Global Emerging Market Equities, Propitious Research

Wium Malan, CFA

Global Emerging Market Equities

Equity Bottom-Up

<p><a href="https://www.smartkarma.com/entities/baidu-inc" target="_blank" data-smartkarma-citation="entities:179:1" rel="noopener">Baidu (BIDU US)</a>, and the rest of the Chinese Online Search industry, has consistently been losing market share to the likes of <a href="https://www.smartkarma.com/entities/alibaba-group" target="_blank" data-smartkarma-citation="entities:28434:1" rel="noopener">Alibaba Group (9988 HK)</a>, <a href="https://www.smartkarma.com/entities/bytedance-technology" target="_blank" data-smartkarma-citation="entities:27936:1" rel="noopener">ByteDance (1460967D CH)</a>, <a href="https://www.smartkarma.com/entities/tencent-holdings-ltd" target="_blank" data-smartkarma-citation="entities:26:1" rel="noopener">Tencent Holdings (700 HK)</a>, <a href="https://www.smartkarma.com/entities/pinduoduo-inc" target="_blank" data-smartkarma-citation="entities:27250:1" rel="noopener">Pinduoduo (PDD US)</a> and <a href="https://www.smartkarma.com/entities/meituan-dianping" target="_blank" data-smartkarma-citation="entities:26970:1" rel="noopener">Meituan Dianping (3690 HK)</a> over the past two years. Although I still believe there is significant long term growth left for the Chinese digital advertising market, it can easily be argued that this growth will be heavily skewed and that the “pure” Search market is in effect an “industry in decline”. </p>
<p>In his book “Competitive Strategy: Techniques for Analysing Industries and Competitors”, Michael Porter expands on four key strategies which firms could successfully follow when they find themselves in a declining industry. In this insight, I analyse Baidu’s current strategy against these offered strategies to assess if there is indeed value left in the company (or at least the core search business). </p>
<p>Baidu should be able to continue to produce significant cash flow from its core search business as long as it sticks to the “leadership” strategy – given their dominant share of search queries, the low penetration they have in the SME market, the suitability to Search advertising for certain industry verticals and their superior profitability. I estimate Baidu’s fair value at US$168/ADS based on a SOTP valuation. The values used in my SOTP for <a href="https://www.smartkarma.com/entities/iqiyi-inc" target="_blank" data-smartkarma-citation="entities:26755:1" rel="noopener">iQIYI Inc (IQ US)</a>, <a href="https://www.smartkarma.com/entities/trip-com-group-ltd" target="_blank" data-smartkarma-citation="entities:180:1" rel="noopener">Trip.com (TCOM US)</a> (market value), Net Cash and Other investments (book value) would imply that Baidu’s core operations are currently valued at only $10.4bn ex-cash, which equates to only 9.1x 2021F PE (only 3.9x PE ex-cash).</p>

Baidu (BIDU US), and the rest of the Chinese Online Search industry, has consistently been losing market share to the likes of Alibaba Group (9988 HK), ByteDance (1460967D CH), Tencent Holdings (700 HK), Pinduoduo (PDD US) and Meituan Dianping (3690 HK) over the past two years. Although I still believe there is significant long term growth left for the Chinese digital advertising market, it can easily be argued that this growth will be heavily skewed and that the “pure” Search market is in effect an “industry in decline”. 
In his book “Competitive Strategy: Techniques for Analysing Industries and Competitors”, Michael Porter expands on four key strategies which firms could successfully follow when they find themselves in a declining industry. In this insight, I analyse Baidu’s current strategy against these offered strategies to assess if there is indeed value left in the company (or at least the core search business). 
Baidu should be able to continue to produce significant cash flow from its core search business as long as it sticks to the “leadership” strategy – given their dominant share of search queries, the low penetration they have in the SME market, the suitability to Search advertising for certain industry verticals and their superior profitability. I estimate Baidu’s fair value at US$168/ADS based on a SOTP valuation. The values used in my SOTP for iQIYI Inc (IQ US), Trip.com (TCOM US) (market value), Net Cash and Other investments (book value) would imply that Baidu’s core operations are currently valued at only $10.4bn ex-cash, which equates to only 9.1x 2021F PE (only 3.9x PE ex-cash).

Baidu: Strategies for Operating in an Industry in Decline

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.

