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

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Event-Driven

Member of the Hang Seng Composite Index (HSCI) are included in the Southbound Stock Connect program if their market cap exceeds HK$5bn. However, Secondary Listings and Biotech stocks that listed under Chapter 18A of the Listing Rules were excluded from the Stock Connect program.This headline "*H.K. TO INCLUDE SECONDARY-LISTED COS IN STOCK CONNECT: SING TAO" could drive stocks that are HSCI members but not a part of Stock Connect higher. If Chapter 18A listed Biotech stocks are added to Stock Connect, they could run even more.In this Insight, we take a look at stocks that are a part of the HSCI or are expected to join the HSCI in the next review and could be eligible to be included in the Stock Connect program.

Member of the Hang Seng Composite Index (HSCI) are included in the Southbound Stock Connect program if their market cap exceeds HK$5bn. However, Secondary Listings and Biotech stocks that listed under Chapter 18A of the Listing Rules were excluded from the Stock Connect program.This headline "*H.K. TO INCLUDE SECONDARY-LISTED COS IN STOCK CONNECT: SING TAO" could drive stocks that are HSCI members but not a part of Stock Connect higher. If Chapter 18A listed Biotech stocks are added to Stock Connect, they could run even more.In this Insight, we take a look at stocks that are a part of the HSCI or are expected to join the HSCI in the next review and could be eligible to be included in the Stock Connect program.

Stock Connect - Secondary Listings and Biotech Stocks to Become Eligible?

Shimao Services Holdings Limited / Event-Driven

Hang Seng Indexes Company (HSIL) reviews the constituents of the Hang Seng Composite Index (HSCI) on a half yearly basis in March and September with data cut-off dates as of the end of December and June. The review announcement for the March 2021 review should be made on 12 February and will be effective after the close of trading on 5 March.Although there are almost no assets indexed to the HSCI, the index forms the basis of stocks that are eligible for Southbound Stock Connect. Stocks that are included in the HSCI and subsequently included in the Stock Connect program get inflows from mainland investors.Secondary Listings and Biotech stocks listed under Chapter 18A of the Listing Rules are not eligible for inclusion in the Stock Connect program.There are a lot of stocks that will join the HSCI and subsequently included as a part of the Southbound Stock Connect program - these stocks will see buying from mainland investors and could outperform their peers and the market.There are stocks that will be deleted from the HSCI and consequently deleted from the Southbound Stock Connect buy list. There are other stocks that will remain a part of the HSCI but will be removed from the Southbound Stock Connect buy list since their average market cap drops below HKD 5bn.Read on for more details and stocks affected by the changes.

Hang Seng Indexes Company (HSIL) reviews the constituents of the Hang Seng Composite Index (HSCI) on a half yearly basis in March and September with data cut-off dates as of the end of December and June. The review announcement for the March 2021 review should be made on 12 February and will be effective after the close of trading on 5 March.Although there are almost no assets indexed to the HSCI, the index forms the basis of stocks that are eligible for Southbound Stock Connect. Stocks that are included in the HSCI and subsequently included in the Stock Connect program get inflows from mainland investors.Secondary Listings and Biotech stocks listed under Chapter 18A of the Listing Rules are not eligible for inclusion in the Stock Connect program.There are a lot of stocks that will join the HSCI and subsequently included as a part of the Southbound Stock Connect program - these stocks will see buying from mainland investors and could outperform their peers and the market.There are stocks that will be deleted from the HSCI and consequently deleted from the Southbound Stock Connect buy list. There are other stocks that will remain a part of the HSCI but will be removed from the Southbound Stock Connect buy list since their average market cap drops below HKD 5bn.Read on for more details and stocks affected by the changes.

HSCI Index Rebalance and Stock Connect: Early Look at Potential Changes

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>Game revenue, accounting for 74% of total revenue, grew by 20% in 3Q20.</li>
<li>The subsidiary, Youdao (DAO), spent more sale and marketing expense than its total revenue.</li>
<li>According to the P/S ratios of US game developers in 2021, we believe NTES will have an upside of 35%.</li>
<li>Please note that one ADS represents 5 shares now, compared to 25 shares in the last quarter.</li>
</ul>


Game revenue, accounting for 74% of total revenue, grew by 20% in 3Q20.
The subsidiary, Youdao (DAO), spent more sale and marketing expense than its total revenue.
According to the P/S ratios of US game developers in 2021, we believe NTES will have an upside of 35%.
Please note that one ADS represents 5 shares now, compared to 25 shares in the last quarter.


