ChinaDaily Briefs

China: Beijing Jingneng Clean Energy, Sunac Services, Evergrande Services, Dali Foods Group, Baidu, Pinduoduo, Blue Moon Group Holdings, Lonking Holdings, ZTO Express and more

In today’s briefing:

  • Beijing Jingneng (579 HK): Privatisation Offer From Parent
  • Sunac Services (1516 HK) – Listing Tomorrow; Passives Need to Sell at the Close
  • Evergrande Services (恒大物业) Pre-IPO – Bad Parenting
  • Dali Foods: Low-Price Copycat With A Persistent High-Return Character But A Too Narrow Moat
  • Baidu: Acquisition of YY Live Is More Beneficial to JOYY than Baidu
  • Sunac Services (融创服务) IPO Trading – Subscription Rate Similar to Jinke Svcs
  • Pinduoduo Placement: As Expensive As It May Seem, There Could Be More Upside
  • Blue Moon IPO: Doing the Wash
  • Lonking (3339 HK): Rapid Catch-Up in Unit Sales, Further Backed by Attractive Yield
  • ZTO Q3 Results: As Margins Implode, It’s Coming ‘Back To the Pack’, Retain SELL

Beijing Jingneng (579 HK): Privatisation Offer From Parent

By David Blennerhassett

Following a suspension on the 3 July this year pursuant to the Code on Takeovers and Mergers, Beijing Jingneng Clean Energy (579 HK), an SOE utility, subsequently announced it had received a letter from Beijing Energy Holdings (BEH), its controlling shareholder, of an intention to make a Conditional General Offer.

Late last night, a voluntary conditional offer was announced at HK$2.70/share, a 70.89% premium to the undisturbed price. The Offer price is final. No dividends are expected during the Offer period.

Jingneng is incorporated in the PRC, and as such, there are no rights to compulsorily acquire shares or to require an Offeror do so. The only mechanism available to privatise is via a Merger by Absorption, incorporating a Scheme-like vote (≥ 75% for, ≤10% against). Additionally, as this is a “voluntary conditional offer”, a tendering condition of 90% is also present.

This looks done. There is just a question mark over timing.

More below the fold.


Sunac Services (1516 HK) – Listing Tomorrow; Passives Need to Sell at the Close

By Brian Freitas

Sunac Services (1516 HK) has announced that the offer price has been determined at HK$11.60/share and trading will start on 19 November. The offer price is the middle of the indicated range of HK$10.55-12.65 per share.

Based on the offer price of HK$11.6/share, the net proceeds from the global offering are estimated to be HK$7,859.7m. The company will receive additional net proceeds of HK$1,182.5m if the overallotment option is exercised.

Hang Seng China Enterprises Index (HSCEI INDEX) trackers will receive shares in Sunac Services (1516 HK) by virtue of their holding of Sunac China Holdings (1918 HK). We estimate passive trackers will need to sell around 1.1m shares at the close of trading on 19 November, though some of the selling could be done prior to the close.

Index arb traders will need to adjust their index compositions since the traded price of Sunac Services (1516 HK) will be used in the calculation of the Hang Seng China Enterprises Index (HSCEI INDEX) level and will result in the index moving 1.5bps higher.


Evergrande Services (恒大物业) Pre-IPO – Bad Parenting

By Zhen Zhou, Toh

Evergrande Services (EGS HK) (EGS) is looking to raise US$3bn in its upcoming Hong Kong IPO. 

Evergrande Services (EGS) is the property management arm of China Evergrande Group (3333 HK). The company has presence in 280 cities across 22 provinces in China with a total GFA under management of about 25m sqm and contracted GFA of 513m sqm as of 30th June, 2020.

In this note, we will look at company fundamentals, brief peer comparison, pre-IPO investors and the implied valuation.


Dali Foods: Low-Price Copycat With A Persistent High-Return Character But A Too Narrow Moat

By Steven Chen

  • Fujian-based Dali Foods operates multiple brands in the categories of food and beverage;
  • Since its foundation, the company has pursued a simple “copycat” strategy combined with an emphasis on lower-tier regions;
  • Despite a persistently high return on capital, we do not see a moat that is wide enough and difficult to cross in this rapidly-evolving and fiercely-competitive consumer goods market in China.

Baidu: Acquisition of YY Live Is More Beneficial to JOYY than Baidu

By Shifara Samsudeen, ACMA, CGMA

  • On 16th November, Baidu (BIDU US)  announced that it has entered into a definitive agreement with JOYY (YY US)  to acquire its domestic video-based entertainment live streaming business in China (known as YY Live). JOYY will retain its overseas business.
  • The deal includes YY mobile app, YY.com website and PC YY, among others, for an aggregate purchase price of approximately US$3.6bn in cash and the transaction is expected to occur in 1H2021 subject to certain conditions.
  • According to Baidu, YY Live stands to benefit from the company’s large traffic and thriving mobile ecosystem while Baidu will receive immediate operational experience and knowhow for large-scale video-based social media development, as well as a creator network that will further strengthen Baidu’s massive content provider network.
  • Baidu has been a late entrant to the thriving short video app market in China which is currently dominated by Douyin and Kuaishou. Baidu has been attempting to reduce its dependence on core advertising revenues, however, these efforts are yet to make any meaningful impact on the company’s top line and margins.

