TMT/Internet

In this briefing:

1. Renesas: Factory Stoppage Announcement Should Correct Premature Rebound Expectations
2. Samsung’s NXP Acquisition: Story Again Resurfaces, Trade Approach on SamE Common/1P
3. Korea M&A Spotlight: POSCO or SK to Acquire KCFT for About 1 Trillion Won?
4. MYOB Setting Up As A Riskier Trade
5. Sea Ltd (SE US): The Bear Case – A One-Hit Wonder?

1. Renesas: Factory Stoppage Announcement Should Correct Premature Rebound Expectations

We commented previously on 13 Dec 2018 that:

We visited Renesas Electronics (6723 JP) this week to discuss progress on inventory reduction and its likely ramp of utilisation rates/wafer throughput, as well as to gather further details on the IDT acquisition and its long -term strategy. On the whole, we continue to like the long-term picture, consider the stock to be undervalued and believe investors with long time horizons should be looking at the stock on the long side. However, our discussions suggested to us that while production cuts to reduce inventory should be completed this month or at worst in 1Q2019, a ramp in utilisation rates could take longer than is implied by consensus.

Following this comment Renesas Electronics (6723 JP) traded directionally with the market though in very volatile fashion, first dropping 17% before rebounding 69%. Now, with Nikkei reporting that the company would halt production at most facilities during the year and for as much as two months in some cases, the stock is once again giving up its gains and is limit down -14%.  This leaves it just 10% above where we previously commented on the stock and as it approaches the ¥500 level again we feel it is becoming interesting again. We examine the potential financial impact from the production halts below.

2. Samsung’s NXP Acquisition: Story Again Resurfaces, Trade Approach on SamE Common/1P

• Local street began to speculate on this story since early last year when Lee Jae-yong got released from prison. NXP was widely considered as Lee’s first M&A attempt since his release. This could make sense both symbolically and business fundamentally. He needed something big to justify to general public about him being back in Samsung’s top position. Business wise, NXP would be a home-run in terms of fulfilling the three goals for non-memory business.
• Korea’s local street began to speculate on this since early last year when Lee Jae-yong got released from prison. This story was reignited earlier this year when the news broke that Samsung’s M&A head Sohn Young-kwon privately met NXP CEO Rick Clemmer. This morning Invest Chosun reported that Samsung may make a big announcement in the pretty near future.
• I suggested going long 1P/short Common last week on the grounds that falling memory prices would be pressing down Common more harshly. Now we are hearing a more elaborate story about NXP acquisition. Circumstantially, I don’t think this NXP takeover story will go unnoticed by the market. This should be more of a Common price pusher than Pref. I’d wrap my current position at this point.

3. Korea M&A Spotlight: POSCO or SK to Acquire KCFT for About 1 Trillion Won?

It was reported in numerous local Korean media yesterday that POSCO (005490 KS) and SK Group are leading contenders to acquire a Korean company called KCFT (KCF Technology) for about 1 trillion won. KCFT specializes in making copper foil and thin film products, especially for the lithium ion batteries sector. KCFT’s major customers include Samsung SDI, LG Chem, NEC, and Panasonic. 

The KKR private equity firm is the seller of KCFT. In February 2018, KKR acquired a 100% stake of LS Mtron’s copper foil and thin film business for 300 billion won and after this acquisition, renamed it KCFT. It has been reported that should these groups (POSCO or SK) low bid for KCFT, KKR may opt for an IPO of KCFT instead. 

If POSCO is able to acquire KCFT, this should help to accelerate the POSCO Group’s expansion of the rechargeable battery related materials business and enhance its vertical integration of this business. If the deal gets completed at about 1 trillion won, this would represent a P/S of about 3.3x and P/E of about 25x, using 2018 figures. 

4. MYOB Setting Up As A Riskier Trade

When I wrote about KKR’s purchase of 17.6% of MYOB Group Ltd (MYO AU) from Bain in October – a trade which got KKR to a 19.9% holding, my take on it was that the deal was probably a bit light. It was not outrageously bad because a) Bain agreed to sell their 17.6% at A$3.15 vs the A$3.65 IPO , and b) something like 93% of volume traded since the IPO in May 2015 had taken place below the proposed indicative offer price, but it was still one of the few platforms on which someone could take a stand to compete against the likes of Xero Ltd (XRO AU) and Intuit Inc (INTU US), it was not overly expensive as SaaS platforms went, and its online presence was growing rapidly.

The full write-up is MYOB: KKR Launches a Proposal. Lightish?

