TMT/Internet

In this briefing:

1. Up Fintech (Tiger Brokers) Pre-IPO Quick Note – Much Too Reliant on IBKR
2. JD.com (JD): The Real Main Business Grew 46% YoY, and Not 20% YoY in 4Q2018
3. Optorun (6235) Orders Bottoming and 5G Will Benefit the Company Considerably. BUY
4. Sea Ltd: Further Share Re-Rating After a 35% Daily Gain? Why Not?
5. Samsung Electronics Share Class: Long 1P / Short Common on Falling Memory Prices

1. Up Fintech (Tiger Brokers) Pre-IPO Quick Note – Much Too Reliant on IBKR

Up Fintech (TIGR US) plans to raise up to US$150m in its US listing. The company counts Xiaomi Corp (1810 HK) and Interactive Brokers Group, Inc (IBKR US) as its main investors.

While TIGR has grown at a stupendous pace over the past three years, it has been able to do so owing to IBKR doing most of the heavy lifting of execution and clearing. While its trying to change that now, nearly all the revenue is still being driven by its IBKR affiliation.

I’ve covered some of the aspects of TIGR’s model in Futu Holdings IPO Quick Note – Comparison with Tiger Brokers – Same Market, Different Economics. In this insight, I’ll take a quick look at the company’s performance and the issues highlighted above. 

2. JD.com (JD): The Real Main Business Grew 46% YoY, and Not 20% YoY in 4Q2018

• We believe the real main business line is service (commission), but not product (direct sales).
• In 4Q2018, service revenues grew by 46% YoY, but nominal main business line, product, grew only 20%.
• JD raised its commission rate in 2018, as demonstrating  that the company still has the bargaining power over retailers.
• Historical GMV numbers suggest significant upside.

3. Optorun (6235) Orders Bottoming and 5G Will Benefit the Company Considerably. BUY

Given the slowdown in Apple orders, which are only part of the story here, the shares have been a dreadful performer. They have underperformed TOPIX by 40% over the last 12 months and are 40% off their July 2018 high. They now trade on 11x this year’s numbers (and yield 2.7%), which we believe to be conservative. With the roll out of 5G orders next year will surely be up as well. We would buy at current levels.

4. Sea Ltd: Further Share Re-Rating After a 35% Daily Gain? Why Not?

• The biggest positive surprise from Sea Ltd’s (SE US) conference call is strong 2019 adjusted sales guidance: 82%-97% YoY growth for Garena (digital entertainment division) and 117-127% YoY growth for Shopee (e-commerce arm).
• Management expects first positive quarterly EBITDA for Shopee Taiwan operations in 1Q19, indicating there is a path to profitability for Shopee’s business model.
• Another great news: management expresses high confidence that Shopee’s S&M expenses in terms of absolute dollars would trend down in 2019, vs. 2018.
• After a 35% daily share gain on 27 Feb, SE trades at 4.1x 2019E P/adjusted revenue excl. 1P sales, yet still a whopping 49% discount to Pinduoduo’s (PDD US) 8.1x P/S.

5. Samsung Electronics Share Class: Long 1P / Short Common on Falling Memory Prices

• SamE Common/1P price ratio gap is again above +100% of σ on a 20D MA in favor of Common. Deepening concerns about memory chip price hammered both SamE and Hynix yesterday. But SamE 1P couldn’t capitalize. 1P fell even further, almost reaching 120D high in Common/1P price ratio in favor of Common.
• We’ve recently heard rebounding demand for memory chips. This has pushed up both SamE and Hynix lately. Improving fundamentals coupled with the March AGM cycle factor have consistently supported SamE Common/1P price ratio above +0.5σ on a 20D MA since late Jan. This optimism is now facing a serious challenge probably for the first time since late last year.
• Opinions are still heavily divided on memory chip business outlook. The concerns reignited by the falling price news would be here with us in the coming few weeks at least. This’d outweigh even the March AGM factor. 1P starts placing itself ahead of Common. I’d go long 1P and short Common now. I’d hold onto the position until -150~200% of σ. This is a 5~6% yield.

In this briefing:

1. Nexon Valuation Analysis
2. Topcon (7732 JP): Weak 3Q, Likely to Fall Short of FY Mar-19 Guidance
3. EM Equity Strategy: Cyclicals Leading, China Surging
4. Surya Citra Media (SCMA IJ) – Digital Revolution in the Spring – On the Ground in J-Town
5. Telstra: Earnings Under Pressure in FY19 but Move to Mobile Should Lead to Gains from FY20.

1. Nexon Valuation Analysis

In this report, we provide a valuation analysis of Nexon Co Ltd (3659 JP). A key question is “How much are investors willing to pay for Nexon which would drive higher EV/EBIT multiples and inversely reduce the earnings yield (measured by EBIT/EV)?” 

In our view, we believe that investors would be comfortable with earnings yield (measured by EBIT/EV) of about 7-9% given the risks of operating a global game franchise such as Nexon. This would suggest EV/EBIT of about 11x to 14x, using 2019 estimates. Our sensitivity analysis suggests that at the top end of the EV/EBIT valuation range of 14x, this would imply market cap of 1,905 billion yen, which would be 21% higher than current market cap. As such, despite Nexon’s share price rising 25% YTD, we think there could be further upside in the months ahead. 

Having digested plethora of public information on this deal (but not privy to all the bankers’ discussions) in the past several days, we believe that the US based companies including Amazon and Comcast are better positioned to acquire NXC Corp/Nexon, rather than the consortium led by Tencent. 

We believe there is an intense Chinese government pressure on Tencent to not do this deal. (This is just our guess based on public information). The game industry is not strategically important to China, unlike other industries such as semiconductors, energy, or financial. Depending on how much controlling stake Tencent wants to take, it is likely to involve several billions of dollars ($4 billion to $7 billion for Tencent, for example). This is a lot of money. Plus, China Inc’s balance sheet is not as strong as pre-GFC of 2008. Forking over $4 to $7 billion out of China into Japan/Korea would be meaningful. In short, although Tencent would like to do this deal, we think that behind the scenes, the Chinese government appears to be putting intense pressure on Tencent to not do this deal. 

2. Topcon (7732 JP): Weak 3Q, Likely to Fall Short of FY Mar-19 Guidance

Topcon’s FY Mar-19 guidance looks over-optimistic. Operating profit was up 8.5% year-on-year on a 1.4% increase in sales in the nine months to December, but down 10.1% on a 2.3% decrease in sales in 3Q. To make management’s full-year targets, it would have to increase by 41.0% on a 6.8% increase in sales in 4Q. The sales of all three major product segments – Smart Infrastructure, Positioning and Eye Care – have been slow. Intra-company eliminations have undercut segment profits.

At ¥1,561 (Friday, March 1, close), the shares are selling at 23.6x our EPS estimate for this fiscal year and 9.8x projected EV/EBITDA. These multiples compare with 5-year historical lows of 16.1x and 6.8x. Japan Analytics’ calculation of Annual No-Growth Valuation shows further downside risk (see chart below). 

3. EM Equity Strategy: Cyclicals Leading, China Surging

Broadly speaking, RS for MSCI EM is currently exhibiting some mild deterioration vs. MSCI EAFE following four months of clear outperformance. Nonetheless, the MSCI EM index is bottoming and remains attractive from a price perspective.  In today’s report we offer a technical appraisal of major EM markets, and offer a host of technically attractivec bottoms-up stock ideas across the EM universe.

