Brief Equities Bottom-Up: Alps Alpine Buyback Proceeding Apace and more

In this briefing:

1. Alps Alpine Buyback Proceeding Apace
2. Snippets #19: Marijuana, Mergers, and More
3. HK Connect Discovery – February Snapshot (Tencent, COFCO Meat)
4. Rakuten (4755) Lyft Lifts Shares Price but There Is Much Further to Go.
5. 58.com (WUBA): Weak Membership Growth Suggests More Volatile Performance, 17% Downside

1. Alps Alpine Buyback Proceeding Apace

Late last year, in the final run-up to the vote to determine whether Alpine (6816 JP) investors would subject themselves to a bad share exchange ratio or would choose to oblige Alps (6770 JP) to have another run at it in a different format, Alps announced a shareholder return policy which included buying back ¥40 billion of shares. 

It is to be noted that this meant that the combined entity was going to be left with less cash than the total deemed necessary by the two companies just a very short while before. Why? Because Alps – with the strong governance it has – obviously had the right amount – and Alpine also had the right amount (it needed substantial equity-funded cash as “working capital” because otherwise it would run a serious danger of business disruption and deterioration. So despite this severe business risk, the two companies effectively announced they would disburse 90% of Alpine’s cash on hand to shareholders POST-MERGER through the special dividend offered to sweeten the pot to get the merger through, and the ¥40 billion buyback. 

The merger, of course, went through, and the ¥28.4 billion* buyback is proceeding apace.

2. Snippets #19: Marijuana, Mergers, and More

Five interesting trends/developments that could impact Thai equities in the recent period:

• Legalization of medicinal marijuana. Thailand legalized medicinal use of marijuana at end of February and has already received immense interest from potential growers. At some point, pharma and healthcare companies could be beneficiaries of this trend.
• Rumbles in the airline industry. Asia Aviation (AAV TB) , parent company of Thai Air Asia, acquires a stake in competitor Nok Air. This is one of the few signs of industry consolidation in this sector.
• MOU signed between TMB and Thanachart. The deal may take longer than initially expected, but the two sides have agreed on some basics such as 70% equity financing and deal size of roughly Bt130-140bn.
• Read-through from US Election 2020. Some of the Democrat policies advocated by candidates in 2020 could turn out to be positive for Asian equities.
• BGrimm acquires Glow SPP1 for a bargain price of Bt3.3bn, or 55% of the expected price, opening the way for the GPSC-Glow merger, potentially the largest deal of 2019.

3. HK Connect Discovery – February Snapshot (Tencent, COFCO Meat)

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 outflow continue from January. In February, we have seen Chinese investors were selling Tencent in February after buying Tencent in January. Chinese investors were also buying domestic automotive manufacturers and Macau gaming sectors.

Our February Coverage of Hong Kong Connect southbound flow

• HK Connect Discovery Weekly: China Tower, Geely, COFCO Meat (2019-02-15)
• HK Connect Discovery Weekly: Geely, Great Wall Motor and Sands China (2019-02-22)

4. Rakuten (4755) Lyft Lifts Shares Price but There Is Much Further to Go.

Assuming a sum of the parts valuation the shares are cheap. We can assume the fintech business is worth perhaps Y800-900bn (based on 10x ebit, similar to Credit Saison), the domestic e-commerce operation (which makes an operating profit of about Y70bn on revenue of Y450bn) is worth perhaps Y1.2tr (assuming a valuation of 3x sales vs. 3.5x for Amazon). There are other parts of the business which detract and there are others, including a Y350bn plus investment portfolio which add but overall, all this compares with a market cap of a mere Y1.3tr. This suggests the market is thinking that Rakuten is more than throwing its MNO investment of Y600bn away. Given the Governments desire to reduce prices in the mobile market, and its desire for 4 operators, we would suggest this is overly negative. The recent announcement that Lyft will seek an IPO has lifted the share price given its 10% stake in this name (rumoured valuation of $23bn vs. $15bn currently), but we suspect the shares have much further to run. The market knows earnings will be depressed for the next 2 years or so but does not anticipate any recovery thereafter it would appear.

5. 58.com (WUBA): Weak Membership Growth Suggests More Volatile Performance, 17% Downside

* We believe that the stagnancy in membership was due to the new competitor Ke.com and will make total revenues more volatile in the future.

* We assume total revenues will slow down, but the operating margin will be stable in 2019.

* We compare WUBA’s expected P/E for 2019 with other vertical platforms in China and conclude 17% downside.