Brief China: HK Connect Discovery – February Snapshot (Tencent, COFCO Meat) and more

In this briefing:

1. HK Connect Discovery – February Snapshot (Tencent, COFCO Meat)
2. Weekly Oil Views: OPEC Shrugs off Trump’s “Take It Easy” Tweet, but Crude Complies
3. 58.com (WUBA): Weak Membership Growth Suggests More Volatile Performance, 17% Downside
4. Sea Ltd: Follow-On Public Offering an Opportunistic Fundraising?

1. HK Connect Discovery – February Snapshot (Tencent, COFCO Meat)

This is a monthly version of our HK Connect Weekly note, in which I highlight Hong Kong-listed companies leading the southbound flow weekly. Over the past month, we have seen the outflow continue from January. In February, we have seen Chinese investors were selling Tencent in February after buying Tencent in January. Chinese investors were also buying domestic automotive manufacturers and Macau gaming sectors.

Our February Coverage of Hong Kong Connect southbound flow

• HK Connect Discovery Weekly: China Tower, Geely, COFCO Meat (2019-02-15)
• HK Connect Discovery Weekly: Geely, Great Wall Motor and Sands China (2019-02-22)

2. Weekly Oil Views: OPEC Shrugs off Trump’s “Take It Easy” Tweet, but Crude Complies

As stock-market watchers begin to pick “resistance levels” for benchmark equity indexes that have been steadily heading north amid optimism over a US-China trade deal, we wonder if Trump and his tweets are the barrier point for crude’s rally.

And if they are, what might the US president’s “pain threshold” be? For his latest shot across OPEC’s bow, it appeared to be Brent touching a three-month high just above $67/barrel.

OPEC shrugged off Trump’s gentle warning. Saudi Energy Minister and de facto leader of the oil exporters’ group, Khalid al-Falih, appeared smiling and relaxed when asked about Trump’s tweet in a CNBC interview. OPEC was indeed “taking it easy,” he said. The group and its non-OPEC collaborators were determined to rebalance the markets, but with a “very slow and measured approach,” Al-Falih said.

We believe OPEC will be careful not to over-tighten the market this time around. Perhaps Trump was being over-cautious. If a US-China trade deal is signed in the next few weeks (that may happen on March 27, The Wall Street Journal reported on Monday), global stock markets could rally further. But they will not take crude along for the entire ride.

Our Chart of the Week shows that the rebound of the past two months in global equities has already left crude’s recovery far behind. The divergence should not come as a surprise. Crude may have already priced in most of the economic impetus of a US-China trade rapprochement. Unlike the MSCI global stock market index, which is closing in on its early-October levels (before the start of the financial markets turmoil), crude is highly unlikely to get within sight of the four-year highs it touched on October 3, shortly before it hit the skids.

3. 58.com (WUBA): Weak Membership Growth Suggests More Volatile Performance, 17% Downside

* We believe that the stagnancy in membership was due to the new competitor Ke.com and will make total revenues more volatile in the future.

* We assume total revenues will slow down, but the operating margin will be stable in 2019.

* We compare WUBA’s expected P/E for 2019 with other vertical platforms in China and conclude 17% downside.

4. Sea Ltd: Follow-On Public Offering an Opportunistic Fundraising?

• We evaluate the attractiveness of Sea Ltd’s (SE US) US$1 bn follow-on public offering announced last Fri.
• This offering is a typical opportunistic fundraising as its ADR price has recently surged.
• At assumed deal price of US$21, SE post deal would trade at 4.6x 2019E P/adjusted sales (excl. 1P e-commerce sales), vs. peers average of 5.2x.
• We would recommend investors to go for the deal if it is priced at US$20 or lower.