Brief Industrials: Koolearn (新东方在线) IPO Review – Yet to See Results from Increased Spending and more

In this briefing:

1. Koolearn (新东方在线) IPO Review – Yet to See Results from Increased Spending
2. Keppel Infrastructure Trust Placement – Scaled Down but Large Deal; Very Well Flagged Deal
3. Yokogawa Electric (6841 JP): A Less Risky Investment in LNG Engineering
4. Company Visits: Berli Jucker, M Visions
5. StubWorld: Wharf Under Pressure As Cooling Measures Bite

1. Koolearn (新东方在线) IPO Review – Yet to See Results from Increased Spending

Koolearn (1797 HK) is looking to raise up to US$S234m in its upcoming IPO.  We have previously covered the company in:

• Koolearn (新东方在线) Pre-IPO – Profitable Online Edu Company but Poor Sentiment Weighs
• New Regulatory Tightening on Online Education Reads Badly on Koolearn IPO

In this insight, we will look at the updates on financials and operating metrics, compare it to other listed online education companies, and run the deal through our framework.

The increase in spending on marketing has not yielded the intended results as the growth rates of student enrollment and gross billings slowing down. Furthermore, aggressive spending behavior is similar to that of STG and LAIX and both companies did not perform well post listing.

2. Keppel Infrastructure Trust Placement – Scaled Down but Large Deal; Very Well Flagged Deal

Keppel Infrastructure Trust (KIT SP) plans to raise US$450m via an equity placement and non-renounacable preferential offering. Its sponsor, Keppel Corp Ltd (KEP SP) will subscribe in the placement and the preferential offering to maintain its 18.2% stake.

KIT announced the acquisition of IXOM in Nov 2018 and has been talking about the need to issue equity ever since. Its earlier presentations seem to indicate a preference for raising a large sum via an equity issuance. Furthermore, despite the smaller raise the accretion to DPU is probably only marginal. 

3. Yokogawa Electric (6841 JP): A Less Risky Investment in LNG Engineering

Yokogawa Electric is one of the world’s leading suppliers of distributed control systems (DCS) used in the LNG, oil & gas, petrochemical and other industries. It is particularly strong in LNG, having provided control systems for dozens of liquefaction trains, LNG carriers and re-gasification plants.

Unlike Chiyoda Corporation (6366 JP) and JGC (1963 JP), which depend on a small number of large engineering, procurement and construction (EPC) orders, which can be as large as ¥500 billion, Yokogawa only rarely receives an order as large as ¥10 billion and most of its orders are less than ¥1 billion. It is geared primarily to ongoing investments and operating expenditures in its user industries, less exposed to highly variable orders for large LNG and other engineering projects, and relatively immune to cost overruns and other problems at projects gone wrong.

Margins have expanded over the past several years due to a combination of restructuring and technological advance. Unprofitable non-core businesses have been abandoned or sold, high-wage domestic employees retired, and administration, manufacturing and logistics rationalized. Enterprise and robotic process automation (RPA) software have been introduced and an Industrial Internet of Things (IIoT) cloud computing platform is under development.  Top-line growth has been slow, but the operating margin has risen from from 5.0% in FY Mar-12 to 8.0% in FY Mar-18, and should reach 10% in FY Mar-21, in our estimation.

At ¥2,215 (Wednesday, March 13 closing price), the shares are selling at 23x our EPS estimate for FY Mar-19 and 20x our estimate for FY Mar-21. Projected EV/EBITDA multiples for the same two years are 9.8x and 8.2x. These and other projected valuation multiples are above their recent historical averages, but indicate upside potential of 20% or more if the anticipated upturn in new LNG investments materializes. Investors willing to take on more speculative risk should look at Chiyoda and JGC.

4. Company Visits: Berli Jucker, M Visions

We visited one big-cap stock, Berli Jucker, and one pip-squeak recent IPO M Vision today. A couple of highlights:

• Slow revenue growth at BJC at under 5% largely driven by Big C (hypermarket), but earnings growth was strong at 28% mainly due to lower cost of palm oil in the snack business.
• Good progress in Vietnam with expansion of the bottle capacity this year and SABECO increasing purchases of bottles.
• Overall unimpressed. The company isn’t expecting to grow revenues more than 9% this year, and many of the cost cuts we saw in 2018 are clearly one-offs. Higher oil prices are likely to lead to rising palm oil prices this year too, since the two commodities are linked through substitution effect.
• MVP underwent a bad year on the profit level, but their various businesses, at least on the top line level, looks like it could recover quickly this year.

5. StubWorld: Wharf Under Pressure As Cooling Measures Bite

This week in StubWorld …

• Wheelock & (20 HK) is coming up “expensive”, but it’s Wharf Holdings (4 HK) which is under-performing after PRC property sales targets are lowered amid Beijing’s cooling measures.

Preceding my comments on Wheelock and other stubs are the weekly setup/unwind tables for Asia-Pacific Holdcos.

These relationships trade with a minimum liquidity threshold of US$1mn on a 90-day moving average, and a % market capitalisation threshold – the $ value of the holding/opco held, over the parent’s market capitalisation, expressed in percent – of at least 20%.