China

• In this insight, we take a look at some of the names with high likelihood of being involved in index changes for the Hang Seng Index in September 2023.
• The index changes for the September 2023 rebalance could be announced in mid-August and implemented in early-September.
• Although the index methodology is highly subjective and predicting index changes is extremely tricky, the HSI is an important index in the region and here are our thoughts for September. 

• Three risks in the short term: 1) Decreased gross billings from former legacies due to macro. 2) Lifecycle issues with new games. 3) Market over-optimism regarding new games and AI.
• NetEase still has some positive catalysts in the long term, including: 1) New games and content expansions. 2) Overseas game publishing. 3) Continual improvement in margins.
• We expect NetEase’s revenue in 2Q23 to be slightly lower than the consensus estimates of 2.5%, with a 13.3% beat in profits. Cut TP to $102, but maintain BUY rating.

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.

• Greentown China
• Yuexiu Property

• Robosense Technology (ROBO HK) (RT) is looking to raise around US$300m (estimated) in its upcoming Hong Kong IPO. The deal will be run by JPM and China Renaissance.
• As of Mar 23, it had earned design wins for mass production of LiDAR for 52 vehicles with 21OEMs and Tier 1 suppliers, ranking No. 1 globally, according to CIC.
• As of Mar 23, it had served the largest number of automotive OEMs and Tier 1 suppliers, according to CIC.

• Zhejiang Yongtai Tech A (002326 CH) is looking to raise US$107m in its London GDR listing. Huatai is the sole bookrunner on the deal.
• The firm is offering 11.4m GDRs (1 GDR to 5 ordinary A-shares) for sale, at a fixed 12.7% discount to last close on its A-share leg.
• The deal is a relatively small one for the firm to digest, representing just 3.9 days of three month ADV on its A-share leg.

• Lalatech Holdings Co Ltd (LALA HK) is looking to raise about US$1bn in its upcoming HK IPO.
• Lalatech operates via a marketplace model serving merchants and carriers. Its platform facilitates closed-loop transactions from online shipping order booking to intelligent order matching, and automated dispatching to after-sale services.
• We have looked at the company’s past performance and peer comparison in our earlier notes. In this note we will talk about valuations.

• We finally got to 80 Hang Seng Index constituents in June. Now comes the next step of moving up to 100 index constituents though there is no timeline for completion.
• The conclusions of the market consultation on the inclusion of foreign stocks in the Hang Seng Index should be announced soon though implementation could start only in December.
• We highlight 10 potential inclusions to the index with passive trading impact varying from 1.5-5.6 days of ADV. There are large shorts on some of the stocks.

• We spoke with the management of Perfect Medical Health (1830 HK). The key highlight is a steady recovery for FY24e and an overall expansion of 60% in three years. 
• Expansion plans in HK (75% of revenue) have commenced, with ten centers opening over the year, adding to the existing 22 HK centers (one already opened in June 2023).
• They also highlighted an aggressive long-term goal of making one bn HKD of profit by FY26 (Mkt cap: 4.8 bn HKD) and short-term guidance of 30-40% profit growth for FY24e. 

• Key customers & their retail partners battling excess inventory, waning consumer demand, and market share losses in certain geographies
• Plans for capacity expansion amid demand uncertainties and alt data and macro picture may prove aggressive and along with risks of reshoring/nearshoring & friend-shoring may prove margin dilutive
• Consensus expectations for 2H23 and 2024 appear overly optimistic and valuation is not cheap given the growth profile

• Back On 29 September 2019, Hainan Meilan International Airport (357 HK) entered into a subscription agreement with Hopu-affiliate Aero Infrastructure, for 200mn new H shares at HK$4.69/share.
• That issuance failed as CSRC approval was not secured by the Long Stop. Hopu reckoned HMIA reneged on its duties to secure approval and lodged a notice of arbitration.
• HKIAC recently agreed and opines HMIA did not use its best endeavours to complete the subscription. Hopu is seeking up to HK$6.962bn in compensation. Quite the overhang.

• Fenbi Ltd (2469 HK) is a newly listed China edtech company that focuses on tutoring for China civil servant exams.  
• The company’s share price was caught by a perfect storm in June, dropping by as much as 70% during the month.
• Very interesting opportunity to have exposure to a quality company in a sector that is very different from K12 tutoring.  

The Asia Monthly focuses on providing updates on recent events, information on new issues and spread movements, as well as summarising our top picks. The Asia Monthly is intended to broaden investors’ understanding of the Asian USD high-yield market.

