China

In this briefing:

1. Japan – Chinese Flu
2. China Tower Results Confirm Lower Capex Outlook, but Were Otherwise Mixed
3. ESR Cayman Pre-IPO – A Giant in the Making
4. China Headwinds May Have Less Impact on Macau VIP Revenue than Forecasted
5. Xinyi Solar Placement – Past Deals Have Done Well, Improvement in Sentiment Should Help

1. Japan – Chinese Flu

By Konstantinos Venetis, Senior Economist

• Japan skirts recession but near-term prospects remain weak
• Deflationary headwinds to persist in H1, threatening business spending
• Recovery likely in late 2019 as world trade finds a firmer footing

2. China Tower Results Confirm Lower Capex Outlook, but Were Otherwise Mixed

China Tower (788 HK) reported 4Q18 results that looks slightly disappointing. However, they did deliver strong net profit, confirmation that capex is likely to materially undershoot guidance, and the first dividend for the company. However, while that is positive, there were areas of disappointment, with weaker revenue growth and EBITDA.

Our view remains that China Tower’s shares are relatively undervalued and expect share prices to continue to move higher over time, as the stock reflects its inflecting ROIC. It remains our favored name in China given the risks of policy driven over-investment into 5G (see Chinese Telcos: Rising 5G Capex Risk Leads to Another Downgrade).

3. ESR Cayman Pre-IPO – A Giant in the Making

ESR Cayman (ESR HK) aims to raise up to US$1.5bn in its planned Hong Kong listing, as per media reports. The company is backed by Warburg Pincus and counts APG, the Netherlands’ largest pension provider, as one of its main investors.

ESR operates an end-to-end model starting from development of the asset to divesting it to one of its private funds and/or REITs. It operates in China, Japan, South Korea, Australia, Singapore and India. AUM has grown rapidly over the past few years as the company has undertaken a number of acquisitions in the recent past. 

In this insight, I’ll touch upon the company’s business model and provide an overview of its operations. 

4. China Headwinds May Have Less Impact on Macau VIP Revenue than Forecasted

• Our profile of VIP gamblers indicate greater resiliency to slowing macro economics due to the nature of their wealth sources and motivations. We continue to believe Macau stocks are cheap.
• Our overall market forecast for 2019 remains +8% y/y. It includes a 4% upside in VIP.
• VIP gamblers behavior patterns lean to more influence from personal, rather than economic factors such as macro headwinds.

5. Xinyi Solar Placement – Past Deals Have Done Well, Improvement in Sentiment Should Help

Xinyi Solar Holdings (968 HK) is looking to raise about US$170m in its top-up placement with an upsize option of 225m shares.

The deal scored well on our framework owing to its good track record, strong earnings and price momentum. The company’s 2H 2018 result had marginally beaten estimates while the news of China potentially reversing its effort to reduce solar subsidy has helped improve the overall sentiment of Xinyi Solar. On top of that, the past deals have generally done well.

In this briefing:

1. NIO (NIO US): Lock-Up Expiry – This Could Get Messy
2. Matahari Department Store (LPPF IJ) – A Retail Conundrum
3. January Chip Revenues Down 15.6% Year-On-Year
4. Futures and Spot Opportunities
5. China A Share: Near-Term Momentum, but Time to Start Taking Profits

1. NIO (NIO US): Lock-Up Expiry – This Could Get Messy

Yesterday, NIO Inc (NIO US)’s share tumbled 20% on the back of poor 1Q19 guidance. NIO warned that deliveries of ES8, its electric SUV, have been sluggish so far in 2019 and scrapped plans to build its Shanghai Manufacturing Plant. NIO blamed the slump on uncertainty over government subsidies for electric vehicles, China’s slowing economy and disruption caused by the Chinese New Year holidays.

2. Matahari Department Store (LPPF IJ) – A Retail Conundrum

Pt Matahari Department Store (LPPF IJ)‘s FY18 results call was an interesting combination of kitchen sinking, a cautious outlook, combined with some more optimistic strategies on specialty stores with new brands and smaller format stores for regional expansion. The big question is whether these strategies will win out or will the company continue to underwhelm on its growth prospects? 

