Brief China: China Minsheng: Unless There Is Opposing Wind, a Kite Cannot Rise. and more

In this briefing:

1. China Minsheng: Unless There Is Opposing Wind, a Kite Cannot Rise.
2. Guotai Junan Securities Placement Quick Take – Might Be Too Big to Sail
3. China’s Greater Bay Area: The Essential
4. Studio City – Thoughts on Lock-Up Expiry
5. Changliao (畅聊) AKA Paipai (派派) Pre-IPO Review – Self-Sufficient

1. China Minsheng: Unless There Is Opposing Wind, a Kite Cannot Rise.

Profitability at China Minsheng Banking A (600016 CH) in 2018 slipped. Similar to other Chinese lenders, rising Loan Loss Provisions exerted a negative pull on the bottom-line, testament to gnawing Asset Quality issues. In addition, similar to some banks, the top-line came under pressure from the rising cost of source of funding. Also the bank was not alone in juicing up its bottom-line with hefty trading gains. Thus Earnings Quality could have been better.

Given the underlying squeeze on core Income, it was encouraging to see management at least restrain OPEX.

Regarding Asset quality, write-offs soared by 153% YoY while substandard and loss Loans jumped by 68% YoY and 14%, respectively, and Loan Loss Provisions rose by 35.6% YoY. It is perhaps a little surprising then that coverage ratios decreased given the trend in credit costs, NPL migration, and charge-offs.

LDR remains quite high though credit growth last year was not gung-ho and broadly in line with Deposit expansion. We do note though a ratcheting up of CRE lending which jumped from 8.8% of the total Loan book to 12.3%.

2. Guotai Junan Securities Placement Quick Take – Might Be Too Big to Sail

Guotai Junan Securities (H) (2611 HK) plans to raise around US$350m via placing new H-Shares. We had earlier covered the IPO, you can find our coverage below:

• Guotai Junan Securities IPO: Second, if Not the Largest, China Security Broker, A-H Premium Examined
• Guotai Junan IPO: A Big Player but Relatively Less Liquid, How A-H Premium Plays

This is a large deal to digest and the shares seem to be trading at a relatively tighter A-H spread versus peers.

3. China’s Greater Bay Area: The Essential

Executive summary

We launch our inaugural joint policy research on China’s Greater Bay Area (GBA) with the assistance from Joy Rich Securities Investment’s Guangdong-Hong Kong-Macau Greater Bay Area Academic Research Group. Here we highlight what comprises GBA, timeline, comparison against major economies and other bay areas, deep-dive research into key industries and policies toward each part of GBA. China is a Policy-induced story and GBA is in the Chinese government’s interest to prosper.

We believe the composition of 9 cities and 2 special administrative regions, together with policy support by the Chinese government provides a backdrop for rising credit growth backed by productivity. We will continue to monitor credits which either are based in GBA or will benefit from the GBA scheme (EXHIBIT 9). 

4. Studio City – Thoughts on Lock-Up Expiry

Studio City, a spin-off by MLCO US, was listed on October 18th, 2018 and its lock-up will expire next week on April 16th. The company raised USD 359 million in its IPO with the majority of the shares taken up by its shareholders.

In this insight, we will review the company’s operation, shares subject to lock-up expiry and its valuation vs peers. 

Our previous insights on Studio City

• Studio City (新濠影汇) IPO: A Melco Spin-Off Turning Profitable
• Studio City (新濠影汇) IPO: Attractive Valuation with Options for Long-Term Upside (Part 2)
• Studio City (新濠影汇) IPO Trading Update: Performance Within Expectations, Near-Term Upside Capped

5. Changliao (畅聊) AKA Paipai (派派) Pre-IPO Review – Self-Sufficient

Changliao Inc (CL HK) is looking to raise about US$100m in its upcoming IPO. The company just filed its draft prospectus with the HKEX last week.

Changliao is a fast-growing social networking entertainment platform. The business model of engaging and monetizing users through interactive games is interesting.

However, the need for an IPO is questionable since the company has a healthy net cash balance sheet and it had paid out dividends in the past two years. It can easily finance its growth through debt or operating cash flow. 

Tencent is an investor in the firm, however, it had only invested RMB9m in the company in FY2016. There are no other notable investors despite several rounds of financing.

In this insight, we will look at the company’s business model, analyze its financial performance and operating metrics.