Brief TMT & Internet: China Tower Corp: Trading Idea Before Lock-Up Expiry and more

In this briefing:

1. China Tower Corp: Trading Idea Before Lock-Up Expiry
2. AMD. Our Opteron Thesis Is Intact & Reinforced After Q2 2018 Earnings
3. Facebook 4Q Results: An Easy Beat – Has Zuck Turned the Tanker?
4. Teasing Updates on CaiNiao Network & Ele.me Out of Alibaba’s Q3 Results
5. CEVA’s Fair & Reasonable Offer; But Please Don’t Tender

1. China Tower Corp: Trading Idea Before Lock-Up Expiry

China Tower Corp, the owner and operator and telecommunication tower network in China, listed on August 8th last year. Over the past six months, the stock has returned 35% with the addition of a number of global investors to its share registry.

• As it heads into lock-up expiry in Feb, in this insight we would like to examine China Tower’s performance since listing.
• We note that China Tower has delivered a decent set of results for 3Q2018 and it will be a key beneficiary of China’s push into 5G built-up with little uncertainty.
• The current valuation of the company was still lower than international tower providers.
• With the improving operating metrics and stable income, we believe there are still upsides for China Tower Corp post-lock-up expiry. 

Our previous coverage on China Tower Corp

• China Tower Corp IPO: An Elephant Still Growing
• China Tower Corp (中国铁塔) IPO: Fairly Valued For One Doing National Service
• China Tower Corp (中国铁塔) Post-IPO: Lacklustre Trading Interest but Looking Forward to 1H Results

2. AMD. Our Opteron Thesis Is Intact & Reinforced After Q2 2018 Earnings

Advanced Micro Devices reported earnings of $1.42 billion for fourth quarter 2018, up 6% YoY, narrowly missing consensus estimates by $20 million. For 2018 as a whole, AMD grew revenues by 23% to $6.48 billion. On the conference call, CEO Lisa Su claimed that the company exited the year having met its long-stated interim goal of 5% server market share. Furthermore, she reiterated her company’s intention to double that market share within four to six quarters.

On the earnings call, the company revealed that combined data center CPU and GPU sales for the quarter amounted to mid-teens percentage of overall revenue, roughly equally split between the two. This implies that data center GPU revenues were in the order of $105 million, amounting to ~20% of Nvidia‘s recently announced guidance miss for the quarter. 

Paradoxically, AMD’s ambitions in the data center will remain largely unthwarted by the current semiconductor downturn, their market share gains will come at the expense of Intel and NVIDIA. Our original Opteron thesis remains intact and reinforced by the unexpectedly strong data center GPU market share gains against NVIDIA. 

3. Facebook 4Q Results: An Easy Beat – Has Zuck Turned the Tanker?

When we wrote in 3Q18 that there were scope for *upgrades* to Facebook’s earnings, the sell-side remained cautious.  With the stock up 12% after-hours, we assess whether Facebook has further legs to the investment case. More details below.

4. Teasing Updates on CaiNiao Network & Ele.me Out of Alibaba’s Q3 Results

A set of generally solid Q3FY19 earnings results from Chinese e-commerce giant Alibaba Group Holding (BABA US) also yielded some interesting insights into the company’s two main logistics-related ventures (CaiNiao Network and on-demand food delivery specialist ele.me).

Unfortunately, the information we can glean from BABA’s Q3FY19 results suggests CaiNiao and ele.me are either growing slower or generating significant losses — or both.

In our view, the main logistics takeaways from BABA’s results are:

1. Alibaba’s ‘Core Commerce’ revenues continue to grow faster than express delivery. For the seventh consecutive quarter, Alibaba’s ‘core commerce’ grew much faster than China’s parcel delivery market, outgrowing parcel volume by 8% and parcel delivery revenue by almost 18%. At the margins, China’s express delivery firms are being bypassed by new modes of fulfillment, in our view. 
2. CaiNiao Network’s 15% growth in Q3FY19 is disappointing. Revenue at Alibaba’s CaiNiao Network grew by just 15% Y/Y in the December quarter, to 4.5 bn RMB. In other words, CaiNiao grew even slower than overall Chinese express delivery revenue in the December quarter (+17% Y/Y). That’s disappointing for a company that enjoyed an equity valuation of US$20 bn when Alibaba upped its stake to 51% in late 2017.
3. The reporting segment that includes ele.me barely grew from Q2FY19 to Q3FY19. Alibaba’s ‘Local Consumer Services’ segment had revenue of 5.2 bn RMB in Q3FY19, representing Q/Q growth of just 2.7%. It’s unclear how much local services venture Koubei contributed to this, as Alibaba only began consolidating its revenues some time in December.
4. It looks like losses from CaiNiao & ele.me continued to pile up in Q3FY19. Although it’s not an ‘apples-to-apples’ comparison, EBITA losses from the group of companies that includes CaiNiao and ele.me expanded from 5.8 bn RMB in Q2FY19 to over 8.2 bn RMB in Q3FY19.  This suggests the deep losses from this group (which were equivalent to about 15% of BABA’s core ‘marketplace’ EBITA in Q2FY19) aren’t going away soon.

5. CEVA’s Fair & Reasonable Offer; But Please Don’t Tender

CMA CGM SA (144898Z FP) has published its prospectus for what is evidently a heavily orchestrated Public Tender Offer for Ceva Logistics AG (CEVA SW).

Ceva’s Board has concluded that “the offer price of CHF 30 per CEVA share is reasonable from a financial perspective and that the Offer provides a fair exit opportunity for shareholders who wish to receive cash for their CEVA shares”.

However, CEVA Board does not recommend that shareholders tender shares in the belief that shareholders could realise a higher value with their continuing investment, due to:

• the growth potential inherent in the CEVA business.
• the effects of the acquisition of the freight management business of CMA CGM.
• the strategic partnership between CEVA and CMA CGM.

According to Ceva, “the valuation of the revised business plan indicates a midpoint value of 40 francs per share, well above the share price of 30 francs offered“.

CMA CGM added that “the recommendation to shareholders from the CEVA board not to tender shares in exchange for cash is done in perfect agreement with CMA CGM“.

CMA CGM currently holds 50.6% of CEVA, via a 33% direct stake with the remainder in derivatives. It is the intention of CMA CGM to maintain CEVA’s listing. 

After a 10-trading day cooling off period, the offer will be open for acceptances between February 12 to March 12, unless extended.

Shares are currently trading (marginally) through terms.