Korea / Special Sits, Pairs, Index Rebalancing, Clepsydra Capital

Sanghyun Park

Korea / Special Sits, Pairs, Index Rebalancing

Clepsydra Capital

Investigate special situations, pairs, and index rebalancing trades in Korea.

Equity Capital Markets

<p>Regulatory risk in China, triggered by the DiDi Chuxing incident, is again emerging as the most important issue for Krafton's listing.</p><div class="content-highlight"><p><strong>IR will also start when the book opens on July 14th. And it goes on until the 27th. The question that will most likely come up from investors during this period is undoubtedly the sustainability of the fees it receives from Tencent, which currently accounts for 70% of its sales.</strong></p></div><table class="table table-striped">
<colgroup>
<col width="100">
<col width="100">
<col width="100">
</colgroup>
<tbody>
<tr>
<td data-sheets-value='{"1":2,"2":"Schedule"}'>Schedule</td>
<td style="text-align: right;" data-sheets-value='{"1":2,"2":"Previous"}'>Previous</td>
<td style="text-align: right;" data-sheets-value='{"1":2,"2":"Adjusted"}'>Adjusted</td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Book open"}'>Book opens &amp; IR begins</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":44375}' data-sheets-numberformat='{"1":5,"2":"yyyy. m. d","3":1}'>2021. 6. 28</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":44391}' data-sheets-numberformat='{"1":5,"2":"yyyy. m. d","3":1}'><strong>2021. 7. 14</strong></td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Book close"}'>Book closes &amp; IR ends</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":44386}' data-sheets-numberformat='{"1":5,"2":"yyyy. m. d","3":1}'>2021. 7. 9</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":44404}' data-sheets-numberformat='{"1":5,"2":"yyyy. m. d","3":1}'><strong>2021. 7. 27</strong></td>
</tr>
<tr>
<td data-sheets-value='{"1":2,"2":"Subscription"}'>Subscription</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":44391}' data-sheets-numberformat='{"1":5,"2":"yyyy. m. d","3":1}'>2021. 7. 14</td>
<td style="text-align: right;" data-sheets-value='{"1":3,"3":44410}' data-sheets-numberformat='{"1":5,"2":"yyyy. m. d","3":1}'><strong>2021. 8. 2</strong></td>
</tr>
<tr><td colspan="3" data-sheets-value='{"1":2,"2":"Source: DART"}'>Source: DART</td></tr>
</tbody>
</table><h2>Krafton's lie</h2><p>Krafton, which is about to go public, announced that it is providing technical services to Tencent's mobile game Peacekeeper Elite (和平精英) and is receiving a fee. This is causing controversy as to whether Krafton has lied so far and actually provided game services in China through a detour.</p><p>China's National Radio and Television Administration publishes new business license status every month. Chinese game companies are granted domestic licenses, and overseas game companies are granted foreign licenses. After the THAAD incident, Korean game companies have not been issued foreign licenses except for Summoners War developed by Com2uS.</p><p>Krafton stopped the Chinese version of PUBG Mobile in May 2019 when it failed to receive a business license. However, when this service was updated, it was automatically changed to Peacekeeper Elite (和平精英), which Tencent serviced, causing controversy over detours. Krafton argued at the time that the two games were separate and unrelated. Krafton also said that it did not receive <strong>royalties</strong> from Tencent.</p><p><strong>However, as it was officially revealed during the IPO process that the Peacekeeper Elite (和平精英) royalties were received, this issue, apart from Krafton's lies, is leading to questions about the sustainability of the Peacekeeper Elite (和平精英) service in China in the future.</strong></p>

Regulatory risk in China, triggered by the DiDi Chuxing incident, is again emerging as the most important issue for Krafton's listing.IR will also start when the book opens on July 14th. And it goes on until the 27th. The question that will most likely come up from investors during this period is undoubtedly the sustainability of the fees it receives from Tencent, which currently accounts for 70% of its sales.







