Global Emerging Market Equities, Propitious Research

Wium Malan, CFA

Global Emerging Market Equities

Independent, Fundamental Quantitative Research

Propitious Research

Fully independent, fundamental and quantitative equity research, focused on companies in the Telecommunication, Media, Technology, Internet and Healthcare sectors in the Global Emerging Markets. Idea generation focused on Quality stocks, trading below their intrinsic Value, with sound Corporate Governance.

Equity Bottom-Up

<p>Although <a href="https://www.smartkarma.com/entities/tencent-holdings-ltd" target="_blank" data-smartkarma-citation="entities:26:1" rel="noopener">Tencent (700 HK)</a> has still significantly outperformed both <a href="https://www.smartkarma.com/entities/netease" target="_blank" data-smartkarma-citation="entities:29030:1" rel="noopener">NetEase (9999 HK)</a> and the <a href="https://www.smartkarma.com/entities/hong-kong-hang-seng-index" target="_blank" data-smartkarma-citation="entities:22899:1" rel="noopener">Hong Kong Hang Seng Index (HSI INDEX)</a> on a 12month basis, it has significantly lagged over, especially, the past 3months as we have witnessed increased anti-monopoly regulatory efforts from the State Administration for Market Regulation (SAMR) as well as the possibility of a regulatory-induced restructuring of its financial services operations along with the prospect for slowing games revenue growth (which still contributes 32% to Group Revenue and &gt;50% to Group Gross Profit). </p><p>In this insight, I take a closer look at the Chinese online games industry, its long-term opportunity in the context of the global games industry, and the relative performance of key games developers and publishers. With online games revenue growth set to decelerate significantly this year, of the high base set during the stay-at-home COVID-19 impacted 2020, Tencent should be able to draw on its competitive advantages to continue its relative outperformance.</p>

Although Tencent (700 HK) has still significantly outperformed both NetEase (9999 HK) and the Hong Kong Hang Seng Index (HSI INDEX) on a 12month basis, it has significantly lagged over, especially, the past 3months as we have witnessed increased anti-monopoly regulatory efforts from the State Administration for Market Regulation (SAMR) as well as the possibility of a regulatory-induced restructuring of its financial services operations along with the prospect for slowing games revenue growth (which still contributes 32% to Group Revenue and &gt;50% to Group Gross Profit). In this insight, I take a closer look at the Chinese online games industry, its long-term opportunity in the context of the global games industry, and the relative performance of key games developers and publishers. With online games revenue growth set to decelerate significantly this year, of the high base set during the stay-at-home COVID-19 impacted 2020, Tencent should be able to draw on its competitive advantages to continue its relative outperformance.

Tencent: A Closer Look at the Online Games Market and Its Relative Strength as Revenue Growth Slows

Head of Research, IPOs & Placements, Aequitas Research

Sumeet Singh

Head of Research, IPOs & Placements

IPOs and Placements coverage across Asia Pacific

Aequitas Research

We cover all listing across the Asia Pacific along with follow-up placements. As of Dec 2020, our team had covered 539 IPOs with a hit rate of 73.5% and 685 placements with a hit rate of 66.8%.

We combine fundamental bottom-up views with our proprietary quantitative framework to provide a holistic coverage across new listings and placements. Our coverage includes pre-IPO notes before the deal is launched, follow-up analysis once the deal is live and post-listing trading analysis as well.

Equity Capital Markets

<p>Kanzhun, an online recruitment platform in China, aims to raise around US$800m in its US IPO. The company is backed by Tencent. Kanzhun runs BOSS Zhipin APP, which allows enterprise users and jobseekers to directly chat, thus, providing more convenience to both.</p><p>Kanzhun is the largest online recruitment platform in China, as measured by average MAU in 2020, according to the CIC Report. As of Mar 2021, it had 13.0m verified enterprise users, 6.3m verified enterprises, and 85.8m verified job seekers on its platform. For 12 months ended Mar 2021, it had 2.89m paid enterprise customers. Its average MAU (including job seekers and enterprise users) reached 24.0m in 1Q21.</p><p>The company nearly doubled its revenue in 2020 and its 1Q21 revenue was nearly triple that of 1Q20. Furthermore, while it remains loss making, it has been operating cash flow positive since 2020.</p>

