Lyft Inc (LYFT US) announced an increase in its IPO price range from $62-68 to $70-72 after previous reports had indicated that the IPO became oversubscribed very early.
There has been significant coverage of the name on Smartkarma but a disappointing lack of obvious puns:
We would highlight Johannes’ interview piece as being well worth a read to understand the driver perspective, as well as Sumeet’s piece and the comments sections for discussions of business model strengths and weaknesses.
Ultimately, this issue isn’t going to be bought for its cheapness and we would guess that it will be successful (initially) due to pent up demand and relatively strong broad stock market performance over the last few months. Below, however, we examine NY transportation data to point out what we feel are misconceptions about the overall value proposition of the ride sharing industry.
Since then, Money Forward’s share price has picked up (closing at JPY4,400 on 26th March 2019), on the back of strong topline guidance for FY11/19E (+55%-65% YoY growth) and “aggressive” medium-term profit targets (positive EBITDA by FY11/21E).
However, following our recent conversation with MF’s IR team, we believe that the above guidance needs to be slightly toned down.
SNK Corp (950180 KS), a Japanese game company founded in 1978, is trying to complete its IPO in the Korean stock market (KOSDAQ) in April. SNK is well known its The King of Fighters game. The IPO price range is between 30,800 won and 40,400 won. The IPO base deal size ranges from $114 million to $150 million.
This is the second time that SNK Corp is trying to complete the IPO after a failed attempt in late 2018. The company has reduced the average IPO price range by 12% this time compared to the first try in late 2018.
The bankers used four comparable companies including Webzen, NCsoft, Pearl Abyss, and Netmarble Games to value SNK Corp. Using P/B valuation method, the bankers derived an average P/B multiple of 4.1x. The bankers then took the applied equity (controlling interest) of the company and applied the P/B multiple of 4.1x to derive an implied value of the company. After applying additional 8.57% to 32.99% IPO discount, the bankers derived an IPO price range of 34,300 – 46,800 won.
Have you ever wondered how a company secures the Chinese lucky number “8” as their ticker in Hong Kong? I’ll explain later on, but let’s just say that being the son of Li Ka Shing helps.
Li Ka Shing is a name that hardly needs introduction in Hong Kong and Richard Li, Li Ka Shing’s youngest son and Chairman of PCCW Ltd (8 HK), follows suit. After being born into Hong Kong’s richest family, Richard Li was educated in the US where he worked various odd jobs at McDonald’s and as a caddy at a local golf course before enrolling at Menlo College and eventually withdrawing without a degree. As fate would have it, Mr. Li went on to set up STAR TV, Asia’s satellite-delivered cable TV service, at the tender age of 24. Three years after starting STAR TV, Richard Li sold the venture, which had amassed a viewer base of 45 million people, to Rupert Murdoch’s News Corp (NWS AU) for USD 1 billion in 1993. During the same year, Mr. Li founded the Pacific Century Group and began a streak of noteworthy acquisitions.
You may be starting to wonder what all of this has to do with a trade on PCCW Ltd (8 HK) and I don’t blame you. In the rest of this insight I will:
finish the historical overview of the Li family and PCCW
present my trade idea and rationale
give a detailed overview of the business units of PCCW and the associated performance of each
recap ALL of my stub trades on Smartkarma and the performance of each
Keyence Corp (6861 JP) has long been a standout within the Japanese machinery sector for its exceptional margins, with only Fanuc Corp (6954 JP) and perhaps Smc Corp (6273 JP) really operating in the same the stratosphere. But while Fanuc has faded, with its OPM now struggling to stay over 30% and SMC has only recently peaked its head over the 30% level, Keyence has been powering ahead and is on the cusp of recording five straight years over 50% OPM.
With relatively limited disclosures to go along with such stellar performance it is understandable then that some investors are concerned that the story is too good to be true, and even the FT has written a series of articles with a slightly critical bent: 1234
Having recently visited the company, we analyse below, the nature of its competitive advantages by comparing it with its most similar peer Cognex Corp (CGNX US).
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On Friday, Qutoutiao Inc (QTT US) unveiled plans to raise around $11 million (based on the closing price of $11.45 per ADS) through a public offering of 1.1 million ADS. Also, certain selling shareholders will offer 7.5 ADS in the offering. The public offering comes hot on the heels of the announcement of a $171.1 million convertible loan from Alibaba Group Holding (BABA US) on 28 March.
We remain cautious on Qutoutiao as it faces an inescapable catch-22 as it cannot attract users without increasing its user acquisition spend and it cannot reach breakeven without lowering its user acquisition costs. Overall, we would not participate in the public offering.
Qutoutiao Inc (QTT US) announced a USD 100 million share sales by the company and its shareholders, slightly more than two weeks after the lock-up expiration on March 13th. In this insight, we will provide our quick thought on the deal.
According to management, weak demand for factory automation sensors had a significant negative impact on sales and profits in 1Q of FY Dec-19. Also, in our estimation, it is likely to cause 1H results to fall short of guidance. But this should be in the share price, which has dropped by nearly 50% from its 52-week high.
In the year to December 2018, operating profit was up only 2.1% on a 7.0% increase in sales, largely due to an increase in machine vision marketing expenses. In January and February 2019, factory automation orders and sales dropped abruptly as customers sought to reduce excess inventories. In March, some new orders were received for delivery in May, indicating that the situation may stabilize in 2H. Demand for security and automatic door sensors continues to grow at low single-digit rates.
For FY Dec-19 as a whole, management is guiding for a 6.2% increase in operating profit on a 7.2% increase in sales. Our forecast is for flat operating profit on a 2% increase in sales. Sales and profit growth should pick up over the following two years, in our estimation, but remain in single digits.
At ¥1,765 (Friday, March 29, closing price), Optex is selling at 18x our EPS estimate for FY Dec-19 and 17x our estimate for FY Dec-20. Over the past 5 years, the P/E has ranged from 13x to 36x. On a trailing 12-month basis, Japan Analytics calculates 5% upside to a no-growth valuation, which is in line with our forecast for this fiscal year. This suggests: buy either for the bounce or for the long term.
The semiconductor silicon wafer market saw continued growth in demand for all wafer diameters supported by applications for servers, data centers, automobiles and IoT applications.