• Silver Dragon Water Supply Group (2210081D CH) is looking to raise at least US$100m in its upcoming Hong Kong IPO. The bookrunners on the deal are HSBC and Huatai International.
• Silver Dragon Water Supply Group (SDW) is principally engaged in the supply of tap water, raw water and pipeline direct drinking water in China.
• As per Frost & Sullivan (F&S), the firm had the largest water pipeline network in terms of water pipeline length among all water supply companies in China in 2022.

• We expect PDD to report 1Q23’s revenue and non-GAAP net income (5.4%) and (5.6%) vs. consensus, respectively.
• Taobao/Tmall and JD launched more subsidy campaigns in 2Q23 to strengthen their low-cost mindsets among customers, while PDD remains to be more restrained, which might lead to decelerating top-line growth.
• We cut PDD’s FY23 EPS by 3.7% and TP to US$ 88 on slower 2Q23 top-line growth and increasing Temu costs, but maintain its BUY rating.

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
• First Pacific Co

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
• First Pacific Co

• We compile our selection of small and mid-cap names with our desired characteristics of high dividend yields, value, and margin of safety. 
• Post the interim results, we provide short updates on each company and links to our latest work on them. 
• Our top picks are Perfect Medical Health (1830 HK), Water Oasis (1161 HK), Taste Gourmet (8371 HK), Uchi Technologies (UCHI MK), and The Keepers Holdings (KEEPR PM).

• Alibaba’s new chairman decides to provide logistics service to outside customers.
• We believe Alibaba is following JD Logistics, as both companies have large retailer bases.
• We suggest buying JD Logistics the role model instead of Alibaba the follower.

• Country Garden Services Holdings (6098 HK) and Zhongsheng Group (881 HK) are high probability deletions in September, while Trip.com (9961 HK) is a high probability inclusion.
• The second add could be BeiGene Ltd (6160 HK) if it passes the velocity test. If not, Chow Tai Fook Jewellery (1929 HK) will be added.
• With the exception of Zhongsheng Group (881 HK), short interest has been rising on all the other stocks and could affect how the stocks trade close to implementation date.

• Two thirds of the way through the review period for the June rebalance of the CSI500 Index, we forecast 50 changes (the maximum permitted) at the close on 8 December.
• There is a big sector skew in the potential changes. We estimate a one-way turnover of 10.1% at the December rebalance resulting in a one-way trade of CNY 6.75bn.
• The potential adds have outperformed the potential deletes and the CSI500 Index over the last six weeks. There could be more outperformance till nearer the end of the review period.

• Great Wall Motor Co. Ltd. (601633.SH +2.50%) said on Wednesday that it will enter the Vietnamese market in August with its Haval H6 hybrid model, while a broader plan to build an assembly plant for new-energy vehicles in the country is set for 2025.
• The Haval H6s will initially be exported to Vietnam from its manufacturing facility in Rayong, Thailand, the Hebei-based carmaker said earlier.
• Vietnam is the fourth-largest auto market in the Association of Southeast Asian Nations (ASEAN) region after Indonesia, Thailand and Malaysia, according to 2022 passenger car sales figures released by the ASEAN Automotive Federation.

• We recently discussed BABA’s management changes with more e-commerce practitioners, and our main conclusion is that this change will be more beneficial to BABA’s e-commerce business rather than other subsidiaries;
• BABA is expected to learn from Tencent and ByteDance by shifting from a centralized authority model to a racehorse mechanism. Some subsidiaries, especially AliCloud and Cainiao, undergo a painful transformation;
• This may be good news for BABA because its e-commerce  is the largest of its valuation. We also remind investors to exercise caution regarding the upcoming IPOs of BABA subsidiaries.

• YZY is a company that is serious about drug development However, there is actually high R&D risk of its pipeline candidates. So, YZY’s R&D capability has yet to be proven.
• There are still many unanswered questions in the whole direction of bispecific antibody. If YZY’s candidates fail to prove better marginal clinical benefits, they won’t have good commercialization performance. 
• YZY has a long way to go based on its pipeline situation. Considering Wuhan YZY Biopharma (YZY HK) has no product in commercialization stage, its valuation may not be high.

• Combination of high NIM contraction with high loan growth is not a good combination
• BOC has seen its NIM down 14% in the past year but against 12% loan growth
• PBOC pressure to cut rates and for banks to support ailing debtors, is a risk

• S.F. Holding (002352 CH) (SFH), China’s largest express delivery company, aims to raise around US$2-3bn in its H-share listing in Hong Kong.
• SFH is the largest integrated express logistics service provider in China and the fourth largest in the world. It has been listed on the Shenzhen Stock Exchange since 2017
• In this note, we look at its past performance and other deal dynamics that might impact the listing.