Pt Matahari Department Store (LPPF IJ) remains a market leader in its space with 159 departments stores across Indonesia selling affordable fashion to the middle classes but it has underwhelmed on a few occasions on its growth and guidance. It is reducing its dividend payout to facilitate the build-out of specialty stores with new brands on board. 

Valuations do now look interesting with the company trading on 6.0x FY19E PER and 5.4x FY20E PER. It generates a forecast ROE of 70% and ROE of 30%, which is extremely high for a retailer. The question is how much analysts will downgrade and whether investors will look through its Lippo connection. After another 9% fall in the share price today after 22% yesterday, a lot does seem to have been factored in already.

3. January Chip Revenues Down 15.6% Year-On-Year

The Semiconductor Industry Association in the US released the latest WSTS figures for January chip revenues.  Monthly revenues are down 15.6% from January of 2018.  While this is not a surprise to our clients it is frightening to those who anticipated that 2019 would be a continuation of the bonanza enjoyed in 2018.

4. Futures and Spot Opportunities

Liquidity is driving the futures market to push up iron ore. We know futures trading is very active. This tells us we are not the only ones who noticed the divergence and are looking to capitalize.The fundamental issue is that we expect the futures and spot are back together after being seeing a gap. 

5. China A Share: Near-Term Momentum, but Time to Start Taking Profits

Bottoming out (albeit marginal) of investor confidence drove the market rally YTD. News on 28th Feb that MSCI decides to quadruple China A-Shares inclusion in emerging market index is further boosting the market. Positive signals from Government Work Report might keep the market rally going for a while.

However, stake sale plans of listed companies’ major shareholders, who own 53% of A-share free-floating market cap, are on the way. This might be the catalyst for the rally to end as attracting new investors into the market is going to be tough. Institutional investors’ share positions are close to their historical high after keeping buying in the past few weeks and have limit cash for buying more. There are also no signal signs individual investors are increasing their capital allocation for stock investment.  In addition the aggressive stake reduction plans of major shareholders might be taken by other market participants to indicate negative expectations on their companies’ earnings this year. 

We think it’s time to turn cautious on A-shares: take profit and wait for the next buying opportunity for value investors.

In this briefing:

1. China Tower Results Confirm Lower Capex Outlook, but Were Otherwise Mixed
2. ESR Cayman Pre-IPO – A Giant in the Making
3. China Headwinds May Have Less Impact on Macau VIP Revenue than Forecasted
4. Xinyi Solar Placement – Past Deals Have Done Well, Improvement in Sentiment Should Help
5. NIO (NIO US): Lock-Up Expiry – This Could Get Messy

1. China Tower Results Confirm Lower Capex Outlook, but Were Otherwise Mixed

China Tower (788 HK) reported 4Q18 results that looks slightly disappointing. However, they did deliver strong net profit, confirmation that capex is likely to materially undershoot guidance, and the first dividend for the company. However, while that is positive, there were areas of disappointment, with weaker revenue growth and EBITDA.

Our view remains that China Tower’s shares are relatively undervalued and expect share prices to continue to move higher over time, as the stock reflects its inflecting ROIC. It remains our favored name in China given the risks of policy driven over-investment into 5G (see Chinese Telcos: Rising 5G Capex Risk Leads to Another Downgrade).

2. ESR Cayman Pre-IPO – A Giant in the Making

ESR Cayman (ESR HK) aims to raise up to US$1.5bn in its planned Hong Kong listing, as per media reports. The company is backed by Warburg Pincus and counts APG, the Netherlands’ largest pension provider, as one of its main investors.

ESR operates an end-to-end model starting from development of the asset to divesting it to one of its private funds and/or REITs. It operates in China, Japan, South Korea, Australia, Singapore and India. AUM has grown rapidly over the past few years as the company has undertaken a number of acquisitions in the recent past. 

In this insight, I’ll touch upon the company’s business model and provide an overview of its operations. 

3. China Headwinds May Have Less Impact on Macau VIP Revenue than Forecasted

• Our profile of VIP gamblers indicate greater resiliency to slowing macro economics due to the nature of their wealth sources and motivations. We continue to believe Macau stocks are cheap.
• Our overall market forecast for 2019 remains +8% y/y. It includes a 4% upside in VIP.
• VIP gamblers behavior patterns lean to more influence from personal, rather than economic factors such as macro headwinds.

