Global TMT analyst with Asia ex-Japan focus.

Mitchell Kim

Equity Bottom-Up

On Monday, 12 April 2021, PBoC stated that Ant Group met with regulators and announced its business restructuring to comply with new regulations.  (See our report, <a href="https://www.smartkarma.com/insights/alibaba-baba-us-ant-group-pay-get-out-move-forward" target="_blank" data-smartkarma-citation="insights:50254" rel="noopener">Alibaba (BABA US): Ant Group - Pay, Get Out, Move Forward)</a> While the media and the global investment community focused on Ant Group because of the much-publicized canceled IPO in November 2020, we believe the potential valuation risk of Tencent <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> and its associate, Webank, was overlooked, in my view.This report highlights three key thoughts:<ul>
<li>While Ant Group’s devaluation weighed down Alibaba’s shares, Tencent’s shares did not fully price in the adverse impact of the regulatory change.</li>
<li>Tencent’s shares could be overvalued by 20% as the market did not reflect the lower fintech value.</li>
<li>Even though Ant Group’s fintech business is larger (see our direct comparison chart), I argue that the impact on Tencent’s shares is bigger than it does for <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> because Tencent’s fintech business is wholly owned compared to Alibaba’s 33% stake in Ant Group. </li>
</ul>In this report, we also provide a detailed look at Tencent’s fintech business and WeBank’s financials based on WeBank’s 2019 annual report.

On Monday, 12 April 2021, PBoC stated that Ant Group met with regulators and announced its business restructuring to comply with new regulations.  (See our report, Alibaba (BABA US): Ant Group - Pay, Get Out, Move Forward) While the media and the global investment community focused on Ant Group because of the much-publicized canceled IPO in November 2020, we believe the potential valuation risk of Tencent Tencent Holdings (700 HK) and its associate, Webank, was overlooked, in my view.This report highlights three key thoughts:
While Ant Group’s devaluation weighed down Alibaba’s shares, Tencent’s shares did not fully price in the adverse impact of the regulatory change.
Tencent’s shares could be overvalued by 20% as the market did not reflect the lower fintech value.
Even though Ant Group’s fintech business is larger (see our direct comparison chart), I argue that the impact on Tencent’s shares is bigger than it does for Alibaba Group (BABA US) because Tencent’s fintech business is wholly owned compared to Alibaba’s 33% stake in Ant Group. 
In this report, we also provide a detailed look at Tencent’s fintech business and WeBank’s financials based on WeBank’s 2019 annual report.

Tencent (700 HK): Fintech Risk Is Lurking

China and US Equity Analyst

Roger Xie

Thematic (Sector/Industry)

<ul>
<li>China digital Yuan has made a splash to expand its pioneer program to 10 cities since the initial launch in May 2020. So far, more than 750,000 early recipients have already spent digital Yuan and total transaction has exceed RMB 1 billion. China digital Yuan will likely form a disruptive payment system given its advantage over other app-based payments such as Alipay and WeChat. It is widely believed that China government will raise the amount of digital currency in the future and lower physical cash in circulation. </li>
<li>Compared with cryptocurrency, China digital Yuan has a couple of distinctions: 1) China Digital Currency/Electronic Payment (DC/EP) system will feature two-tier issuance, with the PBOC issuing digital currency for both commercial banks and customers; (2) controllable anonymity, with DC/EP wallets independent of bank accounts for smaller transactions; and (3) centralized processing instead of a distributed ledger.</li>
<li>Digital economy has accounted 36% in China and pandemic has accelerated its acceptance. The rising of China Digital Currency/Electronic Payment (DC/EP) system could be disruptive to financial system. We believe it will lead the changes in payment, risk control, user data and credit history etc. in financial system.  Not only tech giant such as <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> and <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>but Chinese banks need to renovate their infrastructure for digital transformation. </li>
</ul>


China digital Yuan has made a splash to expand its pioneer program to 10 cities since the initial launch in May 2020. So far, more than 750,000 early recipients have already spent digital Yuan and total transaction has exceed RMB 1 billion. China digital Yuan will likely form a disruptive payment system given its advantage over other app-based payments such as Alipay and WeChat. It is widely believed that China government will raise the amount of digital currency in the future and lower physical cash in circulation. 
Compared with cryptocurrency, China digital Yuan has a couple of distinctions: 1) China Digital Currency/Electronic Payment (DC/EP) system will feature two-tier issuance, with the PBOC issuing digital currency for both commercial banks and customers; (2) controllable anonymity, with DC/EP wallets independent of bank accounts for smaller transactions; and (3) centralized processing instead of a distributed ledger.
Digital economy has accounted 36% in China and pandemic has accelerated its acceptance. The rising of China Digital Currency/Electronic Payment (DC/EP) system could be disruptive to financial system. We believe it will lead the changes in payment, risk control, user data and credit history etc. in financial system.  Not only tech giant such as Alibaba Group (BABA US) and Tencent Holdings (700 HK), but Chinese banks need to renovate their infrastructure for digital transformation. 


