Asian Hedge Fund Manager, Long Short Equity, Macro

David Mudd

Equity Bottom-Up

Alibaba Group Holding  / Equity Bottom-Up

<ul>
<li><strong>Hong Kong's unusual trading channel pattern may be coming to an end and short selling declines.</strong></li>
<li><strong><a href="https://www.smartkarma.com/entities/alibaba-group-holding-ltd-d7b798e2-202d-4e01-9a1e-799e2ae8f0c7" target="_blank" data-smartkarma-citation="entities:28434:1" rel="noopener">Alibaba Group Holding (9988 HK)</a> broke a falling triangle pattern and now trades above near term support levels.  The company's dual listing announcement and large buyback program are near-term positives.</strong></li>
<li>
<a href="https://www.smartkarma.com/entities/gds-holdings-ltd" target="_blank" data-smartkarma-citation="entities:32157:1" rel="noopener"><strong>GDS Holdings (9698 HK)</strong></a><strong> has broken out of its rounding bottom pattern with a positive earnings announcement.  <a href="https://www.smartkarma.com/entities/china-ruyi-holdings-ltd" target="_blank" data-smartkarma-citation="entities:3296:1" rel="noopener">China Ruyi Holdings (136 HK)</a> has broken out from its triangle pattern.</strong>
</li>
</ul>


Hong Kong's unusual trading channel pattern may be coming to an end and short selling declines.
Alibaba Group Holding (9988 HK) broke a falling triangle pattern and now trades above near term support levels.  The company's dual listing announcement and large buyback program are near-term positives.

GDS Holdings (9698 HK) has broken out of its rounding bottom pattern with a positive earnings announcement.  China Ruyi Holdings (136 HK) has broken out from its triangle pattern.



Technically Speaking, Breakouts and Breakdowns: HONG KONG (AUGUST 24)

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

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Periscope Analytics

Periscope Analytics focuses on event-driven trades across Asia Pacific and provides comprehensive, timely and systematic coverage of index changes to major Asia Pacific indices in a structured manner.

The analysis includes forecasted inclusions and exclusions to all major Asian indices that have significant amount of tracking assets, including estimates of passive buy/sell flow on the stocks. The service also provides commentary and impact of market consultations, ground rule changes, and other events (IPOs, spin-offs, M&A) that could lead to index changes and passive flow.

Periscope Analytics works with multi-strategy hedge funds, proprietary trading firms, stat arb trading groups and long-only investors that invest and trade in the Asia Pacific region with the data being used to trade index rebalances, avoid pre-positioning and passive flow, and to time entry into and exit from stocks.

Event-Driven Trades Across Asia Pacific

Event-Driven

<ul>
<li>
<a href="https://www.smartkarma.com/entities/tencent-holdings-ltd" target="_blank" data-smartkarma-citation="entities:26:1" rel="noopener">Tencent (700 HK)</a> announced in-specie dividends of <a href="https://www.smartkarma.com/entities/jd-com-inc" target="_blank" data-smartkarma-citation="entities:29043:1" rel="noopener">JD.com (9618 HK)</a> (US$15bn+) in 2021 and <a href="https://www.smartkarma.com/entities/meituan" target="_blank" data-smartkarma-citation="entities:26970:1" rel="noopener">Meituan (3690 HK)</a> (US$20bn) in 2022.</li>
<li>With the <a href="https://www.smartkarma.com/entities/tencent-holdings-ltd" target="_blank" data-smartkarma-citation="entities:26:1" rel="noopener">Tencent (700 HK)</a> Board meeting on 15 November to approve Q3 results and considering the payment of a dividend, the pattern could repeat this year.</li>
<li>
<a href="https://www.smartkarma.com/entities/tencent-holdings-ltd" target="_blank" data-smartkarma-citation="entities:26:1" rel="noopener">Tencent (700 HK)</a> owns stakes of US$1bn+ in 10 listed companies. We take a look at the stocks that could be next in line to be paid as in-specie dividends.</li>
</ul>



Tencent (700 HK) announced in-specie dividends of JD.com (9618 HK) (US$15bn+) in 2021 and Meituan (3690 HK) (US$20bn) in 2022.
With the Tencent (700 HK) Board meeting on 15 November to approve Q3 results and considering the payment of a dividend, the pattern could repeat this year.

