China

In this briefing:

1. Pinduoduo (拼多多) Lock-Up Expiry – A Bug with Overhang
2. HK Connect Discovery Weekly: Tencent, Kingsoft, and Yichang HEC (2019-01-18)
3. The GER Weekly EVENTS Wrap: Softbank, Xiaomi, Capitaland and Navitas
4. TRACKING TRAFFIC/Chinese Express & Logistics: Inter-City Pricing -9.1%
5. Pinduoduo (PDD US): Lock-Up Expiry – Keep Calm, Keep Going

1. Pinduoduo (拼多多) Lock-Up Expiry – A Bug with Overhang

Just as Pinduoduo (PDD US) lock-up expiry date (22nd January) is approaching, there was news of a massive bug that could result in an RMB20bn loss for PDD. According to the company’s official Weibo account, the bug has already been rectified and a police report has been filed. 

In this insight, we will analyze the potential impact of the bug and the number of shares that could potentially be sold upon lock-up expiry.

2. HK Connect Discovery Weekly: Tencent, Kingsoft, and Yichang HEC (2019-01-18)

In our Discover HK Connect series, we aim to help our investors understand the flow of southbound trades via the Hong Kong Connect, as analyzed by our proprietary data engine. We will discuss the stocks that experienced the most inflow and outflow by mainland investors in the past seven days.

We split the stocks eligible for the Hong Kong Connect trade into three groups: component stocks in the HSCEI index, stocks with a market capitalization between USD 1 billion and USD 5 billion, and stocks with a market capitalization between USD 500 million and USD 1 billion.

In this week’s HK Connect Discovery, we highlight that Tencent topped the weekly inflow by quantum and its shares held by mainland investors via Stock Connect is at one year low. Stocks exposed to mobile game sector experienced inflow too. In addition, we continue to observe that the mainland investors holding on Yichang HEC continue to rise. 

3. The GER Weekly EVENTS Wrap: Softbank, Xiaomi, Capitaland and Navitas

Have nascent bull cases developed for maligned Softbank Group (9984 JP) and Xiaomi Corp (1810 HK)? In this version of the GER weekly events wrap, we asses an interesting debt tender for Softbank Group (9984 JP) which could portend action for the equity. Secondly, we review our long-standing negative stance on Xiaomi Corp (1810 HK) after a very poor recent run. Finally, we are hesitant on the Capitaland Ltd (CAPL SP) acquisition and think a bump is possible for Navitas Ltd (NVT AU)

The rest of our event-driven research can be found below. 

Best of luck for the new week – Rickin, Venkat and Arun

4. TRACKING TRAFFIC/Chinese Express & Logistics: Inter-City Pricing -9.1%

Tracking Traffic/Chinese Express & Logistics is the hub for our research on China’s express parcels and logistics sectors. Tracking Traffic/Chinese Express & Logistics features analysis of monthly Chinese express and logistics data, notes from our conversations with industry players, and links to company and thematic notes. 

This month’s issue covers the following topics:

We retain a negative view of China’s express industry’s fundamentals: demand growth is slowing and pricing for inter-city shipments appears to be falling faster than costs can be cut, leading to margin compression. 

5. Pinduoduo (PDD US): Lock-Up Expiry – Keep Calm, Keep Going

The recent collapse of Xiaomi Corp (1810 HK)’s shares after the end of its six-month lock-up period has focused minds on upcoming lockup expirations. Pinduoduo (PDD US) is the next major Chinese tech company with an upcoming lock-up expiration – its six-month lock-up period expires on 22 January.

In this briefing:

1. RIO & BHP:  Valuation Gap Gone; Closing Long-Rio/Short-BHP
2. RRG Global Macro Weekly – Dramatic Brexit Defeat A Positive for Markets? We Are Not So Sanguine
3. Wanted: A 21st Century Monetary Theory
4. Maoyan Entertainment (猫眼娱乐) IPO: Turning Profitable, Thoughts on Valuation
5. Weekly Oil Views: US, China Shore up Oil Market Sentiment

1. RIO & BHP:  Valuation Gap Gone; Closing Long-Rio/Short-BHP

Investment Conclusion:
We recommend closing our long-Rio Tinto Ltd (RIO AU)/short-Bhp Billiton (BHP AU) following recent trading updates from both companies which helped to narrow the previous valuation gap we identified in our Aug-18 note: US$20bn in Lost Market Cap Looks Hard to Justify: Recommend Long Rio; Short BHP

2. RRG Global Macro Weekly – Dramatic Brexit Defeat A Positive for Markets? We Are Not So Sanguine

The dramatic defeat of PM May’s Brexit arrangement with the EU was seen by the markets as a positive development. Apparently the markets believe that this could result in Britain remaining in the EU.

