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The 90% club: The search for deep value in EM equities

  • Around 10 US$1bn+ stocks have declined by 90%+ from recent peaks. Unsurprisingly, China and Tech feature heavily

  • We identify five beaten-up names that could rally strongly: Ebang Int’l, I-Mab, LianBio (China); Pagaya, REE (Israel)

  • Despite developing valuable proprietary technology, their market caps are typically just half of their net cash holdings

The 90% club: The search for deep value in EM equities
Rahul Shah
Rahul Shah

Head of Corporate & Thematic Research

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Tellimer Research
3 December 2022
Published byTellimer Research

2022 has been a tough year for investors across a wide range of asset classes. EM equities are down 23% year-to-date, but some investors have experienced much bigger declines. Looking at stocks with a market cap in excess of US$100mn, around 10 of these have declined by at least 90% from their one-year peaks (meaning that they were, recently, US$1bn+ stocks).

By sector, the highest incidence of these big losers has been in Technology; by market, China has the biggest weighting.

Biggest EM share price falls over the past year

Strong balance sheets give downside protection; proprietary tech generates upside

To identify beaten-down names (ie those that have fallen 90% or more from their peak) with bounce-back potential and limited additional downside risk, we filtered for the following two criteria:

  • Cash > debt ie net debt is less than zero; and

  • Current assets > current liabilities ie liquidity risks should be limited.

We also relaxed our one-year price-measuring period and US$100mn minimum market cap criteria to allow us to capture some more compelling stories. After some qualitative screening, we have shortlisted three names from China and two from Israel (although we accept that, for many investors, this market does not fall under the EM umbrella).

For these stocks, their net cash position is almost twice their market cap, current assets are 15x greater than current liabilities and their price/book ratio is c0.7x. All these names use proprietary technology to deliver innovative solutions to major problems.

Five beaten-up stocks that could rally strongly

Further background on each of these names is provided below.

1. I-Mab

China-based biopharmaceutical company, I-Mab specialises in cancer and autoimmune disorders. It owns nine clinical and 10 pre-clinical stage assets and claims to have a cash runway of over three years. As well as conducting its own R&D, it partners with global pharma firms to help commercialise products in China.

Why the stock has tumbled?

The stock price has fallen by c95% over the past 12 months. A big contributor to this dismal performance has likely been the negative top-line momentum of the business, with annual revenue falling from US$236mn in 2020 to less than US$14mn in 2021.

What could drive a recovery

The company has taken action to reduce its cash burn rate, and expects milestone payments from existing partnership deals and income from new business development deals to provide some positive cashflow.

The market is likely to be particularly sensitive to newsflow regarding the company’s five prioritised assets:

  • Lemzoparlimab. This cancer treatment has received the go-ahead for Phase 3 trials, and further results from the Phase 2 study are expected before year-end.

  • Uliledlimab. This lung cancer treatment should soon release its Phase 2 trial results with a pivotal trial expected in 2023.

  • TJ-CD4B. This treatment for gastric and pancreatic cancer is currently in Phase 1.

  • Eftansomatropin is a long-acting growth hormone in Phase 3 with a biologics license application (BLA) expected in 2023-25. A commercial partnership with JumpCan is expected to generate US$315mn in milestone payments (with US$35mn already received), followed by a 50/50 split of profits.

  • Felzartmab. This cancer treatment is in Phase 3 with BLA expected in 2023-25. I-Mab is looking at entering into commercial partnerships in China.

What could still go wrong?

I-Mab is subject to a lawsuit from Tracon Pharmaceuticals, which contends that I-Mab breached its contractual obligations as outlined in two collaboration and clinical trial agreements signed in 2018. This could lead to a US$9mn payout. Continued top-line weakness or increased cash burn would further damage already weak investor sentiment. As a US-listed Chinese business, investors may be exposed to the risk of increased tensions between the leaders of these two leading economies.

