The company is an internet key opinion leader (KOL) incubator in China. Revenue and GMV grew at impressive rates of 63% and 57% YoY in FY2018, respectively.
The idea of being able to leverage on KOLs influence over consumers to understand demand and retain consumers is interesting but Ruhnn has yet to demonstrate that it has a sustainable business model.
Gross margin has deteriorated and losses widened as a percentage of revenue. Service fee paid to KOLs as a percentage of revenue has increased and showed little improvement in 9M FY2019. The company depends heavily on the top KOL, Zhang Dayi, to generate revenue, almost half of the company’s GMV and revenue is generated from her.
Chris Hoare sees increasing signs that the worst is over, at least for Bharti Airtel (BHARTI IN). ARPUs and therefore revenues are bottoming. The 3Q numbers were the first quarter where the market as a whole grew sequentially (+2.5% QoQ) since Jio launched. We expect profits to follow. Signs of stabilization are much clearer for Bharti, as the performance gap vs Vodafone Idea (IDEA IN) remains wide. Both Bharti and IDEA are raising around $3.5bn of new equity. However, as we wrote previously, we do not think this is enough for Vodafone IDEA and expect the company to continue to lose market share. By contrast, Bharti’s capital increase puts the company in a strong position going forward and allows investors to fully discount extreme stress scenarios.
A conversation with the management of Xl Axiata (EXCL IJ) following news that the company has started putting up prices in earnest for its existing customers revealed a more positive outlook for ARPUs and margins in 2019. 2018 was a difficult year with the impact of compulsory SIM registration in the first half plus a more intense competitive environment at the same time.
4Q18 results already reflected a better picture with QoQ growth for the quarter in service revenue, data revenue, and EBITDA confirming a positive trend established in the previous quarter.
Competition from other major players such a Telekomunikasi Indonesia (TLKM IJ), Indosat Tbk PT (ISAT IJ) and Hutchison has become more rational with the latter two operators raising prices in 2019 paving the way for Xl Axiata (EXCL IJ)‘s recent increases in renewal packages versus acquisition products previously.
The availability of cheap but highly functional locally Chinese smartphones and XL’s own Xtream 4G handsets continues to drive data growth which now makes up 82% of services revenues for XL.
4G subscribers, which now make up more than 55% of XL’s subs, also consume far more data than those using 3G. XL has been successfully monetising its more data-centric subscriber base in 2H18, reflected in its higher ARPU’s, which increased from IDR32,000 in 3Q18 to IDR33,000 in 4Q18.
The increasing push by content players such as iFlix, Vidio.com, and other OTT players and digital advertisers into the mobile space will only increase the appetite for data in the mobile space.
The wild card on the competition front is Smartfren Telecom (FREN IJ) owner by Sinar Mas Group, which continues to push out aggressive data packages, although this had been tempered this year after it was hauled up by the regulator for breaking the pre-paid SIM rules.
After a tough start to 2018, Xl Axiata (EXCL IJ) began to more effectively monetise its data and more importantly its 4G advantage in 2H18 and more holistically in 1Q19. If this momentum continues this year, it looks set to move back to headline profitability. Valuations look attractive, with the company trading on an EV/EBITDA of 4.2x FY19E, according to Capital IQ consensus estimates. After moving into profitability in 2019, it is forecast to see EPS growth of +63% and +68% for FY20E and FY21E respectively, implying an FY21E PER of 14.8x. Given the improvement in data pricing and strong growth in data, especially from 4G subscribers, consensus estimates appear conservative with room for upgrades to earnings estimates.
Tencent Music Entertainment (TME US) reported its full year results today, post US market close. Revenue growth was slightly ahead of estimates as paying ratio continue to improve for both online music (subscription revenue) and social entertainment (live streaming). Growth for the latter continued to be driven more by ARPU rather than user growth.
The concerning bit in the results was the decline in gross margins as the company continues to invest in more content.
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
In-depth interviews with two full-time drivers reveal that Lyft Inc (0812823D US) has disrupted the incumbent Yellow Cab in NY City due to better take-home income economics for drivers.
Bargaining and pricing power favor LYFT (vs. drivers) as LYFT could provide the volume (sufficient number of rides per day) for drivers.
LYFT’s path to profitability depends on 1) the further scale-up of network effect 2) diversification of transportation-related business and 3) progress in autonomous cars’ unit cost economics.
Given its track record as a disruptive force, investors could be willing to pay up (over 5.0x P/S multiple) for LYFT, making the IPO a hot deal.
Wisetech Global (WTC AU) plans to raise US$177m/AUD250m in order to shore-up its balancesheet for future acquistiions.
The company has done exceedingly well since listing and even its past fund raising delivered good returns. However, the deal scores a mixed score on our framework as valuations appear strecthed with the stock trading above analysts target price. Thus, the deal might warrant a large discount.
Subscription rate is 797 to 1. Offer price was fixed at ₩48,000, substantially higher than the upper end. Deal size is now ₩168.5bil. Company value is put at slightly higher than ₩1tril. Demands are spread out pretty well between long-term funds and hot money and local and foreign investors as well. All of the orders are universally placed at 75% of upper end or higher.
Local street is betting on Autoever/Glovis merger not long after this IPO. That is, HMG is still wanting the initial Glovis/Mobis merger plan. To better manage to win shareholder support, they must be thinking that bigger Glovis can be an answer. This means HMG should do whatever it takes to make Autoever bigger in the immediate future.
This is what local street is betting on and why they went really aggressive on this IPO. As witnessed in the bookbuilding results, this street mentalitywon’t be changed any time soon. We should expect even stronger prices after new shares are listed on Mar 28.
Late Monday evening, Larsen & Toubro (LT IN) launched India’s first ever hostile takeover in the tech sector. L&T is seeking to acquire a 20.3-66.3% stake in Mindtree Ltd (MTCL IN) through a three-step transaction. Mindtree’s founders/promoters together have a 13.3% stake and staunchly oppose the takeover. L&T’s open offer presents an opportunity for longstanding large shareholders to partially or fully exit their stakes at a reasonable price.
L&T’s open offer is less enticing for minority shareholders due to the small premium. Minority shareholders hope that a bidding battle will drive up bid premiums. However, we believe that minority shareholders should stick with their holdings as Mindtree’s fundamentals remain solid, but a chance of a material bump to L&T’s open offer is low.
In this report, we provide a trading strategy for Hyundai Autoever Corp (0978519D KS) IPO, which is expected to start trading on March 28th. The IPO price has been finalized at 48,000 won, which is 9% higher than the high-end of the original IPOprice of 44,000 won. The institutional investors’ demand for the Hyundai Autoever IPO was very strong at 797 to 1.
Given the very strong institutional demand for this IPO, it appears that our base case valuation (59,454 won), which is 24% higher than the IPO price, may be too conservative. A more likely scenario now is that the stock reaches about 60,000 won to 65,000 won in the first few hours of trading on the first day, overshooting its intrinsic value and sells off a bit for a few days/weeks, enters a consolidation phase and then resumes its higher share price again.
Of the 913 institutional investors that participated in the Hyundai Autoever IPO survey, 89% of them thought that the intrinsic value of the company should be more than the high end of the IPO price range (44,400 won), which provides a strong vote of confidence that this IPO should do well once it starts trading.
