Total Access Communication (DTAC TB) recently settled a number of outstanding cases with CAT, one of the two Thai Telecom authorities (the other being TOT). DTAC agreed to pay THB9.5bn ($300m) to CAT to settle a number of outstanding disputes. They did NOT clear all their disputes and there are substantial remaining potential liabilities. In the past, The Thai telcos have tended to ignore these cases given the glacial moves through the system (some are 20+ years), but DTAC’s moves suggest it is time to take a closer look. The total numbers for the industry are substantial at around $20bn and, following DTAC’s settlement, Chris Hoare thinks the risk of crystallizing losses has increased. We have cut our target prices as a result. The industry was already facing headwinds from the business revival at DTAC now that it has secured access to spectrum.
My colleagues strive to cover M&A transactions in Asia-Pac – and further afield – with a market cap >US$100mn and/or when liquidity or the backdrop story warrant comment. This insight is no exception.
In the past two weeks, two companies who form part of the Huarong-CMB network (HCN), as discussed by David Webb, and one company enmeshed in the Enigma network, have received official offers or are have made announcements pursuant to the Hong Kong Code on Takeovers and Mergers.
Below are brief comments on all three situations. In the case of New Sports, it is a very real deal, with financing in place for the cash option.
It is arguable whether the tanking in CSST shares yesterday after the resumption of trading, increases or lessens the chances of an official Offer unfolding.
Maoyan Entertainment (EPLUS HK) is the largest online movie ticketing service provider in China. The mid-point of Maoyan’s IPO price range of HK$14.8-20.4 per share implies a market value of $2.5 billion (HK$19.8 billion). Five cornerstone investors have agreed to buy $30 million or 10% of the offering at the IPO mid-point. The cornerstone investors are Imax China Holding (1970 HK), Hylink Digital Solutions, Prestige of The Sun, Welight Capital and Xiaomi Corp (1810 HK).
Our analysis suggests Maoyan is being offered at a material premium to a peer group of major Chinese internet companies. Due to challenging prospects faced by Maoyan as outlined in our previous research, we believe a premium rating is unwarranted. Consequently, we are inclined to sit out this IPO.
HET has grown its revenue at an impressive 73% CAGR from 2015 to 2017 and has been accompanied by gross margin expansion. The strong growth was supported by improving operating metrics such as an increase in student enrollment and average spending.
However, HET has been making losses and continues to spend more than its net billing. It is unclear whether HET had already achieved break even for its proprietary courses before expanding into its CCtalk platform. But from its high level of expenses, it seems unsustainable for HET to be relying heavily on the sales and marketing spending to get users to purchase online courses.
In this insight, we will look into the company’s financial and operating performance, regulatory risks regarding K12 courses, aggressive spending on sales and marketing, and the performance of other online education companies.
From end of 2008 to end of 2017, Taiwan Semiconductor Manufacturing Company (TSMC) (2330 TT) had a remarkable run with the share price up more than 400%. However, TSMC share price has not fared so well in the past year with its share price down nearly 16% during this period. In this report, we provide a BEAR INVESTMENT CASE for TSMC. We do not believe all its troubles are over. Rather, we expect its sales and earnings to be much lower than the consensus in 2020. The following are the seven major reasons that are likely to negatively impact TSMC’s share price and its financials in the next two years:
The major tipping point period of higher demand for autonomous vehicles (which is likely to drive higher incremental demand for semiconductor products) is not likely until 2023. [Timing of incremental customers demand]
The major tipping point period of higher demand for 5G service (which is likely to drive higher incremental demand for semiconductor products) is not likely until 2021/2022. [Timing of incremental customers demand]
Increasing threats to Apple. [Threats to a major customer]
Major semiconductor memory prices such as DRAM and NANDFlash have been declining in the past few weeks. This could foreshadow a further softening of demand and prices in the entire semiconductor sector, including the foundry. The semiconductor companies increased their capex excessively in 2017 and this is likely to result in further reduced prices in 2019. [Concerns about oversupply/capex]
Collapsing demand for cryptocurrency mining machines. [Concerns about a customer segment]
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Preceding my comments on Intouch and Yoosung T&S (024800 KS) are the weekly setup/unwind tables for Asia-Pacific Holdcos.
These relationships trade with a minimum liquidity threshold of US$1mn on a 90-day moving average, and a % market capitalisation threshold – the $ value of the holding/opco held, over the parent’s market capitalisation, expressed as a % – of at least 20%.
Total Access Communication (DTAC TB) recently settled a number of outstanding cases with CAT, one of the two Thai Telecom authorities (the other being TOT). DTAC agreed to pay THB9.5bn ($300m) to CAT to settle a number of outstanding disputes. They did NOT clear all their disputes and there are substantial remaining potential liabilities. In the past, The Thai telcos have tended to ignore these cases given the glacial moves through the system (some are 20+ years), but DTAC’s moves suggest it is time to take a closer look. The total numbers for the industry are substantial at around $20bn and, following DTAC’s settlement, Chris Hoare thinks the risk of crystallizing losses has increased. We have cut our target prices as a result. The industry was already facing headwinds from the business revival at DTAC now that it has secured access to spectrum.
My colleagues strive to cover M&A transactions in Asia-Pac – and further afield – with a market cap >US$100mn and/or when liquidity or the backdrop story warrant comment. This insight is no exception.
In the past two weeks, two companies who form part of the Huarong-CMB network (HCN), as discussed by David Webb, and one company enmeshed in the Enigma network, have received official offers or are have made announcements pursuant to the Hong Kong Code on Takeovers and Mergers.
Below are brief comments on all three situations. In the case of New Sports, it is a very real deal, with financing in place for the cash option.
It is arguable whether the tanking in CSST shares yesterday after the resumption of trading, increases or lessens the chances of an official Offer unfolding.
Maoyan Entertainment (EPLUS HK) is the largest online movie ticketing service provider in China. The mid-point of Maoyan’s IPO price range of HK$14.8-20.4 per share implies a market value of $2.5 billion (HK$19.8 billion). Five cornerstone investors have agreed to buy $30 million or 10% of the offering at the IPO mid-point. The cornerstone investors are Imax China Holding (1970 HK), Hylink Digital Solutions, Prestige of The Sun, Welight Capital and Xiaomi Corp (1810 HK).