While we agree this would be good news we consider it unlikely without many more months or years of uncertainty as another referendum is organized and implemented.

Romania: GDP in Q3 grew 4.4% y/y, up from 4.1% in Q2. The country’s economy is doing better than most EU countries.
Brazil: The CPI in Dec rose 3.7%, down from 4.05% in Nov. Lowest rate since May, as prices slowed for food and fuel.
India: The trade deficit in Dec narrowed to $13.1 bn. Exports rose a meager 0.3% and imports fell 2.44%. GDP growth of 7% is expected for this year and next..

3. Wanted: A 21st Century Monetary Theory

The globe is facing more than an ordinary business cycle.

Joseph C. Sternberg, editorial-page editor and European political-economy columnist for the Wall Street Journal’s European edition, recently interviewed Claudio Borio, head of the Monetaryand Economic Department of the BIS. Mr. Borio said that politicians have relied far too much on central banks, which are constrained by economic theories that offer little meaningful guidance on how to sustain growth and financial stability. The only tool they have is an interest rate that can affect output in the short run but ends up affecting only inflation in the end.

4. Maoyan Entertainment (猫眼娱乐) IPO: Turning Profitable, Thoughts on Valuation

Maoyan Entertainment (formerly Entertainment Plus) launched its institutional book building last Friday. We covered the company’s background, industry backdrop, financials, shareholders and the regulatory overhang in our previous two notes.

In this note, we will look at the recent development of the company, based on the data from the prospectus and our channel checks. We will also discuss the valuation of the company. 

Our Previous Insight on Maoyan Entertainment:

• Entertainment Plus (猫眼娱乐) IPO: The Engineered Movie Ticketing Leader that Runs Out of Steam (Part 1)
• Entertainment Plus (猫眼娱乐) IPO: The Coming Regulatory Bang Isn’t That Bad (Part 2)

5. Weekly Oil Views: US, China Shore up Oil Market Sentiment

Reports of overtures and concessions from both Washington and Beijing were coming thick and fast by the time last week came to a close, providing a big boost to stock markets across the globe as well as crude. 

The US-China trade spat has hung like an ominous and growing cloud over the prospects of global economic growth in 2019, becoming one of the major reasons for increasing risk aversion among investors since last October. As stock markets plummeted amid a sustained and steep sell-off, oil was dragged along for the ride.

If the US and China manage a rapprochement in the coming days and weeks, investor sentiment will recover, stocks will rebound, and so will crude prices. 

Benchmark Brent and WTI crude futures settled at two-month highs on January 18, having retraced 24% and 27% respectively from their 52-week lows hit on Christmas eve. However, they are still 27% and 30% below the four-year peak hit on October 3. 

How much further does crude have to go? In the next few days and weeks, it could claw back some more of its Q4 losses, especially if the US and China take concrete steps to unwind their bruising trade war. Once this big pressure is removed (excepting any last-minute surprises that stall or worsen the tensions), leading to a rosier outlook for global oil demand growth, crude will reconnect with its fundamentals. That could put OPEC back in the driver’s seat, and see market sentiment recovering as the OPEC/non-OPEC cuts mop up surplus barrels. Our most bullish scenario for the first quarter sees Brent climbing from the low-$60s towards $70/barrel. We see WTI $8-10 below Brent.

