Brief China: Up Fintech (Tiger Brokers) IPO Trading Update – First Day Volume Was Higher than Futu, Close to QTT and more

In this briefing:

1. Up Fintech (Tiger Brokers) IPO Trading Update – First Day Volume Was Higher than Futu, Close to QTT
2. Tencent Music: A Case of Failing to Live up to Hyped Expectations
3. Tencent Music (TME): Problems Come from Corporate Clients and In-House Contents, 35% Downside
4. Global Credit Cycle: Full-Blown Repeat of 2008 Crisis Unlikely…Contrary to Doomsayers
5. Wuxi Biologics Placement – Past Deals Have Done Well but Progressive Returns Are Getting Lower

1. Up Fintech (Tiger Brokers) IPO Trading Update – First Day Volume Was Higher than Futu, Close to QTT

Up Fintech (TIGR US)‘s IPO was priced at US$8/share, above its range of US$5-7/ADS raising at total of US$111m, including the proceeds from the private placement with Interactive Brokers Group, Inc (IBKR US). 

In my earlier insights, I looked at the company’s background,  past financial performance, scored the deal on our IPO framework and compared it to Futu Holdings Ltd (FHL US): 

• Futu Holdings IPO Quick Note – Comparison with Tiger Brokers – Same Market, Different Economics
• Up Fintech (Tiger Brokers) Pre-IPO Quick Note – Much Too Reliant on IBKR
• Up Fintech (Tiger Brokers) IPO Quick Take – It’s Not like Futu, Won’t Perform like It Either

In this insight, I will re-visit some of the deal dynamics, comment on share price drivers and provide a table with implied valuations.

2. Tencent Music: A Case of Failing to Live up to Hyped Expectations

• One word to describe Tencent Music Entertainment’s (TME US) first conference call post IPO is uninspiring.
• Management does not provide concrete 2019/1Q19 guidance, but hints margin pressures persist largely due to investments in music contents.
• We expect that consensus still has to revise down TME’s 2019-20E net profits forecast by 17-26%.
• On our earnings forecast, TME unattractively trades at 46.3x/37x 2019-20E PE, a whopping 48-52% premium to peers average.

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

• 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%.

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

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.

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

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:

• Jun 2017 – US$500m: WuXi Biologics IPO Review – An Opportunity to Get Exposure to Biologics in China
• Dec 2017- US$550m: Wuxi Biologics Placement – Selldown Right when Lockup Expires Suggests Eagerness to Offload
• Mar 2018 – US$600m: Wuxi Biologics Placement – In Time for the Next Lock-Up, Returns Will Probably Not Match Prior Ones
• Jun 2018 – US$500m: Wuxi Biologics Placement – Probably Not a Surprise to Sell Again when Lock-Up Expires

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.