Brief China: China NEV: Subsidy Cut Deeper than Expected, Avoid BYD and more

In this briefing:

1. China NEV: Subsidy Cut Deeper than Expected, Avoid BYD
2. China Power New Energy To Be Delisted After SOE Injection Abandoned
3. The Dollar IS the Story; Gold Confounds, A Brexit Rabbit Hole; EUR Punished
4. Global-Ex-U.S. Equity Strategy: Add Exposure To Technology, Communications
5. Screening the Silk Road: (Small-)Mid Cap Free Cash Flow

1. China NEV: Subsidy Cut Deeper than Expected, Avoid BYD

2019 NEV subsidy policy announced on March 26th, which cut subsidies deeper than expected. However, as the new policy will take effect only on June 25th, its negative impact on OEM’s FY2019 earnings would be less than our estimates. 

Amongst the start-ups, we estimate Yudo would be hurt the most, as its lower ASP makes its sales more sensitive to the subsidy reduction.

Among traditional OEMs, BYD would be hurt the most by having its FY2019 net profit drop by nearly 14% yoy based on our estimates. BYD Yuan would be the biggest loser among BYD’s existing NEV models.

2. China Power New Energy To Be Delisted After SOE Injection Abandoned

SOE State Power Investment Corporation (SPIC) is seeking to privatise China Power New Energy Development Co (735 HK) by way of a Scheme at $5.45/share, a 41.9% premium to last close and a 78.1% premium to the 30-day average.

A scrip alternative (6 New shares for one Scheme shares) into an unlisted vehicle under SPIC is also available.

China Three Gorges, CPNED’s largest shareholder with 27.10%, have given an irrevocable undertaking to vote for the Scheme and to elect the share alternative.

However, China Three Gorges is presumably required to abstain from voting at the court meeting, as it is deemed to be acting in concert with the SPIC under class (1) of the definition of the acting in concert in the Takeovers Code. The announcement does not make this clear.

Assuming China Three Gorges does abstain, a 10% blocking stake at the court meeting is equivalent to 4.48% of shares out or 53mn shares.

This looks like a pretty clean deal. It is priced above the highest close since its listing by way of introduction on the 18 July 2017, while the excitement over the potential injection of all nuclear power assets and businesses from State Nuclear Power Technology Company has been removed after the restructuring was cancelled in July last year.

The stock is currently trading at an attractive gross/annualised spread of 8.3%/28.9% conservatively assuming a late July completion, and inclusive of the final dividend. 

3. The Dollar IS the Story; Gold Confounds, A Brexit Rabbit Hole; EUR Punished

• The dollar IS the story
• EUR punished for negative yields
• Chasing Brexit down a rabbit hole
• Gold confounds
• Bitcoin at an interesting juncture

The fact that the dollar has strengthened despite the dovish turn at the Fed this year and the significant fall in US rates and bond yields has confounded many analysts.

4. Global-Ex-U.S. Equity Strategy: Add Exposure To Technology, Communications

We view weakness in global equity markets over the past week as correcting a significant amount of the excess optimism. We recommend taking advantage of the pullback by adding exposure to our favorite areas – namely Technology. Our overall outlook on global equities (both the MSCI ACWI and ACWI ex-US) remains positive and we continue to expect higher equity prices going forward.  In today’s report we provide a technical appraisal of all major markets and highlight actionable stocks throughout the int’l Technology and Communications sectors.

5. Screening the Silk Road: (Small-)Mid Cap Free Cash Flow

In April 2018, we published a FCF screen with the sole aim of identifying potential names which could prove to be strong candidates in a Small-Mid Cap portfolio. We move to update this list with a strong bias to the mid-cap stocks appearing.

This screen performs well with markets where the value style is in favour. Given the market appears to be trending back to this style, we believe the Small-Mid Cap universe should capitalise on this over the next 12-months. We identify within the screen some high trading liquidity deep value candidates across the Asia Pacific universe.

Our updated 2019 list of names contains 17 stocks, with a more diversified spread of countries and sectors, compared to April 2018. A point to note is that basic material stocks have strengthened within the composition. Interestingly, the style of stock which has increased its presence amongst the list is the contrarian style, highlighting an opening up in value.