In this briefing:
- Shaily Engineering-Q2FY18 Results Update
- ECM Weekly (12 January 2019) – Futu, China East Education, China Kepei Education, Viva Biotech
- MonotaRO (3064 JP): Strong Finish to FY Dec-18
- Chinese Telcos: 5G Launches in 2019. Buy the 5G Beneficiary (China Tower).
- Toshiba Buyback: Proceeding Apace, But That’s Slow
1. Shaily Engineering-Q2FY18 Results Update
Shaily Engineering Plastics (SHEP IN) Q2 FY19 results were below our expectations. While revenue increased by 10% YoY, PAT declined by 9% YoY in Q2 FY19. This muted performance was primarily due higher raw material prices and a shortage of labour as well as power outage that resulted in low machine utilization. We analyze the results.
2. ECM Weekly (12 January 2019) – Futu, China East Education, China Kepei Education, Viva Biotech
Aequitas Research puts out a weekly update on the deals that have been covered by Smartkarma Insight Providers recently, along with updates for upcoming IPOs.
Despite a shaky 2018 Q4 market and the disappointing Softbank Corp (9434 JP)‘s IPO, we have been getting a steady stream of newsflow on upcoming IPOs.
Starting with upcoming IPOs, Chengdu Expressway Company Limited (1785 HK) and Weimob.com (2013 HK) will be listing next week on Tuesday, 15th January. Weimob was priced at the low end of its price range while Chengdu Expressway’s IPO was at a fixed price of HK$2.20. We are bearish on both IPOs. Weimob is overly reliant on Tencent for its SaaS and Ads business and, at the same time, Tencent will only own less than 3% stake after listing. Whereas Chengdu Expressway has been a well-managed company but valuation implies limited upside. Trading liquidity will likely remain tepid as like Qilu Expressway Co Ltd (1576 HK) which listed mid last year.
In the pipeline, we are hearing that Kepei Education (KEPEI HK) will likely open its book next Monday. We will be following up with a note on valuation. In other IPOs that are coming in this quarter, Helenbergh China and Zhongliang, both property developers, are looking to IPO in this quarter. Viva Biotech Shanghai Ltd (1577881D HK) is also looking to list in Hong Kong Q2 while Urban Commons, a US property developer, is planning a US$500m REIT IPO in Singapore.
Activity seems healthy for the ECM space, but sentiment has not been the best as seen from Xiaomi’s high profile IPO that took a hit just as its lockup expired. Its share price has corrected from a high of HK$22.20 to just above HK$10.34 this Friday. This should not have been a big surprise since many have already pointed out that its valuation should really have been closer to that of a hardware business and we pointed out that the IPO’s trajectory would likely be similar to Razer.
This reminds us of a particular listing last year, Razer Inc (1337 HK) , and, in fact, both bear quite a handful of similarities. Strong portfolio of investors, hardware business with software capabilities, expensive valuations, and etc. The stock did well at first but has come back down to earth since then.
Accuracy Rate:
Our overall accuracy rate is 72% for IPOs and 64% for Placements
(Performance measurement criteria is explained at the end of the note)
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New IPO filings
- China Tobacco International (Hong Kong, US$100m)
- China East Education (Hong Kong, US$400m)
- Ebang International (Hong Kong, re-filed)
- MicuRx Pharma (Hong Kong, re-filed)
Below is a snippet of our IPO tool showing upcoming events for the next week. The IPO tool is designed to provide readers with timely information on all IPO related events (Book open/closing, listing, initiation, lock-up expiry, etc) for all the deals that we have worked on. You can access the tool here or through the tools menu.
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News on Upcoming IPOs
- Urban Commons plans IPO of up to US$500m at Q1-end
- Viva Biotech plans IPO in the second quarter
- CStone Pharma plans US$400m IPO in Feb
- Global Switch plans about US$1bn HK IPO
- China’s Wanda files for US IPO of sports unit to raise up to US$500m
Smartkarma Community’s this week Analysis on Upcoming IPO
- Futu Holdings IPO Preview: Running Out of Steam
- Futu Holdings Pre-IPO – Great Metrics but in a Commoditised Industry
- China Tobacco International (IPO): The Monopolist Will Not Recover
- China Tobacco International IPO: Heavy Regulation, Declining Margins – A Bit Late to IPO Party
- IPO Radar: AutoCorp, Honda’s Avatar in Thailand
List of pre-IPO Coverage on Smartkarma
3. MonotaRO (3064 JP): Strong Finish to FY Dec-18
In the three months to December, MonotaRO’s domestic (parent company) sales continued to grow at an annual rate close to 25%, indicating that full-year consolidated results should be close to management’s guidance and our own estimates. This also suggests that our 18% sales growth forecast for 2019 could be conservative.
Parent company data for December show sales up 18.4% year-on-year in nominal terms, but up 24.6% when adjusted for the number of working days in the month. The figures for November were 27.3% growth in nominal terms, but 21.3% adjusted.