Kanzhun, an online recruitment platform in China, aims to raise around US$800m in its US IPO. The company is backed by Tencent. Kanzhun runs BOSS Zhipin APP, which allows enterprise users and jobseekers to directly chat, thus, providing more convenience to both.Kanzhun is the largest online recruitment platform in China, as measured by average MAU in 2020, according to the CIC Report. As of Mar 2021, it had 13.0m verified enterprise users, 6.3m verified enterprises, and 85.8m verified job seekers on its platform. For 12 months ended Mar 2021, it had 2.89m paid enterprise customers. Its average MAU (including job seekers and enterprise users) reached 24.0m in 1Q21.The company nearly doubled its revenue in 2020 and its 1Q21 revenue was nearly triple that of 1Q20. Furthermore, while it remains loss making, it has been operating cash flow positive since 2020.

Equity Analyst, LightStream Research

Oshadhi Kumarasiri

Equity Analyst

Long-Short Analysis on Japan, Asia and the World

LightStream Research

LightStream conducts quantitatively rigorous and data-driven analysis with a focus on Japan and Asia.

We consistently cover the Tech, Consumer and Industrial sectors, and provide ECM and Events coverage more broadly.

We supplement traditional qualitative insights from company relationships with a robust quantitative foundation that examines as much historical data as is available.
We further refine the accuracy of our insights and calls through the use of alternative data to flesh out current trends, and through a valuation framework that emphasises non-superficial peer group selection and a proper attempt to understand the metrics and changes that have driven security valuations in the past.

Event-Driven

<p>As the partial removal of the mask mandate signaled an end to the US’s COVID-19 troubles, investors started to aggressively reposition their portfolios to take advantage of the reopening of the economy. Chinese tech stocks listed on the US exchanges were among the hardest-hit by this trend, as inflation plays (with no sign of decreasing government spending) surged.</p><p>This sell-off has brought back the tech valuations from their peaks to a more than desirable level, especially the valuations of companies like <a href="https://www.smartkarma.com/entities/alibaba-group-holding-ltd" target="_blank" data-smartkarma-citation="entities:787:1" rel="noopener">Alibaba Group (BABA US)</a>, which can be considered a value stock in the tech space considering its profitability and valuation multiples.</p>

As the partial removal of the mask mandate signaled an end to the US’s COVID-19 troubles, investors started to aggressively reposition their portfolios to take advantage of the reopening of the economy. Chinese tech stocks listed on the US exchanges were among the hardest-hit by this trend, as inflation plays (with no sign of decreasing government spending) surged.This sell-off has brought back the tech valuations from their peaks to a more than desirable level, especially the valuations of companies like Alibaba Group (BABA US), which can be considered a value stock in the tech space considering its profitability and valuation multiples.

Chinese Tech Pair Trade: Value Tech Stocks Seems Attractive, Especially with a Short Hedge

Global TMT analyst with Asia ex-Japan focus.

