ECM

In this briefing:

1. Futu Holdings Pre-IPO – Great Metrics but in a Commoditised Industry
2. China Tobacco International IPO: Heavy Regulation, Declining Margins – A Bit Late to IPO Party
3. Futu Holdings IPO Preview: Running Out of Steam
4. IPO Radar: AutoCorp, Honda’s Avatar in Thailand

1. Futu Holdings Pre-IPO – Great Metrics but in a Commoditised Industry

Futu Holdings Ltd (FHL US) plans to raise around US$300m in its US IPO. The company is backed by Tencent Holdings (700 HK) , Matrix Partners and Sequoia, who together own over 45% of the company.

The founding team comes mostly from Tencent, which might explain Tencent’s large stake in the company. Growth for the company has been stupendous despite the jittery markets, with margin financing adding to the top-line growth. 

While its low costs will help it to steal clients from the more traditional brokers, other new low-cost brokers seem to be offering similar services at comparable rates. In addition, the company is not licensed or regulated by any entities in China, despite the majority of its client base being Chinese nationals. Furthermore, the company plans to expand into newer overseas market where it doesn’t seem to have much of a cost advantage.

2. China Tobacco International IPO: Heavy Regulation, Declining Margins – A Bit Late to IPO Party

China Tobacco International (GHALPZ CH) is a subsidiary and offshore unit of China National Tobacco Corp., a state-owned enterprise (SOE). The company procures tobacco leaves from regions around the world and exports tobacco leaf products and branded cigarettes to the duty-free outlets outside China’s customs area and in Southeast Asia.

The IPO is expected to raise US$100M and the company expects to use the proceeds to expand market share, acquire new cigarette brands, working capital, and other corporate purposes.                      

3. Futu Holdings IPO Preview: Running Out of Steam

Futu Holdings Ltd (FHL US) is the fourth largest online broker in Hong Kong. Futu has filed for a Nasdaq IPO to raise $300 million, down from an earlier indication of a $500 million raise according to press reports. Futu is backed by Tencent Holdings (700 HK) (38.2% shareholder), Matrix Partners (6.1%) and Sequoia Capital (4.0%).

4. IPO Radar: AutoCorp, Honda’s Avatar in Thailand

In August 2017, Honda stole the top spot in Thai passenger cars from Toyota and held it for a few months. They are still formidable players, and ACG (AutoCorp) which runs Honda dealerships and service centers across Thailand, is expected to IPO some time in 2019. Here’s our quick look at the company.

• We value this IPO at Bt2/sh using DCF, since there’s really no good comparables. The company is expected to enjoy slower revenue growth and higher margins going forward as car sales slow down nationally and maintenance becomes a bigger chunk of the revenues.
• They only operate in four provinces and run 8 showrooms with over 6,000 sqm of display space. The service centers account for almost 17,200 sqm. The big chunk comes from lower margin car sales. Along with accessories, these account for 84% of revenues.
• The IPO is firmly underwritten by Singapore’s Phillips Securities and is good for more than a quarter of shares outstanding (26%). The founding Rangkanuwat family control all remaining shares and have committed to 6 month lock-up period.

In this briefing:

1. Leong Hup IPO Preview: A Game of Chicken
2. Metropolis Healthcare IPO: Stands Apart in Pricing Power, Revenue Growth and Margins
3. ECM Weekly (12 January 2019) – Futu, China East Education, China Kepei Education, Viva Biotech
4. ASIC Review of Allocation in Equity Raising – Some Truths, Some Half-Truths – No Improvements
5. China East Education (中国东方教育) Pre-IPO – The Company Known for Its Culinary School

1. Leong Hup IPO Preview: A Game of Chicken

Leong Hup International (LEHUP MK) is one of the largest producers of poultry, eggs and livestock feeds in Southeast Asia. After an unusually quite 2018, Malaysia’s equity capital market is set for rebound with at least three issuers looking to raise up to $500 million from IPOs. Leong Hup is set to the be the first as it has started the search for cornerstone investors.

2. Metropolis Healthcare IPO: Stands Apart in Pricing Power, Revenue Growth and Margins

• Metropolis Health Services Limited (MHL IN) is the 3^rd largest pathology chain in India and caters to the Rs600bn market growing at 15% Cagr. It is strongest in the lucrative Mumbai and Chennai markets.
• Though India’s pathology market has seen intense price competition and price discounting, Metropolis managed to grow revenue/patient much ahead of peers
• Its revenue/patient is 20% higher than its nearest competitor and the gap has been widening over FY16-18
• It is the only major pathology chain to have accelerated revenue growth over FY16-18 despite the lowest A&P spend
• It managed to grow Gross Margin 330bps and hold Ebitda margins over FY16-18. Major competitors like Dr Lal Pathlabs (DLPL IN) (-340bps) and SRL (-520bps) saw sharp contraction in Ebitda margins.
• On the flip side, its patient growth has lagged its retail network growth by a wide margin. Its cash conversion cycle is much longer than DLAL’s. It is also the most vulnerable to any government regulated price caps on testing in the future owing to its premium pricing.
• Lastly, it doesn’t need any fresh money and the entire IPO is an offer for sale by the promoters and Carlyle Group.

