and improve upon its market share, it needs local game content – this is where Leyou comes in.
  • This is still a pre-event and there is no guarantee a firm Offer will emerge. But there are now three interested parties, assuming Bloomberg sources are sound. And major shareholder Yuk Kwok Cheung Charles wants out. Downside appears marginal with respect to peers and the undisturbed price – Leyou’s peer group is up 30% on average since Leyou’s announcement in September, and 22% YTD.  The rumoured CVC/iDreamsky Offer price is ~$3.11/share. I’d get involved – one of these indicative/informal offers from this triumvirate can be expected to turn firm shortly.

(link to my insight: Sony In The Mix To Takeover Leyou?)


Sanyo Chemical Industries (4471 JP)  (Mkt Cap: $1bn; Liquidity: $2mn)

Sanyo Chem and Nippon Shokubai (4114 JP) had – as described in the press meeting on 13 April where the two companies announced a delay in their merger – already decided everything there was to decide about the merger, EXCEPT earnings deterioration at Shokubai suggested a need to revisit the ratio, so the two companies delayed their merger by 6 months.  They now want to get the ratio announced by year-end. Then form the Holdco in April 2021 and be fully integrated less than a year later. That means investors have but 5-6 months left to trade this. So why is the ratio still at the old merger terms?   

  • The Sanyo Chem CEO Ando-san made zero bones about it. He said the only reason for the delay was to reassess price.  That suggests to Travis something more than a 5% move. Perhaps Sanyo Chem is looking at a 10% bump? Perhaps more? The current market ratio is trading 0.56% above the original announcement price, which is about the same level as the price ratio before the deal was first announced over a year ago (and after which Sanyo Chem’s FY20 OP forecast fell 13% and Shokubai’s fell 60+%). If you think there could be 10% upside vs 0.56% downside, that sounds like a good reward:risk.
  • Any number of fundamental ratio observations suggest a 15-20% bump would not be remiss. Sanyo Chem has a ~40% stake in a new polymer resin battery company where lithium-ion batteries cost 60% less to make and are safer than normal lithium-ion. They are partnered with the guy who invented the idea. To Travis, if the deal breaks tomorrow at current pricing in the market, Travis’d rather be long Sanyo than Shokubai. 
  • If you own Nippon Shokubai, look to switch into Sanyo Chem at 0.82-0.85.  If you are interested in the combo, get long Sanyo Chem.  If you like the ratio bet, Buy Sanyo Chem and short Nippon Shokubai. 

(link to Travis’ insight: SanyoChem/NipponShokubai – Ratio Is a Buy)


Viglacera Corp (VGC VN)  (Mkt Cap: $0.4bn; Liquidity: $1mn)

The board of Vietnam Electrical Equipment JSC (GEX VN) (also known as Gelex) – the second-largest shareholder of well-known Vietnamese construction material maker and industrial park developer Viglacera – “officially” announced its intention to purchase more shares in Viglacera through a public offer. Gelex currently holds 24.97% of Viglacera, with direct ownership of 5.54% and indirectly through its subsidiary Gelex Electric (19.43%). The largest shareholder is still the Ministry of Construction at 38.85%. The number of shares to be bought is 95,000,000 (21.19%), which would bring their holding to almost 207mm shares and ~46.51% of shares out. 

  • This is the start of a process. It may be a few months before we know the price. Determining the Tender Offer Price, there are minima, and because the filing has not been made yet, depending on how long it takes to make the filing, the floor price might be quite a bit higher than where it would be if they filed on Friday (VND 17,917).
  • The timing of the Tender is unclear, but so is the timing of the Ministry of Construction’s possible divestment.  It is eminently possible that Gelex is going to launch its Tender Offer before the MoC is prepared to sell, and that it will achieve a 46+% stake by buying the extra 21.2% from the public, which would be about 59% pro-ration.  This would suit Gelex and probably suit the MOC as well. It is possible also that the MoC will participate to the extent of the Tender Offer quantity (95mm shares), in which case minimum pro-ration would be ~37%.
  • We do not know the min pro-ration, We do not know the price. How much does MoC want? What price will Gelex pay? The price will be decided, Vietnam style, by the General Director, in the filing to the State Securities Commission.  The trade will be to buy the stock on dips.  For the moment, this looks like it goes in the “too-hard” bucket until the price moves away from the 95mm shares = VND 2 trillion price level. Travis also believes the stock is relatively inexpensive on a fundamental basis given the practically ideal space that it is in.

(link to Travis’ insight: Gelex Officially Decides to Go After Viglacera – A Vietnamese Pre-Event)


Iberdrola SA (IBE SM) has raised its bid in Infigen Energy (IFN AU) to A$0.89/share. Iberdrola has despatched its Bidder’s Statement and First Supplementary Bidder’s Statement.  UAC Energy has declared their A$0.86/share bid Wholly Unconditional (they have 13.4%). Here is UAC Energy’s Second Supplementary Bidder’s Statement. Infigen Board reiterates support for Iberdrola bid and rejects – here is the First Target Statement. An AFR StreetTalk article suggested that an Australia-based infrastructure fund with A$2.5bn in AUM in various windfarms, pipelines, and similar named Infrastructure Capital Group may be poised to make a run at Infigen with a position of just under 5%. 


The AFR is reporting that a determined hedge fund has given Metlifecare Ltd (MET NZ)‘s chairman Kim Ellis until this past Friday to re-engage with EQT, or be shown the door. This hedge fund reckons it has the support of more than 25% of shares out. MET believes that is an overstatement with only 15% of shares out in hedge fund hands.  According to the article: “Metlifecare had approached EQT to work out a revised deal but the price was too high; then EQT came back with a subsequent offer, which was considered too low. The hedge funds now want talks to be fired back up.”


