Daily Brief China: Li Auto, Perfect Medical Health, Shenzhou Intl Group Holdings, Hainan Meilan International Airport, Fenbi Ltd, ABM Investama, Silver Dragon Water Supply Group, PDD Holdings Inc, Country Garden Holdings Co and more

• We finally got to 80 Hang Seng Index constituents in June. Now comes the next step of moving up to 100 index constituents though there is no timeline for completion.
• The conclusions of the market consultation on the inclusion of foreign stocks in the Hang Seng Index should be announced soon though implementation could start only in December.
• We highlight 10 potential inclusions to the index with passive trading impact varying from 1.5-5.6 days of ADV. There are large shorts on some of the stocks.

• We spoke with the management of Perfect Medical Health (1830 HK). The key highlight is a steady recovery for FY24e and an overall expansion of 60% in three years. 
• Expansion plans in HK (75% of revenue) have commenced, with ten centers opening over the year, adding to the existing 22 HK centers (one already opened in June 2023).
• They also highlighted an aggressive long-term goal of making one bn HKD of profit by FY26 (Mkt cap: 4.8 bn HKD) and short-term guidance of 30-40% profit growth for FY24e. 

• Key customers & their retail partners battling excess inventory, waning consumer demand, and market share losses in certain geographies
• Plans for capacity expansion amid demand uncertainties and alt data and macro picture may prove aggressive and along with risks of reshoring/nearshoring & friend-shoring may prove margin dilutive
• Consensus expectations for 2H23 and 2024 appear overly optimistic and valuation is not cheap given the growth profile

• Back On 29 September 2019, Hainan Meilan International Airport (357 HK) entered into a subscription agreement with Hopu-affiliate Aero Infrastructure, for 200mn new H shares at HK$4.69/share.
• That issuance failed as CSRC approval was not secured by the Long Stop. Hopu reckoned HMIA reneged on its duties to secure approval and lodged a notice of arbitration.
• HKIAC recently agreed and opines HMIA did not use its best endeavours to complete the subscription. Hopu is seeking up to HK$6.962bn in compensation. Quite the overhang.

• Fenbi Ltd (2469 HK) is a newly listed China edtech company that focuses on tutoring for China civil servant exams.  
• The company’s share price was caught by a perfect storm in June, dropping by as much as 70% during the month.
• Very interesting opportunity to have exposure to a quality company in a sector that is very different from K12 tutoring.  

The Asia Monthly focuses on providing updates on recent events, information on new issues and spread movements, as well as summarising our top picks. The Asia Monthly is intended to broaden investors’ understanding of the Asian USD high-yield market.

• Silver Dragon Water Supply Group (2210081D CH) is looking to raise at least US$100m in its upcoming Hong Kong IPO. The bookrunners on the deal are HSBC and Huatai International.
• Silver Dragon Water Supply Group (SDW) is principally engaged in the supply of tap water, raw water and pipeline direct drinking water in China.
• As per Frost & Sullivan (F&S), the firm had the largest water pipeline network in terms of water pipeline length among all water supply companies in China in 2022.

• We expect PDD to report 1Q23’s revenue and non-GAAP net income (5.4%) and (5.6%) vs. consensus, respectively.
• Taobao/Tmall and JD launched more subsidy campaigns in 2Q23 to strengthen their low-cost mindsets among customers, while PDD remains to be more restrained, which might lead to decelerating top-line growth.
• We cut PDD’s FY23 EPS by 3.7% and TP to US$ 88 on slower 2Q23 top-line growth and increasing Temu costs, but maintain its BUY rating.

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.

• Country Garden Holdings Co
• First Pacific Co

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.

• Country Garden Holdings Co
• First Pacific Co