Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

<p><a href="https://www.smartkarma.com/entities/china-evergrande-group" target="_blank" rel="noopener">Evergrande Real Estate Group (3333 HK)</a> shares rallied enormously sharply in 2017, moving from the mid single digits to HK$30+ by Q3 that year. That year the float in Evergrande was also sharply reduced by the purchases of shares by <a href="https://www.smartkarma.com/entities/chinese-estates-holdings-limited" target="_blank" rel="noopener">Chinese Estates Holdings (127 HK)</a> and its owners. </p>
<p>When the shares fell back after getting squeezed, Evergrande conducted a buyback which got them within a hair's breadth of the residual minimum free float requirement mandated by the Hong Kong Stock Exchange. The shares stayed higher. </p>
<p>Eventually, Evergrande saw more of the employee share options with low exercise prices exercised which increased the share count and float so when shares fell in 2020, the company could buy back shares, and it did so after shares fell to new 3yr lows in the covid-crash. It bought shares back from May to June, again reducing float to within a hair's breadth of the free float limit, and in the period, shares rose about 50%. </p>
<p>Then at the start of H2, with a <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2020/0701/2020070100031.pdf" target="_blank" rel="noopener">press release</a> about unaudited June sales results and how strong sales had been in H1, the shares popped 40% (from HK$20 to HK$28/share) in three days, then fell back over 6 weeks, going back below HK$20 when the company <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2020/0813/2020081301678.pdf" target="_blank" rel="noopener">disclosed</a> it was pre-selling stakes in its property management unit before the IPO, and three days later Evergrande actually issued a <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2020/0816/2020081600097.pdf" target="_blank" rel="noopener">profit warning</a>, just before releasing H1 results. </p>
<p>Also in August, but undisclosed at the time, was the fact that several major real estate developers, including Evergrande, had been called on the carpet to discuss their participation in the so-called Three Red Lines pilot program (the three red lines are a liability-to-asset ratio excluding advanced receipts of 70%, net debt-to-equity ratio of 100%, and cash to short-term debt ratio at 1x). Companies which crossed one of three red lines could not increase interest-bearing borrowing by more than 10% in a year. Cross two of them and they were capped at 5% growth. Cross all three of them and the developer could not increase debt at all. This is tough when funding at high single digits to 10+% interest rates are used to carry ever more non-interest-earning land bank. But Evergrande "met" all three so needed to reduce debt and raise cash, discussed in <a href="https://www.smartkarma.com/insights/evergrande-may-be-facing-a-funding-squeeze" target="_blank" rel="noopener">Evergrande May Be Facing a Funding Squeeze</a>. </p>
<p>There was a story about a "letter", later denied by the company, in September, discussing the importance of the local government helping Evergrande deal with its short-term funding issues, which included the issue of the buyback guarantee offered by Evergrande to minority shareholders of Evergrande's major onshore operating unit Hengda. Evergrande denied the <em>existence</em> of the letter, but despite the fact some Hengda shareholders reportedly wanted out as listing was unlikely, somehow, with the local government's help, Evergrande announced a new agreement meaning repayment in January 2021 was unnecessary. The shares rallied and two weeks later Evergrande raised some capital (discussed in <a href="https://www.smartkarma.com/insights/evergrande-equity-placement-musical-shares" target="_blank" rel="noopener">Evergrande Equity Placement - Musical Shares</a>).</p>
<p>I had my ideas about WHY those shares were placed, and it was not to raise equity to pay down debt. The capital raised was less than expected despite the large discount and the shares quickly fell below placement price.  So just 3 weeks after raising equity, it started <em>buying back</em> shares, reasonably quickly raising the price above where it had sold shares. This was discussed in <a href="https://www.smartkarma.com/insights/evergrande-equity-de-placement-musical-shares" target="_blank" rel="noopener">Evergrande Equity De-Placement: Musical Shares</a>. Then a couple weeks later, we saw <a href="https://www.smartkarma.com/insights/evergrande" target="_blank" rel="noopener">Evergrande Terminate Hengda's Backdoor Listing</a> so the story left was one of an optically "cheap" but heavily indebted developer, lowering selling prices to liquidate inventory, lower debt and raise cash levels, etc. There were sales of shares of recently listed subsidiaries. There were announcements of how much debt had been lowered. But shares fell. </p>
<p>There were stories in Chinese media and in social media about issues with the company's trade acceptance bills. An <a href="https://www.bloomberg.com/news/articles/2021-07-09/china-urged-evergrande-founder-to-find-quick-fix-for-debt-woes" target="_blank" rel="noopener">article</a> on Bloomberg.com a week ago reported that while Evergrande chairman Hui Ka Yan was in Beijing for the 100th anniversary celebrations 1 July, he met with the Financial Stability and Development Committee, which urged him to solve his company's debt problems pronto. The article is worth reading. It suggested more worry at the top than thought, and even says FSDC officials had suggested bringing in strategic investors. Hui said he was speaking with local investors. </p>
<p>Bonds have traded lower and lower and the 2024-2025 maturity bonds appear to be trading in the 60s, with shorter-dated bonds trading at 30+% yield to maturity. Wednesday, the shares closed at HK$8.91 - lowest in four years. </p>
<h3>Yesterday, there was new news. </h3>
<p>The company announced a board meeting for 27 July where the Board would consider a special dividend. </p>
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<p></p>
<p>My first reaction was, I admit, one of surprise, but on second thought it should not be THAT surprising.</p>
<p>The immediate public comments I have seen suggested an attempt to squeeze shorts. According to data from the SFC, shorts have risen from levels near-matching covid-crash lows, and now stand at roughly 2.1% of shares out (a bit under 10% of float), but that would not do it.</p>
<p>The single most indebted real estate company in the world, with short-term bonds yielding risk-free-rate plus.... [checks notes] 30+%, where the chairman gets called onto the carpet of the highest financial regulator in China - not the PBOC, CSRC, or CBIRC - above them - urging him to <em>Do Something</em> - sell assets, lower debt, raise equity - deciding to pay a special dividend to its equity holders? </p>
<p>I expect Hui Ka Yan has his reasons, and I expect those reasons do not include rewarding long-suffering minority shareholders. Or squeezing shorts. </p>
<p><br><br></p>

