Daily Brief China: China Traditional Chinese Medicine, Brilliance China Automotive, China Merchants China Direct Investments, Oriental Watch, Atour Lifestyle Holdings, Asia High Yield Bond Index, New World Development and more

• Just plain ugly. China Traditional Chinese Medicine (570 HK) (“TCM”) fell 11.7% yesterday. It’s down another 7.9%, on large volume, as I type.  The stock is now ~35% below terms
• Depending on who you talk to, the sudden move was triggered by a couple of event pods dumping stock; or the incoming CNPGC chairman is not supportive. Or perhaps both. 
• Since rumours surfaced early Feb as to an Offer, a basket of TCM’s peers are up 8% on average. The HSI is up 15%. TCM’s downside from here appears limited.

• Brilliance China Automotive (1114 HK) is up 220% on a total return basis since we first published our insight in August 2023.
• The company paid a special dividend in April this year and will pay a large special dividend of HK$4.3/share going ex-div on 3 July.
• The resultant drop in market cap will result in deletion of the stock from large global passive portfolios at the close on 3 July.

• The recent news on China Merchants China Direct Investments (133 HK) was director Elizabeth Kan narrowly getting re-elected. Of interest, ISS recommended shareholders vote AGAINST. Glass Lewis was FOR re-election.
• The key takeaway here is that the majority of the minorities want change. The next development may occur in the lead up to the management agreement renewal in November. 
• In addition, Argyle Street Management, CMSCI’s key shareholder activist, is also requesting the company buy back 20% of shares outstanding at 90% of NAV. 

• Oriental Watch (398 HK) reported revenue/profits down 2%/15% YoY for the full year (vs our expectation of 10%). H2 revenue/profitability fell 12%/22% YoY due to a weak Q4. 
• Cash and investments fell from 1.1 bn to 920 mn HKD, owing to dividend payments, increased inventories, and reduced payables.  Cash represents 55% of market capitalization. 
• The company maintains a 100% dividend payout, but dividends declined in line with earnings to 51.5 cents (FY23: 60 cents), representing a 15% dividend yield. 

• Atour recorded steep product sales growth during 618. We raised our C2Q24 revenue by 7.5% and full year by 5.1%, driven by (1) stronger pillow sales during the 618 promotions; 
• Thanks to retail, Atour’s RevPAR after including retail sales maintained positive growth of 1.7% YoY, although pure hotel RevPAR dropped 2.9% YoY due to a decline in hotel price.
• We raise TP by US$1 to US$36/ADS and keep the rating as BUY, factoring in the strong growth momentum of Atour’s retail business.

• As we are entering the second half of 2024, inflation has remained sticky as expected.
• The lingering fear of a global recession has been mitigating rising shipping and production costs and, as a result, kept inflation in check.
• We see more opportunities in selected Chinese bonds in industries away from property and local government financing vehicle (LGFV) sectors and believe non-Asia emerging bonds offer better value.

Lucror Analytics Morning Views comprise our fundamental credit analysis, opinions and trade recommendations on high yield issuers in the region, based on key company-specific developments in the past 24 hours. Our Morning Views include a section with a brief market commentary, key market indicators and a macroeconomic and corporate event calendar.

• New World Development
• Softbank Group