Vantage International (15 HK) has received an Offer by way of a Scheme. The Offeror is Ngai Chun Hung, a director, with 50.2% of shares out.  The cancellation price is HK$0.90/share, an 80% premium to last close. The price will not be increased. Independent Scheme shares total 33.5% of shares out, therefore the blocking stake is 3.35%. Bermuda incorporated – the headcount test applies.  No mention of dividends

EVENTS

Sembcorp Industries (SCI SP)  (Mkt Cap: $2.2bn; Liquidity: $14mn)

In the three weeks since the 8 June announcement, forward forecasts for SCI and SMM business have fallen, but not dramatically. SCI shares opened sharply higher vs their pre-announcement price of S$1.53/share, but from the open of trading post-announcement, they have underperformed FTSE Straits Times Index by 1.5%. SCM shares have fallen sharply.  The move on SCM was predictable. Travis thinks there is further to go.  The move on SCI is interesting, and while optically it looks like the fall in SCM share price matters because the current SCI includes future spinoff shares as a large portion of its “value.” If the value of the dividend to be received falls, the shares cum dividend will fall. 

  • But investors are missing the forest for the trees. If SCM shares fall a further 50%, the implied value of SCM shares and SCI ex-SCM shares is about 50% each of the current S$1.82/share price. In fact it slightly favours SCM still.  But future SCI will generate 90% of the combined two-company EBITDA in 2020-2021, and 95% of the EBITDA attributable to SCI ownership. 
  • The forward implied PER and EV/EBITDA of SCI are too low. A couple turns higher on EV/EBITDA out to 2022 would get the business closer to where peers trade, and that would imply a significantly higher share price (in effect a tripling of the implied SCI share price, or a doubling of the current price). To get to a 10x PER would require a near-doubling of the current share price. 
  • The Trade is to get long SCI. The timing is tough.  The classic “spinoff trade” is to buy the parent in order to get the spinoff, then sell the parent as soon as the spinoff spins. This trade is the opposite. If you could hedge your SMM now, you would, and SCI ex-SMM on a forward basis is a great thing to buy.  The problem is hedging is difficult or impossible. There is not much borrow at all.  As long as SMM shares continue to fall in price, there may be reluctance on the part of many to buy SCI shares. That is short-term wise long-term foolish in my opinion.
  • The next 30% down on SCM shares will lower the “real-time TERP” by 10%. The thing which SCI is going to spin off to you is the “real-time TERP.” If you are a spinoff investor, watch for the right timing. But if we are talking about future SCI having 50-100% upside or more, and the TERP of SMM having downside of 10-20% (20% fall in TERP would get you to a trading price well below S$.20/share), timing matters less than you think it does.  A large investor should look at what the business is on a forward basis. Sure you will get SMM shares dumped on you, and you can sell them for what you think you should, but the SCI stub is the prize. 

(link to Travis’ insight: Thinking About Sembcorp Industries’ Future – Be Bigly Bullish)


In Hankook Technology Group:  Chairman’s 2nd Son Takes Over But It Is Not Over Yet!, Douglas Kim discussed news that Hankook Technology Group (000240 KS)‘s Chairman Cho Yang-Rae sold his 23.59% stake to his 2nd son Cho Hyun-Bum in a block deal. As a result, the 2nd son Cho Hyun-Bum’s stake in Hankook Tech will increase from 19.3% previously to 42.9%. 


As announced in India’s 2019 Union Budget and confirmed by the Ministry of Finance in October 2019, the Foreign Portfolio Investment limit in companies was raised from 24% to the sectoral limits effective 1 April 2020. FTSE has now confirmed their implementation of the new Foreign Ownership Limits (FOL) in India. MSCI has just announced that they will defer the implementation of the FOL increases pending clarifications on the timeliness, quality and standardization of the data provided by NSDL & CDSL. In India Foreign Ownership Limit Increase – FTSE Flows Staggered, MSCI Defers Implementation Yet Again, Brian Freitas reckons Kotak Mahindra Bank (KMB IN) could be the biggest beneficiary of the changes since it will enter the FTSE indices. From the shareholding pattern ending 31 March 2020, there was just over 23% foreign room. However, the stock may not be added to the FTSE indices if the foreign room is below 20% as of 30 June 2020.


AMFI publishes a list of stocks every January and July to categorize stocks into large-cap, mid-cap and small-cap segments of the market. For the six months ending 30 June 2020, Brian sees quite a few changes due to the volatility in the markets and active fund managers will need to buy/sell these stocks to align with the new categorization. In India Stock Classification Changes – Active Portfolio Churn, Brian recommends going long stocks that are migrating upwards and sell/ go short stocks moving to a lower market cap category. The stock expected to move from mid-cap to large-cap are SBI Cards (SBICARD IN)Adani Green Energy (ADANIGR IN)Abbott India (BOOT IN)Indraprastha Gas (IGL IN)Cadila Healthcare (CDH IN)Alkem Laboratories (ALKEM IN)Tata Global Beverages (TGBL IN)Mrf Ltd (MRF IN) and Whirlpool Of India (WHIRL IN). The stocks expected to move from large-cap to mid-cap are Piramal Enterprises (PIEL IN)Yes Bank (YES IN)Power Finance (POWF IN)ACC Ltd (ACC IN)Kansai Nerolac Paints (KNPL IN)Rural Electrification (RECL IN)ABB India Ltd (ABB IN), Oracle Financial Services (OFSS IN) and Zee Entertainment Enterprises (Z IN).

