Daily Brief TMT/Internet: Kokusai Electric , Hollysys Automation Technologies, Nintendo, Hygon Information Technology C, Telefonica Deutschland Holding, Novatek Microelectronics Corp, Vanguard Intl Semiconductor, DataTec Ltd, Cambium Networks and more

• Quiddity’s “Who is Ready” series of insights aims to objectively identify names listed on the Tokyo Stock Exchange that are potential additions to the TOPIX Index in future.
• Our main pre-event candidate CELSYS (3663 JP) has outperformed TOPIX by ~12.6% since 1 Sep (when it was highlighted) and 6 Nov 2023.
• There are three TOPIX Inclusion events confirmed for the end of November and two other interesting pre-event names we are closely monitoring.

• Ascendent Capital has made a non-binding proposal for Hollysys Automation Technologies (HOLI US) at US$26.00 per share, a 4.0% premium to the MBO and Recco proposal of US$25.00 per share. 
• Ascendent has also become the largest shareholder by securing 13.69% of outstanding shares at an average price of A$20.84 per share. Ascendant is supportive of the special meeting request.
• The Board has tried several delaying tactics, but the emergence of Ascendant ramps up the pressure on the Board to conduct a transparent sale process and address shareholder concerns. 

• Nintendo’s Q2 results show solid performance but still fall short of expectations, with a conservative full-year profit outlook
• The impending release of “Switch 2” in 2H24 raises questions about the company’s ability to replicate the original Switch’s success
• We see the current 11x EV/EBIT as fair for the stock and do not anticipate a valuation breakout until the market can assess the credentials of “Switch 2”

• With the review period complete, we see 9 stocks in inclusion zone and 10 in deletion zone. However, there can be a maximum of 5 changes at a review.
• We estimate a one-way turnover of 4.7% at the December rebalance leading to a one-way trade of CNY 3.86bn. Index arb balances could increase the impact on the stocks.
• Apart from being added to the SSE50 Index, Hygon Information Technology (688041 CH) could also be added to other local/global indices over the next few weeks and months.

• Telefonica SA (TEF SM) surprised everyone with a €2.35/share voluntary cash offer for the minorities in Telefonica Deutschland Holding (O2D GR), 37.6% premium, 4.4x EV/Fwd EBITDA (vs.5.1x Telefonica), €1970 million value.
• The premium is attractive, c.31% premium to median IBES consensus TP, so I believe the offer will succeed. There will be no additional acceptance period. Spread is +0.17%.
• Telefonica will add 7% more leverage at a time it is seeking the opposite: on the cards are some sort of divestment of Virgin Media O2 or a dividend cut.

• It’s likely that quarterly sales will return to normal seasonality in 2024F, and the Smartphone demand has shown some signs of recovery.
• Revenue/ GM/ OPM are declined 8.6%/ 2.7%/ 2.7% in 4Q23F, but we consider the end market might be recovery. 
• The OLED penetration rate in smartphones is 42.5% in 2023F , and it’s anticipated that Novatek Microelectronics Corp (3034 TT) will exceed the market in terms of OLED sales.

• It remains cautiously optimistic for the 2024 outlook despite limited order visibility.  
• The Vanguard wafer shipment has decreased by 8-10% QoQ, with the ASP declining by 0-2% QoQ. The GM for 4Q23F is projected to be 22-24%. 
• The smartphone and computing/NB/TV sectors have returned to normal levels.

Datatec reported a strong performance in H124, with revenue up 15% y-o-y, adjusted EBITDA up 2% and underlying EPS up 336%. As supply chain issues have eased, the company has been able to reduce its backlog from previously elevated levels. Datatec expects improved performance in all divisions in FY24. While the company closely manages working capital, higher revenues and a gradual reduction in supplier extended payment terms drive our higher net debt forecasts. Our estimates are broadly unchanged at a group level, with adjustments at a divisional level to reflect Westcon strength and uncertainty in Latin America, and higher operating profitability offsetting increased interest costs.

• Cambium Networks (CMBM) is a leading mid-market wireless solutions provider.
• Growth is being driven by 5G and new 6 GHz products. The company believes its strengths are its RF algorithms and software.
• The cnMaestro X network management solution makes significant use of AI and lies at the center of the company’s product suite.