IPOs and Catalysts/Events, Global Equity Research Ltd

Arun George

IPOs and Catalysts/Events

Uncompromised, Independent, Conflict-Free Research

Global Equity Research Ltd

Global Equity Research was started in 2017 by a group of experienced research professionals. It was founded on a passionate belief in the importance and the need for uncompromised, independent, conflict-free research. We aim to provide differentiated and actionable primary and bottom up fundamental research.

Event-Driven

<a href="https://www.smartkarma.com/entities/joyy-inc" target="_blank" data-smartkarma-citation="entities:285:1" rel="noopener">JOYY (YY US)</a> may be subject to a privatisation bid from Mr David Li (co-founder and Chairman) and Mr Jun Lei (founder and Chairman of <a href="https://www.smartkarma.com/entities/xiaomi-corp" target="_blank" data-smartkarma-citation="entities:24409:1" rel="noopener">Xiaomi Corp (1810 HK)</a>), its top two shareholders, according to Reuters report on 26 August. Mr David Li and Mr Jun Lei are looking to privatise Joyy at $75-$100 per ADS and finalise the deal by the end of 2021. Mr David Li and Mr Jun Lei aim to spin off Joyy's key asset, BIGO, and list it in Hong Kong, to take advantage of higher valuations, according to Reuters. On 27 August, Joyy said it has not received any formal takeover offers, according to Chinese media reports.  Joyy shares are around 60% below their February peak due to weak guidance (3Q21 revenue guidance was around 16% below consensus), the delay of SAMR anti-trust approval for the YY Live disposal and ongoing policy uncertainty on Chinese tech.As a reminder, on 16 November 2020, Joyy entered into a definitive agreement with <a href="https://www.smartkarma.com/entities/baidu-inc" target="_blank" data-smartkarma-citation="entities:179:1" rel="noopener">Baidu (BIDU US)</a> for the disposal of YY Live for $3.6 billion in cash, subject to certain adjustments. The sale was substantially completed on 8 February 2021 resulting in a $1.9 billion payment from Baidu. Notably, Joyy’s market cap of $4.9 billion is 7% below its net cash of $5.2 billion, which is the sum of the 2Q1 net cash of $3.9 billion and Baidu's remaining payment net of tax $1.4 billion.As Joyy is incorporated in the Cayman Islands, for potential privatisation to succeed, shareholders representing two-thirds of shares present and voting need to approve the deal. Mr David Li represents 76.0% of the voting interest and has the two-thirds voting interest threshold needed to approve any potential privatisation deal.<div class="content-highlight">Our SOTP and relative valuation suggest that the rumoured privatisation range of $75-100 per ADS is justifiable and reasonable. Our base-case SOTP valuation is $71.69 per ADS, which is a 16% premium to the last close price of $61.97 per ADS. Despite Joyy's insistence that no formal bid has been received, we would be buyers as the shares offer a favourable risk/reward profile to the emergence of a formal privatisation bid.</div>