JAPAN ETFs

A significant majority of companies have a fiscal year-end on 31 March. That leads to a huge number of AGMs at the end of June, with one or two days accounting for more than a quarter of listed companies’ AGMs. It also means there are dividend ex-dates twice a year when 80+% of the dividends paid out by large Japanese companies on those two days alone. And that causes large dislocations in delta and style variance for a bit over a week. This was last discussed here.  There are behavioural and style biases to do with the tax year and individual investors.  Then there are behavioural and style biases to do with what foreign investors do (discussed before here and still relevant) – less seasonal but still significant. But you’d think that ETFs would be different. They are not. They too have a weird seasonality. And as discussed by Travis in The Annual Japan ETF Dividend Ding, it comes to a head this Monday-Wednesday.

M&A – UK

Cello Group Plc (CLL LN) (Mkt Cap: $0.2bn; Liquidity: $1mn)

On 1st July, UK-based Healthcare marketing services provider Cello announced they had received a Takeover Offer from US-based PE firm Arsenal Capital Partners. The Deal values the company at a market cap of £179mn.  The Offer Price will be 161 pence and the consideration will be in the form of cash. The Shares of Cello are currently trading above terms at 162 pence. This is a friendly all-cash Deal. The board has agreed to the Terms and unanimously recommended Shareholders to vote in favour of the Deal.  The Scheme requires approval from Target Shareholders representing 75% of Cello’s Shares.  Cello Target Shareholders holding 35.2% have already shown support.

  • If these irrevocables remain unchanged, the Deal could require Target Shareholders holding up to 42,416,117 shares out of the remaining 80,017,898 shares (outside the irrevocable undertakings and non-binding letters of intent) to vote in favour – an approval rate of 61.4%. Furthermore, any potential absenteeism (typical of shareholder meetings) could mean the actual requirement might be lower in reality. Janaghan Jeyakumar believes Target Shareholders might give the nod for the following reasons.
  • The Offer comes at an all-time high price and translates to healthy premia of 43.8%, 40.9%, and 28.3% to the undisturbed price, 3-month VWAP, 6-month VWAP respectively.  The EV/EBITDA (LTM) multiple of 13.3x offered for Cello is higher than that offered for Huntsworth (HNT LN). Although the forecast EBITDA growth is higher for Cello, on a growth-adjusted basis, both EV/EBITDA multiples seem quite similar.
  • This transaction is expected to close in Mid-August. The expected timeline is quite similar to the Huntsworth – CD&R Deal which took approximately two months to complete. Avoid buying the stock above Terms. If the price drops below Terms, this could possibly become suitable for a short-dated Rate-of-Return Trade or a low-cost bump option, but Janaghan doesn’t expect a bump. He expects the Deal to complete as-is.
(link to Janaghan’s insight: Cello Health: Trading Above Terms, Bump Needed?

M&A – SAUDI ARABIA

Samba Financial Group (SAMBA AB) (Mkt Cap: $14bn; Liquidity: $13mn)

Saudi Arabian banks National Commercial Bank (NCB AB) and Samba announced they had entered into a “Framework Agreement” on 25th June 2020 in order to begin “a reciprocal due diligence process and to negotiate definitive and binding terms of a potential merger” between the two entities. The two parties have also agreed on an Exchange Ratio Range on a non-binding basis. Based on the outcome of the due diligence process, the shareholders of Samba will receive between 0.736 and 0.787 newly issued shares of NCB in exchange for every share they hold in Samba. Right now, given the dividend differential, this is trading roughly at the lower end of terms.

  • This is a Non-Binding Deal. At this point, neither party is under any obligation to proceed with the Potential Transaction and there can be no assurance the Deal will be completed even if both Parties agree to a Binding Deal. If this turns into a binding agreement, the Transaction will be completed by way of a “merger” where National Commercial Bank will be the Merging Bank (“Surviving Entity”) and Samba would be the Merged Bank (“Extinct Entity”).  The parties expect to conclude due diligence and sign a definitive agreement within approximately 4 months. 
  • This Deal is likely to require approvals from shareholders of both companies and the acceptance threshold is likely to be “three-quarter majority vote of shares represented at the meeting”. But Public Investment Fund, Public Pension Agency, and General Organization for Social Insurance collectively own 41.5% and 54.9% of total shares outstanding in Samba and NCB respectively. However, according to Article 191 of Companies Law, “a partner who owns shares in the merged and merging companies may vote on the merger decision only in either company.”  This creates a weird situation and may need some clarification. 
  • If you are inclined to think that this deal will be pushed through politically, then you probably want to own Samba. If DD is “successful” then it gets done at the top end. If you think it does not get done because like last year’s potential deal between NCB and Riyad, there are differences in valuation, this could fall 15%. That suggests the reward/risk ratio here between the two banks is 1:3 or a 75% likelihood this gets done. All told, Travis would be hesitant to put this trade on right now without a feeling that Samba management might fight for a bit more upside. Travis would want at least another 1%/month relative upside. That could be a 1% wider spread in a month, or it could be this spread in 2 months.
(link to Travis’ insight: Doing the Big Bank Samba in KSA

M&A ROUND-UP IN JANUARY

For the month of June, 20 new deals were discussed on Smartkarma with an overall announced deal size of ~US$12bn. The average premium for the new deals announced in June was ~33% and the YTD average premium for all deals discussed on Smartkarma is 32%.  The average for all deals discussed on Smartkarma in 2019 (145 deals all-in) was 31.5%.