Mitchell Kim

<ul>
<li>While Tencent’s 25% YoY total revenue growth in 1Q21 was respectable, <strong>extended slow online games revenue growth increases the downside risk for the stock</strong>, in my view.  In 2018, Tencent's share price fell from the peak of HKD470 to nearly HKD250 as game revenue growth fell from 30%+ to single digits. </li>
<li> I flagged that <a href="https://www.smartkarma.com/entities/tencent-holdings-ltd" target="_blank" data-smartkarma-citation="entities:26:1" rel="noopener">Tencent (700 HK)</a> will not be able to sustain the 30-40% YoY game revenue growth in my report, <a href="https://www.smartkarma.com/insights/tencent-700-hk-taking-foot-off-the-pedal" target="_blank" data-smartkarma-citation="insights:49643" rel="noopener">Tencent (700 HK): Taking Foot Off the Pedal</a>, after Tencent’s 4Q20 results on 25 March 2021. <strong> In 1Q21, Tencent’s total online game revenue (including smartphone revenues in social media) growth decelerated to 15% YoY</strong>, the lowest rate since 3Q19. </li>
<li>
<strong>Games revenue growth remains a key share price driver</strong> because the segment still contributes 64% of the total gross profit (Game business is the majority of VAS segment) even though it only makes up 40% of the total revenues.</li>
<li> <strong>Added to the game revenue slowdown risk, the Fintech restructuring risk is still looming.</strong> In my Tencent report, <a href="https://www.smartkarma.com/insights/tencent-700-hk-fintech-risk-is-lurking" target="_blank" data-smartkarma-citation="insights:50512" rel="noopener">Tencent (700 HK): Fintech Risk Is Lurking</a>, I noted that stricter consumer loan and asset management regulation will adversely impact Tencent shares more than Alibaba because of Tencent’s greater ownership of its fintech business.      </li>
<li>
<strong>The saving grace for Tencent in 1Q21 was fintech and cloud businesses.</strong>  Fintech and business services (incl Cloud) was the largest growth driver in 1Q21.  However, FinTech Service revenue growth benefitted from the comparison with the stay-at-home law impacted 1Q20.  </li>
<li>
<strong>Tencent's 1Q21 results were broadly at par with <a href="https://www.smartkarma.com/entities/netease-inc-adr" target="_blank" data-smartkarma-citation="entities:17203:1" rel="noopener">NetEase Inc (NTES US)</a> but underperformed e-commerce platforms' results</strong> -- <a href="https://www.smartkarma.com/entities/alibaba-group-holding-ltd" target="_blank" data-smartkarma-citation="entities:787:1" rel="noopener">Alibaba Group (BABA US)</a>, <a href="https://www.smartkarma.com/entities/jd-com-inc-adr" target="_blank" data-smartkarma-citation="entities:446:1" rel="noopener">JD.com Inc (ADR) (JD US)</a>, and <a href="https://www.smartkarma.com/entities/vipshop-holdings-ltd-adr" target="_blank" data-smartkarma-citation="entities:1088:1" rel="noopener">Vipshop Holdings (VIPS US)</a> -- on revenue, gross profit and operating profit (normalized) growth.  </li>
</ul>


While Tencent’s 25% YoY total revenue growth in 1Q21 was respectable, extended slow online games revenue growth increases the downside risk for the stock, in my view.  In 2018, Tencent's share price fell from the peak of HKD470 to nearly HKD250 as game revenue growth fell from 30%+ to single digits. 
 I flagged that Tencent (700 HK) will not be able to sustain the 30-40% YoY game revenue growth in my report, Tencent (700 HK): Taking Foot Off the Pedal, after Tencent’s 4Q20 results on 25 March 2021.  In 1Q21, Tencent’s total online game revenue (including smartphone revenues in social media) growth decelerated to 15% YoY, the lowest rate since 3Q19. 

Games revenue growth remains a key share price driver because the segment still contributes 64% of the total gross profit (Game business is the majority of VAS segment) even though it only makes up 40% of the total revenues.
 Added to the game revenue slowdown risk, the Fintech restructuring risk is still looming. In my Tencent report, Tencent (700 HK): Fintech Risk Is Lurking, I noted that stricter consumer loan and asset management regulation will adversely impact Tencent shares more than Alibaba because of Tencent’s greater ownership of its fintech business.      

The saving grace for Tencent in 1Q21 was fintech and cloud businesses.  Fintech and business services (incl Cloud) was the largest growth driver in 1Q21.  However, FinTech Service revenue growth benefitted from the comparison with the stay-at-home law impacted 1Q20.  

Tencent's 1Q21 results were broadly at par with NetEase Inc (NTES US) but underperformed e-commerce platforms' results -- Alibaba Group (BABA US), JD.com Inc (ADR) (JD US), and Vipshop Holdings (VIPS US) -- on revenue, gross profit and operating profit (normalized) growth.  


