Brief China: Trade War Uncertainty Bites into Investment Spending and Production and more

In this briefing:

1. Trade War Uncertainty Bites into Investment Spending and Production
2. China Rail: Paths to Financial Viability for CRC
3. ByteDance (字节跳动) IPO: How Jinri Toutiao Paves The Way for a Bigger Empire (Part 1)
4. Guangxin Reloads A Peculiar Low-Ball Offer For Xingfa Aluminium
5. The Empowerment

1. Trade War Uncertainty Bites into Investment Spending and Production

Import elasticities. Ease of transferring business between countries. Reliability of alternative supply chains. Time taken to relocate production. The list of unknowns on how easily companies could relocate production from China goes on and on but the bottom line is that uncertainty has been raised and that is bad news for global growth.

In Reality Check: China and the US Trade War, we wrote “Even if the Trade War ends tomorrow, the damage  has already been done”. 

2. China Rail: Paths to Financial Viability for CRC

CRC (China Railway Corporation, previously known as MOR) has been questioned about its extremely high liability rate and trillions of debts for years. Some experts believe China shall stop HSR (High Speed Railway) construction to reduce the liability in rail system and lower the financial risk of the society. While others believe a high speed rail transportation system is necessary and would improve the efficiency of the society, because China is the third largest country in the world by geographic area.

In this report, we list three possible solutions for CRC’s liability issue: to increase revenue to cover the Capex; to increase funding from local governments or private sectors; to reduce annual rail investment.

Conclusion:

In our view, China will stop expanding its rail system sooner or later. The main frame of HSR is completed. Only some extension lines are required. If CRC doesn’t start building high speed rails for freight transportation, which was mentioned in 2012-2013, China’s annual rail investment might be reduced after 2023.

Before that, CRC is capable of remain its existing investment amount unchanged, without further increasing the financial risk of China’s banking sector. To reduce its debts, increasing rail investment funding proportion from local governments is still an easier option than increasing CRC’s net profit. Once China reduces its rail investment, CRC would be able to reduce its net gearing significantly. 

3. ByteDance (字节跳动) IPO: How Jinri Toutiao Paves The Way for a Bigger Empire (Part 1)

ByteDance, an emerging TMT player in China and one of the challengers to the BAT’s dominance in China, is said to be preparing for 2019 listing. It will be the largest Chinese TMT listing this year as the company was valued at USD 75 billion in the pre-IPO fundraising, closed in October 2018. 

In this insight, we will discuss ByteDance’s business, in particular, how the text-based media distribution platform Jinri Toutiao (今日头条) built the foundation of the company, and paved ways for the short-video distribution platform Watermelon Video (西瓜视频), Volcano Video (火山视频), and Tiktok (抖音).

In our next insight, we will discuss how Tiktok became successful and the company’s overseas expansion.

4. Guangxin Reloads A Peculiar Low-Ball Offer For Xingfa Aluminium

Xingfa Aluminium (98 HK) has announced its major shareholder, Guangxin Aluminium (a wholly-owned Guangdong SASAC vehicle), has acquired 5,000 shares, lifting its stake to 30.001%, triggering a mandatory general offer. The offer price is $5.60, a premium of just 2.94% to last close.

Guangxin, together with certain management of Xingfa, attempted to take Xingfa private at $3.70/share back in 1H17. That scheme failed comprehensively, which was a good outcome for minorities as FY17 net income increased 28%. 1H18 profit was also a 25% improvement over the corresponding period.

The offer price is in line to where Xingfa traded last October and 23% below the recent peak back in mid-June 2018. It is also 37% below where China Lesso Group Holdings (2128 HK) acquired its 26.3% stake in April last year.

At a guess, this low-ball offer provides an exit for large(r) investor with regards to Xingfa’s low liquidity. But no irrevocables have been given and the Offer remains conditional on Guangxin holding 50% of the voting votes.

As expected, Xingfa is currently trading 1.4% through terms. For those interested in small-cap, illiquid stocks, I would buy around these levels to play the back-end, or the (remote) possibility of a bump. The offer has not been declared final.

5. The Empowerment

Starbucks’ growth story in China faces a new threat: WeWork Go. U.S. dollar stores face rising threat of substitutes from healthcare insurers. Uber Freight’s new Yelp-like Facility Ratings raises bar further for trucking brokerage firms.

• U.S. Dollar Stores: Dollar Tree and Dollar General will face a rising threat of substitutes as healthcare insurers like Health Care Service Corp. launch subsidized meal delivery services to low-income consumers living in food deserts as a preventative healthcare measure.
• Trucking Brokerage Firms: Uber Freight’s new Yelp-like Facility Ratings feature raises the bar further for trucking brokerage firms by providing its drivers with a new level of empowerment and transparency.
• Starbucks: Starbucks’ growth story in China faces a new threat with the launch of WeWork Go which offers the public free coffee and pay-as-you-go access to WeWork’s locations.

I was thrilled to learn that Google just launched a new feature called Live Transcribe as it will empower deaf people, like my brother, by transcribing audio in real time. I’m also excited to order Casper’s new Glow Light for my kids to help them fall asleep better and wake up. It’s exciting to see Aetna partner with Apple on a new health-tracking and motivation app as it could be really valuable to help people engage in healthy behaviours. It’s also very encouraging to see health insurers like Health Care Service Corp. try to help low-income consumers living in food deserts by offering them subsidized health meal delivery services. While Uber Freight is looking to empower its drivers through its new Yelp-like feature for shipping and receiving facilities, Amazon is empowering its sellers with its Amazon Live Creator app which enables them to livestream for free on its platform to promote their products. And even Foot Locker seems to be gaining a social conscience with its new community-driven mission “to inspire and empower youth culture”, which coincides with its $100M strategic investment in the sneaker resale marketplace GOAT Group.