Korea/Asia, Events, IPOs, Douglas Research Advisory

Douglas Kim

Korea/Asia, Events, IPOs

Equity Capital Markets

<p>In this insight, we discuss the gray market value and the very long view of JD Logistics. The <a href="https://inews.hket.com/article/2967663/%E3%80%90%E6%96%B0%E8%82%A1IPO%E3%80%91%E4%BA%AC%E6%9D%B1%E7%89%A9%E6%B5%812618%E6%9A%97%E7%9B%A4%E5%8D%87%E5%85%A9%E8%87%B3%E4%B8%89%E6%88%90%E3%80%80%E4%B8%80%E6%89%8B%E5%B8%B3%E9%9D%A2%E6%9C%80%E5%A4%9A%E8%B3%BA1199%E5%85%83?mtc=40001&amp;srkw=IPO%E6%9C%80%E5%BF%AB%E6%9C%80%E9%BD%8A" target="_blank" rel="noopener">gray market value</a> of JD Logistics has been trading at 30 to 40%+ higher than the IPO price, which is favorable for the IPO. We continue to maintain our positive view of JD Logistics. Our base case valuation of JD Logistics is $47.6 billion, which is based on a 2.3x EV/S valuation multiple and applying our 2022 estimated sales of 123.4 billion RMB.</p><p>In this IPO, there will likely be some investors that choose to take partial profits on the day of trading, especially if it goes up 30-50%+ from the IPO price. However, there will also be many investors that choose to take much longer view of the company. In our view, there is likely to be very significant improvements in the use of technology such as automation, robotics, and artificial intelligence to reduce the long-term operating costs of the company.</p><p>Over a much longer time frame (8-15 years), we believe that there is a real possibility that the employees related expenses as a percentage of sales could be reduced much further to about 20%, using greater amounts of AI driven automated robotics, much lower than in 2020 when labor costs accounted for 35.5% of total sales. </p>

In this insight, we discuss the gray market value and the very long view of JD Logistics. The gray market value of JD Logistics has been trading at 30 to 40%+ higher than the IPO price, which is favorable for the IPO. We continue to maintain our positive view of JD Logistics. Our base case valuation of JD Logistics is $47.6 billion, which is based on a 2.3x EV/S valuation multiple and applying our 2022 estimated sales of 123.4 billion RMB.In this IPO, there will likely be some investors that choose to take partial profits on the day of trading, especially if it goes up 30-50%+ from the IPO price. However, there will also be many investors that choose to take much longer view of the company. In our view, there is likely to be very significant improvements in the use of technology such as automation, robotics, and artificial intelligence to reduce the long-term operating costs of the company.Over a much longer time frame (8-15 years), we believe that there is a real possibility that the employees related expenses as a percentage of sales could be reduced much further to about 20%, using greater amounts of AI driven automated robotics, much lower than in 2020 when labor costs accounted for 35.5% of total sales. 

JD Logistics: Gray Market Value & The Very Long-Term View Driven by Technological Innovations

Consumer Discretionary / Industrials

Henry Kwon

Equity Bottom-Up

<p>CPNG's shares declined by 9.3% on May 13, the day following its 1Q21 earnings release, but has since recovered its loss as of close on May 17. A key question should be whether this represents a dead cat bounce, or whether it represents the beginning of a sustainable share price recovery?</p><p>Without reliable technical parameters established, we mainly rely on two factors, namely Fibonnaci retracement levels and a DCF analysis based on current consensus forecasts to determine how much growth CPNG would have to generate in order to justify its current share price levels.</p><ul>
<li>$39.95 represents the stock's 78.6% Fibonacci Retracement level which became resistance since it was breached on May 6 on intra-day basis and confirmed on May 7 close.</li>
<li>Taking current consensus 3-year EBITDA and Free Cash Flow Forecasts, with a 20% target Debt ratio in the mix, a DCF analysis suggests that current share price level would be sustainable on a terminal growth range of 9.6-10.1%. A terminal growth rate of 2% would suggest a $5.00 share price, on the other hand.</li>
</ul><p>In a flattening yield curve environment, we believe the market would not have much objections to 8-9% terminal growth assumptions at a practical level even though analysts would sound alarm bells. However, at this juncture we believe investors should pay heed to whether inflationary concerns will continue to lead to a steepening yield curve, thereby creating continuing headwinds for CPNG's share price performance over the next 3 to 6 months.</p>