3. ECM Weekly (12 January 2019) – Futu, China East Education, China Kepei Education, Viva Biotech

Aequitas Research puts out a weekly update on the deals that have been covered by Smartkarma Insight Providers recently, along with updates for upcoming IPOs.

Accuracy Rate:

Our overall accuracy rate is 72% for IPOs and 64% for Placements 

(Performance measurement criteria is explained at the end of the note)

New IPO filings

• China Tobacco International (Hong Kong, US$100m)
• China East Education (Hong Kong, US$400m)
• Ebang International (Hong Kong, re-filed)
• MicuRx Pharma (Hong Kong, re-filed)

Below is a snippet of our IPO tool showing upcoming events for the next week. The IPO tool is designed to provide readers with timely information on all IPO related events (Book open/closing, listing, initiation, lock-up expiry, etc) for all the deals that we have worked on. You can access the tool here or through the tools menu.

News on Upcoming IPOs

• Urban Commons plans IPO of up to US$500m at Q1-end
• Viva Biotech plans IPO in the second quarter
• CStone Pharma plans US$400m IPO in Feb
• Global Switch plans about US$1bn HK IPO
• China’s Wanda files for US IPO of sports unit to raise up to US$500m

Smartkarma Community’s this week Analysis on Upcoming IPO

• Futu Holdings IPO Preview: Running Out of Steam
• Futu Holdings Pre-IPO – Great Metrics but in a Commoditised Industry
• China Tobacco International (IPO): The Monopolist Will Not Recover
• China Tobacco International IPO: Heavy Regulation, Declining Margins – A Bit Late to IPO Party
• IPO Radar: AutoCorp, Honda’s Avatar in Thailand 

List of pre-IPO Coverage on Smartkarma

4. ASIC Review of Allocation in Equity Raising – Some Truths, Some Half-Truths – No Improvements

Over 2017-18, the Australian Securities & Investments Commission (ASIC) undertook a review of allocation in equity raising transactions. The review involved large and mid-sized licensees (brokers), Issuers, International investors and other international regulators. The results of the review were published by ASIC in Dec 2018. This insight highlights some of the key findings.

It’s good to see that some of the standard practices of banks allocating more to existing clients and participants of earlier deals have at least been acknowledged. Even though some institutional investors have outright labelled the allocation process as a “black box”, ASIC doesn’t seem to want to do much about it.

The area where ASIC is more concerned is the messaging to investors which highlights the different definitions of “well-covered” across banks. Although, the banks seem to have mislead the regulator on interpretation of “real-demand” with ECM bankers saying that all orders are taken at face-value. That raises a whole new level of questions on the messaging around demand for the deal.

5. China East Education (中国东方教育) Pre-IPO – The Company Known for Its Culinary School

China Xinhua Education (2779 HK) listed in Q1 of 2018 and we wrote in our insight that the founder had vocational schools that have been separated from China Xinhua that seemed to be his prized asset. Fast forward to December 2018, the prized asset has finally filed its draft prospectus under the entity China East Education (CEE HK) and it is looking to raise US$400m in its IPO.

In this insight, we will analyze the company’s financial and operating performance, compare it to listed education companies, and provide some questions we have for management.

In this briefing:

1. 2019 M&A/IPO Preview: Chinese Express Sector Quickly Building Out ‘Last-Mile’ & Int’l Capabilities
2. Leong Hup IPO Preview: A Game of Chicken
3. Metropolis Healthcare IPO: Stands Apart in Pricing Power, Revenue Growth and Margins
4. ECM Weekly (12 January 2019) – Futu, China East Education, China Kepei Education, Viva Biotech
5. ASIC Review of Allocation in Equity Raising – Some Truths, Some Half-Truths – No Improvements

1. 2019 M&A/IPO Preview: Chinese Express Sector Quickly Building Out ‘Last-Mile’ & Int’l Capabilities

A year ago we published a note that described how we expected corporate activity in China’s domestic express  sector to play out in 2018 (see 2018 M&A/IPO Activity Preview: Chinese Express, Logistics Sectors Hit by Slower Growth & BABA Vs JD). In this new piece, we look back at how things actually played out in the sector last year and look forward to 2019 and beyond. 

