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.

Thematic (Sector/Industry)

This insight provides a summary of the key news developments impacting the largest countries and constituents of the Global Emerging Markets equity indices. Companies mentioned this week:<a href="https://www.smartkarma.com/entities/tencent-holdings-ltd" target="_blank" data-smartkarma-citation="entities:26:1" rel="noopener">Tencent (700 HK)</a>, <a href="https://www.smartkarma.com/entities/iqiyi-inc" target="_blank" data-smartkarma-citation="entities:26755:1" rel="noopener">iQIYI Inc (IQ US)</a>, <a href="https://www.smartkarma.com/entities/alibaba-group" target="_blank" data-smartkarma-citation="entities:28434:1" rel="noopener">Alibaba Group (9988 HK)</a>, <a href="https://www.smartkarma.com/entities/suning-com-co-ltd-a" target="_blank" data-smartkarma-citation="entities:9178:1" rel="noopener">Suning.com (002024 CH)</a>, <a href="https://www.smartkarma.com/entities/trip-com-group-ltd" target="_blank" data-smartkarma-citation="entities:180:1" rel="noopener">Trip.com (TCOM US)</a>, <a href="https://www.smartkarma.com/entities/didi-chuxing-inc" target="_blank" data-smartkarma-citation="entities:27467:1" rel="noopener">DiDi Global (DIDI US)</a>, <a href="https://www.smartkarma.com/entities/nio-inc" target="_blank" data-smartkarma-citation="entities:27399:1" rel="noopener">NIO Inc (NIO US)</a>, <a href="https://www.smartkarma.com/entities/bytedance-technology" target="_blank" data-smartkarma-citation="entities:27936:1" rel="noopener">ByteDance (1439927D CH)</a>, <a href="https://www.smartkarma.com/entities/reliance-industries-ltd" target="_blank" data-smartkarma-citation="entities:198:1" rel="noopener">Reliance Industries (RIL IN)</a>, <a href="https://www.smartkarma.com/entities/saudi-aramco" target="_blank" data-smartkarma-citation="entities:27317:1" rel="noopener">Saudi Aramco (ARAMCO AB)</a>, <a href="https://www.smartkarma.com/entities/alibaba-health-information-technology-ltd" target="_blank" data-smartkarma-citation="entities:453:1" rel="noopener">Alibaba Health Information Technology (241 HK)</a>, <a href="https://www.smartkarma.com/entities/jd-health-international-inc" target="_blank" data-smartkarma-citation="entities:29677:1" rel="noopener">JD Health (6618 HK)</a>, <a href="https://www.smartkarma.com/entities/ping-an-healthcare-and-technology-company-limited" target="_blank" data-smartkarma-citation="entities:27008:1" rel="noopener">Ping An Healthcare and Technology Company Limited (1833 HK)</a>

This insight provides a summary of the key news developments impacting the largest countries and constituents of the Global Emerging Markets equity indices. Companies mentioned this week:Tencent (700 HK), iQIYI Inc (IQ US), Alibaba Group (9988 HK), Suning.com (002024 CH), Trip.com (TCOM US), DiDi Global (DIDI US), NIO Inc (NIO US), ByteDance (1439927D CH), Reliance Industries (RIL IN), Saudi Aramco (ARAMCO AB), Alibaba Health Information Technology (241 HK), JD Health (6618 HK), Ping An Healthcare and Technology Company Limited (1833 HK) 

