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Here are some stock pitches for investment banking interviews only. They are not updated and should not be relied upon to make an investment decision.

Alibaba Group (NYSE: BABA / SEHK: 9988)

  • Largest technology company in China with competitive moat in three core platforms – finance/payments (including Ant Financial/Alipay), e-Commerce (Taobao TMall Alibaba) and Cloud
  • Market leader in cloud in China
    • Huge anchor in self-serving for cloud, where infrastructure is tested every year in marquee Singles Day shopping event (November 11)
      • Alibaba Cloud provided a scalable, reliable and secure public cloud infrastructure that handled single day gross merchandise value of RMB268 billion (US$38.4 billion) on 11.11 – multiples of what was achieved on Cyber Monday/Black Friday
      • Processed 544,000 orders per second at peak and 970 petabytes of data without disruption for the sales event
  • 824 million mobile monthly active users
  • 711 million active annual customers
  • Has first in class logistics channel
    • Majority stakeholder in Cainiao logistics services
  • Large venture capital provider for nascent Chinese tech with strong investment returns
  • Major player in entertainment industry and digital media in China
    • Alibaba Pictures responsible for many highest grossing films in China

Financials

  • EBITA of US$7.3 billion
  • Strong free cash flow generation of RMB78 billion or US$11bn
    • This is not a typo! They have an immense amount of interest income/income from equity associates owing to its market leadership as a lender (which is below the EBITDA line)
  • 38% revenue growth in 2019
    • 38% core e-commerce revenue growth
    • 62% cloud computing revenue growth

Valuation and Total Return

  • Trading at 26x EV/2020 EBITDA and 30x Price/Earnings
    • High growth and strong free cash flow – estimate 15x EV/EBITDA by 2022
  • Low debt
  • In theory should be trading partially as a multiple to sales with a sum-of-the-parts valuation on the back of a new cloud division
    • Cloud quarterly revenue was RMB10 billion in 4Q2019

Catalysts

  • Market leadership and advanced technology for serving huge available markets
    • Financial technology can allow Alibaba to supplant major retail and commercial banks as a lending platform
      • Big data and default rates are one possibility
    • Total available market for cloud in China is massive and Alibaba is the runaway market leader
  • Alibaba is one of the largest and most important Chinese companies but by virtue of having historically listed in New York before a Hong Kong IPO in 2019 is not listed on any major Chinese indices
    • When they do become an index constituent, institutional buyers will be able to hold more Alibaba stock
    • This is especially true for benchmark hugging mutual funds
      • Applicable for both Chinese domestic funds as well as global institutional investors as China will continue to make up a growing piece of the world index pie
  • Alibaba is currently not investable for retail Mainland Chinese buyers (to purchase Hong Kong listed stocks) as it is not a stock connect participant
    • Demand will rise once this is realized
  • Alibaba trades much lower on a multiple basis versus U.S. technology peers
    • Either U.S. technology will rerate down or Alibaba will experience strong multiple expansion
      • Additionally, they have a huge addressable market across multiple industries including cloud and financial technology
  • Plans to pursue similar platform building in developing countries through repeatability of success in China
    • Lazada is the leading e-commerce platform in Southeast Asia

ANTA Sports Products Limited (SEHK: 2020)

  • The Chinese Nike, ANTA owns FILA (yes FILA is Chinese now), FILA KIDS, KINGKOW, KOLON Sport and various other brands
    • Brand representatives include Klay Thompson (Golden State Warriors)
      • Increasing brand recognition in China and globally – previously was a mass market or lower market brand taking advantage of a rapidly growing consumer base
      • Now plays in both luxury and mass market niches that can continue to target rural China and developing markets
        • Acquisition of FILA allows for new distribution channel for FILA in Chinese market (similar to Volvo / Geely)
        • Cross-branding with Marvel and brand ambassadors to increase brand awareness
        • Official partner of the Beijing 2022 Olympic Winter Games
  • Multi-channel distribution on street stores, shop-in-shop, outlets and large presence online
    • Active on Tmall, JD and Vipshop
  • Industry cluster in Fujian spearheads strong R&D strategy and efficient supply chain
  • Chip Wilson (Lululemon founder) has substantial equity stake
  • Major equity investment in Amer Sports
    • Arc’teryx

Financials

  • Analyst consensus estimates of RMB36 billion in revenue and RMB 10 billion in EBITDA for 2020
    • Strong operating margin of 29%
    • Continues to benefit from economies of scale
  • Mid- to high teens sales growth for corporate and 30% growth for FILA
  • Strong free cash flow
  • Consistently enjoys return on equity of 30% or greater

Investment Thesis

  • Growing consumer market domestically in China and starting to gain relevant brand power
    • Chinese GDP growth of 6% per year with shift towards domestic consumption
      • Total consumer goods retail sales in China was RMB20 trillion in 1H2019
      • Nationalist sentiment rising will pivot consumer tastes domestically (negative for Nike and Under Armour)
    • Sport and athleisure / leisure wear becoming more relevant
    • Lifestyle trends are focused on fitness with various reinforcement mediums (Douyin/Tiktok, Weibo)
  • Well positioned to sell to multiple market segments in developing world