Our analysis suggests Maoyan is being offered at a material premium to a peer group of major Chinese internet companies. Due to challenging prospects faced by Maoyan as outlined in our previous research, we believe a premium rating is unwarranted. Consequently, we are inclined to sit out this IPO.
HET has grown its revenue at an impressive 73% CAGR from 2015 to 2017 and has been accompanied by gross margin expansion. The strong growth was supported by improving operating metrics such as an increase in student enrollment and average spending.
However, HET has been making losses and continues to spend more than its net billing. It is unclear whether HET had already achieved break even for its proprietary courses before expanding into its CCtalk platform. But from its high level of expenses, it seems unsustainable for HET to be relying heavily on the sales and marketing spending to get users to purchase online courses.
In this insight, we will look into the company’s financial and operating performance, regulatory risks regarding K12 courses, aggressive spending on sales and marketing, and the performance of other online education companies.
Get Straight to the Source on Smartkarma
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
Tim Cook passed the buck to the weak sales in China. However, we believe China’s retailing is running well based on our visits to shopping malls with Apple stores.
Luxury goods sold better in China than all other major markets in the world in 2018.
We believe that the price reduction in Mainland China is just taking market share from Apple Stores in Hong Kong, but not from competitors.
We also believe that the app review process is the fatal shortcoming for AAPL.
On November 6th, NTT (Nippon Telegraph & Telephone) (9432 JP)announced a ¥150 billion buyback program, and NTT Docomo Inc (9437 JP)announced that its very large ¥600 billion buyback program presented days before would be done through a single below-market-price Tender Offer where NTT was expected to be the only seller. That left NTT buying shares on market and NTT Docomo buying shares off-market in the immediate future.
The Tender Offer went through as planned (though NTT sold a tiny trifle less than expected).
On January 7th, NTT announced it had repurchased 8.4mm shares for ¥38.8 billion, leaving only ¥15.35 billion to repurchase in this program. That is worth about 7-8 trading days of buying. The buyback is therefore almost done.
A hint as to the future came in a Nikkei article in December. It may be many months before we see more NTT on-market buybacks.
In our Discover HK Connect series, we aim to help our investors understand the flow of southbound trades via the Hong Kong Connect, as analyzed by our proprietary data engine. We will discuss the stocks that experienced the most inflow and outflow by mainland investors in the past seven days.
We split the stocks eligible for the Hong Kong Connect trade into three groups: those with a market capitalization of above USD 5 billion, those with a market capitalization between USD 1 billion and USD 5 billion, and those with a market capitalization between USD 500 million and USD 1 billion.
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
From end of 2008 to end of 2017, Taiwan Semiconductor Manufacturing Company (TSMC) (2330 TT) had a remarkable run with the share price up more than 400%. However, TSMC share price has not fared so well in the past year with its share price down nearly 16% during this period. In this report, we provide a BEAR INVESTMENT CASE for TSMC. We do not believe all its troubles are over. Rather, we expect its sales and earnings to be much lower than the consensus in 2020. The following are the seven major reasons that are likely to negatively impact TSMC’s share price and its financials in the next two years:
The major tipping point period of higher demand for autonomous vehicles (which is likely to drive higher incremental demand for semiconductor products) is not likely until 2023. [Timing of incremental customers demand]
The major tipping point period of higher demand for 5G service (which is likely to drive higher incremental demand for semiconductor products) is not likely until 2021/2022. [Timing of incremental customers demand]
Increasing threats to Apple. [Threats to a major customer]
Major semiconductor memory prices such as DRAM and NANDFlash have been declining in the past few weeks. This could foreshadow a further softening of demand and prices in the entire semiconductor sector, including the foundry. The semiconductor companies increased their capex excessively in 2017 and this is likely to result in further reduced prices in 2019. [Concerns about oversupply/capex]
Collapsing demand for cryptocurrency mining machines. [Concerns about a customer segment]
Taiwan Semiconductor Mfg Co has dominated the foundry segment over the past two decades. With revenues of $33 billion in 2017, the company had a 56% share of the foundry market and was over five times the size of its nearest competitor, Globalfoundries. Under the visionary leadership of Morris Chang, TSMC effectively invented the fabless model. Originally mocked by former AMD CEO Gerry Sanders who once famously quipped that “real men own fabs”, the fabless model has evolved into a thriving ecosystem, one which has facilitated the meteoric rise of some of the biggest names in the semiconductor segment including Apple, Qualcomm and Nvidia.
TSMC’s success has been predicated upon the company’s so-called Trinity of Strengths, namely process leadership, manufacturing excellence and customer trust. In today’s highly competitive foundry landscape, those strengths have never been more significant.
While the smartphone processor business has been central to TSMC’s growth in recent years with Apple accounting for some 22% of revenues, the company is well positioned to diversify and benefit from high, secular growth trends in IoT, Automotive and AI acceleration. Even more significantly, TSMC is set to compete for the first time with Intel in the lucrative data center market by virtue of its role in manufacturing server chips for Advanced Micro Devices and a growing swathe of ARM-based server initiatives lead by none other than Amazon.
Between 2006 and 2017, TSMC grew at a CAGR of 9.8% in NT$ terms, easily outpacing growth of both the broader semiconductor segment and its foundry peers. For the period 2019-2022, we model TSMC growing at a slightly lower CAGR of 8.36%, but nonetheless more than double the anticipated CAGR for the semiconductor segment as a whole.
