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>Meituan’s revenue continued to grew fast in 2Q21 due to the low comparison base in 2Q20.</li>
<li>We see restaurants crowded and food delivery scooters running in streets.</li>
<li>Both food delivery and in-store were healthy as the operating margins improved.</li>
<li>The company admitted that it continued to invest heavily in Meituan Select, but no company wins in the community group purchase market.</li>
<li>The operating loss swelled to RMB9.2 billion in 2Q21 from RMB8 billion in 1Q21.</li>
</ul>


Meituan’s revenue continued to grew fast in 2Q21 due to the low comparison base in 2Q20.
We see restaurants crowded and food delivery scooters running in streets.
Both food delivery and in-store were healthy as the operating margins improved.
The company admitted that it continued to invest heavily in Meituan Select, but no company wins in the community group purchase market.
The operating loss swelled to RMB9.2 billion in 2Q21 from RMB8 billion in 1Q21.


Meituan (3690 HK): 2Q21, Initiatives Loss Continued to Swell

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

Ke Yan, CFA, FRM

Asia Pac IPO & Placement Research, China biotech

Quantitative Analysis

In our weekly HK Connect Flow series, we aim to highlight key stocks and sectors which the mainland investors traded via the southbound Hong Kong Connect, as analyzed by our proprietary data engine. Since the opening of Hong Kong Connect scheme in 2014, southbound Chinese money started to play an increasingly important role in the Hong Kong stock market. In a Hong Kong exchange report released in July 2019, the exchange highlighted that flows from mainland China accounted for 12% of the total trading volume in the market and is ahead of the US investors' 10% and UK investors' 7% share respectively.  We split the stocks eligible for the Hong Kong Connect trade into three groups: HSCEI component stocks, stocks with a market capitalization between USD 1 billion and USD 5 billion, and stocks with a market capitalization between USD 500 million and USD 1 billion. In this insight, we will highlight inflows into Tencent Holdings Limited (700 HK), China Resources Power Holdings Company Limited (836 HK), as well as outflows from Wh Group Limited (288 HK), Meituan (3690 HK), and Li Ning Company Limited (2331 HK).

In our weekly HK Connect Flow series, we aim to highlight key stocks and sectors which the mainland investors traded via the southbound Hong Kong Connect, as analyzed by our proprietary data engine.  Since the opening of Hong Kong Connect scheme in 2014, southbound Chinese money started to play an increasingly important role in the Hong Kong stock market. In a Hong Kong exchange report released in July 2019, the exchange highlighted that flows from mainland China accounted for 12% of the total trading volume in the market and is ahead of the US investors' 10% and UK investors' 7% share respectively.   We split the stocks eligible for the Hong Kong Connect trade into three groups: HSCEI component stocks, stocks with a market capitalization between USD 1 billion and USD 5 billion, and stocks with a market capitalization between USD 500 million and USD 1 billion.   In this insight, we will highlight inflows into Tencent Holdings Limited (700 HK), China Resources Power Holdings Company Limited (836 HK), as well as outflows from Wh Group Limited (288 HK), Meituan (3690 HK), and Li Ning Company Limited (2331 HK).

Hong Kong Connect Flows: WH Group, Meituan, Li Ling Led the Outflows

Asset Allocation & Fund Positioning, Copley Fund Research

Steven Holden

Asset Allocation & Fund Positioning

Copley Fund Research

Copley Fund Research provide research and data on asset allocation among Global and Emerging Market equity funds.  The analysis details absolute and relative positioning across countries, sectors and industries together with highly granular data on single stock and single fund allocations.  The data is updated monthly with time series going back to January 2011.

Global Research - Analysis of 165 prominent Global equity funds, combined AUM $335bn
GEM Research - Analysis of 127 prominent global EM equity funds, combined AUM $250bn