In the three months to December, adjusted sales were up 24.2%, a slight improvement from 23.9% growth in 3Q. In FY Dec-18 as a whole, reported parent company sales were up 24.4% to ¥105.3 billion, slightly exceeding management’s ¥104.1 billion guidance.
At ¥2,523 (Friday, January 11, close), the shares have dropped 25% since October. They are now selling at 61x our EPS estimate for FY Dec-18, 54x our estimate for FY Dec-19 and 47x our estimate for FY Dec-20. Price/sales multiples for the same three years are 5.7x, 4.8x and 4.2x.
Consolidated results for FY Dec-18 are due to be announced by the end of January.
MonotaRO is the only pure-play e-commerce MRO (Maintenance, Repair and Operation) investment in the Japanese stock market. With over 10,000 SKUs (stock keeping units – i.e., individual items, including gloves, hand and power tools, hardware, painting supplies, etc.) for sale to construction companies, manufacturers, auto repair shops and other customers, the company is both driving and benefitting from the growth of Japan’s B2B MRO market. Overseas subsidiaries in South Korea, Indonesia and China, which account for about 4% of consolidated sales, are not yet profitable.
4. Chinese Telcos: 5G Launches in 2019. Buy the 5G Beneficiary (China Tower).
We highlighted in a recent note Chris Hoare‘s positive outlook for China Tower (788 HK). Our view takes into account the 5G build-out commencing this year, improved capex efficiency from using “social resources”, the rapid growth in non-tower businesses that lie outside the Master Services Agreement (MSA), and the valuation benefit from what looks like surprisingly investor friendly management.
This note focuses on four key issues facing the Chinese telcos in 2019:
- 5G capex (March) (this is by far the most important),
- Regulatory newsflow (February/ March),
- Operating trend improvements (August), and
- Emerging business opportunities driving future growth (August).
We remain positive on the telcos which trade at low multiples. China Unicom (762 HK) continues to trade at a discount, yet is most exposed to the positive story emerging at China Tower. We switch our top pick among the telcos from China Mobile (941 HK) back to China Unicom as a result. Alastair Jones thinks China Telecom’s (728 HK) premium multiple is at risk if management execution on the cost base doesn’t improve. It is our least preferred telco at this stage. Overall, we expect China Tower to outperform all telcos and it is our top pick. The upgrade to China Tower flows through the telcos (valuation and costs) and our new target prices are as follows: China Unicom to HK$14.4, China Telecom to HK$5.4 and China Mobile to HK$96.
5. Toshiba Buyback: Proceeding Apace, But That’s Slow
In November 2017, Toshiba Corp (6502 JP) bowed to the inevitable and issued shares in order to shore up shareholder equity ahead of the 31 March 2018 deadline where if the company had not announced a positive shareholder equity number, it would have been delisted according to the Enforcement Rules of the Tokyo Stock Exchange.
So it issued ¥600 billion of equity in an accelerated privately-negotiated placement to hedge funds. There was some jawboning later from domestic institutions who had not gotten the show on the deal, but they would do well to remember that when Toshiba was in dire straits earlier that year, and continued listing was not guaranteed because of accounting issues which were later overcome (before the equity issuance), it was the hedge funds who bought dozens of percent of the company – not domestic financial institutions. In any case, the equity was predictably needed, but as a way of making it clear that it would not be forever, the release accompanying the financing said the company would accelerate returns to shareholders once the sale of Toshiba Memory Corporation was complete.
That return of capital to shareholders was announced in June 2018 after the closing of the TMC transaction had been confirmed. Toshiba would buy back ¥700 billion of shares. At the time, that was up to 40% of shares outstanding, but the shares rose as the shares of companies with large buyback plans do, and it took until November to dot the “i”s and cross the “t”s on making sure that the cash in the bank account was deemed distributable capital surplus. On November 8th, a year after announcing the sale of equity, Toshiba announced the start of a Very Large Buyback. A few days later the company announced a large ToSTNeT-3 buyback, offering to buy back all ¥700 billion of shares the following morning at that day’s close. A week later the company had bought back ¥243 billion or more than 35% of the total buyback then announced further purchases would be made in the market.
That’s when the fun began.
For previous recent treatment on the Toshiba buyback, see the following:
Toshiba: King Street’s Buyback Proposals Lack Required Detail (5 Oct 2018)
Toshiba’s Buyback – How It Might Work (9 Nov 2018)
Toshiba’s ToSTNeT-3 Buyback: Unwinding? Another Game of 🐓? (12 Nov 2018)
Toshiba ToSTNeT-3: Round 2 (¥579bn To Go) (14 Nov 2018)
Toshiba ToSTNeT-3 Buyback Means 1/3 Done. Off To Buy In The Market Now! (21 Nov 2018)
Toshiba Buyback Update – Not Banging Down Doors To Get Stock Yet (3 Dec 2018)
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