From end of 2008 to end of 2017, Taiwan Semiconductor Manufacturing Company (TSMC) (2330 TT) had a remarkable run with the share price up more than 400%. However, TSMC share price has not fared so well in the past year with its share price down nearly 16% during this period. In this report, we provide a BEAR INVESTMENT CASE for TSMC. We do not believe all its troubles are over. Rather, we expect its sales and earnings to be much lower than the consensus in 2020. The following are the seven major reasons that are likely to negatively impact TSMC’s share price and its financials in the next two years:
The major tipping point period of higher demand for autonomous vehicles (which is likely to drive higher incremental demand for semiconductor products) is not likely until 2023. [Timing of incremental customers demand]
The major tipping point period of higher demand for 5G service (which is likely to drive higher incremental demand for semiconductor products) is not likely until 2021/2022. [Timing of incremental customers demand]
Increasing threats to Apple. [Threats to a major customer]
Major semiconductor memory prices such as DRAM and NANDFlash have been declining in the past few weeks. This could foreshadow a further softening of demand and prices in the entire semiconductor sector, including the foundry. The semiconductor companies increased their capex excessively in 2017 and this is likely to result in further reduced prices in 2019. [Concerns about oversupply/capex]
Collapsing demand for cryptocurrency mining machines. [Concerns about a customer segment]
Taiwan Semiconductor Mfg Co has dominated the foundry segment over the past two decades. With revenues of $33 billion in 2017, the company had a 56% share of the foundry market and was over five times the size of its nearest competitor, Globalfoundries. Under the visionary leadership of Morris Chang, TSMC effectively invented the fabless model. Originally mocked by former AMD CEO Gerry Sanders who once famously quipped that “real men own fabs”, the fabless model has evolved into a thriving ecosystem, one which has facilitated the meteoric rise of some of the biggest names in the semiconductor segment including Apple, Qualcomm and Nvidia.
TSMC’s success has been predicated upon the company’s so-called Trinity of Strengths, namely process leadership, manufacturing excellence and customer trust. In today’s highly competitive foundry landscape, those strengths have never been more significant.
While the smartphone processor business has been central to TSMC’s growth in recent years with Apple accounting for some 22% of revenues, the company is well positioned to diversify and benefit from high, secular growth trends in IoT, Automotive and AI acceleration. Even more significantly, TSMC is set to compete for the first time with Intel in the lucrative data center market by virtue of its role in manufacturing server chips for Advanced Micro Devices and a growing swathe of ARM-based server initiatives lead by none other than Amazon.
Between 2006 and 2017, TSMC grew at a CAGR of 9.8% in NT$ terms, easily outpacing growth of both the broader semiconductor segment and its foundry peers. For the period 2019-2022, we model TSMC growing at a slightly lower CAGR of 8.36%, but nonetheless more than double the anticipated CAGR for the semiconductor segment as a whole.
M1 Ltd (M1 SP), the third largest telecom operator in Singapore, is subject to a voluntary conditional offer (VGO) at S$2.06 cash per share from Keppel Corp Ltd (KEP SP) and Singapore Press Holdings (SPH SP) (KCL-SPH). KCL-SPH said on Tuesday that they wouldn’t increase their S$2.06 offer price “under any circumstances whatsoever.”
KCL-SPH’s stance not to increase their S$2.06 offer price is a clever ploy to the put the ball in Axiata Group (AXIATA MK)’s court. Axiata has three options, in our view. We believe that the probability of a material bid to KCL-SPH’s offer is low with Axiata most likely to retain its stake as a minority shareholder.
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In this week’s GER M&A wrap, we highlight the dwindling likelihood of a follow-on deal for Don Quijote Holdings (7532 JP) , which is now trading below terms. Secondly, we take a contrarian view on the M1 Ltd (M1 SP) deal and contend there is less likely to be a bidding war. Finally, we update on rejected by Healius (HLS AU) and provide a comprehensive list of upcoming catalysts for near-term M&A deals.
The rest of our event-driven research can be found below.
Best of luck for the new week – Rickin, Venkat and Arun
We expect Chinese domestic express demand to continue to moderate in 2019, and in response we expect the express companies to increase their investments in ‘last-mile’ and international delivery, which will probably create a drag on profitability in the medium-term. Although we believe e-commerce giants Alibaba and JD.com would like their growing portfolios of logistics investments to become self-funding sooner rather than later, we foresee somewhat limited investor appetite for more large Chinese logistics IPOs in 2019, since many high-profile offerings have faltered since going public.
The recent trade talk meeting between the US and Chinese government went into an extended unplanned third day which could be seen as a positive development – a sign that both sides are serious on getting a deal done. President Trump’s recent tweet citing “”Talks with China are going very well!” has been responded positively in Asian equities market. Is it all just that or are there more in the company?
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Following Yaskawa’s second downward revision at 3Q earnings, we are shifting towards a more positive stance on the stock, even from a long-term perspective. We had been negative on the stock from late 2017 and as the stock tumbled we maintained that it was still too early buy for the long-term, though by mid-late 2018 we did (incorrectly) feel that there was the potential for a short term rally due to the severity of underperformance.
With the stock selling off harshly in the recent market fall but rebounding following its weak earnings we feel that much of the bad news is now priced in and expectations have corrected to the point where this is once again interesting on the long side.
Three key emerging risks to the Starbucks’ growth story: 1) New entrant poses a threat to China growth story; 2) New CEO is missing the magic of the beans; and 3) New Uber partnership could erode Starbucks’ brand equity.
In our January 8 research note, we cautioned that Starbucks had outperformed the NASDAQ by 37% since we turned positive on August 8 but we were concerned about two new developments that we viewed as red flags: shelving of Reserve coffee bar expansion and aggressive China expansion plans of Luckin Coffee. While we do not believe this represents a short opportunity, we do believe it foreshadows emerging risks to Starbucks’ long-term growth story.
An undisclosed institutional shareholder of Xiaomi Corp (1810 HK) is looking to sell 231m shares of the company for approximately US$273m.
There will likely to be more selling pressure in the near term. The 594m shares sold down by Apoletto and the anonymous shareholder who sold at a 14% discount does not inspire confidence. Furthermore, there will be even more overhang to come from the twelve-month lock-up expiry. The deal also scores poorly on our framework owing to its expensive valuation and the lack of information on the seller.
Weimob.com (2013 HK) IPO was priced at the low-end at HKD2.80/share. The retail tranche was 0.79x covered while the institutional tranche was slightly over-subscribed.