While the demand for semiconductors, data centers and other IoT applications are declining, Sumco expects firm demand from power semiconductors, sensors and automotive uses. The management expects the demand from the 5G market also to aid in top-line growth.
Sumco has posted an extraordinary loss following the early termination of a long-term polysilicon purchasing agreement. The long-term contract with Osaka Titanium is expected to end in March 2019. We expect this move to help Sumco switch to cheaper polysilicon which in turn should help reduce costs. That being said, some of the long-term contracts for polysilicon are still continuing, and there is still significant inventory built-up so this impact could take four to five years to be fully realised.
Having visited the company recently, Sumco still has more potential brownfield capacity available, which we believe can be used in the event the demand picks up enabling the company to add new capacity faster than its competitors and enjoy the benefits from growing demand and increasing prices.
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BabyTree (1761.HK)’s reported results for FY2018 continues to be impacted by the ‘shift in e-commerce strategy’ post collaboration with Alibaba Group Holding (BABA US) (also a key investor). China’s leading parenting community platform that went public in November 2018 has announced a revenue decline of 4% during 2H2018; its e-commerce revenues were down 70% as its being ‘integrated’ with Alibaba. This is expected to be completed by 2Q2019. While the details of the collaboration (and revenue share, if any) are not given, Management has stated that Alibaba will manage the back-end e-commerce at a reduced cost and better efficiency while it will ‘manage’ users. Despite the fall in revenues, gross profits were up 18% helped by growth in advertisement revenues which now account for 85% of the total. Advertising as a revenue source has limited long term growth and valuation potential compared to e-commerce. The stock is up 25% since results announcement on March 27th, likely enthused by Net profit for FY2018 at Rmb526.2 mn and EPS of Rmb0.29 (implied current Year P/E of 23x). Key risk will be failure to revive e-commerce revenues post ‘integration’.
BabyTree also announced its first global foray – it has invested USD8mn in Healofy, amongst the top 3 leading parenting apps in India currently. India’s online Parenting app segment has numerous players and revenue generation/growth may not be easy in the near term for Healofy. However, our analysis suggests that India’s overcrowded parenting app segment is now witnessing consolidation and this funding could probably help Healofy solidify its ranking amongst top 3 parenting platforms in India. In this context, BabyTree’s foray into India seems well timed. Healofy could potentially follow BabyTree’s operating model and fit into Alibaba Group Holding (BABA US) ‘s India e-commerce strategy (Refer our earlier report Alibaba’s India Game Plan – More than Meets the Eye; Investor Day Analysis (Part II) ).
In the detailed report that follows, we briefly comment on BabyTree’s reported 2018 results and also present a quick overview of India Parenting App segment – key players, investors and why we think it may be on a consolidation mode.
It was reported over the weekend that the troubled display supplier to iPhone maker Apple, Japan Display (JDI) has almost finalized a deal to raise more than JPY110bn (US$990m) from a China-Taiwan consortium and Japanese public-private fund INCJ Ltd.
The China-Taiwan consortium is expected to secure some 50% stake in Japan Display while the top shareholder INCJ’s current stake of 25.3% is expected to be halved.
The consortium is aiming to restructure JDI’s remaining debt payments of about JPY100bn from Apple for the construction of its plant while it also aims to procure parts for the latest iPhone. In addition, the consortium is also trying to modify a contract stipulating that Apple can seize plants if JDI’s cash and deposits fall below a certain amount.
The consortium along with JDI is planning to build an OLED panel plant in China with JDI providing the technological know-how while the consortium partners invest in capital expenditures and equity.
Japan Display has been struggling to navigate its display business due to the slowdown in iPhone sales, falling behind competition on OLED technology and facing stiff price competition from Chinese panel makers.
We expect the proposed OLED plant in China could help the company stabilize its panel business with Chinese smartphone makers Huawei and Xiaomi who prefer to source panels locally from domestic panel makers such as BOE Technology and Tianma.
On Monday, Bilibili Inc (BILI US) unveiled plans to raise around $192 million (based on the closing price of $18.95 per ADS) through a public offering of 10.6 million ADS and a concurrent offering of $300 million convertible senior notes. Also, certain selling shareholders will offer 6.5 ADS in the offering.
We believe bilibili’s fundamentals are mixed as rapid monthly active users (MAUs) and non-mobile games growth is offset by a declining margin and higher cash burn. Overall, the proposed offering is unnecessary and highly opportunistic, and we would not participate in the offering.
Bilibili announced a USD 300 million share placement and a USD 300 million convertible note placement after market close on Monday. This is the first major placement since Bilibili’s IPO in March 2018. In this insight, we will provide our thoughts on the deal and score the deal in our ECM Framework.
While we have been sceptical about Mercari Inc (4385 JP)‘s efforts in the US, we have always appreciated the domestic business and have only been put off by the rather demanding multiples. After speaking to the company, we continue to like the domestic business and feel that recent initiatives to broaden the user base are likely to be successful. In addition, while we still feel that there are numerous question marks about whether the business model can work in the US, we have come around to a more positive view on the company’s execution there. Lastly, we believe Merpay’s edge in the cashless wars is underappreciated and the fall in the share price is starting to make the stock attractive.
We discuss the details below.
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This post estimates Nexon Japan tender price. For this, I use the same approach that a local PE named “MBK Partners” would use based on EBITDA multiple and IRR on a 3 year exit. From their position, the only proven value-up path would be KOSPI moving. MBK must try to stay as conservative as possible. Whatever Netmarble value addition should be an extra when deciding on a tender price. So, I base my estimation solely based on KOSPI moving effect. For this, I use NCsoft as a sole valuation comp.
On April 4, we attended the DTAC shareholders’ meeting and listened to how management defended their strategic decisions in various areas such as legal settlements, marketing, and spectrum bidding. This is our take on their responses to various issue:
Settlement with CAT. DTAC plans to do a further settlement worth Bt9.05bn nett with CAT to resolve all past bilateral issues, but will resume paying dividends in H2’19.
Spectrum. Since they still have less spectrum than both AIS and True Move, we can’t really fault them for bidding for the 900MHz spectrum, especially since competition has come down considerably.
