Brief TMT & Internet: AMD. Market Share Gains Across The Board As Intel Vows To Fight To Protect Its Position and more

In this briefing:

1. AMD. Market Share Gains Across The Board As Intel Vows To Fight To Protect Its Position
2. Autohome (ATHM): Promising Auto Loan, Waiting for Buying Opportunity
3. Futu Holdings IPO – Given the Team, Execution, and Backers, Might Be Worth a Look at the Low-End
4. Procurri: Exit DeClout, Enter Novo Tellus. Company Remains Highly Undervalued at 4.4x 2018 EV/EBITDA
5. HKT Benefits from Price Increases and Offers Strong Dividend Support.

1. AMD. Market Share Gains Across The Board As Intel Vows To Fight To Protect Its Position

Some two years on from the initial launch of products designed around their new Zen-based architecture, Advanced Micro Devices is finally gaining meaningful traction in terms of market share gains. In Q4 2018, AMD gained market share in desktop, mobile, and server sequentially and year over year – the fourth straight quarter of gains in all segments as well as their highest market shares across all segments in almost five years. Perhaps the most significant accomplishment was in server where AMD’s share doubled QoQ to 3.2%, according to data supplied by Mercury Research.

As you might expect, Intel is taking notice, acknowledging the competitive environment on its latest earnings call and vowing to fight to protect its position. In light of the 25-30% reduction in the price of Intel’s latest and highest end desktop processors on leading German online retailer MindFactory since their launch last October, it would appear that Intel’s battle tactics include sacrificing ASPs where it deems fit.  

2. Autohome (ATHM): Promising Auto Loan, Waiting for Buying Opportunity

• The 4Q2018 results suggest that it is a right decision to close out direct automobile sales and start auto loan.
• The 4Q2018 results also suggest that ATHM has successfully completed the post-acquisition integration after three years.
• Peer companies’P/E ratios suggest ATHM is fairly valued, but we believe it will be a good opportunity to accumulate if the stock price falls.

3. Futu Holdings IPO – Given the Team, Execution, and Backers, Might Be Worth a Look at the Low-End

Futu Holdings Ltd (FHL US) plans to raise upto US$130m in its US listing. The deal has been downsized from its earlier indicative size of US$300m and the valuation too has been downsized by almost the same extent to around US$1.2-1.5bn.

In my earlier insights, Futu Holdings Pre-IPO – Great Metrics but in a Commoditised Industry and Futu Holdings Pre-IPO – FY18 Updates And Quick Thoughts on Valuation, I looked at the company’s background and past financial performance.

 In this insight, I’ll run the deal through our IPO framework and comment on valuations. At the low-end the deal might be worth looking into, although free-float might end up being very small owing to US$30m being taken up Tencent which would leave just about US$100m as free-float.

4. Procurri: Exit DeClout, Enter Novo Tellus. Company Remains Highly Undervalued at 4.4x 2018 EV/EBITDA

Procurri Corporation (PROC SP) released FY18 results which showed the company growing revenues to 220M SGD (+21% vs FY17), EBITDA to 19.7M SGD (+185% vs FY17), PBT to 10.1M SGD (vs 2.3M loss in 2017) and a small net profit of 5.3M SGD which was artificially low because of an astronomical 47% tax rate. The high tax rate should reverse in 2H19 which would show the reported profitability of Procurri improve substantially. 

Procurri remains deep value trading at just 4.4x 2018 EV/EBITDA and 0.4x 2018 EV/Sales. If we adjust the FY18 net profit figure(assume 30% tax rate vs 47%) the shares trade at a P/E multiple of just 13x.

The shareholder register of Procurri has seen a dramatic change YTD with multiple announcements on SGX. The most significant development is the entry of Singapore PE fund Novo Tellus acquiring a 29.6% stake on 19/2/19. Consequently this means that the biggest corporate overhang on Procurri (read: the control by Declout Ltd (DLL SP) ) is now almost over with their stake reduced to 17% from 47% previously.

Given the well-publicized track record of Novo Tellus at SGX listed Aem Holdings (AEM SP) the question is if Novo Tellus sees another multi-bagger in the making?

While a “10-bagger” type return like AEM is unlikely at Procurri, doubling the market cap from 90M to 180M SGD would not be impossible as Procurri continues to grow in FY19 and the depressed multiple expands modestly.

5. HKT Benefits from Price Increases and Offers Strong Dividend Support.

HKT (6823 HK) reported 2H18 EBITDA slightly below our estimates but free cash flow was in line and allowed a 5% increase in the dividend (to a 5.7% yield). We look for the dividend to grow gradually going forward as management’s focus is once again on returns. We saw that with the move by HKT to raise prices in September 2018 which is already helping mobile top-line trends.

Despite HKBN (1310 HK) and China Mobile HK not following, the pre-paid segment does not appear to be suffering. Management has not ruled out further tariff increases, and they clearly want to see more rational competition in the run up to 5G (and to allow for dividend growth).

Growing cash flow has allowed management to maintain an attractive dividend policy which we see as supportive for the group overall. The improved monetization in mobile and continued efficiencies is likely to support future cash flow growth. Given the encouraging mobile outlook we have lifted our target slightly HKD13.8 from HKD13.6), and maintain a BUY on the stock. For a discussion on parent PCCW (8 HK) and the stub trade, please see David Blennerhassett ‘s recent note: StubWorld: PCCW Is “Cheap” but Stub Ops Are Deteriorating.