Global Emerging Markets Weekly: 20 August 2021

Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

<a href="https://www.smartkarma.com/entities/china-evergrande-group" target="_blank" rel="noopener">Evergrande Real Estate Group (3333 HK)</a> shares rallied enormously sharply in 2017, moving from the mid single digits to HK$30+ by Q3 that year. That year the float in Evergrande was also sharply reduced by the purchases of shares by <a href="https://www.smartkarma.com/entities/chinese-estates-holdings-limited" target="_blank" rel="noopener">Chinese Estates Holdings (127 HK)</a> and its owners. 
When the shares fell back after getting squeezed, Evergrande conducted a buyback which got them within a hair's breadth of the residual minimum free float requirement mandated by the Hong Kong Stock Exchange. The shares stayed higher. 
Eventually, Evergrande saw more of the employee share options with low exercise prices exercised which increased the share count and float so when shares fell in 2020, the company could buy back shares, and it did so after shares fell to new 3yr lows in the covid-crash. It bought shares back from May to June, again reducing float to within a hair's breadth of the free float limit, and in the period, shares rose about 50%. 
Then at the start of H2, with a <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2020/0701/2020070100031.pdf" target="_blank" rel="noopener">press release</a> about unaudited June sales results and how strong sales had been in H1, the shares popped 40% (from HK$20 to HK$28/share) in three days, then fell back over 6 weeks, going back below HK$20 when the company <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2020/0813/2020081301678.pdf" target="_blank" rel="noopener">disclosed</a> it was pre-selling stakes in its property management unit before the IPO, and three days later Evergrande actually issued a <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2020/0816/2020081600097.pdf" target="_blank" rel="noopener">profit warning</a>, just before releasing H1 results. 
Also in August, but undisclosed at the time, was the fact that several major real estate developers, including Evergrande, had been called on the carpet to discuss their participation in the so-called Three Red Lines pilot program (the three red lines are a liability-to-asset ratio excluding advanced receipts of 70%, net debt-to-equity ratio of 100%, and cash to short-term debt ratio at 1x). Companies which crossed one of three red lines could not increase interest-bearing borrowing by more than 10% in a year. Cross two of them and they were capped at 5% growth. Cross all three of them and the developer could not increase debt at all. This is tough when funding at high single digits to 10+% interest rates are used to carry ever more non-interest-earning land bank. But Evergrande "met" all three so needed to reduce debt and raise cash, discussed in <a href="https://www.smartkarma.com/insights/evergrande-may-be-facing-a-funding-squeeze" target="_blank" rel="noopener">Evergrande May Be Facing a Funding Squeeze</a>. 
There was a story about a "letter", later denied by the company, in September, discussing the importance of the local government helping Evergrande deal with its short-term funding issues, which included the issue of the buyback guarantee offered by Evergrande to minority shareholders of Evergrande's major onshore operating unit Hengda. Evergrande denied the existence of the letter, but despite the fact some Hengda shareholders reportedly wanted out as listing was unlikely, somehow, with the local government's help, Evergrande announced a new agreement meaning repayment in January 2021 was unnecessary. The shares rallied and two weeks later Evergrande raised some capital (discussed in <a href="https://www.smartkarma.com/insights/evergrande-equity-placement-musical-shares" target="_blank" rel="noopener">Evergrande Equity Placement - Musical Shares</a>).
I had my ideas about WHY those shares were placed, and it was not to raise equity to pay down debt. The capital raised was less than expected despite the large discount and the shares quickly fell below placement price.  So just 3 weeks after raising equity, it started buying back shares, reasonably quickly raising the price above where it had sold shares. This was discussed in <a href="https://www.smartkarma.com/insights/evergrande-equity-de-placement-musical-shares" target="_blank" rel="noopener">Evergrande Equity De-Placement: Musical Shares</a>. Then a couple weeks later, we saw <a href="https://www.smartkarma.com/insights/evergrande" target="_blank" rel="noopener">Evergrande Terminate Hengda's Backdoor Listing</a> so the story left was one of an optically "cheap" but heavily indebted developer, lowering selling prices to liquidate inventory, lower debt and raise cash levels, etc. There were sales of shares of recently listed subsidiaries. There were announcements of how much debt had been lowered. But shares fell. 
There were stories in Chinese media and in social media about issues with the company's trade acceptance bills. An <a href="https://www.bloomberg.com/news/articles/2021-07-09/china-urged-evergrande-founder-to-find-quick-fix-for-debt-woes" target="_blank" rel="noopener">article</a> on Bloomberg.com a week ago reported that while Evergrande chairman Hui Ka Yan was in Beijing for the 100th anniversary celebrations 1 July, he met with the Financial Stability and Development Committee, which urged him to solve his company's debt problems pronto. The article is worth reading. It suggested more worry at the top than thought, and even says FSDC officials had suggested bringing in strategic investors. Hui said he was speaking with local investors. 
Bonds have traded lower and lower and the 2024-2025 maturity bonds appear to be trading in the 60s, with shorter-dated bonds trading at 30+% yield to maturity. Wednesday, the shares closed at HK$8.91 - lowest in four years. 
<h3>Yesterday, there was new news. </h3>
The company announced a board meeting for 27 July where the Board would consider a special dividend. 
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My first reaction was, I admit, one of surprise, but on second thought it should not be THAT surprising.
The immediate public comments I have seen suggested an attempt to squeeze shorts. According to data from the SFC, shorts have risen from levels near-matching covid-crash lows, and now stand at roughly 2.1% of shares out (a bit under 10% of float), but that would not do it.
The single most indebted real estate company in the world, with short-term bonds yielding risk-free-rate plus.... [checks notes] 30+%, where the chairman gets called onto the carpet of the highest financial regulator in China - not the PBOC, CSRC, or CBIRC - above them - urging him to Do Something - sell assets, lower debt, raise equity - deciding to pay a special dividend to its equity holders? 
I expect Hui Ka Yan has his reasons, and I expect those reasons do not include rewarding long-suffering minority shareholders. Or squeezing shorts.