About three weeks later, KKR bumped their indicative offer to A$3.77/share, and MYOB opened its books to allow KKR due diligence. That suggested the price was in the range of the acceptable to MYOB’s board (but that A$3.70 was borderline). 

Then KKR did its due diligence, global equities continued to fall out of bed (down 10+% in two months for many major indices including Australia’s S&P/ASX200), KKR’s due diligence process came down to the wire, and the final bid presented came in at A$3.40, with a very short “take-it-or-leave-it” deadline. The immediate reaction of MYOB’s board was, as David Blennerhassett wrote in Friday Deadline Looms As MYOB Snubs KKR’s Reduced Offer,

Following completion of due diligence and finalisation of debt funding commitments, KKR has revised the offer price to $3.40 per share. …  The board has informed KKR that it is not in a position to recommend the revised proposal, however it remains in discussions with KKR regarding its proposal. (David Blennerhassett ‘s emphasis)

Four days later, KKR and MYOB entered into a Scheme Implementation Agreement (SIA) at A$3.40/share, putting MYOB at a A$2bn market cap.

David Blennerhassett discussed the SIA and the upcoming schedule of events in some detail in MYOB Caves And Agrees To KKR’s Reduced Offer. MYOB’s board unanimously recommended shareholders vote in favour of the Offer in the absence of a superior proposal and subject to an independent expert concluding the Offer was in the best interest of shareholders. There was a specific “go-shop” provision through the 22nd of February – when MYOB was expected to release FY results. No offer was forthcoming. KKR had matching rights but if they did not match an offer which was 5% higher and all-cash, then KKR would be obliged to sell its shares into the higher offer.

The New News

While not new new, US-based hedge fund – somewhat well-known for being involved in M&A situations – started accumulating a position in MYOB in January and has reached a stake of 9.99%. This was declared on Monday. On Tuesday Manikay sent a letter to MYOB (discussed below). This morning MYOB responded saying “The MYOB Board continues to unanimously recommend the Proposal subject to no Superior Proposal being forthcoming, and the receipt of an IER [Independent Experts’ Report] concluding that the Proposal is in the best interests of MYOB Shareholders.”

The Scheme Booklet is currently with ASIC and is expected to be despatched “in coming weeks” (original schedule was for mid-March with Scheme Meeting April 19). The wording in the MYOB release suggests that might get pushed back a little, meanwhile Manikay is likely to make more noise.

5. Sea Ltd (SE US): The Bear Case – A One-Hit Wonder?

Despite burning through $700mn in cash in 2018, investors decided to give another $1.3bn to Sea Ltd (SE US) . We believe investors should treat Sea Ltd with caution for the following reasons:

A significant slowdown in e-commerce

Is the gaming division a one-hit wonder?

Expecting another 800mn cash burn into 2019

Consensus has priced in further upgrades while cash flow metrics worst in the sector

NB. Our team has taken both sides of the Sea Ltd investment case as we think this makes for better decision making and encourages unique thinking within our team. We strongly recommend that investors read my colleague Arun’s positive notes on the company listed below, if you have not already done so.

Sea Ltd (SE US): Placing Price Leaves Money on the Table

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

In this briefing:

1. Samsung’s NXP Acquisition: Story Again Resurfaces, Trade Approach on SamE Common/1P
2. Korea M&A Spotlight: POSCO or SK to Acquire KCFT for About 1 Trillion Won?
3. MYOB Setting Up As A Riskier Trade
4. Sea Ltd (SE US): The Bear Case – A One-Hit Wonder?
5. Sea Ltd (SE US): Placing Price Leaves Money on the Table

1. Samsung’s NXP Acquisition: Story Again Resurfaces, Trade Approach on SamE Common/1P

• Local street began to speculate on this story since early last year when Lee Jae-yong got released from prison. NXP was widely considered as Lee’s first M&A attempt since his release. This could make sense both symbolically and business fundamentally. He needed something big to justify to general public about him being back in Samsung’s top position. Business wise, NXP would be a home-run in terms of fulfilling the three goals for non-memory business.
• Korea’s local street began to speculate on this since early last year when Lee Jae-yong got released from prison. This story was reignited earlier this year when the news broke that Samsung’s M&A head Sohn Young-kwon privately met NXP CEO Rick Clemmer. This morning Invest Chosun reported that Samsung may make a big announcement in the pretty near future.
• I suggested going long 1P/short Common last week on the grounds that falling memory prices would be pressing down Common more harshly. Now we are hearing a more elaborate story about NXP acquisition. Circumstantially, I don’t think this NXP takeover story will go unnoticed by the market. This should be more of a Common price pusher than Pref. I’d wrap my current position at this point.

