TMT/Internet

In this briefing:

1. M&A: A Round-Up of Deals in February 2019
2. Nexon M&A: Amazon & Comcast Enter the Race – It Ain’t Over Till Its Over!

1. M&A: A Round-Up of Deals in February 2019

For the month of February, thirteen new deals were discussed on Smartkarma with an overall deal size of US$12.3bn.

This overall number includes the “offer” for Hanergy Thin Film Power (566 HK) which has no value, as yet, attached to the scrip component.

A firm number for Glow Energy Pcl (GLOW TB) has yet to be announced, which could result in a US$4bn+ deal.

The average premium to last close for the new deals was 27.5%.

Brief Summary of News in February of Arb Situations On Our Radar

2. Nexon M&A: Amazon & Comcast Enter the Race – It Ain’t Over Till Its Over!

In a surprising move, it was reported after the market close today that Amazon.com Inc (AMZN US) (market cap of US$804 billion) and Comcast (US$176 billion) will enter the race and have submitted initial bids to acquire Nexon Co Ltd (3659 JP)/NXC Corp. 

The entrance of Amazon and Comcast is a major positive surprise and it should have a strong positive impact on Nexon’s share price. Prior to the entrance of Amazon and Comcast in this M&A battle, the market was firmly leaning towards the consortium including Tencent, Netmarble Games, and MBK Partners to acquire NXC Corp/Nexon.

Now, Amazon and Comcast’s entrance into this M&A battle has made it a lot more exciting and uncertain. Nexon Co Ltd (3659 JP)‘s share price is up 19% YTD but its share price trend has been flattening out in February. In the next few weeks, we expect further boost to Nexon’s share price (15%+), mainly because a lot more investors will think that the Tencent consortium, Amazon, and Comcast will try to pay higher price to acquire NXC Corp/Nexon. Kudos to Nexon shareholders!

In this briefing:

1. Japan Mobile: MVNO Data for Q3 Includes Slowest Growth Since 2014 but that Makes Sense for Rakuten
2. Scout24 Tender Offer Launched: Price Still Not Quite Full
3. LYFT: Wouldn’t It Be Ironic if This Was an IPO to Rent but Not Own?
4. A Reality Check for Money Forward (3994 JP): Key Takeaways from Our Recent Visit
5. SNK Corp IPO Preview

1. Japan Mobile: MVNO Data for Q3 Includes Slowest Growth Since 2014 but that Makes Sense for Rakuten

The Ministry of Industry Affairs and Communications (MIC, the regulator) released Q3 (Dec 2018) data for industry mobile virtual network operator (MVNO) subs today (29 March) characterized by continued declines in growth YoY (+15% in Q3 v 18% in Q2) and the lowest absolute net adds (+480K) since Q2 2014.  Growth for the largest consumer-focused MVNO Rakuten Inc (4755 JP) also appears to be the lowest since data has become available but that is not necessarily a sign of strength for the existing network operators as it makes sense for Rakuten to slow MVNO growth before its October real network launch.  

2. Scout24 Tender Offer Launched: Price Still Not Quite Full

In December (13 Dec after trading hours), the FT had an article noting that Germany’s leading property classifieds firm Scout24 AG (G24 GR) (also known for auto classifieds across Europe) was possibly looking to sell itself and that PE firms were lining up to bid. Silver Lake, which had bought British player ZPG (which operates property portals Zoopla and PrimeLocation) for $2.8bn in July 2018, was mentioned as a bidder. Once owned by Deutsche Telekom, control of Scout24 was sold to Blackstone and Hellman & Friedman LLC in 2013-14 (H&F spent €1.5 billion to take a 70% stake in 2013, and Blackstone bought a stake of undisclosed size in 2014), and they listed the company in 2015 with an initial market cap of €3.2 billion. The IPO was €1.16 billion and both sold down, with H&F fully exiting in a placement in 2016.

The share price had been doing well until Q3 last year when German lawmakers, anxious with skyrocketing property prices, started looking at revamping the structure of real estate transaction costs so that they were borne by sellers rather than loaded onto buyers. The shares fell.

A combination of Blackstone and Hellman & Friedman LLC launched an non-LBO LBO for Scout24 AG (G24 GR) in mid-January at €43.50/share (€4.7 billion) which was about an 8% premium to the then-current market price, which had already been juiced because of speculation starting after the FT article in late December. The company rejected the Offer saying it was too low. 

