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.

Equity Bottom-Up

Overnight many Chinese gaming-related names fell ~3% on news that China would be restricting playing time for minors to just three hours a week, specifically 20:00-21:00 on Friday, Saturday and Sunday. The market reaction grossly underestimates how drastic these restrictions will be for gaming companies and seems to simply be superficially looking at the low single-digit revenue contribution percentages of minors.

Overnight many Chinese gaming-related names fell ~3% on news that China would be restricting playing time for minors to just three hours a week, specifically 20:00-21:00 on Friday, Saturday and Sunday. The market reaction grossly underestimates how drastic these restrictions will be for gaming companies and seems to simply be superficially looking at the low single-digit revenue contribution percentages of minors.

China Gaming Restrictions Are FAR More Severe Than the Market Is Assuming

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.

Event-Driven

<a href="https://www.smartkarma.com/entities/joyy-inc" target="_blank" data-smartkarma-citation="entities:285:1" rel="noopener">JOYY (YY US)</a> may be subject to a privatisation bid from Mr David Li (co-founder and Chairman) and Mr Jun Lei (founder and Chairman of <a href="https://www.smartkarma.com/entities/xiaomi-corp" target="_blank" data-smartkarma-citation="entities:24409:1" rel="noopener">Xiaomi Corp (1810 HK)</a>), its top two shareholders, according to Reuters report on 26 August. Mr David Li and Mr Jun Lei are looking to privatise Joyy at $75-$100 per ADS and finalise the deal by the end of 2021. Mr David Li and Mr Jun Lei aim to spin off Joyy's key asset, BIGO, and list it in Hong Kong, to take advantage of higher valuations, according to Reuters. On 27 August, Joyy said it has not received any formal takeover offers, according to Chinese media reports.  Joyy shares are around 60% below their February peak due to weak guidance (3Q21 revenue guidance was around 16% below consensus), the delay of SAMR anti-trust approval for the YY Live disposal and ongoing policy uncertainty on Chinese tech.As a reminder, on 16 November 2020, Joyy entered into a definitive agreement with <a href="https://www.smartkarma.com/entities/baidu-inc" target="_blank" data-smartkarma-citation="entities:179:1" rel="noopener">Baidu (BIDU US)</a> for the disposal of YY Live for $3.6 billion in cash, subject to certain adjustments. The sale was substantially completed on 8 February 2021 resulting in a $1.9 billion payment from Baidu. Notably, Joyy’s market cap of $4.9 billion is 7% below its net cash of $5.2 billion, which is the sum of the 2Q1 net cash of $3.9 billion and Baidu's remaining payment net of tax $1.4 billion.As Joyy is incorporated in the Cayman Islands, for potential privatisation to succeed, shareholders representing two-thirds of shares present and voting need to approve the deal. Mr David Li represents 76.0% of the voting interest and has the two-thirds voting interest threshold needed to approve any potential privatisation deal.<div class="content-highlight">Our SOTP and relative valuation suggest that the rumoured privatisation range of $75-100 per ADS is justifiable and reasonable. Our base-case SOTP valuation is $71.69 per ADS, which is a 16% premium to the last close price of $61.97 per ADS. Despite Joyy's insistence that no formal bid has been received, we would be buyers as the shares offer a favourable risk/reward profile to the emergence of a formal privatisation bid.</div>

