Brief Hong Kong: StubWorld: Hang Lung’s Implied Stub At Extreme Levels and more

In this briefing:

1. StubWorld: Hang Lung’s Implied Stub At Extreme Levels
2. Fast Fashion in Asia: Trendy Clothing’s Toxic Trails – Investors Beware
3. Oil Exploration: We Expect a Resurgence in 2019 Pointing to Strong Performance for E&Ps
4. Maoyan Entertainment (猫眼娱乐) Post-IPO: The CNY Box Office Catalyst Hasn’t Materialized

1. StubWorld: Hang Lung’s Implied Stub At Extreme Levels

This week in StubWorld …

• Hang Lung (10 HK) has lagged 57.6%-held Hang Lung Properties (101 HK) after announcing full-year results, resulting in the implied stub touching 2 STD away from the average.
• An update on Intouch Holdings (INTUCH TB)‘s stub investments via its venture capital arm, InVent.

Preceding my comments on HLG and Intouch 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%.

2. Fast Fashion in Asia: Trendy Clothing’s Toxic Trails – Investors Beware

Fashion industry is a leading polluter of water, air and land and its rapid growth has inflicted serious environmental damage in manufacturing bases across Asia. With increased consumer awareness and public scrutiny, leading brands globally have committed to adopt sustainable practices. This can mean a rise in operating costs, margin pressures which can lead to higher prices and/or lower volumes. What does that mean for corporate earnings growth and stock valuations? Our report attempts to arrive at some ballpark estimations based on a scenario analysis. Leading branded apparel companies can suffer market value destruction ranging  up to 30% if their long term margins and growth assumptions are reset at lower levels following a shake-up of their existing low cost model. And, those who refuse to adapt and adopt sustainable processes could soon be shunned by ESG-led investors and environmentally mindful consumers alike, leading to valuation discounts. Investors Beware.

Over the past decades, corporate growth and profitability agenda overshadowed environmental considerations, and apparel brands have grown in an environmentally unsustainable manner. Beneath the façade of glitzy fashion magazines lies the dirty underbelly of pesticide use, water mismanagement, irresponsible effluent discharge, chemical poisoning, greenhouse gas emissions, energy overuse, micro-plastic pollution and landfill dumping. Until recently, the notion that apparel retailers should be responsible and accountable for the environmental infringements in their highly fragmented but globalised supply chain was an unwelcome idea. Under pressure from consumers and activists, this is now changing. With ESG-led investing going mainstream, investors too may start to take notice.

The detailed report below includes:

1. Summary and conclusions from the study on Fast Fashion’s environmental footprint in Asia and impact of rise in consumer awareness on global apparel companies
2. Understanding Fast fashion
3. Fast Fashion trends in Asia – Survey findings on consumer attitudes to shopping and environmental issues
4. Environmental issues in Asia due to Fast fashion
5. Sustainable clothing – an emerging trend, and what can turn it mainstream

6. Investing in Fast fashion: between a rock and a hard place – a Valuation vulnerability analysis

7. Sustainability & 13 leading fast Fashion players – how future ready are they?

3. Oil Exploration: We Expect a Resurgence in 2019 Pointing to Strong Performance for E&Ps

We see oil exploration making a comeback in 2019, as drilling spending sees an increase and on the back of encouraging well results year to date. Already in 2019 there have been 4 high impact discoveries in the UK, South Africa and Guyana. Given the need of companies, especially the majors, to replenish their portfolios, there will still be a number of frontier, high impact wells being drilled. The areas where we see material exploration wells being drilled this year are Guyana, US GoM, Mexico, Brazil the Eastern Mediterranean and West Africa.

If there is some exploration success, the pure-play exploration companies will be good performers, especially those that have exposure to several wells that could be material relative to their size. A pick up in drilling will also be positive for the offshore drilling companies and seismic names. We look at the merits and pitfalls of investing in exploration, performance in 2018, outlook for 2019, the debate over exploring for resource versus buying it, how the economics of exploration have improved and the impact of the time value of money. 

4. Maoyan Entertainment (猫眼娱乐) Post-IPO: The CNY Box Office Catalyst Hasn’t Materialized

We mentioned in our previous note prior to the listing of Maoyan Entertainment on Feb 4th that Chinese New Year (CNY) Box office from the two movies, namely Pegasus and The New King of Comedy that the company invested could be a catalyst post listing. However, our analysis of CNY box office data suggests although Pegasus reported box office revenues slightly north of RMB 1bn, it is far behind the number one movie, The Wandering Earth’s RMB 2bn box office. In addition to the company-specific movie investment, the overall box office for the CNY holiday has been disappointing, suggesting a challenging year for the movie industry in 2019. 

• Entertainment Plus (猫眼娱乐) IPO: The Engineered Movie Ticketing Leader that Runs Out of Steam (Part 1)
• Entertainment Plus (猫眼娱乐) IPO: The Coming Regulatory Bang Isn’t That Bad (Part 2)
• Maoyan Entertainment (猫眼娱乐) IPO: Turning Profitable, Thoughts on Valuation
• Maoyan Entertainment (猫眼娱乐) IPO: Lackluster Demand but CNY Blockbusters Could Be a Catalyst