China

• The index committee has continued to use a 6-month minimum listing history leading to five changes to the SSE STAR50 (STAR50 INDEX) in March.
• One way turnover is estimated at 4.95% and will result in a one-way trade of CNY 4,413m. The estimated impact on the deletes is higher than that on the adds.
• The inclusions have outperformed the deletions over multiple time periods. There will be pre-positions on the stocks and those could be unwound over the next week or two.

• On Friday 24 February 2023, the Hang Seng Index Committee announced changes for the HSTECH Index – Weibo Corp (9898 HK) IN, Ming Yuan Cloud Group (909 HK) OUT.
• Notably, the changes in FAF due to the new treatment for Dual Primary Companies means decent boosts in weight for XPeng (9868 HK) and Li Auto (2015 HK). 
• Of the three “major” indices, this one produces the most fun – US$900mm+ and 8.7% flow one-way. And the big flows are additive to the other indices.

• HSCEI keeps its constituent count at 80 names, adds XPeng (9868 HK) and deletes China Feihe (6186 HK). 
• There are decent flows in this rebal, with Tencent (700 HK) and Alibaba Group (9988 HK) seeing selling, Meituan (3690 HK) seeing buying. Li Auto (2015 HK) sees FAF upweight.
• Janaghan Jeyakumar, CFA had called the deletion of China Feihe, but had another name higher on the ADD list. 3.2% and HK$2.6bn one-way flow.

• We summarise the latest spreads and newsflow of merger arb situations covered by us across Hong Kong, Australia, New Zealand, Singapore, Japan, Indonesia, Malaysia, Philippines, Thailand and Chinese ADRs.
• Highest spreads – 21Vianet Group (VNET US), Alliance Aviation Services (AQZ AU), 111 Inc (YI US), Golden Energy & Resources (GER SP), Origin Energy (ORG AU), Toyo Construction (1890 JP).    
• Lowest spreads – Ihara Science (5999 JP), Tyro Payments (TYR AU), Nitro Software Ltd (NTO AU), Boustead Projects (BOCJ SP), Nissin Electric (6641 JP), Techno Associe (8249 JP). 

• The decline in 2H22 profit (53.1% YoY and 43.8% HoH) for Pacific Basin Shipping (2343 HK) is a matter of the past. Market rates have already rebounded from the trough.  
• Demand recovery on China re-opening, good forward cargo cover, reduction in operating costs, strengthened financial position and diversified customer base are Pacific Basin’s key merits. 
• Lower profit for FY23 should be well anticipated by the market, yet it still generates ROE of 20.9%, making its 1.0x P/B inexpensive. Moreover, yield will stay at 10% level. 

• Meituan has been hiring delivery workers in Hong Kong since February 20.
• JD will provide a subsidy of RMB1.5 billion to customers to compete with Pinduoduo (PDD) in early March.
• Four companies released financial performance for 4Q22, including Baidu, iQiyi, NetEase, and Sohu.

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 Jinmao Holdings
• Lenovo
• China Datang Corp Renewable Power

• Haidilao issued a positive profit alert last Friday which beat our and market expectations by a big margin. Profitability improved  mainly due to shutting restaurants and labor optimization. 
• We expect the news and the street’s earnings revision will drive near-term stock rally. 
• That said, growth challenges remain and will be under spotlight during 2023-24. The expected stock rally will just build more expectations in the price. Take profit from the rally. 

• There are 35 adds and 28 deletes for the Hang Seng Composite Index (HSCI) at the March rebalance to take the number of index constituents up to 527.
• We expect 29 of the 35 inclusions to the HSCI will be added to Stock Connect, while 20 of the 28 HSCI deletions will be removed from Southbound Stock Connect.
• 19 stocks could be deleted from Stock Connect only since their average market cap has dropped below HK$5bn- unless the new threshold of HK$4bn is approved in the next week.