Evergrande Real Estate Group (3333 HK) shares rallied enormously sharply in 2017, moving from the mid single digits to HK$30+ by Q3 that year. That year the float in Evergrande was also sharply reduced by the purchases of shares by Chinese Estates Holdings (127 HK) and its owners. 
When the shares fell back after getting squeezed, Evergrande conducted a buyback which got them within a hair's breadth of the residual minimum free float requirement mandated by the Hong Kong Stock Exchange. The shares stayed higher. 
Eventually, Evergrande saw more of the employee share options with low exercise prices exercised which increased the share count and float so when shares fell in 2020, the company could buy back shares, and it did so after shares fell to new 3yr lows in the covid-crash. It bought shares back from May to June, again reducing float to within a hair's breadth of the free float limit, and in the period, shares rose about 50%. 
Then at the start of H2, with a press release about unaudited June sales results and how strong sales had been in H1, the shares popped 40% (from HK$20 to HK$28/share) in three days, then fell back over 6 weeks, going back below HK$20 when the company disclosed it was pre-selling stakes in its property management unit before the IPO, and three days later Evergrande actually issued a profit warning, just before releasing H1 results. 
Also in August, but undisclosed at the time, was the fact that several major real estate developers, including Evergrande, had been called on the carpet to discuss their participation in the so-called Three Red Lines pilot program (the three red lines are a liability-to-asset ratio excluding advanced receipts of 70%, net debt-to-equity ratio of 100%, and cash to short-term debt ratio at 1x). Companies which crossed one of three red lines could not increase interest-bearing borrowing by more than 10% in a year. Cross two of them and they were capped at 5% growth. Cross all three of them and the developer could not increase debt at all. This is tough when funding at high single digits to 10+% interest rates are used to carry ever more non-interest-earning land bank. But Evergrande "met" all three so needed to reduce debt and raise cash, discussed in Evergrande May Be Facing a Funding Squeeze. 
There was a story about a "letter", later denied by the company, in September, discussing the importance of the local government helping Evergrande deal with its short-term funding issues, which included the issue of the buyback guarantee offered by Evergrande to minority shareholders of Evergrande's major onshore operating unit Hengda. Evergrande denied the existence of the letter, but despite the fact some Hengda shareholders reportedly wanted out as listing was unlikely, somehow, with the local government's help, Evergrande announced a new agreement meaning repayment in January 2021 was unnecessary. The shares rallied and two weeks later Evergrande raised some capital (discussed in Evergrande Equity Placement - Musical Shares).
I had my ideas about WHY those shares were placed, and it was not to raise equity to pay down debt. The capital raised was less than expected despite the large discount and the shares quickly fell below placement price.  So just 3 weeks after raising equity, it started buying back shares, reasonably quickly raising the price above where it had sold shares. This was discussed in Evergrande Equity De-Placement: Musical Shares. Then a couple weeks later, we saw Evergrande Terminate Hengda's Backdoor Listing so the story left was one of an optically "cheap" but heavily indebted developer, lowering selling prices to liquidate inventory, lower debt and raise cash levels, etc. There were sales of shares of recently listed subsidiaries. There were announcements of how much debt had been lowered. But shares fell. 
There were stories in Chinese media and in social media about issues with the company's trade acceptance bills. An article on Bloomberg.com a week ago reported that while Evergrande chairman Hui Ka Yan was in Beijing for the 100th anniversary celebrations 1 July, he met with the Financial Stability and Development Committee, which urged him to solve his company's debt problems pronto. The article is worth reading. It suggested more worry at the top than thought, and even says FSDC officials had suggested bringing in strategic investors. Hui said he was speaking with local investors. 
Bonds have traded lower and lower and the 2024-2025 maturity bonds appear to be trading in the 60s, with shorter-dated bonds trading at 30+% yield to maturity. Wednesday, the shares closed at HK$8.91 - lowest in four years. 
Yesterday, there was new news. 
The company announced a board meeting for 27 July where the Board would consider a special dividend. 




