Almost half of China’s population surfs the internet on a daily basis. Many users are drawn by the contact with other people: Students and white collar workers get to rub shoulders with CEOs and film stars. Interaction drives participation. From this have arisen hugely influential internet giants, with the most successful being those that foster communication. Tencent’s (0700.HKG) WeChat smartphone messaging app is at the 400 million user mark and has helped the company’s market value soar above US$100 billion, putting it within touching distance of Western internet darling Facebook (FB.NASDAQ). But recent euphoria surrounding WeChat may be tempered by aggressive censorship being directed out of Beijing. In early September, a legal interpretation of China’s Criminal Law was extended to cover defamation and “spreading of rumors” on the internet. Even though the service facilitates private conversations out of earshot of censors its huge popularity could make it a target. A senior security official in Zhejiang province has already warned users of the dangers of posting on WeChat’s public “Moments” function. Jin Yoon, analyst at Nomura in Hong Kong, said it was “possible” that WeChat could be targeted by the authorities. That could hurt an IPO for WeChat that Tencent is reportedly planning. “WeChat is a significant portion of Tencent’s overall valuation – it does impact Tencent both valuation wise and operationally,” Yoon said in an email.
Beijing has spoken and the dairy industry trembles
The government marked out its future plan for the domestic dairy industry this week, and you're either in or you're out. China Mengniu Dairy (2319.HKG), Inner Mongolia Yili Industrial Group (600887.SHA), Feihe International (ADY.NYSE), Heilongjiang Wondersun Dairy and Treasure of Plateau will receive nearly US$5 billion in government loans, subsidies and tax preferences over a number of years with the hope of consolidating the industry. The government has spoken; other brands don't stand a chance. Analysts who spoke with China Economic Review said the support is undoubtedly positive for the companies that are in, especially after half a decade of safety scandals at some of the firms. However, a few of the big names outside of government support could present a play for investors. Synutra International (SYUT.NASDAQ) and Zhejiang Beingmate Scientific (0002570.SHE) will not get the state charity and so are likely buyout candidates for the favored companies. If Chinese brands don't purchase these companies, foreign dairy giants looking for a better foothold in the country may target the two, one analyst said. Investors in Synutra can expect a decent premium, should a buyout go down.
HK jewelers see sparkling success on surge in shoppers
For those who keep an eye on China dealings, mainland tourists to Hong Kong conjures two images: Bad behavior and a shopping frenzy. With the annual “Golden Week” holiday just around the corner, there are opportunities to play the retail burst that comes at this time of year. But before checking out the big retailers in the territory, consider the mainland’s new tourism regulations: Beijing has ordered travel agents to stop taking tourists to retailers that pay them commission. This revenue stream partially subsidized package holidays; local media reports say the cost of a group trip to Hong Kong has soared by up to 80% from last year. Overseas visits by tourists are projected to be lower 10-20% over the Golden Week holiday from a year earlier, meaning more people will be around to shop at home. Analysts at Credit Suisse recommend brands that don’t pay tour operators to bring in shoppers and have a good physical exposure to mainland consumers. Jewelers Chow Tai Fook (1929.HKG) and Chow Sang Sang (0116.HKG) fit both criteria.
IPO Watch
Ludao Tech (02023.HKG) is set to list in Hong Kong next week. The firm, which is a wholly owned subsidiary of Green Island Investment Holdings, will reportedly issue 100 million shares at HK$0.72-$0.89 each with the hopes of raising HK$67.99 million. The company produces cosmetics as well as general household goods including air fresheners and furniture polish. There's little else of interest in Hong Kong's IPO market for the mainland.
