ChinaDaily Briefs

China: Alibaba Group, Jinxin Fertility Co Ltd, Soho China Ltd, Cloud Village, WH Group, CNY, China Huarong Asset Management, HNA Group, Boeing Co and more

In today’s briefing:

  • Alibaba (BABA): Over Impacted Before Quarter Result
  • Jinxin Fertility: Signs of Policy Tailwind and Valuation Dislocation
  • SOHO China (410 HK): In For a Penny …
  • Cloud Village (NetEase Music) Pre-IPO – Tencent Music Peer Comp, Regulatory Impact
  • WH Group Offer Doc Out – This Little Piggy Went To Market
  • FX Dashboard: Will Asian Currencies Continue to Underperform?
  • China Huarong Asset Management – Preventing Another Daisy Chain
  • The China Credit Chronicle:  Hazardous National Anecdote
  • India Cleantech Launches $ Bond; Macro; Rating Changes; New Issues; Talking Heads; Top Gainers an…

Alibaba (BABA): Over Impacted Before Quarter Result

By Ming Lu

  • The stock price has plunged since October 2020.
  • Over the past few days, BABA became a casualty of the policy against tutoring companies.
  • However, we believe the China online retail has been recovering.
  • We also believe the stock has an upside of 27% in nine months.

Jinxin Fertility: Signs of Policy Tailwind and Valuation Dislocation

By Ke Yan, CFA, FRM

We have discussed in our previous note that Jinxin Fertility will be a beneficiary for the China’s promotional policy for the third child. With the recent share price weakness and development on the policy front, we provide updates on the company and continue to believe that it is a name to hold for more favorable policy tailwinds to come. 

SOHO China (410 HK): In For a Penny …

By David Blennerhassett

Yesterday, SOHO China Ltd (410 HK)‘s shares were utterly cremated, ostensibly in response to a media report the pre-conditional Offer from the Blackstone Group faces regulatory obstacles.

At one stage, shares were down 31%, or 48% adrift of the $5.00/share offer price, and 13% below the undisturbed price, before recovering to close at $3.02/share.

Yet that media article was vague in context, and ultimately stopped short of saying the deal would be blocked. 

As they say, “In for a penny, in for a pound.”

More thoughts below the fold.

Cloud Village (NetEase Music) Pre-IPO – Tencent Music Peer Comp, Regulatory Impact

By Sumeet Singh

Cloud Village Inc. (CVI), also known as NetEase Music, plans to raise around US$1bn in its Hong Kong IPO. The company has also obtained investments from Baidu and Alibaba, along with other investors.

As of Dec 20, it had 181m online music MAUs, 16m online music services monthly paying users, 327,000 social entertainment services monthly paying users. It had over 60m music tracks, of which more than 1m were created by registered independent artists. Its daily active users on average spent 76mins daily listening to music. 

CVI’s revenue has grown 4.3x over FY18-20, to RMB4.9bn. There have been no signs of slowdown as its revenue increased by 102% in FY19 and was up another 111% in FY20. Both online music services and social entertainment services revenue have shown strong growth. Online music services revenue grew by 73% in 2019 and another 47.6% in 2020. Social entertainment services revenue was the largest driver of growth, as it grew by 344% in 2019 and was up another 320% in 2020. However, it remains a distant second player in the market and has yet to make a profit.

We covered various aspects of the deal in our previous note, Cloud Village (NetEase Music) Pre-IPO – Was in the slow stream, playing catch-up.

In this note, we compare CVI with its main peer Tencent Music Entertainment (TME) and comment on the recent regulatory announcement with respect to TME.

WH Group Offer Doc Out – This Little Piggy Went To Market

By Travis Lundy

On 6 June 2021, WH Group (288 HK) announced a proposal for a Voluntary Buyback Offer. The company decided it had enough cash and excess capital given its investment requirements and decided to return the excess to shareholders by buying up to 13% of shares outstanding. The Controlling Group would not tender, so they would see their stake increase and the minimum pro-ration would reach nearly 20%. 

The shares popped, then fell. Then they kept on falling. Yesterday and today they hit the level which has been a low point in the oscillator cycle for the last few years at HK$6.00/share.

I wrote about the situation that very day in WH Group Buyback Offer Announced – Strong Accretion Creates Accretion Risk. I wrote that based on then-current pricing, expectations, and the trading levels of its peers, it would not be considered expensive at prices higher than the previous close (which had, to be fair, seen a nice pop on news). 

But markets gonna market. 

The peers fell. DRAMATICALLY. The 7 names in a HK- or China-listed basket of peers have fallen 23% as live hog prices have fallen and the hog/feed ratio has also fallen, indicating hog producers are making even less than before (or, according to the NDRC, losing more than before).

The NEW News – The Offer Doc is Out

Last night, late-ish, WH Group (288 HK) released its Offer Document whereby it launches the Conditional Voluntary Cash Offer for 13% of its own shares at HK$7.80/share. 

