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

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Event-Driven

<p>The Hang Seng Indexes Company Limited (HSIL) announced the results of its review of the Hang Seng Family of Indexes post market close on 21 May. The constituent changes will be effective after the close of trading on 4 June.</p><p>For 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> there are 3 inclusions - <a href="https://www.smartkarma.com/entities/xinyi-solar-holdings-ltd" target="_blank" data-smartkarma-citation="entities:318:1" rel="noopener">Xinyi Solar Holdings (968 HK)</a>, <a href="https://www.smartkarma.com/entities/byd-co-ltd-h" target="_blank" data-smartkarma-citation="entities:20962:1" rel="noopener">BYD (1211 HK)</a> and <a href="https://www.smartkarma.com/entities/country-garden-services-holdings-company-limited" target="_blank" data-smartkarma-citation="entities:27343:1" rel="noopener">Country Garden Services Holdings (6098 HK)</a>.</p><p>The 3 inclusions will increase the number of index constituents to 58. With the target of getting to 80 stocks by mid-2022, the expectation was for more stocks to be included at this review. What likely resulted in fewer stocks being added was the large turnover due to the capping changes.</p><p>While we had expected the inclusion of <a href="https://www.smartkarma.com/entities/xinyi-solar-holdings-ltd" target="_blank" data-smartkarma-citation="entities:318:1" rel="noopener">Xinyi Solar Holdings (968 HK)</a> and <a href="https://www.smartkarma.com/entities/country-garden-services-holdings-company-limited" target="_blank" data-smartkarma-citation="entities:27343:1" rel="noopener">Country Garden Services Holdings (6098 HK)</a>, the inclusion of <a href="https://www.smartkarma.com/entities/byd-co-ltd-h" target="_blank" data-smartkarma-citation="entities:20962:1" rel="noopener">BYD (1211 HK)</a> will have a big impact since the stock has also been included in 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>. </p><p>One-way turnover is estimated at 7.77% and will result in a one-way trade of HK$16.82bn.  The largest passive inflows will be on <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/alibaba-group" target="_blank" data-smartkarma-citation="entities:28434:1" rel="noopener">Alibaba Group (9988 HK)</a> as a result of the capping change from 5% to 8%, while the largest outflows will be from <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>, <a href="https://www.smartkarma.com/entities/tencent-holdings-ltd" target="_blank" data-smartkarma-citation="entities:26:1" rel="noopener">Tencent (700 HK)</a> and <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> due to the capping change from 10% to 8%.</p><p>There are only 10 trading days to implementation of the changes and we expect all 3 inclusions to open higher on Monday and continue to outperform the market over the period.</p>

The Hang Seng Indexes Company Limited (HSIL) announced the results of its review of the Hang Seng Family of Indexes post market close on 21 May. The constituent changes will be effective after the close of trading on 4 June.For the Hong Kong Hang Seng Index (HSI INDEX) there are 3 inclusions - Xinyi Solar Holdings (968 HK), BYD (1211 HK) and Country Garden Services Holdings (6098 HK).The 3 inclusions will increase the number of index constituents to 58. With the target of getting to 80 stocks by mid-2022, the expectation was for more stocks to be included at this review. What likely resulted in fewer stocks being added was the large turnover due to the capping changes.While we had expected the inclusion of Xinyi Solar Holdings (968 HK) and Country Garden Services Holdings (6098 HK), the inclusion of BYD (1211 HK) will have a big impact since the stock has also been included in the Hang Seng China Enterprises Index (HSCEI INDEX). One-way turnover is estimated at 7.77% and will result in a one-way trade of HK$16.82bn.  The largest passive inflows will be on Meituan (3690 HK) and Alibaba Group (9988 HK) as a result of the capping change from 5% to 8%, while the largest outflows will be from AIA Group Ltd (1299 HK), Tencent (700 HK) and HSBC Holdings (5 HK) due to the capping change from 10% to 8%.There are only 10 trading days to implementation of the changes and we expect all 3 inclusions to open higher on Monday and continue to outperform the market over the period.