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.
The legal battle between Reliance Communications (RCOM IN) and its lender group has further intensified after the Supreme Court directed the company to submit INR4.53bn within four weeks. The Court ruled that Chairman Anil Ambani had wilfully not paid INR5.5 bn to Swedish Telecom equipment maker Ericsson (Lm) Tel-Sp Adr (ERIC US). In our view, the situation has become almost untenable for RCOM and Mr. Ambani as the company will struggle to sell off its spectrum and other assets in time. In addition, The spectrum sale is yet to be resolved and this means that raising funds quickly remains a challenge. We have revised our recommendation for RCOM 6.5% 20s from NEUTRAL to UNDERWEIGHT due to the on-going negative headlines which we believe is an asymmetric downside risk to the bonds. This is despite some positive developments we highlighted in our last report (Reliance Communications Ltd. •Too Few Steps Forward• dated 18-Oct-18) and our recovery calculation in our previous report (Reliance Communications: Waiting to Exhale dated 07-Jul-18), which is proven wrong by the market.
On March 6th, a day before the Hitachi Ltd (6501 JP) Taiwan elevator business Tender Offer for just over a third of Yungtay Engineering (1507 TT) was expected to close, the closing date was extended to 22 April, notably because the acquiring entity had not yet received Taiwan Ministry of Economy Investment Commission approval for the foreign investment, and the Fair Trading Commission had not yet given the green light, so there was no hope of getting it done by the next day in accordance with Taiwan’s Public Acquisition of Public Company Shares Administrative Law Article 18 Para 2. The proposed purchase price was unchanged at NT$60.
While there have been noises in the market that both Otis and Schindler, which are reported to hold roughly 5-6% each (last year’s shareholder list included UT Park View which United Technologies (UTX US)‘s 10-K showed was a wholly-owned sub) were willing to offer more than Hitachi’s offered NT$60 (and MOPS filings indicate the board approval meeting in end-January referenced a NT$63 potential bid), there was no competitive bid made public and to the authorities by five business days prior to the first bid close (which would have been 26 Feb) as per the same law Article 7 Para 2.
Since then, there have also been other ructions. While terms remain unchanged, it is worthwhile looking into what has been going on. This is still interesting and because of its various inputs, slightly disconcerting to some, and the modalities continue to surprise me.
Delta Electronics Thai (DELTA TB) (Delta) released its opinion (Form 250-2) and the opinion of the Independent Financial Advisor (IFA) on the tender offer. Delta Electronics (2308 TT) (DEI) launched the conditional voluntary tender offer for Delta, an electronics contract manufacturer, on 26 February 2019. The tender offer of THB71.00 cash per share values Delta at an EV of THB72 billion ($2.2 billion).
The IFA valued Delta at THB62.33-67.80 per share. Unsurprisingly, both the Delta Board and the IFA concluded that the shareholders should accept the tender offer. While the tender offer’s premium to underlying value is unlikely to set the pulse racing for minority shareholders, we continue to recommend minority shareholders to accept the tender offer.
Last Friday, Gds Holdings (Adr) (GDS US), the largest third-party data centre operator in China, announced the placing price of its public offering of 11.9 million ADS. At the placing price of $33.50 per share, GDS will raise net proceeds of $385.5 million which will be used for the development and acquisition of new data centres.
We are positive on GDS as the business remains in rude health due to strong revenue growth, rising margins and high revenue visibility. Overall, we would participate in the public offering at the placing price.
Something of a slower week on Smartkarma this week (I contributed to that slowness by being away and under the weather when back) with about 120 insights published. A list of the insights to do with Japan and Korea this week are listed below.
For me, the MUST READS of this weak are the cashless payment-related pieces by Kirk Boodry and Michael Causton shown at the bottom.
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.
Our base case forecast is Case 2 (among three scenarios analysis), which suggests an implied market cap of $21 billion or $75 per share. Given that our intrinsic value of the company does not provide enough upside versus the likely IPO price, we would AVOID this deal.
Even if the company is able to complete this IPO, raising nearly $2.0-2.5 billion, it is very possible that the company may need to come back to the market in two or three years in a secondary share offering, which would dilute the existing shareholders. This is probably the biggest risk I see with the Lyft IPO right now.
Our base case financial forecast for Lyft assumes the following:
Sales growth rate (CAGR from 2018 to 2030) – 26.6%
Year in which Lyft turns operating profit positive – 2025
On November 13th last year, Linkbal Inc (6046 JP) announced it was looking to move from MOTHERS to the TSE First Section. The stock rallied. At the same time the company said that it was preparing to file an application for the move.
On March 5th, the company announced a forthcoming tachiaigai bunbai offering designed to increase the float. That tachiaigai bunbai offering (designed for retail investors only) takes place this morning after an announcement the company would oversee the offer of 970,000 shares (about 5% of the company but about 180% of the float currently held by public retail investors) at a price of ¥905/share (1,000 shares max per buyer), which is a 3% discount to yesterday’s close of ¥933 yen.
This will get it most of the way towards meeting the requirements, but likely not all the way. An inclusion is still months off. And there would likely be another sale to increase shareholder count by 800-1000 before then, whether in the form of a Public Offering/Uridashi or in the form of another tachiaigai bunbai.
The Thai mobile market reported another weak quarter in 4Q18, with trends deteriorating at all three operators. The weakness was partly due to the cheap unlimited fixed speed offers which were popular in 2018 but which have now been removed from the market. Growth should recover by 2H19. With Total Access Communication (DTAC TB) having acquired spectrum in 2018, it will no longer cede market share without a struggle. That suggests competitive risks are high in Thailand, with all three operators aiming to boost market share. We remain cautious on the sector and are also worried that the government seems keen to push on with 5G spectrum auctions despite a lack of use cases.
China Tower (788 HK) has rallied strongly in recent months and the question raised repeatedly in recent client meetings was “how much further is China Tower likely to rally?”. Chris Hoare sees China Tower’s position as unusual as the price moves are not driven by earnings upgrades or changed 5G expectations. Rather is is a sustained move post the IPO when the information in the market was incomplete and expectations were much lower. We were negative at the time of the IPO but changed our views as more information became available. We remain positive on the scope for revaluation in China Tower given its rapid revenue growth and low valuations vs EM peers. While the recent results were somewhat disappointing, we see good upside as the market factors is lower capex and higher returns.
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.
After 6 months of haggling and due diligence, debt negotiation, and structuring, global education company Navitas has now signed a Scheme Implementation Deed with a consortium led by Australian Private Equity firm BGH Capital consortium, which includes Navitas Founder Rod Jones (also the largest holder at 13%) and AustralianSuper. The Scheme Price of A$5.825 is a 6% uplift from the original A$5.50 offered in the preliminary, indicative, non-binding offer announced on 10 October 2018 and a 34% premium to the undisturbed price of 9 October 2018 of A$4.35/share.
At an equity valuation of A$2.1bn, this is being done at a TTM EV/EBITDA of ~15.5x (and probably around 0.8 turns less for FY19 forecast, which is healthy, but the company spins off prodigious cashflow, which makes it doable for private equity with leverage.
