TMT/Internet

In this briefing:

1. StubWorld: Naspers’ Restructuring Update
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. Alibaba (BABA): Weakest Business Line Transfers Risk to Suppliers and Cuts Headcount, 38% Upside

1. StubWorld: Naspers’ Restructuring Update

This week in StubWorld …

• Naspers Ltd (NPN SJ)‘s discount to NAV narrows as it teases out more information on spinning-off and separately listing Tencent Holdings (700 HK).

Preceding my comments on Naspers are the weekly setup/unwind tables for Asia-Pacific Holdcos.

These relationships trade with a minimum liquidity threshold of US$1mn on a 90-day moving average, and a % market capitalisation threshold – the $ value of the holding/opco held, over the parent’s market capitalisation, expressed in percent – of at least 20%.

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. Alibaba (BABA): Weakest Business Line Transfers Risk to Suppliers and Cuts Headcount, 38% Upside

* Youku, the online TV subsidiary of BABA, is transforming its risk of loss to content providers.

* Youku is dismissing employees.

* We believe both of Youku’s decisions are positive for cost control and the operating margin will recover in FY2020.

* The P/E band suggests a price target HKD250, which is 38% upside above the market price.

In this briefing:

1. Ctrip (CTRP): Overcame Two Difficulties in Q4, But Market Over-Reacted to “Global No. 1”
2. S&P 500 and S&P 600 Testing Resistance…Still
3. Delta Electronics (DELTA TB): Little Option but to Accept the Tender Offer

1. Ctrip (CTRP): Overcame Two Difficulties in Q4, But Market Over-Reacted to “Global No. 1”

* The recovery in 4Q2018 shows that CTRP has already survived the new law and the new competitor in 2018.
* We believe EPS will grow 12% in 2019.
* However, we believe the market has already over-reacted to the news last November that CTRP became the largest online travel agency.
* We set a target price of USD23.80, which is 32% below the market price.

2. S&P 500 and S&P 600 Testing Resistance…Still

The S&P 500 is beginning to come off of short-term overbought extremes, consolidating near the confluence of key overhead resistance and the 200-day moving average. This level is roughly 2,817 on the S&P 500 and roughly 1,000 on the S&P 600 Small Cap index. Some consolidation or a mild pullback is possible in the near-term, which we believe would help alleviate current overbought readings and allow for a more orderly and meaningful move higher.  In today’s report we highlight attractive Groups and stocks within the Consumer Discretionary, Health Care, and Services Sectors.

3. Delta Electronics (DELTA TB): Little Option but to Accept the Tender Offer

Delta Electronics (2308 TT) (DEI) launched the conditional voluntary tender offer for Delta Electronics Thai (DELTA TB) (Delta), an electronics contract manufacturer, on 26 February 2019. The tender offer of THB71.00 cash per share values Delta at an EV of THB72 billion ($2.2 billion).

In this briefing:

1. Ctrip (CTRP): Overcame Two Difficulties in Q4, But Market Over-Reacted to “Global No. 1”
2. S&P 500 and S&P 600 Testing Resistance…Still
3. Delta Electronics (DELTA TB): Little Option but to Accept the Tender Offer
4. Rakuten: Lyft IPO Provides Timely Support for Mobile Deployment

1. Ctrip (CTRP): Overcame Two Difficulties in Q4, But Market Over-Reacted to “Global No. 1”

* The recovery in 4Q2018 shows that CTRP has already survived the new law and the new competitor in 2018.
* We believe EPS will grow 12% in 2019.
* However, we believe the market has already over-reacted to the news last November that CTRP became the largest online travel agency.
* We set a target price of USD23.80, which is 32% below the market price.

2. S&P 500 and S&P 600 Testing Resistance…Still

The S&P 500 is beginning to come off of short-term overbought extremes, consolidating near the confluence of key overhead resistance and the 200-day moving average. This level is roughly 2,817 on the S&P 500 and roughly 1,000 on the S&P 600 Small Cap index. Some consolidation or a mild pullback is possible in the near-term, which we believe would help alleviate current overbought readings and allow for a more orderly and meaningful move higher.  In today’s report we highlight attractive Groups and stocks within the Consumer Discretionary, Health Care, and Services Sectors.

