In today’s briefing:
- Renesas Electronics (6723 JP): INCJ Clean Up; Index Buying Smaller than Expected
- Trend Micro BIG Bonanza But Shareholder AND Balance Sheet Structure Matter. N225 Divs Get a Fillip
- Spotlight on Trading Prospects Arising from ETFs as Short Selling Workarounds in Korea
- Cybernet Systems (4312 JP): Fuji Soft’s Tender Offer at JPY1,095
- KKR/Telecom Italia: Uncertainty Endures
- Duolingo: Rich Valuation and Limited Upside Despite Better Than Expected 3QFY23 Results
- [ACM Research (ACMR US, BUY, TP US$30) Earnings Review]: Korea and US Are the Next Battlefields
- Chenqi Technology Pre-IPO – Listing Would Almost Feel like a Pipe Dream
Renesas Electronics (6723 JP): INCJ Clean Up; Index Buying Smaller than Expected
- INCJ is selling the last of its stake in Renesas Electronics (6723 JP). This will remove the overhang but could lead to selling in the short-term.
- Renesas Electronics (6723 JP) has outperformed its peers over the last couple of years but valuations are in-line with the peer group (or slightly cheaper).
- The float increase in global indices will coincide with the offering, but the TSE Tokyo Price Index TOPIX (TPX INDEX) float increase will take quite a while.-
Trend Micro BIG Bonanza But Shareholder AND Balance Sheet Structure Matter. N225 Divs Get a Fillip
- Trend Micro Inc (4704 JP) has been under pressure to improve capital allocation after Value Act bought in 2022. In February 2023, Trend announced a weak sauce capital return policy.
- They promised a 100% payout ratio with 70% div payout ratio. But with huge piles of cash and securities, it wasn’t going to be enough, and shareholder structure ALWAYS matters.
- Here it meant Trend Micro was vulnerable to further attack. Today, Trend announced a HUGE capital return with buyback, and a special div and this will excite Nikkei 225 arbs.
Spotlight on Trading Prospects Arising from ETFs as Short Selling Workarounds in Korea
- During the previous period of short-selling restrictions, a pattern was observed in which ETFs were utilized as a workaround for short-selling.
- We should anticipate more substantial price impacts this time. Of particular significance is the possibility of utilizing not only the MSCI Korea ETF but also sector ETFs for similar purposes.
- This calls for our attention to the possibility that this short-selling workaround could generate a significantly wider range of trading opportunities in the spot market compared to three years ago.
Cybernet Systems (4312 JP): Fuji Soft’s Tender Offer at JPY1,095
- Cybernet Systems Co (4312 JP) has recommended Fuji Soft Inc (9749 JP)’s tender offer of JPY1,095 per share, a 31.8% premium to the undisturbed price (8 November).
- The transaction is a two-step acquisition through a cash tender offer and subsequent squeeze-out. The lower limit of the tender offer is set at a 12.28% ownership ratio.
- The offer price is attractive and marginally below the ten-year share price high. The minimum acceptance condition (lower limit) requires a 26.9% minority acceptance rate, which is doable.
KKR/Telecom Italia: Uncertainty Endures
- As a result of the deal with KKR, Telecom Italia SPA (TIT IM) projects a decrease in net debt of about €14 billion, bringing Net Debt/EBITDAaL from >4.5x to around 2.0x.
- This should guarantee the survival of Telecom Italia, but Vivendi is ready to challenge the decision. Equity is volatile as net debt represents 3.7x the market cap. Debt looks more interesting.
- TLIT 6.875 FEB-2028 with YTM 6.624, or TLIT 7.875 JUL-2028, with YTM 6.838, likely to profit from a rating upgrade. Savings shares are unlikely to receive a dividend until 2027.
Duolingo: Rich Valuation and Limited Upside Despite Better Than Expected 3QFY23 Results
- Duolingo reported stronger than expected 3QFY23 results, including revenues of $137.6M (consensus: $132.2M) and net income of $2.8M. The company raised guidance for FY23 revenues and total bookings.
- Stock indicated up ~9% after hours. Duolingo beat all key estimates. However, ABPDAU declined to $25.38, while net new ARR growth will slow in 4Q and the next fiscal year.
- With a market cap of ~$8.2B on a fully diluted basis, Duolingo shares trade at ~14x and ~11x EV/Rev on my respective FY23/FY24 estimates, a significant premium to comparable companies.
[ACM Research (ACMR US, BUY, TP US$30) Earnings Review]: Korea and US Are the Next Battlefields
- ACMR reported C3Q23 revenue, non-GAAP EBIT, GAAP net profit (5%), 21%, in-line vs. our est., and (3%), 63%, 49% vs. cons., respectively. Gross margin beat by +9ppts due to FX.
- ACMR received a second order from a U.S. semiconductor maker, which indicates potential for significant market share gain by 2025. SK Hynix is engaging its entire product line, per management.
- We maintain BUY rating and US$ 30 TP, implying 18x FY23 EV/Earnings.
Chenqi Technology Pre-IPO – Listing Would Almost Feel like a Pipe Dream
- Chenqi Technology Limited (CT HK) is looking to raise US$300m in its upcoming Hong Kong IPO.
- Chenqi Technology (Chenqi) is a mobility technology and service company in China, founded by the GAC Group and Tencent.
- Chenqi has grown its GTV fast on the back of network expansion. However, Dida’s inability to list and Chinese regulators’ scrutiny on Didi would likely dent sentiment surrounding Chenqi.
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