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

Equity Bottom-Up

*Mainland Chinese Stock Exchange Powerhouse: According to Reuters, mainland China is contemplating the establishment of a new stock exchange to attract overseas-listed firms (including Hong Kong) which will bolster Shanghai’s status as a global financial center; and  *Here Comes The Pain Trade: If mainland China is successful this time around (and we think that they will be), it is probably pretty fair to say that the HKEX/mainland China growth story will have come to an abrupt end. In terms of where we are with valuation, HKEX’s P/E has exploded in the face of weaker volumes on the expectation of future US ADR listings. The increase in the stamp duty to cover Hong Kong’s tax shortfall only adds to the misery that HKEX may encounter.

*Mainland Chinese Stock Exchange Powerhouse: According to Reuters, mainland China is contemplating the establishment of a new stock exchange to attract overseas-listed firms (including Hong Kong) which will bolster Shanghai’s status as a global financial center; and  *Here Comes The Pain Trade: If mainland China is successful this time around (and we think that they will be), it is probably pretty fair to say that the HKEX/mainland China growth story will have come to an abrupt end. In terms of where we are with valuation, HKEX’s P/E has exploded in the face of weaker volumes on the expectation of future US ADR listings. The increase in the stamp duty to cover Hong Kong’s tax shortfall only adds to the misery that HKEX may encounter.

Hong Kong Exchanges & Clearing – Building The HKEX Coffin

Insight Provider, CrossASEAN Research

Nicolas Van Broekhoven

Insight Provider

CrossASEAN Research

At CrossASEAN Research we strive to produce unbiased and differentiated on the ground insights on companies across South East Asia. Our Research is produced for the most part after face to face meetings and conversations with company management to dig deep into the long term vision and strategy of the companies we cover. We seek to deliver investable and actionable themes on sectors and markets across SE Asia, often in collaboration with other Insight Providers across the region, pooling the vast experience of the analysts within the Smartkarma Ecosystem. We also offer bespoke work and tailor made trips for our clients. 

Insights across South East Asia

Jardine Strategic Holdings / Equity Bottom-Up

Yesterday <a href="https://www.smartkarma.com/entities/jardine-strategic-holdings-ltd" target="_blank" data-smartkarma-citation="entities:15081:1" rel="noopener">Jardine Strategic Holdings (JS SP)</a> published its annual results in which it disclosed the NAV was 58.22 USD on 31/12/20. Contrast this with the 33 USD buyout offer tabled earlier this week. Something is seriously off here. Before one goes any further,<a href="https://www.jardines.com/assets/files/Investors/Reports/strategic/js-ar2019.pdf" target="_blank" rel="noopener"> please re-read the Corporate Governance (pages 136-141) of Jardine Strategic's 2019 annual report.</a> It will be good to contrast what is written there with what is happening in real-life.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/193/684/original/image_59443962741615508974779.png?1615508975" class="editor-image img-responsive" data-smartkarma-image-id="193684"></figure>The buzzword "du jour" for all investors is ESG. For the avoidance of doubt this stands for:Environmental, Social, and Governance.In the currently proposed buyout of <a href="https://www.smartkarma.com/entities/jardine-strategic-holdings-ltd" target="_blank" data-smartkarma-citation="entities:15081:1" rel="noopener">Jardine Strategic Holdings (JS SP)</a> by <a href="https://www.smartkarma.com/entities/jardine-matheson-holdings-ltd" target="_blank" data-smartkarma-citation="entities:19718:1" rel="noopener">Jardine Matheson Holdings (JM SP)</a> the entire board of both companies (largely the same people) is showing the investment community what it really thinks about the G in ESG. Given the transaction was advised by both <a href="https://www.smartkarma.com/entities/jpmorgan-chase-co" target="_blank" data-smartkarma-citation="entities:277:1" rel="noopener">JPMorgan Chase &amp; Co (JPM US)</a> and <a href="https://www.smartkarma.com/entities/hsbc-holdings-plc" target="_blank" data-smartkarma-citation="entities:516:1" rel="noopener">HSBC Holdings (5 HK)</a> we now also know how "ingrained" the ESG ethos is in practice at those banks.Given the +/-85% ownership of Jardine Strategic by Matheson, one would expect that Matheson could not vote on the proposed transaction and only Jardine Strategic minorities would have an actual vote to deem this offer "fair and reasonable" and give it their thumbs up/down at an SGM. Not in this case. Matheson is intending to use its 85% votes to "ram" this offer across the finish line. Which explains why Matheson expects this deal to close by the end of April 2021. Some changes take decades at Jardine, others clearly don't.It is astonishing that not a single person in these large banking institutions has stood up to Jardine's board and challenged them on the "fairness", "correctness" and "governance" of its proposed 33 USD offer. It is not because you have found some loophole, as made clear by David Webb, in your byzantine listings between Bermuda-Singapore-London that you are required to put your "Gangster" hat on and use it. The "Governance" hat could have been used, a fair buyout of Strategic shareholders could have been chosen but...it was not. The 33 USD offer price might have been a 20% premium to last Friday's closing price but other than that it was a completely arbitrary number unrelated to its Net Asset Value.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/193/672/original/image_53585158121615504013720.png?1615504014" class="editor-image img-responsive" data-smartkarma-image-id="193672"></figure>Any ESG fund worth their name in salt should therefore shun Jardine and any of its subsidiaries as the directors at Jardine are mostly the same directors at <a href="https://www.smartkarma.com/entities/dairy-farm-intl-hldgs-ltd" target="_blank" data-smartkarma-citation="entities:7427:1" rel="noopener">Dairy Farm Intl Hldgs (DFI SP)</a>, <a href="https://www.smartkarma.com/entities/mandarin-oriental-intl-ltd" target="_blank" data-smartkarma-citation="entities:4773:1" rel="noopener">Mandarin Oriental Intl (MAND SP)</a>, <a href="https://www.smartkarma.com/entities/hongkong-land-holdings-ltd" target="_blank" data-smartkarma-citation="entities:15465:1" rel="noopener">Hongkong Land (HKL SP)</a>  and <a href="https://www.smartkarma.com/entities/jardine-cycle-carriage-ltd" target="_blank" data-smartkarma-citation="entities:347:1" rel="noopener">Jardine Cycle &amp; Carriage (JCNC SP)</a>. If you do invest in any of the above know one thing: the ESG statements in their annual reports are not worth the paper they are written on. Buyer beware.

