ChinaDaily Briefs

China: Tencent, Nature Home Holding Company, Alibaba Group, Beijing Huafeng Test & Control Technology-A, Kunlun Energy, iShares Barclays USD Asia High Yield Bond Index ETF, Hong Kong Hang Seng Index, Evergrande Real Estate Group, Beijing Airdoc Technology and more

In today’s briefing:

  • Tencent/NetEase: July Game Approval Analysis
  • Nature Home (2083 HK)’s Full Offer
  • Few Points to Consider Before Bottom Fishing Chinese Tech
  • Tencent (700 HK): When to Catch a Falling Knife
  • STAR50 Index Rebalance Preview: Big Turnover in a Volatile Market
  • Kunlun Energy (135 HK): Positive Takeaways from Discussion with Company
  • ESR REIT Launches S$ 5Y; Macro; Rating Changes; New Issues; Talking Heads; Top Gainers & Losers
  • China/HK Short and Support Points
  • Morning Views Asia: Evergrande Real Estate Group
  • Pre-IPO Beijing Airdoc Technology – The Strength and the Concerns

Tencent/NetEase: July Game Approval Analysis

By Ke Yan, CFA, FRM

Recently the Chinese regulator National Press and Publication Administration (NPPA) announced the July batch of approvals for domestic games. 

In this insight, we will have a close look at the trend of domestic game approval for both Tencent and its key competitor, Netease. We will also have a review of domestic games approved in 2021 YTD. 

We are of the view that Netease Inc (Adr) (NTES US) has done better than Tencent Holdings (700 HK) in terms of games approved. 

Nature Home (2083 HK)’s Full Offer

By David Blennerhassett

After wood flooring manufacturer Nature Home Holding Company (2083 HK) was suspendedpursuant to the Code of Takeovers and Mergers” on the 19 July, in Nature Home (2083 HK): Possible Takeover Target I concluded if an Offer was to be tabled, it would likely be via a Scheme and at ~HK$1.70/share.

And this is exactly what transpired. 

Late last night, Nature Home announced an Offer from its founding shareholders, by way of a Scheme, at HK$1.70/share. The Offer Price will not be increased. Nature Home does not intend to declare any dividends during the Offer period. 

Dehua Tb New Decoration A (002043 CH) has given an irrevocable rollover undertaking for its 19.6% stake. 

Standard Scheme conditions apply. On account of the Rollover Agreement, Dehua does not form part of the independent shareholders who will vote on the merits of the Scheme.

This Offer looks done.

More below the fold.

Few Points to Consider Before Bottom Fishing Chinese Tech

By Oshadhi Kumarasiri

After trading sideways during May/June 2021, bulls got excited as Alibaba Group (9988 HK) rallied by 10% in the last week of June to $229.4 per share. Unfortunately, the joy was cut short, as Xi Jinping’s government went back on the offence with a broadened crackdown on tech platforms, especially the US-listed Chinese tech companies like the recent ride-sharing IPO DiDi Chuxing (DIDI US). As a result, Alibaba’s share price dropped 15% to a new 52 week low. Before the dust settled the Chinese government introduced reforms to private education companies, preventing them from making profits from the after-school tutoring businesses.

We believe all of these interventions are messages about the direction of the government policy over the next few years and the government’s effort to bring equality through preventing monopolistic behaviour and address cybersecurity, data collection and privacy concerns could be broader policies of Xi Jinping’s government as the Chinese economy enters a new era of growth.

New economy stocks like Alibaba, Tencent, Vipshop and have never gone through a period of time that’s even remotely similar to the time frame it is about to go through in the next few years.

Therefore, we think bottom fishing Chinese e-commerce stocks during this regulatory crackdown and economic policy transition could be of high risk unless they get to a point where they are bargains on price to book multiples.

In this insight, we discuss some important points to make a note of, if you are considering bottom fishing Alibaba, one of the safest Chinese tech stocks in the market.

Tencent (700 HK): When to Catch a Falling Knife

By Mitchell Kim

Investors’ concerns over increasingly expanding regulatory restrictions and the potential market intervention led to a rout of Chinese tech and education stocks over the last several trading sessions. The select 9 Chinese tech stocks I follow collectively lost USD320 billion in value over 20 July to 27 July.  While some of the regulatory risks were known from March 2021, ramifications of the potential value-destroying restrictions on the education companies, termination of Tencent Music (TME US)’s exclusive rights, and the suspension of new user registration for Tencent (700 HK)‘s Wechat spook the market. 

Tencent’s market cap has declined 19% during the seven-day period, which cannot be fully explained by the potential value lost from the recently announced regulatory measures, in my view.  Back in April (see Tencent (700 HK): Fintech Risk Is Lurking) I pointed out that Tencent shares could be overvalued by 20% on fintech risk alone.  The shares are down nearly 30% since then. I now believe the shares could be undervalued by 10%, notwithstanding the undefined regulatory risks ahead.  Having said that, catching a falling knife is not for the faint-hearted. 

These stocks rebounded on the US Wednesday trading session, possibly reflecting the sentiment “enough is enough.” Bloomberg reported that the securities regulator assured select investment bankers that the education policies are not to be for other industries.     