Valuation and Total Return

  • Enterprise value and Market capitalization of approx. RMB190 billion (net cash position)
    • Excellent financial position with cash exceeding cheap bank debt and ample liquidity
    • Trades at 16x forward EBITDA and 23x forward earnings but on the back of very strong growth and large addressable market
      • Supported by very high return on equity and operating margin
      • Annual revenue growth of 25% expected for 2020
  • Often compared to Xtep and Li Ning but only Li Ning has a similar return on capital invested/return on equity (minimal net debt for both)
    • Has scale advantage from a cost perspective but Li Ning growth is greater given smaller base
  • Pays dividend of 1.1%
  • Trades cheaply versus Li Ning and global peers Nike, Under Armour, Lululemon, and in line with Adidas and Puma
  • Trades at a premium to Xtep and 361 Degrees who are struggling in Chinese domestic market

China East Education Holdings (SEHK 0667)

  • Provides vocational training
    • As of 1H19, 168 schools operated with 133,000 average number of students enrolled
  • Primary segments are Culinary Arts, Information Technology and Auto Services
    • All are relevant secondary disciplines in academic focused China and beneficial for gainful employment
  • Headquartered in Hefei, Anhui

Valuation and Total Return

  • EV of RMB31 billion but market cap of RMB36 billion owing to large net cash balance
  • Trading at 7x sales of RMB4.5 billion with expected 22% growth for 2020
    • Tuition is tailored to be affordable (usually max out around 70,000 RMB)
      • Focus is shifting from short term courses to more lucrative but cheaper per time unit long term courses
  • Trading at 17x EBITDA or 11x 2021 EBITDA
  • 2021 P/E of 24x
  • Should be caution as still not widely held by institutional investors (9% ownership)
    • Majority controlled by cofounders
    • Matthews Asia is the largest institutional owner of the stock

Investment Thesis

  • Sets up Chinese workforce for large shift to domestic consumer spending and a growing tertiary industry from primary (resource extraction) and secondary (manufacturing)
  • In-demand trades allow for many Chinese to find middle to high paying jobs in services
  • Addressable market for vocational training will rise as incomes rise and households shift from savings to consumption
  • Government policy will likely be stimulative, further pushing industry and supporting employment

China Merchants Bank SHSE: 600036 SEHK: 3968

  • Major wholesale and retail bank that operates in Greater China and internationally with 80,000 employees
    • Not a state-owned bank
    • In June 2019, CMB had 139 branches and 1,679 sub branches in more than 130 cities in Mainland China and 6 branches and 2 representative offices overseas
    • CMB owns Wing Lung Bank in Hong Kong, a commercial bank
  • Offers full suite of commercial banking products from time deposits to loans to credit cards
    • Has a leasing practice under CMB Financial Leasing Co.
    • 50% interest in Cigna CMB Life Insurance
  • Has a robust asset management and private banking practice with strong R&D in technology and fintech (approximately 800,000 customers on the CMB app and developments in cloud + API, Big Data + Artificial Intelligence)
    • Highest private banking AUM far ahead of number 2 Bank of China
  • Market cap of RMB 888 billion (February 2020)
    • Highest price/book and price/earnings for Chinese banks, consistently trading at a premium to peer universe as investor favorite
  • 134 million retail customers with a total AUM of 7.3 trillion RMB

Financials

Investment Thesis

  • China is poised to liberalize interest rates and encourage increased lending and China Merchants Bank is best positioned with the high retail deposit base (and accordingly the lowest cost of funds)
    • This is tempered by rising competition from mobile wallets and fintech firms such as Alibaba’s Ant Financial, but the buy is growing much faster than competitive pressures
  • Growing retail and private banking base – with some of the best customers that are bankable in Greater China choosing to bank with CMB that have various cross-sell opportunities in wealth management products and insurance
  • Low downside risk owing to strong non-performing loan coverage (NPL) and continued outperformance (high ROE) make it unlikely to be under stress like other Chinese financials

Valuation and Total Return

  • Current dividend yield of 2.6%
  • Generally valued using a Dividend Discount but not going to get into the details here
  • Versus other H-share banks, CMB has a 3x Price/2020 Earnings multiple premium which we see staying still (while profit continues to grow at a faster rate)
  • Only bank trading above 1x Price/Book
    • Justified as CMB has the highest ROE and ROA by far