Marketing. Like AIS, they are looking beyond just voice airtime. Mobile gaming is one area they will look at. DTAC’s subsidy on game-centric iPhones and the data airtime that comes with it is significantly more than both True Move and AIS.
Others. They also managed to get a raise for the Chairman and do finishing touches on the PaySabai (a payment platform) consolidation. In our view, these are really formalities at this phase, since PaySabai is pretty much wholly owned.
Here it is. The end – the culmination of years of effort and high balance sheet usage by hedge funds. Altaba Inc (AABA US) is going out with a whimper plus a little upside.
Reportedly plans for the sale of NHC have been abandoned with a focus on selling its Nexon Co Ltd (3659 JP)gaming unit.
We now have an agreed deal for Panalpina Welttransport Holding (PWTN SW) supported by the Ernst Göhner Foundation, the major activist shareholders, and Panalpina management.
Altaba will sell or distribute, in stages, its remaining net assets to shareholders, with a “pre-dissolution liquidating distribution to stockholders (in cash, Alibaba ADSs or a combination thereof), which Altaba currently expects will be made in the fourth quarter of 2019 and estimates will be in an amount between $52.12 and $59.63/share in cash and/or Alibaba ADSs (which estimates assume, among other things, an Alibaba Share price realized on sale and, if applicable, an Alibaba share value at the time of distribution, of $177.00/Alibaba share).”
As p55 of the preliminary proxy makes clear, based on the same US$177/share assumption of value realized or distributed per Alibaba share held, the total distributed would be in a range of $76.72 and $79.72 based on some other assumptions.
A larger portion of the remaining amount could take 12 months to arrive, and there could be other residual portions which will take longer (years), as discussed in the proxy and call transcript.
It looks like there is upside as the stock closed at US$72.76 (at the time of the insight). But there is less than you think simply because it will take time to get out of it. And discount rates of the first portion may be low, but discount rates applied to the later payments post-delisting and post court workout for the Holdback Amount could be higher.
Travis Lundy has opinions on what to do once you start getting into the arb risks. Do read his insight.
Sanghyun Park discussed Nexon sale after the FT reported bankers has stopped plans to sell the holding company NXC. The sale of NXC is probably the simplest exit path for Kim Jung-ju as it would be a more attractive tax outcome than selling Nexon Japan outright.
But there’s a lot of other stuff in NXC that suitors don’t want to, which ideally should be sold before selling NXC. There’s also the issue of whether a tender offer would be required whether the sale of NXC or Nexon – Travis concludes an offer would be required while Sanghyun does not.
Korean local news outlet reported thatTencent Holdings (700 HK)‘s US$6bn bond issuance may be a fund raising for a Nexon takeover. Still, South Korea would prefer keep Nexon’s ownership domestic, which may favour Kakao Games (1404796D KS) or PE outfit MBK.
Summit Ascent announced that First Steamship (the major shareholder) and Kuo Jen Hao (chairman) are in talks to sell their entire shareholdings. No numbers were disclosed. This stake sale would not trigger an MGO and there was no reference to the release of an announcement pursuant to the Codes on Takeovers and Mergers and Share Buy-Backs in Hong Kong. Shares are up 35%.
Summit is trading at a trailing PER of 267x. CapIQ forecasts point to a threefold increase in earnings in FY19, although I would advise caution on those numbers given the tight cluster of target prices; historically, target prices for Summit have been wide of the mark.
First Steamship bought in at $1.06 in December 2017, around the same price when this announcement was made. Should this sale complete, this would result in the third time the shares of the major shareholder have changed hands. This looks like a great opportunity to exit.
On the 20th March, MYO announcing receipt of a letter from KKR saying that the A$3.40 price was their “best and final offer”, making it clear under Truth in Takeovers language that Manikay was not going to get a higher price out of them. Manikay continued to buy shares on the 20th and the 21st, getting to 16.16% of the company as filed on the 22nd.
On Monday 1 April, MYOB announced a supplemental disclosure to the Scheme documents noting KKR’s final intention, and that the directors continued to unanimously recommend the Scheme.
Mid-week, Manikay caved and said intends to vote all its shares for the upcoming Scheme, subject to there being no proposal that we consider to be superior prior to the vote. This is now MUCH closer to being a done deal. It will trade tight.
Travis is a trifle surprised Manikay did not wait a little longer. They were able to increase their stake in the low A$3.30s because of the uncertainty of their intentions, and they could probably have gone close to 20% in the low 3.30s before saying “Yes.” That would have been a welcome extra profit.
Lifeboat market play Ezion has received a bail-out from Malaysia’sYinson Holdings (YNS MK) via a capitalisation of debt and option agreement. Ezion remains suspended.
On the surface, this looks like a bargain for Yinson which is ostensibly taking over Ezion for US$200mn. However, Yinson said that it is still negotiating with the designated lenders of the US$916mn debt on the terms and conditions..
Yinson’s business risks include contact risk, oil price fluctuations and the level of activities in the O&G industry. These risks do not change should the Ezion proposal complete.
The last time came on the heels of a long independent review by EY which found KCF had given up profit to the parent through a series of relatively unfair interested party transaction agreements.
At the end, the Bermudan Court of Appeals went against a Supreme Court decision which had decided that a replacement counterparty decision was prejudiced against minorities, and despite the April 2017 deal being not fair and not reasonable according to the IFA, the parent acquired ~10% (of the 28% it did not own) bringing their stake to 82.3%. A year later the parent acquired another 5.5% bringing them to almost 88%.
Now an offer at SGD 0.60/share (compared to the Revalued NTA of SGD 0.7086/share from the IFA report (p36) of two years ago gets closer to the mark, but crucially, it is designed to squeeze out minorities with the threat of delisting. Kingboard Laminates only needs 2.05% to oblige a delisting from the SGX. As far as Travis can tell, it would require more – at least 95% of shares – to oblige a mandatory squeezeout of minorities according to Section 102-103 of Bermuda Companies Act.
The deal is at a negligible premium and is far, far below Tangible Book Value Per Share (which is almost three times the offer price). Given that the acquirer bought a large stake in the company and offered perpetual capital of almost the current market cap at a significant premium to the MGO price, Travis thinks it an unattractive offer.
It is puzzling as to why the CEO would sell his shares at such a discount, especially when the company and Everbright co-own some of the assets.
