Brief China: Why China’s Stimulus Will Disappoint and more

In this briefing:

1. Why China’s Stimulus Will Disappoint
2. Dongzheng Auto Finance (东正汽车金融) Pre-IPO Review – Dependent on Dealership Network for Growth
3. Up Fintech (Tiger Brokers) IPO Quick Take – It’s Not like Futu, Won’t Perform like It Either
4. Meituan Dianping 4Q2018 Quick Read: Monetization Rate and Margins Disappointed
5. NIO (NIO): NIO Is Essentially a Distributor, Not an OEM…3 Things to Keep in Mind at Lock-Up Expiry

1. Why China’s Stimulus Will Disappoint

By Lawrence Brainard, Chief Emerging Market Economist at TS Lombard

• In a Chinese version of QE the PBoC is flooding markets with liquidity
• Commercial banks will be slow to use it to boost lending to SMEs

2. Dongzheng Auto Finance (东正汽车金融) Pre-IPO Review – Dependent on Dealership Network for Growth

Dongzheng Automotive Finance (2718 HK) is looking to raise approximately US$300 – 500m in its upcoming IPO. 

DAF is a fast growing auto finance company which acquires customers through a network of dealership around China. Its net interest income grew by 66% CAGR from FY2016 to FY2018 while net fees/comms income and profit grew by 39.6% and 61% CAGR over the same period.

However, most of its growth originated from ZhengTong dealers and joint promotion arrangement. Excluding loans from joint promotion arrangement, gross outstanding loan had only grown by 12% CAGR.

In this insight, we will look at the company’s business, analyze the competitive landscape, provide thoughts on valuation, and some questions for management.

3. Up Fintech (Tiger Brokers) IPO Quick Take – It’s Not like Futu, Won’t Perform like It Either

Up Fintech (TIGR US) plans to raise up to US$91m in its US listing. The company counts Xiaomi Corp (1810 HK) and Interactive Brokers Group, Inc (IBKR US) as its main investors.

In my earlier insights, I commented about Tiger’s reliance on IBKR and compared its operations with Futu Holdings Ltd (FHL US):

• Up Fintech (Tiger Brokers) Pre-IPO Quick Note – Much Too Reliant on IBKR
• Futu Holdings IPO Quick Note – Comparison with Tiger Brokers – Same Market, Different Economics

In this insight, I’ll run the deal through our framework and comment on valuations.

4. Meituan Dianping 4Q2018 Quick Read: Monetization Rate and Margins Disappointed

Meituan Dianping reported 4Q2018 numbers last night. As we covered the company’s IPO and lock-up expiry, we took a close look the company 4Q2018 results and listened in the conference call. While we are encouraged by the company’s strong transaction volume and revenue growth in 4Q2018, we are less bullish given the deceleration of monetization growth. We also note that the company trimmed down the details of reporting, in particular, the operation of its New Initiative segment and hence results were less transparent. 

5. NIO (NIO): NIO Is Essentially a Distributor, Not an OEM…3 Things to Keep in Mind at Lock-Up Expiry

NIO’s 6-month Lock-up expires today and as of the time of this writing the stock is down by 6.6% from the closing price on Friday, March 8.  The stock’s share overhang issue have been well covered on the Smartkarma platform by other analysts (see NIO Post-CBS Rally Making TSLA Valuation a Grand Bargain (Price Target =$3) , NIO (NIO US): Lock-Up Expiry – This Could Get Messy) so while we do not see a need to rehash those details in this insight, here are 3 things that we believe every NIO investor and would-be investor should keep in mind about the company especially if one wants to play the Tesla vs. NIO scenario:

1. Licensing/Regulatory Risk – NIO has an autonomous driving testing license but no EV manufacturing license.  An EV manufacturing license issued by the NDRC is required for EV manufacturers to market and sell their products but a 100k unit scale is a main prerequisite.  This is a key reason why NIO entered into a 5-year outsourcing relationship with JAC.  While this relationship was assumed to be temporary, there could be many hurdles for NIO to actually obtain a license in the coming years should it decide to invest in production facilities again.
2. Core IP Held by Suppliers – Powertrain technology is held by CATL and the State-owned JAC is listed as the ES8’s manufacturer on the Ministry of Information and Technology website.  Continental AG designs NIO’s vehicle suspension and chassis.  It is also unclear how much actual development work other than exterior/cockpit design is done in-house at NIO based on publicly available information.  Without scale and IP we believe NIO’s bargaining position with its suppliers is weak and displays stronger characteristics of a distributor than a final assembler. 
3. Low ASP, low margins – NIO’s ASP on the ES8 from what we have seen was $64k per unit in 2018 and $63k per unit in 1Q19 while Tesla’s Model X ASP is about $100k per unit.  There is a reason why gross margin at NIO is razor thin and it has more to do with low price point than low volumes in our view.   

Given differences between the U.S. and China operating environment for EV makers, we believe Tesla is not a good equity valuation comp for NIO, which is basically a distributor in our view.  As such, long term value drivers would most likely come from aftermarket and service revenues, while short-mid term value drivers seem elusive especially in the aftermath of the company’s decision to scrap its production plant investment plans in Shanghai.

The NIO ES8