China Everbright Water and NetDragon look interesting… (30 Jul 2020)

This week, notwithstanding the continuous interest in glove companies, pharmaceutical companies etc, there are some companies which seem to have some steady inflows, based on chart observations.

Two companies come to my mind, namely NetDragon and China Everbright Water Limited (“CEWL”).

What is so interesting about the above companies? Let’s take a closer look at its chart and other noteworthy points.

1. NetDragon – on an uptrend, with all 13 analysts calling it a BUY

Company description – before I delve into the chart…

Some readers may not be familiar with NetDragon (HKSE: 0777). According to NetDragon company description, it builds internet communities with a long track record of developing and scaling multiple internet and mobile platforms. These include China’s number one online gaming portal, 17173.com, and China’s most influential smartphone app store platform, 91 Wireless, which was sold to Baidu for US$1.9 billion in 2013 as the largest Internet M&A transaction in China.

Established in 1999, NetDragon is one of the most reputable and well-known online game developers in China with a history of successful game titles including Eudemons Online, Heroes Evolved and Conquer Online. In recent years, NetDragon has also started to scale its online education business on the back of management’s vision to create the largest global online learning community, and to bring the “classroom of the future” to every school around the world. For more information, please visit www.netdragon.com and http://www.netdragon.com/investor/press-announcements_1.shtml

FY19 results are segregated into three segments, viz. (1) Online games, (2) education (online learning), and (3) mobile solutions and mobile marketing accounted for 57%, 41%, and 2% of FY19 revenue respectively.

 

Chart outlook – still on an uptrend

After NetDragon touched an intraday high of HKD26.40 on 9 Jul 20, it slid 16% on profit taking to close at HKD22.20 on 29 Jul 20. Based on Chart 1 below, NetDragon seemed to have bounced off from its uptrend line. Except for its short-term indicators 6D and 20D EMA, the other EMAs are still rising. In line with the drop in share price, most indicators such as RSI and MACD have weakened. However, OBV has been forming higher lows since 18 Mar 20, which is interesting. All in, chart looks generally bullish. A sustained break below HKD20.30 with volume expansion is negative.

Near term supports: HKD21.90 / 21.40 – 21.55 / 21.00 / 20.60 / 20.30

Near term resistances: HKD22.60 / 23.00 / 24.10 / 24.50 / 25.40 / 26-26.50

Chart 1: Bullish chart underpinned by rising EMAs and strengthening indicators

NetDragon chart 30 Jul 20
Source: InvestingNote 30 Jul 2020

 

Other interesting aspects of NetDragon

A) Analysts are very positive on NetDragon

Based on Figure 1 below, it is apparent that NetDragon is a favourite among the analysts. It is not often when you see one company which is well covered by more than a dozen analysts and none of them gives a hold or sell call. Average analyst target price is around HKD33.33 with a potential capital upside of around 50%. Coupled with an estimated dividend yield of around 2.1%, total potential return is approximately 52%.

Fig 1: All analysts call a Buy; with average analyst target HKD

Analyst 30 Jul 20

Source: Bloomberg 30 Jul 20

B) Good secular growth with excellent news flow from company

As mentioned above, NetDragon’s business segments mainly revolve around online games and education (online learning). It is likely that both segments should see secular growth. Furthermore, Covid 19 may even boost their growth in the medium term. Here are some examples for reference.

For example, on 20 Mar 2020, NetDragon, through its education product Edmodo, has been selected in an unprecedented move by the Ministry of Education in the Arab Republic of Egypt (“MoE”) to be the designated online learning platform for the K12 education system in Egypt. Starting 20 Mar, Edmodo will be rolled out to over 22+ million students and over 1+ million teachers in the country to provide distance learning support in the period of school suspension and to enhance learning thereafter

NetDragon announced on 26 May 2020 that its education products, namely Edmodo and Coding Galaxy, have been selected by the Ministry of Education Thailand (“MoE”) to begin trial as the online learning platform and coding learning solution for 10,000 K-12 schools. The project is expected to commence in the second half of 2020. The project’s coverage is expected to expand beyond 10,000 schools to more than 40,000 schools and 10 million students under the MoE upon satisfactory results of the pilot.

On 15 Jun 2020, NetDragon announced its subsidiary Edmodo has signed its first U.S. state-wide partnership with the Vermont Agency of Education to create a state-wide network for Vermont educators to collaborate and access Continuity of Learning resources to enable continued support for all Vermont students.

