Brief Consumer: Hyundai Autoever IPO Bookbuilding: Surprising Results, Local Street Bets on Autoever/Glovis Merger and more

In this briefing:

1. Hyundai Autoever IPO Bookbuilding: Surprising Results, Local Street Bets on Autoever/Glovis Merger
2. NVIDIA’s $6.9 Billion Mellanox Band-Aid Is A Strategic Misstep
3. HK Connect Discovery Weekly: Eligibility Adjustment (2019-03-15)
4. SUTL: Puteri Harbor Construction Started Last Week, Membership Sales to Follow, Cash = 84% of MktCap
5. Re-Launching Coverage of ZTO Express with Sell Rating and US$13.31 Target Price

1. Hyundai Autoever IPO Bookbuilding: Surprising Results, Local Street Bets on Autoever/Glovis Merger

• Subscription rate is 797 to 1. Offer price was fixed at ₩48,000, substantially higher than the upper end. Deal size is now ₩168.5bil. Company value is put at slightly higher than ₩1tril. Demands are spread out pretty well between long-term funds and hot money and local and foreign investors as well. All of the orders are universally placed at 75% of upper end or higher.
• Local street is betting on Autoever/Glovis merger not long after this IPO. That is, HMG is still wanting the initial Glovis/Mobis merger plan. To better manage to win shareholder support, they must be thinking that bigger Glovis can be an answer. This means HMG should do whatever it takes to make Autoever bigger in the immediate future.
• This is what local street is betting on and why they went really aggressive on this IPO. As witnessed in the bookbuilding results, this street mentalitywon’t be changed any time soon. We should expect even stronger prices after new shares are listed on Mar 28.

2. NVIDIA’s $6.9 Billion Mellanox Band-Aid Is A Strategic Misstep

On March 11’th 2019, Nvidia announced the acquisition of market leading high-speed interconnect company Mellanox for $6.9 billion in an all-cash deal. At first blush, the benefits touted by both companies and accepted by most commentators make sense and the deal will be immediately accretive to both EPS and revenues upon closing according to NVIDIA. 

However, the clear and present threat to NVIDIA’s future success has little to do with interconnect technologies. Rather, it is the competitive challenge to their GPU solutions for data center acceleration from a broad spectrum of alternatives from the likes of Alphabet, Baidu, Intel, Xilinx, Advanced Micro Devices etc, not to mention the host of custom-ASIC accelerator startups poised to launch their products this year. The acquisition of Mellanox will do nothing to address this situation and we see it as being a distraction from where the company really needs to be focusing.

It will serve one purpose though, as a BandAid to mask the otherwise inevitable decline in its data center revenue growth in the face of ever-increasing competition. 

3. HK Connect Discovery Weekly: Eligibility Adjustment (2019-03-15)

In our Discover HK Connect series, we aim to help our investors understand the flow of southbound trades via the Hong Kong Connect, as analyzed by our proprietary data engine. We will discuss the stocks that experienced the most inflow and outflow by mainland investors in the past seven days.

We split the stocks eligible for the Hong Kong Connect trade into three groups: component stocks in the HSCEI index, stocks with a market capitalization between USD 1 billion and USD 5 billion, and stocks with a market capitalization between USD 500 million and USD 1 billion.

In this insight, we will provide an analysis of the performance of selected stocks that just joined the Stock Connect last week. 

4. SUTL: Puteri Harbor Construction Started Last Week, Membership Sales to Follow, Cash = 84% of MktCap

Sutl Enterprise (SUTL SP) did not grow revenues in 2018 as it continued to operate only its flagship Sentosa marina. Change is coming as it has 9 projects in the pipeline which could dramatically alter the financial future of the company by FY21. 

The biggest news is the groundbreaking of Puteri Harbor in Malaysia last week. With a sales gallery opening by May 2019, it will be very interesting to follow the progress on this project and its contribution to SUTL’s top/bottom-line results in FY19/FY20.

SUTL is misunderstood by investors because management disclosure is lacking and liquidity is poor. The valuation of SUTL could be improved if investors had a better understanding of the earnings trajectory we could expect in FY19-FY21.

We realize the Tay family is not looking to sell its stake anytime soon so is not concerned about its current market cap. We caution that this might not be a smart way to run a publicly listed company as a more expensive ‘currency’  (stock price) might help the company be taken more seriously when attempting to make acquisitions overseas. 

However, this does not alter the fact that 84% of the market cap is cash and the EV of this consistently profitable company is barely 6.7M USD. SUTL is undeniably one of the cheapest stocks on SGX.

5. Re-Launching Coverage of ZTO Express with Sell Rating and US$13.31 Target Price

ZTO Express (ZTO US)‘s earnings will fail to meet the high expectations of sell-side analysts and investors who seeit as a cheap proxy for Chinese e-commerce activity.

China’s express sector revenue grew 43.5% YoY in 2016, the year ZTO went public. Last year, revenue growth was just half that (21.8%), and we expect the sector’s growth to continue to moderate over the next few years.

The express sector is also evolving in ways that will put downward pressure on profitability and require greater investment from the express companies.

We expect the profitability of ZTO’s express business to decline in the medium-term as the company adjusts to slowing demand and emerging sector trends. Our earnings estimates, which are far below consensus figures, reflect these challenges.

ZTO suffers from declining earnings quality and two accounting issues that we feel make it a risky, unattractive investment. Our 12-month target price for ZTO is US$13.31, based on 16 times our blended 2019-20 EPS estimates. We rate the stock Sell.