While the stated intention of the Offeror is to keep the stock listed, and the MGO is presented almost as “technical”, it would be enormously to Everbright’s benefit to buy as many shares as they could down at this price level. It will go from being underwater on an equity affiliate stake purchase to having a huge writeup in value if Everbright consolidates the asset post MGO.
For that, Travis thinks there is a possibility of a bump just to make it more attractive, though the IFA report could come out with a not fair and reasonable result which shows NTA or NAV far, far higher than the Offer Price, which is not yet declared final.
In a mainly technical piece, I explained why China Three Gorges, China Power New Energy Development Co (735 HK)‘s largest shareholder with 27.1% is currently required to abstain from voting at the forthcoming court meeting, despite the misleading statement in the announcement that China Three Gorges has given an irrevocable undertaking to vote for the Scheme. (link to my insight: China Three Gorges’ Rebuttable Presumption)
What was once a tough deal is now an agreed deal. The deal is 2.375 shares of DSV for every share of Panalpina, which as of the previous Friday’s close had a value of CHF 195.80/share which is a 43% premium to the CHF 137/share, where Panalpina was trading the day before DSV’s first bid.
Panalpina is getting taken out at 28.1x reported 2018 EV/EBITDA multiple (pre-IFRS 16) calculated at a CHF 195.8 price. Panalpina shareholders will own ~23% of DSV shares out if all shares are exchanged and the Ernst Göhner Foundation will be the largest shareholder at ~11%.
69.9% of shares have irrevocably agreed to support the Exchange Offer. The customary condition is 80% to make it go through, meaning DSV needs another 10.1% out of the 30% extant (or just over one-third).
Travis expects there is another 10-15% held by arbitrageurs and 5-7% held by indexers already so this deal looks to me like it is done. He expects the Exchange Offer may settle as early as early-August. If it trades tight, he would get out because DSV is probably priced to a very good level.
Reuters reported that Alexey Mordashov’s Severgroup had reached an agreement to buy a 41.9% stake, excluding treasury shares, in Lenta from those TPG and European Bank for Reconstruction and Development, for a total of US$721mm, or US$18 per share or US$3.60 per GDR. That implies a price of US$1.75bn for the whole company. This was followed by Lenta announced confirming the cash offer. The Offer Price is an 8.11% premium to the last trade on 26 March – the undisturbed price, and a premium of 9.76% to the 6mo average price of US$3.28 for the GDRs.
The first 41.9% are sold conditional on FAS Clearance (presumably Mordashov has cleared this transaction with “the right people”) expected in May 2019, a few easily achieved conditions, and the condition of no sanctions being in play for any of the selling or buying parties.
Once cleared – expected in May 2019 – this becomes a straightforward offer with no minimum acceptances meaning that investors can sell shares into the deal or decide not to do so.
It’s not an attractive offer price, with the possibility of a bump if enough people complain. If you want to buy and hold, this deal is a put option.
Since announcing 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 – I calculate Naspers discount to NAV has narrowed to 34.4% from 37.1%, the day before the announcement, placing the current discount a shade below the 12-month average.
The likelihood of NewCo trading at a tighter discount to where Naspers’ previously (& currently trades) is universally accepted. Naspers will benefit from that reduced discount via its 75% stake; but it is not known where Naspers’ own discount will trade after the spin-off.
There are indications the management want to see the group discount narrow to 30%, possibly down to the 20% level, which implies a significantly lower discount for Naspers, potentially around 10%. That would seem optimistic as investors focus more on the directly-held Tencent vehicle, and the fact Naspers is a holding company, holding a stake in another holding company.
Naspers’ discount may drift narrower on the expectation Naspers’ spin-off works its magic. Greater clarity on the option into Naspers or NewCo may provide an additional boost; but conversely, if such an option is limited, there is likely to be disappointment.
With Melco trading at a (then) 32% discount to NAV, Curtis Lehnert recommends a set-up trade on a dollar for dollar basis. The current level, as I write, is statistically the most attractive according to the Smartkarma Holdco Tool, sitting at -1.8 standard deviations from the 180 DMA.
Stub assets are minimal – around 8% of GAV – if excluding gaming licenses, goodwill and trademarks. Net cash is $6.4bn or $4.27/share.
Those stub assets are still loss-making, after deconsolidating out MLCO, to the tune of $386mn in EBITDA, but that was an improvement on (HK$682mn) figure in FY17.
Still, Curtis thinks now is the time to enter the trade to take advantage of both the statistical and fundamental supports to the trade.
For the month of March, ten new deals were discussed on Smartkarma with a cumulative deal size of US$22.3bn. This overall number includes Blackstone and Hellman & Friedman’s proposal for Scout24 AG (G24 GR) after the Tender Offer was officially launched in March. This deal was first proposed in mid-January – which was rejected by the board – and subsequently an improved offer was tabled, which was then supported.
The average premium to last close for the new deals announced in March was 18%, while the average for the first quarter of 2019 is 33%.
Delta Electronics Thai (DELTA TB)‘s results of the CVTO have been announced. 42.85% of shares tendered, therefore the offeror held 63.78% of shares at the close of the offer. The MSCI downweight occurred at the close Thursday, however shares popped 17.5%.
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.
This is a “clean-up” as Kingboard Laminates owns 87.96% of Kingboard Copper Foil already.
It is unconditional in all respects and the Offeror owns 87.96%. The goal is delisting. If they get 17.03% of the minority, they will be able to engineer a delisting. Squeezeout is a bit further out but is far from impossible.
This looks like a done deal. This one should trade at shouldn’t trade at a premium UNLESS…
Quiddity’s new Quiddity Singapore M&A Guide 2019 is now published with guidelines to the relevant rules, regulations, documentation, and pointers to the Singapore M&A landscape. Watch for more in the series to be published shortly.
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.
Placements activity picked up momentum this week as evidenced by the number of follow-on offerings launched by a handful of US-listed Chinese tech companies. It all started with Qutoutiao Inc (QTT US) ‘s follow-on offering, then followed by Bilibili Inc (BILI US)‘s equity + convertible note placement, and ending the week with HUYA Inc (HUYA US)‘s follow-on offering and Baozun Inc. (BZUN US)‘s convertible bond and placement.
