Daily Brief China: Ping An Insurance (H), AIA Group Ltd, Tongwei Co Ltd A, Longfor Properties, Alibaba (ADR), Zhongsheng Group, S.F. Holding, Jiangsu Hengrui Medicine, Sichuan Baicha Baidao Industrial and more

• The premium of Ping An Insurance Group of (601318 CH) to Ping An Insurance (H) (2318 HK) has jumped from 4% to 14% in the space of a week.
• There has also been a jump in the Hang Seng Stock Connect China AH Premium Index and big inflows to mainland China ETF raising the possibility of National Team buying.
• A stabilisation in onshore China markets could lead to the AH premium dropping back towards parity and we would gradually scale out of long A/ short H positions.

• 1Q23 shows strong Value Of New Business (VONB), not sure of profit flow through
• Comparative to 1H22 is easy vs loss of USD556m in the period, but risk to downside
• Despite, stock buybacks, increased dividends market cap down 34% since peak this year

• Based on the close of 21 August, there could be two changes for the iShares A50 China (2823 HK)/ CSOP A50 (HKD) (2822 HK) in September.
• NARI Technology Co Ltd A (600406 CH) and CSC Financial (601066 CH) should replace Tongwei Co Ltd A (600438 CH) and Shaanxi Coal Industry (601225 CH) in the ETFs.
• There are couple of stocks with over 1x ADV to trade from the ETFs. Plus there are cash and carry positions that will need to be rebalanced, adding to flow.

Longfor’s H1/23 results were weaker than expected, with y-o-y declines of 35% in overall revenue to CNY 65 bn and 40% in revenue from property development to CNY 50 bn. That said, recurring income rose 10.4% to CNY 12.2 bn, which is becoming a meaningful annuity-like cash flow. This will be helpful in underpinning Longfor’s financial risk profile should there be a prolonged downturn in the property sector.

The company appears to have healthy access to bank funding, and should have sufficient liquidity to meet near-term debt maturities. That said, we highlight the risk of a potential reduction in the liquidity buffer, due to weak contracted sales and higher ST debt. Longfor recorded contracted sales of only CNY 7.6 bn in July 2023, compared to an average of CNY 11 bn per month in H1. ST debt surged 75% to c. CNY 39 bn, from c. CNY 22 bn at FYE 2022.

We maintain our “Hold” recommendation on the LNGFOR curve. The various notes appear to offer good value at current yields of 15-21%. That said, market technicals are very poor for private developers, with even the bonds of solid names such as Longfor experiencing volatility.

• Taobao and Tmall have implemented two major reforms: 1) The launch of the Wanxiangtai Platform Unlimited Edition; 2) Changing the rules for displaying merchant sales volume from monthly to annual.
• Although the new Wanxiangtai differs from PDD’s “Fangxintui” and “Quanzhantui” , the idea is to simplify and automate merchant promotion. We anticipate that this change will boost the take rate.
• We increased our core e-commerce take rate estimate for BABA in FY24/FY25 to 3.85%/4.0%, respectively, and raised our TP to US$ 127.

• China MeiDong Auto (1268 HK) announced a profit warning this morning, expecting a 90% decline in net profit for 1H23. 
• Luxury auto dealer in China is facing major uncertainties in its business model, with no visibility in the near term. 
• However, Zhongsheng Group (881 HK) currently employs the best long-term strategy amidst industry transformation.  Suggest to keep a close eye on the name.

• Chinese express parcel volume growth was 11.7% in July, far slower than in Feb-May
• July ASP for all segments fell to 8.84 Yuan per piece, the lowest in at least ten years
• Industry leader SF Holding partly insulated from margin pressure by air, international 

• Hengrui’s performance recovery in 23H1 (especially 23Q2) was due to the low base last year caused by pandemic/lockdown. Increasing innovative drugs revenue proportion also reduced the negative impact of VBP.
• People think the turning point of Hengrui’s performance has arrived, but we hold different opinions.Some big varieties haven’t entered VBP. It would take some time to achieve breakthrough in internationalization.
• The negative impact of 23H2 anti-corruption hasn’t been reflected in interim report.Even if Hengrui’s performance growth could be back to 20-25% YoY in 2025/2026, over 60 PE/TTM is already expensive. 

• Sichuan Baicha Baidao Industrial (SCBCBDID CH) is looking to raise up to US$300m in its upcoming HK IPO. The deal will be run by CICC.
• Sichuan Baicha Baidao Industrial (SBBI) sells new-style tea drinks through its ChaPanda stores, most of which are franchised.
• As of the Latest Practicable Date (8th Aug 2023), ChaPanda’s store network comprised 7,117 stores, spanning across 31 provinces and municipalities in mainland China.