Pan-Asia Index Flows & Special Situations, Quiddity Advisors

Janaghan Jeyakumar, CFA

Pan-Asia Index Flows & Special Situations

Quiddity Advisors

Pan-Asia Catalysts/Events

Event-Driven

<p>Australian small-cap Telco company <a href="https://www.smartkarma.com/entities/5g-networks-ltd-australia" target="_blank" data-smartkarma-citation="entities:30406:1" rel="noopener">5G Networks Ltd/Australia (5GN AU)</a> and related company <a href="https://www.smartkarma.com/entities/webcentral-grp-ltd" target="_blank" data-smartkarma-citation="entities:15203:1" rel="noopener">Webcentral (WCG AU)</a> announced on Friday that they have agreed to merge in a <a href="https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02396172-2A1310324?access_token=83ff96335c2d45a094df02a206a39ff4" target="_blank" rel="noopener">Scrip Transaction</a> that will see 5GN shareholders receive 2 WCG shares per 5GN share. </p><p>The companies claim that the Merger will "<em>create a larger entity with a single shareholder base propelling the company towards ASX300 status</em>".   </p><p>The Deal is conditional on shareholder approvals from both companies and is expected to be completed in late-October 2021. </p><div><p><em>More below the fold. </em></p></div><hr><div><div><div class="content-remarks"><p>For more information about M&amp;A rules, regulations, and practices in Australia, please refer to <a href="https://www.smartkarma.com/insights/quiddity-australia-m-a-guide-2019" target="_blank" data-smartkarma-citation="insights:30118" rel="noopener">Quiddity Australia M&amp;A Guide 2019</a> and <a href="https://www.smartkarma.com/insights/quiddity-m-a-australia-foreign-investment-reforms" target="_blank" data-smartkarma-citation="insights:40210" rel="noopener">Quiddity M&amp;A: Australia Foreign Investment Reforms</a> </p></div></div></div>

Australian small-cap Telco company 5G Networks Ltd/Australia (5GN AU) and related company Webcentral (WCG AU) announced on Friday that they have agreed to merge in a Scrip Transaction that will see 5GN shareholders receive 2 WCG shares per 5GN share. The companies claim that the Merger will "create a larger entity with a single shareholder base propelling the company towards ASX300 status".   The Deal is conditional on shareholder approvals from both companies and is expected to be completed in late-October 2021. More below the fold. For more information about M&amp;A rules, regulations, and practices in Australia, please refer to Quiddity Australia M&amp;A Guide 2019 and Quiddity M&amp;A: Australia Foreign Investment Reforms 

Webcentral - 5GN Merger: A Small-Cap Merger Aimed at ASX300 Status

Overseas Chinese Equities, Aequitas Research

Ming Lu

Overseas Chinese Equities

Equity Bottom-Up

<ul>
<li>We believe the online community WeChat is the real main business of Tencent, because WeChat’s user base supports all business lines in Tencent and attracts clients outside Tencent. We believe the game business that the market cares most about is merely one of those businesses based on WeChat’s user base. </li>
</ul>
<ul>
<li>We believe Tencent’s business lines in financial statements are confusing. We re-classify Tencent’s business lines into online community, Video, and Game. Online communities account for 39%~42% of total revenues, more than 29% for game revenues. </li>
</ul>
<ul>
<li>We believe it is the growth rate of WeChat advertising revenues , 44% yoy in 4Q2018, rather than the growth rate of total revenues, 28% yoy, that represents the growth momentum in following years. With the largest user base among all apps in China, we believe WeChat advertising revenues will increase 41% in 2019 and 37% in 2020. </li>
</ul>
<ul>
<li>Mini-program is another direction of expansion. WeChat Pay is a mini-program in WeChat and is the second largest online payment system in China. Tongcheng-Elong (780 HK) has a mini-program in the mini-program WeChat Pay. In 2018, 42% of Tongcheng-Elong’s active users come from WeChat Pay and 80% come from the whole WeChat community. </li>
</ul>
<ul>
<li>We believe the market overly focus on one-time events. For example, the authorities suspended game license approval and the FIFA World Cup took audience from TV series. We notice clear recovery trends in the weakest parts of video and game businesses. </li>
</ul>
<ul>
<li>We believe Tencent’s user base has irreplaceable market power, so we measure Tencent with historical price / earnings ratio. We set the target price HKD457, which is 29% over the market price.</li>
</ul>
<p><strong>Contents</strong></p>
<p>A. Misconception “Just a Game Operator”</p>
<p>B. Real Main Business - WeChat</p>
<p>C. WeChat Pay - Best In-house Mini-Program of WeChat</p>
<p>D. Online Game - Gained Market Share During Licence Suspension</p>
<p>E. Video Streaming - Main Competitor in Trouble</p>
<p>F. Risks of Social Responsibility and Governance</p>
<p>G. Valuation</p>
<p>H. Appendices</p>


We believe the online community WeChat is the real main business of Tencent, because WeChat’s user base supports all business lines in Tencent and attracts clients outside Tencent. We believe the game business that the market cares most about is merely one of those businesses based on WeChat’s user base. 


We believe Tencent’s business lines in financial statements are confusing. We re-classify Tencent’s business lines into online community, Video, and Game. Online communities account for 39%~42% of total revenues, more than 29% for game revenues. 


We believe it is the growth rate of WeChat advertising revenues , 44% yoy in 4Q2018, rather than the growth rate of total revenues, 28% yoy, that represents the growth momentum in following years. With the largest user base among all apps in China, we believe WeChat advertising revenues will increase 41% in 2019 and 37% in 2020. 


Mini-program is another direction of expansion. WeChat Pay is a mini-program in WeChat and is the second largest online payment system in China. Tongcheng-Elong (780 HK) has a mini-program in the mini-program WeChat Pay. In 2018, 42% of Tongcheng-Elong’s active users come from WeChat Pay and 80% come from the whole WeChat community. 


We believe the market overly focus on one-time events. For example, the authorities suspended game license approval and the FIFA World Cup took audience from TV series. We notice clear recovery trends in the weakest parts of video and game businesses. 


We believe Tencent’s user base has irreplaceable market power, so we measure Tencent with historical price / earnings ratio. We set the target price HKD457, which is 29% over the market price.

Contents
A. Misconception “Just a Game Operator”
B. Real Main Business - WeChat
C. WeChat Pay - Best In-house Mini-Program of WeChat
D. Online Game - Gained Market Share During Licence Suspension
E. Video Streaming - Main Competitor in Trouble
F. Risks of Social Responsibility and Governance
G. Valuation
H. Appendices

Tencent Bull Case: Buy the Online Community Empire, Not Just a Game Operator

United States

Web.com Group Inc. provides full-service web site solutions to small businesses. The Company offers marketing, e-commerce, and various other services.

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Web.Com Group (WEB US)

Webcentral - 5GN Merger: A Small-Cap Merger Aimed at ASX300 Status

Australian small-cap Telco company 5GN Ltd and related company Webcentral are merging in an all-scrip Deal. After Deal Completion in Oct 2021. the...

Janaghan Jeyakumar, CFA

Tencent Bull Case: Buy the Online Community Empire, Not Just a Game Operator

We believe the online community WeChat is the real main business of Tencent, because WeChat’s user base supports all business lines in Tencent and...

Ming Lu

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