Given the lack of any real news or rumour of competing offer in the last five months, or in the period since the lockup, Travis Lundy doesn’t think it likely we will see one. Because he thinks this deal has very few hurdles, expect it to trade tight.
Harbin Electric’s (“HE”) composite doc for its merger by absorption has been dispatched. HE’s major shareholder Harbin Electric Corporation, an SOE, is seeking to delist the company by way of a merger by absorption at HK$4.56/share, an 82.4% premium to last close. The offer has been declared final and the IFA considers the offer fair & reasonable. The significant offer premium to last close, the material drop in FY18 profit, and the lack of possibility of a competitive bidder emerging suggests this Offer falls over the line.
Seeing it blocked at the H-share meeting is a risk, although no single shareholder has the requisite stake to block the deal. The tendering acceptance condition in this two-step hybrid Offer of 90% of H shares out, has been seen in prior PRC-incorporated takeovers.
However, I still consider a “fair” price to be something like the distribution of net cash (~$3.48/share by my calcs) to zero then taking over the company on a PER with respect to peers. Dissension rights are available, although I am not aware of any precedents from discussions with both the PRC and HK tribunals, nor the calculation methodology of a “fair price” under such a dissension, nor the timing of payment.
Trading at a wide gross/annualised spread of 8.3%/54.5%, implying a >80% chance of completion. The current downside should this break is 45%. Not an attractive risk/reward.
On March 6th, a day before Hitachi Ltd (6501 JP)‘s Tender Offer for a minimum of just over a third of Yungtay was expected to close, the closing date was extended to 22 April, as Taiwan regulators (MEIC and FTC) had not signed off. The proposed purchase price was unchanged at NT$60.
An EGM called by independent director Chen – who has been against the deal – was expected to take place on the 18 April. It was not clear the underlying purpose of the EGM other than to change the directors in place and gain management rights for the Baojia Group and Hsu Tso-Ming. Perhaps IF the board were to be renewed with less support for Hitachi, then the board could change its support/opinion and that might affect retail investor support for the deal. Retail tends to vote with management. In any event Hitachi filed an injunction to stop the EGM.
IF Hitachi is unlikely to get the required number of shares, then it could easily be the case that they lose board and management control. If they do get the support, they will effectively control the board and management for the foreseeable future.
Travis’ expectation was that this deal was still “Safe” and would get done, most likely at NT$60 but with the option of a “kiss” to NT$63 or so in the case of more public awareness and castigation of Hitachi and the board for ignoring competing indications at higher prices.
Helpfully, after the close on Friday, Hitachi gave it a kiss, raising the Tender Offer price to NT$65/share.
Travis has opinions on what to do here. Read the insights.
On the 8th of March, Bain Capital raised the Tender Offer Price by 14.8% to ¥700/share and extended the Tender Offer by almost two weeks to the 25th of March. It also lowered the amount which needs to be bought to 50.1% from 66.67%. So, on the 21 March, Murakami-san launched a Tender Offer of his own.
Murakami-affiliated entities Minami Aoyama Fudosan KK and Reno KK’s Tender Offer at ¥750/share is to buy a minimum of 9,100,900 shares and a maximum of all remaining shares. The entities currently own 3,355,900 shares (13.47%). That minimum should be easier than buying a minimum of 12,456,800 shares at ¥700/share under Bain Capital’s offer.
There is a theoretical possibility that Japanese retail investors decide to tender their shares into Bain’s bid because it is supported by management rather than sell to a higher bid which is not. Travis doubted it will go this way but stranger things have happened. Bain should be willing to walk.
After Travis wrote the first two insights listed below with the content above, the stock soared 16.5% on Friday and ended at a 14.5% premium to the Murakami tender of ¥750/share (i.e. closed at ¥859/share). The company maintained its support for the Bain Capital bid at ¥700/share, but withdrew its recommendation that investors tender into it. The company did not yet offer a real opinion on Murakami-san’s offer. That must come in the next 9 business days.
Travis has opinions on what to do here. Read the insights below.
Australian property developer, Villa World Ltd (VLW AU)announced that it had received an unsolicited proposal, by way of a scheme, from AVID Property Group Australia at an offer price A$2.23, or a 12% premium to last close. AVID’s indicative offer translates to an LTM PER and P/B of 6.4x and 0.9x, with the P/B metric roughly in line peers.
During 2018, VLW’s share price declined by 36% to A$1.76 from A$2.77, with a large chunk of that downward move occurring in December after VLW withdrew its FY19E earnings guidance. That forecast withdrawal was exacerbated by the fact VLW had maintained the 2019 forward guidance at its mid-November AGM.
Ho Bee Land Ltd (HOBEE SP), VLW’s largest shareholder and JV partner, responded to AVID’s proposal by buying 2.2mn shares (~1.8% of shares out) at an average of A$1.95/share – and a high of A$2.18/share – lifting its stake to 9.41%. VLW has also recently bought back and cancelled 1.76mn shares or ~1.4% of shares out. The highest price paid was $2.09.
AVID’s offer looks opportunistic and it’s doubtful VLW will want to engage. VLW is trading below its book, paying out one of the highest yields among its peers, and with ~21% of the share register potentially defending their position- the largest shareholder actively buying – there’s likely upside from here. Shares closed Friday at $2.24.
Aveo announced in early February a number of indicative non-binding bids were received for a “whole of company transaction” with the AFR reporting (paywalled) that Lone Star had joined the bidding. Other interested parties are believed to include Blackstone and Cerberus Capital. Aveo’s share price is up ~11% since announcing the receipt of the indicative bids – and closing at $1.97 on Friday – having drifted down from a (recent) closing peak of $2.14 earlier this month.
Aveo is currently trading at an attractive 0.52x P/B vs. 1.8x for its peer group, with the next closest peer valuation at 0.7x P/B. An offer of >0.7x, a level last traded as recently as June 2018, appears reasonable with ~92% of assets in investment property.
The partial offer has successfully closed, with no major surprise in the expected pro-ration and the back end traded higher than one’s purchase price – not down. Some of this may be due to lack of stock borrow, and conversely, some of the strength may be due to those who had shorted their borrow buying back their short.
That left us with a question – do we want to own a residual here? Or instantiate a new position? The current post-tender price was 35.7% higher than the undisturbed price.
Travis could not recommend an outright buy on fundamental reasons. He thinks the Itochu story is reasonably compelling, or will be, but the lack of near-term observable fundamental turnaround may disappoint some. There may not be a lot of IR or analyst coverage of the situation either. For that, if you have a residual trade, he would sell it here.
This is not a short recommendation. This is a “It was a good arb trade and now the arb trade is over so don’t become a long-term investor just because it is doing better than you thought.”
CATL which grabbed Panasonic Corp (6752 JP)’s leading position in the battery supplier industry last year now seems to be grabbing the latter’s key customer as well. The news circulating states that CATL could power Tesla Motors (TSLA US)’s Model 3 cars which Tesla is planning to start assembling at Tesla’s new factory near Shanghai.
However, the news lacks credibility as neither company has commented on the matter, while Tesla has already agreed with Tianjin Lishen to supply batteries for its Chinese Plant.
