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>The main business, game, continued to slow down in 1Q20.</li>
<li>We believe NTES is losing brand advantage, because the game industry has changed.</li>
<li>We believe the operating margin will decline when non-game businesses account for a larger proportion of total revenues.</li>
<li>We set a downside of 17%.</li>
</ul>


The main business, game, continued to slow down in 1Q20.
We believe NTES is losing brand advantage, because the game industry has changed.
We believe the operating margin will decline when non-game businesses account for a larger proportion of total revenues.
We set a downside of 17%.


NetEase (NTES): 1Q21, Game Slowing Down as Game Industry Has Changed

TMT & Consumer Independent Equity Research Analyst, Obex Capital Research

Aaron Gabin

TMT & Consumer Independent Equity Research Analyst

TMT & Consumer Independent Equity Research

Obex Capital Research

“Obex” is Latin for Barriers to Entry. Obex Capital Management’s investment philosophy is driven by an intense focus on which business model’s Barriers to Entry are able to withstand the ever increasing competitive disruption in the TMT and Consumer Sectors.

<p><strong>Summary: </strong>Coursera, an online education platform will see its business model decelerate faster than expected. While the TAM trajectory of online education has clearly inflected higher due to the pandemic, we think  the Coursera’s growth trajectory is being mismodeled based on 2020’s surge in signups. Coursera’s profitability is dependent on scaling its enterprise and degree customer bases. While the demand for upskilling employees is real, intense competition from LinkedIn, Pluralsight, and others may crimp growth and gross margins segment, while a lack of leverage with its content suppliers (university partners), plus edX’s open source alternative  weaken revenue sharing over time. A lack of tangible evidence of Coursera’s skills-based credentialing translating to jobs will result in underwhelming consumer growth and lack of pricing power. Downside risks around regulation and competitive incursion by tech platforms paired with an obscene valuation make a compelling short case.</p><p> <strong>Base Case Valuation: $33                                  Bull Case: $57                                 Bear Case: $20</strong></p><p></p><div class="content-highlight"><p>Obex’s fundamental research process is focused on secular change in the TMT and Consumer sectors. We seek to differentiate between fundamental business analysis and security analysis. Before deciding if a security’s pricing and positioning merit a long or short position, we analyze the four pillars of business fundamentals (Secular Factors, TAM, Competitive Advantage, Business Model) in order to determine if this is a “good” or “not so good” opportunity.</p></div>

Summary: Coursera, an online education platform will see its business model decelerate faster than expected. While the TAM trajectory of online education has clearly inflected higher due to the pandemic, we think  the Coursera’s growth trajectory is being mismodeled based on 2020’s surge in signups. Coursera’s profitability is dependent on scaling its enterprise and degree customer bases. While the demand for upskilling employees is real, intense competition from LinkedIn, Pluralsight, and others may crimp growth and gross margins segment, while a lack of leverage with its content suppliers (university partners), plus edX’s open source alternative  weaken revenue sharing over time. A lack of tangible evidence of Coursera’s skills-based credentialing translating to jobs will result in underwhelming consumer growth and lack of pricing power. Downside risks around regulation and competitive incursion by tech platforms paired with an obscene valuation make a compelling short case. Base Case Valuation: $33                                  Bull Case: $57                                 Bear Case: $20Obex’s fundamental research process is focused on secular change in the TMT and Consumer sectors. We seek to differentiate between fundamental business analysis and security analysis. Before deciding if a security’s pricing and positioning merit a long or short position, we analyze the four pillars of business fundamentals (Secular Factors, TAM, Competitive Advantage, Business Model) in order to determine if this is a “good” or “not so good” opportunity.

APAC IPOs & Placements

Zhen Zhou, Toh

Equity Capital Markets

Zhihu Technology / Equity Capital Markets

<div><p><a href="https://www.smartkarma.com/entities/zhihu-technology-ltd" target="_blank" data-smartkarma-citation="entities:32185:1" rel="noopener">Zhihu Technology (ZH US)</a> raised US$773m at the bottom-end of the IPO price range (including the US$250m concurrent placement).</p></div><div><p>In this note, we will discuss what is circulating in the market and share our thoughts on how it impacts Zhihu.</p></div><div><p>Our previous coverage of Zhihu:</p></div><div><ul style="list-style-type: disc;">
<li>
<a href="https://www.smartkarma.com/insights/zhihu-pre-ipo-in-the-early-stages-of-monetization" target="_blank" data-smartkarma-citation="insights:49157" rel="noopener">Zhihu (知乎) Pre-IPO - In the Early Stages of Monetization</a> </li>
<li>
<a href="https://www.smartkarma.com/insights/zhihu-censorship-as-top-risk-may-follow-fate-of-weibo" target="_blank" data-smartkarma-citation="insights:49184" rel="noopener">Zhihu (知乎): Censorship as Top Risk, May Follow Fate of Weibo</a> </li>
<li>
<a href="https://www.smartkarma.com/insights/zhihu-ipo-monetizing-curiosity" target="_blank" data-smartkarma-citation="insights:49467" rel="noopener">Zhihu (知乎) IPO - Monetizing Curiosity</a> </li>
<li>
<a href="https://www.smartkarma.com/insights/zhihu-ipo-trading-peers-have-corrected-significantly-but-still-has-a-modest-upside" target="_blank" data-smartkarma-citation="insights:49684" rel="noopener">Zhihu (知乎) IPO Trading - Peers Have Corrected Significantly but Still Has a Modest Upside</a> </li>
</ul></div>

