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.

Event-Driven

<a href="https://www.smartkarma.com/entities/china-youzan-limited" target="_blank" data-smartkarma-citation="entities:11467:1" rel="noopener">China Youzan (8083 HK)</a> has provided an update on its privatisation proposal. There is no change to the scheme consideration (HK$0.1352 in cash per scheme share) and the terms of the Youzan Technology distribution (0.05077265 Youzan Technology share for every China Youzan share). The key change is that Youzan Technology shares will be listed on the HKEx by way of an offering of new shares, instead of by way of introduction. The privatisation offer implies a total value of HK$1.4654 per share, which is a 100.7% premium to the last trading day price of HK$0.73 (27 August). However, the implied valuation of HK$1.4654 per share is -37% lower than the original valuation of HK$2.3088 per share (announced on 28 February 2021). As the cash consideration is unchanged, the lower valuation is driven by the decline in Youzan Technology’s estimated value between the original valuation reference date (30 November 2020) and the new valuation reference date (30 June 2021). The key conditions precedent are the headcount test and the scheme approved by at least 75% disinterested shareholders (&lt;10% disinterested shareholders rejection). No independent shareholder holds a blocking stake.The valuer continues to base Youzan Technology's valuation by deducting the market value of the payment &amp; other business from the market cap of China Youzan. However, since the latest assessment date (30 June 2021), China Youzan’s shares have further declined -45% in part due to the Chinese tech selloff driven by the regulatory reset. Consequently, based on the valuer’s methodology, Youzan Technology’s valuation is RMB11.02 per share at the last close vs the valuation of RMB21.76 per share at the valuation reference date (30 June 2021). <div class="content-highlight">
The privatisation offer remains broadly fair in both the distribution in-specie (distribution ratio in line with the control ratio) and the cash consideration (marginally below the value of the payments business due to peer multiple re-rating).
China Youzan’s valuation hinges on the valuation of Youzan Technology, which remains in a state of flux due to the uncertain regulatory backdrop. China Youzan’s last close price of HK$0.82 per share implies that Youzan Technology is valued at a trailing EV/Sales multiple of 12.7x, broadly in line with SaaS commerce peers' current trailing EV/Sales multiple of 13.4x (but at a premium to Chinese peers). As Youzan Technology is at best fairly valued at China Youzan’s last close price, we would remain on the sidelines. 
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China Youzan (8083 HK) has provided an update on its privatisation proposal. There is no change to the scheme consideration (HK$0.1352 in cash per scheme share) and the terms of the Youzan Technology distribution (0.05077265 Youzan Technology share for every China Youzan share). The key change is that Youzan Technology shares will be listed on the HKEx by way of an offering of new shares, instead of by way of introduction. The privatisation offer implies a total value of HK$1.4654 per share, which is a 100.7% premium to the last trading day price of HK$0.73 (27 August). However, the implied valuation of HK$1.4654 per share is -37% lower than the original valuation of HK$2.3088 per share (announced on 28 February 2021). As the cash consideration is unchanged, the lower valuation is driven by the decline in Youzan Technology’s estimated value between the original valuation reference date (30 November 2020) and the new valuation reference date (30 June 2021). The key conditions precedent are the headcount test and the scheme approved by at least 75% disinterested shareholders (&lt;10% disinterested shareholders rejection). No independent shareholder holds a blocking stake.The valuer continues to base Youzan Technology's valuation by deducting the market value of the payment &amp; other business from the market cap of China Youzan. However, since the latest assessment date (30 June 2021), China Youzan’s shares have further declined -45% in part due to the Chinese tech selloff driven by the regulatory reset. Consequently, based on the valuer’s methodology, Youzan Technology’s valuation is RMB11.02 per share at the last close vs the valuation of RMB21.76 per share at the valuation reference date (30 June 2021). 
The privatisation offer remains broadly fair in both the distribution in-specie (distribution ratio in line with the control ratio) and the cash consideration (marginally below the value of the payments business due to peer multiple re-rating).
China Youzan’s valuation hinges on the valuation of Youzan Technology, which remains in a state of flux due to the uncertain regulatory backdrop. China Youzan’s last close price of HK$0.82 per share implies that Youzan Technology is valued at a trailing EV/Sales multiple of 12.7x, broadly in line with SaaS commerce peers' current trailing EV/Sales multiple of 13.4x (but at a premium to Chinese peers). As Youzan Technology is at best fairly valued at China Youzan’s last close price, we would remain on the sidelines. 


China Youzan’s Updated Privatisation Proposal

Equity Analyst, LightStream Research

Shifara Samsudeen, ACMA, CGMA

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.

It was reported by Reuters and several other news media outlets that <a href="https://www.smartkarma.com/entities/joyy-inc" target="_blank" data-smartkarma-citation="entities:285:1" rel="noopener">JOYY (YY US)</a> top two shareholders: David Li - Chairman and Lei Jun – founder of Xiaomi, plan to take the Nasdaq-listed company private. David Li and Lei Jun respectively owned 23.2% and 7.8% of JOYY with David Li having 76% of voting power. Li and Len are said to be planning to offer about US$75-100 per JOYY’s share which will value the company at US$5.8-8bn and is aimed to be finalised by the end of 2021. As at the end of Friday (27th August), JOYY’s shares closed at US$61.97 per share at a market capitalisation of US$4.9bn and an EV of US$1.3bn.Tightening audit requirements and higher regulatory scrutiny have led to a number of New-York listed Chinese companies to opt out of the US through either going private or carrying out secondary listings in markets closer to China.

