Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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China’s hottest IPO in 2021 plunges 79% from its high
5 minutes to read
Peter Garnry
Chief Investment Strategist
Summary: Our China Consumer & Technology basket is bouncing back in August but underneath the average performance some companies such as Kuaishou Technology, which IPO'ed back in February in the largest global IPO since Uber, is down 15% today causing other technology stocks to decline in China. We update our view on Chinese technology companies and also touch on the consumer segment which we believe is the next growth frontier for Chinese equities.
As we wrote on Monday our China Consumer & Technology basket was the worst performing in July amid the government’s crackdown on its for-profit education industry and wider technology sector. While the basket has bounced back in the first week of August there is still internal bleeding going up with the most notable being Kuaishou Technology, a content community and social platform, down 15% today in Hong Kong trading taking the decline from the closing high to whopping 79%.
Kuaishou Technology was the biggest technology since Uber raising $5.4bn in its IPO back in early February and rose in only 7 trading days from its IPO price of HKD 115 to HKD 415 catapulting the company into being one of the most valuable Chinese technology companies. The company together with ByteDance (parent company behind TikTok) are both removing an app on their platform called Zynn without further reasons explained and recently many platforms in China have been required to remove content and information. This part of a bigger move by the government which wants to control how and what content is served on various social platforms in China.
The crackdown on technology platforms in China has caused foreign investors to reduce exposure to the Chinese technology sector and in general the impact from the ongoing crackdown is uncertain at this point as Alibaba earnings call earlier this week also hinted at. Kuaishou Technology has also likely been hit by restrictions on its shares have been lifted leaving many major shareholders that been with the company for a long time to cash out. The Chinese technology crackdown that is now in its 10th month is also zooming in on removing certain tax advantages for gaming companies as they are now wildly profitable, something that could hit Tencent profitability.
A couple of months ago we argued that the risk-reward ratio was favouring some of the large Chinese technology companies despite the crackdown as valuations were getting quite attractive. As long as we do not see material impact on growth and profitability, we will not change that view, so investors with the right risk profile could find opportunities in this segment. We have also said, and that is why our basket has both consumer and technology companies, that consumer companies in China will be more immune from regulation as their business model is not depended on user data and does not pose a challenge for the political system.
This week China announced that it will carry out policies to incentivize more people in China to do more physical exercising and be healthier. The Chinese sports manufacturer Anta Sports rose 4.7% on the news and in general we encourage investors to get exposure to the Chinese consumer industry (see our basket composition below) as it will most likely be a high growth industry with expanding valuation multiples over the coming decade.
| Name | Industry | Market Cap (USD mn.) | Sales growth (%) | EPS growth (%) | Diff to PT (%) | 5yr return |
| Alibaba Group Holding Ltd | E-commerce | 545,566 | 40.2 | 4.5 | 36.9 | 137.3 |