In this report, I summarize the announced regulatory events this year to date and share my thoughts on why the market may be over discounting Tencent’s value by looking at the potential value impact of Tencent’s fintech value (a reiteration from the April report) and the impact of the value decline of DiDi Chuxing (DIDI US) and Tencent Music.          

STAR50 Index Rebalance Preview: Big Turnover in a Volatile Market

By Brian Freitas

The SSE STAR 50 (STAR50 INDEX) is a free float market cap weighted and is made up of the 50 largest stocks based on full market cap that are listed on the STAR Market.

The review period for the September rebalance ends on 31 July, the results of the rebalance will be announced towards the end of August and the changes will be implemented at the close of trading on 10 September.

With only 2 trading days left in the review period, we see Shanghai Shen Lian Biomedical (688098 CH)Piesat Information Technology (688066 CH)Guangzhou Fang Bang Electr-A (688020 CH)Shenzhen Lifotronic Techno-A (688389 CH) and Appotronics Corp Ltd (688007 CH) as high probability deletions from the index.

Coming up with a definitive list of inclusions is tougher given the subjectivity of the index rules for this review. The subjectivity comes from the whether the index committee uses a minimum listing history period of 12 months or 6 months.

Higher probability inclusions (if a 12 month minimum listing history is used) are Eyebright Medical Technology Beijing (688050 CH), Sinocelltech Group (688520 CH), Beijing Huafeng Test & Control Technology-A (688200 CH), Zhejiang Orient Gene Biotech-A (688298 CH) and Tinavi Medical Technologies (688277 CH).

Lower probability inclusions (if a 6 month minimum listing history is used) are Zhejiang Supcon Technology (688777 CH), Tianneng Battery Group (688819 CH), Bestechnic Shanghai (688608 CH), 3peak (688536 CH) and Pylon Technologies Co Ltd (688063 CH).

The inclusions, exclusions and capping changes will result in a one-way turnover of 8.45% and result in a one-way trade of CNY3.3bn.

Kunlun Energy (135 HK): Positive Takeaways from Discussion with Company

By Osbert Tang, CFA

Kunlun Energy (135 HK) should have a decent operating performance in 1H21, with good growth achieved for natural gas sales, LPG sales, LNG terminal and also the exploration and production segment. Their performance all look to be ahead of the full-year guidance put forward in FY20 result announcement in Mar 2021 – this is encouraging.

Gas project M&A momentum stays decent and, with IRRs of 10-12%, the returns are ahead of the hurdle level of 8%. Following China Gas Holdings’ (384 HK)  Shiyan gas explosion, local governments now prefer large SOEs to invest in projects given their more stringent safety standards, and this is an advantage of Kunlun. The gas industry also entails less regulatory risks amid government’s heightened regulatory measures towards various industries lately. The recent pull-back has made valuations even more appealing, in our view.  

ESR REIT Launches S$ 5Y; Macro; Rating Changes; New Issues; Talking Heads; Top Gainers & Losers

By BondEvalue

US markets broke the winning streak on a risk-off sentiment. S&P and Nasdaq were both down 0.5% and 1.2%. The fall was led by Consumer Discretionary, IT, Energy and Communication Services, down more than 1%. Real Estate and Healthcare, up 0.8% and 0.4% respectively, provided support to the markets. Apple, Microsoft and Alphabet’s earnings beat Wall Street expectations (details below). Facebook, Paypal and Boeing earnings are due today alongside the FOMC decision. US 10Y Treasury yields eased 4bp to 1.24%. US IG CDS and HY spreads widened 1bp and 5.8bp respectively. European stocks also ended ~0.5% lower – the CAC, DAX and FTSE were down 0.7%, 0.6% and 0.4% respectively. EU Main and Crossover spreads widened 0.6bp and 3.8bp respectively. Brazil’s Bovespa was down 1.1%. Saudi TASI was up 0.2% while UAE’s ADX was flat. Asia Pacific stocks started mixed – the Nikkei and Singapore’s STI were down 1.2% and 0.3% respectively, while Shanghai was broadly flat and HSI was up 0.8%. Asia ex-Japan CDS spreads were 4.6bp wider.

China/HK Short and Support Points

By Thomas Schroeder

China A50 break below 16,500 important support now becomes fresh resistance. HSI below 27,000 represents the fresh pivot level and H shares 10,000. These were important floors that were broken and shifts the trading range lower.

HSI has been a top short in Asia from back at 30k and the A50 break of critical support at 16,500 unleashed selling pressure and an impulsive decline that will set up a fresh short.

Let’s see if the short covering bounce can extend.

Morning Views Asia: Evergrande Real Estate Group

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.

Pre-IPO Beijing Airdoc Technology – The Strength and the Concerns

By Xinyao (Criss) Wang

In recent years, the value of AI medical imaging has become increasingly prominent. For example, the application of CT for diagnosis in COVID-19 pandemic has strengthened the importance of imaging and played an immeasurable role in the prevention and treatment of COVID-19. In this context, many players in this industry have planned to start IPO in the capital market. On June 21, Beijing Airdoc Technology (BAT HK) filed its prospectus with the HKEX and officially started its IPO process. Airdoc is a global market leader and pioneer in providing AI-empowered retina-based early detection, diagnosis and health risk assessment solutions. This insight mainly analyzed the business, the financial position and concerns of the Company.

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