IPOs and Catalysts/Events, Global Equity Research Ltd

Arun George

IPOs and Catalysts/Events

Uncompromised, Independent, Conflict-Free Research

Global Equity Research Ltd

Global Equity Research was started in 2017 by a group of experienced research professionals. It was founded on a passionate belief in the importance and the need for uncompromised, independent, conflict-free research. We aim to provide differentiated and actionable primary and bottom up fundamental research.

Equity Capital Markets

<a href="https://www.smartkarma.com/entities/cloud-village-inc" target="_blank" data-smartkarma-citation="entities:33412:1" rel="noopener">Cloud Village (CLV HK)</a> is the second-largest online music platform after <a href="https://www.smartkarma.com/entities/tencent-music-entertainment" target="_blank" data-smartkarma-citation="entities:27255:1" rel="noopener">Tencent Music (TME US)</a> as measured by users and revenue in China. The cornerstone product is NetEase Cloud Music that delivers diverse music and music-inspired content and provides interactive community features. Founded by <a href="https://www.smartkarma.com/entities/netease-inc-adr" target="_blank" data-smartkarma-citation="entities:17203:1" rel="noopener">NetEase Inc (NTES US)</a>, NetEase Cloud Music, has been operating as a stand-alone business since October 2016. Cloud Village is braving the moribund Chinese IPO market by pre-marketing an HKEx IPO to raise around $1 billion, according to press reports. In <a href="https://www.smartkarma.com/insights/cloud-village-netease-music-ipo-initiation-musical-shares" target="_blank" data-smartkarma-citation="insights:52266" rel="noopener">Cloud Village (NetEase Music) IPO Initiation: Musical Shares</a>, we stated that at first sight, Cloud Village performance seems poor as its high growth has come at the cost of negative gross margin and cash burn. However, Cloud Village is on the cusp of turning around its performance due to a fundamental change in its cost structure. We concluded that Cloud Village has the potential to shed its underdog status vs the much larger Tencent Music.  <div class="content-highlight">In this note, we examine the 1Q21 results and the recent developments disclosed in the PHIP. While Cloud Village expects to remain unprofitable over the next three years, the 1Q21 results and the recent SAMR ruling on Tencent Music support our view that Cloud Village is on track to combine its high growth with an improving cost structure. With investors understandably wary of Chinese IPOs due to China’s regulatory onslaught, Cloud Village has the potential to entice investors to give Chinese IPOs a renewed look.   </div>

Cloud Village (CLV HK) is the second-largest online music platform after Tencent Music (TME US) as measured by users and revenue in China. The cornerstone product is NetEase Cloud Music that delivers diverse music and music-inspired content and provides interactive community features. Founded by NetEase Inc (NTES US), NetEase Cloud Music, has been operating as a stand-alone business since October 2016. Cloud Village is braving the moribund Chinese IPO market by pre-marketing an HKEx IPO to raise around $1 billion, according to press reports. In Cloud Village (NetEase Music) IPO Initiation: Musical Shares, we stated that at first sight, Cloud Village performance seems poor as its high growth has come at the cost of negative gross margin and cash burn. However, Cloud Village is on the cusp of turning around its performance due to a fundamental change in its cost structure. We concluded that Cloud Village has the potential to shed its underdog status vs the much larger Tencent Music.  In this note, we examine the 1Q21 results and the recent developments disclosed in the PHIP. While Cloud Village expects to remain unprofitable over the next three years, the 1Q21 results and the recent SAMR ruling on Tencent Music support our view that Cloud Village is on track to combine its high growth with an improving cost structure. With investors understandably wary of Chinese IPOs due to China’s regulatory onslaught, Cloud Village has the potential to entice investors to give Chinese IPOs a renewed look.   

