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Smartkarma Originals

The Potential of DApps to Disrupt Ownership Rights for Digital Assets and Content

By | Smartkarma Originals

The Ethereum Blockchain: First Mover That Transformed the Blockchain

The Ethereum blockchain was launched in 2015 and is built on the decentralised and distributed architecture present in Bitcoin. Ethereum uses smart contracts which can be interconnected to interact with each other and hence create an operational platform.

The significance of the Ethereum platform is that it allows users to build applications running on the blockchain, similar to software running on a computer. Through running smart contracts on Ethereum Virtual Machine (EVM), mass consumption of decentralised apps is made possible.

Given that Ethereum is a decentralised network, clients will have the benefit of control over their data, with no central governing authority. Ethereum is a permission-free, public blockchain platform whereby all transactions recorded on it are visible and accessible by everyone. The blockchain uses a Proof of Work (PoW) consensus mechanism according to which all nodes need to agree on a ledger to access the entries recorded in the network.

The key benefit of Ethereum when compared with other blockchains is that it has a large network which has been tested through years of operation and billions of trading value. For instance, in the early part of 2020, the total value of cryptocurrencies invested in Ethereum smart contracts exceeded US$ 10bn.

However, on the other hand, due to this growing popularity, Ethereum transaction (gas) fees reached a record US$ 23 per transaction in February 2021. Previously, for most of 2020, gas fees were around US$ 2. Although gas fees hit a high of US$ 61.74 in May 2021, transaction fees had declined to reasonable levels in the subsequent month of June 2021 at an average of around US$ 2.15. However, the decline in gas prices is indicative of the decline in demand for Ethereum (the cryptocurrency).

Ethereum Average Transaction Fee
Source: ycharts

Another key issue is that the growing demand has caused slower processing times whereby processing times are much slower than those of newer blockchains.

Ethereum’s open-ended and open-source nature has led to the creation of numerous dApps on the blockchain. In this report, we will be discussing some dApps which run on the Ethereum blockchain and how each of these have responded to the issues of high transaction fees and slow processing times on the blockchain.

These dApps and the sidechains that have evolved to support greater functionality for them create interesting new possibilities which we believe are currently underappreciated. In particular, we believe investor attention is too focused on what blockchains can currently enable rather than the overall direction in which blockchain technology is evolving. This is because despite the massive media attention on crypto and blockchain, the technology itself remains at the early stages of its development and deployment and thus many of the critical limitations it faces could be solved in time. It is thus more pertinent, we feel, to examine what some of these early dApps are trying to accomplish and some of the future possibilities that they hint at.

LightStream Research • Japan/Asia Long-Short • (Opens in a new window) ⧉

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Tea/Coffee Chains: As Asians Acquire a Taste for Coffee, Novelty Seems Like the Way Forward for Tea

By | Smartkarma Originals

Historically, tea dominated the Asian beverages market, but over the last few years we are seeing a renewed interest in coffee and coffee-based beverages among Asians. Meanwhile, the tea industry is focusing on new products/trends such as bubble tea and fruit-infused tea to counter the threat posed by coffee as well as to provide a growth driver to counteract stagnant demand.

The younger generation favors the bubble tea and fruit tea trends, meaning that teahouses have been a tremendous success over the last four to five years. However, we think bubble tea and fruit tea lack the ability to encourage consumers to make regular purchases, affecting the long-term foot traffic of teahouses. Meanwhile, tea is generally less profitable than coffee. On the other hand, the coffee trend is more long-lasting. It also has the potential to generate superior returns/profitability over the medium/long term.

Nevertheless, there are both good apples and bad apples in both camps (coffee and tea). In this insight, we take a look at a few coffee and tea chains in China, Japan, and South Korea, assessing the long-term investment and business cases for our top picks in those markets.

What’s Original?

In this original, we discuss the value chain, costs of production and global demand and supply conditions in the tea and coffee markets. Additionally, we look at the emerging trends and the unit cost dynamics within tea/coffee chains in Asia, focusing on the three biggest tea/coffee markets in the region (China, Japan and South Korea). Furthermore, we briefly talk about popular tea/coffee chains and highlight the long-term investment and business cases for our top picks in the above markets.