Sunac Services (融创服务) IPO Trading – Subscription Rate Similar to Jinke Svcs

By Zhen Zhou, Toh

Sunac Services (1516 HK) (SSH) raised about US$1bn by pricing its IPO at HK$11.60 per share, exactly at the midpoint of the price range. 

SSH is the property management arm of Sunac China. As of 31st May, 2020, SSH has a total contracted GFA of 226.8m sqm which covers 126 cities across 29 provinces, autonomous regions, and municipalities. The company has a focus on properties located in first and second-tier cities which make up about 86.2% of total GFA under management.

In this note, we will look at the deal dynamics and provide a table with implied valuation at different share price levels.

Our previous coverage of the IPO:


Pinduoduo Placement: As Expensive As It May Seem, There Could Be More Upside

By Supun Walpola

Pinduoduo (PDD US) plans to raise around $5bn through an issue of ADS and convertible bonds. PDD will offer $1.75bn worth of 5-year bonds convertible from 2023-25 and around 22m ADS worth around $3bn (at the market price of $132.4 as of 17/11/2020).

Proceeds from the placement will be used to invest in agricultural logistics infrastructure and responsive manufacturing as a part of the company’s broader strategy to take on e-commerce giants like Alibaba Group (BABA US) and JD.com Inc (ADR) (JD US) by tapping into the emerging online grocery shopping market.

In this note, we revisit our thesis on PDD ahead of the proposed placement.

PDD’s valuation looks bit of a stretch against Chinese e-commerce peers, however, not so much against other high-growth large-cap names. PDD’s share price has increased by more than 200% YTD and the momentum is still quite strong. With PDD potentially nearing profitability, we believe there could be further gains to be made on good news over the next few quarters. We would participate in the placement at the current valuation. 


Blue Moon IPO: Doing the Wash

By Arun George

Blue Moon Group Holdings (BMG HK) is a leading consumer household care company in China. In 2019, Blue Moon ranked first in China’s liquid laundry detergent market, concentrated liquid laundry detergent market and liquid soap market as measured by retail sales value, with a market share of 24.4%, 27.9% and 17.4%, respectively, according to Frost & Sullivan. Blue Moon has filed its PHIP and is pre-marketing for a Hong Kong IPO to raise $1 billion, according to press reports.

In Blue Moon IPO Initiation: Laundry List, we stated that on balance we think the positives (market-leading brand, strong margin progression, solid cash generation) outweigh the negatives (declining revenue growth and short-term COVID-19 impact). The 1H20 results disclosed in the PHIP show that the Blue Moon has creditably navigated the adverse revenue decline on its core business due to the COVID-19 outbreak by improving margin and cash generation. With the impact of the COVID-19 outbreak gradually receding in China, Blue Moon has strong fundamentals to ride a recovery in demand for its core fabric care products. Overall, we continue to believe that Blue Moon’s fundamentals are attractive.


Lonking (3339 HK): Rapid Catch-Up in Unit Sales, Further Backed by Attractive Yield

By Osbert Tang, CFA

After an underperforming 1H20, Lonking Holdings (3339 HK) has rapidly caught up with the industry in its unit sales performance. Sales of wheel loaders and excavators for 10M20 now achieved a 5% and 14% growth, respectively, compared with -2.6% and -11.2% respectively in 1H20, suggesting powerful pick-up in the last several months. Growth in products including forklifts and road rollers has also boosted all product categories to positive growth in 10M20.

We forecast 2H20 core earnings will grow 20.5% YoY (vs. -6.4% YoY in 1H20), but its share price now only trades on 0.8x P/B, exactly at historical average. Such multiple looks low relative to a projected ROE of 19%, the highest in the last five years. We also see its Rmb0.61/share of net cash (or 32% of share price) comfortably sustaining its 54% payout ratio, leading to an attractive 11.5% dividend yield.  


ZTO Q3 Results: As Margins Implode, It’s Coming ‘Back To the Pack’, Retain SELL

By Daniel Hellberg

ZTO Express (ZTO US) reported Q3 earnings results after the US close on Wednesday. While parcel volume and revenue both showed strong growth — up 51% and 26% YoY, respectively — core margins imploded and diluted net earnings per share fell about 10% versus Q3 2019. The collapse of ZTO’s core express margins shows ZTO has fallen back to the pack it used to lead convincingly.

We also note sharp YoY increases in gross profit from non-express activities, ‘other operating income’, and tax breaks, all of which flattered the company’s weak bottom line. Without these, we estimate net profit would have fallen by around a third in Q3. ZTO’s growing reliance on ‘other’ items indicates worsening earnings quality, in our view. 

Despite these, ZTO continues to enjoy rich valuation multiples, which we believe is undeserved, given our expectation of continued margin pressure in 2021. We retain our SELL rating on ZTO. 


Before it’s here, it’s on Smartkarma