TMT/Internet

In this briefing:

1. Yahoo Japan 3Q Update: Consumer Business Drives Mid-Term Growth; Plans to Diversify in the Long Run
2. Samsung Electronics Share Class: Long 1P / Short Common on BlackRock Showing
3. CJ Corp Holdco/Synthetic Sub Trade: Current Status & Trade Approach
4. Pinduoduo (拼多多) Placement – Not a Good Sign
5. Korean & Taiwanese Governments May Restrict the Use of Huawei Telecom Equipment Products

1. Yahoo Japan 3Q Update: Consumer Business Drives Mid-Term Growth; Plans to Diversify in the Long Run

Yahoo Japan (4689 JP)  reported 3Q FY03/19 financial results last Monday (04th February). Revenue and OP were on par with consensus. YJ revised the lower range of its FY03/19E OP guidance upwards by JPY7bn to JPY140bn mainly due to lower than expected growth related expenses (expenses for new challenges as per the management). Meanwhile, the upper limit of the FY03/19E OP guidance of JPY143bn remains unchanged. The revised OP guidance for FY03/19E is JPY140-143bn.

2. Samsung Electronics Share Class: Long 1P / Short Common on BlackRock Showing

• It was reported yesterday that BlackRock upped its stake in SamE by 0.04% to 5.03%. BlackRock announcement will increase expectation on higher dividend. Sentiment wise this news will likely push 1P over Common in the short-term.
• SamE shares are now enjoying a 21% YTD return. But Common/1P price ratio got reversed in favor of Common since around Jan 21. This must have been partly because of lower dividend concerns for this year. Local street expected a 25% payout on ₩30tril earnings. This’d put C/1P div yield difference at about 0.6%p. This is well below last year’s average.
• With BlackRock showing, somewhere around ₩1,450~1,500 per share seems to be a realistic expectation. At this much DPS on ₩30tril earnings, C/1P div yield difference would be right near last year’s yearend level. We are entering the March shareholder meeting phase. Usually, this’d not be a good time to go after 1P. But in this special situation, I’d go long 1P and go short Common for a short-term mean reversion.

3. CJ Corp Holdco/Synthetic Sub Trade: Current Status & Trade Approach

• CJ Corp is a three-sub holdco. CJ Cheiljedang and CJ ENM, account for three fourth of the holdings. CJ Olive Networks accounts for 10%. Olive Young’s growth has slowed down substantially. There is nearly nothing in Holdco’s stub. Holdco price should now be virtually pegged to the two listed subs.
• It’d be safe to do a stub trade with a synthetic sub. I synthesize the four listed subs on a ratio of 50:40:7:3 (CJ Cheiljedang, CJ ENM, CJ CGV and CJ FW). It’d be also fine to do a simpler one with 55:45 on CJ Cheiljedang and CJ ENM only.
• Holdco/Synthetic Sub are now at -0.25σ on a 20D MA. Normally, I wouldn’t make any move at this point. But things still look a bit tempting in favor of Holdco. We are now seeing a much higher price volatility on Korea’s media content stocks including CJ ENM.
• Generally, a higher sub price volatility leads to a higher holdco valuation relative to sub. In addition, this Olive Networks IPO story is being re-ignited by local investors lately. I expect Holdco to hit a +2σ level which we saw late December. I’d go long Holdco and short the synthetic sub even at this point.

4. Pinduoduo (拼多多) Placement – Not a Good Sign

Pinduoduo (PDD US) is looking to raise about US$1.5bn in its follow-up offering. The placement is a mix of primary and secondary selldown.

The deal scores poorly on our framework due to its large deal size and expensive valuation relative to peers. We find that the timing of the placement to be peculiar and the large overhang post-offering is a worry. Banyan’s selldown in this placement suggested that principal shareholders may progressively look to exit their stakes contrary to our previous assumption and their shares will add pressure to the share price in the near-term.

5. Korean & Taiwanese Governments May Restrict the Use of Huawei Telecom Equipment Products

• It was announced on February 7th that the South Korean National Assembly will start to discuss the threats that Huawei’s products may pose on the South Korean national security. The National Assembly will specifically discuss about banning all Huawei products for government telecommunication networks. This is the first time that the issue of Huawei products potentially posing a national security threat will be discussed in the South Korea National Assembly. 
• Taiwan is also another major country that is seriously thinking about banning all Huawei’s 5G related telecom equipment. In late January, the local Taiwanese news outlets reported that the Taiwanese government may announce a ban of Huawei’s telecom equipment by the end of March. At this time, the Taiwanese government may also announce a “blacklist” of Chinese companies that may pose national security threat. The companies that could potentially be included in this “blacklist” include Huawei, Hikvision, Lenovo, and Zhejiang Dahua Technology Co. 
• It remains to be seen how the Taiwanese government may decide on this case but this could have an enormous repercussion on not just on Huawei but also on Taiwan Semiconductor Manufacturing Company (TSMC) (2330 TT) since Huawei is a major customer of TSMC. 