4. Xinyi Solar Placement – Past Deals Have Done Well, Improvement in Sentiment Should Help

Xinyi Solar Holdings (968 HK) is looking to raise about US$170m in its top-up placement with an upsize option of 225m shares.

The deal scored well on our framework owing to its good track record, strong earnings and price momentum. The company’s 2H 2018 result had marginally beaten estimates while the news of China potentially reversing its effort to reduce solar subsidy has helped improve the overall sentiment of Xinyi Solar. On top of that, the past deals have generally done well.

5. NIO (NIO US): Lock-Up Expiry – This Could Get Messy

Yesterday, NIO Inc (NIO US)’s share tumbled 20% on the back of poor 1Q19 guidance. NIO warned that deliveries of ES8, its electric SUV, have been sluggish so far in 2019 and scrapped plans to build its Shanghai Manufacturing Plant. NIO blamed the slump on uncertainty over government subsidies for electric vehicles, China’s slowing economy and disruption caused by the Chinese New Year holidays.

In this briefing:

1. China Headwinds May Have Less Impact on Macau VIP Revenue than Forecasted
2. Xinyi Solar Placement – Past Deals Have Done Well, Improvement in Sentiment Should Help
3. NIO (NIO US): Lock-Up Expiry – This Could Get Messy
4. Matahari Department Store (LPPF IJ) – A Retail Conundrum
5. January Chip Revenues Down 15.6% Year-On-Year

1. China Headwinds May Have Less Impact on Macau VIP Revenue than Forecasted

• Our profile of VIP gamblers indicate greater resiliency to slowing macro economics due to the nature of their wealth sources and motivations. We continue to believe Macau stocks are cheap.
• Our overall market forecast for 2019 remains +8% y/y. It includes a 4% upside in VIP.
• VIP gamblers behavior patterns lean to more influence from personal, rather than economic factors such as macro headwinds.

2. Xinyi Solar Placement – Past Deals Have Done Well, Improvement in Sentiment Should Help

Xinyi Solar Holdings (968 HK) is looking to raise about US$170m in its top-up placement with an upsize option of 225m shares.

The deal scored well on our framework owing to its good track record, strong earnings and price momentum. The company’s 2H 2018 result had marginally beaten estimates while the news of China potentially reversing its effort to reduce solar subsidy has helped improve the overall sentiment of Xinyi Solar. On top of that, the past deals have generally done well.

3. NIO (NIO US): Lock-Up Expiry – This Could Get Messy

Yesterday, NIO Inc (NIO US)’s share tumbled 20% on the back of poor 1Q19 guidance. NIO warned that deliveries of ES8, its electric SUV, have been sluggish so far in 2019 and scrapped plans to build its Shanghai Manufacturing Plant. NIO blamed the slump on uncertainty over government subsidies for electric vehicles, China’s slowing economy and disruption caused by the Chinese New Year holidays.

4. Matahari Department Store (LPPF IJ) – A Retail Conundrum

Pt Matahari Department Store (LPPF IJ)‘s FY18 results call was an interesting combination of kitchen sinking, a cautious outlook, combined with some more optimistic strategies on specialty stores with new brands and smaller format stores for regional expansion. The big question is whether these strategies will win out or will the company continue to underwhelm on its growth prospects? 

Pt Matahari Department Store (LPPF IJ) remains a market leader in its space with 159 departments stores across Indonesia selling affordable fashion to the middle classes but it has underwhelmed on a few occasions on its growth and guidance. It is reducing its dividend payout to facilitate the build-out of specialty stores with new brands on board. 

Valuations do now look interesting with the company trading on 6.0x FY19E PER and 5.4x FY20E PER. It generates a forecast ROE of 70% and ROE of 30%, which is extremely high for a retailer. The question is how much analysts will downgrade and whether investors will look through its Lippo connection. After another 9% fall in the share price today after 22% yesterday, a lot does seem to have been factored in already.

5. January Chip Revenues Down 15.6% Year-On-Year

The Semiconductor Industry Association in the US released the latest WSTS figures for January chip revenues.  Monthly revenues are down 15.6% from January of 2018.  While this is not a surprise to our clients it is frightening to those who anticipated that 2019 would be a continuation of the bonanza enjoyed in 2018.

