Cachet's Insight 15/07/2020

Market Observation: Microport’s Hundred Billion Capitalization

Microport Scientific Corp (853.HK) is a leading developer, manufacturer, and marketer of medical devices in China. Currently, the company's revenue mainly comes from cardiovascular intervention products, orthopedic medical devices and heart rhythm management, and its profits mainly come from Cardiovascular intervention products business. Market value of Microport exceeds HK$70 billion. Earlier this year, Microport stated that it was considering spinning off its subsidiary, MicroPort CardioFlow, which valuation is close to HK$10 billion. Microport focuses on R&D, and R&D expenses increase year by year, making the company's products extremely competitive.

Cachet’s View

With the rise of the domestic alternative concept under the China-US trade war, domestic medical devices quickly seized market share with a cheap and high-quality strategy, while MicroPort invested more in R&D and mergers and acquisitions, and took the high-end product route. Gaoling Capital has invested approximately HK$1.5 billion in this year, to show its continuous optimistic about the company's fundamentals. In the short term, the financial data of MicroPort is hard to be surprised. At present, it can only rely on cardiovascular intervention products to support the development of the group's business. However, in the long run, with the advancement of medical technology, the entire domestic high-speed circuit is replaced. The medical device segment will face a long period of golden growth, so MicroPort with a PE ratio of more than 200 times is still popular among capital, and it has risen sharply. With such a high valuation, long-term investors need to stand on the shoulders of giants and have enough faith to invest at current price.

Market Outlook: High Yield Bond of Chinese Property Developers are still popular among the bond market

The scale of Asian dollar bond issuance reached US$11.2 billion this week, higher than the previous week’s US$2 billion. Many issuers, mainly Chinese companies, issued bonds in the offshore market. Several Chinese developers issued bonds, including Kaisa Group (1638.HK), Modern Land (1107.HK) and Sunac China (1918.HK). Some deals enjoyed strong investor demand. Among them, Greentown China (3900.HK) 300 million US dollar bonds have been subscribed for more than 3 billion U.S. dollars, and Kaisa Group (1638.HK) 400 million U.S. dollar notes have been oversubscribed more than five times.

Greentown China (3900.HK) related bonds

Cachet’s View

In the first half of 2020, the market continues to heat up, and the demolition of housing companies accelerates. The monthly sales of the top 100 housing companies increased by 13.4% year-on-year. The overall sales recovery of the top 100 housing companies was better than expected, and the full-caliber performance scale in the second quarter was higher than the same period last year. Supported by strong sales data, the market's risk appetite for high-interest-bearing bonds in the Chinese property market has increased. If the company has good liquidity, it can be easily financed. Investor can select some of the top 50 real estate companies with investment ratings of BB or above and select some stable and well-established companies in the market, such as Greentown China (3900.HK) and Sunac China (1918.HK). If it is a B-level company, investors should pay more attention to whether the company has a plan to reduce debt in the future.

Market Outlook: Greater China stock market performance

Recently, the A-share index has reached a record high, and the volume of transactions has also increased significantly. Various signs indicate that A-shares may have entered a new round of bull market. On the one hand, the mainland has achieved excellent control of the 2019-COVID, and various economic data have been steadily improving. On the other hand, the world has released a lot of liquidity. Global funds favor China's high-quality assets. Inflows of A shares through Shanghai-Shenzhen-Hong Kong Stock Connect, makes Hong Kong stocks and Hong Kong dollars get support. Hong Kong dollar exchange rate has been at a strong level of 7.75 for a long time, and the average daily turnover of Hong Kong stocks is at a new high of nearly 200 billion.

Cachet’s View

Looking at the sectors rotation of the market, we strong believe that a bull market is brewing. Although a lot of capitals are driving the development of the market, they did not bought irrationality. Capitals are chasing various high-quality strong stocks, such as Guizhou Moutai (600519.CH), Tencent Holdings (0700.HK) and other blue chips. In the short term, some strong stocks are showing signs of overbought, and there may be a drawback, but in the long term, we still firmly believe that quality companies in the Greater China region will become one of the core holdings of the future portfolio.

Product of The Week

As of today, over 400 brands have joined an advertising boycott against Facebook over a lack of comprehensive policy that appropriately deals with hate speech on its platform. The list of brands includes major advertisers such as Starbucks, Coca-Cola, Unilever, Microsoft and Ford. Most recently, Facebook has been hit with complaints alleging widespread discrimination against Black Workers. Facebook CEO, Mark Zuckerberg, and COO, Sheryl Sandberg, are scheduled to meet at least 3 civil rights groups next week to try to come to an understanding on how it can improve its policies. Meanwhile, volatility on Facebook stock has risen as it recovered over 9% last week after falling 12% from last month’s highs. Perhaps investors are looking past the advertising boycotts and holding a positive view on the stock. At the same time, the advertising boycott on Facebook could drive business over to its competitors and bring increased revenues and profitability for those names.

Today, we provide 2 routes to market on this theme:

  1. The increased volatility on Facebook can be harvested via an FCN suitable for a range trading view.

  2. Gain exposure to a basket of Facebook’s advertising competitors via a OTM strike BEN providing a buffer on strike suitable for a range trading to more bullish view.

FCN on Facebook, Microsoft and Amazon

An FCN on a mega-cap tech basket consisting of Facebook, gives a 25.50% buffer on strike, yielding an 8% p.a. coupon in 6-month tenor.

*Please noted that product prices are indicative only subject to refresh before trade, the prices change subject to market conditions.

OTM strike BEN on Facebook’s advertising Competitors

With a buffer of 27% on strike and yielding an 8% flat coupon if maturity conditions are met in 6 months. The potential coupon received at maturity is FLAT not p.a. For example, if at maturity Worst underlying is above strike level, at least an 8% flat coupon is received and is equivalent to 16% returns p.a.

*Please noted that product prices are indicative only subject to refresh before trade, the prices change subject to market conditions.

If you are interested in the above products, please free to contact our team to learn more.

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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.

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