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.

Equity Bottom-Up

Following the completion of <a href="https://www.smartkarma.com/entities/prosus-nv" target="_blank" data-smartkarma-citation="entities:28104:1" rel="noopener">Prosus (PRX NA)</a>’ voluntary exchange offer for <a href="https://www.smartkarma.com/entities/naspers-ltd" target="_blank" data-smartkarma-citation="entities:21085:1" rel="noopener">Naspers (NPN SJ)</a> shares, we are left with management having achieved their goal of meaningfully reducing Naspers’ overweight position on the notable South African equity indices (a key driver of the discount to NAV), and increasing the Prosus free float materially, with a commensurate increase in index weightings. It has also left us with a cross-holding structure which has significantly increased the complexity of trading dynamics, increased currency risk exposures, and a reduced corporate governance perception of the group. 
In a detailed insight last year (<a href="https://www.smartkarma.com/insights/naspers-double-discount-warranted-the-search-for-a-catalyst-continues" target="_blank" data-smartkarma-citation="insights:44014" rel="noopener">Naspers: “Double” Discount Warranted? The Search for a Catalyst Continues</a>), I analysed what I believed to be the 6 key drivers of Prosus’ and Naspers’ holding company discounts to find a catalyst for value unlock, and perhaps an interesting, discounted entry point to <a href="https://www.smartkarma.com/entities/tencent-holdings-ltd" target="_blank" data-smartkarma-citation="entities:26:1" rel="noopener">Tencent (700 HK)</a>. Following the exchange offer, which has just been concluded, I revisit these drivers and update the fundamental sum-of-the-parts valuations for both Prosus and Naspers.

Following the completion of Prosus (PRX NA)’ voluntary exchange offer for Naspers (NPN SJ) shares, we are left with management having achieved their goal of meaningfully reducing Naspers’ overweight position on the notable South African equity indices (a key driver of the discount to NAV), and increasing the Prosus free float materially, with a commensurate increase in index weightings. It has also left us with a cross-holding structure which has significantly increased the complexity of trading dynamics, increased currency risk exposures, and a reduced corporate governance perception of the group. 
In a detailed insight last year (Naspers: “Double” Discount Warranted? The Search for a Catalyst Continues), I analysed what I believed to be the 6 key drivers of Prosus’ and Naspers’ holding company discounts to find a catalyst for value unlock, and perhaps an interesting, discounted entry point to Tencent (700 HK). Following the exchange offer, which has just been concluded, I revisit these drivers and update the fundamental sum-of-the-parts valuations for both Prosus and Naspers.

Prosus/Naspers: Fundamental Drivers of the Discount Revisited Post the Exchange Offer

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

Ke Yan, CFA, FRM

Asia Pac IPO & Placement Research, China biotech

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.

We have discussed previously that the Chinese central government could impose tightening measure on online game companies to restrict screen time for the youth. Last night the NPPA announced a notice further tightening the youth playing. In this note, we will take a look at the notice and assess the impact on Tencent and Netease. We are of the view that this policy will have little impact on the two companies.

We have discussed previously that the Chinese central government could impose tightening measure on online game companies to restrict screen time for the youth. Last night the NPPA announced a notice further tightening the youth playing. In this note, we will take a look at the notice and assess the impact on Tencent and Netease. We are of the view that this policy will have little impact on the two companies. 

Tencent/Netease: Online Game Tightening Coming to an End

Japan/Asia Long-Short, LightStream Research

Mio Kato

Japan/Asia Long-Short

Long-Short Analysis on Japan, Asia and the World

LightStream Research

LightStream conducts quantitatively rigorous and data-driven analysis with a focus on Japan and Asia.

We consistently cover the Tech, Consumer and Industrial sectors, and provide ECM and Events coverage more broadly.

We supplement traditional qualitative insights from company relationships with a robust quantitative foundation that examines as much historical data as is available.
We further refine the accuracy of our insights and calls through the use of alternative data to flesh out current trends, and through a valuation framework that emphasises non-superficial peer group selection and a proper attempt to understand the metrics and changes that have driven security valuations in the past.

Overnight many Chinese gaming-related names fell ~3% on news that China would be restricting playing time for minors to just three hours a week, specifically 20:00-21:00 on Friday, Saturday and Sunday. The market reaction grossly underestimates how drastic these restrictions will be for gaming companies and seems to simply be superficially looking at the low single-digit revenue contribution percentages of minors.

Overnight many Chinese gaming-related names fell ~3% on news that China would be restricting playing time for minors to just three hours a week, specifically 20:00-21:00 on Friday, Saturday and Sunday. The market reaction grossly underestimates how drastic these restrictions will be for gaming companies and seems to simply be superficially looking at the low single-digit revenue contribution percentages of minors.

