ChinaDaily Briefs

China: Tencent, Hansoh Pharmaceutical, Li Auto Inc., Alibaba Group, PCCW Ltd, Asymchem Laboratories, Meituan, Nature Home Holding Company, Lockheed Martin, Yonghe Medical Group and more

In today’s briefing:

  • Tencent Holdings – Only The Beginning
  • As The Dust Settles – Potential Index Changes to the FTSE China 50/A50 & HSCEI
  • Li Auto (LI US) Dual Primary Listing: HSCI Fast Entry; HSCEI Dec Inclusion & Div Futures Lower
  • Alibaba (BABA US) – Looking for a Reprieve from Regulatory Headwinds
  • StubWorld: The Trimming Of PCCW
  • Asymchem Labs A/H Listing Early Look – Fast Growing, Relatively Insulated
  • Meituan Sell Levels on a Bounce
  • Nature Home’s Privatisation Bid
  • AVIC Launches € Bond; Macro; Rating Changes; New Issues; Talking Heads; Top Gainers & Losers
  • Pre-IPO Yonghe Medical Group – Here Are the Concerns

Tencent Holdings – Only The Beginning

By Thomas J. Monaco

*What’s Up With WeChat: Mainland China appears to have taken additional action against Tencent Holdings (700.HK) [Tencent], following Monday’s regulatory edict. Tencent is suspending new user registrations for its WeChat services, as it is undergoing a “security technical upgrade” in accordance with relevant laws and regulations. WeChat is Tencent’s most important business, and dominates mainland Chinese social media; and 

*Pain Trade Coming:Tencent is widely expected pay a large fine. In addition, Tencent may have to give up its exclusive music rights and possibly dispose of Kuwo and Kugou. Further, we have no doubt that Tencent will also follow Alibaba Group (BABA.US) [Alibaba] in their formation of a financial holding company. For Tencent, WeChat Pay and the broader lending/deposit taking business are likely to be reined-in. At CNY 38.5 bn for full year 2020, FinTech represents a growing 28.8% of revenue – and is a key and growing component of Tencent’s current and future results. No matter what spin that Tencent wants to place on its other businesses, an FHC represents significant downside risks. Earnings will compress, as capital requirements increase.


As The Dust Settles – Potential Index Changes to the FTSE China 50/A50 & HSCEI

By Brian Freitas

As regulations have changed in China, and as the market positions for regulations that could be changed in China, the fallout has resulted in markets selling off with a few sectors firmly in the crosshairs.

What started off with the ‘three red lines’ for real estate companies, the pulled IPO of Ant Financial Services Group (6688 HK) in November 2020 and regulating monopolies in big-tech has spread to the online education industry, food delivery industry, property service companies and the market is bracing for regulation of the medical and pharmaceutical industry.

The rampant selling of stocks that are affected by the regulations or could be affected will have an impact on the upcoming September index rebalances for the FTSE China 50 Index and FTSE China A50 Index (XIN9I INDEX) and the December rebalance for the Hang Seng China Enterprises Index (HSCEI INDEX).

In addition, there will be a lot more mainland China companies that will list in Hong Kong since they will not need to (or will find it easier to) get approval from the Cyberspace Administration of China. That will also have implications for these indices.

In this Insight, we look at the potential changes to the FTSE China 50, FTSE China A50 Index (XIN9I INDEX) and Hang Seng China Enterprises Index (HSCEI INDEX) in the upcoming reviews based on the close of trading on 27 July.


Li Auto (LI US) Dual Primary Listing: HSCI Fast Entry; HSCEI Dec Inclusion & Div Futures Lower

By Brian Freitas

Li Auto Inc. (LI US) has got approval from the HKEX (388 HK) for a dual primary listing. Media reports indicate that the company could raise between US$1bn-2bn in the offering. Based on the XPeng (9868 HK) timeline, Li Auto could list around 6-9 August.

Xpeng (XPEV US) / XPeng (9868 HK) raised US$1.8bn via a dual primary listing earlier this month and Li Auto Inc. (LI US) is following closely behind. Maybe NIO Inc (NIO US) comes next.

We expect Li Auto Inc. (LI US) to get Fast Entry to the Hang Seng Composite Index (HSCI) though, as a WVR security, the stock will only be eligible for Stock Connect once it has completed 6 months of listing plus 20 trading days.

Li Auto could also be included in the Hang Seng China Enterprises Index (HSCEI INDEX) at the December review. This will lead to a further drop in the HSCEI 2022 dividend futures since we do not expect Li Auto Inc. (LI US) to pay dividends in the near future, while the potential deletion is a higher dividend yielding stock.


