Daily Brief China: Shanghai United Imaging Healthcare, Tencent, Onewo Space-Tech, China Longyuan Power, Simcere Pharmaceutical Group, Health And Happiness (H&H), Tower Bersama Infrastructure and more

• Nearly 90% of the way through the review period, we see 4 changes using a 12 month minimum listing history, and 5 changes using a 6 month minimum listing history.
• There are overlaps in the inclusions using 6/12 month minimum listing history, so there is less risk if the index committee switches from 6 to 12 months at the review.
• Using a 6 month minimum listing history, one-way turnover is estimated at 5.07% and will result in a one-way trade of CNY 2,795m.

• Derivative trade ideas to maintain upside/protect downside in Tencent. Stock is cheap but risks remain 
• Take advantage of a retracement in implied vols and depressed skew levels to improve payoffs and protect against broader market risk
• We look at 3 alternative trades depending on your position and outlook

• Onewo Space-Tech (ONEWO HK) is getting ready to complete an IPO in Hong Kong in the coming weeks. The company is seeking to raise nearly US$2 billion in this IPO.
• Onewo is one of the leading property management service providers in China with a market share of 4.3% in the US$16 billion industry in China. 
• The major real estate downturn in China is one of the biggest headwinds on the Onewo IPO. 

• With concerns on weaker 1H22 profit and lower industry return (due to Lianjiang offshore project) now behind us, China Longyuan Power (916 HK) is well set for better 2H22.
• Utilisation hours should see improvement while new capacity growth is another major driver. The upgrades of aged and small-sized units will almost double its existing capacity. 
• Receipt of Rmb11.4bn subsidies clearly represented an acceleration in collection. This will stay as contributor to better cash flow and enhance financial position. 

• Simcere’s profit was mainly driven by the income of non-recurring items (investment business). Due to unfriendly external environment, investors are recommended to be prepared for further decline in net profit. 
• The overall quality of Simcere’s pipeline is not high, which would be difficult to bring decent revenue in the next few years. Simcere’s transformation is not as smooth as expected.
• In fact, over the years, Simcere’s strongest capability lies in the sales rather than R&D. Since the game rule changes, we are bearish on Simcere.

We view Health and Happiness International (H&H) as “Medium Risk” on the LARA scale. The company has a sound business profile, with stable branded products in the Baby Nutrition and Care​ (BNC) and Adult Nutrition and Care (ANC) markets. The acquisition of Zesty Paws in 2021 allowed H&H to expand into the Pet Nutrition and Care ​(PNC) business. The company’s strong distribution channels support cross-border and e-commerce sales strategies. That said, the positive factors are balanced by the risk of entering new markets and selling new products, along with the fragmented and competitive Chinese market. We like H&H’s solid business fundamentals, strong market positions and healthy financial profile. In particular, it has a sound liquidity profile and steady CFO.

We note that the acquisition has impacted H&H’s financial profile and weakened its leverage metrics. That said, PNC is part of the company’s sustainable growth plan. We expect it to work on deleveraging in the near term, in order to maintain a healthy credit profile.

The USD bondholders suffer material structural subordination. The issuing entity is a Cayman Islands company with no operating assets, and the PRC operating subsidiaries do not guarantee the USD notes. The level of priority creditors is high at the Australian subsidiary. Bondholders would have very limited access to assets in a liquidation scenario.

Our Credit Bias on H&H is “Stable”, given the company’s solid business fundamentals, strong market positions and moderate financial profile. The ANC and PNC segments are expected to deliver stronger performance, while BNC should continue facing challenges. As a result, ANC and PNC will likely be H&H’s key growth segments, offsetting the competitive 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”.

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.

• Longfor Properties
• Tower Bersama Infrastructure