China Gaming Restrictions Are FAR More Severe Than the Market Is Assuming

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

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Event-Driven

The upcoming rebalances 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>, <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> and <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> will be implemented at the close of trading on 3 September. The rebalance will use data from todays close to cap the stocks in the index at a maximum of 8% of the index weight.In this Insight, we show the flows after capping stocks using the close on 30 August. The final numbers will be marginally different based on todays closing prices.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>.For 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>, the inclusions are <a href="https://www.smartkarma.com/entities/jd-logistics" target="_blank" data-smartkarma-citation="entities:31500:1" rel="noopener">JD Logistics (2618 HK)</a> and <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> while the deletions are <a href="https://www.smartkarma.com/entities/shimao-property-holdings-limited" target="_blank" data-smartkarma-citation="entities:8375:1" rel="noopener">Shimao Property Holdings (813 HK)</a> and <a href="https://www.smartkarma.com/entities/anhui-conch-cement-co-ltd" target="_blank" data-smartkarma-citation="entities:159:1" rel="noopener">Anhui Conch Cement (914 HK)</a>.For the <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> there is one set of changes with Trip.com (9961 HK) / <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> replacing <a href="https://www.smartkarma.com/entities/koolearn-technology-holding" target="_blank" data-smartkarma-citation="entities:27796:1" rel="noopener">Koolearn (1797 HK)</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>'s weight in all 3 indices is higher than 8% following the increase in the number of index shares at the July monthly rebalance. The stock will have the largest passive selling due to capping back to 8%.Capping and float changes will lead to passive buying on <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/meituan-dianping" target="_blank" data-smartkarma-citation="entities:26970:1" rel="noopener">Meituan (3690 HK)</a> and <a href="https://www.smartkarma.com/entities/beijing-kuaishou-technology-co-ltd" target="_blank" data-smartkarma-citation="entities:29725:1" rel="noopener">Kuaishou Technology (1024 HK)</a>, while there will be passive selling on <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>, <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>, <a href="https://www.smartkarma.com/entities/china-construction-bank-h" target="_blank" data-smartkarma-citation="entities:45:1" rel="noopener">China Construction Bank H (939 HK)</a>, <a href="https://www.smartkarma.com/entities/xiaomi-corp" target="_blank" data-smartkarma-citation="entities:24409:1" rel="noopener">Xiaomi Corp (1810 HK)</a> and <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>.There will be selling on a lot of 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> constituents due to funding flows.

The upcoming rebalances for the Hong Kong Hang Seng Index (HSI INDEX), Hang Seng China Enterprises Index (HSCEI INDEX) and Hang Seng Tech Index (HSTECH INDEX) will be implemented at the close of trading on 3 September. The rebalance will use data from todays close to cap the stocks in the index at a maximum of 8% of the index weight.In this Insight, we show the flows after capping stocks using the close on 30 August. The final numbers will be marginally different based on todays closing prices.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).For the Hang Seng China Enterprises Index (HSCEI INDEX), the inclusions are JD Logistics (2618 HK) and Li Ning Co Ltd (2331 HK) while the deletions are Shimao Property Holdings (813 HK) and Anhui Conch Cement (914 HK).For the Hang Seng Tech Index (HSTECH INDEX) there is one set of changes with Trip.com (9961 HK) / Trip.com (TCOM US) replacing Koolearn (1797 HK).Alibaba Group (9988 HK)'s weight in all 3 indices is higher than 8% following the increase in the number of index shares at the July monthly rebalance. The stock will have the largest passive selling due to capping back to 8%.Capping and float changes will lead to passive buying on Tencent (700 HK), Meituan (3690 HK) and Kuaishou Technology (1024 HK), while there will be passive selling on HSBC Holdings (5 HK), AIA Group Ltd (1299 HK), China Construction Bank H (939 HK), Xiaomi Corp (1810 HK) and HKEX (388 HK).There will be selling on a lot of the Hong Kong Hang Seng Index (HSI INDEX) constituents due to funding flows.

HSI, HSCEI, HSTECH: September Rebalance Flows Post Capping

IPOs and Catalysts/Events, Global Equity Research Ltd

Arun George

IPOs and Catalysts/Events

Uncompromised, Independent, Conflict-Free Research

Global Equity Research Ltd

Global Equity Research was started in 2017 by a group of experienced research professionals. It was founded on a passionate belief in the importance and the need for uncompromised, independent, conflict-free research. We aim to provide differentiated and actionable primary and bottom up fundamental research.

