Overseas Chinese Equities, Aequitas Research

Ming Lu

Overseas Chinese Equities

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 Bottom-Up

<ul class="">
<li>The real main business, social entertainment, continued to recover in 3Q20.</li>
<li>Music, as the nominal main business, is facing a mature market.</li>
<li>TME’s largest entertainment platform, Kugou, stopped paying basic salary to live broadcasters; therefore, we believe the margins will prove in 2021.</li>
<li>The downside has narrowed from 28% to 2%. We believe the stock is fairly valued now.</li>
</ul>


The real main business, social entertainment, continued to recover in 3Q20.
Music, as the nominal main business, is facing a mature market.
TME’s largest entertainment platform, Kugou, stopped paying basic salary to live broadcasters; therefore, we believe the margins will prove in 2021.
The downside has narrowed from 28% to 2%. We believe the stock is fairly valued now.


Tencent Music (TME): Real Main Business Continued to Recover in 3Q20, Downside Has Narrowed

Alibaba Group Holding  / Equity Bottom-Up

<ul>
<li>We believe the new law will slow down the expansion of the lending business related to e-commerce companies.</li>
<li>iQiyi (IQ) announced it would raise the membership fees.</li>
<li>Tencent Music (TME) signed a contract for exclusively using Peer Music’s copyrights in China.</li>
</ul>


We believe the new law will slow down the expansion of the lending business related to e-commerce companies.
iQiyi (IQ) announced it would raise the membership fees.
Tencent Music (TME) signed a contract for exclusively using Peer Music’s copyrights in China.


China Internet Weekly (9Nov2020): New Law on Online Small Amount Lending

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

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Event-Driven

Hang Seng China Enterprises Index / Event-Driven

After staying negative on 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> dividend futures expiring in 2021 for most of the year, we finally think a near term bottom has been formed. The dividend futures are 28% lower over the period, and adjusted for a strengthening <a href="https://www.smartkarma.com/entities/cny" target="_blank" data-smartkarma-citation="entities:22820:1" rel="noopener">CNY (USDCNY CURNCY)</a> are around 35% lower.Most of the drop has come about as a result of the changes (and upcoming changes) to the constituents of 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>, with the damage done by COVID-19 adding to the selloff.Post the inclusion of <a href="https://www.smartkarma.com/entities/ant-financial-services-group" target="_blank" data-smartkarma-citation="entities:24240:1" rel="noopener">Ant Group (6688 HK)</a> in the HSCEI and the changes in the upcoming review to be announced on 13 November (and implemented at the close on 4 December), we do not see any major changes to the index.The company Q3 results announced over the last couple of weeks do not provide any major catalysts, and the future direction of the 2021 dividend futures will be driven by news flow, expectations around the dividends to be paid out by the megabanks, and expectations around further changes to 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> capping on WVR securities.With the market trading near our estimated fair value of 271.825 index points, we take a look at some catalysts that could cause our estimates to move higher/ lower. Spoiler: there are a lot more catalysts for the dividend futures to move lower than higher.

After staying negative on the Hang Seng China Enterprises Index (HSCEI INDEX) dividend futures expiring in 2021 for most of the year, we finally think a near term bottom has been formed. The dividend futures are 28% lower over the period, and adjusted for a strengthening CNY (USDCNY CURNCY) are around 35% lower.Most of the drop has come about as a result of the changes (and upcoming changes) to the constituents of the Hang Seng China Enterprises Index (HSCEI INDEX), with the damage done by COVID-19 adding to the selloff.Post the inclusion of Ant Group (6688 HK) in the HSCEI and the changes in the upcoming review to be announced on 13 November (and implemented at the close on 4 December), we do not see any major changes to the index.The company Q3 results announced over the last couple of weeks do not provide any major catalysts, and the future direction of the 2021 dividend futures will be driven by news flow, expectations around the dividends to be paid out by the megabanks, and expectations around further changes to the Hang Seng China Enterprises Index (HSCEI INDEX) capping on WVR securities.With the market trading near our estimated fair value of 271.825 index points, we take a look at some catalysts that could cause our estimates to move higher/ lower. Spoiler: there are a lot more catalysts for the dividend futures to move lower than higher.

HSCEI Dividends: Finely Poised; Negative Catalysts Overwhelm the Positive

Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

On Friday 30 October in the morning, <a href="https://www.smartkarma.com/entities/prosus-nv" target="_blank" data-smartkarma-citation="entities:28104:1" rel="noopener">Prosus (PRX NA)</a><a href="https://www.prosus.com/news/media-release-prosus-to-acquire-us%245-billion-of-na" target="_blank" rel="noopener">announced</a> that it would conduct a US$5bn buyback of Prosus shares and <a href="https://www.smartkarma.com/entities/naspers-ltd" target="_blank" data-smartkarma-citation="entities:21085:1" rel="noopener">Naspers (NPN SJ)</a> shares (i.e. the subsidiary would buy shares in the parent to avoid passing down income from sub to parent which could be taxed). 
There were some pleasant, shareholder-friendly comments. 
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<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/168/871/original/Screenshot%202020-11-02%20at%207.58.47%20PM.png?1604318402" class="editor-image img-responsive" data-smartkarma-image-id="168871"></figure>
</section>
In total, Prosus will acquire up to US$5 billion in shares in Naspers and Prosus on the open market, starting after interim earnings are released on 23 November 2020. Purchases will be made on a pro-rata (72.5%/27.5%) basis in line with the economic stakes of both companies in the Prosus/Naspers asset base and Prosus would not vote shares purchased and they would come out of the per-share calculations for EPS and BVPS.
It isn't a lot in the grand scheme of things, but $5bn is $5bn, and the discount is quite wide, so this deserves a look.