• Qiniu Limited (1045102D CH) is looking to raise about US$200m in its upcoming Hong Kong IPO.
• Qiniu Limited (Qiniu) is a one-stop scenario-based intelligent audiovisual service provider.
• According to iResearch, the firm is the third largest audiovisual platform as a service (PaaS) provider in China in terms of FY22 revenue, with a market share of 5.7%. 

• There could be 25 inclusions, including many new listings, to the Hang Seng Composite Index (HSCI) in September. Another 6 stocks are close adds on liquidity and market cap.
• We see 19 potential deletes and 2 close deletes on market cap, 5 potential deletes on prolonged trading suspension, and 2 close deletes on liquidity.
• There are 8 potential deletions where holdings via Stock Connect are more than 20% of shares outstanding. There could be some unwinding of positions over the next couple of months.

• We summarise the latest spreads and newsflow of merger arb situations we cover across Hong Kong, Australia, New Zealand, Singapore, Japan, Indonesia, Malaysia, Philippines, Thailand and Chinese ADRs.
• Highest spreads – 111 Inc (YI US), United Malt Group Ltd (UMG AU), Chindata Group (CD US), ENM Holdings (128 HK), Tesserent Ltd (TNT AU), Poly Culture. 
• Lowest spreads – Healius (HLS AU), Liontown Resources (LTR AU), Toyo Construction (1890 JP), Musgrave Minerals (MGV AU), Metro Pacific Investments Co (MPI PM), Kenedix Residential Investment (3278 JP).

• Keep Inc., the largest online fitness platform in China, set terms for HK IPO and plans to raise ~HK$667M at the high end of the range at HK$61.46/share. 
• CICC is leading the offering and Keep Inc (KEEP HK) will trade under the stock code “3650”. The company offers ~10.8M shares at a price range of HK$28.92-HK$61.46.
• The low end of the range implies an IPO valuation of HK$15B, which looks attractive and is equal to the last round valuation of ~$2B that was led by SoftBank.

• Two thirds of the way through the review period, we see 14 potential index changes at the December rebalance that will be implemented at the close on 8 December.
• We estimate a one-way turnover of 1.98% at the December rebalance leading to a one-way trade of CNY 5.32bn.
• The potential adds have outperformed the potential deletes and the Shanghai Shenzhen CSI 300 Index (SHSZ300 INDEX) over the last five months, though there is some near-term underperformance.

• 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 stock mentioned in this regular insight is Red Star Macalline Group Corp (1528 HK).

• In this insight we look at the development of J&T’s China business over the past few years, including J&T’s purchase of Best Inc’s express operation in late 2021
• We also compare J&T’s Chinese operation to five listed Chinese express companies in terms of scale, market position, financial performance, and relationships with e-comm platforms
• Finally, we present a framework for the valuation of J&T’s China business, and offer a list of questions we would ask management as the company prepares for its IPO

• While having a slow FY23, Bosideng International Holdings (3998 HK) is well-positioned to capture the rebound in down apparel sales growth as pent-up demand is released.  
• We also expect a recovery in margin, further improvement in channel efficiency and operating leverage from cost control will add to earnings momentum. 
• Management expects revenue growth will at least sustain at the rate in the last 5 years. The stock’s valuations are cheap when compared with growth outlook and global peers. 

• The Naspers (NPN SJ) / Prosus (PRX NA) circularity was too complex. Lots of people hated it. It was actually easier than most thought, but optically was difficult to reconcile. 
• Swire Pacific (19 HK) was a clear buy: there is no justification for assigning a similar discount for cash from the US Coke ops as you would to unlisted ops
• A residual NTT (9432 JP) individual small-holder shareholding tenure reward does not get split 25:1 when the stock gets split 25:1. It doesn’t mean much, but it’s an interesting artefact. 

• We expect that Meituan and Douyin engaged in fierce competition in 2Q23. Meituan intensified its efforts in three aspects: commission reduction and rebates, promotion of “Meituan Quanquan,” and video subsidy. 
• However, our 2Q23 Meituan revenue/profit estimates are in-line/34% higher vs. cons. This is mainly because it was Meituan’s first quarter of counterattack.
• Meituan’s counterattack has shown initial results, in Douyin’s slowing local services growth during 618, and the return of merchants. We maintain Meituan’s BUY rating, but lowered TP to HK$ 165.