2. Korea M&A Spotlight: POSCO or SK to Acquire KCFT for About 1 Trillion Won?

It was reported in numerous local Korean media yesterday that POSCO (005490 KS) and SK Group are leading contenders to acquire a Korean company called KCFT (KCF Technology) for about 1 trillion won. KCFT specializes in making copper foil and thin film products, especially for the lithium ion batteries sector. KCFT’s major customers include Samsung SDI, LG Chem, NEC, and Panasonic. 

The KKR private equity firm is the seller of KCFT. In February 2018, KKR acquired a 100% stake of LS Mtron’s copper foil and thin film business for 300 billion won and after this acquisition, renamed it KCFT. It has been reported that should these groups (POSCO or SK) low bid for KCFT, KKR may opt for an IPO of KCFT instead. 

If POSCO is able to acquire KCFT, this should help to accelerate the POSCO Group’s expansion of the rechargeable battery related materials business and enhance its vertical integration of this business. If the deal gets completed at about 1 trillion won, this would represent a P/S of about 3.3x and P/E of about 25x, using 2018 figures. 

3. MYOB Setting Up As A Riskier Trade

When I wrote about KKR’s purchase of 17.6% of MYOB Group Ltd (MYO AU) from Bain in October – a trade which got KKR to a 19.9% holding, my take on it was that the deal was probably a bit light. It was not outrageously bad because a) Bain agreed to sell their 17.6% at A$3.15 vs the A$3.65 IPO , and b) something like 93% of volume traded since the IPO in May 2015 had taken place below the proposed indicative offer price, but it was still one of the few platforms on which someone could take a stand to compete against the likes of Xero Ltd (XRO AU) and Intuit Inc (INTU US), it was not overly expensive as SaaS platforms went, and its online presence was growing rapidly.

The full write-up is MYOB: KKR Launches a Proposal. Lightish?

About three weeks later, KKR bumped their indicative offer to A$3.77/share, and MYOB opened its books to allow KKR due diligence. That suggested the price was in the range of the acceptable to MYOB’s board (but that A$3.70 was borderline). 

Then KKR did its due diligence, global equities continued to fall out of bed (down 10+% in two months for many major indices including Australia’s S&P/ASX200), KKR’s due diligence process came down to the wire, and the final bid presented came in at A$3.40, with a very short “take-it-or-leave-it” deadline. The immediate reaction of MYOB’s board was, as David Blennerhassett wrote in Friday Deadline Looms As MYOB Snubs KKR’s Reduced Offer,

Following completion of due diligence and finalisation of debt funding commitments, KKR has revised the offer price to $3.40 per share. …  The board has informed KKR that it is not in a position to recommend the revised proposal, however it remains in discussions with KKR regarding its proposal. (David Blennerhassett ‘s emphasis)

Four days later, KKR and MYOB entered into a Scheme Implementation Agreement (SIA) at A$3.40/share, putting MYOB at a A$2bn market cap.

David Blennerhassett discussed the SIA and the upcoming schedule of events in some detail in MYOB Caves And Agrees To KKR’s Reduced Offer. MYOB’s board unanimously recommended shareholders vote in favour of the Offer in the absence of a superior proposal and subject to an independent expert concluding the Offer was in the best interest of shareholders. There was a specific “go-shop” provision through the 22nd of February – when MYOB was expected to release FY results. No offer was forthcoming. KKR had matching rights but if they did not match an offer which was 5% higher and all-cash, then KKR would be obliged to sell its shares into the higher offer.

The New News

While not new new, US-based hedge fund – somewhat well-known for being involved in M&A situations – started accumulating a position in MYOB in January and has reached a stake of 9.99%. This was declared on Monday. On Tuesday Manikay sent a letter to MYOB (discussed below). This morning MYOB responded saying “The MYOB Board continues to unanimously recommend the Proposal subject to no Superior Proposal being forthcoming, and the receipt of an IER [Independent Experts’ Report] concluding that the Proposal is in the best interests of MYOB Shareholders.”

The Scheme Booklet is currently with ASIC and is expected to be despatched “in coming weeks” (original schedule was for mid-March with Scheme Meeting April 19). The wording in the MYOB release suggests that might get pushed back a little, meanwhile Manikay is likely to make more noise.

