Cachet's Insight 11/08/2020

Updated: Aug 13


Market outlook: Blue Moon Group Holdings Limited, Chinese detergent front runner raises fund in Hong Kong

Following on our house view last week, since the introduction of the "internal cycle" concept, some major, mass market consumer brands have emerged, including Nongfu Spring and Blue Moon. Both have submitted listing applications to the Hong Kong Stock Exchange. Blue Moon was founded in 1992, originally producing hand sanitizer and cleaning detergent. After years of growth, the brand now monopolizes the market and is a household name across Mainland China. According to the prospectus, 6.178 billion out of the 7 billion revenue recorded in 2019 are of Laundry & Detergents products, accounting for 87.6% of the total revenue. With this track record, it is easy to say Blue Moon has successfully grown to become the leading brand of household cleaning products in China.


Cachet’s View

Pricing of Blue Moon is not out yet, we are unable to determine attractiveness of the valuation. We are strong proponents of the national policy of "internal cycle", given China’s relative closed market and consumers’ stickiness to local brands. We are paying close attention to this company and may recommend investing for long-term after listing. Blue Moon has already dominated major sales channels in all provinces in China. Nearly 70% of its offline distributors are in third tier and lower-tier cities, with revenue from online sales channels in 2019 accounted for 47.2% of the company's total revenue. The e-commerce platform’s shopping festival sales volume was top of the chart, proving the company’s sales performance are extremely solid both online and offline. Major investors include Hillhouse Capital which holds nearly 10%. According to the Frost & Sullivan Report, China has one of the world's largest house cleaning markets, the market size will grow from 110.8 billion yuan in 2019 to 167.7 billion yuan in 2024, at a growth rate of more than 50%.


Market outlook: WeChat banned by the U.S.

After the United States blocked TikTok (Overseas) last week, it has continued to expand its "clean network" program against Chinese Tech companies this week U.S. President Trump claimed that the move aims at protecting the privacy of U.S. citizens and sensitive company information, and to prevent them from being hacked or transferred by China. Various analysts pointed out that Trump might issue executive order to prohibit U.S. individuals or companies from using WeChat to conduct transactions with Tencent (700 HK), and pressure Apple (AAPL US) and Google (GOOG US) mobile app stores to take the app off their shelves in the U.S. Impacted by the news, Tencent’s stock price fell 10% last Friday, with its market value evaporated by more than HK$500 billion.


Cachet’s View

We think the effect of WeChat’s ban on Tencent is quite minimal. WeChat currently has 1.2 billion monthly active users worldwide, the size is 3.5 times the total population of the United States, and has a relatively low domestic WeChat user base in the U.S. Most of them are Chinese students and Chinese immigrants for communications purposes with relatives and friends in China, and rarely for commercial purposes. Most importantly, the actual revenue of U.S. WeChat users contributes very little to Tencent's revenue. We believe the prohibition of WeChat and Tencent from conducting transactions within the U.S. would have minimal effect on Tencent's actual business. The majority of Tencent’s business growth still comes from its gaming and corporate services within China. Investors can pay attention to Tencent's upcoming interim results report in August and continue to focus on the long-term growth of the company's core business. We also noticed that the market does not seem to take account of Tencent’s strategic holdings in Tesla (TSLA US), JD (JD US), Pinduoduo (PDD US) and Meituan Dianping (3690 HK), as those share prices have not been affected. As our analysis team believes Tencent’s valuation this year is between HK$600-650, we believe that Tencent’s future drop offers a good entry. There seems a strong psychological resistance at around HK$500.


Market outlook: Politics plays a key role on market changes in Q3

China and the United States ’full-scale power play is ongoing and still escalating. 2020 saw most of the large-scale Chinese technology companies have used Hong Kong’s open financial system to raise USD funds. The Hang Seng Index (HSI) will adjust its component weight at the end of August, it is expected that more Chinese tech giants will be included as constituent stocks of the HSI, over 20% proportions of Hang Sang Index are contributed by those giant tech companies. Thus, the corresponding political blockade in the United States might further increase the volatility of the Hang Seng Index. Since the mainland A-share market is still relatively inactive, if funds are bearish on China, they will hold short positions in Hong Kong first.