HSI Index Rebalance: Only 3 Additions but BIG Turnover

Chief Economist

Diana Choyleva

Enodo Economics

Enodo Economics is an independent macroeconomic forecasting company that untangles complexity, challenges the consensus, and makes sense of the future. Our focus is on China – one of the most misunderstood economies in the world, but one of the most important to figure out.  Enodo’s chief economist, Diana Choyleva, has been analysing China for almost 20 years, while Enodo’s team boasts a combined 140 years’ experience covering China’s economy, politics and markets. 

Macroeconomics

<h2>China News That Matters</h2><ul>
<li>Cracking down on cryptocurrency</li>
<li>And on Big Tech too</li>
<li>World-beating vaccination rates</li>
<li>“Cold War mindset and gross interference” </li>
<li>You sent your battleship!</li>
</ul><div class="content-remarks"><p>In my weekly digest China News That Matters, I will give you selected summaries, sourced from a variety of local Chinese-language and international news outlets, and highlight why I think the news is significant. These posts are meant to neither be bullish nor bearish, but help you separate the signal from the noise.</p></div>

China News That Matters
Cracking down on cryptocurrency
And on Big Tech too
World-beating vaccination rates
“Cold War mindset and gross interference” 
You sent your battleship!
In my weekly digest China News That Matters, I will give you selected summaries, sourced from a variety of local Chinese-language and international news outlets, and highlight why I think the news is significant. These posts are meant to neither be bullish nor bearish, but help you separate the signal from the noise.

Crypto/ Tech/ Covid-19/ US-China/ UK-China

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.

Equity Bottom-Up

<p><a href="https://www.smartkarma.com/entities/tencent-holdings-ltd" target="_blank" data-smartkarma-citation="entities:26:1" rel="noopener">Tencent (700 HK)</a>  reported 1Q21 results on Thursday (20<sup>th</sup> May) which saw revenues growing 25% YoY to RMB135.3bn (versus consensus revenue of RMB133.8bn) while operating profit (non-IFRS) increased 20% YoY to RMB42.8bn (IFRS OP of RMB56.3bn versus consensus OP of RMB42.8bn) during the quarter.</p><p>Despite the ongoing regulatory concerns regarding the company’s fintech business, past M&amp;A deals and WeChat User data, Tencent’s businesses continued to see strong performance during 1Q. However, Tencent’s core online advertising revenue and its Weixin &amp; WeChat user growth are slowing down.</p>

Tencent (700 HK)  reported 1Q21 results on Thursday (20th May) which saw revenues growing 25% YoY to RMB135.3bn (versus consensus revenue of RMB133.8bn) while operating profit (non-IFRS) increased 20% YoY to RMB42.8bn (IFRS OP of RMB56.3bn versus consensus OP of RMB42.8bn) during the quarter.Despite the ongoing regulatory concerns regarding the company’s fintech business, past M&amp;A deals and WeChat User data, Tencent’s businesses continued to see strong performance during 1Q. However, Tencent’s core online advertising revenue and its Weixin &amp; WeChat user growth are slowing down.

Tencent: Earnings Beat Consensus; Falling User Growth and Game Revenue Growth Concerning

Global TMT analyst with Asia ex-Japan focus.

