ConsumerDaily Briefs

Consumer: Sands China Ltd, Alibaba Group, DiDi Chuxing, Zomato, NIO Inc, Kakao Pay, Cloud Village, Luckin Coffee, Great Wall Motor and more

In today’s briefing:

  • Sands China (1928 HK): Gambling On The Future
  • Alibaba: Still Too Risky to Own
  • Daojia Pre-IPO – Can’t Pinpoint the True Growth
  • Zomato (ZOM IN) | How to Avoid a Deliveroo
  • Zomato Pre-IPO – Peer Comparison – Listed and Domestic
  • NIO: Market Waking Up to VIE Risk?
  • Kakao Pay Immediate Float Is Too Tight at 10%: Alipay Exit Possibilities & Indices Fast Entry
  • Cloud Village IPO: Improving Financials and Less Fear of Regulatory Crackdowns for Investors
  • Tougher Chinese Regulatory Oversight of Foreign Listed Chinese Companies (With Caveats)
  • Great Wall Motor: Too Early to Get Excited

Sands China (1928 HK): Gambling On The Future

By David Blennerhassett

One step forward …

The travel bubble – or perhaps travel corridor has a nicer ring to it – between Hong Kong and China remains very much a work in progress. 

There were earlier reports that cross-border travel between the two SARs would resume on July 11, under certain conditions.

Yet Hong Kong’s tourism sector lawmaker Yiu Si-wing said cross-border travel between Hong Kong and Macau is unlikely to resume next week as the two administrations have yet to put forward any concrete plans regarding the travel arrangement.

As it stands,  the Macau government raised the threshold for resumption of travel, with Hong Kong required to reach 14 days without either local coronavirus infections or community ones linked to imported cases. Previously, the requirement was for no untraceable cases for 28 days.

The Macau Tourism website mentions if departing from Hong Kong, you need a clear Covid test within the last 24 hours, and you will still need to go to designated places for a 14-day medical observation. Visitors from China face similar restrictions – although the Covid test must be within a 7-day window.

This brings us to the Macau gaming sector.

Despite meaningfully reduced visitation (~16% of 2019 levels in the 1Q21), positive EBITDA in Macau is occurring. 1Q21 mass gaming has recovered to approximately 38% of 1Q19 levels.

In this insight, I look at how Sands China Ltd (1928 HK) has weathered the pandemic and how it is placed for a recovery.


Alibaba: Still Too Risky to Own

By Oshadhi Kumarasiri

Mega cap tech stocks rarely underperform the market to the same extent as Alibaba Group (9988 HK) during the last seven months, especially with no deterioration in earnings growth potential.

Source: Cap IQ

After trading sideways during May/June 2021, technicals were pointing the right way for the very first time for Alibaba in 2021.

The stock rallied by 10% in the last week of June to $229.4 per share, causing most of us to assume that Alibaba was making a comeback.

Unfortunately, the joy lasted just a short time, 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).

After underperforming the S&P for almost seven months, most Chinese technology stocks, especially Alibaba, seem very cheap, but it is not cheap enough to call it a bottom amidst ongoing regulatory crackdowns and the geopolitical rivalry between the US and China. As such, we would not rush to buy any dips and recommend that we wait till the rally well and truly begins.


Daojia Pre-IPO – Can’t Pinpoint the True Growth

By Sumeet Singh

Daojia Limited (DL), one of the largest one-stop home services platforms in China, aims to raise at least US$300m in its US IPO, which now may or may not happen. The company is backed by 58.com and Baba.

DL operates Swan Daojia, a platform where it offers multiple services across categories such as maternity nurse, nanny, housekeeping services, along with training services and SaaS-based solutions.


Zomato (ZOM IN) | How to Avoid a Deliveroo

By Pranav Bhavsar

Deliveroo (ROO LN) ‘s IPO debut and its ESG related backlash should provide valuable lessons to Zomato (ZOM IN) which is expected to open for subscription in less than two weeks.

Deliveroo’s ESG concerns especially the poor treatment of delivery workers were one of the prominent reasons for ROO’s flop debut. In this insight, we address the key ESG concerns ZOM should address and improve its ESG disclosures as it prepares to hit the capital markets.


Zomato Pre-IPO – Peer Comparison – Listed and Domestic

By Sumeet Singh

Zomato (ZOM IN)  aims to raise US$1.1bn in its upcoming India IPO, which will be launched next week. This would be the largest listing in India from the technology sector.

Zomato operates a technology platform that provides services for restaurant partners, customers, and delivery partners. During FY20, Zomato recorded 41.5m average MAU and was one of the leading Food Services platforms in India, in terms of value of goods sold, according to RedSeer. As of 31 Dec 20, it had a presence in 526 Indian cities and had 350,174 active restaurant listings.

In this note, we will undertake a peer comparison with its global peers and its main local peer.


NIO: Market Waking Up to VIE Risk?