In this briefing:

1. LNG Producers Outperform as More LNG from the US Is Coming into the Market
2. Migrant Workers and Employment
3. EM Active Fund Performance:  Difficult 2018, but Long-Term Outperformance Remains
4. China’s Household Consumption in a Slowing Economy
5. China’s December GDP

1. LNG Producers Outperform as More LNG from the US Is Coming into the Market

On the back of a growing LNG global trade volume, LNG producers have outperformed the US market and their E&P peers including the oil majors over the last two years. As global LNG production reaches a record 316m tonnes in 2018, a 9.6% increase year on year, new capacity additions set to come online in the next three years will be dominated by the US. This insight will examine how the recent entry of US LNG in the market is transforming the LNG industry and which emerging players are driving the change.

Exhibit 1: LNG Producers Outperform the US Market

2. Migrant Workers and Employment

Recently, we have profiled a spat of news items focusing on China’s employment numbers and efforts to better handle migrant workers. On Monday, some updated data on employment numbers and migrant workers was released. Much of the focus on Monday was on GDP, but there are some gems among the employment data that can shed light on the China’s employment numbers and the impact it could have on the wider economy.

3. EM Active Fund Performance:  Difficult 2018, but Long-Term Outperformance Remains

2018 was a year to forget for many active GEM managers. Absolute returns were the worst since 2011 and, relative to the I-Shares MSCI Emerging Markets ETF, active funds registered their first average underperformance since 2008.  Here we share some of the key data points on active fund performance for 2018 and over the longer term.

4. China’s Household Consumption in a Slowing Economy

Now that we know China’s GDP posted the lowest growth rate in decades in December 2018, a lot of attention has turned to stimulus. A key outlier of stimulus is getting consumers to spend, so today we take a look at consumer spending and household consumption overall. Yet, first we need to take a look at disposable income and just where it is coming from.

5. China’s December GDP

China’s quarterly numbers are in and China’s economic growth decreased to 6.4%. We are reviewing the most recent numbers and examining some inconsistencies.We believe there are pronounced weak spots in China’s GDP growth and expect to see that downward pressure in the Chinese economy going forward.

In this briefing:

1. New Oriental (EDU): Do Not Fear Q2 Record Losses, 27% Upside
2. Maoyan Entertainment IPO Valuation: Press the Skip Button
3. Inventory Clearance and the Semiconductor Cycle
4. Hujiang Education (沪江教育) Pre-IPO – Spending More than It Earns
5. China Meidong (1268 HK): Standout Story in Gloomy Auto Dealership Sector; Luxury Brands Outperform

1. New Oriental (EDU): Do Not Fear Q2 Record Losses, 27% Upside

• The record net losses were mainly due to a seasonally weak quarter and recognition of the impairment in a subsidiary.
• Q2 revenues did not slow down and management does not believe Q3 revenues will slow down.
• EDU will not be negatively impacted by the new law from the Ministry of Education.
• The P/E band suggests an upside of 27% and a price target of USD90.

2. Maoyan Entertainment IPO Valuation: Press the Skip Button

Maoyan Entertainment (EPLUS HK) is the largest online movie ticketing service provider in China. The mid-point of Maoyan’s IPO price range of HK$14.8-20.4 per share implies a market value of $2.5 billion (HK$19.8 billion). Five cornerstone investors have agreed to buy $30 million or 10% of the offering at the IPO mid-point. The cornerstone investors are Imax China Holding (1970 HK), Hylink Digital Solutions, Prestige of The Sun, Welight Capital and Xiaomi Corp (1810 HK). 

3. Inventory Clearance and the Semiconductor Cycle

A very normal part of the semiconductor cycle is inventory clearance.  DRAM makers are starting to discuss this in their earnings calls.  What they are NOT telling their investors is how significant this is to the onset of a price collapse, perhaps because they don’t understand it themselves.  This Insight will help readers to learn how and why an inventory clearance helps ratchet a budding oversupply into a full-blown glut.

4. Hujiang Education (沪江教育) Pre-IPO – Spending More than It Earns

Hujiang Education (1414698D CH) (HET) is planning to raise US$200m in its upcoming IPO.

HET has grown its revenue at an impressive 73% CAGR from 2015 to 2017 and has been accompanied by gross margin expansion. The strong growth was supported by improving operating metrics such as an increase in student enrollment and average spending. 

However, HET has been making losses and continues to spend more than its net billing. It is unclear whether HET had already achieved break even for its proprietary courses before expanding into its CCtalk platform. But from its high level of expenses, it seems unsustainable for HET to be relying heavily on the sales and marketing spending to get users to purchase online courses.

