TMT/Internet

• Mercari was expected to announce at some point that it would attempt to transfer to TSE Prime. They have now announced. 
• This will end up being a BIG TOPIX inclusion in May or June. 
• And the changes to the TOPIX Free Float Weight Methodology will mean it is bigger than it would have been under the old regime (despite unchanged FFW).

• HKMA released a discussion paper on the regulation of stablecoins in Hong Kong which seems to suggest a divergence in regulatory approach towards crypto from China’s current stance
• China has historically allowed banned activities from the mainland to operate in a controlled environment such as gaming in Macau
• We explore the potential that HK is the perfect firewalled environment where crypto could be allowed to develop without contagion for the rest of China

• AInnovation Technology (AIT HK) is a fast-growing enterprise AI solutions provider in China. It is set to launch an HKEx IPO to raise up to US$157 million.  
• The fundamentals are mixed as diverging growth profiles of key segments, low market share and cash burn are accompanied by a narrowing loss margin. 
• Overall, we believe the negatives outweigh the positives and we would give the IPO a pass. 

• Akm Industrial (1639 HK) announced a privatisation offer from Alpha Luck and AKM Meadville at HK$1.82 per scheme share, a 14.47% premium to last full trading day price of HK$1.59. 
• The key pre-condition is several regulatory approvals which be forthcoming as Alpha Luck is indirectly 100% owned by the SASAC. 
• The key condition is the scheme approved by at least 75% disinterested shareholders (<10% disinterested shareholders rejection). We think the offer price is reasonable and the scheme will pass. 

We maintain our BUY rating with a target price of INR 1,485, valuing the HCLT stock at 22x Mar-24E EPS, factoring in +13/14% CAGRs in revenue/EPS over FY21-24E HCL Technologies: We maintain BUY on HCL Tech (HCLT), supported by strong growth in services (+5.3% QoQ CC) and recovery in P&P (+24.5% QoQ CC). The services growth was led by ER&D but the ~200 bps decline in margin was higher than peers. Key attributes that support our growth outlook are: (1) growth momentum in ER&D services (+8.3 QoQ CC), supported by digital engineering and IoT services; (2) robust TCV of USD 2.14bn (+64% YoY growth), led by eight large deals in services and product; and (3) strong fresher hiring, which will continue in FY23E.

• Money Forward reported full year results post close on Friday. The stock will react negatively…probably.  
• The stock is down 45% from its 52-week high, along with most high growth SaaS stocks 
• The fundamentals, earnings and growth remain intact, but valuations are unlikely to recover as excess liquidity drains out of the market.  One for patient LT investors

• There are currently 45 – mostly firm – transactions currently being discussed and analysed on Smartkarma.
• One new deal discussed this week – SASAC-backed Hubei Ports’ tilt for China Infrastructure & Logistics Group (1719 HK).
• There were updates for Crown Resorts (CWN AU), Razer Inc (1337 HK), Australian Pharmaceutical Industries (API AU), Katakura Industries (3001 JP), and Irongate Group (IAP AU).

• We have been sceptical about Krafton’s valuation and ability to generate new hits since its listing. 
• After treading water close to its IPO price for five months the new year has seen the stock crater 25%. 
• In our view the bad news is just getting started and that is despite PUBG: Mobile still doing well in China and India.

• NDX is dangerously close to a meaningful break below macro trendline and price support that would induce downside pressure on supports in other key indices.
• NDX Pivot support break would set in motion a downward spiral in the DJI and SPX as well as the global risk cycle. On alert!
• Late January a weaker cycle for a washout that sets up a tender bullish February grind with Q1 topping signals maturing.

• In this insight, we discuss the end of lock-up periods for Kakao Pay, KakaoBank, Hyundai Heavy Industries, Krafton Inc, and SD Biosensor in 1Q 2022.
• Typically, investors tend to focus on the end of the lock-up periods in Korea about 1-2 months ahead of the actual end of these lock-up periods.
• Among these five companies, there are relatively large number of shares that could be sold post end of the lock-up periods for Kakao Pay and Kakao Bank in 1Q 2022. 

TCS reported 3QFY22 revenue of USD6.52b, up 4.0% QoQ in constant currency (CC) above our estimate of 3.2% QoQ growth. 3Q topline was driven by Communication, Technology and Regional markets, while Manufacturing and Retail verticals dragged down growth. EBIT margin contracted 60bp QoQ to 25.0%, 100bp lower than our estimate of 26.0%, as TCS augmented its employee intake (all-time high at 28k), along with a spike in sub-contracting cost.

