TMT/Internet

• On 26th Aug 2022, PCAOB and CSRC announced that they had entered into an agreement granting US authorities access to investigate public accounting firms headquartered in China and HK.
• On 2nd Apr 2022, CSRC put out a draft for public comments on the revision of certain provisions which would allow easier access by overseas regulators to China ADRs audits.
• In this note, we’ll talk about the latest developments and its implications.

• The revenue growth rate decelerated, but operating loss shrank in 2Q22.
• We believe the the revenue reclassification is unnecessary and suspicious.
• We set a downside of 19% and a price target of HK$148.

• On 22 June, Axiata Group (AXIATA MK) and XL Axiata (EXCL IJ) completed the acquisition of a combined 63.45% interest in Link Net (LINK IJ) for approximately RM2.63 billion (IDR8.72 trillion).
• Today, Axiata announced that the mandatory tender offer (MTO) runs from 30 August to 28 September. The MTO price is IDR4,800 with no minimum acceptance condition.
• At the current price of IDR4,740 per share, the gross and annualised spread for a mid-October payment is 1.3% and 9.1%, respectively.

• Tencent invested in Samsung Insurance China Co. Ltd. and is the second largest shareholder.
• JD Health’s revenue increased by 48% YoY, but the stock plunged.
• KE revenue shrank by 45% YoY due to the weak property market.

• Meituan (3690 HK) reported 2Q2022 results on Friday. Revenue grew 16.4% YoY to RMB50.9bn (vs consensus RMB49.2bn) while operating losses dropped to 1.0% of revenue to RMB493m (vs consensus RMB3.3bn).
• The company has changed its segmental reporting to a new reporting structure; Core Local Commerce, New Initiatives and Unallocated items.
• Disclosures on key operating matrices such as GTV and no. of hotel room nights have not been provided and difficult to assess the performance of core businesses.

• Duolingo (DUOL US)  reported solid 2QFY22 results and hosted annual Duocon 2022 event in August. Management raised full-year revenue guidance, but the stock remained range bound. 
• We model total revenues growing +45% y/y to $365M in FY22 and +42% y/y to $517M in FY23, up vs. our prior estimates and projections. 
• 2QFY22 results beat all key estimates, driven by accelerating user growth and strength across the entire business. Duolingo (DUOL US)  remains our top mid-cap pick in the EdTech industry.

• In my opinion, DLocal is an expensive stock. Typically when you see very expensive businesses not outperform on every metric, or at least a majority of them, you see their stock price struggle.
• On a valuation perspective, DLocal finds itself priced in line with the most expensive stocks on the stock market.
• The thing that makes DLocal unique is its profitability compared to many of the other software stocks as they run 35%+ EBITDA margins on a consistent basis.

• We summarise the latest spreads and newsflow of merger arb situations covered by us across Hong Kong, Australia, New Zealand, Singapore, Indonesia, Malaysia, Thailand and Chinese ADRs.
• Highest spreads – 21Vianet Group (VNET US), Alliance Aviation Services (AQZ AU), Infomedia Ltd (IFM AU), Ramsay Health Care (RHC AU), Resapp Health (RAP AU), True Corp Pcl (TRUE TB).
• Lowest spreads MACA Ltd (MLD AU), Nearmap Ltd (NEA AU), Dongzheng Automotive Finance (2718 HK), Excelpoint Technology (EXLP SP), MyDeal.com.au Ltd (MYD AU), China Vast Industrial Urban Development (6166 HK) 

• New title approvals halved during 2021, yet overall industry games revenue grew by 3.4%y/y. 1H22 new games approvals are down a further 82%y/y, yet games revenue is down 1.8%.
• Tencent has lost revenue market share to the overall Chinese online game software market, most notably to NetEase, this year.
• Tencent’s paying gamer participation rate has dropped to levels last seen during 2018.