Mitchell Kim

<ul>
<li>While Tencent’s 25% YoY total revenue growth in 1Q21 was respectable, <strong>extended slow online games revenue growth increases the downside risk for the stock</strong>, in my view.  In 2018, Tencent's share price fell from the peak of HKD470 to nearly HKD250 as game revenue growth fell from 30%+ to single digits. </li>
<li> I flagged that <a href="https://www.smartkarma.com/entities/tencent-holdings-ltd" target="_blank" data-smartkarma-citation="entities:26:1" rel="noopener">Tencent (700 HK)</a> will not be able to sustain the 30-40% YoY game revenue growth in my report, <a href="https://www.smartkarma.com/insights/tencent-700-hk-taking-foot-off-the-pedal" target="_blank" data-smartkarma-citation="insights:49643" rel="noopener">Tencent (700 HK): Taking Foot Off the Pedal</a>, after Tencent’s 4Q20 results on 25 March 2021. <strong> In 1Q21, Tencent’s total online game revenue (including smartphone revenues in social media) growth decelerated to 15% YoY</strong>, the lowest rate since 3Q19. </li>
<li>
<strong>Games revenue growth remains a key share price driver</strong> because the segment still contributes 64% of the total gross profit (Game business is the majority of VAS segment) even though it only makes up 40% of the total revenues.</li>
<li> <strong>Added to the game revenue slowdown risk, the Fintech restructuring risk is still looming.</strong> In my Tencent report, <a href="https://www.smartkarma.com/insights/tencent-700-hk-fintech-risk-is-lurking" target="_blank" data-smartkarma-citation="insights:50512" rel="noopener">Tencent (700 HK): Fintech Risk Is Lurking</a>, I noted that stricter consumer loan and asset management regulation will adversely impact Tencent shares more than Alibaba because of Tencent’s greater ownership of its fintech business.      </li>
<li>
<strong>The saving grace for Tencent in 1Q21 was fintech and cloud businesses.</strong>  Fintech and business services (incl Cloud) was the largest growth driver in 1Q21.  However, FinTech Service revenue growth benefitted from the comparison with the stay-at-home law impacted 1Q20.  </li>
<li>
<strong>Tencent's 1Q21 results were broadly at par with <a href="https://www.smartkarma.com/entities/netease-inc-adr" target="_blank" data-smartkarma-citation="entities:17203:1" rel="noopener">NetEase Inc (NTES US)</a> but underperformed e-commerce platforms' results</strong> -- <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/jd-com-inc-adr" target="_blank" data-smartkarma-citation="entities:446:1" rel="noopener">JD.com Inc (ADR) (JD US)</a>, and <a href="https://www.smartkarma.com/entities/vipshop-holdings-ltd-adr" target="_blank" data-smartkarma-citation="entities:1088:1" rel="noopener">Vipshop Holdings (VIPS US)</a> -- on revenue, gross profit and operating profit (normalized) growth.  </li>
</ul>


While Tencent’s 25% YoY total revenue growth in 1Q21 was respectable, extended slow online games revenue growth increases the downside risk for the stock, in my view.  In 2018, Tencent's share price fell from the peak of HKD470 to nearly HKD250 as game revenue growth fell from 30%+ to single digits. 
 I flagged that Tencent (700 HK) will not be able to sustain the 30-40% YoY game revenue growth in my report, Tencent (700 HK): Taking Foot Off the Pedal, after Tencent’s 4Q20 results on 25 March 2021.  In 1Q21, Tencent’s total online game revenue (including smartphone revenues in social media) growth decelerated to 15% YoY, the lowest rate since 3Q19. 

Games revenue growth remains a key share price driver because the segment still contributes 64% of the total gross profit (Game business is the majority of VAS segment) even though it only makes up 40% of the total revenues.
 Added to the game revenue slowdown risk, the Fintech restructuring risk is still looming. In my Tencent report, Tencent (700 HK): Fintech Risk Is Lurking, I noted that stricter consumer loan and asset management regulation will adversely impact Tencent shares more than Alibaba because of Tencent’s greater ownership of its fintech business.      

The saving grace for Tencent in 1Q21 was fintech and cloud businesses.  Fintech and business services (incl Cloud) was the largest growth driver in 1Q21.  However, FinTech Service revenue growth benefitted from the comparison with the stay-at-home law impacted 1Q20.  

