Daily BriefsMost Read

Most Read: Tencent, Alibaba Group, China Youzan, Krafton Inc and more

In today’s briefing:

  • China Gaming Restrictions Are FAR More Severe Than the Market Is Assuming
  • Tencent/Netease: Online Game Tightening Coming to an End
  • HSI, HSCEI, HSTECH: September Rebalance Flows Post Capping
  • China Youzan (8083 HK): Once Bitten …
  • KRX BBIG Index Rebalance: Krafton, SK Bioscience, SK IE Tech Included (Among Others)

China Gaming Restrictions Are FAR More Severe Than the Market Is Assuming

By Mio Kato

Overnight many Chinese gaming-related names fell ~3% on news that China would be restricting playing time for minors to just three hours a week, specifically 20:00-21:00 on Friday, Saturday and Sunday. The market reaction grossly underestimates how drastic these restrictions will be for gaming companies and seems to simply be superficially looking at the low single-digit revenue contribution percentages of minors.

Tencent/Netease: Online Game Tightening Coming to an End

By Ke Yan, CFA, FRM

We have discussed previously that the Chinese central government could impose tightening measure on online game companies to restrict screen time for the youth. Last night the NPPA announced a notice further tightening the youth playing. In this note, we will take a look at the notice and assess the impact on Tencent and Netease. We are of the view that this policy will have little impact on the two companies. 

HSI, HSCEI, HSTECH: September Rebalance Flows Post Capping

By Brian Freitas

The upcoming rebalances for the Hong Kong Hang Seng Index (HSI INDEX), Hang Seng China Enterprises Index (HSCEI INDEX) and Hang Seng Tech Index (HSTECH INDEX) will be implemented at the close of trading on 3 September. The rebalance will use data from todays close to cap the stocks in the index at a maximum of 8% of the index weight.

In this Insight, we show the flows after capping stocks using the close on 30 August. The final numbers will be marginally different based on todays closing prices.

For the Hong Kong Hang Seng Index (HSI INDEX) there are 3 inclusions – Xinyi Glass Holdings (868 HK)Li Ning Co Ltd (2331 HK) and China Merchants Bank H (3968 HK) and 1 exclusion – Bank Of Communications Co H (3328 HK).

For the Hang Seng China Enterprises Index (HSCEI INDEX), the inclusions are JD Logistics (2618 HK) and Li Ning Co Ltd (2331 HK) while the deletions are Shimao Property Holdings (813 HK) and Anhui Conch Cement (914 HK).

For the Hang Seng Tech Index (HSTECH INDEX) there is one set of changes with Trip.com (9961 HK) / Trip.com (TCOM US) replacing Koolearn (1797 HK).

Alibaba Group (9988 HK)‘s weight in all 3 indices is higher than 8% following the increase in the number of index shares at the July monthly rebalance. The stock will have the largest passive selling due to capping back to 8%.

Capping and float changes will lead to passive buying on Tencent (700 HK), Meituan (3690 HK) and Kuaishou Technology (1024 HK), while there will be passive selling on HSBC Holdings (5 HK), AIA Group Ltd (1299 HK), China Construction Bank H (939 HK), Xiaomi Corp (1810 HK) and HKEX (388 HK).

There will be selling on a lot of the Hong Kong Hang Seng Index (HSI INDEX) constituents due to funding flows.

China Youzan (8083 HK): Once Bitten …

By David Blennerhassett

Back on the 28 February this year, SaaS provider China Youzan Limited (8083 HK) announced a pre-conditional Offer by way of a Scheme to take its GEM-listed shares private, then list 51.7%-held Youzan Technology on Hong Kong’s mainboard by “way of introduction“. Shareholders were to be offered HK$0.1352/share in cash plus an in-specie distribution of 0.05077265 Youzan Technology shares for every China Youzan share held. The total indicative Offer price was HK$2.3088/share, a 30.2% discount to last close. The scrip portion was based on a fair value of RMB35.73/share for Youzan Tech.

In China Youzan (8083 HK): Proposal Towards Relisting Youzan Tech, I recommended avoiding the stock –  China Youzan was up 283% in the past year, and 44% YTD prior to the Offer announcement. 

Disinterested Scheme Shareholders approved at the First SGM on the 6 May, a rollover arrangement and other side-agreements – not the take-private proposal as was incorrectly reported by some media sources.

At the time, shares were trading at $2.09/share, down 37% since the delisting proposal. 

And shares continued to fall, with double-digit declines on multiple days including 19.5% on the 11 May on significant volume. 

The Scheme Document was expected to be posted on or before the 15 June, but was delayed on that day to at least the 19 October. 

Reportedly Youzan Tech’s listing application had been rejected, however, the wording in the monthly update on the 13 August said “Youzan Technology has been revising features of its application“, a slightly varied statement to “Youzan Technology has continued to progress its application with the Stock Exchange” seen in previous monthly updates

Shares touched a low of HK$0.71/share on the 23 August. 

The New News

China Youzan announced yesterday Youzan Tech has re-filed its application for the listing of shares, which will now be done by way of an offering of new shares, not a listing by introduction. 

Both the scrip ratio and cash portion remain unchanged under China Youzan’s delisting transaction, by way of Scheme.

The estimated value per Youzan Tech shares by an independent valuer is now RMB21.76 (~HK$26.20/share), down 39% from the previous indicative price. 

Therefore the proposed consideration for China Youan shareholders is HK$1.4654/share (HK$0.1352 +(HK$0.05077265 x HK$26.20)), a 100.7% premium to last close, but a 55.7% discount to last close ahead of the initial announcement in February this year. 

Shares are up ~16% in the last two trading days, but down 74% since the delisting proposal and 37% adrift of the indicative Offer price in February. Those are pretty grim performance numbers.

There’s probably value to be had here at the current level, but there are a multitude of factors at work in arriving at a “fair value.” Further delays in the dispatch of the Scheme Doc are feasible. And will the Exchange grant this listing application, when it clearly had issues with the prior submission?

More below the fold.

KRX BBIG Index Rebalance: Krafton, SK Bioscience, SK IE Tech Included (Among Others)

By Brian Freitas

The KRX has announced the results of the September review of the BBIG indices and the changes will become effective after the close of trading on 9 September.

These are the changes to the indices:

KRX has broken its own rules (everyone does it, so join in!) by including Krafton Inc (259960 KS) even though the stock listed post the July-end cut off and there is no provision of Fast Entry in the index methodology.

Stocks with the largest inflows are SK Bioscience (302440 KS), Krafton Inc (259960 KS), SK IE Technology (361610 KS), LG Chem Ltd (051910 KS), SK Innovation (096770 KS) and Douzone Bizon (012510 KS) while the stocks with the largest outflows are Kakao Games Corp (293490 KS), SK Biopharmaceuticals Co Ltd (326030 KS), Kakao Corp (035720 KS), Posco Chemical Co Ltd (003670 KS), SKC Co Ltd (011790 KS) and Samsung SDI (006400 KS).

Krafton Inc (259960 KS) is also a Fast Entry to the Korea Stock Exchange Kospi 200 Index (KOSPI2 INDEX) and there will be passive buying from those trackers as well.

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