Quality-first, Business-perspective Strategy, Urbem (HK) Limited

Steven Chen

Quality-first, Business-perspective Strategy

Equity Bottom-Up

<ul>
<li>Fujian-based Dali Foods operates multiple brands in the categories of food and beverage;</li>
<li>Since its foundation, the company has pursued a simple "copycat" strategy combined with an emphasis on lower-tier regions;</li>
<li>Despite a persistently high return on capital, we do not see a moat that is wide enough and difficult to cross in this rapidly-evolving and fiercely-competitive consumer goods market in China.</li>
</ul>


Fujian-based Dali Foods operates multiple brands in the categories of food and beverage;
Since its foundation, the company has pursued a simple "copycat" strategy combined with an emphasis on lower-tier regions;
Despite a persistently high return on capital, we do not see a moat that is wide enough and difficult to cross in this rapidly-evolving and fiercely-competitive consumer goods market in China.


Dali Foods: Low-Price Copycat With A Persistent High-Return Character But A Too Narrow Moat

Pan-Asia Index Rebalances/ Events/ Delta One, Periscope Analytics

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Event-Driven

Hansoh Pharmaceutical Group  / Event-Driven

<p>The Hang Seng Indexes Company Limited (HSIL) announced the results of its review of the Hang Seng Family of Indexes post market close on 13 November. The constituent changes will be effective after the close of trading on 4 December.</p><p>For the <a href="https://www.smartkarma.com/entities/hang-seng-china-enterprises-index" target="_blank" data-smartkarma-citation="entities:22900:1" rel="noopener">Hang Seng China Enterprises Index (HSCEI INDEX)</a>, there are 9 inclusions and 9 deletions.</p><p>The inclusions are <a href="https://www.smartkarma.com/entities/alibaba-health-information-technology-ltd" target="_blank" data-smartkarma-citation="entities:453:1" rel="noopener">Alibaba Health Information Technology (241 HK)</a>, <a href="https://www.smartkarma.com/entities/china-overseas-land-invest" target="_blank" data-smartkarma-citation="entities:419:1" rel="noopener">China Overseas Land &amp; Investment Ltd (688 HK)</a>, <a href="https://www.smartkarma.com/entities/semiconductor-manufacturing-international-corp-smic" target="_blank" data-smartkarma-citation="entities:14231:1" rel="noopener">Semiconductor Manufacturing International Corp (SMIC) (981 HK)</a>, <a href="https://www.smartkarma.com/entities/evergrande-real-estate-group-limited" target="_blank" data-smartkarma-citation="entities:479:1" rel="noopener">Evergrande Real Estate Group (3333 HK)</a>, <a href="https://www.smartkarma.com/entities/hansoh-pharmaceutical-group" target="_blank" data-smartkarma-citation="entities:23675:1" rel="noopener">Hansoh Pharmaceutical (3692 HK)</a>, <a href="https://www.smartkarma.com/entities/china-feihe-ltd" target="_blank" data-smartkarma-citation="entities:24413:1" rel="noopener">China Feihe (6186 HK)</a>, <a href="https://www.smartkarma.com/entities/haidilao-international-holding-ltd" target="_blank" data-smartkarma-citation="entities:27044:1" rel="noopener">Haidilao (6862 HK)</a>, <a href="https://www.smartkarma.com/entities/jd-com-inc" target="_blank" data-smartkarma-citation="entities:29043:1" rel="noopener">JD.com (HK) (9618 HK)</a> and <a href="https://www.smartkarma.com/entities/netease" target="_blank" data-smartkarma-citation="entities:29030:1" rel="noopener">NetEase (9999 HK)</a>. </p><p>The deletions are <a href="https://www.smartkarma.com/entities/want-want-china-holdings-ltd" target="_blank" data-smartkarma-citation="entities:355:1" rel="noopener">Want Want (151 HK)</a>, <a href="https://www.smartkarma.com/entities/fosun-international-ltd" target="_blank" data-smartkarma-citation="entities:433:1" rel="noopener">Fosun International (656 HK)</a>, <a href="https://www.smartkarma.com/entities/china-telecom-corp-ltd-h" target="_blank" data-smartkarma-citation="entities:1015:1" rel="noopener">China Telecom Corp Ltd (H) (728 HK)</a>, <a href="https://www.smartkarma.com/entities/china-taiping-insurance-hldgs-co-ltd" target="_blank" data-smartkarma-citation="entities:489:1" rel="noopener">China Taiping Insurance Hldgs (966 HK)</a>, <a href="https://www.smartkarma.com/entities/china-citic-bank-corp-ltd-ea6c25fd-4b20-45cb-a4a6-df7a60136f03" target="_blank" data-smartkarma-citation="entities:653:1" rel="noopener">China Citic Bank Corp Ltd H (998 HK)</a>, <a href="https://www.smartkarma.com/entities/china-shenhua-energy-co-h" target="_blank" data-smartkarma-citation="entities:382:1" rel="noopener">China Shenhua Energy Co H (1088 HK)</a>, <a href="https://www.smartkarma.com/entities/china-minsheng-banking-h" target="_blank" data-smartkarma-citation="entities:8983:1" rel="noopener">China Minsheng Banking H (1988 HK)</a>, <a href="https://www.smartkarma.com/entities/china-vanke-co-ltd-h" target="_blank" data-smartkarma-citation="entities:18368:1" rel="noopener">China Vanke Co Ltd (H) (2202 HK)</a> and <a href="https://www.smartkarma.com/entities/picc-property-casualty-h" target="_blank" data-smartkarma-citation="entities:350:1" rel="noopener">PICC Property &amp; Casualty H (2328 HK)</a>. </p><p>One-way turnover is estimated at 10.21% and volumes at the closing auction on 4 December are going to be HUGE. Passive funds will need to trade between 1.5-4.5 days of ADV on the deletions and between 0.5-4 days of ADV on the inclusions.</p><p>We had picked all 9 inclusions and exclusions, so there are no surprises in the review. That said, the probability of <a href="https://www.smartkarma.com/entities/hansoh-pharmaceutical-group" target="_blank" data-smartkarma-citation="entities:23675:1" rel="noopener">Hansoh Pharmaceutical (3692 HK)</a> being included was the lowest since it was right at the cusp of inclusion, so there could be a pop at the open on Monday. Hansoh, at almost 4 days of ADV, has the biggest impact to buy from passive funds. The corresponding deletion was <a href="https://www.smartkarma.com/entities/picc-property-casualty-h" target="_blank" data-smartkarma-citation="entities:350:1" rel="noopener">PICC Property &amp; Casualty H (2328 HK)</a> and the stock could start trading lower on Monday.</p>