• Sumo Logic Inc (SUMO US)  surprised investors and reported solid 2QFY23 results pushing shares up over 10% during a regular trading session on Friday. 
• Provider of cloud-based machine data analytics reported revenue/non-GAAP EPS of $74.1M/($0.10), above consensus, and improved FY23 outlook.  
• Management focused on delivering more efficient growth and reduced hiring plans. Customer metrics remained strong, with a dollar-based net retention rate of 115%.

• Grab (GRAB US) reported 2Q2022 results today. Revenue grew 79% YoY to $321m (vs consensus $273.5m) and reported an adjusted EBITDA (negative) of $233m (vs consensus $256.5m).
• Demand for food deliveries has started softening with opening of economies in the SEA region and the segment’s 2Q earnings were driven by the integration of Jaya Grocers.
• Grab has downgraded its GMV forecast for 2022E due to softening of food deliveries and the launch of digital bank is postponed to the second half of the year.

• The Softbank share price and discount to NAV are largely back to where they were before the Q1 report earlier this month
• The early settlement of Alibaba derivative contracts has eased leverage worries although that may be less obvious within Softbank’s net calculation of that measure
• But worries about tech valuations, particularly in the private portfolio, remain robust. We have updated our main tables below

• Advanced Micro Devices continued its strong execution across the board and delivered an all-around beat in the recent result driven by its premier product line, and diverse business strategy.
• The management also observed a significant year-over-year rise for their networking and FPGA solutions, which are the best in the business, with cloud and financial customers.
• During the quarter, they also launched Ryzen Embedded R-Series system-on-chips processors in order to broaden their product line and target emerging markets.

• Model Solution makes prototypes to mainly check design and function in the product development stage, which is before the mass production stage of new products such as IT devices. 
• The IPO price range is from 24,000 won to 27,000 won. The expected market cap of the IPO is from 153 billion won to 173 billion won.
• The company had sales of 61.1 billion won (up 9.9% YoY) and operating profit of 8.9 billion won (up 32.1% YoY) in 2021.

• PayPal has seen some level of recovery after the stock nosedived and stayed low in the period from May to July 2022.
• Also, it has reinvigorated its organizational operating model and has been recruiting world-class talent in its product, technology, and engineering functions.
• We see a further recovery in the stock of PayPal Holdings and we give it a ‘Buy’ rating with a revision in the target price.

• Verizon Communications had a below par performance in the quarter as the inflationary pressure has been impacting consumer behavior resulting in the company failing to match earnings expectations and just about beating revenue expectations of Wall Street.
• The company updated its financial guidance by lowering its expectations of other revenue and service.
• The company launched its plan Welcome Unlimited for consumers wireless which will meet the requirements of budget-conscious consumers without offering device subsidies.

• US fintech Chime, another high-profile fintech in Softbank’s Vision Fund 2 portfolio, sees its secondary market valuation in the private market fall by nearly 50% on a year-to-date basis
• Chime had been planning to IPO in 1H 2022, with its IPO valuation estimated at close to USD40bn; poor market conditions have led to the IPO being shelved
• Chime’s reduced valuation is another hit to Softbank’s portfolio, which has yet to feature a recent “down round”, and which we believe negatively impacts its Vision Fund 2 in particular

• TSMC’s ADR premium falls past the lower bound of its 3-year range
• All dual-listed Taiwan semiconductor companies have seen a decline in premiums or an increase in discounts.
• ChipMOS ADR’s discount to the company’s Taiwan listing widens further.

• Intel and Brookefield Asset Management recently announced that they intend to jointly invest US$30 billion into building Intel foundries in Arizona, leveraging on the US CHIPS Act.
• Although inflation and declining consumer demand continue to affect all chipmakers, U.S. strategic objectives and policies will set Intel on a new growth trajectory and competitive position in our view.
• A Long Intel/ Short Taiwan semiconductor strategy present a compelling opportunity. We prefer Long Intel vs. Short UMC, however, we expect Long Intel vs. Short TSMC to also be profitable.

