China

• As a PRC aviation/defense play, AviChina Industry & Technology H (2357 HK)‘s fundamentals are undemanding. 
• Preceding my comments on AviChina are the current setup/unwind tables for Asia-Pacific Holdcos.
• These relationships trade with a minimum liquidity of US$1mn, and a % market capitalisation >20%.

• The data in this insight is collated from the “shareholding disclosure” link on the HKEx website.
• Often there is a corresponding HKEx announcement on the increase – or decrease – in the shareholding by directors. Or pledging. However, such disclosures are by no means an absolute.
• The key stocks mentioned in this regular insight are Hang Lung (10 HK) and Hang Lung Properties (101 HK).

We view Yankuang as “Low Risk” on the LARA scale. This reflects: [1] the company’s huge scale (producing over 100 mn tons a year) and status as the second-largest producer in the Chinese coal sector; and [2] that it is majority owned by, and has strategic importance to, the Shandong government. These translate to strong access to onshore capital. Our assessment also takes into account Yankuang’s: [1] earnings being dependent on coal price fluctuations; [2] improving financial profile; [3] exposure to adverse movements of the USD against the CNY; and [4] track record of operation.

Our fundamental Credit Bias on Yankuang is “Positive”, due to: [1] the company’s enhanced SOE status following the completion of the Yanzhou Coal/Shandong Energy merger; and [2] supportive coal prices.

Controversies are “Immaterial”, but the ESG Impact on Credit is “Moderately Negative”. The coal mining industry in China is exposed to regulatory and geopolitical risks, such as forced closures of inefficient mines. The industry also faces extreme scrutiny from environmental agencies, given its negative impact on the environment.

• Brilliance China Automotive (1114 HK) was deleted from local and global indices following its prolonged trading suspension from April 2021 to September 2022.
• Following the resumption of trading, Brilliance China Automotive (1114 HK) was added to the HSCI in March and subsequently to Southbound Stock Connect.
• The stock should be bought by global passive trackers over the next few months and there should be substantial passive inflows.

• ImmuneOnco’s execution/R&D efficiency is far from satisfactory. After about seven years since the establishment in 2015, there are no candidates entering phase III trials or close to market launch.
• The biggest concerns are druggability and safety profile of CD47-targeted candidates. There could be potential R&D failure risks. The pipeline layout around CD47 also makes it hard to diversify risks.
• It’s challenging for ImmuneOnco Biopharmaceuticals (Shanghai) (IOB HK) to hit high-quality license-out deals with reputable big pharma, leading to uncertainties on internationalization. We’re conservative about the outlook. 

We view Lenovo as “Low Risk” on the LARA scale, mainly due to the business’ large size, track record and strong balance sheet. Lenovo is the world’s largest PC maker, with the PC segment being the company’s key profit centre. The Mobile segment has been scaled back to certain markets, and has turned profitable. The Data Centre/Server business is promising and has grown impressively, albeit still suffering losses.

Negatively, all three of the company’s market segments are becoming commoditised. The PC markets, having previously experienced a structural decline due to changes in user behaviour as well as substitutes (smartphones and tablets), has enjoyed strong demand as more people have been working from home amid the pandemic.

Our Credit Bias on Lenovo remains “Stable”, as the growth outlook is subdued due to weak post-COVID-19 PC demand. We do not expect the credit to improve further. That said, the strong balance sheet, sound liquidity and solid working-capital management would cushion Lenovo from the PC segment’s inventory adjustment period.

Controversies are “Immaterial” and the ESG Impact on Credit is “Moderately Positive”. ESG-compliant funds may find Lenovo attractive due to its strong ESG. The company has done very well in terms of environmental factors, with a strong management team as well as a long and positive track record. Lenovo is mainly exposed to geopolitical risk, albeit it has managed this very well amid the US-China trade war.

Lucror Analytics Morning Views comprise our fundamental credit analysis, opinions and trade recommendations on high yield issuers in the region, based on key company-specific developments in the past 24 hours. Our Morning Views include a section with a brief market commentary, key market indicators and a macroeconomic and corporate event calendar.

• AAC Technologies Holdings
• Sino-Ocean Service

• SMIC reported C2Q23 top-line, EBIT, and non-IFRS net profit in-line, (10%), and (20%) vs. our est., and in-line, (35%), and (8%) vs. cons., respectively.
• SMIC guided 3Q revenues up 3-5% QoQ, but gross profit flattish QoQ. This suggests SMIC is shipping 8” wafers with low, or negative profit per wafer.
• We maintain BUY on Huawei exposure but cut our TP to HK$ 24 to reflect the low profitability of 8” wafer orders that could persist given weak demand.

