Brief Healthcare: Bristol Myers Squib & Celgene–Starboard Objections Addressed Today- Successful Deal Closure Probable and more

In this briefing:

1. Bristol Myers Squib & Celgene–Starboard Objections Addressed Today- Successful Deal Closure Probable
2. Sea Ltd (SE US): The Bear Case – A One-Hit Wonder?
3. Shanghai/Shenzhen Connect – $8.4 Bn Inflows in February (Kweichow Moutai, Aier Eye, Luxshare)
4. Snippets #19: Marijuana, Mergers, and More
5. Topcon (7732 JP): Weak 3Q, Likely to Fall Short of FY Mar-19 Guidance

1. Bristol Myers Squib & Celgene–Starboard Objections Addressed Today- Successful Deal Closure Probable

The proposed Bristol Myers Squibb Co (BMY US) & Celgene Corp (CELG US) transaction announced in the first week of 2019, garnered many sceptical comments. Starboard Value jumped in the fray by writing a letter denouncing the transaction while one of the largest holders of BMY, Wellington Management Group, holding about 7.7% of the stock expressed a desire to vote against the transaction. BMY’s response to Starboard’s half-baked objections is credible, and in our view, increases the likelihood of a successful closure manifold. We are bullish on the transaction.

2. Sea Ltd (SE US): The Bear Case – A One-Hit Wonder?

Despite burning through $700mn in cash in 2018, investors decided to give another $1.3bn to Sea Ltd (SE US) . We believe investors should treat Sea Ltd with caution for the following reasons:

A significant slowdown in e-commerce

Is the gaming division a one-hit wonder?

Expecting another 800mn cash burn into 2019

Consensus has priced in further upgrades while cash flow metrics worst in the sector

NB. Our team has taken both sides of the Sea Ltd investment case as we think this makes for better decision making and encourages unique thinking within our team. We strongly recommend that investors read my colleague Arun’s positive notes on the company listed below, if you have not already done so.

Sea Ltd (SE US): Placing Price Leaves Money on the Table

Sea Ltd (SE US): Placement a Good Opportunity to Enter an Attractive Story

3. Shanghai/Shenzhen Connect – $8.4 Bn Inflows in February (Kweichow Moutai, Aier Eye, Luxshare)

In our Discover SZ/SH Connect series, we aim to help our investors understand the flow of northbound trades via the Shanghai Connect and Shenzhen Connect, as analyzed by our proprietary data engine. We will discuss the stocks that experienced the most inflow and outflow by offshore investors in the past seven days.

We split the stocks eligible for the northbound trade into three groups: those with a market capitalization of above USD 5 billion, and those with a market capitalization between USD 1 billion and USD 5 billion.

We note that offshore investors were buying all GICS sectors, and had a strong preference for Industrials, Consumer Staples, Consumer Discretionary, and Financials names. We estimate that total inflow into the A-share market via northbound trade amounted to USD 8.4 bn in February.

4. Snippets #19: Marijuana, Mergers, and More

Five interesting trends/developments that could impact Thai equities in the recent period:

• Legalization of medicinal marijuana. Thailand legalized medicinal use of marijuana at end of February and has already received immense interest from potential growers. At some point, pharma and healthcare companies could be beneficiaries of this trend.
• Rumbles in the airline industry. Asia Aviation (AAV TB) , parent company of Thai Air Asia, acquires a stake in competitor Nok Air. This is one of the few signs of industry consolidation in this sector.
• MOU signed between TMB and Thanachart. The deal may take longer than initially expected, but the two sides have agreed on some basics such as 70% equity financing and deal size of roughly Bt130-140bn.
• Read-through from US Election 2020. Some of the Democrat policies advocated by candidates in 2020 could turn out to be positive for Asian equities.
• BGrimm acquires Glow SPP1 for a bargain price of Bt3.3bn, or 55% of the expected price, opening the way for the GPSC-Glow merger, potentially the largest deal of 2019.

5. Topcon (7732 JP): Weak 3Q, Likely to Fall Short of FY Mar-19 Guidance

Topcon’s FY Mar-19 guidance looks over-optimistic. Operating profit was up 8.5% year-on-year on a 1.4% increase in sales in the nine months to December, but down 10.1% on a 2.3% decrease in sales in 3Q. To make management’s full-year targets, it would have to increase by 41.0% on a 6.8% increase in sales in 4Q. The sales of all three major product segments – Smart Infrastructure, Positioning and Eye Care – have been slow. Intra-company eliminations have undercut segment profits.

At ¥1,561 (Friday, March 1, close), the shares are selling at 23.6x our EPS estimate for this fiscal year and 9.8x projected EV/EBITDA. These multiples compare with 5-year historical lows of 16.1x and 6.8x. Japan Analytics’ calculation of Annual No-Growth Valuation shows further downside risk (see chart below).