In this briefing:

1. Baidu: Time to Swoop In, with NAV Discount Widening Substantially
2. Pinduoduo (PDD US): Follow-On Offering Is a Smart Move for the Company, Rather than for Investors

1. Baidu: Time to Swoop In, with NAV Discount Widening Substantially

• Our stub valuation analysis reveals that Baidu Inc (ADR) (BIDU US) attractively trades at near 2 SD below its 3-yr average of NAV discount.
• Fundamentally, BIDU’s core business (Baidu Core) has grown healthily, with strong cash flows generation.
• China consumption slowdown is likely to mean modest sales growth deceleration (not a “sales falling off the cliff” scenario) for BIDU in 2019E.
• Implied in the current ADR price, the market is unjustifiably valuing Baidu Core (11.2x 2019E PE) as an “Old economy” company with little to no growth prospect, in our opinion.
• Our PT for next 3-6 mo, assuming 10% holdco discount to NAV, works out to be US$224/ADR, representing a 27% upside potential.   

2. Pinduoduo (PDD US): Follow-On Offering Is a Smart Move for the Company, Rather than for Investors

With the shares hitting all-time highs, Pinduoduo (PDD US) announced a follow-on public offering to raise net proceeds (potentially of $1.1 billion) from the sale of 37 million ADS along with the placing of 14.8 million ADS from existing shareholders (post-lockup expiry).

In this briefing:

1. Silverlake Axis Rally Ignition and Hurdles
2. TRACKING TRAFFIC/Chinese Tourism: HK & Macau Gained ‘Share’ in December, Continuing H218 Trend
3. Honda Chooses CATL as Battery Partner for Their EVs; Panasonic Has Lost the Chance
4. Sumco Reports Solid Growth in Revenue and Operating Profit; Stock Is Still Trading at a Discount
5. Nintendo Downgrades Switch Unit Sales Forecast for FY03/19 Despite Strong 3Q Financial Performance

1. Silverlake Axis Rally Ignition and Hurdles

Silverlake Axis (SILV SP) triggered a buy above the triangle formation break at 0.43 and the daily MACD barrier outlined in our recent update Silver Lake Bottom Targets . The pick up in buy volumes were noted as an underlying positive as rally energy started to take shape.

Buy volumes have picked up nicely after noted accumulation in late 2018.

The failure to reach for a final low has set in motion the rally toward medium term pivot resistance and more importantly a test on the higher end of the intermediate range.

Near term, this rally is looking extended. We like buying weakness for a press through pocket resistance. Silverlake rallies tend to be explosive.

2. TRACKING TRAFFIC/Chinese Tourism: HK & Macau Gained ‘Share’ in December, Continuing H218 Trend

Tracking Traffic/Chinese Tourism is the hub for all of our research on China’s tourism sector. This monthly report features analysis of Chinese tourism data, notes from our conversations with industry participants, and links to recent company news and thematic pieces. Our aim is to highlight important trends in China’s tourism sector (and changes to those trends).

In this issue readers can find:

Although we remain positive on the long-term growth of Chinese tourism, it’s clear that near-term demand growth has slowed, and that Chinese tourists are generally staying closer to home and probably spending less than they were a year ago. 

Happy New Year (of the Pig)!

3. Honda Chooses CATL as Battery Partner for Their EVs; Panasonic Has Lost the Chance

CATL (A) (300750 CH) announced on Monday that it has signed a deal with Honda Motor (7267 JP) for jointly developing Li-ion batteries. This news comes to us as no surprise, given CATL’s effort in expanding market share globally by tying with leading automakers such as Nissan Motor (7201 JP), Daimler AG (DAI GR), and Bayerische Motoren Werke Ag (BMW GR). It seems that the Chinese battery leader is now targeting leading Japanese automakers alongside their focus on luxury automakers in Europe ( BMW to Invest in CATL: Chinese Battery Maker to Gain Exposure in Europe?).  Following Panasonic Corp (6752 JP)’s news about forming a Joint Venture with Toyota, we were under the impression that Panasonic would hit a deal with Honda as well. However, it seems that CATL has emerged as a first mover and secured a steady business by partnering with Honda, one of the leading automakers in Japan. Although Panasonic and Honda joined hands for developing a swappable battery system in Indonesia, the team hasn’t really gone ahead in developing Li-ion batteries. Honda’s battery sales are now for CATL, while Panasonic has lost a steady business deal unless the latter makes plans with Honda to develop new battery technologies such as solid-state batteries. In our opinion, Honda and CATL, being leaders in their respective industries, when joined together via this agreement should capture a strong position in the auto sector which is striding towards electrification. The effect of this news on CATL share price cannot be really seen as the markets are closed for ongoing holidays in China. Panasonic, however, opened -5.1% low on February 5th, mainly due to its disappointing 3QFY03/19 earnings and could be partly due to this news.