• As expected, XPeng (9868 HK) replaces China Feihe (6186 HK) in the Hang Seng China Enterprises Index (HSCEI INDEX) at the close on 10 March.
• Using prices from the close on 24 February, estimated one-way turnover is 3.28% and will result in a one-way trade of HK$2,162m at the close on 10 March.
• Short interest on XPeng (9868 HK), Li Auto (2015 HK), China Feihe (6186 HK) is quite high in terms of days of ADV to cover and in terms of float.

• BABA’s December results highlighted how the performance of this e-commerce giant – as a proxy for China consumption – increasingly tracks Chinese economy.
• The Alibaba that suffered from China’s slump in 2022 should also be the Alibaba that stands to reap the fruits from China’s recovery in 2023.
• Trading at 12x PE on the cusp of economic recovery, the payoff of BABA is much better for bulls than bears. Maintain $500 billion target valuation. Buy.

• 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

• Jehoshaphat’s short report has alleged that Techtronic Industries (669 HK)/TTI has been inflating its profits dramatically for over a decade with manipulative accounting.
• Our forensic analysis of the allegations suggests that some are credible red flags while others are essentially an exaggeration.
• TTI’s response to Jehoshaphat is pitiful. Valuation is meaningless until management adopts more conservative accounting or compelling disprove the allegations.

• Alibaba’s 3QFY23 results marginally topped consensus. With the share price dropping 0.65% cf. +0.35% for the index, both results and the price reaction were in line with our expectations.
• Yesterday’s results confirm that Alibaba (ADR) (BABA US)’s core businesses, Taobao and Tmall are in trouble and cost-cutting elsewhere is insufficient to offset the short-term weakness.
• Therefore, we do think that this is a good opportunity to profit on the short side with Alibaba shares having the potential to fall another 40-45% in the short term.

• Techtronic Industries (669 HK) was targeted by Jehoshaphat Research (JR) accusing that the company’s profits are inflated dramatically over a decade with manipulative accounting.
• As per the report, routine expenses incurred have been booked under various asset accounts such as deferred development costs thereby showing ever increasing margins for a cyclical business.
• We have assessed the merits of some of these claims using our forensic accounting framework and it appears that most of the claims are very difficult to refute.

• Troubled coalbed methane play Sino Oil And Gas Holdings (702 HK) is currently suspended pursuant to the Hong Kong Code on Takeovers and Mergers. 
• Sino Oil is burdened with a large convertible note and a winding-up petition.  Its auditor has disclaimed accounts since 2017 over its ability to continue as a going concern.
• Jiangxi Jovo Energy (605090 CH) is interested in taking more than 50% of Sino Oil (via new shares), but less than 75%. Sino Oil is up >100% in the past month. 

• In our latest int’l reports we have preached caution, and since January we have discussed our expectations for $93 to cap upside on the ACWI-US
• Thus far, $93 has proven to be rock-solid resistance, and ACWI-US now displays a 4.5-month uptrend violation signaling the pullback has officially begun.
• We would expect this pullback to continue down to $86-87 at minimum, and potentially $84 (December 2022 low). Even $75-77 (the 2022 lows) is not out of the question.

• Tencent faced formidable resistance at 385 where old lows and old highs coincided and was our short level outlined on January 17.
• 300 is our base line downside target. March will be a bearish month. Buy zone at sub-300.
• Macro is constructive if 270 holds. Current decline is labeled a deep correction of the October to late January rally.

We view Shui On as “Medium Risk” on the LARA scale. Our opinion is underpinned by the company’s portfolio of high-quality assets situated in prime locations in major Chinese cities. Shui On has a large investment property portfolio, which generates sufficient recurring revenue to cover more than 1x of adjusted interest expense. The investment properties were worth CNY 51.2 bn as at end-June 2022, covering net debt by 1.7x. Moreover, the company can dispose assets to boost cash flow if needed. These positive factors are balanced against Shui On’s small scale and lumpy earnings profile.