Yesterday Jardine Strategic Holdings (JS SP) published its annual results in which it disclosed the NAV was 58.22 USD on 31/12/20. Contrast this with the 33 USD buyout offer tabled earlier this week. Something is seriously off here. Before one goes any further, please re-read the Corporate Governance (pages 136-141) of Jardine Strategic's 2019 annual report. It will be good to contrast what is written there with what is happening in real-life.The buzzword "du jour" for all investors is ESG. For the avoidance of doubt this stands for:Environmental, Social, and Governance.In the currently proposed buyout of Jardine Strategic Holdings (JS SP) by Jardine Matheson Holdings (JM SP) the entire board of both companies (largely the same people) is showing the investment community what it really thinks about the G in ESG. Given the transaction was advised by both JPMorgan Chase &amp; Co (JPM US) and HSBC Holdings (5 HK) we now also know how "ingrained" the ESG ethos is in practice at those banks.Given the +/-85% ownership of Jardine Strategic by Matheson, one would expect that Matheson could not vote on the proposed transaction and only Jardine Strategic minorities would have an actual vote to deem this offer "fair and reasonable" and give it their thumbs up/down at an SGM. Not in this case. Matheson is intending to use its 85% votes to "ram" this offer across the finish line. Which explains why Matheson expects this deal to close by the end of April 2021. Some changes take decades at Jardine, others clearly don't.It is astonishing that not a single person in these large banking institutions has stood up to Jardine's board and challenged them on the "fairness", "correctness" and "governance" of its proposed 33 USD offer. It is not because you have found some loophole, as made clear by David Webb, in your byzantine listings between Bermuda-Singapore-London that you are required to put your "Gangster" hat on and use it. The "Governance" hat could have been used, a fair buyout of Strategic shareholders could have been chosen but...it was not. The 33 USD offer price might have been a 20% premium to last Friday's closing price but other than that it was a completely arbitrary number unrelated to its Net Asset Value.Any ESG fund worth their name in salt should therefore shun Jardine and any of its subsidiaries as the directors at Jardine are mostly the same directors at Dairy Farm Intl Hldgs (DFI SP), Mandarin Oriental Intl (MAND SP), Hongkong Land (HKL SP)  and Jardine Cycle &amp; Carriage (JCNC SP). If you do invest in any of the above know one thing: the ESG statements in their annual reports are not worth the paper they are written on. Buyer beware.