CNOOC SEHK: 0883 China National Offshore Oil Company

  • One of China’s big 3 state-owned oil and gas companies, primarily involved in offshore domestic and international oil and gas production
  • Released 3-year target in strategy guidance
    • Production growth of 6-7% per year to 2025 and attractive current dividend yield approaching 6%
  • Beaten down due to reduced oil demand from China’s Wuhan coronavirus, this is a temporary trough
    • Unlike the other two Chinese major State Owned Producers it is a pure play E&P and has good torque to oil prices but a low cost base so that it is more protected in a decline
    • Share price is highly correlated to the oil price
  • Good explorer and operator, with major finds in major oilfields in Guyana (Liza), China Bohai Bay (4.4 billion barrels of heavy oil), and the UK North Sea (Buzzard) and much more exploration upside
  • Very low cost producer with sub US$30 breakevens (this is for full cycle including depreciation, actual cash costs are very low, around $10 including decommissioning)
    • US$35 per barrel investment criteria
  • Strong free cash flow during growth period as operating cash flow is in excess of growth capex and dividend (room to grow dividend)
  • Good return on capital (above 12% return on equity despite low leverage) and relatively longer-life stable production versus U.S. shale

Li Ning Company Limited (SEHK 2331)

  • Sports company started by previous generation Chinese sports hero Li Ning
  • LI-NING is China’s sportswear company with the highest brand value
  • Business mix is split fairly evenly between Sports Casual (including China LI-NING, basketball (both 30%), running, training (both 20%
    • Top tier badminton brand, this generation’s YONEX
  • Major brand ambassadors include Dwyane Wade
    • Influencers using streaming and social media to raise awareness
  • Multi-channel selling through normal retail (sell through, company run stores), online and planned flagship or semi-flagship stores (Tianjin Binjiang road Modern City Store with monthly sales of RMB1.4 million or Chengdu Chunxi South Road Experience store)
    • 100-120 stores at YE 2019

1H19 Financials

  • Revenue increased by 33% to RMB 6,255 million
    • Mid teens same store sales growth (SSSG)
      • 30-40% e-commerce growth
        • Using big data to position products for target audiences
  • Operating cash flow of RMB1,366 million
  • Net profit for 1H2019 was RMB795 million with profit margin of 12.7%
    • Represents growth of 196%
  • Improvement in working capital
    • Gross average WC fell by 16% while revenue jumped 33% y-o-y

Valuation and Total Return

  • Stock is expensive with growth priced in at 30x forward consensus 2020 earnings
  • Minimal debt and large net cash position (RMB4.5 billion)
  • Return on equity of 23% in 2019
  • 1% dividend yield

Investment Thesis

  • Sports industry trending upwards in China as growing mass affluent middle class enroll children in sports and popularity of active lifestyle increases for adults
  • E-Sports sponsorship is extending brand outreach in relatively new market segment
    • League of Legends and other online games are amongst most popular pastimes for Chinese millennials and Generation Z
  • National Policy pushing active lifestyles to improve healthcare and quality of life outcomes
    • Estimated sports industry of over RMB5 trillion by 2025
  • E-commerce and augmented reality increasingly relevant for partnership and development for Li-Ning
  • Undervalued and poorly understood, but being a national champion means Li Ning will be a beneficiary of rising Chinese nationalism in response to perceived aggressive foreign policy from the U.S. (Huawei, coronavirus, xenophobia)
    • Li-Ning has a prominent Chinese theme (frequently invokes cultural symbols in design) and strong brand equity as a national symbol unlike ANTA or Xtep

Ping An Insurance (Group) Company of China (SEHK 2318)

  • Largest private asset manager and financial group in China with businesses in insurance, banking (Ping An Bank), asset management and fintech/healthcare technology (Ping An Good Doctor / Ping An Technology)
    • Property & Casualty Insurance provides auto, non-auto, accident and health to individuals and group (corporates)
    • Banking was formed post the purchase of a large Shenzhen bank and is a top performing underwriter of loans, asset manager (wealth management products or WMPs) and overall credit provider
    • Ping An has an investment banking division under Ping An Securities, which includes equity research and trading
    • Large trust business
    • Asset manager with mutual funds and other financial products

Financials

  • Revenue of approx. HKD 850 billion in 2019, 2020E of HKD 942 billion
    • 200 million retail customers, having risen 9.5% in the first 9 months of 2019
      • Acquired 30 million new retail customers
  • Net income of approx HKD 174 billion in FY 2019
  • Ample R&D spending in technology
    • Technology patent applications increased to 20,248 in 2019 3Q
    • AI interview system HR-X and blockchain network have won innovation awards

Valuation and Total Return

  • One of the largest companies in China with a market capitalization of 1.7 trillion HKD (over 200 billion USD)
  • Currently trading at 9x price/earnings and 2.6x Price/Book Value
    • 2021E price earnings of 8.4x

Investment Thesis

  • Premium name in insurance and asset management in China
    • Brand equity allows Ping An to attract top talent
  • Ahead of the curve versus other financial institutions in technology – has set aside large amounts for R&D and innovation
  • Trades at a cheap multiple (albeit relative premium to weaker financials)
  • Will benefit from Chinese investors switching to equities via wealth management products and secular tailwinds from an increasingly affluent society

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