Brief China: Tencent Music 4Q18 Quick Note – Growth on Track, Margins Could Drag – Stock Price Needs a Breather and more

In this briefing:

1. Tencent Music 4Q18 Quick Note – Growth on Track, Margins Could Drag – Stock Price Needs a Breather
2. Quick Update on ZTO Express: Results OK, but Guidance Unimpressive
3. Sun Car Insurance Agency (盛世大联) IPO: Over Valued Vs P&C Companies
4. China Tower. How Far Will It Rally?
5. The China A-Share Revolution

1. Tencent Music 4Q18 Quick Note – Growth on Track, Margins Could Drag – Stock Price Needs a Breather

Tencent Music Entertainment (TME US) reported its full year results today, post US market close. Revenue growth was slightly ahead of estimates as paying ratio continue to improve for both online music (subscription revenue) and social entertainment (live streaming). Growth for the latter continued to be driven more by ARPU rather than user growth. 

The concerning bit in the results was the decline in gross margins as the company continues to invest in more content. 

My previous insights on TME’s IPO:

• The company’s performance: Tencent Music Pre-IPO Review – The Final Countdown – Growth Doesn’t Seem to Be Slowing Down,
• The working of the apps: Tencent Music Pre-IPO – This Is How We Do It – A Quick Look at How the Apps Work,
• Industry dynamic: Tencent Music Pre-IPO – Industry – Don’t Cry – In 2010 a Little Red Dot Almost Overtook the Dragon, and
• Peer analysis: Tencent Music Pre-IPO – Quick Peer Analysis – If I Was You, I’d Wanna Be Me Too – Bigger and Faster,
• Valuations overview: Tencent Music Pre-IPO – Valuations Estimates – Leaving on a Jet Plane – $30bn Was Quite Stretched.
• First take on the IPO pricing: Tencent Music Pre-IPO Updates – Welcome to the Jungle – Rumoured Asking Valuations More Reasonable
• IPO valuation update: Tencent Music IPO – Don’t Stop Me Now – 9M18 Updates, Outlook and Price Limits
• Some more information on Ultimate Music acquisition: Tencent Music IPO – A Little Less Conversation – A Little More Information on Ultimate Music
• Trading strategies: Tencent Music IPO – Firework – Trading Strategies

2. Quick Update on ZTO Express: Results OK, but Guidance Unimpressive

After reviewing 4Q18 results and guidance for 2019, we retain our negative view of ZTO. For 2019 and 2020, we continue to expect slower top-line growth, margin compression, and a sharp increase in CapEx requirements. Our 2019-20 EPS forecasts and target price of $13.31 remain unchanged.

With help from a sharp increase in non-operating income, ZTO’s 4Q18 Adjusted EPS met consensus expectations of $0.24per ADS. But FY19Adjusted Net Profit guidance fell short of expectations, and management’s decision to withdraw quarterly guidance altogether is also disappointing.

ZTO’s gross margin fell ~370 bps in 4Q18 due to cost pressures and the rapid growth of certain low-margin businesses. We believe the same factors will continue to put downward pressure on margins in 2019 and 2020.

ZTO stated during the earnings call that Capex this year would increase by 50-100% compared to the 4bn RMB the company spent in 2018. According to management, much of the increase will go into building out ‘last-mile’ and rural infrastructure and we suspect the initial returns on these investments will be poor

3. Sun Car Insurance Agency (盛世大联) IPO: Over Valued Vs P&C Companies

Sun Car Insurance Agency is a leading automobile insurance agency and B2B2C automobile after-sales service provider in China. The company is listed in the NEEQ board since 2014 and is raising up to USD 167 million to list in Hong Kong. In this insight we cover:

• The company’s two major business lines, the automobile insurance agency and automobile butler services
• The industry backdrop
• The company’s shareholder
• Our thought on valuation

4. 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.

5. 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.