• This is the Brand Spanking New and Extra Spiffy H/A-Share Discount/Premium Weekly designed to help investors see the relationships easily. We used to do it. 
• We decided to bring it back better. There are lots of cool interactive tables, and charts, heat maps, and comparative data. And 19 Trade Recommendations. 
• We hope this new version serves readers even better. Feedback is actively solicited to see if we can improve it from here. 

• In response to media speculation, L’Occitane (973 HK) has clarified that Reinold Geiger, the Chairman and the largest shareholder, is contemplating a possible transaction through a voluntary general offer.
• However, the rumoured offer of HK$35 per share is false. Mr Geiger has confirmed that the potential offer price would be no less than HK$26.00 per share.
• The floor price of HK$26 is light and needs a bump (towards HK$30), particularly if Mr Geiger wants 95% of voting rights to exercise the right of compulsory acquisition (squeeze-out).

• Alibaba delivered a strong June quarter that beat consensus by a wide margin and across the board, showcasing an acceleration of recovery.
• The strong results were however clouded by China’s weak macro signals and investors’ lingering concern about China consumption of which Alibaba is commonly seen as a proxy.
• Alibaba trades at 9x our revised-up FY24 earnings. The most certain thing about Alibaba amidst all the uncertainties is it is getting cheaper and it is not a value trap.

• BABA reported CY2Q23 top-line and non-GAAP net profit 10% and in-line vs. our estimate, and 12% and 20% vs. consensus, respectively. Taobao/T-mall 3P, international retail, and DME beat our estimate.
• We suspect WeChat cooperation has been a main driver for increasing DAU of a cohort of previously untapped users. This also drove merchants to return to the platform.
• We maintain BUY and raise TP to US$ 120 to reflect (1) higher growth of Taobao/Tmall, and (2) improved profitability of most business groups.

• Within Alibaba (ADR) (BABA US)‘s June quarter results, the numbers from logistics arm Cainiao Smart Logistics (1437124D HK) stood out: revenue up 34% Y/Y, & EBITA turned to +ive
• In this insight we attempt to place Cainiao’s stellar results into context: it grew far faster than parent Alibaba’s revenue, but also faster than Chinese e-comm and Chinese express
• As Cainiao preps for its IPO, its June results should boost investors’ confidence. The numbers also hint at what is driving Cainiao’s recent performance, and which indicators to watch

• Back on the 7 June, Chindata Group (CD US) announced Bain Capital’s NBIO to buy all shares of the Chinese data center provider it does not already own for $8/ADS.
• On the 13 July, Chindata announced that China Merchants Capital has made an NBIO at $9.20/ADS.
• Now Chindata has entered into a definitive agreement with Chindata at US$8.60/ADS. Bain holds more than 2/3s of Chindata to vote this through. And there is no PRC regulator approval.

Lucror Analytics Morning Views comprise our fundamental credit analysis, opinions and trade recommendations on high yield issuers in the region, based on key company-specific developments in the past 24 hours. Our Morning Views include a section with a brief market commentary, key market indicators and a macroeconomic and corporate event calendar.

• Adani Ports & Special Economic Zone
• China Jinmao Holdings
• Road King Infrastructure

• Chindata Group (CD US) has entered a definite agreement with Bain Capital at US$8.60 per ADS, 7.5% higher than its previous offer of US$8.00 per ADS.
• Completion is conditional on shareholder approval, dissenting shareholders representing less than 12% of outstanding shares and any applicable regulatory approvals. The completion conditions should be met.
• CMC’s offer, while higher, does not meet the “superior proposal” criterion. At the last close price and December-end completion, the gross and annualised spread is 6.0% and 16.6%, respectively.

• Aequitas Research puts out a weekly update on the deals that were covered by the team recently along with updates for upcoming IPOs.
• In India, TVS Supply Chain Solutions (1915741D IN) launched its IPO bookbuild. Suzlon Energy (SUEL IN) had also launched its well-flagged INR20bn (US$240m) QIP.
• While Japan saw Star Asia Investment (3468 JP) launching its primary follow-on for acquiring properties as well. 