JOYY (YY US) may be subject to a privatisation bid from Mr David Li (co-founder and Chairman) and Mr Jun Lei (founder and Chairman of Xiaomi Corp (1810 HK)), its top two shareholders, according to Reuters report on 26 August. Mr David Li and Mr Jun Lei are looking to privatise Joyy at $75-$100 per ADS and finalise the deal by the end of 2021. Mr David Li and Mr Jun Lei aim to spin off Joyy's key asset, BIGO, and list it in Hong Kong, to take advantage of higher valuations, according to Reuters. On 27 August, Joyy said it has not received any formal takeover offers, according to Chinese media reports.  Joyy shares are around 60% below their February peak due to weak guidance (3Q21 revenue guidance was around 16% below consensus), the delay of SAMR anti-trust approval for the YY Live disposal and ongoing policy uncertainty on Chinese tech.As a reminder, on 16 November 2020, Joyy entered into a definitive agreement with Baidu (BIDU US) for the disposal of YY Live for $3.6 billion in cash, subject to certain adjustments. The sale was substantially completed on 8 February 2021 resulting in a $1.9 billion payment from Baidu. Notably, Joyy’s market cap of $4.9 billion is 7% below its net cash of $5.2 billion, which is the sum of the 2Q1 net cash of $3.9 billion and Baidu's remaining payment net of tax $1.4 billion.As Joyy is incorporated in the Cayman Islands, for potential privatisation to succeed, shareholders representing two-thirds of shares present and voting need to approve the deal. Mr David Li represents 76.0% of the voting interest and has the two-thirds voting interest threshold needed to approve any potential privatisation deal.Our SOTP and relative valuation suggest that the rumoured privatisation range of $75-100 per ADS is justifiable and reasonable. Our base-case SOTP valuation is $71.69 per ADS, which is a 16% premium to the last close price of $61.97 per ADS. Despite Joyy's insistence that no formal bid has been received, we would be buyers as the shares offer a favourable risk/reward profile to the emergence of a formal privatisation bid.

Joyy’s Potential Privatisation by Top Two Shareholders

Global Emerging Market Equities, Propitious Research

Wium Malan, CFA

Global Emerging Market Equities

Independent, Fundamental Quantitative Research

Propitious Research

Fully independent, fundamental and quantitative equity research, focused on companies in the Telecommunication, Media, Technology, Internet and Healthcare sectors in the Global Emerging Markets. Idea generation focused on Quality stocks, trading below their intrinsic Value, with sound Corporate Governance.

<a href="https://www.smartkarma.com/entities/tencent-holdings-ltd" target="_blank" data-smartkarma-citation="entities:26:1" rel="noopener">Tencent (700 HK)</a>’s investment track record has been nothing short of remarkable, as is evidenced by the increase in the reported fair value of listed Investees, which has grown by 99%y/y to nearly RMB1.45trn as of 30 June 2021, contributing as much as 31% to Tencent’s market cap. These investments have also driven material income statement gains that account for the bulk of Tencent’s positive operating profit earnings surprises over the past 2 years. However, based on share price weakness experienced post the most recent reporting period, I estimate that the current fair market value of listed associates could have declined by 26%, or RMB378bn, which is also likely to have a materially adverse impact on reported income statement numbers for 3Q21. Given that Tencent is already facing very tough comps from its online gaming revenue segment, a negative impact to “Other gains, net” could provide for significant earnings miss in 3Q21 reported numbers. If we add to that the ongoing uncertainty around the Chinese regulatory environment and economic slowdown, we could see more short-term volatility in Tencent’s share price. The main caveat to this is that, with a resurgence of the Delta-variant and COVID-19 pandemic, we could see a near-term pickup in online gaming revenue as lockdowns intensify in China, which should be positive for Tencent’s near-term earnings outlook. Tencent currently trades on a 22.1x NTM PE ratio, which is roughly 2 standard deviations below its 5-year historical average trading range. Should we exclude Tencent’s Investees at fair value, I estimate that Tencent’s consolidated operations currently trade on only a 12.1x NTM PE ratio which remains an extremely attractive longer-term entry point to the consolidated operations that are expected to grow Net Operating Profit After Tax (NOPAT) at mid-teens levels from next year onwards, even if we factor in further near-term earnings downgrades, economic headwinds to the advertising segment, or an increase in tax rates for the online games segment.

