ChinaDaily Briefs

China: Hong Kong Hang Seng Index, China Machinery Engineering, China Renewable Energy Investment, Gcl Poly Energy Holdings Limited, Ant Group, China Maple Leaf Educational Systems, MicroPort CardioFlow, RLX Technology Inc, Linklogis, Chongqing Zhifei Biological Products and more

In today’s briefing:

  • HSI and HSCEI: Collateral Damage of the Executive Order
  • China Machinery Engineering (1829 HK): Delisting Offer From Parent
  • China Renewable Energy (987 HK): Possible Privatisation Offer
  • GCL Poly Energy Holdings Placement – Won’t Solve Its Debt Problems
  • Ant Group: Regulatory Pressures Drive the State’s “big Data” Grab, and a Revised SOTP Valuation
  • Maple Lead Edu Bottom Projection
  • MicroPort Cardioflow (微创心通) Pre-IPO: Strong Sales Ramp-Up Despite Being Late in Market
  • RLX Technology Pre-IPO – Peer Comparison and Valuation
  • Linklogis IPO Initiation: ISupply
  • Chongqing Zhifei Biological Products- Promising Future After Successful Renewal of Contract with MSD

HSI and HSCEI: Collateral Damage of the Executive Order

By Brian Freitas

Following President Trump’s ‘Executive Order on Addressing the Threat from Securities Investments that Finance Communist Chinese Military Companies’, FTSE, MSCI and S&P have been quick to delete Semiconductor Manufacturing International Corp (SMIC) (981 HK), China Mobile (941 HK), China Telecom Corp Ltd (H) (728 HK) and China Unicom Hong Kong (762 HK), while CNOOC Ltd (883 HK) could be deleted toward the end of January.

With these stocks included in the Hong Kong Hang Seng Index (HSI INDEX) and Hang Seng China Enterprises Index (HSCEI INDEX), US persons are unable to trade them or derivatives/ETFs where these stocks are a constituent. This has led to US banks, hedge funds and other asset managers not being able to put on any new positions on these stocks/products and they will be unwinding these positions over the next 10 months to divest all their holdings.

With State Street Global Advisors Asia and BlackRock Asset Management North Asia announcing that they will not make any new investments in a sanctioned entity, and a move from full index replication to representative sampling for the Hong Kong Hang Seng Index (HSI INDEX), the tracking error on these ETFs will increase. The dividend yield on the Tracker Fund of Hong Kong Ltd (2800 HK) will drop since most of these stocks have high dividend yields and could lead to large outflows from retail investors that would look to alternative ETFs that hold these stocks in the correct weight in the index.

We have also got questions on whether Hang Seng Indexes would delete these stocks from their indices and the implication of the deletions on the indices. Hang Seng Indexes has said they have no plans to delete the stocks from their indices, but they were monitoring market developments closely. We think there is a very very small probability of the stocks being deleted from the Hong Kong Hang Seng Index (HSI INDEX) and Hang Seng China Enterprises Index (HSCEI INDEX)

China Machinery Engineering (1829 HK): Delisting Offer From Parent

By David Blennerhassett

After China Machinery Engineering (1829 HK)‘s (CMEC) shares were suspended ahead of trading on the 8 January  “pursuant to The Codes on Takeovers and Mergers which constitute inside information of the Company“, CMEC has now announced a pre-conditional Offer from its controlling shareholder, state-owned Chinese National Machinery Industry Corporation, also known as SINOMACH.

The Offer price is HK$3.70/share, a 45.10% premium to last close, and a 118.93% premium to the average closing price over the previous 30 trading days. The Offer price will not be increased. A concurrent Offer for CMEC’s domestic shares at RMB3.082692/share is also tabled.

CMEC has 4,125,700,000 shares out, comprising 908,270,000 H shares and 3,217,430,000 domestic shares.

SINOMACH holds 3.185bn domestic shares directly, and 32.174mn shares indirectly via China United. Together this totals 77.99% of the total voting interest in CNEC. 

