Smartkarma Originals

• In this Smartkarma Original, we provide a guide on short-sell strategies employed by short-sellers to identify, analyse, and subsequently target companies. We also provide our recommendations to companies to prevent, detect, and combat short-sell attacks.
• We believe companies whose share prices have increased significantly within a short period of time and whose valuations are at significant premiums to their peers become vulnerable for short-sell attacks. The share price of the short-sell targets in our sample increased by 89.2% on average from its 52-week low to the date of release of the short-sell report. The EV/Revenue, EV/OP, P/E, and P/B multiples of the short-sell targets in our sample were at premiums of 241.2%, 37.6%, 42.5%, and 118.7% on average over their peers, respectively.
• Short sellers also seem to target companies that significantly outperform their peers on operating matrices. Short-sellers imply that such outperformance is due to fabricated results. The OP margin of the short-sell targets in our sample were around 4.5x higher than their peers.
• It is conventional wisdom that insiders cash-out when they are no longer confident about the prospects of the company. Short sellers try to exploit this idea and are often on the lookout for instances where insiders are continuously cashing out, either by way of selling their stake in the company, or through back door transactions like share pledges, collar transactions, and high levels of compensation.
• Short-sellers show no mercy when it comes to questionable or complex corporate structures like VIE arrangements either. Short-sellers are of the view that such dubious corporate structures enable companies to round trip revenue and assets to fabricate financial results. Short-sellers are also on the lookout for suspicious M&A transactions with related parties, particularly overvalued asset sales to and undervalued asset purchases from insiders.     
• When a company fakes revenue or profit at the income statement level, it leads to a fake cash problem, i.e. the company then has to forge significant cash balances to match its inflated profit. Short sellers believe that inflated capex or R&D expenses are helpful tools to burn fake cash as these expenses often do not raise any suspicion if they do not generate instant returns.
• Short-sellers also seem to target companies and insiders that historically have a bad reputation. We also came across several instances where short-sellers have questioned the track record of auditors, underwriters, and appraisers that were employed by the target companies. Short-sellers also consider frequent auditor changes and audit fees that are either too-high or too-low as red-flags.
• Short-sellers regularly keep an eye out for companies with weaker corporate governance practices. However, some of the cases that we came across in our research suggest that traditional corporate governance matrices have limited relevance in exposing fraudsters in this day and age. Short-sellers now seem to question the true “independence” of independent directors and are sceptical about companies with high board turnover.
• A short-seller can identify a plethora of red-flags for a company, but a short-sell attack is seldom successful without any smoking-gun evidence. Therefore, short-sellers often thrive on finding that one key piece of evidence that would make their thesis irrefutable. In most of the cases we looked at, this smoking gun evidence has come in the form of alternative filings, which include the likes of filings with the local regulators, credit reports, and tax filings. Short sellers have often used these alternative filings to reconcile reported financials and in some cases to trace the “true” ownership of assets.
• We believe recent short-sell reports on Luckin Coffee (LK US) and GSX Techedu (GSX US) raise the bar for modern-day short-sellers. The anonymous short-sell report on Luckin was backed by 11,000+ hours of store traffic video and 25,000+ customer receipts while Grizzly’s short-sell report on GSX Techedu used a variety of alternative data sources such as customer reviews, web traffic, keyword search results and app rankings as smoking-gun evidence.
• Short-seller attacks have become part of today’s investment world and companies should learn to co-exist with them and more importantly, to defend these attacks, companies should have a plan in place while strengthening their fundamentals and improving corporate disclosures.  
• In order to prevent short-seller attacks we recommend companies to 1) be honest about any errors and make due restatements to reported financials, 2) adopt conservative accounting practices, 3) avoid providing aggressive earnings guidance, 4) provide detailed disclosures when deviating from accepted accounting standards, 5) avoid withholding or delaying bad news such as product failures, litigation, profit warnings, layoffs, etc. from the market, 6) improve corporate governance measures, 7) and improve company disclosures particularly regarding company acquisitions, divestitures, and capital investments.
• If a company has always been committed to providing complete disclosures and its shareholders are kept informed about both good and bad news regarding a company, the best way to approach the shorts may be to completely ignore them. However, a company should respond to a short sell attack if the allegations laid out by the shorts were unreasonable or misleading or if it is impacting the company’s valuation.

