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 Capital Markets

<a href="https://www.smartkarma.com/entities/manycore-tech-inc-adr" target="_blank" data-smartkarma-citation="entities:33517:1" rel="noopener">Manycore Tech (KOOL US)</a>  operates a design software platform in China which offers 3D interior design, decoration and construction for residential, commercial and industrial spaces. According to iResearch, Manycore was the world’s largest platform for 3D interior design, decoration and construction in terms of the number of average monthly active users (MAUs) in 1Q2021.The company has filed for an IPO to list its shares in the US and has a placeholder indication to raise about US$ 100m.The interior DDC (design, decoration and construction) software market is forecasted to see rapid growth in China and in overseas markets driven by increasing trend for digital transformation and growing penetration of cloud-based software. Manycore’s revenues have continued to see strong growth over the last three years driven by increase in the number of paid subscribers, the enterprise customers in particular. The company also has expanded its operations outside of China and revenue from overseas markets have seen rapid growth. The company has not yet been able to generate any profits, however, we expect the company’s profitability to gradually improve with better pricing and stable costs.

Manycore Tech (KOOL US)  operates a design software platform in China which offers 3D interior design, decoration and construction for residential, commercial and industrial spaces. According to iResearch, Manycore was the world’s largest platform for 3D interior design, decoration and construction in terms of the number of average monthly active users (MAUs) in 1Q2021.The company has filed for an IPO to list its shares in the US and has a placeholder indication to raise about US$ 100m.The interior DDC (design, decoration and construction) software market is forecasted to see rapid growth in China and in overseas markets driven by increasing trend for digital transformation and growing penetration of cloud-based software. Manycore’s revenues have continued to see strong growth over the last three years driven by increase in the number of paid subscribers, the enterprise customers in particular. The company also has expanded its operations outside of China and revenue from overseas markets have seen rapid growth. The company has not yet been able to generate any profits, however, we expect the company’s profitability to gradually improve with better pricing and stable costs.

Manycore IPO: Overshadowed by the Chinese Regulatory Crackdown

Consumer Discretionary / Industrials

Henry Kwon

Equity Bottom-Up

NIO closed down at $46.03 (-8.47%), breaking through both its 10-day EMA ($48.51) and 21-day EMA ($46.64). The 38.2% Fibonacci Retracement ($49.49) which used to be support, has now become resistance. In the wake of the Cyberspace Administration of China's removal order to app stores of the Didi Chuxing app citing issues with Didi's personal information collection and usage, U.S.-listed China stocks have been showing weakness following the 4th of July holiday weekend. We see three major market concerns as they specifically apply to NIO at this point:<ul>
<li>
VIE Structure Risk: NIO is, strictly speaking, a Cayman Islands offshore entity with ADS listed in the U.S. having a VIE structure in China. The market could be concerned that the listed shares of NIO in the U.S. are not actually shares in the operational entities in China, and legal loopholes that have allowed this structure to persist in the past may be addressed by the Chinese government in the near future. Historically we do not believe this was a potential risk that was priced into NIO's shares.
</li>
<li>
U.S. Regulatory Risk: The SEC has already adopted measures to require stricter disclosure for U.S.-listed Chinese firms under the Holding Foreign Companies Accountable Act enacted during the Trump Administration (<a href="https://www.sec.gov/news/press-release/2021-53" target="_blank" rel="noopener">https://www.sec.gov/news/press-release/2021-53</a>). The Biden Administration has not backtracked on the Trump Administration's basic policy direction and the June 3 Executive Order that goes into effect on August 2 will prohibit U.S. investors from investing in 59 Chinese companies "in a targeted manner - U.S. investments in Chinese companies that undermine the security or democratic values of the United States and our allies."(<a href="https://www.whitehouse.gov/briefing-room/statements-releases/2021/06/03/fact-sheet-executive-order-addressing-the-threat-from-securities-investments-that-finance-certain-companies-of-the-peoples-republic-of-china/" target="_blank" rel="noopener">https://www.whitehouse.gov/briefing-room/statements-releases/2021/06/03/fact-sheet-executive-order-addressing-the-threat-from-securities-investments-that-finance-certain-companies-of-the-peoples-republic-of-china/</a>). As U.S.-listed Chinese stocks now seem like they are caught between a rock and a hard place, investors may become wary about bottom fishing so long as the de-listing risk theme is alive in the market.</li>
<li>
Concerns about June Auto Demand in China and what it may imply for 2H21: According to media reports, CAAM expects to see 1.93m units of vehicle sales (-9.3% MoM, -16.1% YoY) in June (see <a href="https://www.reuters.com/business/autos-transportation/chinas-auto-sales-likely-fall-16-june-trade-body-says-2021-07-05/" target="_blank" rel="noopener">https://www.reuters.com/business/autos-transportation/chinas-auto-sales-likely-fall-16-june-trade-body-says-2021-07-05/</a>). The figures refer to combined PV and CV sales based on the expected YoY drop, which implies that we are likely to see June SAAR falling to 24.4m units (-15.6% MoM, -18.2% YoY). If June sales comes in at the 1.93m units that media reports have attributed to CAAM, then it would suggest that China demand may be showing decline, not just decelerating growth.</li>
</ul>NIO's ascending channel was broken today. The 50% Fibonacci Retracement level sits at $44.08 while the 200 DMA currently sits at $42.29. With RSI at 51 as of close, there is still technical room for a further drop based on our observation. If the 50% Fibonacci Retracement level holds, then first resistance would likely come in at the $46-48 zone.