I’ve covered most aspects of the deal in my earlier insights:
In this insight, I’ll provide an update on the deal dynamics, valuations and provide a table with the implied valuations at different share price levels.
Take out an ad in a magazine or pay a one of the Wondergirls to post an Instagram photo of herself using our makeup? How do we get Americans and Europeans to want our bubble tea sleeping packs and panda-shaped palettes? All valid questions for K-beauty companies in the midst of a global expansion.
Source: Internet – Chosungah Beauty
Korean beauty products powerhouse, Amorepacific is going through some growing pains at the moment. In the 3Q18 the group reported a YoY sales increase of 6% but OP tumbled 24% due to increased personnel and marketing costs. In a management policy statement last week, Chairman Suh outlined the problems the group is encountering as it copes with reaching customers in a world where online and offline customer interaction is changing.
The stub is now trading at its widest discount to NAV in at least 3 years and has reached 22% discount to its Sum of the Parts NAV by my calculations. This level represents a level 1.5 standard deviations below its long-term average and also offers compelling value.
In this insight I will detail:
an actionable market-neutral trade idea
an analysis of the various business units of Amorepacific
reasons for the under-performance of Amorepacific parent and a sign of a rebound
a recap of ALL my stub trade ideas on Smartkarma, including track record of performance
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Tim Cook passed the buck to the weak sales in China. However, we believe China’s retailing is running well based on our visits to shopping malls with Apple stores.
Luxury goods sold better in China than all other major markets in the world in 2018.
We believe that the price reduction in Mainland China is just taking market share from Apple Stores in Hong Kong, but not from competitors.
We also believe that the app review process is the fatal shortcoming for AAPL.
On November 6th, NTT (Nippon Telegraph & Telephone) (9432 JP)announced a ¥150 billion buyback program, and NTT Docomo Inc (9437 JP)announced that its very large ¥600 billion buyback program presented days before would be done through a single below-market-price Tender Offer where NTT was expected to be the only seller. That left NTT buying shares on market and NTT Docomo buying shares off-market in the immediate future.
The Tender Offer went through as planned (though NTT sold a tiny trifle less than expected).
On January 7th, NTT announced it had repurchased 8.4mm shares for ¥38.8 billion, leaving only ¥15.35 billion to repurchase in this program. That is worth about 7-8 trading days of buying. The buyback is therefore almost done.
A hint as to the future came in a Nikkei article in December. It may be many months before we see more NTT on-market buybacks.
In our Discover HK Connect series, we aim to help our investors understand the flow of southbound trades via the Hong Kong Connect, as analyzed by our proprietary data engine. We will discuss the stocks that experienced the most inflow and outflow by mainland investors in the past seven days.
We split the stocks eligible for the Hong Kong Connect trade into three groups: those with a market capitalization of above USD 5 billion, those with a market capitalization between USD 1 billion and USD 5 billion, and those with a market capitalization between USD 500 million and USD 1 billion.
In this report, we will explain our strategy for trading NCsoft Corp (036570 KS) shares in 2019. NCsoft is expected to launch five new mobile games in 2019 including “Lineage 2M”, “AION 2”, “Blade & Soul 2”, “Blade & Soul M”, and “Blade & Soul S”. These five new games are based on its existing MMORPG franchise games. The company is hoping to release all five of these new mobile games in 1H 2019.
Lineage 2M, which is perhaps the most anticipated mobile game among these five games, is expected to be launched in 2Q19. Traders are starting to gear up for the launch of this important game in the coming months. Many investors are likely to take the “buy on rumor and sell on news” strategy, which in this case the news would refer to the launch of the Lineage 2M game.
Nonetheless, in this case, we believe that because many investors may be getting ready to sell NCsoft near the launch date of Lineage 2M, many savvy investors are likely to sell their shares a few days/weeks earlier than the actual launch date. At this point, the most likely period as to when Lineage 2M may be launched is in May 2019. As a result, a good time to consider selling NCsoft may be sometime in March/April 2019.
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TSMC has struggled after breaking trend support last summer and from pressure stemming from the double top.
Underlying support is starting to take shape as the weekly cycle wrestles with a cycle trough amid a constructive descending wedge forming in the daily cycle. There are still a number of overhead hurdles to clear for a sustainable up cycle to resume. Current support is critical to hold as we hover just above this inflection point. A break below outlined support would take TSMC into a lower trading range.
Tracking Traffic/Chinese Express & Logistics is the hub for our research on China’s express parcels and logistics sectors. Tracking Traffic/Chinese Express & Logistics features analysis of monthly Chinese express and logistics data, notes from our conversations with industry players, and links to company and thematic notes.
This month’s issue covers the following topics:
December express parcel pricing fell by over 9% Y/Y. Average pricing per express parcel fell by 9.1% Y/Y, the worst decline since Q216 (excluding January/February figures distorted by the Lunar New Year holiday).
Express parcel revenue growth remained well below 20% last month. Weak pricing dragged sector revenue growth down to 17% in December, the 4th consecutive month of sub-20% growth.
Intra-city pricing (ie, local delivery) was strong in 2018. Relative to weak inter-city pricing (down 3.1% Y/Y in 2018), pricing for intra-city express shipments was firm, rising by 0.1% last year. In fact, average pricing for intra-city express shipments has risen in four of the last five years.
Underlying domestic transport demand remained firm in December. Although demand for inter-city express shipments appears to be moderating (from high levels), underlying transportation activity in December remained firm. The three modes of freight transport we track (rail, highway, air) in aggregate rose 6.6% Y/Y in December, even as the growth of air freight slowed.
We retain a negative view of China’s express industry’s fundamentals: demand growth is slowing and pricing for inter-city shipments appears to be falling faster than costs can be cut, leading to margin compression.
The recent collapse of Xiaomi Corp (1810 HK)’s shares after the end of its six-month lock-up period has focused minds on upcoming lockup expirations. Pinduoduo (PDD US) is the next major Chinese tech company with an upcoming lock-up expiration – its six-month lock-up period expires on 22 January.