We’ve divided this year’s piece into four sections:

1. A quick review of our expectations from 2018, and how things actually played out
2. New (and ongoing) trends we expect to see in express sector M&A this year
3. The continued battle for leadership between Alibaba Group Holding (BABA US) and JD.com Inc (ADR) (JD US)
4. Potential IPO candidates for 2019 and beyond

We expect Chinese domestic express demand to continue to moderate in 2019, and in response we expect the express companies to increase their investments in ‘last-mile’ and international delivery, which will probably create a drag on profitability in the medium-term. Although we believe e-commerce giants Alibaba and JD.com would like their growing portfolios of logistics investments to become self-funding sooner rather than later, we foresee somewhat limited investor appetite for more large Chinese logistics IPOs in 2019, since many high-profile offerings have faltered since going public.

2. Leong Hup IPO Preview: A Game of Chicken

Leong Hup International (LEHUP MK) is one of the largest producers of poultry, eggs and livestock feeds in Southeast Asia. After an unusually quite 2018, Malaysia’s equity capital market is set for rebound with at least three issuers looking to raise up to $500 million from IPOs. Leong Hup is set to the be the first as it has started the search for cornerstone investors.

3. Metropolis Healthcare IPO: Stands Apart in Pricing Power, Revenue Growth and Margins

• Metropolis Health Services Limited (MHL IN) is the 3^rd largest pathology chain in India and caters to the Rs600bn market growing at 15% Cagr. It is strongest in the lucrative Mumbai and Chennai markets.
• Though India’s pathology market has seen intense price competition and price discounting, Metropolis managed to grow revenue/patient much ahead of peers
• Its revenue/patient is 20% higher than its nearest competitor and the gap has been widening over FY16-18
• It is the only major pathology chain to have accelerated revenue growth over FY16-18 despite the lowest A&P spend
• It managed to grow Gross Margin 330bps and hold Ebitda margins over FY16-18. Major competitors like Dr Lal Pathlabs (DLPL IN) (-340bps) and SRL (-520bps) saw sharp contraction in Ebitda margins.
• On the flip side, its patient growth has lagged its retail network growth by a wide margin. Its cash conversion cycle is much longer than DLAL’s. It is also the most vulnerable to any government regulated price caps on testing in the future owing to its premium pricing.
• Lastly, it doesn’t need any fresh money and the entire IPO is an offer for sale by the promoters and Carlyle Group.

4. ECM Weekly (12 January 2019) – Futu, China East Education, China Kepei Education, Viva Biotech

Aequitas Research puts out a weekly update on the deals that have been covered by Smartkarma Insight Providers recently, along with updates for upcoming IPOs.

Accuracy Rate:

Our overall accuracy rate is 72% for IPOs and 64% for Placements 

(Performance measurement criteria is explained at the end of the note)

New IPO filings

• China Tobacco International (Hong Kong, US$100m)
• China East Education (Hong Kong, US$400m)
• Ebang International (Hong Kong, re-filed)
• MicuRx Pharma (Hong Kong, re-filed)

Below is a snippet of our IPO tool showing upcoming events for the next week. The IPO tool is designed to provide readers with timely information on all IPO related events (Book open/closing, listing, initiation, lock-up expiry, etc) for all the deals that we have worked on. You can access the tool here or through the tools menu.

News on Upcoming IPOs

• Urban Commons plans IPO of up to US$500m at Q1-end
• Viva Biotech plans IPO in the second quarter
• CStone Pharma plans US$400m IPO in Feb
• Global Switch plans about US$1bn HK IPO
• China’s Wanda files for US IPO of sports unit to raise up to US$500m

Smartkarma Community’s this week Analysis on Upcoming IPO

• Futu Holdings IPO Preview: Running Out of Steam
• Futu Holdings Pre-IPO – Great Metrics but in a Commoditised Industry
• China Tobacco International (IPO): The Monopolist Will Not Recover
• China Tobacco International IPO: Heavy Regulation, Declining Margins – A Bit Late to IPO Party
• IPO Radar: AutoCorp, Honda’s Avatar in Thailand 

List of pre-IPO Coverage on Smartkarma

5. ASIC Review of Allocation in Equity Raising – Some Truths, Some Half-Truths – No Improvements

Over 2017-18, the Australian Securities & Investments Commission (ASIC) undertook a review of allocation in equity raising transactions. The review involved large and mid-sized licensees (brokers), Issuers, International investors and other international regulators. The results of the review were published by ASIC in Dec 2018. This insight highlights some of the key findings.

It’s good to see that some of the standard practices of banks allocating more to existing clients and participants of earlier deals have at least been acknowledged. Even though some institutional investors have outright labelled the allocation process as a “black box”, ASIC doesn’t seem to want to do much about it.

The area where ASIC is more concerned is the messaging to investors which highlights the different definitions of “well-covered” across banks. Although, the banks seem to have mislead the regulator on interpretation of “real-demand” with ECM bankers saying that all orders are taken at face-value. That raises a whole new level of questions on the messaging around demand for the deal.

