Brief China: Nexon M&A: Amazon & Comcast Enter the Race – It Ain’t Over Till Its Over! and more

In this briefing:

1. Nexon M&A: Amazon & Comcast Enter the Race – It Ain’t Over Till Its Over!
2. Hong Kong’s Growth Mirage
3. Amidst Sino-US Economic Uncertainty…US Ponders Plaza-Style Accord on Trade Dispute
4. AIG Sells PICC: A Clean-Up Trade Cum Liquidity Event
5. Autohome (ATHM): Promising Auto Loan, Waiting for Buying Opportunity

1. Nexon M&A: Amazon & Comcast Enter the Race – It Ain’t Over Till Its Over!

In a surprising move, it was reported after the market close today that Amazon.com Inc (AMZN US) (market cap of US$804 billion) and Comcast (US$176 billion) will enter the race and have submitted initial bids to acquire Nexon Co Ltd (3659 JP)/NXC Corp. 

The entrance of Amazon and Comcast is a major positive surprise and it should have a strong positive impact on Nexon’s share price. Prior to the entrance of Amazon and Comcast in this M&A battle, the market was firmly leaning towards the consortium including Tencent, Netmarble Games, and MBK Partners to acquire NXC Corp/Nexon.

Now, Amazon and Comcast’s entrance into this M&A battle has made it a lot more exciting and uncertain. Nexon Co Ltd (3659 JP)‘s share price is up 19% YTD but its share price trend has been flattening out in February. In the next few weeks, we expect further boost to Nexon’s share price (15%+), mainly because a lot more investors will think that the Tencent consortium, Amazon, and Comcast will try to pay higher price to acquire NXC Corp/Nexon. Kudos to Nexon shareholders!

2. Hong Kong’s Growth Mirage

It may not feel like it. It may not smell like it. But make no mistake Hong Kong is in recession. We are underweight in our relative regional equity portfolio.  The only positives are that the real cost of lending is easing (which might bring some relief to mortgage owners) and Hong Kong corporate balance sheets are in good shape to weather the current downturn. But the negative overwhelm these positives.

3. Amidst Sino-US Economic Uncertainty…US Ponders Plaza-Style Accord on Trade Dispute

Successful resolution of geopolitical issues pertaining to China’s continued integration into the world economy remains crucial for global corporate profit expectations and risky assets.

Uncertainty about the US economic outlook has increased in recent weeks as testified by falling corporate profit growth expectations, while the recent government shutdown has delayed the release of crucial data required for monetary policy formulation.

China’s economy continues to decelerate, as testified by slowing big ticket activity, but record monthly credit growth in January indicates how the fallout from the US trade dispute has diverted attention away from lowering excessive leverage in the economy, as well as rising bond defaults. 

The US will insist that currency devaluation by China cannot be deployed under any Sino-US trade dispute resolution, but this will reduce China’s sovereignty over discretionary monetary policy conduct.

Meanwhile, rumours are circulating that the US wants to impose a Plaza Accord style memorandum for China to be committed to an orderly appreciation of the yuan as part of any trade dispute resolution, but China will be wary of the fate that befell Japan after 1985 following the Plaza agreement.

4. AIG Sells PICC: A Clean-Up Trade Cum Liquidity Event

AIG is selling its USD 450 million stakes in PICC today after market close. The deal scores negatively in our ECM Framework. 

We like the fact that it will increase the free-float significantly and hence there will be a liquidity event, meanwhile, we are also concerned that the deal size is large compared to its liquidity.

5. Autohome (ATHM): Promising Auto Loan, Waiting for Buying Opportunity

• The 4Q2018 results suggest that it is a right decision to close out direct automobile sales and start auto loan.
• The 4Q2018 results also suggest that ATHM has successfully completed the post-acquisition integration after three years.
• Peer companies’P/E ratios suggest ATHM is fairly valued, but we believe it will be a good opportunity to accumulate if the stock price falls.