4. Sumco Reports Solid Growth in Revenue and Operating Profit; Stock Is Still Trading at a Discount

Sumco (3436 JP) reported its 4QFY12/18 and Full-year FY12/18 results yesterday (5th February). The company reported double-digit growth in revenue and operating profit for 4QFY12/18 driven by strong demand for semiconductor silicon wafers across all sizes alongside a favourable trend in wafer prices. Revenue grew 17.7% YoY in the 4^th quarter, in spite of missing its own top-line estimate by 1.7% and falling a touch below consensus and our estimates. Operating profit increased 57.1% YoY to JPY20.9bn, yet again falling below guidance, consensus and our estimates. The strong growth in operating profit resulted in a 640-bps expansion in the operating profit margin to 25.3% compared to the 18.9% reported in 4QFY12/17.

5. Nintendo Downgrades Switch Unit Sales Forecast for FY03/19 Despite Strong 3Q Financial Performance

• Nintendo recorded strong revenue and OP performance in 3QFY03/19. Revenue for the quarter amounted to JPY608.4bn (+25.9% YoY) and OP amounted to JPY158.6bn (+36.1% YoY).
• Albeit strong performance across topline and bottomline, the company downgraded the sales units forecast for the Switch from 20m to 17m for FY03/19. Switch unit sales continue to be heavily driven by software releases. The company has only two hit software releases planned for 4QFY03/19. As such, the company has not made any changes to guidance. 
• The company continues to broaden its reach in the mobile gaming market with two releases set for summer 2019. While this may help the company reduce its reliance on gaming consoles over the long run, currently, mobile games make up less than 10% of the company’s topline.
• Based on our estimates, Nintendo is currently trading at a FY1 EV/EBIT multiple of 11.4x, lower than its historical median of 13.4x.

In this briefing:

1. Baidu: Time to Swoop In, with NAV Discount Widening Substantially
2. Pinduoduo (PDD US): Follow-On Offering Is a Smart Move for the Company, Rather than for Investors
3. Hamamatsu Photonics (6965 JP): 1Q Sales Growth Led by Medical, Semiconductor & Factory Automation
4. The War on Huawei, Its Impact on TSMC, and the Invincible Spanish Armada
5. Koolearn: Marketing Expenses Have Taken Operating Profits Down the Drain

1. Baidu: Time to Swoop In, with NAV Discount Widening Substantially

• Our stub valuation analysis reveals that Baidu Inc (ADR) (BIDU US) attractively trades at near 2 SD below its 3-yr average of NAV discount.
• Fundamentally, BIDU’s core business (Baidu Core) has grown healthily, with strong cash flows generation.
• China consumption slowdown is likely to mean modest sales growth deceleration (not a “sales falling off the cliff” scenario) for BIDU in 2019E.
• Implied in the current ADR price, the market is unjustifiably valuing Baidu Core (11.2x 2019E PE) as an “Old economy” company with little to no growth prospect, in our opinion.
• Our PT for next 3-6 mo, assuming 10% holdco discount to NAV, works out to be US$224/ADR, representing a 27% upside potential.   

2. Pinduoduo (PDD US): Follow-On Offering Is a Smart Move for the Company, Rather than for Investors

With the shares hitting all-time highs, Pinduoduo (PDD US) announced a follow-on public offering to raise net proceeds (potentially of $1.1 billion) from the sale of 37 million ADS along with the placing of 14.8 million ADS from existing shareholders (post-lockup expiry).

3. Hamamatsu Photonics (6965 JP): 1Q Sales Growth Led by Medical, Semiconductor & Factory Automation

Consolidated sales were up 4.1% year-on-year in the three months to December, supported by demand from the medical, semiconductor and factory automation sectors, to which sales were up 8.7%, 11.0% and 8.2%, respectively. Gross profit was up 4.5%, but higher S,G&A expenses resulted in a 1.8% decline in operating profit (the operating margin was, however, up from the previous quarter). Net profit was up 4.9% after a decline in extraordinary losses. It was a relatively good performance in view of the cyclical downturns in the semiconductor and factory automation markets, and medical sales growth of only 3.2% in FY Sep-18.

Management’s three-year plan calls for 4.2% growth in sales and 0.9% growth in operating profit this fiscal year, followed by acceleration in FY Sep-20 and FY Sep-21. This is predicated on investment in new production capacity, which should be largely completed over the coming year, sufficient demand to absorb that capacity, and depreciation leveling off in FY Sep-21. Sales growth was on target in 1Q while operating profit fell short, but management has a record of cutting R&D and other expenses in order to achieve profit guidance. 

At ¥3,985, the shares are selling at 29x management’s implied EPS estimate for this fiscal year (net profit guidance/ current shares outstanding), 26x next year’s estimate and 22x the estimate for FY Sep-21.