CPNG's shares declined by 9.3% on May 13, the day following its 1Q21 earnings release, but has since recovered its loss as of close on May 17. A key question should be whether this represents a dead cat bounce, or whether it represents the beginning of a sustainable share price recovery?Without reliable technical parameters established, we mainly rely on two factors, namely Fibonnaci retracement levels and a DCF analysis based on current consensus forecasts to determine how much growth CPNG would have to generate in order to justify its current share price levels.
$39.95 represents the stock's 78.6% Fibonacci Retracement level which became resistance since it was breached on May 6 on intra-day basis and confirmed on May 7 close.
Taking current consensus 3-year EBITDA and Free Cash Flow Forecasts, with a 20% target Debt ratio in the mix, a DCF analysis suggests that current share price level would be sustainable on a terminal growth range of 9.6-10.1%. A terminal growth rate of 2% would suggest a $5.00 share price, on the other hand.
In a flattening yield curve environment, we believe the market would not have much objections to 8-9% terminal growth assumptions at a practical level even though analysts would sound alarm bells. However, at this juncture we believe investors should pay heed to whether inflationary concerns will continue to lead to a steepening yield curve, thereby creating continuing headwinds for CPNG's share price performance over the next 3 to 6 months.

CPNG: Dead Cat Bounce or a More Sustainable Price Recovery in the Cards?

Telco/Internet specialist

Kirk Boodry

Redex Research

<p>In the run-up to results last week, we said that tech weakness could push Softbank closer to a buyback renewal but it is tech gains that highlight market disappointment. A return to tech on Friday boosted Vision Fund’s public portfolio by $5.2bn (¥571bn equal to ¥158/share @48% VF equity and 1.7bn S/O) but SBG shares are down today as the discount has widened to 34% from 32% on Friday and 21% a week ago. In recent years, shares have traded in the range of 40-50% of the underlying public value until the Vision Fund IPO parade kicked into higher gear even as an unprecedented buyback plan provided additional support. With tech weakness, a return to that level seems more likely and the Friday valuation rebound underscores the importance of returns to shareholders too.</p>

In the run-up to results last week, we said that tech weakness could push Softbank closer to a buyback renewal but it is tech gains that highlight market disappointment. A return to tech on Friday boosted Vision Fund’s public portfolio by $5.2bn (¥571bn equal to ¥158/share @48% VF equity and 1.7bn S/O) but SBG shares are down today as the discount has widened to 34% from 32% on Friday and 21% a week ago. In recent years, shares have traded in the range of 40-50% of the underlying public value until the Vision Fund IPO parade kicked into higher gear even as an unprecedented buyback plan provided additional support. With tech weakness, a return to that level seems more likely and the Friday valuation rebound underscores the importance of returns to shareholders too.

Softbank Group - The Market Is Sending a Message

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.

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<div><p><a href="https://www.smartkarma.com/entities/hello-inc" target="_blank" data-smartkarma-citation="entities:33031:1" rel="noopener">Hello Inc (1883864D US)</a>, which is backed by <a href="https://www.smartkarma.com/entities/ant-group-co-ltd" target="_blank" data-smartkarma-citation="entities:24240:1" rel="noopener">Ant Financial Services Group (6688 HK)</a>, is China's third-largest local services platform by transaction volume, according to iResearch. Hello offers bike-sharing and e-bike sharing services known as <em>Hello Bike</em> and <em>Hello e-Bike</em>. It also has a carpooling marketplace known as <em>Hello Carpooling</em>. Hello is seeking to raise $1 billion through a Nasdaq listing, according to press reports.   </p></div>
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<p>In <a href="https://www.smartkarma.com/insights/hello-ipo-initiation-goodbye" target="_blank" data-smartkarma-citation="insights:50795" rel="noopener">Hello IPO Initiation: Goodbye</a> we stated that Hello’s investor pitch is that its various businesses create a flywheel that drives user spending growth with limited user acquisition costs. However, Hello remains saddled with a core business (shared two-wheeler services) that has challenging prospects due to declining growth, low profitability and high cash burn.</p>
<div class="content-highlight"><p>In <a href="https://www.smartkarma.com/insights/hello-ipo-1q21-update-does-not-change-the-avoid-tag" target="_blank" data-smartkarma-citation="insights:51119" rel="noopener">Hello IPO: 1Q21 Update Does Not Change the Avoid Tag</a>, we noted that at first glance, the 1Q21 update looks stunning due to accelerating growth and margin progression. However, a closer look, suggests that business continues to face daunting challenges. In this note, we present our forecasts and take the first look at Hello's potential valuation range. </p></div>
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Hello Inc (1883864D US), which is backed by Ant Financial Services Group (6688 HK), is China's third-largest local services platform by transaction volume, according to iResearch. Hello offers bike-sharing and e-bike sharing services known as Hello Bike and Hello e-Bike. It also has a carpooling marketplace known as Hello Carpooling. Hello is seeking to raise $1 billion through a Nasdaq listing, according to press reports.   