In this briefing:

1. China East Education (中国东方教育) Pre-IPO – The Company Known for Its Culinary School
2. Futu Holdings Pre-IPO – Great Metrics but in a Commoditised Industry
3. China Tobacco International IPO: Heavy Regulation, Declining Margins – A Bit Late to IPO Party
4. Futu Holdings IPO Preview: Running Out of Steam
5. IPO Radar: AutoCorp, Honda’s Avatar in Thailand

1. China East Education (中国东方教育) Pre-IPO – The Company Known for Its Culinary School

China Xinhua Education (2779 HK) listed in Q1 of 2018 and we wrote in our insight that the founder had vocational schools that have been separated from China Xinhua that seemed to be his prized asset. Fast forward to December 2018, the prized asset has finally filed its draft prospectus under the entity China East Education (CEE HK) and it is looking to raise US$400m in its IPO.

In this insight, we will analyze the company’s financial and operating performance, compare it to listed education companies, and provide some questions we have for management.

2. Futu Holdings Pre-IPO – Great Metrics but in a Commoditised Industry

Futu Holdings Ltd (FHL US) plans to raise around US$300m in its US IPO. The company is backed by Tencent Holdings (700 HK) , Matrix Partners and Sequoia, who together own over 45% of the company.

The founding team comes mostly from Tencent, which might explain Tencent’s large stake in the company. Growth for the company has been stupendous despite the jittery markets, with margin financing adding to the top-line growth. 

While its low costs will help it to steal clients from the more traditional brokers, other new low-cost brokers seem to be offering similar services at comparable rates. In addition, the company is not licensed or regulated by any entities in China, despite the majority of its client base being Chinese nationals. Furthermore, the company plans to expand into newer overseas market where it doesn’t seem to have much of a cost advantage.

3. China Tobacco International IPO: Heavy Regulation, Declining Margins – A Bit Late to IPO Party

China Tobacco International (GHALPZ CH) is a subsidiary and offshore unit of China National Tobacco Corp., a state-owned enterprise (SOE). The company procures tobacco leaves from regions around the world and exports tobacco leaf products and branded cigarettes to the duty-free outlets outside China’s customs area and in Southeast Asia.

The IPO is expected to raise US$100M and the company expects to use the proceeds to expand market share, acquire new cigarette brands, working capital, and other corporate purposes.                      

4. Futu Holdings IPO Preview: Running Out of Steam

Futu Holdings Ltd (FHL US) is the fourth largest online broker in Hong Kong. Futu has filed for a Nasdaq IPO to raise $300 million, down from an earlier indication of a $500 million raise according to press reports. Futu is backed by Tencent Holdings (700 HK) (38.2% shareholder), Matrix Partners (6.1%) and Sequoia Capital (4.0%).

5. IPO Radar: AutoCorp, Honda’s Avatar in Thailand

In August 2017, Honda stole the top spot in Thai passenger cars from Toyota and held it for a few months. They are still formidable players, and ACG (AutoCorp) which runs Honda dealerships and service centers across Thailand, is expected to IPO some time in 2019. Here’s our quick look at the company.

• We value this IPO at Bt2/sh using DCF, since there’s really no good comparables. The company is expected to enjoy slower revenue growth and higher margins going forward as car sales slow down nationally and maintenance becomes a bigger chunk of the revenues.
• They only operate in four provinces and run 8 showrooms with over 6,000 sqm of display space. The service centers account for almost 17,200 sqm. The big chunk comes from lower margin car sales. Along with accessories, these account for 84% of revenues.
• The IPO is firmly underwritten by Singapore’s Phillips Securities and is good for more than a quarter of shares outstanding (26%). The founding Rangkanuwat family control all remaining shares and have committed to 6 month lock-up period.

In this briefing:

1. Chengdu Expressway (成都高速) Post-IPO – Low Liquidity and Tiny Adjusted Free Float
2. Weimob IPO Trading Update – Existing Shareholders to the Rescue
3. Last Week in GER IPO Research: Leong Hup, China Tobacco, Futu and Weimob
4. China Kepei Edu (科培教育) IPO – Regulation Poses Significant Near-Term Risks
5. Japan Hotel REIT Placement – Biggish Acquisition, Smallish Accretion

1. Chengdu Expressway (成都高速) Post-IPO – Low Liquidity and Tiny Adjusted Free Float

Chengdu Expressway Company Limited (1785 HK) raised US$112m at the fixed price of HK$2.20 per share. We have previously looked at the IPO in Chengdu Expressway (成都高速) IPO Review – Well-Managed but Unexciting.

In this insight, we will update on the deal dynamics, implied valuation, and include a valuation sensitivity table.

2. Weimob IPO Trading Update – Existing Shareholders to the Rescue

Weimob.com (2013 HK) IPO was priced at the low-end at HKD2.80/share. The retail tranche was 0.79x covered while the institutional tranche was slightly over-subscribed.

