Market Overview:

On 30 Jun, Hong Kong stocks markets weakened after a Chinese government report showed economic activity cooled this month amid resurgence in Covid-19 infections. Meanwhile, IPO stocks had mixed performance. Chinese bubble-tea chain Nayuki (2150 HK) slumped in its trading debut and closed at HKD17.12 (vs. its IPO offer price of HKD19.8), while, HutchMed (13 HK) closed at HKD60.3, which was 50% higher than its IPO offer price of HKD40.1. The Hang Seng Index was down 166pts to 28,827pts with a turnover of HKD140.2b. Macau recorded Jun gross gaming revenue of MOP6.54b (+810% YoY or-37.4% MoM). The MoM decline was mainly due to new Covid-19 cases emerging in China. Looking ahead, the situation is expected to improve given that the Macau government plans to allow quarantine-free inbound travel via Hong Kong.

China Macro

According to the National Bureau of Statistics, China’s official Purchasing Managers’ Index (PMI), a key gauge of manufacturing activities, edged down to 50.9 in June from last month’s 51, as chip and power supply shortages slowed the expansion of production. The result was better than consensus forecast of 50.80. Meanwhile, China’s official non-manufacturing PMI, which includes services and construction activities, fell to a weaker-than-expected 53.5 in June from 55.2 in May. The fall in non-manufacturing PMI was mainly due to the resurgence of COVID-19 in Guangdong and related tightening in social distancing rules.

Yongda Auto (3669 HK)

Yongda auto announced sale of 80% stake in its auto finance leasing operation for a consideration of RMB447m (at 1x P/B value). Market views this deal as positive give that the company would (1) reduce gearing-ratio in the balance sheet, which might result in lower interest rate in the future; (2) has potential non-organic growth via M&A thanks to abovementioned RMB447m cash flow. Meanwhile, this auto finance asset disposal might trigger a re-rate given the previous investors’ concerns on auto finance related asset, like Dongzheng and Yixin. Market expects Yongda auto’s new car margin to improve in 2Q21E on reduced retail price discount. The Porsche brand’s China market average discount declined 1.4ppt QoQ to 4.3% in May, while the BMW brand’s China market average discount declined 1.8ppt QoQ to 11.4% in May 2021.

Bud APAC (1876 HK)

According to National Bureau of Statistics, China beer production volume was up by 1.3% and down by 12.5% for April/May respectively. June might be slightly impacted by regional pandemic outbreaks. Market believes Bud APAC is able to outperform the industry with c.4% volume growth YoY in 2Q21E as premium beers led the way with robust growth, driven by line expansion. Owing to the favourable mix change, its ASP is expected to record a strong organic increase by mid-single digits. Though the recovery progress is slow, the South Korea market is improving as the government keeps relaxing the social distancing restrictions. The trend should be more visible in 2H21E due to a low base and a higher vaccination rate.

China East Edu (667 HK)

Its share price slumped to 52-week lowest level as market expects soft new student enrolment in 1H21E. Looking ahead, the company may face structural challenges from: (1) saturated market with premium pricing and focus on junior high graduates; (2) changing student demand for diplomas or shorter programs; (3) rising competition from public vocational schools with lower tuition fees and diplomas. Hence, the company plans to list these initiatives in order to boost revenue: (1) more new majors in existing brands and the launch of new brands; (2) increasing the coverage of programs with formal secondary education diploma; and (3) focusing more on three-year programs with better unit economics.

CH Modern Dairy (1117 HK)

On 28 June, CH Modern Dairy announced that its current CEO Nina Gao will retire and Executive Director SUN Yugang will be the new CEO on 1 Jul. During an analyst call, its management highlighted the following key things: (1) its 5-year plan to double the herd size and production volume (to 3.6m tonnes) by 2025E, and (2) the raw milk price grew by 13% YoY in 5M21 and will likely see double-digit YoY growth in 2021E (previous guidance: +6% YoY), faster than the feed cost increase. The recent surge in the imported cow price (c.RMB30k per head vs. fair value of c.RMB20k, as per management) has led CMD’s competitors to reduce their imports of dairy cows in order to speed up expansion; (3) the company is eyeing feed trading, beef cow and the expansion of its specialty milk businesses to enhance its revenue in the long term.

3SBio Inc (1530 HK)

3SBio recently suffered from selling pressure, caused by share reduction by substantial shareholders. On 25 Jun, 3SBio’s share price was down 16.7% after Hillhouse sold its stake in 3SBio (c.9%) completely. Its management indicated that Hillhouse’s share selling was unexpected and Hillhouse did not notify the company in advance. Its management reiterated its topline guidance of double-digit growth in 2021E. Apart from the strong momentum of Mandi, HER2 drug Saiputing is nicely ramping up with positive MoM sales growth, after the implementation of new NRDL in Mar 2021.