But if true, Tesla would be the key one to benefit, while CATL could be taking up a considerable share of risk in terms of stable future orders.
The boards of Medco Energi Internasional T (MEDC IJ) and Ophir have agreed to increase the Offer price to £0.575 from £0.55, representing a 73.2% premium to the undisturbed price. All other details of the scheme remain unchanged. The court meeting is to take place on the 25 March, while the long stop is the 20 June – unless both companies agree to an extension.
Subsequent to the bump, Coro Energy PLC (CORO LN), which had previously submitted a non-binding cash/scrip reverse takeover offer, declared it has no intention to bid. Sand Grove has also announced it has given an irrevocable undertaking to vote its 18.73% in favour of the scheme. Coro held discussions with Sand Grove before abandoning its bid.
Petrus, which previously estimated a £0.64 – £1.42/share range – just for Ophir’s SEA investments, has yet to respond to the Offer increase; but it’s wholly doubtful their position has altered. Shortly before the bump, it said it would vote its 3.95% stake against the scheme.
While I consider the offer for Ophir sub-optimal – and shares have closed above terms on 30% of the trading days since Medco’s initial offer – Petrus alone cannot disrupt the vote. Medco’s Offer is conditional on 75%+ approval from Ophir’s shareholders, which appears less tenuous following the 4.5% bump and Sand Grove’s irrevocable undertaking. Shares closed at £0.569 on Friday.
CMA CGM SA (144898Z FP)has 89.47% of CEVA and will now move to squeeze out and delist. The additional tender period will run from 20 March to 2 April. CEVA’s board of directors have reversed their earlier opinion and recommend shareholders to tender.
If delisting occurs, it is expected concurrently occur with a squeeze-out, which would be expected to take place in the third quarter of 2019 once all stock exchange and other legal conditions are fulfilled.
Depending on the final tendered %, the squeeze-out will occur via the simpler market squeeze-out process if CMA gets 98%+; or the more complex off-market merger/squeeze out route if the % tendered is between 90%-98%.
Ecopro BM is up 48% since its IPO on March 5th. Ecopro, which holds 56% in Ecopro BN is up just 1%. That stake is now worth 115% of its market cap.
The stub assets primarily comprise a 100% stake in Ecopro Innovation, which is involved in the processing of lithium for lithium ion batteries. Innovation’s net profit increased to ₩26.3bn in the 1Q-3Q18 from ₩10.4bn in 2017. Innovation’s book value also increased to ₩35.3bn at the end of 3Q18 from ₩7.4bn at end of 2017.
Douglas Kim recommended going long Ecopro Co and shorting Ecopro BM. Plugging in his numbers, I back out a discount to NAV of 55%. Both legs are pretty liquid.
Curtis Lehnert closes this set-up trade as levels have reverted to the average. Both companies recently reported so-so results, suggesting the core business continues to face declining revenue from “roadshop” brands aimed at the lower-end of the market.
More surprising was the stock buyback announced at both companies 20 days after the earnings announcement, which spurred a 15% rally in the Group’s share price while Corp rallied nearly 11%. The buyback announcement seems to have caught the market by surprise and also caused the stub to revert to its 6-month average level of ~16% discount to NAV.
Douglas recommended closing the Hyosung unwind trade, which has returned ~8.2% before comms and borrowing cos.
The reason for Hyosung TNC’s recent move upwards? Right place, right time it would seem, as its trading value substantially increased, touching ₩8.9bn on the 19 March, the highest level this year, and the highest level since August 22nd, 2018.
On November 13th last year, Linkbal announced it was looking to move from MOTHERS to the TSE First Section. The stock rallied. Then it fell a lot. On March 5th, the company announced a forthcoming tachiaigai bunbai offering designed to increase the float. This would get it most of the way towards meeting the requirements, but likely not all the way.
An inclusion is still months off. And there would likely be another sale to increase shareholder count by 800-1000 before then, whether in the form of a Public Offering/Uridashi or in the form of another tachiaigai bunbai.
The company’s market cap is not large enough to warrant analyst coverage, and float will remain relatively small. I expect the stock to get re-evaluated by small-cap managers. There are some. There probably should be more.
Travis recommended investors buy the stock – which traded over 2% of shares outstanding at -2% in the first five minutes, and 3% of outstanding in the first 20 minutes, before rising to close +13.6% on Wednesday. The stock fell 6% on Friday.
Hopewell Holdings (54 HK)‘s “Egregiously Bad” scheme has passed with 96.27% of disinterested shareholders approving the resolution. Shares will now be suspended at the close of trading on the 17 April. Cheques are expected to be dispatched on the 14 April. Seems like I’m not the only one as David Webb was also unimpressed with the Offer.
After Eclipx (ECX AU) announced a 42.4% decline in NPATA in the first five months vs. FY18, and other significant issues in the Right2Drive and Grays divisions, Mcmillan Shakespeare (MMS AU)said it did “not believe it will be possible to complete the proposed scheme“. Eclipx closed down 60% on the week.
Brookfield has received FIRB approval in its tilt for Healthscope Ltd (HSO AU). The AFR is reporting (paywalled) that BGH is now out of the running for Healthscope. Which leaves Brookfield’s twin bids ($2.50 via a scheme or $2.40 via an off-market takeover) as the expected winner. Norges Bank announced it now holds 5.08%.
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.
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.
Theme of the week: Block trades/Placements + news flow on upcoming IPOs
Starting with placements, the shareholders of Wuxi Biologics (Cayman) Inc (2269 HK) are back on the market again to sell some shares. They been quite consistent with the selling and our team have covered the company the IPO each of the placements. Wisetech Global (WTC AU) and Platinum Asset Management (PTM AU) also had blocks that were sold earlier this week. The former did excceedingly well post-placement, currently more than 10% above its deal price while the latter had struggled as a result of Kerr and his ex-wife selling a portion of their shares in the company.
As for upcoming IPOs, Hong Kong ECM activity is ramping up. Megvii, the Chinese AI startup is looking to list in Hong Kong or US whereas China Feihe (FEIHE HK) is said to be revisit its US$1bn HK IPO. Ke Yan, CFA, FRM has covered the latter in this insight almost two years ago.
We also heard that Frontage had already met investors and Ke Yan, CFA, FRM has provided preliminary thoughts on valuation in:
Mulsanne Group (previously known as Alpha Smart (GXG)), Xinyi Energy Holdings, CMGE Tech, and 360 ludashi (鲁大师) re-filed their draft prospectuses. We have covered Mulsanne and Xinyi Energy in:
360 ludashi’s previous filing indicated that its IPO deal size will be small (<US$100m). However, the updated financials shown an almost 50% YoY PATMI growth which could put its IPO at a borderline deal size of US$100m if growth maintains at 50%.
In the U.S, Yunji Inc. (YJ US) filed for a US$200m IPO. The company runs a Chinese e-commerce site that uses a social platform to promote its products. We will be writing an early note on the company next week.
In Singapore, Eagle Hospitality REIT is said to have started investor education for its IPO while Lendlease is planning to raise up to US$500m for its retail REIT according to media reports.