3. Delta Electronics (DELTA TB): Little Option but to Accept the Tender Offer

Delta Electronics (2308 TT) (DEI) launched the conditional voluntary tender offer for Delta Electronics Thai (DELTA TB) (Delta), an electronics contract manufacturer, on 26 February 2019. The tender offer of THB71.00 cash per share values Delta at an EV of THB72 billion ($2.2 billion).

4. Rakuten: Lyft IPO Provides Timely Support for Mobile Deployment

The publication of Lyft’s IPO prospectus is a clear positive for Rakuten Inc (4755 JP) . As a pure investment, Rakuten’s return on its Lyft investments could be 273-366% or ¥101-136 per share based on the $20-25bn valuation range reported by the press. There has been a lot of focus on the investment gains Rakuten should accrue but the real upside is a timely boost to liquidity plus accounting cover as mobile investment accelerates.  Whether one believes Rakuten can succeed in mobile or not, it has the capital and paper profits to support a splashy introduction and spending is already accelerating.

In this briefing:

1. Ruhnn (如涵) Trading Update – Worst First-Day Performance Out of Recent US ADR Listings
2. Naspers: Addressing the Discount (Again). New Moves to Realize Value Are Having an Impact
3. Alibaba (BABA): Weakest Business Line Transfers Risk to Suppliers and Cuts Headcount, 38% Upside
4. Summit Ascent’s Slippery Slope
5. Manikay Caves and Accepts KKR’s Reduced (And Now Final) Offer

1. 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.

2. 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. 

3. Alibaba (BABA): Weakest Business Line Transfers Risk to Suppliers and Cuts Headcount, 38% Upside

* Youku, the online TV subsidiary of BABA, is transforming its risk of loss to content providers.

* Youku is dismissing employees.

* We believe both of Youku’s decisions are positive for cost control and the operating margin will recover in FY2020.

* The P/E band suggests a price target HKD250, which is 38% upside above the market price.

4. Summit Ascent’s Slippery Slope

Back in September 2017, Lawrence Ho, Summit Ascent Holdings (102 HK)‘s major shareholder, reduced his stake to 18.75% from 27.06% (at between $1.13-$1.60/share, but mainly at the low end of this range), according to Hong Kong Exchange disclosure of interest filings. The share price of this Russian integrated gaming play declined 34% to $1.06/share in the following five trading days. Who bought those shares was not disclosed – CCASS shows these shares moving out of VC Brokerage into at least 10 different brokerage accounts.

Shortly after, Howard Klein quoted one insider in his insight Melco Resorts: A Gem Hiding in Plain Sight Offers an Entry Point After a Recent Dip that the sell-down wasn’t likely a sign “Ho has lost confidence in the area.“

On the 15 December, Ho announced a complete exit from Summit, selling 17.37% of shares out. Concurrently Ho resigned from his NED and chairman positions. Those shares moved from VC Brokerage to Sun Hung Kai Investments on the 20 December 2017. Shares traded unchanged on the news. 

At the same time, First Steamship (2601 TT) disclosed it held 12.67% on the 18 December 2017. Concurrently, Kuo Jen Hao was appointed as NED and Chairman of the Board, with effect from 28 December 2017.  Kuo is also the chairman and the general manager of First Steamship. First Steamship gradually increased its stake to 19.11% as at 24 October 2018.

The New News

Yesterday, Summit Ascent announced it has been informed that First Steamship and Kuo are in talks to sell their entire shareholdings. No numbers were disclosed. This stake sale would not trigger an MGO and there was no reference to the release of an announcement pursuant to the Codes on Takeovers and Mergers and Share Buy-Backs in Hong Kong. Shares are up 24%.

With increased liquidity surrounding the news, this looks like a great opportunity to exit.

5. Manikay Caves and Accepts KKR’s Reduced (And Now Final) Offer

Originally I had thought KKR’s offer could go higher. Instead, it came in lower at A$3.40 and KKR gave MYOB Group Ltd (MYO AU) management all of a couple of days to think about it.

The title to my subsequent piece was MYOB Caves And Agrees To KKR’s Reduced Offer.

Manikay Partners started buying up shares and by early March had reached a position of 11%. They made noise. The Scheme Booklet came out on the 14th of March. Four days later Manikay announced their position was now 13.61% and the following day Mawer announced re-upped its stake from the mid 8s to high 9% level.

