Global TMT analyst with Asia ex-Japan focus.

Mitchell Kim

Equity Bottom-Up

<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> shares slid 18% in the two months after reaching the record high on 25 January 2021. The shares have been under pressure mostly on regulatory risks along with Alibaba.  As Tencent reported solid 4Q20 earnings on 24 March 2021, many of the Chinese Internet stocks took a hit on news that Chinese Internet platforms may be “encouraged” to contribute their digital payment and eCommerce transaction data to a joint venture company overseeing such lucrative data collection. While this news has been slowly reverberating since the beginning of the year, we are likely to have more clarity in the coming months. Our preliminary view on the Fintech risk is that Tencent will likely face a smaller impact than <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>  – albeit, Alibaba shares have more than fully reflected such known risk, in our view – because Tenpay has a smaller exposure to consumer loans.  We will cover this discussion at another time. While investors certain can blame such share overhang risks undercutting the bullish momentum from the beginning of the year, we flag that Tencent’s results hint that the company’s benefit from the COVID-19 is fading.  Our key observations from the results are:<ul>
<li>
The online game growth of 2Q-3Q20 is not sustainable.  The growth for 2020 was impressive and the 4Q20 growth was still solid but there are signs that the growth is slowing even with new game introductions.  We estimate online game revenue growth to slow to 25% in 2021. </li>
<li>
Online advertising revenue growth re-accelerated marginally in 2020.  Tencent’s social advertising growth is gaining momentum as P4P is picking up with Moments ads.  We estimate advertising revenue growth remains stable at 19% in 2021. </li>
<li>
 Fintech growth is promising, notwithstanding the government risk.  4Q20 growth remained healthy at 29%.  We believe 19% growth in 2021e is achievable.   </li>
</ul>Valuation: Our SOTP based on 2020 valuation comparables suggests a fair value at over HKD700, but there is a lower upside as we roll over to 2021 valuation comps.  Even though operating metrics still look solid, Tencent’s risk-return profile looks less compelling despite the 18% fall.

Tencent Holdings (700 HK) shares slid 18% in the two months after reaching the record high on 25 January 2021. The shares have been under pressure mostly on regulatory risks along with Alibaba.  As Tencent reported solid 4Q20 earnings on 24 March 2021, many of the Chinese Internet stocks took a hit on news that Chinese Internet platforms may be “encouraged” to contribute their digital payment and eCommerce transaction data to a joint venture company overseeing such lucrative data collection. While this news has been slowly reverberating since the beginning of the year, we are likely to have more clarity in the coming months. Our preliminary view on the Fintech risk is that Tencent will likely face a smaller impact than Alibaba Group (BABA US)  – albeit, Alibaba shares have more than fully reflected such known risk, in our view – because Tenpay has a smaller exposure to consumer loans.  We will cover this discussion at another time. While investors certain can blame such share overhang risks undercutting the bullish momentum from the beginning of the year, we flag that Tencent’s results hint that the company’s benefit from the COVID-19 is fading.  Our key observations from the results are:

The online game growth of 2Q-3Q20 is not sustainable.  The growth for 2020 was impressive and the 4Q20 growth was still solid but there are signs that the growth is slowing even with new game introductions.  We estimate online game revenue growth to slow to 25% in 2021. 

Online advertising revenue growth re-accelerated marginally in 2020.  Tencent’s social advertising growth is gaining momentum as P4P is picking up with Moments ads.  We estimate advertising revenue growth remains stable at 19% in 2021. 

 Fintech growth is promising, notwithstanding the government risk.  4Q20 growth remained healthy at 29%.  We believe 19% growth in 2021e is achievable.   
Valuation: Our SOTP based on 2020 valuation comparables suggests a fair value at over HKD700, but there is a lower upside as we roll over to 2021 valuation comps.  Even though operating metrics still look solid, Tencent’s risk-return profile looks less compelling despite the 18% fall.     