On 22 Jun 2020, NetDragon clinched a tender project of Fuzhou Education Bureau, comprising Smart Campus Construction of Fuzhou No.3 High School Binhai Campus, Smart Campus Construction of Fuzhou Experimental School Binhai Campus and Smart Campus Construction of Fuzhou Binhai New City Experimental Kindergarten. NetDragon’s cumulative winning bids from the Fuzhou “Smart Campus” project have totalled nearly RMB100 million since winning its first tender in August 2019.

On the gaming side, NetDragon announced on 9 Jun 2020 that its subsidiary, JumpStar has rolled out a mobile-friendly version of Neopets for fans to learn and play with their favourite virtual pets and friends anywhere, anytime.

C) Included in Hang Seng TECH Index

NetDragon is one of the 30 companies alongside with Alibaba, Xiaomi, Tencent, Sunny Optical, Meituan etc to be included in the Hang Seng TECH Index, touted to be the Nasdaq of the East. The inclusion serves as the Company’s another major milestone in the capital market, following its inclusion in Hang Seng Composite Index and Stock Connect (Southbound). Such inclusion (even if the weightage may not be high at the start), provides another platform where funds and institutions can have the opportunity to know more and have exposure in NetDragon.

D) Valuations are not demanding

NetDragon trades at 12.9x current PE and 1.9x P/BV vis-à-vis its average 2Y PE and P/BV of around 20.4x and 1.7x respectively. NetDragon’s average 10Y PE and P/BV stood at 73.3x and 2.0x respectively. In view of the potential secular growth, such valuations are not demanding.

 

2. CEWL – Potential breakout from its 4-month trading range

Bullish chart underpinned by rising EMAs and volume

Based on Chart 2 below, since 17 Mar 2020, CEWL has been trading sideways from $0.200 – 0.235. If a breakout ensues after such a lengthy period of consolidation, it is usually quite powerful. 4.8m shares transacted on 29 Jul 2020, which is a one month plus high. A bullish sustained breakout above $0.235 accompanied with volume expansion is bullish and points to an eventual technical measured target $0.270. A sustained break below $0.215 with volume expansion is negative.

Short and medium-term indicators are strengthening as evidenced by the golden crosses formed between 20D EMA and 50D EMA. ADX has been generally trending up since 3 Jul 2020 and last trades at 32.9, amid positively placed DIs. MACD has seen both a bullish signal line and centerline crossover. OBV and RSI are also strengthening. All in, chart looks generally bullish.

Near term supports: $0.225 / 0.215 / 0.200 – 0.205

Near term resistances: $0.240 – 0.245 / 0.255 / 0.270

Chart 2: Bullish chart underpinned by rising EMAs and strengthening indicators

China Everbright Water chart 29 Jul 20

Source: InvestingNote 29 Jul 2020
 

Other interesting aspects of CEWL

A) Analysts are generally positive on CEWL

CEWL is covered by six analysts with target prices ranging from $0.240 – 0.490. Average analyst target price is around $0.400 with a potential capital upside of around 70%. Coupled with an estimated dividend yield of around 6.1%, total potential return is approximately 76%. You can view CEWL’s analyst reports HERE.

B) Low valuations

Based on Bloomberg’s 29 Jul 2020 data, CEWL trades at 4.3x current PE and 0.4x P/BV. This is significantly lower than its average 2Y PE and P/BV of around 6.8x and 0.6x respectively. CEWL’s average 10Y PE and P/BV stood at 16.8x and 0.9x respectively. CEWL’s NAV / share is approximately $0.533.

Furthermore, it trades at lower valuations as compared to SIIC (4.7x PE) and Beijing Enterprises Water (6.3x PE)

 

Risks

It is noteworthy that some possible risk factors include but not limited to are a broad market selloff (i.e. market risk); project execution risk; higher leverage from expansion; forex risk, subjectivity of chart etc. in addition, if there is a broad market selloff, almost all stocks will be affected.
 

Conclusion

The above is written based mainly on technical charts. To my best effort, I have included in some updates for NetDragon and CEWL so as to give you more information. As everybody is different in terms of their percentage invested, returns expectation, risk profile, investment horizon, personal market outlook etc., do exercise your independent judgement and make your own independent decisions.

P.S: I have already notified my clients to take note of CEWL and NetDragon on last Monday. I am vested for trading purposes only.

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Disclaimer

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