In this briefing:
- Nissan Governance Outlook – Foggy Now, Sunny Later
- CyberAgent: Tumbling Dice
- Itochu and Descente: Gloves Off
- Homeplus REIT IPO – The Largest Ever REIT IPO in Korea
- ECM Weekly (9 February 2019) – Pinduoduo, Homeplus, PNB Metlife, Cal-Comp Tech
1. Nissan Governance Outlook – Foggy Now, Sunny Later
This past week saw developments which put the Nissan Motor (7201 JP) – Renault SA (RNO FP) relationship on a better path.
There are interesting noises around the likely arrival of Jean-Dominique Senard on the board of Nissan which the French state won’t like (because they won’t be getting the pony they want) but which would ultimately serve Renault’s interests better.
Renault and Nissan are conducting a joint investigation into the Renault-Nissan Alliance BV entity which Carlos Ghosn also chaired, and Renault has passed a dossier of Ghosn’s personal expenses borne by Renault and the Alliance to French investigators.
A trial balloon was floated in the Nikkei suggesting the French government had said to the Japanese government it was open to Renault selling some Nissan shares and perhaps the state could lower its stake in Renault. This was “categorically denied” by the French with some haste but the idea of forming a holding company was categorically denied as acceptable by the French just under a year ago. Things have changed.
Governance changes are afoot, with a steady flow of developments likely coming in March, April, May, and June.
Below, a discussion of what the board looks like, will look like, and could look like in/after June and a discussion of the structure of possible capital changes.
2. CyberAgent: Tumbling Dice
Source: Japan Analytics
TUMBLING DICE – After ZOZO (3092 JP) (-52%) and Mercari (4385 JP) (-50%), CyberAgent (4751 JP) is the worst-performing large-cap Internet stock in Japan over the last seven months. The company is the sector’s leading foreigner-held stock with over 48% (60%+ of the float) held by institutional investors such as Baillie Gifford (11.9%), JP Morgan AM (6.9%), Tybourne Capital (5.1%) and Blackrock Japan (5.0%). Having outperformed the sector and the market annually over the last nine years by 38% and 25%, respectively, over the seven months since the stock peaked in terms of our Relative Price Score on 13th July, CyberAgent shares have declined by 56%, underperforming the market by 48% and the sector by 37%.
PASSIVE PERILS – We will discuss the ‘perils ‘ of Passive TV in the DETAIL below. However, CyberAgent is yet another good example of the ‘perils’ of passive investing. On September 5th Nikkei Inc. announced that CyberAgent would replace Furukawa (5715 JP) in the Nikkei 225 index, with the inclusion occurring on October 1st. Since the ¥6050 intraday peak of the week before inclusion in the index, the shares have declined by 49% in 90 trading days.
SUMMARY – CyberAgent’s business has three ‘pillars’, internet advertising, mobile gaming software, and media. The latter now includes the linear free-to-view AbemaTV business, which helped drive the share price to a post-listing high of ¥6930 in July 2018. Since then, business conditions for two of these ‘pillars’ have degraded significantly, while the fledgeling TV business remains in ‘up-front’ investment mode. To cap what will be a turbulent year for CyberAgent, the company is moving into a new head office building in Shibuya called ‘Abema Towers‘ in March. We shall refrain from making any analogies to the Skyscraper Index.
This Insight will review: –
- CyberAgent’s growth strategy
- The company’s track profitability track record from the perspective of Net Operating Profit After Tax (NOPAT), Comprehensive Income and Operating Profit margins
- The three main business segments – Internet Advertising, Game Software, and Media
- Cash Flow and Valuation
We will also attempt to value AbemaTV and will reverse-engineer some target metrics that would justify the market’s current implied ¥41b valuation for this business, a valuation that reached ¥543b only seven months ago.
VISION SHIFT? – In previous years, CyberAgent had a clear vision statement – ‘To create the 21st century’s leading company’. The company’s recent performance has led to a change of tone, and CyberAgent is now rather more modestly just ‘Aiming to be a company with medium to long-term supporters’. In the vein of the lyrics from the best song on the best Rolling Stones album, Exile on Main Street, the business has recently been at ‘all sixes and sevens and nines’. In the search for new ‘supporters’, we encourage CyberAgent to just ‘keep on rolling’, letting the dice fall where they may.
3. Itochu and Descente: Gloves Off
Descente Ltd (8114 JP) issued a 13-page statement yesterday in response to Itochu Corp’s (8001 JP) tender offer to raise its stake in the sports firm from 30.44% to 40%.
In brief: its gloves off and Descente is limbering up for a fight for its independence – an independence it has not had since the 1990s.
Itochu insists it is the answer to Descente’s weaknesses but Descente is having none of it, arguing that it is already implementing the strategies proposed by Itochu.