Our fundamental Credit Bias on Shui On is “Stable”, supported by the improved operating and financing environment for stronger Chinese developers. The company has a high-quality asset base and sizeable investment property portfolio, which would support access to bank financing. We also believe Shui On’s differentiated business model (compared to peers with heavy reliance on property development) will thrive in the post-property crisis environment.

Controversies are “Immaterial” and the ESG Impact on Credit is “Neutral”. Shui On’s management appears to place a strong emphasis on ESG issues, and we note positively the company’s high level of disclosure and transparency.

• Jehoshaphat Research (JR) argues the case that Techtronic Industries (669 HK) has been engaged in “snowballing” to maintain margin growth.
• JR flags TTI is the only public company in the world (with over $1bn in revenues) exhibiting positive sequential gross margin change in every semi-annual period over ten years.
• Short interest had been picking up ahead of the short sell report. Shares fell 19% before being suspended in the afternoon session.  

• Revenue grew by 2% YoY in 3Q22, as the decrease of online sales offset the increase of physical stores.
• The operating margin began to improve, as the company cut sales and marketing expenses in minor businesses.
• We believe the stock has an upside of 78% for March 2024 and the price target will be HK$170.

• A correction in Perfect Medical Health’s (1830 HK) share price recently has led to it trading at a decent multiple of 15.2x/11.6x FY23e/24e PE(x) with a 6.9%/9.1% FY23e/24e dividend yield. 
• We estimate the lockdowns in China from Oct-Dec last year will impact the H2 FY23 result, leading to softer revenue growth of 4.8% for FY23 (profit 11% YoY). 
• We are optimistic about China re-opening and cross-border travel and believe that >20% revenue growth can materialize in FY24, led by a recovery in China/HK revenue. 

• Following several years of sustained revenue share loss, Search’s digital advertising revenue market share has stabilised, having seemingly retained its core advertising customers.
• With China’s economic growth recovery, Baidu is perfectly positioned to accelerate its core marketing revenue growth, which is also a high-margin operation.
• Baidu is set up for significant group margin expansion as the higher-margin core marketing business returns to positive annualised growth and it continues to expand AI Cloud margins.

• Fangzhou Group (FANGZHOU HK) is looking to raise about US$300m in its upcoming Hong Kong IPO.
• Fangzhou (FZ) is an online chronic disease management (CDM) service provider in China.
• In this note, we will talk about the not-so-positive aspects of the deal.

• Guangzhou Tinci Materials Technlgy (002709 CH) is looking to raise up to US$1.5bn in its upcoming Swiss GDR listing. Bookrunners on the deal are CICC, HSBC, and JPMorgan.
• As per the firm’s filings, it is to issue no more than 289m A-shares, or not exceeding 15% of the firm’s total ordinary share capital.
• In this note, we discuss the GDR’s timeline, and the firm’s recent financial performance.

• Guangzhou Automobile Group Co. Ltd. (GAC) (601238.SH -0.51%) is working to get more domestically produced microchips into its vehicles.
• It relies on overseas suppliers for about 90% of its automotive chips.
• GAC Capital Co. Ltd. sees plenty of opportunity to increase the share of domestic chips in the automaker’s cars.

• Pharmaron’s disappointing 2022 performance is just a start.Its business layout has always been “one step behind”. CGT cannot become the main cornerstone business supporting valuation growth for the next stage.
• The overall environment of CXO is different from that of the past. Even if Pharmaron finally achieves end-to-end integration,whether the prosperity of CXO industry still exists is a question mark.
• Pharmaron may have entered a vicious circle, so that it is very challenging to generate the expected results no matter which direction the Company tries to break through.  

• Fangzhou initially launched online retail pharmacy to address the needs of chronic disease patients, and then expand to online chronic disease management. However,the investment logic of this business is problematic. 
• Due to the low willingness to pay/high acquisition cost of C-end patients, it is difficult to achieve large-scale profits. Developing To B business would be important for Fangzhou’s future development. 
• Either To B business or To C business, the key point is to accumulate/retain large physician resources, but Fangzhou hasn’t had “a panacea” in this regard.

