ChinaDaily Briefs

China: Chongqing Zhifei Biological Products, Modern Dental Group, Xpeng, JD Logistics, Sichuan Languang Justbon Service Group, Chindata Group, Mapletree Logistics Trust, Perennial Energy Holdings Ltd and more

In today’s briefing:

  • FTSE China A50 Index Rebalance Preview: One High Probability Change; One on the Cusp
  • Modern Dental: A Turnaround Story with Tremendous Upside
  • Modern Dental Group (3600.HK) – Insights on Recent Rally of Stock Price and Future Outlook
  • Xpeng Support Downgrade
  • JD Logistics (京东物流) Pre-IPO – PHIP Updates and Fine-Tuning Valuation
  • Languang Justbon (2606 HK): Offer Now Open – For Up To Four Months
  • Chindata Group: Data Centre Value
  • Mapletree Launches S$ Perp; HY Outperforms IG Again in Apr; Macro; Ratings; Talking Heads; Gainer…
  • Perennial Energy (2798 HK): Take Money Off The Table Into Potential MSCI Up Weight
  • Languang Justbon’s Composite Document, IFA Opinion and Extended Closing Date

FTSE China A50 Index Rebalance Preview: One High Probability Change; One on the Cusp

By Brian Freitas

The FTSE China A50 Index (XIN9I INDEX) is designed to represent the performance of the 50 largest companies by full market cap of the mainland Chinese market that is available to domestic and international investors via the QFII, RQFII and Stock Connect programs.

The next rebalance will be effective after the close of trading on 18 June and the changes will be announced on 2 June. The review uses data from the close on 24 May to determine the stocks to be included and excluded.

Using data from 30 April, we see 2 potential inclusions Chongqing Zhifei Biological Products (300122 CH) and Haier Smart Home (600690 CH). The stocks that would be deleted from the index are Offcn Education Technology (002607 CH) and CSC Financial Co Ltd (601066 CH).

Chongqing Zhifei Biological Products (300122 CH) was included in the index at the September 2020 review and deleted at the December 2020 review. The stock could now be included in the index again following the run up in the stock price.

Modern Dental: A Turnaround Story with Tremendous Upside

By Sameer Taneja

Investment Thesis in Modern Dental

  1. We believe that Modern Dental Group (3600 HK)  has been a beneficiary of Covid as it has gained market share in the last 3 quarters globally in the dental prosthetics market. Q1 2021 showed 15-20% YoY revenue growth. Management guides revenue growth of not less than 10% for FY21 (vs. normalized high single-digit revenue growth from FY17-19) which we believe is conservative.
  2. The company has emerged leaner from Covid 19 as they completed a massive restructuring in 2020, resulting in EBITDA margin expansion to 25%  (from the 15-16% levels historically) in Q4 2020. We believe the company will maintain a 53%  gross profit margin and 25% EBITDA margin, and 16.5% Net profit margin through 2021, resulting in 410 mn HKD net profit for FY21. Based on this estimate, the stock trades on 9.2x PE FY21 despite the stellar run in share price in Q1 2021.
  3. With improving cash flows due to low Capex requirements (~90 mn HKD in FY21e and FY22e), we see Modern Dental Group (3600 HK) generate a free cash flow of 330 mn HKD in FY21e and 400+mn HKD in FY22e. At the very minimum, if the company adheres to its stated 30% dividend payout ratio, it will be net cash 52 mn HKD in FY21 and 338 mn HKD in FY22 ( almost 9% of the current market capitalization) from a net debt position of 158 mn HKD in FY20. 
  4. The company will use the excess cash on its balance sheet to raise the dividend payout ratio beyond 30%.  We also think management will continue to buy back stock subject to management stake not increasing by more than 5% every year.  The company has actively repurchased stock in 2020 and 2021. 