Tencent's 1Q21 results were broadly at par with NetEase Inc (NTES US) but underperformed e-commerce platforms' results -- Alibaba Group (BABA US), JD.com Inc (ADR) (JD US), and Vipshop Holdings (VIPS US) -- on revenue, gross profit and operating profit (normalized) growth.  


Tencent (700 HK): Take a Deep Breath and Reassess: Online Game Growth Is Slowing

ASEAN Insight Provider, CrossASEAN Research

Angus Mackintosh

ASEAN Insight Provider

CrossASEAN Research

At CrossASEAN Research we strive to produce unbiased and differentiated on the ground insights on companies across South East Asia. Our Research is produced for the most part after face to face meetings and conversations with company management to dig deep into the long term vision and strategy of the companies we cover. We seek to deliver investable and actionable themes on sectors and markets across SE Asia, often in collaboration with other Insight Providers across the region, pooling the vast experience of the analysts within the Smartkarma Ecosystem. We also offer bespoke work and tailor made trips for our clients. 

Insights across South East Asia

Private Capital Markets

<p>Looking at the reports in the press on the news that <a href="https://www.smartkarma.com/entities/grabtaxi-holdings-pte-ltd" target="_blank" data-smartkarma-citation="entities:26950:1" rel="noopener">Grab</a> will seek a listing through an Altimeter Capital SPAC, there seems to be nothing but euphoria, without very much commentary on the potential risks ahead to the company's bullish forecasts and relatively high valuations. </p>
<div>
<p>In terms of profitability, <a href="https://www.smartkarma.com/entities/grabtaxi-holdings-pte-ltd" target="_blank" data-smartkarma-citation="entities:26950:1" rel="noopener">Grab</a> maintains that ride-hailing was EBITDA positive in 4Q2019 but the company still lost US$800m in 2020.</p>
<p><a href="https://www.smartkarma.com/entities/grabtaxi-holdings-pte-ltd" target="_blank" data-smartkarma-citation="entities:26950:1" rel="noopener">Grab</a>'s projections are quite long-dated in the face of increasing and very unpredictable competitive pressures from the other major digital players, more especially the newly merged <a href="https://www.smartkarma.com/entities/gojek" target="_blank" data-smartkarma-citation="entities:25976:1" rel="noopener">Gojek</a> and <a href="https://www.smartkarma.com/entities/tokopedia-pt" target="_blank" data-smartkarma-citation="entities:24239:1" rel="noopener">Tokopedia</a> under "GoTo Group" and from Shopee (<a href="https://www.smartkarma.com/entities/sea-ltd" target="_blank" data-smartkarma-citation="entities:8509:1" rel="noopener">Sea Ltd (SE US)</a>). </p>
</div>
<div>
<p>The delivery and mobility take-rate assumptions also look quite high given the potential for heavy promotional activity from major competitors.</p>
</div>
<div>
<p>In the company's presentation, there are three pages of detailed "Risk Factors Relating to Grab" in a small font covering a lot of bases, and leaving plenty of room for disappointment.</p>
<p>Our main concern would be the strong competition from Shopee on digital payments plus its move into food delivery in Indonesia under ShopeeFood.  It is also possible OVO stands to lose a good deal of business to GoPay with the merger moving ahead. </p>
<p>We also see the combined force of <a href="https://www.smartkarma.com/entities/gojek" target="_blank" data-smartkarma-citation="entities:25976:1" rel="noopener">Gojek</a> and <a href="https://www.smartkarma.com/entities/tokopedia-pt" target="_blank" data-smartkarma-citation="entities:24239:1" rel="noopener">Tokopedia</a> under GoTo Group will also be a formidable competitor, given it will also have an e-commerce arm. Please see <a href="https://www.smartkarma.com/insights/goto-enter-the-green-dragon" target="_blank" data-smartkarma-citation="insights:51664" rel="noopener">GoTo - Enter the Green Dragon</a> for more background</p>
</div>
<div>
<div class="content-highlight">
<p>The valuations look quite aggressive given that on the stated EV of US$30.36bn, it will be valued at 13.2x FY21E EV/Sales and 9.2x FY22E EV/Sales, which is pretty much in line with <a href="https://www.smartkarma.com/entities/sea-ltd" target="_blank" data-smartkarma-citation="entities:8509:1" rel="noopener">Sea Ltd (SE US)</a>, which currently trades on .</p>
<p>We await more details on the planned floatation of GoTo Group, which is expected to be valued at more than US$40bn but probably deserves a higher multiple, given it has an e-commerce arm and a more established digital finance business, even though still at an early stage.</p>
<p>It is interesting to note that the share price of the Altimeter SPAC is approaching US$11, which suggests there is not much of a premium being built into the float, given that PIPE investors get shares at US$10.</p>
</div>
</div>
<div>
<div>
<p></p>
</div>
</div>