I’ve covered most aspects of the deal in my earlier insights: 

• Weimob Pre-IPO – Can Be Steamrolled by Tencent, Anytime
• Weimob IPO Quick Take – Less SaaS, More Ads -> Lower Valuation

In this insight, I’ll provide an update on the deal dynamics, valuations and provide a table with the implied valuations at different share price levels.

3. Last Week in GER IPO Research: Leong Hup, China Tobacco, Futu and Weimob

We slide into 2019 with GER’s recap of our latest IPO research. This week, we talk chicken as Arun initiates on the IPO Malaysian poultry producer Leong Hup International (LEHUP MK). Secondly, Venkat initiates on China Tobacco International (GHALPZ CH) with a cautious view. In addition, Arun initiates on online broker Futu Holdings Ltd (FHL US)  and we remind of Arun’s valuation piece on Weimob.com (2013 HK) . 

Quote of the week 

Are you insane?

-Sky news presenter to UK MP Boris Johnson ahead of the Brexit parliament vote planned for today

Best of luck for the week and new year- Rickin, Venkat and Arun

4. China Kepei Edu (科培教育) IPO – Regulation Poses Significant Near-Term Risks

China Kepei Education (1890 HK) is looking to raise up to US$122m in its upcoming IPO. 

Overall, the company has continued to show that its undergraduate program is the driver behind its growth. It grew its 8M 2018 revenue and gross profit both by about 24% YoY. However, there are significant near-term risks if the MOJ Draft for Comments gets implemented. It may result in Kepei registering its schools as for-profit private schools which would shrink its net profit margin.

In this insight, we will provide updates on the company’s 8M 2018 financials and operating performance, the potential impact of policy change and compare its valuation to other listed education peers. We will also run the deal through our framework.

5. Japan Hotel REIT Placement – Biggish Acquisition, Smallish Accretion

Japan Hotel Reit Investment (8985 JP) (JHR) plans to raise around US$300m/JPY33bn to part fund the acquisition of Hilton properties located in Tokyo and Osaka.

We have previously covered four other capital raising by JHR:

• US$170m in Jun 2017, Japan Hotel REIT Placement – An Accretive Acquisition, JGB 10Y Yield Seems Stable
• US$340m in July 2016, Japan Hotel REIT – YEN a Bigger Driver than the Acquisitions,
• US$120m in Jan 2016, Japan Hotel REIT – Acquisition to Aid DPU Growth, but RMB Needs to Hold Up for the Stock to Perform, and
• US$230m in Jan 2015, Japan Hotel REIT (8985 JP) – Acquisition to aid DPU growth; take the deal

The prior-deals have given mixed bag results over the short-term. In this insight, we will run the deal through our framework and analyse past performance.

In this briefing:

1. Japan Hotel REIT Placement – Biggish Acquisition, Smallish Accretion
2. 2019 M&A/IPO Preview: Chinese Express Sector Quickly Building Out ‘Last-Mile’ & Int’l Capabilities
3. Leong Hup IPO Preview: A Game of Chicken
4. Metropolis Healthcare IPO: Stands Apart in Pricing Power, Revenue Growth and Margins
5. ECM Weekly (12 January 2019) – Futu, China East Education, China Kepei Education, Viva Biotech

1. Japan Hotel REIT Placement – Biggish Acquisition, Smallish Accretion

Japan Hotel Reit Investment (8985 JP) (JHR) plans to raise around US$300m/JPY33bn to part fund the acquisition of Hilton properties located in Tokyo and Osaka.

We have previously covered four other capital raising by JHR:

• US$170m in Jun 2017, Japan Hotel REIT Placement – An Accretive Acquisition, JGB 10Y Yield Seems Stable
• US$340m in July 2016, Japan Hotel REIT – YEN a Bigger Driver than the Acquisitions,
• US$120m in Jan 2016, Japan Hotel REIT – Acquisition to Aid DPU Growth, but RMB Needs to Hold Up for the Stock to Perform, and
• US$230m in Jan 2015, Japan Hotel REIT (8985 JP) – Acquisition to aid DPU growth; take the deal

The prior-deals have given mixed bag results over the short-term. In this insight, we will run the deal through our framework and analyse past performance.

2. 2019 M&A/IPO Preview: Chinese Express Sector Quickly Building Out ‘Last-Mile’ & Int’l Capabilities

A year ago we published a note that described how we expected corporate activity in China’s domestic express  sector to play out in 2018 (see 2018 M&A/IPO Activity Preview: Chinese Express, Logistics Sectors Hit by Slower Growth & BABA Vs JD). In this new piece, we look back at how things actually played out in the sector last year and look forward to 2019 and beyond. 