China Digital Currency: Leading the Innovation in Financial System

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

<a href="https://www.smartkarma.com/entities/meituan-dianping" target="_blank" data-smartkarma-citation="entities:26970:1" rel="noopener">Meituan (3690 HK)</a> aims to raise around US$10bn via a combination of an equity placement and convertible bond issuance. Along with the US$6.6bn top-up placement, its largest shareholder <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> will chip in another US$400m. In this note, we will run the deal through our framework and talk about deal dynamics.

Meituan (3690 HK) aims to raise around US$10bn via a combination of an equity placement and convertible bond issuance. Along with the US$6.6bn top-up placement, its largest shareholder Tencent Holdings (700 HK) will chip in another US$400m. In this note, we will run the deal through our framework and talk about deal dynamics.

Meituan Placement - Might Not Do a Tencent but Low-End Looks Enticing

Silver Point

Thomas J. Monaco

Independent Insight Provider

Silver Point is a boutique research firm that focuses on the broader financial services sector, with a particular focus on troubled institutions globally. 

Asia Ex Japan

*One Reorganization Down, One More To Go: Tencent Holdings (700.HK) [Tencent] announced a new round of organizational and employee adjustments in its Platform and Content Group (PCG) - the largest reshuffle since it began in 2018. With Alibaba Holdings (BABA] agreeing to form a financial holding company. Tencent cannot be far behind; and  *Earnings To Decline, Capital Requirements To Increase: For Tencent, WeChat Pay and the broader lending/deposit taking business are likely to be reined-in. At CNY 38.5 bn, FinTech represents a growing 28.8% of revenue – and are key component of Tencent’s current and future results.  No matter what spin that Tencent wants to place on its other businesses, an FHC represents significant downside risks. Earnings will compress, as capital requirements increase.

*One Reorganization Down, One More To Go: Tencent Holdings (700.HK) [Tencent] announced a new round of organizational and employee adjustments in its Platform and Content Group (PCG) - the largest reshuffle since it began in 2018. With Alibaba Holdings (BABA] agreeing to form a financial holding company. Tencent cannot be far behind; and  *Earnings To Decline, Capital Requirements To Increase: For Tencent, WeChat Pay and the broader lending/deposit taking business are likely to be reined-in. At CNY 38.5 bn, FinTech represents a growing 28.8% of revenue – and are key component of Tencent’s current and future results.  No matter what spin that Tencent wants to place on its other businesses, an FHC represents significant downside risks. Earnings will compress, as capital requirements increase.

Tencent Holdings – FHC Restructure On Its Way

<div>
Trip.com raised around US$1.2bn in its secondary listing in Hong Kong.
We have covered the background of the deal in our earlier notes:
<ul>
<li>
<a href="https://www.smartkarma.com/insights/trip-com-secondary-listing-probably-needs-to-correct" target="_blank" rel="noopener">Trip.com Secondary Listing - Probably Needs to Correct,</a> and</li>
<li><a href="https://www.smartkarma.com/insights/trip-com-secondary-listing-quick-take-doing-the-bare-minimum-needs-some-more-correction" target="_blank" rel="noopener">Trip.com Secondary Listing Quick Take - Doing the Bare Minimum - Needs Some More Correction.</a></li>
</ul>
</div><div>In this note, we'll talk about the updates since then.</div>


Trip.com raised around US$1.2bn in its secondary listing in Hong Kong.
We have covered the background of the deal in our earlier notes:


Trip.com Secondary Listing - Probably Needs to Correct, and
Trip.com Secondary Listing Quick Take - Doing the Bare Minimum - Needs Some More Correction.

In this note, we'll talk about the updates since then.

Trip.com Secondary Trading Note - Delivered a Good Correction but Seems to Be Widely Distributed

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)

Tencent (700 HK): Fintech Risk Is Lurking

BABA is down 19% since 9 Nov 2020 when the Ant Group IPO was canceled. Fintech business has an even greater impact on Tencent's value. Tencent is...

Mitchell Kim

China Digital Currency: Leading the Innovation in Financial System

The rising of China Digital Yuan system could be disruptive to financial system. We believe it will lead the changes in payment, risk control, user...

Roger Xie

Meituan Placement - Might Not Do a Tencent but Low-End Looks Enticing

Meituan aims to raise around US$10bn via a combination of an equity placement and convertible bond issuance. In this note, we will run the deal...

Sumeet Singh

Tencent Holdings – FHC Restructure On Its Way

TENCENT HOLDINGS: Tencent announced a reorganization to its Platform and Content Group (PCG). With Alibaba Holdings (BABA] agreeing to form a...

Thomas J. Monaco

Trip.com Secondary Trading Note - Delivered a Good Correction but Seems to Be Widely Distributed

Trip.com raised around US$1.2bn in its secondary listing in Hong Kong. In this note, we'll talk about the trading dynamics.

Sumeet Singh

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