Tencent (700 HK): Taking Foot Off the Pedal

Telco/Internet specialist

Kirk Boodry

Redex Research

Softbank shares have returned to the pre-Coupang levels of early February, driven by increasing concerns about the value of the Vision Fund portfolio that remains private.  Number one on the list is the potential for second-order effects from the Greensill bankruptcy which not only cost Vision Fund $1.5bn in lost equity but also includes a further $1.2bn in debt exposure and a potential cash squeeze for other Vision Fund companies that were also clients.

Softbank shares have returned to the pre-Coupang levels of early February, driven by increasing concerns about the value of the Vision Fund portfolio that remains private.  Number one on the list is the potential for second-order effects from the Greensill bankruptcy which not only cost Vision Fund $1.5bn in lost equity but also includes a further $1.2bn in debt exposure and a potential cash squeeze for other Vision Fund companies that were also clients.

Softbank Group - Concerns on the Value of Private Vision Fund Assets Re-Surface

Lead Equity Research Analyst

Sameer Merchant, CFA

Pinduoduo (PDD) has fast become the quintessential disruptor, pioneering a new social form of e-commerce, now imitated by incumbents. Fronted by its pioneering team purchase model and supported by WeChat app integration, Pinduoduo has recorded impressive revenue CAGR of 217% (excl. merchandise) over the past three years to become the largest e-commerce player in China by number of users (788m in 2020 vs Alibaba’s 779m) and third largest by GMV. However, the recent departure of Chairman and founder, Colin Huan pushed share prices down 12%, overshadowing its Q4 2020 earnings beat.We see PDD as one of the best-in-class tech companies in China benefitting from its strong industry positioning, best-in-class growth prospects, a pioneering business model and exceptional management, spearheaded by CEO, Lei Chen, who given his long track-record of working with Colin Huang is a plug and play substitute for the departing Chairman.      The avant-garde turns disruptor: Much of the success of PDD can be attributed to its pioneering team purchase platform, built to thrive on the WeChat app. In the same vein, it was also the first of its kind to build the Customer to Merchants business model, allowing manufacturers to cut out the middlemen and sell directly to customers. It has also brought to market several products to drive customer engagement such as gaming. PDD dominates the e-commerce space in rural China given its roots in agricultural e-commerce and is investing heavily to roll out its in-house agricultural logistics network, which if done well will be its key differentiator.Multitude of drivers lends us confidence in its growth trajectory: We expect PDD's number of users to grow @14% CAGR over the next three years driven primarily by the ongoing penetration of WeChat users. Even though the diffusion rate of PDD into WeChat users has increased from 14% in 2017 to 59% in 2020, we see significant room for growth over the next three years. Moreover, PDDs ARPU is significantly lower than peers and one we see as a significant driver of growth for the young tech company. Management is focused on increasing both higher Average Selling Prices and increasing order frequency to drive revenue growth.New regulations heighten competitive intensity: New anti-trust regulations published in February and aimed to tackle monopolistic behaviours have already fined multiple internet players including PDD. Whilst some regulations such as exclusivity of merchants will benefit PDD, others such as curtailing price incentives will likely impinge future growth prospects. Also, the new regulations bars social media platforms and live video streaming websites to block third party e-commerce sellers which we understand will allow PDD to launch its app on rival’s apps such as Douyin (TikTok) but will also increase competition on native apps such as WeChat.Departing Chairman adds to PDD’s risk profile: In its FY 2020 earnings release, PDD announced that its Founder and Chairman, Colin Huang will be stepping down from the Board. Current CEO, Chen Lei, who replaced Colin as CEO last July, will now also become Chairman. We see the fundamentals of the business unchanged and continue to monitor the performance of the new CEO who worked on a number of start-ups with Colin before setting up PDD. Even though Colin Huang has stepped down from the business he will continue to work with PDD in agricultural research.