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

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Asian Brokers: A Competition Between Value and Growth

By | Smartkarma Originals

This Original aims to identify the key investment opportunities among the listed brokers in the three major East Asian countries – China, Japan, and Korea. 

By looking at the development of the brokerage sectors in these three countries, we observe a general trend where upstart online brokers first compete against the more established brokers based on their cost and technological advantages. This then pushes the more established brokers to either focus on more lucrative wholesale businesses or adopt and invest in tech initiatives in order to stay competitive in the retail market.

After further establishing themselves in the retail market, these upstart online brokers then also diversify and expand into the more lucrative wealth/asset management or even wholesale businesses.  By gauging at which phase the broker is in this cycle, investors can have a good understanding of its future outlook.

In our opinion, Korean brokers currently offer the best value, while the Chinese pure-play online brokers offer the highest growth potential. As such, our pecking order, in terms of investment attractiveness, is Kiwoom Securities (039490 KS), East Money Information Co A (300059 CH), Futu Holdings Ltd (FUTU US), Monex Group Inc (8698 JP) / Huatai Securities Co Ltd (H) (6886 HK).  

What is Original?

In this Original, we look into the competitive landscape of the brokerage sectors in China, Japan, and Korea. 55 listed brokers from these three countries are included in this Original as the company universe for regression analysis. 

Among them, a total of 8 brokers are chosen, with their company profiles separately presented, to further showcase and contrast the impact of competition and technological disruption. Based on this, a pecking order is then developed, both on a country and a company basis.

• EM focused Principal Investments Partner • (Opens in a new window) ⧉

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Asia-Pac Airports: Ups, But Mostly Downs

By | Smartkarma Originals

Within the hospitality-affected complex, the airline industry garners the lion’s share of the negative news from the Covid fall-out. The International Air Transport Association said last month it estimates losses in 2021 of US$48bn, up from $38bn previously. And that’s on top of an estimated $370bn of losses to the industry in FY20, according to the International Civil Aviation Organization.

But spare a thought for the airports which facilitate the arrival and departure of these airlines, as this crisis becomes increasingly protracted, and in many ways, deeper than many anticipated 18 months ago.

Amid the doom and gloom, there are parking bays of good news. April’s domestic air passenger traffic in China was ~96% of December 2019 levels. Shenzhen Airport Co A (000089 CH) (SZAC) is at level pegging with overall traffic numbers in 2019, and domestic flow into SZAC, Shanghai International Airport (600009 CH), and Guangzhou Baiyun International Airport (600004 CH) all exceed 2019 levels. 

Yet outside of the Chinese airport space, where international passenger throughput has historically commanded >40%+ of total throughput – up to 80% for Airports of Thailand (AOT TB) –  the outlook remains subdued, and largely uncertain.

Just this week, Thailand recorded its highest level of Covid-related fatalities, Taiwan is facing its first serious outbreak, and Australia’s state of Victoria entered its fourth lockdown. 

Provided airports have sufficient funds to ride out the tough times to the other side of the valley, all will undergo a major re-rate when international travel restarts. Yet the vaccine rollout – and uptake – and when international borders will reopen, remain indeterminate.

Quiddity Advisors • Pan-Asia Catalysts/Events • (Opens in a new window) ⧉

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Investment Opportunities in China Medical Device Industry

By | Smartkarma Originals

Executive Summary

With the natural growth of the population and the inevitable trend of population aging, the demand in the healthcare industry will continue to rise. In addition, the improvement of people’s health consciousness, the upgrade of medical consumption and related favorable policies are the core factors driving the demand of China’s medical device industry. Over the past five years, the global medical device market has maintained an annual growth rate of about 5%, while the growth rate of China’s medical device market was more than 15%. It is expected that the gap between China and the global medical device market size would be gradually narrowed and China’s medical device market would play a more important role in the future. Therefore, the investment opportunities in China medical device market are very attractive and unmissable. On the other hand, with the promotion of the centralized procurement of high-value medical consumables nationwide, related medical device companies are facing pressure. So, how to find valuable investment targets that can avoid the influence of government’s centralized procurement policy is important to investors. This Original mainly analyzed good investment opportunities, the industry characteristics, the investment rationale and the potential risks.