In this briefing:

1. Futures and Spot Opportunities
2. China A Share: Near-Term Momentum, but Time to Start Taking Profits
3. Sea Ltd (SE US): The Bear Case – A One-Hit Wonder?
4. Meituan Dianping (美团点评): Thoughts Before Lock-Up Expiry
5. Weibo (WB): Revenues Slowed Down Significantly in 4Q2018, Failed in Transition

1. Futures and Spot Opportunities

Liquidity is driving the futures market to push up iron ore. We know futures trading is very active. This tells us we are not the only ones who noticed the divergence and are looking to capitalize.The fundamental issue is that we expect the futures and spot are back together after being seeing a gap. 

2. China A Share: Near-Term Momentum, but Time to Start Taking Profits

Bottoming out (albeit marginal) of investor confidence drove the market rally YTD. News on 28th Feb that MSCI decides to quadruple China A-Shares inclusion in emerging market index is further boosting the market. Positive signals from Government Work Report might keep the market rally going for a while.

However, stake sale plans of listed companies’ major shareholders, who own 53% of A-share free-floating market cap, are on the way. This might be the catalyst for the rally to end as attracting new investors into the market is going to be tough. Institutional investors’ share positions are close to their historical high after keeping buying in the past few weeks and have limit cash for buying more. There are also no signal signs individual investors are increasing their capital allocation for stock investment.  In addition the aggressive stake reduction plans of major shareholders might be taken by other market participants to indicate negative expectations on their companies’ earnings this year. 

We think it’s time to turn cautious on A-shares: take profit and wait for the next buying opportunity for value investors.

3. Sea Ltd (SE US): The Bear Case – A One-Hit Wonder?

Despite burning through $700mn in cash in 2018, investors decided to give another $1.3bn to Sea Ltd (SE US) . We believe investors should treat Sea Ltd with caution for the following reasons:

A significant slowdown in e-commerce

Is the gaming division a one-hit wonder?

Expecting another 800mn cash burn into 2019

Consensus has priced in further upgrades while cash flow metrics worst in the sector

NB. Our team has taken both sides of the Sea Ltd investment case as we think this makes for better decision making and encourages unique thinking within our team. We strongly recommend that investors read my colleague Arun’s positive notes on the company listed below, if you have not already done so.

Sea Ltd (SE US): Placing Price Leaves Money on the Table

Sea Ltd (SE US): Placement a Good Opportunity to Enter an Attractive Story

4. Meituan Dianping (美团点评): Thoughts Before Lock-Up Expiry

Meituan Dianping, the largest O2O platform in China, was listed on September 20th last year and lock-up expiry will be on March 20th. The stock has returned -13% since listing. 

• As it heads into lock-up expiry on March 20th, we will examine Meituan Dianping shareholder structure and potential shares up for sale.
• Meituan was included by MSCI recently and will be eligible for the Hong Kong Connect soon thanks to rule amendment.
• The company delivered a decent topline growth in 3Q2018 but its profit fell short of expectation. We highlight potentials from the food supply chain solution. We also discuss implication from MoBike acquisition.
• We review our SOTP valuation of Meituan and believe there is an upside. 

5. Weibo (WB): Revenues Slowed Down Significantly in 4Q2018, Failed in Transition

• The advertising revenues slowed down significantly in 4Q2018.
• We believe the content transition from politics to entertainment was not as good as the management expected.
• We believe WB will not defeat Tencent’s WeChat.
• We believe the stock price has downside of 9%.

In this briefing:

1. Xinyi Solar Placement – Past Deals Have Done Well, Improvement in Sentiment Should Help
2. NIO (NIO US): Lock-Up Expiry – This Could Get Messy
3. Matahari Department Store (LPPF IJ) – A Retail Conundrum
4. January Chip Revenues Down 15.6% Year-On-Year
5. Futures and Spot Opportunities

1. Xinyi Solar Placement – Past Deals Have Done Well, Improvement in Sentiment Should Help

Xinyi Solar Holdings (968 HK) is looking to raise about US$170m in its top-up placement with an upsize option of 225m shares.