INDEX REBALS

Nearing the last month of the NIFTY Index (NIFTY INDEX) review period that runs from February to July, four stocks are eligible for inclusion HDFC Standard Life Insurance (HDFCLIFE IN)SBI Life Insurance (SBILIFE IN)Divi’S Laboratories (DIVI IN) and Dabur India Ltd (DABUR IN) while the four lowest-ranked stocks by average free-float market cap and at risk of exclusion are Zee Entertainment Enterprises (Z IN)Bharti Infratel (BHIN IN)Gail India Ltd (GAIL IN) and Vedanta Ltd (VEDL IN). In NIFTY50 Index Rebalance Preview – Maxing Out The Limits, Brian thinks Avenue Supermarts (DMART IN) ranks very highly on market cap and is a constituent of the Nifty100 Index but it does not have listed Futures & Options (F&O), a prerequisite for inclusion. There is still time till end July for F&O to be introduced which would make the stock eligible for inclusion in the Nifty 50 index. The index rules allow for a maximum of 5 changes to the index constituents in a calendar year. With only one change in the March review, 4 changes in September would be the maximum permitted.


As discussed by Brian in NIFTY50 Ad-Hoc Index Rebalance: Vedanta Out, HDFC Life In the Index Maintenance Sub-Committee (IMSC) of NSE Indices Limited made an ad-hoc change to the NIFTY Index (NIFTY INDEX) excluding Vedanta Ltd (VEDL IN) and including HDFC Standard Life Insurance (HDFCLIFE IN) with effect from the close of business on 30 July to coincide with the Futures & Options (F&O) expiry. With this change, we expect three changes in the next regular rebalance in September. We expect the inclusions of SBI Life Insurance (SBILIFE IN)Divi’S Laboratories (DIVI IN) and Dabur India Ltd (DABUR IN) while the three lowest-ranked stocks by average free-float market cap and at risk of exclusion are Zee Entertainment Enterprises (Z IN)Bharti Infratel (BHIN IN) and Gail India Ltd (GAIL IN).


SK Biopharmaceuticals (326030 KS) is up a lot since its IPO. The question now on a lot of investors minds is the possibility of index inclusion. It is almost certain to be included as discussed by Sanghyun Park in SK Biopharmaceuticals: KOSPI 200 Inclusion Event and Brian in SK Biopharmaceuticals – Index Fast Entry Possibilities: KOSPI200, FTSE, MSCI.

SHANGHAI/SHENZHEN CONNECT

In Hong Kong Short Interest: From the Wuhan Lockdown, The Market Low, Until Now at end-May, I analyzed how shorts behaved in 2020, using specific notable points in time as reference points (at the time of the lockdown in Wuhan (23 Jan), the low of stock markets in late March) against where we were then. In something of a companion piece, this insight looked at the holdings via the Shanghai & Shenzhen Connect into Hong Kong stocks (i.e. southbound holdings) at these moments in time.

  • I’ve broken down these holdings into various industries, both in HK$ terms and as a % of the accumulated market caps of the companies into which the Shanghai/Shenzhen holdings are held. I’ve also looked into the top price to book companies via these connect holdings to gauge if any meaningful pattern emerges.

(link to my insight: Shanghai/Shenzhen Connect: Holdings From the Wuhan Lockdown, The Market Low, Until Now)

OTHER M&A & EVENT UPDATES

  • Vedanta Ltd (VEDL IN) is reportedly trying to upsize its US$2.5bn loan to US$2.75bn, leaving the $1.75bn to be paid back quickly on dividend payouts from HZL at the same level. In the evening of 2 July, the IMSC has decided to replace Vedanta from various indices on account of proposed voluntary delisting. The changes shall become effective from July 31, 2020 (close of July 30, 2020). This will affect the NIFTY 50, NIFTY Next 50, NIFTY 500, NIFTY 100, NIFTY LargeMidCap 250, NIFTY 200, NIFTY Metals, NIFTY Commodities, NIFTY MNC, NIFTY 50 Value 20, and a few others. 
  • Skyworth Group Limited (751 HK)‘s Offer doc has been delayed until the 31 July, from 8 July originally. This was largely to be expected.
  • SAIC Motor HK Investment Limited – presumably an entity under SAIC Motor (600104 CH) – will acquire 20.87% of shares out in Car Inc (699 HK) from UCAR, and 14.76% from Amber Gen – both at $3.10/share – taking its take to 28.92%. 

  • A-Living Services (3319 HK) has received formal approval from the CSRC converting the H-share full circulation program, enabling the company to convert up to 900mn domestic shares & up to 86.66mn overseas-listed foreign shares into H shares.
  • Languang Justbon Services (2606 HK) has received formal approval from the CSRC converting the H-share full circulation program, enabling the company to convert up to 127.6mn domestic shares into H shares.
  • In its monthly update, CGN New Energy Holdings (1811 HK) says there is no update
  • KKR acquired 427mn shares in First Gen (FGEN PM), or 11.9% of shares out, bringing its total to 12.55%, based on the initial holding – although this total % holding is not specified in the announcement. All shares tendered would be purchased, implying 100% pro-ration.

  • As expected, the dispatch of Jinmao Hotel & Jinmao (China) Hotel Investments and Management Limited (6139 HK)‘s Scheme Doc has been delayed to the 17 August (6 days past my initial estimate) from 3 July.
  • Beijing Jingneng Clean Energy (579 HK) suspended pursuant to the Code on Takeovers and Mergers. Looks like another “clean energy” take out.  
  • Perennial Real Estate Holdings (PREH SP)‘s Offer Co is out. The first close is the 3 August. 