G Stands for Governance: When Jardine Makes a Mockery of ESG; JS Publishes 58.22 USD NAV on 31/12/20

Alpha-Centric ESG Research

Kyle Rudden

The collective carbon footprint of global freight transportation and logistics is utterly massive, and growing. Freight and logistics accounts for 10-15% of the world's greenhouse gas (GHG) emissions, or 3.4-5.1 billion tonnes of carbon dioxide (CO2) per year of the world's 34 billion-tonne total. Current GHG mitigation and decarbonisation policies will be enough to fully offset GHG emissions from expected growth in freight transportation and logistics. Projections suggest a 60-80% increase in emissions by 2050, when a decrease of 55-80% is needed to meet the Paris Agreement goals.Climate impacts of trade growth are compounded by how it will shift freight movement from North Atlantic to Indian Ocean corridors, increasing average distances 12%. More critical is the local leg; 10% by tonne-kilometres but 30% of GHGs (inland modes like trucking are more GHG-intensive).On a company level, carbon footprint – present and future – depends on several things. Aside from macro issues like regional fuel mix and climate policies, two big factors are: 1) a company's specific function (e.g., freight trains vs. logistics software), and 2) its decarbonisation initiatives.The collective carbon footprint is a major ESG issue but we should not apply a broad-brush. Freight and logistics companies are vital to the economy and deliver life-critical goods like medication and food. Moreover, companies like <a href="https://www.smartkarma.com/entities/jd-logistics" target="_blank" data-smartkarma-citation="entities:31500:1" rel="noopener">JD Logistics (JDL HK)</a> – are leading a "greening" of supply chains.This is an important ESG issue to watch, but not an "exclusionary screen" by any means.

The collective carbon footprint of global freight transportation and logistics is utterly massive, and growing. Freight and logistics accounts for 10-15% of the world's greenhouse gas (GHG) emissions, or 3.4-5.1 billion tonnes of carbon dioxide (CO2) per year of the world's 34 billion-tonne total. Current GHG mitigation and decarbonisation policies will be enough to fully offset GHG emissions from expected growth in freight transportation and logistics. Projections suggest a 60-80% increase in emissions by 2050, when a decrease of 55-80% is needed to meet the Paris Agreement goals.Climate impacts of trade growth are compounded by how it will shift freight movement from North Atlantic to Indian Ocean corridors, increasing average distances 12%. More critical is the local leg; 10% by tonne-kilometres but 30% of GHGs (inland modes like trucking are more GHG-intensive).On a company level, carbon footprint – present and future – depends on several things. Aside from macro issues like regional fuel mix and climate policies, two big factors are: 1) a company's specific function (e.g., freight trains vs. logistics software), and 2) its decarbonisation initiatives.The collective carbon footprint is a major ESG issue but we should not apply a broad-brush. Freight and logistics companies are vital to the economy and deliver life-critical goods like medication and food. Moreover, companies like JD Logistics (JDL HK) – are leading a "greening" of supply chains.This is an important ESG issue to watch, but not an "exclusionary screen" by any means.

Carbon Footprint of Freight Transportation and Logistics and Other ESG Issues

China and US Equity Analyst

Roger Xie

<ul>
<li>
<a href="https://www.smartkarma.com/entities/hong-kong-exchanges-clearing" target="_blank" data-smartkarma-citation="entities:490:1" rel="noopener">HKEX (388 HK)</a> share price and Hong Kong market in general have tumbled significantly after Hong Kong government revealed the proposal to increase stamp duty on stock to 13bps from 10bps for both buy and sell transaction. The change needs to be approved by the HK Legislative Council and enacted as a law for it to be effective. We believe the real impact of stamp duty is at least 6 month away. And the increase of stock stamp duty could effectively alleviate the budget pressure at Hong Kong government due to the prolonged COVID-19 pandemic. </li>
<li>HKEx serves as the only offshore gateway to China capital market. HKEx has consistently enjoyed the superior margin and profitability, given that it can charge higher trading fee rates than other bourses. Chinese companies and investors prefer HKEx as the offshore trading venue. We don't expect this dynamic will change. In our view, HKEx for Chinese ADR listing and expanding business into lucrative derivative trading would be the game changer.  Although the higher stamp duty could moderately increase trading cost, the impact on trading volume will be small. We believe the market has over-reacted in the sell-off. On the contrary, the multi-year strategic transformation of HKEx would be much larger earning driver for upside. We recommend investors to buy HKEx during the pull-back.
</li>
<li>HKEx also reported 4Q20 net income of HK$2,925mn, up 48% year-over-year. FY20 net income of HK$11,505mn is up 23% year-over-year. Both results are above investors' expectation. The beat was largely driven by investment income, partly offset by higher depreciation. HKEX (388 HK) January ADT (Average Daily Turnover) remains very strong, delivering amazing 136% year-over-year growth in the month. We forecast Securities ADT of HK$240bn in FY 21 (Hong Kong and Stock Connect Northbound) and reiterate HKEx TP HKD 550. 
</li>
</ul>