In this insight, we will look into the company’s financial and operating performance, regulatory risks regarding K12 courses, aggressive spending on sales and marketing, and the performance of other online education companies.

5. China Meidong (1268 HK): Standout Story in Gloomy Auto Dealership Sector; Luxury Brands Outperform

China Meidong Auto (1268 HK) has been on a rollercoaster ride in 2018. The stock price of Meidong started 2018 around 2.7 HKD and recently has been trading around 2.9 HKD.

Nice and steady ride? Not exactly, as it has swung from 4.3 HKD in June to 2.6 HKD in August. After analyzing how NPAT estimates evolved over the past year there should be no justifications for these wild swings. 

Meidong is likely to report solid FY18 results by late March vs industry peers which are expected to report a weak 2H18. While BMW dealers have been reportedly suffering in China during 2018, Meidong was fortunate to have other luxury brands pick up the slack.

FY19 should be another growth year for Meidong as 1) recently acquired BMW showrooms contribute their maiden results and 2) other luxury brands continue to perform despite overall doom and gloom in the Chinese auto market. Should the Chinese government launch car replacement stimulus measures this would be icing on the cake.

Fair Value lowered slightly from 4.7 HKD to 4.4 HKD (10x 2019E) on lower 2019 profit estimates, which leaves 52% upside excluding dividends.

In this briefing:

1. Semiconductor WFE Billings Decline Reverses Course in December, First Bullish Signal in Six Months
2. CStone Pharma (基石药业) IPO: Strong Assembly and Backing (Part 1)
3. China Kepei Edu (科培教育) Post-IPO – Tepid Demand Means Little Support if IPO Price Breaks
4. Global Ex-U.S. Equity Strategy: MSCI EM in Early Stages of Bottoming
5. GER Upcoming EVENTS and Earnings Calendar

1. Semiconductor WFE Billings Decline Reverses Course in December, First Bullish Signal in Six Months

On January 24’th 2019, SEMI announced that Wafer Fab Equipment (WFE) billings for North America-based manufacturers of semiconductor equipment amounted to $2.11 billion worldwide in December 2018. This represents an 8.5% MoM increase, although still lower YoY by 12.1%. December’s data marks the reversal of a six month long downtrend in monthly billings, a bullish signal that the WFE segment has bottomed and better times lie ahead. 

This latest billings data coincides with WFE bellwether Lam Research (LRCX US)‘s latest earnings report which slightly exceeded guidance with revenues of $2.5 billion, up 8.7% sequentially. On the call, company executives stated that first quarter CY 2019 would mark the trough from a gross margin perspective, strongly implying that it would be the same for revenues. 

LRCX shares surged 15.7% in overnight trading triggering a rising tide that lifted large swathes of semiconductor stocks, particularly those within the WFE sector. Two swallows don’t necessarily mean it’s Spring, but for now, the markets are betting that it does. 

2. CStone Pharma (基石药业) IPO: Strong Assembly and Backing (Part 1)

CStone Pharma is raising up to USD 400 million via a listing on the Hong Kong Stock Exchange. In this insight, we will discuss the following topics:

• The company’s background
• Details of pipeline drug candidates
• Potential market size for the key products
• Shareholders and investors
• Summary of our likes and concerns
• Questions for management meetings

We will leave the discussion of valuation for our next insight.

• Hansoh Pharma (翰森制药) IPO: A Leading Generic Player with Regulatory Overhang (Part 1)
• WuXi Apptec (药明康德) IPO: This A+H Listing Will Be Different

• Frontage Holding (方达控股) IPO: More Disclosure Needed to Understand Moat and Growth Prospect
• Ascentage Pharma (亚盛医药) IPO: Too Early for an IPO
• Junshi Bioscience (君实医药) IPO: Thoughts on Valuation (Part 2)
• Junshi Bioscience (君实医药) IPO: Early in Application but Behind in Key Indications (Part 1)
• CanSino Biologics (康希诺) IPO: Promising Pre-Clinical Results but Vaccine Scandal Weighs (Part 1)

