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

Alibaba Group Holding  / Equity Bottom-Up

<ul>
<li>Revenue from physical store chains grew by 80% YoY in 1Q22.</li>
<li>The margin decline is partly due to temporary changes.</li>
<li>Generally, we believe EPS will decline by 11% in FY2022, but grow by 13% in FY2023.</li>
<li>We believe the stock has an upside of 30% for the end of March 2022.</li>
</ul>


Revenue from physical store chains grew by 80% YoY in 1Q22.
The margin decline is partly due to temporary changes.
Generally, we believe EPS will decline by 11% in FY2022, but grow by 13% in FY2023.
We believe the stock has an upside of 30% for the end of March 2022.


Alibaba (BABA): FY1Q22, Physical Stores Growing Strongly, Margin Lower but Controllable, 30% Upside

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

<p><em><strong>*Magic Fairy Dust:</strong></em> Square (SQ.US) has agreed to purchase Afterpay Touch (APT.AU) [Afterpay) for USD 29 bn in an all-stock transaction – implying Afterpay’s shares to be worth AUD 126.21. This is not a bad outcome for Afterpay, which only posts consistent losses. Tencent Holdings (700.HK) [Tencent] stands to gain 462% on its initial stake for a gain of over USD 800 mn – not bad for a passive deal 15 months ago;  and</p>
<p><strong><em>Risks Remain: </em></strong>In addition to Tencent is suspending new user registrations for its WeChat services, as it is undergoing a “security technical upgrade” in accordance with relevant laws and regulations, there are multiple other challenges. We have no doubt that Tencent will also follow Alibaba Group (BABA.US) [Alibaba] in their formation of a financial holding company. For Tencent, WeChat Pay and the broader lending/deposit taking business are likely to be reined-in. An FHC represents significant downside risks. Earnings will compress, as capital requirements increase.</p>

*Magic Fairy Dust: Square (SQ.US) has agreed to purchase Afterpay Touch (APT.AU) [Afterpay) for USD 29 bn in an all-stock transaction – implying Afterpay’s shares to be worth AUD 126.21. This is not a bad outcome for Afterpay, which only posts consistent losses. Tencent Holdings (700.HK) [Tencent] stands to gain 462% on its initial stake for a gain of over USD 800 mn – not bad for a passive deal 15 months ago;  and
Risks Remain: In addition to Tencent is suspending new user registrations for its WeChat services, as it is undergoing a “security technical upgrade” in accordance with relevant laws and regulations, there are multiple other challenges. We have no doubt that Tencent will also follow Alibaba Group (BABA.US) [Alibaba] in their formation of a financial holding company. For Tencent, WeChat Pay and the broader lending/deposit taking business are likely to be reined-in. An FHC represents significant downside risks. Earnings will compress, as capital requirements increase.

Tencent Holdings – Clairvoyance Pays Off

Head of Research, IPOs & Placements, Aequitas Research

Sumeet Singh

Head of Research, IPOs & Placements

Equity Capital Markets

<div><p>Cloud Village Inc. (CVI), also known as NetEase Music, plans to raise around US$1bn in its Hong Kong IPO. The company has also obtained investments from Baidu and Alibaba, along with other investors.</p></div><div><p>As of Dec 20, it had 181m online music MAUs, 16m online music services monthly paying users, 327,000 social entertainment services monthly paying users. It had over 60m music tracks, of which more than 1m were created by registered independent artists. Its daily active users on average spent 76mins daily listening to music. </p></div><div><p>CVI’s revenue has grown 4.3x over FY18-20, to RMB4.9bn. There have been no signs of slowdown as its revenue increased by 102% in FY19 and was up another 111% in FY20. Both online music services and social entertainment services revenue have shown strong growth. Online music services revenue grew by 73% in 2019 and another 47.6% in 2020. Social entertainment services revenue was the largest driver of growth, as it grew by 344% in 2019 and was up another 320% in 2020. However, it remains a distant second player in the market and has yet to make a profit.</p></div><div><p>We covered various aspects of the deal in our previous notes, <a href="https://www.smartkarma.com/insights/cloud-village-netease-music-pre-ipo-was-in-the-slow-stream-playing-catch-up" target="_blank" rel="noopener">Cloud Village (NetEase Music) Pre-IPO - Was in the slow stream, playing catch-up </a>and <a href="https://www.smartkarma.com/insights/cloud-village-netease-music-pre-ipo-tencent-music-peer-comp-regulatory-impact" target="_blank" rel="noopener">Cloud Village (NetEase Music) Pre-IPO - Tencent Music Peer Comp, Regulatory Impact</a>.</p></div><div><p>In this note, we will comment on valuations.</p></div>