The Hang Seng Indexes Company Limited (HSIL) announced the results of its review of the Hang Seng Family of Indexes post market close on 13 November. The constituent changes will be effective after the close of trading on 4 December.For the Hang Seng China Enterprises Index (HSCEI INDEX), there are 9 inclusions and 9 deletions.The inclusions are Alibaba Health Information Technology (241 HK), China Overseas Land &amp; Investment Ltd (688 HK), Semiconductor Manufacturing International Corp (SMIC) (981 HK), Evergrande Real Estate Group (3333 HK), Hansoh Pharmaceutical (3692 HK), China Feihe (6186 HK), Haidilao (6862 HK), JD.com (HK) (9618 HK) and NetEase (9999 HK). The deletions are Want Want (151 HK), Fosun International (656 HK), China Telecom Corp Ltd (H) (728 HK), China Taiping Insurance Hldgs (966 HK), China Citic Bank Corp Ltd H (998 HK), China Shenhua Energy Co H (1088 HK), China Minsheng Banking H (1988 HK), China Vanke Co Ltd (H) (2202 HK) and PICC Property &amp; Casualty H (2328 HK). One-way turnover is estimated at 10.21% and volumes at the closing auction on 4 December are going to be HUGE. Passive funds will need to trade between 1.5-4.5 days of ADV on the deletions and between 0.5-4 days of ADV on the inclusions.We had picked all 9 inclusions and exclusions, so there are no surprises in the review. That said, the probability of Hansoh Pharmaceutical (3692 HK) being included was the lowest since it was right at the cusp of inclusion, so there could be a pop at the open on Monday. Hansoh, at almost 4 days of ADV, has the biggest impact to buy from passive funds. The corresponding deletion was PICC Property &amp; Casualty H (2328 HK) and the stock could start trading lower on Monday.