• Operating costs moved to USD8.9bn in 4Q22 from USD8.0bn in 3Q22
• Continued high growth in QoQ credit costs up 33% QoQ in 4Q22
• Net fee income seems to be shrinking about USD100m quarterly

• Zeekr, a premium EV brand by Geely, aims to raise around US$1bn (estimated) in its US listing in 1H2023. GS, BofA and MS are said to be running the deal.
• Zeekr was formed in Mar 2021 as a JV between Geely and its founder. Its first model was launched in Apr 21 with deliveries starting in Oct 21.
• In this note, we take an early look at the IPO based on publicly avaiable information.

• Alibaba (BABA US) is set to report earnings tomorrow on the 23rd
• Stock has pulled back from the highs but earnings could be the next catalyst to determine direction
• We use the derivatives market to extract market expectations and suggest some suitable trades

• IQ released a set of clean-beat 4Q results, marking the end of turnaround and the start of high-quality growth.
• Years of investments in original content production capabilities paid off and solidified IQ’s leadership in China’s long form video industry. 
• Successful refinancing removed debt overhang. We expect IQ to generate RMB3.5 billion net profit out of RMB32 billion revenue for 2023 and see further upside to share price.  

• Fangzhou Group (FANGZHOU HK) is looking to raise about US$300m in its upcoming Hong Kong IPO.
• Fangzhou (FZ) is an online chronic disease management (CDM) service provider in China.
• In this note, we will talk about the positive aspects of the deal.

• It’s necessary for investors to understand the “true secret” of Topchoice’s success, which is impossible to copy. This is also the core reason why we’re not optimistic about the company. 
• The profit margin decline of dental implant and orthodontics businesses is inevitable, not only due to centralized procurement, but also the fierce competition of private dental hospitals in price war.
• Topchoice is now paying for its ambition to deviate from its main business. The overall performance in 2022 may not be optimistic. We think Topchoice’s good times are over.

• Jiangnan (1366 HK) disclosed a scheme privatisation offer from Mr Chu Hui (Chairman and CEO) at HK$0.40 per share, a 107.3% premium to the undisturbed price (HK$0.193 on 13 February).
• The key condition is approval by at least 75% of disinterested shareholders (<10% of all disinterested shareholders rejection). The shareholder with a blocking stake will be supportive. 
• The price is final and attractive in the context of historical prices and multiples. The scheme meeting is likely in mid-May. At last close, the gross spread is 12.7%.

• Alibaba Group (9988 HK)‘s 3QFY23 results scheduled to release this Thursday is yet again going to be somewhat disappointing with our analysis indicating around RMB35.0bn OP cf. RMB49.7bn in 3QFY21.
• Nevertheless, 3QFY23 results could beat the conservative consensus revenue estimate by 2.8% while the OP is likely to be in line with consensus.
• Having risen 100%+ in few months, a small beat is unlikely to drive-up the share price any longer. Renewed US-China tensions are likely going to be a much bigger driver.

• A50 sell res near 14,100. Hard down close followed by 3% squeeze needs some digestion off of dual MA support. Our take is to sell strength.
• HSI is trading heavy after a muted bounce with 19,600 targeted and remains our top short.
• SPX needs a nudge and firm close below 4,080 to induce downside momentum and tip the global cycle.

• Kuaishou Technology (1024 HK) will report 4Q2022 and full-year results on 23rd March 2023.
• The company’s livestreaming revenues have made significant progress since 4Q2021 while its domestic business reported an operating profit for the first time in 3Q2022.
• Though the company’s share price has not moved up yet, we think there is further upside to the current share price driven by improved earnings.

• Contemporary Amperex Technology Co. Ltd. (CATL), the world’s largest electric-vehicle (EV) battery-maker, is in talks to offer automakers steeply discounted prices in exchange for sourcing the vast bulk of their power cells from the company in a bid to stave off growing competition from smaller rivals, Caixin has learned.
• If the plan goes ahead, CATL will sell the strategic clients EV batteries made from self-manufactured lithium carbonate at a low price.
• In return, they will be required to sign a contract committing them to buy 80% of their EV batteries from CATL over the next three years, a person close to the company told Caixin on Sunday.