Cloud Village Inc. (CVI), also known as NetEase Music, plans to raise around US$1bn in its Hong Kong IPO. The company has also obtained investments from Baidu and Alibaba, along with other investors.As of Dec 20, it had 181m online music MAUs, 16m online music services monthly paying users, 327,000 social entertainment services monthly paying users. It had over 60m music tracks, of which more than 1m were created by registered independent artists. Its daily active users on average spent 76mins daily listening to music. CVI’s revenue has grown 4.3x over FY18-20, to RMB4.9bn. There have been no signs of slowdown as its revenue increased by 102% in FY19 and was up another 111% in FY20. Both online music services and social entertainment services revenue have shown strong growth. Online music services revenue grew by 73% in 2019 and another 47.6% in 2020. Social entertainment services revenue was the largest driver of growth, as it grew by 344% in 2019 and was up another 320% in 2020. However, it remains a distant second player in the market and has yet to make a profit.We covered various aspects of the deal in our previous notes, Cloud Village (NetEase Music) Pre-IPO - Was in the slow stream, playing catch-up and Cloud Village (NetEase Music) Pre-IPO - Tencent Music Peer Comp, Regulatory Impact.In this note, we will comment on valuations.

Cloud Village (NetEase Music) Pre-IPO - Initial Thoughts on Valuation

China and US Equity Analyst

Roger Xie

Cross Asset Strategy

<ul>
<li>China’s tech sector has been in the spotlight in recent days. Beijing has released a series of rules aiming to remake private education and tech sectors. to curb cost pressure and better serve ordinary people.  we believe the magnitude of policy change on private education sector is unprecedent, which could surprise investors. This negative sentiments further spurs the fear of  anti-trust and unfair competition scrutiny on China Internet sector. It has led to capital flight from China tech sector. <a href="https://www.smartkarma.com/entities/hang-seng-tech-index" target="_blank" data-smartkarma-citation="entities:31367:1" rel="noopener">Hang Seng Tech Index (HSTECH INDEX)</a> has declined 40% from its high in February this year.</li>
<li>In the newly released policy, the State Council banned foreign capital from investing in education institutions through any approach, including VIE (Variable Interest Entity) structure. This has led to investor concerns whether the ban on foreign investments through VIE will be extended to other sectors. VIE is considered to be the foundation of offshore China ADR listing structure. Our assessment shows that the VIE structure will remain to stay, but the new oversea listings could face more scrutiny from regulators. The paradigm shift could fundamentally benefit <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> as the preferred listing venue for offshore China ADR. And the dual-listing status for many China tech giants will remain. </li>
<li>China central bank lowered bank reserve requirement ratio early this month and free up US$154bn from the system. The benchmark 10-year treasury  yield hovered around 2.9%  past few weeks indicating plenty of liquidity. Investors have been speculating that LPR (Loan Prime Rate) might be cut further to stimulate the growth. We believe structural monetary policy operations will continue. Likely, more support will be provided toward green energy, innovations and industry upgrade, but it might remain tightening for property and overcapacity sectors. The upcoming Politburo Meeting in end of July could give more hints about monetary policy stance. More than 40% of China A-share companies have released their 1H earning preview, which delivered 120% year-over-year growth (due to low base by pandemic in 2020). We remain sanguine on China equity market outlook in 2H 2021, but would recommend more clarity on policy for China tech giants.</li>
</ul>


China’s tech sector has been in the spotlight in recent days. Beijing has released a series of rules aiming to remake private education and tech sectors. to curb cost pressure and better serve ordinary people.  we believe the magnitude of policy change on private education sector is unprecedent, which could surprise investors. This negative sentiments further spurs the fear of  anti-trust and unfair competition scrutiny on China Internet sector. It has led to capital flight from China tech sector. Hang Seng Tech Index (HSTECH INDEX) has declined 40% from its high in February this year.
In the newly released policy, the State Council banned foreign capital from investing in education institutions through any approach, including VIE (Variable Interest Entity) structure. This has led to investor concerns whether the ban on foreign investments through VIE will be extended to other sectors. VIE is considered to be the foundation of offshore China ADR listing structure. Our assessment shows that the VIE structure will remain to stay, but the new oversea listings could face more scrutiny from regulators. The paradigm shift could fundamentally benefit HKEX (388 HK) as the preferred listing venue for offshore China ADR. And the dual-listing status for many China tech giants will remain. 
China central bank lowered bank reserve requirement ratio early this month and free up US$154bn from the system. The benchmark 10-year treasury  yield hovered around 2.9%  past few weeks indicating plenty of liquidity. Investors have been speculating that LPR (Loan Prime Rate) might be cut further to stimulate the growth. We believe structural monetary policy operations will continue. Likely, more support will be provided toward green energy, innovations and industry upgrade, but it might remain tightening for property and overcapacity sectors. The upcoming Politburo Meeting in end of July could give more hints about monetary policy stance. More than 40% of China A-share companies have released their 1H earning preview, which delivered 120% year-over-year growth (due to low base by pandemic in 2020). We remain sanguine on China equity market outlook in 2H 2021, but would recommend more clarity on policy for China tech giants.