We’ve divided this year’s piece into four sections:

1. A quick review of our expectations from 2018, and how things actually played out
2. New (and ongoing) trends we expect to see in express sector M&A this year
3. The continued battle for leadership between Alibaba Group Holding (BABA US) and JD.com Inc (ADR) (JD US)
4. Potential IPO candidates for 2019 and beyond

We expect Chinese domestic express demand to continue to moderate in 2019, and in response we expect the express companies to increase their investments in ‘last-mile’ and international delivery, which will probably create a drag on profitability in the medium-term. Although we believe e-commerce giants Alibaba and JD.com would like their growing portfolios of logistics investments to become self-funding sooner rather than later, we foresee somewhat limited investor appetite for more large Chinese logistics IPOs in 2019, since many high-profile offerings have faltered since going public.

3. Leong Hup IPO Preview: A Game of Chicken

Leong Hup International (LEHUP MK) is one of the largest producers of poultry, eggs and livestock feeds in Southeast Asia. After an unusually quite 2018, Malaysia’s equity capital market is set for rebound with at least three issuers looking to raise up to $500 million from IPOs. Leong Hup is set to the be the first as it has started the search for cornerstone investors.

4. Metropolis Healthcare IPO: Stands Apart in Pricing Power, Revenue Growth and Margins

• Metropolis Health Services Limited (MHL IN) is the 3^rd largest pathology chain in India and caters to the Rs600bn market growing at 15% Cagr. It is strongest in the lucrative Mumbai and Chennai markets.
• Though India’s pathology market has seen intense price competition and price discounting, Metropolis managed to grow revenue/patient much ahead of peers
• Its revenue/patient is 20% higher than its nearest competitor and the gap has been widening over FY16-18
• It is the only major pathology chain to have accelerated revenue growth over FY16-18 despite the lowest A&P spend
• It managed to grow Gross Margin 330bps and hold Ebitda margins over FY16-18. Major competitors like Dr Lal Pathlabs (DLPL IN) (-340bps) and SRL (-520bps) saw sharp contraction in Ebitda margins.
• On the flip side, its patient growth has lagged its retail network growth by a wide margin. Its cash conversion cycle is much longer than DLAL’s. It is also the most vulnerable to any government regulated price caps on testing in the future owing to its premium pricing.
• Lastly, it doesn’t need any fresh money and the entire IPO is an offer for sale by the promoters and Carlyle Group.

5. ECM Weekly (12 January 2019) – Futu, China East Education, China Kepei Education, Viva Biotech

Aequitas Research puts out a weekly update on the deals that have been covered by Smartkarma Insight Providers recently, along with updates for upcoming IPOs.

Accuracy Rate:

Our overall accuracy rate is 72% for IPOs and 64% for Placements 

(Performance measurement criteria is explained at the end of the note)

New IPO filings

• China Tobacco International (Hong Kong, US$100m)
• China East Education (Hong Kong, US$400m)
• Ebang International (Hong Kong, re-filed)
• MicuRx Pharma (Hong Kong, re-filed)

Below is a snippet of our IPO tool showing upcoming events for the next week. The IPO tool is designed to provide readers with timely information on all IPO related events (Book open/closing, listing, initiation, lock-up expiry, etc) for all the deals that we have worked on. You can access the tool here or through the tools menu.

News on Upcoming IPOs

• Urban Commons plans IPO of up to US$500m at Q1-end
• Viva Biotech plans IPO in the second quarter
• CStone Pharma plans US$400m IPO in Feb
• Global Switch plans about US$1bn HK IPO
• China’s Wanda files for US IPO of sports unit to raise up to US$500m

Smartkarma Community’s this week Analysis on Upcoming IPO

• Futu Holdings IPO Preview: Running Out of Steam
• Futu Holdings Pre-IPO – Great Metrics but in a Commoditised Industry
• China Tobacco International (IPO): The Monopolist Will Not Recover
• China Tobacco International IPO: Heavy Regulation, Declining Margins – A Bit Late to IPO Party
• IPO Radar: AutoCorp, Honda’s Avatar in Thailand 

List of pre-IPO Coverage on Smartkarma

In this briefing:

1. IPO Radar: AutoCorp, Honda’s Avatar in Thailand

1. IPO Radar: AutoCorp, Honda’s Avatar in Thailand

In August 2017, Honda stole the top spot in Thai passenger cars from Toyota and held it for a few months. They are still formidable players, and ACG (AutoCorp) which runs Honda dealerships and service centers across Thailand, is expected to IPO some time in 2019. Here’s our quick look at the company.

• We value this IPO at Bt2/sh using DCF, since there’s really no good comparables. The company is expected to enjoy slower revenue growth and higher margins going forward as car sales slow down nationally and maintenance becomes a bigger chunk of the revenues.
• They only operate in four provinces and run 8 showrooms with over 6,000 sqm of display space. The service centers account for almost 17,200 sqm. The big chunk comes from lower margin car sales. Along with accessories, these account for 84% of revenues.
• The IPO is firmly underwritten by Singapore’s Phillips Securities and is good for more than a quarter of shares outstanding (26%). The founding Rangkanuwat family control all remaining shares and have committed to 6 month lock-up period.