• XL Axiata 2Q2022 results reflected a better pricing environment and the success of its focus on high-quality service, with the highest data speeds, leading to higher subs and ARPUs. 
• The company continues to migrate its subscribers to 4G, and build out its 4G BTS whilst shutting down its 3G towers, which should be positive for the quality of service.
• XL Axiata (EXCL IJ) should be seen as the leader in providing converged services in Indonesia, with the acquisition of Link Net accelerating its lead, which will boost long-term profitability.

• Product revenues beat consensus by 7% and EBIT margins by 5%, while full year guidance was and margins were raised ~2% ahead of consensus.
• Fears of a consumption model driven slowdown (like Datadog) did not play out, and cRPO growth actually accelerated QoQ to 81%.
• Data sharing is picking up with larger customers, with 65% of $1M+ customers utilizing stable edges.

• Paycom Software continues to witness a strong demand for automation of management of human capital and self-service payroll with more companies embracing its various solutions, especially Beti.
• The success to attract new business wins as well as robust demand for employee-focused easy-to-use solutions, drives the company’s revenue growth.
• We provide the stock of Paycom Software with a ‘Hold’ rating with a revision in the target price.

• The index constituent weights of the FTSE TWSE Dividend+ Index will be capped during the upcoming September 2022 Index quarterly index review.
• In addition, Elan Microelectronics (2458 TT) could also get deleted as discussed in FTSE TWSE Quiddity Leaderboard Sep 2022: Elan Micro (2458 TT) Could Be a Big Negative Surprise 
• In this insight, we take a look at Quiddity’s expectations for index flows resulting from these events. 

• Intouch Holdings (INTUCH TB)‘s discount to NAV is back to levels last seen in November 2021, where euphoric trading was rolling over subsequent to Gulf Energy Development (GULF TB)‘s VTO.
• Intouch’s net cash increased in the 2Q22 and its look-through interim dividend payout is the highest in at least five years.
• I’d be shorting Intouch here and buying Advanced Info Service (ADVANC TB), with a view to mean reversion of ~25% NAV discount. 

• On 23 August, Intel announced that it will partner with Canada’s Brookfield Asset Management to jointly fund up to $30 billion to make advanced semiconductor chips in Arizona. 
• Despite Intel’s aggressive plans to expand the semiconductor chip production, we are more concerned about the overall downturn in the semiconductor sector which lead to further decline in sales. 
• Despite our negative view of Intel’s shares in the near term, Intel could gain market share versus Samsung and TSMC in the semiconductor sector in the next three years.

• We had a call with Fitipower management to understand the company’s latest situation in light of its weak share price and light analyst coverage. 
• Compared to the overall semiconductor industry, Fitipower’s inventory status is exceptionally better than the industry median and thus the company will be under less pressure in the coming quarters.
• Fitipower has a large T$12bn net cash position, equivalent to 48% of its market cap. For 2022E, we expect T$4.5-5bn in EBITDA, which is about 18-20% of its market cap.

• Palo Alto Networks produced an impressive FY4Q22 earnings, blowing out billings growth and showing an impressive display of “platformization”…only trades 8x forward revenues for 25-30% revenue and FCF growth.
• Farfetch finally acquired Yoox Net a Porter, after over a year of speculation. Deal is excellent for FTCH, gives them a monopolistic position in lux ecommerce.
• Netflix’s Gray Man yet another example of the company’s inability to create compelling big budget movies.

• HubSpot delivered a solid quarterly result with 41% revenue growth over the year in a constant currency surpassing Wall Street expectations.
• Its customers have been growing by 25% year on year and the company also delivered an earnings beat.
• In the upper-end market, the company is increasing its pricing of marketing hub enterprise to match the additional value it has been delivering to its customers in the past few years.

• In 2Q22, the company’s adverting revenue increased by 11% YoY, while the market size shrank by 8% YoY.
• The company raised both of its user base and Time Spent per Daily Active User.
• The company’s operating margin continued to shrink due to the layoff at the beginning of this year.