HSCEI Index Rebalance: 9 Adds, 9 Deletes, BIG Turnover

IPOs and Catalysts/Events, Global Equity Research Ltd

Arun George

IPOs and Catalysts/Events

Uncompromised, Independent, Conflict-Free Research

Global Equity Research Ltd

Global Equity Research was started in 2017 by a group of experienced research professionals. It was founded on a passionate belief in the importance and the need for uncompromised, independent, conflict-free research. We aim to provide differentiated and actionable primary and bottom up fundamental research.

Equity Capital Markets

<div><p><a href="https://www.smartkarma.com/entities/nongfu-spring" target="_blank" data-smartkarma-citation="entities:28955:1" rel="noopener">Nongfu Spring (9633 HK)</a> is a leader in the packaged drinking water and beverage business in China. Nongfu had the leading market share in the packaged drinking water market in China for eight consecutive years from 2012 to 2019, according to Frost &amp; Sullivan. Nongfu will commence trading on Tuesday, 8 September. Nongfu priced its IPO at HK$21.50 per share, at the top end of the indicative price range of $19.50-21.50 per H share. Nongfu raised net proceeds of HK$8,149 million ($1.1 billion).</p></div><div><div><div class="content-highlight"><p>In <a href="https://www.smartkarma.com/insights/nongfu-spring-ipo-initiation-still-or-sparkling" target="_blank" rel="noopener">our initiation note</a>, we stated that Nongfu is a play on the attractive growth of the Chinese soft beverage markets, which is underpinned by the increasing urbanisation rate, the growing health awareness and consumption upgrade. In <a href="https://www.smartkarma.com/insights/nongfu-spring-ipo-update-points-to-green-shoots-of-recovery" target="_blank" rel="noopener">our PHIP update note</a>, we opined that the key negative remains the large pre-IPO dividends with RMB7,800 million ($1.1 billion) cash dividend declared on 14 August. Overall, we continue to believe that Nongfu remains attractive at the IPO price due to a reasonable PEG valuation.</p></div></div></div>

Nongfu Spring (9633 HK) is a leader in the packaged drinking water and beverage business in China. Nongfu had the leading market share in the packaged drinking water market in China for eight consecutive years from 2012 to 2019, according to Frost &amp; Sullivan. Nongfu will commence trading on Tuesday, 8 September. Nongfu priced its IPO at HK$21.50 per share, at the top end of the indicative price range of $19.50-21.50 per H share. Nongfu raised net proceeds of HK$8,149 million ($1.1 billion).In our initiation note, we stated that Nongfu is a play on the attractive growth of the Chinese soft beverage markets, which is underpinned by the increasing urbanisation rate, the growing health awareness and consumption upgrade. In our PHIP update note, we opined that the key negative remains the large pre-IPO dividends with RMB7,800 million ($1.1 billion) cash dividend declared on 14 August. Overall, we continue to believe that Nongfu remains attractive at the IPO price due to a reasonable PEG valuation.

Asian Equities Analyst, Logistics & Transport, Tracking Traffic

Daniel Hellberg

Asian Equities Analyst, Logistics & Transport

Tracking Traffic

Focusing on Asian logistics, transportation, and travel companies

<p>Revenue in H120 at <a href="https://www.smartkarma.com/entities/dali-foods-group-co-ltd" target="_blank" data-smartkarma-citation="entities:1082:1" rel="noopener">Dali Foods Group (3799 HK)</a> declined by 8.7% YoY, but margins were relatively stable and the company managed to report net EPS of 0.14 RMB (-9.5% YoY). Dali Foods declared an interim dividend of 0.075 HKD, equivalent to about 47% of net profit. </p>
<p>The company's main three product areas posted wildly divergent results in H120. Sales of <em>Household Consumption</em> items -- soy-based drinks and bread products -- held up well during the pandemic, rising 7.7% YoY. Sales of <em>Snacks</em> declined, but only by 2% YoY. But Dali's <em>Ready to Drink</em><em>Beverages</em> saw sales decline by almost 23% YoY due to intense competition in the segment. </p>
<p>All told, Dali's sales performance in H120 barely outperformed overall retail sales in China (Dali -8.7% versus -10.9% retail sales excluding autos). Certainly the pace of revenue growth will recover here in H2 as pandemic fears subside, but we see few reasons to get excited about the stock. Retain SELL and HK$4.18 target price, implying 16% downside from the closing price on September 4. </p>