NetEase (NTES): In 3Q20, Rapid Growth, Weak Earnings Due to Minor Businesses

ASEAN Insight Provider, CrossASEAN Research

Angus Mackintosh

ASEAN 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

<a href="https://www.smartkarma.com/entities/sea-ltd" target="_blank" data-smartkarma-citation="entities:8509:1" rel="noopener">Sea Ltd (SE US)</a> just released its 3Q2020 numbers and yet again hit the ball out of the park on revenue growth, with +110% growth in its digital entertainment (DE) revenues to US$944.7m and +173% growth in its e-commerce (EC) revenues to US$618.7m.
Digital Entertainment revenues grew by +31.9% QoQ in 3Q2020, whilst e-commerce expanded by +39.7% QoQ. Total group revenues for 3Q2020 grew by +98.7% YoY to US$1,212.2m.
The company also registered a positive EBITDA of US$120.4m in 3Q2020 versus (US$30.8m) loss for 3Q2019 and US$7.7m in 2Q2020 but it still booked a net loss of (US$346m) after share-based compensation and changes in the value of the 2017 convertible notes versus (US$175m) in 3Q2019.
<a href="https://www.smartkarma.com/entities/sea-ltd" target="_blank" data-smartkarma-citation="entities:8509:1" rel="noopener">Sea Ltd (SE US)</a> booked a +99% growth rate in total GAAP revenue US$1.2bn, whilst gross profits grew by +100.6% YoY in 3Q2020 to US$407.6m. Gross merchandise value (GMV) increased +103% to US$9.3bn in 3Q2020. 
<a href="https://www.smartkarma.com/entities/sea-ltd" target="_blank" data-smartkarma-citation="entities:8509:1" rel="noopener">Sea Ltd (SE US)</a> has yet again demonstrated its ability to lead the pack both through Garena in gaming and Shopee for e-commerce in terms of extraordinary rates of revenue growth, with its digital entertainment effectively bankrolling its e-commerce business.
E-commerce is also marching in the right direction with the EBITDA loss per order continuing to decline QoQ as it winds its way towards profitability, although that will not happen until 2023.
<div class="content-highlight">
Looking out to FY21E, the average EV/Sales for the company's peers stands at 5.5x versus <a href="https://www.smartkarma.com/entities/sea-ltd" target="_blank" data-smartkarma-citation="entities:8509:1" rel="noopener">Sea Ltd (SE US)</a> on 9.45x but it is forecast to grow sales at +43.6%, twice the average growth rate of peers. Investors will pay a premium for this growth and its market leadership, with an increasing focus on profitability. 
</div>

Sea Ltd (SE US) just released its 3Q2020 numbers and yet again hit the ball out of the park on revenue growth, with +110% growth in its digital entertainment (DE) revenues to US$944.7m and +173% growth in its e-commerce (EC) revenues to US$618.7m.
Digital Entertainment revenues grew by +31.9% QoQ in 3Q2020, whilst e-commerce expanded by +39.7% QoQ. Total group revenues for 3Q2020 grew by +98.7% YoY to US$1,212.2m.
The company also registered a positive EBITDA of US$120.4m in 3Q2020 versus (US$30.8m) loss for 3Q2019 and US$7.7m in 2Q2020 but it still booked a net loss of (US$346m) after share-based compensation and changes in the value of the 2017 convertible notes versus (US$175m) in 3Q2019.
Sea Ltd (SE US) booked a +99% growth rate in total GAAP revenue US$1.2bn, whilst gross profits grew by +100.6% YoY in 3Q2020 to US$407.6m. Gross merchandise value (GMV) increased +103% to US$9.3bn in 3Q2020. 
Sea Ltd (SE US) has yet again demonstrated its ability to lead the pack both through Garena in gaming and Shopee for e-commerce in terms of extraordinary rates of revenue growth, with its digital entertainment effectively bankrolling its e-commerce business.
E-commerce is also marching in the right direction with the EBITDA loss per order continuing to decline QoQ as it winds its way towards profitability, although that will not happen until 2023.

Looking out to FY21E, the average EV/Sales for the company's peers stands at 5.5x versus Sea Ltd (SE US) on 9.45x but it is forecast to grow sales at +43.6%, twice the average growth rate of peers. Investors will pay a premium for this growth and its market leadership, with an increasing focus on profitability. 