Asset Allocation - Global and GEM Equity

Cross Asset Strategy

China allocations among Global active managers have fallen to below pre 2017 levels.  Average holding weights among the 381 funds in our analysis dropped to 3.76%, underweight the MSCI All Country World index by -1.18% with just 28.3% overweight the benchmark. This allocation drop is in stark contrast to what is occurring in the USA, with allocations powering to all-time highs of 53.70%.  The difference between US and China weights are at all-time wides.The most widely held stocks are <a href="https://www.smartkarma.com/entities/alibaba-group-holding-ltd" target="_blank" data-smartkarma-citation="entities:787:1" rel="noopener">Alibaba Group (BABA US), </a><a href="https://www.smartkarma.com/entities/aia-group-ltd" target="_blank" data-smartkarma-citation="entities:14895:1" rel="noopener">AIA Group Ltd (1299 HK)</a> and <a href="https://www.smartkarma.com/entities/tencent-holdings-ltd" target="_blank" data-smartkarma-citation="entities:26:1" rel="noopener">Tencent (700 HK)</a>, with the trio accounting for 40.6% of total China allocations.  If Global managers are to increase weights in China, they will likely have to broaden their investment horizons.  Comparing Global stock holdings in China with their Global Emerging Market peers suggests a number of stocks that could enter the radar of Global investors.  We highlight <a href="https://www.smartkarma.com/entities/ping-an-insurance-grp-co-of-china-ltd" target="_blank" data-smartkarma-citation="entities:12880:1" rel="noopener">Ping An Insurance (H) (2318 HK)</a> , <a href="https://www.smartkarma.com/entities/meituan-dianping" target="_blank" data-smartkarma-citation="entities:26970:1" rel="noopener">Meituan (3690 HK)</a> and <a href="https://www.smartkarma.com/entities/jd-com-inc-adr" target="_blank" data-smartkarma-citation="entities:446:1" rel="noopener">JD.com Inc (ADR) (JD US)</a> as stocks lightly held by Global managers but well invested by EM active funds.

China allocations among Global active managers have fallen to below pre 2017 levels.  Average holding weights among the 381 funds in our analysis dropped to 3.76%, underweight the MSCI All Country World index by -1.18% with just 28.3% overweight the benchmark. This allocation drop is in stark contrast to what is occurring in the USA, with allocations powering to all-time highs of 53.70%.  The difference between US and China weights are at all-time wides.The most widely held stocks are Alibaba Group (BABA US), AIA Group Ltd (1299 HK) and Tencent (700 HK), with the trio accounting for 40.6% of total China allocations.  If Global managers are to increase weights in China, they will likely have to broaden their investment horizons.  Comparing Global stock holdings in China with their Global Emerging Market peers suggests a number of stocks that could enter the radar of Global investors.  We highlight Ping An Insurance (H) (2318 HK) , Meituan (3690 HK) and JD.com Inc (ADR) (JD US) as stocks lightly held by Global managers but well invested by EM active funds.

Global Funds China Fall:  Gap to US Largest in History

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

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

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Event-Driven

<div>The Hang Seng Indexes Company Limited (HSIL) announced the results of its review of the Hang Seng Family of Indexes post market close on 20 August. The constituent changes will be effective after the close of trading on 3 September.</div><div>
For the <a href="https://www.smartkarma.com/entities/hong-kong-hang-seng-index" target="_blank" data-smartkarma-citation="entities:22899:1" rel="noopener">Hong Kong Hang Seng Index (HSI INDEX)</a> there are 3 inclusions - <a href="https://www.smartkarma.com/entities/xinyi-glass-holdings-ltd" target="_blank" data-smartkarma-citation="entities:11940:1" rel="noopener">Xinyi Glass Holdings (868 HK)</a>, <a href="https://www.smartkarma.com/entities/li-ning-co-ltd" target="_blank" data-smartkarma-citation="entities:6047:1" rel="noopener">Li Ning Co Ltd (2331 HK)</a> and <a href="https://www.smartkarma.com/entities/china-merchants-bank-co-ltd-3388a037-4214-4997-b45d-520518cfdb57" target="_blank" data-smartkarma-citation="entities:10987:1" rel="noopener">China Merchants Bank H (3968 HK)</a> and 1 exclusion - <a href="https://www.smartkarma.com/entities/bank-of-communications-co-h" target="_blank" data-smartkarma-citation="entities:659:1" rel="noopener">Bank Of Communications Co H (3328 HK)</a>. This takes the number of index constituents to 60.
Following an increase in the index shares and no change in the capping factor at the July monthly rebalance, <a href="https://www.smartkarma.com/entities/alibaba-group" target="_blank" data-smartkarma-citation="entities:28434:1" rel="noopener">Alibaba Group (9988 HK)</a>'s weight will be capped at 8% leading to outflows from the stock. 
One-way turnover is estimated at 6.82% and will result in a one-way trade of HK$13.77bn.
There are only 10 trading days to implementation of the changes. We expect all inclusions to open higher on Monday. <a href="https://www.smartkarma.com/entities/li-ning-co-ltd" target="_blank" data-smartkarma-citation="entities:6047:1" rel="noopener">Li Ning Co Ltd (2331 HK)</a> and <a href="https://www.smartkarma.com/entities/china-merchants-bank-co-ltd-3388a037-4214-4997-b45d-520518cfdb57" target="_blank" data-smartkarma-citation="entities:10987:1" rel="noopener">China Merchants Bank H (3968 HK)</a> are surprise inclusions while <a href="https://www.smartkarma.com/entities/bank-of-communications-co-h" target="_blank" data-smartkarma-citation="entities:659:1" rel="noopener">Bank Of Communications Co H (3328 HK)</a> is a surprise deletion. The largest passive impact will be on <a href="https://www.smartkarma.com/entities/bank-of-communications-co-h" target="_blank" data-smartkarma-citation="entities:659:1" rel="noopener">Bank Of Communications Co H (3328 HK)</a> where there will be over 7 days of ADV to sell. <a href="https://www.smartkarma.com/entities/li-ning-co-ltd" target="_blank" data-smartkarma-citation="entities:6047:1" rel="noopener">Li Ning Co Ltd (2331 HK)</a>has been announced as an inclusion to the <a href="https://www.smartkarma.com/entities/hang-seng-china-enterprises-index" target="_blank" data-smartkarma-citation="entities:22900:1" rel="noopener">Hang Seng China Enterprises Index (HSCEI INDEX)</a> as well.
Big Tech is conspicuous by its absence among the inclusions in the review. HSIL seems to have consciously avoided the stocks due to the constantly changing regulatory landscape in China. HSIL is also taking its time in moving towards it goal of reaching 80 index constituents by mid-2022. That leaves 20 stocks to be included at the next 3 index reviews.
</div>