The 20th saw a Scheme Update from MYO announcing receipt of a letter from KKR saying that the A$3.40 price was their “best and final offer”, making it clear under Truth in Takeovers language that Manikay was not going to get a higher price out of them.

Manikay continued to buy shares on the 20th and the 21st, getting to 16.16% of the company as filed on the 22nd.

On Monday 1 April, MYOB announced a supplemental disclosure to the Scheme documents noting KKR’s final intention, and that the directors continued to unanimously recommend the Scheme.

Today we have new news.

Manikay Caves and Agrees to KKR’s Reduced (Now Final) Offer

Earlier today a Reuters story about Manikay accepting the offer popped up and MYOB shares popped from A$3.34 to A$3.38-39 area where they closed. Partway through the day MYOB released a document on the ASX feed saying that Manikay had sent a letter saying…

In order avoid speculation regarding our voting intentions in respect of the Scheme, we are writing to inform you that we, Manikay Partners, intend to vote all the MYOB shares that we own or control FOR the upcoming Scheme, subject to there being no proposal that we consider to be superior prior to the vote.

We remain very disappointed that, despite our repeated efforts to convince you otherwise, you failed to change your recommendation in light of the material improvement in market conditions since announcement of the Scheme, among other factors. We are also disappointed that the disclosures to MYOB shareholders did not fully explain the impact of such improved market conditions on the value of MYOB.
excerpt of the letter.

In this briefing:

1. Alibaba (BABA): Weakest Business Line Transfers Risk to Suppliers and Cuts Headcount, 38% Upside
2. Summit Ascent’s Slippery Slope
3. Manikay Caves and Accepts KKR’s Reduced (And Now Final) Offer
4. Naver Faces Macro Downside Pressure
5. Malaysian Telcos: Look for Improvements to Continue in 2019.

1. Alibaba (BABA): Weakest Business Line Transfers Risk to Suppliers and Cuts Headcount, 38% Upside

* Youku, the online TV subsidiary of BABA, is transforming its risk of loss to content providers.

* Youku is dismissing employees.

* We believe both of Youku’s decisions are positive for cost control and the operating margin will recover in FY2020.

* The P/E band suggests a price target HKD250, which is 38% upside above the market price.

2. Summit Ascent’s Slippery Slope

Back in September 2017, Lawrence Ho, Summit Ascent Holdings (102 HK)‘s major shareholder, reduced his stake to 18.75% from 27.06% (at between $1.13-$1.60/share, but mainly at the low end of this range), according to Hong Kong Exchange disclosure of interest filings. The share price of this Russian integrated gaming play declined 34% to $1.06/share in the following five trading days. Who bought those shares was not disclosed – CCASS shows these shares moving out of VC Brokerage into at least 10 different brokerage accounts.

Shortly after, Howard Klein quoted one insider in his insight Melco Resorts: A Gem Hiding in Plain Sight Offers an Entry Point After a Recent Dip that the sell-down wasn’t likely a sign “Ho has lost confidence in the area.“

On the 15 December, Ho announced a complete exit from Summit, selling 17.37% of shares out. Concurrently Ho resigned from his NED and chairman positions. Those shares moved from VC Brokerage to Sun Hung Kai Investments on the 20 December 2017. Shares traded unchanged on the news. 

At the same time, First Steamship (2601 TT) disclosed it held 12.67% on the 18 December 2017. Concurrently, Kuo Jen Hao was appointed as NED and Chairman of the Board, with effect from 28 December 2017.  Kuo is also the chairman and the general manager of First Steamship. First Steamship gradually increased its stake to 19.11% as at 24 October 2018.

The New News

Yesterday, Summit Ascent announced it has been informed that First Steamship and Kuo are in talks to sell their entire shareholdings. No numbers were disclosed. This stake sale would not trigger an MGO and there was no reference to the release of an announcement pursuant to the Codes on Takeovers and Mergers and Share Buy-Backs in Hong Kong. Shares are up 24%.

With increased liquidity surrounding the news, this looks like a great opportunity to exit.

3. Manikay Caves and Accepts KKR’s Reduced (And Now Final) Offer

Originally I had thought KKR’s offer could go higher. Instead, it came in lower at A$3.40 and KKR gave MYOB Group Ltd (MYO AU) management all of a couple of days to think about it.

