Thematic (Sector/Industry)

• Japanese equities were slightly higher over the past week, while the yen strengthened to Y146.6 versus the dollar
• Quarterly results in Japan determine the week’s stock winners and losers
• Japan embraces “Trussonomics” with planned supplementary budget ($200b) paid for by new borrowing

• The Global Emerging Markets weekly provides a summary of the key news and related developments impacting the largest countries and constituents of the Global Emerging Markets equity indices.
• Macro data points: China, Taiwan, South Korea, Thailand, Indonesia, Malaysia, and Vietnam PMIs; South Korean exports and inflation
• Companies mentioned:Hon Hai Precision Industry (2317 TT), Foxconn Technology (2354 TT), NetEase (9999 HK), Tencent (700 HK), China Unicom Hong Kong (762 HK)

• The driving force for the big performance growth of domestic culture medium companies mainly come from the logic of import substitution. We think there are investment opportunities in this industry.
• Due to soaring costs of electricity prices, raw material prices and transportation costs, European pharmaceutical plants are facing difficulties in sustaining production. Chinese API enterprises could face expansion opportunities.
• For industries that have been recognized by investors,the market begins to think in terms of long logic from a broader perspective rather than simply tracking the performance of individual companies.

• State-owned China Bond Insurance Co. is expanding a debt guarantee program to help about a dozen property developers issue 20 billion yuan ($2.75 billion) of bonds to shore up an industry that’s mired in a liquidity crisis amid slumping housing sales.
• The debt-support policies are aimed at alleviating financial stress for private companies that are battling an economic slowdown and disruptions caused by the latest wave of Covid-19 lockdowns.
• Defaults by private enterprises are increasing, and investors are becoming more wary of buying their debt.

• A fresh wave of Covid-19 outbreaks and tightened control measures across China are stoking concerns among merchants that logistics disruptions could undermine sales in the annual “Double 11” shopping promotion.

• The event, also known as “Singles’ Day,” is one of the biggest money-earners in the retail calendar.

• But Covid lockdowns are again squeezing logistics in some parts of the country.

• Social platforms and e-commerce platforms used to exist in a symbiosis where the former harnessed consumers’ attention and the latter offered goods for sale, and where ad dollars traded hands in between.
• The rise of Social Commerce has disrupted that status quo forever, with both types of platforms making moves to better delight consumers while capturing a greater share of the economic value.
• While still in its early days, this archetype of Social Commerce is already proving consequential to Southeast Asia’s e-commerce landscape and forcing brands and retail companies to reconsider their online channel mix

• As investors may not really realize the significance and historical opportunities represented by the 20th National Congress, we analyzed the potential future directions of A-share and related investment opportunities.
• The real battlefield isn’t in Taiwan Strait but in capital market.In the final analysis,it is to achieve the subjectivity of RMB rather than an extension of the credit of dollar. 
• Only by making full preparations can China open to the outside world with higher quality. We advise investors to change thinking mode so as not to miss China’s next boom. 

In the next webinar, we have Smartkarma Insight Provider Eric Fernandez, CFA who will be taking us through his top short trade ideas in the US. Have your burning questions answered in the live Q&A session that will follow after Eric’s presentation. 

The webinar will be hosted on Wednesday, 16 November 2022, 17:00 SGT/HKT.

Eric Fernandez, CFA, has 30+ years of research and investment banking experience in company modeling, equity valuation and credit is the backbone of Two Rivers Analytics analytical approach. He founded Two Rivers to remedy a shortfall of traditional short idea generation which relies primarily on thematic, top-down processes. Instead, Two Rivers combines a methodical framework to sift through the universe looking for markers of various types of short candidates, which are subsequently vetted via traditional fundamental analysis. Our Stocks at Risk (SAR 2.0) models are a comprehensive framework for identifying short sale candidates. Each model is tailored to the various types of short situations. The models generate ideas to match different client preferences in shorting styles, from lower beta, long horizon Declining Businesses, to higher volatility Breaking Growth short types. They help in diversifying short portfolios by type, beta, time horizon, risk/return, and other characteristics. On net, this framework produces more ideas, boosting returns, and saving time for portfolio managers and analysts.

• Chinese government will continue to boost the slowing domestic economy by supporting consumption. The A-share consumer staples sector, which is less volatile than discretionary, will be benefited.
• We see attractive stories for Shanxi Xinghuacun Fen Wine (600809 CH), Foshan Haitian Flavouring (603288 CH), Inner Mongolia Yili Industrial (600887 CH) and Fu Jian Anjoy Foods (603345 CH).  
• While they are trading on high-end of peer multiples, their earnings quality, leadership status and product premiumisation provide good justifications for valuation. Also, all of them have solid financial position.  

• Lula’s narrow win in the second round of the Brazilian Presential election has so far passed in relative calm, although sitting President Jair Bolsonaro has yet to concede defeat
• Markets will be hoping for a peaceful transition, and influential Bolsonaro allies have asked Brazilians to respect the result, to avoid social unrest and any potential intervention by the military
• It is unclear how anti-market Lula’s policies will be but we expect downside risk for Brazilian financials and fintechs; Banco do Brasil is in for volatility, Itausa may be defensive

• Utilities have benefited from sector rotation among UK managers over the last year.  Typically an underweighted sector, managers are now overweight by 0.22% on average, the highest on record.
• Over the last year, average weights have increased by +0.55%, the percentage of funds with exposure by +1.18% and 7.85% of the UK funds in our analysis moved to overweight
• Nearly 2/3rds of allocations are in National Grid plc, SSE plc and Northumbrian Water, though UK managers are raising exposure to Centrica, Drax Group and United Utilities. 