The deal scored well on our framework owing to its good track record, strong earnings and price momentum. The company’s 2H 2018 result had marginally beaten estimates while the news of China potentially reversing its effort to reduce solar subsidy has helped improve the overall sentiment of Xinyi Solar. On top of that, the past deals have generally done well.

2. NIO (NIO US): Lock-Up Expiry – This Could Get Messy

Yesterday, NIO Inc (NIO US)’s share tumbled 20% on the back of poor 1Q19 guidance. NIO warned that deliveries of ES8, its electric SUV, have been sluggish so far in 2019 and scrapped plans to build its Shanghai Manufacturing Plant. NIO blamed the slump on uncertainty over government subsidies for electric vehicles, China’s slowing economy and disruption caused by the Chinese New Year holidays.

3. Matahari Department Store (LPPF IJ) – A Retail Conundrum

Pt Matahari Department Store (LPPF IJ)‘s FY18 results call was an interesting combination of kitchen sinking, a cautious outlook, combined with some more optimistic strategies on specialty stores with new brands and smaller format stores for regional expansion. The big question is whether these strategies will win out or will the company continue to underwhelm on its growth prospects? 

Pt Matahari Department Store (LPPF IJ) remains a market leader in its space with 159 departments stores across Indonesia selling affordable fashion to the middle classes but it has underwhelmed on a few occasions on its growth and guidance. It is reducing its dividend payout to facilitate the build-out of specialty stores with new brands on board. 

Valuations do now look interesting with the company trading on 6.0x FY19E PER and 5.4x FY20E PER. It generates a forecast ROE of 70% and ROE of 30%, which is extremely high for a retailer. The question is how much analysts will downgrade and whether investors will look through its Lippo connection. After another 9% fall in the share price today after 22% yesterday, a lot does seem to have been factored in already.

4. January Chip Revenues Down 15.6% Year-On-Year

The Semiconductor Industry Association in the US released the latest WSTS figures for January chip revenues.  Monthly revenues are down 15.6% from January of 2018.  While this is not a surprise to our clients it is frightening to those who anticipated that 2019 would be a continuation of the bonanza enjoyed in 2018.

5. Futures and Spot Opportunities

Liquidity is driving the futures market to push up iron ore. We know futures trading is very active. This tells us we are not the only ones who noticed the divergence and are looking to capitalize.The fundamental issue is that we expect the futures and spot are back together after being seeing a gap. 

In this briefing:

1. Matahari Department Store (LPPF IJ) – A Retail Conundrum
2. January Chip Revenues Down 15.6% Year-On-Year
3. Futures and Spot Opportunities
4. China A Share: Near-Term Momentum, but Time to Start Taking Profits
5. Sea Ltd (SE US): The Bear Case – A One-Hit Wonder?

1. Matahari Department Store (LPPF IJ) – A Retail Conundrum

Pt Matahari Department Store (LPPF IJ)‘s FY18 results call was an interesting combination of kitchen sinking, a cautious outlook, combined with some more optimistic strategies on specialty stores with new brands and smaller format stores for regional expansion. The big question is whether these strategies will win out or will the company continue to underwhelm on its growth prospects? 

Pt Matahari Department Store (LPPF IJ) remains a market leader in its space with 159 departments stores across Indonesia selling affordable fashion to the middle classes but it has underwhelmed on a few occasions on its growth and guidance. It is reducing its dividend payout to facilitate the build-out of specialty stores with new brands on board. 

Valuations do now look interesting with the company trading on 6.0x FY19E PER and 5.4x FY20E PER. It generates a forecast ROE of 70% and ROE of 30%, which is extremely high for a retailer. The question is how much analysts will downgrade and whether investors will look through its Lippo connection. After another 9% fall in the share price today after 22% yesterday, a lot does seem to have been factored in already.

2. January Chip Revenues Down 15.6% Year-On-Year

The Semiconductor Industry Association in the US released the latest WSTS figures for January chip revenues.  Monthly revenues are down 15.6% from January of 2018.  While this is not a surprise to our clients it is frightening to those who anticipated that 2019 would be a continuation of the bonanza enjoyed in 2018.

3. Futures and Spot Opportunities

Liquidity is driving the futures market to push up iron ore. We know futures trading is very active. This tells us we are not the only ones who noticed the divergence and are looking to capitalize.The fundamental issue is that we expect the futures and spot are back together after being seeing a gap. 