• Tata Consultancy Services: TCS reported in-line revenue performance, while the margin was a miss
• Infosys: We maintain BUY on Infosys (INFY), following a significant beat in revenue (+7% QoQ CC vs. estimate of 4.4%) and a strong growth outlook.
• Wipro: Wipro delivered a muted performance in Q3; growth of 3.0% QoQ CC was below estimate and the lowest in the last five quarters

• Tata Consultancy Services Ltd (TCS) reported a 4.3% revenue growth QoQ in Q3FY22 in Rupee terms, much in line with our expectations
• The company’s revenues stood at Rs 48,885 Cr, up 16.3% YoY and 4.3% QoQ
• We recommend a HOLD rating on the stock and assign a 31x P/E multiple to its FY24E earnings of Rs 135.2/share to arrive at a TP of Rs 4,200/share

• Wipro Ltd’s (Wipro) revenue growth stood below our expectations at Rs 20,313 Cr, up 3.1% QoQ and 27% YoY in CC terms
• Operating profit grew robust 30.8% YoY to Rs 3,492 Cr, aided by better executions, better employee management and service mix
• We recommend a HOLD rating on the stock and assign a 27x P/E multiple to its FY24E earnings of Rs 27.7/share to arrive at a TP of Rs 750/share, implying an upside of 9% from CMP.

INFO reported a growth of 7% QoQ CC, ahead of our estimate of 4.8%, on the back of a broad based performance. Large deal TCV stood at USD2.53b (net new at 44%). The management indicated traction in large deals, and highlighting that the deal pipeline was the highest in a very long time. EBIT margin dipped only 10bp QoQ to 23.5%, in line with our estimate, despite a drag from employee additions (12.5k), higher sub-contracting, and…

• Wipro (WPRO) reported 3QFY22 IT Services revenue of USD2.64b (+3.0% QoQ CC), missing our estimate by 70bps
• We now expect FY22 IT Services revenue growth at 27.4% (18.5% YoY organic growth), down 100bps v/s the previous expectation.
• We lower our FY22–24E EPS estimate by 1% to factor in the miss on the growth front. We maintain our Neutral stance as we view the current valuation as fair

• Infosys Ltd (Infy) reported Q3FY22 revenue of Rs 31,867 Cr, up 7.7% QoQ and 7% QoQ (in CC terms)
• The company’s operating profit stood at Rs 7,484 Cr, reporting a growth of 7.3% on a QoQ basis
• We recommend a BUY rating on the stock and assign a 29x P/E multiple to its FY24E earnings of Rs 73.5/share to arrive at a TP of Rs 2,140/share

• A share pop a flash in the pan and still shows heavy price action as the bull wedge matures into late January.
• HSI is meeting the fresh short target zone near 24,700 with a minor new low in store for late January.
• HK tech is making strides to bottom as RSI divergence matures but still needs some final strokes for a higher conviction base.

• The consortium’s updated transaction has lowered the offer price -27.6% to $57.25 in cash per ADS, a 24.92% premium to the last trading price (11 January 2022).
• The combination of the dramatically lower price, spurious justification for lowering the price and the shares recently trading higher than the revised price is unlikely to win over minorities.
• Meeting the two-thirds shareholder approval threshold is likely a challenge due to the need to convince around 27% of disinterested shareholders to vote in favour of the transaction. 

• TSMC posted results at or above the top end of its guidance ranges for 4Q21 at the revenue, GPM and OPM levels. 
• Guidance for 1Q22 was also punchy with the midpoint of revenue guidance 6.0% above consensus and mid to high 20s revenue growth guidance for the year. 
• We still suspect however that momentum could actually accelerate through the year.

• With the penetration rate as high as 42%, Mitra could be fast running out of room for growth.
• Consensus seems to be overestimating Bukalapak (BUKA IJ)’s 2021 and 2022 revenue by 22% and 40% respectively.
• At 6.0x consensus FY+2 revenue, Bukalapak is still expensive compared to the peer average of 4.3x.

• We expect a wide price range ranging from 18,001 won to 39,939 won for Skonec Entertainment IPO, which is much higher than the high end of IPO price range.
• We estimate Skonec to generate sales of 6.0 billion won in 2021 (up 27.6% YoY) and 13.9 billion won in 2022 (up 132% YoY). 
• Skonec Entertainment’s main business is VR-based content production. It has also been providing metaverse VR game business through VR platforms such as Oculus and PlayStation.

• TCS reported a healthy revenue growth of 15.4% YoY in constant currency (CC) terms. Operating margins contracted by -60bp to 25%, due to supply-side challenges. 
• LTM attrition for TCS was 15.4%, best in the industry. However, on an absolute basis, it is high and TCS is continuously working on stabilizing it.  
• Growth has been broad-based across sectors and the demand outlook remains robust on the back of strong spends by corporates on digital transformation and adoption of cloud.