• Recent share-price declines in healthcare is mainly related to anti-corruption campaigns. Here’re some updates.We recommend investors not to rush to buy the dip, but wait for the bottom.
• We recommend A-share healthcare companies to buy back shares/increase dividends, in which case, despite slowing growth, A-shares are still the RMB-asset with the greatest potential for increases in expected returns.
• CanSino Biologics (6185 HK) has entered a Framework Agreement with AstraZeneca, but investors should not be overly optimistic about the short-term or even medium-term performance contribution brought by this cooperation.

• Li Ning (2331 HK) reported today a headline beat on 1H23 results, with sales up 13% yoy and net profit down 3% yoy.
• Both numbers are around 5% better than the already low market expectations. 
• However, a closer look at the results shows that the quality of the beat is low. 

• Sino Land is a developer in Hong Kong and China with both DP and IP rental business. 
• Sino Land has a net cash position of HKD41bn, its strong balance sheet makes the stock a defensive play
• Despite trading at attractive valuation (0.46x P/B), we see there is a lack of catalyst and the stock may remain as value trap

Lucror Analytics Weekly Wraps provide an overview of all Morning Views comments and reports published by our analyst team in the past week, and also showcase a list of the most-read reports.

In this Insight:

1. Country Garden Holdings Co
2. Longfor Properties
3. Sino-Ocean Group
4. China SCE
5. Sunny Optical Technology Group

and more…

Country Garden Holdings Co. Ltd., one of China’s largest property developers, said it expects to report a record, multibillion-dollar net loss for the first half, raising further concerns as the company slides deeper into a debt crisis.

Guangdong-based Country Garden estimated its net loss at 45 billion yuan to 55 billion yuan ($6.2 billion to $7.6 billion) for the first six months of 2023, compared with a net profit of 1.91 billion yuan a year ago, according to a Hong Kong exchange filing late Thursday.

The company warned July 31 that it would report red ink for the first half.

• The revenue growth rate rose to 14% in 1Q24, compared to the past four stagnant quarters.
• All businesses continued to improve their margins, so that the general operating margin rose to 19% in 1Q24 versus 12% in 1Q23.
• We believe the re-organization is successful and the stock price is overly impacted. Buy.

• Alibaba (ADR) (BABA US)‘s 1QFY24 revenue and OP beat consensus by RMB 9.2bn and RMB 14.4bn respectively, possibly on the back of a successful 6.18 shopping festival.
• It looks like Alibaba Group Holding (9988 HK) has decided to abandon its New Retail Strategy and instead, put more effort into e-commerce, especially on popular platforms like Taobao and Tmall.
• Although this is a good-sign and could rally the stock short-term, we would still steer clear of Alibaba as we remain skeptical about the overall health of the Chinese economy.

• According to Sing Tao, two PRC firms and a mainland bank have formed a consortium to acquire Hongkong Land (HKL SP)‘s 33-storey Three Exchange Square.
• This “news” is straight out of left field. For its part, HKL said the market rumour is pure speculation.
• HKL’s P/B of 0.24x is closing in on its all-time low of 0.21x during the depths of Covid. 

• We expect Huitongda (HTD) 1H23 revenue in-line with consensus, and non-IFRS NI 15.6% lower than consensus. 
• The lower bottom-line is due to 1) product mix change result in lower gross margin; 2) higher impairment loss from account receivables due to its SME focused model.
• We maintain the stock as SELL. We raise TP by HK$2.5 to HK$20.5 to factor in the upward revision of NI from downsizing of minority interest.

• Taste Gourmet (8371 HK) reported its Q1 FY24 with revenues up 47% YoY and core profits up 349% YoY.  We believe that the company will report stronger revenues in Q2.
• The restaurant count increased from 39 to 42 by the end of Q1 FY24 for HK. As of the latest date, the company has 46 restaurants in HK. 
• The company also had 126.5 mn HKD of net cash at the end of Q1 FY24 (vs 118 mn HKD in FY23), almost 20% of the current market capitalization. 

Lucror Analytics Morning Views comprise our fundamental credit analysis, opinions and trade recommendations on high yield issuers in the region, based on key company-specific developments in the past 24 hours. Our Morning Views include a section with a brief market commentary, key market indicators and a macroeconomic and corporate event calendar.

• Country Garden Holdings Co
• Sino-Ocean Service
• Wynn Macau Ltd

• According to Bloomberg, L’Occitane (973 HK) is set to receive a HK$35 per share privatisation offer from Reinold Geiger, the Chairman and the largest shareholder.
• The rumoured price is attractive and represents an all-time high share price. Therefore, Acatis KVG, the shareholder with a blocking stake, would be supportive.
• The rumoured price implies multiples at a discount to peer multiples, which explains Mr Geiger’s ambitions for a possible European listing to secure higher valuation multiples. 

