In this briefing:
- Bilibili Offering: Unnecessary and Opportunistic
- China Construction Bank: Not Strategically Dear
- China’s New Semiconductor Thrust – Part 1: Why and How?
- Qutoutiao Offering: Funding a Costly Battle
- Notes from the Silk Road: Xtep Int’l Holdings (1368 HK): Time to Run (Away) For Now
1. Bilibili Offering: Unnecessary and Opportunistic
On Monday, Bilibili Inc (BILI US) unveiled plans to raise around $192 million (based on the closing price of $18.95 per ADS) through a public offering of 10.6 million ADS and a concurrent offering of $300 million convertible senior notes. Also, certain selling shareholders will offer 6.5 ADS in the offering.
We believe bilibili’s fundamentals are mixed as rapid monthly active users (MAUs) and non-mobile games growth is offset by a declining margin and higher cash burn. Overall, the proposed offering is unnecessary and highly opportunistic, and we would not participate in the offering.
2. China Construction Bank: Not Strategically Dear
China Construction Bank (601939 CH) FY18 results reflected stability and some encouraging signs of positive fundamental momentum. The highlights were a positive “underlying jaws” of 220bps, fortified Capital Adequacy, enhanced Provisioning, and firmer net interest spread and margin. Liquidity remains prudent with credit and deposit growth both expanding by mid-single digits. In addition, the top-line exhibited solid growth with funding expense growth (an issue elsewhere) only mildly in excess of interest income growth. Sharply higher asset loan loss provisions reflected the ongoing battle with troubling systemic asset quality challenges.
CCB is committed to becoming a core comprehensive service provider for smart city development, in alignment with government strategic targets. In terms of technology, AI robots (in wealth management, for example), Intelligent Risk Management Platforms, Biometric verification plus a public and private “cloud ecosphere” are evolving. Big data is developing with data warehouse integrating internal and external data; with enterprise data management and application architecture; and via working platforms. CCB is wedded to IoT, blockchain as well as big data in industry chain finance, via internet-based “e Xin Tong”, “e Xin Tong” and “e Qi Tong”. The bank has a strategy of Mobile First, provision of internet-based smart financial services, booming WeChat banking, and integration of online banking services that combines transactions, sales, and customer service.
Automation and “intelligence” is the bedrock of risk management: the key area today of what is a highly leveraged system. Here, CCB is integrating corporate and retail early warning systems and unifying the monitoring of different exposures. Management launched a “new generation” retail customer scorecard model, elevating the level of automation and “intelligence” of risk metrics. In addition, the bank is attaining greater recognition and control of fraud. Regarding the remote monitoring system, CCB is adapting to the fast development of information, network and big data technology, by building a monitoring system with unified plans, standards, software and hardware.
While CCB trades at a P/Book of 0.8x (regional median, including Japan) and a franchise valuation of 9% (regional median, including Japan), the Earnings Yield of 17.4% is well in excess of regional median of 10%. The combination of a top decile PH Score™, capturing fundamental momentum, an underbought technical signal, and a reasonable franchise valuation position CCB in the top decile of opportunity globally. For a core strategic policy bank, this represents an opportunity.
3. China’s New Semiconductor Thrust – Part 1: Why and How?
China’s current efforts to gain prominence in the semiconductor market targets memory chips – large commodities. This three-part series of insights examines how China determined its strategy and explains which companies are the most threatened by it.
In the first part of this series we will see what motivated China to enter the market and how it plans to do so.
4. Qutoutiao Offering: Funding a Costly Battle
On Friday, Qutoutiao Inc (QTT US) unveiled plans to raise around $11 million (based on the closing price of $11.45 per ADS) through a public offering of 1.1 million ADS. Also, certain selling shareholders will offer 7.5 ADS in the offering. The public offering comes hot on the heels of the announcement of a $171.1 million convertible loan from Alibaba Group Holding (BABA US) on 28 March.
We remain cautious on Qutoutiao as it faces an inescapable catch-22 as it cannot attract users without increasing its user acquisition spend and it cannot reach breakeven without lowering its user acquisition costs. Overall, we would not participate in the public offering.
5. Notes from the Silk Road: Xtep Int’l Holdings (1368 HK): Time to Run (Away) For Now
Xtep International (1368 HK) has announced a placing and top-up subscription of new shares event, creating a capital base which is 9% larger.
XTEP states that they have considered various ways of raising funds and consider that it would be in their best interests to raise equity funding through the placing and the subscription.
With the share price down 16% since the placement, we examine what this means for the company’s fundamentals and shareholders. We believe the results will prove to be mixed for management and shareholders alike. We highlight how we expect the stock ranking to react, given we the placement was only a few days back and this is yet to reflect. This special situation analysis may surprise you with the conclusions.
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