ECM

In this briefing:

1. Japan Post Insurance Offering – Now It Gets Real
2. Japan Post Insurance Placement – Performance of Other Big Deals Indicates a Need for Correction
3. Last Week in GER Research: Huya, Bilibili and Qutoutiao
4. ECM Weekly (6 April 2019) – Bilibili, Huya, Qutoutiao, Polycab, PNB Metlife, CIMC Vehicle
5. Japan Post Insurance Placement – 3x the IPO Size – Basics and Index Impact

1. Japan Post Insurance Offering – Now It Gets Real

The Background

Almost 150 years ago in 1871, a modern postal service was established in Japan by the new Meiji government. The following year, a government-sponsored nationwide network of postal services was launched. Postal money orders started in 1875 and other money and payment services started in the following two decades. In the first decade of the 20th century, domestic money transfers and pension payment receipt were launched. In 1916 postal life insurance sales began. Life annuity sales began a decade later. The Japanese postal system of teigaku deposits started in 1941. In 1949, postal operations were established as the Ministry of Posts alongside the Ministry of Electric Communications (Telecommunications), and eventually both were subsumed into the Ministry of Posts & Telecommunications. In 2001, the business of the Japanese postal system was separated into the Japan Postal Agency, a short-lived entity set up under “central government restructuring” which took place that year. In 2003, the postal system was set up as the Japan Post Corporation under a law which established it as a statutory public corporation (in England, the Bank of England, the BBC, and the Civil Aviation Authority are such companies). 

The issue of privatisation – i.e. making it responsible for its own accounts, which would take things one step further rather than being a government budget item – had long been mooted but constantly rejected because it might cost jobs and reduce services. Finally after several Lower House LDP politicians voted against Koizumi’s proposal to split the Japan Post Corporation into four parts in summer 2005 and the Upper House knocked it down, Koizumi dissolved both houses of the Diet and called a snap election saying that it was a referendum on postal privatization. He won easily and the bill was passed a month later. Things were iffy as a privatized company for a few years until after the 2011 Tohoku Earthquake, after which the government needed to find sources of extra funds to finance reconstruction. In 2012, the government announced it would sell shares to the public within three years.  

Three years ago and change, the government of Japan launched the promised public offering for Japan Post Holdings (6178 JP) (“JPH”), which acted as a holding company for Japan Post Bank (7182 JP) (“JPB”), and affiliated insurance arm Japan Post Insurance (7181 JP) (“JPI”). At the time, the triple-IPO at ¥1.4 trillion was the largest one-day offering in almost two decades, and the situation created some significant and interesting short-term trading opportunities. 

In the end, there was always going to be “overhang” because the explicit goal of the privatization policy was to get JPH’s ownership of JPB and JPI below 50%. In doing so, the bank and insurance operations could then go out and compete with other banks and insurers; currently they are to a large extent restricted from offering new products and entering new markets.

The stock rallied very sharply Friday, rising 3% at the open and ending the morning session up 3% but rising much further in the afternoon to end up 9.9%. 

After the close Friday, the company announced it would spend ¥100bn to buy up to 37.411mm shares pre-open on ToSTNeT-3 on Monday morning. That was 6.2% of shares outstanding. 

The dynamics of this ToSTNeT-3 buyback were discussed in Japan Post Insurance – The ToSTNeT-3 Buyback. The ToSTNeT-3 buyback was, at its basest, an interesting garbitrage trade for a limited number of traders but the resulting dynamics are important. They influence the supply in the Offering, the dynamics of demand, and may influence trading patterns into pricing. 

There are several things going on here. There is a huge offering, a buyback, earnings accretion, a float change, substantial sale to foreigners this time, and index changes. Sooner and later, it will mean a substantial move towards getting closer to 50%, and the fact that this is now investable for lots of institutional investors.

It is worth looking at these aspects independently to better understand demand for the offering as a whole. 

Read on for more.

2. Japan Post Insurance Placement – Performance of Other Big Deals Indicates a Need for Correction

Japan Post Holdings (6178 JP) (JPH) plans to raise up to US$3.3bn via selling its stake in Japan Post Insurance (7181 JP) (JPI). The size of the deal has been adjusted downwards owing to the buyback conducted today morning.

I’ve covered some of the background and index weightage impact in my earlier insight: Japan Post Insurance Placement – 3x the IPO Size – Basics and Index Impact. For people interested in reading more about the history and background, I’ve covered the IPO and JPH sell down in the below series of insights:

• All three IPOs: When the bank is cheap and holdco discount makes the mothership cheaper, then who needs insurance?
• JPI IPO: Three’s a crowd – A minnow amongst giants risks getting lost in the chatter
• JPB IPO: Dividend yield looks enticing versus JGBs yield, while risks are similar
• JPH IPO: Final call to board the mothership. They don’t come much cheaper than this.
• JPH Placement: Japan Post Holdings Placement – Similar Reasons, Similar Price Will Probably Yield Similar Returns

In this insight, I’ll run the deal through our framework and analyze the performance of some of the other sizeable deals in the recent past.

