Global Emerging Market Equities, Propitious Research

Wium Malan, CFA

Global Emerging Market Equities

Equity Bottom-Up

<p>Over the past two weeks, there have been two significant negative catalytic events (SEC moved forward on the road to a potential US delisting and missed margin calls by Archegos Capital Management created a forced seller) which has placed significant pressure on the Baidu share price, listed in the US <a href="https://www.smartkarma.com/entities/baidu-inc" target="_blank" data-smartkarma-citation="entities:179:1" rel="noopener">Baidu (BIDU US)</a> and Hong Kong <a href="https://www.smartkarma.com/entities/baidu-inc-a55ca720-5968-48f0-8194-ac94390d065c" target="_blank" data-smartkarma-citation="entities:32212:1" rel="noopener">Baidu (9888 HK)</a>.  </p>
<p>In this insight, I analyse the impact of recent share price movements on Baidu’s valuation and what that implies for the Core Search and Non-marketing Core operations. </p>

Over the past two weeks, there have been two significant negative catalytic events (SEC moved forward on the road to a potential US delisting and missed margin calls by Archegos Capital Management created a forced seller) which has placed significant pressure on the Baidu share price, listed in the US Baidu (BIDU US) and Hong Kong Baidu (9888 HK).  
In this insight, I analyse the impact of recent share price movements on Baidu’s valuation and what that implies for the Core Search and Non-marketing Core operations. 

Baidu: Attractive Short Term Entry Point Following SEC Statement and Block Sales

Head of Research, IPOs & Placements, Aequitas Research

Sumeet Singh

Head of Research, IPOs & Placements

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.

Event-Driven

<div>
<p>On 25th Mar 2021, we wrote about the knee jerk correction in some of the China ADRs that were yet to undertake a secondary listing as being unwarranted. Since then the ADRs have corrected further but now we know that the correction was more than just a reaction to SEC notice. In this note, we take a look at the recent updates and share price action and talk about its implications.</p>
</div>
<div>
<p>We have looked at the ADRs in the past, in our previous notes:</p>
</div>
<div>
<ul style="list-style-type: disc;">
<li>
<a href="https://www.smartkarma.com/insights/china-adrs-secondary-listing-deep-dive-yin-and-yang" target="_blank" rel="noopener">China ADRs Secondary Listing Deep-Dive: Yin and Yang,</a> published in Feb 2020,  we looked at the background and rules around undertaking a secondary listing in Hong Kong and then came up with a short-list of companies that might undertake a secondary listing. </li>
<li>
<a href="https://www.smartkarma.com/insights/china-adrs-secondary-listing-covid-19-has-increased-the-tension-but-narrowed-the-short-list" target="_blank" rel="noopener">In China ADRs Secondary Listing: COVID-19 Has Increased the Tension but Narrowed the Short List</a> published in May 2020, we looked at the recent developments and provided an revised short-list</li>
<li>In <a href="https://www.smartkarma.com/insights/china-adrs-secondary-listing-holding-foreign-companies-accountable-act-i-m-coming-home" target="_blank" rel="noopener">China ADRs Secondary Listing - Holding Foreign Companies Accountable Act - I’m Coming Home</a>, published in May 2020, we spoke about the implication of the act which had made its way through the senate.</li>
<li>In <a href="https://www.smartkarma.com/insights/china-adrs-secondary-listing-pipeline-looks-rich-have-three-years-to-move" target="_blank" rel="noopener">China ADRs Secondary Listing - Pipeline Looks Rich, Have Three Years to Move</a>, published in Feb 2021 we looked at the ADR pipeline and spoke about the updates from the Holding Foreign Companies Accountable Act becoming law and the updates at Hong Kong end as well. </li>
<li>In <a href="https://www.smartkarma.com/insights/china-adrs-sec-notice-instead-of-three-probably-have-four-years-till-2025-correction-overdone" target="_blank" rel="noopener">China ADRs - SEC Notice - Instead of Three, Probably Have Four Years till 2025 - Correction Overdone, </a> we spoke about the new SEC notice and its implications. </li>
</ul>
</div>


On 25th Mar 2021, we wrote about the knee jerk correction in some of the China ADRs that were yet to undertake a secondary listing as being unwarranted. Since then the ADRs have corrected further but now we know that the correction was more than just a reaction to SEC notice. In this note, we take a look at the recent updates and share price action and talk about its implications.


We have looked at the ADRs in the past, in our previous notes:




China ADRs Secondary Listing Deep-Dive: Yin and Yang, published in Feb 2020,  we looked at the background and rules around undertaking a secondary listing in Hong Kong and then came up with a short-list of companies that might undertake a secondary listing. 