The two buyers came back in mid-February with a Takeover Offer priced at €46.00/share, 5.7% higher than January’s foray and 27% higher than the level pre-FT article; that was about 25x earnings and 28x 2019e cashflow, which is a bit lower than Silver Lake’s ZPG buy multiple. Both Scout24’s Management Board and Supervisory Board agreed to support the offer and said they believed that the transaction is in the best interest of the Company, and an Investment Agreement was signed between the three companies.

The unusual thing about this deal is that the two PE firms are looking to buy a minimum of 50% plus one share, and leave the company listed. The shares jumped to €46 and have been trading at just below to slightly through, leaving many to think that this was a setup for a strategic buyer or possibly Silver Lake to come in over the top. 

The New News

Yesterday, the BidCo officially launched its Tender Offer at €46, due to run through 9th May.

More discussion below.

3. 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.

4. A Reality Check for Money Forward (3994 JP): Key Takeaways from Our Recent Visit

In our previous note, Money Forward (3994 JP): Solid Mid-Term Prospects for the Fintech Pro, but Overvalued, published July last year (2018), we suggested that Money Forward (3994 JP) (MF) was overvalued despite its strong growth profile. MF’s share price, which was at an all-time high (close to JPY6,000) around this time, fell below its IPO price (JPY3,000) in December, reinforcing our bearish view.

Since then, Money Forward’s share price has picked up (closing at JPY4,400 on 26th March 2019), on the back of strong topline guidance for FY11/19E (+55%-65% YoY growth) and “aggressive” medium-term profit targets (positive EBITDA by FY11/21E).

However, following our recent conversation with MF’s IR team, we believe that the above guidance needs to be slightly toned down.

5. 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.  

In this briefing:

1. Nexon M&A: Amazon & Comcast Enter the Race – It Ain’t Over Till Its Over!
2. AMD. Market Share Gains Across The Board As Intel Vows To Fight To Protect Its Position

1. Nexon M&A: Amazon & Comcast Enter the Race – It Ain’t Over Till Its Over!

In a surprising move, it was reported after the market close today that Amazon.com Inc (AMZN US) (market cap of US$804 billion) and Comcast (US$176 billion) will enter the race and have submitted initial bids to acquire Nexon Co Ltd (3659 JP)/NXC Corp. 

The entrance of Amazon and Comcast is a major positive surprise and it should have a strong positive impact on Nexon’s share price. Prior to the entrance of Amazon and Comcast in this M&A battle, the market was firmly leaning towards the consortium including Tencent, Netmarble Games, and MBK Partners to acquire NXC Corp/Nexon.

Now, Amazon and Comcast’s entrance into this M&A battle has made it a lot more exciting and uncertain. Nexon Co Ltd (3659 JP)‘s share price is up 19% YTD but its share price trend has been flattening out in February. In the next few weeks, we expect further boost to Nexon’s share price (15%+), mainly because a lot more investors will think that the Tencent consortium, Amazon, and Comcast will try to pay higher price to acquire NXC Corp/Nexon. Kudos to Nexon shareholders!

2. AMD. Market Share Gains Across The Board As Intel Vows To Fight To Protect Its Position

Some two years on from the initial launch of products designed around their new Zen-based architecture, Advanced Micro Devices is finally gaining meaningful traction in terms of market share gains. In Q4 2018, AMD gained market share in desktop, mobile, and server sequentially and year over year – the fourth straight quarter of gains in all segments as well as their highest market shares across all segments in almost five years. Perhaps the most significant accomplishment was in server where AMD’s share doubled QoQ to 3.2%, according to data supplied by Mercury Research.

As you might expect, Intel is taking notice, acknowledging the competitive environment on its latest earnings call and vowing to fight to protect its position. In light of the 25-30% reduction in the price of Intel’s latest and highest end desktop processors on leading German online retailer MindFactory since their launch last October, it would appear that Intel’s battle tactics include sacrificing ASPs where it deems fit.  