4. Surya Citra Media (SCMA IJ) – Digital Revolution in the Spring – On the Ground in J-Town

A meeting Surya Citra Media Pt Tbk (SCMA IJ) in Jakarta found management in a relatively ebullient mood. The share price performance has been slightly perplexing the fact that its digital strategy is close to coming to fruition, with upcoming acquisitions representing a positive catalyst.

The company will move forward on acquiring controlling stakes in digital streaming player www.vidio.com, internet company www.kapanlagi.com, and out of home media advertising player EYE Indonesia.

Total revenues from the digital and non-TV space will grow from less than 5% of SCMA’s total revenue to nearly 20% of the total, making it the biggest player in both free-to-air and a major player in digital adverting in Indonesia.

Vidio.com is especially interesting given how fragmented that market is currently. Iy=t already has 22m active users viewing its sport and local content but is looking to bring in a major global player to help finance original content and bring in more international content. 

Internet companies represent the biggest and fastest growing advertising customers outside FMCG. They are increasingly paying above market rates for up to two-hour exclusive slots on prime time, where they air their own programming which allows them to engage with the audience. 

The recent Kraft Heinz Co (KHC US) debacle may signal the end of zero-based budgeting, which may mean global players such as Unilever Indonesia (UNVR IJ) start to spend more on advertising. in the meantime, local FMCG players remain more aggressive on advertising their products on TV. 

Surya Citra Media Pt Tbk (SCMA IJ) remains the best quality proxy to the advertising market in Indonesia. The upcoming acquisitions in the digital space represent strong potential catalysts for the stock, which have not yet been factored into valuations. Its core business continues to register stable and rising growth, especially from local FMCG players, with the re-entry of the tobacco companies potentially representing another boon for this year, given there has been no excise tax increase. According to Capital IQ consensus, the company is trading on 15.3x FY19E PER and 13.8x FY20E PER, with forecasts EPS growth of +8.5% and +10.5% for FY19E and FY20E respectively.  The company is forecast to achieve an ROE of 33% in 2019, with a dividend yield of 4.2%. 

5. Telstra: Earnings Under Pressure in FY19 but Move to Mobile Should Lead to Gains from FY20.

Recently, Telstra (TLS AU) reported 1H19 numbers which showed declines in revenue, EBITDA and net profit.  That seems to have put the brakes on a decent share price recovery (Telstra shares had risen 14% to their recent peak YTD). And with the weak numbers, Telstra cut its interim dividend to 8cps. The result was well telegraphed to the market so did not come as a huge surprise, although Ian Martin had hoped the dividend would not be cut. Our view remains that Telstra is working to get through two years of change, with 2019 seen as the bottom for earnings. There are plenty of risks ahead and, with dividend support reduced, we have put Telstra back on a Hold recommendation with a target price of $A$3.30. The three year outlook is promising as Telstra switches the focus to mobile, delivers on its T22 strategy and works through several NBN related issues. 

Telstra summary P&L  – a three year view

In this briefing:

1. Topcon (7732 JP): Weak 3Q, Likely to Fall Short of FY Mar-19 Guidance
2. EM Equity Strategy: Cyclicals Leading, China Surging
3. Surya Citra Media (SCMA IJ) – Digital Revolution in the Spring – On the Ground in J-Town
4. Telstra: Earnings Under Pressure in FY19 but Move to Mobile Should Lead to Gains from FY20.
5. Up Fintech (Tiger Brokers) Pre-IPO Quick Note – Much Too Reliant on IBKR

1. Topcon (7732 JP): Weak 3Q, Likely to Fall Short of FY Mar-19 Guidance

Topcon’s FY Mar-19 guidance looks over-optimistic. Operating profit was up 8.5% year-on-year on a 1.4% increase in sales in the nine months to December, but down 10.1% on a 2.3% decrease in sales in 3Q. To make management’s full-year targets, it would have to increase by 41.0% on a 6.8% increase in sales in 4Q. The sales of all three major product segments – Smart Infrastructure, Positioning and Eye Care – have been slow. Intra-company eliminations have undercut segment profits.

At ¥1,561 (Friday, March 1, close), the shares are selling at 23.6x our EPS estimate for this fiscal year and 9.8x projected EV/EBITDA. These multiples compare with 5-year historical lows of 16.1x and 6.8x. Japan Analytics’ calculation of Annual No-Growth Valuation shows further downside risk (see chart below). 

2. EM Equity Strategy: Cyclicals Leading, China Surging

Broadly speaking, RS for MSCI EM is currently exhibiting some mild deterioration vs. MSCI EAFE following four months of clear outperformance. Nonetheless, the MSCI EM index is bottoming and remains attractive from a price perspective.  In today’s report we offer a technical appraisal of major EM markets, and offer a host of technically attractivec bottoms-up stock ideas across the EM universe.

3. Surya Citra Media (SCMA IJ) – Digital Revolution in the Spring – On the Ground in J-Town

A meeting Surya Citra Media Pt Tbk (SCMA IJ) in Jakarta found management in a relatively ebullient mood. The share price performance has been slightly perplexing the fact that its digital strategy is close to coming to fruition, with upcoming acquisitions representing a positive catalyst.

The company will move forward on acquiring controlling stakes in digital streaming player www.vidio.com, internet company www.kapanlagi.com, and out of home media advertising player EYE Indonesia.

Total revenues from the digital and non-TV space will grow from less than 5% of SCMA’s total revenue to nearly 20% of the total, making it the biggest player in both free-to-air and a major player in digital adverting in Indonesia.

Vidio.com is especially interesting given how fragmented that market is currently. Iy=t already has 22m active users viewing its sport and local content but is looking to bring in a major global player to help finance original content and bring in more international content. 

Internet companies represent the biggest and fastest growing advertising customers outside FMCG. They are increasingly paying above market rates for up to two-hour exclusive slots on prime time, where they air their own programming which allows them to engage with the audience. 

The recent Kraft Heinz Co (KHC US) debacle may signal the end of zero-based budgeting, which may mean global players such as Unilever Indonesia (UNVR IJ) start to spend more on advertising. in the meantime, local FMCG players remain more aggressive on advertising their products on TV. 

Surya Citra Media Pt Tbk (SCMA IJ) remains the best quality proxy to the advertising market in Indonesia. The upcoming acquisitions in the digital space represent strong potential catalysts for the stock, which have not yet been factored into valuations. Its core business continues to register stable and rising growth, especially from local FMCG players, with the re-entry of the tobacco companies potentially representing another boon for this year, given there has been no excise tax increase. According to Capital IQ consensus, the company is trading on 15.3x FY19E PER and 13.8x FY20E PER, with forecasts EPS growth of +8.5% and +10.5% for FY19E and FY20E respectively.  The company is forecast to achieve an ROE of 33% in 2019, with a dividend yield of 4.2%. 

4. Telstra: Earnings Under Pressure in FY19 but Move to Mobile Should Lead to Gains from FY20.

Recently, Telstra (TLS AU) reported 1H19 numbers which showed declines in revenue, EBITDA and net profit.  That seems to have put the brakes on a decent share price recovery (Telstra shares had risen 14% to their recent peak YTD). And with the weak numbers, Telstra cut its interim dividend to 8cps. The result was well telegraphed to the market so did not come as a huge surprise, although Ian Martin had hoped the dividend would not be cut. Our view remains that Telstra is working to get through two years of change, with 2019 seen as the bottom for earnings. There are plenty of risks ahead and, with dividend support reduced, we have put Telstra back on a Hold recommendation with a target price of $A$3.30. The three year outlook is promising as Telstra switches the focus to mobile, delivers on its T22 strategy and works through several NBN related issues. 