NIO closed down at $46.03 (-8.47%), breaking through both its 10-day EMA ($48.51) and 21-day EMA ($46.64). The 38.2% Fibonacci Retracement ($49.49) which used to be support, has now become resistance. In the wake of the Cyberspace Administration of China's removal order to app stores of the Didi Chuxing app citing issues with Didi's personal information collection and usage, U.S.-listed China stocks have been showing weakness following the 4th of July holiday weekend. We see three major market concerns as they specifically apply to NIO at this point:

VIE Structure Risk: NIO is, strictly speaking, a Cayman Islands offshore entity with ADS listed in the U.S. having a VIE structure in China. The market could be concerned that the listed shares of NIO in the U.S. are not actually shares in the operational entities in China, and legal loopholes that have allowed this structure to persist in the past may be addressed by the Chinese government in the near future. Historically we do not believe this was a potential risk that was priced into NIO's shares.


U.S. Regulatory Risk: The SEC has already adopted measures to require stricter disclosure for U.S.-listed Chinese firms under the Holding Foreign Companies Accountable Act enacted during the Trump Administration (https://www.sec.gov/news/press-release/2021-53). The Biden Administration has not backtracked on the Trump Administration's basic policy direction and the June 3 Executive Order that goes into effect on August 2 will prohibit U.S. investors from investing in 59 Chinese companies "in a targeted manner - U.S. investments in Chinese companies that undermine the security or democratic values of the United States and our allies."(https://www.whitehouse.gov/briefing-room/statements-releases/2021/06/03/fact-sheet-executive-order-addressing-the-threat-from-securities-investments-that-finance-certain-companies-of-the-peoples-republic-of-china/). As U.S.-listed Chinese stocks now seem like they are caught between a rock and a hard place, investors may become wary about bottom fishing so long as the de-listing risk theme is alive in the market.

Concerns about June Auto Demand in China and what it may imply for 2H21: According to media reports, CAAM expects to see 1.93m units of vehicle sales (-9.3% MoM, -16.1% YoY) in June (see https://www.reuters.com/business/autos-transportation/chinas-auto-sales-likely-fall-16-june-trade-body-says-2021-07-05/). The figures refer to combined PV and CV sales based on the expected YoY drop, which implies that we are likely to see June SAAR falling to 24.4m units (-15.6% MoM, -18.2% YoY). If June sales comes in at the 1.93m units that media reports have attributed to CAAM, then it would suggest that China demand may be showing decline, not just decelerating growth.
NIO's ascending channel was broken today. The 50% Fibonacci Retracement level sits at $44.08 while the 200 DMA currently sits at $42.29. With RSI at 51 as of close, there is still technical room for a further drop based on our observation. If the 50% Fibonacci Retracement level holds, then first resistance would likely come in at the $46-48 zone.

Forensic Analyst

Jason Yap, CFA

Forensic Accounting

On 6 July 2021, Chinese regulators introduces guidelines for a crackdown on capital markets misconduct including, amongst others, data security lapses and financial fraud.  This article focuses on the financial fraud aspects of the latest guidelines, including how the <a href="https://www.smartkarma.com/entities/luckin-coffee-inc" target="_blank" data-smartkarma-citation="entities:28046:1" rel="noopener">Luckin Coffee (LKNCY US)</a> incident might have been an impetus for the introduction of these guidelines, what the Chinese regulators' attitude had been, and how future developments might unfold.

