Brief Event-Driven: Honda Chooses CATL as Battery Partner for Their EVs; Panasonic Has Lost the Chance and more

In this briefing:

1. Honda Chooses CATL as Battery Partner for Their EVs; Panasonic Has Lost the Chance
2. Hyundai Motor Share Class: Long 2PB / Short 1P Amid Restructuring Speculation
3. Baidu: Time to Swoop In, with NAV Discount Widening Substantially
4. Pinduoduo (PDD US): Follow-On Offering Is a Smart Move for the Company, Rather than for Investors

1. Honda Chooses CATL as Battery Partner for Their EVs; Panasonic Has Lost the Chance

CATL (A) (300750 CH) announced on Monday that it has signed a deal with Honda Motor (7267 JP) for jointly developing Li-ion batteries. This news comes to us as no surprise, given CATL’s effort in expanding market share globally by tying with leading automakers such as Nissan Motor (7201 JP), Daimler AG (DAI GR), and Bayerische Motoren Werke Ag (BMW GR). It seems that the Chinese battery leader is now targeting leading Japanese automakers alongside their focus on luxury automakers in Europe ( BMW to Invest in CATL: Chinese Battery Maker to Gain Exposure in Europe?).  Following Panasonic Corp (6752 JP)’s news about forming a Joint Venture with Toyota, we were under the impression that Panasonic would hit a deal with Honda as well. However, it seems that CATL has emerged as a first mover and secured a steady business by partnering with Honda, one of the leading automakers in Japan. Although Panasonic and Honda joined hands for developing a swappable battery system in Indonesia, the team hasn’t really gone ahead in developing Li-ion batteries. Honda’s battery sales are now for CATL, while Panasonic has lost a steady business deal unless the latter makes plans with Honda to develop new battery technologies such as solid-state batteries. In our opinion, Honda and CATL, being leaders in their respective industries, when joined together via this agreement should capture a strong position in the auto sector which is striding towards electrification. The effect of this news on CATL share price cannot be really seen as the markets are closed for ongoing holidays in China. Panasonic, however, opened -5.1% low on February 5th, mainly due to its disappointing 3QFY03/19 earnings and could be partly due to this news.

2. Hyundai Motor Share Class: Long 2PB / Short 1P Amid Restructuring Speculation

• Hyundai Motor 1P/2PB price ratio is currently at 152% of σ on a 20D MA. This is the highest since late Nov last year. Price ratio wise, they are now slightly above 120D average.
• 1P/2PB div yield difference on FY19e is -0.34%p. This is lower than last year’s yearend level. Hyundai Motor Common has been drifting sideways for a while lately. 2PB has generally been more quickly responding to Common’s price movement. This led to a higher-than-usual price divergence on 1P/2PB. 1P should be following Common/2PB at this point.
• It is locally being speculated that HMG will announce a revised restructuring plan as early as next month. When this happened last time, 2PB responded first and 1P followed suit. This market speculation will also serve to boost 2PB in the short-term. I’d go long 2PB and short 1P.

3. Baidu: Time to Swoop In, with NAV Discount Widening Substantially

• Our stub valuation analysis reveals that Baidu Inc (ADR) (BIDU US) attractively trades at near 2 SD below its 3-yr average of NAV discount.
• Fundamentally, BIDU’s core business (Baidu Core) has grown healthily, with strong cash flows generation.
• China consumption slowdown is likely to mean modest sales growth deceleration (not a “sales falling off the cliff” scenario) for BIDU in 2019E.
• Implied in the current ADR price, the market is unjustifiably valuing Baidu Core (11.2x 2019E PE) as an “Old economy” company with little to no growth prospect, in our opinion.
• Our PT for next 3-6 mo, assuming 10% holdco discount to NAV, works out to be US$224/ADR, representing a 27% upside potential.   

4. Pinduoduo (PDD US): Follow-On Offering Is a Smart Move for the Company, Rather than for Investors

With the shares hitting all-time highs, Pinduoduo (PDD US) announced a follow-on public offering to raise net proceeds (potentially of $1.1 billion) from the sale of 37 million ADS along with the placing of 14.8 million ADS from existing shareholders (post-lockup expiry).