Telstra summary P&L  – a three year view

5. Up Fintech (Tiger Brokers) Pre-IPO Quick Note – Much Too Reliant on IBKR

Up Fintech (TIGR US) plans to raise up to US$150m in its US listing. The company counts Xiaomi Corp (1810 HK) and Interactive Brokers Group, Inc (IBKR US) as its main investors.

While TIGR has grown at a stupendous pace over the past three years, it has been able to do so owing to IBKR doing most of the heavy lifting of execution and clearing. While its trying to change that now, nearly all the revenue is still being driven by its IBKR affiliation.

I’ve covered some of the aspects of TIGR’s model in Futu Holdings IPO Quick Note – Comparison with Tiger Brokers – Same Market, Different Economics. In this insight, I’ll take a quick look at the company’s performance and the issues highlighted above. 

In this briefing:

1. JD.com (JD): The Real Main Business Grew 46% YoY, and Not 20% YoY in 4Q2018
2. Optorun (6235) Orders Bottoming and 5G Will Benefit the Company Considerably. BUY
3. Sea Ltd: Further Share Re-Rating After a 35% Daily Gain? Why Not?
4. Samsung Electronics Share Class: Long 1P / Short Common on Falling Memory Prices
5. Versum Materials – Entegris Beaten to the Punch by Merck KGaA

1. JD.com (JD): The Real Main Business Grew 46% YoY, and Not 20% YoY in 4Q2018

• We believe the real main business line is service (commission), but not product (direct sales).
• In 4Q2018, service revenues grew by 46% YoY, but nominal main business line, product, grew only 20%.
• JD raised its commission rate in 2018, as demonstrating  that the company still has the bargaining power over retailers.
• Historical GMV numbers suggest significant upside.

2. Optorun (6235) Orders Bottoming and 5G Will Benefit the Company Considerably. BUY

Given the slowdown in Apple orders, which are only part of the story here, the shares have been a dreadful performer. They have underperformed TOPIX by 40% over the last 12 months and are 40% off their July 2018 high. They now trade on 11x this year’s numbers (and yield 2.7%), which we believe to be conservative. With the roll out of 5G orders next year will surely be up as well. We would buy at current levels.

3. Sea Ltd: Further Share Re-Rating After a 35% Daily Gain? Why Not?

• The biggest positive surprise from Sea Ltd’s (SE US) conference call is strong 2019 adjusted sales guidance: 82%-97% YoY growth for Garena (digital entertainment division) and 117-127% YoY growth for Shopee (e-commerce arm).
• Management expects first positive quarterly EBITDA for Shopee Taiwan operations in 1Q19, indicating there is a path to profitability for Shopee’s business model.
• Another great news: management expresses high confidence that Shopee’s S&M expenses in terms of absolute dollars would trend down in 2019, vs. 2018.
• After a 35% daily share gain on 27 Feb, SE trades at 4.1x 2019E P/adjusted revenue excl. 1P sales, yet still a whopping 49% discount to Pinduoduo’s (PDD US) 8.1x P/S.

4. Samsung Electronics Share Class: Long 1P / Short Common on Falling Memory Prices

• SamE Common/1P price ratio gap is again above +100% of σ on a 20D MA in favor of Common. Deepening concerns about memory chip price hammered both SamE and Hynix yesterday. But SamE 1P couldn’t capitalize. 1P fell even further, almost reaching 120D high in Common/1P price ratio in favor of Common.
• We’ve recently heard rebounding demand for memory chips. This has pushed up both SamE and Hynix lately. Improving fundamentals coupled with the March AGM cycle factor have consistently supported SamE Common/1P price ratio above +0.5σ on a 20D MA since late Jan. This optimism is now facing a serious challenge probably for the first time since late last year.
• Opinions are still heavily divided on memory chip business outlook. The concerns reignited by the falling price news would be here with us in the coming few weeks at least. This’d outweigh even the March AGM factor. 1P starts placing itself ahead of Common. I’d go long 1P and short Common now. I’d hold onto the position until -150~200% of σ. This is a 5~6% yield.

5. Versum Materials – Entegris Beaten to the Punch by Merck KGaA

Merck KGaA (MRK GY), the German pharmaceutical and chemical company, gatecrashed the Entegris Inc (ENTG US) merger with Versum Materials (VSM US) the morning of February 27, 2019, with the announcement of a $48 per share cash acquisition proposal that was presented to Versum’s board of directors that same day. Versum, which was spun out of Air Products & Chemicals, Inc (APD US) in 2016, is a global provider of solutions (Materials and Delivery Systems and Services) to the semiconductor and display industries.

On January 28, 2019, a day after the WSJ broke the story that Versum and Entegris were in talks, the companies announced a $9 billion (combined value) merger of equals whereby each VSM share would receive a fixed exchange ratio of 1.12 ENTG shares, resulting in VSM holders owning 47.5% of the combined company and ENTG holders owning the other 52.5%. The deal was well received with both companies’ shares climbing steadily since the announcement.

However, these best laid plans took a Teutonic turn when the other Merck (Merck KGaA, the German pharmaceuticals and chemicals group unaffiliated with Merck & Co Inc. (MRK US) of the USA) threw its hat in the ring.

According to Merck, its Executive Board unanimously approved its proposal and is fully committed to pursuing the transaction. Merck said it is prepared to proceed immediately to due diligence and negotiations and to quickly agree to a merger agreement. It further stated the completion of the offer will be subject to customary closing conditions, including the receipt of necessary regulatory clearances.

The $48 per share proposed price is a 51.7% premium over VSM’s January 25, 2019 share price just prior to the announcement of the Versum/Entegris merger and a 15.9% premium over VSM’s closing price on February 26, 2019.

The ball is now in the VSM board of directors’ court and below we’ll look at how the board might react and where the chips may fall.

In this briefing:

1. Optorun (6235) Orders Bottoming and 5G Will Benefit the Company Considerably. BUY
2. Sea Ltd: Further Share Re-Rating After a 35% Daily Gain? Why Not?
3. Samsung Electronics Share Class: Long 1P / Short Common on Falling Memory Prices
4. Versum Materials – Entegris Beaten to the Punch by Merck KGaA
5. The Mechanics of the Panalpina Vote

1. Optorun (6235) Orders Bottoming and 5G Will Benefit the Company Considerably. BUY

Given the slowdown in Apple orders, which are only part of the story here, the shares have been a dreadful performer. They have underperformed TOPIX by 40% over the last 12 months and are 40% off their July 2018 high. They now trade on 11x this year’s numbers (and yield 2.7%), which we believe to be conservative. With the roll out of 5G orders next year will surely be up as well. We would buy at current levels.

