China

In this briefing:

1. Fosun Tourism IPO Trading Update – Low Traded Volume and Fair Value Indicate It Has a Long Way to Go
2. Japan Display: Squeezing Up 36% As Chinese Investment Could Solve Balance Sheet Troubles
3. Starbucks (SBUX): China Strategy Reaped by Luckin’s Parasitical Tactic, a Visit and Case Study
4. Hengan Intl. (1044 HK): Our Analysis Suggests that Bonitas’ Allegations Have Some Substance
5. Alpha Smart – Pre-IPO – PE Investors Recovered 56% of Their Cost in Two Years but Left It in Debt

1. Fosun Tourism IPO Trading Update – Low Traded Volume and Fair Value Indicate It Has a Long Way to Go

Fosun Tourism (1992 HK)‘s IPO was priced at the low-end, HKD15.60/share. The retail tranche was undersubscribed while the institutional tranche was said to be moderately over-subscribed. I have covered most aspects of the deal in my earlier insights:

• Fosun Tourism Pre-IPO – No Improvement or Major Changes in Club Med Since the Acquisition
• Fosun Tourism IPO – Fair Value Is Probably Below Low-End

In this insight, I’ll provide an update on the deal dynamics, valuations and provide a table with the implied valuations at different share price levels.

2. Japan Display: Squeezing Up 36% As Chinese Investment Could Solve Balance Sheet Troubles

As we mentioned in a comment in  Japan Display: Cost Structure Improvement Is Good but Shipment Delay and IPhone XR Cloud Outlook the NHK reported last night that JDI was in talks with a Chinese consortium to secure something in the region of ¥50bn in funding (more than its market cap yesterday) for a more than 33% stake in the company. The Nikkei shed light on the identities of some of the consortium this morning mentioning investment fund Silk Road, Minth Group Ltd (425 HK) and  Shenzhen O Film Tech Co A (002456 CH). Bloomberg has also mentioned that the consortium could invest a further ¥500bn to establish a new facility in China for the production of OLED panels.

We spoke to the company this morning to get colour on these announcements.

3. Starbucks (SBUX): China Strategy Reaped by Luckin’s Parasitical Tactic, a Visit and Case Study

• We believe Luckin copies SBUX’s site selection, but chooses low rental places close to Starbucks shops.
• Starbucks plans to add delivery business to raise margins and comparable store sales, but Luckin has focused on delivery since inception.
• Starbucks needs the China market as its growth momentum, but we believe Luckin’s parasitical tactic will be a major resistance.

4. Hengan Intl. (1044 HK): Our Analysis Suggests that Bonitas’ Allegations Have Some Substance

Hengan Intl Group (1044 HK), China’s leading sanitary towel and nappy producer, has been targeted by a short seller, Bonitas Research. Hengan has denied Bonitas’ allegations to which Bonitas has responded that Hengan’s response was weak and evasive. The shares have continued to slide suggesting that investors are less than convinced with Hengan’s rebuttal.

5. Alpha Smart – Pre-IPO – PE Investors Recovered 56% of Their Cost in Two Years but Left It in Debt

Alpha Smart (ALS HK), the parent of Chinese menswear fashion retailer GXG, plans to raise US$300m in its Hong Kong IPO. L Catterton, LVMH’s investment arm, along with another PE investor, owns a 73% stake in the company. 

Earnings have been consistently growing with the highest contribution still coming from its flagship brand “GXG”. The recent expansion of the online channel has further aided sales growth, with ASL claiming to be the largest menswear retailer in terms of online sales.

Apart from a large dividend payout which covered half of the acquisition costs for L Capital, nothing much seems to have changed recently. In addition, operating cash flow has not kept pace with earnings due to a consistent increase in inventory. To add to that there are a few related party issues as well including some stores being run by former employees.

In this briefing:

1. Trade Me (TMZ NZ): Hellman & Friedman Could Again Counter-Bid Apax, but Modestly
2. China Tower: Changing Our View to Positive. Low Cost Expansion Should Generate Better Returns
3. IPO Trading Strategy: A Deep-Dive on Early Trade of Chinese Companies Listing in the US
4. Natural Foods IPO Trading Update – Not Expensive but Needs to Show a Clear Turnaround
5. Mobvista IPO Trading Update – Not a Buyer at Anywhere Close to These Level

1. Trade Me (TMZ NZ): Hellman & Friedman Could Again Counter-Bid Apax, but Modestly

Trade Me (TME NZ), the largest online auction platform operating in New Zealand, has entered into a scheme implementation agreement with Apax Partners. Apax Partners has upped its bid for Trade Me from NZ$6.40 to $6.45 a share, to match Hellman & Friedman’s bid.

2. China Tower: Changing Our View to Positive. Low Cost Expansion Should Generate Better Returns

At the time of the IPO we were quite negative on China Tower (788 HK) prospects. However, in recent calls and meetings our view has changed and become more constructive. Chris Hoare now believes that China Tower is managing to generate co-location growth outside the Master Services Agreement (MSA) and at a much lower level of capital intensity (perhaps up to 50%) than indicated in the IPO. Management has also proven to be more open to shareholders than expected and with lower capex, higher FCF generation we upgrade to a BUY with a HK$1.60 target price.  The stock has started to move as the market has begun to understand the more positive outlook. It will be interesting to see if China Tower is allowed to retain these benefits long term.