The title to my subsequent piece was MYOB Caves And Agrees To KKR’s Reduced Offer.

Manikay Partners started buying up shares and by early March had reached a position of 11%. They made noise. The Scheme Booklet came out on the 14th of March. Four days later Manikay announced their position was now 13.61% and the following day Mawer announced re-upped its stake from the mid 8s to high 9% level.

The 20th saw a Scheme Update from MYO announcing receipt of a letter from KKR saying that the A$3.40 price was their “best and final offer”, making it clear under Truth in Takeovers language that Manikay was not going to get a higher price out of them.

Manikay continued to buy shares on the 20th and the 21st, getting to 16.16% of the company as filed on the 22nd.

On Monday 1 April, MYOB announced a supplemental disclosure to the Scheme documents noting KKR’s final intention, and that the directors continued to unanimously recommend the Scheme.

Today we have new news.

Manikay Caves and Agrees to KKR’s Reduced (Now Final) Offer

Earlier today a Reuters story about Manikay accepting the offer popped up and MYOB shares popped from A$3.34 to A$3.38-39 area where they closed. Partway through the day MYOB released a document on the ASX feed saying that Manikay had sent a letter saying…

In order avoid speculation regarding our voting intentions in respect of the Scheme, we are writing to inform you that we, Manikay Partners, intend to vote all the MYOB shares that we own or control FOR the upcoming Scheme, subject to there being no proposal that we consider to be superior prior to the vote.

We remain very disappointed that, despite our repeated efforts to convince you otherwise, you failed to change your recommendation in light of the material improvement in market conditions since announcement of the Scheme, among other factors. We are also disappointed that the disclosures to MYOB shareholders did not fully explain the impact of such improved market conditions on the value of MYOB.
excerpt of the letter.

4. Naver Faces Macro Downside Pressure

Naver Corp (035420 KS) is nearing tactical support for a trading buy but continues to face macro bear pressure stemming from key resistances note in the weekly RSI and MACD postures. This bear pressure is due to resume after a bounce sequence.

Naver has broken down out of triangulation after completing a corrective bounce cycle outlined in our recent update. Naver Bull Wedge to Trade Higher . We are now resuming the macro down cycle and view tactical rallies as selling opportunities as the major trend remains down.

A Kospi 200 rise above 290 will play a role in lifting Naver in the outlined tactical bounce cycle.

5. Malaysian Telcos: Look for Improvements to Continue in 2019.

The 4Q18 numbers released by the Malaysia wireless operators, showed stable trends vs 3Q. Market service revenue growth of -1.1% YoY was stable, with Maxis (MAXIS MK) the only operator able to slightly increase its market share (again). While 2H18 marked a small break in the Malaysian wireless sector recovery, guidance for 2019 looks broadly encouraging.

• Axiata (AXIATA MK) expects a “promising 2019” with revenue and profit growth momentum (across the board),
• Maxis guides for a slight improvement of revenues, albeit with EBITDA declining due to new business opportunities, and
• DIGI (DIGI MK) which is a bit more cautious, expects flat revenues.

Data usage is already very high in Malaysia, but we expect growth to continue (at a slower pace) supported by youthful demographics (younger people use more video on mobile). The Malaysian operators have done a reasonable job at monetizing data growth so far. 

Chris Hoare turned more positive on Malaysian telcos in early 2019 as affordability has improved and there is a new profitable growth opportunity in fibre wholesale (with Telekom Malaysia (T MK) being forced to offer at low prices). Operating trends have also improved and we expect this to continue. In January, we upgraded Axiata to Buy and both Maxis and Digi to Neutral. None of them are “cheap” with Maxis (MAXIS MK) and DIGI (DIGI MK) on 11-13x EV:EBITDA, and Axiata on a more reasonable 6.5x.

In this briefing:

1. Lyft IPO Preview
2. Alps Alpine Buyback Proceeding Apace

1. Lyft IPO Preview

Lyft Inc (LYFT US), a leading US based ride-hailing company, is getting ready for an IPO in the US in the next several weeks. One of the major positives of the Lyft IPO is the timing – Lyft should be able to complete its IPO ahead of its chief rival Uber which is expected to file its IPO later in 2019. 