2. Sea Ltd: Further Share Re-Rating After a 35% Daily Gain? Why Not?

• The biggest positive surprise from Sea Ltd’s (SE US) conference call is strong 2019 adjusted sales guidance: 82%-97% YoY growth for Garena (digital entertainment division) and 117-127% YoY growth for Shopee (e-commerce arm).
• Management expects first positive quarterly EBITDA for Shopee Taiwan operations in 1Q19, indicating there is a path to profitability for Shopee’s business model.
• Another great news: management expresses high confidence that Shopee’s S&M expenses in terms of absolute dollars would trend down in 2019, vs. 2018.
• After a 35% daily share gain on 27 Feb, SE trades at 4.1x 2019E P/adjusted revenue excl. 1P sales, yet still a whopping 49% discount to Pinduoduo’s (PDD US) 8.1x P/S.

3. Samsung Electronics Share Class: Long 1P / Short Common on Falling Memory Prices

• SamE Common/1P price ratio gap is again above +100% of σ on a 20D MA in favor of Common. Deepening concerns about memory chip price hammered both SamE and Hynix yesterday. But SamE 1P couldn’t capitalize. 1P fell even further, almost reaching 120D high in Common/1P price ratio in favor of Common.
• We’ve recently heard rebounding demand for memory chips. This has pushed up both SamE and Hynix lately. Improving fundamentals coupled with the March AGM cycle factor have consistently supported SamE Common/1P price ratio above +0.5σ on a 20D MA since late Jan. This optimism is now facing a serious challenge probably for the first time since late last year.
• Opinions are still heavily divided on memory chip business outlook. The concerns reignited by the falling price news would be here with us in the coming few weeks at least. This’d outweigh even the March AGM factor. 1P starts placing itself ahead of Common. I’d go long 1P and short Common now. I’d hold onto the position until -150~200% of σ. This is a 5~6% yield.

4. Versum Materials – Entegris Beaten to the Punch by Merck KGaA

Merck KGaA (MRK GY), the German pharmaceutical and chemical company, gatecrashed the Entegris Inc (ENTG US) merger with Versum Materials (VSM US) the morning of February 27, 2019, with the announcement of a $48 per share cash acquisition proposal that was presented to Versum’s board of directors that same day. Versum, which was spun out of Air Products & Chemicals, Inc (APD US) in 2016, is a global provider of solutions (Materials and Delivery Systems and Services) to the semiconductor and display industries.

On January 28, 2019, a day after the WSJ broke the story that Versum and Entegris were in talks, the companies announced a $9 billion (combined value) merger of equals whereby each VSM share would receive a fixed exchange ratio of 1.12 ENTG shares, resulting in VSM holders owning 47.5% of the combined company and ENTG holders owning the other 52.5%. The deal was well received with both companies’ shares climbing steadily since the announcement.

However, these best laid plans took a Teutonic turn when the other Merck (Merck KGaA, the German pharmaceuticals and chemicals group unaffiliated with Merck & Co Inc. (MRK US) of the USA) threw its hat in the ring.

According to Merck, its Executive Board unanimously approved its proposal and is fully committed to pursuing the transaction. Merck said it is prepared to proceed immediately to due diligence and negotiations and to quickly agree to a merger agreement. It further stated the completion of the offer will be subject to customary closing conditions, including the receipt of necessary regulatory clearances.

The $48 per share proposed price is a 51.7% premium over VSM’s January 25, 2019 share price just prior to the announcement of the Versum/Entegris merger and a 15.9% premium over VSM’s closing price on February 26, 2019.

The ball is now in the VSM board of directors’ court and below we’ll look at how the board might react and where the chips may fall.

5. The Mechanics of the Panalpina Vote

This insight is a kind of public service announcement for investors looking at the Panalpina Welttransport Holding (PWTN SW) situation as it might affect the likely upcoming Extraordinary General Meeting that the Ernst Göhner Foundation requested of Panalpina, and to which Panalpina has acquiesced. The agenda item of the EGM requested is to implement a “One Share One Vote” system. 

Activist Cevian has come out against the proposal by the Ernst Göhner Foundation. This sounds counterintuitive except for one odd legal angle.

The Foundation’s ostensible goal is to ensure that the vote is “fair” so that Cevian and Artisan Partners can vote their full stake after having been capped at 5% for many years because of Article 5 in the Panalpina Articles of Association. The more cunning aspect of this is that, as per the Panalpina announcement…

In a letter addressed to Panalpina’s Board of Directors, minority shareholder Cevian had recently questioned the practice to fully admit EGF with all its voting rights at the Company’s shareholders’ meetings. Cevian took the position that the voting restriction of 5% must be applied to all shareholders and, hence the voting power of EGF must be reduced to 5%. An ad hoc board of independent directors (BoiD) consisting of five directors (without representatives of EGF and Cevian) and chaired by Thomas E. Kern, is currently evaluating the situation based on expert opinions submitted by each of EGF and Cevian and based on independent expert advice obtained by the BoiD.

The Foundation knows that their position may be legally weak, and their position could be capped at 5% rather than grandfathered. Indeed, the “independent expert advice” obtained by Cevian includes the opinions of “four leading Swiss stockbrokers” who had come to the conclusion that the Foundation had been unlawfully excluded from the 5% cap, according to this Reuters article on the 26th. The company states that the Ernst Göhner Foundation is and has been exempted from this rule because of “grandfathering” because it owned the shares before the implementation of the rule, but there is nothing in the Articles of Association which grants the EGF that exemption. The full Cevian press releases in English and German are available through their spokesperson and are attached below (at the bottom of the insight).

Another Reuters article discussed the situation, with quotes from Cevian, and added this tidbit at the end.

An ad hoc board of independent directors consisting of five directors, without representatives of EGF and Cevian…will review the proposal and decide how the voting on it will take place at the extraordinary general meeting,” spokeswoman Edna Ayme-Yahil said.

Investors should note…..

The last paragraph of Article 5 of the Panalpina Articles of Association says “No entries shall be made in the register of shareholders following the dispatch of the convocation to the Shareholders’ Meeting until the day after the Shareholders’ Meeting.” This is a little different than is the case for many large Swiss companies where they give the convocation and investors may subsequently register their shares.

In Panalpina’s case, if you are not registered by the time the company sends out the convocation, there is no requirement for the company to admit your shares to the register even if there is plenty of time to do so (though the Board can make exceptions to the entry restriction).

For investors interested in or concerned about the situation, there are measures which may be advisable to implement ASAP to ensure you can vote.

In this briefing:

1. EM Equity Strategy: Cyclicals Leading, China Surging
2. Surya Citra Media (SCMA IJ) – Digital Revolution in the Spring – On the Ground in J-Town
3. Telstra: Earnings Under Pressure in FY19 but Move to Mobile Should Lead to Gains from FY20.
4. Up Fintech (Tiger Brokers) Pre-IPO Quick Note – Much Too Reliant on IBKR
5. JD.com (JD): The Real Main Business Grew 46% YoY, and Not 20% YoY in 4Q2018

1. EM Equity Strategy: Cyclicals Leading, China Surging

Broadly speaking, RS for MSCI EM is currently exhibiting some mild deterioration vs. MSCI EAFE following four months of clear outperformance. Nonetheless, the MSCI EM index is bottoming and remains attractive from a price perspective.  In today’s report we offer a technical appraisal of major EM markets, and offer a host of technically attractivec bottoms-up stock ideas across the EM universe.

2. Surya Citra Media (SCMA IJ) – Digital Revolution in the Spring – On the Ground in J-Town

A meeting Surya Citra Media Pt Tbk (SCMA IJ) in Jakarta found management in a relatively ebullient mood. The share price performance has been slightly perplexing the fact that its digital strategy is close to coming to fruition, with upcoming acquisitions representing a positive catalyst.

