In this briefing:
- Ruhnn (如涵) Pre-IPO Review- Significant Concentration Risk
- Frontage Holding (方达控股) IPO: Updates from 2018 Numbers
- Starboard Value. The Game Changing Activist Investor That Doesn’t Take No For An Answer.
- Harbin Electric’s Offer: One For The Brave
- Tencent Music 4Q18 Quick Note – Growth on Track, Margins Could Drag – Stock Price Needs a Breather
1. Ruhnn (如涵) Pre-IPO Review- Significant Concentration Risk
Ruhnn Holding Ltd (RUHN US) is looking to raise about US$200m in its upcoming IPO.
The company is an internet key opinion leader (KOL) incubator in China. Revenue and GMV grew at impressive rates of 63% and 57% YoY in FY2018, respectively.
The idea of being able to leverage on KOLs influence over consumers to understand demand and retain consumers is interesting but Ruhnn has yet to demonstrate that it has a sustainable business model.
Gross margin has deteriorated and losses widened as a percentage of revenue. Service fee paid to KOLs as a percentage of revenue has increased and showed little improvement in 9M FY2019. The company depends heavily on the top KOL, Zhang Dayi, to generate revenue, almost half of the company’s GMV and revenue is generated from her.
2. Frontage Holding (方达控股) IPO: Updates from 2018 Numbers
Frontage Holding, a contract research organization subsidiary of A-share listed Hangzhou Tigermed Consulting (300347 CH), re-filed to list on the Hong Kong Stock Exchange recently. We have covered the company’s fundamentals in our previous insight here. In this insight, we will provide an updated analysis based on new data available from the new prospectus, as well as our thoughts on valuation.
3. Starboard Value. The Game Changing Activist Investor That Doesn’t Take No For An Answer.
New York based activist investor firm Starboard Value has been intricately involved in shaping the fortunes and futures of two high profile technology companies in recent years, Marvell and Mellanox. The firm first to prominence some five years ago when they were the first among their peers to accomplish the extraordinary feat of replacing the CEO and entire board of Fortune 500 restaurant group Darden, while holding less than 10% of the company’s shares.
In the wake of their Darden coup, the firm has gone from strength to strength. To date the firm has taken positions in a total of 105 publicly listed companies, replacing or adding some 211 directors on over 60 corporate boards.
On March 7’th 2019, Starboard Value announced the acquisition of a 4% stake in US comms infrastructure firm Zayo. In the intervening period, Zayo’s share price has risen by 14% as canny investors scramble to partake in the goodness that will surely be extracted by the activist firm that simply doesn’t take no for an answer.
4. Harbin Electric’s Offer: One For The Brave
Harbin Electric Co Ltd H (1133 HK)‘s (“HE”) composite doc for its merger by absorption has been dispatched. HE’s major shareholder Harbin Electric Corporation (HEC), an SOE, is seeking to delist the company by way of a merger by absorption at HK$4.56/share, an 82.4% premium to last close. The offer has been declared final. The IFA (Somerley) considers the offer fair & reasonable.
As HE is PRC-incorporated with unlisted domestic shares, the transaction is executed as a hybrid scheme/tender offer. The proposal requires ≥ 75% for, ≤10% against, in a scheme-like vote from independent H-shareholders. HEC holds no H shares. A 10% blocking stake is equal to 67.5mn shares. Should the resolution pass, the tendering acceptance condition in this two-step Offer is 90% of H shares out. Those who do not tender will be left holding unlisted scrip.