4. China A Share: Near-Term Momentum, but Time to Start Taking Profits

Bottoming out (albeit marginal) of investor confidence drove the market rally YTD. News on 28th Feb that MSCI decides to quadruple China A-Shares inclusion in emerging market index is further boosting the market. Positive signals from Government Work Report might keep the market rally going for a while.

However, stake sale plans of listed companies’ major shareholders, who own 53% of A-share free-floating market cap, are on the way. This might be the catalyst for the rally to end as attracting new investors into the market is going to be tough. Institutional investors’ share positions are close to their historical high after keeping buying in the past few weeks and have limit cash for buying more. There are also no signal signs individual investors are increasing their capital allocation for stock investment.  In addition the aggressive stake reduction plans of major shareholders might be taken by other market participants to indicate negative expectations on their companies’ earnings this year. 

We think it’s time to turn cautious on A-shares: take profit and wait for the next buying opportunity for value investors.

5. Sea Ltd (SE US): The Bear Case – A One-Hit Wonder?

Despite burning through $700mn in cash in 2018, investors decided to give another $1.3bn to Sea Ltd (SE US) . We believe investors should treat Sea Ltd with caution for the following reasons:

A significant slowdown in e-commerce

Is the gaming division a one-hit wonder?

Expecting another 800mn cash burn into 2019

Consensus has priced in further upgrades while cash flow metrics worst in the sector

NB. Our team has taken both sides of the Sea Ltd investment case as we think this makes for better decision making and encourages unique thinking within our team. We strongly recommend that investors read my colleague Arun’s positive notes on the company listed below, if you have not already done so.

Sea Ltd (SE US): Placing Price Leaves Money on the Table

Sea Ltd (SE US): Placement a Good Opportunity to Enter an Attractive Story

In this briefing:

1. January Chip Revenues Down 15.6% Year-On-Year
2. Futures and Spot Opportunities
3. China A Share: Near-Term Momentum, but Time to Start Taking Profits
4. Sea Ltd (SE US): The Bear Case – A One-Hit Wonder?
5. Meituan Dianping (美团点评): Thoughts Before Lock-Up Expiry

1. January Chip Revenues Down 15.6% Year-On-Year

The Semiconductor Industry Association in the US released the latest WSTS figures for January chip revenues.  Monthly revenues are down 15.6% from January of 2018.  While this is not a surprise to our clients it is frightening to those who anticipated that 2019 would be a continuation of the bonanza enjoyed in 2018.

2. Futures and Spot Opportunities

Liquidity is driving the futures market to push up iron ore. We know futures trading is very active. This tells us we are not the only ones who noticed the divergence and are looking to capitalize.The fundamental issue is that we expect the futures and spot are back together after being seeing a gap. 

3. China A Share: Near-Term Momentum, but Time to Start Taking Profits

Bottoming out (albeit marginal) of investor confidence drove the market rally YTD. News on 28th Feb that MSCI decides to quadruple China A-Shares inclusion in emerging market index is further boosting the market. Positive signals from Government Work Report might keep the market rally going for a while.

However, stake sale plans of listed companies’ major shareholders, who own 53% of A-share free-floating market cap, are on the way. This might be the catalyst for the rally to end as attracting new investors into the market is going to be tough. Institutional investors’ share positions are close to their historical high after keeping buying in the past few weeks and have limit cash for buying more. There are also no signal signs individual investors are increasing their capital allocation for stock investment.  In addition the aggressive stake reduction plans of major shareholders might be taken by other market participants to indicate negative expectations on their companies’ earnings this year. 

We think it’s time to turn cautious on A-shares: take profit and wait for the next buying opportunity for value investors.

4. Sea Ltd (SE US): The Bear Case – A One-Hit Wonder?

Despite burning through $700mn in cash in 2018, investors decided to give another $1.3bn to Sea Ltd (SE US) . We believe investors should treat Sea Ltd with caution for the following reasons:

A significant slowdown in e-commerce

Is the gaming division a one-hit wonder?

Expecting another 800mn cash burn into 2019

Consensus has priced in further upgrades while cash flow metrics worst in the sector

NB. Our team has taken both sides of the Sea Ltd investment case as we think this makes for better decision making and encourages unique thinking within our team. We strongly recommend that investors read my colleague Arun’s positive notes on the company listed below, if you have not already done so.