JOYY (YY US) may be subject to a privatisation bid from Mr David Li (co-founder and Chairman) and Mr Jun Lei (founder and Chairman of Xiaomi Corp (1810 HK)), its top two shareholders, according to Reuters report on 26 August. Mr David Li and Mr Jun Lei are looking to privatise Joyy at $75-$100 per ADS and finalise the deal by the end of 2021. Mr David Li and Mr Jun Lei aim to spin off Joyy's key asset, BIGO, and list it in Hong Kong, to take advantage of higher valuations, according to Reuters. On 27 August, Joyy said it has not received any formal takeover offers, according to Chinese media reports.  Joyy shares are around 60% below their February peak due to weak guidance (3Q21 revenue guidance was around 16% below consensus), the delay of SAMR anti-trust approval for the YY Live disposal and ongoing policy uncertainty on Chinese tech.As a reminder, on 16 November 2020, Joyy entered into a definitive agreement with Baidu (BIDU US) for the disposal of YY Live for $3.6 billion in cash, subject to certain adjustments. The sale was substantially completed on 8 February 2021 resulting in a $1.9 billion payment from Baidu. Notably, Joyy’s market cap of $4.9 billion is 7% below its net cash of $5.2 billion, which is the sum of the 2Q1 net cash of $3.9 billion and Baidu's remaining payment net of tax $1.4 billion.As Joyy is incorporated in the Cayman Islands, for potential privatisation to succeed, shareholders representing two-thirds of shares present and voting need to approve the deal. Mr David Li represents 76.0% of the voting interest and has the two-thirds voting interest threshold needed to approve any potential privatisation deal.Our SOTP and relative valuation suggest that the rumoured privatisation range of $75-100 per ADS is justifiable and reasonable. Our base-case SOTP valuation is $71.69 per ADS, which is a 16% premium to the last close price of $61.97 per ADS. Despite Joyy's insistence that no formal bid has been received, we would be buyers as the shares offer a favourable risk/reward profile to the emergence of a formal privatisation bid.

Joyy’s Potential Privatisation by Top Two Shareholders

Overseas Chinese Equities, Aequitas Research

Ming Lu

Overseas Chinese Equities

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 Bottom-Up

<ul>
<li>Kuaishou’s revenue increased by 49% YoY in 2Q21 versus 37% YoY in 1Q21.</li>
<li>Direct-response sales video raised time on site and revenue per user.</li>
<li>The gross margin rose to 44% in 2Q21 versus 34% in 2Q20.</li>
<li>We believe Kuaishou has an upside of 64% for the year end of 2021.</li>
</ul>


Kuaishou’s revenue increased by 49% YoY in 2Q21 versus 37% YoY in 1Q21.
Direct-response sales video raised time on site and revenue per user.
The gross margin rose to 44% in 2Q21 versus 34% in 2Q20.
We believe Kuaishou has an upside of 64% for the year end of 2021.


Kuaishou (1024 HK): 2Q21, Direct-Response Sales Raised Growth and Gross Margin

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.

The Chinese short-video and livestreaming platform <a href="https://www.smartkarma.com/entities/beijing-kuaishou-technology-co-ltd" target="_blank" data-smartkarma-citation="entities:29725:1" rel="noopener">Kuaishou Technology (1024 HK)</a> reported its 2Q2021 results today where revenues grew 48.8% YoY to RMB19.1bn (vs consensus revenue of RMB18.7bn) driven by strong growth in revenue from online marketing services. Kuaishou’s revenue from online marketing services continue to expand which now accounts for more than 50% (52.1% in 2Q2021) of the company’s consolidated revenues. Kuaishou’s core business of short-video livestreaming continues to decelerate where revenue from livestreaming declined 13.7% YoY during the quarter.The operating losses for the quarter increased to 37.7% of revenues to RMB7.2bn (vs consensus operating losses of RMB6.7bn) from 19.7% in 2Q2021 despite gross profit margins significantly expanding in 2Q2021.Kuaishou has not disclosed the number of paying users and ARPPU for its livestreaming segment, however, we managed to calculate the implied paying users and it was obvious that the paying users have declined during the quarter.

The Chinese short-video and livestreaming platform Kuaishou Technology (1024 HK) reported its 2Q2021 results today where revenues grew 48.8% YoY to RMB19.1bn (vs consensus revenue of RMB18.7bn) driven by strong growth in revenue from online marketing services. Kuaishou’s revenue from online marketing services continue to expand which now accounts for more than 50% (52.1% in 2Q2021) of the company’s consolidated revenues. Kuaishou’s core business of short-video livestreaming continues to decelerate where revenue from livestreaming declined 13.7% YoY during the quarter.The operating losses for the quarter increased to 37.7% of revenues to RMB7.2bn (vs consensus operating losses of RMB6.7bn) from 19.7% in 2Q2021 despite gross profit margins significantly expanding in 2Q2021.Kuaishou has not disclosed the number of paying users and ARPPU for its livestreaming segment, however, we managed to calculate the implied paying users and it was obvious that the paying users have declined during the quarter.