On 6 July 2021, Chinese regulators introduces guidelines for a crackdown on capital markets misconduct including, amongst others, data security lapses and financial fraud.  This article focuses on the financial fraud aspects of the latest guidelines, including how the Luckin Coffee (LKNCY US) incident might have been an impetus for the introduction of these guidelines, what the Chinese regulators' attitude had been, and how future developments might unfold.

Tougher Chinese Regulatory Oversight of Foreign Listed Chinese Companies (With Caveats)

Oshadhi Kumarasiri

Alibaba Group Holding  / Equity Bottom-Up

Mega cap tech stocks rarely underperform the market to the same extent as <a href="https://www.smartkarma.com/entities/alibaba-group" target="_blank" data-smartkarma-citation="entities:28434:1" rel="noopener">Alibaba Group (9988 HK)</a> during the last seven months, especially with no deterioration in earnings growth potential.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/217/249/original/image_11147906721625671618744.png?1625671621" class="editor-image img-responsive" data-smartkarma-image-id="217249"></figure><div class="content-caption">Source: Cap IQ</div>After trading sideways during May/June 2021, technicals were pointing the right way for the very first time for Alibaba in 2021.The stock rallied by 10% in the last week of June to $229.4 per share, causing most of us to assume that Alibaba was making a comeback.Unfortunately, the joy lasted just a short time, as Xi Jinping’s government went back on the offence with a broadened crackdown on tech platforms, especially the US-listed Chinese tech companies like the recent ride sharing IPO <a href="https://www.smartkarma.com/entities/didi-chuxing-inc" target="_blank" data-smartkarma-citation="entities:27467:1" rel="noopener">DiDi Chuxing (DIDI US)</a>.After underperforming the S&amp;P for almost seven months, most Chinese technology stocks, especially Alibaba, seem very cheap, but it is not cheap enough to call it a bottom amidst ongoing regulatory crackdowns and the geopolitical rivalry between the US and China. As such, we would not rush to buy any dips and recommend that we wait till the rally well and truly begins.

Mega cap tech stocks rarely underperform the market to the same extent as Alibaba Group (9988 HK) during the last seven months, especially with no deterioration in earnings growth potential.Source: Cap IQAfter trading sideways during May/June 2021, technicals were pointing the right way for the very first time for Alibaba in 2021.The stock rallied by 10% in the last week of June to $229.4 per share, causing most of us to assume that Alibaba was making a comeback.Unfortunately, the joy lasted just a short time, as Xi Jinping’s government went back on the offence with a broadened crackdown on tech platforms, especially the US-listed Chinese tech companies like the recent ride sharing IPO DiDi Chuxing (DIDI US).After underperforming the S&amp;P for almost seven months, most Chinese technology stocks, especially Alibaba, seem very cheap, but it is not cheap enough to call it a bottom amidst ongoing regulatory crackdowns and the geopolitical rivalry between the US and China. As such, we would not rush to buy any dips and recommend that we wait till the rally well and truly begins.

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.