3. Last Week in GER Research: Huya, Bilibili and Qutoutiao

Below is a recap of the key IPO/placement research produced by the Global Equity Research team. This week, we update on the bevvy of placements offered by various companies. After placements by Pinduoduo (PDD US) and Sea Ltd (SE US) , we saw more offerings from HUYA Inc (HUYA US) , Bilibili Inc (BILI US) and Qutoutiao Inc (QTT US). We update on these three offerings and perhaps big picture, this could reflect a signalling inflection point in these shares. More details below 

In addition, we have provided an updated calendar of upcoming catalysts for EVENT driven names below. 

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

4. ECM Weekly (6 April 2019) – Bilibili, Huya, Qutoutiao, Polycab, PNB Metlife, CIMC Vehicle

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 72.4% for IPOs and 63.5% for Placements 

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

New IPO filings

• Changliao AKA 派派(Hong Kong, ~US$100m)

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

• Leong Hup – comeback sunny side up
• Polycab India eyes to raise around Rs 1,345 crore through IPO
• Carlyle-backed Metropolis Healthcare’s IPO nears halfway mark on second day
• Eagle Hospitality Trust eyes Singapore IPO to raise up to US$575m
• Cancer Treatment Firm Plans Hong Kong IPO
• Goldman-Backed Chinese Online Pet Store Boqii Plans IPO
• China drone maker EHang delays IPO plan, eyes private funding-sources

This week Analysis on Upcoming IPO

• Map Aktif Follow-On Offering – Lace up for a Potential Long Run
• Zhongliang (中梁地产) Pre-IPO Review – Incredible Growth Bogged Down by Related Party Transactions
• CIMC Vehicle (中集车辆): Market Leader of Semi-Trailers but Little Growth Ahead
• PNB Metlife Pre-IPO Quick Take – Doesn’t Stack up Well Versus Its Larger Peers
• Polycab India Limited IPO – Probably Near Peak Margins, Improvements Unexplained

5. Japan Post Insurance Placement – 3x the IPO Size – Basics and Index Impact

Yesterday, post-market close, Japan Post Holdings (6178 JP)(JPH) announced that it will sell 185m shares (including over-allotment) or 30.8% of Japan Post Insurance (7181 JP)(JPI) amounting to US$4bn. JPI plans to buy back up to 50m shares out of these, leaving around US$3.1bn worth of stock to be placed. Out of these 185m shares, 30% will be placed with foreigners.

The selldown is part of the government’s plan for privatization under which JPH is supposed to reduce its stake in JPI and Japan Post Bank (7182 JP)(JPB) to around 50%. This was highlighted in the IPO of the three entities in 2015. Thus, the deal is not totally unexpected but the timing of it was never certain. For people interested in more about the history and background, we’ve covered the IPO and JPH sell down in the below series of insights:

• All three IPOs: When the bank is cheap and holdco discount makes the mothership cheaper, then who needs insurance?
• JPI IPO: Three’s a crowd – A minnow amongst giants risks getting lost in the chatter
• JPB IPO: Dividend yield looks enticing versus JGBs yield, while risks are similar
• JPH IPO: Final call to board the mothership. They don’t come much cheaper than this.
• JPH Placement: Japan Post Holdings Placement – Similar Reasons, Similar Price Will Probably Yield Similar Returns

In this insight, I’ll comment on some of the deal dynamics and index weighting impact.

In this briefing:

1. Huya Offering: Everyone Else Was Doing It Excuse
2. Huya Placement: Best Performing Live Streaming Stock but Beware Douyu Is Catching Up
3. Ruhnn (如涵) Trading Update – Worst First-Day Performance Out of Recent US ADR Listings
4. Naspers: Addressing the Discount (Again). New Moves to Realize Value Are Having an Impact
5. Ronshine (融信集团) Placement – Back for a Equity Raise

1. Huya Offering: Everyone Else Was Doing It Excuse

Follow-on offerings by Chinese ADRs are the flavour of the day. Hot on the heels of Qutoutiao Inc (QTT US) and Bilibili Inc (BILI US), HUYA Inc (HUYA US) filed for a potential $550 million public offering without presenting any details on the new ADS being offered. Also, certain selling shareholders will offer shares in the offering.

2. Huya Placement: Best Performing Live Streaming Stock but Beware Douyu Is Catching Up

Huya, a leading live streaming player in China, announced share placement of USD 550 million after market close on April 3rd. In this insight, we will look at recent developments of Huya and score the deal in our ECM Framework.

3. Ruhnn (如涵) Trading Update – Worst First-Day Performance Out of Recent US ADR Listings

Ruhnn Holding Ltd (RUHN US) raised US$125m at US$12.50 per share, the mid-point of the price range. We have previously analyzed the IPO in:

• Ruhnn (如涵) IPO Review – Expensive Influence
• Ruhnn (如涵) Pre-IPO Review- Significant Concentration Risk

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

4. Naspers: Addressing the Discount (Again). New Moves to Realize Value Are Having an Impact

Naspers (NPN SJ) recently announced another attempt to reduce the holdco discount which has remained stubbornly high despite previous attempts by management to reduce it. Since the announcement there has been movement, so perhaps this time it really is different!

So what is being done? Naspers will spin off its international internet assets, which account for >99% of its value, into a newco. They will then list 25% of newco on the Euronext in Amsterdam by issuing these shares to Naspers’ shareholders. The intention is to create a vehicle which can attract increased foreign and tech investors without the complication of a South African listing. The company believes this has been a key factor behind the wide holdco discount. The move also reduces Naspers weighting in South African indices which is another contributing factor.

