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In this briefing:
- Changliao (畅聊) AKA Paipai (派派) Pre-IPO Review – Self-Sufficient
- GEM Active Funds: Big Q1 Outperformance
- China – Not Out of the Woods by Any Means
- JD.com (JD): Cancels Delivery Man’s Basic Salary, Adapts to Growth of Commission Business
- Weekly Oil Views: Crude in a Leap of Faith to Fresh Five-Month Highs
1. Changliao (畅聊) AKA Paipai (派派) Pre-IPO Review – Self-Sufficient
Changliao Inc (CL HK) is looking to raise about US$100m in its upcoming IPO. The company just filed its draft prospectus with the HKEX last week.
Changliao is a fast-growing social networking entertainment platform. The business model of engaging and monetizing users through interactive games is interesting.
However, the need for an IPO is questionable since the company has a healthy net cash balance sheet and it had paid out dividends in the past two years. It can easily finance its growth through debt or operating cash flow.
Tencent is an investor in the firm, however, it had only invested RMB9m in the company in FY2016. There are no other notable investors despite several rounds of financing.
In this insight, we will look at the company’s business model, analyze its financial performance and operating metrics.
2. GEM Active Funds: Big Q1 Outperformance
Global Emerging Market funds made a strong start to 2019, with just over two-thirds of funds outperforming the benchmark, generating an average alpha above the IShares MSCI Emerging Markets Indx (ETF) (EEM US) of 1.3%.
In this report, we look at the performance of 180 global emerging market strategies over the first quarter of 2019 and analyse the countries, sectors and stocks that helped generate that outperformance. We also take a look at the longer-dated outperformance of active GEM funds.
3. China – Not Out of the Woods by Any Means
The Chinese onshore and offshore equity markets have been outstanding performers over Q1, due to; i) rising hopes of a trade settlement with the US; ii) expectations of easier monetary policy from the Fed in response to the weakness in the global economy partly emanating from China and iii) the increased representation of Chinese onshore debt and equity securities in the most widely followed global indices.
However, the Chinese authorities are both unwilling and unable to tackle the underlying causes of financial fragility in the local government and industrial sectors, by imposing a hard budget constraint that would trigger a series of potentially systemic crises. The inflows of cash from overseas are therefore merely helping Beijing to kick the proverbial can further down the road in the absence of significant structural reforms.
Chinese equities listed offshore ranked 11th cheapest out of 48 global markets at the end of March down from 5th at the start of January, according to the Ecstrat sector-adjusted valuation table, based on a median stock rather than a market cap weighted methodology. I remain underweight for structural reasons despite the very strong buying momentum from both domestic and foreign investors.
4. JD.com (JD): Cancels Delivery Man’s Basic Salary, Adapts to Growth of Commission Business
* JD cut delivery men’s salary by 25% last week.
* JD ever generated cash flows by accounts payable in direct sales, but cost control is necessary when the commission business grew faster than the direct sales business.
* We believe that the overwhelming majority of delivery men will stay with JD after the salary cut, as many small delivery companies went bankrupt in 2018.
* we believe JD will be able to control costs well and keep close-to-zero net margin in 2019.
5. Weekly Oil Views: Crude in a Leap of Faith to Fresh Five-Month Highs
Crude scored successive new five-month highs last week, with Brent closing above the key $70/barrel psychological mark on Friday.
Tight supply fundamentals remain supportive of crude prices. OPEC reduced its supply further in March, its 11 members that are bound by quotas swinging way beyond 100% compliance with their pledged cuts.
Meanwhile, signs of the US and China inching close to a trade deal and a strong US jobs report on Friday spurred a rush of funds into risk assets and crude went up with the rising tide.
But how far can it rise? Not much from its current levels, we say. It’s important to not forget the Trump factor. The US president loathes high oil prices. His tweets against OPEC may be proving the law of diminishing returns, but he has some other important and effective levers, and he won’t hesitate to use them.
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