Brief TMT & Internet: ByteDance (字节跳动) IPO: How Jinri Toutiao Paves The Way for a Bigger Empire (Part 1) and more

In this briefing:

1. ByteDance (字节跳动) IPO: How Jinri Toutiao Paves The Way for a Bigger Empire (Part 1)
2. Facebook Inc. – Is Consensus Overly Cautious?
3. GMO Internet Reports Solid FY12/18 Despite Heavy Losses Incurred in Crypto Mining Business
4. U.S. Equity Strategy: Upgrading Manufacturing Sector
5. NTT Corp: The Rising Dividend Story Is Playing Out.

1. ByteDance (字节跳动) IPO: How Jinri Toutiao Paves The Way for a Bigger Empire (Part 1)

ByteDance, an emerging TMT player in China and one of the challengers to the BAT’s dominance in China, is said to be preparing for 2019 listing. It will be the largest Chinese TMT listing this year as the company was valued at USD 75 billion in the pre-IPO fundraising, closed in October 2018. 

In this insight, we will discuss ByteDance’s business, in particular, how the text-based media distribution platform Jinri Toutiao (今日头条) built the foundation of the company, and paved ways for the short-video distribution platform Watermelon Video (西瓜视频), Volcano Video (火山视频), and Tiktok (抖音).

In our next insight, we will discuss how Tiktok became successful and the company’s overseas expansion.

2. Facebook Inc. – Is Consensus Overly Cautious?

Facebook Inc A (FB US) is a bellwether stock for the equity markets. Although the market capitalisation is approaching $475 billion, the Company is still considered a growth stock. In our view, 2019 could be a pivotal year for the Company after a lack lustre 2018, when FB, although volatile, underperformed the NASDAQ. We believe that investors are underestimating revenue growth for 2019 and that FB is likely to surprise to the upside in Q1-19. 

3. GMO Internet Reports Solid FY12/18 Despite Heavy Losses Incurred in Crypto Mining Business

GMO Internet, Inc. (9449 JP) announced its consolidated financial results for its full-year FY12/18 yesterday (12^th February). Despite heavy losses incurred in the cryptocurrency mining business in FY12/18, GMO managed to achieve a solid year with 20% YoY growth in top-line alongside a 23.5% YoY growth in operating profits. Excluding the crypto losses, the operating profit increased 35.7% YoY, with an OPM of 13.2% compared to 11.4% reported a year ago. For the full-year, the company has reported a net loss of JPY20.7bn as opposed to a net profit of JPY8bn in FY12/17, blaming the crypto losses for the decline. For FY12/18, the management has proposed a dividend of JPY29.5 per share (compared to JPY23 paid in FY12/17) in spite of reporting net losses for the fiscal year. Further, the company has also allocated JPY1.36bn (equivalent to 0.7% of outstanding shares at the current price) for share repurchases in FY2019.

GMO is currently trading at JPY1,741 per share which we believe is undervalued compared to its combined equity stake in 8 listed subsidiaries. The company share price has lost more than 40% since it peaked in June last year due to the negativity surrounding its cryptocurrency and mining segment. However, we believe further downside is limited as the company has closed down a majority of its mining related business which weighs very little on the consolidated performance of the company. Further, the company’s key businesses, Internet Infrastructure, Online Advertising & Media and Internet Finance generate solid recurring revenues, which should help the company achieve strong growth. Following its earnings announcement, the share price gained 5.6% from the previous days close.

4. U.S. Equity Strategy: Upgrading Manufacturing Sector

The S&P 500 continues to hover below critical resistance at its 200-day moving average while market participants remain in a wait-and-see mode for new developments on U.S.-China trade and details on the latest border security proposal. At the same time, breadth improvements have extended to our Manufacturing Sector – a welcomed sight given its cyclical nature.  We are Upgrading Manufacturing to market weight from underweight. Our cap-weighted Manufacturing Sector has steadily improved in our RSR ranks due in large part to strength in Aerospace & Defense Groups. In today’s report we highlight attractive Groups within Manufacturing and Technology..

5. NTT Corp: The Rising Dividend Story Is Playing Out.

As we wrote about in Preference for NTT Retained on Its Commitment to a Substantial Long Term Profit Increase, we like the long term story at NTT (Nippon Telegraph & Telephone) (9432 JP) given its relatively low payout ration, long term opportunities for cost reductions as their workforce shrinks through retirements. While government action and the announced price cuts announced by NTT Docomo Inc (9437 JP) hurt sentiment to the sector in 2H18, Chris Hoare remains positive. The recent 3Q results were decent with the key positives being a rising dividend and strong cash flow growth which is in line with our long term positive thesis on the stock. We remain Buyers with a target price of ¥7,150.