HKEX (388 HK) share price and Hong Kong market in general have tumbled significantly after Hong Kong government revealed the proposal to increase stamp duty on stock to 13bps from 10bps for both buy and sell transaction. The change needs to be approved by the HK Legislative Council and enacted as a law for it to be effective. We believe the real impact of stamp duty is at least 6 month away. And the increase of stock stamp duty could effectively alleviate the budget pressure at Hong Kong government due to the prolonged COVID-19 pandemic. 
HKEx serves as the only offshore gateway to China capital market. HKEx has consistently enjoyed the superior margin and profitability, given that it can charge higher trading fee rates than other bourses. Chinese companies and investors prefer HKEx as the offshore trading venue. We don't expect this dynamic will change. In our view, HKEx for Chinese ADR listing and expanding business into lucrative derivative trading would be the game changer.  Although the higher stamp duty could moderately increase trading cost, the impact on trading volume will be small. We believe the market has over-reacted in the sell-off. On the contrary, the multi-year strategic transformation of HKEx would be much larger earning driver for upside. We recommend investors to buy HKEx during the pull-back.

HKEx also reported 4Q20 net income of HK$2,925mn, up 48% year-over-year. FY20 net income of HK$11,505mn is up 23% year-over-year. Both results are above investors' expectation. The beat was largely driven by investment income, partly offset by higher depreciation. HKEX (388 HK) January ADT (Average Daily Turnover) remains very strong, delivering amazing 136% year-over-year growth in the month. We forecast Securities ADT of HK$240bn in FY 21 (Hong Kong and Stock Connect Northbound) and reiterate HKEx TP HKD 550. 



HKEx(388.HK): Transformational Strategy Should Offset the Higher Stamp Duty Fear

*Poor Quarter: Hong Kong Exchanges &amp; Clearing (388.HK) [HKEX] reported 4Q20 earnings of HKD 2.9 bn, declining HKD 522 mn (15.6%) linked quarter. Results were challenged on many fronts, as evidenced by HKEX’ negative operating jaws during the period, whereby revenues declined HKD 210 mn (4.0%) whilst expenses jumped HKD 187 mn (13.2%)– pushing its C/I ratio higher by 480 bp to 31.4%; and*Stamp Dutied: Despite the poor showing during 4Q20, the real story for HKEX is the issue of the stamp duty which likely will impact earnings and market sentiment for the foreseeable future. Given the financial stress of the pandemic on the finances of the Hong Kong government,  on February 24, 2021 it was announced that there would be a 3 bp or 30% increase in the stamp duty to help offset the government budget deficit.

*Poor Quarter: Hong Kong Exchanges &amp; Clearing (388.HK) [HKEX] reported 4Q20 earnings of HKD 2.9 bn, declining HKD 522 mn (15.6%) linked quarter. Results were challenged on many fronts, as evidenced by HKEX’ negative operating jaws during the period, whereby revenues declined HKD 210 mn (4.0%) whilst expenses jumped HKD 187 mn (13.2%)– pushing its C/I ratio higher by 480 bp to 31.4%; and*Stamp Dutied: Despite the poor showing during 4Q20, the real story for HKEX is the issue of the stamp duty which likely will impact earnings and market sentiment for the foreseeable future. Given the financial stress of the pandemic on the finances of the Hong Kong government,  on February 24, 2021 it was announced that there would be a 3 bp or 30% increase in the stamp duty to help offset the government budget deficit.

Hong Kong Exchanges & Clearing – Hitting The Wall

United Kingdom

London Stock Exchange Group plc is the United Kingdom's primary stock exchange. The LSE provides markets that facilitate the raising of capital and the trading of corporate securities, access to a trading environment, as well as real-time pricing and reference information services worldwide.  Market coverage includes equities, derivatives and fixed-interest securities.

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Hong Kong Exchanges & Clearing – Building The HKEX Coffin

HONG KONG EXCHANGES & CLEARING: Mainland China is contemplating a new stock exchange to attract overseas firms. If mainland China is successful,...

Thomas J. Monaco

G Stands for Governance: When Jardine Makes a Mockery of ESG; JS Publishes 58.22 USD NAV on 31/12/20

ESG is the buzzword "du jour". When the G in ESG gets put to the test in the recent Jardine Strategic buyout the 33 USD offer price looks extremely...

Nicolas Van Broekhoven

Carbon Footprint of Freight Transportation and Logistics and Other ESG Issues

The carbon footprint of global freight and logistics is large, growing, and a source of ESG risk for investors. Fortunately, firms like JD...

Kyle Rudden

HKEx(388.HK): Transformational Strategy Should Offset the Higher Stamp Duty Fear

HKEx serves as the only offshore gateway to China capital market. We believe the market has over-reacted on higher stamp duty news in the sell...

Roger Xie

Hong Kong Exchanges & Clearing – Hitting The Wall

HONG KONG EXCHANGES & CLEARING: HKEX reported a 15.6% QOQ decline in 4Q20 earnings, given the period's negative operating jaws. The story is the...

Thomas J. Monaco

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