In China ADRs Secondary Listing: COVID-19 Has Increased the Tension but Narrowed the Short List published in May 2020, we looked at the recent developments and provided an revised short-list
In China ADRs Secondary Listing - Holding Foreign Companies Accountable Act - I’m Coming Home, published in May 2020, we spoke about the implication of the act which had made its way through the senate.
In China ADRs Secondary Listing - Pipeline Looks Rich, Have Three Years to Move, published in Feb 2021 we looked at the ADR pipeline and spoke about the updates from the Holding Foreign Companies Accountable Act becoming law and the updates at Hong Kong end as well. 
In China ADRs - SEC Notice - Instead of Three, Probably Have Four Years till 2025 - Correction Overdone,  we spoke about the new SEC notice and its implications. 



China ADRs- Blocks, Liquidation, Buyback - Implications

Equity Capital Markets

Alibaba Group Holding  / Equity Capital Markets

<div>
<p>On 24th Mar 2021, Securities Exchange Commission (SEC) issued Amendments, Seeks Public Comment on Holding Foreign Companies Accountable Act. On the back of this, large China ADRs fell by 7.5% on average. </p>
<p>We have covered various aspects of this topic before in our prior note, links to which are below. In this note, I'll talk about the SEC updates.</p>
</div>
<div>
<p>In our previous notes:</p>
</div>
<div>
<ul style="list-style-type: disc;">
<li>
<a href="https://www.smartkarma.com/insights/china-adrs-secondary-listing-deep-dive-yin-and-yang" target="_blank" rel="noopener">China ADRs Secondary Listing Deep-Dive: Yin and Yang,</a> published in Feb 2020,  we looked at the background and rules around undertaking a secondary listing in Hong Kong and then came up with a short-list of companies that might undertake a secondary listing. </li>
<li>
<a href="https://www.smartkarma.com/insights/china-adrs-secondary-listing-covid-19-has-increased-the-tension-but-narrowed-the-short-list" target="_blank" rel="noopener">In China ADRs Secondary Listing: COVID-19 Has Increased the Tension but Narrowed the Short List</a> published in May 2020, we looked at the recent developments and provided an revised short-list</li>
<li>In <a href="https://www.smartkarma.com/insights/china-adrs-secondary-listing-holding-foreign-companies-accountable-act-i-m-coming-home" target="_blank" rel="noopener">China ADRs Secondary Listing - Holding Foreign Companies Accountable Act - I’m Coming Home</a>, published in May 2020, we spoke about the implication of the act which had made its way through the senate.</li>
<li>In <a href="https://www.smartkarma.com/insights/china-adrs-secondary-listing-pipeline-looks-rich-have-three-years-to-move" target="_blank" rel="noopener">China ADRs Secondary Listing - Pipeline Looks Rich, Have Three Years to Move</a>, published in Feb 2021 we looked at the ADR pipeline and spoke about the updates from the Holding Foreign Companies Accountable Act becoming law and the updates at Hong Kong end as well. </li>
</ul>
</div>


On 24th Mar 2021, Securities Exchange Commission (SEC) issued Amendments, Seeks Public Comment on Holding Foreign Companies Accountable Act. On the back of this, large China ADRs fell by 7.5% on average. 
We have covered various aspects of this topic before in our prior note, links to which are below. In this note, I'll talk about the SEC updates.


In our previous notes:




China ADRs Secondary Listing Deep-Dive: Yin and Yang, published in Feb 2020,  we looked at the background and rules around undertaking a secondary listing in Hong Kong and then came up with a short-list of companies that might undertake a secondary listing. 

In China ADRs Secondary Listing: COVID-19 Has Increased the Tension but Narrowed the Short List published in May 2020, we looked at the recent developments and provided an revised short-list
In China ADRs Secondary Listing - Holding Foreign Companies Accountable Act - I’m Coming Home, published in May 2020, we spoke about the implication of the act which had made its way through the senate.
In China ADRs Secondary Listing - Pipeline Looks Rich, Have Three Years to Move, published in Feb 2021 we looked at the ADR pipeline and spoke about the updates from the Holding Foreign Companies Accountable Act becoming law and the updates at Hong Kong end as well. 



China ADRs - SEC Notice - Instead of Three, Probably Have Four Years till 2025 - Correction Overdone

Global TMT analyst with Asia ex-Japan focus.