Trading at an undemanding valuation of 9.2x/8.7x PE FY21/22, we think there is an opportunity for at least 50% upside as peers in the similar industry of dental supply trade in the 20-25x range.  With a 30% payout ratio, there is also a decent dividend yield of 3.5% on the stock.

Modern Dental Group (3600.HK) – Insights on Recent Rally of Stock Price and Future Outlook

By Xinyao (Criss) Wang

Dentistry has always been one of the areas that investors are interested in. In the HKEX, there are also companies that focus on dental business such as Modern Dental Group (3600 HK), one of the world’s leading global dental prosthetic device providers. The Company’s share price rose from HK$1.44/share in the beginning of the year to HK$3.95/share on May 2, 2021, up 174%, and has been rising continuously in recent weeks, which was mainly driven by the positive financial results after the Company released its 2020 financial reports and previous relatively low valuation. This insight mainly analyzed the logic behind the rally of stock price, the future business prospects and investment suggestion of this Company.

Xpeng Support Downgrade

By Thomas Schroeder

Xpeng (XPEV US) displays weaker bull energy where the 30 support is now under pressure again after a rally that stalled at 38/39, representing fresh resistance. Downgrading to dig for support near 23/20.

Rally failure to reach the 45 pivot resistance sets a weaker tone for Xpeng.

Trendline resistance if the bull/bear pivot that will control the range.

Macro positive is the bull wedge that is forming but does appear to need more time.

JD Logistics (京东物流) Pre-IPO – PHIP Updates and Fine-Tuning Valuation

By Zhen Zhou, Toh

JD Logistics (JDL HK) is looking to raise US$4bn in its upcoming Hong Kong IPO. 

JD Logistics (JDL) was the leading supply chain solutions and logistics services provider in China in terms of revenue in 2018 and 2019. The company offers a full spectrum of supply chain solutions and logistics services ranging from warehousing to distribution, spanning across manufacturing to end-customers, covering regular and specialized items. 

In this note, we briefly look at the JDL’s PHIP filing which includes FY2020 numbers and fine-tune our valuation model.

We had previously covered the IPO in:

Languang Justbon (2606 HK): Offer Now Open – For Up To Four Months

By David Blennerhassett

On the 22 March, Sichuan Languang Justbon Service Group (2606 HK) (“Justbon”) announced its major shareholder (plus two other vendors) had entered into MOUs with Country Garden Services Holdings (6098 HK) (CGS), such that 126,011,860 H shares AND 750,000 domestic shares or 71.17% of shares out would be acquired. Upon completion, CGS was obligated to make an unconditional mandatory general Offer (MGO) for the H shares (at HK$51.0571/share) and domestic shares (at RMB42.8547/share).

In addition, if a delisting resolution was approved by independent H-shareholders and a 90% acceptance condition (of independent H-shares)) was satisfied, H-shareholders will receive HK$54.30/share and domestic shareholders RMB45.5768/share.

On the 19 April, Justbon said all three agreements had completed, giving CGS 71.17%.
The Composite Document has now been despatched, and the Offer is open to acceptances. The H Share Class Meeting will be held on the 17 June, which is also the first closing date. 
Assuming the delisting resolution is approved, the latest time for the acceptance condition to be satisfied is the 3 September, four months from now. 
But as this is an unconditional MGO, this extended acceptance period tilts the deal in favour of CGS securing the 90% tendering condition.
More below the fold.

Chindata Group: Data Centre Value

By Arun George

Chindata is a data centre operator. It is the largest carrier-neutral hyperscale data centre operator in Asia-Pacific emerging markets as measured by capacity in service, according to Frost & Sullivan. The MSCI May 2021 review period has just wrapped up, and Chindata is among the stocks with the highest probability of inclusion in the MSCI Standard index and the largest buying impact from passive funds – MSCI May 2021 Index Rebalance Preview: Let The Games Begin.  

