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Most Read: China Resources Mixc Lifestyle Services, SK IE Technology, JD Logistics, Chongqing Zhifei Biological Products, Modern Dental Group and more

In today’s briefing:

  • MSCI May 21 Index Rebalance Preview: Review Period Is a Wrap
  • Index Rebalance & ETF Flow Recap: MSCI, KOSPI200, KOSDAQ150, Sensex, SIMSCI, PCOMP, CSI300
  • JD Logistics IPO – Looking to Raise $4 Billion but Valuation Pulled Down by SF Holding
  • FTSE China A50 Index Rebalance Preview: One High Probability Change; One on the Cusp
  • Modern Dental: A Turnaround Story with Tremendous Upside

MSCI May 21 Index Rebalance Preview: Review Period Is a Wrap

By Brian Freitas

The MSCI May Semi Annual Index Review (SAIR) will use the price cutoff data from any of the trading days from 19-30 April to determine the list of stocks to be included into/ excluded from its indices.

MSCI is scheduled to announce the results of the May 2021 SAIR at 11pm Central European Time (CET) on 11 May (12 May Asia time) with the changes implemented after the close of trading on 28 May.

Post the end of the review period, we see 85 potential inclusions and 84 potential exclusions from the MSCI Standard indices across Asian developed and emerging markets – the actual number will be lower and will depend on the market cap cut-off date chosen by MSCI.

The largest net inflow from the changes will be to China, India and Korea while there could be significant outflows from Japan.

The ‘light’ rebalancing scenario will not need to be used in the rebalance, nor do we see any stocks that would be caught under the ‘extreme price moves’ scenario.

Stocks with the highest probability of inclusion in the MSCI Standard index and the largest buying impact from passive funds are Perennial Energy Holdings Ltd (2798 HK)Lucky Cement (LUCK PA), Adani Transmission Ltd (ADANIT IN)Powerlong Real Estate Holdings (1238 HK),  China Resources Mixc Lifestyle Services (1209 HK), Tower Bersama Infrastructure (TBIG IJ), Domino’s Pizza Enterprises Ltd (DMP AU), Reece Ltd (REH AU)Sany Heavy Equipment Intl (631 HK), Chindata Group Holdings-Adr (CD US), Venus MedTech (2500 HK), Sunac Services Holdings (1516 HK) and I-Mab (IMAB US).

Stocks with a slightly lower probability of inclusion but high impact are Chow Tai Fook Jewellery (1929 HK), Carabao Group (CBG TB) and SITC International (1308 HK).

Stocks with the highest probability of deletion from the MSCI Standard index and the largest selling impact from passive funds are Kasikornbank PCL (KBANK/F TB)Aboitiz Power (AP PM), Oil & Gas Development (OGDC PA)Genting Plantations (GENP MK), Megaworld Corp (MEG PM)Samsung Card Co (029780 KS)Ottogi Corporation (007310 KS)Suzuken Co Ltd (9987 JP)PCCW Ltd (8 HK), Perusahaan Gas Negara Perser (PGAS IJ), TPG Telecom Ltd (TPG AU) and Air Water Inc (4088 JP).

Stocks with a slightly lower probability of inclusion but high impact are Keihan Holdings Co., Ltd. (9045 JP), A2 Milk Co Ltd (ATM NZ) and Marui Group (8252 JP)


Index Rebalance & ETF Flow Recap: MSCI, KOSPI200, KOSDAQ150, Sensex, SIMSCI, PCOMP, CSI300

By Brian Freitas

In this weeks recap, we look at:

Redemptions in iShares MSCI South Korea Index Fund (ETF) (EWY US) continue ahead of the resumption of short selling in Korea.

Event this week

Close of

Index

Detail

4 May
FTSE

Decrease in Vedanta Ltd (VEDL IN)  investability weighting


JD Logistics IPO – Looking to Raise $4 Billion but Valuation Pulled Down by SF Holding

By Douglas Kim

Last week, JD Logistics (JDL HK) received the regulatory approval for an IPO on the Hong Kong stock exchange that could raise up to $4 billion. According to Nikkei Asia, JD Logistics is seeking a valuation of about $40 billion. This valuation level is the same as the level the company was seeking in late 2020.