Mitchell Kim

<p><strong><a href="https://www.smartkarma.com/entities/tencent-holdings-ltd" target="_blank" data-smartkarma-citation="entities:26:1" rel="noopener">Tencent Holdings (700 HK)</a> shares slid 18% in the two months after reaching the record high on 25 January 2021.</strong> The shares have been under pressure mostly on regulatory risks along with Alibaba.  As Tencent reported solid 4Q20 earnings on 24 March 2021, many of the Chinese Internet stocks took a hit on news that Chinese Internet platforms may be “encouraged” to contribute their digital payment and eCommerce transaction data to a joint venture company overseeing such lucrative data collection. While this news has been slowly reverberating since the beginning of the year, we are likely to have more clarity in the coming months. </p><p>Our preliminary view on the Fintech risk is that Tencent will likely face a smaller impact than <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>  – albeit, Alibaba shares have more than fully reflected such known risk, in our view – because Tenpay has a smaller exposure to consumer loans.  We will cover this discussion at another time. </p><p>While investors certain can blame such share overhang risks undercutting the bullish momentum from the beginning of the year, we flag that Tencent’s results hint that the company’s benefit from the COVID-19 is fading.  Our key observations from the results are:</p><ul>
<li>
<strong>The online game growth of 2Q-3Q20 is not sustainable.</strong>  The growth for 2020 was impressive and the 4Q20 growth was still solid but there are signs that the growth is slowing even with new game introductions.  We estimate online game revenue growth to slow to 25% in 2021. </li>
<li>
<strong>Online advertising revenue growth re-accelerated marginally in 2020.</strong>  Tencent’s social advertising growth is gaining momentum as P4P is picking up with Moments ads.  We estimate advertising revenue growth remains stable at 19% in 2021. </li>
<li>
<strong> Fintech growth is promising, notwithstanding the government risk. </strong> 4Q20 growth remained healthy at 29%.  We believe 19% growth in 2021e is achievable.   </li>
</ul><p><strong>Valuation:</strong> Our SOTP based on 2020 valuation comparables suggests a fair value at over HKD700, but there is a lower upside as we roll over to 2021 valuation comps.  <strong>Even though operating metrics still look solid, Tencent’s risk-return profile looks less compelling despite the 18% fall. </strong>    </p>

Tencent Holdings (700 HK) shares slid 18% in the two months after reaching the record high on 25 January 2021. The shares have been under pressure mostly on regulatory risks along with Alibaba.  As Tencent reported solid 4Q20 earnings on 24 March 2021, many of the Chinese Internet stocks took a hit on news that Chinese Internet platforms may be “encouraged” to contribute their digital payment and eCommerce transaction data to a joint venture company overseeing such lucrative data collection. While this news has been slowly reverberating since the beginning of the year, we are likely to have more clarity in the coming months. Our preliminary view on the Fintech risk is that Tencent will likely face a smaller impact than Alibaba Group (BABA US)  – albeit, Alibaba shares have more than fully reflected such known risk, in our view – because Tenpay has a smaller exposure to consumer loans.  We will cover this discussion at another time. While investors certain can blame such share overhang risks undercutting the bullish momentum from the beginning of the year, we flag that Tencent’s results hint that the company’s benefit from the COVID-19 is fading.  Our key observations from the results are:

The online game growth of 2Q-3Q20 is not sustainable.  The growth for 2020 was impressive and the 4Q20 growth was still solid but there are signs that the growth is slowing even with new game introductions.  We estimate online game revenue growth to slow to 25% in 2021. 

Online advertising revenue growth re-accelerated marginally in 2020.  Tencent’s social advertising growth is gaining momentum as P4P is picking up with Moments ads.  We estimate advertising revenue growth remains stable at 19% in 2021. 

 Fintech growth is promising, notwithstanding the government risk.  4Q20 growth remained healthy at 29%.  We believe 19% growth in 2021e is achievable.   
Valuation: Our SOTP based on 2020 valuation comparables suggests a fair value at over HKD700, but there is a lower upside as we roll over to 2021 valuation comps.  Even though operating metrics still look solid, Tencent’s risk-return profile looks less compelling despite the 18% fall.     

