Daily Brief China: Tongcheng Travel Holdings , Li Auto , Baidu, Cathay Pacific Airways, Luckin Coffee, Air China Ltd (H), China Vanke , Xunfei Healthcare Technology and more

• The Hang Seng Index, HSCEI, and HS Tech rebals were announced on 16 Feb. Janaghan Jeyakumar, CFA had expected GDS out, Tongcheng Travel in on HSTECH, along with the…
• …deletion of Zhongsheng Group (881 HK) in HSCEI, with a low conviction replacement of Zijin Mining, which turned out to be an add of China Unicom Hong Kong (762 HK). 
• No changes to the main HSI Index, which means evolution is further delayed. Today was the day to recap the caps. Mar1 Flow estimates are included below for all three.

• The March rebalance of the HSI, HSCEI, HSTECH and HSIII indices will use today’s closing prices to cap the index constituent weights at 8%/12%. This will lead to large flows.
• Tencent (700 HK), Meituan (3690 HK) and Tongcheng Travel (780 HK) are the biggest buys while Alibaba (9988 HK), Li Auto (2015 HK),  HSBC (5 HK) are the biggest sells.
• The round-trip trade across all stocks across the four indices is estimated at HK$16.16bn (US$2.06bn).

• We expect Baidu to report C4Q23 revenue, GAAP op. profit and GAAP net income inline, (2.3%) and (4.5%) vs. consensus.
• The slight bottom-line miss was mainly attribute to the increased marketing costs related to user acquisition. Baidu cloud revenue is robust due to AI product stimulating demand. 
• We cut our target price to US$146 for the spendings related to the construction of future e-commerce business but maintain BUY for its cheap valuation.

• We publish a deep dive on historical margin management at Cathay Pacific following Bloomberg reports that Air China is considering raising its 29.99% stake.
• We see Cathay’s consistent underperformance of the global industry as due to structural disadvantages competing against lower cost competitors without the benefit of attractive joint ventures or M&A.
• Our deep dive comparing margin generation to ten major global peers highlights weak pricing power without sufficient offset from staff cost/other cost efficiencies as the key problem.

• Luckin Coffee reported 4Q23 revenue/non-GAAP NI in-line/(39.8%) vs. our estimate due to (1) extra winter subsidies; (2) rental cost from new stores; (3) more operating expenditures.
• We view the non-GAAP NPM decline to 5.1% in 4Q23 as temporary and outlook for sequential improvements in 1H24 from (1)ASP rebound from easing competition, (2)efficiency improvement in rental cost
• We think Luckin’s profitability outlook is intact and maintain BUY rating, but lower TP by US$2 to US$41 to factor in the rising cost.

• Speculations on Air China Ltd (753 HK) seeking control of Cathay Pacific (293 HK) reappeared recently. We think a change in CX’s ownership is just a matter of time.
• CX has been a more important profit contributor to Air China after the pandemic, and depends on pricing, Air China is expected to benefit from such acquisition.
• Both are trading on 0.5SD below their 5-year P/B average and we prefer CX in the short term, but Air China looks to be a better long-term choice. 

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.

• China Vanke

• In healthcare AI industry, the commercialization process is complex and burdened with challenges. Related products mainly plays an auxiliary role in medical scenarios, rather than a core support or rigid-demand. 
• The idea of creating corresponding solutions for C-end and B-end customers by FUNFEI is not inappropriate. However, both B-end and C-end businesses of FUNFEI have encountered varying degrees of problems.
• We’re not optimistic about XUNFEI’s profitability. The sluggish stock price performance after Airdoc’s listing indicates that the market/investors have not fully recognized healthcare AI enterprises, leading to low valuation.