4. Sea Ltd (SE US): The Bear Case – A One-Hit Wonder?

Despite burning through $700mn in cash in 2018, investors decided to give another $1.3bn to Sea Ltd (SE US) . We believe investors should treat Sea Ltd with caution for the following reasons:

A significant slowdown in e-commerce

Is the gaming division a one-hit wonder?

Expecting another 800mn cash burn into 2019

Consensus has priced in further upgrades while cash flow metrics worst in the sector

NB. Our team has taken both sides of the Sea Ltd investment case as we think this makes for better decision making and encourages unique thinking within our team. We strongly recommend that investors read my colleague Arun’s positive notes on the company listed below, if you have not already done so.

Sea Ltd (SE US): Placing Price Leaves Money on the Table

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

5. Sea Ltd (SE US): Placing Price Leaves Money on the Table

Sea Ltd (SE US) announced that it would raise gross proceeds of $1.35 billion after increasing the size of its placement from 50 million to 60 million ADS. The placement is priced at $22.50 per ADS, 6.5% discount to its last close price. Tencent Holdings (700 HK), as well as one of Sea’s directors, are expected to buy 6.3 million ADS in the placement. The placing is expected to close on or about 8 March 2019.

In this briefing:

1. Korea M&A Spotlight: POSCO or SK to Acquire KCFT for About 1 Trillion Won?
2. MYOB Setting Up As A Riskier Trade
3. Sea Ltd (SE US): The Bear Case – A One-Hit Wonder?
4. Sea Ltd (SE US): Placing Price Leaves Money on the Table
5. Meituan Dianping (美团点评): Thoughts Before Lock-Up Expiry

1. Korea M&A Spotlight: POSCO or SK to Acquire KCFT for About 1 Trillion Won?

It was reported in numerous local Korean media yesterday that POSCO (005490 KS) and SK Group are leading contenders to acquire a Korean company called KCFT (KCF Technology) for about 1 trillion won. KCFT specializes in making copper foil and thin film products, especially for the lithium ion batteries sector. KCFT’s major customers include Samsung SDI, LG Chem, NEC, and Panasonic. 

The KKR private equity firm is the seller of KCFT. In February 2018, KKR acquired a 100% stake of LS Mtron’s copper foil and thin film business for 300 billion won and after this acquisition, renamed it KCFT. It has been reported that should these groups (POSCO or SK) low bid for KCFT, KKR may opt for an IPO of KCFT instead. 

If POSCO is able to acquire KCFT, this should help to accelerate the POSCO Group’s expansion of the rechargeable battery related materials business and enhance its vertical integration of this business. If the deal gets completed at about 1 trillion won, this would represent a P/S of about 3.3x and P/E of about 25x, using 2018 figures. 

2. MYOB Setting Up As A Riskier Trade

When I wrote about KKR’s purchase of 17.6% of MYOB Group Ltd (MYO AU) from Bain in October – a trade which got KKR to a 19.9% holding, my take on it was that the deal was probably a bit light. It was not outrageously bad because a) Bain agreed to sell their 17.6% at A$3.15 vs the A$3.65 IPO , and b) something like 93% of volume traded since the IPO in May 2015 had taken place below the proposed indicative offer price, but it was still one of the few platforms on which someone could take a stand to compete against the likes of Xero Ltd (XRO AU) and Intuit Inc (INTU US), it was not overly expensive as SaaS platforms went, and its online presence was growing rapidly.

The full write-up is MYOB: KKR Launches a Proposal. Lightish?

About three weeks later, KKR bumped their indicative offer to A$3.77/share, and MYOB opened its books to allow KKR due diligence. That suggested the price was in the range of the acceptable to MYOB’s board (but that A$3.70 was borderline). 

Then KKR did its due diligence, global equities continued to fall out of bed (down 10+% in two months for many major indices including Australia’s S&P/ASX200), KKR’s due diligence process came down to the wire, and the final bid presented came in at A$3.40, with a very short “take-it-or-leave-it” deadline. The immediate reaction of MYOB’s board was, as David Blennerhassett wrote in Friday Deadline Looms As MYOB Snubs KKR’s Reduced Offer,

Following completion of due diligence and finalisation of debt funding commitments, KKR has revised the offer price to $3.40 per share. …  The board has informed KKR that it is not in a position to recommend the revised proposal, however it remains in discussions with KKR regarding its proposal. (David Blennerhassett ‘s emphasis)

Four days later, KKR and MYOB entered into a Scheme Implementation Agreement (SIA) at A$3.40/share, putting MYOB at a A$2bn market cap.