4. The War on Huawei, Its Impact on TSMC, and the Invincible Spanish Armada

Huawei is one of the largest telecom equipment companies in the world and it is also one of the top customers of Taiwan Semiconductor Manufacturing Company (TSMC) (2330 TT). There has been a war waged on Huawei by the US government administration. Most recently in January 2019, the US Justice Department announced 23 counts of indictments on Huawei related to the intellectual property theft, obstruction of justice, and fraud related to its evasion of US sanctions against Iran. The following are the major reasons why the US government has become so aggressive in targeting Huawei to prevent this company from selling its telecom equipment products in the US and in other allied countries:

• Serious concerns about Huawei’s equipment which can be used to conduct espionage
• The quest for 5G 
• Beyond 5G & Global technology leadership

HiSilicon Technologies, which is a fully owned company of Huawei, is one of the top five customers of TSMC. Of TSMC’s top five customers, both Apple and Huawei face significant headwinds which could reduce their sales growth rates. Although we do not have an exact figure of what percentage of TSMC’s sales that Apple and Huawei represent, we believe that is closer to about 25-30%. 

The current US administration is trying to slow down this excessive outsourcing of manufacturing out of the US. The US government’s war on Huawei is a reflection of the US government’s desire to slow down the progress of Huawei and China’s dominance of 5G services combined with threats of potential espionage. In the midst of all these intricate battles and concerns involving Huawei, TSMC is becoming negatively impacted as one of the main companies that produce chips for Huawei’s Hisilicon. 

5. Koolearn: Marketing Expenses Have Taken Operating Profits Down the Drain

• Koolearn updated its IPS prospectus and posted operating losses for 1H2019 (ended Nov. 2018).
• The company spent significantly on online promotion, but we believe that online promotion is not useful.
• We also believe online marketing expenditures are not a productive use of the Company’s cash, as Koolearn’s brand was already well known among consumers due to its parent company, New Oriental.

In this briefing:

1. The War on Huawei, Its Impact on TSMC, and the Invincible Spanish Armada
2. Koolearn: Marketing Expenses Have Taken Operating Profits Down the Drain
3. Last Week in GER Research: Softbank, TPG Telecom, Cstone Pharma, Ebang and Facebook

1. The War on Huawei, Its Impact on TSMC, and the Invincible Spanish Armada

Huawei is one of the largest telecom equipment companies in the world and it is also one of the top customers of Taiwan Semiconductor Manufacturing Company (TSMC) (2330 TT). There has been a war waged on Huawei by the US government administration. Most recently in January 2019, the US Justice Department announced 23 counts of indictments on Huawei related to the intellectual property theft, obstruction of justice, and fraud related to its evasion of US sanctions against Iran. The following are the major reasons why the US government has become so aggressive in targeting Huawei to prevent this company from selling its telecom equipment products in the US and in other allied countries:

• Serious concerns about Huawei’s equipment which can be used to conduct espionage
• The quest for 5G 
• Beyond 5G & Global technology leadership

HiSilicon Technologies, which is a fully owned company of Huawei, is one of the top five customers of TSMC. Of TSMC’s top five customers, both Apple and Huawei face significant headwinds which could reduce their sales growth rates. Although we do not have an exact figure of what percentage of TSMC’s sales that Apple and Huawei represent, we believe that is closer to about 25-30%. 

The current US administration is trying to slow down this excessive outsourcing of manufacturing out of the US. The US government’s war on Huawei is a reflection of the US government’s desire to slow down the progress of Huawei and China’s dominance of 5G services combined with threats of potential espionage. In the midst of all these intricate battles and concerns involving Huawei, TSMC is becoming negatively impacted as one of the main companies that produce chips for Huawei’s Hisilicon. 

2. Koolearn: Marketing Expenses Have Taken Operating Profits Down the Drain

• Koolearn updated its IPS prospectus and posted operating losses for 1H2019 (ended Nov. 2018).
• The company spent significantly on online promotion, but we believe that online promotion is not useful.
• We also believe online marketing expenditures are not a productive use of the Company’s cash, as Koolearn’s brand was already well known among consumers due to its parent company, New Oriental.

3. Last Week in GER Research: Softbank, TPG Telecom, Cstone Pharma, Ebang and Facebook

In this version of the GER weekly research wrap, we dig into the debt tender for Softbank Group (9984 JP) and assess the merger between TPG Telecom Ltd (TPM AU) and VHA. On the IPO front, we initiate on CStone Pharma (CSTONE HK) while we update on Ebang (EBANG HK) . Finally, we dig into the beat at Facebook Inc A (FB US) and assess whether there are further legs for the investment case. We also provide a list of upcoming catalysts for upcoming event-driven ideas. 

More details can be found below. 