Alastair Jones sees the announcement as a positive, although there are still issues with the main listing being in South Africa. He still believes a buyback would be the most effective way to reduce the discount, but Naspers is also keen to keep investing. 

5. Ronshine (融信集团) Placement – Back for a Equity Raise

Ronshine China Holdings (3301 HK) is looking to raise about US$122m in a top-up placement.

The deal scores marginally positive on our framework owing to its decent track record, and price and earnings momentum.

Its past deals have done well in the long run. Even though it did not perform well over the one-month period, its first week returns have tend to hold up above the deal price.

In this briefing:

1. Guotai Junan Securities Placement Quick Take – Might Be Too Big to Sail
2. Studio City – Thoughts on Lock-Up Expiry
3. Changliao (畅聊) AKA Paipai (派派) Pre-IPO Review – Self-Sufficient
4. Hollysys Auto Tech Placement – Has Ample Cash, Reasons for the Raising Remain Unclear
5. AGC Placement Quick Take – Relatively Smaller Deal, Share Price Correction Should Help

1. Guotai Junan Securities Placement Quick Take – Might Be Too Big to Sail

Guotai Junan Securities (H) (2611 HK) plans to raise around US$350m via placing new H-Shares. We had earlier covered the IPO, you can find our coverage below:

• Guotai Junan Securities IPO: Second, if Not the Largest, China Security Broker, A-H Premium Examined
• Guotai Junan IPO: A Big Player but Relatively Less Liquid, How A-H Premium Plays

This is a large deal to digest and the shares seem to be trading at a relatively tighter A-H spread versus peers.

2. Studio City – Thoughts on Lock-Up Expiry

Studio City, a spin-off by MLCO US, was listed on October 18th, 2018 and its lock-up will expire next week on April 16th. The company raised USD 359 million in its IPO with the majority of the shares taken up by its shareholders.

In this insight, we will review the company’s operation, shares subject to lock-up expiry and its valuation vs peers. 

Our previous insights on Studio City

• Studio City (新濠影汇) IPO: A Melco Spin-Off Turning Profitable
• Studio City (新濠影汇) IPO: Attractive Valuation with Options for Long-Term Upside (Part 2)
• Studio City (新濠影汇) IPO Trading Update: Performance Within Expectations, Near-Term Upside Capped

3. Changliao (畅聊) AKA Paipai (派派) Pre-IPO Review – Self-Sufficient

Changliao Inc (CL HK) is looking to raise about US$100m in its upcoming IPO. The company just filed its draft prospectus with the HKEX last week.

Changliao is a fast-growing social networking entertainment platform. The business model of engaging and monetizing users through interactive games is interesting.

However, the need for an IPO is questionable since the company has a healthy net cash balance sheet and it had paid out dividends in the past two years. It can easily finance its growth through debt or operating cash flow. 

Tencent is an investor in the firm, however, it had only invested RMB9m in the company in FY2016. There are no other notable investors despite several rounds of financing.

In this insight, we will look at the company’s business model, analyze its financial performance and operating metrics.

4. Hollysys Auto Tech Placement – Has Ample Cash, Reasons for the Raising Remain Unclear

Hollysys Automation Technolo (HOLI US) plans to raise around US$170m in its follow-on offering.

The company has been reporting flattish earnings for the past few years and remains well positioned in its main segments. HOLI is net cash, it has ample cash for that matter, and it has been generating operating cash flow consistently. It hasn’t provided any specific reasons for the capital raise. Which makes one wonder if this is just an opportunistic raise. 

In my view, either the company needs to clearly disclose the intended use of capital or it needs to offer the deal at a very wide discount to where the shares are currently trading.

5. AGC Placement Quick Take – Relatively Smaller Deal, Share Price Correction Should Help

AGC Inc (5201 JP) plans to raise US$215m (including over allotment) via a secondary offering of share, this represents 2.9% of the outstanding shares.  

The deal scores a mixed score on our framework, aided by its cheaper valuation while it scoring is hampered by its under performance versus it regional peers. However, the shares have been correcting since the deal was announced and the deal represents just a few days of ADV.

In this briefing:

1. Embassy Office Parks REIT IPO – FY19 Revised Down, Yield Propped up by Zero Coupon Bond
2. Ruhnn IPO Preview: Hard to Stay Red-Hot for Long
3. Dongzheng Auto Finance (东正汽车金融) Pre-IPO Review – Dependent on Dealership Network for Growth
4. Up Fintech (Tiger Brokers) IPO Quick Take – It’s Not like Futu, Won’t Perform like It Either
5. Short Haidilao (海底捞) Before Earning & Lock-Up Expiry

1. Embassy Office Parks REIT IPO – FY19 Revised Down, Yield Propped up by Zero Coupon Bond

Embassy Office Parks REIT (EOP IN) plans to raise around US$680m in its India IPO. Of this, it has already raised around US$125m from Capital Group, who came in as a strategic investor. EOP will primarily hold office assets in Bengaluru, Pune and Noida with a total portfolio size of around US$4.5bn. 