Tencent (700 HK): Take a Deep Breath and Reassess: Online Game Growth Is Slowing

ASEAN Insight Provider, CrossASEAN Research

Angus Mackintosh

ASEAN Insight Provider

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

<p><a href="https://www.smartkarma.com/entities/sea-ltd" target="_blank" data-smartkarma-citation="entities:8509:1" rel="noopener">Sea Ltd (SE US)</a> announced its 1Q2021 results which look like a blowout set of numbers with +147% growth in total GAAP revenues with +117% growth in digital bookings for digital entertainment and +250% YoY growth in e-commerce GAAP revenues.</p>
<p>Gross Profit increased a staggering +212% YoY to US$645.4m in 1Q2021 and the company booked a positive EBITDA of US$88.1m versus a (US$69.9m) loss in 1Q2020.</p>
<p>The gross profit margin increased from 28% in 1Q2020 to 36% in 1Q2021, which is a testament to the fact that the company is moving along the path to profitability. Digital entertainment saw higher margins, while-commerce saw falling EBITDA loss per order.</p>
<p>In Digital Entertainment (DE) division continues to see strong growth in its user base with +61% YoY growth in quarterly active users (QAU) to 648.6m but more importantly quarterly paying users saw growth of +12.3% YoY to 79.8m signifying a higher level of monetization on its self-developed game <em>Free Fire.</em></p>
<p>The company continues to successfully expand its gaming business to new geographies, with India being the latest growth engine and players are spending more time on Free Fire and spending more. It continues to add new content and characters to increase the appeal and stickiness of <em>Free Fire</em>. It is also seeing huge response in the eSports arena for <em>Free Fire.</em></p>
<p>Shopee ranked number one in the shopping category by monthly active users and time spent in app in 1Q2021 for both South East Asia and Taiwan, according to App Annie. E-commerce continues to show supercharged growth and especially in the core market of Indonesia.</p>
<p><a href="https://www.smartkarma.com/entities/sea-ltd" target="_blank" data-smartkarma-citation="entities:8509:1" rel="noopener">Sea Ltd (SE US)</a>'s move into digital payments in South -East Asia under SeaMoney and ShopeePay in Indonesia continues to see strong momentum.  The mobile wallet total payment volume saw total payment volume triple in 1Q2021 to US$3.4bn. </p>
<p>The company is also expanding the offline use-cases for ShopeePay most recently extending use to Indomaret in Indonesia, the largest mini-market operator in the country.</p>
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<p><a href="https://www.smartkarma.com/entities/sea-ltd" target="_blank" data-smartkarma-citation="entities:8509:1" rel="noopener">Sea Ltd (SE US)</a>'s move into food delivery through ShopeeFood and evidence suggests that it has already had a strong reception to its launch in Jakarta, with growth similar to that in other categories.</p>
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<p>This latest set of results provides further proof of the success of the <a href="https://www.smartkarma.com/entities/sea-ltd" target="_blank" data-smartkarma-citation="entities:8509:1" rel="noopener">Sea Ltd (SE US)</a> growth model which generates huge EBITDA from gaming and reinvests that money into growing the company's e-commerce and digital finance businesses, whilst maintaining the investment momentum into the gaming cash cow, buy pushing out into new geographies such as India.</p>
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<p><a href="https://www.smartkarma.com/entities/sea-ltd" target="_blank" data-smartkarma-citation="entities:8509:1" rel="noopener">Sea Ltd (SE US)</a> continues to standout as the best way to play the explosive growth in e-commerce in South East Asia, funded by the popularity of its self developed game <em>Free Fire </em>and its gaming business, together with its move into digital payments a third leg to future growth.</p>
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<section class="figure"><a href="https://www.smartkarma.com/entities/sea-ltd" target="_blank" data-smartkarma-citation="entities:8509:1" rel="noopener">Sea Ltd (SE US)</a> valuations are higher than its listed peers on 13x and 9x EV/Sales for FY21E and FY22E respectively but it is growing at more than twice the pace in terms of sales to justify this. The market is also paying a premium for its unique financing plus its market leadership and strong track record on execution, with 11 consecutive quarters of triple-digit growth.</section>
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Sea Ltd (SE US) announced its 1Q2021 results which look like a blowout set of numbers with +147% growth in total GAAP revenues with +117% growth in digital bookings for digital entertainment and +250% YoY growth in e-commerce GAAP revenues.
Gross Profit increased a staggering +212% YoY to US$645.4m in 1Q2021 and the company booked a positive EBITDA of US$88.1m versus a (US$69.9m) loss in 1Q2020.
The gross profit margin increased from 28% in 1Q2020 to 36% in 1Q2021, which is a testament to the fact that the company is moving along the path to profitability. Digital entertainment saw higher margins, while-commerce saw falling EBITDA loss per order.
In Digital Entertainment (DE) division continues to see strong growth in its user base with +61% YoY growth in quarterly active users (QAU) to 648.6m but more importantly quarterly paying users saw growth of +12.3% YoY to 79.8m signifying a higher level of monetization on its self-developed game Free Fire.
The company continues to successfully expand its gaming business to new geographies, with India being the latest growth engine and players are spending more time on Free Fire and spending more. It continues to add new content and characters to increase the appeal and stickiness of Free Fire. It is also seeing huge response in the eSports arena for Free Fire.
Shopee ranked number one in the shopping category by monthly active users and time spent in app in 1Q2021 for both South East Asia and Taiwan, according to App Annie. E-commerce continues to show supercharged growth and especially in the core market of Indonesia.
Sea Ltd (SE US)'s move into digital payments in South -East Asia under SeaMoney and ShopeePay in Indonesia continues to see strong momentum.  The mobile wallet total payment volume saw total payment volume triple in 1Q2021 to US$3.4bn. 
The company is also expanding the offline use-cases for ShopeePay most recently extending use to Indomaret in Indonesia, the largest mini-market operator in the country.