On Friday 30 October in the morning, Prosus (PRX NA)announced that it would conduct a US$5bn buyback of Prosus shares and Naspers (NPN SJ) shares (i.e. the subsidiary would buy shares in the parent to avoid passing down income from sub to parent which could be taxed). 
There were some pleasant, shareholder-friendly comments. 



In total, Prosus will acquire up to US$5 billion in shares in Naspers and Prosus on the open market, starting after interim earnings are released on 23 November 2020. Purchases will be made on a pro-rata (72.5%/27.5%) basis in line with the economic stakes of both companies in the Prosus/Naspers asset base and Prosus would not vote shares purchased and they would come out of the per-share calculations for EPS and BVPS.
It isn't a lot in the grand scheme of things, but $5bn is $5bn, and the discount is quite wide, so this deserves a look.

Naspers & Prosus - A $5bn Catalyst Arrives

On Friday evening, the Stock Exchange of Hong Kong Limited (SEHK), a wholly-owned subsidiary of <a href="https://www.smartkarma.com/entities/hong-kong-exchanges-clearing" target="_blank" data-smartkarma-citation="entities:490:1" rel="noopener">HKEX (388 HK)</a>, <a href="https://www.hkex.com.hk/News/Regulatory-Announcements/2020/201030news?sc_lang=en" target="_blank" rel="noopener">published</a> the conclusions to its consultation on the Corporate WVR beneficiaries.The SEHK will treat Greater China issuers that are controlled by corporate Weighted Voting Rights (WVRR) beneficiaries and have a primary listing on a Qualifying Exchange in the same manner as current grandfathered Greater China issuers. The cut-off date for the grandfathered issues is 30 October 2020.Qualifying corporate WVR issuers will need to meet the following requirements:<ul>
<li>a minimum market cap threshold of at least HK$40bn, or a market cap of at least HK$10bn and revenue of at least HK$1bn in its most recent audited financial year.</li>
<li>be an 'innovative company' as part of the suitability for listing</li>
<li>demonstrate that the laws, rules and regulations provide certain shareholder protection standards</li>
</ul>The secondary listing applicant would also need to demonstrate that it is controlled by a single corporate WVR beneficiary, or a group of corporate beneficiaries acting in concert, controlling at least 30% of the total shareholder votes.This paves the way for <a href="https://www.smartkarma.com/entities/tencent-music-entertainment" target="_blank" data-smartkarma-citation="entities:27255:1" rel="noopener">Tencent Music (TME US)</a> and <a href="https://www.smartkarma.com/entities/iqiyi-inc" target="_blank" data-smartkarma-citation="entities:26755:1" rel="noopener">iQIYI Inc (IQ US)</a>, among others, to pursue a secondary listing on the <a href="https://www.smartkarma.com/entities/hong-kong-exchanges-clearing" target="_blank" data-smartkarma-citation="entities:490:1" rel="noopener">HKEX (388 HK)</a>.

On Friday evening, the Stock Exchange of Hong Kong Limited (SEHK), a wholly-owned subsidiary of HKEX (388 HK), published the conclusions to its consultation on the Corporate WVR beneficiaries.The SEHK will treat Greater China issuers that are controlled by corporate Weighted Voting Rights (WVRR) beneficiaries and have a primary listing on a Qualifying Exchange in the same manner as current grandfathered Greater China issuers. The cut-off date for the grandfathered issues is 30 October 2020.Qualifying corporate WVR issuers will need to meet the following requirements:
a minimum market cap threshold of at least HK$40bn, or a market cap of at least HK$10bn and revenue of at least HK$1bn in its most recent audited financial year.
be an 'innovative company' as part of the suitability for listing
demonstrate that the laws, rules and regulations provide certain shareholder protection standards
The secondary listing applicant would also need to demonstrate that it is controlled by a single corporate WVR beneficiary, or a group of corporate beneficiaries acting in concert, controlling at least 30% of the total shareholder votes.This paves the way for Tencent Music (TME US) and iQIYI Inc (IQ US), among others, to pursue a secondary listing on the HKEX (388 HK). 

Conclusions of the Corporate WVR Consultation: Small Changes for Now

China

Tencent Music Entertainment operates an online music entertainment platform in China. The Company offers platform that comprises of online music, recording, music-centric live streaming enabling users to discover, listen, sing, watch, perform, and socialize music.

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Tencent Music (TME US)

Tencent Music (TME): Real Main Business Continued to Recover in 3Q20, Downside Has Narrowed

The real main business, social entertainment, continued to recover in 3Q20. Music, as the nominal main business, is facing a mature market. The...

Ming Lu

China Internet Weekly (9Nov2020): New Law on Online Small Amount Lending

We believe the new law will slow down the expansion of online lending. iQiyi raised the membership fees. Tencent Music signed an exclusive contract...

Ming Lu

HSCEI Dividends: Finely Poised; Negative Catalysts Overwhelm the Positive

The HSCEI dividend futures expiring in 2021 are trading near our estimated fair value, but there are a lot more catalysts that could take the...

Brian Freitas

Naspers & Prosus - A $5bn Catalyst Arrives

Naspers/Prosus finally has a catalyst. It's not a HUGE catalyst but US$5bn is US$5bn. The trick is to think about where this places you at the end...

Travis Lundy

Conclusions of the Corporate WVR Consultation: Small Changes for Now

The HKEX has published the conclusions of the consultation on corporate WVR beneficiaries. There are no major changes, but the proposed changes...

Brian Freitas

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