After touching $23.65 per ADS on 26 Feb 2021, Chindata has derated and is down 45% YTD. The last close price of $13.19 per ADS is 2% below the IPO price of $13.50 per ADS. The Asia-Pacific hyperscale data centre market remains a structural growth market in part due to the increasing prevalence of outsourcing data centre services, rising client demand for higher power density, and increasing regulatory requirements on data security. Overall, we think that Chindata remains an attractive play on these favourable market dynamics and the shares are worth a closer look. 

Mapletree Launches S$ Perp; HY Outperforms IG Again in Apr; Macro; Ratings; Talking Heads; Gainer…

By BondEvalue

S&P fell 0.7% on Friday to reverse the prior day’s gains while Nasdaq was 0.9% lower. US 10Y Treasury yields pushed lower to 1.63%. European equities were also lower with the DAX and CAC down 0.1% and 0.5% while FTSE was 0.1% higher. FT reports that a double-dip recession has emerged in the Eurozone after Germany’s GDP printed a quarterly contraction of 1.7% alongside Spain, Italy and Portugal contracting 0.5%, 0.4% and 3.3% respectively; France was a ray of hope growing by 0.4%. US IG CDS spreads were 0.4bp wider and HY widened 2.3bp. EU main CDS spreads were 0.3bp tighter and crossover spreads tightened 0.6bp. Asian equity markets are trading lower by 0.3% today and Asia ex-Japan CDS spreads were 0.5bp tighter.

Perennial Energy (2798 HK): Take Money Off The Table Into Potential MSCI Up Weight

By Sameer Taneja

Perennial Energy Holdings Ltd (2798 HK) has had a stellar run over the last year, with the share price up over 680% since January 3rd, 2020.  We firmly believe that with forward earnings at around 30x PE FY21 and 19x PE FY22,  it’s time to take money off the table from this name. We do understand that there is some anticipation of the stocks inclusion in the MSCI, which has been written about by fellow insight provider Brian Freitas in his insight yesterday MSCI May 21 Index Rebalance Preview: Review Period Is a Wrap. We would take this opportunity to sell into strength.

There is better value for money in owning Shougang Fushan Resources (639 HK), which I have written about in my insight Shougang Fushan: Deep Value Play with Coking Coal Price Move Upside. Trading at 2.5x EV-EBITDA with a 10% dividend yield Shougang Fushan Resources (639 HK) offers way more stability and margin of safety to Perennial Energy Holdings Ltd (2798 HK).

Languang Justbon’s Composite Document, IFA Opinion and Extended Closing Date

By Arun George

Sichuan Languang Justbon Service Group (2606 HK) has despatched the composite document in relation to Country Garden Services Holdings (6098 HK) base and enhanced offer. Currently, Country Garden owns 71.17% of the outstanding shares comprising 66.99% of the domestic shares and 71.20% of the H Shares. 

The base offer is an unconditional mandatory cash offer for all the issued shares is HK$51.0571 per H-share (RMB42.8547 per domestic share. The enhanced share offer, which is payable only if the delisting is approved, is HK$54.3000 per H-share (RMB45.5768 per domestic share). 

Unsurprisingly, the IFA considers the base and enhanced offer to be fair and reasonable. We broadly agree with the IFA analysis with the exception that the peer multiple comparisons could be improved. 

The two key conditions for the delisting will be approval by at least 75% independent H-shareholders (<10% of all independent H-shareholders rejection) and the satisfaction of the minimum acceptance condition (90% of H-shares held by independent H-shareholders). Satisfaction of the minimum acceptance condition is the key hurdle. We note the privatisation proposals for Beijing Jingneng Clean Energy (579 HK) and Harbin Electric Co Ltd H (1133 HK) have previously failed due to the inability to meet the 90% minimum acceptance condition.  

Country Garden Services has bought itself some leeway by having the right to extend the closing date from 17 June to not later than 3 September. In theory, the extended time period should provide a greater chance of meeting the 90% threshold. At the last close, the gross spread to the enhanced offer price of HK$54.3000 stands at 4.9%.

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