| Tencent Holdings Ltd | Gaming & social media | 541,903 | 27.4 | 24.1 | 67.0 | 140.9 |
| Kweichow Moutai Co Ltd | Beverages | 330,343 | 10.5 | 11.1 | 33.4 | 492.5 |
| Meituan | E-commerce | 166,442 | 42.0 | NA | 71.4 | NA |
| BYD Co Ltd | Car manufacturer (EV & ICE) | 120,531 | 51.9 | 376.8 | -0.8 | 463.2 |
| Pinduoduo Inc | E-commerce | 111,894 | 133.7 | 52.0 | 82.1 | NA |
| JD.com Inc | E-commerce | 111,312 | 33.3 | 112.9 | 38.9 | 226.8 |
| Hangzhou Hikvision Digital Technology Co Ltd | Video surveillance | 87,335 | 26.1 | 17.1 | 23.1 | 292.8 |
| Xiaomi Corp | Smartphone manufacturer | 84,832 | 28.9 | -4.0 | 28.5 | NA |
| China Tourism Group Duty Free Corp Ltd | Duty free goods | 77,062 | 47.4 | 290.2 | 39.9 | 1,087.4 |
| Foshan Haitian Flavouring & Food Co Ltd | Food seasoning manufacturer | 76,515 | 19.2 | 23.1 | 29.6 | 524.6 |
| Midea Group Co Ltd | Household appliances | 76,285 | 18.4 | 17.8 | 43.5 | 182.9 |
| NIO Inc | Car manufacturer (EV) | 73,881 | 202.3 | 37.9 | 43.5 | NA |
| WuXi AppTec Co Ltd | Drug manufacturing technology | 72,726 | 37.7 | 59.0 | 9.6 | NA |
| NetEase Inc | Gaming | 62,415 | 24.6 | -17.4 | 43.5 | 148.4 |
| ANTA Sports Products Ltd | Sports apparel | 61,596 | 4.7 | -1.6 | 12.3 | 936.8 |
| Nongfu Spring Co Ltd | Beverages | 60,737 | -4.8 | 7.5 | 10.4 | NA |
| Baidu Inc | Online search & advertising | 57,928 | 6.5 | 30.9 | 80.6 | -2.1 |
| Kuaishou Technology | Social media | 47,662 | 50.2 | NA | 185.5 | NA |
| Luxshare Precision Industry Co Ltd | Connectivity manufacturer | 45,115 | 38.6 | 34.7 | 23.4 | 637.1 |
| Gree Electric Appliances Inc of Zhuhai | Air conditioners | 44,805 | 1.5 | 7.0 | 51.1 | 178.9 |
| Will Semiconductor Co Ltd Shanghai | Semiconductors & image sensory | 43,166 | 50.1 | 228.4 | 19.8 | NA |
| Semiconductor Manufacturing International Corp | Semiconductor foundry | 41,555 | 28.9 | 124.9 | -7.6 | 329.2 |
| XPeng Inc | Car manufacturer (EV) | 37,295 | 216.9 | NA | 18.0 | NA |
| Haier Smart Home Co Ltd | Household appliances | 37,221 | 4.5 | 134.8 | 36.7 | NA |
| Foxconn Industrial Internet Co Ltd | Networking equipment | 36,439 | 10.2 | 7.0 | 48.6 | NA |
| Sunny Optical Technology Group Co Ltd | Optical instruments | 35,175 | 0.4 | 19.4 | -2.7 | 685.9 |
| Shenzhou International Group Holdings Ltd | Textile manufacturing | 34,889 | 1.6 | 0.1 | 11.3 | 382.5 |
| SAIC Motor Corp Ltd | Car manufacturer (EV & ICE) | 34,449 | 10.2 | 42.2 | 31.0 | 5.7 |
| JD Health International Inc | Online healthcare platform | 30,954 | 78.8 | NA | 94.7 | NA |
| BOE Technology Group Co Ltd | Display panels manufacturer | 30,866 | 40.4 | 793.5 | NA | 109.6 |
| ZTE Corp | 5G & telecommunication | 27,155 | 18.0 | 125.8 | 3.9 | 180.3 |
| Yum China Holdings Inc | Restaurant chain | 26,300 | 20.1 | 42.1 | 16.4 | NA |
| KE Holdings Inc | Housing transaction platform | 24,902 | 86.9 | NA | 234.2 | NA |
| Haidilao International Holding Ltd | Restaurant chain | 19,619 | 7.8 | -91.4 | 62.0 | NA |
| Tencent Music Entertainment Group | Music streaming | 17,890 | 17.9 | 2.6 | 98.8 | NA |
| Focus Media Information Technology Co Ltd | Offline advertising solutions | 16,925 | 20.0 | 238.9 | 92.0 | -11.5 |
| Trip.com Group Ltd | Online travel agency | 15,414 | -45.1 | NA | 83.8 | -43.8 |
| Oppein Home Group Inc | Household furniture manufacturer | 13,483 | 30.2 | 43.9 | 23.1 | NA |
| Topsports International Holdings Ltd | Sports retailer | 9,266 | 6.9 | 4.2 | 26.2 | NA |
| Aggregate / median | 3,389,844 | 25.4 | 27.5 | 36.7 | 204.9 |
Source: Bloomberg and Saxo Group
* Sales and EPS growth is measured on 12-month trailing figures, Diff to PT is the difference between consensus price target and the current price in %
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