China

Brief China: Tencent Music (TME): Problems Come from Corporate Clients and In-House Contents, 35% Downside and more

In this briefing:

  1. Tencent Music (TME): Problems Come from Corporate Clients and In-House Contents, 35% Downside
  2. Global Credit Cycle: Full-Blown Repeat of 2008 Crisis Unlikely…Contrary to Doomsayers
  3. Wuxi Biologics Placement – Past Deals Have Done Well but Progressive Returns Are Getting Lower
  4. Ruhnn (如涵) Pre-IPO Review- Significant Concentration Risk
  5. Frontage Holding (方达控股) IPO: Updates from 2018 Numbers

1. Tencent Music (TME): Problems Come from Corporate Clients and In-House Contents, 35% Downside

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  • Stripping music subscription revenues, we find TME’s revenues from corporate clients are not stable.
  • We believe in-house products will negatively impact margin in 2019.
  • We believe the main business line, social entertainment, will grow strongly. However, we also believe the market is over optimistic about the margin.
  • We believe the stock price has downside of 35%.

2. Global Credit Cycle: Full-Blown Repeat of 2008 Crisis Unlikely…Contrary to Doomsayers

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The slowing world economy has raised concerns in some quarters about an inflexion point in the global credit cycle that could provoke a repeat of the 2008 crisis due to higher levels of debt.

Governments have mainly contributed to the rise in global debt since 2008, particularly in advanced economies, while China has presided over debt expansion across all non-financial sectors of its economy.

Concerns about the US corporate bond market have centred around the significant growth of the BBB-rated segment since 2008, along with its ability to sustain liquidity given the looming satiation of investor mandates.

China’s corporate debt has risen aggressively and become increasingly risky since 2008, but a sovereign backstop and predominantly domestic funding sources limit any prospective cross-border fallout.

A full-blown repetition of the 2008 debt crisis is unlikely due to: 1) lower cross-border banking linkages, 2) a smaller role for banks in overall credit intermediation, and 3) far lower leverage in the US financial system.

3. Wuxi Biologics Placement – Past Deals Have Done Well but Progressive Returns Are Getting Lower

Trackrecord

Biologics holdings is looking to raise upto US$517m by selling a 4.2% stake in Wuxi Biologics (Cayman) Inc (2269 HK). This will be fourth placement by the company since it listed less than two years ago. Below is a link to our coverage of the listing and the earlier placement:

Each of the past placement has been of a similar size and has generally done well. The company recently reported results which were ahead of street estimates. The deal scores a marginal positive score on our framework but there is still a lot more selling left once the 90-day lock-up expires.

4. Ruhnn (如涵) Pre-IPO Review- Significant Concentration Risk

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Ruhnn Holding Ltd (RUHN US) is looking to raise about US$200m in its upcoming IPO.

The company is an internet key opinion leader (KOL) incubator in China. Revenue and GMV grew at impressive rates of 63% and 57% YoY in FY2018, respectively.

The idea of being able to leverage on KOLs influence over consumers to understand demand and retain consumers is interesting but Ruhnn has yet to demonstrate that it has a sustainable business model. 

Gross margin has deteriorated and losses widened as a percentage of revenue. Service fee paid to KOLs as a percentage of revenue has increased and showed little improvement in 9M FY2019.  The company depends heavily on the top KOL, Zhang Dayi, to generate revenue, almost half of the company’s GMV and revenue is generated from her.

5. Frontage Holding (方达控股) IPO: Updates from 2018 Numbers

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Frontage Holding, a contract research organization subsidiary of A-share listed Hangzhou Tigermed Consulting (300347 CH), re-filed to list on the Hong Kong Stock Exchange recently. We have covered the company’s fundamentals in our previous insight here. In this insight, we will provide an updated analysis based on new data available from the new prospectus, as well as our thoughts on valuation.

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