• After a substantial rally, the S&P500 was unable to break above its 200-day MA and market indexes have violated steep 5-week uptrends; we view this pullback as a critical test.
• This is where we see if prior breakout levels/important moving averages hold and market indexes make a higher low, or if this was nothing more than a bear market rally.
• Barring a Fed pivot, and with Treasury yields and the DXY inflecting higher (and potentially commodities, too), it increases the odds for a deeper pullback in the broad market indexes.

• Kuaishou Technology (1024 HK) reported 2Q2022 results today. Revenue grew 13.4% YoY to RMB21.7bn (vs consensus RMB20.7bn) while reported operating losses dropped to RMB3.1bn (vs consensus RMB4.6bn).
• Though top line growth of online marketing services has been declining, the company managed to report growth while peers have been facing decrease in revenues.
• Kuaishou’s domestic biz has turned profitable at the OPM line while there has been significant decrease in Op. losses from the overseas segment.

• Amazon.com delivered a mixed result surpassing Wall Street expectations in terms of revenues but missed out on earnings.
• Net sales exceeded in the quarter, and the revenue growth accelerated to more than 40%.
• The company made solid progress in reducing several cost pressures that faced the fulfillment network productivity, inflationary costs, worldwide stores business, and fixed cost deleverage.

• Despite supply shortages, significant currency headwinds, and the adverse geopolitical impact on Apple’s business in Russia, the company reported an outstanding quarter with revenue of $83 billion, surpassing Wall Street expectations and also delivering an earnings beat.
• The company reached an all-time high in the number of active devices it has installed.
• Apple unleashed a surge of innovation that included the entirely revamped MacBook Air and a new 13-inch MacBook Pro.

• With the street relatively bearish on the stock and the display market overall, we had a call with ChipMOS management to learn if they can prove bears wrong.
• We identify seven supportive factors that can help the company defy industry weakness.
• Valuation has priced in a lot of negativity, we see downside support at 1x PBV and the stock appears inexpensive. Dual-listings are trading near parity.

• Meta Platforms had a disappointing result where it failed to meet Wall Street expectations in terms of both, revenues as well as earnings.
• In Q2, while the average price per ad dropped by 14%, the overall number of ad impressions served across all of their services climbed by 15%.
• In general, Facebook engagement trends have been greater than expected, and robust real growth is still driving engagement on both Facebook and Instagram.

• ServiceNow has had a particularly good performance throughout 2022 and its recent Q2 results were quite robust.
• In Q2, ITSM participated in 12 of the top 20 deals, with 7 of those sales totaling more than $1 million.
• Nine of the top 20 sales totaled over $1 million, and ITOM was involved in 13 of those deals.

• Micron Technology is in the process of transitioning to more sophisticated nodes and is also investing heavily in memory manufacturing.
• The management is striving to control capital expenditures, manage funds utilization, especially for some of its legacy nodes, and focus on cost-effective nodes to see how it can optimize them and the manufacturing footprint area.
• In this report, we have carried out a fundamental analysis of the historical financial statements of the company.

• Founded in 2008, Ridi is a leading webcomic, digital novels, and e-book provider in Korea.
• In March 2022, Ridi raised $99.4 million in a funding led by GIC at a valuation of $1.3 billion.
• The webtoon market surged to more than $840 million in Korea in 2020, up from about $45 million in 2010, representing a CAGR of 34% in this period.

• The local market is betting that Samsung Electronics will announce an additional shareholder return measure. Special dividends or buyback? They lean towards a buyback.
• It is unlikely that it will be another pref-skewed buyback. The Lee family needs cash now, so preventing the dilution of voting shares becomes the top priority. 
• Hence, we should not have high expectations for a further decline in the pref discount. Instead, we should consider designing a short position aimed at block sales.

• Softbank (9982 JP) is knocking on 6,000 compelling resistance that sets up a short trade just under this barrier. 5,300 lower pattern support is the level to test/break.
• RSI is also building energy for a powerful breakout from the triangle/flat range with a bear spin.
• 6,000 is a stiff barrier and if it caps will set in motion a higher degree decline to retest the 4,200-macro support line.