In my previous insights I’ve covered the company background, its projected growth and compared it to its main listed peer and other yield assets in India: 

• Embassy Office Parks REIT – Good Assets but Projections Might Be a Tad Too Bullish, and
• Embassy Office Parks REIT – Comparison with AIT and a Look at the Required Yield

In this insight, I’ll cover the deal dynamics, compare the revised forecast in the RHP with the earlier one from the DRHP, comment on the yield boost from the zero coupon debt and run the deal through our framework.

2. Ruhnn IPO Preview: Hard to Stay Red-Hot for Long

Ruhnn Holding Ltd (RUHN US) is an e-commerce platform which drives sales through KOLs (key opinion leaders). Ruhnn is the largest internet KOL facilitator in China as measured by revenue, the number of online stores and GMV in 2018 according to Frost & Sullivan. Ruhnn is backed by Alibaba Group Holding (BABA US), an 8.6% shareholder, and is seeking to raise $200 million through a Nasdaq IPO.

3. Dongzheng Auto Finance (东正汽车金融) Pre-IPO Review – Dependent on Dealership Network for Growth

Dongzheng Automotive Finance (2718 HK) is looking to raise approximately US$300 – 500m in its upcoming IPO. 

DAF is a fast growing auto finance company which acquires customers through a network of dealership around China. Its net interest income grew by 66% CAGR from FY2016 to FY2018 while net fees/comms income and profit grew by 39.6% and 61% CAGR over the same period.

However, most of its growth originated from ZhengTong dealers and joint promotion arrangement. Excluding loans from joint promotion arrangement, gross outstanding loan had only grown by 12% CAGR.

In this insight, we will look at the company’s business, analyze the competitive landscape, provide thoughts on valuation, and some questions for management.

4. Up Fintech (Tiger Brokers) IPO Quick Take – It’s Not like Futu, Won’t Perform like It Either

Up Fintech (TIGR US) plans to raise up to US$91m in its US listing. The company counts Xiaomi Corp (1810 HK) and Interactive Brokers Group, Inc (IBKR US) as its main investors.

In my earlier insights, I commented about Tiger’s reliance on IBKR and compared its operations with Futu Holdings Ltd (FHL US):

• Up Fintech (Tiger Brokers) Pre-IPO Quick Note – Much Too Reliant on IBKR
• Futu Holdings IPO Quick Note – Comparison with Tiger Brokers – Same Market, Different Economics

In this insight, I’ll run the deal through our framework and comment on valuations.

5. Short Haidilao (海底捞) Before Earning & Lock-Up Expiry

Haidilao International, the largest Chinese cuisine player by valuation, was listed on September 26th last year and lock-up expiry will be on March 26th. The stock has returned 24% since listing. 

• As it heads into lock-up expiry, we will examine Haidilao’s shareholder structure and potential shares up for sale.
• Haidilao was included in the Hong Kong Connect Scheme on December 10th, 2018 and shares held by mainland investors have been consistently increasing.
• But we think Haidilao’s valuation has built in a perfect growth scenario.
• Risk of de-rating for Haidilao warrants a short position.

Our previous coverage on Meituan Dianping

• Haidilao IPO First Glance: Legendary Hot Pot Restaurant that Will Be Hot (Part 1)
• Haidilao (海底捞) IPO: Superior Metrics in a Scalable Segment (Part 2)
• Haidilao (海底捞) IPO: Near Term Rapid Growth but Deceleration Ahead (Part 3)
• Haidilao (海底捞) IPO: Appealing Valuation at the Low End for a Branded National Champion (Part 4) 
• Haidilao (海底捞) Post-IPO Trading Update: Not Much Upside from High End, Lessons from Meituan

In this briefing:

1. Leong Hup Pre-IPO – Hard to Pinpoint What’s Going to Be the Revenue Driver Going Forward
2. Dongzheng Auto Finance (东正汽车金融) IPO Review – Relaunched at Lower Price
3. Pinterest IPO Preview
4. Ruhnn IPO Valuation: Face Value
5. ECM Weekly (23 March 2019) – ESR, Sun Car, Ruhnn, CanSino, Frontage, Wuxi Bio, WiseTech,

1. Leong Hup Pre-IPO – Hard to Pinpoint What’s Going to Be the Revenue Driver Going Forward

Leong Hup International (LEHUP MK) (LHI) plans to raise up to US$400m in its Malaysian IPO. LHI is one of the largest integrated poultry producer in Southeast Asia. 

LHI was listed on Bursa Malaysia from 1990 to 2012.  Since delisting, it has consolidated  its Southeast Asia operations under a single entity and is now looking to relist the larger entity.

While revenue has been growing steadily, margins have been volatile. In addition, its difficult to pinpoint which products are performing well in which geographies. The feedmills business seems to be a more consistent performer as compared to the livestock business. It’s also a larger revenue contributor in the faster growing regions.

2. Dongzheng Auto Finance (东正汽车金融) IPO Review – Relaunched at Lower Price

Dongzheng Automotive Finance (2718 HK) (DAF) re-launched its IPO at a lower fixed price of HK$3.06 per share, expecting to raise about US$208m. We have covered the fundamentals and valuation of the company in:

• Dongzheng Auto Finance (东正汽车金融) Pre-IPO Review – Dependent on Dealership Network for Growth
• Dongzheng Auto Finance (东正汽车金融) IPO Review – Better off Buying the Parent

In this insight, we will only look at the company’s updated valuation and re-run the deal through IPO framework.