• AOBiome Therapeutics IPO: Hope for Natural Therapeutic Treatment
• Stealth Biotherapeutics IPO: Cure the Symptoms but Not the Cause (Part 1)
• Innovent Biologics (信达生物) IPO: Pricing the PD-1 and Biosimilars Competition (Part 2)
• Innovent Biologics (信达生物) IPO: A Major PD-1 MAb Competitor Might Have Just Emerged (Part 1)
• MicuRx Pharma (盟科医药) IPO: Betting on Single Drug in the Not so Attractive Antibiotic Segment
• Hua Medicine (华领医药) IPO: Thoughts on Valuation
• Hua Medicine (华领医药) IPO: Reviving Roche’s Failed Attempt?
• BeiGene (百济神州) IPO: Dual-Listing with Upside Capped in the Near Term
• Ascletis Pharma (歌礼制药) IPO: Valuation Not Justified by Ganovo and Ravidasvir NPV (Part 3)
• Ascletis Pharma (歌礼制药) IPO: Three Valuation Risk Factors (Part 2)
• Ascletis Pharma (歌礼制药) IPO: Emerging Player in the Crowded HCV Drug Market
• China Isotope & Radiation IPO: Oligopoly, Visible Growth and High Barrier to Entry
• Zai Lab IPO: Thoughts on Valuation, Risks and Upsides (Part 2)
• Zai Lab IPO: Experienced Team, Promising In-Licensing Drug Pipeline (Part 1)

3. China Kepei Edu (科培教育) Post-IPO – Tepid Demand Means Little Support if IPO Price Breaks

Kepei Education (1890 HK) has raised US$112m at HK$2.48 per share, just slightly above the mid-end of the IPO price range. We have previously covered the insight in: 

• China Kepei Edu (科培教育) Pre-IPO Review – A Well Run Private Higher Education Company
• China Kepei Edu (科培教育) IPO – Regulation Poses Significant Near-Term Risks

In this insight, we will update on the deal dynamics, implied valuation, and include a valuation sensitivity table.

4. Global Ex-U.S. Equity Strategy: MSCI EM in Early Stages of Bottoming

Our overall global outlook remains cautious and continued downward pressure on global equities remains our expectation. One bright spot is EM (more on this below), which continues to give us hope that global equities can bottom out.  We provide a technical appraisal of major markets and highlight actionable setups within the global Utilities and Staples Sectors.

5. GER Upcoming EVENTS and Earnings Calendar

Next week promises to be a large catalyst driven week, with Apple Inc (AAPL US), NTT Docomo Inc (9437 JP) and Tesla Motors (TSLA US) expected to report results, among others. We have provided a list below of the key equity catalysts for next week as well as potential drivers for M&A deals and stubs. If you are interested in importing this directly into Outlook or have any further requests, please let us know. 

Kind regards, Rickin Arun and Venkat

In this briefing:

1. China Kepei Edu (科培教育) Post-IPO – Tepid Demand Means Little Support if IPO Price Breaks
2. Global Ex-U.S. Equity Strategy: MSCI EM in Early Stages of Bottoming
3. GER Upcoming EVENTS and Earnings Calendar
4. LNG Producers Outperform as More LNG from the US Is Coming into the Market
5. Migrant Workers and Employment

1. China Kepei Edu (科培教育) Post-IPO – Tepid Demand Means Little Support if IPO Price Breaks

Kepei Education (1890 HK) has raised US$112m at HK$2.48 per share, just slightly above the mid-end of the IPO price range. We have previously covered the insight in: 

• China Kepei Edu (科培教育) Pre-IPO Review – A Well Run Private Higher Education Company
• China Kepei Edu (科培教育) IPO – Regulation Poses Significant Near-Term Risks

In this insight, we will update on the deal dynamics, implied valuation, and include a valuation sensitivity table.

2. Global Ex-U.S. Equity Strategy: MSCI EM in Early Stages of Bottoming

Our overall global outlook remains cautious and continued downward pressure on global equities remains our expectation. One bright spot is EM (more on this below), which continues to give us hope that global equities can bottom out.  We provide a technical appraisal of major markets and highlight actionable setups within the global Utilities and Staples Sectors.