• After shares gained 63% in the morning session of the 16 Feb, then subsequently suspended, Chu Hui, the chairman and major shareholder, has made his move on Jiangnan (1366 HK).
• Chu is offering HK$0.40/share by of a Scheme, a 12.68% premium to last close, but a whopping 83.49% over the last full trading day’s closing price. This price is final.
• This is done. Expect payment around late July based on precedent Cayman-incorporated privatisations. 

Lenovo has posted weak Q3/22-23 results. Revenue dropped 24% y-o-y to USD 15.3 bn, with gross profit down 22% at USD 2.6 bn and operating profit declining 20% to USD 750 mn. Net profit fell 32% to USD 437 mn. Positively, liquidity remains sound, with over USD 5 bn of cash and USD 20 bn of undrawn credit facilities. OCF stayed positive at USD 74 mn.

• The decline in revenue from multiple categories of drugs due to VBP indicates that Luye Pharma (2186 HK) urgently needs a group of new products to reverse the overall weak performance. 
• Without the advantages in R&D efficacy and product competitiveness, the current pipeline would generate little value. It’s hard to convince people that the fundamentals of Luye have truly changed.
• We are not optimistic about Luye’s outlook, which lacks long investment logic. Meanwhile, we think that this Placement is not cost-effective due to more potential downside to valuation.

• China Renaissance (1911 HK) was once touted as a “leading investment bank and asset manager dedicated to the new economy“. At the time of its 1Q21 post-IPO high, it was.
• Late last Thursday, the 16 February, CR said it was unable to contact (hours, days, weeks?) Bao Fan, its chairman, CEO, and controlling shareholder. Shares subsequently fell 28%.
• Bao is the face of CR and instrumental in client dealing and complex large-scale deal making. Clarification is recommended before investors dip their toe back in the water.

• Keymed is one of the few enterprises we believe have the strength to develop FIC in the future. Keymed’s “pragmatic” in terms of commercialization,which set it apart from other biotech.
• The current valuation is expensive based on our forecast. The expansion potential of future valuation depends on the progress of overseas R&D/commercialization. This is where Keymed really takes off.
• One big reason we’ve been positive about Keymed is because of its founder, Chen Bo. The down-to-earth style of management makes us full of expectations for Keymed Biosciences (2162 HK).

• We summarise the latest spreads and newsflow of merger arb situations covered by us across Hong Kong, Australia, New Zealand, Singapore, Japan, Indonesia, Malaysia, Philippines, Thailand and Chinese ADRs.
• Highest spreads – 21Vianet Group (VNET US), Alliance Aviation Services (AQZ AU), Origin Energy (ORG AU), 111 Inc (YI US), Golden Energy & Resources (GER SP), Genesis Minerals (GMD AU). 
• Lowest spreads – Boustead Projects (BOCJ SP), Ihara Science (5999 JP), Nitro Software Ltd (NTO AU), Tyro Payments (TYR AU), Essential Metals (ESS AU), Warrego Energy (WGO AU). 

• The FY22 profit warning for China Longyuan Power (916 HK) reflected mostly items of one-off in nature and the weak result should be a matter of the past.
• The Jan overall generation growth of 30.6% and wind power growth of 44.4% are very solid performance. With economic rebound and low comparison base, we expect growth to sustain.
• Asset injection from CHN Energy and improvement in financial position through subsidy collection are positives, making its below 10x PERs for FY23 and FY24 attractive. 

• The second wave of pandemic is important logic to drive up Fu Shou Yuan’s share price, but the peak value/lethality could be lower than first wave, leading to lower-than-expected demand.
• Whether the second wave can “arrive as expected” may not depend on pandemic itself, but on “whether to let it happen”,especially when China’s making every effort to promote economic recovery.
• Besides solid fundamentals/optimistic performance, hot market sentiment is very essential if Fu Shou Yuan (1448 HK)’s share price is to outperform. Policy changes are also a potential source of unease.