In other ASEAN markets, there are also a handful of IPOs to watch out for.
In Indonesia, Lion Air is said to be targeting US$1bn listing in the third quarter of this year and it is starting to gauge investor interest. MAP Actif has already started pre-marketing its IPO.
In Thailand, Kerry Express Thailand is said to have hired banks to prepare for a >US$100m IPO.
In Malaysia, QSR Brands (QSR MY) has started to pre-market for its US$500m IPO. Sumeet Singh had previously written an early note:
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.
Today’s Micron earnings call underscored how difficult the memory business is getting, and the company’s guidance indicated that this is only the start of it. Revenues for 2FQ19 were down 26% Q/Q at $5.8 billion, and the company projects 3QF19 revenues to fall to $4.8 billion.
The news released on the 11th of March, about Tesla Motors (TSLA US) choosing CATL (A) (300750 CH) as battery supplier has focused much attention on the two companies and other battery suppliers. CATL which grabbed Panasonic Corp (6752 JP)’s leading position in the industry last year now seems to be grabbing the latter’s key customer as well. The news circulating states that, CATL could power Tesla’s Model 3 cars which Tesla is planning to start assembling at Tesla’s new factory near Shanghai. Following the release of this supposed deal, the stocks of the two companies moved positively, with CATL surging by almost 6.7% while Tesla rose by almost 2.4% during the day. However, both parties have not commented on this news yet or made any formal announcement regarding such a potential deal. In our Insight, Tesla Drifting Away Could Leave Panasonic Struggling to Gain Traction in China, we mentioned that Tesla was looking to locally source its batteries in China and that CATL could potentially be one such supplier. However, in January this year, it was reported that Tesla had signed a preliminary agreement with China’s Tianjin Lishen to supply batteries for its new Shanghai car factory, making the current news look less believable. Although it seems like the ongoing news about a Tesla-CATL pair up lacks integrity, with CATL sort of denying its intend to work with Tesla (according to an updated news release), the news does look interesting and its effect upon the related companies seems noteworthy.
The worst business, online game, recovered in 4Q2018, because small competitors died.
The growth rate of game broadcast also bounced up in 4Q2018, as an important competitor Panda TV went bankrupt.
In fact, games are only a small part of Tencent and other businesses have been growing strongly.
The re-organization in October 2018 controlled expenses well.
The 5-year P/E band suggests that Tencent’s stock price has upside of 26%.
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.
Relative strength for the PHLX Semiconductor index began a bottoming process in November of 2018. In mid-December. Since then we have expanded our recommendations substantially and upgraded Technology to overweight in late-January. Despite four months of outperformance, we believe the move for semis is just beginning. In today’s report we highlight our favorite technical setups, including: AMAT, MRVL, AMBA, STM, ON, MU, NVDA, SWKS, MCHP, TXN, AVGO, LRCX, NXPI, ASML, TER, MKSI, ICHR, ACLS, and TSEM.
In my earlier insights, I looked at the company’s background, past financial performance, scored the deal on our IPO framework and compared it to Futu Holdings Ltd (FHL US):
Established in 2013, this has been a huge success story in Japan. The company operates the largest C to C mobile app that allows customers to trade in second hand goods with each other. Growth has been phenomenal. In the year to 6/15, Mercari had revenue of Y4.2bn, three years later (6/18) this had risen to Y35.7bn. This growth carries on, first half revenue this year to December 2018 rose 45% to Y23.7bn. It has begun an operation in the US, currently loss making, and has just introduced “Merpay”, a prepaid card incorporated into one’s mobile phone along the lines of Suica that allows users to purchase goods and pay bills. Funds can be deposited following a sale on Mercari’s site or transferred from a bank. Revenue will probably continue to grow at a rapid pace and whilst there are some that will jump on board, it is impossible to come up with any sensible valuation that can really justify a purchase here. There is no p.e.r. and the company will be loss making for the next couple of years. Its market cap of Y440bn means that it is trading on perhaps 6x 6/20 sales. On top of this, there are risks with regards to the viability of its US operation. Management appear to be aware to this and have set certain time limits for a turn around. There are many BUYS out on this name, thematically it has much going for it, but the valuation leaves us cold.
In my original insight on January 15, 2019 TRADE IDEA: Amorepacific (002790 KS) Stub: A Beautiful Opportunity, I proposed setting up a stub trade to profit from the mis-priced stub business of Amorepacific that was trading at its widest discount to NAV in at least three years. During the 65 calendar days that followed, Amorepacific Group (002790 KS) has gained 7.3% and the outperformed Amorepacific Corp (090430 KS) by 2.84%. The trade has reverted to average levels in a period of about two months and in this insight I will outline why I think the trade is over.
In this insight I will discuss:
Performance of ALL my recommended stub trades
a post-trade analysis on the Amorepacific stub
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.
There is no apparent value enhancement to Naspers Ltd (NPN SJ)‘s spinning-off and separately listing Tencent Holdings (700 HK), while there is no change in governance and no monetisation at the parent level.
Preceding my comments on Naspers 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 in percent – of at least 20%.
SamE voluntarily red flagged its 1Q19 earnings even before 1Q ends. SamE mentioned two things: 1. Falling memory chip prices and 2. slowing demand for display panels. Given the ‘usual’ profit size of DP business, this should be all about memory chips, specifically server DRAM.
Memory chip price falling should not be enough to explain this much 1Q profit loss. It must be that SamE has decided to reflect huge inventory losses and pay bills from Amazon and Google on the book in this first quarter. Of course, SamE wouldn’t want to talk about this explicitly.
SamE shares aren’t reacting to this a lot right now. It is mainly because local street already heavily adjusted 1Q OP to as low as ₩6.5~7tril. This 1Q earnings shock factor must have been already reflected into the price. Even below ₩6tril level wouldn’t be taken as a huge surprise.
SamE said last month that memory sales would be revived starting 2H this year. I think this is still a valid and crucial point. This suggests that server DRAM demand from Amazon and Google will likely be back starting 3Q19. This means SamE is confident that it can handle the server DRAM optimization issue by then.
I’m still sticking to my previous OP forecast for FY19. It should be ₩8tril more than the current street consensus. At this, SamE Common is trading at a 8.73x PER. SamE is scheduled to deliver 1Q19 interim numbers next week on Apr 5.
Chris Hoare downgraded China Mobile (941 HK) some time ago on rising concerns that 5G capex would be higher than expected. While China Unicom (762 HK) and China Telecom (728 HK) both laid out very modest 2019 5G capex plans, China Mobile did not. And despite what we saw as reasonable results, earnings guidance was weak and the lack of a rising dividend payout suggests internal concerns over 5G spending. We had seen China Mobile as a defensive stock, but recent strong performance and rising 5G worries led us to downgrade our recommendation. It remains at Reduce with a HK$75 target.
China Telecom (728 HK), having delivered strong revenue growth but weak margins in 3Q18, delivered better 4Q numbers. Like its peers however, the business is under some pressure with ARPUs weak despite strong data growth. We see the Chinese Telcos as vulnerable to policy demands for accelerated 5G spending. While the market may like the look of a joint roll-out of 5G with China Unicom (762 HK), that may be simplistic. Chris Hoare thinks the cost of a combined roll-out is likely to be even higher than China Mobile (941 HK). Recent price strength makes our Reduce recommendation clearer.