3. GER Upcoming EVENTS and Earnings Calendar

Next week promises to be a large catalyst driven week, with Apple Inc (AAPL US), NTT Docomo Inc (9437 JP) and Tesla Motors (TSLA US) expected to report results, among others. We have provided a list below of the key equity catalysts for next week as well as potential drivers for M&A deals and stubs. If you are interested in importing this directly into Outlook or have any further requests, please let us know. 

Kind regards, Rickin Arun and Venkat

4. LNG Producers Outperform as More LNG from the US Is Coming into the Market

On the back of a growing LNG global trade volume, LNG producers have outperformed the US market and their E&P peers including the oil majors over the last two years. As global LNG production reaches a record 316m tonnes in 2018, a 9.6% increase year on year, new capacity additions set to come online in the next three years will be dominated by the US. This insight will examine how the recent entry of US LNG in the market is transforming the LNG industry and which emerging players are driving the change.

Exhibit 1: LNG Producers Outperform the US Market

5. Migrant Workers and Employment

Recently, we have profiled a spat of news items focusing on China’s employment numbers and efforts to better handle migrant workers. On Monday, some updated data on employment numbers and migrant workers was released. Much of the focus on Monday was on GDP, but there are some gems among the employment data that can shed light on the China’s employment numbers and the impact it could have on the wider economy.

In this briefing:

1. Xiaomi Placement – The Selling Continues

1. Xiaomi Placement – The Selling Continues

An undisclosed institutional shareholder of Xiaomi Corp (1810 HK) is looking to sell 231m shares of the company for approximately US$273m. 

There will likely to be more selling pressure in the near term. The 594m shares sold down by Apoletto and the anonymous shareholder who sold at a 14% discount does not inspire confidence. Furthermore, there will be even more overhang to come from the twelve-month lock-up expiry. The deal also scores poorly on our framework owing to its expensive valuation and the lack of information on the seller. 

In this briefing:

1. HK Connect Discovery Weekly: China Tower, Tencent, New China Life (2019-01-11)

1. HK Connect Discovery Weekly: China Tower, Tencent, New China Life (2019-01-11)

In our Discover HK Connect series, we aim to help our investors understand the flow of southbound trades via the Hong Kong Connect, as analyzed by our proprietary data engine. We will discuss the stocks that experienced the most inflow and outflow by mainland investors in the past seven days.

We split the stocks eligible for the Hong Kong Connect trade into three groups: those with a market capitalization of above USD 5 billion, those with a market capitalization between USD 1 billion and USD 5 billion, and those with a market capitalization between USD 500 million and USD 1 billion.

We see the Financials sector led the outflow by mainland investors last week with 201 million USD of net selling. We also highlight a few companies this week: China Tower (788 HK), Tencent Holdings (700 HK), New China Life Insurance (1336 HK), and Ping An Good Doctor (1833 HK).

In this briefing:

1. 2018 HK-Connect SouthBound In a Nutshell
2. Apple (AAPL): Reduces Prices in Mainland China – Right Action, But Not Enough
3. China Kepei Edu (科培教育) IPO – Regulation Poses Significant Near-Term Risks
4. Ten Years On – Asia’s Time Is Coming, Don’t Miss The Boat
5. Weekly Oil Views: Crude Back in a Bull Market but Cheer Momentum Wanes

1. 2018 HK-Connect SouthBound In a Nutshell

Since autumn of 2014, the HK-Shanghai Connect, and later the HK-Shenzhen Connect mechanisms have provided means for mainland investors to buy Hong Kong-listed stocks. 

We have been tracking the H/A relationships and the Southbound flows per name on a weekly basis and occasionally writing commentary about it since late 2016. 

This report provides a brief synopsis of the SOUTHBOUND flows into Hong Kong-listed stocks over the course of 2018, by sector, by average percentage change in mainland ownership of HK shares outstanding subject to the Connect mechanisms, and the top and bottom five names per sector per quarter.

2. Apple (AAPL): Reduces Prices in Mainland China – Right Action, But Not Enough

• Tim Cook passed the buck to the weak sales in China. However, we believe China’s retailing is running well based on our visits to shopping malls with Apple stores.
• Luxury goods sold better in China than all other major markets in the world in 2018.
• We believe that the price reduction in Mainland China is just taking market share from Apple Stores in Hong Kong, but not from competitors.
• We also believe that the app review process is the fatal shortcoming for AAPL.