• In late 2018, there were reports that French beauty retailer L’Occitane (973 HK) had drawn interest from Advent International. That rumour came to naught. 
• Similarly, late last month, L’Occitane clarified media reports that it had not received any Offer or proposal. 
• After going into a trading halt this morning, reportedly (Reuters) Chairman Reinold Geiger has been discussing a possible offer of ~HK$35 for each L’Occitane share he doesn’t already own.

• STAR 50 Index represents the performance of the top 50 securities by market capitalization and liquidity listed on the Science and Technology Innovation (STAR) Board of the Shanghai Stock Exchange.
• This is one of the most significant indices in Mainland China when considering the average passive AUM per stock as a percentage of float.
• In this insight, we take a brief look at the index selection methodology and the historical price and volume performance of STAR 50 index rebalance baskets.

• Li Auto reported solid 2Q23 results, with both top line beating cons/our est. by 5.3%/3.6% and GPM of 21.8% beating cons/our est. by 1.1/1.7ppt.
• We reiterate that capacity ramp-up is the key for Q3/Q4 delivery. Q3 sees a temporary capacity bottleneck albeit this is likely to be resolved in Q4.
• We expect the launch of MEGA BEV in 4Q23 to be the next catalyst. We reiterate Li Auto as our top pick and raise TP due to better-than-expected margin outlook.

Lucror Analytics Morning Views comprise our fundamental credit analysis, opinions and trade recommendations on high yield issuers in the region, based on key company-specific developments in the past 24 hours. Our Morning Views include a section with a brief market commentary, key market indicators and a macroeconomic and corporate event calendar.

• China SCE
• Hopson Development
• Sunny Optical Technology Group

• Based on endogenous development and external M&A, the outlook of Hygeia is full of imagination. Hygeia also start to expand business in northwest region of China by acquiring Chang’an Hospital.
• If public hospitals have a role in “guiding patients” to Hygeia, anti-corruption campaign would affect Hygeia’s future performance, which is a significant uncertainty that could also shake its investment logic.
• There may be short-term chaos. It remains to be seen whether performance can sustain growth of around 30%. The 23H2 revenue growth would be an important guidance for Hygeia’s outlook.

• Swire Properties is one of the largest office and retail landlords in HK.  Office is facing headwind despite should see recovery in the long-term.  HK retail is recovering.
• Swire announced to spend 100bn to expand its portfolio in terms of capital management, yet it did not announce a share buyback that many investors would like to see
• Lack of share buyback, with weak HK office and China retail, could drag Swire’s share price.  Despite we see value in the stock, it could remain as value trap

• HealthyWay cannot rely on drug/product sales to achieve rapid expansion of revenue scale because it hasn’t huge user base accumulated on e-commerce platforms like Taobao/JD.com, leading to different business model.
• Relying on Baidu’s search engine to guide traffic could be worthless, because B-end users would not pay for the traffic that cannot provide added value.HealthyWay hasn’t a strong cornerstone business. 
• HealthyWay’s valuation should be lower than that of ClouDr. Due to the lack of imagination space in business model, it would to some extent suppress the valuation growth of HealthyWay.

• SF Holding differs from its Chinese peers in several important ways, including business scale, its lack of a formal relationship with Alibaba, and its many non-express lines of business
• SF also differs from the pre-Covid version of itself: it’s far larger than it was in 2019, but core margins have declined, and internatonal exposure has risen dramatically
• In this insight we also take a look at current EV/Revenue valuations vs peers and list important milestones to watch for ahead of the company’s planned HK IPO

Lucror Analytics Morning Views comprise our fundamental credit analysis, opinions and trade recommendations on high yield issuers in the region, based on key company-specific developments in the past 24 hours. Our Morning Views include a section with a brief market commentary, key market indicators and a macroeconomic and corporate event calendar.

• Adani Ports & Special Economic Zone
• Softbank Group

• Teenage Mutant Ninja Turtles: Mutant Mayhem had a smash opening grossing over 50M USD at the box office in its first week of operation.
• The box office success de-risks the upside potential for Playmates Toys as successful movies have a high likelihood of driving toy sales.
• Paramount+ launching the new TMNT-inspired series will also drive Ninja Turtles’ revival even more.

