Check out the key picks for this week by SaxoStrats team
- EURCHF at 1.1282 should be on everyone’s radar in the event of a Eurozone sell-off which should prompt a breakthrough of the 1.10 level. The flight to safety might soon overpower technical and fundamentals and support a long EURCHF position.
- EM Contagion risk is spreading with the turmoil in Argentina and Turkey finding resonance as a wider EM theme (see 1-month performance of the main EM currencies). The likely addition of US tariffs on Chinese goods worth $200 bn might provide additional fuel to the EM rout.
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I. Upcoming IPO: NIO
- NIO, often called “China Tesla”, is expected to price its IPO on September 11 at a price range of $6.25-8.25 with a mid-price of $ 7.25 and the first day of trading is expected on September 12.
- The electric vehicle and battery industry is one of the hottest investment themes today with massive government backing meant to kickstart a revolution in transportation away from the internal combustion engine (ICE).
- NIO is likely one of the most aggressive IPOs seen in the US over the past 10 years. Based on the expected shares outstanding immediately after the IPO and using the mid-price, the estimated market value is $7.33bn and that’s for a car company with less than 2,000 deliveries so while the offering represents an opportunity to invest in this emerging new industry, it comes with great risks.
- Tesla is the only other publicly-listed pure BEV manufacturer in the world so it’s the only sensible yardstick for any comparison. The only meaningful metric we can compare to Tesla is the enterprise value to total assets as any measure of valuation. Tesla’s EV/Total assets ratio is 2.21x compared to NIO’s of 6.46x. So despite no revenue or meaningful production volume, the company wants the market to value its assets to Tesla's at a factor of three.
- The valuation and financial numbers warrant a very severe risk disclaimer. It will be exciting to see whether the company can successfully IPO without any significant headwinds prior to and after the offering. This might very well be the greatest test of equity market froth in this economic cycle.
- Trade NIO from September 12th under ticker NIO:xnys
II. Upcoming IPO: Meituan-Dianping
- Tencent-backed Meituan-Dianping, a Beijing-based technology startup and China’s answer to Groupon, Uber Eats, and Yelp all rolled into one, has filed for a Hong Kong IPO. Full details of the listing are yet to be released, but Meituan are said to be seeking to raise at least $4 billion, according to the China Securities Journal.
- Meituan is the worlds fourth most-valuable tech startup, according to Bloomberg, and has been growing at a rapid pace, offering hotel, travel, shopping, entertainment, and food delivery services to China’s ever-increasing consumer demographic. Meituan connects offline merchants to online consumers through a smartphone app/social platform providing on-demand access to a vast range of products and services from manicures, massages, and home delivery meals to movie tickets and bike hire.
- Meituan has grown at a startling pace and now has more than 300mn annual transacting users. Revenue has also grown rapidly increasing to 33.9bn yuan ($5.2bn) in 2017, up 161% from a year earlier. However, last year the company still posted a loss of 18.99bn yuan according to the prospectus, although after adjusting for changes in the value of convertible redeemable preference shares, share-based compensation expenses and other items adjusted net loss was recorded as 2.85bn yuan.
- Whilst there is significant upside potential for Meituan, the industry is highly competitive and will not come without challenges. The IPO will provide funds for Meituan to compete within the growing Chinese e-commerce industry, allowing them to grow user numbers at the same rapid pace and sustain growth, which is a necessity for Meituan to drive eventual long term profitabilty through economies of scale as revenue growth will then surpass operating costs.
- Chinese equities are now the cheapest relative to US equities since 2015. Technically this represents a good starting point for increasing exposure to Chinese equities if historical relationships replay themselves. The relative valuation is now attractive enough that there is limited downside risk from valuation.
- The bar is set so low that the slightest upside surprise on trade will likely push Chinese/EM equities higher by 5%.
- And in particular the consumer related stocks with very little impact from trade war/export exposure. The only stable part of aggregate demand has been consumption so positioning towards stocks that benefit from the long term demographic and growing middle class are more likely to benefit from rerating’s across Chinese equities.
- Shenzhou International (02313:xhkg), Foshan Haitan (603288:xssc), Kweichow Moutai (600519:xssc), China New higher education (02001:xhkg), Hengan International (01044:xhkg), Inner Mongolia (03948:xhkg), Mengniu Dairy (02319:xhkg) are all stocks to watch in this space.
- The rise of the spread on Italian government bonds might spill over to the rest of the European periphery so we might see a rise in yields of Spanish, Portuguese and Greek debt vs the Bund yield and US T-notes might also catch a bid in a sell-off scenario of the European periphery.
- Trade Government Bonds Futures:
Euro-Btp (FBTP), Short-Term-Euro-BTP (FBTS), Euro-Bono (FBON), Euro-Bund (FGBL), Ultra 10-Year U.S. Treasury Note (TN)
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Weekly Most Traded A-shares*
|Stock Code||Stock Name||Saxo Code||Average Daily |
RMB (30 Aug - 5 Sep)
|000063 CH Equity||ZTE CORP-A||000063:xsec||4,084,413,742|
|601318 CH Equity||PING AN INSURA-A||601318:xssc||3,132,402,854|
|000651 CH Equity||GREE ELECTRIC-A||000651:xsec||2,385,225,312|
|600519 CH Equity||KWEICHOW MOUTA-A||600519:xssc||2,317,278,426|
|600887 CH Equity||INNER MONG YIL-A||600887:xssc||1,998,427,022|
|000725 CH Equity||BOE TECHNOLOGY-A||000725:xsec||1,373,822,700|
|600536 CH Equity||CHINA NATIONAL-A||600536:xssc||1,347,978,662|
|000858 CH Equity||WULIANGYE YIBI-A||000858:xsec||1,313,676,608|
|002230 CH Equity||IFLYTEK CO LTD-A||002230:xsec||1,297,556,963|
|600196 CH Equity||SHANGHAI FOSUN-A||600196:xssc||1,194,358,578|