3. China Kepei Edu (科培教育) IPO – Regulation Poses Significant Near-Term Risks

China Kepei Education (1890 HK) is looking to raise up to US$122m in its upcoming IPO. 

Overall, the company has continued to show that its undergraduate program is the driver behind its growth. It grew its 8M 2018 revenue and gross profit both by about 24% YoY. However, there are significant near-term risks if the MOJ Draft for Comments gets implemented. It may result in Kepei registering its schools as for-profit private schools which would shrink its net profit margin.

In this insight, we will provide updates on the company’s 8M 2018 financials and operating performance, the potential impact of policy change and compare its valuation to other listed education peers. We will also run the deal through our framework.

4. Ten Years On – Asia’s Time Is Coming, Don’t Miss The Boat

We noted in   Ten Years On – Asia Outperforms Advanced Economies Asia’s economies and companies have outperformed advanced country peers in the ten years to 2017.  Growing by 6.8%, real, through the crisis the region is 188% larger in US dollar terms while US dollar per capita incomes 170% higher compared with 2007. In this note we argue even though Asian stock markets have underperformed since 2010 and the bulk of global capital flows have gone to advanced countries, Asia’s time is coming. Valuations are cheap. Growth fundamentals strong. There are few external or internal imbalances. Macroeconomic management has been better than in advanced economies and the scope to ease policy to ward off headwinds in 2019 is greater. China has already started.

5. Weekly Oil Views: Crude Back in a Bull Market but Cheer Momentum Wanes

A nine-day winning streak until Thursday, January 10, had put Brent and WTI back in the bull market (gains of >20% from their 52-week lows). It was capped by a highly volatile trading day and a lower close of the benchmark crude futures on Friday, pointing to a return of uncertainty and indecisiveness in the market.

US-China trade talks over January 7-8, which were extended to January 9, set last week off to a flying start. There were no deals for sure, but the two sides appeared to have narrowed their differences. That was enough to send the stock markets climbing, with crude prices in tow.

Follow-up negotiations at a higher level are expected in the US later this month, though no dates have been announced yet. For now, it seems the financial markets, probably in gloom fatigue and perhaps oversold, needed any excuse to recover and a baby step towards the resolution of the US-China trade dispute was as good as any.

Of course, one can’t ignore the US Fed’s dovish turn, which also provided a major boost to sentiment. US Federal Reserve Chairman Jerome Powell said on Thursday that the central bank would be “patient” over future rate hikes. It was music to investors’ ears.

OPEC heavyweight Saudi Arabia repeated its promise to slash exports, with the energy minister providing specific figures for the benefit of the media and the market, and fundamentals had done their bit to help crude’s rally.

However, macroeconomic data and business outlook from companies across the world continues to be weak and disappointing. And crude remains firmly in the grip of the economic sentiment, maintaining a very strong correlation with the equity markets since last October.

In this briefing:

1. Early Investors Say “Xiaomi The Money” Post LockUp Expiry
2. Yaskawa Electric: We Are Probably Now Close to the Bottom for This LT Structural Growth Story
3. CRRC: Earnings Booming With Raised New Rail Line Delivery Target
4. Starbucks (SBUX): Could Starbucks’ Beans Start to Lose Their Magic?
5. Much Ado About Credit

1. Early Investors Say “Xiaomi The Money” Post LockUp Expiry

Xiaomi Corp (1810 HK) is likely to break HK$10 this morning again after a placement equal to about 1% of shares outstanding was proposed to buyers last night at a sharp discount to the close. This insight attempts to nail down the shape and size of the ongoing overhang.

After the HK Stock Exchange announced in late April 2018 that it would permit companies with Weighted Voting Rights (WVRs) to list on the HKEx, after sticking to the one-share one-vote principle for years (losing the Alibaba Group Holding (BABA US) listing to NASDAQ in the process), Xiaomi Corp (1810 HK) quickly raised its hand with the prospect of a US$10bn IPO and a US$100bn market cap – heady numbers even for a fast-growing company. This was quickly followed by the launch of the China Depositary Receipt program which saw a quick establishment and even quicker acceptance of a Xiaomi application, potentially setting up a situation where demand was pulled from HK to China. 