Summary China Tower forecasts: 

3. IPO Trading Strategy: A Deep-Dive on Early Trade of Chinese Companies Listing in the US

Ahead of Tencent Music (TME US)‘s IPO today , we have done a deep-dive analysis on the past 28 major Chinese IPOs that have listed in the US. We note the following points

 A higher pop associated with a lower free float?

If it starts weak , we wouldn’t assume disaster – historically shares have broken above IPO price at some point during day one trade

Day one moves by pricing range – pops across the board

GER pricing view for Tencent music

Companies assessed in this report: X Financial (XYF US) , Qudian Inc (QD US) , Pinduoduo (PDD US) , Qutoutiao Inc (QTT US) , HUYA Inc (HUYA US) , Pintec Technology Holdings L (PT US) , 111 Inc (YI US) , Uxin Ltd (UXIN US) , BEST Inc (BSTI US) , Sunlands Online Education Gr (STG US) , Cango Inc (CANG US) , Huami Corp (HMI US) , Sea Ltd (SE US) , Aurora Mobile Ltd (JG US) , Viomi Technology Co Ltd (VIOT US) , Weidai Ltd (WEI US) , Jianpu Technology (JT US) , Greentree Hospitality (GHG US) , iQIYI Inc (IQ US), Sogou Inc (SOGO US) , Onesmart Education (ONE US) , CNFinance Holdings Ltd (1640496D US) , TuanChe Ltd (TC US) , NIO Inc (NIO US) , CooTek Cayman Inc (CTK US) , Niu Technologies (NIU US) , Mogu (MOGU US) , and Bilibili Inc (BILI US)

More details below 

4. Natural Foods IPO Trading Update – Not Expensive but Needs to Show a Clear Turnaround

Natural Food International H (1837 HK)‘s  IPO was priced at the low-end at HKD1.62/share. The retail tranche was 1.4x covered and the institutional tranche was said to be moderately over-subscribed. I have covered most aspects of the deal in my earlier insight, 

• Natural Food IPO – Quick Take – Network Expansion Can Only Go so Far, SSSG Might Have Turned -Ve

In this insight, I’ll provide an update on the deal dynamics, valuations and provide a table with the implied valuations at different share price levels.

5. Mobvista IPO Trading Update – Not a Buyer at Anywhere Close to These Level

Mobvista (1860 HK)‘s IPO was priced just above the low-end at HKD4/share, the retail tranche was 1.8x covered while the institutional tranche was moderately oversubscribed. I have covered most aspects of the deal in my earlier insights:

• Mobvista Pre-IPO – Impairments Would Have Wiped off past Profit, Related Parties Still Owed Money, and
• Mobvista IPO – One Client Rescued 1H18, the Slowdown Has Been on Since 2H17. P/ E Doesn’t Matter

In this insight, I’ll provide an update on the deal dynamics, valuations and provide a table with the implied valuations at different share price levels.

In this briefing:

1. DeNA (2432): Undervalued Internet Stock
2. US Treasury Market Switches Its Message to the Fed and Raises the Ante on Policy Conduct
3. CMGE Tech (中手游) Pre-IPO Review – Unfortunate Timing

1. DeNA (2432): Undervalued Internet Stock

Dena Co Ltd (2432 JP) used to be the GO-GO internet stock for both retail and institutional investors in Japan during the previous bull run before 2008 and trading at 40-50x PER. The multiples have since then collapsed to 10-20x PER although the business prospect remains solid if not better. Benefiting from the increasing regulation in China, DeNA signed an agreement with Tencent Holdings (700 HK) to distribute Arena of Valor in Japan which will boost revenue and improve margin. At 14x PER and 1.2x PBR, DeNA looks attractive. 

2. US Treasury Market Switches Its Message to the Fed and Raises the Ante on Policy Conduct

Bond investors have recently joined their equity counterparts and raised the ante on the Federal Open Market Committee (FOMC) to pause further increases in the federal funds rate.

Despite the lack of sufficient evidence that economic growth has reverted to a more sustainable footing, bond investors have reverted to playing the long-standing game of chicken with the FOMC about the economy’s ability to withstand members’ estimate of the neutral federal funds rate.

Concerns about yield curve inversion have recently returned, but investors are struggling to adjust to a more normal environment where short-term interest rate volatility is no longer being artificially suppressed by Fed policy.

The persistently low term premium demanded by bond investors has boosted financial accommodation at any given policy rate level, thereby raising the risks that the FOMC may still increase the federal funds rate even after the yield curve has become inverted in order to achieve sustainable growth.

East Asian economies have imparted a downward bias on US inflation and bond yields over the past 25 years and have consequently pushed the Fed into adopting more accommodative policy settings over the aforementioned period.

The FOMC needs unambiguous evidence of slowing jobs growth towards levels that alleviate downward pressure on the unemployment rate before contemplating a pause in hiking the federal funds rate at the March FOMC meeting.

3. CMGE Tech (中手游) Pre-IPO Review – Unfortunate Timing

China Mobile Games Adr (CMGE US) plans to raise US$300m in its upcoming Hong Kong IPO.

CMGE is an intellectual-property (IP) oriented mobile game operator. The company delisted from Nasdaq in 2015 and tried to do a backdoor listing on Shenzhen Exchange in late 2015 but it was canceled due to unfavorable market condition. It is now trying to list on the Hong Kong Exchange when the sentiment is poor due to the game approval suspension.

In this insight, we will take a look at the financial performance, key operating metrics, and analyze its games pipeline.