In this briefing:

1. Nexon M&A: Amazon & Comcast Enter the Race – It Ain’t Over Till Its Over!
2. AMD. Market Share Gains Across The Board As Intel Vows To Fight To Protect Its Position
3. Autohome (ATHM): Promising Auto Loan, Waiting for Buying Opportunity
4. Futu Holdings IPO – Given the Team, Execution, and Backers, Might Be Worth a Look at the Low-End

1. Nexon M&A: Amazon & Comcast Enter the Race – It Ain’t Over Till Its Over!

In a surprising move, it was reported after the market close today that Amazon.com Inc (AMZN US) (market cap of US$804 billion) and Comcast (US$176 billion) will enter the race and have submitted initial bids to acquire Nexon Co Ltd (3659 JP)/NXC Corp. 

The entrance of Amazon and Comcast is a major positive surprise and it should have a strong positive impact on Nexon’s share price. Prior to the entrance of Amazon and Comcast in this M&A battle, the market was firmly leaning towards the consortium including Tencent, Netmarble Games, and MBK Partners to acquire NXC Corp/Nexon.

Now, Amazon and Comcast’s entrance into this M&A battle has made it a lot more exciting and uncertain. Nexon Co Ltd (3659 JP)‘s share price is up 19% YTD but its share price trend has been flattening out in February. In the next few weeks, we expect further boost to Nexon’s share price (15%+), mainly because a lot more investors will think that the Tencent consortium, Amazon, and Comcast will try to pay higher price to acquire NXC Corp/Nexon. Kudos to Nexon shareholders!

2. AMD. Market Share Gains Across The Board As Intel Vows To Fight To Protect Its Position

Some two years on from the initial launch of products designed around their new Zen-based architecture, Advanced Micro Devices is finally gaining meaningful traction in terms of market share gains. In Q4 2018, AMD gained market share in desktop, mobile, and server sequentially and year over year – the fourth straight quarter of gains in all segments as well as their highest market shares across all segments in almost five years. Perhaps the most significant accomplishment was in server where AMD’s share doubled QoQ to 3.2%, according to data supplied by Mercury Research.

As you might expect, Intel is taking notice, acknowledging the competitive environment on its latest earnings call and vowing to fight to protect its position. In light of the 25-30% reduction in the price of Intel’s latest and highest end desktop processors on leading German online retailer MindFactory since their launch last October, it would appear that Intel’s battle tactics include sacrificing ASPs where it deems fit.  

3. Autohome (ATHM): Promising Auto Loan, Waiting for Buying Opportunity

• The 4Q2018 results suggest that it is a right decision to close out direct automobile sales and start auto loan.
• The 4Q2018 results also suggest that ATHM has successfully completed the post-acquisition integration after three years.
• Peer companies’P/E ratios suggest ATHM is fairly valued, but we believe it will be a good opportunity to accumulate if the stock price falls.

4. Futu Holdings IPO – Given the Team, Execution, and Backers, Might Be Worth a Look at the Low-End

Futu Holdings Ltd (FHL US) plans to raise upto US$130m in its US listing. The deal has been downsized from its earlier indicative size of US$300m and the valuation too has been downsized by almost the same extent to around US$1.2-1.5bn.

In my earlier insights, Futu Holdings Pre-IPO – Great Metrics but in a Commoditised Industry and Futu Holdings Pre-IPO – FY18 Updates And Quick Thoughts on Valuation, I looked at the company’s background and past financial performance.

 In this insight, I’ll run the deal through our IPO framework and comment on valuations. At the low-end the deal might be worth looking into, although free-float might end up being very small owing to US$30m being taken up Tencent which would leave just about US$100m as free-float.

In this briefing:

1. HKT Benefits from Price Increases and Offers Strong Dividend Support.

1. HKT Benefits from Price Increases and Offers Strong Dividend Support.

HKT (6823 HK) reported 2H18 EBITDA slightly below our estimates but free cash flow was in line and allowed a 5% increase in the dividend (to a 5.7% yield). We look for the dividend to grow gradually going forward as management’s focus is once again on returns. We saw that with the move by HKT to raise prices in September 2018 which is already helping mobile top-line trends.

Despite HKBN (1310 HK) and China Mobile HK not following, the pre-paid segment does not appear to be suffering. Management has not ruled out further tariff increases, and they clearly want to see more rational competition in the run up to 5G (and to allow for dividend growth).

Growing cash flow has allowed management to maintain an attractive dividend policy which we see as supportive for the group overall. The improved monetization in mobile and continued efficiencies is likely to support future cash flow growth. Given the encouraging mobile outlook we have lifted our target slightly HKD13.8 from HKD13.6), and maintain a BUY on the stock. For a discussion on parent PCCW (8 HK) and the stub trade, please see David Blennerhassett ‘s recent note: StubWorld: PCCW Is “Cheap” but Stub Ops Are Deteriorating.