2. Pagaya Technologies

Pagaya Technologies Ltd is an Israel-based fintech company. It develops data science, machine learning and AI technology analytics, enabling accurate, real-time customer credit assessments. It provides its services to fintechs, banks and other entities that interface with consumers. As well as providing a risk management filter, Pagaya helps these partners fund their loans by facilitating access to institutional investors wishing to gain exposure to such assets. Most of its business is generated in the US.

Why the stock has tumbled?

Pagaya Technologies was taken public through a special purpose acquisition company (SPAC) deal in June 2022. After rallying spectacularly (but briefly) in August and almost hitting US$30, the stock fell by over 80% in September and by a further 20%+ in October and is now close to US$1 per share. Two factors contributing to this weakness are likely the end of the lock-up period for some selling shareholders and pressure from a secondary stock offering. Higher interest rates also affect Pagaya's core lending services business.

What could drive a recovery?

In Q3, Pagaya's network volume grew 26% year-over-year to US$1.9bn and total revenue rose 49% to reach a record US$204mn. A top three auto loan partner onboarded in May, enabling further expansion in this product, with dealership representation now in over 70% of all U.S. franchise dealerships. As Pagaya gains scale, it should benefit from increased credibility in the marketplace, improved customer service and risk management via its larger dataset, and a broadening of its product suite.

What could still go wrong

Further lock-up expiries take effect in mid-December, which could lead to more share supply. The deteriorating macro environment, with a potentially toxic combination of higher interest rates, inflation-eroded consumer earnings power and a weaker job market, could test the validity of Pagaya’s risk management tools. Tighter funding conditions could also make it more difficult for Pagaya’s customers to grant loans, hitting business volumes.

Other observations

Pagaya has a dual-class share structure. Class B shares have 10 votes each and are fully owned by the three co-founders. Together, these three individuals control the company. Minority shareholders will therefore have limited ability to influence corporate strategy and execution.

3. LianBio

LianBio’s mission is to catalyze the development and accelerate the availability of paradigm-shifting medicines to patients in China and other major Asian markets. The firm has a pipeline of nine treatments (of which six already have clinical trials) covering cardiovascular, oncology, ophthalmology, inflammatory diseases and respiratory indications. Together, these treatments could benefit over 15mn people in China. The senior management team and Board of Directors have significant industry expertise.

Why has the stock tumbled?

LianBio’s stock was US$16 a year ago but is now cUS$1.50. One issue that may have spooked investors is that the approval of its hypertrophic cardiomyopathy drug (mavacamten) came with a label warning of the risk of heart failure.

What could drive a recovery?

LianBio does not report any revenue currently but expects this to change from:

  • Completion of its Phase 3 EXPLORER-CN trial of mavacamten in Chinese patients with symptomatic oHCM in mid-2023

  • Completion of its Phase 3 LIBRA trial of TP-03 (for the treatment of Demodex blepharitis, an eye condition caused by skin mites) in Q4 2023

  • Completion of its Phase 2a trial of Infigratinib cancer treatment in H2 2023

  • Initiation of its Phase 1 trial of BBP-398 (another cancer treatment) in H1 2023

One key growth area for LianBio is its ability to help approved western biotech medicines access the large Chinese market – fewer than 10% of such products are currently available in the country.

What could still go wrong?

Over the past year, LianBio’s cash burn rate was US$123mn, which equates to a runway of over 2.5 years. However, the launch of clinical trials could accelerate the cash burn rate, and hence shorten the solvency runway; the company has estimated a runway to H2 2024. The company expects that it will need to raise additional capital in the future to develop its product pipeline; existing shareholders may get diluted if the company issues equity. As a US-listed ADR of a company with significant Chinese operations, shareholders are exposed to risks relating to the relationship between the world’s two largest economies.

Other information

Perceptive Advisors is the controlling shareholder. Based on Bloomberg data, this US hedge fund has over 100 investments in the health care/biotech space with a total value of over US$3bn. Lianbio is a top 10 holding for the firm. Minority investors may be able to take some comfort from the ongoing due diligence and oversight of the business by this investment firm.

