Brief Growth Ideas: Shanghai/Shenzhen Connect – Inflow Turned Cautious in March but MSCI Adjustment Ahead and more

In this briefing:

1. Shanghai/Shenzhen Connect – Inflow Turned Cautious in March but MSCI Adjustment Ahead
2. Huya Placement: Best Performing Live Streaming Stock but Beware Douyu Is Catching Up
3. MTG Co Ltd; Problems Stretch Far Beyond the New Chinese E-Commerce Legislation
4. Ruhnn (如涵) Trading Update – Worst First-Day Performance Out of Recent US ADR Listings
5. Naspers: Addressing the Discount (Again). New Moves to Realize Value Are Having an Impact

1. Shanghai/Shenzhen Connect – Inflow Turned Cautious in March but MSCI Adjustment Ahead

In our Discover SZ/SH Connect series, we aim to help our investors understand the flow of northbound trades via the Shanghai Connect and Shenzhen Connect, as analyzed by our proprietary data engine. We will discuss the stocks that experienced the most inflow and outflow by offshore investors in the past seven days.

We split the stocks eligible for the northbound trade into three groups: those with a market capitalization of above USD 5 billion, and those with a market capitalization between USD 1 billion and USD 5 billion.

We note that in March, northbound inflows turned more cautious vs strong inflows in February (link to our Feb note) and January (link to our Jan note). Nevertheless we see strong inflows into Healthcare sector, led by Jiangsu Hengrui Medicine Co., (600276 CH). We also highlight Universal Scientific Industrial Shanghai (601231 CH 环旭电子) in the mid cap space that attracted strong northbound inflows.

2. Huya Placement: Best Performing Live Streaming Stock but Beware Douyu Is Catching Up

Huya, a leading live streaming player in China, announced share placement of USD 550 million after market close on April 3rd. In this insight, we will look at recent developments of Huya and score the deal in our ECM Framework.

3. MTG Co Ltd; Problems Stretch Far Beyond the New Chinese E-Commerce Legislation

• MTG revised their original targets for FY2019 and issued revised targets which were significantly below the original targets
• The share price has already been on the decline even prior to the notice of revised targets
• Declining inbound sales of its flagship brand ReFa is the main culprit for guidance reversion
• The impact of Chinese e-commerce legislation was significant due to limited exposure to pure inbound sales
• Parallel buyers, those who buy products to resell them in China: dominates MTG’s inbound sales
• MTG’s price difference in Japan duty-free purchases vs official sales channels in China
• The Troubles of MTG, Causing Panic Among Consensus
• Insider ownership and lack of free float keeping the share price above its fair value
• Price to book approaching 1.0x; limits the immediate downside risk

4. Ruhnn (如涵) Trading Update – Worst First-Day Performance Out of Recent US ADR Listings

Ruhnn Holding Ltd (RUHN US) raised US$125m at US$12.50 per share, the mid-point of the price range. We have previously analyzed the IPO in:

• Ruhnn (如涵) IPO Review – Expensive Influence
• Ruhnn (如涵) Pre-IPO Review- Significant Concentration Risk

In this insight, we will update on the deal dynamics, implied valuation, and include a valuation sensitivity table.

5. Naspers: Addressing the Discount (Again). New Moves to Realize Value Are Having an Impact

Naspers (NPN SJ) recently announced another attempt to reduce the holdco discount which has remained stubbornly high despite previous attempts by management to reduce it. Since the announcement there has been movement, so perhaps this time it really is different!

So what is being done? Naspers will spin off its international internet assets, which account for >99% of its value, into a newco. They will then list 25% of newco on the Euronext in Amsterdam by issuing these shares to Naspers’ shareholders. The intention is to create a vehicle which can attract increased foreign and tech investors without the complication of a South African listing. The company believes this has been a key factor behind the wide holdco discount. The move also reduces Naspers weighting in South African indices which is another contributing factor.

Alastair Jones sees the announcement as a positive, although there are still issues with the main listing being in South Africa. He still believes a buyback would be the most effective way to reduce the discount, but Naspers is also keen to keep investing.