David Blennerhassett discussed the SIA and the upcoming schedule of events in some detail in MYOB Caves And Agrees To KKR’s Reduced Offer. MYOB’s board unanimously recommended shareholders vote in favour of the Offer in the absence of a superior proposal and subject to an independent expert concluding the Offer was in the best interest of shareholders. There was a specific “go-shop” provision through the 22nd of February – when MYOB was expected to release FY results. No offer was forthcoming. KKR had matching rights but if they did not match an offer which was 5% higher and all-cash, then KKR would be obliged to sell its shares into the higher offer.

The New News

While not new new, US-based hedge fund – somewhat well-known for being involved in M&A situations – started accumulating a position in MYOB in January and has reached a stake of 9.99%. This was declared on Monday. On Tuesday Manikay sent a letter to MYOB (discussed below). This morning MYOB responded saying “The MYOB Board continues to unanimously recommend the Proposal subject to no Superior Proposal being forthcoming, and the receipt of an IER [Independent Experts’ Report] concluding that the Proposal is in the best interests of MYOB Shareholders.”

The Scheme Booklet is currently with ASIC and is expected to be despatched “in coming weeks” (original schedule was for mid-March with Scheme Meeting April 19). The wording in the MYOB release suggests that might get pushed back a little, meanwhile Manikay is likely to make more noise.

3. Sea Ltd (SE US): The Bear Case – A One-Hit Wonder?

Despite burning through $700mn in cash in 2018, investors decided to give another $1.3bn to Sea Ltd (SE US) . We believe investors should treat Sea Ltd with caution for the following reasons:

A significant slowdown in e-commerce

Is the gaming division a one-hit wonder?

Expecting another 800mn cash burn into 2019

Consensus has priced in further upgrades while cash flow metrics worst in the sector

NB. Our team has taken both sides of the Sea Ltd investment case as we think this makes for better decision making and encourages unique thinking within our team. We strongly recommend that investors read my colleague Arun’s positive notes on the company listed below, if you have not already done so.

Sea Ltd (SE US): Placing Price Leaves Money on the Table

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

4. Sea Ltd (SE US): Placing Price Leaves Money on the Table

Sea Ltd (SE US) announced that it would raise gross proceeds of $1.35 billion after increasing the size of its placement from 50 million to 60 million ADS. The placement is priced at $22.50 per ADS, 6.5% discount to its last close price. Tencent Holdings (700 HK), as well as one of Sea’s directors, are expected to buy 6.3 million ADS in the placement. The placing is expected to close on or about 8 March 2019.

5. Meituan Dianping (美团点评): Thoughts Before Lock-Up Expiry

Meituan Dianping, the largest O2O platform in China, was listed on September 20th last year and lock-up expiry will be on March 20th. The stock has returned -13% since listing. 

• As it heads into lock-up expiry on March 20th, we will examine Meituan Dianping shareholder structure and potential shares up for sale.
• Meituan was included by MSCI recently and will be eligible for the Hong Kong Connect soon thanks to rule amendment.
• The company delivered a decent topline growth in 3Q2018 but its profit fell short of expectation. We highlight potentials from the food supply chain solution. We also discuss implication from MoBike acquisition.
• We review our SOTP valuation of Meituan and believe there is an upside. 

In this briefing:

1. Sea Ltd (SE US): The Bear Case – A One-Hit Wonder?
2. Sea Ltd (SE US): Placing Price Leaves Money on the Table
3. Meituan Dianping (美团点评): Thoughts Before Lock-Up Expiry
4. Weibo (WB): Revenues Slowed Down Significantly in 4Q2018, Failed in Transition
5. Hyundai Autoever IPO Valuation Analysis

1. Sea Ltd (SE US): The Bear Case – A One-Hit Wonder?

Despite burning through $700mn in cash in 2018, investors decided to give another $1.3bn to Sea Ltd (SE US) . We believe investors should treat Sea Ltd with caution for the following reasons:

A significant slowdown in e-commerce

Is the gaming division a one-hit wonder?

Expecting another 800mn cash burn into 2019

Consensus has priced in further upgrades while cash flow metrics worst in the sector

NB. Our team has taken both sides of the Sea Ltd investment case as we think this makes for better decision making and encourages unique thinking within our team. We strongly recommend that investors read my colleague Arun’s positive notes on the company listed below, if you have not already done so.

Sea Ltd (SE US): Placing Price Leaves Money on the Table

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

2. Sea Ltd (SE US): Placing Price Leaves Money on the Table

Sea Ltd (SE US) announced that it would raise gross proceeds of $1.35 billion after increasing the size of its placement from 50 million to 60 million ADS. The placement is priced at $22.50 per ADS, 6.5% discount to its last close price. Tencent Holdings (700 HK), as well as one of Sea’s directors, are expected to buy 6.3 million ADS in the placement. The placing is expected to close on or about 8 March 2019.