The financials for Lyft will likely to change significantly in the next five to ten years, mainly due to the increased adoption of autonomous vehicles, which would reduce the need for Lyft to pay for the drivers. This cost can be eventually eliminated with full scale autonomous driving. Although we do not have figures as to exactly how much Lyft pays for all its drivers, in five to ten years when the fully autonomous vehicles are allowed, this could significantly change the basic economics of operating its ridesharing business. 

Potential shares dilution risk from additional rights offering a few years after this IPO is a serious risk for the company. Once Lyft completes its IPO in a few weeks, depending on the institutional investors’ demand for the deal, the company is likely to be infused with several billions of dollars from IPO proceeds. However, the IPO proceeds may not be enough and the company may need to conduct another large scale rights offering in a few years (for example in 2021 or 2022) which may be prior to the fully autonomous vehicles acceptance and regulatory approval by major countries around the world such as the United States.

2. Alps Alpine Buyback Proceeding Apace

Late last year, in the final run-up to the vote to determine whether Alpine (6816 JP) investors would subject themselves to a bad share exchange ratio or would choose to oblige Alps (6770 JP) to have another run at it in a different format, Alps announced a shareholder return policy which included buying back ¥40 billion of shares. 

It is to be noted that this meant that the combined entity was going to be left with less cash than the total deemed necessary by the two companies just a very short while before. Why? Because Alps – with the strong governance it has – obviously had the right amount – and Alpine also had the right amount (it needed substantial equity-funded cash as “working capital” because otherwise it would run a serious danger of business disruption and deterioration. So despite this severe business risk, the two companies effectively announced they would disburse 90% of Alpine’s cash on hand to shareholders POST-MERGER through the special dividend offered to sweeten the pot to get the merger through, and the ¥40 billion buyback. 

The merger, of course, went through, and the ¥28.4 billion* buyback is proceeding apace.

In this briefing:

1. Lyft IPO Preview
2. Alps Alpine Buyback Proceeding Apace
3. Sea Ltd (SE US): Placement a Good Opportunity to Enter an Attractive Story

1. Lyft IPO Preview

Lyft Inc (LYFT US), a leading US based ride-hailing company, is getting ready for an IPO in the US in the next several weeks. One of the major positives of the Lyft IPO is the timing – Lyft should be able to complete its IPO ahead of its chief rival Uber which is expected to file its IPO later in 2019. 

The financials for Lyft will likely to change significantly in the next five to ten years, mainly due to the increased adoption of autonomous vehicles, which would reduce the need for Lyft to pay for the drivers. This cost can be eventually eliminated with full scale autonomous driving. Although we do not have figures as to exactly how much Lyft pays for all its drivers, in five to ten years when the fully autonomous vehicles are allowed, this could significantly change the basic economics of operating its ridesharing business. 

Potential shares dilution risk from additional rights offering a few years after this IPO is a serious risk for the company. Once Lyft completes its IPO in a few weeks, depending on the institutional investors’ demand for the deal, the company is likely to be infused with several billions of dollars from IPO proceeds. However, the IPO proceeds may not be enough and the company may need to conduct another large scale rights offering in a few years (for example in 2021 or 2022) which may be prior to the fully autonomous vehicles acceptance and regulatory approval by major countries around the world such as the United States.

2. Alps Alpine Buyback Proceeding Apace

Late last year, in the final run-up to the vote to determine whether Alpine (6816 JP) investors would subject themselves to a bad share exchange ratio or would choose to oblige Alps (6770 JP) to have another run at it in a different format, Alps announced a shareholder return policy which included buying back ¥40 billion of shares. 

It is to be noted that this meant that the combined entity was going to be left with less cash than the total deemed necessary by the two companies just a very short while before. Why? Because Alps – with the strong governance it has – obviously had the right amount – and Alpine also had the right amount (it needed substantial equity-funded cash as “working capital” because otherwise it would run a serious danger of business disruption and deterioration. So despite this severe business risk, the two companies effectively announced they would disburse 90% of Alpine’s cash on hand to shareholders POST-MERGER through the special dividend offered to sweeten the pot to get the merger through, and the ¥40 billion buyback. 

The merger, of course, went through, and the ¥28.4 billion* buyback is proceeding apace.