In this briefing:

1. HKT Benefits from Price Increases and Offers Strong Dividend Support.
2. Hanergy’s Hobson’s Choice

1. HKT Benefits from Price Increases and Offers Strong Dividend Support.

HKT (6823 HK) reported 2H18 EBITDA slightly below our estimates but free cash flow was in line and allowed a 5% increase in the dividend (to a 5.7% yield). We look for the dividend to grow gradually going forward as management’s focus is once again on returns. We saw that with the move by HKT to raise prices in September 2018 which is already helping mobile top-line trends.

Despite HKBN (1310 HK) and China Mobile HK not following, the pre-paid segment does not appear to be suffering. Management has not ruled out further tariff increases, and they clearly want to see more rational competition in the run up to 5G (and to allow for dividend growth).

Growing cash flow has allowed management to maintain an attractive dividend policy which we see as supportive for the group overall. The improved monetization in mobile and continued efficiencies is likely to support future cash flow growth. Given the encouraging mobile outlook we have lifted our target slightly HKD13.8 from HKD13.6), and maintain a BUY on the stock. For a discussion on parent PCCW (8 HK) and the stub trade, please see David Blennerhassett ‘s recent note: StubWorld: PCCW Is “Cheap” but Stub Ops Are Deteriorating.

2. Hanergy’s Hobson’s Choice

On the 23 October last year, the Board of Hanergy Mobile Energy Holdings Group Limited (HMEH), Hanergy Thin Film Power (566 HK)‘s majority shareholder, announced an intention to privatise the company at “no less than HK$5/share” via cash or scrip. Over a full week later, Hanergy acknowledged the proposal.

Following this privatisation, Hanergy would be listed on China’s A-share market. The indicative offer valued Hanergy at ~US$27bn.  Hanergy has been suspended since 20 May 2015 and last traded at $3.91/share.

Hanergy has now announced the intention of HMEH to privatise the company by way of a Scheme. The ultimate intention of HMEH still remains the listing of Hanergy’s business in China.

The rub is that the consideration under the Scheme will be in the form of one special purpose vehicle share (SPV) per Hanergy share.  To this: 

it is not certain whether the A-Share Listing can be achieved. If the A-Share Listing cannot be completed, the Independent Shareholders will be holding onto unlisted SPV Shares for which there is no exchange platform for transfers. Even if the A-Share Listing is completed, there is no certainty as to
(a) when and how the SPV will be able to dispose of the A-Share Listco Shares;
(b) at what price the A-Share Listco Shares can be sold; and
(c) when the cash exit can be available to the Independent Shareholders, via the proposed A-Share Listing.

Upon consultation with the Executive and given the above uncertainties, the Offeror is required not to attribute any monetary value to
(i) the Proposal and
(ii) any potential cash exit for the Independent Shareholders.

The announcement does not stipulate the jurisdiction of the SPV, only that it may be established in a jurisdiction apart from Hong Kong. That itself is a risk.

Long-suffering shareholders, who comprise 32.49% of shares out, have the dubious honour of holding SPV  shares which may remain in A-share pre-listing purgatory; or should the Scheme fail/lapse, hold unlisted shares if Hanergy fails to resume trading by end-July 2019, as per recently introduced HKEx guidelines. Such an outcome affords HMEH the flexibility to squeeze out minorities at a bargain price.

(A Hobson’s choice is a free choice in which only one thing is offered. In this instance, each outcome is undesirable.)

In this briefing:

1. Scout24 Tender Offer Launched: Price Still Not Quite Full
2. LYFT: Wouldn’t It Be Ironic if This Was an IPO to Rent but Not Own?
3. A Reality Check for Money Forward (3994 JP): Key Takeaways from Our Recent Visit
4. SNK Corp IPO Preview
5. TRADE IDEA – PCCW (8 HK) Stub: The Li Legacy Lives On

1. Scout24 Tender Offer Launched: Price Still Not Quite Full

In December (13 Dec after trading hours), the FT had an article noting that Germany’s leading property classifieds firm Scout24 AG (G24 GR) (also known for auto classifieds across Europe) was possibly looking to sell itself and that PE firms were lining up to bid. Silver Lake, which had bought British player ZPG (which operates property portals Zoopla and PrimeLocation) for $2.8bn in July 2018, was mentioned as a bidder. Once owned by Deutsche Telekom, control of Scout24 was sold to Blackstone and Hellman & Friedman LLC in 2013-14 (H&F spent €1.5 billion to take a 70% stake in 2013, and Blackstone bought a stake of undisclosed size in 2014), and they listed the company in 2015 with an initial market cap of €3.2 billion. The IPO was €1.16 billion and both sold down, with H&F fully exiting in a placement in 2016.