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.
The global gaming market is transitioning towards mobile gaming, which currently captures around 50% of market share. This has resulted in Korean gaming company Nexon slowly shifting its focus towards mobile games.
Over the year’s Nexon’s mobile gaming segment has grown faster than the PC online segment. When looking at the five-year revenue CAGR between the two business segments, the PC online segment has grown at a CAGR of 9.4% over FY2013-18 while the mobile games segment has grown at a double digit CAGR of 14.1% over the same period.
For the mobile gaming segment, in the future, Nexon’s primary focus includes developing mobile games based on IPs of older PC games.
The company has a steady line up of mobile games planned for FY2019, with ten titles set to release in the first half.
On our estimates, Nexon seems over-valued, currently trading at a FY1 EV/OP of 9.6x compared to its five-year historical median of 7.7x.
This post looks at the tax situations that Nexon’s Kim may be facing for each of the two options and the signals that he may be sending with regard to his decision. Also, this post discusses how each option may impact on mandatory tender offer which is a crucial point for current massive short buildup on Nexon Japan shares.
The fog lifts, slowly, on Nissan Motor (7201 JP), but merger talks will have to wait until the company gets its governance in order, and a full-on merger seems remote at best.
Both Mio Kato, CFA and Travis Lundy tackled a report in the FT suggesting that Renault “aims to restart merger talks with Nissan within 12 months” and the long-awaited release of Nissan’s Special Committee for Improving Governance (SCIG) report.
Governance weakness under Ghosn was inexcusably bad. Worse than previously reported. Ghosn unilaterally decided the compensation of directors, top management and himself, while Kelly held broad sway over essentially everyone else, acting as a gatekeeper even against auditors and the accounting department. And it appears that there is zero understanding at Renault that Renault itself is not blameless for bad governance at Nissan over the years. The SCIG recommendations to the board now are, on the whole, pretty decent.
If France and Renault “push” for a merger, Nissan will continue to push back for the foreseeable future. As the governance report shows, the house is nowhere near being in order. All that has happened is that the steps which need to take place for it to be put in order have been identified.
Where Mio and Travis diverge – click to both insights below – is that Mio thinks a breakup of the alliance is more likely than a merger near term, especially if Paris continues to ignore Nissan’s priorities and constantly push for a merger ASAP. He does not feel scale is quite as necessary as people seem to assume, as long as you have access to a strong supply chain.
Travis thinks an outright merger is also unlikely, as the trust is not there, but is a big fan of the existing single platform design to lower costs and reduce parts count. There would be no need to replicate the R&D for parts and platforms across multiple marks, so he thinks the production alliance stays in place even if the capital alliance does not move further.
Sanghyun Park concluded the market had misinterpreted Amazon’s server DRAM demand cut in 4Q18. It wasn’t a sign of falling demand nor is there any convincing sign of server DRAM demand drop-off. It’s more a technical issue and by the time SamE gets the optimization issues right, server DRAM demand of Amazon and Google will return, stabilising DRAM prices.
And that demand may come sooner, potentially by the end of 2Q. This will lead to a ₩4tn quarterly addition to the current street consensus, which backs out a current PER of ~9x.
SamE is up since Micron announced it plans to reduce its output of DRAM and NAND by ~5% this year. From a Common-1P perspective, Sanghyun recommends going long the Common.
Aqila Ali discusses Denso Corp (6902 JP) investment in Airbiquity Inc, one of the leading companies in the connected vehicle services sector and one of the companies that has continuously developed automotive telematics technology. This proposal follows its investment in Quadric.io this year. Denso is in full swing in the development of its autonomous driving business and next-generation technologies development, and it wouldn’t be a surprise to see Denso emerge as the first mover in next-generation technologies such as AD and connectivity solutions. (link to Aqila’s insight: Denso Continues to Strengthen Its Investment CASE with Acquisitions)
Wesfarmers Ltd (WES AU) surprised the market and announced a non-binding proposal to acquire Lynas at A$2.25/share (cash) by way of a scheme. This is a 44.7% premium to the one-day price and a 36.4% premium to the 60-day price. However, it is a 0% premium to the price at which Lynas was trading on 3 December 2018, the day before the Malaysian government imposed two pre-conditions on the rolling over of the processing licence (later in 2019), and it is a 3.2% premium to the one-year average as of 4 December 2018. Lynas rejected the proposal the next day.
Lynas shares have, since mid-December, been trading as if there is significant risk to the renewal of their operating license in Malaysia.
This is a long-term bet by Wesfarmers. But seeing it through would require that Lynas shareholders decide once Malaysia has approved the renewal of their license that this business won’t be able to see better margins ahead the way there was a dream to see them a year ago. Travis did not think that the increased buying on the dip by Greencape Pty and FIL since the Dec 4th announcement are omens of a desire to sell at A$2.25.
A priori, the bid by Wesfarmers does not increase the likelihood of a good outcome on the Malaysian regulatory front. And it disappears if Lynas can’t sort its problems satisfactorily. Therefore, it is not clear what value the bid brings to Lynas shares today. If neither the outcome’s probabilities nor the outcome’s price levels change, the bid should have no material impact on Lynas shares.
At the time of his report, Travis thought this would be a short if the stock pops to the very high A$1 range or A$2.00 area. One caveat to shorting too low: if you think WES would conceivably bid quite a bit higher to enable Lynas to have a processing plant and battery plant at WES in Australia and maintain processing in Malaysia, that might be a different story.
The ACCC said will not oppose a tie in between IPH Ltd (IPH AU) and Xenith. Xenith acknowledged the ACCC decision resolves a major uncertainty, but stops short of supporting IPH’s offer as there still exist a number of concerns as detailed in its 19 March announcement.
None of these remaining concerns raised by Xenith appear deal-breakers, and Xenith’s general pushback fails to mention the benefits of leveraging off IPH’s Asia-based presence, IPH’s superior liquidity (versus QANTM limited liquidity), together with the certainty of value under IPH’s offer via the large cash portion.
With IPH’s 19.9% blocking stake, the QANTM/Xenith scheme is a non-starter. Xenith still should engage with IPH, whose offer provides a gross/annualised spread of 7.5%/24.5% – a decent risk/reward – assuming late July completion. The scheme meeting to decide on the QANTM Offer, scheduled for the 3 April, has now been postponed.
SOE State Power Investment Corporation (SPIC) is seeking to privatise China Power New Energy Development Co (735 HK) by way of a Scheme at $5.45/share, a 41.9% premium to last close and a 78.1% premium to the 30-day average. A scrip alternative (6 New shares for one Scheme shares) into an unlisted vehicle under SPIC is also available, but presumably just for SOE shareholders. China Three Gorges, CPNED’s largest shareholder with 27.10%, have given an irrevocable undertaking to vote for the Scheme and to elect the share alternative.
This looks like a pretty clean, straightforward privatization. It is priced above the highest close since its listing by way of introduction on the 18 July 2017, while the excitement over the potential injection of all nuclear power assets and businesses from State Nuclear Power Technology Company has been removed after the restructuring was cancelled in July last year.