  • This will need to be approved by Shareholders – both the Offer and the Whitewash Waiver (the Executive has indicated its intention to approve the WW subject to 50+% of Independent Shareholder votes cast supporting the Offer and 75% of Independent Shareholder votes). 
  • The Record Date for the EGM is 19 August 2021, the EGM is 16 August, and if approved, the Offer will become Unconditional on 16 August and will close on 30 August.
  • Cheques will be sent no later than 8 Sep. Shares not bought back will be returned no later than 9 Sep. 
  • Minimum pro-ration is 19.7%. 

There are things to do here for hedge funds and arbitrageurs.

There are things to do here for long-only funds who love the stock. 

This remains an interesting situation. 

Read on below.

FX Dashboard: Will Asian Currencies Continue to Underperform?

By Gautam Jain, PhD, CFA

As a group, Asian currencies have underperformed the broad EM complex this year. Several factors are behind this underperformance: delay in the economic recovery due to the slow pace of vaccination, differences in monetary policy stances with much of the rest of EM already raising rates, and aggressive FX interventions. With these factors still broadly applicable, we see no reason for Asian currencies to outperform in the near term. Instead, we find differentiation among countries in Asia providing relative-value opportunities.

Separately, the attached file is a snapshot of the EM currency market in which we seek to identify the leaders and laggards among currencies by comparing the performance of each to its history as well as to other currencies based on their respective betas to an EM currency index.

China Huarong Asset Management – Preventing Another Daisy Chain

By Thomas J. Monaco

*Stress All Around: China Huarong Asset Management (2799.HK) [Huarong] still continues to teeter on the edge of insolvency and ongoing silence from Beijing has materially impacted funding costs. The USD 23.3 bn in Huarong debt, however, still risks crippling the USD credit market in mainland China. As Huarong is one of mainland China’s largest issuers in offshore markets, this would be by far the largest credit default to date of an important state-owned company. Potential contagion risks via higher a cost of funding for offshore borrowing are occurring;  and 

*Evergrande Harbinger: Mainland Chinese authorities are going to great lengths to prevent a systemic daisy chain impact of a China Evergrande Group (3333.HK) [Evergrande] default on the mainland Chinese financial system. Given the systemic risks also posed by Huarong, we believe the mainland Chinese will construct some form of bailout. Distressed investors should consider picking away at Huarong’s debt; we’ll believe it when see Beijing imposing losses SOEs.

The China Credit Chronicle:  Hazardous National Anecdote

By Warut Promboon

Since our last China Credit Chronicle (CCC) on 28-April, the sentiment on high-yield credits in China has not improved, to say the least. The “3 Red Lines” requirements on Chinese property developers are proven to be a bit too draconian, in our view. The strict rule forced Chinese property developers to cut prices and may have incentivized a few to manipulate their balance sheets to lower their debt levels, in our judgment. The latest spotlight is on Evergrande Real Estate Group (3333 HK) (China Evergrande Group) of which we are working on the updated report to capture additional information once the information from the group is sufficient to form a judgment.

In this flash note, we update recent events of HNA Group (HNAGRZ CH)(HNA) on its on-going bankruptcy procedure. HNA-related bonds have not been active of late on a lack of liquidity and recent updates from the group. We believe it is impossible at this stage to gauge the recovery rate of the HNA complex on its hidden liabilities and potential frauds evidenced by the embezzlement cases this year.

At 29 cents on the dollar (ask), we are not confident to recommend a Buy on the maturing SANYPH 10/21s without additional knowledge on the restructuring plan, but we believe the market prices HNA’s recovery around 12 cents on the dollar, based on HONAIR Perp’s bid price.

At the end of the day, HNA shows us that these Chinese mega corporates (i.e. China Huarong Asset Management (HUAZ CH) and China Evergrande Group) have enticed international investors (and perhaps rating agencies) to ignore credit fundamentals and believe they will be supported by the local and/or central government when necessary. Liquidity of these companies are all about credit facilities with Chinese banks, many of which are state-owned. Once the state support wanes, we believe the local bank credit facilities will be reduced and that could lead to an eventual default, in our view. We believe the fall of HNA and others to come is a necessary step of the learning curve for investors in Chinese credits although we do not believe the fallout will turn into a contagion for all Chinese high-yield credits.

That said, we believe investors need to learn how to price Chinese credits on a stand-alone basis properly, and rating agencies, especially Chinese rating agencies, need to adjust their rating models. In our opinion, wishful ratings at the issuances, followed by multiple and rush downgrades simply do not work and have left investors unprepared to sell bonds.

India Cleantech Launches $ Bond; Macro; Rating Changes; New Issues; Talking Heads; Top Gainers an…

By BondEvalue

US markets shed the risk-off sentiment with the S&P broadly flat while the tech heavy Nasdaq gained 0.7%. The upside was supported by Energy and Healthcare up 1% and 0.4% respectively while the indices were dragged down by Consumer Staples and Real Estate, down 0.9% and 0.6% respectively. Facebook and Boeing (detailed below) beat expectations while Paypal reported a drop in profits. Amazon is set to report earnings later today. European stocks reversed some of the losses – the CAC was up 1.2% and DAX and FTSE were up 0.3% each. Saudi TASI and UAE’s ADX were up 0.2% and 1% respectively. Asia Pacific stocks were up – the HSI led, up 2%, followed by Shanghai, Singapore’s STI and Nikkei up 0.9%, 0.5% and 0.4% respectively.

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