Daily Brief China: Oriental Watch, Pinduoduo, Chongqing Hongjiu Fruit, EVOC Intelligent Technology Company Limited H, Tencent, Times China, Giant Biogene Holding, China Communications Construction and more

• After a disastrous April and May due to lockdowns resulting in >-50% SSSGs, the company is seeing the situation stabilize in June and July.
• We remain cautious on H1 2023, as margins and revenue will likely decline, with gross margins likely to drop 300-400 bps and revenues down 10-15% YoY.
• Expect a generous dividend with over a 100% payout. Since >50% of the market cap is in cash, a special dividend could also be expected. 

• Community group buying is starting to face multiple headwinds from funding shortages to excessive price competition.
• Even though Pinduoduo (PDD US) is yet to announce any job cuts or scaling back of operations, we think the operating environment shouldn’t be much different from competitors.
• With QoQ revenue growth at a standstill and sales and marketing cost cutting almost fully exhausted, we think the current consensus expectations are too optimistic and bound for a correction.

• Chongqing Hongjiu Fruit (CHF HK) is looking to raise up to US$300m in its upcoming Hong Kong IPO.
• Chongqing Hongjiu Fruit (CHJF) is a multi-brand fresh fruit distributor in China with an end-to-end supply chain. They have 1.0% market share as China’s second largest fruit distributor.
• It appears that CHJF had benefited from a slight increase in margins of certain core fruit products. However, we continue to remain doubtful of its long-term prospects. 

• EVOC Intelligent Technology Company Limited H (2308 HK) entered a trading halt pending the release of an announcement under the Hong Kong Code on Takeovers and Mergers on 1 August.
• It is likely that after two failed attempts, Mr Chen Zhi Lie, the ultimate controlling shareholder, will try a third time to privatise EVOC.
• The previous offer of HK$1.50 per H Share in 2020 marginally missed the 90% minimum acceptance condition. Expect a similar structure with a likely slightly higher offer price.  

• China’s gaming regulator has granted publishing licenses to 69 online games, which excludes Tencent (700 HK) and NetEase (9999 HK) again for the fourth time.
• Though 9-month long game approval freeze was lifted in April, both Tencent and NetEase failed to make it into the approved list of more than 200 titles so far.
• Chinese gaming companies have been seeking for overseas expansion as domestic gaming market is struggling with ban on new approvals and new restrictions.

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.

• Bright Scholar Education
• Times China
• UPL Ltd
• Yuexiu Property

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.

• Bright Scholar Education
• Times China
• UPL Ltd
• Yuexiu Property

• Giant Biogene (GB) aims to raise around US$500m in its Hong Kong IPO.
• GB is a leader in the bioactive ingredient-based professional skin treatment product industry in China.
• In this note, we talk about the positive aspects of the deal.

• China Communications Construction (1800 HK) sealed Rmb371bn of new contract in 2Q22, or a 35.2% YoY growth, representing a sharp acceleration from just 4.9% in 1Q22. 
• We estimate backlog is now around Rmb3.5trn and this equals to 5.2x FY21 revenue. This should have improved from 4.6x at end-FY21 and provides CCCC a secured pipeline.
• CCCC is well positioned to gain more contracts in 2H22 as driven by the local government special purpose bonds issue. Such issue reached Rmb1.5trn, or a 166.1% growth, in Jun.