3. Sea Ltd (SE US): Placement a Good Opportunity to Enter an Attractive Story

Last Friday, Sea Ltd (SE US) unveiled plans to raise around $1 billion (based on the closing price on 28 February) through an underwritten public offering of 50 million ADS. The fundraising was inevitable due to the high cash burn and net cash position.

In this briefing:

1. Summit Ascent’s Slippery Slope
2. Manikay Caves and Accepts KKR’s Reduced (And Now Final) Offer
3. Naver Faces Macro Downside Pressure
4. Malaysian Telcos: Look for Improvements to Continue in 2019.
5. HK Connect Discovery – March Snapshot (WH Group, Air China)

1. Summit Ascent’s Slippery Slope

Back in September 2017, Lawrence Ho, Summit Ascent Holdings (102 HK)‘s major shareholder, reduced his stake to 18.75% from 27.06% (at between $1.13-$1.60/share, but mainly at the low end of this range), according to Hong Kong Exchange disclosure of interest filings. The share price of this Russian integrated gaming play declined 34% to $1.06/share in the following five trading days. Who bought those shares was not disclosed – CCASS shows these shares moving out of VC Brokerage into at least 10 different brokerage accounts.

Shortly after, Howard Klein quoted one insider in his insight Melco Resorts: A Gem Hiding in Plain Sight Offers an Entry Point After a Recent Dip that the sell-down wasn’t likely a sign “Ho has lost confidence in the area.“

On the 15 December, Ho announced a complete exit from Summit, selling 17.37% of shares out. Concurrently Ho resigned from his NED and chairman positions. Those shares moved from VC Brokerage to Sun Hung Kai Investments on the 20 December 2017. Shares traded unchanged on the news. 

At the same time, First Steamship (2601 TT) disclosed it held 12.67% on the 18 December 2017. Concurrently, Kuo Jen Hao was appointed as NED and Chairman of the Board, with effect from 28 December 2017.  Kuo is also the chairman and the general manager of First Steamship. First Steamship gradually increased its stake to 19.11% as at 24 October 2018.

The New News

Yesterday, Summit Ascent announced it has been informed that First Steamship and Kuo are in talks to sell their entire shareholdings. No numbers were disclosed. This stake sale would not trigger an MGO and there was no reference to the release of an announcement pursuant to the Codes on Takeovers and Mergers and Share Buy-Backs in Hong Kong. Shares are up 24%.

With increased liquidity surrounding the news, this looks like a great opportunity to exit.

2. Manikay Caves and Accepts KKR’s Reduced (And Now Final) Offer

Originally I had thought KKR’s offer could go higher. Instead, it came in lower at A$3.40 and KKR gave MYOB Group Ltd (MYO AU) management all of a couple of days to think about it.

The title to my subsequent piece was MYOB Caves And Agrees To KKR’s Reduced Offer.

Manikay Partners started buying up shares and by early March had reached a position of 11%. They made noise. The Scheme Booklet came out on the 14th of March. Four days later Manikay announced their position was now 13.61% and the following day Mawer announced re-upped its stake from the mid 8s to high 9% level.

The 20th saw a Scheme Update from MYO announcing receipt of a letter from KKR saying that the A$3.40 price was their “best and final offer”, making it clear under Truth in Takeovers language that Manikay was not going to get a higher price out of them.

Manikay continued to buy shares on the 20th and the 21st, getting to 16.16% of the company as filed on the 22nd.

On Monday 1 April, MYOB announced a supplemental disclosure to the Scheme documents noting KKR’s final intention, and that the directors continued to unanimously recommend the Scheme.

Today we have new news.

Manikay Caves and Agrees to KKR’s Reduced (Now Final) Offer

Earlier today a Reuters story about Manikay accepting the offer popped up and MYOB shares popped from A$3.34 to A$3.38-39 area where they closed. Partway through the day MYOB released a document on the ASX feed saying that Manikay had sent a letter saying…

In order avoid speculation regarding our voting intentions in respect of the Scheme, we are writing to inform you that we, Manikay Partners, intend to vote all the MYOB shares that we own or control FOR the upcoming Scheme, subject to there being no proposal that we consider to be superior prior to the vote.

