Alpha-Centric ESG Research

Kyle Rudden

Oh, the inhumanity of Monopolium Inquisitorum, leviathans made to stand before the judgement of inquisitorial courts. Repent and reform, or burn in everlasting… fine, maybe just shed a few worldly possessions, WhatsApp would be a good start, and stop coveting thy neighbors' data so much.Big technology companies (aka "Big Tech") are the subject of ever-expanding antitrust inquisitions by regulators and courts around the world. In the U.S., informal inquiries into prominent members of FAANG by the U.S. Congress turned into formal antitrust suits, first Alphabet then Facebook.Yesterday, the U.S. Federal Trade Commission (FTC) announced yet another inquiry, this one into the data collection practices of social media companies. It mentioned nine companies by name, a few of which are "new" to this conversation (ByteDance, Tencent-investee Discord, and Snap).This Insight looks at one particular ESG angle to this antitrust stuff. Specifically, the potential for antitrust investigations – not the outcomes, but the process – to trigger ESG ratings downgrades and, in turn, constituency changes to major ESG indices. Summary points, for the cover page:<ul>
<li>Antitrust investigations will inevitably result in additional ESG ratings downgrades, and since most ESG indices are constructed using those ratings, constituency changes are likely.</li>
<li>Index changes might not happen until annual reviews a few months from now, but they are not tied to eventual antitrust outcomes (e.g., breakups) that could be years away, or not at all.</li>
<li>Presently, Facebook and Alphabet are the only U.S. stocks that stand out vis-à-vis the potential for antitrust-driven changes to ESG ratings and/or ESG indices (more so for Facebook).</li>
<li>Let's be honest, we are not talking about Tesla being added to the S&amp;P 500. Even for larger ESG indices, index-linked AUM is comparatively small vis-à-vis broader market indices.</li>
<li>However, one thing keeps it interesting. ESG indices are bloated with Big Tech, many of which are right behind Facebook and Alphabet on the antitrust plank walk.</li>
</ul>Herein, I explain my thought process – antitrust, to ESG ratings downgrades, to ESG index changes – then cover Facebook and Alphabet in some detail (albeit limited by constraints). There is less to say about the other U.S. "antitrust stocks" at the moment, but that may change. More importantly, I am looking into something similar, but related to Asian stocks. So, more to come.

Oh, the inhumanity of Monopolium Inquisitorum, leviathans made to stand before the judgement of inquisitorial courts. Repent and reform, or burn in everlasting… fine, maybe just shed a few worldly possessions, WhatsApp would be a good start, and stop coveting thy neighbors' data so much.Big technology companies (aka "Big Tech") are the subject of ever-expanding antitrust inquisitions by regulators and courts around the world. In the U.S., informal inquiries into prominent members of FAANG by the U.S. Congress turned into formal antitrust suits, first Alphabet then Facebook.Yesterday, the U.S. Federal Trade Commission (FTC) announced yet another inquiry, this one into the data collection practices of social media companies. It mentioned nine companies by name, a few of which are "new" to this conversation (ByteDance, Tencent-investee Discord, and Snap).This Insight looks at one particular ESG angle to this antitrust stuff. Specifically, the potential for antitrust investigations – not the outcomes, but the process – to trigger ESG ratings downgrades and, in turn, constituency changes to major ESG indices. Summary points, for the cover page:
Antitrust investigations will inevitably result in additional ESG ratings downgrades, and since most ESG indices are constructed using those ratings, constituency changes are likely.
Index changes might not happen until annual reviews a few months from now, but they are not tied to eventual antitrust outcomes (e.g., breakups) that could be years away, or not at all.
Presently, Facebook and Alphabet are the only U.S. stocks that stand out vis-à-vis the potential for antitrust-driven changes to ESG ratings and/or ESG indices (more so for Facebook).
Let's be honest, we are not talking about Tesla being added to the S&amp;P 500. Even for larger ESG indices, index-linked AUM is comparatively small vis-à-vis broader market indices.
However, one thing keeps it interesting. ESG indices are bloated with Big Tech, many of which are right behind Facebook and Alphabet on the antitrust plank walk.
Herein, I explain my thought process – antitrust, to ESG ratings downgrades, to ESG index changes – then cover Facebook and Alphabet in some detail (albeit limited by constraints). There is less to say about the other U.S. "antitrust stocks" at the moment, but that may change. More importantly, I am looking into something similar, but related to Asian stocks. So, more to come.

Big Tech Antitrust Scrutiny Could Mean ESG Ratings Downgrades, Constituency Changes for ESG Indices

Asian Insight Provider - Actionable ideas, CrossASEAN Research

Henry Soediarko

Asian Insight Provider - Actionable ideas

CrossASEAN Research

At CrossASEAN Research we strive to produce unbiased and differentiated on the ground insights on companies across South East Asia. Our Research is produced for the most part after face to face meetings and conversations with company management to dig deep into the long term vision and strategy of the companies we cover. We seek to deliver investable and actionable themes on sectors and markets across SE Asia, often in collaboration with other Insight Providers across the region, pooling the vast experience of the analysts within the Smartkarma Ecosystem. We also offer bespoke work and tailor made trips for our clients. 