Sea Ltd (SE US)'s move into food delivery through ShopeeFood and evidence suggests that it has already had a strong reception to its launch in Jakarta, with growth similar to that in other categories.

This latest set of results provides further proof of the success of the Sea Ltd (SE US) growth model which generates huge EBITDA from gaming and reinvests that money into growing the company's e-commerce and digital finance businesses, whilst maintaining the investment momentum into the gaming cash cow, buy pushing out into new geographies such as India.



Sea Ltd (SE US) continues to standout as the best way to play the explosive growth in e-commerce in South East Asia, funded by the popularity of its self developed game Free Fire and its gaming business, together with its move into digital payments a third leg to future growth.

Sea Ltd (SE US) valuations are higher than its listed peers on 13x and 9x EV/Sales for FY21E and FY22E respectively but it is growing at more than twice the pace in terms of sales to justify this. The market is also paying a premium for its unique financing plus its market leadership and strong track record on execution, with 11 consecutive quarters of triple-digit growth.

















China

NetEase, Inc. is an Internet technology company that develops applications, services and other Internet technologies in China. The Company's core businesses consist of email service, web portal and online entertainment, including online gaming services. NetEase also offers online advertising, search, mobile applications and e-commerce.

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NetEase Inc (NTES US)

Tencent: A Closer Look at the Online Games Market and Its Relative Strength as Revenue Growth Slows

In this insight, I take a closer look at the Chinese online games industry, its long-term opportunity in a global context, and the relative...

Wium Malan, CFA

Kanzhun Pre-IPO - Bumble Meets Linkedin

Kanzhun, an online recruitment platform in China, aims to raise around US$800m in its US IPO. The company is backed by Tencent. Kanzhun runs BOSS...

Sumeet Singh

Chinese Tech Pair Trade: Value Tech Stocks Seems Attractive, Especially with a Short Hedge

Alibaba is currently trading at new all-time low EV/Sales and EV/EBIT multiples offering limited downside risks. However, the sector could drift...

Oshadhi Kumarasiri

Tencent (700 HK): Take a Deep Breath and Reassess: Online Game Growth Is Slowing

Tencent's online game revenue growth slowed to 15% YoY. The stock nearly halved in 2018 when the growth rate fell to single digits. Can it happen...

Mitchell Kim

Sea Ltd - Supercharged

Sea Ltd (SE US) is the best way to proxy for the explosive growth in e-commerce in South East Asia, funded by its gaming revenue, with its move...

Angus Mackintosh

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