• It’s commonly known that investment theses are the most powerful when demographic trends are on your side. Crypto adoption may enjoy the same tailwind as internet adoption
• We analyze the fact that the younger segment of the population has evolved to be early adopters of crypto and blockchain technology, which protends strong future growth
• We argue that the young are embracing crypto because it is a much easier game to play and win for those who do not benefit as traditional asset owners 

• TSMC’s 2022 outlook is bright, but new drama around Intel’s possible orders could define the foundry in 2023
• IPhone’s 2022 modem is currently equipped with Qualcomm’s design but 2023’s will be designed by Apple
• TSMC’s continuously updated technology roadmap shows it as a tech-leader in the foundry space

• Early last year we very wrongly called Capcom as our top short-term pick as we expected an earnings blowout in 1QFY22. 
• The blowout duly came with OP 37% above clueless sell side expectations and… the stock tanked. 
• Almost a year later the stock languishes 28% lower just as the PC version of Monster Hunter Rise launches.

• Bilibili launched a shopping cart feature (Xiaohuangche) recently on its livestreaming platform which enables users to purchase goods while watching a live-stream.
• This comes at a time; China’s common prosperity crackdown has set its eyes on livestreaming e-commerce.
• Bilibili has been looking at ways to improve its monetisation to reduce losses, but we think the new initiative will likely add further pressure on deteriorating margins.

• Qingdao Ainnovation Technology Group Co Ltd (1853807D CH) is looking to raise up to US$200m in its Hong Kong IPO.
• Qingdao AInnovation Technology Group is an AI solutions provider offering full-stack AI-based products and solutions. 
• While revenue has grown since inception, margin improvement can’t be attributed solely to better cost controls. It also has an unproven track record and operates in a highly fragmented market. 

• Infosys reported strong Q3FY22 earnings with constant currency (CC) sequential growth of 7%, despite weak seasonality.  YoY CC growth at 21.5% is the highest ever over the past 11 years.
• Large deal wins and continued momentum in digital revenue growth helped Infosys Ltd (INFO IN) to post a strong Q3. Share of digital revenues grew to 58.5% vs 50.1% YoY.
• On the back of strong Q3FY22 earnings, Infosys raised its FY22 revenue growth guidance to 19.5-20% vs 16.5%-17.5% earlier.

• IOT data platform meant to digitize physical operations for manufacturing, transportation, construction, utilities, healthcare, and education. 
• Excellent management team, previously co-founded Meraki, which was sold to Cisco.
• Hypergrowth software business on par with ServiceNow and Workday at this stage in growth, but much less profitable (so far) due to hardware and bandwidth costs.

• CALX has yet to experience the full extent of our original sell thesis even though there are growing signs of an impending impact
• Component issues could have become a headwind in the fourth quarter and remain a challenge in 2022.
• With Huawei equipment replacement predominately complete, small service providers could reduce their spending

• In this weekly, we look at the macro where the recent selldown is well within the historical performance of the asset class
• Despite the end year correction, crypto funds have returned 178% in 2021 based on Eurekahedge which is leading to significant new launches in 2022 
• Meanwhile, NFTs continue to make headlines as Eminem spent half a million on a BAYC jpeg and a South Korean presidential hopeful taps NFTs to raise campaign funds 

• SK Square’s discount to NAV is reaching 68%, pretty close to the deepest end of the local peers.
• The cause of this price correction can be seen as the collapse of the overall market flow balance due to the LG Energy IPO.
• Entry timing for MSCI float-rate increase momentum is early February.

• With half of Nasdaq stocks down 50% from the top, is further meltdown ahead?  Valuation compression is already larger than recent big growth selloffs.  
• We like a balance of highest quality high growth (CRWD, SNOW, RBLX) and attractive relative valuations (PANW, NOW, BABA)
• Amazon is poised for a big 2022 as 1 day Prime shipping reaccelerates growth, and price increases hike profits.

• We have made a bullish yield argument from the 10yr 1.37% zone to clear the key 1.68% breakout barrier. A yield spike will pressure tech at NDX macro trendline support.
• NDX long term trendline make or break support lies at 15,300. We expect a break in later Q1 but if broken now it will bring forward a negative risk cycle.
• Our macro 10yr yield rise to the 2%+ region for a top correlated with a peak in the equity cycle in late Q1. Rate sensitive ration undercurrents.

• Blockchain games are gaining popularity and traction with new players. There are now over 1.4m people playing blockchain games daily  
• The economics of blockchain gaming and NFT is driving a flood of new investment into the space, with $4b committed by VCs in 2021. This year will be significantly higher  
• Square Enix understands that blockchain games are here to stay despite opposition from “legacy fans.” We expect further announcements on blockchain gaming to drive the stock

• Aequitas Research puts out a weekly update on the deals that were covered by the team recently along with updates for upcoming IPOs.
• LG Energy Solution (LGENERGY KS) started book building for its mega US$10bn+ IPO
• Placements too got off to a large, if not strong, start with Sea Ltd (SE US) and Nippon Paint Holdings (4612 JP) US$1bn+ deals. 