The company will move forward on acquiring controlling stakes in digital streaming player www.vidio.com, internet company www.kapanlagi.com, and out of home media advertising player EYE Indonesia.

Total revenues from the digital and non-TV space will grow from less than 5% of SCMA’s total revenue to nearly 20% of the total, making it the biggest player in both free-to-air and a major player in digital adverting in Indonesia.

Vidio.com is especially interesting given how fragmented that market is currently. Iy=t already has 22m active users viewing its sport and local content but is looking to bring in a major global player to help finance original content and bring in more international content. 

Internet companies represent the biggest and fastest growing advertising customers outside FMCG. They are increasingly paying above market rates for up to two-hour exclusive slots on prime time, where they air their own programming which allows them to engage with the audience. 

The recent Kraft Heinz Co (KHC US) debacle may signal the end of zero-based budgeting, which may mean global players such as Unilever Indonesia (UNVR IJ) start to spend more on advertising. in the meantime, local FMCG players remain more aggressive on advertising their products on TV. 

Surya Citra Media Pt Tbk (SCMA IJ) remains the best quality proxy to the advertising market in Indonesia. The upcoming acquisitions in the digital space represent strong potential catalysts for the stock, which have not yet been factored into valuations. Its core business continues to register stable and rising growth, especially from local FMCG players, with the re-entry of the tobacco companies potentially representing another boon for this year, given there has been no excise tax increase. According to Capital IQ consensus, the company is trading on 15.3x FY19E PER and 13.8x FY20E PER, with forecasts EPS growth of +8.5% and +10.5% for FY19E and FY20E respectively.  The company is forecast to achieve an ROE of 33% in 2019, with a dividend yield of 4.2%. 

3. Telstra: Earnings Under Pressure in FY19 but Move to Mobile Should Lead to Gains from FY20.

Recently, Telstra (TLS AU) reported 1H19 numbers which showed declines in revenue, EBITDA and net profit.  That seems to have put the brakes on a decent share price recovery (Telstra shares had risen 14% to their recent peak YTD). And with the weak numbers, Telstra cut its interim dividend to 8cps. The result was well telegraphed to the market so did not come as a huge surprise, although Ian Martin had hoped the dividend would not be cut. Our view remains that Telstra is working to get through two years of change, with 2019 seen as the bottom for earnings. There are plenty of risks ahead and, with dividend support reduced, we have put Telstra back on a Hold recommendation with a target price of $A$3.30. The three year outlook is promising as Telstra switches the focus to mobile, delivers on its T22 strategy and works through several NBN related issues. 

Telstra summary P&L  – a three year view

4. Up Fintech (Tiger Brokers) Pre-IPO Quick Note – Much Too Reliant on IBKR

Up Fintech (TIGR US) plans to raise up to US$150m in its US listing. The company counts Xiaomi Corp (1810 HK) and Interactive Brokers Group, Inc (IBKR US) as its main investors.

While TIGR has grown at a stupendous pace over the past three years, it has been able to do so owing to IBKR doing most of the heavy lifting of execution and clearing. While its trying to change that now, nearly all the revenue is still being driven by its IBKR affiliation.

I’ve covered some of the aspects of TIGR’s model in Futu Holdings IPO Quick Note – Comparison with Tiger Brokers – Same Market, Different Economics. In this insight, I’ll take a quick look at the company’s performance and the issues highlighted above. 

5. JD.com (JD): The Real Main Business Grew 46% YoY, and Not 20% YoY in 4Q2018

• We believe the real main business line is service (commission), but not product (direct sales).
• In 4Q2018, service revenues grew by 46% YoY, but nominal main business line, product, grew only 20%.
• JD raised its commission rate in 2018, as demonstrating  that the company still has the bargaining power over retailers.
• Historical GMV numbers suggest significant upside.

In this briefing:

1. Surya Citra Media (SCMA IJ) – Digital Revolution in the Spring – On the Ground in J-Town
2. Telstra: Earnings Under Pressure in FY19 but Move to Mobile Should Lead to Gains from FY20.
3. Up Fintech (Tiger Brokers) Pre-IPO Quick Note – Much Too Reliant on IBKR
4. JD.com (JD): The Real Main Business Grew 46% YoY, and Not 20% YoY in 4Q2018
5. Optorun (6235) Orders Bottoming and 5G Will Benefit the Company Considerably. BUY

1. Surya Citra Media (SCMA IJ) – Digital Revolution in the Spring – On the Ground in J-Town

A meeting Surya Citra Media Pt Tbk (SCMA IJ) in Jakarta found management in a relatively ebullient mood. The share price performance has been slightly perplexing the fact that its digital strategy is close to coming to fruition, with upcoming acquisitions representing a positive catalyst.

The company will move forward on acquiring controlling stakes in digital streaming player www.vidio.com, internet company www.kapanlagi.com, and out of home media advertising player EYE Indonesia.

Total revenues from the digital and non-TV space will grow from less than 5% of SCMA’s total revenue to nearly 20% of the total, making it the biggest player in both free-to-air and a major player in digital adverting in Indonesia.

Vidio.com is especially interesting given how fragmented that market is currently. Iy=t already has 22m active users viewing its sport and local content but is looking to bring in a major global player to help finance original content and bring in more international content. 

Internet companies represent the biggest and fastest growing advertising customers outside FMCG. They are increasingly paying above market rates for up to two-hour exclusive slots on prime time, where they air their own programming which allows them to engage with the audience. 

The recent Kraft Heinz Co (KHC US) debacle may signal the end of zero-based budgeting, which may mean global players such as Unilever Indonesia (UNVR IJ) start to spend more on advertising. in the meantime, local FMCG players remain more aggressive on advertising their products on TV. 

Surya Citra Media Pt Tbk (SCMA IJ) remains the best quality proxy to the advertising market in Indonesia. The upcoming acquisitions in the digital space represent strong potential catalysts for the stock, which have not yet been factored into valuations. Its core business continues to register stable and rising growth, especially from local FMCG players, with the re-entry of the tobacco companies potentially representing another boon for this year, given there has been no excise tax increase. According to Capital IQ consensus, the company is trading on 15.3x FY19E PER and 13.8x FY20E PER, with forecasts EPS growth of +8.5% and +10.5% for FY19E and FY20E respectively.  The company is forecast to achieve an ROE of 33% in 2019, with a dividend yield of 4.2%. 

2. Telstra: Earnings Under Pressure in FY19 but Move to Mobile Should Lead to Gains from FY20.

Recently, Telstra (TLS AU) reported 1H19 numbers which showed declines in revenue, EBITDA and net profit.  That seems to have put the brakes on a decent share price recovery (Telstra shares had risen 14% to their recent peak YTD). And with the weak numbers, Telstra cut its interim dividend to 8cps. The result was well telegraphed to the market so did not come as a huge surprise, although Ian Martin had hoped the dividend would not be cut. Our view remains that Telstra is working to get through two years of change, with 2019 seen as the bottom for earnings. There are plenty of risks ahead and, with dividend support reduced, we have put Telstra back on a Hold recommendation with a target price of $A$3.30. The three year outlook is promising as Telstra switches the focus to mobile, delivers on its T22 strategy and works through several NBN related issues. 