4. Ree Automotive

REE is an Israeli automotive technology leader with the goal of delivering platforms for all of tomorrow's zero-emission electric vehicles. REE's disruptive corner technology (compact, independently controlled and powered wheels) enables a completely flat and modular chassis that supports all mission-specific EVs from class 1 (e-bikes) to class 6 (trucks/ lorries).

Why the stock has tumbled?

The current share price of cUS$0.5 per share compares with pricing in excess of US$10 during parts of 2021. The shares have been savaged by two broader market trends:

  • SPACs: REE was acquired by 10X Capital Venture Acquisition Corp in Q1 2021 at the peak of SPAC mania. The IPOX SPAC index has halved since this time, and is down 30% so far this year. from its peak; and

  • Electric vehicles: Tesla has more than halved this year, Chinese players like Nio and XPeng have fared even worse.

What could drive a recovery

The company has almost US$200mn cash and anticipates that it has sufficient liquidity to achieve the initial production of its P7 platform and continue to advance other commercial activities. Cash needs for 2023 are anticipated by the company to be cUS$130mn-150mn.

The firm has entered into agreements with high-profile partners, which will limit the investment outlay needed to take its products live. Its UK assembly line is expected to be operational by year-end. Breakeven volume for this facility is expected to be single-digit 1,000s, versus its total capacity of 10,000.

What could still go wrong

The chassis platform is fundamental to any vehicle and original equipment manufacturers (such as Toyota and Volkswagen) need a stable and reliable partner to justify the investment in production, design and marketing needed to get their products into the hands of their customers. REE may not tick enough boxes for these entities, particularly since the firm is still not generating any revenue. They may also prefer to develop their own chassis in order to differentiate their offerings from their competitors.

Other risks include REE’s reliance on its UK Engineering Center of Excellence for the design, validation, verification, testing and homologation of its products; REE’s limited operating history; risks associated with plans for REE’s initial commercial production; development of the market for commercial EVs; intense competition in the e-mobility space, including with competitors who have significantly more resources.

Other observations

The two co-founders Daniel Barel and Ahishai Sardes own around one-third of the shares. However, since they own Class B shares (with 10 votes each), they have effective control of the company. Accordingly, other corporate governance measures to protect minority shareholders acquire much greater importance. 

5. Ebang International Holdings Inc

Ebang International Holdings is a China-based holding company principally involved in application-specific integrated circuit (ASIC) chip design and the manufacture and sales of Bitcoin mining machines. The company also provides telecommunication products and management and maintenance services.

Why the stock has tumbled?

One of the key issues is the turmoil in the crypto markets, which has been exacerbated by the recent FTX collapse. Customers will have less interest in buying mining machines if the price of crypto assets is depressed. Further, there was a severe regulatory crackdown on cryptocurrency trading and mining in China last year. It is not surprising, therefore, that the total computing power sold by Ebang International in H1 22 was down 60% year-on-year.

Due to the difficulties in Ebang’s core business, the firm recently diversified into cryptocurrency exchange and cross-border payments activities. But this has served to increase its operating cost base.

Some observers have cast doubt on the strength of Ebang's corporate governance controls (see also below).

What could drive a recovery

Positive results at the new cryptocurrency exchange and cross-border payments businesses could be well received, as would a more general firming of cryptocurrency values. Ebang’s Australian cryptocurrency exchange platform has collaborated with Mastercard to become the first principal member in Australia for self-issuance of crypto-linked cards, which could help to drive innovation in the crypto and payments space in the country.

What could still go wrong

As a US-listed ADR of a Chinese company, investors are exposed to risks related to increased tensions between the world’s two largest economies. In addition, the regulatory framework for companies operating in the cryptocurrency space is subject to significant uncertainty in China; further restrictions could damage Ebang’s business. 

Other information

Chairman and CEO Hu Dong owns all of the class B shares, which have 20 votes each. As a result, he wields control over the company. Executives fill three of the six board seats, which further limits the protection afforded to minority shareholders.