3. Meituan Dianping (美团点评): Thoughts Before Lock-Up Expiry

Meituan Dianping, the largest O2O platform in China, was listed on September 20th last year and lock-up expiry will be on March 20th. The stock has returned -13% since listing. 

• As it heads into lock-up expiry on March 20th, we will examine Meituan Dianping shareholder structure and potential shares up for sale.
• Meituan was included by MSCI recently and will be eligible for the Hong Kong Connect soon thanks to rule amendment.
• The company delivered a decent topline growth in 3Q2018 but its profit fell short of expectation. We highlight potentials from the food supply chain solution. We also discuss implication from MoBike acquisition.
• We review our SOTP valuation of Meituan and believe there is an upside. 

4. Weibo (WB): Revenues Slowed Down Significantly in 4Q2018, Failed in Transition

• The advertising revenues slowed down significantly in 4Q2018.
• We believe the content transition from politics to entertainment was not as good as the management expected.
• We believe WB will not defeat Tencent’s WeChat.
• We believe the stock price has downside of 9%.

5. Hyundai Autoever IPO Valuation Analysis

Hyundai Autoever Corp (0978519D KS) IPO institutional investors bookbuilding starts in about seven days. In conclusion, we believe a 11-13x EV/EBIT valuation multiples are appropriate for Hyundai Autoever. These multiples are between the average comps multiples and slightly lower multiples than Samsung SDS’ level. Our base case implied market cap is 1.25 trillion won, representing 59,454 won, or 35% higher than the high end of the IPO price range of 44,000 won. As such, we would take this deal. 

To value Hyundai Autoever, we prefer to use EV/EBIT multiples. However, we have also referenced P/Sales and P/E multiples based valuations for comparison purposes. The comps have better sales growth, operating profit growth, and balance sheet strength. However, Hyundai Autoever has better net margin and ROE. 

We believe that Hyundai Autoever should trade at lower EV/EBIT multiples than Samsung SDS but similar to higher multiples than POSCO ICT and Lotte Data Communications. Hyundai Autoever is expected to play a key role in the Hyundai Motor Group’s push to become a leading global player of autonomous driving in the coming decade. 

In this briefing:

1. Sea Ltd (SE US): Placing Price Leaves Money on the Table
2. Meituan Dianping (美团点评): Thoughts Before Lock-Up Expiry
3. Weibo (WB): Revenues Slowed Down Significantly in 4Q2018, Failed in Transition
4. Hyundai Autoever IPO Valuation Analysis
5. Ctrip (CTRP): Overcame Two Difficulties in Q4, But Market Over-Reacted to “Global No. 1”

1. Sea Ltd (SE US): Placing Price Leaves Money on the Table

Sea Ltd (SE US) announced that it would raise gross proceeds of $1.35 billion after increasing the size of its placement from 50 million to 60 million ADS. The placement is priced at $22.50 per ADS, 6.5% discount to its last close price. Tencent Holdings (700 HK), as well as one of Sea’s directors, are expected to buy 6.3 million ADS in the placement. The placing is expected to close on or about 8 March 2019.

2. Meituan Dianping (美团点评): Thoughts Before Lock-Up Expiry

Meituan Dianping, the largest O2O platform in China, was listed on September 20th last year and lock-up expiry will be on March 20th. The stock has returned -13% since listing. 

• As it heads into lock-up expiry on March 20th, we will examine Meituan Dianping shareholder structure and potential shares up for sale.
• Meituan was included by MSCI recently and will be eligible for the Hong Kong Connect soon thanks to rule amendment.
• The company delivered a decent topline growth in 3Q2018 but its profit fell short of expectation. We highlight potentials from the food supply chain solution. We also discuss implication from MoBike acquisition.
• We review our SOTP valuation of Meituan and believe there is an upside. 

3. Weibo (WB): Revenues Slowed Down Significantly in 4Q2018, Failed in Transition

• The advertising revenues slowed down significantly in 4Q2018.
• We believe the content transition from politics to entertainment was not as good as the management expected.
• We believe WB will not defeat Tencent’s WeChat.
• We believe the stock price has downside of 9%.