What’s Original?

We have identified the following investment opportunities in the Health Care Equipment and Services category in MSCI China:

  • Shenzhen Mindray Bio-Medical Electronics (300760 CH): Mindray is the largest medical device and solution supplier in China. Its three core businesses are all in the forefront in China, and is also one of the few domestic companies that is truly capable of achieving import substitution and internationalization and could compete with overseas giants. Meanwhile, because of the Company’s business layout, Mindray is not greatly affected by the centralized procurement policy in the short term. Together with the strategy of “innovation + M&A + internationalization”, Mindray has formed the high moat and become the industry benchmark.
  • Ovctek China Inc (300595 CH): OVCTEK is the leading company in China orthokeratology lens market, with broad market prospect. Considering the high prosperity of the industry in which the Company is located, the good competition pattern, and the low penetration rate of orthokeratology lens, OVCTEK is expected to continue to maintain rapid growth in the future. Meanwhile, because the products have strong consumption attributes, OVCTEK’s business will not be affected by the centralized procurement policy. The obvious product performance advantage, the strong sales channel and the large market potential are the drivers for revenue and margins.
  • Jafron Biomedical Co Ltd (300529 CH): JAFRON is the leading company in the field of hemoperfusion in China. As there are very limited competing products in the market, the Company is currently in a monopoly position of hemoperfusion cartridge, with strong pricing power and over 80% gross margin for more than five years. In addition, there is still a lot of room for growth in the hemoperfusion cartridge market, together with the strong product competitiveness, and the technical, raw material and channel advantages, JAFRON has established a high moat in this market.

The pecking order is: Mindray, OVCTEK and JAFRON.

• HK/China Healthcare Analyst (ex-Fosun Pharma) • (Opens in a new window) ⧉

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Carbon Markets Original: An In-Depth Analysis into the Evolution of Carbon Markets

By | Smartkarma Originals

What’s Original?

Global warming and climate change have now started to cause major problems such as heatwaves and wildfires which when coupled with more awareness about the environment due to COVID-19, has led to increasing interest in reducing carbon emissions. Governments moves to implement regulations to control emissions and encourage a shift to renewable energy sources are accelerating particularly in Asia. 

In this original, we will be discussing the history of carbon emission regulation systems and the types of systems. The different types of markets and offsets will also be discussed. Given that the EU is one of the most significant emission trading systems – the world’s first international trading market and the largest for many years (until the launch of China’s ETS), we will be discussing this in much detail with a focus on the history of the EU ETS (Emission Trading System), and recent developments. We will also be focusing on how the EU ETS impacted other countries when creating their own emission trading systems.

Carbon pricing has also been affected by a number of recent developments and trends which have pushed regulators to make faster decisions and we will examine what is believed to be an optimal price in order to meet the targets under the Paris Agreement.

LightStream Research • Japan/Asia Long-Short • (Opens in a new window) ⧉

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China Private Education: This Is Where the Future Lies

By | Smartkarma Originals

The China Private Education Sector presents an exciting growth story, riding on the increase in spending on education, rise in demand for quality education, support from local governments for private investments and increase in acceptance towards online delivery mode, among others. These positive factors, however, are balanced by the decrease in birth rates and the tight regulatory regime. Despite so, we continue to see good prospects given that earnings growth will remain ahead of the overall market by significant magnitude. Meanwhile, valuations have already returned to more reasonable levels, with investment value started to emerge on some names.

Companies in the sector have different focuses, including K-12 education, higher education, vocational education, tutoring (online) and tutoring (online and offline), and we have to be very selective. We prefer companies that focus on higher education which face lower regulatory risks, have a clear defined expansion strategy and specialise in a niche market segment. Out of the ten companies covered in this Smartkarma Original, we put forward China Education Group (839 HK), Tianli Education (1773 HK) and China Yuhua Education (6169 HK) as our top picks.

