Daily Brief China: Alibaba (ADR), Alibaba Group, Meituan, Tencent, Pinduoduo, Leapmotor, YH Entertainment Group, Shui On Land and more

• On 26th Aug 2022, PCAOB and CSRC announced that they had entered into an agreement granting US authorities access to investigate public accounting firms headquartered in China and HK.
• On 2nd Apr 2022, CSRC put out a draft for public comments on the revision of certain provisions which would allow easier access by overseas regulators to China ADRs audits.
• In this note, we’ll talk about the latest developments and its implications.

• State-Owned-Entities (SOEs) in Tianjin are set to complete the migration of their data from private sector operators like Alibaba Group (9988 HK) to a state-backed cloud by 30th Sept 2022.
• This has already started to tip the balance of power in Chinese cloud computing in favour of politically favoured cloud operators like China Telecom.
• We think the impact of nationalising the cloud could escalate to Alibaba Cloud’s overseas markets as most of its customers overseas are Chinese companies with a global presence.

• The revenue growth rate decelerated, but operating loss shrank in 2Q22.
• We believe the the revenue reclassification is unnecessary and suspicious.
• We set a downside of 19% and a price target of HK$148.

• Tencent invested in Samsung Insurance China Co. Ltd. and is the second largest shareholder.
• JD Health’s revenue increased by 48% YoY, but the stock plunged.
• KE revenue shrank by 45% YoY due to the weak property market.

• Meituan (3690 HK) reported 2Q2022 results on Friday. Revenue grew 16.4% YoY to RMB50.9bn (vs consensus RMB49.2bn) while operating losses dropped to 1.0% of revenue to RMB493m (vs consensus RMB3.3bn).
• The company has changed its segmental reporting to a new reporting structure; Core Local Commerce, New Initiatives and Unallocated items.
• Disclosures on key operating matrices such as GTV and no. of hotel room nights have not been provided and difficult to assess the performance of core businesses.

• In 2Q22, revenue growth rate accelerated and the operating profit achieved record high.
• However, we believe PDD does not fully explain its exclusive advantages over competitors.
• We set a downside of 19% and a price target of US$47 for year end 2023.

• Leapmotor is getting ready to complete its IPO in Hong Kong in the next few weeks, aiming to raise US$1 billion to US$1.5 billion.
• Leapmotor is one of the fastest growing pure play EV companies in China in terms of delivery volume. Leapmotor shipped more than 43,000 EVs in 2021, up 443.5% YoY.
• Leapmotor’s revenue surged from 117 million RMB in 2019 to 3,132 million RMB in 2021. Operating margin improved from -625% in 2019 to -137.7% in 2020, and -91.6% in 2021.

• YH Entertainment Group (2306 HK) is looking to raise up to US$144m in its Hong Kong IPO.
• YH Entertainment (YHE) is an artist management company in China. Its business covers the entire artist management industry value chain, from auditioning, training, artist operation to artist promotion.
• As per Frost & Sullivan (F&S), YHE was ranked first amongst artist management companies in China with a market share of 1.9%, based on artist management revenue generated in 2021. 

• Leapmotor (LM) aims to raise around US$1.5bn in its Hong Kong IPO. LM is a smart EV company based in China, founded in 2015.
• As of end Jun 22, it had delivered a total of 104,829 cars with most of its sales coming from its mini units, T03.
• In our previous notes, we spoke about the company’s past performance. In this note, we will have a look at its PHIP updates.

Shui On’s H1/22 results were mixed in our view. The company’s revenue recognition was heavily impacted by pandemic-related lockdowns in Shanghai during Q2/22, though we expect an improvement from Q3/22. Positively, Shui On’s investment properties performed well despite the lockdowns. This was evidenced by the properties’ high occupancy rates, steady valuations and stable rental income. Negatively, the company’s financial profile weakened slightly, with net debt rising more than expected. This may be due to lower cash collections. Still, we deem Shui On’s near-term refinancing pressure as low.