Telstra summary P&L  – a three year view

3. Up Fintech (Tiger Brokers) Pre-IPO Quick Note – Much Too Reliant on IBKR

Up Fintech (TIGR US) plans to raise up to US$150m in its US listing. The company counts Xiaomi Corp (1810 HK) and Interactive Brokers Group, Inc (IBKR US) as its main investors.

While TIGR has grown at a stupendous pace over the past three years, it has been able to do so owing to IBKR doing most of the heavy lifting of execution and clearing. While its trying to change that now, nearly all the revenue is still being driven by its IBKR affiliation.

I’ve covered some of the aspects of TIGR’s model in Futu Holdings IPO Quick Note – Comparison with Tiger Brokers – Same Market, Different Economics. In this insight, I’ll take a quick look at the company’s performance and the issues highlighted above. 

4. JD.com (JD): The Real Main Business Grew 46% YoY, and Not 20% YoY in 4Q2018

• We believe the real main business line is service (commission), but not product (direct sales).
• In 4Q2018, service revenues grew by 46% YoY, but nominal main business line, product, grew only 20%.
• JD raised its commission rate in 2018, as demonstrating  that the company still has the bargaining power over retailers.
• Historical GMV numbers suggest significant upside.

5. Optorun (6235) Orders Bottoming and 5G Will Benefit the Company Considerably. BUY

Given the slowdown in Apple orders, which are only part of the story here, the shares have been a dreadful performer. They have underperformed TOPIX by 40% over the last 12 months and are 40% off their July 2018 high. They now trade on 11x this year’s numbers (and yield 2.7%), which we believe to be conservative. With the roll out of 5G orders next year will surely be up as well. We would buy at current levels.

In this briefing:

1. Telstra: Earnings Under Pressure in FY19 but Move to Mobile Should Lead to Gains from FY20.
2. Up Fintech (Tiger Brokers) Pre-IPO Quick Note – Much Too Reliant on IBKR
3. JD.com (JD): The Real Main Business Grew 46% YoY, and Not 20% YoY in 4Q2018
4. Optorun (6235) Orders Bottoming and 5G Will Benefit the Company Considerably. BUY
5. Sea Ltd: Further Share Re-Rating After a 35% Daily Gain? Why Not?

1. Telstra: Earnings Under Pressure in FY19 but Move to Mobile Should Lead to Gains from FY20.

Recently, Telstra (TLS AU) reported 1H19 numbers which showed declines in revenue, EBITDA and net profit.  That seems to have put the brakes on a decent share price recovery (Telstra shares had risen 14% to their recent peak YTD). And with the weak numbers, Telstra cut its interim dividend to 8cps. The result was well telegraphed to the market so did not come as a huge surprise, although Ian Martin had hoped the dividend would not be cut. Our view remains that Telstra is working to get through two years of change, with 2019 seen as the bottom for earnings. There are plenty of risks ahead and, with dividend support reduced, we have put Telstra back on a Hold recommendation with a target price of $A$3.30. The three year outlook is promising as Telstra switches the focus to mobile, delivers on its T22 strategy and works through several NBN related issues. 

Telstra summary P&L  – a three year view

2. Up Fintech (Tiger Brokers) Pre-IPO Quick Note – Much Too Reliant on IBKR

Up Fintech (TIGR US) plans to raise up to US$150m in its US listing. The company counts Xiaomi Corp (1810 HK) and Interactive Brokers Group, Inc (IBKR US) as its main investors.

While TIGR has grown at a stupendous pace over the past three years, it has been able to do so owing to IBKR doing most of the heavy lifting of execution and clearing. While its trying to change that now, nearly all the revenue is still being driven by its IBKR affiliation.

I’ve covered some of the aspects of TIGR’s model in Futu Holdings IPO Quick Note – Comparison with Tiger Brokers – Same Market, Different Economics. In this insight, I’ll take a quick look at the company’s performance and the issues highlighted above. 

3. JD.com (JD): The Real Main Business Grew 46% YoY, and Not 20% YoY in 4Q2018

• We believe the real main business line is service (commission), but not product (direct sales).
• In 4Q2018, service revenues grew by 46% YoY, but nominal main business line, product, grew only 20%.
• JD raised its commission rate in 2018, as demonstrating  that the company still has the bargaining power over retailers.
• Historical GMV numbers suggest significant upside.

4. Optorun (6235) Orders Bottoming and 5G Will Benefit the Company Considerably. BUY

Given the slowdown in Apple orders, which are only part of the story here, the shares have been a dreadful performer. They have underperformed TOPIX by 40% over the last 12 months and are 40% off their July 2018 high. They now trade on 11x this year’s numbers (and yield 2.7%), which we believe to be conservative. With the roll out of 5G orders next year will surely be up as well. We would buy at current levels.

5. Sea Ltd: Further Share Re-Rating After a 35% Daily Gain? Why Not?

• The biggest positive surprise from Sea Ltd’s (SE US) conference call is strong 2019 adjusted sales guidance: 82%-97% YoY growth for Garena (digital entertainment division) and 117-127% YoY growth for Shopee (e-commerce arm).
• Management expects first positive quarterly EBITDA for Shopee Taiwan operations in 1Q19, indicating there is a path to profitability for Shopee’s business model.
• Another great news: management expresses high confidence that Shopee’s S&M expenses in terms of absolute dollars would trend down in 2019, vs. 2018.
• After a 35% daily share gain on 27 Feb, SE trades at 4.1x 2019E P/adjusted revenue excl. 1P sales, yet still a whopping 49% discount to Pinduoduo’s (PDD US) 8.1x P/S.

In this briefing:

1. Sea Ltd: Further Share Re-Rating After a 35% Daily Gain? Why Not?
2. Samsung Electronics Share Class: Long 1P / Short Common on Falling Memory Prices
3. Versum Materials – Entegris Beaten to the Punch by Merck KGaA
4. The Mechanics of the Panalpina Vote
5. Tesla – Truth and Consequences

1. Sea Ltd: Further Share Re-Rating After a 35% Daily Gain? Why Not?

• The biggest positive surprise from Sea Ltd’s (SE US) conference call is strong 2019 adjusted sales guidance: 82%-97% YoY growth for Garena (digital entertainment division) and 117-127% YoY growth for Shopee (e-commerce arm).
• Management expects first positive quarterly EBITDA for Shopee Taiwan operations in 1Q19, indicating there is a path to profitability for Shopee’s business model.
• Another great news: management expresses high confidence that Shopee’s S&M expenses in terms of absolute dollars would trend down in 2019, vs. 2018.
• After a 35% daily share gain on 27 Feb, SE trades at 4.1x 2019E P/adjusted revenue excl. 1P sales, yet still a whopping 49% discount to Pinduoduo’s (PDD US) 8.1x P/S.

2. Samsung Electronics Share Class: Long 1P / Short Common on Falling Memory Prices

• SamE Common/1P price ratio gap is again above +100% of σ on a 20D MA in favor of Common. Deepening concerns about memory chip price hammered both SamE and Hynix yesterday. But SamE 1P couldn’t capitalize. 1P fell even further, almost reaching 120D high in Common/1P price ratio in favor of Common.
• We’ve recently heard rebounding demand for memory chips. This has pushed up both SamE and Hynix lately. Improving fundamentals coupled with the March AGM cycle factor have consistently supported SamE Common/1P price ratio above +0.5σ on a 20D MA since late Jan. This optimism is now facing a serious challenge probably for the first time since late last year.
• Opinions are still heavily divided on memory chip business outlook. The concerns reignited by the falling price news would be here with us in the coming few weeks at least. This’d outweigh even the March AGM factor. 1P starts placing itself ahead of Common. I’d go long 1P and short Common now. I’d hold onto the position until -150~200% of σ. This is a 5~6% yield.