What’s Original?

This Smartkarma Original takes an in-depth analysis on 10 companies in the Private Education Sector in China, covering stocks listed in the HKEx, NYSE, Shenzhen Stock Exchange as well as dual listings. In the A-share space, we cover Offcn Education Technology (002607 CH), which is sizeable (market cap of almost HK$210bn) and with unique exposure to the civil servants recruitment examination training.

Besides addressing the key evolving trends of the industry and the all-important regulatory issues, we also touched on the private funding aspects for some prominent unlisted companies and the IPO trends of the industry. Where appropriate, we share some of our on-ground experiences with the aim to provide a closer feel on the industry and companies. We hope this Smartkarma Original will be a comprehensive and updated reference for China’s Private Education Sector.

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

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Male Grooming in Asia: Blooming Prospects. Skincare to Drive Growth

By | Smartkarma Originals

Emerging Asia – notably China and India –  is witnessing a  steady expansion in the Male grooming sector as men’s habits around personal care is shifting – led by a confluence of social, economic and compelling demographic factors. Expect this trend to gather more momentum as image-conscious young men adopt a wider array of personal care products. Skincare products that address specific needs/concerns of male customers will drive the early stage of segment growth; light cosmetics are picking up demand too. Companies that are quick to identify and address the demand with male-specific products/brands stand to gain from early mover advantage given male customers, reportedly, are far more brand loyal compared to female counterparts.

What is original in this report? We discuss the social, economic and compelling demographic factors driving the shift and growth in the Male grooming sector in China and India. We look at the emerging trends across segments and in both the markets to arrive at a pecking order in terms of investment potential. We have scanned the personal care and cosmetics products landscape to shortlist brands and companies that offer a male-specific product range. A brief on select companies – private and listed –  are presented for further investment analysis and evaluation. 

Investory • Asia Consumer Research, Equity Analyst • (Opens in a new window) ⧉

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ESports – Entering the Third Innings

By | Smartkarma Originals

eSports offer intriguing investment possibilities to investors given very large projected TAMs, high growth rates and links to a variety of other fast growing industries including games, streaming, animation, tech hardware and social media. This makes eSports important to understand and below we examine key themes that investors should be aware of, before delving into a full primer on the space, companies with exposure to eSports, Asian eSports franchises and key eSports games to be aware of.

LightStream Research • Japan/Asia Long-Short • (Opens in a new window) ⧉

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Asian Nuclear Energy Industry: The Value Chain

By | Smartkarma Originals

Asia is the focal region globally where nuclear power is growing significantly to meet its increasing demand for clean electricity. There are approximately 135 operable nuclear power reactors, with 35 under construction – around two-thirds of the reactors under construction worldwide. China is the clear leader in nuclear generation growth.

There were divergent responses to the Fukushima accident, leading some countries to reassess their long-term domestic energy policy, while others experienced a short-term pause, before continuing with long-term strategies, with few to no changes. 

The debate is ongoing whether nuclear power is a safe energy source for mitigating global climate change, or presents an unnecessary risk, given past disasters, coupled with the unavoidable by-product of radioactive waste. Additionally, renewable energy such as solar and wind has become increasingly competitive and sustainable.

For countries such as China, India, and South Korea, there remain solid economic reasons for the expansion of global nuclear power, and its role in lowering emissions from energy production.

The vast majority of nuclear power plants in Asia are operated by unlisted government entities; or in Japan, the bulk of reactors remain in shutdown mode after Fukushima.

CGN Power Co Ltd H (1816 HK) is one of the few listed nuclear pure-plays in Asia, and trades at undemanding multiples, together with an attractive ROE and yield.

What’s Original?

This insight presents a comprehensive view of the Asian nuclear energy industry, and its value chain

Quiddity Advisors • Pan-Asia Catalysts/Events • (Opens in a new window) ⧉

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