Evergrande Real Estate Group (3333 HK) shares rallied enormously sharply in 2017, moving from the mid single digits to HK$30+ by Q3 that year. That year the float in Evergrande was also sharply reduced by the purchases of shares by Chinese Estates Holdings (127 HK) and its owners. 
When the shares fell back after getting squeezed, Evergrande conducted a buyback which got them within a hair's breadth of the residual minimum free float requirement mandated by the Hong Kong Stock Exchange. The shares stayed higher. 
Eventually, Evergrande saw more of the employee share options with low exercise prices exercised which increased the share count and float so when shares fell in 2020, the company could buy back shares, and it did so after shares fell to new 3yr lows in the covid-crash. It bought shares back from May to June, again reducing float to within a hair's breadth of the free float limit, and in the period, shares rose about 50%. 
Then at the start of H2, with a press release about unaudited June sales results and how strong sales had been in H1, the shares popped 40% (from HK$20 to HK$28/share) in three days, then fell back over 6 weeks, going back below HK$20 when the company disclosed it was pre-selling stakes in its property management unit before the IPO, and three days later Evergrande actually issued a profit warning, just before releasing H1 results. 
Also in August, but undisclosed at the time, was the fact that several major real estate developers, including Evergrande, had been called on the carpet to discuss their participation in the so-called Three Red Lines pilot program (the three red lines are a liability-to-asset ratio excluding advanced receipts of 70%, net debt-to-equity ratio of 100%, and cash to short-term debt ratio at 1x). Companies which crossed one of three red lines could not increase interest-bearing borrowing by more than 10% in a year. Cross two of them and they were capped at 5% growth. Cross all three of them and the developer could not increase debt at all. This is tough when funding at high single digits to 10+% interest rates are used to carry ever more non-interest-earning land bank. But Evergrande "met" all three so needed to reduce debt and raise cash, discussed in Evergrande May Be Facing a Funding Squeeze. 
There was a story about a "letter", later denied by the company, in September, discussing the importance of the local government helping Evergrande deal with its short-term funding issues, which included the issue of the buyback guarantee offered by Evergrande to minority shareholders of Evergrande's major onshore operating unit Hengda. Evergrande denied the existence of the letter, but despite the fact some Hengda shareholders reportedly wanted out as listing was unlikely, somehow, with the local government's help, Evergrande announced a new agreement meaning repayment in January 2021 was unnecessary. The shares rallied and two weeks later Evergrande raised some capital (discussed in Evergrande Equity Placement - Musical Shares).
I had my ideas about WHY those shares were placed, and it was not to raise equity to pay down debt. The capital raised was less than expected despite the large discount and the shares quickly fell below placement price.  So just 3 weeks after raising equity, it started buying back shares, reasonably quickly raising the price above where it had sold shares. This was discussed in Evergrande Equity De-Placement: Musical Shares. Then a couple weeks later, we saw Evergrande Terminate Hengda's Backdoor Listing so the story left was one of an optically "cheap" but heavily indebted developer, lowering selling prices to liquidate inventory, lower debt and raise cash levels, etc. There were sales of shares of recently listed subsidiaries. There were announcements of how much debt had been lowered. But shares fell. 
There were stories in Chinese media and in social media about issues with the company's trade acceptance bills. An article on Bloomberg.com a week ago reported that while Evergrande chairman Hui Ka Yan was in Beijing for the 100th anniversary celebrations 1 July, he met with the Financial Stability and Development Committee, which urged him to solve his company's debt problems pronto. The article is worth reading. It suggested more worry at the top than thought, and even says FSDC officials had suggested bringing in strategic investors. Hui said he was speaking with local investors. 
Bonds have traded lower and lower and the 2024-2025 maturity bonds appear to be trading in the 60s, with shorter-dated bonds trading at 30+% yield to maturity. Wednesday, the shares closed at HK$8.91 - lowest in four years. 
Yesterday, there was new news. 
The company announced a board meeting for 27 July where the Board would consider a special dividend. 