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

In this briefing:

1. Last Week in GER Research: Softbank, TPG Telecom, Cstone Pharma, Ebang and Facebook
2. Hoya Reports Solid 3QFY03/19 Performance; Our Outlook on the Company Remains Unchanged
3. Netmarble Games + Tencent = The Most Likely Consortium to Acquire NXC Corp/Nexon?
4. KDDI: 3Q18/19 Results Miss Slightly but Stock Is Poised to Benefit From Lower Handset Subsidies
5. M&A: A Round-Up of Deals in January 2019

1. Last Week in GER Research: Softbank, TPG Telecom, Cstone Pharma, Ebang and Facebook

In this version of the GER weekly research wrap, we dig into the debt tender for Softbank Group (9984 JP) and assess the merger between TPG Telecom Ltd (TPM AU) and VHA. On the IPO front, we initiate on CStone Pharma (CSTONE HK) while we update on Ebang (EBANG HK) . Finally, we dig into the beat at Facebook Inc A (FB US) and assess whether there are further legs for the investment case. We also provide a list of upcoming catalysts for upcoming event-driven ideas. 

More details can be found below. 

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

2. Hoya Reports Solid 3QFY03/19 Performance; Our Outlook on the Company Remains Unchanged

Hoya Corporation (7741 JP) reported its 3QFY03/19 earnings yesterday (01^st Feb). The revenues grew at 4.9% YoY while operating profit increased by a hefty 20.2% YoY during the quarter. On a constant currency basis, revenues grew 6.6% YoY while pre-tax profit increased 15.0% YoY during the period. In addition, Hoya’s margin too witnessed an expansion with operating profit margin reaching 27.8% from 24.3%, while it reported a pre-tax margin of 27.7% compared to 25.4% a year ago. Moreover, the company beat consensus estimates on revenue, operating profit and pre-tax profit.

Revenues grew thanks to strong performances by the Life Care and Electronics businesses although the Imaging business saw a decline.

3. Netmarble Games + Tencent = The Most Likely Consortium to Acquire NXC Corp/Nexon?

Netmarble Games (251270 KS) officially announced on January 31st that it is interested in buying Nexon/NXC Corp. We believe that there is a growing likelihood of a potential consortium which includes Tencent and Netmarble Games to acquire NXC Corp/Nexon. Three major reasons why Tencent may want to partner with Netmarble Games to acquire NXC Corp/Nexon include the following:

• Avoid the cultural backlash from Korean gamers
• Among all the companies that Tencent has invested in Korea, Netmarble Games has become the biggest in amount. 
• Netmarble Games is more focused on games and has a stronger balance sheet than Kakao Corp, which has also shown interest in acquiring NXC Corp/Nexon. 

4. KDDI: 3Q18/19 Results Miss Slightly but Stock Is Poised to Benefit From Lower Handset Subsidies

KDDI’s (9433 JP) 3Q results were a small miss (2% vs our forecasts), at both the revenue and profit lines, but not enough to change our positive stance. A key part of our view is derived from our negative view on Apple (AAPL US) from August 2018 where we see an “air-pocket” of demand loss coming through. This is particularly important to Japan where the iPhone accounts for around 75% of smartphones. Apple has downgraded guidance and we believe is in a secular downtrend as refresh cycles elongate and that has been accentuated by the pull forward of demadn for the iPhone X. 

This is playing out in Japan, with KDDI reporting handset revenues down 13% YoY, and the key cause of the revenue miss. KDDI increased discounting to offset falling sales in 3Q adding a ¥9.9bn increase in handset costs in the quarter. Without that, EBIT would have beaten expectations. KPIs were generally strong, and service revenue trends improved to -0.1% YoY from -0.8%. Given the nature of the miss, and the fact the company is reiterating guidance we do not expect material changes to forecasts. Our price target is ¥4,100, and our recommendation remains Buy.

5. M&A: A Round-Up of Deals in January 2019

For the month of January, seventeen new deals were discussed on Smartkarma with an overall deal size of US$91bn, with ~81% of that figure from the Celgene Corp (CELG US) deal. This overall number does not include rumours on Nexon Gt Co Ltd (041140 KS) and Capitaland Ltd (CAPL SP)‘s acquisition of Ascendas-Singbridge. The average transaction premium was 43%, or 26% if ignoring Earthport plc (EPO LN).

M1 Ltd (M1 SP) is essentially an ongoing transaction; while Mastercard Inc Class A (MA US) trumped Visa Inc Class A Shares (V US)‘s December offer for Earthport. Healius (HLS AU) rejected its proposal.

Bank Danamon Indonesia (BDMN IJ) is similarly an ongoing transaction and arguably the premium is higher than 14.9%, which is based on the last close.

Directly below is a summary of ongoing M&A situations, followed by a recap of news associated with each event situation.

In this briefing:

1. DTAC: Survived 2019 but Pressured on All Sides. Maintain Reduce.

1. DTAC: Survived 2019 but Pressured on All Sides. Maintain Reduce.

Total Access Communication (DTAC TB) has emerged from a torrid 2018 and has survived. That was not always a certainty as the year progressed and their access to much of their spectrum expired. In the end DTAC managed to buy some 2x5MHZ of 900MHZ and 2x5MHZ of 1800MHZ spectrum and retain access temporarily to expired spectrum (the remedy). See DTAC 3Q Result: No Recovery Yet. Spectrum Issue Now Solved, but Leverage Is Rising.