Looking at the reports in the press on the news that Grab will seek a listing through an Altimeter Capital SPAC, there seems to be nothing but euphoria, without very much commentary on the potential risks ahead to the company's bullish forecasts and relatively high valuations. 

In terms of profitability, Grab maintains that ride-hailing was EBITDA positive in 4Q2019 but the company still lost US$800m in 2020.
Grab's projections are quite long-dated in the face of increasing and very unpredictable competitive pressures from the other major digital players, more especially the newly merged Gojek and Tokopedia under "GoTo Group" and from Shopee (Sea Ltd (SE US)). 


The delivery and mobility take-rate assumptions also look quite high given the potential for heavy promotional activity from major competitors.


In the company's presentation, there are three pages of detailed "Risk Factors Relating to Grab" in a small font covering a lot of bases, and leaving plenty of room for disappointment.
Our main concern would be the strong competition from Shopee on digital payments plus its move into food delivery in Indonesia under ShopeeFood.  It is also possible OVO stands to lose a good deal of business to GoPay with the merger moving ahead. 
We also see the combined force of Gojek and Tokopedia under GoTo Group will also be a formidable competitor, given it will also have an e-commerce arm. Please see GoTo - Enter the Green Dragon for more background



The valuations look quite aggressive given that on the stated EV of US$30.36bn, it will be valued at 13.2x FY21E EV/Sales and 9.2x FY22E EV/Sales, which is pretty much in line with Sea Ltd (SE US), which currently trades on .
We await more details on the planned floatation of GoTo Group, which is expected to be valued at more than US$40bn but probably deserves a higher multiple, given it has an e-commerce arm and a more established digital finance business, even though still at an early stage.
It is interesting to note that the share price of the Altimeter SPAC is approaching US$11, which suggests there is not much of a premium being built into the float, given that PIPE investors get shares at US$10.








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)

HSI Index Rebalance: Only 3 Additions but BIG Turnover

There are 3 inclusions (BYD, Xinyi Solar, CG Services) to the HSI taking the number of constituents up to 58. Turnover is high at 7.77% and will...

Brian Freitas

Crypto/ Tech/ Covid-19/ US-China/ UK-China

In my weekly digest, I will give you selected summaries, sourced from a variety of local Chinese-language and international news outlets, and...

Diana Choyleva

Tencent: Earnings Beat Consensus; Falling User Growth and Game Revenue Growth Concerning

Tencent’s 1Q21 revenues and profits saw strong growth, however, we are concerned about the slow down in online games revenue growth as the segment...

Shifara Samsudeen, ACMA, CGMA

Tencent (700 HK): Take a Deep Breath and Reassess: Online Game Growth Is Slowing

Tencent's online game revenue growth slowed to 15% YoY. The stock nearly halved in 2018 when the growth rate fell to single digits. Can it happen...

Mitchell Kim

Grab - Too Much Euphoria?

Grab is close to listing through the Altimeter SPAC in New York, which has brought with it much euphoria amongst commentators. We look to some of...

Angus Mackintosh

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