SINOMACH does not hold any H  shares.

The pre-conditions, which cannot be waived, include approvals from NDRC, MoC, and SAFE.

As CMEC is PRC incorporated, this delisting proposal is by way of a Merger by Absorption, which involves a Scheme-like vote from disinterested shareholders. There is no tendering acceptance condition attached to this delisting.

This appears a relatively clean deal. The Long Stop date is the 13 January 2022, but this should be completed well before. Merger by Absorption transactions are typically wrapped up in around four months.

More below the fold.

China Renewable Energy (987 HK): Possible Privatisation Offer

By David Blennerhassett

China Renewable Energy Investment (987 HK) is a micro-cap clean energy play in China.

Last April, 55.66% of issued shares moved within CCASS, from HSBC into BEA. This is Hkc Holdings (190 HK)‘s stake.

The movement may simply have been an administrative matter. But given the flurry of M&A activity in the PRC renewable energy space, it was worth speculating on the matter.

Both China Renewable Energy Investment (987 HK) and Hkc Holdings (190 HK) are now suspended pursuant to the Hong Kong Code on Takeovers and Mergers.

Should an Offer be tabled, this would be the fifth Hong Kong-listed, clean-energy company subject to a privatisation or change of control in the last two years – and seventh in which interested parties have been circling.

As always, more below the fold.

GCL Poly Energy Holdings Placement – Won’t Solve Its Debt Problems

By Sumeet Singh

Gcl Poly Energy Holdings Limited (3800 HK) aims to raise around US$460m via a primary placement to reduce borrowings. 

The shares have done exceedingly well since Aug 2020 in the face of multiple headwinds.

Ant Group: Regulatory Pressures Drive the State’s “big Data” Grab, and a Revised SOTP Valuation

By Victor Galliano

  • Regulatory pressure is driving Ant Group to place its financial operations into a holding company which would be subject to bank-like regulation, as Chinese regulators seek increasing oversight of the fast growth in consumer and SMB debt
  • Furthermore, and more importantly, press reports indicate that regulators are pushing for Chinese FinTech giants to share their consumer credit data with state entities, to enhance the centralized “big data” repository at the PBoC
  • The planned launch of the PBoC’s digital currency – the e-yuan – is intended to try to level the playing field between electronic payments leaders Alipay (Ant) and WeChat pay (Tencent) and the bank system, as well as giving the state a powerful tool for digital financial surveillance
  • For Ant, more bank-like regulation of credit would imply higher capital requirement for its credit operations as well as slower loan growth, with the sharing of Ant Group’s many terabytes of data with the authorities also potentially detracting from Ant Group’s “big data” edge and, by extension, valuation
  • We take a preliminary stab at a revised SOTP valuation range – despite the lack of clear regulatory parameters so far – of USD130-160bn for Ant Group, a far cry from the market’s estimated USD250bn+ valuation in 4Q20
  • We see further upside potential in the near term for Chinese SOE banks, as regulators begin to level the regulatory playing filed with FinTech; it is also time, in our view, to look again at Alibaba Group (BABA US), 33% shareholder in Ant Group
  • Risks to our negative view on Ant Group include a less aggressive implementation of regulatory rules on Chinese FinTech, and only limited disclosure on its “big data” lake

Maple Lead Edu Bottom Projection

By Thomas Schroeder

China Maple Leaf Educational Systems (1317 HK) downside gap on volume will lead to a capitulation reach for support. MLES stands out on the value radar at a time when markets are looking frothy and seeking rotation plays.

The initial spike lower on high sell volume typically sees follow through downside and in this case would briefly breach lower pattern support at 1.78 and sets up a long near projection at 1.58.

MicroPort Cardioflow (微创心通) Pre-IPO: Strong Sales Ramp-Up Despite Being Late in Market

By Ke Yan, CFA, FRM

MicroPort Cardioflow is a transcatheter valve therapeutic medical device company incubated from the MicroPort Group. The company aims to raise up to USD 300m via a Hong Kong listing.