However, survival has come at a cost. DTAC is paying a high price to TOT to rent its 2300MHZ spectrum (and is paying to build out the network), it has paid large sums to secure small amounts of 1800MHZ and 900MHZ spectrum to partially replaced expired concession spectrum and has agreed to pay to use equipment sitting on CAT’s infrastructure.  Finally it has moved to settle a number of disputes with CAT (discussed in Thai Telcos: Outstanding Liabilities to CAT/TOT Loom Post DTAC’s Partial Settlement) and pay them a net THB9bn. That clears the decks partially but there are some very large outstanding cases not covered (these relate to all three operators).

Latest results do little to suggest that good times are just around the corner. They were disappointing and suggest the Thai market will continue to struggle in 2019 as discussed in Emerging Asean Telcos 2019: Indonesia Looks Best Placed. Malaysia Improving. DTAC’s survival has led to increased competition in the market as it moves to win back customers and that suggests more earnings disappointment to come. We remain cautious and somewhat surprised by the strong move in recent days. We have a Reduce recommendation and THB32 target price.

In this briefing:

1. Last Week in GER Research: Softbank, TPG Telecom, Cstone Pharma, Ebang and Facebook
2. Hoya Reports Solid 3QFY03/19 Performance; Our Outlook on the Company Remains Unchanged
3. Netmarble Games + Tencent = The Most Likely Consortium to Acquire NXC Corp/Nexon?
4. KDDI: 3Q18/19 Results Miss Slightly but Stock Is Poised to Benefit From Lower Handset Subsidies
5. M&A: A Round-Up of Deals in January 2019

1. Last Week in GER Research: Softbank, TPG Telecom, Cstone Pharma, Ebang and Facebook

In this version of the GER weekly research wrap, we dig into the debt tender for Softbank Group (9984 JP) and assess the merger between TPG Telecom Ltd (TPM AU) and VHA. On the IPO front, we initiate on CStone Pharma (CSTONE HK) while we update on Ebang (EBANG HK) . Finally, we dig into the beat at Facebook Inc A (FB US) and assess whether there are further legs for the investment case. We also provide a list of upcoming catalysts for upcoming event-driven ideas. 

More details can be found below. 

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

2. Hoya Reports Solid 3QFY03/19 Performance; Our Outlook on the Company Remains Unchanged

Hoya Corporation (7741 JP) reported its 3QFY03/19 earnings yesterday (01^st Feb). The revenues grew at 4.9% YoY while operating profit increased by a hefty 20.2% YoY during the quarter. On a constant currency basis, revenues grew 6.6% YoY while pre-tax profit increased 15.0% YoY during the period. In addition, Hoya’s margin too witnessed an expansion with operating profit margin reaching 27.8% from 24.3%, while it reported a pre-tax margin of 27.7% compared to 25.4% a year ago. Moreover, the company beat consensus estimates on revenue, operating profit and pre-tax profit.

Revenues grew thanks to strong performances by the Life Care and Electronics businesses although the Imaging business saw a decline.

3. Netmarble Games + Tencent = The Most Likely Consortium to Acquire NXC Corp/Nexon?

Netmarble Games (251270 KS) officially announced on January 31st that it is interested in buying Nexon/NXC Corp. We believe that there is a growing likelihood of a potential consortium which includes Tencent and Netmarble Games to acquire NXC Corp/Nexon. Three major reasons why Tencent may want to partner with Netmarble Games to acquire NXC Corp/Nexon include the following:

• Avoid the cultural backlash from Korean gamers
• Among all the companies that Tencent has invested in Korea, Netmarble Games has become the biggest in amount. 
• Netmarble Games is more focused on games and has a stronger balance sheet than Kakao Corp, which has also shown interest in acquiring NXC Corp/Nexon. 

4. KDDI: 3Q18/19 Results Miss Slightly but Stock Is Poised to Benefit From Lower Handset Subsidies

KDDI’s (9433 JP) 3Q results were a small miss (2% vs our forecasts), at both the revenue and profit lines, but not enough to change our positive stance. A key part of our view is derived from our negative view on Apple (AAPL US) from August 2018 where we see an “air-pocket” of demand loss coming through. This is particularly important to Japan where the iPhone accounts for around 75% of smartphones. Apple has downgraded guidance and we believe is in a secular downtrend as refresh cycles elongate and that has been accentuated by the pull forward of demadn for the iPhone X. 

This is playing out in Japan, with KDDI reporting handset revenues down 13% YoY, and the key cause of the revenue miss. KDDI increased discounting to offset falling sales in 3Q adding a ¥9.9bn increase in handset costs in the quarter. Without that, EBIT would have beaten expectations. KPIs were generally strong, and service revenue trends improved to -0.1% YoY from -0.8%. Given the nature of the miss, and the fact the company is reiterating guidance we do not expect material changes to forecasts. Our price target is ¥4,100, and our recommendation remains Buy.