• We are more positive on G6’s potential due to attractive pricing and higher conversion rate brought by nationwide availability of display vehicles. 
• The success of G6 will add visibility of its growth due to the shared architecture.  We reiterate a rebound of sales momentum starting from 2Q23, driven by: 
• 1) increased order intake of P7i and G6; 2) faster channel expansion than its peers. We raise our TP to US$ 13.7. Our TP implies 2.5x PS.

• Weekly summary of vol changes and moves across Global Markets
• Analysing ATM volatility and skew changes over the last 5 days
• We suggest a few trades to take advantage of the implied vol surfaces

• We cautioned investors about the excessive optimism around the company’s growth potential a few months ago.
• Its growth momentum has since rapidly diminished, at a pace that also surprises us and points to a dimmer outlook.
• Despite rounds of downward earnings revision, we still see further downside risks to earnings. We expect 20-30% decline in share price by end of this year.

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. Central China Real Estate
2. Sino-Ocean Group
3. China Jinmao Holdings
4. Lifestyle International Holdings
5. Geely Auto

and more…

• Last night, Swire Pacific announced it planned to sell its US Coca Cola Distribution business to its parent company. That means a Circular, an IFA Opinion, and an EGM.
• I expect a September EGM and the Special Div to follow in Q4. While I find the price low, I expect the deal to be approved by Swire shareholders.
• This deal has an effect on the Swire B/A ratio. Some may get it. Some may not. Makes sense to be ready. Swire A is cheap. Swire B is cheaper.

• Times Neighborhood (9928 HK) is a China property management company headquartered in the Big Bay Area, trading at 3x 2023 P/E and below net cash.
• China property management as a sector has lost most of its value given close relationship with China property.  However, there are still some investable property management companies.
• Upcoming catalysts include interim results in August, potential favorable policies in China property sector, and potential shareholder actions.  

• The share price of MTR Corp (66 HK) has not moved and lagged behind other transport operators in Asia.
• High-Frequency numbers from the company has shown improvement and signs that the Chinese tourists are gradually returning.
• The reopening of the checking in facility in downtown Hong Kong is another sign that more tourists are expected to come. 

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.

• Bharat Petroleum Corp
• Meituan
• Pertamina Geothermal Energy

• J&T’s China growth will slow from a lack of (1) M&A targets, and (2) cash to sustain a price war. SEA’s growth will slow, and profit margin decline due to
•  (1) Shopee in-sourcing of high-profit parcels(2) PE-backed rivals using price wars to gain market share. Lower penetration of China supply-chain platforms will stunt J&T’s growth in New Markets, we expect.
• In our base case we value J&T at US$ 10 bn, which is (25%) vs. J&T’s valuation in its latest round of funding.

• After shares were suspended on the 20 June, art and culture play Poly Culture Group Corp H (3636 HK) has announced a pre-conditional privatisation at HK$8.88 per H-share.
• This Offer, from SOE Poly Group, is by way of a Merger by Absorption, which incorporates a Scheme-like vote. There is no tendering condition.
• The premium to last close is 77.6%; and a 112.5% premium to the five-day closing average. 

• Perfect Medical Health (1830 HK) reported a steady earnings growth of 3.5% YoY for FY23 despite the interruption of operations in China.
• Since its listing, the company has consistently maintained a ROCE of >25%, with FY23 being no exception. Net cash and investments at 738 mn HKD represent 18% of market capitalization. 
• The company declared a final dividend of 17 cents (Full year dividend FY23: 30 HKD cents Vs. FY22: 25 cents), representing an 8% yield with a 118% payout ratio. 

• Kelun-Biotech is a China-based integrated innovative biopharmaceutical company. The company launched a deal to  raise up to US$200m via a Hong Kong listing.
• In our previous note, we looked at the company’s product lines and provided a brief overview on the company’s valuation.
• In this note, we provide an update for the book building. We provide our quick thoughts on the valuation and deal dynamics.

• Swire Pacific (19 HK) has announced it is selling its US Coca-Cola ops to its parent for HK$30.4bn (US$3.9bn). That’s 40% of its market cap.
• Preceding my comments on Swire 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%.

• Mobvoi is a leading AI company with generative AI and voice interaction technologies at the core of its business. The company has filed for an IPO on the HKEx.
• Unlike a lot of the AI start-ups, Mobvoi has already begun commercialising its products and services and the company has started generating operating profits in 2022.
• The advent of ChatGPT and Midjourney have created a hype for AI. Mobvoi has taken the right decision to go public at the right time.