Sea Ltd (SE US): Placing Price Leaves Money on the Table

Sea Ltd (SE US): Placement a Good Opportunity to Enter an Attractive Story

5. Meituan Dianping (美团点评): Thoughts Before Lock-Up Expiry

Meituan Dianping, the largest O2O platform in China, was listed on September 20th last year and lock-up expiry will be on March 20th. The stock has returned -13% since listing. 

• As it heads into lock-up expiry on March 20th, we will examine Meituan Dianping shareholder structure and potential shares up for sale.
• Meituan was included by MSCI recently and will be eligible for the Hong Kong Connect soon thanks to rule amendment.
• The company delivered a decent topline growth in 3Q2018 but its profit fell short of expectation. We highlight potentials from the food supply chain solution. We also discuss implication from MoBike acquisition.
• We review our SOTP valuation of Meituan and believe there is an upside. 

In this briefing:

1. China A Share: Near-Term Momentum, but Time to Start Taking Profits
2. Sea Ltd (SE US): The Bear Case – A One-Hit Wonder?
3. Meituan Dianping (美团点评): Thoughts Before Lock-Up Expiry
4. Weibo (WB): Revenues Slowed Down Significantly in 4Q2018, Failed in Transition
5. Global Manufacturing PMI Slump at Odds with Equity and Commodity Price Rebound

1. China A Share: Near-Term Momentum, but Time to Start Taking Profits

Bottoming out (albeit marginal) of investor confidence drove the market rally YTD. News on 28th Feb that MSCI decides to quadruple China A-Shares inclusion in emerging market index is further boosting the market. Positive signals from Government Work Report might keep the market rally going for a while.

However, stake sale plans of listed companies’ major shareholders, who own 53% of A-share free-floating market cap, are on the way. This might be the catalyst for the rally to end as attracting new investors into the market is going to be tough. Institutional investors’ share positions are close to their historical high after keeping buying in the past few weeks and have limit cash for buying more. There are also no signal signs individual investors are increasing their capital allocation for stock investment.  In addition the aggressive stake reduction plans of major shareholders might be taken by other market participants to indicate negative expectations on their companies’ earnings this year. 

We think it’s time to turn cautious on A-shares: take profit and wait for the next buying opportunity for value investors.

2. Sea Ltd (SE US): The Bear Case – A One-Hit Wonder?

Despite burning through $700mn in cash in 2018, investors decided to give another $1.3bn to Sea Ltd (SE US) . We believe investors should treat Sea Ltd with caution for the following reasons:

A significant slowdown in e-commerce

Is the gaming division a one-hit wonder?

Expecting another 800mn cash burn into 2019

Consensus has priced in further upgrades while cash flow metrics worst in the sector

NB. Our team has taken both sides of the Sea Ltd investment case as we think this makes for better decision making and encourages unique thinking within our team. We strongly recommend that investors read my colleague Arun’s positive notes on the company listed below, if you have not already done so.

Sea Ltd (SE US): Placing Price Leaves Money on the Table

Sea Ltd (SE US): Placement a Good Opportunity to Enter an Attractive Story

3. Meituan Dianping (美团点评): Thoughts Before Lock-Up Expiry

Meituan Dianping, the largest O2O platform in China, was listed on September 20th last year and lock-up expiry will be on March 20th. The stock has returned -13% since listing. 

• As it heads into lock-up expiry on March 20th, we will examine Meituan Dianping shareholder structure and potential shares up for sale.
• Meituan was included by MSCI recently and will be eligible for the Hong Kong Connect soon thanks to rule amendment.
• The company delivered a decent topline growth in 3Q2018 but its profit fell short of expectation. We highlight potentials from the food supply chain solution. We also discuss implication from MoBike acquisition.
• We review our SOTP valuation of Meituan and believe there is an upside. 

4. Weibo (WB): Revenues Slowed Down Significantly in 4Q2018, Failed in Transition

• The advertising revenues slowed down significantly in 4Q2018.
• We believe the content transition from politics to entertainment was not as good as the management expected.
• We believe WB will not defeat Tencent’s WeChat.
• We believe the stock price has downside of 9%.