CCASS

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

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

Name

% chg

Into

Out of

GBA Dynamic (1189 HK)
18.71%
Emperor
Satinu
13.76%
Guotai
Outside CCASS
20.59%
Huarong
Outside CCASS
18.28%
MS
Outside CCASS
12.29%
Citi
Outside CCASS
12.20%
Black Marble
Huarong
10.14%
Get Nice
Kingston
Source: HKEx

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

Name

% chg

Into

Out of

16.34%
Yue Xiu
Outside CCASS
10.59%
MS
Outside CCASS
Suoxinda (3680 HK)
34.02%
CMB
Outside CCASS
Source: HKEx

3. Cathay Media & Education IPO Initiation: Tune In

Pipeline

Cathay Media and Education (1981 HK) is a media group, built on twin pillars of a leading TV/film production business and a higher education business focused on media and arts. It has launched a Hong Kong IPO to raise net proceeds of HK$1,103.5 million ($142 million) at the mid-point of the IPO price range of HK$2.86-3.10 per share. 

The China media sector is characterised by high revenue volatility (due to regulations and the timing of the delivery of productions) and high capital intensity. Our analysis suggests that Cathay is an attractive play for investors seeking exposure to the relatively faster-growing China media sector but with a lower risk profile due to the relatively stable revenue and cash generation from the higher education business. 

4. Asia HY Monthly – Framework For Discerning Fraud In Asian Companies – Lucror Analytics

Following the recent string of high-profile fraud scandals, from Luckin Coffee in China to Wirecard in Germany, our In-Focus section this month deals with our framework for discerning fraud in Asian companies. We also give an overview of common techniques used to manipulate financial information in Asian markets, and present case studies of alleged or confirmed fraud drawn from our coverage universe.

The Asia Monthly focuses on providing updates on recent events, information on new issues and spread movements, as well as summarising our top picks and discussing specific areas of interest in the “In-Focus” section. The Asia Monthly is intended to broaden investors’ understanding of the Asian USD high-yield market.

5. SISB: Resilient Business & Robust Growth Make a Defensive Play

Slide10

We initiate coverage on SISB with a BUY recommendation based on a target price of Bt11.20, implying an upside of 15% from the current price. We derive our target price from a 30% premium to the PB/ROE of Thai Consumer Discretionary due to SISB’s resilient business and apply a 15% small-cap discount.

Investment thesis:

  • Growing wealthy class increases demand for private international education
  • Renovations and ongoing expansions help growing student capacity
  • Maintaining high educational standards to remain competitive

Risks: Potential shortage of qualified educators, increased competition, dependency on key management, adverse regulatory changes regarding private education.

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Brief Consumer: Yihai Kerry IPO: Shifting Consumer Purchasing Patterns Make Yihai Kerry An Enticing Long-Term Play and more

By | Consumer Sector, Daily Briefs

In this briefing:

  1. Yihai Kerry IPO: Shifting Consumer Purchasing Patterns Make Yihai Kerry An Enticing Long-Term Play
  2. Beyond Meat (BYND US): Index Inclusion Corrodes Short Interest. Upbeat Times.
  3. Cathay Media & Education IPO: Valuation Insights
  4. Major Accordia Golf Trust Shareholder Has Issues With Price & Process
  5. Jiumaojiu (九毛九) Lock-Up Expiry Trade Idea – Heady Valuation with Significant Overhang

1. Yihai Kerry IPO: Shifting Consumer Purchasing Patterns Make Yihai Kerry An Enticing Long-Term Play

Image 86829476451594010459145

  • Months after the initial announcement, 99.99%-owned subsidiary of Singapore’s Wilmar International (WIL SP), Yihai Kerry Arawana Holdings Co Ltd (YKA CH), filed for an IPO to list on the Shenzhen Stock Exchange’s ChiNext Board. The company expects to raise RMB 13.78bn ($1.95bn) through selling up to 542m new shares (10% post-IPO shares of Yihai Kerry). 
  • Yihai Kerry is one of China’s largest processors and distributors of agricultural and consumer products. The company has around 29,000 employees, more than 70 production bases and over 100 production enterprises in China.
  • The company is mainly involved in industries such as oil seed crushing, edible oil refining, speciality fats, oleochemicals, processing of corn, wheat and soybean, sustainable multi-stage processing of rice, food and beverage, and grain and oil technology R&D.
  • Its products include edible oil, rice, flour, fine dried noodles, rice noodles, soy milk, special grains and oils, food raw and supplementary materials, oleochemicals and sells them under famous brand names such as “Arawana”, “Olivoila”, “Orchid”, “Wonder Farm”, “Neptune”, “Fengyuan”, “Golden Delicious”, “Reyland”, and “Jiejin 100”.
Source: Company Disclosures
  • According to Nielsen, Yihai Kerry is ranked No. 1 in China’s packed edible oil, rice, and flour markets.
Source: Company Disclosures
  • The company is also ranks high in the feed raw materials and oil and fat technology industry. In addition, Yihai Kerry is actively developing new products, and has made great progress in the field of noodles, condiments, cosmetics, and other sub-products.