5. M&A: A Round-Up of Deals in January 2019

For the month of January, seventeen new deals were discussed on Smartkarma with an overall deal size of US$91bn, with ~81% of that figure from the Celgene Corp (CELG US) deal. This overall number does not include rumours on Nexon Gt Co Ltd (041140 KS) and Capitaland Ltd (CAPL SP)‘s acquisition of Ascendas-Singbridge. The average transaction premium was 43%, or 26% if ignoring Earthport plc (EPO LN).

M1 Ltd (M1 SP) is essentially an ongoing transaction; while Mastercard Inc Class A (MA US) trumped Visa Inc Class A Shares (V US)‘s December offer for Earthport. Healius (HLS AU) rejected its proposal.

Bank Danamon Indonesia (BDMN IJ) is similarly an ongoing transaction and arguably the premium is higher than 14.9%, which is based on the last close.

Directly below is a summary of ongoing M&A situations, followed by a recap of news associated with each event situation.

In this briefing:

1. Intel’s New CEO. The Best An IDM Can Get?
2. HK Connect Discovery – January Snapshot
3. Hyundai Heavy/DSME Event – Comprehensive Summary
4. SCSK (9719 JP) Launches Buyout of Subsidiary VeriServe (3724 JP)

1. Intel’s New CEO. The Best An IDM Can Get?

After seven months of searching, Intel has just announced that interim CEO Bob Swan’s position will be made permanent, making him the seventh CEO in the company’s 50 year history and the first to attain that position not having risen through the ranks of what was once a world-class succession planning process. Mr. Swan, who joined the company to replace Stacy Smith as CFO back in 2016, had originally declared himself out of the running for the role. Is Mr. Swan the best a global IDM giant can get as its CEO?

2. HK Connect Discovery – January Snapshot

This is a monthly version of our HK Connect Weekly note, in which I highlight Hong Kong-listed companies leading the southbound flow weekly. Over the past month, we have seen the flow turning from outflow to inflow. Our previous insights published in Jan can be found in the links below. In this insight, we will focus on the month flow to get a bigger picture vs the weekly flow.

Our January Coverage of Hong Kong Connect southbound flow

• HK Connect Discovery Weekly: CR Beer, Great Wall Motors, and Kingsoft (2019-01-07)
• HK Connect Discovery Weekly: China Tower, Tencent, New China Life (2019-01-11)
• HK Connect Discovery Weekly: Tencent, Kingsoft, and Yichang HEC (2019-01-18)
• HK Connect Discovery Weekly: CRRC, Car Inc/ UCar (2019-01-25)

3. Hyundai Heavy/DSME Event – Comprehensive Summary

• Below is a comprehensive summary of the Hyundai Heavy/DSME event that engulfed the Korean market yesterday. This is a multi step process. Details of most events will be determined after one month of holdback period.
• I will provide a trade approach on each name in a follow-up post.

4. SCSK (9719 JP) Launches Buyout of Subsidiary VeriServe (3724 JP)

Today after the close, Sumitomo Corp (8053 JP) consolidated subsidiary SCSK Corp (9719 JP) announced a Tender Offer to buy out minorities in Veriserve Corp (3724 JP).

SCSK currently holds 2,900,000 shares or 55.59% of voting rights. 

The Tender Offer is at ¥6,700/share which is a 43.6% premium to the last traded price of the day before the announcement (¥4,665), a 44.6% premium to the one-month average, a 28.3% premium to the 3-month average, and a 36.6% premium to the 6-month average.

The price does not seem egregiously unfair, but for investors who own it who think it has another double in it this year they might get upset.

This is one of those situations with which the currently underway METI M&A Fairness enquiry might have a problem.

And if you care about the fairness of the M&A bidding and response process, and ensuring that minority investors get their interests defended by process, have a look at the METI Fair M&A panel and its consultation paper and by all means offer your comments. 

In this briefing:

1. Hoya Reports Solid 3QFY03/19 Performance; Our Outlook on the Company Remains Unchanged
2. Netmarble Games + Tencent = The Most Likely Consortium to Acquire NXC Corp/Nexon?
3. KDDI: 3Q18/19 Results Miss Slightly but Stock Is Poised to Benefit From Lower Handset Subsidies
4. M&A: A Round-Up of Deals in January 2019
5. DTAC: Survived 2019 but Pressured on All Sides. Maintain Reduce.