• Shareholders approved the scheme at the scheme meeting. However, Link Administration (LNK AU) shares declined due to the slow progress in satisfaction of conditions precedent.
• Key conditions precedent is ACCC, FIRB, UK’s FCA and Central Bank of Ireland approvals. The wording in the Chairman’s address on the conditions precedent is incrementally negative.
• The downside to a deal break remains low. At the last close, the potential upside to the offer (10.1%) outweighs the downside (-3.8% to our A$4.21 price target).

• Nearmap Ltd (NEA AU) entered a scheme implementation deed (SID) with Thoma Bravo at A$2.10 per share, a 39.1% premium to the undisturbed price.
• The offer price is attractive. The key conditions are shareholders and regulatory (FIRB & US antitrust) approvals. The scheme meeting is in November. 
• At last close and for the end of November payment, the gross and annualised spread to the offer is 1.4% and 5.2%, respectively.

• After the disappointing withdrawal of two IPOs (SK Shieldus and One Store) in 2Q 2022, shares of SK Square are starting to recover in the past seven weeks. 
• On a NAV basis, shares of SK Square are deeply undervalued. The current valuation reflects a NAV holdco discount of nearly 72.5%.
• If we assume a moderate 50% holdco discount, this would suggest a NAV of 74,677 won per share, which would be 81% higher than current price.

• Inside is a recap of movements in the last week relating to the Hong Kong Stock Exchange -Shanghai and Shenzhen Northbound Connect facilities, broken down by company and industry.
• Overall, net inflow over the past week was ~US$1.2bn, split between Shanghai (US$0.9bn) and Shenzhen (US$0.3bn).
• The largest inflows were into CATL (300750 CH) and Hundsun Technologies (600570 CH). The largest outflows were in TBEA Co Ltd A (600089 CH) and Tongwei Co Ltd (600438 CH).

• Inside is a recap of movements in the last week relating to the Shanghai and Shenzhen-Hong Kong Stock Connect facilities, broken down by company and industry.
• Overall, the net outflow over the past week was ~US$0.21bn, split (-US$0.24bn) for Shanghai and (+US$0.3bn) for Shenzhen.
• The largest inflows were into China International Marine (2039 HK) and Li Ning (2331 HK). The largest outflows were in Meituan (3690 HK)and Kuaishou Technology (1024 HK).

• Shift Up is a game developer in Korea that recently reached the unicorn status. 
• The company is expected to launch Goddess of Victory: Nikke mobile game and Eve console game on PS5 sometime in late 2022/early 2023. 
• The CEO of Shift Up Kim Hyung-tae previously worked as an art director at NCsoft. Shift Up is expected to complete an IPO in 2023. 

• IGA Works is an data tech, digital marketing SaaS unicorn in Korea. It is getting ready for an IPO by the end of 2022.
• IGA Works is a data technology company that provides a complete set of platforms and services for digital transformation and data-driven marketing. 
• Recent local media accounts have mentioned that the the corporate value of IGA Works could exceed 2 trillion won.

• It was a curious thing Nearmap Ltd (NEA AU) agreeing to pay Thoma Bravo up to US$3mn if a transaction agreement did not result. Unless negotiations were well advanced.  
• Mapping technology outfit Nearmap’s board has now unanimously backed Thoma Bravo’s A$2.10/share Offer by way of a Scheme of Arrangement. 
• This is a done deal and accordingly, trading tight to terms.

• We summarise the latest spreads and newsflow of merger arb situations covered by us across Hong Kong, Australia, New Zealand, Singapore, Indonesia, Malaysia, Thailand and Chinese ADRs.
• Highest spreads are 21Vianet Group (VNET US), Alliance Aviation Services (AQZ AU), Ramsay Health Care (RHC AU), Infomedia Ltd (IFM AU), Resapp Health (RAP AU), Lifestyle International Holdings (1212 HK).
• Lowest gross spreads are MACA Ltd (MLD AU), Dongzheng Automotive Finance (2718 HK), Excelpoint Technology (EXLP SP), Xiamen International Port H (3378 HK), MyDeal.com, Giordano International (709 HK).