LightStream Research • Equity Analyst • (Opens in a new window) ⧉

We are positive on the long term prospects of China internet healthcare industry and expect robust growth outlook, driven by large & fast growing users base, increasing adoption and penetration rate, supported by government favorable policies. However, in the near term, only pharma e-commerce business has a valid monetization model & is proven to have reliable revenue stream for leading players, such as Alibaba Health Information Technology (241 HK) ; While online consultation player Ping An Healthcare and Technology Company Limited (1833 HK) and internet hospital provider WeDoctor are still struggling to find sustainable profit model, due to certain policies limitation & lower paying client conversion, the massive growth potentials are likely unlocked by further policy tailwinds such as online prescription drug sales, insurance reimbursement of online medical services, in our view. 

In the order of stock preference, we prefer Alibaba Health Information Technology (241 HK) with its dominate position in the pharma e-commerce market, distinctive edges in users acquisition from synergies from Alibaba Group (9988 HK); 3) best positioned to benefit robust growth upon the opening of online prescription drugs sales with its integrated business model. With >70% 3-year sales CAGR forecast, our DCF valuation suggests margin of safety of 22%.

With its leading position on online consultation, we believe Ping An Healthcare and Technology Company Limited (1833 HK) will continue to enjoy fast users growth thanks to its supported from Ping An group. Yet, the lower paying client conversation rate & large revenue reliance from Ping An group concerned us. At current level, we believe the street has over priced in the potential policy benefits & growth potential. With ~38% sales CAGR estimates, our DCF valuation reveal potential downside of 30%. 

Our proprietary scorecard rating system also suggests Ali Health stands ahead of peers, with larger MOAT, more comprehensive product & services offerings, higher sales CAGR, better profitability, more efficiency (higher customer acquisition growth, lower acquisition cost), higher productivity. 

• Asia-ex Japan, Senior Healthcare Analyst • (Opens in a new window) ⧉

What’s Original?

This Smartkarma Original takes a detailed look on the revised “Solid Waste Pollution Environmental Prevention and Treatment Law” and reads on the implications to the major listed waste treatment companies.  In addition to discussions on the revenue and profit drivers of the individual companies, we will also assess the outlook for improvement in returns, and compared the relative valuations of individual companies within the sector based on their P/B vs. ROE and PEG ratios.

Since the waste treatment industry is highly fragmented, we analyse the possibility of consolidation as a potential way to improve sector return levels. Lastly, we will take this opportunity to introduce a leading A-share waste treatment company – Zhejiang Weiming Environment (603568 CH), which has recorded a marvelous share price performance – up 95% over the last three years and 28% YTD.

• China Analyst – Onshore Credit, Equity Long-Short • (Opens in a new window) ⧉

In this Original, we have created a repository of Asian companies and associated key insiders targeted by prominent short-sellers, over the last decade, to help serve as a tool for insider diagnostics.

Insight Flow:

• Prominent Short-Sellers (Targeting Asian Companies)
• Target Companies
• Key Insiders
• High Risk Insiders & Associated Companies
• Other Notable Insiders & Associated Companies
• Notable External Agencies
  • Does Presence of Global Renowned Auditors/Investment Banks imply Strong Governance?
• Key Limitations

• Equity L/S Analyst | Forensic Accounting | India • (Opens in a new window) ⧉

Intuitively, you would expect hospitals to do well during a pandemic given a spike in the number of sick people but quite the opposite is true. In fact, most of a private hospital’s bread and butter patients tend to steer clear of hospitals, unless an emergency, for fear of closer contact with those infected with COVID-19.  Otherwise, hospitals are called into public service to cater for testing and victims of the pandemic, with hospital staff putting their lives on the line in return for cost recovery only. 