Insights across South East Asia

Equity Bottom-Up

Far East Hospitality Trust / Equity Bottom-Up

<a href="https://www.smartkarma.com/entities/far-east-hospitality-trust" target="_blank" data-smartkarma-citation="entities:19061:1" rel="noopener">Far East Hospitality Trust (FEHT SP)</a>provides the stability that investors need from the substantial portion of the fixed revenue in the slow recovery in the hospitality industry. The company also benefit from getting the government contract to facilitate the SHN and hosts the Malaysian worker of <a href="https://www.smartkarma.com/entities/comfortdelgro-corp-ltd" target="_blank" data-smartkarma-citation="entities:497:1" rel="noopener">Comfortdelgro Corp (CD SP)</a> and <a href="https://www.smartkarma.com/entities/singapore-post-ltd" target="_blank" data-smartkarma-citation="entities:150:1" rel="noopener">Singapore Post (SPOST SP)</a> . 
Among all the hotel assets, 3 of the hotels in the Orchard area will be the first ones to recover their occupancy rate and the room rate which will translate into a higher RevPar. 
Thanks to the skew in high PER from Ascott Residence Trust, FEHT is trading at a 51% discount to the peers while in PBR, FEHT is trading at a 37.5% discount to the peers. Excluding Ascott Residence Trust, FEHT is trading at a 7% premium to the peers and a 41% discount to the peers. FEHT is also trading below its book value currently. BUY.

Far East Hospitality Trust (FEHT SP)provides the stability that investors need from the substantial portion of the fixed revenue in the slow recovery in the hospitality industry. The company also benefit from getting the government contract to facilitate the SHN and hosts the Malaysian worker of Comfortdelgro Corp (CD SP) and Singapore Post (SPOST SP) . 
Among all the hotel assets, 3 of the hotels in the Orchard area will be the first ones to recover their occupancy rate and the room rate which will translate into a higher RevPar. 
Thanks to the skew in high PER from Ascott Residence Trust, FEHT is trading at a 51% discount to the peers while in PBR, FEHT is trading at a 37.5% discount to the peers. Excluding Ascott Residence Trust, FEHT is trading at a 7% premium to the peers and a 41% discount to the peers. FEHT is also trading below its book value currently. BUY. 

Far East Hospitality Trust (FEHT): Stable in Slow Recovery

Silver Point

Thomas J. Monaco

Independent Insight Provider

Silver Point is a boutique research firm that focuses on the broader financial services sector, with a particular focus on troubled institutions globally. 

Asia Ex Japan

*November Market Stats Generally Positive: The Singapore Exchange (SGX.SP) [SGX] released its market statistics for November 2020. Unsurprisingly, the progress of the COVID-19 vaccine fuelled volume gains across the entire spectrum of SGX products; and*Taiwan Pressures: SGX ceased trading of MSCI Taiwan futures contracts on October 30, 2020 as these contracts moved to Hong Kong Exchanges &amp; Clearing (388.HK) [HKEx]. Notional value traded market share of SGX - while usually volatile - has begun gradually declining to 90.4% in November from 92.4% in October. This will have significant implications over how much market share and fee pressure will be placed on SGX's lucrative A50 contract.

*November Market Stats Generally Positive: The Singapore Exchange (SGX.SP) [SGX] released its market statistics for November 2020. Unsurprisingly, the progress of the COVID-19 vaccine fuelled volume gains across the entire spectrum of SGX products; and*Taiwan Pressures: SGX ceased trading of MSCI Taiwan futures contracts on October 30, 2020 as these contracts moved to Hong Kong Exchanges &amp; Clearing (388.HK) [HKEx]. Notional value traded market share of SGX - while usually volatile - has begun gradually declining to 90.4% in November from 92.4% in October. This will have significant implications over how much market share and fee pressure will be placed on SGX's lucrative A50 contract.  

Singapore Exchange – Strains Seen For TW Futures

*Joint Announcement For Stock Connect Expansion: Just when we thought that Hong Kong Exchanges &amp; Clearing (388.HK) [KKEx] had no other rabbits to pull out of its hat in 2020, the HKEx, Shanghai Stock Exchange (SSE), and Shenzhen Stock Exchange (SZSE) jointly announced further scope for Stock Connect expansion in early 2021 on November 27, 2020 regarding the STAR Market and biotech companies;  *Solid Quarter: Hong Kong Exchanges &amp; Clearing (388.HK) [HKEX] reported 3Q20 earnings of HKD 3.3 bn, improving HKD 376 mn (12.7%) linked quarter. Results were even more impressive when we exclude investment income (declined HKD 206 mn or 23.2% linked quarter) – increasing HKD 582 mn (28.0%) to HKD 2.7 bn; and*Peak Value: So much value has been derived on hope for the shares of HKEx, which included that on: southbound connect, futures markets,  structural reforms, and the change in CEO. As such, we have witnessed HKEx’s 2020 share performance of 44.4% that has resulted in a global exchange leading valuation of 10.4x P/BV.

