Daily Brief China: HKEX, Haitong International Securities Group, AIA Group Ltd, Tencent, Galaxy Entertainment Group, WuXi XDC Cayman , Taste Gourmet, Genecast Group, SJM Holdings and more

• The FRTIB has decided to switch its benchmark for the International Stock Index Investment Fund from the EAFE Index to the ACWI IMI ex-USA ex-China ex-Hong Kong Index.
• With around US$68bn invested in the I Fund, this will set off churn among the constituent stocks in 2024. One-way trade is around US$28bn with DM outflows and EM inflows.
• The benchmark shift could be done over a 4 month period with higher trading during periods where liquidity opportunities arise.

• The pre-condition relating to Haitong International Securities Group (665 HK)’s privatisation offer from Haitong Securities Co Ltd (A) (600837 CH) is satisfied. The offer is at HK$1.52 per share. 
• The key conditions are approval by at least 75% of independent shareholders (<10% of independent shareholders rejection) and the headcount test. The high takeover premium facilitates approval. 
• This is a done deal. At the last close and for an estimated early February 2024 payment, the gross and annualised spread is 5.6% and 26.4%, respectively.

• The Federal Retirement Thrift Investment Board which manages the four major funds in the Thrift Savings Plan for US federal government employees will change benchmark for its International Fund
• This was announced on 14 November. The transition will take place “in 2024.” It entails moving from MSCI EAFE to MSCI All Country World ex-USA ex-China ex-HongKong Investable Market Index.
• The explanation: double the countries, lots more stocks, BUT CHINA! This means selling ~US$1.6bn of HK stocks but US$20bn of one-way flow in total (lots of Japan/UK/Europe to sell)

• Tencent (700 HK) ’s 3Q2023 revenues fell marginally below consensus, however, OP beat consensus estimates. Domestic games returned to growth after a flat quarter in 2Q2023.
• Both Online Advertising and Fintech businesses have seen strong increase in top line with GPM approaching new highs for the two businesses.
• Though Tencent’s earnings show a recovery, we would remain cautious given the slowdown in Chinese economy and Tencent failing to make into new game approval list since July 2023.

• Our review of the  three stocks here reveals considerable run room ahead as revenue  recovery in Asia gaming is  outpacing  forecasts.
• These companies  have proven   resilient after taking big hits during covid crisis.
• Balance sheets are stronger, revenue  rising, margins  improved–much of  this not as yet  reflected in valuations.

• Advertising, international game, and Fintech grew by two digits, but domestic entertainments were stagnant.
• The gross margins of all business lines improved and admin expense as percentage of total revenue decreased.
• We believe the stock has an upside of 30% for the year end of 2024.

• WuXi XDC Cayman (1877628D HK) raised US$470m in its Hong Kong IPO.
• WuXi XDC Cayman (WXDC) is a CRDMO focused on the global antibody drug conjugates (ADC) and broader bioconjugate market providing integrated and end-to-end services.
• In our previous notes, we looked at the company’s past performance and valuations. In this note, we talk about the trading dynamics.

• Taste Gourmet (8371 HK) reported Q2 profits 25% over our expectations at 30 mn HKD (81% YoY), led by net margin expansion to 11.2% (vs. our expectation of 8.8%)
• The net cash of 133 mn HKD represents around 27% of market capitalization, which is used to increase the restaurant count in HK from 42 to 48 QoQ.
• The company declared a 5.5 cent interim dividend (Vs. 4.8 cents last year). We believe they can declare a 12.5/13 cent dividend for FY24 (March-End)

• The clinical need for NGS hasn’t developed as rigid demand due to high cost, difficult operation, high requirements on hospitals/personnel, etc. It takes time for NGS to improve market penetration.
• Genecast’s LDT business could face compliance issue.Its in-hospital business has lower gross margin.Increasing R&D expenditure is inevitable since products need to get approval by regulatory authorities, putting pressure on profitability. 
• Burning Rock is in a leading position in NGS field, but its market value is quite low. We advise investors to be prepared for valuations to fall short of expectations.

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.

• SJM Holdings