We remain very disappointed that, despite our repeated efforts to convince you otherwise, you failed to change your recommendation in light of the material improvement in market conditions since announcement of the Scheme, among other factors. We are also disappointed that the disclosures to MYOB shareholders did not fully explain the impact of such improved market conditions on the value of MYOB.
excerpt of the letter.

3. Naver Faces Macro Downside Pressure

Naver Corp (035420 KS) is nearing tactical support for a trading buy but continues to face macro bear pressure stemming from key resistances note in the weekly RSI and MACD postures. This bear pressure is due to resume after a bounce sequence.

Naver has broken down out of triangulation after completing a corrective bounce cycle outlined in our recent update. Naver Bull Wedge to Trade Higher . We are now resuming the macro down cycle and view tactical rallies as selling opportunities as the major trend remains down.

A Kospi 200 rise above 290 will play a role in lifting Naver in the outlined tactical bounce cycle.

4. Malaysian Telcos: Look for Improvements to Continue in 2019.

The 4Q18 numbers released by the Malaysia wireless operators, showed stable trends vs 3Q. Market service revenue growth of -1.1% YoY was stable, with Maxis (MAXIS MK) the only operator able to slightly increase its market share (again). While 2H18 marked a small break in the Malaysian wireless sector recovery, guidance for 2019 looks broadly encouraging.

• Axiata (AXIATA MK) expects a “promising 2019” with revenue and profit growth momentum (across the board),
• Maxis guides for a slight improvement of revenues, albeit with EBITDA declining due to new business opportunities, and
• DIGI (DIGI MK) which is a bit more cautious, expects flat revenues.

Data usage is already very high in Malaysia, but we expect growth to continue (at a slower pace) supported by youthful demographics (younger people use more video on mobile). The Malaysian operators have done a reasonable job at monetizing data growth so far. 

Chris Hoare turned more positive on Malaysian telcos in early 2019 as affordability has improved and there is a new profitable growth opportunity in fibre wholesale (with Telekom Malaysia (T MK) being forced to offer at low prices). Operating trends have also improved and we expect this to continue. In January, we upgraded Axiata to Buy and both Maxis and Digi to Neutral. None of them are “cheap” with Maxis (MAXIS MK) and DIGI (DIGI MK) on 11-13x EV:EBITDA, and Axiata on a more reasonable 6.5x.

5. HK Connect Discovery – March Snapshot (WH Group, Air China)

This is a monthly version of our HK Connect Weekly note, in which I highlight Hong Kong-listed companies leading the southbound flow weekly. Over the past month, we have seen the flow turned from outflow in February to inflow in March. Chinese investors were also buying Consumer Staples and Consumer Discretionary stocks.

Our March Coverage of Hong Kong Connect southbound flow

• HK Connect Discovery Weekly: PICC, Xinyi Solar (2019-03-08)
• HK Connect Discovery Weekly: Eligibility Adjustment (2019-03-15)
• HK Connect Discovery Weekly: Mainland Investors Buying WH Group (2019-03-22)

In this briefing:

1. Sea Ltd (SE US): Placement a Good Opportunity to Enter an Attractive Story

1. Sea Ltd (SE US): Placement a Good Opportunity to Enter an Attractive Story

Last Friday, Sea Ltd (SE US) unveiled plans to raise around $1 billion (based on the closing price on 28 February) through an underwritten public offering of 50 million ADS. The fundraising was inevitable due to the high cash burn and net cash position.

In this briefing:

1. BabyTree(1761.HK) FY18 Results: E-Com Further Hit by ‘integration’ with Alibaba; India Foray Timely
2. Japan Display: Deal to Raise JPY110bn from China-Taiwan Consortium and Japanese Investment Fund
3. Bilibili Offering: Unnecessary and Opportunistic
4. Bilibili Placement: Momentum Bodes Well
5. Mercari: Why Mercari Is Likely to Be a Winner in the Cashless Wars