It was reported by Reuters and several other news media outlets that JOYY (YY US) top two shareholders: David Li - Chairman and Lei Jun – founder of Xiaomi, plan to take the Nasdaq-listed company private. David Li and Lei Jun respectively owned 23.2% and 7.8% of JOYY with David Li having 76% of voting power. Li and Len are said to be planning to offer about US$75-100 per JOYY’s share which will value the company at US$5.8-8bn and is aimed to be finalised by the end of 2021. As at the end of Friday (27th August), JOYY’s shares closed at US$61.97 per share at a market capitalisation of US$4.9bn and an EV of US$1.3bn.Tightening audit requirements and higher regulatory scrutiny have led to a number of New-York listed Chinese companies to opt out of the US through either going private or carrying out secondary listings in markets closer to China.

JOYY Inc Privatisation: Our Thoughts on Valuation

Oshadhi Kumarasiri

Equity Bottom-Up

Alibaba Group Holding  / Equity Bottom-Up

Reuters reported last week that the Chinese city of Tianjin has asked government firms to migrate their data from private sector operators like <a href="https://www.smartkarma.com/entities/alibaba-group" target="_blank" data-smartkarma-citation="entities:28434:1" rel="noopener">Alibaba Group (9988 HK)</a> and <a href="https://www.smartkarma.com/entities/tencent-holdings-ltd" target="_blank" data-smartkarma-citation="entities:26:1" rel="noopener">Tencent (700 HK)</a> to a state-backed cloud system called “guoziyun” by next year. The decision to exclude private cloud platforms was made under direct instructions by China's cabinet, the State Council and it prohibits government firms from entering or renewing contracts with third-party cloud platforms for the use of cloud services.It seems like the intention of the Chinese government is to follow through with all the proposed policy changes regardless of the devastating impact on the Chinese tech sector valuations.Even though the valuations have dropped drastically from the peak, valuation multiples have plenty of room to the downside. Meanwhile, we think regulatory clampdowns are yet to reach the home stretch, making the risk-reward balance still heavily skewed to the risk side. Thus, we think it is prudent to avoid investing in the Chinese tech sector for the time being.

Reuters reported last week that the Chinese city of Tianjin has asked government firms to migrate their data from private sector operators like Alibaba Group (9988 HK) and Tencent (700 HK) to a state-backed cloud system called “guoziyun” by next year. The decision to exclude private cloud platforms was made under direct instructions by China's cabinet, the State Council and it prohibits government firms from entering or renewing contracts with third-party cloud platforms for the use of cloud services.It seems like the intention of the Chinese government is to follow through with all the proposed policy changes regardless of the devastating impact on the Chinese tech sector valuations.Even though the valuations have dropped drastically from the peak, valuation multiples have plenty of room to the downside. Meanwhile, we think regulatory clampdowns are yet to reach the home stretch, making the risk-reward balance still heavily skewed to the risk side. Thus, we think it is prudent to avoid investing in the Chinese tech sector for the time being.

Alibaba Cloud: Near-Zero Dollars Valuation Is Not Entirely Impossible

Asia Pac IPO & Placement Research, China biotech, Aequitas Research

Ke Yan, CFA, FRM

Asia Pac IPO & Placement Research, China biotech

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.

Quantitative Analysis

In our weekly HK Connect Flow series, we aim to highlight key stocks and sectors which the mainland investors traded via the southbound Hong Kong Connect, as analyzed by our proprietary data engine. Since the opening of Hong Kong Connect scheme in 2014, southbound Chinese money started to play an increasingly important role in the Hong Kong stock market. In a Hong Kong exchange report released in July 2019, the exchange highlighted that flows from mainland China accounted for 12% of the total trading volume in the market and is ahead of the US investors' 10% and UK investors' 7% share respectively.  We split the stocks eligible for the Hong Kong Connect trade into three groups: HSCEI component stocks, stocks with a market capitalization between USD 1 billion and USD 5 billion, and stocks with a market capitalization between USD 500 million and USD 1 billion. In this insight, we will highlight inflows into Tencent Holdings Limited (700 HK), China Resources Power Holdings Company Limited (836 HK), as well as outflows from Wh Group Limited (288 HK), Meituan (3690 HK), and Li Ning Company Limited (2331 HK).