3. Pinterest IPO Preview

Pinterest Inc (PINS US), a leading digital media platform in the US, is getting ready for an IPO in the next several weeks. In our view, this is one of the most exciting global tech IPOs since the Elastic NV (ESTC US) IPO in October 2018. Pinterest has one of those rare combinations of strong sales growth, leading website brand awareness, loyal users network effect, and a clear path to profitability. Pinterest was most recently valued at $12.3 billion in private market valuation when it raised $150 million in 2017. 

One of the attractive features about Pinterest is the fact that it has a very loyal user base among moms in the US. According to the company,  about two thirds of its total user base are female, mostly in the US. Nearly 8 out of 10 moms (who are often the decision makers for purchasing household goods) and about half of the millennials in the US regularly use Pinterest.  

The company has a very attractive income statement. Its revenue increased 59% CAGR from 2016 to 2018 and its operating losses have been declining nicely. Operating loss as a percentage of sales declined from 62.9% in 2016 to 9.9% in 2018. 

4. Ruhnn IPO Valuation: Face Value

Ruhnn Holding Ltd (RUHN US) is an e-commerce platform which drives sales through KOLs (key opinion leaders), backed by Alibaba Group Holding (BABA US) which an 8.6% shareholder. It announced its IPO price range of $11.50-13.50 per ADS. At the mid-point of the IPO price range, Ruhnn will raise net proceeds of $113 million, resulting in a fully diluted market cap of $1 billion.

5. ECM Weekly (23 March 2019) – ESR, Sun Car, Ruhnn, CanSino, Frontage, Wuxi Bio, WiseTech,

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 72.3% for IPOs and 64.3% for Placements 

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

New IPO filings

• Yunji (the U.S, ~US$200m)
• 360 LuDaShi (Hong Kong, potentially >US$100m)
• CMGE Tech (Hong Kong, re-filed)
• Mulsanne Group – FKA Alpha Smart – AKA GXG (Hong Kong, re-filed)
• Xinyi Energy (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

• Chinese AI start-up Megvii mulls IPO in either Hong Kong or New York to raise  US$800m
• Lendlease planning to raise up to US$500m with retail Reit listing on SGX
• Indonesia’s Lion Air Starts Work on $1 Billion IPO
• Chinese Tower Operator Guodong Is Said to Plan Hong Kong IPO
• Feihe International ‘revisits plan for Hong Kong IPO’
• Solar co Xinyi Energy revives Hong Kong IPO plan

This week Analysis on Upcoming IPO

• Ruhnn (如涵) Pre-IPO Review- Significant Concentration Risk
• Frontage Holding (方达控股) IPO: Updates from 2018 Numbers
• Sun Car Insurance Agency (盛世大联) IPO: Over Valued Vs P&C Companies
• ESR Cayman Pre-IPO – Earnings and Segment Analysis
• CanSino Biologics (康希诺) IPO: Valuation Attractive, Lilly Asia Doubling Up (Part 4)
• PagerDuty IPO Preview

In this briefing:

1. Tencent Music 4Q18 Quick Note – Growth on Track, Margins Could Drag – Stock Price Needs a Breather
2. Lyft IPO: Valuation Analysis (Prudent Investment or Quasi-Gambling?)
3. Platinum Asset Management Placement –  Co-Founder Selling + Weak Earnings Momentum
4. Sun Car Insurance Agency (盛世大联) IPO: Over Valued Vs P&C Companies
5. Lyft IPO: Key Takeaways from In-Depth Interviews with Drivers

1. Tencent Music 4Q18 Quick Note – Growth on Track, Margins Could Drag – Stock Price Needs a Breather

Tencent Music Entertainment (TME US) reported its full year results today, post US market close. Revenue growth was slightly ahead of estimates as paying ratio continue to improve for both online music (subscription revenue) and social entertainment (live streaming). Growth for the latter continued to be driven more by ARPU rather than user growth. 

The concerning bit in the results was the decline in gross margins as the company continues to invest in more content. 

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
• Trading strategies: Tencent Music IPO – Firework – Trading Strategies

2. Lyft IPO: Valuation Analysis (Prudent Investment or Quasi-Gambling?)

Our base case forecast is Case 2 (among three scenarios analysis), which suggests an implied market cap of $21 billion or $75 per share. Given that our intrinsic value of the company does not provide enough upside versus the likely IPO price, we would AVOID this deal. 

Even if the company is able to complete this IPO, raising nearly $2.0-2.5 billion, it is very possible that the company may need to come back to the market in two or three years in a secondary share offering, which would dilute the existing shareholders. This is probably the biggest risk I see with the Lyft IPO right now. 

Our base case financial forecast for Lyft assumes the following:

• Sales growth rate (CAGR from 2018 to 2030) – 26.6%
• Year in which Lyft turns operating profit positive – 2025
• Operating margin in 2030 – 15.0%

3. Platinum Asset Management Placement –  Co-Founder Selling + Weak Earnings Momentum

The co-founder of  Platinum Asset Management (PTM AU), Kerr Neilson, and Judith Neilson are looking to sell 30m shares of the company at a fixed price of A$5.00. 

The deal scores poorly on our framework due to its poor track record, large deal size, weak earnings momentum and relatively expensive valuation. The selldown comes after the company weak 1H FY19 results last month which could put pressure on share price in the near term.