Zhihu Technology (ZH US) raised US$773m at the bottom-end of the IPO price range (including the US$250m concurrent placement).In this note, we will discuss what is circulating in the market and share our thoughts on how it impacts Zhihu.Our previous coverage of Zhihu:

Zhihu (知乎) Pre-IPO - In the Early Stages of Monetization 

Zhihu (知乎): Censorship as Top Risk, May Follow Fate of Weibo 

Zhihu (知乎) IPO - Monetizing Curiosity 

Zhihu (知乎) IPO Trading - Peers Have Corrected Significantly but Still Has a Modest Upside 


Zhihu (知乎) IPO Trading Update - Peers Took Another Leg Down on the Back of Rumored Document

Investment Advisors, JL Warren Capital

Junheng Li

Investment Advisors

JL Warren Capital

JL Warren Capital LLC is a leading independent equity research firm focused on Chinese companies and listed multinationals in China. We employ a bottom-up research approach that takes great care to avoid the acquisition of material non-public information. Through investigative due diligence including channel surveys and interviews, our research helps clients to pinpoint the dislocations in the market.

Thematic (Sector/Industry)

<p><em>In CY 2018 private AST operators responded to the regulatory tightening by swiftly reigning in their capacity expansions. In July 2018 <a href="https://www.smartkarma.com/entities/new-oriental-education-tech-grp-adr" target="_blank" data-smartkarma-citation="entities:531:1" rel="noopener">New Oriental Education (EDU US)</a>  and <a href="https://www.smartkarma.com/entities/tal-education-group" target="_blank" data-smartkarma-citation="entities:1124:1" rel="noopener">TAL Education (TAL US)</a>  guided ~27% and ~45% YoY topline YoY growth in the following summer semesters (August Q 2018, FQ2 19 for TAL, FQ1 19 for EDU), decelerating from 44% and 71% YoY growth in FQ1 2019 ended May 2018, respectively.  Both stocks were massively sold off:  TAL declined by 51% from then all-time high of 47 USD in June to 23 USD in October 2018.   During the same period, EDU dropped 50% from then all-time high of 105 USD (before 10 for 1 stock split on March 2021) in June 2018 to 52 USD in December 2018.   Nevertheless, since then EDU and TAL delivered 198% and 164% return since the beginning of 2019. </em></p>

In CY 2018 private AST operators responded to the regulatory tightening by swiftly reigning in their capacity expansions. In July 2018 New Oriental Education (EDU US)  and TAL Education (TAL US)  guided ~27% and ~45% YoY topline YoY growth in the following summer semesters (August Q 2018, FQ2 19 for TAL, FQ1 19 for EDU), decelerating from 44% and 71% YoY growth in FQ1 2019 ended May 2018, respectively.  Both stocks were massively sold off:  TAL declined by 51% from then all-time high of 47 USD in June to 23 USD in October 2018.   During the same period, EDU dropped 50% from then all-time high of 105 USD (before 10 for 1 stock split on March 2021) in June 2018 to 52 USD in December 2018.   Nevertheless, since then EDU and TAL delivered 198% and 164% return since the beginning of 2019. 

China’s Congress on AST Industry Oversight: Mostly Rhetoric, Little Practicality

Alibaba Group Holding  / Equity Bottom-Up

<ul>
<li>Kuaishou (1024 HK)’s vice president of community content was arrested for taking bribes.</li>
<li>Alibaba (BABA)’s public relation manager was rumored to jump off the office building in Beijing.</li>
<li>Suning Commerce (002024 CN)’s founder will sell his shareholdings.</li>
</ul>


Kuaishou (1024 HK)’s vice president of community content was arrested for taking bribes.
Alibaba (BABA)’s public relation manager was rumored to jump off the office building in Beijing.
Suning Commerce (002024 CN)’s founder will sell his shareholdings.


China Internet Weekly (Feb 22): Kuaishou VP Arrested, BABA Manager Dead “by Accident”, & Q4 Results

China

Youdao, Inc. develops and markets mobile internet applications. The Company provides language translation applications, personal cloud applications, e-commerce shopping applications, and other related products. Youdao also develops investment related applications.

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Youdao, Inc. (DAO US)

NetEase (NTES): 1Q21, Game Slowing Down as Game Industry Has Changed

The main business, game, continued to slow down in 1Q20. We believe NTES is losing brand advantage, because the game industry has changed.

Ming Lu

Coursera: Back to School

Coursera, an online education platform will see its business model decelerate faster than expected. Downside risks around regulation and...

Aaron Gabin

Zhihu (知乎) IPO Trading Update - Peers Took Another Leg Down on the Back of Rumored Document

We think the drop is overdone. Sure, Zhihu is sort of an educational website but it is nowhere close to what the techedu companies are doing.

Zhen Zhou, Toh

China’s Congress on AST Industry Oversight: Mostly Rhetoric, Little Practicality

The crackdown on irregular AST businesses, if seriously implemented, will wipe out small operators (mostly mom and pops), and leave the big ones...

JL Warren Capital

China Internet Weekly (Feb 22): Kuaishou VP Arrested, BABA Manager Dead “by Accident”, & Q4 Results

Kuaishou’s vice president was arrested for taking bribes. Alibaba’s manager was rumored to jump off the office building. Suning Commerce’s founder...

Ming Lu

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