Tencent (700 HK) owns stakes of US$1bn+ in 10 listed companies. We take a look at the stocks that could be next in line to be paid as in-specie dividends.


Tencent (700 HK): Board Meets Next Week; In-Specie Dividend Candidates

<ul>
<li>
<a href="https://www.smartkarma.com/entities/sensetime-group-inc" target="_blank" data-smartkarma-citation="entities:34319:1" rel="noopener">SenseTime Group (20 HK)</a> listed just prior to review cutoff and will be eligible for inclusion in the <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> at the March rebalance.</li>
<li>We expect <a href="https://www.smartkarma.com/entities/sensetime-group-inc" target="_blank" data-smartkarma-citation="entities:34319:1" rel="noopener">SenseTime Group (20 HK)</a> to be added to the index and replace <a href="https://www.smartkarma.com/entities/autohome-inc" target="_blank" data-smartkarma-citation="entities:33492:1" rel="noopener">Autohome (2518 HK)</a> at the close of trading on 4 March.</li>
<li>The real float of <a href="https://www.smartkarma.com/entities/sensetime-group-inc" target="_blank" data-smartkarma-citation="entities:34319:1" rel="noopener">SenseTime Group</a> is much lower than what HSIL is likely to use. Expect a BIG squeeze if the stock is added at a higher float.</li>
</ul>



SenseTime Group (20 HK) listed just prior to review cutoff and will be eligible for inclusion in the Hang Seng Tech Index (HSTECH INDEX) at the March rebalance.
We expect SenseTime Group (20 HK) to be added to the index and replace Autohome (2518 HK) at the close of trading on 4 March.
The real float of SenseTime Group is much lower than what HSIL is likely to use. Expect a BIG squeeze if the stock is added at a higher float.


Hang Seng TECH Index Rebalance Preview (March 2022): SenseTime Could Be Added with HUGE Impact

Pan-Asia Catalysts/Events, Quiddity Advisors

David Blennerhassett

Pan-Asia Catalysts/Events

Quiddity Advisors

<ul>
<li>
<strong><a href="https://www.smartkarma.com/entities/china-evergrande-group" target="_blank" data-smartkarma-citation="entities:479:1" rel="noopener">Evergrande (3333 HK)</a></strong> resurfaces as "cheap" on my monitor versus <a href="https://www.smartkarma.com/entities/china-evergrande-new-energy-vehicle-group-ltd" target="_blank" data-smartkarma-citation="entities:713:1" rel="noopener"><strong>Evergrande Auto (708 HK)</strong></a>, but the equity is still best viewed from the sidelines.</li>
<li>Preceding my comments on Evergrande, are the current setup/unwind tables for Asia-Pacific Holdcos. </li>
<li>These relationships trade with a minimum liquidity of US$1mn, and a % market capitalisation &gt;20%.</li>
</ul>



Evergrande (3333 HK) resurfaces as "cheap" on my monitor versus Evergrande Auto (708 HK), but the equity is still best viewed from the sidelines.
Preceding my comments on Evergrande, are the current setup/unwind tables for Asia-Pacific Holdcos. 
These relationships trade with a minimum liquidity of US$1mn, and a % market capitalisation &gt;20%.


