Daily Brief China: Midea Group Co Ltd A, Prosus NV, Samsonite, The United Laboratories International Holdings Limited, Health And Happiness (H&H), 4Paradigm, ENN Natural Gas, ZTO Express Cayman , Shulan Health Management and more

• Midea Group Co Ltd A (000333 CH) could raise between HK$35-54bn (US$4.5-6.9bn) in its H-share listing depending on the H-shares discount and exercise of the overallotment option.
• The H-shares could get Fast Entry to some global indices depending on the number of shares that are allotted to cornerstone and/or strategic investors.
• The H-shares will be added to Southbound Stock Connect following the end of the price stabilisation period. Inclusion in the Hang Seng Composite Index will come later.

• Bob van Dijk, CEO of both Naspers (NPN SJ) and Prosus NV (PRX NA), has stepped down, effective 18 September. 
• Van Dijk was instrumental in the 2019 listing of Prosus and the creation (and subsequent unwinding) of the highly-criticised Prosus/Naspers cross-holding structure. 
• His departure should have minimal impact. Everything else basically stays the same. Continue to be long Prosus vs. NAV – that is, Prosus vs. Tencent (700 HK).

• The move from 80 index constituents to 100 could take most of next year (and possibly even the year after that) to manage turnover and add profitable companies.
• Foreign companies will be eligible for inclusion in the index from the December rebalance. That makes Samsonite (1910 HK) a high probability inclusion candidate.
• We highlight 8 potential inclusions to the index with passive trading impact varying from 1.6-4.3 days of ADV. There are large shorts on some of the stocks.

• Last year, United Lab mainly relied on antibiotics to make money. However, after the pandemic is under control, antibiotic sales may decline. United Lab’s performance could be under pressure.
• As a late comer, sales of United Lab’s weight management products could be lower than expected in the future under increasing competition. The veterinary drugs business requires time to cultivate.
• RMB12 billion market value of United Lab has priced in all positive factors.There could be a pullback in valuation. RMB6 billion market value is a safe place to go long.

We view H&H International as “Medium Risk” on the LARA scale. The company has a sound business profile, with stable branded products in the Baby Nutrition & Care (BNC) and Adult Nutrition & Care (ANC) markets. The acquisition of Zesty Paws in 2021 allowed H&H to expand into the Pet Nutrition & Care (PNC) market. The company’s strong distribution channels support cross-border and e-commerce sales strategies. That said, the positive factors are balanced by risks associated with penetration into new markets and products, along with the fragmented and competitive Chinese market.

We view positively H&H’s solid business fundamentals and strong market positions. We highlight the company’s sound liquidity profile and stable CFO. Negatively, the Zesty Paws acquisition affected H&H’s financial profile, weakening the leverage metrics. That said, PNC is part of the company’s sustainable growth plan. We expect H&H to work on deleveraging in the near term, in order to maintain a healthy credit profile.

Bondholders of the 2026 USD notes suffer from small degree of structural subordination, as the company’s PRC subsidiaries do not guarantee the notes, but certain PRC subsidiaries are likely to be guarantors for the term loan.

Our Credit Bias on H&H is “Stable”, given the company’s solid business fundamentals, strong market positions and moderate financial profile. ANC and PNC are expected to deliver better numbers going forward, while BNC should remain challenging. As a result, ANC and PNC will likely be H&H’s key growth segments, offsetting high competition in the BNC business. The company aims to expand into other business segments and markets outside China, in order to compensate for muted growth in the country.

Controversies are “Immaterial” and the ESG Impact on Credit is “Neutral”.

• 4Paradigm (1764934D HK), a leader in enterprise artificial intelligence (AI) in China, has launched an HKEx IPO to raise up to US$144 million.
• We previously discussed the IPO in 4Paradigm IPO: The Bull Case and 4Paradigm IPO: The Bear Case. 
• In this note, we discuss forecasts and valuation. Our analysis suggests that the IPO price range of HK$55.60-61.16 per share is unattractive. We would give the IPO a pass.

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.

• ENN Natural Gas

• ZTO Express Cayman (2057 HK)‘s impressive 1H23 and 2Q23 results are only reflections of its competitive strengths. We believe the company is poised to generate even better profitability. 
• Its market share expansion, excellent cost management, positive volume growth, new business initiatives and solid net cash position are all strengths that drive long-term outlook.
• While trading on premium vs. peers, ZTO’s PER valuations are well justified by its leadership position, healthy financial position, and high EPS CAGR for FY23-FY25F.

• Private general hospitals are the core business of Shulan, but the business model for general hospitals is not good – heavy assets, challenging operations, low profits, difficult to expand nationwide. 
• Even with the endorsement of renowned academician Dr. Li Lanjuan, whether Shulan’s hospitals can attract constantly sufficient patient flow remains a question. Most patients still prioritize public hospitals for treatment.
• Due to the lack of solid profit model and expansion model, we’re not optimistic about Shulan’s profitability and future financial performance. Shulan may be in a state of long-term loss.