Descente’s statement of intent was followed by Descente’s labour union, All Descente, supporting Descente, saying Itochu’s bid was contrary to Descente’s long-term interests.
Descente may well hope for an MBO as a way out, and Itochu may want a third party to acquire Descente as Travis Lundy suggests. Either way, a quick resolution is needed if Descente is to take advantage of the upcoming sports boom in Japan.
The question remains as to whether Descente would benefit from independence or control by Itochu. To date, it is arguable that the very tension between Itochu’s demand for faster growth and higher profits and, on the other hand, Descente’s reining in of this demand in favour of long-term brand cultivation that has led to Descente’s recent growth path. Without this delicate balance of tensions, the whole edifice may sag.
4. Homeplus REIT IPO – The Largest Ever REIT IPO in Korea
The Homeplus REIT (“Korea Retail Homeplus #1 REIT”), which is expected to be completed by end of March, will be the biggest ever REIT IPO in Korea. The key investment merit of this Homeplus REIT is that it offers a stable dividend yield of about 6-7%. We expect a very strong demand for this Homeplus REIT IPO.
Homeplus is the second largest retailer in Korea, after E Mart Inc (139480 KS). Homeplus REIT will use 51 Homeplus stores (out of total of 141 stores) located throughout Korea as its base assets. Homeplus REIT is expected to raise between 1.5 trillion won and 1.7 trillion won in this IPO, of which the allocation between institutional and retail is set at 80:20. The IPO price range is between 4,530 won to 5,000 won.
Rising interest rates also pose a concern for the company. Of the company’s total long term debt, about 61% are floating rate based so higher interest rates could result in higher interest payments for the company.
Overall, this Homeplus REIT IPO is likely to attract high interests among overseas institutional investors. However, there are some concerns that this deal could have relatively lower local institutions interest. One of the main reasons for this is because many large local institutions including the NPS have already invested in Homeplus as a consortium of MBK Partners. Although there is no public market value of Homeplus right now, many investors believe that the consortium led by MBK Partners overpaid for Homeplus back in 2015. As a result, these local institutions that have already invested stakes in Homeplus are less likely to further invest in the Homeplus REIT IPO.
5. ECM Weekly (9 February 2019) – Pinduoduo, Homeplus, PNB Metlife, Cal-Comp Tech
Aequitas Research puts out a weekly update on the deals that have been covered by Smartkarma Insight Providers recently, along with updates for upcoming IPOs.
There are no new IPO filings in Hong Kong but there is news on the timeline of a few upcoming IPOs.
In Korea, Homeplus will be starting its investor education next Monday to raise about US$1.5bn. Brief details of the deal are already available. The company will be selling 345m primary shares at an indicative range of KRW4,530 – 5,000 per share. We heard that the roadshow kick off on 28th February and will likely list on 29th March.
In India, PNB is targeting to list PNB MetLife between April to September. The estimated IPO size was about US$150 – 300m and its draft prospectus was filed last year.
In the Philippines, Cal-Comp Tech (Philippines) (CCTP PH) is targeting to launch its US$123m IPO towards the end of the third quarter this year based on media reports. We have previously covered the IPO in Cal-Comp Tech (Philippines) Pre-IPO Review – Muted Growth in Core Products.
As for placements, Pinduoduo (PDD US) chose to launch its follow-on offering in the midst of Chinese New Year, raising about US$1bn in fresh capital along with sell-down from existing investors. The placement was priced at US$25 per share, a 17.5% discount from its pre-announcement price of US$30.33 on 5th February and a 5.7% discount to its 7th February close price. Settlement date is on 12th February, greenshoe expires on 10th March and lock-up expires 9th May according to Bloomberg.
Accuracy Rate:
Our overall accuracy rate is 72.1% for IPOs and 63.8% for Placements
(Performance measurement criteria is explained at the end of the note)
No new IPO filings
Below is a snippet of our IPO tool showing upcoming events for the next week. The IPO tool is designed to provide readers with timely information on all IPO related events (Book open/closing, listing, initiation, lock-up expiry, etc) for all the deals that we have worked on. You can access the tool here or through the tools menu.
News on Upcoming IPOs
- PineBridge-backed Uniparts gets SEBI nod to float IPO
- Cal-Comp Philippines eyes IPO by third quarter
- JERA new president says IPO is an option
- Singapore’s Zalora explores listing to fuel expansion
- S. Korea’s Homeplus files for up to $1.5 bln REIT IPO
- Korean bio unicorn in the making, Voronoi, to join the Kosdaq this year
Smartkarma Community’s this week Analysis on Upcoming IPO
- Koolearn: Losses in Full View
- Koolearn: Marketing Expenses Have Taken Operating Profits Down the Drain
List of pre-IPO Coverage on Smartkarma
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