Daily Brief China: JD.com , Tencent, Great Eagle Holdings, Pop Mart International Group L, BYD Electronics, Guangzhou Great Power Ener-A, China Traditional Chinese Medicine, Chow Tai Fook Jewellery, China Vanke and more

• The June rebalance of the HSI, HSCEI INDEX, HSTECH and HSIII indices will use today’s closing prices to cap the index constituent weights at 8%/12%. This will lead to large flows.
• The round-trip trade across all stocks across the four indices is estimated at HK$32bn (US$4.1bn).
• Li Auto, Alibaba, NetEase, Zijin Mining, SenseTime and BYD Electronics are the largest buys while Tencent, Meituan, JD.com, Kuaishou Technology, Xiaomi and HSBC Holdings are the largest sells.

• MSC indices were rebalanced in the closing auction on Friday. Turnover for the day on the JSE was R41.9bn, R25bn traded in the closing auction (60%).
• Turnover at the February rebalance was R25.6bn. Most SA constituents were pushed lower in the closing auction and for the day, consistent with the downweighting of SA Inc.
• China was downweighted in the ACWI and EM indices for a second straight quarter, reducing the country weight in ACWI by 6bps to 2.69%.

• Unexpectantly, Great Eagle Holdings (41 HK) said it would not proceed with an Offer; and Hong Kong hotel-play Langham Hospitality (1270 HK) promptly cratered. But why the flip flop?
• Preceding my comments on GE, Langham and Champion REIT (2778 HK), are the current setup/unwind tables for Asia-Pacific Holdcos.
• These relationships trade with a minimum liquidity of US$1mn, and a % market capitalisation >20%.

• In 1Q24, Pop Mart International Group L (9992 HK)‘s international sales grew around 250% yoy, and made up around one quarter of sales (vs. 17% of sales in 2023). 
• I now expect 39% sales growth in 2024, driven by 140% yoy growth in the international business and 18% growth in domestic China business. 
• I further expect a 50% yoy growth in net profit growth in 2024 driven by a 0.8ppt increase in gross margin and 0.5ppt in operating leverage. 

• The HSI added BYD Electronics (285 HK) and deleted Country Garden Services (6098 HK). HSCEI added Zijin Mining Group Co Ltd H (2899 HK) deleted Xinyi Solar Holdings (968 HK) 
• HSTECH had no changes, but lots of flow. The index team sets capping levels, then resets them a three days before the actual rebalancing. There were some capping/recapping changes.
• Below we offer tables showing all the changes and flows across the indices for each stock, ranked by Flows, ADV, and Ticker. And a spreadsheet with all the relevant data.

• The June 2024 index review results for the ChiNext and ChiNext 50 indices were announced yesterday.
• There will be seven changes for the ChiNext index and five changes for the ChiNext 50 index. Some of these names surprised us.
• In this insight, we take a look at our final flow expectations for the confirmed index changes and our thoughts on the selection process.

• The approval/filing process of China TCM’s privatization is complicated and would take some time, but there’re almost no cases of disapproval. It also depends on the adequacy of materials submitted.
• Due to the extension of time for the despatch of Scheme Document, this process would be delayed for more months.But we should receive clear information by October at the latest.
• For arbitrageurs, China TCM is an investment opportunity of high success rate, which becomes more attractive if HK stock market is depressed.It’s better suited to idle funds considering potential risks/returns.

• The market’s assumption of no special dividends in Chow Tai Fook Jewellery (1929 HK)‘s upcoming FY24 result is conservative, and this does not fit into its usual pattern. 
• Should it pay special DPS, the dividend yield may reach an attractive 10.7%. With its net cash position, CTF can financially maintain the average 135.6% payout ratio. 
• A return to its historical average dividend yield of 7.4% means that CTF’s share price will need to go up by 45% from the current level.

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.

• China Vanke