<a href="https://www.smartkarma.com/entities/china-youzan-limited" target="_blank" data-smartkarma-citation="entities:11467:1" rel="noopener">China Youzan (8083 HK)</a> has provided an update on its privatisation proposal. There is no change to the scheme consideration (HK$0.1352 in cash per scheme share) and the terms of the Youzan Technology distribution (0.05077265 Youzan Technology share for every China Youzan share). The key change is that Youzan Technology shares will be listed on the HKEx by way of an offering of new shares, instead of by way of introduction. The privatisation offer implies a total value of HK$1.4654 per share, which is a 100.7% premium to the last trading day price of HK$0.73 (27 August). However, the implied valuation of HK$1.4654 per share is -37% lower than the original valuation of HK$2.3088 per share (announced on 28 February 2021). As the cash consideration is unchanged, the lower valuation is driven by the decline in Youzan Technology’s estimated value between the original valuation reference date (30 November 2020) and the new valuation reference date (30 June 2021). The key conditions precedent are the headcount test and the scheme approved by at least 75% disinterested shareholders (&lt;10% disinterested shareholders rejection). No independent shareholder holds a blocking stake.The valuer continues to base Youzan Technology's valuation by deducting the market value of the payment &amp; other business from the market cap of China Youzan. However, since the latest assessment date (30 June 2021), China Youzan’s shares have further declined -45% in part due to the Chinese tech selloff driven by the regulatory reset. Consequently, based on the valuer’s methodology, Youzan Technology’s valuation is RMB11.02 per share at the last close vs the valuation of RMB21.76 per share at the valuation reference date (30 June 2021). <div class="content-highlight">
The privatisation offer remains broadly fair in both the distribution in-specie (distribution ratio in line with the control ratio) and the cash consideration (marginally below the value of the payments business due to peer multiple re-rating).
China Youzan’s valuation hinges on the valuation of Youzan Technology, which remains in a state of flux due to the uncertain regulatory backdrop. China Youzan’s last close price of HK$0.82 per share implies that Youzan Technology is valued at a trailing EV/Sales multiple of 12.7x, broadly in line with SaaS commerce peers' current trailing EV/Sales multiple of 13.4x (but at a premium to Chinese peers). As Youzan Technology is at best fairly valued at China Youzan’s last close price, we would remain on the sidelines. 
</div>

China Youzan (8083 HK) has provided an update on its privatisation proposal. There is no change to the scheme consideration (HK$0.1352 in cash per scheme share) and the terms of the Youzan Technology distribution (0.05077265 Youzan Technology share for every China Youzan share). The key change is that Youzan Technology shares will be listed on the HKEx by way of an offering of new shares, instead of by way of introduction. The privatisation offer implies a total value of HK$1.4654 per share, which is a 100.7% premium to the last trading day price of HK$0.73 (27 August). However, the implied valuation of HK$1.4654 per share is -37% lower than the original valuation of HK$2.3088 per share (announced on 28 February 2021). As the cash consideration is unchanged, the lower valuation is driven by the decline in Youzan Technology’s estimated value between the original valuation reference date (30 November 2020) and the new valuation reference date (30 June 2021). The key conditions precedent are the headcount test and the scheme approved by at least 75% disinterested shareholders (&lt;10% disinterested shareholders rejection). No independent shareholder holds a blocking stake.The valuer continues to base Youzan Technology's valuation by deducting the market value of the payment &amp; other business from the market cap of China Youzan. However, since the latest assessment date (30 June 2021), China Youzan’s shares have further declined -45% in part due to the Chinese tech selloff driven by the regulatory reset. Consequently, based on the valuer’s methodology, Youzan Technology’s valuation is RMB11.02 per share at the last close vs the valuation of RMB21.76 per share at the valuation reference date (30 June 2021). 
The privatisation offer remains broadly fair in both the distribution in-specie (distribution ratio in line with the control ratio) and the cash consideration (marginally below the value of the payments business due to peer multiple re-rating).
China Youzan’s valuation hinges on the valuation of Youzan Technology, which remains in a state of flux due to the uncertain regulatory backdrop. China Youzan’s last close price of HK$0.82 per share implies that Youzan Technology is valued at a trailing EV/Sales multiple of 12.7x, broadly in line with SaaS commerce peers' current trailing EV/Sales multiple of 13.4x (but at a premium to Chinese peers). As Youzan Technology is at best fairly valued at China Youzan’s last close price, we would remain on the sidelines. 


China Youzan’s Updated Privatisation Proposal

China

Tencent Holdings Limited operates as an investment holding company. The Company, through its subsidiaries, provides Internet and mobile value-added services (VAS), online advertising, and e-commerce transactions. Tencent Holdings offers services to users worldwide.

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Tencent (700 HK)

Prosus/Naspers: Fundamental Drivers of the Discount Revisited Post the Exchange Offer

In this insight, and following the completion of their exchange offer, I revisit what I believe to be the 6 key fundamental drivers of the Naspers...

Wium Malan, CFA

Tencent/Netease: Online Game Tightening Coming to an End

Last night the NPPA announced a notice further tightening the youth playing. In this note, we will take a look at the notice and continue to...

Ke Yan, CFA, FRM

China Gaming Restrictions Are FAR More Severe Than the Market Is Assuming

We believe the market reaction to China's new gaming restrictions grossly underestimates how drastic the long-term impact will be.

Mio Kato

HSI, HSCEI, HSTECH: September Rebalance Flows Post Capping

There are some pretty large flows across the HSI, HSCEI and HSTECH at the September rebalance due to name/float/capping changes. Impact on some...

Brian Freitas

China Youzan’s Updated Privatisation Proposal

China Youzan’s valuation hinges on the valuation of Youzan Technology, which remains in a state of flux. As Youzan Technology is at best fairly...

Arun George

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