Cloud Village (NetEase Music) IPO: Play List

Asia Pac IPO & Placement Research, China biotech, Aequitas Research

Ke Yan, CFA, FRM

Asia Pac IPO & Placement Research, China biotech

IPOs and Placements coverage across Asia Pacific

Aequitas Research

We cover all listing across the Asia Pacific along with follow-up placements. As of Dec 2020, our team had covered 539 IPOs with a hit rate of 73.5% and 685 placements with a hit rate of 66.8%.

We combine fundamental bottom-up views with our proprietary quantitative framework to provide a holistic coverage across new listings and placements. Our coverage includes pre-IPO notes before the deal is launched, follow-up analysis once the deal is live and post-listing trading analysis as well.

Equity Bottom-Up

China's Xinhua news agency released a report this morning describing online gaming as spiritual opium highlighting that the youth has suffered from the addictiveness of the online game. As a result, sentiment for online gaming companies was weak  in the morning. We are of the view that the regulation on the online gaming sector has been more of less done in the past and if there's any new tightening targeting the control of play time of the youth, it will be more likely fine-tuning from the past policy guidance. Therefore the impact on online gaming companies should be manageable.

China's Xinhua news agency released a report this morning describing online gaming as spiritual opium highlighting that the youth has suffered from the addictiveness of the online game. As a result, sentiment for online gaming companies was weak  in the morning. We are of the view that the regulation on the online gaming sector has been more of less done in the past and if there's any new tightening targeting the control of play time of the youth, it will be more likely fine-tuning from the past policy guidance. Therefore the impact on online gaming companies should be manageable. 

Korea/Asia, Events, IPOs, Douglas Research Advisory

Douglas Kim

Korea/Asia, Events, IPOs

<div class="content-highlight">
On 3 August, a Chinese state media outlet (Economic Information Daily) mentioned that the online video games are like "spiritual opium." The article mentioned more curbs on the online video game industry are necessary as there are significant concerns that these games may be harming millions of people, especially the younger generation.
<a href="https://www.reuters.com/technology/tencent-falls-after-china-media-calls-online-gaming-spiritual-opium-2021-08-03/" target="_blank" rel="noopener">Economic Information Daily</a> stated that "No industry, no sport, can be allowed to develop in a way that will destroy a generation," likening online video games to "electronic drugs".
</div>We believe that there is an increasing probability of the Chinese government cracking down much more severely on the online/mobile gaming sector in China which could severely impact major game companies such as Krafton. We now believe that the valuation of Krafton is likely to drift towards the low-to-mid end of our valuation sensitivity analysis over the next 6 to 12 months, which would suggest implied market cap of 17.3 trillion won to 23 trillion won (344,487 won per share to 455,942 won per share). We continue to have a NEGATIVE view of the Krafton IPO.


On 3 August, a Chinese state media outlet (Economic Information Daily) mentioned that the online video games are like "spiritual opium." The article mentioned more curbs on the online video game industry are necessary as there are significant concerns that these games may be harming millions of people, especially the younger generation.
Economic Information Daily stated that "No industry, no sport, can be allowed to develop in a way that will destroy a generation," likening online video games to "electronic drugs".
We believe that there is an increasing probability of the Chinese government cracking down much more severely on the online/mobile gaming sector in China which could severely impact major game companies such as Krafton. We now believe that the valuation of Krafton is likely to drift towards the low-to-mid end of our valuation sensitivity analysis over the next 6 to 12 months, which would suggest implied market cap of 17.3 trillion won to 23 trillion won (344,487 won per share to 455,942 won per share). We continue to have a NEGATIVE view of the Krafton IPO. 

Chinese Government to Crack Down on the Online Gaming Sector? A Big Negative for the Krafton IPO

Japan/Asia Long-Short, LightStream Research

Mio Kato

Japan/Asia Long-Short

Long-Short Analysis on Japan, Asia and the World

LightStream Research

LightStream conducts quantitatively rigorous and data-driven analysis with a focus on Japan and Asia.

We consistently cover the Tech, Consumer and Industrial sectors, and provide ECM and Events coverage more broadly.