Schedule
Previous
Adjusted


Book opens &amp; IR begins
2021. 6. 28
2021. 7. 14


Book closes &amp; IR ends
2021. 7. 9
2021. 7. 27


Subscription
2021. 7. 14
2021. 8. 2

Source: DART

Krafton's lieKrafton, which is about to go public, announced that it is providing technical services to Tencent's mobile game Peacekeeper Elite (和平精英) and is receiving a fee. This is causing controversy as to whether Krafton has lied so far and actually provided game services in China through a detour.China's National Radio and Television Administration publishes new business license status every month. Chinese game companies are granted domestic licenses, and overseas game companies are granted foreign licenses. After the THAAD incident, Korean game companies have not been issued foreign licenses except for Summoners War developed by Com2uS.Krafton stopped the Chinese version of PUBG Mobile in May 2019 when it failed to receive a business license. However, when this service was updated, it was automatically changed to Peacekeeper Elite (和平精英), which Tencent serviced, causing controversy over detours. Krafton argued at the time that the two games were separate and unrelated. Krafton also said that it did not receive royalties from Tencent.However, as it was officially revealed during the IPO process that the Peacekeeper Elite (和平精英) royalties were received, this issue, apart from Krafton's lies, is leading to questions about the sustainability of the Peacekeeper Elite (和平精英) service in China in the future.

Krafton's China Risk for Tencent Relationship Amid DiDi Chuxing Scandal: Key Talking Points

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.

Event-Driven

<div>
<a href="https://www.smartkarma.com/entities/tencent-holdings-ltd" target="_blank" data-smartkarma-citation="entities:26:1" rel="noopener">Tencent (700 HK)</a>  shares closed at HK$528 per share as at the end of Thursday’s trading, only 5.2% higher than the company’s 12-month low of HK$502 per share. The company’s shares have been on a downward trend on the back of increased regulatory scrutiny over Chinese internet stocks. As Chinese regulators have broadened their crackdown on the country’s internet tech platforms during the past few days, Tencent’s shares dropped almost 10% over the last one week (since the beginning of July).</div><div></div><div><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/217/580/original/image_22041245221625797905092.png?1625797914" class="editor-image img-responsive" data-smartkarma-image-id="217580"></figure></div><div>There is no sign that China is slowing down with its antitrust crackdown on the country’s tech platforms, rather the regulators have broadened their investigation to include cybersecurity violations such as on the recently listed <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> , <a href="https://www.smartkarma.com/entities/kanzhun-ltd" target="_blank" data-smartkarma-citation="entities:33368:1" rel="noopener">Kanzhun (BZ US)</a> and <a href="https://www.smartkarma.com/entities/full-truck-alliance" target="_blank" data-smartkarma-citation="entities:33429:1" rel="noopener">Full Truck Alliance (YMM US)</a> .</div><div></div><div>According to the CNN, the People’s Bank of China has said that it would further regulate the countries’ payments companies after its massive overhaul of Ant Group. The Chinese online payment market is largely dominated by Alipay and WeChat Pay.</div>


Tencent (700 HK)  shares closed at HK$528 per share as at the end of Thursday’s trading, only 5.2% higher than the company’s 12-month low of HK$502 per share. The company’s shares have been on a downward trend on the back of increased regulatory scrutiny over Chinese internet stocks. As Chinese regulators have broadened their crackdown on the country’s internet tech platforms during the past few days, Tencent’s shares dropped almost 10% over the last one week (since the beginning of July).There is no sign that China is slowing down with its antitrust crackdown on the country’s tech platforms, rather the regulators have broadened their investigation to include cybersecurity violations such as on the recently listed DiDi Chuxing (DIDI US) , Kanzhun (BZ US) and Full Truck Alliance (YMM US) .According to the CNN, the People’s Bank of China has said that it would further regulate the countries’ payments companies after its massive overhaul of Ant Group. The Chinese online payment market is largely dominated by Alipay and WeChat Pay.

