Brief Hong Kong: This Week in Blockchain & Cryptos: Bakkt, Li Ka-Shing, & Starbucks and more

In this briefing:

1. This Week in Blockchain & Cryptos: Bakkt, Li Ka-Shing, & Starbucks
2. Don’t Write off Further Aussie LNG Supply Growth: Positive for WPL AU; Negative for US LNG Players
3. Ebang IPO Preview: Balance Sheet Indicators Point to a Significant Slowdown
4. HK Connect Discovery Weekly: CRRC, Car Inc/UCar (2019-01-25)
5. Chinese Telcos: Rising Capex Expectations a Risk. Downgrade China Mob and China Tel to Neutral.

1. This Week in Blockchain & Cryptos: Bakkt, Li Ka-Shing, & Starbucks

• If you are a follower of the Asian stock markets, one of the “rules of thumb” is to carefully follow the investments trails of the “superman” Li Ka-Shing, who has recently publicly declared that he supports Bakkt. On December 31st, 2018, Bakkt raised $182.5 million from high profile investors including Li Ka-Shing backed Horizon Ventures, M12 (Microsoft’s venture capital arm), Intercontinental Exchange (owner of the New York Stock Exchange), Alan Howard, and the Boston Consulting Group. 

• Starbucks and Bakkt have yet to mention exactly when Starbucks will allow consumers to use Bitcoin to purchase coffee at their stores. In terms of timing, we believe that the probable time frame is likely to be sometime in 4Q 2019 to 2020 when Starbucks will start allowing their consumers to start using Bitcoin at some of their stores. This will represent a crucial positive tipping point for Bitcoin in the next two years.
• Rakuten & Bitcoin – It has been reported that Rakuten may start to allow Bitcoin as a means of payment as early as April 2019. 

2. Don’t Write off Further Aussie LNG Supply Growth: Positive for WPL AU; Negative for US LNG Players

We think the market is underestimating global LNG supply in the early to mid-2020s from current facilities: initially we look at Australia, which became the world’s largest LNG exporter on a monthly basis in November (~80mtpa or 25% of global supply). Our analysis of Australian LNG supply suggests that production in the early to mid-2020s will be much higher than market expectations of falling production, as fields move into decline. Overall we think this is negative longer-term for the LNG market as supply could supply to the upside but it is a relative positive for the Australian LNG companies. 

We think production could grow to around 95mtpa by the mid-2020s due to substantial upside to the nameplate capacity on existing facilities, tie-backs and new developments keeping existing facilities full and utilizing new brownfield LNG trains. Australia’s key advantages versus LNG projects elsewhere are the low offshore upstream operating costs, cheap shipping costs to Asia, an investor friendly environment and having a huge installed base of LNG infrastructure and associated cashflows.

Relative to its size Woodside Petroleum (WPL AU) should be the biggest beneficiary and it is also positive for Inpex Corp (1605 JP) and Santos Ltd (STO AU) . It is also good news for the larger integrated players such as Chevron Corp (CVX US), Total Sa Spon Adr (TOT US) and Royal Dutch Shell (RDSA LN). We think that the US LNG players are disadvantaged relative to Australian expansions so this is relatively negative for the likes of Cheniere Energy (LNG US) and NextDecade Corp (NEXT US).

3. Ebang IPO Preview: Balance Sheet Indicators Point to a Significant Slowdown

Ebang (EBANG HK) is a Chinese designer of bitcoin mining machines which are sold under the Ebit brand. Ebang refiled its draft prospectus with HKEX on 20 December 2018, but the IPO plans of cryptocurrency related companies are in a state of flux. Last week, the CEO of the Hong Kong Exchanges and Clearing, said that companies seeking to go public in Hong Kong should show consistency in their business models, in response to questions about the IPO applications of Bitmain Technologies Ltd (1374554D CH), Canaan Inc. (CANAAN HK) and Ebang.

4. HK Connect Discovery Weekly: CRRC, Car Inc/UCar (2019-01-25)

In our Discover HK Connect series, we aim to help our investors understand the flow of southbound trades via the Hong Kong Connect, as analyzed by our proprietary data engine. We will discuss the stocks that experienced the most inflow and outflow by mainland investors in the past seven days.

We split the stocks eligible for the Hong Kong Connect trade into three groups: component stocks in the HSCEI index, stocks with a market capitalization between USD 1 billion and USD 5 billion, and stocks with a market capitalization between USD 500 million and USD 1 billion.

In this week’s HK Connect Discovery, we highlight that CRRC’s outflow coincides with media reports that highlight the risks of China’s investment in high-speed railway. We also see a very substantial southbound flow into Car Inc. 

5. Chinese Telcos: Rising Capex Expectations a Risk. Downgrade China Mob and China Tel to Neutral.

We have been positive on the Chinese telcos, in part due to our thesis that peak 5G capex expectations were too high for China Mobile. That has largely played out as capex expectations have come down and the stock has performed well. The telcos see a steady state approach to 5G capex as the best way forward given the lack of a current business case. However, there are larger forces at work which imply higher capex – the need to support Huawei/ZTE (763 HK) given the moves against Chinese equipment manufacturers internationally, and the likelihood of economic stimulus packages.

We have downgraded China Mobile (941 HK) and China Telecom (728 HK) to Neutral as the risk now is that capex expectations start to rise again. China Unicom (762 HK) remains a BUY as it trades at a much lower multiple. We reiterate our preference for China Tower (788 HK) which is exposed positively to rising telecom capex.

We have increased our 2020 capex expectations for Chinese Telcos. China Mobile most affected (RMB bn)