Tencent (700 HK): Taking Foot Off the Pedal

<p>We have been flagging that despite the appeal of ultra-growth the risk-return favors the downside on both operating momentum and valuations.  In our last report, <a href="https://www.smartkarma.com/insights/pinduoduo-pdd-us-know-when-to-fold-know-when-to-run" target="_blank" data-smartkarma-citation="insights:48659" rel="noopener">Pinduoduo (PDD US): Know When to Fold, Know When to Run</a>, we highlighted that <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> offers much better value than PDD on P/GMV.  PDD's share price fell 18% in the month of March, but the stock still trades at a 29% premium to BABA shares (however, we do note the share overhang on BABA shares from the anti-monopoly uncertainty in the near-term.)   </p><p>In this report, we highlight four charts that would make PDD holders nervous:</p><ol>
<li>
<strong>P/Sales chart</strong> – PDD trades at 3x BABA’s multiple.  PDD is not profitable.  BABA’s operating margin was 22% in the Dec quarter and 72% EBITA margin for the marketplace. </li>
<li>Once the growth rate breaks below 100%, the rate of deceleration is rapid.  Take a look at <a href="https://www.smartkarma.com/entities/vipshop-holdings-ltd-adr" target="_blank" data-smartkarma-citation="entities:1088:1" rel="noopener">Vipshop Holdings (VIPS US)</a>, <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>, and BABA’s <strong>historical revenue deceleration rates.</strong>  PDD’s revenue growth in 2020 fell to 62% (normalized to exclude merchandise sales) from 130% in 2019.</li>
<li>
<strong>GMV (Gross Merchandise Value) growth</strong> continued to decelerate in 4Q20.  PDD needs both buyer number and revenue per buyer increase to grow 30%+ respectably to maintain 60%+ revenue growth.  PDD recorded 35% and 23% growth, respectively, in 4Q20. </li>
<li>The path to profitability remains unclear.  <strong>Gross margin continues to come under pressure</strong> and operating loss margin widened instead of narrowing QoQ, excluding the new merchandise sales. We don't see meaningful evidence of ready to turn profitable yet, although the new merchandise sales appear to be margin accretive.         </li>
</ol>

We have been flagging that despite the appeal of ultra-growth the risk-return favors the downside on both operating momentum and valuations.  In our last report, Pinduoduo (PDD US): Know When to Fold, Know When to Run, we highlighted that Alibaba Group (BABA US) offers much better value than PDD on P/GMV.  PDD's share price fell 18% in the month of March, but the stock still trades at a 29% premium to BABA shares (however, we do note the share overhang on BABA shares from the anti-monopoly uncertainty in the near-term.)   In this report, we highlight four charts that would make PDD holders nervous:

P/Sales chart – PDD trades at 3x BABA’s multiple.  PDD is not profitable.  BABA’s operating margin was 22% in the Dec quarter and 72% EBITA margin for the marketplace. 
Once the growth rate breaks below 100%, the rate of deceleration is rapid.  Take a look at Vipshop Holdings (VIPS US), JD.com Inc (ADR) (JD US), and BABA’s historical revenue deceleration rates.  PDD’s revenue growth in 2020 fell to 62% (normalized to exclude merchandise sales) from 130% in 2019.

GMV (Gross Merchandise Value) growth continued to decelerate in 4Q20.  PDD needs both buyer number and revenue per buyer increase to grow 30%+ respectably to maintain 60%+ revenue growth.  PDD recorded 35% and 23% growth, respectively, in 4Q20. 
The path to profitability remains unclear.  Gross margin continues to come under pressure and operating loss margin widened instead of narrowing QoQ, excluding the new merchandise sales. We don't see meaningful evidence of ready to turn profitable yet, although the new merchandise sales appear to be margin accretive.         


Pin Duo Duo (PDD US): Four Charts To Make You Want to Run

China

Vipshop Holdings Ltd. retails branded products at discount over the Internet. The Company retails through flash sales, in which limited quantities of an item are sold at deep discount for a specified period of time.

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Vipshop Holdings (VIPS US)

Baidu: Attractive Short Term Entry Point Following SEC Statement and Block Sales

In this insight, I analyse the impact of recent share price movements on Baidu’s valuation and what that implies for the Core Search and Non...

Wium Malan, CFA

China ADRs- Blocks, Liquidation, Buyback - Implications

On 25th Mar 2021, we wrote about the knee jerk correction in some of the China ADRs. Since then the ADRs have corrected further. In this note, we...

Sumeet Singh

China ADRs - SEC Notice - Instead of Three, Probably Have Four Years till 2025 - Correction Overdone

On 24th Mar 2021, SEC issued Amendments, Seeks Public Comment on Holding Foreign Companies Accountable Act. On the back of this, large China ADRs...

Sumeet Singh

Tencent (700 HK): Taking Foot Off the Pedal

Tencent shares are under pressure due to regulatory uncertainty, but its game growth is also slowing as the benefit of COVID-19 stay-at-home order...

Mitchell Kim

Pin Duo Duo (PDD US): Four Charts To Make You Want to Run

We believe BABA and JD shares offer better value than the ultra-growth PDD shares. In this report, we highlight four charts that would make PDD...

Mitchell Kim

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