My first reaction was, I admit, one of surprise, but on second thought it should not be THAT surprising.
The immediate public comments I have seen suggested an attempt to squeeze shorts. According to data from the SFC, shorts have risen from levels near-matching covid-crash lows, and now stand at roughly 2.1% of shares out (a bit under 10% of float), but that would not do it.
The single most indebted real estate company in the world, with short-term bonds yielding risk-free-rate plus.... [checks notes] 30+%, where the chairman gets called onto the carpet of the highest financial regulator in China - not the PBOC, CSRC, or CBIRC - above them - urging him to Do Something - sell assets, lower debt, raise equity - deciding to pay a special dividend to its equity holders? 
I expect Hui Ka Yan has his reasons, and I expect those reasons do not include rewarding long-suffering minority shareholders. Or squeezing shorts. 
  

Evergrande's Very Special... Special Dividend?

HK/China Equity Long-Short

Osbert Tang, CFA

Equity Bottom-Up

Shenzhen International / Equity Bottom-Up

Share price of <a href="https://www.smartkarma.com/entities/shenzhen-intl-holdings" target="_blank" data-smartkarma-citation="entities:9:1" rel="noopener">Shenzhen Intl (152 HK)</a> (SZI) has been under pressure lately due to concerns on the proposed acquisition of <a href="https://www.smartkarma.com/entities/suning-com-co-ltd-a" target="_blank" data-smartkarma-citation="entities:9178:1" rel="noopener">Suning.com (002024 CH)</a> and weakened performance on its 49%-owned Shenzhen Airlines (SZA). However, now that it decided not to go ahead on Suning.com and there are signs of recovery at SZA, the still-depressed valuation (0.61x P/B, 5-year low) is unwarranted, in our opinion.Its core logistics segment performed well in 1H21, achieving higher occupancy which is supportive to rental income, and the expansion in project portfolio should be an added driver. The proposed acquisition of <a href="https://www.smartkarma.com/entities/shenzhen-investment-holdings-bay-area-development" target="_blank" data-smartkarma-citation="entities:12134:1" rel="noopener">Shenzhen Investment Holdings Bay Area Development (737 HK)</a> by its subsidiary <a href="https://www.smartkarma.com/entities/shenzhen-expressway-co-h" target="_blank" data-smartkarma-citation="entities:2875:1" rel="noopener">Shenzhen Expressway Co H (548 HK)</a> should also generate good cash flow with upside from its land assets. Long-term, the transformation of South China Logistics Park may potentially create another successful story similar to its Qianhai project. At FY21F dividend yield of 8%, we believe SZI is very attractive at the current level.