The share price had been doing well until Q3 last year when German lawmakers, anxious with skyrocketing property prices, started looking at revamping the structure of real estate transaction costs so that they were borne by sellers rather than loaded onto buyers. The shares fell.

A combination of Blackstone and Hellman & Friedman LLC launched an non-LBO LBO for Scout24 AG (G24 GR) in mid-January at €43.50/share (€4.7 billion) which was about an 8% premium to the then-current market price, which had already been juiced because of speculation starting after the FT article in late December. The company rejected the Offer saying it was too low. 

The two buyers came back in mid-February with a Takeover Offer priced at €46.00/share, 5.7% higher than January’s foray and 27% higher than the level pre-FT article; that was about 25x earnings and 28x 2019e cashflow, which is a bit lower than Silver Lake’s ZPG buy multiple. Both Scout24’s Management Board and Supervisory Board agreed to support the offer and said they believed that the transaction is in the best interest of the Company, and an Investment Agreement was signed between the three companies.

The unusual thing about this deal is that the two PE firms are looking to buy a minimum of 50% plus one share, and leave the company listed. The shares jumped to €46 and have been trading at just below to slightly through, leaving many to think that this was a setup for a strategic buyer or possibly Silver Lake to come in over the top. 

The New News

Yesterday, the BidCo officially launched its Tender Offer at €46, due to run through 9th May.

More discussion below.

2. 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.

3. A Reality Check for Money Forward (3994 JP): Key Takeaways from Our Recent Visit

In our previous note, Money Forward (3994 JP): Solid Mid-Term Prospects for the Fintech Pro, but Overvalued, published July last year (2018), we suggested that Money Forward (3994 JP) (MF) was overvalued despite its strong growth profile. MF’s share price, which was at an all-time high (close to JPY6,000) around this time, fell below its IPO price (JPY3,000) in December, reinforcing our bearish view.

Since then, Money Forward’s share price has picked up (closing at JPY4,400 on 26th March 2019), on the back of strong topline guidance for FY11/19E (+55%-65% YoY growth) and “aggressive” medium-term profit targets (positive EBITDA by FY11/21E).

However, following our recent conversation with MF’s IR team, we believe that the above guidance needs to be slightly toned down.

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. TRADE IDEA – PCCW (8 HK) Stub: The Li Legacy Lives On

Have you ever wondered how a company secures the Chinese lucky number “8” as their ticker in Hong Kong? I’ll explain later on, but let’s just say that being the son of Li Ka Shing helps. 

Li Ka Shing is a name that hardly needs introduction in Hong Kong and Richard Li, Li Ka Shing’s youngest son and Chairman of PCCW Ltd (8 HK), follows suit. After being born into Hong Kong’s richest family, Richard Li was educated in the US where he worked various odd jobs at McDonald’s and as a caddy at a local golf course before enrolling at Menlo College and eventually withdrawing without a degree. As fate would have it, Mr. Li went on to set up STAR TV, Asia’s satellite-delivered cable TV service, at the tender age of 24. Three years after starting STAR TV, Richard Li sold the venture, which had amassed a viewer base of 45 million people, to Rupert Murdoch’s News Corp (NWS AU) for USD 1 billion in 1993. During the same year, Mr. Li founded the Pacific Century Group and began a streak of noteworthy acquisitions. 

You may be starting to wonder what all of this has to do with a trade on PCCW Ltd (8 HK) and I don’t blame you. In the rest of this insight I will:

• finish the historical overview of the Li family and PCCW
• present my trade idea and rationale
• give a detailed overview of the business units of PCCW and the associated performance of each
• recap ALL of my stub trades on Smartkarma and the performance of each  

In this briefing:

1. Hanergy’s Hobson’s Choice
2. AEM Holdings: FY18 Results Solid; Decent FY19 Outlook; Upside Could Come from Huawei and Novoflex

1. Hanergy’s Hobson’s Choice

On the 23 October last year, the Board of Hanergy Mobile Energy Holdings Group Limited (HMEH), Hanergy Thin Film Power (566 HK)‘s majority shareholder, announced an intention to privatise the company at “no less than HK$5/share” via cash or scrip. Over a full week later, Hanergy acknowledged the proposal.

