ChinaDaily Briefs

China: Tencent, WH Group, Orient Overseas International, Helen’s International Holding, AirPower Technologies, Novotech Holdings, JD Logistics, JD.com Inc (ADR) and more

In today’s briefing:

  • China Gaming Restrictions Redux – Market Seems to Be in Denial
  • WH Group Post-Tender Outlook
  • Tencent Holdings – Modern Day Opium War
  • Orient Overseas Placement – Fourth Deal This Year. Is the Largest and at the Tightest Discount.
  • Helens Intl (海伦司国际) IPO Trading – Decent Demand but Still Some Way to Go to Our Preferred Buy Level
  • Airpower Technologies Pre-IPO Tearsheet
  • Novotech Pre-IPO: PHIP and Valuation Update
  • JD Logistics (2618 HK): Higher Growth, Higher Loss
  • Tencent: Temporary Freeze of New Game Approvals to Further Impact Slowing Games Business
  • Conditions Continue To Improve; EM Buy Signal; Growth Outperforming; Gold Vs. SPX Downtrend Intact

China Gaming Restrictions Redux – Market Seems to Be in Denial

By Mio Kato

We said a couple of weeks ago that the restrictions on the gaming sector imposed by China were far more severe than the market reaction indicated. However, our view was mostly a call on the long-term impact of the gaming time restrictions on minors. The latest updates suggest that even the short-term outlook could get dire fast.


WH Group Post-Tender Outlook

By Travis Lundy

The shares of WH Group (288 HK) to be returned to shareholders after the Buyback Offer have been returned to shareholders as of this morning. Some appeared to have sold yesterday, some today, and some may not “get notice” of the return until tonight, which means they would sell tomorrow or later. 

Now we look ahead. 

Based on a pure price-vs-peers basis, the price today is about 3% below where it was compared to a mix of Chinese and global peers as of the day before the announcement. 

However, that does not include the 15% accretion to EPS from the buyback. That puts the stock a fair bit cheaper than its peer basket since the announcement 3+ months ago. 

And it has ALWAYS traded cheap on governance concerns (and one reason why showed up last month in a public spat between the spurned first son and the chairman, discussed in WH Group – Stock Plummets as Ousted Son Drags Pigs Into The Mud. The question investors should ask themselves is…. if the family were ousted, would that be good for the share price? 

If the answer is yes, then the exposure here probably has some convexity given the shares trade at a multi-year low to Peers on an accretion-adjusted basis.


Tencent Holdings – Modern Day Opium War

By Thomas J. Monaco

*Being “Seriously Dealt” With: No sooner than Tencent Holdings’ (700.HK) [Tencent] virtual call ended with a competitor dismissing new gaming restrictions did the mainland Chinese regulator haul in gaming industry executives for a complete dressing down. It’s probably fair to say, Tencent’s recent hubris was their Jack Ma moment. It kind of makes one wonder what the authorities have planned next for Tencent. As the screws continue to tighten, the question becomes whether or not Tencent can narrow the regulatory discount, or whether these issues will remain a persistent overhang?; 

*As We’ve Just Learned – Ignoring It, Doesn’t Make It Go Away: Mainland China’s crackdown on capital markets activities has rapidly expanded under the broad narrative of “financial stability”. There remains no doubt, in our view, that Tencent will follow Alibaba Group (BABA.US) [Alibaba] in the formation of a financial holding company. It’s pretty surprising that Tencent refuses to discuss this matter when financial services are the largest component of earnings and growth; and 

*Prior To The War On Gaming, 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.    


Orient Overseas Placement – Fourth Deal This Year. Is the Largest and at the Tightest Discount.

By Sumeet Singh

Orient Overseas (OOIL) aims to raise around US$419m via a top-up placement. 

The stock has been a tear this year owing to the rising freight rates. However, this will be the fourth placement in the name and will be the largest and is being offered at the tightest discount. None of the past deals held on to the deal price in the near term.