In the next webinar, we have Smartkarma Analyst Kyle Rudden, who will be joined by the CEO of Helixtap, Farah Miller. They will run through the ESG landscape in agri commodities through a financial and data driven perspective. Through their discussion on the importance of data in planning ESG goals in supply chains, they will also highlight how Helixtap’s data and products can help companies meet their sustainability targets. 

The webinar will be hosted on Friday, 9 November 2022, 17:00 SGT/HKT.

Kyle Rudden is an ESG (Environmental, Social, Governance) analyst with an alpha-centric approach to ESG research. Previously, an Institutional Investor and Wall Street Journal All-Star sell-side analyst at J.P. Morgan, he believes global sustainability – i.e., environmental stewardship, social equality, and economic prosperity – is imperative, and private-sector capital is its cornerstone. Private-sector capital still has fiduciary responsibilities. Profitability is necessary for sustained impact. The Triple Bottom Line. People, Planet, AND Profit. You can expect his insights to be investigative research into emergent ESG issues; data-driven analyses of deals (pre-IPO ESG research, ESG-focused M&A consequence analyses, etc.); and trading-oriented ideas like ESG short selling and playing ESG index constituency changes. He brings both ESG expertise and traditional investing experience, as well as some rather unique perspectives on ESG (a lesson in governance from Enron, anyone?). Kyle has spent the last decade exclusively on ESG, researching links to equity returns, credit ratings, cost of capital, and yield spreads. He also contributed to ESG reporting standards (SASB and GRI), and the MBA curriculum (Impact Investing) at the Kellogg School of Management.

• An interesting dynamic has emerged over the past few months with mega cap technology companies like Meta, Alphabet, and Amazon all seeing considerable weakness while other pockets of the market have emerged to move higher.
• The market has recently “shaken off” some pretty bad earnings reports from mega cap tech while other pockets of the market continue to see breakouts which is a notable character change from the past few years.
• After seeing mega cap technology earnings results from this past week, some have questioned whether a new crop of market leadership is ready to take over the mantle from the big cap technology companies.

• Google, Temasek, and Bain&Co just released their much-anticipated eConomy SEA 2022 report outlining recent trends and future expectations for South-East Asia’s digital economy. 
• No doubt post-pandemic growth has been tapering but the long-term growth story remains intact. The key focus has switched to the path to profitability versus headline growth.
• Major digital players in South-East Asia will release 3Q results next month with all eyes focused on take rates, contribution margins, and Adjusted EBITDA margins rather than headline growth.

• The Global Emerging Markets weekly provides a summary of the key news and related developments impacting the largest countries and constituents of the Global Emerging Markets equity indices.
• Macro data points: Chinese GDP, industrial production, retail sales, exports; South Korean GDP
• Companies mentioned:SK Hynix (000660 KS), Flipkart Online Services (1398508D IN), Walmart (WMT US)

• After the centralized procurement in Hebei Province included OK lens, products with high gross margin and low market penetration rate seem to be the new trend of centralized procurement.
• Although the current valuation of healthcare industry is relatively low compared with historical levels, that comparison is of little significance due to the fast pace of change.
• In terms of when domestic biotech companies could achieve break-even, there is some logic actually. Investors can estimate the time for biotechs to achieve profitability.

• Consumer electronics retailers and producers benefited a lot from the pandemic, supplying customers stuck at home with kit for work and play. 
• The Olympics also encouraged people to update their TVs and entertainment systems.
• Now, sales are falling to pre-2020 levels due to saturation. Inflationary pressures also mean more people are turning to second-hand options or simply not replacing old appliances at all.

• Semiconductor collapses like today’s are led by memory chips, which are a commodity
• The leading memory manufacturers: Samsung, SK hynix, Micron, and WDC, have announced their 3Q22 earnings, with only Kioxia remaining.  All have suffered substantial revenue declines.
• Memory prices are dropping to cost, and should remain at cost until demand catches back up with supply in late 2023

• Following the purple patch of growth experienced in the wake of accelerated digitization following the COVID-19 pandemic, revenue growth has continued to slow down during FY2023, for the sector.
• Operating margin deterioration has continued, despite significant FX tailwinds, largely due to the inflationary impact of increased employee attrition rates, to record levels, across the industry.
• Given weakening near-term revenue growth prospects and valuation levels barely touching fair value levels, we remain cautious on the sector.

• Southeast Asia’s digital economy is poised to hit US$200 billion in gross merchandise value (GMV) in 2022 – three years earlier than predicted.
• Over the past three years, 100 million users have come online in Southeast Asia, with the region housing over 460 million internet users.
• However, the report stated that after years of acceleration and growth, digital players are more concerned about deepening engagement with current consumers rather than acquiring new ones.

• Chinese steel exports fell four months in a row amid weakening global demand, another signal of the world economy’s precarious situation amid rising inflation and a global energy crunch.
• In September, China exported 4.984 million tons of steel, down 19% from August and up only 1.3% year-on-year.
• It was the lowest monthly export total since May, according to China Customs data

• A dramatic reduction in the value of land purchases by state firms at an auction in the Jiangsu province trade hub of Wuxi this week suggests the noose could be tightening
• It came after China’s Ministry of Finance banned local authorities from using their own state-owned enterprises (SOEs) to inflate their revenue from land sales
• This year, local government income from land sales has plummeted in the wake of the property sector’s crisis of liquidity and confidence, tumbling 28.5% year-on-year in the first eight months, compared with a 12.1% increase in the same period last year.

• We discuss how White Castle, which has one of the most loyal customer base for franchise burger chain in the United States, has been using robots to make French fries.
• In February 2022, White Castle started to roll out Miso Robotics’ Flippy 2 machine robots on about White Castle 100 restaurants in the United States.
• In the next several years, there is a real chance for McDonald’s, White Castle, and Burger King to replace human workers making French fries and burgers with robots.