Kuaishou: Livestreaming Continues to Decelerate, Losses Widen; No Disclosure on Paying User Numbers

Global Emerging Market Equities, Propitious Research

Wium Malan, CFA

Global Emerging Market Equities

Independent, Fundamental Quantitative Research

Propitious Research

Fully independent, fundamental and quantitative equity research, focused on companies in the Telecommunication, Media, Technology, Internet and Healthcare sectors in the Global Emerging Markets. Idea generation focused on Quality stocks, trading below their intrinsic Value, with sound Corporate Governance.

<a href="https://www.smartkarma.com/entities/tencent-holdings-ltd" target="_blank" data-smartkarma-citation="entities:26:1" rel="noopener">Tencent (700 HK)</a>’s investment track record has been nothing short of remarkable, as is evidenced by the increase in the reported fair value of listed Investees, which has grown by 99%y/y to nearly RMB1.45trn as of 30 June 2021, contributing as much as 31% to Tencent’s market cap. These investments have also driven material income statement gains that account for the bulk of Tencent’s positive operating profit earnings surprises over the past 2 years. However, based on share price weakness experienced post the most recent reporting period, I estimate that the current fair market value of listed associates could have declined by 26%, or RMB378bn, which is also likely to have a materially adverse impact on reported income statement numbers for 3Q21. Given that Tencent is already facing very tough comps from its online gaming revenue segment, a negative impact to “Other gains, net” could provide for significant earnings miss in 3Q21 reported numbers. If we add to that the ongoing uncertainty around the Chinese regulatory environment and economic slowdown, we could see more short-term volatility in Tencent’s share price. The main caveat to this is that, with a resurgence of the Delta-variant and COVID-19 pandemic, we could see a near-term pickup in online gaming revenue as lockdowns intensify in China, which should be positive for Tencent’s near-term earnings outlook. Tencent currently trades on a 22.1x NTM PE ratio, which is roughly 2 standard deviations below its 5-year historical average trading range. Should we exclude Tencent’s Investees at fair value, I estimate that Tencent’s consolidated operations currently trade on only a 12.1x NTM PE ratio which remains an extremely attractive longer-term entry point to the consolidated operations that are expected to grow Net Operating Profit After Tax (NOPAT) at mid-teens levels from next year onwards, even if we factor in further near-term earnings downgrades, economic headwinds to the advertising segment, or an increase in tax rates for the online games segment.

Tencent (700 HK)’s investment track record has been nothing short of remarkable, as is evidenced by the increase in the reported fair value of listed Investees, which has grown by 99%y/y to nearly RMB1.45trn as of 30 June 2021, contributing as much as 31% to Tencent’s market cap. These investments have also driven material income statement gains that account for the bulk of Tencent’s positive operating profit earnings surprises over the past 2 years. However, based on share price weakness experienced post the most recent reporting period, I estimate that the current fair market value of listed associates could have declined by 26%, or RMB378bn, which is also likely to have a materially adverse impact on reported income statement numbers for 3Q21. Given that Tencent is already facing very tough comps from its online gaming revenue segment, a negative impact to “Other gains, net” could provide for significant earnings miss in 3Q21 reported numbers. If we add to that the ongoing uncertainty around the Chinese regulatory environment and economic slowdown, we could see more short-term volatility in Tencent’s share price. The main caveat to this is that, with a resurgence of the Delta-variant and COVID-19 pandemic, we could see a near-term pickup in online gaming revenue as lockdowns intensify in China, which should be positive for Tencent’s near-term earnings outlook. Tencent currently trades on a 22.1x NTM PE ratio, which is roughly 2 standard deviations below its 5-year historical average trading range. Should we exclude Tencent’s Investees at fair value, I estimate that Tencent’s consolidated operations currently trade on only a 12.1x NTM PE ratio which remains an extremely attractive longer-term entry point to the consolidated operations that are expected to grow Net Operating Profit After Tax (NOPAT) at mid-teens levels from next year onwards, even if we factor in further near-term earnings downgrades, economic headwinds to the advertising segment, or an increase in tax rates for the online games segment.