We have been bulls on Pinduoduo with the shares up 32% since its IPO. While we are not privy to the shareholding plans of Pinduoduo’s shareholders, we believe that Pinduoduo will likely not mirror Xiaomi’s share price collapse after the end of its six-month lock-up period.
After 6.5bn+ shares came off lockup last week (by Travis Lundy’s estimate), Xiaomi made a placement equal to about 1% of shares outstanding at a sharp discount to the close. This follows a block of 120mm shares last Thursday at HK$8.80 (at a 13+% discount); Apoletto reported a distribution (sale) of 594+mm shares on January 9th to reduce their total position across all funds from 9.25% to 4.99%; and there was a block placement launched earlier in the week for 231mm shares for sale between HK$9.28 and HK$9.60.
While as much as 1bn shares may have already transacted (assuming most of the 594mm shares distributed by Apoletto have been sold in the market), there were ~6.5 billion shares which could be sold and an additional 1bn+ of additional conversions designed to be sold.
In another 6 months, there will be another 4bn+ shares which come off LockUp. In total, that is up to 10-11bn shares coming off lockup between a week ago and 6 months from now. That is four times the total IPO size, and 70-80% of the total position coming off lock-up has an average in-price of HK$2.00 or less. Apoletto’s average in-price was HK$9.72.
Travis is also skeptical that the company’s capital deserves a premium to peers, and is not entirely convinced that the pre-IPO profit forecasts are going to be met in the medium-term. In the meantime, a lot of the current capital structure base is looking to get out.
Nota Bene: Bloomberg’s 3bn-shares-to-come-off-lockup number was confirmed by Travis (the day he published the piece linked below) with the people who tallied the info for the CACS function. They had neglected to count a certain group of shareholders. The actual number will be well north of 6 billion shares.
After the close of trading on the 15 January, NTT announced it had repurchased 3.395mm shares for ¥15.349bn in the first 7 trading days of the month, purchasing 10.9% of the volume traded. This announcement was bang in line with Travis’ insight the prior day, where he anticipated the buybacks would soon be done.
The push to buy shares on-market at NTT vs off-market at NTT Docomo has had some effect but not a huge effect. The NTT/Docomo price ratio is a bit more than 5% off its late October 2018 lows prior to the “Docomo Shock”, but the ratio is off highs. Off the lows, the Stub Trade has done really well.
NTT DoCoMo bought back ¥600bn of shares from NTT at the end of 2018. That means NTT DoCoMo could buy back perhaps ¥300-400bn of shares from the market over the next year or so before ‘feeling the need’ to buy back shares from NTT again. NTT will likely buy back at least ¥160bn of NTT shares from the government in FY19 starting April 1st, which means there will be room to buy back another ¥100bn from the government before not having any more room to do so.
There could be an NTT buyback from the market in FY2019, and one should expect that for the company to buy back shares from the government again, if NTT follows the pattern shown to date, there should be another ¥400-500bn of buybacks from the market over the next two years, and if EPS threatens a further fall on NTT DoCoMo earnings weakness, NTT might boost the buyback to make up for that.
The very large sale by NTT of NTT Docomo shares this past December will free up a significant amount of Distributable Capital Surplus.
On a three-year basis, Travis would rather own NTT than NTT Docomo. But he expects the drift on the ratio will not be overwhelming unless NTT does “something significant”.
Singaporean real-estate group Capitaland has entered into a SPA to buy Ascendas-Singbridge (ASB) from its controlling shareholder, Temasek. The proposed acquisition values ASB at an enterprise value of S$10.9bn and equity value of S$6.0bn. Capitaland will fund the acquisition through 50% cash and 50% in shares (862.3mn shares @$3.25/share – ~17% dilution). Capitaland-ASB will have a pro-forma AUM of S$116bn, making it the largest real estate investment manager in Asia and the ninth largest global real estate manager.
Hitachi Ltd (6501 JP)announced it had received approvals from the relevant government authorities, and its Tender Offer for Yungtay (at TWD 60/share) has now launched. The Tender Offer will go through March 7th 2019 with the target of reaching 100% ownership. Son of the founder, former CEO, and Honorary Chairman Hsu Tso-Li (Chou-Li) of Yungtay has agreed to tender his 4.27% holding. The main difference between the offer details as discussed in Going Up! Hitachi Tender for Yungtay Engineering (1507 TT) back in October, is a minimum threshold for success of reaching just over one-third of the shares outstanding, with a minimum to buy of 88,504,328 shares (21.66%, including the 4.27% to be tendered by Hsu Tso-Li).
This deal looks pretty straightforward, but the stock has been trading reasonably tight to terms, with annualized spreads on a reasonable expectation of closing date in the 3.5-4.5% annualized range for a decent part of December, rising into early January before seeing a jump in price and drop in annualized on the second trading day of the year. This shows some expectation of a fight and a bump.
To avoid that fight and bump – the Baojia Group, which supported Hsu Tso-Ming’s board revolt last summer (discussed in the previous insight), has reportedly accumulated a 10% stake – Hitachi has lowered its minimum threshold to complete the deal to get to one-third plus a share. Given that it controls 11.7% itself as the largest shareholder, and has another 4.3% from the chairman in the bag, that means it needs about 17.3% of the remaining 84% to be successful.
Because the minimum is only about 21% of the float, this deal has quite decent odds of getting up unless someone makes a more serious run for it. As an arb, Travis sees a small chance of a bump because of some potential harassment value by Hsu Tso-Ming’s friends at Baojia Group. Hitachi has already taken that into account with the lowering of the minimum, but it is possible that enough noise can be created to obtain a bump.
Courts, a leading electrical, consumer electronics and furniture retailer predominantly in Singapore and Malaysia, has announced a voluntary conditional offer from Japanese big box electronics retailer Nojima Corp (7419 JP) at $0.205/share, a 34.9% premium to the last closing price. The key condition to the Offer is the valid acceptances of 50% of shares out. Singapore Retail Group, with 73.8%, has given an irrevocable to tender. Once tendered, this offer will become unconditional. The question is whether minorities should hold on.