Clarity is required as to whether China Three Gorges can vote at the court meeting. Based on the Code, it appears evident they cannot. In addition, the final dividend is expected to be added to the offer price, but again, the announcement is not explicit on this.
The stock is currently trading at an attractive gross/annualised spread of 7.5%/25.7% conservatively assuming a late July completion, and inclusive of the final dividend.
Merck KGaA (MRK GR) has launching an unsolicited, fully financed tender offer on VSM at $48/share cash, a 52% premium to VSM’s stock price on January 25, the day before it agreed to sell itself to Entegris Inc (ENTG US)‘s in an all-stock deal.
Conditions include a minimum acceptance threshold (a majority of shares), the rejection of ENTG’s offer, HSR/CFIUS clearance, plus the usual MACs. Merck does not rule out an increase in the Offer price.
The shareholder vote on the VSM/ENTG is scheduled for April 26th, 2019. The record date to vote is April 2, 2019. This means the last day to buy and participate was this past Friday.
Merck said “the Versum board’s hasty rejection of our proposal and unwillingness to engage in discussions with us has forced us to take this proposal directly to shareholders. … Tell the Versum board to start doing its job and put your interests first.”
A combination of Blackstone and Hellman & Friedman LLC launched an non-LBO LBO for Scout24 in mid-January at €43.50/share (€4.7bn), which was about an 8% premium to the then-current market price, which had already been juiced because of speculation starting after the FT article in late December. Scout24’s Board rejected the Offer. The two buyers came back in mid-February with a Takeover Offer priced at €46.00/share. Both Scout24’s Management Board and Supervisory Board agreed to support the offer. The BidCo has now officially launched its Tender Offer.
The unusual thing about this deal is that the two PE firms are looking to buy a minimum of 50% plus one share, and leave the company listed. The stock has been trading above terms since the new €46 bid. It appears the idea is that another bidder might come in over the top. Travis tends to think the occasional trading at just above €46 is due to arbitrageurs looking at this as a put option. Plus, the lack of additional noise means another bid may not be forthcoming.
Because Scout24 is basically a pure play inline classifieds business, it gets a decent multiple (17x 2019e EV/EBITDA). That said, it is not overwhelmingly expensive for a business which has strong network effects and significant ability to create niche marketplaces using existing technology/IP.
Travis would see nothing wrong with selling in the market here, but as an arb, he is still a buyer at €46.01/share.
Naspers announced the intended listing of its international internet assets on Euronext Amsterdam “no earlier than H2 2019“, together with a secondary, inward listing on the Johannesburg Stock Exchange. The Newco spin-off will include Naspers’ holdings in listcos Tencent and Mail.Ru (MAIL LI), together with ex-South African internet assets. Naspers will maintain a 75% stake in Newco plus Takealot, Media24, and net cash.
Newco’s discount is likely to be narrower than Naspers presently, on account of the smaller free float, and >$2.26bn of investment just from index funds. It will however, still be a Tencent holding vehicle, while Newco’s assets comprise ~94% of Nasper’s assets.
The remaining Naspers, post-spin off could have a wider discount – or “discounts on discounts”. It will be one layer removed from what investors are most interested in – the Tencent holding. As witnessed in other holdco restructurings, providing additional clarity on investments/holdings within a company via spin-offs does not necessarily translate to the parent company’s discount narrowing.
Assigning a 20-25% discount to the Newco and keeping the discount constant (optimistically) at Naspers, gives a negative ~7-13% return. I simply don’t see the value enhancement here, while there is no change in governance and no monetisation at the parent level.
Using a Sum of the Parts analysis, Curtis Lehnert calculated the current discount to NAV to be 37%, the widest level it has been since at least 2015, and approaching the -2 standard deviation level relative to its 6 month average.
The current dividend yield on PCCW was 6.62% vs. 5.55% for HKT. That 1% yield differential is also near the widest since HKT’s listing in 2011.
As Curtis notes, a catalyst for re-rating is hard to find. Still, he argues that the discount has widened out so much that the statistical advantages of mean reversion are in your favor.
Separately – and as expected – the composite document issuance for HKCIM has been delayed until (on or before) the 18 April.
Eclipx (ECX AU) has rallied after a market update confirming it will sell two divisions (Grays and Right2Drive) and use the proceeds to pay down corporate debt.
Ophir Energy (OPHR LN)‘s shareholders approvedMedco Energi Internasional T (MEDC IJ)‘s Offer. Completion of the Offer remains subject to the receipt of clearances from the relevant authorities in Tanzania and not losing all or substantially all of its Bualuang interests in Thailand.
The Offer docs for Healthscope Ltd (HSO AU) have been pushed out to the 24 April so as to incorporate the Scheme and Takeover Documents into a single integrated booklet.
CCASS
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.
The Ministry of Industry Affairs and Communications (MIC, the regulator) released Q3 (Dec 2018) data for industry mobile virtual network operator (MVNO) subs today (29 March) characterized by continued declines in growth YoY (+15% in Q3 v 18% in Q2) and the lowest absolute net adds (+480K) since Q2 2014. Growth for the largest consumer-focused MVNO Rakuten Inc (4755 JP) also appears to be the lowest since data has become available but that is not necessarily a sign of strength for the existing network operators as it makes sense for Rakuten to slow MVNO growth before its October real network launch.
In December (13 Dec after trading hours), the FT had an article noting that Germany’s leading property classifieds firm Scout24 AG (G24 GR) (also known for auto classifieds across Europe) was possibly looking to sell itself and that PE firms were lining up to bid. Silver Lake, which had bought British player ZPG (which operates property portals Zoopla and PrimeLocation) for $2.8bn in July 2018, was mentioned as a bidder. Once owned by Deutsche Telekom, control of Scout24 was sold to Blackstone and Hellman & Friedman LLC in 2013-14 (H&F spent €1.5 billion to take a 70% stake in 2013, and Blackstone bought a stake of undisclosed size in 2014), and they listed the company in 2015 with an initial market cap of €3.2 billion. The IPO was €1.16 billion and both sold down, with H&F fully exiting in a placement in 2016.
The share price had been doing well until Q3 last year when German lawmakers, anxious with skyrocketing property prices, started looking at revamping the structure of real estate transaction costs so that they were borne by sellers rather than loaded onto buyers. The shares fell.
source: investing.com
A combination of Blackstone and Hellman & Friedman LLC launched an non-LBO LBO for Scout24 AG (G24 GR) in mid-January at €43.50/share (€4.7 billion) which was about an 8% premium to the then-current market price, which had already been juiced because of speculation starting after the FT article in late December. The company rejected the Offer saying it was too low.
The two buyers came back in mid-February with a Takeover Offer priced at €46.00/share, 5.7% higher than January’s foray and 27% higher than the level pre-FT article; that was about 25x earnings and 28x 2019e cashflow, which is a bit lower than Silver Lake’s ZPG buy multiple. Both Scout24’s Management Board and Supervisory Board agreed to support the offer and said they believed that the transaction is in the best interest of the Company, and an Investment Agreement was signed between the three companies.
