Daily China: H/A Spread & Southbound Monitor – Going Into Year End and more

In this briefing:

1. H/A Spread & Southbound Monitor – Going Into Year End
2. Wuxi Apptec (药明康德) IPO: What You Need to Know Before the Trading Debut
3. Tencent Music IPO: Price Target Hit; Risk/Reward Now More Balanced and Key Next Steps
4. Macro Debt Risks in China According to the PBOC
5. Xinyi Energy IPO Valuation: Asking More Than What It Is Paying to Acquire Target Portfolio

1. H/A Spread & Southbound Monitor – Going Into Year End

An H/A Spread Monitor Project offering a brief look at recent changes in H-Share and A-Share spreads, Southbound flow and impact, and where the spreads are trading within their own historical ranges.

There are five sets of data for now:
1.   HK-Shanghai Connect Southbound Turnover and Net Buying vs Indices and HKEx Turnover
2.   Top 20 Net Southbound buys and sells over the last 5 days
3.   H-Share/A-Share Discounts, Changes in Discount over 1 and 4 wks, Changes in Southbound Flow
4.   Southbound Flow as a % of Volume and Float on All Eligible Stocks
5.   H-Share/A-Share Sector Discount Ranges and Averages Charted Over the Last 12 months 

Net Southbound flows continue to be somewhat lacklustre. November was negative after a couple of positive months. December so far is very mildly positive. Northbound had been strongly positive for months, but say RMB 5.8bn of outflows in October only to rebound to RMB +32.5bn in November. So far this month, NB is positive too.

2. Wuxi Apptec (药明康德) IPO: What You Need to Know Before the Trading Debut

Wuxi Apptec’s USD 1 billion IPO was priced at HKD 68/share and will start trading today. We summarize the latest information with updates on our valuation in this short note, prior to the trading debut. 

 Our previous coverage on Wuxi Apptec listing

• WuXi Apptec (药明康德) IPO: This A+H Listing Will Be Different
• WuXi Apptec (药明康德) IPO:Upside at Middle and Low End
• Wuxi Apptec (药明康德) IPO: Pricing Update Before Book Close

3. Tencent Music IPO: Price Target Hit; Risk/Reward Now More Balanced and Key Next Steps

Tencent Music Entertainment (TME US) rallied up 14% on day one of trade to hit our PT and closed up c8% on its first day of trade. Given the skepticism/ambivalence on the story, poor macro backdrop, weak recent listings from China in the US alongside a full-sized deal and a mid-December launch, this day one performance is a solid result in our view.  We outline some further thoughts and next steps for the TME story below.

A recap of the trade: We recommended buying Tencent Music at the low end of the range ($13) and we estimated a base-case fair value of 14% upside. Tencent music rallied up 14% intraday on its first day of trade and closed up c8%. We think this is a fairly good result given the skepticism/ambivalence on the name alongside a weak macro backdrop and a mid-December deal-launch. 

Historical week one trade provides mixed support for further gains:

Long-term – we prefer TME to Spotify but recent events give us pause on the cautious near-term view for Spotify: 

Updated DCF Valuation: 

GER view: 

More details below…

4. Macro Debt Risks in China According to the PBOC

If there is one thing China is acutely aware of it is the debt risks.  For many years, I questioned whether China even understood the enormity of its debt risks.  Due to a number of factors, I have actually become quite convinced that yes they do understand these debt risks.  It should be emphasized that just because they understand the size and enormity of the debt risks does not mean they are going to take corrective steps that in normal financial markets we would expect (I will return to this point later).  However, they do clearly grasp the underlying risks of the debt buildup.

5. Xinyi Energy IPO Valuation: Asking More Than What It Is Paying to Acquire Target Portfolio

Xinyi Energy Holdings Ltd (1671746D HK) is a solar farm operator seeking a listing on Hongkong stock exchange raising up to US$680M (including Greenshoe). The company announced a price range of HK$1.89/share to HK$2.42/share valuing the company between HK$12.5B to HK$16B. The company is issuing 1.9B shares and 282M shares of Greenshoe as part of the IPO. The offer price will be announced on 13^th December. The shares are expected to trade on Hongkong Stock Exchange on the 21^st December. 

Based on GER’s analysis valuations appear rich and the investors should avoid the IPO which are priced at a significant premium at the lower end of offer price compared to its peers.