Brief Hong Kong: Sea Ltd (SE US): The Bear Case – A One-Hit Wonder? and more

In this briefing:

1. Sea Ltd (SE US): The Bear Case – A One-Hit Wonder?
2. Politics, Uncertainty and Bad Policy: The Third Wheels of Profits and the Investment Cycle
3. Quick Read of 2019 Government Work Report – Bulls and Bears
4. Shanghai/Shenzhen Connect – $8.4 Bn Inflows in February (Kweichow Moutai, Aier Eye, Luxshare)

1. Sea Ltd (SE US): The Bear Case – A One-Hit Wonder?

Despite burning through $700mn in cash in 2018, investors decided to give another $1.3bn to Sea Ltd (SE US) . We believe investors should treat Sea Ltd with caution for the following reasons:

A significant slowdown in e-commerce

Is the gaming division a one-hit wonder?

Expecting another 800mn cash burn into 2019

Consensus has priced in further upgrades while cash flow metrics worst in the sector

NB. Our team has taken both sides of the Sea Ltd investment case as we think this makes for better decision making and encourages unique thinking within our team. We strongly recommend that investors read my colleague Arun’s positive notes on the company listed below, if you have not already done so.

Sea Ltd (SE US): Placing Price Leaves Money on the Table

Sea Ltd (SE US): Placement a Good Opportunity to Enter an Attractive Story

2. Politics, Uncertainty and Bad Policy: The Third Wheels of Profits and the Investment Cycle

Our positive view of the Asian region in 2018 was not reflected in stock market performance. But now is not the time to discard fundamentals and fundamental analysis. Unlike the US, the Asian region is in the early stages of a profit upcycle. As we have argued on many occasions, that is the building block required to kick start the investment cycle. But theoretical explanations of the growth process aside, is there any empirical support for the argument that profits and investment, and therefore growth, are related? We would answer in the affirmative and, in the following report, we try to show how the process works and where Asia stands on two of our Austrian Stress Indicators (ASIs). Market volatility aside, the conditions for good growth gains are firmly in place in most of the region.

3. Quick Read of 2019 Government Work Report – Bulls and Bears

The Premier Li Keqiang had just conducted an annual Government Work Report in the two session conference (两会) in Beijing this morning. In this insight, we will briefly walk through key points of his report and identify bulls and bears in the market.

While the theme of cost reduction benefits manufacturing companies, it will negative for some infrastructure service providers, such as telecom companies.

The full text in Chinese can be accessed here.

4. Shanghai/Shenzhen Connect – $8.4 Bn Inflows in February (Kweichow Moutai, Aier Eye, Luxshare)

In our Discover SZ/SH Connect series, we aim to help our investors understand the flow of northbound trades via the Shanghai Connect and Shenzhen Connect, as analyzed by our proprietary data engine. We will discuss the stocks that experienced the most inflow and outflow by offshore investors in the past seven days.

We split the stocks eligible for the northbound trade into three groups: those with a market capitalization of above USD 5 billion, and those with a market capitalization between USD 1 billion and USD 5 billion.

We note that offshore investors were buying all GICS sectors, and had a strong preference for Industrials, Consumer Staples, Consumer Discretionary, and Financials names. We estimate that total inflow into the A-share market via northbound trade amounted to USD 8.4 bn in February.