Equity Capital Markets

<p>Founded by Mr. Ji Qi, a co-founder of <a href="https://www.smartkarma.com/entities/trip-com-group-ltd" target="_blank" data-smartkarma-citation="entities:180:1" rel="noopener">Trip.com (TCOM US)</a>, <a href="https://www.smartkarma.com/entities/huazhu-group-ltd" target="_blank" data-smartkarma-citation="entities:17527:1" rel="noopener">Huazhu Group (HTHT US)</a> is the second-largest hotel chain in China and the ninth-largest in the world. Huazhu has 17 hotel chain brands covering the entire spectrum from budget to upscale hotels.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/159/208/original/image_97971089031600189349309.png?1600189350" class="editor-image img-responsive" data-smartkarma-image-id="159208"></figure><div class="content-caption"><em>Source: Company Disclosures</em></div><p>The company started operations in 2005 as a budget hotel chain and was listed on the NASDAQ stock exchange on 26<sup>th</sup> March 2010.</p><p>Following other US-listed Chinese companies, Huazhu has filed for a secondary listing on the Hong Kong stock exchange to issue 20.4m shares at a maximum offer price of HK$ 368.0 per share.</p><p>The offer commenced on 11<sup>th</sup> September and remains open till 12:00 noon on 16<sup>th</sup> September 2020.</p>

Founded by Mr. Ji Qi, a co-founder of Trip.com (TCOM US), Huazhu Group (HTHT US) is the second-largest hotel chain in China and the ninth-largest in the world. Huazhu has 17 hotel chain brands covering the entire spectrum from budget to upscale hotels.Source: Company DisclosuresThe company started operations in 2005 as a budget hotel chain and was listed on the NASDAQ stock exchange on 26th March 2010.Following other US-listed Chinese companies, Huazhu has filed for a secondary listing on the Hong Kong stock exchange to issue 20.4m shares at a maximum offer price of HK$ 368.0 per share.The offer commenced on 11th September and remains open till 12:00 noon on 16th September 2020.

Huazhu Group Secondary Listing: Consensus Ignores COVID Even as The Business Goes Asset-Heavy

Asian Equities Analyst, Logistics & Transport, Tracking Traffic

Daniel Hellberg

Asian Equities Analyst, Logistics & Transport

Tracking Traffic

Focusing on Asian logistics, transportation, and travel companies

Thematic (Sector/Industry)

<p>After a hiatus, we have updated our Travel Tracker to reflect activity through September 11th. </p><p>While average hotel room rates in the region have continued to recover, airport departure activity seems to have stalled after a steady improvement over the Summer. This is true for most locations we track, including the four Mainland Chinese airports that have led the surge in activity since April. Stagnant traffic may simply reflect normal seasonal patterns, however.</p><p>While Chinese domestic travel demand continues to recover, the data suggest that recovery may be taking a breather. And outside of China travel activity remains virtually non-existent. </p>

After a hiatus, we have updated our Travel Tracker to reflect activity through September 11th. While average hotel room rates in the region have continued to recover, airport departure activity seems to have stalled after a steady improvement over the Summer. This is true for most locations we track, including the four Mainland Chinese airports that have led the surge in activity since April. Stagnant traffic may simply reflect normal seasonal patterns, however.While Chinese domestic travel demand continues to recover, the data suggest that recovery may be taking a breather. And outside of China travel activity remains virtually non-existent. 

TRACKING TRAFFIC's Travel Tracker Dashboard (September 11): Room Rates Up, But Air Activity Stalled

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.