Following this privatisation, Hanergy would be listed on China’s A-share market. The indicative offer valued Hanergy at ~US$27bn.  Hanergy has been suspended since 20 May 2015 and last traded at $3.91/share.

Hanergy has now announced the intention of HMEH to privatise the company by way of a Scheme. The ultimate intention of HMEH still remains the listing of Hanergy’s business in China.

The rub is that the consideration under the Scheme will be in the form of one special purpose vehicle share (SPV) per Hanergy share.  To this: 

it is not certain whether the A-Share Listing can be achieved. If the A-Share Listing cannot be completed, the Independent Shareholders will be holding onto unlisted SPV Shares for which there is no exchange platform for transfers. Even if the A-Share Listing is completed, there is no certainty as to
(a) when and how the SPV will be able to dispose of the A-Share Listco Shares;
(b) at what price the A-Share Listco Shares can be sold; and
(c) when the cash exit can be available to the Independent Shareholders, via the proposed A-Share Listing.

Upon consultation with the Executive and given the above uncertainties, the Offeror is required not to attribute any monetary value to
(i) the Proposal and
(ii) any potential cash exit for the Independent Shareholders.

The announcement does not stipulate the jurisdiction of the SPV, only that it may be established in a jurisdiction apart from Hong Kong. That itself is a risk.

Long-suffering shareholders, who comprise 32.49% of shares out, have the dubious honour of holding SPV  shares which may remain in A-share pre-listing purgatory; or should the Scheme fail/lapse, hold unlisted shares if Hanergy fails to resume trading by end-July 2019, as per recently introduced HKEx guidelines. Such an outcome affords HMEH the flexibility to squeeze out minorities at a bargain price.

(A Hobson’s choice is a free choice in which only one thing is offered. In this instance, each outcome is undesirable.)

2. AEM Holdings: FY18 Results Solid; Decent FY19 Outlook; Upside Could Come from Huawei and Novoflex

Aem Holdings (AEM SP) reported solid FY18 results and gave a decent outlook for FY19. Customer concentration remains high (85%+ of revenues linked to one of biggest IT companies globally) but new growth opportunities with Huawei and Novoflex could potentially add meaningfully to earnings and customer diversification as of FY20.

The balance sheet remains strong (58M SGD net cash) and should be further utilized for M&A to complement the current product offering.

Given the large change in the shareholder register over the past twelve months (after Novo Tellus distributed the shares to its LPs) free float is now 83% with Aberdeen and UBS among the largest shareholders. The high free float and low market cap make AEM a prime takeover candidate the coming 2-3 years.

Fair Value of 2.1 SGD remains unchanged (based on just 2x revenue or 10x FY2020 EV/EBITDA).

In this briefing:

1. Hanergy’s Hobson’s Choice
2. AEM Holdings: FY18 Results Solid; Decent FY19 Outlook; Upside Could Come from Huawei and Novoflex
3. Brazilian Payments Report: Cielo on the Defensive Against Disruptive Challengers

1. Hanergy’s Hobson’s Choice

On the 23 October last year, the Board of Hanergy Mobile Energy Holdings Group Limited (HMEH), Hanergy Thin Film Power (566 HK)‘s majority shareholder, announced an intention to privatise the company at “no less than HK$5/share” via cash or scrip. Over a full week later, Hanergy acknowledged the proposal.

Following this privatisation, Hanergy would be listed on China’s A-share market. The indicative offer valued Hanergy at ~US$27bn.  Hanergy has been suspended since 20 May 2015 and last traded at $3.91/share.

Hanergy has now announced the intention of HMEH to privatise the company by way of a Scheme. The ultimate intention of HMEH still remains the listing of Hanergy’s business in China.