Pinduoduo (PDD) has fast become the quintessential disruptor, pioneering a new social form of e-commerce, now imitated by incumbents. Fronted by its pioneering team purchase model and supported by WeChat app integration, Pinduoduo has recorded impressive revenue CAGR of 217% (excl. merchandise) over the past three years to become the largest e-commerce player in China by number of users (788m in 2020 vs Alibaba’s 779m) and third largest by GMV. However, the recent departure of Chairman and founder, Colin Huan pushed share prices down 12%, overshadowing its Q4 2020 earnings beat.We see PDD as one of the best-in-class tech companies in China benefitting from its strong industry positioning, best-in-class growth prospects, a pioneering business model and exceptional management, spearheaded by CEO, Lei Chen, who given his long track-record of working with Colin Huang is a plug and play substitute for the departing Chairman.      The avant-garde turns disruptor: Much of the success of PDD can be attributed to its pioneering team purchase platform, built to thrive on the WeChat app. In the same vein, it was also the first of its kind to build the Customer to Merchants business model, allowing manufacturers to cut out the middlemen and sell directly to customers. It has also brought to market several products to drive customer engagement such as gaming. PDD dominates the e-commerce space in rural China given its roots in agricultural e-commerce and is investing heavily to roll out its in-house agricultural logistics network, which if done well will be its key differentiator.Multitude of drivers lends us confidence in its growth trajectory: We expect PDD's number of users to grow @14% CAGR over the next three years driven primarily by the ongoing penetration of WeChat users. Even though the diffusion rate of PDD into WeChat users has increased from 14% in 2017 to 59% in 2020, we see significant room for growth over the next three years. Moreover, PDDs ARPU is significantly lower than peers and one we see as a significant driver of growth for the young tech company. Management is focused on increasing both higher Average Selling Prices and increasing order frequency to drive revenue growth.New regulations heighten competitive intensity: New anti-trust regulations published in February and aimed to tackle monopolistic behaviours have already fined multiple internet players including PDD. Whilst some regulations such as exclusivity of merchants will benefit PDD, others such as curtailing price incentives will likely impinge future growth prospects. Also, the new regulations bars social media platforms and live video streaming websites to block third party e-commerce sellers which we understand will allow PDD to launch its app on rival’s apps such as Douyin (TikTok) but will also increase competition on native apps such as WeChat.Departing Chairman adds to PDD’s risk profile: In its FY 2020 earnings release, PDD announced that its Founder and Chairman, Colin Huang will be stepping down from the Board. Current CEO, Chen Lei, who replaced Colin as CEO last July, will now also become Chairman. We see the fundamentals of the business unchanged and continue to monitor the performance of the new CEO who worked on a number of start-ups with Colin before setting up PDD. Even though Colin Huang has stepped down from the business he will continue to work with PDD in agricultural research.

Pinduoduo (PDD US): Time to Shine for the Sorcerer’s Apprentice: Initiating Coverage

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

<div>Linklogis, a technology solution provider for supply chain finance in China, is aiming to raise over US$500m in its Hong Kong IPO. Its investors include Tencent, GIC and Standard Chartered Bank.</div><div>
We have covered various aspects of the deal in our earlier insights,
<ul>
<li>
<a href="https://www.smartkarma.com/insights/linklogis-pre-ipo-the-positives-fast-growing-blockchain-driven-supply-chain-financier" target="_blank" rel="noopener">Linklogis Pre-IPO - The Positives - Fast Growing Blockchain Driven Supply Chain Financier,</a> </li>
<li><a href="https://www.smartkarma.com/insights/linklogis-pre-ipo-the-negatives-inconsistent-growth-and-margins-well-funded-competitors" target="_blank" rel="noopener">Linklogis Pre-IPO - The Negatives - Inconsistent Growth and Margins, Well Funded Competitors, and</a></li>
<li><a href="https://www.smartkarma.com/insights/linklogis-pre-ipo-earnings-forecast-peer-comparison-and-first-stab-at-valuation" target="_blank" rel="noopener">Linklogis Pre-IPO - Earnings Forecast, Peer Comparison and First Stab at Valuation</a></li>
</ul>
In this note, we'll talk about the latest updates from the recently filed PHIP.
</div>

Linklogis, a technology solution provider for supply chain finance in China, is aiming to raise over US$500m in its Hong Kong IPO. Its investors include Tencent, GIC and Standard Chartered Bank.
We have covered various aspects of the deal in our earlier insights,


Linklogis Pre-IPO - The Positives - Fast Growing Blockchain Driven Supply Chain Financier, 
Linklogis Pre-IPO - The Negatives - Inconsistent Growth and Margins, Well Funded Competitors, and
Linklogis Pre-IPO - Earnings Forecast, Peer Comparison and First Stab at Valuation

In this note, we'll talk about the latest updates from the recently filed PHIP.