3. Versum Materials – Entegris Beaten to the Punch by Merck KGaA

Merck KGaA (MRK GY), the German pharmaceutical and chemical company, gatecrashed the Entegris Inc (ENTG US) merger with Versum Materials (VSM US) the morning of February 27, 2019, with the announcement of a $48 per share cash acquisition proposal that was presented to Versum’s board of directors that same day. Versum, which was spun out of Air Products & Chemicals, Inc (APD US) in 2016, is a global provider of solutions (Materials and Delivery Systems and Services) to the semiconductor and display industries.

On January 28, 2019, a day after the WSJ broke the story that Versum and Entegris were in talks, the companies announced a $9 billion (combined value) merger of equals whereby each VSM share would receive a fixed exchange ratio of 1.12 ENTG shares, resulting in VSM holders owning 47.5% of the combined company and ENTG holders owning the other 52.5%. The deal was well received with both companies’ shares climbing steadily since the announcement.

However, these best laid plans took a Teutonic turn when the other Merck (Merck KGaA, the German pharmaceuticals and chemicals group unaffiliated with Merck & Co Inc. (MRK US) of the USA) threw its hat in the ring.

According to Merck, its Executive Board unanimously approved its proposal and is fully committed to pursuing the transaction. Merck said it is prepared to proceed immediately to due diligence and negotiations and to quickly agree to a merger agreement. It further stated the completion of the offer will be subject to customary closing conditions, including the receipt of necessary regulatory clearances.

The $48 per share proposed price is a 51.7% premium over VSM’s January 25, 2019 share price just prior to the announcement of the Versum/Entegris merger and a 15.9% premium over VSM’s closing price on February 26, 2019.

The ball is now in the VSM board of directors’ court and below we’ll look at how the board might react and where the chips may fall.

4. The Mechanics of the Panalpina Vote

This insight is a kind of public service announcement for investors looking at the Panalpina Welttransport Holding (PWTN SW) situation as it might affect the likely upcoming Extraordinary General Meeting that the Ernst Göhner Foundation requested of Panalpina, and to which Panalpina has acquiesced. The agenda item of the EGM requested is to implement a “One Share One Vote” system. 

Activist Cevian has come out against the proposal by the Ernst Göhner Foundation. This sounds counterintuitive except for one odd legal angle.

The Foundation’s ostensible goal is to ensure that the vote is “fair” so that Cevian and Artisan Partners can vote their full stake after having been capped at 5% for many years because of Article 5 in the Panalpina Articles of Association. The more cunning aspect of this is that, as per the Panalpina announcement…

In a letter addressed to Panalpina’s Board of Directors, minority shareholder Cevian had recently questioned the practice to fully admit EGF with all its voting rights at the Company’s shareholders’ meetings. Cevian took the position that the voting restriction of 5% must be applied to all shareholders and, hence the voting power of EGF must be reduced to 5%. An ad hoc board of independent directors (BoiD) consisting of five directors (without representatives of EGF and Cevian) and chaired by Thomas E. Kern, is currently evaluating the situation based on expert opinions submitted by each of EGF and Cevian and based on independent expert advice obtained by the BoiD.

The Foundation knows that their position may be legally weak, and their position could be capped at 5% rather than grandfathered. Indeed, the “independent expert advice” obtained by Cevian includes the opinions of “four leading Swiss stockbrokers” who had come to the conclusion that the Foundation had been unlawfully excluded from the 5% cap, according to this Reuters article on the 26th. The company states that the Ernst Göhner Foundation is and has been exempted from this rule because of “grandfathering” because it owned the shares before the implementation of the rule, but there is nothing in the Articles of Association which grants the EGF that exemption. The full Cevian press releases in English and German are available through their spokesperson and are attached below (at the bottom of the insight).

Another Reuters article discussed the situation, with quotes from Cevian, and added this tidbit at the end.

An ad hoc board of independent directors consisting of five directors, without representatives of EGF and Cevian…will review the proposal and decide how the voting on it will take place at the extraordinary general meeting,” spokeswoman Edna Ayme-Yahil said.

Investors should note…..

The last paragraph of Article 5 of the Panalpina Articles of Association says “No entries shall be made in the register of shareholders following the dispatch of the convocation to the Shareholders’ Meeting until the day after the Shareholders’ Meeting.” This is a little different than is the case for many large Swiss companies where they give the convocation and investors may subsequently register their shares.

In Panalpina’s case, if you are not registered by the time the company sends out the convocation, there is no requirement for the company to admit your shares to the register even if there is plenty of time to do so (though the Board can make exceptions to the entry restriction).

For investors interested in or concerned about the situation, there are measures which may be advisable to implement ASAP to ensure you can vote.

5. Tesla – Truth and Consequences

Tesla’s problems aren’t going away, they’re escalating:

• Elon Musk is in trouble again with the SEC;
• Tesla’s brand-new general counsel is leaving after just two months on the job;

• Consumer Reports withdrew its recommendation on the flagship Model 3 due to serious quality and reliability concerns–not actually surprising given increasing risks I have tracked  with Tesla quality controls curtailed and flawed cars increasingly delivered to customers (see “Musk and Weird Q3 Developments Are Driving Investors to Telsa’s Rivals” and “Tesla – Dave’s Not Here, and Musk Won’t Leave” and “Tesla: Down to the Wire”).

• The 2018 10-K filing confirms Tesla’s operations still are not generating consistently sustainable profits or cash flow unvarnished by substantial boosts from accounting maneuvers and unusual items as seen with the “miracle” third quarter (see “Great Magic Trick Tesla; Now Do it Again“)
• Which is bad news for first quarter results already foundering with pricing cuts, rising costs, unhappy customers, and escalating demand pressure;
• Plus liquidity strain worsened by $920 million in cash due to go out on March 1st to pay off maturing convertible bonds.
• Tesla Shanghai Gigafactory construction is underway and yet still not fully funded after at least six months of negotiations with bankers, and thus may also be developing differently versus what Tesla has presented (adding to my previously noted concerns in “Tesla – Shanghai Surprise“).

The common theme here is that all these problems were preventable, avoidable, and unnecessary. 

That’s not going away any time soon–as long as Musk remains in complete control.

How long will that be? 

Good question–Read on as Bond Angle analysis continues.

In this briefing:

1. Samsung Electronics Share Class: Long 1P / Short Common on Falling Memory Prices
2. Versum Materials – Entegris Beaten to the Punch by Merck KGaA
3. The Mechanics of the Panalpina Vote
4. Tesla – Truth and Consequences
5. KDDI: Key Takeaways from Company Visit Are Mostly Positive

1. Samsung Electronics Share Class: Long 1P / Short Common on Falling Memory Prices

• SamE Common/1P price ratio gap is again above +100% of σ on a 20D MA in favor of Common. Deepening concerns about memory chip price hammered both SamE and Hynix yesterday. But SamE 1P couldn’t capitalize. 1P fell even further, almost reaching 120D high in Common/1P price ratio in favor of Common.
• We’ve recently heard rebounding demand for memory chips. This has pushed up both SamE and Hynix lately. Improving fundamentals coupled with the March AGM cycle factor have consistently supported SamE Common/1P price ratio above +0.5σ on a 20D MA since late Jan. This optimism is now facing a serious challenge probably for the first time since late last year.
• Opinions are still heavily divided on memory chip business outlook. The concerns reignited by the falling price news would be here with us in the coming few weeks at least. This’d outweigh even the March AGM factor. 1P starts placing itself ahead of Common. I’d go long 1P and short Common now. I’d hold onto the position until -150~200% of σ. This is a 5~6% yield.