<div>
<p><a href="https://www.smartkarma.com/entities/huazhu-group-ltd" target="_blank" data-smartkarma-citation="entities:17527:1" rel="noopener">Huazhu Group (HTHT US)</a> plans to raise around US$900m in its secondary listing in Hong Kong.</p>
</div>
<div>
<p>I have covered the background of the deal in my earlier note, <a href="https://www.smartkarma.com/insights/huazhu-hk-secondary-listing-early-look-needs-the-cash-more-than-most-secondary-candidates" target="_blank" rel="noopener">Huazhu HK Secondary Listing - Early Look - Needs the Cash More than Most Secondary Candidates.</a></p>
<p>In this insight, I'll talk about the deal dynamics and what to do with the ADR while waiting for the completion of the Hong Kong listing.</p>
</div>
<div>
<p></p>
<p><strong>Links to my previous notes on the topic:</strong></p>
<ul>
<li><a href="https://www.smartkarma.com/insights/yum-china-hk-ipo-trading-index-flows-to-the-rescue" target="_blank" rel="noopener">Yum China HK IPO Trading - Index Flows to the Rescue</a></li>
<li>
<a href="https://www.smartkarma.com/insights/yum-china-hk-listing-relatively-bigger-should-offer-a-bigger-discount" target="_blank" rel="noopener">Yum China HK Listing - Relatively Bigger, Should Offer a Bigger Discount</a>.</li>
<li><a href="https://www.smartkarma.com/insights/yum-china-hk-listing-early-look-relatively-bigger-deal-should-have-a-relatively-bigger-impact" target="_blank" rel="noopener">Yum China HK Listing - Early Look - Relatively Bigger Deal Should Have a Relatively Bigger Impact</a></li>
</ul>
</div>
<div>
<ul style="list-style-type: disc;">
<li><a href="https://www.smartkarma.com/insights/jd-netease-secondary-listings-what-to-do-with-the-adr-lessons-from-baba" target="_blank" rel="noopener">JD &amp; NetEase Secondary Listings - What to Do with the ADR? Lessons from Baba</a></li>
</ul>
</div>
<div>
<ul style="list-style-type: disc;">
<li><a href="https://www.smartkarma.com/insights/jd-netease-and-other-secondary-listing-index-ftse-msci-hsi-and-hscei-impact" target="_blank" rel="noopener">JD, NetEase and Other Secondary Listing - Index (FTSE, MSCI, HSI And HSCEI) Impact</a></li>
<li><a href="https://www.smartkarma.com/insights/jd-com-hk-listing-early-look-getting-the-ball-rolling" target="_blank" rel="noopener">JD.com HK Listing - Early Look - Getting the Ball Rolling</a></li>
</ul>
</div>
<div>
<ul style="list-style-type: disc;">
<li><a href="https://www.smartkarma.com/insights/jd-secondary-listing-early-to-file-but-late-to-launch-puts-it-in-a-peculiar-position" target="_blank" rel="noopener">JD Secondary Listing - Early to File but Late to Launch Puts It in a Peculiar Position</a></li>
<li><a href="https://www.smartkarma.com/insights/jd-secondary-listing-behaving-better-than-netease-so-far" target="_blank" rel="noopener">JD Secondary Listing - Behaving Better than NetEase, so Far</a></li>
</ul>
</div>
<div>
<ul style="list-style-type: disc;">
<li><a href="https://www.smartkarma.com/insights/jd-secondary-trading-update-strong-demand-but-won-t-have-any-index-flows" target="_blank" rel="noopener">JD Secondary Trading Update - Strong Demand but Won’t Have Any Index Flows</a></li>
</ul>
</div>
<div>
<ul style="list-style-type: disc;">
<li><a href="https://www.smartkarma.com/insights/netease-hk-listing-early-look-follow-the-leader" target="_blank" rel="noopener">NetEase HK Listing - Early Look - Follow the Leader</a></li>
<li><a href="https://www.smartkarma.com/insights/netease-secondary-listing-relatively-bigger-than-baba-should-offer-relatively-bigger-discount" target="_blank" rel="noopener">NetEase Secondary Listing - Relatively Bigger than Baba, Should Offer Relatively Bigger Discount</a></li>
<li><a href="https://www.smartkarma.com/insights/netease-secondary-listing-doing-a-beigene-rather-than-a-baba-risk-reward-shifting" target="_blank" rel="noopener">NetEase Secondary Listing - Doing a BeiGene Rather than a Baba, Risk Reward Shifting</a></li>
</ul>
</div>
<div>
<ul style="list-style-type: disc;">
<li><a href="https://www.smartkarma.com/insights/netease-secondary-trading-update-index-flows-to-provide-near-term-support" target="_blank" rel="noopener">NetEase Secondary Trading Update - Index Flows to Provide near Term Support</a></li>
</ul>
</div>
<div>
<ul style="list-style-type: disc;">
<li><a href="https://www.smartkarma.com/insights/alibaba-ipo-secondary-listing-the-real-ipo-only-begins-on-the-11th-day-post-listing" target="_blank" rel="noopener">Alibaba IPO/​Secondary Listing - The Real IPO Only Begins on the 11th Day Post Listing</a></li>
</ul>
</div>
<div>
<ul style="list-style-type: disc;">
<li dir="ltr">
<p><a href="https://www.smartkarma.com/insights/alibaba-ipo-secondary-listing-proposed-stock-connect-changes-might-throw-a-spanner-in-the-works" target="_blank" rel="noopener">Alibaba IPO/​Secondary Listing - Proposed Stock Connect Changes Might Throw a Spanner in the Works</a></p>
</li>
<li dir="ltr"><a href="https://www.smartkarma.com/insights/alibaba-ipo-secondary-listing-what-to-do-with-the-us-adr-while-waiting-for-the-hk-listing" target="_blank" rel="noopener">Alibaba IPO/​​Secondary Listing - What to Do with the US ADR While Waiting for the HK Listing?</a></li>
<li dir="ltr"><a href="https://www.smartkarma.com/insights/alibaba-ipo-secondary-listing-not-good-for-the-adr-should-have-put-a-price-range-to-it" target="_blank" rel="noopener">Alibaba IPO/​​​Secondary Listing -  Not Good for the ADR, Should Have Put a Price Range to It</a></li>
<li dir="ltr"><a href="https://www.smartkarma.com/insights/alibaba-ipo-secondary-neither-here-not-there-index-announcements-comparison-to-other-deals" target="_blank" rel="noopener">Alibaba IPO/​​​​Secondary -  Neither Here Nor There - Index Announcements, Comparison to Other Deals</a></li>
</ul>
</div>
<div>
<ul style="list-style-type: disc;">
<li><a href="https://www.smartkarma.com/insights/alibaba-ipo-secondary-listing-trading-time-to-converge-that-s-it" target="_blank" rel="noopener">Alibaba IPO/​​​​​Secondary Listing Trading - Time to Converge, That’s It</a></li>
<li><a href="https://www.smartkarma.com/insights/china-adrs-secondary-listing-deep-dive-yin-and-yang" target="_blank" rel="noopener">China ADRs Secondary Listing Deep-Dive: Yin and Yang</a></li>
<li><a href="https://www.smartkarma.com/insights/china-adrs-secondary-listing-holding-foreign-companies-accountable-act-i-m-coming-home" target="_blank" rel="noopener">China ADRs Secondary Listing - Holding Foreign Companies Accountable Act - I’m Coming Home</a></li>
<li><a href="https://www.smartkarma.com/insights/china-adrs-secondary-listing-covid-19-has-increased-the-tension-but-narrowed-the-short-list" target="_blank" rel="noopener">China ADRs Secondary Listing: COVID-19 Has Increased the Tension but Narrowed the Short List</a></li>
</ul>
</div>


