Brief Equities Bottom-Up: Nexon to Increase Focus on Mobile Gaming Amidst Talks of Possible Sale of the Company and more

In this briefing:

1. Nexon to Increase Focus on Mobile Gaming Amidst Talks of Possible Sale of the Company
2. Shaky Situations at DEMCO and Pranda
3. Billionaire Carl Icahn’s Run at Caesars Has yet to Move Stock. What Doesn’t the Market See?
4. Brazil Politics; The “Noise” On Pension Reform Is an Investor Opportunity
5. Japan Mobile: MVNO Data for Q3 Includes Slowest Growth Since 2014 but that Makes Sense for Rakuten

1. Nexon to Increase Focus on Mobile Gaming Amidst Talks of Possible Sale of the Company

• 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.

2. Shaky Situations at DEMCO and Pranda

We visited two companies with very different trajectories. 

• Renewable power specialist DEMCO is struggling, despite doing really well in the past, while jeweler Pranda, once struggling, is on the recovery path.
• DEMCO reported gross profit and revenue decline of 8% and 7% respectively. Their earnings more than doubled, but that’s solely due to dividends from Wind Energy, an investment that cost them Bt800m and is embroiled in scandal.
• Pranda’s operating cash flows surged from Bt12m to Bt230m, as they restructured their store network.
• We’d still be caution on PDJ, as management doesn’t feel the restructuring is over. More stores could be closed down in the future.

3. Billionaire Carl Icahn’s Run at Caesars Has yet to Move Stock. What Doesn’t the Market See?

• Carl Icahn has built his position since February 7th to where he now controls over 28% of the stock of Caesars Entertainment Corporation.
• He has already put three members on the board and will get a fourth seat if management can’t name a new CEO by April 15th.
• Icahn’s track record in casino deals has made him over $2.5bn since 1998/ Investors who joined him have made solid returns, deal after deals.

4. Brazil Politics; The “Noise” On Pension Reform Is an Investor Opportunity

• Negative press “noise” on the pension reform process, with heightened friction between the Executive and the Legislature, has hit the currency and equity markets
• This reflects the Bolsonaro administration’s limited engagement with the Legislature so far on pension reform
• Finance Minister Paulo Guedes is spearheading the effort on pension reform, and has the support of Rodrigo Maia, the leader of the Chamber of Deputies
• The latest poll on pension reform voting intentions in the Chamber suggest it is heading in the right direction, but that the administration needs to accelerate support to get the legislation approved; we see 3Q19 more likely than 2Q19 for pension reform approval
• We see the equity market and currency corrections as an opportunity, and we highlight our positive view on Banco Do Brasil Sa (BBAS3 BZ)

5. Japan Mobile: MVNO Data for Q3 Includes Slowest Growth Since 2014 but that Makes Sense for Rakuten

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.