China Equity Strategy: Tug of War, Policy Uncertainty and Plenty Liquidity

<p>Cloud Village Inc. (CVI), also known as NetEase Music, plans to raise around US$1bn in its Hong Kong IPO. The company has also obtained investments from Baidu and Alibaba, along with other investors.</p><p>As of Dec 20, it had 181m online music MAUs, 16m online music services monthly paying users, 327,000 social entertainment services monthly paying users. It had over 60m music tracks, of which more than 1m were created by registered independent artists. Its daily active users on average spent 76mins daily listening to music. </p><p>CVI’s revenue has grown 4.3x over FY18-20, to RMB4.9bn. There have been no signs of slowdown as its revenue increased by 102% in FY19 and was up another 111% in FY20. Both online music services and social entertainment services revenue have shown strong growth. Online music services revenue grew by 73% in 2019 and another 47.6% in 2020. Social entertainment services revenue was the largest driver of growth, as it grew by 344% in 2019 and was up another 320% in 2020. However, it remains a distant second player in the market and has yet to make a profit.</p><p>We covered various aspects of the deal in our previous note, <a href="https://www.smartkarma.com/insights/cloud-village-netease-music-pre-ipo-was-in-the-slow-stream-playing-catch-up" target="_blank" rel="noopener">Cloud Village (NetEase Music) Pre-IPO - Was in the slow stream, playing catch-up</a>.</p><p>In this note, we compare CVI with its main peer Tencent Music Entertainment (TME) and comment on the recent regulatory announcement with respect to TME.</p>

Cloud Village Inc. (CVI), also known as NetEase Music, plans to raise around US$1bn in its Hong Kong IPO. The company has also obtained investments from Baidu and Alibaba, along with other investors.As of Dec 20, it had 181m online music MAUs, 16m online music services monthly paying users, 327,000 social entertainment services monthly paying users. It had over 60m music tracks, of which more than 1m were created by registered independent artists. Its daily active users on average spent 76mins daily listening to music. CVI’s revenue has grown 4.3x over FY18-20, to RMB4.9bn. There have been no signs of slowdown as its revenue increased by 102% in FY19 and was up another 111% in FY20. Both online music services and social entertainment services revenue have shown strong growth. Online music services revenue grew by 73% in 2019 and another 47.6% in 2020. Social entertainment services revenue was the largest driver of growth, as it grew by 344% in 2019 and was up another 320% in 2020. However, it remains a distant second player in the market and has yet to make a profit.We covered various aspects of the deal in our previous note, Cloud Village (NetEase Music) Pre-IPO - Was in the slow stream, playing catch-up.In this note, we compare CVI with its main peer Tencent Music Entertainment (TME) and comment on the recent regulatory announcement with respect to TME.

Cloud Village (NetEase Music) Pre-IPO - Tencent Music Peer Comp, Regulatory Impact

China

PDD Holdings Inc. is a multinational commerce group that owns and operates a portfolio of businesses. The Company focuses on digital economy so that local communities and small businesses can benefit from the increased productivity and new opportunities. PDD Holdings has built a network of sourcing, logistics, and fulfillment capabilities for its underlying businesses.

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PDD Holdings (PDD US)

Alibaba (BABA): FY1Q22, Physical Stores Growing Strongly, Margin Lower but Controllable, 30% Upside

Revenue from physical store chains grew by 80% YoY in 1Q22. The margin decline is partly due to temporary changes. Generally, we believe EPS will...

Ming Lu

Tencent Holdings – Clairvoyance Pays Off

TENCENT HOLDINGS: Square has agreed to purchase Afterpay for USD 29 bn, and Tencent stands to gain 462% or over USD 800 mn. While positive,...

Thomas J. Monaco

Cloud Village (NetEase Music) Pre-IPO - Initial Thoughts on Valuation

Cloud Village Inc. (CVI), also known as NetEase Music, plans to raise around US$1bn in its Hong Kong IPO. The company has also obtained investments...

Sumeet Singh

China Equity Strategy: Tug of War, Policy Uncertainty and Plenty Liquidity

We remain sanguine on China equity market outlook in 2H 2021 given the earning growth and plenty liquidity, but would wait for more clarity on...

Roger Xie

Cloud Village (NetEase Music) Pre-IPO - Tencent Music Peer Comp, Regulatory Impact

Cloud Village Inc. (CVI), also known as NetEase Music, plans to raise around US$1bn in its Hong Kong IPO. The company has also obtained investments...

Sumeet Singh

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