In our weekly HK Connect Flow series, we aim to highlight key stocks and sectors which the mainland investors traded via the southbound Hong Kong Connect, as analyzed by our proprietary data engine.  Since the opening of Hong Kong Connect scheme in 2014, southbound Chinese money started to play an increasingly important role in the Hong Kong stock market. In a Hong Kong exchange report released in July 2019, the exchange highlighted that flows from mainland China accounted for 12% of the total trading volume in the market and is ahead of the US investors' 10% and UK investors' 7% share respectively.   We split the stocks eligible for the Hong Kong Connect trade into three groups: HSCEI component stocks, stocks with a market capitalization between USD 1 billion and USD 5 billion, and stocks with a market capitalization between USD 500 million and USD 1 billion.   In this insight, we will highlight inflows into Tencent Holdings Limited (700 HK), China Resources Power Holdings Company Limited (836 HK), as well as outflows from Wh Group Limited (288 HK), Meituan (3690 HK), and Li Ning Company Limited (2331 HK).

Hong Kong Connect Flows: WH Group, Meituan, Li Ling Led the Outflows

Asset Allocation & Fund Positioning, Copley Fund Research

Steven Holden

Asset Allocation & Fund Positioning

Copley Fund Research

Copley Fund Research provide research and data on asset allocation among Global and Emerging Market equity funds.  The analysis details absolute and relative positioning across countries, sectors and industries together with highly granular data on single stock and single fund allocations.  The data is updated monthly with time series going back to January 2011.

Global Research - Analysis of 165 prominent Global equity funds, combined AUM $335bn
GEM Research - Analysis of 127 prominent global EM equity funds, combined AUM $250bn

Asset Allocation - Global and GEM Equity

Cross Asset Strategy

China allocations among Global active managers have fallen to below pre 2017 levels.  Average holding weights among the 381 funds in our analysis dropped to 3.76%, underweight the MSCI All Country World index by -1.18% with just 28.3% overweight the benchmark. This allocation drop is in stark contrast to what is occurring in the USA, with allocations powering to all-time highs of 53.70%.  The difference between US and China weights are at all-time wides.The most widely held stocks are <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/aia-group-ltd" target="_blank" data-smartkarma-citation="entities:14895:1" rel="noopener">AIA Group Ltd (1299 HK)</a> and <a href="https://www.smartkarma.com/entities/tencent-holdings-ltd" target="_blank" data-smartkarma-citation="entities:26:1" rel="noopener">Tencent (700 HK)</a>, with the trio accounting for 40.6% of total China allocations.  If Global managers are to increase weights in China, they will likely have to broaden their investment horizons.  Comparing Global stock holdings in China with their Global Emerging Market peers suggests a number of stocks that could enter the radar of Global investors.  We highlight <a href="https://www.smartkarma.com/entities/ping-an-insurance-grp-co-of-china-ltd" target="_blank" data-smartkarma-citation="entities:12880:1" rel="noopener">Ping An Insurance (H) (2318 HK)</a> , <a href="https://www.smartkarma.com/entities/meituan-dianping" target="_blank" data-smartkarma-citation="entities:26970:1" rel="noopener">Meituan (3690 HK)</a> and <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> as stocks lightly held by Global managers but well invested by EM active funds.

China allocations among Global active managers have fallen to below pre 2017 levels.  Average holding weights among the 381 funds in our analysis dropped to 3.76%, underweight the MSCI All Country World index by -1.18% with just 28.3% overweight the benchmark. This allocation drop is in stark contrast to what is occurring in the USA, with allocations powering to all-time highs of 53.70%.  The difference between US and China weights are at all-time wides.The most widely held stocks are Alibaba Group (BABA US), AIA Group Ltd (1299 HK) and Tencent (700 HK), with the trio accounting for 40.6% of total China allocations.  If Global managers are to increase weights in China, they will likely have to broaden their investment horizons.  Comparing Global stock holdings in China with their Global Emerging Market peers suggests a number of stocks that could enter the radar of Global investors.  We highlight Ping An Insurance (H) (2318 HK) , Meituan (3690 HK) and JD.com Inc (ADR) (JD US) as stocks lightly held by Global managers but well invested by EM active funds.

Global Funds China Fall:  Gap to US Largest in History

China

Tencent Holdings Limited operates as an investment holding company. The Company, through its subsidiaries, provides Internet and mobile value-added services (VAS), online advertising, and e-commerce transactions. Tencent Holdings offers services to users worldwide.

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Tencent (700 HK)

China Youzan’s Updated Privatisation Proposal

China Youzan’s valuation hinges on the valuation of Youzan Technology, which remains in a state of flux. As Youzan Technology is at best fairly...

Arun George

JOYY Inc Privatisation: Our Thoughts on Valuation

The rumoured deal price of US$75-100 per share offers a good upside to our SOTP price of US$74.27 per share. Assigning a target EV/Revenue of 1.0x...

Shifara Samsudeen, ACMA, CGMA

Alibaba Cloud: Near-Zero Dollars Valuation Is Not Entirely Impossible

The Chinese government’s appetite for control of data regarding its citizens is bad news for Alibaba Could as it could possibly create a state...

Oshadhi Kumarasiri

Hong Kong Connect Flows: WH Group, Meituan, Li Ling Led the Outflows

We highlight Hong Kong connect inflows into Tencent, China Resources Power, and outflows from WH Group, Meituan, and Li Ning.

Ke Yan, CFA, FRM

Global Funds China Fall: Gap to US Largest in History

China allocations among Global active funds have fallen to below pre 2017 levels. Average holding weights among the 381 funds in our analysis...

Steven Holden

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