Use of IPO Proceeds

Project Category

Use of Proceeds (In RMB bn)

Comprehensive Projects -Kitchen Food

5.91

Edible Oil Projects – Kitchen Food

3.78

Flour Projects – Kitchen Food

1.96

Other items – Kitchen Food

2.22

 Source: Company Disclosures

2. Beyond Meat (BYND US): Index Inclusion Corrodes Short Interest. Upbeat Times.

Screenshot%202020 07 03%20at%2011.44.24%20am

Beyond Meat Inc (BYND US) was included in the FTSE Russell indexes, most notably the Russell 3000 Index (RAY INDEX) and the Russell 1000 Index last week. With few large-sized ETFs from Blackrock Inc (BLK US) and Vanguard tracking these indices, Beyond Meat Inc (BYND US) will likely see buying support in the near term as it gets added to these portfolios. Unsurprisingly, the short interest level at the counter is at its lowest now. The stock has been a strong outperformer after COVID-led fall in the broader market in end-March.  Widespread COVID infections at several of the US meat processing facilities had disrupted the meat market temporarily and turned the focus on Plant-based Meat producers like Beyond Meat Inc (BYND US). Additionally, it announced plans to retail it’s Beyond Burger in 50 Freshippo stores ( Alibaba Group (BABA US) ‘s futuristic retail stores) in Shanghai starting this weekend. Starbucks Corp (SBUX US) has however tied up with Impossible Foods Inc (1249597D US) to offer breakfast items with plant-based protein this summer. Management has guided towards a fall in margins and volumes in the upcoming quarterly results.

In the note below, we discuss our investment view on the stock based on the short and longer-term impact of the above-mentioned updates.

3. Cathay Media & Education IPO: Valuation Insights

Forecasts

Cathay Media and Education (1981 HK) is a media group, built on twin pillars of a leading TV/film production business and a higher education business focused on media and arts. It has launched a Hong Kong IPO to raise net proceeds of HK$1,103.5 million ($142 million) at the mid-point of the IPO price range of HK$2.86-3.10 per share.

In our initiation note, we stated that Cathay is an attractive play for investors seeking exposure to the relatively faster-growing China media sector but with a lower risk profile due to the relatively stable revenue and cash generation from the higher education business. Our valuation analysis suggests that the price range is attractive. 

4. Major Accordia Golf Trust Shareholder Has Issues With Price & Process

Screenshot%202020 07 05%20at%201.41.04%20pm

On Friday 3 July after the close, Hibiki Path Advisors – the second largest shareholder in Accordia Golf Trust (AGT SP) and one who has been noisy on behalf of all shareholders – issued a Press Release which started noting the 29 June announcement of a Board-supported deal by saying…

We would like to publicly announce that we are disappointed with this price which is unarguably low based on our understanding. We are hoping that all independent unitholders agree that this price does not provide “reasonable” premium to fully take over a publicly traded entity generating a significantly attractive cashflow. We will be voting against the proposed divestment in the case the price is not revised higher. As the leading minority unitholder, we are also open for constructive negotiation with the bidder.    [I added the bold]

This comes after a public letter to the board from 15 June shared to fellow unit-holders more recently, and at least one earlier letter to the board. 

There are numerous issues mentioned, some of which have been noted by the Board in the deal announcement. 

It is worth a discussion. 

5. Jiumaojiu (九毛九) Lock-Up Expiry Trade Idea – Heady Valuation with Significant Overhang

Image 225817815101593752051540

Jiumaojiu (9922 HK) (JMJ)’s IPO lock-up period will expire on the 14th of July, 2020.  We have covered the company earlier in:

In this note, we will look at the potential sellers upon lock-up expiry and provide an update of how the company has performed since listing.

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Brief Consumer: SATS: Traffic -99.5% in April and May; How Much Worse Can It Get? and more

By | Consumer Sector, Daily Briefs

In this briefing:

  1. SATS: Traffic -99.5% in April and May; How Much Worse Can It Get?
  2. China Internet Weekly (8Jun2020): AMD Said Not to Buy AMD on Pinduoduo.
  3. Meidong: Time to Take Some Money off the Table?
  4. ECM Weekly (7 June 2020) – JD & NetEase HK Bookbuild, Burning Rock & Nongfu Spring Valuation

1. SATS: Traffic -99.5% in April and May; How Much Worse Can It Get?

Image 3026459941591588183053

SATS Ltd (SATS SP) is a Singapore travel monopoly that has rarely been cheap given its great dividend track record. SATS controls 80% of flight service operations around Changi Airport, one of the top-20 airports in the world. Its most important client Singapore Airlines (SIA SP) has been saved by Temasek and retail shareholders.

According to IATA data Changi flight operations were down -99.5% in April. We expect the same in May. June will see some improvement with travel lines re-opening between China/SG and Singapore Airlines (SIA SP) starting more routes globally next week.

While we continue to wait for FY20 earnings (FY ends 31/3/20) all bad news might be priced in already. With Singapore elections approaching in July and pressure from other global capitals which are re-opening, Singapore can’t afford to have its air-links closed for much longer. Things are set to get incrementally better from here, not worse.

Timing a bottom is always difficult but risk/reward on a long-term basis could be attractive even after a 25% rally from the recent 2.6 SGD low in the past ten days. Read below for more details.

2. China Internet Weekly (8Jun2020): AMD Said Not to Buy AMD on Pinduoduo.

Image 635823921591503929930

  • AMD (AMD) claimed they had not authorized Pinduoduo (PDD) to sell any of their products.
  • Kuaishou, the second largest short video app in China, will promote JD.com (JD) instead of Alibaba (BABA) and Pinduoduo (PDD).
  • The State Post Bureau of China expected home delivery orders to increase by 39.6% YoY in May.