The Hang Seng Indexes Company Limited (HSIL) announced the results of its review of the Hang Seng Family of Indexes post market close on 20 August. The constituent changes will be effective after the close of trading on 3 September.
For the Hong Kong Hang Seng Index (HSI INDEX) there are 3 inclusions - Xinyi Glass Holdings (868 HK), Li Ning Co Ltd (2331 HK) and China Merchants Bank H (3968 HK) and 1 exclusion - Bank Of Communications Co H (3328 HK). This takes the number of index constituents to 60.
Following an increase in the index shares and no change in the capping factor at the July monthly rebalance, Alibaba Group (9988 HK)'s weight will be capped at 8% leading to outflows from the stock. 
One-way turnover is estimated at 6.82% and will result in a one-way trade of HK$13.77bn.
There are only 10 trading days to implementation of the changes. We expect all inclusions to open higher on Monday. Li Ning Co Ltd (2331 HK) and China Merchants Bank H (3968 HK) are surprise inclusions while Bank Of Communications Co H (3328 HK) is a surprise deletion. The largest passive impact will be on Bank Of Communications Co H (3328 HK) where there will be over 7 days of ADV to sell. Li Ning Co Ltd (2331 HK)has been announced as an inclusion to the Hang Seng China Enterprises Index (HSCEI INDEX) as well.
Big Tech is conspicuous by its absence among the inclusions in the review. HSIL seems to have consciously avoided the stocks due to the constantly changing regulatory landscape in China. HSIL is also taking its time in moving towards it goal of reaching 80 index constituents by mid-2022. That leaves 20 stocks to be included at the next 3 index reviews.


HSI Index Rebalance: Big Tech Avoided; Few Changes Now Means More Changes Later

China

Meituan operates as a web based shopping platform for locally found consumer products and retail services. The Company offers deals of the day by selling vouchers on local services and entertainment, dining, delivery, and other services. Meituan provides its services throughout China.

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Meituan (3690 HK)

Meituan (3690 HK): 2Q21, Initiatives Loss Continued to Swell

Revenue continued to grew fast due to the low comparison base. The company continued to invest heavily in Meituan Select, but no company wins in...

Ming Lu

Hong Kong Connect Flows: WH Group, Meituan, Li Ling Led the Outflows

We highlight Hong Kong connect inflows into Tencent, China Resources Power, and outflows from WH Group, Meituan, and Li Ning.

Ke Yan, CFA, FRM

Global Funds China Fall: Gap to US Largest in History

China allocations among Global active funds have fallen to below pre 2017 levels. Average holding weights among the 381 funds in our analysis...

Steven Holden

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

HSI Index Rebalance: Big Tech Avoided; Few Changes Now Means More Changes Later

Hang Seng Indexes has avoided adding Big Tech and included Li Ning, Xinyi Glass and CM Bank while deleting BoComm. Tencent will be capped higher,...

Brian Freitas

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