Helens Intl (海伦司国际) IPO Trading – Decent Demand but Still Some Way to Go to Our Preferred Buy Level

By Zhen Zhou, Toh

Helen’s International Holding (9869 HK) (HIH) raised about US$393m at HK$19.77 per share, the midpoint of its IPO price range.

Helens International Holdings (HIH) is the operator of a bar chain called “Helen’s”. The company was the largest bar chain in China in 2018 –  March 2021, in terms of the number of bars, according to Frost and Sullivan (F&S).

In this note, we will look at deal dynamics, assumptions, and share our thoughts on valuation.

Our previous coverage of the IPO:


Airpower Technologies Pre-IPO Tearsheet

By Clarence Chu

AirPower Technologies (1679085D HK) is looking to raise US$1bn in its upcoming Hong Kong IPO.

Airpower Technologies is an industrial gases solution provider with a nationwide footprint in China. Together with Baosteel Group, it leads China’s overall industrial gases market with 12.6% market share and the independent industrial gases market with 22.3% market share in 2020 by revenue as per Frost & Sullivan (F&S). As of Jun 21, the group owns an extensive network of 135 facilities in operation that covers 24 provincial regions in China.


Novotech Pre-IPO: PHIP and Valuation Update

By Ke Yan, CFA, FRM

Novotech is a leading biotech focused contract research organization in Asia Pacific. The company is looking to raise up to USD 1.5bn via a Hong Kong listing.

In our previous note, we have discussed that the company has a long history of operation since 1997 and was formed by a merger of two companies. It has a customer focus on biotech companies with its flexible services, particularly services in the clinical research stage. We like the company’s leading market position in Australia/New Zealand and South Korea. The company is run by a decent team and has obtained investments from a strong line-up of investors. It has been growing at a rate above the industry average but it only turned profitable in 2020. 

In this note, we look at the latest update of the company’s operation and provide a more detailed forecast and valuation.


JD Logistics (2618 HK): Higher Growth, Higher Loss

By Ming Lu

  • We believe integrated supply chain is more meaningful to the long-term growth.
  • We also believe JD.com provides half of JD Logistics (JDL)’ revenue.
  • We believe JDL has the incentive of expansion but does not have the incentive of profitability.
  • We set a downside of 13% for the end of 2022.

Tencent: Temporary Freeze of New Game Approvals to Further Impact Slowing Games Business

By Shifara Samsudeen, ACMA, CGMA

The government of China announced last week a set of rules aimed at the country’s gaming sector in order to reduce the long-term impact of gaming on the country’s younger population (those under 18 years of age). Those new rules on limiting the mobile gaming time, we think was taken lightly by the market, however, regulators continue to ramp up regulation and tighten their grip on the mobile gaming sector. Executives from Tencent (700 HK) , NetEase (9999 HK)  and other mobile gaming companies were called in for a meeting on Wednesday and were instructed to end their “Solitary focus of pursuing profit” in order to prevent minors from getting addicted to games. This no doubt will require gaming companies to change their game rules and designs that induce addiction and at the same time, changes to operating models that will severely impact revenue and margins of games.

As China tackles to bring down gaming addiction among minor users, SCMP reports that the Chinese regulators will temporarily freeze approvals for new online games.


Conditions Continue To Improve; EM Buy Signal; Growth Outperforming; Gold Vs. SPX Downtrend Intact

By Joe Jasper

The Russell 2000 (IWM) has been moving sideways for 7 months between $208 and $234.50, emblematic of the mixed market environment that we still find ourselves in. As long as $208 support holds we remain constructive on the overall market. On the plus side, conditions have been improving over the past two weeks — not getting worse (more on this below). This increases the odds of a breakout above $234.50 on the IWM in the coming weeks or months, which would signal the start of a new broad-based bull market.

Charts Highlighted: EEM, JD, NFLX, TSLA, YZCAY, BTU, HCC, ARCH, ARLP, CG, ARES, AB, CNS, VRTS, BSIG, VCTR, FDUS, PLD, REXR, FR, STAG, IIPR, TRNO, PSA, EXR, CUBE, LSI, and NSA


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