Cachet’s View

We believe that there is not likely much upside in the third quarter, on the contrary, the market might continue to experience some correction. Hong Kong's local companies are affected by the epidemic. Most yielding assets and rent-collecting companies will seek lower valuations when the population flow is reduced. We believe it is still not the best time to buy LINK REIT (823 HK), China Gas (3 HK) and other assets and rent-collecting companies. On top of further tension between the two countries, these technology companies will also experience a direct impact on the stock prices in the immediate term, especially given the upcoming elections. In view of this, we believe investors who hold the above companies can consider holding Hang Seng Index put options, or Hang Seng Index inverse instruments appropriately, such as CSOP Hang Seng Index Daily (-1x) Inverse Product (7300 HK) as a short term hedge.


Investment idea

Although Tencent (700 HK) being targeted by the United States has brought negative market sentiment towards the firm in the short term, Tencent is still the world’s largest gaming company and has developed a powerful gaming channel, as well as a developed social media and payment ecosystem. There are only 1.5 million WeChat users in the United States, accounting for 0.13% of WeChat's total users. The revenue from US market is less than 2%. On top of that, Tencent's total overseas revenue is only 16.7 billion yuan, so even if Tencent completely loses its overseas business, it will only be a drop in the ocean with a total income of 377.3 billion yuan.

Even if the United States completely bans the use of and transactions on WeChat in the U.S., the impact on Tencent's social ecology will be extremely limited. Amid the intensifying Sino-US rivalry, China may also increase its support for Tencent's overseas business. Therefore, in general, we still firmly believe in Tencent’s long-term prospects. In addition to buying during market sell-off, investors can also consider the following short-term fixed-rate linked notes with a 3-month tenor where they can get the stocks with an 85% strike or a substantial 9% annualized coupon rate.


Product Type: Fixed Coupon Note

*prices indicative and subject to change


The above product can be regarded as a fixed-income derivative product that takes a bullish view on Tencent. If investors want to buy the underlying stocks for long-term investment directly, they can consider purchasing the Tencent + Hong Kong Stock Exchange related enhanced income notes.

Product Type: Bonus Enhanced Notes


Payment mechanism:

  • At maturity, if the worst of underlying closes at or above the strike level, Investors receive 100% of Investors nominal, plus the higher of the bonus coupon or the upside performance of the underlying from the initial level.

  • Otherwise, Investors receive delivery of the worser performing underlying at the strike level

  • Worst case is if worst of underlying falls to zero, in this case, investor will lose the notional invested


*prices indicative and subject to change Please contact our relationship managers if you are interested in the above products.




Disclaimer

This article is distributed by Cachet Group upon the express understanding that no information herein contained has been independently verified. Further, no representation or warranty expressed or implied is made nor is any responsibility of any kind accepted with respect to the completeness or accuracy of any information. Also, no representation or warranty is expressed or implied is made that such information in any respect as of any date or dates after those stated herein with respect to any matter concerning any statement made in this article. Cachet Group and its directors, employees, agents and consultants shall have no liability (including liability to any person by reason of negligence or negligent misstatement) for any statements, opinions, information or matter (express or implied) arising out of, contained in or derived from, or for any omissions from the article. All recipients of this article should make their own independent evaluations and should conduct their own investigation and analysis and should check the accuracy, reliability and completeness of the information and obtain independent and specific advice from appropriate professional advisers, as they deem necessary. Where this article summarizes the provisions of any other documents, that summary should not be relied upon and the relevant documentation must be referred to for its effect.


This article may contain forward-looking statements. All statements other than statements of historical fact are statements that could be forward-looking statements. You can identify these forward-looking statements through our use of words such as “may,”, “will,” “can,” “anticipate,” “assume,” “should,” “indicate,” “would,” “believe,” “contemplate,” “expect,” “seek,” “estimate,” “continue,” “plan,” “point to,” “project,” “predict,” “could,” “intend,” “target,” “potential” and other similar words and expressions of the future. These forward-looking statements are subject to risks and uncertainties that may use cause actual future experience and results to differ materially from those discussed in these forward-looking statements. Cachet Group does not undertake any obligation to release publicly any revisions to such forward-looking statement to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.


This material has not been reviewed by the Securities and Futures Commission (“SFC”) in Hong Kong.

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