My first reaction was, I admit, one of surprise, but on second thought it should not be THAT surprising.
The immediate public comments I have seen suggested an attempt to squeeze shorts. According to data from the SFC, shorts have risen from levels near-matching covid-crash lows, and now stand at roughly 2.1% of shares out (a bit under 10% of float), but that would not do it.
The single most indebted real estate company in the world, with short-term bonds yielding risk-free-rate plus.... [checks notes] 30+%, where the chairman gets called onto the carpet of the highest financial regulator in China - not the PBOC, CSRC, or CBIRC - above them - urging him to Do Something - sell assets, lower debt, raise equity - deciding to pay a special dividend to its equity holders? 
I expect Hui Ka Yan has his reasons, and I expect those reasons do not include rewarding long-suffering minority shareholders. Or squeezing shorts. 
  

Evergrande's Very Special... Special Dividend?

Telco/Internet specialist

Kirk Boodry

Redex Research

Equity Bottom-Up

<p>Softbank has boosted its Vision Fund 2 commitments to $40bn even as a series of recent investments have been concurrent with IPOs or just before. These are effectively investments in public equities, nominally what Northstar covers, but with some optionality on a valuation pop if demand is high although that has not happened so far. Confirmation today of a $1.7bn investment in Korean online travel firm Yanolja appears to be an extension of this trend. The series of late-stage investments also highlights a lack of activity at VF2’s collection of SPACs which were created with these kinds of targets in mind. China weakness appears to be settling but Softbank shares remain range-bound at a mid-40% discount to underlying public values.</p>

Softbank has boosted its Vision Fund 2 commitments to $40bn even as a series of recent investments have been concurrent with IPOs or just before. These are effectively investments in public equities, nominally what Northstar covers, but with some optionality on a valuation pop if demand is high although that has not happened so far. Confirmation today of a $1.7bn investment in Korean online travel firm Yanolja appears to be an extension of this trend. The series of late-stage investments also highlights a lack of activity at VF2’s collection of SPACs which were created with these kinds of targets in mind. China weakness appears to be settling but Softbank shares remain range-bound at a mid-40% discount to underlying public values.