1. BabyTree(1761.HK) FY18 Results: E-Com Further Hit by ‘integration’ with Alibaba; India Foray Timely

BabyTree (1761.HK)’s reported results for FY2018 continues to be impacted by the ‘shift in e-commerce strategy’ post collaboration with Alibaba Group Holding (BABA US) (also a key investor).  China’s leading parenting community platform that went public in November 2018 has announced a revenue decline of 4% during 2H2018; its e-commerce revenues were down 70% as its being ‘integrated’ with Alibaba. This is expected to be completed by 2Q2019. While the details of the collaboration (and revenue share, if any) are not given, Management has stated that Alibaba will manage the back-end e-commerce at a reduced cost and better efficiency while it will ‘manage’ users. Despite the fall in revenues, gross profits were up 18% helped by growth in advertisement revenues which now account for 85% of the total. Advertising as a revenue source has limited long term growth and valuation potential compared to e-commerce. The stock is up 25% since results announcement on March 27th, likely enthused by Net profit for FY2018 at Rmb526.2 mn and EPS of Rmb0.29 (implied current Year P/E of 23x). Key risk will be failure to revive e-commerce revenues post ‘integration’.

BabyTree also announced its first global foray – it has invested USD8mn in Healofy, amongst the top 3 leading parenting apps in India currently. India’s online Parenting app segment has numerous players and revenue generation/growth may not be easy in the near term for Healofy. However,  our analysis suggests that India’s overcrowded parenting app segment is now witnessing consolidation and this funding could probably help Healofy solidify its ranking amongst top 3 parenting platforms in India. In this context, BabyTree’s foray into India seems well timed. Healofy could potentially follow BabyTree’s operating model and fit into Alibaba Group Holding (BABA US) ‘s India e-commerce strategy (Refer our earlier report Alibaba’s India Game Plan – More than Meets the Eye; Investor Day Analysis (Part II) ).  

In the detailed report that follows, we briefly comment on BabyTree’s reported 2018 results and also present a quick overview of India Parenting App segment – key players, investors and why we think it may be on a consolidation mode. 

2. Japan Display: Deal to Raise JPY110bn from China-Taiwan Consortium and Japanese Investment Fund

• It was reported over the weekend that the troubled display supplier to iPhone maker Apple, Japan Display (JDI) has almost finalized a deal to raise more than JPY110bn (US$990m) from a China-Taiwan consortium and Japanese public-private fund INCJ Ltd.
• The China-Taiwan consortium is expected to secure some 50% stake in Japan Display while the top shareholder INCJ’s current stake of 25.3% is expected to be halved.
• The consortium is aiming to restructure JDI’s remaining debt payments of about JPY100bn from Apple for the construction of its plant while it also aims to procure parts for the latest iPhone. In addition, the consortium is also trying to modify a contract stipulating that Apple can seize plants if JDI’s cash and deposits fall below a certain amount.
• The consortium along with JDI is planning to build an OLED panel plant in China with JDI providing the technological know-how while the consortium partners invest in capital expenditures and equity.
• Japan Display has been struggling to navigate its display business due to the slowdown in iPhone sales, falling behind competition on OLED technology and facing stiff price competition from Chinese panel makers.
• We expect the proposed OLED plant in China could help the company stabilize its panel business with Chinese smartphone makers Huawei and Xiaomi who prefer to source panels locally from domestic panel makers such as BOE Technology and Tianma.

3. Bilibili Offering: Unnecessary and Opportunistic

On Monday, Bilibili Inc (BILI US) unveiled plans to raise around $192 million (based on the closing price of $18.95 per ADS) through a public offering of 10.6 million ADS and a concurrent offering of $300 million convertible senior notes. Also, certain selling shareholders will offer 6.5 ADS in the offering.

4. Bilibili Placement: Momentum Bodes Well

Bilibili announced a USD 300 million share placement and a USD 300 million convertible note placement after market close on Monday. This is the first major placement since Bilibili’s IPO in March 2018. In this insight, we will provide our thoughts on the deal and score the deal in our ECM Framework. 

5. Mercari: Why Mercari Is Likely to Be a Winner in the Cashless Wars

While we have been sceptical about Mercari Inc (4385 JP)‘s efforts in the US, we have always appreciated the domestic business and have only been put off by the rather demanding multiples. After speaking to the company, we continue to like the domestic business and feel that recent initiatives to broaden the user base are likely to be successful. In addition, while we still feel that there are numerous question marks about whether the business model can work in the US, we have come around to a more positive view on the company’s execution there. Lastly, we believe Merpay’s edge in the cashless wars is underappreciated and the fall in the share price is starting to make the stock attractive.

We discuss the details below.