Share price of Shenzhen Intl (152 HK) (SZI) has been under pressure lately due to concerns on the proposed acquisition of Suning.com (002024 CH) and weakened performance on its 49%-owned Shenzhen Airlines (SZA). However, now that it decided not to go ahead on Suning.com and there are signs of recovery at SZA, the still-depressed valuation (0.61x P/B, 5-year low) is unwarranted, in our opinion.Its core logistics segment performed well in 1H21, achieving higher occupancy which is supportive to rental income, and the expansion in project portfolio should be an added driver. The proposed acquisition of Shenzhen Investment Holdings Bay Area Development (737 HK) by its subsidiary Shenzhen Expressway Co H (548 HK) should also generate good cash flow with upside from its land assets. Long-term, the transformation of South China Logistics Park may potentially create another successful story similar to its Qianhai project. At FY21F dividend yield of 8%, we believe SZI is very attractive at the current level.

Shenzhen Intl (152 HK): What's Wrong Recently?

HK/China Healthcare Analyst (ex-Fosun Pharma)

Xinyao (Criss) Wang

Equity Capital Markets

Chengdu Quanyuantang Pharmacy Chain / Equity Capital Markets

Since the beginning of 2021, the boom of pharmaceutical e-commerce seems to be continuing. Some leading online pharmacies/retail pharmacies are heading for IPOs. On June 9th, 2021, the leading omni-channel smart retail pharmacy <a href="https://www.smartkarma.com/entities/chengdu-quanyuantang-pharmacy-chain-joint-stock-co-ltd" target="_blank" data-smartkarma-citation="entities:33478:1" rel="noopener">Chengdu Quanyuantang Pharmacy Chain (QPC HK)</a> submitted the listing application to the HKEX. As a representative of the innovative retail pharmacy in recent years, Quanyuantang held its ground under the "stress test" in the pandemic this year. Also because Quanyuantang is among the first batch of market participants launching online retail pharmacies in China, the news of its IPO caught the market's attention. So, how about this Company? This insight mainly analyzed the industry characteristics, the business, and the concerns of Quanyuantang.

Since the beginning of 2021, the boom of pharmaceutical e-commerce seems to be continuing. Some leading online pharmacies/retail pharmacies are heading for IPOs. On June 9th, 2021, the leading omni-channel smart retail pharmacy Chengdu Quanyuantang Pharmacy Chain (QPC HK) submitted the listing application to the HKEX. As a representative of the innovative retail pharmacy in recent years, Quanyuantang held its ground under the "stress test" in the pandemic this year. Also because Quanyuantang is among the first batch of market participants launching online retail pharmacies in China, the news of its IPO caught the market's attention. So, how about this Company? This insight mainly analyzed the industry characteristics, the business, and the concerns of Quanyuantang. 

Pre-IPO Quanyuantang Pharmacy Chain - Can Quanyuantang Find Its Own Place in the Fierce Competition?

Alpha-Centric ESG Research

Kyle Rudden

Well, that sure escalated quickly.Early last week, in the Insight <a href="https://www.smartkarma.com/insights/pre-ipo-esg-analysis-didi-s-exemplary-esg-achievements-eclipsed-by-regulatory-risks-and-uncertainty" target="_blank" data-smartkarma-citation="insights:53687" rel="noopener">Pre-IPO ESG Analysis: DiDi's Exemplary ESG Achievements Eclipsed By Regulatory Risks and Uncertainty</a>, I juxtaposed <a href="https://www.smartkarma.com/entities/didi-chuxing-inc" target="_blank" data-smartkarma-citation="entities:27467:1" rel="noopener">DiDi's (DIDI US)</a> relatively strong ESG results in areas under its control with serious concerns about regulatory risk outside of its direct control.Late last week, days after DiDi's successful US$4.4 billion initial public offering, Chinese regulators ordered the removal of DiDi's business-critical ride-hailing apps from online app markets, until the company rectifies "serious violations" pertaining to collection and use of customer data.DiDi is down 5.3% so far (delayed open today).Regulatory risk was central to my thesis in the first Insight. I hardly anticipated this, but I referred to regulatory risk as real, near-term, tangible investment risk; not just some fuzzy ESG risk. Given that, I felt obliged to follow up. At the same time, however, this news is covered ad nauseam.No sense in beating a dead horse with a broken record.So, I decided to do something different. That statement about regulatory risk being a real tangible investment risk is primarily based on anecdotal evidence – i.e., when regulators flex their muscle, stocks go down, not up. But "anecdotal" isn't good enough.Which is why I took this opportunity to quantify the impacts of adverse regulatory events in China. Specifically, with event studies measuring abnormal returns around major regulatory events across four broad categories. That's what most of this Insight is about. But back to DiDi for a moment.Regulatory risk and uncertainty for DiDi is much worse today than it was last week. Typically, the opposite would be true; a negative event out in the open is better than a possible event lurking in the shadows. But not this time. Barring an immediate change of heart by the PRC, this is bad.Therefore, downgrading to bearish.