Softbank Group - Vision Fund 2’s Late-Private Investments Blur the Lines with Northstar

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.

<ul>
<li>Apps are over-crowded in mobile handsets and the time of mini-program is coming.</li>
<li>WeChat is the largest mini-program platform.</li>
<li>We raise a case of the competition between Meituan and Ele.me.</li>
<li>Other companies also use mini-program to introduce users to their apps.</li>
</ul>


Apps are over-crowded in mobile handsets and the time of mini-program is coming.
WeChat is the largest mini-program platform.
We raise a case of the competition between Meituan and Ele.me.
Other companies also use mini-program to introduce users to their apps.


Tencent (700 HK): Meituan Wins in Mini-Program, But Actually Tencent Wins

Head of Research, IPOs & Placements, Aequitas Research

Sumeet Singh

Head of Research, IPOs & Placements

<div><p>Kakao Bank (KB), South Korea’s largest digital bank, aims to raise up to US$2.2bn in its South Korean IPO. Kakao held a 31.62% stake prior to listing.</p></div><div><p>Even though Kakao started operations only in July 2017, by 2020 it had already garnered more than 1% market share of overall loans and deposits in South Korea. KB’s loans have grown by 138% over 2018 to 1Q21 to reach KRW21.6tn, while its deposits have grown by 197% over the same period to reach KRW24.2tn. </p></div><div><p>Over 2018-20, its total income (Net interest income plus net fee income) grew by 216%, while it went from booking a loss in 2018 to reporting a 26% profit margin by 2020. KB’s total income was up another 60% YoY in 1Q21, while PAT was up 153% YoY.</p></div><div><p>We have covered various aspects of the deal in our previous notes, <a href="https://www.smartkarma.com/insights/kakao-bank-ipo-riding-on-parent-s-network-but-boundaries-with-kakao-pay-remain-unclear" target="_blank" rel="noopener">Kakao Bank IPO - Riding on parents network but boundaries with Kakao Pay remain unclear</a> and <a href="https://www.smartkarma.com/insights/kakao-bank-ipo-pricey-as-it-should-be" target="_blank" rel="noopener">Kakao Bank IPO - Pricey as It Should Be</a>.</p></div><div><p>In this note, we will talk about out the what the lack of lock-up on some investors could mean for index inclusion.</p></div>

Kakao Bank (KB), South Korea’s largest digital bank, aims to raise up to US$2.2bn in its South Korean IPO. Kakao held a 31.62% stake prior to listing.Even though Kakao started operations only in July 2017, by 2020 it had already garnered more than 1% market share of overall loans and deposits in South Korea. KB’s loans have grown by 138% over 2018 to 1Q21 to reach KRW21.6tn, while its deposits have grown by 197% over the same period to reach KRW24.2tn. Over 2018-20, its total income (Net interest income plus net fee income) grew by 216%, while it went from booking a loss in 2018 to reporting a 26% profit margin by 2020. KB’s total income was up another 60% YoY in 1Q21, while PAT was up 153% YoY.We have covered various aspects of the deal in our previous notes, Kakao Bank IPO - Riding on parents network but boundaries with Kakao Pay remain unclear and Kakao Bank IPO - Pricey as It Should Be.In this note, we will talk about out the what the lack of lock-up on some investors could mean for index inclusion.

