ChinaDaily Briefs

China: Tencent, Evergrande, Melco Resorts & Entertainment, Meituan, Dragon Crown Group, Link REIT, Microport Scientific, Pinduoduo, China Conch Venture Holdings, Guangzhou R&F Properties and more

In today’s briefing:

  • Tencent Holdings – Under Severe Pressure
  • China Evergrande Group – Shoes Dropping At Shenjing
  • Melco Resorts: At US$10.44 a Share the Stock Is Immensely Cheap Here, Pandemic or Notwithstanding
  • Meituan: Major Overhang Cleared After $534m Fine
  • Dragon Crown’s VGO Bid Likely to Complete
  • Link REIT – Looking For Handouts
  • Microport Scientific (853.HK) – The Favorable and the Unfavorable Aspects
  • Merchant Deposits and Payables to Pad Cashflows – Who’s Culpable?
  • Conch Venture (586 HK): Not Much Left
  • Morning Views Asia: China Aoyuan Property, CIFI Holdings, Fantasia Holdings Group Co

Tencent Holdings – Under Severe Pressure

By Thomas J. Monaco

*Fintech Hits Are Coming: Regulators have forced the capitulation of internet anti-competitive behavior. Most recently, both Alibaba (BABA.US) [Alibaba} and Tencent (700.HK) [Tencent] have stopped blocking rivals’ links which prevented users to purchase goods using competitor payment apps. This is a big deal, given that FinTech represented a growing 30.3% of revenue for Tencent at 2Q21. The more Tencent relies on Fintech to support growth, the more alarming the moves by Alibaba and other competitors are; and

*Prior To The War On Gaming, Tencent’s Results Have Already Deteriorated: Tencent’s 2Q21 GAAP net income declined CNY 5.2 bn (10.8%) linked quarter – and were of poor quality. Results were challenged by: cost of revenue increase; operating expense increase; losses in associates; higher impairment charges; and weaker online games. Were it not for the artificially lower tax rate, results would have been even more challenged. We can’t wait to see what the impact of mainland China’s latest regulatory maneuvers will have on Tencent’s 3Q21 results out on November 10th.  

China Evergrande Group – Shoes Dropping At Shenjing

By Thomas J. Monaco

*Shenjing Fell Apart Before Evergrande Heated Up: Even prior to the China Evergrande Group (3333.HK) debacle, Shenjing Bank was (2066.HK) [Shenjing] struggling: 1) core operating earnings (excluding gains) were a negative CNY 1.1 tn at 1H21, by our calculation; and 2) short-term liquidity deteriorated at an unprecedented pace. With Evergrande’s risk, we calculate Shenjing’s NPLs are now closer to a whopping 24.4% – and solvency is called into question; and  

*Evergrande’s Smartest Move Ever: The rest of the financial system figured out that Shenjing was an accident waiting to happen, with the interbank market cutting their risk. Despite this, Shengjing Finance Holdings (SFH) purchased Evergrande’s 19.93% stake – becoming the bank’s largest shareholder. For USD 1.55 bn, SFH has now absolved Evergrande of being a liquidity and capital backstop. Well done! 

Melco Resorts: At US$10.44 a Share the Stock Is Immensely Cheap Here, Pandemic or Notwithstanding

By Howard J Klein

  • Sporadic, isolated Covid Delta outbreaks in Asia have stalled recovery cycle. But we see a strong recovery in progress by 2Q22.
  • MLCO has borne a disproportionate downside because of swift pandemic triggered revenue declines both in Macau and Manila.
  • The company’s liquidity assure it a forward positive outlook post pandemic with a daily run rate that runs ~US$2.

Meituan: Major Overhang Cleared After $534m Fine

By Ke Yan, CFA, FRM

On Friday October 8th post-market close, the State Administration for Market Regulation issued a notice to fine Meituan $534m for its monopolistic behavior of “two-choose-one”. In this note, we will analyze the impact of this notice. We think the quantum of the fine is within the market expectation and most importantly, the major overhang of the stock is removed. Recent data also shows that Meituan continues to be a beneficiary of the movement restriction due to COVID-19 and the growing penetration rate of the O2O services in China. 

Dragon Crown’s VGO Bid Likely to Complete

By Arun George

Dragon Crown Group (935 HK) is an integrated terminal service provider in China providing storage and handling services for liquid petrochemicals. After market close on Friday, it announced a pre-conditional voluntary general cash offer from an indirect subsidiary of Guangdong Great River Smarter (002930 CH) (GGRSL). The offeror will offer HK$1.28 in cash per offer share and will not increase the offer price. The bid represents a premium of 8.47% over the closing price of HK$1.18 per share on the last trading date (30 September prior to the trading halt). 