In this briefing:

1. Metropolis Healthcare IPO: Stands Apart in Pricing Power, Revenue Growth and Margins
2. ECM Weekly (12 January 2019) – Futu, China East Education, China Kepei Education, Viva Biotech
3. ASIC Review of Allocation in Equity Raising – Some Truths, Some Half-Truths – No Improvements
4. China East Education (中国东方教育) Pre-IPO – The Company Known for Its Culinary School
5. Futu Holdings Pre-IPO – Great Metrics but in a Commoditised Industry

1. Metropolis Healthcare IPO: Stands Apart in Pricing Power, Revenue Growth and Margins

• Metropolis Health Services Limited (MHL IN) is the 3^rd largest pathology chain in India and caters to the Rs600bn market growing at 15% Cagr. It is strongest in the lucrative Mumbai and Chennai markets.
• Though India’s pathology market has seen intense price competition and price discounting, Metropolis managed to grow revenue/patient much ahead of peers
• Its revenue/patient is 20% higher than its nearest competitor and the gap has been widening over FY16-18
• It is the only major pathology chain to have accelerated revenue growth over FY16-18 despite the lowest A&P spend
• It managed to grow Gross Margin 330bps and hold Ebitda margins over FY16-18. Major competitors like Dr Lal Pathlabs (DLPL IN) (-340bps) and SRL (-520bps) saw sharp contraction in Ebitda margins.
• On the flip side, its patient growth has lagged its retail network growth by a wide margin. Its cash conversion cycle is much longer than DLAL’s. It is also the most vulnerable to any government regulated price caps on testing in the future owing to its premium pricing.
• Lastly, it doesn’t need any fresh money and the entire IPO is an offer for sale by the promoters and Carlyle Group.

2. ECM Weekly (12 January 2019) – Futu, China East Education, China Kepei Education, Viva Biotech

Aequitas Research puts out a weekly update on the deals that have been covered by Smartkarma Insight Providers recently, along with updates for upcoming IPOs.

Accuracy Rate:

Our overall accuracy rate is 72% for IPOs and 64% for Placements 

(Performance measurement criteria is explained at the end of the note)

New IPO filings

• China Tobacco International (Hong Kong, US$100m)
• China East Education (Hong Kong, US$400m)
• Ebang International (Hong Kong, re-filed)
• MicuRx Pharma (Hong Kong, re-filed)

Below is a snippet of our IPO tool showing upcoming events for the next week. The IPO tool is designed to provide readers with timely information on all IPO related events (Book open/closing, listing, initiation, lock-up expiry, etc) for all the deals that we have worked on. You can access the tool here or through the tools menu.

News on Upcoming IPOs

• Urban Commons plans IPO of up to US$500m at Q1-end
• Viva Biotech plans IPO in the second quarter
• CStone Pharma plans US$400m IPO in Feb
• Global Switch plans about US$1bn HK IPO
• China’s Wanda files for US IPO of sports unit to raise up to US$500m

Smartkarma Community’s this week Analysis on Upcoming IPO

• Futu Holdings IPO Preview: Running Out of Steam
• Futu Holdings Pre-IPO – Great Metrics but in a Commoditised Industry
• China Tobacco International (IPO): The Monopolist Will Not Recover
• China Tobacco International IPO: Heavy Regulation, Declining Margins – A Bit Late to IPO Party
• IPO Radar: AutoCorp, Honda’s Avatar in Thailand 

List of pre-IPO Coverage on Smartkarma

3. ASIC Review of Allocation in Equity Raising – Some Truths, Some Half-Truths – No Improvements

Over 2017-18, the Australian Securities & Investments Commission (ASIC) undertook a review of allocation in equity raising transactions. The review involved large and mid-sized licensees (brokers), Issuers, International investors and other international regulators. The results of the review were published by ASIC in Dec 2018. This insight highlights some of the key findings.

It’s good to see that some of the standard practices of banks allocating more to existing clients and participants of earlier deals have at least been acknowledged. Even though some institutional investors have outright labelled the allocation process as a “black box”, ASIC doesn’t seem to want to do much about it.

The area where ASIC is more concerned is the messaging to investors which highlights the different definitions of “well-covered” across banks. Although, the banks seem to have mislead the regulator on interpretation of “real-demand” with ECM bankers saying that all orders are taken at face-value. That raises a whole new level of questions on the messaging around demand for the deal.

4. China East Education (中国东方教育) Pre-IPO – The Company Known for Its Culinary School

China Xinhua Education (2779 HK) listed in Q1 of 2018 and we wrote in our insight that the founder had vocational schools that have been separated from China Xinhua that seemed to be his prized asset. Fast forward to December 2018, the prized asset has finally filed its draft prospectus under the entity China East Education (CEE HK) and it is looking to raise US$400m in its IPO.

In this insight, we will analyze the company’s financial and operating performance, compare it to listed education companies, and provide some questions we have for management.