4. Sun Car Insurance Agency (盛世大联) IPO: Over Valued Vs P&C Companies

Sun Car Insurance Agency is a leading automobile insurance agency and B2B2C automobile after-sales service provider in China. The company is listed in the NEEQ board since 2014 and is raising up to USD 167 million to list in Hong Kong. In this insight we cover:

• The company’s two major business lines, the automobile insurance agency and automobile butler services
• The industry backdrop
• The company’s shareholder
• Our thought on valuation

5. Lyft IPO: Key Takeaways from In-Depth Interviews with Drivers

• In-depth interviews with two full-time drivers reveal that Lyft Inc (0812823D US) has disrupted the incumbent Yellow Cab in NY City due to better take-home income economics for drivers.
• Bargaining and pricing power favor LYFT (vs. drivers) as LYFT could provide the volume (sufficient number of rides per day) for drivers.
• LYFT’s path to profitability depends on 1) the further scale-up of network effect 2) diversification of transportation-related business and 3) progress in autonomous cars’ unit cost economics.
• Given its track record as a disruptive force, investors could be willing to pay up (over 5.0x P/S multiple) for LYFT, making the IPO a hot deal.

In this briefing:

1. Futu Holdings IPO Trading Update – Might Be Trading a Little Too High
2. New Century Hotel (浙江開元酒店) Trading Update – Low Free Float, Poor Liquidity
3. Homeplus REIT IPO: A Key Landmark Deal in the History of the Korean REIT Market

1. Futu Holdings IPO Trading Update – Might Be Trading a Little Too High

Futu Holdings Ltd (FHL US)‘s IPO was priced at the top-end at US$12/ADS raising a total of US$160m, including the US$70m raised from General Atlantic via a concurrent private placement.

In my earlier insights, I looked at the company’s background,  past financial performance, scored the deal on our IPO framework and compared it to Tiger Brokers: 

• Futu Holdings Pre-IPO – Great Metrics but in a Commoditised Industry, 
• Futu Holdings Pre-IPO – FY18 Updates And Quick Thoughts on Valuation,
• Futu Holdings IPO – Given the Team, Execution, and Backers, Might Be Worth a Look at the Low-End, and
• Futu Holdings IPO Quick Note – Comparison with Tiger Brokers – Same Market, Different Economics

In this insight, I will re-visit some of the deal dynamics, comment on share price drivers and provide a table with implied valuations.

2. New Century Hotel (浙江開元酒店) Trading Update – Low Free Float, Poor Liquidity

Zhejiang New Century Hotel Management Group (1158 HK) (NCH) raised about US$136m at HK$16.50 per share, just slightly below the mid point of its IPO price range. We have previously covered the IPO in:

• New Century Hotel (浙江開元酒店) Pre-IPO – Improved Profitability Not Driven by Underlying Operations
• New Century Hotel (浙江開元酒店) IPO Review – Higher ADR and RevPAR than Peers but Margins Fall Short

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

3. Homeplus REIT IPO: A Key Landmark Deal in the History of the Korean REIT Market

The Homeplus REIT IPO is surely a key landmark deal in the 20 year history of the Korean REIT market. We have a positive view on the Homeplus REIT IPO and believe it has a good chance of generating 6-9% return per year (including dividends and capital appreciation) in the next three years. The Homeplus REIT is geared towards the investors who are happy with 6-9% annual returns with relatively low downside risk. For the investors that are seeking 10%+ annual returns, this deal is probably not suitable for them. 

The following are the five major factors why we believe the Homeplus REIT market will be a success: 

• Stable dividend yield of 6-7%.
• Opportunity to get included in a global REIT index (such as EPRA Developed Asia Index).
• Supermarkets related REITs are viewed safer than residential and commercial office building related REITs globally.
• Global investors have wanted to invest in a big, liquid, safe retail REIT with stable dividends in Korea for a long time. The Homeplus REIT possesses many of these characteristics. 

In this briefing:

1. LYFT: Wouldn’t It Be Ironic if This Was an IPO to Rent but Not Own?
2. Koolearn (新东方在线) Trading Update – A Wobbly Start
3. CanSino Biologics (康希诺) IPO Trading Update – Time to Cash Out
4. SNK Corp IPO Preview
5. Jinxin Fertility (锦欣生殖) Pre-IPO: Strong Foothold in Sichuan but Weak Sentiment for Sector

1. LYFT: Wouldn’t It Be Ironic if This Was an IPO to Rent but Not Own?

Lyft Inc (LYFT US) announced an increase in its IPO price range from $62-68 to $70-72 after previous reports had indicated that the IPO became oversubscribed very early.

There has been significant coverage of the name on Smartkarma but a disappointing lack of obvious puns:

Lyft IPO: Key Takeaways from In-Depth Interviews with Drivers by Johannes Salim, CFA

Lyft IPO: Valuation Analysis (Prudent Investment or Quasi-Gambling?) and Lyft IPO Preview by Douglas Kim

Lyft IPO Preview: Maybe We’ll Just Walk? by Rickin Thakrar

LYFT Pre-IPO – Drivers and Shared Rides Hold the Key But the Numbers Are Missing by Sumeet Singh

We would highlight Johannes’ interview piece as being well worth a read to understand the driver perspective, as well as Sumeet’s piece and the comments sections for discussions of business model strengths and weaknesses.