By Henry Kwon

NIO closed down at $46.03 (-8.47%), breaking through both its 10-day EMA ($48.51) and 21-day EMA ($46.64). The 38.2% Fibonacci Retracement ($49.49) which used to be support, has now become resistance. In the wake of the Cyberspace Administration of China’s removal order to app stores of the Didi Chuxing app citing issues with Didi’s personal information collection and usage, U.S.-listed China stocks have been showing weakness following the 4th of July holiday weekend. We see three major market concerns as they specifically apply to NIO at this point:

  • VIE Structure Risk: NIO is, strictly speaking, a Cayman Islands offshore entity with ADS listed in the U.S. having a VIE structure in China. The market could be concerned that the listed shares of NIO in the U.S. are not actually shares in the operational entities in China, and legal loopholes that have allowed this structure to persist in the past may be addressed by the Chinese government in the near future. Historically we do not believe this was a potential risk that was priced into NIO’s shares.
  • U.S. Regulatory Risk: The SEC has already adopted measures to require stricter disclosure for U.S.-listed Chinese firms under the Holding Foreign Companies Accountable Act enacted during the Trump Administration (https://www.sec.gov/news/press-release/2021-53). The Biden Administration has not backtracked on the Trump Administration’s basic policy direction and the June 3 Executive Order that goes into effect on August 2 will prohibit U.S. investors from investing in 59 Chinese companies “in a targeted manner – U.S. investments in Chinese companies that undermine the security or democratic values of the United States and our allies.”(https://www.whitehouse.gov/briefing-room/statements-releases/2021/06/03/fact-sheet-executive-order-addressing-the-threat-from-securities-investments-that-finance-certain-companies-of-the-peoples-republic-of-china/). As U.S.-listed Chinese stocks now seem like they are caught between a rock and a hard place, investors may become wary about bottom fishing so long as the de-listing risk theme is alive in the market.
  • Concerns about June Auto Demand in China and what it may imply for 2H21: According to media reports, CAAM expects to see 1.93m units of vehicle sales (-9.3% MoM, -16.1% YoY) in June (see https://www.reuters.com/business/autos-transportation/chinas-auto-sales-likely-fall-16-june-trade-body-says-2021-07-05/). The figures refer to combined PV and CV sales based on the expected YoY drop, which implies that we are likely to see June SAAR falling to 24.4m units (-15.6% MoM, -18.2% YoY). If June sales comes in at the 1.93m units that media reports have attributed to CAAM, then it would suggest that China demand may be showing decline, not just decelerating growth.

NIO’s ascending channel was broken today. The 50% Fibonacci Retracement level sits at $44.08 while the 200 DMA currently sits at $42.29. With RSI at 51 as of close, there is still technical room for a further drop based on our observation. If the 50% Fibonacci Retracement level holds, then first resistance would likely come in at the $46-48 zone.


Kakao Pay Immediate Float Is Too Tight at 10%: Alipay Exit Possibilities & Indices Fast Entry

By Sanghyun Park

Another important consideration for the Kakao Pay listing is a fairly tight immediate free float.

Kakao Pay’s current shareholder composition is simple: Kakao and Alipay Singapore Holding, owned by China’s Ant Group. They currently hold 55% and 45% stakes, respectively, on a pre-IPO shareholding basis.

Pre-IPO shareholdingShares%
Kakao62,351,92055.00%
Alipay Singapore Holding Pte. Ltd.51,015,20545.00%
Source: DART

Kakao Pay has stated in its IPO prospectus that nominally up to 38.91% on a post-IPO shareholding basis will be an immediate float.

But the problem is the 39.12% stake held by Alipay Singapore Holdings.

Alipay said 8.95% of its stake in Kakao Pay would be locked up for 6 months, and 1.70% will be locked up for 1 year. And the remaining 28.47% are not locked up.

Post-IPO shareholding%Lock-up
Kakao47.83%1 year
Alipay Singapore Holding Pte. Ltd.
8.95%6 months
1.70%1 year
28.47%No lockup
ESOP (post-IPO shareholders)2.61%1 year
IPO shareholders (institutional & retail)10.44%
Total100.00%
Source: DART

Alipay’s investment history on Kakao Pay

Kakao Pay, established in April 2017 by separating the fintech business from Kakao, welcomed Alipay, which participated in a capital increase of ₩224.2B in June of the same year, as its second-largest shareholder. Alipay also invested ₩113.7B in 2020. This year too, Alipay participated in a rights increase (₩20.2B) following the exercise of a call option in April, increasing its stake to 45%.

Based on the prior bonus share offering, Alipay participated in the capital increase in 2017 and 2020 at ₩32,202 and ₩48,726, respectively. In addition, considering the recent rights issue issuance price is ₩9,101, the average purchase price per share of all current stocks is lowered to ₩7,020.

Alipay Singapore Holding investment historyTotal investment valueStake %Purchase price per share
February 2017₩224.2B32.74%₩6,040
June 2020₩113.7B10.30%₩9,745
April 2021₩20.2B1.96%₩9,101
– Average purchase price per share₩7,020
Gain at the upper end of the indicative price band1267.46%
Source: DART

Alipay has invested ₩358.1B in Kakao Pay so far, and the value of its stake jumps to ₩4,897.5B based on the upper end of the indicative price band (₩96,000). This results in a return of more than 12 times the investment amount.