Then investors got cold feet, and what was a $100bn valuation dropped to $90bn then $70bn.  The CSRC also pushed back on the possible CDR issuance to such an extent that Xiaomi withdrew its application, and then pricing delivered a valuation of approximately US$50bn at a sharply reduced IPO price of HK$17/share. 

Day1 saw a 6% fall on the open and the shares closed down 1%. After the Day 1 close, fast-track inclusion into the Hang Seng indices was a pleasant and somewhat unexpected surprise for IPO buyers and responded by rising almost 12% on Day 2 on sharply higher volume. MSCI did not follow suit (it had not been expected) but several days later on inclusion day, the stock was 25% higher than the IPO price. 10 days later the over-allotment option had been fully-exercised.

Xiaomi last year grew its ecosystem and its hardware base, but saw lower market share in China (13%) than in 2017 (14%) according to several sources, including Counterpoint Research quoted in the media. The company, which has targeted 50% of revenue from overseas is now just shy of that mark at 44% after ramping up sales in India, Europe, and MENA. 

Global weakness in handsets on mobile tech led by Apple did not spare Xiaomi, but MOST notable was the sharp drop in the share price in December from HK$14.30-50 area to just below HK$13 at year end. The first day of the new year saw the shares fall 5.5%, and the next day the price fell another 3.6%. The shares fell a little more in the next few days but somewhat stabilised until the morning of the 8th. 

Then the volume picked up. The lockup had expired.  

In five days, the shares have traded 880mm shares, and that is before a large placement proposed after the close on 15th January. 

“Xiaomi The Money” was the title of David Blennerhassett‘s initial pre-IPO insight ( Xiaomi The Money!), followed when details came out by Xiaomi the Ecosystem!

2. Yaskawa Electric: We Are Probably Now Close to the Bottom for This LT Structural Growth Story

Following Yaskawa’s second downward revision at 3Q earnings, we are shifting towards a more positive stance on the stock, even from a long-term perspective. We had been negative on the stock from late 2017 and as the stock tumbled we maintained that it was still too early buy for the long-term, though by mid-late 2018 we did (incorrectly) feel that there was the potential for a short term rally due to the severity of underperformance.

With the stock selling off harshly in the recent market fall but rebounding following its weak earnings we feel that much of the bad news is now priced in and expectations have corrected to the point where this is once again interesting on the long side.

3. CRRC: Earnings Booming With Raised New Rail Line Delivery Target

Based on CRC’s (China Railway Corporation) 2019 plan on rail investment, CRRC’s earnings from rail business might be better than estimated. With a 45% increase on new rail delivery mileage, and significantly increase on HSR train (Multiple Units) repair demand, we estimate CRCC’s EPS increase by another 20% yoy to RMB0.53 in 2019E, following a 17% yoy increase in 2018E.

Also, a better earnings outlook might trigger a mild valuation re-rating. The stock trades at 12.8x P/E 2019E (our estimates), attractive vs. its 15.5x historical P/E average since the merger in 2015.

4. Starbucks (SBUX): Could Starbucks’ Beans Start to Lose Their Magic?

Three key emerging risks to the Starbucks’ growth story: 1) New entrant poses a threat to China growth story; 2) New CEO is missing the magic of the beans; and 3) New Uber partnership could erode Starbucks’ brand equity.

In our January 8 research note, we cautioned that Starbucks had outperformed the NASDAQ by 37% since we turned positive on August 8 but we were concerned about two new developments that we viewed as red flags: shelving of Reserve coffee bar expansion and aggressive China expansion plans of Luckin Coffee. While we do not believe this represents a short opportunity, we do believe it foreshadows emerging risks to Starbucks’ long-term growth story.

5. Much Ado About Credit

• Global financing conditions could tighten further
• Credit demand is deteriorating; credit risks are rising; Eurodollar costs are edging higher
• A de-escalation in trade tensions and a Fed pause could ease the pain
• Will Fed recently turning more dovish (possible shift to slower QT & Fed rate cut in 2019?) + concomitant USD drift provide sufficient respite to put a floor under risk assets?