• According to various public news sources, Brazil’s Suzano SA, the world’s largest pulp maker, and a few private equity players may participate in the bidding for Vinda International (3331 HK).
• Note that the controlling shareholder Essity is looking to potentially dispose its stake, announced in April this year. 
• Two major drivers of share price – pulp price and competition – likely have reached the bottom and could improve in 2H23. 

• SHEIN announced it wants a role in reforming US de minimis import regulations
• A tightening of de minimis threshholds could undermine SHEIN (and Temu) in the US
• The de minimis issue highlights SHEIN’s and Temu’s lack of political allies in the US

• BeiGene maintained strong product sales in 23H1 and its net loss continued to narrow. This means that BeiGene has realized the cost control problem and entered a healthy growth phase.
• Our revenue forecast indicates BeiGene is approaching the minimum threshold for turning losses into profits. A more likely scenario is revenue need to reach over US$4 billion to be breakeven
• However, regardless of the calculation, BeiGene ‘s valuation is still unreasonably high. Its potential/certainty is nowhere near that of Alnylam. Maintaining sustained high growth is not easy because “accidents” remain.

• International Housewares Retail (1373 HK) reported weaker than expected numbers, with revenues down 3% YoY and profits down 18% YoY for FY23 (down 10%/42% for H2 FY23).
• The cause for the decline was the roll-off in COVID-related subsidies worth 30 mn HKD and weak revenues in Q4 FY23 owing to a surge in outbound travel.
• The company declared a 10-cent final dividend ( Full Year: 22 cents). Post the correction in share price, it represents an 8.3% dividend yield. 

• We believe that Kuaishou’s outsized bottom-line beat for 1H23 was driven by stronger advertising and e-commerce business and cost reduction than the street expected.
• However, the market’s muted response suggests that investors are looking beyond 1H23 or even FY23 to price in a mature growth outlook.
• Kuaishou is trading at ~40x our FY23 estimate against 24% earnings CAGR from 2023 to 2025 which represents a hefty valuation premium over other China tech giants.

• The Hang Seng Index (HSI) closed down last week (CC=-1), briefly touching OVERSOLD territory, it may close higher this week. 
• The HSI trend pattern currently identified with the Market Reversal Matrix (MRM) is quite bullish, on average.
• Support levels to go LONG are between 19367 (Q2/Median) and Q3 at 19021.

• Aequitas Research puts out a weekly update on the deals that were covered by the team recently along with updates for upcoming IPOs.
• In the IPO space, Concord Biotech Ltd (658823Z IN) and  SBFC Finance Limited (1547353D IN) opened their respective IPO bookbuilds this week.
• On the Placements front, India began picking up steam post-earnings seasons.

• HUTCHMED’s 23H1 results were in line with expectation. We updated our forecast for the three core products. Its 2023 total revenue would achieve a high double-digit growth. HUTCHMED is undervalued. 
• Performance prospects for 2024 and beyond largely depend on whether fruquintinib can smoothly obtain FDA approval in 2023, which means significant progress in internationalization and possibility of breakeven in 2025.
• Based on the performance so far, we think the clarity of HUTCHMED’s performance is high and the guidance given by management is reliable. The Company deserves more attention from investors.

• We expect Li Auto to report 2Q23 top line and GPM 2.3%/in line vs. cons. We think Li Auto’s share gain in Q1/Q2 reflects market consolidation.
• Our channel check found its weekly order intake remains robust at ~10k. We expect the capacity ramp-up to lead to Q3 delivery of ~100k, 12% vs. cons. 
• We reiterate Li Auto as our top pick, due to 1)  strong model cycle (L9/L8/L7) and channel expansion; 2) margin upside. Li’s MEGA BEV could be the next catalyst.

• We expect MNSO to report C2Q23 revenue 4.6% higher than cons and non-GAAP NI in-line with cons. The beat is due to strong sales from larger ticket size &store expansion.  
• We think the brand upgrade strategy had effectively drove up Miniso stores’ blended ASP, combined with mild recovery of foot traffic, leading to 46% YoY growth in China revenue.
• Besides, we anticipate 37% YoY growth in oversea revenue and 43% YoY growth in total revenue in C2Q23. We maintain Buy rating and raise TP by US$0.5 to US$26.

Lucror Analytics Morning Views comprise our fundamental credit analysis, opinions and trade recommendations on high yield issuers in the region, based on key company-specific developments in the past 24 hours. Our Morning Views include a section with a brief market commentary, key market indicators and a macroeconomic and corporate event calendar.

• Bharti Airtel
• China Jinmao Holdings
• China Vanke
• Greentown China
• Yuexiu Property