StubWorld: Evergrande Trading "Cheap" But Still Uninvestable

<div>
<p>I estimate <a href="https://www.smartkarma.com/entities/china-evergrande-group" target="_blank" data-smartkarma-citation="entities:479:1" rel="noopener">China Evergrande Group (3333 HK)</a> (CEG) is trading at an extraordinary <strong>discount to NAV of 93%</strong> against a one-year average of 77%. </p>
</div>
<div>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/229/889/original/image_37048166931631684887321.png?1631684888" class="editor-image img-responsive" data-smartkarma-image-id="229889"></figure>
</div>
<div style="text-align: left;" class="content-caption">Source: CapIQ, my estimates. According to <a href="https://www.smartkarma.com/entities/shengjing-bank-co-ltd-h" target="_blank" data-smartkarma-citation="entities:96:1" rel="noopener">Shengjing Bank Co Ltd H (2066 HK)</a>'s <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2021/0408/2021040802085.pdf" target="_blank" rel="noopener">2020 annual report</a> (page 63), CEG holds 3.201bn domestic shares. For simplistic sake, I've pegged those shares at the price of Shengjing's H shares. According to <a href="https://www.smartkarma.com/entities/hengten-networks-group-ltd" target="_blank" data-smartkarma-citation="entities:3296:1" rel="noopener">HengTen Ltd (136 HK)</a>'s <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2021/0427/2021042700547.pdf" target="_blank" rel="noopener">2020 annual report</a> (page 13), CEG held 55.64% of shares out. But Evergrande has been selling, and now holds <a href="https://di.hkex.com.hk/di/NSForm2.aspx?fn=CS20210826E00320&amp;sa2=as&amp;sid=223&amp;corpn=HengTen+Networks+Group+Ltd.&amp;sd=15%2f09%2f2020&amp;ed=15%2f09%2f2021&amp;cid=0&amp;sa1=cl&amp;scsd=15%2f09%2f2020&amp;sced=15%2f09%2f2021&amp;sc=136&amp;src=MAIN&amp;lang=EN&amp;g_lang=en&amp;" target="_blank" rel="noopener">26.55%</a>.  For the stub ops, these are simply priced at book. A basket of peers is trading at ~0.6x, so probably a tad generous.</div>
<p>The problem with the calculation is that it marks the "stub ops" - the consolidated but unlisted portions of the business, predominantly Hengda Real Estate - at 1.0x book. Its competitors trade at 0.6x book on average so if one were to remove 40% of the value of the stub ops, that would eliminate roughly three quarters of the "NAV." That sounds huge but if you eliminate three quarters of the NAV, it means the 93% discount drops to 70% (the magic of compounding, in reverse), which still might be attractive. </p>
<p>The problem above and beyond that is that when a company is in "unprecedented difficulties" as the company said yesterday, the value of the assets themselves may be in question.</p>
<p>Evergrande's liquidity crunch has been discussed at length here at Smartkarma, most recently by me in <em><a href="https://skr.ma/jrXuN" target="_blank" rel="noopener">StubWorld: What To Do With Evergrande?</a></em>; and in greater depth by <a href="https://www.smartkarma.com/profiles/travis-lundy" target="_blank" data-smartkarma-citation="accounts:25" rel="noopener">Travis Lundy</a>, in which he said in his latest insight <em><a href="https://skr.ma/KkUHL" target="_blank" rel="noopener">Evergrande as a Study of Quantum Mechanics Theory</a></em>: </p>
<blockquote>
<p>Outside observers are looking at the situation and wondering whether Schrödinger's Cat is dead or alive.</p>
<p>Any process which requires a time-constrained liquidation of assets usually ends up with the asset owner suffering from "fire sale prices." Given the leverage inherent in Evergrande, this should not come out well for shareholders. </p>
</blockquote>
<ul style="list-style-type: disc;">
<li>It need not be said, the general consensus is bearish.</li>
</ul>
<hr>
<div>
<h3>The New News</h3>
<ul>
<li>Early yesterday morning, Evergrande <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2021/0914/2021091400059.pdf" target="_blank" rel="noopener">announced</a> it expects significant declines in contract sales in September.</li>
<li>Contract sales in June, July, and August 2021 were to RMB71.63bn, RMB43.78bn, and RMB38.08bn.</li>
<li>Often the month of September is when real estate companies in China record higher contract sales of properties. Evergrande said: <em>"ongoing negative media reports concerning the Group have dampened the confidence of potential property purchasers in the Group</em>."</li>
<li>Evergrande added it is actively exploring with potential investors the sales of part of its interests in <a href="https://www.smartkarma.com/entities/china-evergrande-new-energy-vehicle-group-ltd" target="_blank" data-smartkarma-citation="entities:713:1" rel="noopener">Evergrande Auto (708 HK)</a> and <a href="https://www.smartkarma.com/entities/evergrande-property-services" target="_blank" data-smartkarma-citation="entities:30921:1" rel="noopener">Evergrande Property Services (6666 HK)</a> - though no material progress has been made -  plus bringing in new investors to the company and its other subsidiaries.</li>
</ul>
<blockquote>
<p>In view of the difficulties, challenges and uncertainties in improving its liquidity .... there is no guarantee that the Group will be able to meet its financial obligations under the relevant financing documents and other contracts.</p>
</blockquote>
<ul>
<li>Evergrande has now engaged Houlihan Lokey (China) Limited and Admiralty Harbour Capital Limited to assess the company's capital structure.</li>
</ul>
<p><strong><em>Separately ...</em></strong></p>
<ul>
<li>Chinese media has lit up recently as property buyers raise concerns their apartments may not ever be completed; and concerns have also been voiced from (mainly ) retail investors (many of whom are Evergrande employees) who invested in wealth management products in which the proceeds were used to fund Evergande's property projects. </li>
<li>This culminated in scores of people protesting outside Evergrande's headquarters in Shenzhen earlier this week according to news reports from Reuters, <a href="https://www.thestandard.com.hk/section-news/section/2/234150/Evergrande-tries-to-calm-investors" target="_blank" rel="noopener">The Standard</a>, and others. </li>
</ul>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/229/892/original/image?1631686617" class="editor-image img-responsive" data-smartkarma-image-id="229892"></figure>
<p><em>Not the ideal welcoming party when you arrive at work in the morning  - police outside one of Evergrande's offices. (photo source: <a href="https://www.mingtiandi.com/real-estate/finance-real-estate/china-evergrande-hires-houlihan-lokey-as-financial-advisor/" target="_blank" rel="noopener">Mingtiandi</a>)</em></p>
</div>
<div>
<ul>
<li>Reportedly Evergrande is offering three repayment options for wealth management buyers:  via cash installments, starting with 10% of their principal and interest of their matured products, with the remainder through 10% installments per annum; repayment via property assets; or investors can apply the outstanding product value to offset the balance of any Evergrande residential unit purchased. The fine print has yet to be ironed out. </li>
<li>Media sources are reporting what has been speculated upon for days... that Evergrande will not pay its loan interest payments due on 20th September. Apparently the Ministry of Housing and Urban-Rural Development notified banks today (Bloomberg). </li>
</ul>
</div>
<p>The fact Evergrande's liquidity issue has now gone fully public makes one question how it can reverse this negative trend. </p>