Alibaba (BABA US) – Looking for a Reprieve from Regulatory Headwinds

By Victor Galliano

  • The market is looking for a signal of an easing of regulatory pressures on China BigTech
  • Alibaba Group (BABA US) is in the eye of the regulatory storm, first with the crackdown on the Ant IPO, then with the anti-trust restrictions on Big Tech and more recently with China regulatory bodies focusing on US listed China tech
  • The share price is now close to the pandemic low of March 2020, having fallen a further 20% since the end of April
  • Alibaba valuations are compelling, even versus its China BigTech peers, and, less surprisingly, compared to Amazon.com Inc (AMZN US)
  • Alibaba’s market capitalization to revenue discount to its core peers has narrowed somewhat, as Chinese regulators have extended their focus on BigTech beyond the Alibaba group, but remains elevated
  • Furthermore, Alibaba’s premium to Amazon in terms of market capitalization to revenue has totally dissipated
  • We stick with our positive view on Alibaba and we believe that, even though regulatory risks have yet to recede, the secular growth story – albeit dented – in China tech still holds and that in the case of Alibaba, its modest valuations stand out
  • Risks to our positive view on Alibaba include further regulatory hurdles, such as market share limitations and tighter controls on big data, as well as client loss as a result of these regulatory limitations

StubWorld: The Trimming Of PCCW

By David Blennerhassett

In StubWorld this week …

PCCW Ltd (8 HK) enters into an SPA with DigitalBridge Group (DBRG US) to sell its Hong Kong and Malaysian data center businesses for US$750mn. 

Preceding my comments on PCCW are the weekly setup/unwind tables for Asia-Pacific Holdcos.

These relationships trade with a minimum liquidity threshold of US$1mn on a 90-day moving average, and a % market capitalisation threshold – the $ value of the holding/opco held, over the parent’s market capitalisation, expressed in percent – of at least 20%.

As always, more below the fold.


Asymchem Labs A/H Listing Early Look – Fast Growing, Relatively Insulated

By Sumeet Singh

Asymchem Laboratories (002821 CH) (AL) aims to raise around US$1-1.5bn in its H-share listing in Hong Kong. The A-shares listed were listed in Shenzhen in 2016.

AL is a provider of outsourced pharmaceutical development and manufacturing solutions and services. AL provides process development and manufacturing services for small molecule drugs throughout the preclinical, clinical and commercial stages. According to Frost & Sullivan, it is the fifth largest drug substance contract development manufacturing organization (CDMO) globally, and the largest China-based commercial stage chemical drug CDMO, as measured by 2020 revenue.

As the A-shares are already listed and well covered, we will treat this listing more like a placement rather than an IPO. However, given the size of the listing, we will go into more details than we would for a regular placement. Hence, in this note we will briefly cover the company’s background and recent performance before touching upon the deal dynamics. 


Meituan Sell Levels on a Bounce

By Thomas Schroeder

Meituan (3690 HK) impulsive decline does warn of lower levels after a bounce with a focus on selling a near term bounce. Spike in sell volume is a negative. Oversold RSI does warn of a reaction bounce for brave traders. 

Trend resistance now lies at 280 as the forward level to clear. As long as this barrier remains intact the trend is down.


Nature Home’s Privatisation Bid

By Arun George

Nature Home Holding Company (2083 HK) manufactures and sells flooring products and customised home decoration products. After market close on Tuesday, it announced a privatisation offer by way of a scheme of arrangement from New Modern Home Limited. The offeror will offer HK$1.70 cash per scheme share. The bid represents a premium of 39.3% over the closing price of HK$1.22 per share on the last full trading day (16 July 2021 prior to the trading halt). 

The key condition precedents are the headcount test along with the scheme approved by at least 75% disinterested shareholders and <10% rejection by all disinterested shareholders. As disinterested scheme shareholders represent 292.1 million shares or 21.20% of shares outstanding, the 10% blocking stake is 29.2 million shares or 2.12% of shares outstanding. No shareholder holds a blocking stake. 

Post-privatisation, the offeror plans to re-list all or part of its businesses in the PRC which while refreshingly honest, may not sit well with some shareholders. Overall, we think the offer price is attractive and that the privatisation bid will be successful. 


AVIC Launches € Bond; Macro; Rating Changes; New Issues; Talking Heads; Top Gainers & Losers

By BondEvalue

US markets hovered around the highs ahead of the Big Tech earrings. S&P was up 0.2% and Nasdaq nudged higher 0.03% created new closing records. Energy up 2.5% and Materials, Consumer Discretionary and Communication Services up ~0.7% pulled the markets higher. Corporate earnings continued as Tesla beat expectations (detailed below) while Lockheed Martin delivered disappointing results. All eyes are now set on the earnings of Apple, Microsoft, Google and Starbucks . Meanwhile, a high level meeting between US and China ended without any material output amid escalated tensions. US 10Y Treasury yields rose 2bp to 1.28%. European stocks were mixed – CAC was up 0.2%, FTSE was flat and DAX was down 0.3%. US IG CDS spreads tightened 0.2bp and HY widened 1.8bp. EU Main and Crossover spreads widened 0.4bp and 3bp respectively. Brazil’s Bovespa was up 0.8%. Saudi TASI and UAE’s DAX were up 0.2% and 0.9% respectively. Asia Pacific stocks edged higher as mainland China stocks gained – the Nikkei, Shanghai and Singapore’s STI were up 0.3-0.5% while HSI was down ~0.7%. Asia ex-Japan CDS spreads were 1.6bp wider.

Pre-IPO Yonghe Medical Group – Here Are the Concerns

By Xinyao (Criss) Wang

Modern fast pace of life and huge work pressure make hair loss anxiety spread to all kinds of groups. As people pay more attention to hair, the awareness of hair health and management is gradually awakening, and hair transplantation is one of the solutions. On June 17, Yonghe Medical Group (YMG HK) formally submitted its prospectus to the HKEX and planned to be listed on the main board. If everything goes well, Yonghe will be the first listed company in the field of hair transplantation in China. However, despite the promising market potential, there are some concerns of the Company that deserve investors’ attention.


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