Alipay Exit Possibilities

As we all know, the level of an immediate float is essential for an IPO that is about the size of the Kakao Pay IPO. This is because it can estimate the fast entry of major domestic and foreign indices and predict overhang issues that significantly impact the short-term stock price.

So, how likely is Alipay’s early exit?

Alipay can sell 28.47% of its total shares immediately after listing. Even at the lower end of the indicative price band, the company is already able to reap 8x profit.

Alipay’s early exit may cause overhang risk in the short term, but it can also act as a positive for the company to be included in MSCI and FTSE as soon as possible. However, the possibility of Alipay’s early profit-taking is low at this point. If they had planned to sell their shares early, they would have done it through the secondary offering of this IPO.

In fact, in terms of its global expansion strategy, Alipay has enough justification for maintaining its stake in Kakao Pay for the time being. In addition to Kakao Pay, Alipay continues to invest in the Asian electronic payment market. Ant Group Chief Technology Officer (CTO) Chun-li called this the ‘Belt and Road Initiative for Payment’ and said, “Ant Group plans to build a simple payment market without borders.”

In a situation where Ant Group is trying to become an unrivaled payment service provider at the global level, there is no reason to terminate its relationship with Kakao Pay, a strategic partner in the Korean market, at this point.

Similarly, the prevailing opinion on local streets is that Kakao Pay wants to continue its current relationship with Alipay. This is because Alipay is essential for Kakao Pay’s overseas expansion.

In fact, Kakao Pay joined hands with Alipay to launch overseas payment services in Japan and Macau. Using this system, Korean users can pay electronically without exchanging money even when they travel abroad. In addition, Kakao Pay is expanding its business scope through cooperation with Alipay in online malls such as Ali Express and iHerb.


Cloud Village IPO: Improving Financials and Less Fear of Regulatory Crackdowns for Investors

By Shifara Samsudeen, ACMA, CGMA

Cloud Village (CLV HK)  is a leading music streaming platform in China and the company is backed-by NetEase Inc (NTES US) , one of the largest games and entertainment company in China. The company has filed for an IPO to list its shares on the Hong Kong Stock Exchange (HKEx) and according to news media outlets, the company plans to raise proceeds of about US$1bn.

Cloud Village generates revenues from online music services and social entertainment services (live streaming) and the competes with Tencent Music (TME US)  in China and the two companies operate similar business models and are backed by two large internet companies in China.

Tencent Music (TME US) has a large paid user base compared to Cloud Village and generates operating profits whereas Cloud Village has not yet been able to make gross margins though gross losses are declining. However, TME is currently probed by the State Administration of Market Regulation (SAMR) in China over its past deals. TME is formed by the acquisition of Kugou and Kuwo apps and the regulators have informed TME should expect to give up exclusive music rights and may even be forced to sell its previously acquired businesses of Kugou and Kuwo in 2016. Kugou and Kuwo account for about 64% of the total MAUs of TME’s online music streaming business and having to let go of these two businesses will wipe out a significant portion of TME’s users and revenues.

In this insight, we examine Cloud Village’s business model, its segments and financials. We plan to compare the company’s financials and KPIs against TME in a follow-up insight.


Tougher Chinese Regulatory Oversight of Foreign Listed Chinese Companies (With Caveats)

By Jason Yap, CFA

On 6 July 2021, Chinese regulators introduces guidelines for a crackdown on capital markets misconduct including, amongst others, data security lapses and financial fraud.  This article focuses on the financial fraud aspects of the latest guidelines, including how the Luckin Coffee (LKNCY US) incident might have been an impetus for the introduction of these guidelines, what the Chinese regulators’ attitude had been, and how future developments might unfold.


Great Wall Motor: Too Early to Get Excited

By Victoria Li

It’s unprecedented for an OEM which focuses on SUVs, to achieve annual sales of 1mn in the past. In April, GWM (Great Wall Motor) unveiled new exciting plans for its 5 brands to drive sales upside. However, after a deep dive analysis, we conclude that upside potential may not match current high valuation the market gives to the stock.

Where could GWM gain additional sales from current about100,000 cars of monthly sales volume? Our best guess is: 10,000 cars from ORA new models; 5,000 cars from pick-ups; 5,000-10,000cars from Haval. This indicates 30% increase on sales volume in the next three years. With ASP trends up and margin improvement, earnings increase over the next three years might reach 50-60%.

Based on Bloomberg consensus, GWM trades at 25x P/E on 2021E, vs. 6-years historical average of 10x P/E and its peers average of 8x (excluding BYD). In our view, valuation re-rating to traditional OEMs are based on brand upgrading and/or breaking into smart EV market. However, whether GWM’s brand upgrading (WEY) or smart EV positioning would be successful or not is highly uncertain.


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