• PC Partner (1263 HK) issued a positive profit alert 15/12/2021.
• Company will report FY21 results in 60 days which will be the best ever. 1H22 is on track to show growth YoY. 
• Forecast exceptional dividend to celebrate 25-yr since founding and 10-yr since IPO. 

• In December, Tencent announced that its board of directors has resolved to declare a special dividend by way of a distribution of its Class A ordinary shares of JD.com. 
• This seems to be in line with regulators’ aim of bringing down walled gardens; however, we think these steps are aimed more towards restructuring Tencent’s fintech business.
• Tencent’s fintech arm has been benefitting from its partnerships with JD.com and Pinduoduo which has helped face competition from closest rival AliPay.

Multiple transitions to drive growth

• Sea Ltd (SE US) stock was down a lot since the announcement of its Q3 results. Tencent (700 HK) selling a 2.6% stake yesterday took the stock down even further.
• Given the large drawdown and Tencent (700 HK) locking in its remaining Sea Ltd (SE US) holding for the next 6 months, the stock could rally in the short term.
• There will be passive inflow from MSCI trackers in February as a part of the tranched inclusion and then more in May due to an increase in the FIF.

• We take a look at the Asia Pacific IPO pipeline for 2022. This list has been compiled on a best effort basis from tracking company filings and other sources.
• For readers who aren’t familiar with our coverage, we aim to cover all IPOs and placements with a minimum deal size of US$100m across Asia-Pacific (ex A-shares), including China ADRs. 
• The deals you see in this note are only a part of our full IPO pipeline tracker. Feel free to drop us a message for additional information on these IPOs.

• The gross spread to the HK$2.82 per share offer has retouched the high of 23%. The headcount test is a key challenge as some minorities voice displeasure over the price.  
• Based on the unaffected price of HK$1.81 and at the last close of HK$2.30, the deal probability retouched lows of 48.5%. A 65% deal probability would imply HK$2.47 per share. 
• In the event of a failed deal, Razer Inc (1337 HK)’s strong fundamentals provide solid valuation support. Our SoTP valuation is HK$2.96 per share, 5% higher than the privatisation price.

• Sea Sale: Tencent sold 14.5 mn shares in Sea, raising approximately USD 3 bn in cash – reducing Tencent’s position in Sea from 21.3% to 18.7%;   
• Not A Surprise: Given mainland China’s crackdown on the country’s largest internet companies, Tencent’s disposal of Sea shares is not a surprise; and  
• Other Stake Sales To Follow: Further divestitures of major stakes are likely if Tencent wishes to remain on the right side of mainland China’s Communist Party.    

• 2021 marked our sixth year covering Equity Capital Markets (ECM) in Asia Pacific. 
• Most markets were in top gear on the ECM front and we ended the year covering the highest number of IPOs and the second highest number of placements since inception.
• For those not familiar with our coverage, we aim to cover all IPOs and placements with a minimum deal size of US$100m across Asia-Pacific, including China ADRs.

• Deal wins for FY21 stood at $781 Mn, showcasing a growth of 11% YoY and the highest ever in the history of Coforge. The company has also added 45 clients during FY2021.
• Revenue growth in FY21 stood industry-leading at 11.4%. The company also reported healthy expansion in its operating margins
• We recommend a BUY rating on the stock and assign a 37 x P/E multiple to its FY24E earnings of Rs 184/share to arrive at a TP of Rs 6,870/share, implying an upside of 15% from CMP.

• We estimate Vision Fund portfolio companies lost $2.1bn in value in Q3 as upside from new listings was not enough to offset valuation losses from the current portfolio.
• A strong debut for SenseTime boosted Q3 gains by $2.3bn and +$1.7bn this week. That takes the sting out of weak Didi Q3 results but China remains a challenge. 
• Shares trade at a 49% discount to NAV because investment losses both lower NAV and boost balance sheet concerns. 

• Square Enix rose 7.5% yesterday driven by some New Year commentary on integration of NFTs from President Yosuke Matsuda. 
• The share price jump stands in contrast to broadly negative and suspicious reactions from consumers. 
• The handling of the issue could be tricky as Ubisoft is finding out but we believe there is positive potential.

• eClerx Services (eClerx) provides business process management, automation and analytics services.
• It caters to financial services, communications, retail, media, manufacturing, travel and technology companies
• We roll over valuations to FY24E and value eClerx at Rs 2900 i.e. 21x P/E on FY24E EPS

• The stock is pretty illiquid, and is effectively a nano cap as insiders effectively own 65% of shares outstanding. Average daily trading volume only about $10k. 
• I feel quite optimistic about it. Trades <10x earnings while co is growing and only at about 1.5x recurring revenue and a lot of operating leverage.
• The company provides tracking software and services to monitor convicts. Generally contracts are signed on a multi year basis