2. Versum Materials – Entegris Beaten to the Punch by Merck KGaA

Merck KGaA (MRK GY), the German pharmaceutical and chemical company, gatecrashed the Entegris Inc (ENTG US) merger with Versum Materials (VSM US) the morning of February 27, 2019, with the announcement of a $48 per share cash acquisition proposal that was presented to Versum’s board of directors that same day. Versum, which was spun out of Air Products & Chemicals, Inc (APD US) in 2016, is a global provider of solutions (Materials and Delivery Systems and Services) to the semiconductor and display industries.

On January 28, 2019, a day after the WSJ broke the story that Versum and Entegris were in talks, the companies announced a $9 billion (combined value) merger of equals whereby each VSM share would receive a fixed exchange ratio of 1.12 ENTG shares, resulting in VSM holders owning 47.5% of the combined company and ENTG holders owning the other 52.5%. The deal was well received with both companies’ shares climbing steadily since the announcement.

However, these best laid plans took a Teutonic turn when the other Merck (Merck KGaA, the German pharmaceuticals and chemicals group unaffiliated with Merck & Co Inc. (MRK US) of the USA) threw its hat in the ring.

According to Merck, its Executive Board unanimously approved its proposal and is fully committed to pursuing the transaction. Merck said it is prepared to proceed immediately to due diligence and negotiations and to quickly agree to a merger agreement. It further stated the completion of the offer will be subject to customary closing conditions, including the receipt of necessary regulatory clearances.

The $48 per share proposed price is a 51.7% premium over VSM’s January 25, 2019 share price just prior to the announcement of the Versum/Entegris merger and a 15.9% premium over VSM’s closing price on February 26, 2019.

The ball is now in the VSM board of directors’ court and below we’ll look at how the board might react and where the chips may fall.

3. The Mechanics of the Panalpina Vote

This insight is a kind of public service announcement for investors looking at the Panalpina Welttransport Holding (PWTN SW) situation as it might affect the likely upcoming Extraordinary General Meeting that the Ernst Göhner Foundation requested of Panalpina, and to which Panalpina has acquiesced. The agenda item of the EGM requested is to implement a “One Share One Vote” system. 

Activist Cevian has come out against the proposal by the Ernst Göhner Foundation. This sounds counterintuitive except for one odd legal angle.

The Foundation’s ostensible goal is to ensure that the vote is “fair” so that Cevian and Artisan Partners can vote their full stake after having been capped at 5% for many years because of Article 5 in the Panalpina Articles of Association. The more cunning aspect of this is that, as per the Panalpina announcement…

In a letter addressed to Panalpina’s Board of Directors, minority shareholder Cevian had recently questioned the practice to fully admit EGF with all its voting rights at the Company’s shareholders’ meetings. Cevian took the position that the voting restriction of 5% must be applied to all shareholders and, hence the voting power of EGF must be reduced to 5%. An ad hoc board of independent directors (BoiD) consisting of five directors (without representatives of EGF and Cevian) and chaired by Thomas E. Kern, is currently evaluating the situation based on expert opinions submitted by each of EGF and Cevian and based on independent expert advice obtained by the BoiD.

The Foundation knows that their position may be legally weak, and their position could be capped at 5% rather than grandfathered. Indeed, the “independent expert advice” obtained by Cevian includes the opinions of “four leading Swiss stockbrokers” who had come to the conclusion that the Foundation had been unlawfully excluded from the 5% cap, according to this Reuters article on the 26th. The company states that the Ernst Göhner Foundation is and has been exempted from this rule because of “grandfathering” because it owned the shares before the implementation of the rule, but there is nothing in the Articles of Association which grants the EGF that exemption. The full Cevian press releases in English and German are available through their spokesperson and are attached below (at the bottom of the insight).

Another Reuters article discussed the situation, with quotes from Cevian, and added this tidbit at the end.

An ad hoc board of independent directors consisting of five directors, without representatives of EGF and Cevian…will review the proposal and decide how the voting on it will take place at the extraordinary general meeting,” spokeswoman Edna Ayme-Yahil said.

Investors should note…..

The last paragraph of Article 5 of the Panalpina Articles of Association says “No entries shall be made in the register of shareholders following the dispatch of the convocation to the Shareholders’ Meeting until the day after the Shareholders’ Meeting.” This is a little different than is the case for many large Swiss companies where they give the convocation and investors may subsequently register their shares.

In Panalpina’s case, if you are not registered by the time the company sends out the convocation, there is no requirement for the company to admit your shares to the register even if there is plenty of time to do so (though the Board can make exceptions to the entry restriction).

For investors interested in or concerned about the situation, there are measures which may be advisable to implement ASAP to ensure you can vote.

4. Tesla – Truth and Consequences

Tesla’s problems aren’t going away, they’re escalating:

• Elon Musk is in trouble again with the SEC;
• Tesla’s brand-new general counsel is leaving after just two months on the job;

• Consumer Reports withdrew its recommendation on the flagship Model 3 due to serious quality and reliability concerns–not actually surprising given increasing risks I have tracked  with Tesla quality controls curtailed and flawed cars increasingly delivered to customers (see “Musk and Weird Q3 Developments Are Driving Investors to Telsa’s Rivals” and “Tesla – Dave’s Not Here, and Musk Won’t Leave” and “Tesla: Down to the Wire”).

• The 2018 10-K filing confirms Tesla’s operations still are not generating consistently sustainable profits or cash flow unvarnished by substantial boosts from accounting maneuvers and unusual items as seen with the “miracle” third quarter (see “Great Magic Trick Tesla; Now Do it Again“)
• Which is bad news for first quarter results already foundering with pricing cuts, rising costs, unhappy customers, and escalating demand pressure;
• Plus liquidity strain worsened by $920 million in cash due to go out on March 1st to pay off maturing convertible bonds.
• Tesla Shanghai Gigafactory construction is underway and yet still not fully funded after at least six months of negotiations with bankers, and thus may also be developing differently versus what Tesla has presented (adding to my previously noted concerns in “Tesla – Shanghai Surprise“).

The common theme here is that all these problems were preventable, avoidable, and unnecessary. 

That’s not going away any time soon–as long as Musk remains in complete control.

How long will that be? 

Good question–Read on as Bond Angle analysis continues.

5. KDDI: Key Takeaways from Company Visit Are Mostly Positive

We expect the Q4 18 report in mid-May will be pivotal for sentiment on KDDI Corp (9433 JP) as the results for its current mid-term plan are announced and new targets for the next three years are set. This plays against a backdrop of moderately higher competitive intensity both in the near-term on cheap handsets and longer-term with Rakuten Inc (4755 JP)  market entry. Shares are down 15% from highs in September 2018 as markets have factored in the new state of affairs but coming out of our meeting with the company today we feel more confident in how they are positioned.