The rub is that the consideration under the Scheme will be in the form of one special purpose vehicle share (SPV) per Hanergy share.  To this: 

it is not certain whether the A-Share Listing can be achieved. If the A-Share Listing cannot be completed, the Independent Shareholders will be holding onto unlisted SPV Shares for which there is no exchange platform for transfers. Even if the A-Share Listing is completed, there is no certainty as to
(a) when and how the SPV will be able to dispose of the A-Share Listco Shares;
(b) at what price the A-Share Listco Shares can be sold; and
(c) when the cash exit can be available to the Independent Shareholders, via the proposed A-Share Listing.

Upon consultation with the Executive and given the above uncertainties, the Offeror is required not to attribute any monetary value to
(i) the Proposal and
(ii) any potential cash exit for the Independent Shareholders.

The announcement does not stipulate the jurisdiction of the SPV, only that it may be established in a jurisdiction apart from Hong Kong. That itself is a risk.

Long-suffering shareholders, who comprise 32.49% of shares out, have the dubious honour of holding SPV  shares which may remain in A-share pre-listing purgatory; or should the Scheme fail/lapse, hold unlisted shares if Hanergy fails to resume trading by end-July 2019, as per recently introduced HKEx guidelines. Such an outcome affords HMEH the flexibility to squeeze out minorities at a bargain price.

(A Hobson’s choice is a free choice in which only one thing is offered. In this instance, each outcome is undesirable.)

2. AEM Holdings: FY18 Results Solid; Decent FY19 Outlook; Upside Could Come from Huawei and Novoflex

Aem Holdings (AEM SP) reported solid FY18 results and gave a decent outlook for FY19. Customer concentration remains high (85%+ of revenues linked to one of biggest IT companies globally) but new growth opportunities with Huawei and Novoflex could potentially add meaningfully to earnings and customer diversification as of FY20.

The balance sheet remains strong (58M SGD net cash) and should be further utilized for M&A to complement the current product offering.

Given the large change in the shareholder register over the past twelve months (after Novo Tellus distributed the shares to its LPs) free float is now 83% with Aberdeen and UBS among the largest shareholders. The high free float and low market cap make AEM a prime takeover candidate the coming 2-3 years.

Fair Value of 2.1 SGD remains unchanged (based on just 2x revenue or 10x FY2020 EV/EBITDA).

3. Brazilian Payments Report: Cielo on the Defensive Against Disruptive Challengers

• The non-cash payments market continues to grow at a double-digit rate in Brazil, driven primarily by growing usage of credit and debit cards
• De-regulation and new entrants have brought challenges for the incumbents, especially for the largest player Cielo SA (CIEL3 BZ), with the challengers taking market share, squeezing margins and promoting better service for SME merchants in particular
• Competitive pressures continue in the Brazil payments market, reflected in the declining merchant discount rate (MDR), lower rental rates and sale prices for POS terminals, as well as pressure on the commissions for early payment of merchant receivables; the near-term prospects for Cielo remain challenging in our view
• Due to the ongoing headwinds, we expect Cielo to show negative earnings growth to 2021; management has announced that Cielo will defend its market share against the challengers; we see further downside risk to consensus earnings and the real risk of a greater than consensus 2019 DPS cut
• StoneCo Ltd (STNE US)and Pagseguro Digital Ltd (PAGS US) are two of the payment challengers in this de-regulated market, growing faster than the Brazilian non-cash transactions market and taking incumbents’ market share; we see StoneCo to be the preferred entity to PagSeguro, based on StoneCo’s higher revenue yielding SME segment of focus and on its more attractive PEG ratio valuation

In this briefing:

1. Hanergy’s Hobson’s Choice
2. AEM Holdings: FY18 Results Solid; Decent FY19 Outlook; Upside Could Come from Huawei and Novoflex
3. Brazilian Payments Report: Cielo on the Defensive Against Disruptive Challengers
4. Yungtay Noises Haven’t Produced a Result Yet

1. Hanergy’s Hobson’s Choice

On the 23 October last year, the Board of Hanergy Mobile Energy Holdings Group Limited (HMEH), Hanergy Thin Film Power (566 HK)‘s majority shareholder, announced an intention to privatise the company at “no less than HK$5/share” via cash or scrip. Over a full week later, Hanergy acknowledged the proposal.

Following this privatisation, Hanergy would be listed on China’s A-share market. The indicative offer valued Hanergy at ~US$27bn.  Hanergy has been suspended since 20 May 2015 and last traded at $3.91/share.

Hanergy has now announced the intention of HMEH to privatise the company by way of a Scheme. The ultimate intention of HMEH still remains the listing of Hanergy’s business in China.