This impacts both out-patients and in-patients, with the former seeing a larger impact than the latter, as their cases tend to be less urgent. However, in-patients booked in for elective treatment involving surgical procedures, will also tend to cancel unless urgent.

This collapse in the number of patients visiting hospital means that occupancy rates for hospitals have fallen significantly, which takes its toll on profitability, given the high fixed cost nature of the business. 

Private Hospitals in different markets are driven by a multitude of different factors depending on how developed those country’s government healthcare systems, the level of hospital penetration, as well as the penetration of individual healthcare insurance and corporate insurance plans which make treatment more affordable.

Revenue streams for hospitals are also very different in different markets, with companies such as Ramsay Health Care (RHC AU) driven more by domestic elective surgeries versus others such as IHH Healthcare (IHH MK) and Bangkok Dusit Medical Services (BDMS TB), which are quite reliant on “medical tourism” as foreign patients from foreign countries fly in for a multitude of different surgical procedures, which are of a high standard but a lot cheaper than in their home countries.

Countries like Indonesia are again very different again given that they rely on domestic patients for the most part, with virtually zero medical tourism but have had to adapt to and cater for government healthcare scheme patients, which generate lower margins. Companies such as Mitra Keluarga Karyasehat Tbk (MIKA IJ), Siloam International Hospital (SILO IJ), and Medikaloka Hermina (HEAL IJ) are also increasing the complexity of treatments available, which means patients can be treated in Indonesia rather than travelling overseas to Singapore or KL for example. 

CrossASEAN Research • ASEAN Insight Provider • (Opens in a new window) ⧉

China’s aerospace and defense industry offers unique investment opportunity to investors, but due to its high sensitivity, all major companies involved are listed as A-shares in either the Shanghai or the Shenzhen Stock Exchanges only.  With the rise in global geopolitical tension, increase in the civilian uses of defense technology, the government’s support of the industry and the potential for further asset injection and restructuring of the listed companies, we are positive on the outlook of the sector.

While there are risks in the investment in this industry of national importance, we believe that they are outweighed by the potential returns. Among the MSCI China A-share constituents in the sector, we prefer Avic Shenyang Aircraft (600760 CH) and AECC Aviation Power (600893 CH). These are then followed by Avic Aircraft Co Ltd A (000768 CH) and China Spacesat Co Ltd A (600118 CH), respectively. However, we ranked China Avionics Systems Co (600372 CH) as the least attractive play among the five stocks. 

What’s Original?

This Smartkarma Original covers the opportunities and risks for the sector by looking at the recent geopolitical developments, including the US-China political and trade tension, and their implications on the future development of China’s defense spending and the market outlook of the aerospace and defense industry. We analyse the revenue and margin drivers, provide global comparison and present our views on the A-share aerospace & defense companies. We also look from the perspectives of potential asset restructuring and industry consolidation given the many unlisted central State-owned enterprises (SOEs) involved in this business and the numerous listed companies under these SOEs. In addition, we address the background and characteristics of the aerospace & defense central SOEs (unlisted parents of these listed companies) as they are essential to the understanding of the listed companies. 

• China Analyst – Onshore Credit, Equity Long-Short • (Opens in a new window) ⧉

The spread of COVID-19, one of the greatest risks to humankind, has forced governments to enforce strict social distancing measures and lock down cities and countries. Businesses across many industries have been shut due to this crisis, as various areas such as travel, tourism, and international trade have been severely disrupted.

On 14^th April 2020, the International Monetary Fund (IMF) reported that all the G7 nations had already entered or were entering into a recession. There are reasons to believe the ongoing recession is likely to be worse and more long-lasting than the 2007-2009 recession. The COVID-19- related health crisis is still underway, and it could take years to develop a vaccine. We believe that it is impossible for economics to predict an end to this recession until countries contain the COVID-19 health crisis. Recessions are detrimental to most companies, and they are deadly for some companies. Therefore, in these uncertain times it is rather important to rank the companies based on their bankruptcy risk.