On the other hand, Ruhnn Holding Ltd (RUHN US)‘s debut this week had been a total disaster. It closed 37% below its IPO price on the first day. This is the worst first-day performance among Chinese ADRs (deal size >US$100m) in the past six months.
Back in Hong Kong, Dongzheng Automotive Finance (2718 HK) also broke its IPO price on the first day after relaunching at a much lower price. As per our trading update note, considering that there will be greenshoe support, we thought that the risk to reward could be favorable for a trade (from its first day mid-day price of HK$2.57).
As for placements, Ronshine China Holdings (3301 HK) seems to have made its equity raise a yearly affair. The company is back to tap the equity market through a top-up placement and it has done the same in 2017 and 2018. The initial deal size was small, US$122m, but was upsized later on. The share price traded well post-placement, closing 9.5% above its deal price of HK$10.95 on Thursday.
Map Aktif Adiperkasa PT (MAPA IJ) will be closing its bookbuild for its follow-on offering next Tuesday (pricing on Wednesday). We heard that books are already covered as of Thursday.
Accuracy Rate:
Our overall accuracy rate is 72.4% for IPOs and 63.5% for Placements
(Performance measurement criteria is explained at the end of the note)
New IPO filings
Changliao AKA 派派(Hong Kong, ~US$100m)
Below is a snippet of our IPO tool showing upcoming events for the next week. The IPO tool is designed to provide readers with timely information on all IPO related events (Book open/closing, listing, initiation, lock-up expiry, etc) for all the deals that we have worked on. You can access the tool here or through the tools menu.
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Naspers (NPN SJ) recently announced another attempt to reduce the holdco discount which has remained stubbornly high despite previous attempts by management to reduce it. Since the announcement there has been movement, so perhaps this time it really is different!
So what is being done? Naspers will spin off its international internet assets, which account for >99% of its value, into a newco. They will then list 25% of newco on the Euronext in Amsterdam by issuing these shares to Naspers’ shareholders. The intention is to create a vehicle which can attract increased foreign and tech investors without the complication of a South African listing. The company believes this has been a key factor behind the wide holdco discount. The move also reduces Naspers weighting in South African indices which is another contributing factor.
Alastair Jones sees the announcement as a positive, although there are still issues with the main listing being in South Africa. He still believes a buyback would be the most effective way to reduce the discount, but Naspers is also keen to keep investing.
Back in September 2017, Lawrence Ho, Summit Ascent Holdings (102 HK)‘s major shareholder, reduced his stake to 18.75% from 27.06% (at between $1.13-$1.60/share, but mainly at the low end of this range), according to Hong Kong Exchange disclosure of interest filings. The share price of this Russian integrated gaming play declined 34% to $1.06/share in the following five trading days. Who bought those shares was not disclosed – CCASS shows these shares moving out of VC Brokerage into at least 10 different brokerage accounts.
On the 15 December, Ho announced a complete exit from Summit, selling 17.37% of shares out. Concurrently Ho resigned from his NED and chairman positions. Those shares moved from VC Brokerage to Sun Hung Kai Investments on the 20 December 2017. Shares traded unchanged on the news.
At the same time, First Steamship (2601 TT)disclosed it held 12.67% on the 18 December 2017. Concurrently, Kuo Jen Hao was appointed as NED and Chairman of the Board, with effect from 28 December 2017. Kuo is also the chairman and the general manager of First Steamship. First Steamship gradually increased its stake to 19.11% as at 24 October 2018.
The New News
Yesterday, Summit Ascent announced it has been informed that First Steamship and Kuo are in talks to sell their entire shareholdings. No numbers were disclosed. This stake sale would not trigger an MGO and there was no reference to the release of an announcement pursuant to the Codes on Takeovers and Mergers and Share Buy-Backs in Hong Kong. Shares are up 24%.
With increased liquidity surrounding the news, this looks like a great opportunity to exit.
Originally I had thought KKR’s offer could go higher. Instead, it came in lower at A$3.40 and KKR gave MYOB Group Ltd (MYO AU) management all of a couple of days to think about it.
Manikay Partners started buying up shares and by early March had reached a position of 11%. They made noise. The Scheme Booklet came out on the 14th of March. Four days later Manikay announced their position was now 13.61% and the following day Mawer announced re-upped its stake from the mid 8s to high 9% level.
The 20th saw a Scheme Update from MYO announcing receipt of a letter from KKR saying that the A$3.40 price was their “best and final offer”, making it clear under Truth in Takeovers language that Manikay was not going to get a higher price out of them.
Manikay continued to buy shares on the 20th and the 21st, getting to 16.16% of the company as filed on the 22nd.
On Monday 1 April, MYOB announced a supplemental disclosure to the Scheme documents noting KKR’s final intention, and that the directors continued to unanimously recommend the Scheme.
Today we have new news.
Manikay Caves and Agrees to KKR’s Reduced (Now Final) Offer
Earlier today a Reuters story about Manikay accepting the offer popped up and MYOB shares popped from A$3.34 to A$3.38-39 area where they closed. Partway through the day MYOB released a document on the ASX feed saying that Manikay had sent a letter saying…
In order avoid speculation regarding our voting intentions in respect of the Scheme, we are writing to inform you that we, Manikay Partners, intend to vote all the MYOB shares that we own or control FOR the upcoming Scheme, subject to there being no proposal that we consider to be superior prior to the vote.
We remain very disappointed that, despite our repeated efforts to convince you otherwise, you failed to change your recommendation in light of the material improvement in market conditions since announcement of the Scheme, among other factors. We are also disappointed that the disclosures to MYOB shareholders did not fully explain the impact of such improved market conditions on the value of MYOB. excerpt of the letter.
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Naver Corp (035420 KS) is nearing tactical support for a trading buy but continues to face macro bear pressure stemming from key resistances note in the weekly RSI and MACD postures. This bear pressure is due to resume after a bounce sequence.
Naver has broken down out of triangulation after completing a corrective bounce cycle outlined in our recent update. Naver Bull Wedge to Trade Higher . We are now resuming the macro down cycle and view tactical rallies as selling opportunities as the major trend remains down.
A Kospi 200 rise above 290 will play a role in lifting Naver in the outlined tactical bounce cycle.