We look at the company’s first-generation TAVR product, VitaFlow. We think it has decent clinical data in terms of efficacy and safety. It was launched two years behind the main competitor, VenusMedtech’s VenusA-Valve. Having said that, its sales ramp is strong since its launch in 2H2019. 

The company’s management team has been working within the MicroPort Group for more than a decade. We believe that the company can leverage on the sales network of MicroPort Group. In terms of pre-IPO investors, we note that they are mainly domestic funds but the quality is decent. 

RLX Technology Pre-IPO – Peer Comparison and Valuation

By Sumeet Singh

RLX Technology Inc (RLX US) aims to raise around US$1bn in its US listing. RLX is the largest branded e-vapor company in China with a market share of closed-system e-vapor products in terms of retail sales value of 48% in 2019 and 62.6% over 9M20. 

RLX only sells its e-vapor products in China. As of Sep 2020, it had over 5,000 branded partner stores and sold its products in over 100,000 other retail outlets, covering over 250 cities in China.

Even though the company only started operations in 2018, it was already recording sales of around US$330m by 9M20. Margins too have been on an uptrend and operating cash flows have been robust. Moreover, the founding team and investor backing appear strong.

However, sales have mostly grown owing to rapid expansion of its distribution network. Furthermore, the brand also appears to have overseas operations but there has been no mention of that in the company’s filings, leaving one to wonder where these operations are housed and who exactly owns them.

In our previous note, links to which are below, we have spoke about various aspects of the deal. In this note, I’ll undertake a peer comparison and talk about valuation.

Links to our previous notes:

Linklogis IPO Initiation: ISupply

By Arun George

Linklogis (LINK HK) is a leading technology solution provider for supply chain finance in China. Its solutions optimise the payment cycle of supply chain transactions and digitalize the entire workflow of supply chain finance. Linklogis was the leading technology solution providers in China with a 20.5% market share of supply chain finance transactions processed in 9M20, according to CIC. Linklogis is backed by Tencent Holdings (700 HK), CITIC Capital, GIC and Standard Chartered (STAN LN). Linklogis has filed for a Hong Kong IPO to raise as much as $500 million, according to press reports.

Linklogis is a play on China’s supply chain finance market. SMEs in China had an average of 92 days of accounts receivable outstanding in 2019, higher than 51 days on average in the US. It could also take up to 6 to 12 months for SMEs to receive final payments. The Chinese government has introduced a series of supportive policies to direct funding towards small businesses, including imposing SME lending growth targets for banks. Supply chain finance has proven to be a useful way to bridge the financing gap of SMEs, as it allows SMEs to get quick access to payment and funding at low costs. In 9M20, Linklogis’ customers helped their SME suppliers obtain low-cost financing at an average financing cost of 5.4%, significantly lower than the cost of financing extended to SMEs relying on their own creditworthiness that ranges from 10% to 20%, according to CIC.

Linklogis is an attractive play on these market dynamics by combining an attractive monetisation model, high customer retention rate (strong revenue visibility) and good operating leverage.

Chongqing Zhifei Biological Products- Promising Future After Successful Renewal of Contract with MSD

By Xinyao (Criss) Wang

On December 29th, 2020, Chongqing Zhifei Biological Products (300122 CH) announced that its self-developed 15-valent pneumococcal conjugate vaccine (PCV15) had completed the preparation work and officially entered the phase III clinical trial. As a number of products in the pipeline continue to advance, PCV15 into clinical phase III is an important step in the pipeline valuation remodeling of the Company. In addition, Zhifei also announced that, on December 23rd, 2020, the Company and MSD reached an agreement: MSD will exclusively supply the products under the agreement to Zhifei, and Zhifei is authorized to import, distribute and promote the products in mainland China as agreed. After the successful renewal of the contract, the performance of the key products would be improved with certainty.

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