ECM

In this briefing:

1. IPO Trading Strategy: A Deep-Dive on Early Trade of Chinese Companies Listing in the US
2. Natural Foods IPO Trading Update – Not Expensive but Needs to Show a Clear Turnaround
3. Mobvista IPO Trading Update – Not a Buyer at Anywhere Close to These Level
4. Sonic Healthcare Placement – Accretive Acquisition, Placement Discount Should Help
5. Tencent Music IPO – Firework – Trading Strategies

1. IPO Trading Strategy: A Deep-Dive on Early Trade of Chinese Companies Listing in the US

Ahead of Tencent Music (TME US)‘s IPO today , we have done a deep-dive analysis on the past 28 major Chinese IPOs that have listed in the US. We note the following points

 A higher pop associated with a lower free float?

If it starts weak , we wouldn’t assume disaster – historically shares have broken above IPO price at some point during day one trade

Day one moves by pricing range – pops across the board

GER pricing view for Tencent music

Companies assessed in this report: X Financial (XYF US) , Qudian Inc (QD US) , Pinduoduo (PDD US) , Qutoutiao Inc (QTT US) , HUYA Inc (HUYA US) , Pintec Technology Holdings L (PT US) , 111 Inc (YI US) , Uxin Ltd (UXIN US) , BEST Inc (BSTI US) , Sunlands Online Education Gr (STG US) , Cango Inc (CANG US) , Huami Corp (HMI US) , Sea Ltd (SE US) , Aurora Mobile Ltd (JG US) , Viomi Technology Co Ltd (VIOT US) , Weidai Ltd (WEI US) , Jianpu Technology (JT US) , Greentree Hospitality (GHG US) , iQIYI Inc (IQ US), Sogou Inc (SOGO US) , Onesmart Education (ONE US) , CNFinance Holdings Ltd (1640496D US) , TuanChe Ltd (TC US) , NIO Inc (NIO US) , CooTek Cayman Inc (CTK US) , Niu Technologies (NIU US) , Mogu (MOGU US) , and Bilibili Inc (BILI US)

More details below 

2. Natural Foods IPO Trading Update – Not Expensive but Needs to Show a Clear Turnaround

Natural Food International H (1837 HK)‘s  IPO was priced at the low-end at HKD1.62/share. The retail tranche was 1.4x covered and the institutional tranche was said to be moderately over-subscribed. I have covered most aspects of the deal in my earlier insight, 

• Natural Food IPO – Quick Take – Network Expansion Can Only Go so Far, SSSG Might Have Turned -Ve

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. Mobvista IPO Trading Update – Not a Buyer at Anywhere Close to These Level

Mobvista (1860 HK)‘s IPO was priced just above the low-end at HKD4/share, the retail tranche was 1.8x covered while the institutional tranche was moderately oversubscribed. I have covered most aspects of the deal in my earlier insights:

• Mobvista Pre-IPO – Impairments Would Have Wiped off past Profit, Related Parties Still Owed Money, and
• Mobvista IPO – One Client Rescued 1H18, the Slowdown Has Been on Since 2H17. P/ E Doesn’t Matter

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.

4. Sonic Healthcare Placement – Accretive Acquisition, Placement Discount Should Help

Sonic Healthcare (SHL AU) plans to raise US$434m (A$600m) via an institutional placement to part fund its US$540m acquisition of Aurora Diagnostic.

As per the company, the acquisition is likely to be earnings accretive and will increase the revenue contribution of US operations to around 26%. While the deal appears attractive, SHL hasn’t provided many details about the past financial performance for Aurora. Some of the earlier filings by Aurora seem to indicate that revenue has been growing much faster than EBITDA. 

5. Tencent Music IPO – Firework – Trading Strategies

Tencent Music Entertainment (TME US)‘s IPO was priced at the low-end US$13/share. The shares will begin trading tonight. As per earlier media reports, books were well covered.

I have covered most aspects of the deal in my previous series of insight, links to which are below. In this insight, I’ll re-look at what peers have been doing since book building began and how its main listed peer Spotify Technology Sa (SPOT US) has been performing. I’ll also provide a sensitivity table of the implied valuations at different price points and my thoughts on the price range for near-term trading.

My previous insights on TME’s IPO:

• The company’s performance: Tencent Music Pre-IPO Review – The Final Countdown – Growth Doesn’t Seem to Be Slowing Down,
• The working of the apps: Tencent Music Pre-IPO – This Is How We Do It – A Quick Look at How the Apps Work,
• Industry dynamic: Tencent Music Pre-IPO – Industry – Don’t Cry – In 2010 a Little Red Dot Almost Overtook the Dragon, and
• Peer analysis: Tencent Music Pre-IPO – Quick Peer Analysis – If I Was You, I’d Wanna Be Me Too – Bigger and Faster,
• Valuations overview: Tencent Music Pre-IPO – Valuations Estimates – Leaving on a Jet Plane – $30bn Was Quite Stretched.
• First take on the IPO pricing: Tencent Music Pre-IPO Updates – Welcome to the Jungle – Rumoured Asking Valuations More Reasonable
• IPO valuation update: Tencent Music IPO – Don’t Stop Me Now – 9M18 Updates, Outlook and Price Limits
• Some more information on Ultimate Music acquisition: Tencent Music IPO – A Little Less Conversation – A Little More Information on Ultimate Music

In this briefing:

1. Fosun Tourism IPO Trading Update – Low Traded Volume and Fair Value Indicate It Has a Long Way to Go
2. Alpha Smart – Pre-IPO – PE Investors Recovered 56% of Their Cost in Two Years but Left It in Debt
3. Wuxi Apptec (药明康德) IPO: What You Need to Know Before the Trading Debut
4. Tencent Music IPO: Price Target Hit; Risk/Reward Now More Balanced and Key Next Steps
5. Xinyi Energy IPO Valuation: Asking More Than What It Is Paying to Acquire Target Portfolio

1. Fosun Tourism IPO Trading Update – Low Traded Volume and Fair Value Indicate It Has a Long Way to Go

Fosun Tourism (1992 HK)‘s IPO was priced at the low-end, HKD15.60/share. The retail tranche was undersubscribed while the institutional tranche was said to be moderately over-subscribed. I have covered most aspects of the deal in my earlier insights:

• Fosun Tourism Pre-IPO – No Improvement or Major Changes in Club Med Since the Acquisition
• Fosun Tourism IPO – Fair Value Is Probably Below Low-End

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.

2. Alpha Smart – Pre-IPO – PE Investors Recovered 56% of Their Cost in Two Years but Left It in Debt

Alpha Smart (ALS HK), the parent of Chinese menswear fashion retailer GXG, plans to raise US$300m in its Hong Kong IPO. L Catterton, LVMH’s investment arm, along with another PE investor, owns a 73% stake in the company. 

Earnings have been consistently growing with the highest contribution still coming from its flagship brand “GXG”. The recent expansion of the online channel has further aided sales growth, with ASL claiming to be the largest menswear retailer in terms of online sales.

Apart from a large dividend payout which covered half of the acquisition costs for L Capital, nothing much seems to have changed recently. In addition, operating cash flow has not kept pace with earnings due to a consistent increase in inventory. To add to that there are a few related party issues as well including some stores being run by former employees.

3. Wuxi Apptec (药明康德) IPO: What You Need to Know Before the Trading Debut

Wuxi Apptec’s USD 1 billion IPO was priced at HKD 68/share and will start trading today. We summarize the latest information with updates on our valuation in this short note, prior to the trading debut. 

 Our previous coverage on Wuxi Apptec listing

• WuXi Apptec (药明康德) IPO: This A+H Listing Will Be Different
• WuXi Apptec (药明康德) IPO:Upside at Middle and Low End
• Wuxi Apptec (药明康德) IPO: Pricing Update Before Book Close

4. Tencent Music IPO: Price Target Hit; Risk/Reward Now More Balanced and Key Next Steps

Tencent Music Entertainment (TME US) rallied up 14% on day one of trade to hit our PT and closed up c8% on its first day of trade. Given the skepticism/ambivalence on the story, poor macro backdrop, weak recent listings from China in the US alongside a full-sized deal and a mid-December launch, this day one performance is a solid result in our view.  We outline some further thoughts and next steps for the TME story below.

A recap of the trade: We recommended buying Tencent Music at the low end of the range ($13) and we estimated a base-case fair value of 14% upside. Tencent music rallied up 14% intraday on its first day of trade and closed up c8%. We think this is a fairly good result given the skepticism/ambivalence on the name alongside a weak macro backdrop and a mid-December deal-launch. 

Historical week one trade provides mixed support for further gains:

Long-term – we prefer TME to Spotify but recent events give us pause on the cautious near-term view for Spotify: 

Updated DCF Valuation: 

GER view: 

More details below…

5. Xinyi Energy IPO Valuation: Asking More Than What It Is Paying to Acquire Target Portfolio

Xinyi Energy Holdings Ltd (1671746D HK) is a solar farm operator seeking a listing on Hongkong stock exchange raising up to US$680M (including Greenshoe). The company announced a price range of HK$1.89/share to HK$2.42/share valuing the company between HK$12.5B to HK$16B. The company is issuing 1.9B shares and 282M shares of Greenshoe as part of the IPO. The offer price will be announced on 13^th December. The shares are expected to trade on Hongkong Stock Exchange on the 21^st December. 

Based on GER’s analysis valuations appear rich and the investors should avoid the IPO which are priced at a significant premium at the lower end of offer price compared to its peers. 

In this briefing:

1. Softbank IPO: Signs Point to Risk of Early IPO Price Break
2. CMGE Tech (中手游) Pre-IPO Review – Unfortunate Timing

1. Softbank IPO: Signs Point to Risk of Early IPO Price Break

Coverage of Softbank Corp (9434 JP)‘s IPO on Smartkarma has offered a mix of viewpoints with some bullish and some bearish opinions. Our own take has been relatively subdued, leaning to the bearish side but only significantly so in the event that Docomo follows through with its announced price cuts and Rakuten’s entry as a full-fledged MNO is particularly aggressive.

By and large we consider the issue to be overvalued but felt that significant downside risk only existed if the dividend were to be cut, which we consider a distinct possibility but by no means a sure thing. This long -term view has not changed, however, we now consider some modest downside to be likely in the short term.

2. CMGE Tech (中手游) Pre-IPO Review – Unfortunate Timing

China Mobile Games Adr (CMGE US) plans to raise US$300m in its upcoming Hong Kong IPO.

CMGE is an intellectual-property (IP) oriented mobile game operator. The company delisted from Nasdaq in 2015 and tried to do a backdoor listing on Shenzhen Exchange in late 2015 but it was canceled due to unfavorable market condition. It is now trying to list on the Hong Kong Exchange when the sentiment is poor due to the game approval suspension.

In this insight, we will take a look at the financial performance, key operating metrics, and analyze its games pipeline.