• Chinese online game revenue decreased year over year for the first time since the statistic started.
• From 2018, the Press and Publishing Administration had significantly reduced the number of new game license.
• Short video has been gradually taking time on site from online game.

• The Chinese online game market shrank for the first time in 2022.
• Tencent’s WeChat plans to launch a cooked food delivery platform.
• Douyin dismissed 15% employees in PICO, which is Douyin’s virtual reality team.

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 Green Energy
• China SCE
• Lenovo
• O-Net Technologies (Group)
• Yuexiu Property

• Aag Energy Holdings (2686 HK) disclosed a pre-conditional privatisation offer from Xinjiang Xintai Natural Gas (603393 CH) at HK$1.85 per share, a 10.1% premium to the undisturbed price.
• The pre-condition is Xinjiang Xintai shareholder approval. Key condition is approval by at least 75% of disinterested shareholders (<10% of all disinterested shareholders rejection). The price is final but light.
• The total privatisation cost is HK$2,704 million vs AAG’s net cash of HK$2,270 million. The offeror is betting that minorities will not be able to launch a concerted NO vote.

• The announcement of the changes to the FTSE GEIS was made on Friday post market close. Friday was also the cutoff for the March review of the S&P/ASX indices.
• Monday is the review cutoff for some indices, while Friday is the announcement of the changes to the Hang Seng family of indices and the SSE STAR50 (STAR50 INDEX). 
• There were big outflows from the IShares Edge MSCI Min Vol Emerging Markets ETF (EEMV US) for yet another week taking YTD outflows to nearly US$3bn.

• On the 14 May 2018, coalbed methane producer AAG Energy Holdings (2686 HK) announced a partial offer (50.5%) from Xinjiang Xintai Natural Gas (603393 CH) at HK$1.75/share. 
• Xinjiang Xintai has returned to the pit with a $1.85/share Offer by way of a Scheme. The Cancellation Price will NOT be increased.
• This is hardly a knockout price, at a 10.1% premium to undisturbed; and just a 2.2% premium over the highest closing price of HK$1.81/share in the past year.

• 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

• Jiangnan (1366 HK), a manufacturer of wires and cables for power transmission and distribution systems, was suspended yesterday at lunchtime pursuant to Hong Kong’s Code on Takeovers and Mergers.
• But not before the share price gained 63% on clear news leakage.
• Chu Hui, the chairman, CEO, and major shareholder, mulled taking the private six years ago. 

• After Asian indexes met targets we have now turned negative in a domino sequence.
• Our table pounding inflationary higher USD and higher yield thesis is seeing the dollar on the move with yield in hot pursuit.
• Bull divergence in yield and the USD warn or a multi month rise. This is just the beginning of the pain trade to unwind peak inflation and peak rate positioning.

• Jiangnan (1366 HK) entered a trading halt pending the release of an announcement under the Hong Kong Code on Takeovers and Mergers on 16 February. 
• It is likely that Mr Chu Hui (Chairman and CEO), the largest shareholder representing 34.99% of outstanding shares is reattempting to privatise Jiangnan. 
• The 83.9% share price run prior to the trading halt suggests that the offeror is very close to finalising a formal proposal at a hefty premium to the undisturbed price. 

• Strong passenger traffic year-to-date indicates that full-year passenger throughput for 2023 will be on par with 2019.
• Concerns that China resuming outbound travel could turn domestic tourists away from Hainan are overblown, overlooking the huge pent-up leisure travel demand over last three years.
• We expect investors will focus on pace and sustainability of the recovery when company announces 2022 results. Being eligible for Stock Connect Program in 2023 will be a key catalyst. 

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. Alam Sutera Realty
2. China SCE
3. China Jinmao Holdings
4. Lifestyle International Holdings
5. Geely Auto

and more…