Indicative Timetable
Date | Data in the Date |
27-Dec-18 | Announcement |
20-Mar-19 | Composite doc |
7-May-19 | H Share Class meeting/EGM |
20-May-19 | Close of acceptances, Last date to be declared unconditional. |
27-May-19 | Last day of trading on HKEx |
29-May-19 | Payment. Assuming unconditional on the 20 May. |
17-Jun-19 | Last day for Offer remaining open for acceptance, assuming unconditional on 20 May |
A Word on Harbin’s Net Cash
As at 31 Dec 2018* | Mine | Bloomberg | CapIQ | Eikon* |
Cash | 12,543 | 12,543 | ||
Debt | 2,073 | 2,373 | ||
Notes payable | 5,836 | – | ||
Net | 4,634 | 5,178 | 10,170 | |
CNYHKD exchange rate | 0.86 | 0.86 | 0.86 | |
In HK$ | 5,420 | 6,056 | 11,894 | 2,958 |
Shares out | 1,707 | 1,707 | 1,707 | 1,707 |
Per share | 3.18 | 3.55 | 6.97 | 1.73 |
In my prior insight, I discussed how the offer was below Harbin’s net cash, using CapIQ 1H18 numbers. That conclusion was not correct. While CapIQ’s net cash exceeds the consideration, its number excludes notes payable, a material number.
Using FY18 figures provided in the composite document, I estimate net cash/share of $3.18, ~70% of the consideration payment. Bloomberg’s number is higher again, while my understanding is Eikon’s $1.73/share (as at 30 June 2018) net cash figure includes (I have not verified, nor drawn a conclusion whether this would indeed be correct) deposits from customers and banks.
What to Do?
The significant offer premium to last close, the material drop in FY18 profit and the zero possibility of a competitive bidder emerging, suggests this Offer falls over the line.
The blocking stake at the H-share meeting is a risk. Although no single shareholder has the requisite stake to block the deal, collectively it is achievable.
The 90% tendering also, prima facie, appears a risk; yet such an acceptance threshold is not uncommon (Shanghai Forte (2337 HK) also required a 90% acceptance condition in 2011; while Hunan Nonferrous Metals H (2626 HK)‘s 2015 merger by absorption required 85%) and once the EGM resolution has been approved, there is little incentive to hold onto shares as Harbin will be delisted. Shares cannot be compulsory acquired.
However, I still consider “fair” to be something like the distribution of net cash to zero then taking over the company on a PER with respect to peers.
Dissension rights are available, although I am not aware of any precedents, nor the calculation methodology of a “fair price” under such a dissension, nor the timing of payment.
Trading at a wide gross/annualised spread of 9.6%/61.4%, implying a >80% chance of completion. The current downside should this break is 40%. I don’t see an attractive risk/reward here.
5. Tencent Music 4Q18 Quick Note – Growth on Track, Margins Could Drag – Stock Price Needs a Breather
Tencent Music Entertainment (TME US) reported its full year results today, post US market close. Revenue growth was slightly ahead of estimates as paying ratio continue to improve for both online music (subscription revenue) and social entertainment (live streaming). Growth for the latter continued to be driven more by ARPU rather than user growth.
The concerning bit in the results was the decline in gross margins as the company continues to invest in more content.
My previous insights on TME’s IPO:
- The company’s performance: Tencent Music Pre-IPO Review – The Final Countdown – Growth Doesn’t Seem to Be Slowing Down,
- The working of the apps: Tencent Music Pre-IPO – This Is How We Do It – A Quick Look at How the Apps Work,
- Industry dynamic: Tencent Music Pre-IPO – Industry – Don’t Cry – In 2010 a Little Red Dot Almost Overtook the Dragon, and
- Peer analysis: Tencent Music Pre-IPO – Quick Peer Analysis – If I Was You, I’d Wanna Be Me Too – Bigger and Faster,
- Valuations overview: Tencent Music Pre-IPO – Valuations Estimates – Leaving on a Jet Plane – $30bn Was Quite Stretched.
- First take on the IPO pricing: Tencent Music Pre-IPO Updates – Welcome to the Jungle – Rumoured Asking Valuations More Reasonable
- IPO valuation update: Tencent Music IPO – Don’t Stop Me Now – 9M18 Updates, Outlook and Price Limits
- Some more information on Ultimate Music acquisition: Tencent Music IPO – A Little Less Conversation – A Little More Information on Ultimate Music
- Trading strategies: Tencent Music IPO – Firework – Trading Strategies
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