The rub is that the consideration under the Scheme will be in the form of one special purpose vehicle share (SPV) per Hanergy share.  To this: 

it is not certain whether the A-Share Listing can be achieved. If the A-Share Listing cannot be completed, the Independent Shareholders will be holding onto unlisted SPV Shares for which there is no exchange platform for transfers. Even if the A-Share Listing is completed, there is no certainty as to
(a) when and how the SPV will be able to dispose of the A-Share Listco Shares;
(b) at what price the A-Share Listco Shares can be sold; and
(c) when the cash exit can be available to the Independent Shareholders, via the proposed A-Share Listing.

Upon consultation with the Executive and given the above uncertainties, the Offeror is required not to attribute any monetary value to
(i) the Proposal and
(ii) any potential cash exit for the Independent Shareholders.

The announcement does not stipulate the jurisdiction of the SPV, only that it may be established in a jurisdiction apart from Hong Kong. That itself is a risk.

Long-suffering shareholders, who comprise 32.49% of shares out, have the dubious honour of holding SPV  shares which may remain in A-share pre-listing purgatory; or should the Scheme fail/lapse, hold unlisted shares if Hanergy fails to resume trading by end-July 2019, as per recently introduced HKEx guidelines. Such an outcome affords HMEH the flexibility to squeeze out minorities at a bargain price.

(A Hobson’s choice is a free choice in which only one thing is offered. In this instance, each outcome is undesirable.)

2. AEM Holdings: FY18 Results Solid; Decent FY19 Outlook; Upside Could Come from Huawei and Novoflex

Aem Holdings (AEM SP) reported solid FY18 results and gave a decent outlook for FY19. Customer concentration remains high (85%+ of revenues linked to one of biggest IT companies globally) but new growth opportunities with Huawei and Novoflex could potentially add meaningfully to earnings and customer diversification as of FY20.

The balance sheet remains strong (58M SGD net cash) and should be further utilized for M&A to complement the current product offering.

Given the large change in the shareholder register over the past twelve months (after Novo Tellus distributed the shares to its LPs) free float is now 83% with Aberdeen and UBS among the largest shareholders. The high free float and low market cap make AEM a prime takeover candidate the coming 2-3 years.

Fair Value of 2.1 SGD remains unchanged (based on just 2x revenue or 10x FY2020 EV/EBITDA).

3. Brazilian Payments Report: Cielo on the Defensive Against Disruptive Challengers

• The non-cash payments market continues to grow at a double-digit rate in Brazil, driven primarily by growing usage of credit and debit cards
• De-regulation and new entrants have brought challenges for the incumbents, especially for the largest player Cielo SA (CIEL3 BZ), with the challengers taking market share, squeezing margins and promoting better service for SME merchants in particular
• Competitive pressures continue in the Brazil payments market, reflected in the declining merchant discount rate (MDR), lower rental rates and sale prices for POS terminals, as well as pressure on the commissions for early payment of merchant receivables; the near-term prospects for Cielo remain challenging in our view
• Due to the ongoing headwinds, we expect Cielo to show negative earnings growth to 2021; management has announced that Cielo will defend its market share against the challengers; we see further downside risk to consensus earnings and the real risk of a greater than consensus 2019 DPS cut
• StoneCo Ltd (STNE US)and Pagseguro Digital Ltd (PAGS US) are two of the payment challengers in this de-regulated market, growing faster than the Brazilian non-cash transactions market and taking incumbents’ market share; we see StoneCo to be the preferred entity to PagSeguro, based on StoneCo’s higher revenue yielding SME segment of focus and on its more attractive PEG ratio valuation

4. Yungtay Noises Haven’t Produced a Result Yet

After almost three months of preparation after the initial news came out in October, Hitachi Ltd (6501 JP) launched its Tender Offer for Yungtay Engineering (1507 TT) in mid-January 2019. 

The background of the two companies’ relationship, the board kerfuffle last year, and some detail on the financials and the growth of the Chinese mainland elevator market was discussed extensively in Going Up! Hitachi Tender for Yungtay Engineering (1507 TT)at the end of October. When the Tender Offer was confirmed as launched, additional details were provided in Hitachi Tender for Yungtay Engineering Launches.

Since then, there has been a litany of small “nuisance” events which so far have not resulted in any changes to the terms of the Tender Offer, but keeping a watchful eye is recommended.