Tencent (700 HK)’s investment track record has been nothing short of remarkable, as is evidenced by the increase in the reported fair value of listed Investees, which has grown by 99%y/y to nearly RMB1.45trn as of 30 June 2021, contributing as much as 31% to Tencent’s market cap. These investments have also driven material income statement gains that account for the bulk of Tencent’s positive operating profit earnings surprises over the past 2 years. However, based on share price weakness experienced post the most recent reporting period, I estimate that the current fair market value of listed associates could have declined by 26%, or RMB378bn, which is also likely to have a materially adverse impact on reported income statement numbers for 3Q21. Given that Tencent is already facing very tough comps from its online gaming revenue segment, a negative impact to “Other gains, net” could provide for significant earnings miss in 3Q21 reported numbers. If we add to that the ongoing uncertainty around the Chinese regulatory environment and economic slowdown, we could see more short-term volatility in Tencent’s share price. The main caveat to this is that, with a resurgence of the Delta-variant and COVID-19 pandemic, we could see a near-term pickup in online gaming revenue as lockdowns intensify in China, which should be positive for Tencent’s near-term earnings outlook. Tencent currently trades on a 22.1x NTM PE ratio, which is roughly 2 standard deviations below its 5-year historical average trading range. Should we exclude Tencent’s Investees at fair value, I estimate that Tencent’s consolidated operations currently trade on only a 12.1x NTM PE ratio which remains an extremely attractive longer-term entry point to the consolidated operations that are expected to grow Net Operating Profit After Tax (NOPAT) at mid-teens levels from next year onwards, even if we factor in further near-term earnings downgrades, economic headwinds to the advertising segment, or an increase in tax rates for the online games segment.

Tencent: Investees, the Potential for ST Earnings Miss, and an Attractive LT Entry Point

Equity Analyst, LightStream Research

Shifara Samsudeen, ACMA, CGMA

Equity Analyst

<a href="https://www.smartkarma.com/entities/bilibili-inc" target="_blank" data-smartkarma-citation="entities:26793:1" rel="noopener">Bilibili Inc (BILI US)</a> reported 2Q2021 results on Thursday (19th August 2021) which saw revenues growing 71.7% YoY to RMB4.5bn (vs consensus revenues of RMB4.3bn) while operating losses for the quarter increased to 33.8% of revenues to RMB1.52bn (vs consensus operating losses of RMB1.4bn).
The company’s Mobile games’ revenue dropped YoY for the first time, however, growth in revenue from other segment’s helped Bilibili continue its strong top line growth. The online games’ companies in China (Including <a href="https://www.smartkarma.com/entities/tencent-holdings-ltd" target="_blank" data-smartkarma-citation="entities:26:1" rel="noopener">Tencent (700 HK)</a> and <a href="https://www.smartkarma.com/entities/huya-inc" target="_blank" data-smartkarma-citation="entities:26983:1" rel="noopener">HUYA Inc (HUYA US)</a>) have seen weaknesses in their gaming revenues during the June quarter due to intense competition in the market and regulatory uncertainties. The diversified revenue base of Bilibili has helped grow its top line at much higher rates compared to its peers.

Bilibili Inc (BILI US) reported 2Q2021 results on Thursday (19th August 2021) which saw revenues growing 71.7% YoY to RMB4.5bn (vs consensus revenues of RMB4.3bn) while operating losses for the quarter increased to 33.8% of revenues to RMB1.52bn (vs consensus operating losses of RMB1.4bn).
The company’s Mobile games’ revenue dropped YoY for the first time, however, growth in revenue from other segment’s helped Bilibili continue its strong top line growth. The online games’ companies in China (Including Tencent (700 HK) and HUYA Inc (HUYA US)) have seen weaknesses in their gaming revenues during the June quarter due to intense competition in the market and regulatory uncertainties. The diversified revenue base of Bilibili has helped grow its top line at much higher rates compared to its peers.