Sea Ltd (SE US) - Gaming the E-Commerce Epiphany

Pan-Asia Catalysts/Events, Quiddity Advisors

David Blennerhassett

Pan-Asia Catalysts/Events

Quiddity Advisors

The role of lock-ups in IPOs is, as one journal <a href="https://www.jstor.org/stable/1262724?seq=1" target="_blank" rel="noopener">put it</a>, a "commitment device to alleviate moral hazard problems".
Lock-ups can be entered into and negotiated with underwriters, as is the case for secondary listings for <a href="https://www.smartkarma.com/entities/netease" target="_blank" data-smartkarma-citation="entities:29030:1" rel="noopener">NetEase (9999 HK)</a>, <a href="https://www.smartkarma.com/entities/jd-com-inc" target="_blank" data-smartkarma-citation="entities:29043:1" rel="noopener">JD.com (HK) (9618 HK)</a>, amongst others. For primary listings in Hong Kong, there are standard rules as to the lock-up duration.
According to <a href="https://en-rules.hkex.com.hk/rulebook/1007-0" target="_blank" rel="noopener">Main Board Rule 10.07(1)</a> (or <a href="https://en-rules.hkex.com.hk/rulebook/1316a" target="_blank" rel="noopener">GEM rule 13.16A(1)</a>), if a person/group of persons is/are listed as the controlling shareholder(s) of the issuer's listing application, shall not (apart from any offer of shares for sale discussed in the listing document):
<ol>
<li>dispose of shares (nor enter into agreements) in a period commencing on the date by reference to which disclosure of the shareholding of the controlling shareholder is made in the listing document and ending on the date which is 6 months from the date of listing (the “First Six-month Period”); and</li>
<li>dispose of shares in the period of 6 months commencing on the date on which the First Six-month Period expires, if immediately following such disposal that person or group of persons would cease to be a controlling shareholder (the “Second Six-month Period”).</li>
</ol>
An example of such wording can be found in Yadong's Group (1795 HK)'s (the most recent Main Board listing) "<a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2020/1117/9515120/2020111700040.pdf" target="_blank" rel="noopener">Share Offer - Announcement of allotment results</a>".
For cornerstone investors, the following is often stated in the share offer document:
<blockquote>
Each of the Cornerstone Investors has agreed that it will not, whether directly or indirectly, at any time during the period of six months following the Listing Date, dispose of any of the Offer Shares it has purchased pursuant to the relevant Cornerstone Investment Agreement, save for certain limited circumstances ...
</blockquote>
Every week in my Event SPACE wrap, I flag large moves (~10%) in CCASS holdings over the past week or so, moves that are often outside normal market transactions.  These may be indicative of share pledges.  Or potential takeovers. Or simply help understand volume swings. 
Large movement(s) concerning recently listed companies are likely lock-up related. 
This insight looks at companies that have been listed for nearly six months or 12 months, as a guide to when insiders/controlling shareholders are permitted to sell, potentially depressing prices and creating an overhang.
A summary of Main Board listings in 2020 is attached at the bottom of this insight.

The role of lock-ups in IPOs is, as one journal put it, a "commitment device to alleviate moral hazard problems".
Lock-ups can be entered into and negotiated with underwriters, as is the case for secondary listings for NetEase (9999 HK), JD.com (HK) (9618 HK), amongst others. For primary listings in Hong Kong, there are standard rules as to the lock-up duration.
According to Main Board Rule 10.07(1) (or GEM rule 13.16A(1)), if a person/group of persons is/are listed as the controlling shareholder(s) of the issuer's listing application, shall not (apart from any offer of shares for sale discussed in the listing document):

dispose of shares (nor enter into agreements) in a period commencing on the date by reference to which disclosure of the shareholding of the controlling shareholder is made in the listing document and ending on the date which is 6 months from the date of listing (the “First Six-month Period”); and
dispose of shares in the period of 6 months commencing on the date on which the First Six-month Period expires, if immediately following such disposal that person or group of persons would cease to be a controlling shareholder (the “Second Six-month Period”).

An example of such wording can be found in Yadong's Group (1795 HK)'s (the most recent Main Board listing) "Share Offer - Announcement of allotment results".
For cornerstone investors, the following is often stated in the share offer document:

Each of the Cornerstone Investors has agreed that it will not, whether directly or indirectly, at any time during the period of six months following the Listing Date, dispose of any of the Offer Shares it has purchased pursuant to the relevant Cornerstone Investment Agreement, save for certain limited circumstances ...

Every week in my Event SPACE wrap, I flag large moves (~10%) in CCASS holdings over the past week or so, moves that are often outside normal market transactions.  These may be indicative of share pledges.  Or potential takeovers. Or simply help understand volume swings. 
Large movement(s) concerning recently listed companies are likely lock-up related. 
This insight looks at companies that have been listed for nearly six months or 12 months, as a guide to when insiders/controlling shareholders are permitted to sell, potentially depressing prices and creating an overhang.
A summary of Main Board listings in 2020 is attached at the bottom of this insight.

China

NetEase, Inc. operates as an leading internet technology company providing online services including content, community, communication, and commerce. The Company develops and operates online games, electronic commerce, internet media, innovative business, and other businesses. NetEase expands its businesses to Japan, North American, and other other international markets.

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NetEase (9999 HK)

Stock Connect - Secondary Listings and Biotech Stocks to Become Eligible?

A rule change that admits Secondary listings and Chapter 18A listed Biotech stocks to the Southbound Stock Connect could see Alibaba, JD and...

Brian Freitas

HSCI Index Rebalance and Stock Connect: Early Look at Potential Changes

While the HSCI does not have assets benchmarked to it, the index review is closely watched since the index forms the basis of stocks that are a...

Brian Freitas

NetEase (NTES): In 3Q20, Rapid Growth, Weak Earnings Due to Minor Businesses

Game revenue grew by 20% in 3Q20. The subsidiary, Youdao (DAO), spent more sale and marketing expense than its total revenue. An upside of 35%.

Ming Lu

Sea Ltd (SE US) - Gaming the E-Commerce Epiphany

Sea Ltd (SE US) continues to generate increasingly robust cashflows from its gaming business, which is used to bankroll the growth in its e...

Angus Mackintosh

Hong Kong IPOs: Lock-Up Expiries

A look at companies that have been listed for nearly six/12 months, as a guide to when insiders/controlling shareholders are permitted to sell,...

David Blennerhassett

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