• A weekly summary of key developments across ECM and Event-Driven names tracked by us across Hong Kong, Australia, New Zealand, Singapore, Indonesia, Malaysia, Thailand, Korea, India and Chinese ADRs.
• ECM developments – China Tourism Group Duty Free Corp Ltd (1880 HK) priced its H Share at HK$158, WCP (WCP KS) issued an updated prospectus.
• Event-Driven developments Alliance Aviation Services (AQZ AU), Nearmap Ltd (NEA AU), Tassal (TGR AU), Genex Power Ltd (GNX AU), Yashili International Holdings (1230 HK), Xiamen International Port H (3378 HK).

• There are no changes to the index names, but FAF and capping changes will lead to a one-way turnover of 4.5% and one-way flow of HK$3,287m.
• An increase in the FAF from 3% to 40% will result in passive inflows of HK$1.18bn for SenseTime Group (20 HK) – that is over 5 days of ADV.
• There are large shorts on some of the stocks that will have passive outflows and some of these positions could be covered on implementation day.

• Chinese food delivery giant Meituan (3690 HK) shed 9% after Tencent (700 HK) reportedly planned to divest its $24bn stake. But it may just be a misunderstanding. Maybe.
• Given Jardine Matheson Holdings (JM SP)‘s strong underlying operating performance, the 40% discount to NAV – one in which there are discounts of discounts – JMH appears attractive here. 
• Expect a firm Offer for Nearmap Ltd (NEA AU) shortly. Thoma Bravo’s due diligence is already at an advanced stage. And why Nearmap entered into the break fee. 

• Aequitas Research puts out a weekly update on the deals that were covered by the team recently along with updates for upcoming IPOs.
• On the IPO front, China Tourism managed to price its IPO above the mid-point.
• There were a host of placements and blocks this week across the region.

• After market close on Friday, Japan-based UI/UX software solutions company Artspark Holdings (3663 JP) announced (link) they will be working towards a Segment transfer from Standard market to Prime market.
• If a TSE-listed name moves from the Standard Market to the Prime Market, a TOPIX Inclusion event will be triggered.
• In this insight, we take a look at the ability of Artspark Holdings (3663 JP) to meet the Prime Market Segment Transfer Requirements and the TOPIX Inclusion Implications.

For our next Webinar, we have the pleasure of welcoming back Analyst Nicolas Van Broekhoven, who will go through his latest picks in the Singapore market, highlighting key stocks and names to watch out for in the Lion City.

The webinar will be hosted on Wednesday, 24 August 2022, 17:00 SGT/HKT.

Nicolas Van Broekhoven was on the buy-side for 15 years, and worked most recently at a medium-sized boutique asset management firm. He grew up in Europe, went to university in the US and has been living in Singapore for the last seven years, which has given him a broad scope on the world and investing in general. He considers himself a generalist investor with a preference for small and mid-cap companies and special situations. However, a large-cap that has gone temporarily out of favour might also pique his interest.

• Canon Inc (7751 JP) announced a buyback on 5 August. That was its 17th ¥50bn buyback in 15 years. And its first “second buyback within a single year” since 2014.
• History suggests outperformance of Peers until the end of the buyback (and it has done well here), then underperformance post-buyback.
• Consensus forward EPS and EBIT ratios vs Peers suggest Canon shares have more to catch up, but some of that would involve reclaiming historical “quality premium.”

• SenseTime Group (20 HK)‘s Free-Float Adjustment Factor (FAF) increases from 3% to 40% following lock-up expiry and the stock will replace China Pacific Insurance (2601 HK) in the HSCEI INDEX. 
• Using prices from the close on 19 August, estimated one-way turnover is 3.82% and will result in a one-way trade of HK$2,751m at the close on 2 September.
• Increase in the FAF on a couple of stocks saves them from index deletion in September but is probably not enough to save them from index deletion in December.