1. Hoya Reports Solid 3QFY03/19 Performance; Our Outlook on the Company Remains Unchanged

Hoya Corporation (7741 JP) reported its 3QFY03/19 earnings yesterday (01^st Feb). The revenues grew at 4.9% YoY while operating profit increased by a hefty 20.2% YoY during the quarter. On a constant currency basis, revenues grew 6.6% YoY while pre-tax profit increased 15.0% YoY during the period. In addition, Hoya’s margin too witnessed an expansion with operating profit margin reaching 27.8% from 24.3%, while it reported a pre-tax margin of 27.7% compared to 25.4% a year ago. Moreover, the company beat consensus estimates on revenue, operating profit and pre-tax profit.

Revenues grew thanks to strong performances by the Life Care and Electronics businesses although the Imaging business saw a decline.

2. Netmarble Games + Tencent = The Most Likely Consortium to Acquire NXC Corp/Nexon?

Netmarble Games (251270 KS) officially announced on January 31st that it is interested in buying Nexon/NXC Corp. We believe that there is a growing likelihood of a potential consortium which includes Tencent and Netmarble Games to acquire NXC Corp/Nexon. Three major reasons why Tencent may want to partner with Netmarble Games to acquire NXC Corp/Nexon include the following:

• Avoid the cultural backlash from Korean gamers
• Among all the companies that Tencent has invested in Korea, Netmarble Games has become the biggest in amount. 
• Netmarble Games is more focused on games and has a stronger balance sheet than Kakao Corp, which has also shown interest in acquiring NXC Corp/Nexon. 

3. KDDI: 3Q18/19 Results Miss Slightly but Stock Is Poised to Benefit From Lower Handset Subsidies

KDDI’s (9433 JP) 3Q results were a small miss (2% vs our forecasts), at both the revenue and profit lines, but not enough to change our positive stance. A key part of our view is derived from our negative view on Apple (AAPL US) from August 2018 where we see an “air-pocket” of demand loss coming through. This is particularly important to Japan where the iPhone accounts for around 75% of smartphones. Apple has downgraded guidance and we believe is in a secular downtrend as refresh cycles elongate and that has been accentuated by the pull forward of demadn for the iPhone X. 

This is playing out in Japan, with KDDI reporting handset revenues down 13% YoY, and the key cause of the revenue miss. KDDI increased discounting to offset falling sales in 3Q adding a ¥9.9bn increase in handset costs in the quarter. Without that, EBIT would have beaten expectations. KPIs were generally strong, and service revenue trends improved to -0.1% YoY from -0.8%. Given the nature of the miss, and the fact the company is reiterating guidance we do not expect material changes to forecasts. Our price target is ¥4,100, and our recommendation remains Buy.

4. M&A: A Round-Up of Deals in January 2019

For the month of January, seventeen new deals were discussed on Smartkarma with an overall deal size of US$91bn, with ~81% of that figure from the Celgene Corp (CELG US) deal. This overall number does not include rumours on Nexon Gt Co Ltd (041140 KS) and Capitaland Ltd (CAPL SP)‘s acquisition of Ascendas-Singbridge. The average transaction premium was 43%, or 26% if ignoring Earthport plc (EPO LN).

M1 Ltd (M1 SP) is essentially an ongoing transaction; while Mastercard Inc Class A (MA US) trumped Visa Inc Class A Shares (V US)‘s December offer for Earthport. Healius (HLS AU) rejected its proposal.

Bank Danamon Indonesia (BDMN IJ) is similarly an ongoing transaction and arguably the premium is higher than 14.9%, which is based on the last close.

Directly below is a summary of ongoing M&A situations, followed by a recap of news associated with each event situation.

5. DTAC: Survived 2019 but Pressured on All Sides. Maintain Reduce.

Total Access Communication (DTAC TB) has emerged from a torrid 2018 and has survived. That was not always a certainty as the year progressed and their access to much of their spectrum expired. In the end DTAC managed to buy some 2x5MHZ of 900MHZ and 2x5MHZ of 1800MHZ spectrum and retain access temporarily to expired spectrum (the remedy). See DTAC 3Q Result: No Recovery Yet. Spectrum Issue Now Solved, but Leverage Is Rising.

However, survival has come at a cost. DTAC is paying a high price to TOT to rent its 2300MHZ spectrum (and is paying to build out the network), it has paid large sums to secure small amounts of 1800MHZ and 900MHZ spectrum to partially replaced expired concession spectrum and has agreed to pay to use equipment sitting on CAT’s infrastructure.  Finally it has moved to settle a number of disputes with CAT (discussed in Thai Telcos: Outstanding Liabilities to CAT/TOT Loom Post DTAC’s Partial Settlement) and pay them a net THB9bn. That clears the decks partially but there are some very large outstanding cases not covered (these relate to all three operators).

Latest results do little to suggest that good times are just around the corner. They were disappointing and suggest the Thai market will continue to struggle in 2019 as discussed in Emerging Asean Telcos 2019: Indonesia Looks Best Placed. Malaysia Improving. DTAC’s survival has led to increased competition in the market as it moves to win back customers and that suggests more earnings disappointment to come. We remain cautious and somewhat surprised by the strong move in recent days. We have a Reduce recommendation and THB32 target price.