We view Hopson Development as “High Risk” on the LARA scale. Our assessment primarily reflects the company’s constantly evolving business strategy and financial risk profile. Positives include Hopson’s high-quality land bank in premium locations (acquired at low cost) and the cash-generating investment property portfolio. Margins are robust given the company’s positioning as a high-end property developer, although this also exposes Hopson to high regulatory and market risk.

Our “Stable” Credit Bias is underpinned by the company’s resilient contracted sales, which are supported by the large and high-quality land bank, improving sales and abundant saleable resources. That said, we remain cautious on Hopson’s aggressive expansion and increasing involvement in equity investments, which may be debt-funded and could introduce significant performance volatility. Controversies are “Material”, while the ESG Impact on Credit is “Moderately Negative”.

While the company’s credit fundamentals appear to be healthy, we believe its bond price could be volatile due to negative impact from weak market sentiment and poor technicals. We therefore maintain our “Hold” recommendation on the HPDLF curve.

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 Water Affairs

• Nws Holdings (659 HK) announced a pre-conditional voluntary general offer from the Cheng family at HK$9.15 or HK$9.47 per share (with a potential 2HFY2023 dividend of HK$0.32 per share).
• The pre-condition related to regulatory approval from the Insurance Authority of Hong Kong and the Bermuda Monetary Authority is a formality due to the Cheng family’s current sway over NWS.
• The key condition is approval by independent New World Development (17 HK) shareholders which is likely as the offer is attractive, reduces NWD’s gearing and results in a special dividend.  

• Dali Foods Group (3799 HK) disclosed a scheme privatisation offer from the founder at HK$3.75 per share, a 37.9% premium to the undisturbed price (HK$2.72 on 20 June).
• Key condition is approval by at least 75% of disinterested shareholders (<10% of all disinterested shareholders rejection). No independent shareholder holds a blocking stake. 
• The price is final. While the offer price is unattractive compared to peer multiples and historical share prices, this looks like a done deal. 

• Poly Culture Group Corp H (3636 HK) announced a pre-conditional privatisation offer from Poly Group at HK$8.88 per H Share, a 77.6% premium to the undisturbed price of HK$5.00.
• The pre-condition of regulatory approvals is a formality as Poly Group is an SOE. The key condition is approval by at least 75% of independent H Shareholders (<10% rejection). 
• The offer price is final. There is no minimum acceptance condition. No independent H Shareholder holds a blocking stake. The offer is attractive, waving the way to success.  

• J&T Express, a global logistics service provider, is looking to raise about US$1bn in its upcoming Hong Kong IPO.
• As per Frost & Sullivan (F&S), the firm is the leading express delivery business in Southeast Asia, with a 22.5% market share as per 2022 parcel volume.
• In this note, we talk about the positive aspects of the deal.

• Late last night (27 June), Dali Foods Group (3799 HK) a leading branded F&B play, announced a privatisation Offer by way of a Scheme from its founder/chairman/CEO Xu Shihui.
• The cancellation price, which has been declared final, is HK$3.75/share, is a respectable 37.87% premium to undisturbed, but… 
• Xu and concert parties control 88.89%, with disinterested shareholders holding 11.11%, therefore a blocking stake at the Scheme meeting is just 1.11% of shares out. 

• In this note, we looked at the privatization offer from Chow Tai Fook, and its impact on NWD 17 HK
• The proposed transaction will help NWD unlock its value and reduce gearing, which has been investor’s major concern
• It is only the beginning of part of strategic review of NWD group.  We view more positive catalysts are coming

• J&T Express, a global logistics service provider, is looking to raise about US$1bn in its upcoming Hong Kong IPO.
• As per Frost & Sullivan (F&S), the firm is the leading express delivery business in Southeast Asia, with a 22.5% market share as per 2022 parcel volume.
• In this note, we talk about the not-so-positive aspects of the deal.

• Baiyunshan is not a typical TCM company. As Great Commerce accounts for the majority of revenue, it clearly drags down the quality of total assets and growth expectation for valuation.
• As Jin Ge and Wang Lao Ji are facing different challenges, the overall growth/profitability of Baiyunshan is under pressure.Due to uncompetitive product line, Baiyunshan’s future growth appears to lack momentum.
• The valuation of Baiyunshan-A share is still expensive, but Baiyunshan-H share is attractive. After all, the future consumption recovery would be beneficial for boosting Baiyunshan’s valuation. Then, trading opportunity occurs. 

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.

• Central China Securities
• China Vanke
• Sino-Ocean Service