Well, that sure escalated quickly.Early last week, in the Insight Pre-IPO ESG Analysis: DiDi's Exemplary ESG Achievements Eclipsed By Regulatory Risks and Uncertainty, I juxtaposed DiDi's (DIDI US) relatively strong ESG results in areas under its control with serious concerns about regulatory risk outside of its direct control.Late last week, days after DiDi's successful US$4.4 billion initial public offering, Chinese regulators ordered the removal of DiDi's business-critical ride-hailing apps from online app markets, until the company rectifies "serious violations" pertaining to collection and use of customer data.DiDi is down 5.3% so far (delayed open today).Regulatory risk was central to my thesis in the first Insight. I hardly anticipated this, but I referred to regulatory risk as real, near-term, tangible investment risk; not just some fuzzy ESG risk. Given that, I felt obliged to follow up. At the same time, however, this news is covered ad nauseam.No sense in beating a dead horse with a broken record.So, I decided to do something different. That statement about regulatory risk being a real tangible investment risk is primarily based on anecdotal evidence – i.e., when regulators flex their muscle, stocks go down, not up. But "anecdotal" isn't good enough.Which is why I took this opportunity to quantify the impacts of adverse regulatory events in China. Specifically, with event studies measuring abnormal returns around major regulatory events across four broad categories. That's what most of this Insight is about. But back to DiDi for a moment.Regulatory risk and uncertainty for DiDi is much worse today than it was last week. Typically, the opposite would be true; a negative event out in the open is better than a possible event lurking in the shadows. But not this time. Barring an immediate change of heart by the PRC, this is bad.Therefore, downgrading to bearish.

PRC Shows DiDi Who's Boss: An Analysis of Adverse Regulatory Events on Stock Prices

China

Suning.com Co., Ltd. operates retail chain stores to sell household appliances, electronic products, office equipment, and communication products. The Company also provides installation and maintenance services.

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Suning.com (002024 CH)

Global Emerging Markets Weekly: 20 August 2021

This insight provides a summary of the key news developments impacting the largest countries and constituents of the Global Emerging Markets equity...

Wium Malan, CFA

Evergrande's Very Special... Special Dividend?

Evergrande has been in a world of hurt, actively selling down assets. It has repaid some short-term bonds, but commercial bills remain an issue. So...

Travis Lundy

Shenzhen Intl (152 HK): What's Wrong Recently?

SZI's depressed share price has already reflected the concerns of the market, with upside coming from good logistics segment, asset transformation...

Osbert Tang, CFA

Pre-IPO Quanyuantang Pharmacy Chain - Can Quanyuantang Find Its Own Place in the Fierce Competition?

This article mainly analyzed Quanyuantang in terms of the industry characteristics, the business, the comparison with peers, the concerns and the...

Xinyao (Criss) Wang

PRC Shows DiDi Who's Boss: An Analysis of Adverse Regulatory Events on Stock Prices

Last week, I wrote about DiDi's regulatory risk. This week, it's worse. Hence the downgrade. But this is mostly an analysis of how regulatory...

Kyle Rudden

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