Ultimately, this issue isn’t going to be bought for its cheapness and we would guess that it will be successful (initially) due to pent up demand and relatively strong broad stock market performance over the last few months. Below, however, we examine NY transportation data to point out what we feel are misconceptions about the overall value proposition of the ride sharing industry.

2. Koolearn (新东方在线) Trading Update – A Wobbly Start

Koolearn (1797 HK) raised about US$214m at HK$10.20 per share, the mid-point of its IPO price range. We have previously covered the IPO in: 

• Koolearn (新东方在线) IPO Review – Yet to See Results from Increased Spending
• New Regulatory Tightening on Online Education Reads Badly on Koolearn IPO
• Koolearn (新东方在线) Pre-IPO – Profitable Online Edu Company but Poor Sentiment Weighs

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

3. CanSino Biologics (康希诺) IPO Trading Update – Time to Cash Out

CanSino Biologics raised USD 148 million at HKD 22/share, at the high end of its guided price range. We have previously covered the IPO in the following note: 

• CanSino Biologics (康希诺) IPO: Promising Pre-Clinical Results but Vaccine Scandal Weighs (Part 1)
• CanSino Biologics (康希诺) IPO: Thoughts on Valuation (Part 2)
• CanSino Biologics (康希诺) IPO: Valuation Update (Part 3)
• CanSino Biologics (康希诺) IPO: Valuation Attractive, Lilly Asia Doubling Up (Part 4)

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

4. SNK Corp IPO Preview

SNK Corp (950180 KS), a Japanese game company founded in 1978, is trying to complete its IPO in the Korean stock market (KOSDAQ) in April. SNK is well known its The King of Fighters game. The IPO price range is between 30,800 won and 40,400 won. The IPO base deal size ranges from $114 million to $150 million. 

This is the second time that SNK Corp is trying to complete the IPO after a failed attempt in late 2018. The company has reduced the average IPO price range by 12% this time compared to the first try in late 2018.

The bankers used four comparable companies including Webzen, NCsoft, Pearl Abyss, and Netmarble Games to value SNK Corp. Using P/B valuation method, the bankers derived an average P/B multiple of 4.1x. The bankers then took the applied equity (controlling interest) of the company and applied the P/B multiple of 4.1x to derive an implied value of the company. After applying additional 8.57% to 32.99% IPO discount, the bankers derived an IPO price range of 34,300 – 46,800 won.  

5. Jinxin Fertility (锦欣生殖) Pre-IPO: Strong Foothold in Sichuan but Weak Sentiment for Sector

Jinxin Fertility, a leading privately owned assisted reproductive service provider in China and the US, refiled to list in Hong Kong. Per news reports, the company planned to raise up to USD 500 million. In this insight, we will cover the following topics:

• Business lines and its hospitals
• The assisted reproductive service industry
• Key risks
• Shareholders and use of proceeds
• Our early thoughts on valuation

In this briefing:

1. Koolearn (新东方在线) IPO Review – Yet to See Results from Increased Spending
2. NASDAQ:GDS Placement – Visible Growth, Additional Ping An Investment
3. Keppel Infrastructure Trust Placement – Scaled Down but Large Deal; Very Well Flagged Deal
4. Dongzheng Auto Finance (东正汽车金融) IPO Review – Better off Buying the Parent
5. CanSino Biologics (康希诺) IPO: Valuation Update (Part 3)

1. Koolearn (新东方在线) IPO Review – Yet to See Results from Increased Spending

Koolearn (1797 HK) is looking to raise up to US$S234m in its upcoming IPO.  We have previously covered the company in:

• Koolearn (新东方在线) Pre-IPO – Profitable Online Edu Company but Poor Sentiment Weighs
• New Regulatory Tightening on Online Education Reads Badly on Koolearn IPO

In this insight, we will look at the updates on financials and operating metrics, compare it to other listed online education companies, and run the deal through our framework.

The increase in spending on marketing has not yielded the intended results as the growth rates of student enrollment and gross billings slowing down. Furthermore, aggressive spending behavior is similar to that of STG and LAIX and both companies did not perform well post listing.

2. NASDAQ:GDS Placement – Visible Growth, Additional Ping An Investment

GDS Holding, the largest carrier-neutral, cloud-neutral data centre operator in China, is raising USD 400 million from a private placement. The deal was launched last night (US time) post the company’s results announcement. In this insight, we will cover: 

• Details of the deal
• Key takeaways from its 4Q2018 results
• USD 150 million investment by Ping An
• Its shareholders
• The score in our Placement Framework

3. Keppel Infrastructure Trust Placement – Scaled Down but Large Deal; Very Well Flagged Deal

Keppel Infrastructure Trust (KIT SP) plans to raise US$450m via an equity placement and non-renounacable preferential offering. Its sponsor, Keppel Corp Ltd (KEP SP) will subscribe in the placement and the preferential offering to maintain its 18.2% stake.

KIT announced the acquisition of IXOM in Nov 2018 and has been talking about the need to issue equity ever since. Its earlier presentations seem to indicate a preference for raising a large sum via an equity issuance. Furthermore, despite the smaller raise the accretion to DPU is probably only marginal. 