Barings/Topaz-controlled Singapore Retail Group are exiting, having not altered their shareholding since CAL’s 2012 listing. If Nojima receives acceptances from 90% of shareholders, it will move to compulsory delisting of the shares. If the Offer closes with Nojima holding >75% of shares, it could still launch an exit/delisting offer pursuant to Rule 1307 and Rule 1308.
Long-suffering shareholders may wish to hold on for a potential turnaround should Nojima extract expected synergies. But this looks like a decent opportunity (of sorts) to also exit along with the controlling shareholder.
The board of Navitas, a global education provider, has unanimously backed a revised bid by 18.4% shareholder BGH Consortium of A$5.825/share, 6% higher than its previous rejected offer and a 34% premium to undisturbed price.
The revised proposal drops the “lock out” conditions attached to BGH Consortium’s previous offer, enabling BGH to support a superior proposal. BGH has also been granted an exclusivity period until the 18 Feb.
Panalpina Welttransport announced that it had received an unsolicited, non-binding proposal from DSV A/S (DSV DC) to acquire the company at a price of CHF 170 per share, consisting of 1.58 DSV shares and CHF 55 in cash for each Panalpina share. The offer comes at a premium of 24% to Panalpina’s closing share price of CHF 137.5 as of 11 January 2019 and 31% to the 60-day VWAP of CHF 129.5 as of 11 January 2019. Following the announcement, Panalpina’s shares surged above the terms of the offer implying that the market was anticipating a higher bid from DSV or one of its competitors.
Investors lashed out at Panalpina’s board last year (after years of griping by some of the top holders), eventually forcing the main shareholder to support the installation of a new chairman of the board.
The stock is clearly in play. And the sector is seeing ongoing consolidation. DSV’s approach to Panalpina comes just months after it failed in an attempt to buy Switzerland’sCeva Logistics AG (CEVA SW). Media reports suggested Switzerland’s Kuehne & Nagel are also rumoured to be considering an offer for Panalpina.
Panalpina’s largest shareholder, Ernst Goehner Foundation, owns a stake of approximately 46%. If EGS wants to see OPMs up at global standards level – in the area of DSV and KNIN – then they may need to see someone else manage the assets. If EGS is steadfastly against Panalpina losing its independence, a deal will not get done. That said, if a deal does not get done because the board reflects the interest of EGS, that proves the board is not as independent as previously claimed. But one must imagine there is a right price for everything.
Earlier this month, Bristol Myers Squibb Co (BMY US)and Celgene announced a definitive agreement for BMY to acquire Celgene in a $74bn cash and stock deal. The headline price of $102.43 per Celgene share plus one CVR (contingent value right) is a 53.7% premium to CELG’s closing price of $66.64 on January 2, 2019, before assigning any value to the CVR. The CVR has a binary outcome: it will either be worth zero or will be worth a $9 cash payment upon the FDA approval of three drugs.
While there don’t appear to be any major problems in commercial products, it remains to be seen whether the antitrust authorities go further into the pipeline to determine whether potential competition from drugs still in clinical trials could present issues in the future.
Overall, the merger agreement appears fairly standard, but it does (also) require BMY shareholder approval which typically overlays a higher risk premium. For John DeMasi, the attraction for this arb is the current risk/reward.
ANTYA Investments Inc. chimes in on the deal and considers it unlikely that a suitor for CELG emerges at a higher price, whereas rumours of suitors for BMY abound, and would therefore make a long bet on BMY.
On the 10 January, PAH announced CKI had entered into a placing agreement to sell 43.8mn shares (2.05% of shares out) at HK$52.93/share (a 4.7% discount to last close), reducing CKI’s holding in PAH to 35.96%. This is CKI’s first stake sale in PAH since the 2015 restructuring of the Li Ka Shing group of companies, and it has been over three years since the CKI/PAH scheme merger was blocked by minority shareholders. It is also around two months since FIRB blocked CKI/PAH/CKA/CKHH in its scheme offer for APA Group (APA AU).
I don’t see a sale of PAH as being a realistic outcome – this is more likely an opportunity to take some money (the placement is just US$328mn) off the table. CKI remains intertwined with PAH via their utility JVs in Australia, Europe and UK, and in most investments, together they have absolute control.
I would also not discount a merger re-load. The pushback in 2015 was that the (revised) merger ratio of 1.066x (PAH/CKI) was too low and took advantage of CKI’s outperformance prior to the announcement. That ratio is now around 0.9x. A relaunched deal at ~1x would probably get up – the average since the deal-break is 1.02x and the 12-month average is 0.95x. And a merger ratio at these levels would ensure Ck Hutchison Holdings (1 HK)‘s holding into the merged entity would be <50%, so it would not be required to consolidate. This recent sell-down does not, however, elevate the near-term chances of a renewed merger.
The takeaway is that the stub is very choppy, it often (but not always) widens after the full-year results, and the highest implied stub/EBITDA occurred outside of FY16, its most profitable year. The downward trend since January last year reflects the anticipated ~17% decline in EBITDA for FY18 to ₩148bn, its lowest level in the past four years.
Sanghyun mentioned that there are signs of improving fundamentals for local cosmetics stocks (as reflected in CapIQ) and that Holdcos have traditionally been more susceptible to fundamental changes. This should augur a shift to the upside in the implied stub.
I see the discount to NAV at 27%, right on the 2STD line and compares to a 12-month average of 3%. This looks like an interesting set-up level.
The Offer for Selangor Properties (SPR MK)has been bumped again, to RM6.30 from RM6.00. The original Offer was pitched at RM5.70/share. This latest proposal is a 55% premium to the undisturbed price and 10% above the initial bid. This is starting to look reasonable, at 0.89x P/B. On balance, this will probably now get up. (link to my earlier insight: Selangor Props – Privatisation Offer Does Not Reflect Full Value)
My ongoing series flags large moves (~10%) in CCASS holdings over the past week or so, moves which are often outside normal market transactions. These may be indicative of share pledges. Or potential takeovers. Or simply help understand volume swings.