Tencent: Investees, the Potential for ST Earnings Miss, and an Attractive LT Entry Point

Asia Pac IPO & Placement Research, China biotech, Aequitas Research

Ke Yan, CFA, FRM

Asia Pac IPO & Placement Research, China biotech

Quantitative Analysis

Hong Kong SFC reported aggregate short position as of Aug 13. The aggregate short value for equities increased by $1,382m (+2.1%) WoW but decreased by $4,126m (-5.7%) over the preceding four weeks.Most shorted stocks by aggregate short value of positions are Ping An Insurance (Group) Company Of China, Ltd./2318 HK($4,799m, -5.1% WoW), China Merchants Bank Co., Ltd./3968 HK($2,264m, +12.3% WoW), Zhongsheng Group Holdings Limited/881 HK($2,083m, +7.3% WoW), Tencent Holdings Limited/700 HK($1,802m, +7.3% WoW), Anta Sports Products Limited/2020 HK($1,671m, -2.5% WoW).<section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/225/359/original/Hong_Kong_Market_Short_Position_Value_%28line%29_and_1W_Changes_%28bar%29_%28%24m%292021-08-22+12_32_41.png?1629622471" class="editor-image img-responsive" data-smartkarma-image-id="225359"></figure></section>

Hong Kong SFC reported aggregate short position as of Aug 13. The aggregate short value for equities increased by $1,382m (+2.1%) WoW but decreased by $4,126m (-5.7%) over the preceding four weeks.Most shorted stocks by aggregate short value of positions are Ping An Insurance (Group) Company Of China, Ltd./2318 HK($4,799m, -5.1% WoW), China Merchants Bank Co., Ltd./3968 HK($2,264m, +12.3% WoW), Zhongsheng Group Holdings Limited/881 HK($2,083m, +7.3% WoW), Tencent Holdings Limited/700 HK($1,802m, +7.3% WoW), Anta Sports Products Limited/2020 HK($1,671m, -2.5% WoW).

HK Short Interest: Kuaishou and Netease Short Covers

China

Kuaishou Technology operates as a content community and social platform. The Company helps users create, upload and watch short videos on mobile devices. Kuaishou Technology offers services worldwide.

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Kuaishou Technology (1024 HK)

Joyy’s Potential Privatisation by Top Two Shareholders

Joyy's rumoured privatisation bid is at $75-$100 per ADS. Our base-case SOTP valuation is $71.69, a 16% premium to the last close. Consequently,...

Arun George

Kuaishou (1024 HK): 2Q21, Direct-Response Sales Raised Growth and Gross Margin

Kuaishou’s revenue increased by 49% YoY in 2Q21 versus 37% YoY in 1Q21. Direct-response sales video raised time on site and revenue per user. The...

Ming Lu

Kuaishou: Livestreaming Continues to Decelerate, Losses Widen; No Disclosure on Paying User Numbers

Kuaishou’s core livestreaming revenues continue to decelerate and the company has not disclosed the number of MPUs for livestreaming. Our implied...

Shifara Samsudeen, ACMA, CGMA

Tencent: Investees, the Potential for ST Earnings Miss, and an Attractive LT Entry Point

In this insight, we take a detailed look at Tencent’s listed Investees, their impact on valuation, and the potential for a near-term negative...

Wium Malan, CFA

HK Short Interest: Kuaishou and Netease Short Covers

We highlight WoW short cover of Kuaishou and Netease based on the latest Hong Kong SFC short position report. We also highlight 4W short position...

Ke Yan, CFA, FRM

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