5. Futu Holdings Pre-IPO – Great Metrics but in a Commoditised Industry

Futu Holdings Ltd (FHL US) plans to raise around US$300m in its US IPO. The company is backed by Tencent Holdings (700 HK) , Matrix Partners and Sequoia, who together own over 45% of the company.

The founding team comes mostly from Tencent, which might explain Tencent’s large stake in the company. Growth for the company has been stupendous despite the jittery markets, with margin financing adding to the top-line growth. 

While its low costs will help it to steal clients from the more traditional brokers, other new low-cost brokers seem to be offering similar services at comparable rates. In addition, the company is not licensed or regulated by any entities in China, despite the majority of its client base being Chinese nationals. Furthermore, the company plans to expand into newer overseas market where it doesn’t seem to have much of a cost advantage.

In this briefing:

1. China Tobacco International IPO: Heavy Regulation, Declining Margins – A Bit Late to IPO Party
2. Futu Holdings IPO Preview: Running Out of Steam
3. IPO Radar: AutoCorp, Honda’s Avatar in Thailand
4. Chengdu Expressway (成都高速) IPO Review – Well-Managed but Unexciting
5. Weimob IPO Valuation: Optically Cheap

1. China Tobacco International IPO: Heavy Regulation, Declining Margins – A Bit Late to IPO Party

China Tobacco International (GHALPZ CH) is a subsidiary and offshore unit of China National Tobacco Corp., a state-owned enterprise (SOE). The company procures tobacco leaves from regions around the world and exports tobacco leaf products and branded cigarettes to the duty-free outlets outside China’s customs area and in Southeast Asia.

The IPO is expected to raise US$100M and the company expects to use the proceeds to expand market share, acquire new cigarette brands, working capital, and other corporate purposes.                      

2. Futu Holdings IPO Preview: Running Out of Steam

Futu Holdings Ltd (FHL US) is the fourth largest online broker in Hong Kong. Futu has filed for a Nasdaq IPO to raise $300 million, down from an earlier indication of a $500 million raise according to press reports. Futu is backed by Tencent Holdings (700 HK) (38.2% shareholder), Matrix Partners (6.1%) and Sequoia Capital (4.0%).

3. IPO Radar: AutoCorp, Honda’s Avatar in Thailand

In August 2017, Honda stole the top spot in Thai passenger cars from Toyota and held it for a few months. They are still formidable players, and ACG (AutoCorp) which runs Honda dealerships and service centers across Thailand, is expected to IPO some time in 2019. Here’s our quick look at the company.

• We value this IPO at Bt2/sh using DCF, since there’s really no good comparables. The company is expected to enjoy slower revenue growth and higher margins going forward as car sales slow down nationally and maintenance becomes a bigger chunk of the revenues.
• They only operate in four provinces and run 8 showrooms with over 6,000 sqm of display space. The service centers account for almost 17,200 sqm. The big chunk comes from lower margin car sales. Along with accessories, these account for 84% of revenues.
• The IPO is firmly underwritten by Singapore’s Phillips Securities and is good for more than a quarter of shares outstanding (26%). The founding Rangkanuwat family control all remaining shares and have committed to 6 month lock-up period.

4. Chengdu Expressway (成都高速) IPO Review – Well-Managed but Unexciting

Chengdu Expressway Company Limited (1785 HK) is looking to raise US$112m in its upcoming IPO. 

The expressways that CEC operate are integral in Chengdu’s transport network. The expressways have been upgraded and expanded consistently over the past three years which has led to an increase in traffic and toll revenue. However, in terms of valuation, CEC will likely trade at a valuation closer to small expressway peers which implies a 10% downside.

In this insight, we will look at the company’s financial and operational performance, toll payment model, and compare its valuation to Hong Kong-listed expressway peers. We will also run the deal through our IPO framework.

5. Weimob IPO Valuation: Optically Cheap

Weimob.com (1260480D CH) is a combination of a SaaS software and an adtech (targeted marketing) business which has started book building to raise gross proceeds of $108-135 million. According to press reports, Weimob is being viewed favourably by investors as it is being offered at a “cheap” valuation of 18-23x 2019 P/E.

In this briefing:

1. Weimob IPO Quick Take – Less SaaS, More Ads -> Lower Valuation

1. Weimob IPO Quick Take – Less SaaS, More Ads -> Lower Valuation

Weimob.com (1260480D CH),  a Tencent Holdings (700 HK) and GIC investee company, plans to raise up to US$135m in its Hong Kong IPO.

I’ve covered most aspects of the deal in my earlier insight, Weimob Pre-IPO – Can Be Steamrolled by Tencent, Anytime, where I spoke about the over-reliance on Tencent, high attrition rates and acquisition costs for SMBs, and the increasing contribution of its ads business.

In this insight, I’ll provide an update from the latest filings, comment on valuations and run the deal through our IPO framework.