China: Hang Seng China Enterprises Index, Li Auto Inc., Guangzhou Xiaopeng Motors Technology Co Ltd, Nexteer Automotive, Alibaba Group, TAL Education and more

In today’s briefing:

  • HSCEI Dividends – Skewed to the Downside
  • Li Auto (理想汽车) Trading Update – No Mention of Hillhouse’s Investment
  • Xpeng: Following Lixiang’s IPO Plan
  • Nexteer (1316): AES to the Rescue
  • Alibaba: Where Is FCF Spent? – FY03/20 Update
  • TAL Education (TAL): Parents Told Reason for Strong 1Q21, But Stock Price Has Risen Too Much

HSCEI Dividends – Skewed to the Downside

By Brian Freitas

The 2021 HSCEI dividend futures have been on a roller coaster ride since January this year when the HSIL published a consultation paper on the inclusion eligibility of WVR securities and secondary listings in the Hang Seng China Enterprises Index (HSCEI INDEX).

The spread between the 2020/21 dividend futures dropped from -10 to -110 and is currently trading at -74 using mid-market prices.

We see a much higher probability of the 2020/21 dividend spread dropping towards its earlier lows due to:

  • The HSIL decision to allow WVR securities and secondary listings in the index and the removal of extra eligibility criteria on P-chips and Red chips that will result in a LOT of changes to the index constituents in the September and December reviews where the expected inclusions have a much higher weight and much lower dividend yield as compared to the expected exclusions;
  • The potential index inclusion of new large cap listings in Hong Kong like Ant Financial (1051260D CH) and secondary listings of Chinese companies listed in the US where the dividend yield will be lower than that on the excluded stocks;
  • Possible increase in the index weight cap on WVR securities and secondary listings from 5% to 10% next year;
  • Possible cuts to bank dividends following the Government asking them to ‘sacrifice’ profits to bolster their balance sheets and lend to SMEs;
  • Company results – companies will start announcing interim results in the next few weeks and the impact of the Coronavirus on their revenues/profits will be known.

The risks to this thesis are:



Xpeng: Following Lixiang’s IPO Plan

By Aqila Ali

Following the surge in share prices of Tesla Motors (TSLA US) and NIO Inc (NIO US) and Li Auto Inc. (LI US)’s filing for an IPO on the NASDAQ, two other EV start-ups, Weltmeister (WM Motor) and Guangzhou Xiaopeng Motors Technology Co Ltd (1564038D CH)(Xpeng) are also eyeing for IPOs in the U.S. Despite the U.S.-China tension, the recovery in the Chinese NEV market following the extension of the subsidy plans, and strong momentum for Tesla and Nio alongside the hype for Li Auto are the driving factors behind these IPO plans. In our opinion, Lixiang was lucky in getting a head start on going public this year; the others might not be as lucky as Lixiang. Most EV start-ups are struggling to make money, and an IPO appears to be a relatively quick way to raise cash.

We take a look at Xpeng (reported to have secretly submitted IPO documents to the US Stock market), in this note and hope to follow up with WM and see if it is any different from Lixiang, Nio, and Tesla.

We go through the details below.


Nexteer (1316): AES to the Rescue

By Henry Soediarko

Having increased its global market share from fifth to second in 2018 thanks to the technological advantages, the company’s share price has disappointed its shareholders and underperformed its customers’ in China due to its heavy reliance on US customers such as Ford and GM.

source: Capital IQ

With the new initiative to focus more on China and Emerging Markets, the company creates an opportunity to diversify its revenue geographically and participate in the rebound in the Chinese auto sector. 
The company is severely undervalued compared to the peers by 68% in PER and 38% in EV/EBITDA despite higher profitability (560% higher ROE) and leaner capital structure (50% better in D/E), showing potential for re-rating

If the company’s AES is to be implemented this year and adopted by various customers in China to start with, then the revenue that the company receives will bolster its current net income (USD 232.4 million) by around 38% to 570% in the next few years depending on the pace of the adoption and market share. Buy Nexteer Automotive (1316 HK) .

source: Capital IQ


Alibaba: Where Is FCF Spent? – FY03/20 Update

By Supun Walpola

Strong FCF generation is one of the key positives for Alibaba Group (BABA US). However, as we have noticed in the past, Alibaba has invested around 30% of its FCF in private companies, that most of the time, are undisclosed to Alibaba’s shareholders (refer our note, Alibaba: Where Is FCF Spent?).

However, in FY03/20, Alibaba’s investments in private companies was only 10% of its FCF, its lowest for the past five years. Instead, investments were directed towards listed equities, short term investments, and equity investees. We believe this provides better transparency of the money flow to Alibaba’s shareholders. We consider this to be a step in the right direction by Alibaba towards better corporate governance in the post-Jack Ma era.


TAL Education (TAL): Parents Told Reason for Strong 1Q21, But Stock Price Has Risen Too Much

By Ming Lu

  • TAL recovered strongly in 1Q21 (by May 2020).
  • We believe TAL’s online courses benefited from the bankruptcy of small tutoring schools.
  • Our EPS estimates are close to the lowest of the analyst estimates on Bloomberg.
  • The P/E band suggests that the stock price has a downside of 21%.
  • The stock has risen for about one year.

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