Linklogis Pre-IPO - PHIP Updates - Nothing to Complain About

APAC IPOs & Placements

Zhen Zhou, Toh

Zhihu Technology / Equity Capital Markets

<div><a href="https://www.smartkarma.com/entities/zhihu-technology-ltd" target="_blank" data-smartkarma-citation="entities:32185:1" rel="noopener">Zhihu Technology (ZH US)</a> is looking to raise about US$1bn (including concurrent placement) in its U.S. IPO.</div><div>
Zhihu is a question-and-answer (Q&amp;A) focused online content community. According to CIC, the company is the largest Q&amp;A-inspired online community and one of the top five online content communities in China in terms of mobile monthly active users (MAUs)  and revenue. As of 4Q20, the company has 75.7m average MAU, a cumulative 315.3m questions and answers contributed by 43.1m content creators.
In this note, we will look at peer comparison, assumptions, and share our thoughts on valuation. 
Our previous coverage of Zhihu:
<ul>
<li>
<a href="https://www.smartkarma.com/insights/zhihu-pre-ipo-in-the-early-stages-of-monetization" target="_blank" data-smartkarma-citation="insights:49157" rel="noopener">Zhihu (知乎) Pre-IPO - In the Early Stages of Monetization</a> </li>
<li>
<a href="https://www.smartkarma.com/insights/zhihu-censorship-as-top-risk-may-follow-fate-of-weibo" target="_blank" data-smartkarma-citation="insights:49184" rel="noopener">Zhihu (知乎): Censorship as Top Risk, May Follow Fate of Weibo</a> </li>
</ul>
</div>

Zhihu Technology (ZH US) is looking to raise about US$1bn (including concurrent placement) in its U.S. IPO.
Zhihu is a question-and-answer (Q&amp;A) focused online content community. According to CIC, the company is the largest Q&amp;A-inspired online community and one of the top five online content communities in China in terms of mobile monthly active users (MAUs)  and revenue. As of 4Q20, the company has 75.7m average MAU, a cumulative 315.3m questions and answers contributed by 43.1m content creators.
In this note, we will look at peer comparison, assumptions, and share our thoughts on valuation. 
Our previous coverage of Zhihu:


Zhihu (知乎) Pre-IPO - In the Early Stages of Monetization 

Zhihu (知乎): Censorship as Top Risk, May Follow Fate of Weibo 



Zhihu (知乎) IPO - Monetizing Curiosity

China

Alibaba Group Holding Limited provides online sales services. The Company provides internet infrastructure, electronic commerce, online financial, and internet content services through its subsidiaries. Alibaba Group Holding offers its products and services worldwide.

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Alibaba Group Holding (BABA US)

Tencent (700 HK): Taking Foot Off the Pedal

Tencent shares are under pressure due to regulatory uncertainty, but its game growth is also slowing as the benefit of COVID-19 stay-at-home order...

Mitchell Kim

Softbank Group - Concerns on the Value of Private Vision Fund Assets Re-Surface

Softbank shares have returned to the pre-Coupang levels of early February, driven by increasing concerns about the value of the Vision Fund...

Kirk Boodry

Pinduoduo (PDD US): Time to Shine for the Sorcerer’s Apprentice: Initiating Coverage

Pinduoduo - Recent departure of Chairman has weighed on shares. We see the growth story fundamentally intact and Chen Lei as an ideal plug and play...

Sameer Merchant, CFA

Linklogis Pre-IPO - PHIP Updates - Nothing to Complain About

Linklogis, a technology solution provider for supply chain finance in China, is aiming to raise over US$500m in its Hong Kong IPO. Its investors...

Sumeet Singh

Zhihu (知乎) IPO - Monetizing Curiosity

Zhihu Technology (ZH US) is looking to raise about US$1bn (including concurrent placement) in its U.S. IPO. Zhihu is a question-and-answer (Q&A)...

Zhen Zhou, Toh

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