Bilibili: Mobile Games Decline and Losses Expand but Other Verticals Continue to Grow

Pan-Asia Catalysts/Events, Quiddity Advisors

David Blennerhassett

Pan-Asia Catalysts/Events

Quiddity Advisors

Has there ever been so much disinformation, speculation and conjecture for a takeover of, ostensibly, a straightforward asset?
From the onset, the <a href="https://www.smartkarma.com/entities/soho-china-ltd" target="_blank" data-smartkarma-citation="entities:4123:1" rel="noopener">SOHO China Ltd (410 HK)</a> deal traded wide on concerns the transaction could turn political on account of the company's founder's son allegedly making salacious comments aimed at China's PLA around the time India and China engaged in skirmishes along the Sino-Indian border last year. 
A vacuum of any positive news and continued speculation reached a helm on the 29 July, following a vague media article suggesting the deal faced regulatory "obstacles." The shares cratered, falling 31% at one point, before "recovering" to $3.02/share, around the undisturbed price and ~40% adrift of the $5.00/share offer price.
Five days later a sister publication of the one behind the "obstacle" article, issued a note that several banks had obtained internal approvals for underwriting some of Blackstone Group’s loans to fund the Offer. Shares consequently popped.
But it appears there was considerably more substance behind that pop in price. 
Last Friday afternoon, after the close of market, SOHO announced that on 3 August 2021, Blackstone received a <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2021/0806/2021080600685.pdf" target="_blank" rel="noopener">notice</a> from SAMR dated 2 August that the case concerning its notification under the PRC Anti-Monopoly Law had been formally accepted by SAMR for review. 
Formal acceptance should be viewed as a major positive.  Less positive is that the application does not appear to a "simple procedure" review.  
More below the fold. 
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Has there ever been so much disinformation, speculation and conjecture for a takeover of, ostensibly, a straightforward asset?
From the onset, the SOHO China Ltd (410 HK) deal traded wide on concerns the transaction could turn political on account of the company's founder's son allegedly making salacious comments aimed at China's PLA around the time India and China engaged in skirmishes along the Sino-Indian border last year. 
A vacuum of any positive news and continued speculation reached a helm on the 29 July, following a vague media article suggesting the deal faced regulatory "obstacles." The shares cratered, falling 31% at one point, before "recovering" to $3.02/share, around the undisturbed price and ~40% adrift of the $5.00/share offer price.
Five days later a sister publication of the one behind the "obstacle" article, issued a note that several banks had obtained internal approvals for underwriting some of Blackstone Group’s loans to fund the Offer. Shares consequently popped.
But it appears there was considerably more substance behind that pop in price. 
Last Friday afternoon, after the close of market, SOHO announced that on 3 August 2021, Blackstone received a notice from SAMR dated 2 August that the case concerning its notification under the PRC Anti-Monopoly Law had been formally accepted by SAMR for review. 
Formal acceptance should be viewed as a major positive.  Less positive is that the application does not appear to a "simple procedure" review.  
More below the fold. 




United States

HUYA Inc. operates as a game live streaming platform. The Company offers interactive video broadcast services including e-sports, music, reality show, entertainment genres, talent shows, and anime and outdoor activities. HUYA serves customers in China.

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HUYA (HUYA US)

China Gaming Restrictions Are FAR More Severe Than the Market Is Assuming

We believe the market reaction to China's new gaming restrictions grossly underestimates how drastic the long-term impact will be.

Mio Kato

Joyy’s Potential Privatisation by Top Two Shareholders

Joyy's rumoured privatisation bid is at $75-$100 per ADS. Our base-case SOTP valuation is $71.69, a 16% premium to the last close. Consequently,...

Arun George

Tencent: Investees, the Potential for ST Earnings Miss, and an Attractive LT Entry Point

In this insight, we take a detailed look at Tencent’s listed Investees, their impact on valuation, and the potential for a near-term negative...

Wium Malan, CFA

Bilibili: Mobile Games Decline and Losses Expand but Other Verticals Continue to Grow

Bilibili’s results was a mixed bag where growth in Value-Added services, advertising and E-commerce have seen strong growth while mobile games has...

Shifara Samsudeen, ACMA, CGMA

SOHO China (410 HK): Time To Buy

Formal acceptance for review is a big positive development. Most deals in China are simply not accepted for review if they are a no-go - and the...

David Blennerhassett

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