The 4Q18 numbers released by the Malaysia wireless operators, showed stable trends vs 3Q. Market service revenue growth of -1.1% YoY was stable, with Maxis (MAXIS MK) the only operator able to slightly increase its market share (again). While 2H18 marked a small break in the Malaysian wireless sector recovery, guidance for 2019 looks broadly encouraging.
Axiata (AXIATA MK) expects a “promising 2019” with revenue and profit growth momentum (across the board),
Maxis guides for a slight improvement of revenues, albeit with EBITDA declining due to new business opportunities, and
DIGI (DIGI MK) which is a bit more cautious, expects flat revenues.
Data usage is already very high in Malaysia, but we expect growth to continue (at a slower pace) supported by youthful demographics (younger people use more video on mobile). The Malaysian operators have done a reasonable job at monetizing data growth so far.
Chris Hoare turned more positive on Malaysian telcos in early 2019 as affordability has improved and there is a new profitable growth opportunity in fibre wholesale (with Telekom Malaysia (T MK) being forced to offer at low prices). Operating trends have also improved and we expect this to continue. In January, we upgraded Axiata to Buy and both Maxis and Digi to Neutral. None of them are “cheap” with Maxis (MAXIS MK) and DIGI (DIGI MK) on 11-13x EV:EBITDA, and Axiata on a more reasonable 6.5x.
This is a monthly version of our HK Connect Weekly note, in which I highlight Hong Kong-listed companies leading the southbound flow weekly. Over the past month, we have seen the flow turned from outflow in February to inflow in March. Chinese investors were also buying Consumer Staples and Consumer Discretionary stocks.
Our March Coverage of Hong Kong Connect southbound flow
Both the cap- and equal-weighted S&P 500 are trading at highs not seen since early October 2018 – a positive indication in itself. Additionally, key risk-on areas we highlighted in last week’s Compass (small-caps, Financials/Banks, and Transports) have outperformed off the recent lows – a welcomed sight for risk sentiment, and confirms out positive outlook. In today’s report we highlight attractive bottom-fishing opportunities within the Financials Sector, and attractive Groups and stocks within Large- and Small-Cap Railroads, and Internet Software
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Almost 150 years ago in 1871, a modern postal service was established in Japan by the new Meiji government. The following year, a government-sponsored nationwide network of postal services was launched. Postal money orders started in 1875 and other money and payment services started in the following two decades. In the first decade of the 20th century, domestic money transfers and pension payment receipt were launched. In 1916 postal life insurance sales began. Life annuity sales began a decade later. The Japanese postal system of teigaku deposits started in 1941. In 1949, postal operations were established as the Ministry of Posts alongside the Ministry of Electric Communications (Telecommunications), and eventually both were subsumed into the Ministry of Posts & Telecommunications. In 2001, the business of the Japanese postal system was separated into the Japan Postal Agency, a short-lived entity set up under “central government restructuring” which took place that year. In 2003, the postal system was set up as the Japan Post Corporation under a law which established it as a statutory public corporation (in England, the Bank of England, the BBC, and the Civil Aviation Authority are such companies).
The issue of privatisation – i.e. making it responsible for its own accounts, which would take things one step further rather than being a government budget item – had long been mooted but constantly rejected because it might cost jobs and reduce services. Finally after several Lower House LDP politicians voted against Koizumi’s proposal to split the Japan Post Corporation into four parts in summer 2005 and the Upper House knocked it down, Koizumi dissolved both houses of the Diet and called a snap election saying that it was a referendum on postal privatization. He won easily and the bill was passed a month later. Things were iffy as a privatized company for a few years until after the 2011 Tohoku Earthquake, after which the government needed to find sources of extra funds to finance reconstruction. In 2012, the government announced it would sell shares to the public within three years.
Three years ago and change, the government of Japan launched the promised public offering for Japan Post Holdings (6178 JP) (“JPH”), which acted as a holding company for Japan Post Bank (7182 JP) (“JPB”), and affiliated insurance arm Japan Post Insurance (7181 JP) (“JPI”). At the time, the triple-IPO at ¥1.4 trillion was the largest one-day offering in almost two decades, and the situation created some significant and interesting short-term trading opportunities.
In the end, there was always going to be “overhang” because the explicit goal of the privatization policy was to get JPH’s ownership of JPB and JPI below 50%. In doing so, the bank and insurance operations could then go out and compete with other banks and insurers; currently they are to a large extent restricted from offering new products and entering new markets.
Japan Post Insurance announced on April 4th after the close that JPH would offer 168.1mm shares of Japan Post Insurance to the public, with another 16.9mm shares offered in an over-allotment. This is big news as it is almost 31% of the shares outstanding of Japan Post Insurance and will dramatically increase its float.
One can say it is a big deal – ¥450bn (~US$4bn) of stock and at announcement it was equivalent to the last 477 days of traded volume. More importantly, this ALMOST like an IPO in that the placement is almost 3x the original IPO size (66mm shares) and will get a lot of foreign investor attention.
In addition, JPI announced it would conduct a buyback for up to 50 million shares (with a spending limit of ¥100 billion) on the ToSTNeT-3 off-hours auction-like trading system on days between April 8th and April 12th.
JPH announced in its “Intention To Sell shares” announcement (end of section 1 on p2) that if it sold shares in the ToSTNeT-3 trade, it would likely reduce the number of shares it offered.
The stock rallied very sharply Friday, rising 3% at the open and ending the morning session up 3% but rising much further in the afternoon to end up 9.9%.
After the close Friday, the company announced it would spend ¥100bn to buy up to 37.411mm shares pre-open on ToSTNeT-3 on Monday morning. That was 6.2% of shares outstanding.
The dynamics of this ToSTNeT-3 buyback were discussed in Japan Post Insurance – The ToSTNeT-3 Buyback. The ToSTNeT-3 buyback was, at its basest, an interesting garbitrage trade for a limited number of traders but the resulting dynamics are important. They influence the supply in the Offering, the dynamics of demand, and may influence trading patterns into pricing.
There are several things going on here. There is a huge offering, a buyback, earnings accretion, a float change, substantial sale to foreigners this time, and index changes. Sooner and later, it will mean a substantial move towards getting closer to 50%, and the fact that this is now investable for lots of institutional investors.