Kakao Bank IPO - Lack of Lock-Up and MSCI, FTSE Index Implications

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

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

<p>Hang Seng Indexes has increased the number of index shares and free float for <a href="https://www.smartkarma.com/entities/alibaba-group" target="_blank" data-smartkarma-citation="entities:28434:1" rel="noopener">Alibaba Group (9988 HK)</a> in 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>, <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> and <a href="https://www.smartkarma.com/entities/hang-seng-tech-index" target="_blank" data-smartkarma-citation="entities:31367:1" rel="noopener">Hang Seng Tech Index (HSTECH INDEX)</a>, with no change made to the capping factor.</p><p>This will lead to an increase in the index weight for <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 passive funds benchmarked to the indices will need to buy the stock at the close of trading on 16 July while selling the other index constituents.</p><p>For July, we estimate passive funds will need to buy 45.52m shares (HK$9.34bn; 2 days of ADV) 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>. The largest impact of passive selling in terms of days of ADV will be on <a href="https://www.smartkarma.com/entities/hsbc-holdings-plc" target="_blank" data-smartkarma-citation="entities:516:1" rel="noopener">HSBC Holdings (5 HK)</a>, <a href="https://www.smartkarma.com/entities/clp-holdings-ltd" target="_blank" data-smartkarma-citation="entities:14433:1" rel="noopener">CLP Holdings (2 HK)</a>, <a href="https://www.smartkarma.com/entities/china-construction-bank-h" target="_blank" data-smartkarma-citation="entities:45:1" rel="noopener">China Construction Bank H (939 HK)</a>, <a href="https://www.smartkarma.com/entities/hang-lung-properties-ltd" target="_blank" data-smartkarma-citation="entities:49:1" rel="noopener">Hang Lung Properties (101 HK)</a> and <a href="https://www.smartkarma.com/entities/country-garden-holdings-co" target="_blank" data-smartkarma-citation="entities:5225:1" rel="noopener">Country Garden Holdings Co (2007 HK)</a>.</p><p>However, passive funds will need to sell <a href="https://www.smartkarma.com/entities/alibaba-group" target="_blank" data-smartkarma-citation="entities:28434:1" rel="noopener">Alibaba Group (9988 HK)</a> at the implementation of the quarterly rebalance in September when the capping factor will be lowered to cap the weight of the stock at 8% in the three indices.</p>

Hang Seng Indexes has increased the number of index shares and free float for Alibaba Group (9988 HK) in the Hong Kong Hang Seng Index (HSI INDEX), Hang Seng China Enterprises Index (HSCEI INDEX) and Hang Seng Tech Index (HSTECH INDEX), with no change made to the capping factor.This will lead to an increase in the index weight for Alibaba Group (9988 HK) and passive funds benchmarked to the indices will need to buy the stock at the close of trading on 16 July while selling the other index constituents.For July, we estimate passive funds will need to buy 45.52m shares (HK$9.34bn; 2 days of ADV) of Alibaba Group (9988 HK). The largest impact of passive selling in terms of days of ADV will be on HSBC Holdings (5 HK), CLP Holdings (2 HK), China Construction Bank H (939 HK), Hang Lung Properties (101 HK) and Country Garden Holdings Co (2007 HK).However, passive funds will need to sell Alibaba Group (9988 HK) at the implementation of the quarterly rebalance in September when the capping factor will be lowered to cap the weight of the stock at 8% in the three indices.

Alibaba (9988 HK): Passive Inflow from HSI, HSCEI, HSTECH Trackers in July

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 (9988 HK)

Evergrande's Very Special... Special Dividend?

Evergrande has been in a world of hurt, actively selling down assets. It has repaid some short-term bonds, but commercial bills remain an issue. So...

Travis Lundy

Softbank Group - Vision Fund 2’s Late-Private Investments Blur the Lines with Northstar

A series of VF investments at or just before the IPO seem to overlap with Northstar's role whilst highlighting a lack of SPAC activity. Meanwhile, ...

Kirk Boodry

Tencent (700 HK): Meituan Wins in Mini-Program, But Actually Tencent Wins

Apps are over-crowded in mobile handsets and the time of mini-program is coming. WeChat is the largest mini-program platform. We raise a case of...

Ming Lu

Kakao Bank IPO - Lack of Lock-Up and MSCI, FTSE Index Implications

Kakao Bank (KB), South Korea’s largest digital bank, aims to raise up to US$2.2bn in its South Korean IPO. Kakao held a 31.62% stake prior to listing.

Sumeet Singh

Alibaba (9988 HK): Passive Inflow from HSI, HSCEI, HSTECH Trackers in July

Following an increase in the number of CCASS shares and free float, Alibaba's index shares will be increased. Passive HSI/ HSCEI/ HSTECH trackers...

Brian Freitas

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