The key pre-conditions are regulatory approval (NDRC, MOFCOM and SAFE), the Shenzhen Stock Exchange approving the material asset restructuring report (MAR) which will be published by GGRSL (the offer will constitute a MAR of GGRSL) and GGRSL shareholder approval. We think that regulatory approvals should be forthcoming as Dongguan SASAC is a co-investor in the offeror. 

The completion conditions include receiving valid acceptances not less than 90% of the offer shares. The offeror has received irrecovables which represent 86.91% of the outstanding shares. The 90% acceptance threshold can be waived if the offeror and concert parties acquire 50% of the voting rights.

Overall, we think the offer price is attractive. In combination with the irrecovables, we think that the voluntary general offer will be successful. 

Link REIT – Looking For Handouts

By Thomas J. Monaco

*Worries In Both Hong Kong and Mainland China: The Hong Kong retail portfolio’s rental reversion rate continued to be challenged YOY in FY 1H22, albeit slightly improving from a negative 1.8% in FY 2H21 to a barely positive low single digits. Not surprisingly, this weakness would appear to be with us for an extended period – especially given the continued border closures amid the COVID-19 disruption.  The mainland Chinese expansion remains worrisome, given the likely carry-on impact of stress seen in the broader mainland Chinese property market and its lenders; and

*Poor Capital Management Becoming A Big Problem: Link REIT (823.HK) [Link] management also appears hell-bent on destroying shareholder value with deals which make little financial sense. Link recently announced the acquisition of Happy Valley Shopping Mall in Guangzhou where the current annualized NPI yield barely covering the project’s cost of funding. In order to improve occupancy, it would appear that Link would likely need to offer significant tenant enticements, and investment massively in asset enhancement. Bizarrely instead of weighing buybacks return versus new investment ROI, management views share buybacks as a mechanism to defend shares against short-selling. 

Microport Scientific (853.HK) – The Favorable and the Unfavorable Aspects

By Xinyao (Criss) Wang

After hitting a record high of HK$72.85/share in June, the share price of Microport Scientific (853 HK) has fallen continuously in the following months, down over 45% by the end of October 8, 2021. This insight mainly analyzed the 2021/1H performance, the business, the concerns and the outlook of MicroPort, including both the favorable and the unfavorable aspects.

Merchant Deposits and Payables to Pad Cashflows – Who’s Culpable?

By Jason Yap, CFA

The State Administration for Market Regulation, China’s antitrust regulator, imposed a fine of RMB3.4 billion (USD530 million) on food delivery group Meituan (3690 HK) for abusing its market position and ordered the company to rectify its operations.

Amongst other required remedial actions, Meituan was ordered to return deposit money to merchants. Merchant had reportedly used deposits, algorithms, and data to ensure that its restaurant merchants remained loyal to the platform, according to an FT article

This begs the question. Why are merchant deposits required by e-commerce companies like Meituan, Alibaba Group (9988 HK) and Pinduoduo (PDD US)? After all, most of the merchant transactions are 3P, which means the platforms do not carry any inventory risk and therefore do not need merchant deposits to offset risks. Could it be to increase switching costs or even to hold merchants ransom as the FT article suggests. 

In this Insight, we discuss how merchant deposits and merchant payables have been used as a means to pad operating cashflows (even though they are not strictly free cashflows), particularly for fast growing e-commerce platforms.

Further, we have seen the “walled gardens” of China’s tech giants start to crack – in other words, merchants can freely switch platforms taking away merchant deposits with them, which could potentially affect cashflows.  

Conch Venture (586 HK): Not Much Left

By Osbert Tang, CFA

We think that after the spin-off of China Conch Environment Protection Holdings (CEP HK), the businesses being left with China Conch Venture Holdings (586 HK) will be even smaller and render it more like a holding company. We think such development is not positive to Conch Venture, and also, based on our sum-of-the-parts valuation; it is trading on 4% premium, suggesting that there is minimal upside from here, in our view.

What’s left with Conch Venture will mainly be the waste incineration solution business, or waste-to-energy, but its capacity is significantly behind that for China Everbright Environment (257 HK) and Canvest Environmental Protection Group (1381 HK). Also, the remaining assets (excluding Anhui Conch Cement (914 HK)) will see slower earnings growth than with CEP.  The 16% rally in share price since Sep should have reflected most of the news. We have also provided in this Insight a matrix table indicating the SOTP value for different levels of CEP’s PER and A-share price of Conch Cement. 

Morning Views Asia: China Aoyuan Property, CIFI Holdings, Fantasia Holdings Group Co

By Charles Macgregor

Lucror Analytics Morning Views comprise our fundamental credit analysis, opinions and trade recommendations on high yield issuers in the region, based on key company-specific developments in the past 24 hours. Our Morning Views include a section with a brief market commentary, key market indicators and a macroeconomic and corporate event calendar.

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