Korea/Asia, Events, IPOs, Douglas Research Advisory

Douglas Kim

Korea/Asia, Events, IPOs

Private Capital Markets

<p>Shein is a monster e-commerce company based in China. Shein is the fastest growing e-commerce company in the world. The company generated nearly $10 billion in revenues in 2020, up nearly 250% YoY. Shein could realistically overtake Zara in terms of revenues by 2022. </p><p>Shein's core business model is to sell clothing (mostly women's apparel) online to the younger generation consumers in the US, Europe, and other parts of the world. <a href="https://techcrunch.com/2021/06/22/why-amazon-should-pay-attention-to-shein/" target="_blank" rel="noopener">Shein</a> is especially popular among the budget conscious younger generation in the Americas, Europe, and Asia (excluding China). </p><p>The following are the key competitive advantages of Shein:</p><ul>
<li><strong>Superb execution of "art of trend setting" in apparel products</strong></li>
<li><strong>Extremely attractive pricing</strong></li>
<li><strong>Faster adoption of new fashion styles</strong></li>
<li><strong>Aggressive promotions through influencers and discount codes</strong></li>
<li><strong>Effective use of data analytics and technology</strong></li>
<li><strong>Capitalize on the tax loop holes between the US and China</strong></li>
</ul><p>The tremendous growth of Shein and other pure-play fashion companies have had major negative impact on some of the largest apparel companies with signficant brick and mortar operations such as <a href="https://www.smartkarma.com/entities/fast-retailing-co-ltd" target="_blank" data-smartkarma-citation="entities:751:1" rel="noopener">Fast Retailing (9983 JP)</a>, <a href="https://www.smartkarma.com/entities/gap-inc-the" target="_blank" data-smartkarma-citation="entities:7941:1" rel="noopener">Gap Inc/The (GPS US)</a>, and <a href="https://www.smartkarma.com/entities/industria-de-diseno-textil-sa" target="_blank" data-smartkarma-citation="entities:21278:1" rel="noopener">Industria De Diseno Textil Sa (ITX SM)</a>.</p>

Shein is a monster e-commerce company based in China. Shein is the fastest growing e-commerce company in the world. The company generated nearly $10 billion in revenues in 2020, up nearly 250% YoY. Shein could realistically overtake Zara in terms of revenues by 2022. Shein's core business model is to sell clothing (mostly women's apparel) online to the younger generation consumers in the US, Europe, and other parts of the world. Shein is especially popular among the budget conscious younger generation in the Americas, Europe, and Asia (excluding China). The following are the key competitive advantages of Shein:
Superb execution of "art of trend setting" in apparel products
Extremely attractive pricing
Faster adoption of new fashion styles
Aggressive promotions through influencers and discount codes
Effective use of data analytics and technology
Capitalize on the tax loop holes between the US and China
The tremendous growth of Shein and other pure-play fashion companies have had major negative impact on some of the largest apparel companies with signficant brick and mortar operations such as Fast Retailing (9983 JP), Gap Inc/The (GPS US), and Industria De Diseno Textil Sa (ITX SM).

SHEIN: The Fastest Growing E-Commerce Company in the World & Ready to Overtake Zara in 2022?

<p><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.</p><p>The company has filed for an IPO to list its shares in the US and has a placeholder indication to raise about US$ 100m.</p><p>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.</p>

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

<p>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:</p><ul>
<li>
<strong>VIE Structure Risk</strong>: 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. <em><strong>Historically we do not believe this was a potential risk that was priced into NIO's shares.</strong></em>
</li>
<li>
<strong>U.S. Regulatory Risk</strong>: 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>
<strong>Concerns about June Auto Demand in China and what it may imply for 2H21</strong>: 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><p>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.</p>

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.

China

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

Price Gauge
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DiDi Global (DIDIY US)

Krafton's China Risk for Tencent Relationship Amid DiDi Chuxing Scandal: Key Talking Points

Regulatory risk in China, triggered by the DiDi Chuxing incident, is again emerging as the most important issue for Krafton's listing. This post...

Sanghyun Park

Tencent: Are We There Yet?

Compared to Alibaba, it has only been bits and pieces for Tencent so far when comes to regulatory crackdown. It seems obvious that Tencent will...

Shifara Samsudeen, ACMA, CGMA

SHEIN: The Fastest Growing E-Commerce Company in the World & Ready to Overtake Zara in 2022?

Shein is the fastest growing e-commerce company in the world. The company generated nearly $10 billion in revenues in 2020, up nearly 250% YoY....

Douglas Kim

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

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52-week Range

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