3. Meidong: Time to Take Some Money off the Table?

Untitled

China Meidong Auto (1268 HK) stock price performance and execution have been stellar over the last two years.  It has left its peers behind by a country mile. I’ve been bullish on this name since 2016 and written about it in a few insights.

Meidong – Multiple Expansion To Facilitate M&A? ( 28th November 2019 ) 

Meidong: A Deep Dive: Looking into 2019 and Beyond ( 26th Feb 2020 )

I also published insights on this name in the past when it was <200 mn USD in market capitalization. 

Meidong: The Next China Auto Dealer to Be Acquired? 

The company recently did a sizeable capital raise for the purpose of “opportunistic acquisitions”. Analyst Sumeet Singh in his insight China MeiDong Auto Placement – Great Track Record but Back-To-Back Deals Don’t Make the Cut has covered the deal in great detail. With over 2.1 bn RMB of net cash, the company has built a war chest now for the purpose of M&A. I do not rule out the possibility of good acquisitions, but with a valuation of 25x/18.8x PE FY20/21, a lot has been baked into the share price. Now that the story of a potential acquisition is well flagged, it’s time to take money off the table. 

My reasons for doing so are : 

1) If Meidong did do an accretive acquisition today, utilizing all the 2+ bn RMB net cash they have, the absolute best-case scenario is a valuation of 8x PE for the target.  This would imply incremental earnings of 250 mn RMB ( on a 700 mn RMB forecast for FY20 ) placing the stock at 20x FY20 and 15x FY21, a valuation slightly above the next best name in this space Zhongsheng Group (881 HK) trading at 16x FY20 and 14x FY21. 

2) I would argue that an 8x valuation may be hard to find in China ( except if you are Zhengtong and Baoxin, but will they sell ? ) given luxury auto dealers have had a decent run in this environment where an auto-recovery is being baked in. Most acquisitions that tend to happen at very cheap valuations in China are turn around stories where the targets are making losses. Would the market take such an acquisition by them positively?  With the valuation Meidong trades at, everything they do from hereon will have to be perfect. 

3) The founder recently sold down 4.45% of his stake. 

source: company filings 

Whilst the founder is still the majority owner of the business, a 4.45% stake sale in my opinion is negative. 

4. ECM Weekly (7 June 2020) – JD & NetEase HK Bookbuild, Burning Rock & Nongfu Spring Valuation

Image 86595962421591502029708

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

Hong Kong ECM is looking even busier than next week. This week we got the bookbuild launches of NetEase Inc (NTES US) and JD.com Inc (ADR) (JD US)‘s secondary listings in Hong Kong. NetEase will list next Thursday (11th June) while JD will list the Thursday (18th June) after.

We are also hearing that Hygeia (US$300m) and Immunotech (US$100m) have sought for listing approvals on Thursday and Bohai Bank is trailing closely, seeking approval next week. We covered these companies earlier in:

There are also a number of lock-up expiry events coming up this month, from listings earlier this year/December last year. We had a look at these companies in:

We also had a first look at Nongfu Spring (NON HK)‘s valuation and on-the-ground survey of their products:

China ADR listings were also in play this week despite tension between China and U.S. Dada Nexus (DADA US) debuted well but failed to hold its ground while Legend Biotech (LEGN US), after pricing above its top-end price range, closed 60% higher. We covered the deals and trading update in:

Following the success of Legend Biotech, Burning Rock Biotech (BNR US) launched its IPO price range on Friday. Ke Yan, CFA, FRM has already shared his thoughts on valuation earlier this week:

Overall, ECM activity in Asia has heated up. Placements are more frequent as companies/investors seem to be more opportunistic in locking in cash/profits at these price levels and probably a good time to keep one’s eyes peeled on IPO lock-up expiry deals.

 Accuracy Rate:

Our overall accuracy rate is 73.3% for IPOs and 65.7% for Placements 

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

New IPO filings this week

  • Shinsun Holdings (Hong Kong, ~US$400m)
  • Excellence Commercial Property (Hong Kong, ~US$300m)
  • Pop Mart (Hong Kong, ~US$200m)

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

NameInsight
Hong Kong
Archosaur Archosaur (祖龙娱乐) Pre-IPO – Short Life Cycle, Volatile Revenue, but It May Look Different Soon 
Ant FinancialAnt Financial IPO Early Thought: Understand Fintech Empire, Growth & Risk Factors
ByteDance

ByteDance (字节跳动) IPO: How Jinri Toutiao Paves The Way for a Bigger Empire (Part 1)

ByteDance

ByteDance (字节跳动) Pre-IPO: Why Facebook Should Worry About TikTok 

ByteDance

ByteDance (字节跳动) IPO: Tiktok the No.1 Short Video App for a Good Reason (Part 2)

ByteDance

ByteDance (字节跳动) Pre-IPO: How Has It Done in 1H? 

