In today’s briefing:
- HK Connect SOUTHBOUND Flows (To 17 May 2024); Banks, Banks, Banks, Tencent, and Big SOEs
- Merger Arb Mondays (20 May) – L’Occitane, China TCM, SciClone, Malaysia Airports, I’rom, Hollysys
- Hang Seng Index (HSI) Rebalance: BYD Electronics Added; Country Garden Services Deleted
- HSCEI Index Rebalance: Zijin Mining In; Xinyi Solar Out; SenseTime Survives (For Now)
- HSTECH Index Rebalance: Float & Capping Changes Result in 8% Turnover & US$2.5bn Round-Trip Trade
- A/H Premium Tracker (To 17 May 2024): Hs Rally Huge Vs As, Again. Avg A/H Premium Lowest in 4yrs
- Weekly Deals Digest (19 May) – ESR Group, L’Occitane, CPMC, Malaysia Airports, I’Rom, Modec
- Lalatech Holdings: FCF Growth Accelerated, Margins Improved, Fair Value May Be North of $10B
- Pinduoduo（PDD US): Growth Stock Priced as Value Play
- BYD Electronic (285 HK): Will HSI Inclusion Be a Kiss of Death?
HK Connect SOUTHBOUND Flows (To 17 May 2024); Banks, Banks, Banks, Tencent, and Big SOEs
- SOUTHBOUND was again a net buyer for HK$18.6bn on strong two-way volumes. The top three net buys of the week were SOE banks. Some may be Central Huijin.
- Some of this may be driven by the dividend w/h tax cancellation on H divs and by significant H-share discounts, but high-div CNOOC was the biggest net sell.
- No end to the inflows, and HK valuations are not at a place where they would hamper continued flows. Alibaba making HK a Primary will spur more inflows over time.
Merger Arb Mondays (20 May) – L’Occitane, China TCM, SciClone, Malaysia Airports, I’rom, Hollysys
- We summarise the latest spreads and newsflow of merger arb situations we cover across Hong Kong, Australia, New Zealand, Singapore, Japan, Indonesia, Malaysia, Philippines, Thailand and Chinese ADRs.
- Highest spreads: Yichang HEC Changjiang Pharma (1558 HK), Hollysys Automation Technologies (HOLI US), QV Equities Ltd (QVE AU), Ansarada Group Ltd (AND AU), Malaysia Airports Holdings (MAHB MK).
- Lowest spreads: Chilled & Frozen Logistics Holdings (9099 JP), Mma Offshore (MRM AU), Great Eastern Holdings (GE SP), Mimasu Semiconductor Industry (8155 JP), Boral Ltd (BLD AU).
Hang Seng Index (HSI) Rebalance: BYD Electronics Added; Country Garden Services Deleted
- BYD Electronics (285 HK) will be added to the Hang Seng Index (HSI INDEX) after market close on 7 June while Country Garden Services (6098 HK) will be deleted.
- Estimated one-way turnover is 1.9% and the estimated round-trip trade is HK$8.46bn (US$1.08bn) with over 1x ADV to trade in the add and delete.
- We remain at 82 index constituents and the road to 100 index members looks to be a long and winding one.
HSCEI Index Rebalance: Zijin Mining In; Xinyi Solar Out; SenseTime Survives (For Now)
- Zijin Mining Group Co Ltd H (2899 HK) will replace Xinyi Solar Holdings (968 HK) in the Hang Seng China Enterprises Index (HSCEI INDEX) after the close on 7 June.
- An increase in the FAF for SenseTime Group (20 HK) results in the stock avoiding deletion at the June rebalance.
- Estimated one-way turnover at the rebalance is 2.9% resulting in a round-trip trade of HK$3.8bn with over 1x ADV to trade on the add and delete.
HSTECH Index Rebalance: Float & Capping Changes Result in 8% Turnover & US$2.5bn Round-Trip Trade
- As expected, there are no constituent changes for the Hang Seng TECH Index (HSTECH INDEX) in June. However, there are float and capping changes.
- Estimated one-way turnover is 8% leading to a round-trip trade of HK$19.2bn (US$2.46bn). There is over 3x ADV to buy in Li Auto (2015 HK).
- Short interest is quite elevated on a lot of stocks both in terms of days of ADV and in terms of free float.
A/H Premium Tracker (To 17 May 2024): Hs Rally Huge Vs As, Again. Avg A/H Premium Lowest in 4yrs
- The New/Better A-H Premium Tracker has tables, charts, measures galore to track A/H premium positioning, southbound and northbound positioning/volatility in pairs over time, etc.
- SOUTHBOUND’s buy streak was interrupted again this past week, but they still net bought, as did NORTHBOUND. HK stocks continued their rise with liquid Hs outperforming their As by 3.8%.
- There were some BIG moves the past two weeks and Average AH Premia are now the lowest in nearly four years vs near 5yr wides less than 12 weeks ago.
Weekly Deals Digest (19 May) – ESR Group, L’Occitane, CPMC, Malaysia Airports, I’Rom, Modec
- A weekly summary of key developments across ECM and Event-Driven names tracked by us across Hong Kong, Australia, New Zealand, Singapore, Japan, Indonesia, Malaysia, Thailand, Korea, India and Chinese ADRs.
- ECM developments: Modec Inc (6269 JP)‘s US$535 million secondary offering.
- Event-Driven developments: ESR Group (1821 HK), L’Occitane (973 HK), CPMC Holdings (906 HK), Malaysia Airports Holdings (MAHB MK), I’Rom Group (2372 JP), Great Eastern Holdings (GE SP).
Lalatech Holdings: FCF Growth Accelerated, Margins Improved, Fair Value May Be North of $10B
- Lalatech Holdings, a technology based global logistics company, has updated its application for Hong Kong IPO and disclosed financial results for 2023.
- Lalatech Holdings is aiming to raise up to $1B and the company’s IPO looks imminent in the coming months as cash flow growth accelerated, while margins and profitability improved.
- My fair valuation of Lalatech Holdings is close to $10B and investors should buy into upcoming IPO given the company’s substantial scale, massive network effects and operating efficiency.
Pinduoduo（PDD US): Growth Stock Priced as Value Play
- We are more bullish on PDD’s 1Q24 results on the back of better monetization of domestic e-commerce business and fast and quality growth of TEMU.
- We now expect 1Q24 adjusted earnings to almost double yoy to RMB20 billion, much higher than our previous estimate of 50% yoy growth and exceeding consensus by ~30%.
- Moreover, we believe earnings growth will be steady throughout 2024 instead of slowing down as we thought. 10x FY24 earnings against 80% yoy growth lead us to see 50%+ upside.
BYD Electronic (285 HK): Will HSI Inclusion Be a Kiss of Death?
- While historically many new inclusions to the HSI have performed disappointingly after their addition, BYD Electronic (285 HK) looks unlikely to follow such a pattern.
- Its share price has underperformed YTD, absolute PER valuations are not stretched and forward P/B multiple is only at the historical average level. These provide a good buffer.
- Its industry and business are not at structural and cyclical peaks, with further growth prospects from AI-enhanced products and solutions. A 33% surge in 1Q24 earnings also adds comfort.
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