In this insight we try to develop a screening system to identify the potential bankruptcy candidates and the most resilient companies.

LightStream Research • Equity Analyst • (Opens in a new window) ⧉

The China Medical device industry has been growing at a 20% CAGR, surpassing the Pharma sector’s 7-10%  growth in the past few years. In this insight, we analyze China Medtech industry with major sub-sectors, including market size, growth prospects, growth drivers, competitive landscape as well as the comparison with global market. In addition, we illustrate the characteristics of China Medtech industry, demonstrate industry tailwinds as well as headwinds.  More importantly, we identify the leading players (from MSCI-List) with detailed analysis of business model, investment thesis/risk and valuation as well as financial/operational matrix comparison. 

In summary, we believe China Medtech industry, especially the two biggest sub-segment Medtech equipment, high end Medtech consumables will continue to grow at >15% CAGR in the next few years, driven by import substitutions, infrastructure and consumption upgrade. Although two invoice system, GPO on high end consumables may post short term price pressure but it will accelerate industry consolidation, which will benefit leading players with dominate market position and innovative product portfolio. 

In the order of preference, we prefer Medtech equipment over high-end Medtech consumables on less policies risks. Among Medtech equipment, we like Shenzhen Mindray Bio-Medical Electronics (300760 CH) with its dominated market position in Medtech equipment/strong growth momentum (>30% CAGR)

Among high-end consumables, as the largest vascular international implants player, Lepu Medical Technology A (300003 CH) is attractively valued with solid growth outlook, but we remain cautious on its weak drug position/high goodwill and leverage ratio.

Shandong Weigao Group Medical Polymer Co (1066 HK) is the largest low-end consumables and orthopedic implants supplier in China, we believe its orthopedic/recently acquired vascular business will continue to gain market share driven by import substitutions encouraged by government, yet we remain sidelined as its slow growth outlook/price pressure on low-end consumables (70% of revenue).  

What’s original ? 

Chinese Medtech sector have drawn many investors attention recently with outstanding stock performance in A/H share market, driven by surging demand from COVID19 outbreak. Yet, Medtech sector is very complex and comprise of more than 5 sub-sectors,  is less covered than Pharma sector by the street.  In addition, recent government policies for Medtech present both opportunities and risks, which international investors need to understand more. 

With the detailed analysis and comparison with global MNCs in term of market size, growth potential, competitive landscape and key growth drivers ahead, we hope to help investor to navigate the market dynamic in China Medtech sector. Especially, our detailed analysis of major sub-sector and the nuances between the segments the major companies operate in will provide further insight for investors. 

While companies like Shenzhen Mindray Bio-Medical Electronics (300760 CH) has increasing drawing investors attentions, especially amid COVID19 outbreak, we further analyzed its competitive edges vs. MNCs in each sub-sectors and reiterate our positive view.  Also, we highlight the key risks on some domestic popular names such as Lepu Medical Technology A (300003 CH) and Shandong Weigao Group Medical Polymer Co (1066 HK). 

Notably, in this report, we did not include Microport Scientific (853 HK) as the best innovative  driven high-end Medtech consumables in China (see Microport Scientific (853.HK): Innovation Driven Medtech with Long Term Value, for more detail, as it is excluded from MSCI). Also we did not include Jiangsu Yuyue Medical Equ A (002223 CH) as its focus on household Medtech equipment. 

• Asia-ex Japan, Senior Healthcare Analyst • (Opens in a new window) ⧉

The e-Conomy SEA report is a widely cited annual study on the state of Southeast Asia’s internet economy. The resource, jointly produced by Google, Temasek, and Bain & Co, analyzes the growth of digital enablers such as internet penetration and smartphone penetration and its impact on the adoption of digital services.

Our report dives into the underlying assumptions used in the report and compares this against how other countries’ internet economies have developed to get a sense of how conservative or aggressive the forecasts are.

Despite the bullish outlook presented in the e-Conomy SEA report, we believe that Google and Temasek still underestimate the potential for Southeast Asia’s growth.