ByteDance

ByteDance: The Unlisted Company’s Video Apps Leading the Market and Threatening Internet Giants 

ByteDance

ByteDance (字节跳动) Pre-IPO: Why Facebook Should Worry About TikTok 

ByteDance

ByteDance (字节跳动) Pre-IPO – Globally the Most Downloaded App for Jan 2020 Driven by India 

GTMH

GreenTown Mgt (绿城管理) Pre-IPO – Sacrificed Margins in Pursuit of Growth, Muddled by JVs 

Helenbergh

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

Hepalink

Shenzhen Hepalink (海瑞普) A+H: A Heparin-API King but Nothing Too Exciting 

Hepalink

Shenzhen Hepalink (海瑞普) A+H: FY2019 Results Snippet and Valuation Update 

Kangji

Kangji Medical (康基医疗) Pre-IPO: Track Record of Growth but Products Too Concentrated 

Kangji

Kangji Medical (康基医疗) Pre-IPO: Superior Financial Metrics, Warrants a Premium 

Kilcoy

Kilcoy Global Foods Pre-IPO – Rapid Earnings Growth on the Back of Margin Improvement 

Kilcoy

Kilcoy Global Foods Pre-IPO – A Lot of Things Still Remain Unexplained 

Megvii Megvii (旷视) Pre-IPO – Remarkable Growth (Part 1) 
Megvii Megvii (旷视) Pre-IPO – A Bet on the Future – Segments, Revenue Drivers and Growth Potential 
Megvii Megvii (旷视) Pre-IPO – The Real Race Is in Research – Founders’ Profile and Talent 
Megvii Megvii (旷视) Pre-IPO – Competitive Landscape and Peer Analysis 
Megvii Megvii (旷视) Pre-IPO –  Initial Thoughts on Valuation 
Nongfu Nongfu Spring Pre-IPO – The Positives – Leaves One Thirsty for More 
Nongfu Nongfu Spring Pre-IPO – The Negatives – Doesn’t Need to List or Expand Production Facilities 
Nongfu Nongfu Spring Pre-IPO – Peer Comparison – Superior Margins and Growth 
Smoore

Smoore Tech (麦克韦尔) IPO: Hidden E-Cigarette Player Behind the FEELM Technology 

Smoore

Smoore Tech (麦克韦尔) Pre-IPO: 6Y and 1H2019 Financials Show Technology Driven Growth 

Smoore

Smoore Intl (思摩尔国际) Pre-IPO: Tripling Capacity in Three Years 

Smoore

Smoore Intl (思摩尔国际) Pre-IPO: Thoughts on E-Cig Regulation 

Tasly Tasly Biopharm (天士力生物) IPO: Visible Growth from Approved Drug but Lacks Blockbusters 
Zhenro Svc Zhenro Services (正荣服务) Pre-IPO – Diversifying Away from Zhenro Property Group 
Zhenro Svc Zhenro Services (正荣服务) Pre-IPO – Peer Comparison and Thoughts on Valuation 
WeDoctor WeDoctor (微医) Pre-IPO -App Walk Through – The Online Medical Directory and More 
WeDoctor WeDoctor (微医) Pre-IPO – A More Focused Online Medical Svc Provider than Ping An Good Doctor 
India
ASK ASK Investment Managers Pre-IPO – Riding on a Wave of Wealth 
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 Hotel

Bharat Hotels Pre-IPO – Catching up with Peers 

Burger King

Burger King India Pre-IPO – Has Been Growing Fast and Plans to Grow Even Faster 

Burger King

Burger King India Pre-IPO – Peer Comparison Yields Interesting Nuggets on Profitability and Capex 

Bajaj En

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

CAMS CAMS Pre-IPO – Quasi Monopoly Status Muddled by Inconsistent Performance 
CMS InfoCMS Info Systems Pre-IPO – When a PE Sells to Another PE… Only One Gets the Timing Right
Crystal CropCrystal Crop Protection Pre-IPO – DRHP Raises More Questions than in Answers
ESAF SFB ESAF Small Finance Bank Pre-IPO – Growing Fast but Remains Highly Dependant on a Related Party 
Equitas SFB Equitas Small Finance Bank Pre-IPO – Another Forced Small Finance Bank Listing 
Equitas SFB Equitas Small Finance Bank Pre-IPO – Another Forced Small Finance Bank Listing 
Flemingo Flemingo Travel Retail Pre-IPO – Its a Different Business in Every Country
Emami Cem Emami Cement Pre-IPO – Still in Ramp Up Phase but Shares Pledge Might Lead to an Early IPO 
IRFC Indian Railway Finance Pre-IPO – Low Risk, Low Margin Business 
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
Mindspace Mindspace Business Parks REIT Pre-IPO – Decent Growth but Not All Assets Are Equal 
Mrs. BectorMrs. Bectors Food Specialities Pre-IPO Quick Take – Sales for Its Main Segment Have Been Sta

LIC

Life Insurance Corporation of India Pre-IPO – Early Take on India’s Largest IPO 

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
Penna Cem Penna Cement – Aggressive Expansion Plans Even Though Past Performance Has Been Tepid 
PNB MetPNB Metlife Pre-IPO Quick Take – Doesn’t Stack up Well Versus Its Larger Peers
Samhi Hotels Samhi Hotels Pre-IPO – Assets and Borrowings Are Growing, but Earnings Haven’t Kept Pace 
Malaysia
Mr DIY Mr D.I.Y. Pre-IPO – Largest Home Improvement Retailer in Malaysia 
Mr DIY Mr D.I.Y. Pre-IPO – Store Walk-Through and Thoughts on Value Proposition 
Mr DIY Mr D.I.Y. Pre-IPO – Peer Comparison – Small Stores with Dominant Market Share  
Mr DIY Mr D.I.Y. Pre-IPO – Assumptions and Thoughts on Valuation 
QSRQSR Brands Pre-IPO – As Healthy as Fast Food
Thailand
PTTOR PTT Oil and Retail IPO – F&B Business Is the Profit Driver 
SCGP SCGP Pre-IPO – Shift to Packaging Has Been Aiding Margins but Acquisition Drove up Leverage 
The U.S
CDP CDP Holdings Pre-IPO Review – Highly Reliant on Best Inc. 
CloudMindsCloudMinds Inc Early Thoughts – Still Nascent

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