In this briefing:
- Japan Display: Squeezing Up 36% As Chinese Investment Could Solve Balance Sheet Troubles
- Starbucks (SBUX): China Strategy Reaped by Luckin’s Parasitical Tactic, a Visit and Case Study
- Hengan Intl. (1044 HK): Our Analysis Suggests that Bonitas’ Allegations Have Some Substance
- Alpha Smart – Pre-IPO – PE Investors Recovered 56% of Their Cost in Two Years but Left It in Debt
- H/A Spread & Southbound Monitor – Going Into Year End
1. Japan Display: Squeezing Up 36% As Chinese Investment Could Solve Balance Sheet Troubles
As we mentioned in a comment in Japan Display: Cost Structure Improvement Is Good but Shipment Delay and IPhone XR Cloud Outlook the NHK reported last night that JDI was in talks with a Chinese consortium to secure something in the region of ¥50bn in funding (more than its market cap yesterday) for a more than 33% stake in the company. The Nikkei shed light on the identities of some of the consortium this morning mentioning investment fund Silk Road, Minth Group Ltd (425 HK) and Shenzhen O Film Tech Co A (002456 CH). Bloomberg has also mentioned that the consortium could invest a further ¥500bn to establish a new facility in China for the production of OLED panels.
We spoke to the company this morning to get colour on these announcements.
2. Starbucks (SBUX): China Strategy Reaped by Luckin’s Parasitical Tactic, a Visit and Case Study
- We believe Luckin copies SBUX’s site selection, but chooses low rental places close to Starbucks shops.
- Starbucks plans to add delivery business to raise margins and comparable store sales, but Luckin has focused on delivery since inception.
- Starbucks needs the China market as its growth momentum, but we believe Luckin’s parasitical tactic will be a major resistance.
3. Hengan Intl. (1044 HK): Our Analysis Suggests that Bonitas’ Allegations Have Some Substance
Hengan Intl Group (1044 HK), China’s leading sanitary towel and nappy producer, has been targeted by a short seller, Bonitas Research. Hengan has denied Bonitas’ allegations to which Bonitas has responded that Hengan’s response was weak and evasive. The shares have continued to slide suggesting that investors are less than convinced with Hengan’s rebuttal.
The aim of our note is to analyse alternative financial metrics to judge if Bonitas’ allegations are groundless or have some substance. Overall, our analysis suggests that Bonitas’ claims have some substance and investors should not be so quick to dismiss them.
4. Alpha Smart – Pre-IPO – PE Investors Recovered 56% of Their Cost in Two Years but Left It in Debt
Alpha Smart (ALS HK), the parent of Chinese menswear fashion retailer GXG, plans to raise US$300m in its Hong Kong IPO. L Catterton, LVMH’s investment arm, along with another PE investor, owns a 73% stake in the company.
Earnings have been consistently growing with the highest contribution still coming from its flagship brand “GXG”. The recent expansion of the online channel has further aided sales growth, with ASL claiming to be the largest menswear retailer in terms of online sales.
Apart from a large dividend payout which covered half of the acquisition costs for L Capital, nothing much seems to have changed recently. In addition, operating cash flow has not kept pace with earnings due to a consistent increase in inventory. To add to that there are a few related party issues as well including some stores being run by former employees.
5. 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.
The Nitty-Gritty Details Follow
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
Historical Southbound Flows: Outright & vs HKEx Turnover
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.