It is worth looking at these aspects independently to better understand demand for the offering as a whole.
After a WSJ article on Sunday suggesting as much, Monday morning 8 April 2018 saw the announcement of a Proposed Merger between OUE Commercial Real Estate Investment Tr (OUECT SP) and OUE Hospitality Trust (OUEHT SP) whereby OUEHT unitholders would receive a combination of cash and OUECT shares (S$0.04075 + 1.3853 shares of OUECT) for every share of OUEHT held. Investors in each would receive any “permitted distributions” (dividends, etc) declared by the respective managers in respect of the period from 1 Jan 2019 up to the day immediately before the date on which Trust Scheme becomes effective.
This would create a REIT with S$6.8bn of assets, a pro-forma market cap of ~S$2.9bn, and a free-float of S$1.1bn (up by 57%). OUE Group would continue to own 48.3% of the total.
The benefits to investors would be increased scale (2.2mm square feet of commercial net lettable area, + 1,640 hotel rooms), more borrowing capacity, increased diversification as asset concentration would be lowered, and because the scope of NewREIT would be broader, it would allow REIT managers more flexibility. The above-mentioned points are advertised as being the fodder for a re-rating. The idea of possible index inclusion is mooted as well.
The OUECT presentation says that the merger is “DPU accretive to unitholders” (+2.1% on a 2018 pro-forma basis) while the OUEHT presentation says that the merger is “value accretive to stapled securityholders” (+18.7% NAV uplift per stapled security).
Details of how this all works below.
Separately, two other Singapore deals announced at the end of last week include:
In our Discover HK Connect series, we aim to help our investors understand the flow of southbound trades via the Hong Kong Connect, as analyzed by our proprietary data engine. We will discuss the stocks that experienced the most inflow and outflow by mainland investors in the past seven days.
We split the stocks eligible for the Hong Kong Connect trade into three groups: component stocks in the HSCEI index, stocks with a market capitalization between USD 1 billion and USD 5 billion, and stocks with a market capitalization between USD 500 million and USD 1 billion.
In this insight, we will highlight Air China and Great Wall Motor.
In this series under Smartkarma Originals, CrossASEAN insight providers AngusMackintosh and Jessica Irene seek to determine whether or not we are close to the end of the rainbow and to a period of outperformance for the property sector. Our end conclusions will be based on a series of company visits to the major listed property companies in Indonesia, conversations with local banks, property agents, and other relevant channel checks.
In the seventh company in ongoing Smartkarma Originals series on the property space in Indonesia, we now look at Indonesia’s oldest Industrial Estate developer and operator Kawasan Industri Jababeka (KIJA IJ). The company’s largest and the original estate is in Cikarang to the East of Jakarta and comprises 1,239 hectares of industrial land bank and a masterplan of 5,600 ha.
The company has also expanded its presence to Kendal, close to Semarang in Central Java, where it has a joint venture with Singapore listed company Sembcorp Industries (SCI SP). This estate covers a total area of 2,700 ha to be developed in three phases over a period of 25 years and is focused on manufacturing in industries.
The company also has successfully installed a 140 MW gas-fired power station at its Cikarang, providing a recurrent stream utility-type earnings, which cushion against the volatility in its industrial estate and property earnings. After some issues with one of its boilers (non-recurrent) and issues early last year with PLN, this asset now looks set to provide a stable earnings stream for the company.
KIJA has also built a dry-port at Cikarang estate which has been increasing throughput by around +25% every year, providing its customers with the facility for customs clearance at a faster pace of that at the Tanjong Priok port, as well as logistics support.
After two difficult years where the company has been hit by a combination of problems at its power plant, foreign exchange write-downs, and slower demand for industrial plots, the company now looks set to see a strong recovery in earnings in 2019 and beyond.
The company has seen coverage from equity analysts dwindle, which means there are no consensus estimates but it looks attractive from both a PBV and an NAV basis trading on 0.85x FY19E PBV and at a 73% discount to NAV. If the company were to trade back to its historical mean from a PBV and PER point of view, this would imply an upside of 33% to IDR325, using a blend of the two measures. An absence of one-off charges in 2019 and a pick up in industrial sales should mean a significant recovery in earnings, putting the company on an FY19E PER multiple of 9.7x, which is by no means expensive given its strategic positioning and given that this is a recovery story.
Below is a recap of the key IPO/placement research produced by the Global Equity Research team. This week, we update on the bevvy of placements offered by various companies. After placements by Pinduoduo (PDD US) and Sea Ltd (SE US) , we saw more offerings from HUYA Inc (HUYA US) , Bilibili Inc (BILI US) and Qutoutiao Inc (QTT US). We update on these three offerings and perhaps big picture, this could reflect a signalling inflection point in these shares. More details below
In addition, we have provided an updated calendar of upcoming catalysts for EVENT driven names below.
Best of luck for the new week – Arun, Venkat and Rickin
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This post discusses the key questions on Nexon sale at this point. It then provides the most realistic answers to these questions from various circumstantial aspects. This post is based on the recent news reports and also various local sources.
Follow-on offerings by Chinese ADRs are the flavour of the day. Hot on the heels of Qutoutiao Inc (QTT US) and Bilibili Inc (BILI US), HUYA Inc (HUYA US) filed for a potential $550 million public offering without presenting any details on the new ADS being offered. Also, certain selling shareholders will offer shares in the offering.
Huya is one of the few recent Chinese “new-economy” IPOs which has lived up to the hype by delivering a creditable post-IPO financial performance. While Huya has proven to be a good IPO, we believe this follow-on offering is highly opportunistic and would be tempted to participate only at a large discount.
On February 27th of this year, Altaba Inc (AABA US) held a “Strategic and Financial Update Conference Call.” In that call the company led by CEO Thomas McInerney said that effectively it was going to deal with its two major remaining assets (2.03bn shares of Yahoo Japan Corp (4689 JP) and 383.56mm shares of Alibaba Group Holding Ltd (BABA US)) in two stages, saying at the time they were “moving to an active monetization mode on [our] Yahoo Japan stake.”
That Yahoo Japan stake took longer, but the company worked to sell $20+bn of Alibaba last summer through a tender offer and selldown to generate cash for corporate liabilities and taxes, and then the company sold its Yahoo Japan stake in early September.