4. Hyundai Autoever IPO Valuation Analysis

Hyundai Autoever Corp (0978519D KS) IPO institutional investors bookbuilding starts in about seven days. In conclusion, we believe a 11-13x EV/EBIT valuation multiples are appropriate for Hyundai Autoever. These multiples are between the average comps multiples and slightly lower multiples than Samsung SDS’ level. Our base case implied market cap is 1.25 trillion won, representing 59,454 won, or 35% higher than the high end of the IPO price range of 44,000 won. As such, we would take this deal. 

To value Hyundai Autoever, we prefer to use EV/EBIT multiples. However, we have also referenced P/Sales and P/E multiples based valuations for comparison purposes. The comps have better sales growth, operating profit growth, and balance sheet strength. However, Hyundai Autoever has better net margin and ROE. 

We believe that Hyundai Autoever should trade at lower EV/EBIT multiples than Samsung SDS but similar to higher multiples than POSCO ICT and Lotte Data Communications. Hyundai Autoever is expected to play a key role in the Hyundai Motor Group’s push to become a leading global player of autonomous driving in the coming decade. 

5. 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.

In this briefing:

1. Meituan Dianping (美团点评): Thoughts Before Lock-Up Expiry
2. Weibo (WB): Revenues Slowed Down Significantly in 4Q2018, Failed in Transition
3. Hyundai Autoever IPO Valuation Analysis
4. Ctrip (CTRP): Overcame Two Difficulties in Q4, But Market Over-Reacted to “Global No. 1”
5. S&P 500 and S&P 600 Testing Resistance…Still

1. Meituan Dianping (美团点评): Thoughts Before Lock-Up Expiry

Meituan Dianping, the largest O2O platform in China, was listed on September 20th last year and lock-up expiry will be on March 20th. The stock has returned -13% since listing. 

• As it heads into lock-up expiry on March 20th, we will examine Meituan Dianping shareholder structure and potential shares up for sale.
• Meituan was included by MSCI recently and will be eligible for the Hong Kong Connect soon thanks to rule amendment.
• The company delivered a decent topline growth in 3Q2018 but its profit fell short of expectation. We highlight potentials from the food supply chain solution. We also discuss implication from MoBike acquisition.
• We review our SOTP valuation of Meituan and believe there is an upside. 

2. Weibo (WB): Revenues Slowed Down Significantly in 4Q2018, Failed in Transition

• The advertising revenues slowed down significantly in 4Q2018.
• We believe the content transition from politics to entertainment was not as good as the management expected.
• We believe WB will not defeat Tencent’s WeChat.
• We believe the stock price has downside of 9%.

3. Hyundai Autoever IPO Valuation Analysis

Hyundai Autoever Corp (0978519D KS) IPO institutional investors bookbuilding starts in about seven days. In conclusion, we believe a 11-13x EV/EBIT valuation multiples are appropriate for Hyundai Autoever. These multiples are between the average comps multiples and slightly lower multiples than Samsung SDS’ level. Our base case implied market cap is 1.25 trillion won, representing 59,454 won, or 35% higher than the high end of the IPO price range of 44,000 won. As such, we would take this deal. 

To value Hyundai Autoever, we prefer to use EV/EBIT multiples. However, we have also referenced P/Sales and P/E multiples based valuations for comparison purposes. The comps have better sales growth, operating profit growth, and balance sheet strength. However, Hyundai Autoever has better net margin and ROE. 

We believe that Hyundai Autoever should trade at lower EV/EBIT multiples than Samsung SDS but similar to higher multiples than POSCO ICT and Lotte Data Communications. Hyundai Autoever is expected to play a key role in the Hyundai Motor Group’s push to become a leading global player of autonomous driving in the coming decade. 

4. 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.

5. 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.

In this briefing:

1. Weibo (WB): Revenues Slowed Down Significantly in 4Q2018, Failed in Transition
2. Hyundai Autoever IPO Valuation Analysis
3. Ctrip (CTRP): Overcame Two Difficulties in Q4, But Market Over-Reacted to “Global No. 1”
4. S&P 500 and S&P 600 Testing Resistance…Still
5. Delta Electronics (DELTA TB): Little Option but to Accept the Tender Offer

1. Weibo (WB): Revenues Slowed Down Significantly in 4Q2018, Failed in Transition

• The advertising revenues slowed down significantly in 4Q2018.
• We believe the content transition from politics to entertainment was not as good as the management expected.
• We believe WB will not defeat Tencent’s WeChat.
• We believe the stock price has downside of 9%.