Often these moves can easily be explained – the placement of new shares, rights issue, movements subsequent to a takeover, amongst others. For those mentioned below, I could not find an obvious reason for the CCASS move.
Leading Indonesian mini-mart operator Sumber Alfaria Trijaya Tbk P (AMRT IJ) (Alfamart) has undergone quite a dramatic transformation over the past 12 months, with a dramatic slowdown in its new store buildout paving the way for a significant pick up in SSSG and a reduction in debt.
The company plans to start to step up its store openings selectively over the next year, with 500 new stores planned and fewer closures. Last year it only opened net 200 new stores having opened 1200 stores the previous year.
The market segment continues to see consolidation, with supermarkets and hypermarts suffering and mini-markets continuing to gain ground as the “pantry of the middle-class”.
The company continues to grow its fee-income business, which is highly profitable, with increasing collaboration with utilities, finance companies, and e-commerce players to name but a few.
After a difficult 2017, Sumber Alfaria Trijaya Tbk P (AMRT IJ) looks to be well and truly back on a growth trajectory, with a rationalisation of its stores, a slow down in its expansion, reduced gearing, and a focus on operational efficiencies. The Mini-market continues to win out in the retail space and is increasingly being used as a distribution network for e-commerce companies. The growth in fee-service from bill payment and other services will be positive for the bottom line. The stock is by no means cheap on a PE basis but provides quite unique exposure to what is still a high-growth area of the economy. According to Capital IQ consensus estimates, the company trades on 51x FY19E PER and 44x FY20E PER, with forecast EPS growth of +30% and +16% for FY19E and FY20E respectively.
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Post the close of market, Softbank Group (9984 JP) announced a $750mn USD tender offer through an unmodified Dutch auction to purchase a portion of its outstanding USD and EUR senior notes. This could be an interesting deal from a timing perspective and could portend action for the equity – more details below.
We are bullish on the Chunbo Co. IPO. Our base case valuation of the company suggests a market cap of 448.4 billion won or44,845 won, which would be 19.5% higher than the mid-point of the bankers’ IPO price band of 37,500 won. We used an estimated P/E of 21.1x (30% premium to the comps’ average P/E of 16.2x) and an estimated net profit of 21.2 billion won in 2019 to derive our base case valuation.
Chunbo Co Ltd (278280 KS) is a provider of fine chemical materials in Korea, is planning to start its institutional bookbuilding of its IPO starting January 21st. Its chemical materials are used in numerous industries including the display, semiconductors, rechargeable batteries, and medical. The IPO base deal size is between $78 million to $89 million.
Chunbo is more profitable and generates higher returns on equity than its peers. For example, Chunbo’s operating margin and ROE averaged 20.7% and 22.0%, respectively in 2016 and 2017. In comparison, the peers’ operating margin and ROE averaged 12.3% and 15.2%, respectively in 2016 and 2017.
Xiaomi Corp (1810 HK) is likely to break HK$10 this morning again after a placement equal to about 1% of shares outstanding was proposed to buyers last night at a sharp discount to the close. This insight attempts to nail down the shape and size of the ongoing overhang.
After the HK Stock Exchange announced in late April 2018 that it would permit companies with Weighted Voting Rights (WVRs) to list on the HKEx, after sticking to the one-share one-vote principle for years (losing the Alibaba Group Holding (BABA US) listing to NASDAQ in the process), Xiaomi Corp (1810 HK) quickly raised its hand with the prospect of a US$10bn IPO and a US$100bn market cap – heady numbers even for a fast-growing company. This was quickly followed by the launch of the China Depositary Receipt program which saw a quick establishment and even quicker acceptance of a Xiaomi application, potentially setting up a situation where demand was pulled from HK to China.
Then investors got cold feet, and what was a $100bn valuation dropped to $90bn then $70bn. The CSRC also pushed back on the possible CDR issuance to such an extent that Xiaomi withdrew its application, and then pricing delivered a valuation of approximately US$50bn at a sharply reduced IPO price of HK$17/share.
Day1 saw a 6% fall on the open and the shares closed down 1%. After the Day 1 close, fast-track inclusion into the Hang Seng indices was a pleasant and somewhat unexpected surprise for IPO buyers and responded by rising almost 12% on Day 2 on sharply higher volume. MSCI did not follow suit (it had not been expected) but several days later on inclusion day, the stock was 25% higher than the IPO price. 10 days later the over-allotment option had been fully-exercised.
Xiaomi last year grew its ecosystem and its hardware base, but saw lower market share in China (13%) than in 2017 (14%) according to several sources, including Counterpoint Research quoted in the media. The company, which has targeted 50% of revenue from overseas is now just shy of that mark at 44% after ramping up sales in India, Europe, and MENA.
Global weakness in handsets on mobile tech led by Apple did not spare Xiaomi, but MOST notable was the sharp drop in the share price in December from HK$14.30-50 area to just below HK$13 at year end. The first day of the new year saw the shares fall 5.5%, and the next day the price fell another 3.6%. The shares fell a little more in the next few days but somewhat stabilised until the morning of the 8th.
Then the volume picked up. The lockup had expired.
data: capitalIQ, exchange data
In five days, the shares have traded 880mm shares, and that is before a large placement proposed after the close on 15th January.
A rising pro-market tide has lifted the big-cap banks, but now it is time to be more selective. We see further potential for stock re-rating among the Brazilian banks, as the new Bolosonaro administration executes its pro-market policies.
Our top pick is Banco Do Brasil Sa (BdoBAS3 BZ) , with a target price of BRL57, which implies 19% re-rating potential. We believe that Banco do Brasil (BdoB) shareholders are set to benefit from less of a “social programme” agenda which in turn should help improve ROE going forward.
Yet the PBV discount between BdoB and its private sector peers – especially against Itaú Unibanco at 52% – has barely narrowed, and we believe that the discount has potential to narrow further as BdoB’s ROE expands and narrows the gap with its private sector peers.
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Corrigenda: There is an error in this insight. Please note the correction.
Correction: Please ignore the incomplete sentence at the end of the second paragraph in the blue box below (“On the valuation end,…”).
