In this briefing:
- Time-Out Not Time up for Trade War
- Chinese Telecoms: Recent Meetings Suggest a Benign Capex Outlook, but There Are Risks over 5G.
- SoftBank Group (9984 JP): SoftBank Corp IPO Has Failed to Meaningfully Narrow the Holdco Discount
- Semiconductor WFE Outlook. Things Just Got Really Ugly
- Tencent Music (TME): Both Live Video and Music Fairly Valued, No Action
1. Time-Out Not Time up for Trade War
- Xi and Trump walk away from Buenos Aires with something to sell at home
- But trade negotiations will be dominated by fraught disagreements
- After 90-day negotiations, further delays to tariff escalation are likely
2. Chinese Telecoms: Recent Meetings Suggest a Benign Capex Outlook, but There Are Risks over 5G.
At recent meetings with the Chinese operators and China Tower (788 HK), Alastair Jones came away convinced the operators were not looking at a massive 5G capex burst in 2019. However, Alastair also worries that in the end, the decision is not made by the operators but with an eye to larger policy issues. With Huawei/ZTE under pressure and the China/US trade was simmering the risks to capex have increased. That said, we do not expect large scale 5G capex in 1H19 and with capacity utilization of the networks low their may even be room for further capex declines. We look for more details of 5G plans to be released in 1Q19.
3. SoftBank Group (9984 JP): SoftBank Corp IPO Has Failed to Meaningfully Narrow the Holdco Discount
Softbank Group (9984 JP)’s market cap has consistently traded below its NAV. A popular expectation was that the Softbank Corp (9434 JP) IPO should be a catalyst to narrow the conglomerate discount (holdco discount). On its trading debut today, SoftBank Corp’s shares fell 14.5% from its IPO price of JPY1,500 to JPY1,282 per share – the worst first-day decline ever for a major IPO in Japan since the Japan Display (6740 JP) IPO in 2014.
In our previous research, we stated that the SoftBank Corp IPO is unlikely to meaningfully narrow SoftBank’s holdco discount. Our updated SoftBank SoTP analysis which reflects SoftBank Corp’s trading debut suggests that SoftBank’s holdco discount has not meaningfully narrowed.
4. Semiconductor WFE Outlook. Things Just Got Really Ugly
SEMI, the global industry association serving the manufacturing supply chain for the electronics industry, published three different forecasts for wafer fab equipment (WFE) sales in the past week. While the forecasts differ in approach and detail, they all agree on one thing, WFE revenues are continuing to fall and the outlook for 2019 is sharply down on previous estimates.
Specifically, Q4 2018 WFE revenues are set to decline 20.8% or $3.3 billion QoQ and the forecast which had just six months ago predicted 7% growth in 2019 is now calling for an 8% decline next year.
These latest forecasts cast a dark shadow over the predictions of the leading WFE manufacturers that H1 2019 would be stronger than H2 2018 and we anticipate a strong downward revision of forward guidance in the upcoming earnings season.
There may be a glimmer of hope on the horizon however as SEMI forecasts a strong rebound in the second half of 2019 leading to a return to growth of ~20% in 2020. Let’s see.
5. Tencent Music (TME): Both Live Video and Music Fairly Valued, No Action
- We believe that TME is fairly valued based on peer companies’ price / sales ratios.
- The Chinese internet peer companies as comparison bases in valuation have declined significantly more than indices, we believe it is not a concern that indices declined further.
- We believe that the main business of music will grow strongly in 2019 and 2020 due to the rapid growth of both the paying user base and ARPU (Average Revenues per User per month).