4. Dongzheng Auto Finance (东正汽车金融) IPO Review – Better off Buying the Parent

Dongzheng Automotive Finance (2718 HK) is raising up to US$428m in its upcoming IPO. We have covered the background of the company in Dongzheng Auto Finance (东正汽车金融) Pre-IPO Review – Dependent on Dealership Network for Growth. 

In this insight, we will look into the company’s valuation, compare it to listed auto peers, and run the deal through our framework.

5. CanSino Biologics (康希诺) IPO: Valuation Update (Part 3)

CanSino is a China-based biotechnology company with a focus on vaccine development. In our previous insight (link to Part 1 and Part 2), we have discussed CanSino’s drug pipeline, the competitive landscape, and the valuation. 

As the company is starting pre-marketing, we will provide an updated valuation based on new information obtained from the approved application document. Our base case valuation for CanSino is USD 856 million on a pre-money basis. Majority of the rNPV based SOTP valuation still comes from its meningococcal conjugate vaccine (MCV2 and MCV4). Over the past few months, the company has completed Phase III for MCV4 and submitted NDA (new drug application) for MCV2 candidates.

In this briefing:

1. Wisetech Global Placement – Past Deal Did Well but Valuations Looks Stretched
2. Hyundai Autoever IPO Bookbuilding: Surprising Results, Local Street Bets on Autoever/Glovis Merger
3. A Trading Strategy for Hyundai Autoever Post IPO
4. CanSino Biologics (康希诺) IPO: Valuation Attractive, Lilly Asia Doubling Up (Part 4)
5. ESR Cayman Pre-IPO – Earnings and Segment Analysis

1. Wisetech Global Placement – Past Deal Did Well but Valuations Looks Stretched

Wisetech Global (WTC AU) plans to raise US$177m/AUD250m in order to shore-up its balancesheet for future acquistiions. 

The company has done exceedingly well since listing and even its past fund raising delivered good returns. However, the deal scores a mixed score on our framework as valuations appear strecthed with the stock trading above analysts target price. Thus, the deal might warrant a large discount.

2. Hyundai Autoever IPO Bookbuilding: Surprising Results, Local Street Bets on Autoever/Glovis Merger

• Subscription rate is 797 to 1. Offer price was fixed at ₩48,000, substantially higher than the upper end. Deal size is now ₩168.5bil. Company value is put at slightly higher than ₩1tril. Demands are spread out pretty well between long-term funds and hot money and local and foreign investors as well. All of the orders are universally placed at 75% of upper end or higher.
• Local street is betting on Autoever/Glovis merger not long after this IPO. That is, HMG is still wanting the initial Glovis/Mobis merger plan. To better manage to win shareholder support, they must be thinking that bigger Glovis can be an answer. This means HMG should do whatever it takes to make Autoever bigger in the immediate future.
• This is what local street is betting on and why they went really aggressive on this IPO. As witnessed in the bookbuilding results, this street mentalitywon’t be changed any time soon. We should expect even stronger prices after new shares are listed on Mar 28.

3. A Trading Strategy for Hyundai Autoever Post IPO

In this report, we provide a trading strategy for Hyundai Autoever Corp (0978519D KS) IPO, which is expected to start trading on March 28th. The IPO price has been finalized at 48,000 won, which is 9% higher than the high-end of the original IPO price of 44,000 won. The institutional investors’ demand for the Hyundai Autoever IPO was very strong at 797 to 1.

Given the very strong institutional demand for this IPO, it appears that our base case valuation (59,454 won), which is 24% higher than the IPO price, may be too conservative. A more likely scenario now is that the stock reaches about 60,000 won to 65,000 won in the first few hours of trading on the first day, overshooting its intrinsic value and sells off a bit for a few days/weeks, enters a consolidation phase and then resumes its higher share price again. 

Of the 913 institutional investors that participated in the Hyundai Autoever IPO survey, 89% of them thought that the intrinsic value of the company should be more than the high end of the IPO price range (44,400 won), which provides a strong vote of confidence that this IPO should do well once it starts trading. 

4. CanSino Biologics (康希诺) IPO: Valuation Attractive, Lilly Asia Doubling Up (Part 4)

CanSino Biologics started its book building today to raise up to USD 160 million to list in Hong Kong. In our previous insights (links provided below), we provided a detailed analysis of the company’s core drug candidates, its shareholders and our thoughts on valuation. In this insight, we will cover the following topics:

• Recap of our valuation
• Highlight of cornerstone investors
• Our thoughts on the deal

Our coverage on Cansino IPO

• CanSino Biologics (康希诺) IPO: Promising Pre-Clinical Results but Vaccine Scandal Weighs (Part 1)
• CanSino Biologics (康希诺) IPO: Thoughts on Valuation (Part 2)
• CanSino Biologics (康希诺) IPO: Valuation Update (Part 3)

5. ESR Cayman Pre-IPO – Earnings and Segment Analysis

ESR Cayman (ESR HK) aims to raise up to US$1.5bn in its planned Hong Kong listing, as per media reports. The company is backed by Warburg Pincus and counts APG, the Netherlands’ largest pension provider, as one of its main investors.

In my earlier insight, I touched upon the company’s business model and provided an overview of its operations, ESR Cayman Pre-IPO – A Giant in the Making. 

In this insight, I’ll talk more about the financials and the drivers for each of the three segments.