Aequitas Research puts out a weekly update on the deals that have been covered by Smartkarma Insight Providers recently, along with updates for upcoming IPOs.
It has been a fairly busy week. Activity in the ECM space seems to be picking up with block trades taking the lead this week. We had Xiaomi Corp (1810 HK), Ayala Corporation (AC PM), Puregold Price Club (PGOLD PM), and Longfor Properties (960 HK) placements this week and most of them secondary sell-downs except for Puregold which was a top-up placement. Most placements performed well, trading above their IPO price, except for Longfor which only managed to claw back to its deal price on Friday.
Starting with Xiaomi, we think that there would likely be more selling considering that there is a massive overhang after the lock-up expired on 9th of January. Our calculation indicated that major shareholders may have about 6bn shares to be sold. Even if we exclude the founders’ shares, there will still be about 4bn shares left to be sold. The share price has managed to claw back above HK$10 level on Friday and we also heard that the books were several times covered with allocation being concentrated among a handful of investors. The tighter discount of this placement compared to the one earlier that crossed at 14% discount probably indicated demand is relatively better for this placement. On the valuation end, we
Ayala Corp’s placement was upsized and has also done well contrary to our view. We thought that the sell-down may perhaps indicate that there is an overhang from Mitsubishi’s remaining stake. But, we heard that books were well covered.
For IPOs this week, Weimob.com (2013 HK) traded well on the first day but took a spectacular dive on the second day of trading. It was down 30% intraday before bouncing back up and finally closing at IPO price on Friday. On the other hand, Chengdu Expressway Company Limited (1785 HK) hovered around its IPO price with little liquidity.
In terms of upcoming deals, PH Resorts Group (PHR PM) is looking to launch a US$350m share sale in about two months time. Maoyan Entertainment (EPLUS HK) has already launched its IPO on Friday while there will be more IPOs heading to the US. Jubilant Pharma is said to have turned to the US for its US$500m IPO after trying to list in Singapore last year. Home Credit Group and Sinopec’s retail unit might be seeking to this in Hong Kong this year. Luckin Coffee is also said to be seeking an IPO in Hong Kong.
Accuracy Rate:
Our overall accuracy rate is 71.9% for IPOs and 64.1% for Placements
(Performance measurement criteria is explained at the end of the note)
New IPO filings
Shenwan Hongyuang Group (Hong Kong, >US$1bn)
Tai Hing Holdings (Hong Kong, ~US$200m)
Changsha Broad Homes Industrial Group (Hong Kong, >US$100m)
Shanghai Gench Education (Hong Kong, >US$100m)
China Yunfang Holdings (Hong Kong, ~US$100m)
Below is a snippet of our IPO tool showing upcoming events for the next week. The IPO tool is designed to provide readers with timely information on all IPO related events (Book open/closing, listing, initiation, lock-up expiry, etc) for all the deals that we have worked on. You can access the tool here or through the tools menu.
We have revised our forecasts for Spark New Zealand (SPK NZ) following recent accounting changes. Ian Martin believes Spark is on track to achieve its revised long term operating EBITDA margin target of 31% by FY21, and possibly by FY20. Spark’s performance is driven largely by on-net mobile, fixed wireless access (FWA) and cloud/data services. Spark has also shown solid cost control gains and is ahead of its target for implementing its Agile program. It plans to launch 5G by July 2020 suggesting steady capex spending, and confidence in its earnings outlook. Spark is also planning to move more deeply into sports content including a partnership with NEC in sports production.
While we remain positive on the long term outlook for Spark, and have raised our target price from NZ$4.05 to NZ$4.40, the stock is not cheap. It trades at 18.2x FY19F EPS and 8.0x FY19 EBITDA. The company needs to show strong cost control to meet targets and for this reason we reduce our recommendation to Neutral.
Xiaomi Corp (1810 HK)’s shares are around 43% below the IPO price partly due to the recent well-documented selling of shares following the end of a lock-up period. Ultimately, every share has a “right” value and the investors buying into the recent share placement presumably have the view that the shares are attractive at current levels.
While there is no longer a strong case to sell the shares at current levels, we do not recommend diving head first to buy the shares due to limited upside, potentially worsening market outlook and ongoing share overhang from lockup expiry.
Our deep-dive segment profitability analysis reveals that Meituan Dianping’s (3690 HK) core business (combined food delivery and in-store, hotel & travel) has made good progress toward profitability.
The ballooning consolidated operating losses mainly stem from new initiatives (particularly car hailing and Mobike).
Furthermore, lower S&M expenses to sales ratio plus food delivery’s higher take rate suggests that competition with Ele.me is more manageable than anticipated.
Our SOTP yields intrinsic value of HK$61.07/share, that represents 37% upside potential.
Hitachi Ltd (6501 JP)announced today after the close that it had received approvals from the relevant government organs for its proposed Tender Offer for Yungtay Engineering (1507 TT) and that the Tender Offer would be launched through Hitachi Elevator Taiwan Co. Ltd at TWD 60/share starting tomorrow. The statement filed by Yungtay on the TWSE website is linked here.
The Tender Offer will go through March 7th 2019 with the target of reaching 100% ownership. Son of the founder, former CEO, and Honorary Chairman Hsu Tso-Li (Chou-Li) of Yungtay has agreed to tender his 4.27% holding. The main difference is a minimum threshold for success of reaching just over one-third of the shares outstanding, with a minimum to buy of 88,504,328 shares (21.66%, including the 4.27% to be tendered by Hsu Tso-Li).
This one detail is different from the original announcement in October, which had set a minimum of 50.1% holding after the tender.
Since the announcement of a deal at a 22% premium, the stock has risen gently from about TWD 56 to just below the TWD 60 Tender Offer price in ever-decreasing volume.
data source: investing.com, TWSE
There has been little to no news on the stock regarding the deal in English, and only limited news in Chinese since the announcement of the deal.
The price evolution makes it look like a pretty straightforward deal. The lowered threshold for success obviously increases the likelihood of success. Weaker markets may also contribute.
But there is a reason why the threshold was lowered.
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