I estimate China Evergrande Group (3333 HK) (CEG) is trading at an extraordinary discount to NAV of 93% against a one-year average of 77%. 




Source: CapIQ, my estimates. According to Shengjing Bank Co Ltd H (2066 HK)'s 2020 annual report (page 63), CEG holds 3.201bn domestic shares. For simplistic sake, I've pegged those shares at the price of Shengjing's H shares. According to HengTen Ltd (136 HK)'s 2020 annual report (page 13), CEG held 55.64% of shares out. But Evergrande has been selling, and now holds 26.55%.  For the stub ops, these are simply priced at book. A basket of peers is trading at ~0.6x, so probably a tad generous.
The problem with the calculation is that it marks the "stub ops" - the consolidated but unlisted portions of the business, predominantly Hengda Real Estate - at 1.0x book. Its competitors trade at 0.6x book on average so if one were to remove 40% of the value of the stub ops, that would eliminate roughly three quarters of the "NAV." That sounds huge but if you eliminate three quarters of the NAV, it means the 93% discount drops to 70% (the magic of compounding, in reverse), which still might be attractive. 
The problem above and beyond that is that when a company is in "unprecedented difficulties" as the company said yesterday, the value of the assets themselves may be in question.
Evergrande's liquidity crunch has been discussed at length here at Smartkarma, most recently by me in StubWorld: What To Do With Evergrande?; and in greater depth by Travis Lundy, in which he said in his latest insight Evergrande as a Study of Quantum Mechanics Theory: 

Outside observers are looking at the situation and wondering whether Schrödinger's Cat is dead or alive.
Any process which requires a time-constrained liquidation of assets usually ends up with the asset owner suffering from "fire sale prices." Given the leverage inherent in Evergrande, this should not come out well for shareholders. 