In Hello IPO Initiation: Goodbye we stated that Hello’s investor pitch is that its various businesses create a flywheel that drives user spending growth with limited user acquisition costs. However, Hello remains saddled with a core business (shared two-wheeler services) that has challenging prospects due to declining growth, low profitability and high cash burn.
In Hello IPO: 1Q21 Update Does Not Change the Avoid Tag, we noted that at first glance, the 1Q21 update looks stunning due to accelerating growth and margin progression. However, a closer look, suggests that business continues to face daunting challenges. In this note, we present our forecasts and take the first look at Hello's potential valuation range. 



Global TMT analyst with Asia ex-Japan focus.

Mitchell Kim

<p>Coupang reported its quarterly earnings for the first time since its IPO on 11 March 2021.  The stock lost USD5 billion in market value in the subsequent trading session.  I offer three reasons why the stock fell even though the revenue growth of 74% met the consensus forecast (my estimate was much higher): </p><ol>
<li>Management's admission that strong revenue growth was against the COVID-19 stimulated demand in 1Q20 (again helped by the stronger won).  Comparing 2Q21 to 4Q21 against the even stronger revenue growth quarters -- 2Q20 to 4Q20 -- will be more challenging.  (Please refer back to my initiation report, <a href="https://www.smartkarma.com/insights/coupang-cpng-us-going-mano-e-mano-with-jd-com" target="_blank" data-smartkarma-citation="insights:49065" rel="noopener">Coupang (CPNG US): Going Mano E Mano with JD.com</a>.) </li>
<li>Active customer growth slowed in 1Q21.  While the revenue per customer increased by 44%, it is decelerated from 59% YoY growth in 4Q20 by my estimate.   </li>
<li>Operating losses expanded nearly 4x (3x excluding the IPO-related costs), weakening the management's argument that operating leverage was improving.  I argue in my previous report that when revenue growth decelerates to 50-60%, the company has to demonstrate that profit is near.     </li>
</ol><p>With the stock trading at 2.7x EV/Revenue compared to <a href="https://www.smartkarma.com/entities/jd-com-inc-adr" target="_blank" data-smartkarma-citation="entities:446:1" rel="noopener">JD.com Inc (ADR) (JD US)</a>'s 0.6x FY21, there is further downside risk, in my view.  </p>

Coupang reported its quarterly earnings for the first time since its IPO on 11 March 2021.  The stock lost USD5 billion in market value in the subsequent trading session.  I offer three reasons why the stock fell even though the revenue growth of 74% met the consensus forecast (my estimate was much higher): 
Management's admission that strong revenue growth was against the COVID-19 stimulated demand in 1Q20 (again helped by the stronger won).  Comparing 2Q21 to 4Q21 against the even stronger revenue growth quarters -- 2Q20 to 4Q20 -- will be more challenging.  (Please refer back to my initiation report, Coupang (CPNG US): Going Mano E Mano with JD.com.) 
Active customer growth slowed in 1Q21.  While the revenue per customer increased by 44%, it is decelerated from 59% YoY growth in 4Q20 by my estimate.   
Operating losses expanded nearly 4x (3x excluding the IPO-related costs), weakening the management's argument that operating leverage was improving.  I argue in my previous report that when revenue growth decelerates to 50-60%, the company has to demonstrate that profit is near.     
With the stock trading at 2.7x EV/Revenue compared to JD.com Inc (ADR) (JD US)'s 0.6x FY21, there is further downside risk, in my view.  

South Korea

Coupang, Inc. operates as an e-commerce company. The Company offers dynamic end-to-end e-commerce and logistic solutions. Coupang serves customers worldwide.

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Coupang (CPNG US)

JD Logistics: Gray Market Value & The Very Long-Term View Driven by Technological Innovations

In this insight, we discuss the gray market value and the very long view of JD Logistics. The gray market value of JD Logistics has been trading at...

Douglas Kim

CPNG: Dead Cat Bounce or a More Sustainable Price Recovery in the Cards?

We look at Fibonnaci Retracement levels and DCF analysis using consensus forecast to see whether price recovery in the last 2 trading sessions...

Henry Kwon

Softbank Group - The Market Is Sending a Message

Even with a record one-day performance for Vision Fund's public portfolio, the discount to fair value has widened to 34% from c. 20% last week...

Kirk Boodry

Hello IPO: Valuation First Look

Hello is seeking to raise $1 billion through a Nasdaq listing, according to press reports. In this note, we present our forecasts and take the...

Arun George

Coupang (CPNG US): Crack in the Armor

Coupang's first earnings report after the IPO was disappointing. Operating leverage is nowhere in sight. Expect revenue growth deceleration to a...

Mitchell Kim

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