Alibaba Group Holding  / Equity Capital Markets

In our previous note <a href="https://www.smartkarma.com/insights/china-adrs-kanzhun-full-truck-and-didi-regulators-sending-a-message" target="_blank" rel="noopener">China ADRs - Kanzhun, Full Truck and Didi - Regulators Sending a Message,</a> we spoke about the recent crackdown on the three US listed firms. Since then more news has been coming in along the same theme of a general crackdown on overseas listings for Chinese companies. 
<div>
We have looked at the ADRs in the past, in our previous notes:
</div>
<div>
<ul style="list-style-type: disc;">
<li>
<a href="https://www.smartkarma.com/insights/china-adrs-secondary-listing-deep-dive-yin-and-yang" target="_blank" rel="noopener">China ADRs Secondary Listing Deep-Dive: Yin and Yang,</a> published in Feb 2020,  we looked at the background and rules around undertaking a secondary listing in Hong Kong and then came up with a short-list of companies that might undertake a secondary listing. </li>
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<a href="https://www.smartkarma.com/insights/china-adrs-secondary-listing-covid-19-has-increased-the-tension-but-narrowed-the-short-list" target="_blank" rel="noopener">In China ADRs Secondary Listing: COVID-19 Has Increased the Tension but Narrowed the Short List</a> published in May 2020, we looked at the recent developments and provided an revised short-list</li>
<li>In <a href="https://www.smartkarma.com/insights/china-adrs-secondary-listing-holding-foreign-companies-accountable-act-i-m-coming-home" target="_blank" rel="noopener">China ADRs Secondary Listing - Holding Foreign Companies Accountable Act - I’m Coming Home</a>, published in May 2020, we spoke about the implication of the act which had made its way through the senate.</li>
<li>In <a href="https://www.smartkarma.com/insights/china-adrs-secondary-listing-pipeline-looks-rich-have-three-years-to-move" target="_blank" rel="noopener">China ADRs Secondary Listing - Pipeline Looks Rich, Have Three Years to Move</a>, published in Feb 2021 we looked at the ADR pipeline and spoke about the updates from the Holding Foreign Companies Accountable Act becoming law and the updates at Hong Kong end as well. </li>
<li>In <a href="https://www.smartkarma.com/insights/china-adrs-sec-notice-instead-of-three-probably-have-four-years-till-2025-correction-overdone" target="_blank" rel="noopener">China ADRs - SEC Notice - Instead of Three, Probably Have Four Years till 2025 - Correction Overdone, </a> we spoke about the new SEC notice and its implications. </li>
<li>In <a href="https://www.smartkarma.com/insights/china-adrs-a-new-act-aims-to-put-an-end-to-china-adr-ipos" target="_blank" rel="noopener">China ADRs - A New Act Aims to Put an End to China ADR IPOs</a>, we spoke about the No IPOs for Unaccountable Actors Act, which aims to prohibit IPO on U.S. exchanges for Chinese companies. </li>
</ul>
</div>
<div>
In this note, we'll talk about the implications of the recent China regulatory announcements.
</div>

In our previous note China ADRs - Kanzhun, Full Truck and Didi - Regulators Sending a Message, we spoke about the recent crackdown on the three US listed firms. Since then more news has been coming in along the same theme of a general crackdown on overseas listings for Chinese companies. 

We have looked at the ADRs in the past, in our previous notes:




China ADRs Secondary Listing Deep-Dive: Yin and Yang, published in Feb 2020,  we looked at the background and rules around undertaking a secondary listing in Hong Kong and then came up with a short-list of companies that might undertake a secondary listing. 

In China ADRs Secondary Listing: COVID-19 Has Increased the Tension but Narrowed the Short List published in May 2020, we looked at the recent developments and provided an revised short-list
In China ADRs Secondary Listing - Holding Foreign Companies Accountable Act - I’m Coming Home, published in May 2020, we spoke about the implication of the act which had made its way through the senate.
In China ADRs Secondary Listing - Pipeline Looks Rich, Have Three Years to Move, published in Feb 2021 we looked at the ADR pipeline and spoke about the updates from the Holding Foreign Companies Accountable Act becoming law and the updates at Hong Kong end as well. 
In China ADRs - SEC Notice - Instead of Three, Probably Have Four Years till 2025 - Correction Overdone,  we spoke about the new SEC notice and its implications. 
In China ADRs - A New Act Aims to Put an End to China ADR IPOs, we spoke about the No IPOs for Unaccountable Actors Act, which aims to prohibit IPO on U.S. exchanges for Chinese companies. 



In this note, we'll talk about the implications of the recent China regulatory announcements.


China ADRs - Now the Message Is Loud and Getting Clearer

China

DiDi Chuxing Incorporated operates passenger transportation platforms. The Company provides mobility solutions, cloud computing and other application based services. DiDi Chuxing serves customers worldwide.

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DiDi Global (DIDI US)

Manycore IPO: Overshadowed by the Chinese Regulatory Crackdown

The ongoing cybersecurity and antitrust crackdown will make it more difficult for Chinese companies to list in the US and is a warning signal to...

Shifara Samsudeen, ACMA, CGMA

NIO: Market Waking Up to VIE Risk?

NIO's ascending channel was broken as regulatory risks mount against U.S. listed Chinese stocks. If June industry sales figures fall to 1.93m units...

Henry Kwon

Tougher Chinese Regulatory Oversight of Foreign Listed Chinese Companies (With Caveats)

Chinese regulators just introduced guidelines for crackdown on capital markets misconduct, the latest one-two punch following the Didi debacle. ...

Jason Yap, CFA

Alibaba: Still Too Risky to Own

Mega cap tech stocks rarely underperform the market to the same extent as Alibaba during the last seven months, especially with no deterioration in...

Oshadhi Kumarasiri

China ADRs - Now the Message Is Loud and Getting Clearer

In our previous note we spoke about the recent crackdown on the three US listed firms. Since then more news has been coming in along the same theme...

Sumeet Singh

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