ChinaDaily Briefs

China: Zhaoke Ophthalmology Pharmaceutical, HKEX, Alibaba Group, Swire Pacific (A), Shanghai Stock Exchange Composite Index, China Education Group, Waterdrop Inc, Sinotrans and more

In today’s briefing:

  • Zhaoke Ophthalmic (兆科眼科) IPO Trading: Strong Cornerstone Doesn’t Save the Deal
  • Hong Kong Exchanges & Clearing – Golden Quarter, But Risks Are High
  • Ant Group-Alibaba (BABA): Are We There Yet?
  • StubWorld: Swire Pac’s Outperformance
  • Shanghai – Bullish on All Counts
  • China Education Group (839 HK): Encouraging Takeaways from 1H21 Result Call
  • Waterdrop IPO: Valuation First Look
  • Sinotrans (598 HK): Good 1Q21, Outlook Stays Very Decent

Zhaoke Ophthalmic (兆科眼科) IPO Trading: Strong Cornerstone Doesn’t Save the Deal

By Ke Yan, CFA, FRM

Zhaoke Ophtalmic raised HKD 1,942 million (USD 250m) from its global offering and will list on the Hong Kong Stock Exchange on Thursday, April 28th.

In our previous note, we looked at the company’s two products, namely CsA gel and ZKY001. We are of the view that CsA gel does provide advantage over Restasis, the top-selling eye gel for the DED, but the forecast of market growth is too aggressive for the DED market. For another core product ZKY001 which will be indicated for CED, while there is no data on the efficacy from Phase I clinical trial, we do note that the licensing parnter’s product which uses the same technology but on a different indication did not meet the primary end point in Phase III clinical trial according to a recent announcement, which raises our concern on the potential of the product candidate. In addition, the company also had a long list of generic referencing top selling glaucoma drugs. The company has an OK management team but strong backing of institutional investors.  We think the company provides aggressive guidance that lacks evidence to support the forecast and valuation. We think the IPO valuation is rich at the high end and the cornerstone investors’ commitment left a large portion of the deal to be sold on debut. 

In this note, we look at the updates since our last note. We were bearish with the deal and would be taking profit if there’s pop on debut.

Our previous coverage on Zhaoke Ophthalmic

Hong Kong Exchanges & Clearing – Golden Quarter, But Risks Are High

By Thomas J. Monaco

*Glittering Quarter: Hong Kong Exchanges & Clearing (388.HK) [HKEX] reported 1Q21 earnings of HKD 3.8 bn, improving HKD 915 mn (31.3%) linked quarter. Results were even more impressive when we exclude investment income (declined HKD 363 mn or 43.8% linked quarter) – increasing HKD 1.3 bn (61.0%) to HKD 3.4 bn. Results were highlighted by HKEX’ positive operating jaws, as recurring revenue increased HKD 1.2 bn (28.6%) while operating expenses declined HKD 194 mn (14.5%) over the period;  and

*Risks Are Increasing: In addition to an extended valuation when ADT has begun to turn and having a new CEO with no exchange experiences, HKEX needs to contend with the government’s examination of a stamp duty increase and mainland China’s contemplation of a new stock exchange to attract overseas-listed firms (including Hong Kong) which will bolster Shanghai’s status as a global financial center.

Ant Group-Alibaba (BABA): Are We There Yet?

By Victor Galliano

  • PBoC’s regulatory pressure and scrutiny are seemingly coming to a head at Ant Financial Services Group (6688 HK) 
  • At the China Digital Summit, the disclosure of “co-operation” between Ant Group and regulator implies that PBoC has secured that Ant Group  share their “big data” lake and capabilities with the PBoC
  • This news regarding big data sharing signals diminishing regulatory risk going forward
  • Bloomberg Intelligence reported that the Ant Group valuation could be as low as USD29bn; we see this as too bearish, even in the worst case
  • Even under our “new reality” business valuation, we arrive at an SOTP valuation range – which factors in the cost of capital needs – of USD41bn to USD62bn
  • We turn constructive on Alibaba Group (BABA US), with a great deal of Ant Group regulatory risk discounted, and given Alibaba’s attractive valuations relative to its peer group
  • Risks to our constructive view on Alibaba include a bigger than expected capital call as a core shareholder, to capitalise Ant Group’s credit business, and a worse than expected loss of payments market share from e-Yuan introduction

StubWorld: Swire Pac’s Outperformance

By David Blennerhassett

This week in StubWorld …

Swire Pacific (A) (19 HK) has gained 78% from its low at the end of October last year, compared to 13% for Swire Properties (1972 HK) and 20% for the HSI.

Swire’s NAV discount has been narrower in the past, but it’s questionable how much reliance can be placed on historical data.

Preceding my comments on Swire 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%.

Shanghai – Bullish on All Counts

By Shyam Devani

Here we use three measures of the Shanghai Stock Exchange Composite Index (SHCOMP INDEX) – all reveal either bullish price action and/or a bullish setup.

These three are 1. The  Shanghai Composite as we would normally view it in Renminbi terms, 2. The Shanghai Composite in USD terms and, 3. The Shanghai Composite in Gold terms

Bullish short term pictures emerge all-round.

China Education Group (839 HK): Encouraging Takeaways from 1H21 Result Call

By Osbert Tang, CFA

China Education Group (839 HK) (CEG) reported an impressive 50.2% YoY growth in its adjusted net profit for 1H21, driven by the combination of good organic momentum and contribution from new schools added. By segment, higher education and global education are the key underpinning factors, as vocational education enrollment has disrupted more by COVID-19.

In the post-1H21 result call, management revealed that 6 M&A projects are now in advance discussion and expects many of them can be concluded in this year. This will add to the organic growth backed by higher enrollment, increase in tuition and efficiency enhancement. We take the guidance of a 32-41% of adjusted net profit growth for FY21 positively, and so is the market as the share price was up 7% so far today. Its valuation multiples are highly justified by the earnings growth prospects, execution capability and quality management, in our view.

Waterdrop IPO: Valuation First Look

By Arun George

Waterdrop Inc (WDH US) is the largest independent third-party insurance platform in China as measured by life and health insurance first-year premiums (FYP) distributed in 2020, according to iResearch. Waterdrop is backed by Tencent Holdings (700 HK), Swiss Re AG (SREN SW) and Meituan (3690 HK).

Waterdrop is pre-marketing an NYSE IPO with a placeholder amount of $100 million. In Waterdrop IPO Initiation: Going for Brokers, we opined that as a leading online third-party insurance broker, Waterdrop is well-positioned to benefit from favourable industry trends. The key unknown is whether the changing regulations will throw a spanner in the works. Notwithstanding the regulatory overhang, we concluded that Waterdrop is worth a look. In this note, we present our forecasts and take the first look at Waterdrop’s potential valuation range. 

Sinotrans (598 HK): Good 1Q21, Outlook Stays Very Decent

By Osbert Tang, CFA

The encouraging 1Q21 result of Sinotrans (598 HK) affirms that FY21 will be a decent year for the company. Recurring profit grew by 323.4% YoY and 43.2% QoQ on the back of excellent strengths in revenue growth and selling and administrative cost control.  Volume for various segments has seen double-digit YoY increase which underpinned the revenue momentum.

We expect Sinotrans to stay as a beneficiary of the positive trade picture, growth in demand for cross-border e-commerce services, sea and air freight forwarding and full-fledged recovery in logistics segment. We believe it should easily achieve our projected 16% recurring earnings growth in FY21, making its 7x PER and 0.68x P/B inexpensive, and its 4.6% dividend yield is also attractive.

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