2. Hyundai Autoever IPO Valuation Analysis

Hyundai Autoever Corp (0978519D KS) IPO institutional investors bookbuilding starts in about seven days. In conclusion, we believe a 11-13x EV/EBIT valuation multiples are appropriate for Hyundai Autoever. These multiples are between the average comps multiples and slightly lower multiples than Samsung SDS’ level. Our base case implied market cap is 1.25 trillion won, representing 59,454 won, or 35% higher than the high end of the IPO price range of 44,000 won. As such, we would take this deal. 

To value Hyundai Autoever, we prefer to use EV/EBIT multiples. However, we have also referenced P/Sales and P/E multiples based valuations for comparison purposes. The comps have better sales growth, operating profit growth, and balance sheet strength. However, Hyundai Autoever has better net margin and ROE. 

We believe that Hyundai Autoever should trade at lower EV/EBIT multiples than Samsung SDS but similar to higher multiples than POSCO ICT and Lotte Data Communications. Hyundai Autoever is expected to play a key role in the Hyundai Motor Group’s push to become a leading global player of autonomous driving in the coming decade. 

3. 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.

4. 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.

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

1. Hyundai Autoever IPO Valuation Analysis

Hyundai Autoever Corp (0978519D KS) IPO institutional investors bookbuilding starts in about seven days. In conclusion, we believe a 11-13x EV/EBIT valuation multiples are appropriate for Hyundai Autoever. These multiples are between the average comps multiples and slightly lower multiples than Samsung SDS’ level. Our base case implied market cap is 1.25 trillion won, representing 59,454 won, or 35% higher than the high end of the IPO price range of 44,000 won. As such, we would take this deal. 

To value Hyundai Autoever, we prefer to use EV/EBIT multiples. However, we have also referenced P/Sales and P/E multiples based valuations for comparison purposes. The comps have better sales growth, operating profit growth, and balance sheet strength. However, Hyundai Autoever has better net margin and ROE. 

We believe that Hyundai Autoever should trade at lower EV/EBIT multiples than Samsung SDS but similar to higher multiples than POSCO ICT and Lotte Data Communications. Hyundai Autoever is expected to play a key role in the Hyundai Motor Group’s push to become a leading global player of autonomous driving in the coming decade. 

2. 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.

3. 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.

4. 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).

5. 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. 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
5. LYFT Pre-IPO – Drivers and Shared Rides Hold the Key But the Numbers Are Missing

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.

5. LYFT Pre-IPO – Drivers and Shared Rides Hold the Key But the Numbers Are Missing

Lyft Inc (0812823D US) plans to list in the US at a valuation of US$20-25bn, as per media reports. 

Overall growth numbers have been great but some of the numbers are missing like the quarterly driver numbers, the number of shared riders versus single riders, organic growth in major cities, and progress of Canada operations, to name a few.

In my view, without the quarterly active driver numbers and the full picture of the extent of shared rides, one can’t develop an accurate picture of the business.

In this briefing:

1. Sell Lenovo: Profit Is an Illusion, Liabilities Are Rising and There Is Little Real Equity Value
2. Thai Telcos Struggle as All Three Seek to Gain Share While Spectrum Risk Looms Again in 2019.
3. Lyft IPO Preview
4. Alps Alpine Buyback Proceeding Apace
5. Sea Ltd (SE US): Placement a Good Opportunity to Enter an Attractive Story

1. Sell Lenovo: Profit Is an Illusion, Liabilities Are Rising and There Is Little Real Equity Value

In Q3, Lenovo (992 HK) reported revenue growth – well ahead of market expectations, improved margins and US$1.9bn of cashflow.  This was a considerable surprise to us – and the market.  However, having analysed the results, most of the reported revenue and profit growth comes from the Fujitsu Ltd (6702 JP) acquisition. The rise in cashflow largely came from working capital, but also benefitted from the structure of the Fujitsu deal. We think real full-year cashflow after investment, US$0.8bn, will yet again, fail to cover finance costs and dividends, and Lenovo will need to borrow another US$400m.

2. Thai Telcos Struggle as All Three Seek to Gain Share While Spectrum Risk Looms Again in 2019.

Chris Hoare met the Thai telcos recently but did not come away particularly enthused. His view is that the market probably remains tough this year. The good news is that the low priced, limited speed with unlimited usage, offers have mostly been withdrawn. It will take 2-3 quarters for this to work through, as these were 12 month plans, but it does suggest improved data monetization as the year progresses. A lack of data monetization was the key reason behind the revenue slowdown in 2H18. However, with data usage now so high (around 10GB/month), and content services unlikely to lead to revenue growth in the foreseeable future, overall revenue recovery is likely to be modest. 

3. 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.

4. 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.

5. 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.