In this briefing:
- WABCO Confirms Being a Takeover Target of The Private German Auto Parts Maker, ZF
- Subaru: Another Month, Another Recall
- JD.com (JD): The Real Main Business Grew 46% YoY, and Not 20% YoY in 4Q2018
- Sea Ltd: Further Share Re-Rating After a 35% Daily Gain? Why Not?
- Tesla – Truth and Consequences
1. WABCO Confirms Being a Takeover Target of The Private German Auto Parts Maker, ZF
Last morning the listed brake supplier, Wabco Holdings (WBC US) confirmed that it is in takeover talks with one of the leading auto parts suppliers in Germany, ZF Friedrichshafen AG. Following the news of being possibly bought by a private company, WABCO’s stock surged almost 10% during the day, reaching USD130.5 by the day’s close. This positive market reaction for WABCO was purely based on its confirmation about having preliminary takeover discussions with its rival company, ZF. There were no further details released on the possible deal price or about the plans that either company has after the takeover. Further, ZF in a news report stated that no decision has been taken yet and that it was the preliminary discussions that were being done. However, we do note the following:
- ZF is known to have made such strategic acquisitions in aiding the long-term development of the company. A similar strategic move was made by ZF back in 2015, when it took over TRW Automotive Holding to expand its exposure to sensors and electronic components.
- In June last year, ZF stated in a news report that it is not prioritising interest in brake suppliers, as its focus is to pursue investments in developing components to support next generation technologies and reported its plan to further invest more than EUR12bn into e-mobility and the autonomous driving field. This could indicate that WABCO takeover discussions may involve reasonable price discipline from ZF, and we would note that ZF had previously desired to acquire Wabco for about €6-8bn. However, we believe that the buyout does look attractive for both companies, especially for ZF, given the possible synergistic effects that could support ZF’s next gen technologies.
- In the last go around, ZF had just completed its acquisition of TRW and the balance sheet made a further large acquisition difficult. Now, much of the additional debt from the TRW has been digested and although levering up again could place considerable financial pressure on ZF in the short term, the company’s history makes up believe that it has the capability to handle any such pressure once synergies kick-in and restore its balance sheet in short order.
2. Subaru: Another Month, Another Recall
Subaru Corp (7270 JP) issued yet another recall notice last night, this time for the Impreza and Forester due to faulty brake lights. The recall affects vehicles manufactured between Sep 2008 and Mar 2017, but is minor in scope relative to the Nov 2018 valve spring recall and thus did not prompt a revision of the company’s guidance.
3. JD.com (JD): The Real Main Business Grew 46% YoY, and Not 20% YoY in 4Q2018
- We believe the real main business line is service (commission), but not product (direct sales).
- In 4Q2018, service revenues grew by 46% YoY, but nominal main business line, product, grew only 20%.
- JD raised its commission rate in 2018, as demonstrating that the company still has the bargaining power over retailers.
- Historical GMV numbers suggest significant upside.
4. Sea Ltd: Further Share Re-Rating After a 35% Daily Gain? Why Not?
- The biggest positive surprise from Sea Ltd’s (SE US) conference call is strong 2019 adjusted sales guidance: 82%-97% YoY growth for Garena (digital entertainment division) and 117-127% YoY growth for Shopee (e-commerce arm).
- Management expects first positive quarterly EBITDA for Shopee Taiwan operations in 1Q19, indicating there is a path to profitability for Shopee’s business model.
- Another great news: management expresses high confidence that Shopee’s S&M expenses in terms of absolute dollars would trend down in 2019, vs. 2018.
- After a 35% daily share gain on 27 Feb, SE trades at 4.1x 2019E P/adjusted revenue excl. 1P sales, yet still a whopping 49% discount to Pinduoduo’s (PDD US) 8.1x P/S.
5. Tesla – Truth and Consequences
Tesla Motors (TSLA US) CEO Elon Musk teased in a tweet late Wednesday night about “news” coming on Thursday, most likely something he hopes will be positive enough to divert attention from a seemingly unending stream of bad news. If so, it may not last.
Tesla’s problems aren’t going away, they’re escalating:
- Elon Musk is in trouble again with the SEC;
- Tesla’s brand-new general counsel is leaving after just two months on the job;
Consumer Reports withdrew its recommendation on the flagship Model 3 due to serious quality and reliability concerns–not actually surprising given increasing risks I have tracked with Tesla quality controls curtailed and flawed cars increasingly delivered to customers (see “Musk and Weird Q3 Developments Are Driving Investors to Telsa’s Rivals” and “Tesla – Dave’s Not Here, and Musk Won’t Leave” and “Tesla: Down to the Wire”).
- The 2018 10-K filing confirms Tesla’s operations still are not generating consistently sustainable profits or cash flow unvarnished by substantial boosts from accounting maneuvers and unusual items as seen with the “miracle” third quarter (see “Great Magic Trick Tesla; Now Do it Again“)
- Which is bad news for first quarter results already foundering with pricing cuts, rising costs, unhappy customers, and escalating demand pressure;
- Plus liquidity strain worsened by $920 million in cash due to go out on March 1st to pay off maturing convertible bonds.
- Tesla Shanghai Gigafactory construction is underway and yet still not fully funded after at least six months of negotiations with bankers, and thus may also be developing differently versus what Tesla has presented (adding to my previously noted concerns in “Tesla – Shanghai Surprise“).
The common theme here is that all these problems were preventable, avoidable, and unnecessary.
That’s not going away any time soon–as long as Musk remains in complete control.
How long will that be?
Good question–Read on as Bond Angle analysis continues.
Get Straight to the Source on Smartkarma
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.