5. Global Manufacturing PMI Slump at Odds with Equity and Commodity Price Rebound

The slump in the global manufacturing PMIs that is broad-based in major economies and alarming in Japan, Korea and Taiwan, appears to reflect a disruption in global trade that may relate to US tariff policy. Services PMIs, on the other hand, are relatively stable and have recovered recently, and may help the global economy avoid a recession.  India’s PMIs have been relatively strong and may account for solid Indian currency and equity market performance.  The slump in the global manufacturing PMI is at odds with stronger global equities and commodity prices this year.  The market appears to be building confidence that the US-China trade dispute will be resolved, and the Chinese stimulus and a patient Fed will combine to revive manufacturing PMIs is coming months.

In this briefing:

1. Sea Ltd (SE US): The Bear Case – A One-Hit Wonder?
2. Meituan Dianping (美团点评): Thoughts Before Lock-Up Expiry
3. Weibo (WB): Revenues Slowed Down Significantly in 4Q2018, Failed in Transition
4. Global Manufacturing PMI Slump at Odds with Equity and Commodity Price Rebound
5. Ctrip (CTRP): Overcame Two Difficulties in Q4, But Market Over-Reacted to “Global No. 1”

1. Sea Ltd (SE US): The Bear Case – A One-Hit Wonder?

Despite burning through $700mn in cash in 2018, investors decided to give another $1.3bn to Sea Ltd (SE US) . We believe investors should treat Sea Ltd with caution for the following reasons:

A significant slowdown in e-commerce

Is the gaming division a one-hit wonder?

Expecting another 800mn cash burn into 2019

Consensus has priced in further upgrades while cash flow metrics worst in the sector

NB. Our team has taken both sides of the Sea Ltd investment case as we think this makes for better decision making and encourages unique thinking within our team. We strongly recommend that investors read my colleague Arun’s positive notes on the company listed below, if you have not already done so.

Sea Ltd (SE US): Placing Price Leaves Money on the Table

Sea Ltd (SE US): Placement a Good Opportunity to Enter an Attractive Story

2. Meituan Dianping (美团点评): Thoughts Before Lock-Up Expiry

Meituan Dianping, the largest O2O platform in China, was listed on September 20th last year and lock-up expiry will be on March 20th. The stock has returned -13% since listing. 

• As it heads into lock-up expiry on March 20th, we will examine Meituan Dianping shareholder structure and potential shares up for sale.
• Meituan was included by MSCI recently and will be eligible for the Hong Kong Connect soon thanks to rule amendment.
• The company delivered a decent topline growth in 3Q2018 but its profit fell short of expectation. We highlight potentials from the food supply chain solution. We also discuss implication from MoBike acquisition.
• We review our SOTP valuation of Meituan and believe there is an upside. 

3. Weibo (WB): Revenues Slowed Down Significantly in 4Q2018, Failed in Transition

• The advertising revenues slowed down significantly in 4Q2018.
• We believe the content transition from politics to entertainment was not as good as the management expected.
• We believe WB will not defeat Tencent’s WeChat.
• We believe the stock price has downside of 9%.

4. Global Manufacturing PMI Slump at Odds with Equity and Commodity Price Rebound

The slump in the global manufacturing PMIs that is broad-based in major economies and alarming in Japan, Korea and Taiwan, appears to reflect a disruption in global trade that may relate to US tariff policy. Services PMIs, on the other hand, are relatively stable and have recovered recently, and may help the global economy avoid a recession.  India’s PMIs have been relatively strong and may account for solid Indian currency and equity market performance.  The slump in the global manufacturing PMI is at odds with stronger global equities and commodity prices this year.  The market appears to be building confidence that the US-China trade dispute will be resolved, and the Chinese stimulus and a patient Fed will combine to revive manufacturing PMIs is coming months.

5. Ctrip (CTRP): Overcame Two Difficulties in Q4, But Market Over-Reacted to “Global No. 1”

* The recovery in 4Q2018 shows that CTRP has already survived the new law and the new competitor in 2018.
* We believe EPS will grow 12% in 2019.
* However, we believe the market has already over-reacted to the news last November that CTRP became the largest online travel agency.
* We set a target price of USD23.80, which is 32% below the market price.