Brief China: Studio City – Thoughts on Lock-Up Expiry and more

In this briefing:

1. Studio City – Thoughts on Lock-Up Expiry
2. Changliao (畅聊) AKA Paipai (派派) Pre-IPO Review – Self-Sufficient
3. GEM Active Funds:  Big Q1 Outperformance
4. China – Not Out of the Woods by Any Means
5. JD.com (JD): Cancels Delivery Man’s Basic Salary, Adapts to Growth of Commission Business

1. Studio City – Thoughts on Lock-Up Expiry

Studio City, a spin-off by MLCO US, was listed on October 18th, 2018 and its lock-up will expire next week on April 16th. The company raised USD 359 million in its IPO with the majority of the shares taken up by its shareholders.

In this insight, we will review the company’s operation, shares subject to lock-up expiry and its valuation vs peers. 

Our previous insights on Studio City

• Studio City (新濠影汇) IPO: A Melco Spin-Off Turning Profitable
• Studio City (新濠影汇) IPO: Attractive Valuation with Options for Long-Term Upside (Part 2)
• Studio City (新濠影汇) IPO Trading Update: Performance Within Expectations, Near-Term Upside Capped

2. Changliao (畅聊) AKA Paipai (派派) Pre-IPO Review – Self-Sufficient

Changliao Inc (CL HK) is looking to raise about US$100m in its upcoming IPO. The company just filed its draft prospectus with the HKEX last week.

Changliao is a fast-growing social networking entertainment platform. The business model of engaging and monetizing users through interactive games is interesting.

However, the need for an IPO is questionable since the company has a healthy net cash balance sheet and it had paid out dividends in the past two years. It can easily finance its growth through debt or operating cash flow. 

Tencent is an investor in the firm, however, it had only invested RMB9m in the company in FY2016. There are no other notable investors despite several rounds of financing.

In this insight, we will look at the company’s business model, analyze its financial performance and operating metrics.

3. GEM Active Funds:  Big Q1 Outperformance

Global Emerging Market funds made a strong start to 2019, with just over two-thirds of funds outperforming the benchmark, generating an average alpha above the IShares MSCI Emerging Markets Indx (ETF) (EEM US) of 1.3%.

In this report, we look at the performance of 180 global emerging market strategies over the first quarter of 2019 and analyse the countries, sectors and stocks that helped generate that outperformance.  We also take a look at the longer-dated outperformance of active GEM funds.

4. China – Not Out of the Woods by Any Means

The Chinese onshore and offshore equity markets have been outstanding performers over Q1, due to; i) rising hopes of a trade settlement with the US; ii) expectations of easier monetary policy from the Fed in response to the weakness in the global economy partly emanating from China and iii) the increased representation of Chinese onshore debt and equity securities in the most widely followed global indices.

However, the Chinese authorities are both unwilling and unable to tackle the underlying causes of financial fragility in the local government and industrial sectors, by imposing a hard budget constraint that would trigger a series of potentially systemic crises. The inflows of cash from overseas are therefore merely helping Beijing to kick the proverbial can further down the road in the absence of significant structural reforms.

Chinese equities listed offshore ranked 11^th cheapest out of 48 global markets at the end of March down from 5^th at the start of January, according to the Ecstrat sector-adjusted valuation table, based on a median stock rather than a market cap weighted methodology. I remain underweight for structural reasons despite the very strong buying momentum from both domestic and foreign investors.

5. JD.com (JD): Cancels Delivery Man’s Basic Salary, Adapts to Growth of Commission Business

* JD cut delivery men’s salary by 25% last week.

* JD ever generated cash flows by accounts payable in direct sales, but cost control is necessary when the commission business grew faster than the direct sales business.

* We believe that the overwhelming majority of delivery men will stay with JD after the salary cut, as many small delivery companies went bankrupt in 2018.

* we believe JD will be able to control costs well and keep close-to-zero net margin in 2019.