Revenue in H120 at Dali Foods Group (3799 HK) declined by 8.7% YoY, but margins were relatively stable and the company managed to report net EPS of 0.14 RMB (-9.5% YoY). Dali Foods declared an interim dividend of 0.075 HKD, equivalent to about 47% of net profit. 
The company's main three product areas posted wildly divergent results in H120. Sales of Household Consumption items -- soy-based drinks and bread products -- held up well during the pandemic, rising 7.7% YoY. Sales of Snacks declined, but only by 2% YoY. But Dali's Ready to DrinkBeverages saw sales decline by almost 23% YoY due to intense competition in the segment. 
All told, Dali's sales performance in H120 barely outperformed overall retail sales in China (Dali -8.7% versus -10.9% retail sales excluding autos). Certainly the pace of revenue growth will recover here in H2 as pandemic fears subside, but we see few reasons to get excited about the stock. Retain SELL and HK$4.18 target price, implying 16% downside from the closing price on September 4. 

Dali Foods (3799 HK): Story Remains Unexciting, Retain SELL

<div><p><a href="https://www.smartkarma.com/entities/nongfu-spring" target="_blank" data-smartkarma-citation="entities:28955:1" rel="noopener">Nongfu Spring (9633 HK)</a> is a leader in the packaged drinking water and beverage business in China. Nongfu had the leading market share in the packaged drinking water market in China for eight consecutive years from 2012 to 2019, according to Frost &amp; Sullivan. Nongfu has launched its IPO at a price range of $19.50-21.50 per H share. At the mid-point of the IPO price range, Nongfu will raise net proceeds of HK$7,768 million ($1 billion).</p></div><div>
<p>In <a href="https://www.smartkarma.com/insights/nongfu-spring-ipo-initiation-still-or-sparkling" target="_blank" rel="noopener">our initiation note</a>, we stated that Nongfu is a play on the attractive growth of the Chinese soft beverage markets, which is underpinned by the increasing urbanisation rate, the growing health awareness and consumption upgrade. In <a href="https://www.smartkarma.com/insights/nongfu-spring-ipo-update-points-to-green-shoots-of-recovery" target="_blank" rel="noopener">our PHIP update note</a>, we opined that the key negative remains the large pre-IPO dividends with RMB7,800 million ($1.1 billion) cash dividend declared on 14 August. Ultimately, we believe that the extent to which pre-IPO dividends detract from the company's fundamentals comes down to each investors’ comfort level with pre-IPO dividends.</p>
<div class="content-highlight"><p>Nongfu’s fundamentals offer more positives than negatives. Overall, we think that a reasonable PEG valuation, a market-leading business and solid cornerstone support makes Nongfu tempting at the proposed pricing range. </p></div>
</div>

Nongfu Spring (9633 HK) is a leader in the packaged drinking water and beverage business in China. Nongfu had the leading market share in the packaged drinking water market in China for eight consecutive years from 2012 to 2019, according to Frost &amp; Sullivan. Nongfu has launched its IPO at a price range of $19.50-21.50 per H share. At the mid-point of the IPO price range, Nongfu will raise net proceeds of HK$7,768 million ($1 billion).
In our initiation note, we stated that Nongfu is a play on the attractive growth of the Chinese soft beverage markets, which is underpinned by the increasing urbanisation rate, the growing health awareness and consumption upgrade. In our PHIP update note, we opined that the key negative remains the large pre-IPO dividends with RMB7,800 million ($1.1 billion) cash dividend declared on 14 August. Ultimately, we believe that the extent to which pre-IPO dividends detract from the company's fundamentals comes down to each investors’ comfort level with pre-IPO dividends.
Nongfu’s fundamentals offer more positives than negatives. Overall, we think that a reasonable PEG valuation, a market-leading business and solid cornerstone support makes Nongfu tempting at the proposed pricing range. 


China

Dali Foods Group Company Ltd. is a snack food and beverage company. The Company is actively expanding its products offering and distributes its products through retailers.

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Dali Foods Group (3799 HK)

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Tracking Traffic

Nongfu Spring IPO: Valuation Insights

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Arun George

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