Brief China: Global EM Special: Andean Condors Vs Asian Elephants – Where Is the Growth in EM? and more

In this briefing:

1. Global EM Special: Andean Condors Vs Asian Elephants – Where Is the Growth in EM?
2. Tesla’s New Plan – Buy Before You Try
3. Up Fintech (Tiger Brokers) Pre-IPO Quick Note – Much Too Reliant on IBKR
4. JD.com (JD): The Real Main Business Grew 46% YoY, and Not 20% YoY in 4Q2018
5. Sea Ltd: Further Share Re-Rating After a 35% Daily Gain? Why Not?

1. Global EM Special: Andean Condors Vs Asian Elephants – Where Is the Growth in EM?

Global growth is expected to slow over the coming quarters, possibly years – and emerging market economies are certainly not immune from this. Nevertheless, within this diverse universe, the pace of deceleration will be uneven. Whilst some “open” EM economies are generally synchronized with growth dynamics in the rest of the world, others will be shielded by a combination of idiosyncratic forces – including renewed accommodative (monetary and fiscal) policies, cyclical recovery or upswing in domestic growth drivers and – for some – positive political developments and reform progress. Still, other EMs are less fortunate and a growth deceleration is likely to deepen in the near-term – held back by less policy flexibility, political uncertainty and various domestic or external shocks.

With 4Q18 GDP growth reports underway, we sifted through – and synthesized – various growth indicators to introduce a “Growth-Profile Framework” (GPF) to systematically evaluate – and rank – growth profiles in a data-driven, automated and standardized manner. The “GPF” not only takes into account GDP for the most recently-reported four quarters but also forward-looking forecasts and the latest economist revisions, which often take into account the latest data surprises and other material developments.

The observation universe is the “Emerging Markets-25” (EM-25) of large, investable EM countries most often found in benchmark indices such as MSCI EM and JPMorgan (GBI-EM and EMBI) indices. This opportunity set offers a breadth of diversity spanning across Asia, EMEA and LatAm and different stages of development. 

Highlights: 

• Introducing the “EM-25” Growth Profile Framework: This data-driven, automated and standardized model generates a ranking of the “EM-25” economies based on a composite of factors reflecting: 1/ The most recent GDP growth data (in relation to three look-back periods), 2/ Forward-looking consensus growth forecasts (in relation to the most recent four quarters of GDP) and 3/ Upgrades and downgrades to those forecasts.
• Andean condors soar while Asian elephants amble along: LatAm – specifically the Andean economies (plus Brazil) – currently stand out as having the most attractive growth profiles among the EM-25. They are helped by a combination of – largely idiosyncratic – factors ranging from newfound reform optimism (Brazil), improving domestic confidence (Colombia), pent-up domestic demand (Peru) and stabilizing appetite for key commodities (Chile). This contrasts with export-oriented Asian manufacturers that dominate the bottom rankings. Elsewhere, the legacy of past macroeconomic policy choices – both painfully orthodox (Argentina) and otherwise (Turkey, Venezuela, Pakistan) – are taking their unique toll on certain other economies.
• Does growth matter for investment strategy? Yes…: Simplistically speaking, economies with exemplary growth profiles are viable candidates for long or overweight positions in equity markets and external debt. Strong growth is often associated with stronger corporate earnings potential as well as lower debt-to-GDP levels, respectively. Growth implications for FX and local debt are more ambiguous, but to the extent that a robust growth outlook guides central banks to tighten policy or lifts the government’s fiscal revenues over time, then this may also be positive for currencies and rates, respectively.

• …But it’s complicated: However, strong growth can detract asset performance if it is the result of unsustainable policies (e.g. overly loose fiscal or monetary actions) or if it leads to overheating conditions (e.g. runaway inflation or a wider current account deficit). An attractive growth profile, as with all data sets, needs to be judged against its context. Although high and improving growth is an end-goal for many policymakers, the road to strong – and sustainable – growth is far more important for its longevity (and for risk assets over the medium-term). For instance: Are growth prospects improving due to rising productivity (as it might from structural reform)? Or rather from overly-stimulative policies that risk fanning inflation or widening the current account deficit? To what extent do officials have the policy flexibility to stoke growth, smoothen downside growth risks or stave off a recession? We touch upon these questions in the individual country sections below.

• While the narrative is almost always more important than the number itself, this GPF framework nevertheless offers a valuable screening tool that systematically evaluates growth profiles – on a stand-alone and relative basis – across the “EM-25” universe.

2. Tesla’s New Plan – Buy Before You Try

Buried in the lede is that Tesla also is initiating additional price cuts across the board, including for Models S and X. It’s moving to an online-only sales strategy and closing hundreds of stores which will trigger additional layoffs.

Oh, and the first quarter will not be profitable after all, according to CEO Elon Musk on the conference call today to discuss Tesla’s announcements.

So is Telsa pursuing a new, evolving strategy for the future or is it being pushed to retrench?

Read on for Bond Angle analysis.

3. Up Fintech (Tiger Brokers) Pre-IPO Quick Note – Much Too Reliant on IBKR

Up Fintech (TIGR US) plans to raise up to US$150m in its US listing. The company counts Xiaomi Corp (1810 HK) and Interactive Brokers Group, Inc (IBKR US) as its main investors.

While TIGR has grown at a stupendous pace over the past three years, it has been able to do so owing to IBKR doing most of the heavy lifting of execution and clearing. While its trying to change that now, nearly all the revenue is still being driven by its IBKR affiliation.

I’ve covered some of the aspects of TIGR’s model in Futu Holdings IPO Quick Note – Comparison with Tiger Brokers – Same Market, Different Economics. In this insight, I’ll take a quick look at the company’s performance and the issues highlighted above. 

4. JD.com (JD): The Real Main Business Grew 46% YoY, and Not 20% YoY in 4Q2018

• We believe the real main business line is service (commission), but not product (direct sales).
• In 4Q2018, service revenues grew by 46% YoY, but nominal main business line, product, grew only 20%.
• JD raised its commission rate in 2018, as demonstrating  that the company still has the bargaining power over retailers.
• Historical GMV numbers suggest significant upside.

5. Sea Ltd: Further Share Re-Rating After a 35% Daily Gain? Why Not?

• The biggest positive surprise from Sea Ltd’s (SE US) conference call is strong 2019 adjusted sales guidance: 82%-97% YoY growth for Garena (digital entertainment division) and 117-127% YoY growth for Shopee (e-commerce arm).
• Management expects first positive quarterly EBITDA for Shopee Taiwan operations in 1Q19, indicating there is a path to profitability for Shopee’s business model.
• Another great news: management expresses high confidence that Shopee’s S&M expenses in terms of absolute dollars would trend down in 2019, vs. 2018.
• After a 35% daily share gain on 27 Feb, SE trades at 4.1x 2019E P/adjusted revenue excl. 1P sales, yet still a whopping 49% discount to Pinduoduo’s (PDD US) 8.1x P/S.