Daily Brief China: Alibaba Group, 21Vianet Group, Country Garden Holdings Co, Alibaba Health Information Technology, Digital Turbine, ABM Investama, Micro-Tech Nanjing Co Ltd, Tencent, Concord Healthcare Group and more

• Alibaba Group (9988 HK) announced yesterday that it is seeking to change its listing status in Hong Kong to a primary listing before the end of 2022.
• With the risk of de-listing from the US, a dual-primary-listing in Hong Kong would allow Alibaba (ADR) (BABA US) to smoothly transition all its trading from the US to Hong Kong.
• In addition, the company could possibly use this opportunity to raise more money from capital markets as it is desperately seeking funding for its loss making ventures.

• Bloomberg reported that MBK Partners is in talks to team up with a partner on a joint offer for 21Vianet Group (VNET US). Considerations are at a preliminary stage.
• A potential bid would compete against The Hina Group and Industrial Bank’s $8.00 per ADS offer. The Board has not provided an update on its stance on this offer.   
• Takeover interest is unsurprisingly due to VNET’s depressed share price, unchanged FY22 guidance and ongoing data centre M&A activity.     

We view Country Garden as “Medium Risk” on the LARA scale. The company’s projects are geographically spread across China, albeit concentrated in Tier 3 and 4 cities. Demand in lower-tier cities is weak, amid poor market sentiment and strict COVID-19 related measures. Positively, Country Garden has a broad debt maturity profile and access to onshore markets.

Our fundamental Credit Bias on Country Garden is “Negative”, given expectations of a significant decline in contracted sales and weakening credit metrics amid challenging market conditions. The company has substantial exposure to low-tier cities with weak economic fundamentals. Recovery in these cities will likely be much slower than in high-tier cities, especially with pandemic-related disruptions that would further dampen market sentiment. That said, we believe Country Garden maintains a good cash collection rate, has an adequate liquidity buffer and enjoys good access to onshore funding.

Controversies are “Material”, with the escrow account for Country Garden’s Fuzhou projects having been frozen by local authorities due to customer complaints about poor quality. The matter has since been resolved, with the freeze being lifted. However, this may raise concerns over the quality of the company’s projects. In addition, escrow account freezes may impact Country Garden’s liquidity. Hence, we view the ESG Impact on Credit as “Moderately Negative”. 

• On 22nd June, China released a draft rule that would prevent third-party e-commerce platforms from selling drugs directly to consumers online.
• Alibaba Health’s share price is down more than 10% since the announcement of the draft rule, however, third-party e-commerce platforms accounts for about 10% of Ali Health’s revenues.
• Pharmaceutical direct sales business has been generating lower GPM compared to JD Health’s direct biz, and the company’s margins have continued to deteriorate during the last 2-years.

• This is our first report on the mobile growth platform provider, Digital Turbine.
• Digital Turbine is now in an expansion mode as evident from its recent results as well as its acquisition-oriented strategy.
• However, in recent quarters, the investors of Digital Turbine have turned against various technology-focused assets, and its stock price also lost much value.

The Asia HY Trade Book for July 2022 includes a summary of our recommendations, as well as our high-conviction ideas. The report also features relative-value charts and lists of the bonds across Asia (ex-Japan) HY and crossover credits.

• The main logic of Micro-Tech’s performance growth is import substitution, but the Company is facing some challenges in the short term, such as centralized procurement, pandemic, inflation, etc.
• Micro-Tech will face lower-than-expected performance growth in 2022. Since the whole series of products would be covered by centralized procurement, the valuation of Micro-Tech should be lower than Mindray.
• However, there are possibilities for Micro-Tech to achieve a turnaround (with bottom-fishing opportunity) if it could make a breakthrough in internationalization and product innovation. We recommend investors follow Micro-Tech closely.

• Online game sales decreased for the first time in 1H22.
• The main problem is the unstable policy of the new game license.
• Big companies like Tencent and NetEase are seeking overseas markets.

• Digital Turbine is a major mobile growth platform provider across the globe and is operating in expansion mode as evident from its recent results as well as its acquisition-oriented strategy.
• However, in recent quarters, the investors of Digital Turbine have turned against various technology-focused assets, and its stock price also lost much value.
• Digital Turbine recently unveiled a single strategy and a unified corporate brand for its partners and clients.

• Concord Healthcare Group (CHG HK), the second largest private oncology healthcare company in China, has submitted application proof for an IPO on the HK Stock Exchange in May 2022.  
• The company has an accumulated loss of RMB1.7 billion during the last three years, with current net debt-to-capital ratio of 170.1%. Its finance cost account for 92.5% of total revenue.
• Concord has a cash balance of just RMB136 million, which makes it hard to grab the growth opportunities in China’s capital-intensive oncology healthcare services segment.