Brief Equities Bottom-Up: HK Connect Discovery – February Snapshot (Tencent, COFCO Meat) and more

In this briefing:

1. HK Connect Discovery – February Snapshot (Tencent, COFCO Meat)
2. Rakuten (4755) Lyft Lifts Shares Price but There Is Much Further to Go.
3. 58.com (WUBA): Weak Membership Growth Suggests More Volatile Performance, 17% Downside
4. JKN: 4Q18 Earnings Grew Both YoY and QoQ

1. 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)

2. 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.

3. 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.

4. JKN: 4Q18 Earnings Grew Both YoY and QoQ

The company’s 4Q18 net profit was at Bt46m (+298%YoY and +8%QoQ). The result was in line with our 2018 forecast and accounted for 97% of our full-year forecast.

• A YoY surge in earnings was due to a 30% increase in revenue to Bt360m, mainly from export revenue (50% revenue contribution in 3Q18 from 0% in 4Q17). A QoQ gain was caused a reduction in extra expenses for holding an annual event ‘JKN mega showcase’ in early August.
• 2019 earnings outlook is still decent on the back of 1.) higher revenue contribution from export market especially South East Asia (26% of revenue in 2018), 2.) CNBC studio commencement in 2Q19, and, 3.) revenue recognition from new channel subscribers (No.5, Thairath, Spring news, True4U, Nation and MONO)

We maintain our forecast and BUY rating for JKN with a target price of Bt8.80 based on 14.8xPE’19E mean of the Asia ex-Japan Consumer Discretionary Sector.