Brief China: ESR Cayman Pre-IPO – A Giant in the Making and more

In this briefing:

1. ESR Cayman Pre-IPO – A Giant in the Making
2. China Headwinds May Have Less Impact on Macau VIP Revenue than Forecasted
3. Xinyi Solar Placement – Past Deals Have Done Well, Improvement in Sentiment Should Help
4. NIO (NIO US): Lock-Up Expiry – This Could Get Messy
5. Matahari Department Store (LPPF IJ) – A Retail Conundrum

1. ESR Cayman Pre-IPO – A Giant in the Making

ESR Cayman (ESR HK) aims to raise up to US$1.5bn in its planned Hong Kong listing, as per media reports. The company is backed by Warburg Pincus and counts APG, the Netherlands’ largest pension provider, as one of its main investors.

ESR operates an end-to-end model starting from development of the asset to divesting it to one of its private funds and/or REITs. It operates in China, Japan, South Korea, Australia, Singapore and India. AUM has grown rapidly over the past few years as the company has undertaken a number of acquisitions in the recent past. 

In this insight, I’ll touch upon the company’s business model and provide an overview of its operations. 

2. China Headwinds May Have Less Impact on Macau VIP Revenue than Forecasted

• Our profile of VIP gamblers indicate greater resiliency to slowing macro economics due to the nature of their wealth sources and motivations. We continue to believe Macau stocks are cheap.
• Our overall market forecast for 2019 remains +8% y/y. It includes a 4% upside in VIP.
• VIP gamblers behavior patterns lean to more influence from personal, rather than economic factors such as macro headwinds.

3. Xinyi Solar Placement – Past Deals Have Done Well, Improvement in Sentiment Should Help

Xinyi Solar Holdings (968 HK) is looking to raise about US$170m in its top-up placement with an upsize option of 225m shares.

The deal scored well on our framework owing to its good track record, strong earnings and price momentum. The company’s 2H 2018 result had marginally beaten estimates while the news of China potentially reversing its effort to reduce solar subsidy has helped improve the overall sentiment of Xinyi Solar. On top of that, the past deals have generally done well.

4. NIO (NIO US): Lock-Up Expiry – This Could Get Messy

Yesterday, NIO Inc (NIO US)’s share tumbled 20% on the back of poor 1Q19 guidance. NIO warned that deliveries of ES8, its electric SUV, have been sluggish so far in 2019 and scrapped plans to build its Shanghai Manufacturing Plant. NIO blamed the slump on uncertainty over government subsidies for electric vehicles, China’s slowing economy and disruption caused by the Chinese New Year holidays.

5. Matahari Department Store (LPPF IJ) – A Retail Conundrum

Pt Matahari Department Store (LPPF IJ)‘s FY18 results call was an interesting combination of kitchen sinking, a cautious outlook, combined with some more optimistic strategies on specialty stores with new brands and smaller format stores for regional expansion. The big question is whether these strategies will win out or will the company continue to underwhelm on its growth prospects? 

Pt Matahari Department Store (LPPF IJ) remains a market leader in its space with 159 departments stores across Indonesia selling affordable fashion to the middle classes but it has underwhelmed on a few occasions on its growth and guidance. It is reducing its dividend payout to facilitate the build-out of specialty stores with new brands on board. 

Valuations do now look interesting with the company trading on 6.0x FY19E PER and 5.4x FY20E PER. It generates a forecast ROE of 70% and ROE of 30%, which is extremely high for a retailer. The question is how much analysts will downgrade and whether investors will look through its Lippo connection. After another 9% fall in the share price today after 22% yesterday, a lot does seem to have been factored in already.