Brief IPOs & Placements: A Trading Strategy for EcoproBM Post IPO and more

In this briefing:

1. A Trading Strategy for EcoproBM Post IPO
2. New Century Hotel (浙江開元酒店) Pre-IPO – Improved Profitability Not Driven by Underlying Operations
3. Ab InBev Asia Pre-IPO – Quick Note – More like CR Beer Rather than Tsingtao
4. Hyundai Autoever IPO Preview
5. Hyundai Autoever IPO Pricing: Likely to Be a Dull Event Given No Growth Story & Glovis Merger

1. A Trading Strategy for EcoproBM Post IPO

• In this report, we provide a trading strategy for Ecopro BM Co Ltd (247540 KS) IPO, which is expected to start trading on March 5th. The IPO price has been determined at 48,000 won, which is 19% higher than the mid-point of the original IPO price range of 37,500 won to 42,900 won. The institutional investors’ demand for the Ecopro BM IPO was extremely strong at 988 to 1. 
• In our previous report Ecopro BM IPO: Valuation Analysis, we proposed the base case to high end of the company’s value to be between 56,000 won and 67,800 won. Given the enormous institutional demand for this IPO, it appears that our base case valuation (56,000 won), which is 17% higher than the IPO price, may be too conservative. 
• A more likely scenario now is that the stock reaches about 65,000 won to 70,000 won in the first few hours of trading on the first day, overshooting its intrinsic value and sells off a bit for a few days/weeks, enters a consolidation phase and then resumes its higher share price again. 

2. New Century Hotel (浙江開元酒店) Pre-IPO – Improved Profitability Not Driven by Underlying Operations

Zhejiang New Century Hotel Management Group (ZHEKAIH HK) (ZNCH) is looking to raise US$220m in its upcoming IPO. 

ZNCH is a hotel operator and manager with presence across China. The company grew its revenue by a modest 5% from 2015 to 2017 but made significant improvements in profitability. Gross profit, EBITDA and PATMI grew by 33%, 61%, and 132% CAGR over the same period.

However, the improved profitability has not been driven by underlying operations. The company seemed a tad too ambitious to be expanding via leasing hotel when it already has a large hotel management pipeline.

In this insight, we will look at the company’s financial and operational performance, the drivers of its strong margin expansion, and include some questions for management.

3. Ab InBev Asia Pre-IPO – Quick Note – More like CR Beer Rather than Tsingtao

Anheuser Busch Inbev Sa/Nv (ABI BB) is looking to list its Asian operations in order to lighten its debt burden. The listing will probably be in Hong Kong and the company could raise around US$5bn at a valuation of around US$70bn.

In my earlier insight, Ab InBev Asia Pre-IPO – A Brief History of the Asia Pacific Operations – Eeking Out Growth in China, I looked at how the Asian operations of ABI have shaped up over the past few years.  

In this insight, I’ll do a quick comparison of the past financial performance of China Resources Beer Holdin (291 HK) and Tsingtao Brewery Co Ltd H (168 HK).

4. Hyundai Autoever IPO Preview

• Hyundai Autoever is ready to complete its IPO in March 2019. Established in 2000, Hyundai Autoever is the IT service arm of the Hyundai Motor Group. Hyundai Autoever is expected to play a key role in the Hyundai Motor Group’s push to become a leading global player of autonomous driving in the coming decade. 
• The IPO price range is between 40,000 won and 44,000 won. The IPO base deal size is from $125 million to $138 million. According to the bankers’ valuation, the expected market cap is expected to range from 840 billion won to 924 billion won. 
• The bankers used four companies including Samsung SDS, POSCO ICT, Lotte Data Comm, and Shinsegae I&C to value Hyundai Autoever. Using the annualized net profit of the comps in 2018, the bankers derived an average P/E multiple of 24x for the peers. Then the bankers took the annualized net profit of Hyundai Autoever in 2018 (52.2 billion won) and applied the peers average P/E multiple of 24x to derive the implied market cap of 1.25 trillion won. After applying additional IPO discount of 26.4% – 33.1%, the bankers derived the IPO price range of 40,000 to 44,000 won. 

5. Hyundai Autoever IPO Pricing: Likely to Be a Dull Event Given No Growth Story & Glovis Merger

• Hyundai Autoever offers a total 3,510,000 shares. Split is 9.9% primary and 90.1% secondary. Shares are preliminarily priced at ₩40,000~44,000. This puts the company value at ₩840~924bil. Bookbuilding will be Mar 13~14.
• Valuation is a bit aggressive. It is being heard that local institutions are not particularly excited about this IPO mainly because of Autoever’s 90% captive business. That is, growth story isn’t looking fancy. At a 17x PER on Autoever’s FY19 expected earnings, it is sitting in the middle of the indicative price band. There shouldn’t be much room to play around.
• The major shareholder was expected to sell as much as 50% of their shares through secondary distribution. Actual offering size is much smaller. This sparks the speculation that Autoever will soon be merged with Glovis. Much smaller offering size may be for facilitating the merger. It can pave a less controversial path for another merger attempt with Mobis.
• But this speculation can render this IPO meaningless though. I expect this IPO will be a dull event. I wouldn’t avoid it completely though. Stable income stream and connected car are are still something worthy. I’d buy them at the right price. Low end should be the right price.