Brief China: China Tower. How Far Will It Rally? and more

In this briefing:

1. China Tower. How Far Will It Rally?
2. The China A-Share Revolution
3. China Blood Products: Deals Highlight Values
4. CanSino Biologics (康希诺) IPO: Valuation Attractive, Lilly Asia Doubling Up (Part 4)
5. NVIDIA’s $6.9 Billion Mellanox Band-Aid Is A Strategic Misstep

1. China Tower. How Far Will It Rally?

China Tower (788 HK) has rallied strongly in recent months and the question raised repeatedly in recent client meetings was “how much further is China Tower likely to rally?”. Chris Hoare sees China Tower’s position as unusual as the price moves are not driven by earnings upgrades or changed 5G expectations. Rather is is a sustained move post the IPO when the information in the market was incomplete and expectations were much lower. We were negative at the time of the IPO but changed our views as more information became available.  We remain positive on the scope for revaluation in China Tower given its rapid revenue growth and low valuations vs EM peers. While the recent results were somewhat disappointing, we see good upside as the market factors is lower capex and higher returns.

2. The China A-Share Revolution

Copley Fund Research analyse the holdings of long-only Global Emerging Market equity funds. All of the Funds in this analysis are actively managed and the majority benchmark the MSCI Emerging Markets Index. The current fund sample spans 180 funds with a combined AUM of $350bn.

In this report, we analyse China A-Share holdings. We gather the latest published filings for all funds and aggregate together as of 02/28/2019. We show the most recent snapshot in positioning, time series data going back to 2011 and recent allocation shifts by the managers in our analysis.

Relative benchmark positioning is measured against the I-Shares MSCI Emerging Markets ETF (EEM) – proportionally adjusted to remove any cash holdings. We will refer to this as ‘the benchmark’ throughout the analysis.

3. China Blood Products: Deals Highlight Values

Grifols SA (GRF SM) and Shanghai RAAS Blood Products Co Ltd (002252.SZ) recently announced an asset exchange that effectively combines the companies’ blood products operations in China. This transaction marks the third investment (two are cross-border) into the industry in the last two years. Despite some challenges arising from recent healthcare reforms, the industry has favorable supply/demand dynamics and high barriers to entry. US-listed China Biologic Products (CBPO US) trades at a significant discount to the implied private market values, but requires patience as management adjusts to the new operating environment.

4. CanSino Biologics (康希诺) IPO: Valuation Attractive, Lilly Asia Doubling Up (Part 4)

CanSino Biologics started its book building today to raise up to USD 160 million to list in Hong Kong. In our previous insights (links provided below), we provided a detailed analysis of the company’s core drug candidates, its shareholders and our thoughts on valuation. In this insight, we will cover the following topics:

• Recap of our valuation
• Highlight of cornerstone investors
• Our thoughts on the deal

Our coverage on Cansino IPO

• CanSino Biologics (康希诺) IPO: Promising Pre-Clinical Results but Vaccine Scandal Weighs (Part 1)
• CanSino Biologics (康希诺) IPO: Thoughts on Valuation (Part 2)
• CanSino Biologics (康希诺) IPO: Valuation Update (Part 3)

5. NVIDIA’s $6.9 Billion Mellanox Band-Aid Is A Strategic Misstep

On March 11’th 2019, Nvidia announced the acquisition of market leading high-speed interconnect company Mellanox for $6.9 billion in an all-cash deal. At first blush, the benefits touted by both companies and accepted by most commentators make sense and the deal will be immediately accretive to both EPS and revenues upon closing according to NVIDIA. 

However, the clear and present threat to NVIDIA’s future success has little to do with interconnect technologies. Rather, it is the competitive challenge to their GPU solutions for data center acceleration from a broad spectrum of alternatives from the likes of Alphabet, Baidu, Intel, Xilinx, Advanced Micro Devices etc, not to mention the host of custom-ASIC accelerator startups poised to launch their products this year. The acquisition of Mellanox will do nothing to address this situation and we see it as being a distraction from where the company really needs to be focusing.

It will serve one purpose though, as a BandAid to mask the otherwise inevitable decline in its data center revenue growth in the face of ever-increasing competition.