*Joint Announcement For Stock Connect Expansion: Just when we thought that Hong Kong Exchanges &amp; Clearing (388.HK) [KKEx] had no other rabbits to pull out of its hat in 2020, the HKEx, Shanghai Stock Exchange (SSE), and Shenzhen Stock Exchange (SZSE) jointly announced further scope for Stock Connect expansion in early 2021 on November 27, 2020 regarding the STAR Market and biotech companies;  *Solid Quarter: Hong Kong Exchanges &amp; Clearing (388.HK) [HKEX] reported 3Q20 earnings of HKD 3.3 bn, improving HKD 376 mn (12.7%) linked quarter. Results were even more impressive when we exclude investment income (declined HKD 206 mn or 23.2% linked quarter) – increasing HKD 582 mn (28.0%) to HKD 2.7 bn; and*Peak Value: So much value has been derived on hope for the shares of HKEx, which included that on: southbound connect, futures markets,  structural reforms, and the change in CEO. As such, we have witnessed HKEx’s 2020 share performance of 44.4% that has resulted in a global exchange leading valuation of 10.4x P/BV. 

Hong Kong Exchanges & Clearing – Making Another Connection

*Lakshmi Vilas Bank Problems Appear Bigger Than DBS Expects: By our calculation and based on LVB’s FY 2Q21 results, the company would appear to be insolvent by the amount of INR 39 bn – nearly 56% greater than the DBS Bank India capital infusion; LVB loses money on an operating basis prior to loss provisions, as revenues (no clarity on what is recurring) of INR 15.4 bn are less than operating expenses of INR 16.0 bn – or by 3.7% at FY 2Q21; et al;  and  *Cram-down Highlights That LVB’s Stated Numbers May Be Wrong:  Prior to the amalgamation, INR 318.2 bn (USD 43 mn) LVB Basel III-compliant Tier 2 bonds (Series VIII, Series IX, and Series X) were written down under the direction of the RBI. To the best of our knowledge, this would appear to be the first time that a cram-down procedure was applied in Asia. As a result, no investor should take any investment in a troubled Indian financial institution for granted. Ultimately, this will make the financial sector more efficient – but calls the sanctity of their audited results into questions as well.

*Lakshmi Vilas Bank Problems Appear Bigger Than DBS Expects: By our calculation and based on LVB’s FY 2Q21 results, the company would appear to be insolvent by the amount of INR 39 bn – nearly 56% greater than the DBS Bank India capital infusion; LVB loses money on an operating basis prior to loss provisions, as revenues (no clarity on what is recurring) of INR 15.4 bn are less than operating expenses of INR 16.0 bn – or by 3.7% at FY 2Q21; et al;  and  *Cram-down Highlights That LVB’s Stated Numbers May Be Wrong:  Prior to the amalgamation, INR 318.2 bn (USD 43 mn) LVB Basel III-compliant Tier 2 bonds (Series VIII, Series IX, and Series X) were written down under the direction of the RBI. To the best of our knowledge, this would appear to be the first time that a cram-down procedure was applied in Asia. As a result, no investor should take any investment in a troubled Indian financial institution for granted. Ultimately, this will make the financial sector more efficient – but calls the sanctity of their audited results into questions as well. 

Singapore

Singapore Exchange Limited owns and operates Singapore's Securities and derivatives exchange and their related clearing houses.  The Company also provides ancillary securities processing and information technology services to participants in the financial sector.

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SGX (SGX SP)

Big Tech Antitrust Scrutiny Could Mean ESG Ratings Downgrades, Constituency Changes for ESG Indices

Antitrust broaches several highly-material ESG issues. Growing antitrust scrutiny of "Big Tech" could lead to ESG rating downgrades, and in turn,...

Kyle Rudden

Far East Hospitality Trust (FEHT): Stable in Slow Recovery

Among all the hotel assets, 3 of the FEHT hotels in the Orchard area will be the first ones to recover their occupancy rate and the room rate which...

Henry Soediarko

Singapore Exchange – Strains Seen For TW Futures

SINGAPORE EXCHANGE: November Stats Look Good Generally Across The Board; However, Taiwan Futures Slippage Could Impact A50.

Thomas J. Monaco

Hong Kong Exchanges & Clearing – Making Another Connection

HONG KONG EXCHANGES & CLEARING: The Three Exchanges Have Added To The Stock Connect With STAR Market and Biotech Additions

Thomas J. Monaco

DBS Group Holdings – The LVB Cram Down

DBS GROUP HOLDINGS: The LVB Cram-down Raises Significant Questions Over Potential Cost For DBS, Raises Significant Concerns Over Audited Financial...

Thomas J. Monaco

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