Since then, there has been a period of watchful waiting. Some have been expecting a period with an acceptable amount of carry and then possible significant upside. I haven’t seen the upside but agree there has been some baseline carry. And if you can get lots of leverage on this and ride the volatility, it could produce an OK return from A to Z if you ignore the indignities and volatility of passing through stops B to Y.
The New News
Yesterday, Altaba and CEO McInerney held a conference call after filing a PRE 14A preliminary proxy statement related to the selldown/unwinding of its entire Alibaba stake and the proposed windup/dissolution of Altaba as an entity.
The company will sell or distribute, in stages, its remaining net assets to shareholders, with a “pre-dissolution liquidating distribution to stockholders (in cash, Alibaba ADSs or a combination thereof), which the Fund currently expects will be made in the fourth quarter of 2019 and estimates will be in an amount between $52.12 and $59.63 per Share in cash and/or Alibaba ADSs (which estimates assume, among other things, an Alibaba Share price realized on sale and, if applicable, an Alibaba Share value at the time of distribution, of $177.00 per Alibaba Share).”
As p55 of the preliminary proxy makes clear (and as discussed in the transcript linked above, which is short and worth reading), based on the same US$177/share assumption of value realized or distributed per Alibaba share held, the total distributed would be in a range of $76.72 and $79.72 based on some other assumptions. A larger portion of the remaining amount could take 12 months to arrive, and there could be other residual portions which will take longer (years), as discussed in the proxy and call transcript.
The figure of $76.72 – $79.72 represents a 5.44-9.56% premium to yesterday’s close of $72.76/share and represents the total of the Pre-Dissolution Liquidating Distribution in Q4 2019, a second distribution in Q4 2020, then residuals thereafter after the court-mandated holdback in the dissolution process pays its claims.
Fair value calculations, parameters, and risk discussion below.
Elaborate fair value calculations using different assumptions of appropriate discount rates for each payment, and exactly how much is in the last bit (and how long it takes to pay out) suggest a group of ranges of fair value, from about 3-4% below the last-traded price, to about 4-5% above. However, for a hedge fund to earn a 10% net return for investors from owning the trade at the close of yesterday, getting there requires a fair bit of leverage and the resulting information ratio may be lower than desirable.
Assuming the approximate time to payment as described in the proxy statement, and amount of payment in the first distribution as described, and a multi-year residual of US$5/share, current borrow rates and an assumption of slightly higher discount rate required for the portion of time the stock is unlisted and even higher when one is receiving residual claims, the current fair value of the stock ranges from about 2% below current price and 4% higher. If you assume a higher Holdback Amount, the range of outcomes shifts lower.
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%.
Huya, a leading live streaming player in China, announced share placement of USD 550 million after market close on April 3rd. In this insight, we will look at recent developments of Huya and score the deal in our ECM Framework.
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Preceding my comments on Amorepacific, Kingboard and other stubs, 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%.
NTT Docomo Inc (9437 JP) recently announced it would sell its 25% stake in Hutchinson Telecom Hong Kong’s ( Hutchison Telecommunications Hk Hld (215 HK) mobile unit for US$60mn with closing expected at the end of May. This ends a 20-year association with Hutchinson forged in the initial excitement over 3G in 1999 but it hasn’t been a good ride for DoCoMo which lost close to 90% on its Hutchison investments and its other international forays were not much better. On a related note, the HK mobile sale follows soon after DoCoMo’s exit from its credit card joint venture with Sumitomo Mitsui but we would not read anything into this beyond a rationalization of its non-core investments.
Changliao Inc (CL HK) is looking to raise about US$100m in its upcoming IPO. The company just filed its draft prospectus with the HKEX last week.
Changliao is a fast-growing social networking entertainment platform. The business model of engaging and monetizing users through interactive games is interesting.
However, the need for an IPO is questionable since the company has a healthy net cash balance sheet and it had paid out dividends in the past two years. It can easily finance its growth through debt or operating cash flow.
Tencent is an investor in the firm, however, it had only invested RMB9m in the company in FY2016. There are no other notable investors despite several rounds of financing.
In this insight, we will look at the company’s business model, analyze its financial performance and operating metrics.
The company has been reporting flattish earnings for the past few years and remains well positioned in its main segments. HOLI is net cash, it has ample cash for that matter, and it has been generating operating cash flow consistently. It hasn’t provided any specific reasons for the capital raise. Which makes one wonder if this is just an opportunistic raise.
In my view, either the company needs to clearly disclose the intended use of capital or it needs to offer the deal at a very wide discount to where the shares are currently trading.
Hoya will continue to refresh its lineup of endoscopes this year as the company introduces new models once in every five to six years and we believe the company’s existing endoscope systems are nearing the end of their life cycles. We believe, this should result in growth in revenues for the company.
Hoya was the first company to introduce its Disposable Injector Development system which is one of the fastest growing businesses for Hoya. The global intraocular market is forecasted to grow at a CAGR of 5.4% until 2024 resulting in growth in top-line for Hoya which has been gradually taking share in this market.
The Luxottica/Essilor merger could pose a significant long-term threat to Hoya and will have a knock-on effect on the rest of the spectacle and eyewear manufacturers due to their market domination. That being said, we forecast the eyeglass and contact lenses to continue to witness growth due to Hoya’s strong presence in the markets in which it operates and a tailwind in the short-term as customers switch to Hoya for diversification reasons. The company’s acquisition of the eyewear business of 3M will also add to the revenue growth.
Hoya holds a monopoly in the glass HDD substrates market and the market is currently underpenetrated. The superior features of glass substrates compared to aluminum should shift the demand towards glass, which is sold at twice the price of aluminum.
Hoya Corporation is currently trading at a 1-year forward EV/EBIT multiple of 16.75x, which is close to its 52-week high of 16.79x. When compared with 5 year forward EBIT multiples there is still room for some multiple expansion in the short-term leading to price appreciation.
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Futu Holdings Ltd (FHL US)‘s IPO was priced at the top-end at US$12/ADS raising a total of US$160m, including the US$70m raised from General Atlantic via a concurrent private placement.
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 Tiger Brokers:
In this insight, I will re-visit some of the deal dynamics, comment on share price drivers and provide a table with implied valuations.
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