Huazhu Group (HTHT US) plans to raise around US$900m in its secondary listing in Hong Kong.


I have covered the background of the deal in my earlier note, Huazhu HK Secondary Listing - Early Look - Needs the Cash More than Most Secondary Candidates.
In this insight, I'll talk about the deal dynamics and what to do with the ADR while waiting for the completion of the Hong Kong listing.



Links to my previous notes on the topic:

Yum China HK IPO Trading - Index Flows to the Rescue

Yum China HK Listing - Relatively Bigger, Should Offer a Bigger Discount.
Yum China HK Listing - Early Look - Relatively Bigger Deal Should Have a Relatively Bigger Impact




JD &amp; NetEase Secondary Listings - What to Do with the ADR? Lessons from Baba




JD, NetEase and Other Secondary Listing - Index (FTSE, MSCI, HSI And HSCEI) Impact
JD.com HK Listing - Early Look - Getting the Ball Rolling




JD Secondary Listing - Early to File but Late to Launch Puts It in a Peculiar Position
JD Secondary Listing - Behaving Better than NetEase, so Far




JD Secondary Trading Update - Strong Demand but Won’t Have Any Index Flows




NetEase HK Listing - Early Look - Follow the Leader
NetEase Secondary Listing - Relatively Bigger than Baba, Should Offer Relatively Bigger Discount
NetEase Secondary Listing - Doing a BeiGene Rather than a Baba, Risk Reward Shifting




NetEase Secondary Trading Update - Index Flows to Provide near Term Support




Alibaba IPO/​Secondary Listing - The Real IPO Only Begins on the 11th Day Post Listing