Although the valuation level that JD Logistics is seeking through this IPO has not changed, what has changed so much in the past 10 weeks is the valuation of S.F. Holding (002352 CH) in this period. SF Holding is one of the key comparable companies for JD Logistics in China. SF Holdings’ share price has crashed by 45% from 18 February to 2 May 2021. 

Our base case valuation of JD Logistics is EV of 289 billion RMB and implied market cap of 314 billion RMB (US$48.6 billion). At an implied market cap of $48.6 billion, this represents a 21% higher level than the recent valuation of $40 billion that the company is seeking. Despite this solid upside, this base case valuation is 15% lower than our previous base case valuation. This is mainly due to the much lower price of its comp SF Holding and the greater competitive pressures in the local logistics and parcel delivery services in China. 


FTSE China A50 Index Rebalance Preview: One High Probability Change; One on the Cusp

By Brian Freitas

The FTSE China A50 Index (XIN9I INDEX) is designed to represent the performance of the 50 largest companies by full market cap of the mainland Chinese market that is available to domestic and international investors via the QFII, RQFII and Stock Connect programs.

The next rebalance will be effective after the close of trading on 18 June and the changes will be announced on 2 June. The review uses data from the close on 24 May to determine the stocks to be included and excluded.

Using data from 30 April, we see 2 potential inclusions Chongqing Zhifei Biological Products (300122 CH) and Haier Smart Home (600690 CH). The stocks that would be deleted from the index are Offcn Education Technology (002607 CH) and CSC Financial Co Ltd (601066 CH).

Chongqing Zhifei Biological Products (300122 CH) was included in the index at the September 2020 review and deleted at the December 2020 review. The stock could now be included in the index again following the run up in the stock price.


Modern Dental: A Turnaround Story with Tremendous Upside

By Sameer Taneja

Investment Thesis in Modern Dental

  1. We believe that Modern Dental Group (3600 HK)  has been a beneficiary of Covid as it has gained market share in the last 3 quarters globally in the dental prosthetics market. Q1 2021 showed 15-20% YoY revenue growth. Management guides revenue growth of not less than 10% for FY21 (vs. normalized high single-digit revenue growth from FY17-19) which we believe is conservative.
  2. The company has emerged leaner from Covid 19 as they completed a massive restructuring in 2020, resulting in EBITDA margin expansion to 25%  (from the 15-16% levels historically) in Q4 2020. We believe the company will maintain a 53%  gross profit margin and 25% EBITDA margin, and 16.5% Net profit margin through 2021, resulting in 410 mn HKD net profit for FY21. Based on this estimate, the stock trades on 9.2x PE FY21 despite the stellar run in share price in Q1 2021.
  3. With improving cash flows due to low Capex requirements (~90 mn HKD in FY21e and FY22e), we see Modern Dental Group (3600 HK) generate a free cash flow of 330 mn HKD in FY21e and 400+mn HKD in FY22e. At the very minimum, if the company adheres to its stated 30% dividend payout ratio, it will be net cash 52 mn HKD in FY21 and 338 mn HKD in FY22 ( almost 9% of the current market capitalization) from a net debt position of 158 mn HKD in FY20. 
  4. The company will use the excess cash on its balance sheet to raise the dividend payout ratio beyond 30%.  We also think management will continue to buy back stock subject to management stake not increasing by more than 5% every year.  The company has actively repurchased stock in 2020 and 2021. 

Trading at an undemanding valuation of 9.2x/8.7x PE FY21/22, we think there is an opportunity for at least 50% upside as peers in the similar industry of dental supply trade in the 20-25x range.  With a 30% payout ratio, there is also a decent dividend yield of 3.5% on the stock.


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