We supplement traditional qualitative insights from company relationships with a robust quantitative foundation that examines as much historical data as is available.
We further refine the accuracy of our insights and calls through the use of alternative data to flesh out current trends, and through a valuation framework that emphasises non-superficial peer group selection and a proper attempt to understand the metrics and changes that have driven security valuations in the past.

In <a href="https://www.smartkarma.com/insights/krafton-ipo-this-should-be-pulled" target="_blank" rel="noopener">(1) Krafton IPO – This Should Be Pulled | Smartkarma </a>we said:
<blockquote>
Given the increasingly aggressive moves in China to reign in tech companies we also believe that greater regulation of mobile gaming overall is not impossible. Not only is there a strong gambling element but it is not likely to be viewed as positive for productivity at a time when labour cost inflation is an increasing problem. We believe stricter curbs on mobile gaming in China are a matter of time though we do not yet have a clear idea as to when this might occur.
</blockquote>
Apparently that matter of time is <a href="https://asia.nikkei.com/Business/China-tech/Tencent-dives-after-Chinese-media-calls-gaming-spiritual-opium" target="_blank" rel="noopener">looking like it will be a lot sooner than we expected</a>.

In (1) Krafton IPO – This Should Be Pulled | Smartkarma we said:

Given the increasingly aggressive moves in China to reign in tech companies we also believe that greater regulation of mobile gaming overall is not impossible. Not only is there a strong gambling element but it is not likely to be viewed as positive for productivity at a time when labour cost inflation is an increasing problem. We believe stricter curbs on mobile gaming in China are a matter of time though we do not yet have a clear idea as to when this might occur.

Apparently that matter of time is looking like it will be a lot sooner than we expected.

Overseas Chinese Equities, Aequitas Research

Ming Lu

Overseas Chinese Equities

<ul class="">
<li>The State Administration for Market Regulation orders Tencent (700 HK) to terminate exclusive music copyrights.</li>
<li>However, independent musician is exempted from the ban on exclusive contracts.</li>
<li>Cloud Village has already got some copyright usage rights that TME exclusively owned before 2020.</li>
<li>The real problems are the mature market and the time competition from short video.</li>
</ul>


The State Administration for Market Regulation orders Tencent (700 HK) to terminate exclusive music copyrights.
However, independent musician is exempted from the ban on exclusive contracts.
Cloud Village has already got some copyright usage rights that TME exclusively owned before 2020.
The real problems are the mature market and the time competition from short video.


Tencent Music (TME): Penalty Not Fatal, But Music Market Bad Enough

China

NetEase, Inc. is an Internet technology company that develops applications, services and other Internet technologies in China. The Company's core businesses consist of email service, web portal and online entertainment, including online gaming services. NetEase also offers online advertising, search, mobile applications and e-commerce.

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NetEase Inc (NTES US)

Cloud Village (NetEase Music) IPO: Play List

With investors understandably wary of Chinese IPOs due to China’s regulatory onslaught, Cloud Village has the potential to entice investors to give...

Arun George

Tencent: Over-Reaction to Xinhua News

We analyze why the market over-react to the article published by Xinhua News Agency targeting the online gaming industry. We think Tencent is well...

Ke Yan, CFA, FRM

Chinese Government to Crack Down on the Online Gaming Sector? A Big Negative for the Krafton IPO

There is an increasing probability of the Chinese government cracking down much more severely on the online gaming sector in China that could cause...

Douglas Kim

Krafton IPO - Didi'd by Spiritual Opium?

News laying the ground for tightened regulation on online gaming in China is hitting related stocks hard with many down 10%, but the juiciest short...

Mio Kato

Tencent Music (TME): Penalty Not Fatal, But Music Market Bad Enough

The authorities order Tencent to terminate exclusive music copyrights. However, independent musician is exempted. The real problems are the mature...

Ming Lu

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