It need not be said, the general consensus is bearish.



The New News

Early yesterday morning, Evergrande announced it expects significant declines in contract sales in September.
Contract sales in June, July, and August 2021 were to RMB71.63bn, RMB43.78bn, and RMB38.08bn.
Often the month of September is when real estate companies in China record higher contract sales of properties. Evergrande said: "ongoing negative media reports concerning the Group have dampened the confidence of potential property purchasers in the Group."
Evergrande added it is actively exploring with potential investors the sales of part of its interests in Evergrande Auto (708 HK) and Evergrande Property Services (6666 HK) - though no material progress has been made -  plus bringing in new investors to the company and its other subsidiaries.


In view of the difficulties, challenges and uncertainties in improving its liquidity .... there is no guarantee that the Group will be able to meet its financial obligations under the relevant financing documents and other contracts.


Evergrande has now engaged Houlihan Lokey (China) Limited and Admiralty Harbour Capital Limited to assess the company's capital structure.

Separately ...

Chinese media has lit up recently as property buyers raise concerns their apartments may not ever be completed; and concerns have also been voiced from (mainly ) retail investors (many of whom are Evergrande employees) who invested in wealth management products in which the proceeds were used to fund Evergande's property projects. 
This culminated in scores of people protesting outside Evergrande's headquarters in Shenzhen earlier this week according to news reports from Reuters, The Standard, and others. 


Not the ideal welcoming party when you arrive at work in the morning  - police outside one of Evergrande's offices. (photo source: Mingtiandi)



Reportedly Evergrande is offering three repayment options for wealth management buyers:  via cash installments, starting with 10% of their principal and interest of their matured products, with the remainder through 10% installments per annum; repayment via property assets; or investors can apply the outstanding product value to offset the balance of any Evergrande residential unit purchased. The fine print has yet to be ironed out. 
Media sources are reporting what has been speculated upon for days... that Evergrande will not pay its loan interest payments due on 20th September. Apparently the Ministry of Housing and Urban-Rural Development notified banks today (Bloomberg). 


The fact Evergrande's liquidity issue has now gone fully public makes one question how it can reverse this negative trend. 

Evergrande (3333 HK): Now Homebuyers And Employees Are Revolting

China

China Ruyi Holdings Limited operates as a holding company. The Company, through its subsidiaries, focuses on online streaming video and internet community businesses. China Ruyi Holdings also manufactures and sells photographic, electronic, and multimedia accessories.

Price Gauge
52-week Range	0.00 - 0.00
Market Cap (USDm)	0.00
P/E	0.00
Dividend (Yield)	0.00

China Ruyi Holdings (136 HK)

Technically Speaking, Breakouts and Breakdowns: HONG KONG (AUGUST 24)

GDS continues to rally after its breakout from its 2 year downtrend. Huatai maintained a BUY on the stock and raised its target price to HK$27.49...

David Mudd

Tencent (700 HK): Board Meets Next Week; In-Specie Dividend Candidates

Tencent could make it a hat-trick of special in-specie dividend distributions. After JD.com and Meituan, Kuaishou could be next. Or it could be...

Brian Freitas

Hang Seng TECH Index Rebalance Preview (March 2022): SenseTime Could Be Added with HUGE Impact

SenseTime could be added to the HSTECH Index at the March rebalance, replacing Autohome. HSIL is likely to use a much higher float for SenseTime...

Brian Freitas

StubWorld: Evergrande Trading "Cheap" But Still Uninvestable

It is now a question of when and how the debt gets restructured. Best to watch from the cheap seats. Evergrande's equity remains un-investable.

David Blennerhassett

Evergrande (3333 HK): Now Homebuyers And Employees Are Revolting

I think we just got a peek at Schrödinger's Cat. And it's dead. Evergrande Group needs government intervention right now.

David Blennerhassett

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)