In particular, we find that if Southeast Asia even partially follows the trajectory of China’s mobile payments adoption several years ago, then the region’s digital economy can easily grow faster than currently expected. This is because e-wallets and mobile payments can serve as a gateway for consumers to more seamlessly enter into the digital economy and conveniently adopt different digital services such as e-commerce, online travel, and online media.

We argue that this scenario is more than likely given that:

1. Big Tech in China is aggressively investing in the region. Companies like Alibaba and Tencent are leveraging their past successes scaling the adoption of digital services in China and applying their playbook to Southeast Asia. Chinese tech companies, having gained maturity and experience through years of growing in the space, can now apply their know-how to capitalize on untapped opportunities in Southeast Asia. We note that out of Southeast Asia’s 11 unicorns, 10 are backed by Chinese investors. These unicorns regularly receive guidance on how best to scale adoption and build ecosystems, and often send executives to their China investors’ headquarters to learn.
2. Developing markets like Southeast Asia can more readily adopt digitalservices. Developing markets have an advantage over developed markets when it comes to digital adoption. This is because developing markets tend to have poorer infrastructure outside of capital cities creating gaps that digital services can then “plug in”. For example, e-commerce is more invaluable in tier 2 or 3 cities where brick & mortar outlets are relatively sparse given than it can take hours to reach the closest mall. 
3. Southeast Asia benefits from favorable demographics and accelerating digital enablers. The region is still relatively young with median ages ranging from the late 20s to early 30s. This is supported by rapidly improving digital enablers such as access to the internet and increasing smartphone penetration.

I. Southeast Asia’s Internet Benchmark: The e-Conomy SEA Report

II. Overly Conservative? The Report has Revised Forecasts Upwards Three Times Already

III. E-commerce, the Largest Driver for SE Asia’s Digital Economy, is Underestimated

IV. Southeast Asia E-commerce can Grow Much Faster Assuming it Even Partially Follows China’s Mobile Payments Trend

1. Rising Internet and Smartphone Penetration
2. Favorable & Younger Demographics

V. Developing Markets Have an Advantage Over Developed Markets When it Comes to Digital Adoption

VI. Chinese Investment is Influencing Southeast Asia’s Internet Economy to Evolve in Similar China-like Ways

1. Grab and Gojek Adopt China’s Super-App Strategy
2. Lazada and Shopee Take Notes from China E-commerce
3. Alibaba and Tencent Fight Proxy Payment Wars in Southeast Asia
4. Digital Banking Another Major Catalyst

VII. Conclusion: Southeast Asia’s Digital Economy Can Grow Much Faster than Expected

Appendix – Digitization Underway: Individual Country Snapshots

1. Indonesia
2. Singapore
3. Philippines
4. Thailand
5. Vietnam
6. Malaysia

Clearsight Systems • • (Opens in a new window) ⧉

We are launching a new monthly product designed to track regional tourism activity, with an emphasis on Chinese tourism. The objectives of this monthly product are three-fold: 

1. To track the near-term recovery in regional tourism activity
2. To track the medium-term trends in the Chinese tourism market
3. To provide context by showing the scale cross-border regional tourism flows

The new product consists of weekly, monthly, and annual data we collect and display in eleven Google Data Studio reports; many of these reports are interactive. Each report is accompanied by brief commentary on the data, which we will update regularly.

We believe the report includes timely information that describes current conditions and even a look into the near future. It also provides needed context about which tourism markets are more or less likely to ‘move the needle’ for service providers like airlines and hotel chains. In short, we think this report can help investors identify signs of a recovery in tourism activity in China and the region, hopefully later in 2020. 

Based on data from the week ending April 24th, we highlight a few takeaways. It appears air travel to and from Chinese cities is recovering gradually, while departures at most of the regional airports we track remains weak. Hotel availability is mixed, but weighted average room rates for the cities we track remain under pressure. 

Tracking Traffic • Asian Equities Analyst, Logistics & Transport • (Opens in a new window) ⧉