Daily Brief China: Kuaishou Technology, China Resources Beer Holdings, Tongcheng Travel Holdings , West China Cement, Oriental Watch, Beijing Tong Ren Tang Healthcare Investment, J&T Global Express , Tata Motors Ltd, ATRenew and more

• The gross margin improved 5 pp (percentage points) YoY and the operating margin improved 7 pp YoY in 2Q24.
• In 2Q24, total revenue grew by 12% YoY, with the main business up by 22% YoY.
• Three cross-sectional comparisons reach similar stock upsides about 100%. Buy.

• Stock valuations for China’s top beer players are near historical lows, but is a recovery on the horizon? Will it ever return to the heady valuations of 2019-2020?
• China Resources Beer Holdings (291 HK) and Budweiser Brewing APAC (1876 HK) have reported 1H2024 results showing a decline in sales volumes, attributed to several short term factors.
• We highlight long-term factors, including an aging population and shifting consumer habits, that could limit sustained growth in China’s alcoholic beverage market.

• Tongcheng Travel Holdings (780 HK) is still suffering from cost pressure, with adjusted net profit increased by 10.9% in 2Q24, despite a 48.1% revenue growth.
• Both GMV and MPU growth rates have slowed in 2Q24 when compared with 1Q24, and revenue may also decelerate in 2H24 given the higher base for comparison.
• The market will need some time to see if the moderating earnings trend will sustain, negatively affecting investor interests. Potential earnings downgrade is also a challenge.

West China Cement (WCC) has released softer than expected H1/24 numbers. The company’s revenue and profitability in Mainland China continued to decline amid the real estate slump, while its performance in Africa was mixed. ​FCF remained negative and leverage continued to deteriorate. That said, liquidity appears manageable, as we expect WCC to refinance its short-term loans. The main debt maturity wall is in July 2026, when the USD 600 mn notes will come due.

In our view, the key risk is uncertainty over the extent of WCC’s overseas expansion. The company stated that it has no plans for capacity expansion in FY 2024, other than the ongoing developments in Ethiopia and Uzbekistan. However, this contradicts media reports on WCC’s investments in Rwanda, Uganda and Zimbabwe. Hence, we are unsure about the level of the company’s planned overseas capex. Going forward, cement demand in Mainland China is likely to remain weak, due to the slowdown in infrastructure investment (with lower growth) and continued decline in real estate investment.

• Hong Kong’s watch and jewelry sales were weak in Q2 CY24 (-24% YoY) as dampened sentiment continues to plague overall retail sales across regional sectors. 
• However, Oriental Watch (398 HK), with its Rolex and Patek Phillipe portfolio, is expected to be more resilient than the rest of the watch industry. 
• The company is still a very good dividend play, trading at 7.6x FY25 PE, with 60% of the market cap in cash and a 13.5% dividend yield. 

• Tong Ren Tang’s performance growth is mainly driven by M&As. Its organic growth and operation management capability are not strong, leading to the concerns on the sustainability of future growth.
• Profit margin is disappointing.If Tong Ren Tang fails to balance the interests of different parties and control costs/expenses,low profit margins will be the norm despite the growth of revenue scale.
• From the perspectives of revenue scale, profitability, operational efficiency, business model, there’s still a gap between Tong Ren Tang and Gushengtang. Tong Ren Tang’s valuation should be lower than Gushengtang.

• J&T Global Express this week reported a strong Y/Y improvement in EBITDA
• The most dramatic improvement came at the company’s China operation
• But the drivers of this improvement appear odd, even contradictory; AVOID

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.

• Tata Motors ADR
• Yankuang Energy Group

• Key 2Q24 takeaways include: 1) revenues likely to step function higher in the near term (4Q24 launch of Apple’s iPhone 16) and beyond reflecting building recycling volumes and rising demand for pre-owned products, particularly in light of ongoing government support 2) management remains focused on increasingly tapping into recycling activity beyond consumer electronics (luxury goods, gold, jewelry, premium liquor), as well as further expanding the company’s store footprint and upgrading existing locations to better showcase multi-category products and 3) we look for further margin expansion looking out to 2H24 and 2025 given a more favorable product/distribution mix.
• From a stock perspective, we see further upside for RERE, as awareness and appreciation of the company’s business model, growth prospects, competitive positioning, and valuation disconnect increasingly take hold.