The unusual thing about this deal is that the two PE firms are looking to buy a minimum of 50% plus one share, and leave the company listed. The shares jumped to €46 and have been trading at just below to slightly through, leaving many to think that this was a setup for a strategic buyer or possibly Silver Lake to come in over the top.
The New News
Yesterday, the BidCo officially launched its Tender Offer at €46, due to run through 9th May.
More discussion below.
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.
We think it is pertinent to identify the moment when the crowd turns… and we think it just happened.
concluding that
Our main point is that there is now significantly more risk of being long and wrong on Tesla, not just in terms of portfolio performance, but in terms of career risk. With Tesla’s rising profile and increasingly bizarre behaviour the ability to justify being long and wrong is diminishing rapidly.
Since then, the roller-coaster ride has, if anything, been even more volatile and the vehemence of both bulls and bears has not decreased.
With recent developments such as the collapse in unit volumes following the reduction of subsidies for Tesla, the departure of CFO Deepak Ahuja and the underwhelming Model Y reveal, we highlight what we believe are the most important indicators of failure amongst the deluge of bad news, below.
Ruhnn Holding Ltd (RUHN US) is an e-commerce platform which drives sales through KOLs (key opinion leaders), backed by Alibaba Group Holding (BABA US) which an 8.6% shareholder. It announced its IPO price range of $11.50-13.50 per ADS. At the mid-point of the IPO price range, Ruhnn will raise net proceeds of $113 million, resulting in a fully diluted market cap of $1 billion.
We had previously expressed our concerns about Ruhnn’s fundamentals. Overall, we believe that the proposed IPO price range in unattractive and would stay clear of the deal.
The market misinterpreted Amazon’s server DRAM demand cut in 4Q18. It wasn’t a sign of falling demand. There isn’t still any convincing sign of server DRAM falling demand. By the time SamE gets the optimization issue right, server DRAM demand of Amazon and Google will come. This will stabilize DRAM price as well. Micron’s production reduction will help it.
There seem to be several signs that it will be over much sooner than initially feared. I expect it to be over by the end of 2Q. This will lead to a ₩4tril addition quarterly to the current street consensus. At this, current PER falls to 9x.
This was the basis of the trade. Hitachi Ltd (6501 JP) has been susceptible to pressure for a bump since even before the Tender Offer was announced because of the proxy fight at last year’s board meeting for management rights. Hitachi supported the incumbent who consequently retired as chairman, but kept the continuity. The board was split 6:3.
Since late January or early February when it became clear that board support for the deal was still split 6:3 and one of the points in a couple of the independent directors’ comments as reasons why the deal was not supported was that Hitachi’s bid at NT$60/share did not match an informal offer from Otis at $63/share, it has been clear that one way to extinguish that criticism was to bid NT$63 or higher.
And now Hitachi has. After the close on Friday, a release from Yungtay Engineering (1507 TT) hit the mops system saying that Hitachi had amended the Public Purchase statement by raising the Purchase Price to NT$65/share. This is closer to the high end of the original valuations provided by the law firm and public accountancy firms of NT$40.27-68.31 and NT$55.15-67.83. Taiwan Hitachi Elevator released a press release carried by the ChinaTimes here.
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
China Unicom’s (762 HK) recent 4Q18 results were not great. The overall figures look ok due to strength in the fixed line business which offset weakness in mobile. However, they were the weakest of the three operators and the stock, which has had a strong run, now looks due for a pause. We have turned more cautious on the Chinese telcos on concerns that 5G spending could be higher than expected. Chris Hoare believes a major reason for the Chinese telcos outperforming in the past year has come from declining capex spending expectations. That trend may now start to reverse. While China Unicom has guided for only modest 5G capex in 2019 the focus will turn to 2020 where it is a much bigger issue and while we expect China Unicom to do a joint roll-out with China Telecom (728 HK) we expect the scale of the spending to be larger than an individual build.
Samsung Electronics (005930 KS) met our rally target outlined in 28 January insight SEC and SK Hynix Breakouts at 70.3k. In that insight we outlined the tactical rise would give way to a pullback toward ideal pocket support that would offer a better risk to reward intermediate entry point for SEC.
Multiple rejection at that 47.2-5k barrier call for fresh lows toward preferred pocket and buy support. Only external pressures would adjust our downside bias to lower pattern support that comes in at 35k.
MACD basing support is expected to create a solid support for price on weakness. Risk lies with the MACD slipping back within the pattern range.
Yunji Inc. (YJ US) is a leading membership-based social e-commerce platform in China which primarily sells merchandise through its Yunji app. Yunji is also referred to as a multi-level revenue sharing platform as the business model is based on providing incentives to members to promote products and invite new members through their social networks. Yunji is seeking to raise $200 million through a Nasdaq IPO.
Our analysis of the balance sheet points to waning member engagement which does not bode well for Yunji’s long-term sustainable growth in a highly competitive market.
On Thursday March 21’st 2019, Micron announced latest quarter (Q2FY19) revenues of $5.8 billion, at the bottom end of their forecast range and down 26% sequentially. The midrange of their forecast for the current quarter (Q3FY19) will see revenues drop another 17% sequentially to $4.8 billion, roughly equivalent to the same quarter two years ago. On the earnings call, CEO Sanjay Mehrotra stated that the company would be cutting back both DRAM and NAND production by ~5% in response to a further deterioration in the CY2019 demand outlook. Furthermore, he refused to be drawn as to whether or not the current quarter would be the downturn trough despite reiterating his belief in the widely anticipated 2H CY2019 recovery thesis.
The challenging environment notwithstanding, there were some key positives also from the earnings call. The company is taking decisive and unprecedented actions to reduce their bit supply, actions we believe will be matched by Samsung Electronics and SK Hynix. Gross margin coming into this downturn was a historic high at 61% and NAND gross margins have remained in the high 30% range despite ASP’s falling for five of the past six quarters. Furthermore, as forecasted three months ago, Micron still expects DRAM bit shipments to increase in the current quarter.
Integrating the latest updates from company, we now model Micron revenues declining for two further quarters to reach a trough at $4.5 billion in the company’s Q4FY19. We further model net income in the trough quarter at $1 billion. Thereafter we model a return to modest, sustained growth in the following quarters. Yes, things may be getting worse for Micron but they are still remarkably good.
Pinterest Inc (PINS US), a leading digital media platform in the US, is getting ready for an IPO in the next several weeks. In our view, this is one of the most exciting global tech IPOs since the Elastic NV (ESTC US) IPO in October 2018. Pinterest has one of those rare combinations of strong sales growth, leading website brand awareness, loyal users network effect, and a clear path to profitability. Pinterest was most recently valued at $12.3 billion in private market valuation when it raised $150 million in 2017.
One of the attractive features about Pinterest is the fact that it has a very loyal user base among moms in the US. According to the company, about two thirds of its total user base are female, mostly in the US. Nearly 8 out of 10 moms (who are often the decision makers for purchasing household goods) and about half of the millennials in the US regularly use Pinterest.
The company has a very attractive income statement. Its revenue increased 59% CAGR from 2016 to 2018 and its operating losses have been declining nicely. Operating loss as a percentage of sales declined from 62.9% in 2016 to 9.9% in 2018.
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.