Alibaba IPO/​Secondary Listing - Proposed Stock Connect Changes Might Throw a Spanner in the Works

Alibaba IPO/​​Secondary Listing - What to Do with the US ADR While Waiting for the HK Listing?
Alibaba IPO/​​​Secondary Listing -  Not Good for the ADR, Should Have Put a Price Range to It
Alibaba IPO/​​​​Secondary -  Neither Here Nor There - Index Announcements, Comparison to Other Deals




Alibaba IPO/​​​​​Secondary Listing Trading - Time to Converge, That’s It
China ADRs Secondary Listing Deep-Dive: Yin and Yang
China ADRs Secondary Listing - Holding Foreign Companies Accountable Act - I’m Coming Home
China ADRs Secondary Listing: COVID-19 Has Increased the Tension but Narrowed the Short List



Huazhu HK Secondary Listing - Needs the Money but Looks Toppish

Tongcheng Travel Holdings  / Equity Bottom-Up

<p>Not surprisingly, online travel agency (OTA) <a href="https://www.smartkarma.com/entities/tongcheng-elong-holdings-ltd" target="_blank" data-smartkarma-citation="entities:27363:1" rel="noopener">Tongcheng-Elong Holdings Ltd (780 HK)</a> reported substantial YoY declines in revenue and earnings in Q220, though market conditions and results were better than in Q120, when Covid19 and the government's response brought travel to a halt.</p>
<p>Tongcheng-ELong's revenue mix has changed as a result of the pandemic, in both positive and negative ways. While it's positive to see increased revenue from advertising and continued strength in its position in smaller cities, we believe the cessation of international travel hurts profitability. In addition, high fixed operating expenses also hit earnings in the second quarter.</p>
<p>As domestic travel normalized in the months following the peak of the pandemic in China, Tongcheng-ELong's shares have rallied by over 60%. Given the moderating pace of the recovery in Chinese travel demand, and stubbornly high operating expenses, we do not expect Tongcheng-ELong's earnings to suddenly 'snap back' in H220.</p>

Not surprisingly, online travel agency (OTA) Tongcheng-Elong Holdings Ltd (780 HK) reported substantial YoY declines in revenue and earnings in Q220, though market conditions and results were better than in Q120, when Covid19 and the government's response brought travel to a halt.
Tongcheng-ELong's revenue mix has changed as a result of the pandemic, in both positive and negative ways. While it's positive to see increased revenue from advertising and continued strength in its position in smaller cities, we believe the cessation of international travel hurts profitability. In addition, high fixed operating expenses also hit earnings in the second quarter.
As domestic travel normalized in the months following the peak of the pandemic in China, Tongcheng-ELong's shares have rallied by over 60%. Given the moderating pace of the recovery in Chinese travel demand, and stubbornly high operating expenses, we do not expect Tongcheng-ELong's earnings to suddenly 'snap back' in H220.

Tongcheng-ELong (780 HK) Q2 Results Reflect Changing Travel Patterns, Stubbornly High OpEx

China

Trip.com Group Ltd. provides online travel agency services. The Company offers mobile applications, hotel reservations, flight ticketing, package tours, corporate travel management, and train ticketing services.

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Trip.com (TCOM US)

Baidu: Strategies for Operating in an Industry in Decline

Baidu, and the rest of the Chinese Online Search industry, has consistently been losing market share to the likes of Alibaba, ByteDance, Tencent,...

Wium Malan, CFA

Huazhu Group Secondary Listing: Consensus Ignores COVID Even as The Business Goes Asset-Heavy

Founded by Mr. Ji Qi, a co-founder of Trip.com, Huazhu Group Limited is the second largest hotel chain in China and the nineth largest in the...

Oshadhi Kumarasiri

TRACKING TRAFFIC's Travel Tracker Dashboard (September 11): Room Rates Up, But Air Activity Stalled

After a hiatus, we have updated our Travel Tracker to reflect activity through September 11th.

Tracking Traffic

Huazhu HK Secondary Listing - Needs the Money but Looks Toppish

Huazhu Group (HTHT US) has filed confidentially for a US$1bn secondary listing in Hong Kong, as per media reports. In our earlier insight, China...

Sumeet Singh

Tongcheng-ELong (780 HK) Q2 Results Reflect Changing Travel Patterns, Stubbornly High OpEx

point 1 point 2 point 3 conclusions

Tracking Traffic

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