Brief TMT & Internet: CJ Corp Holdco/Synthetic Sub Trade: Current Status & Trade Approach and more

In this briefing:

1. CJ Corp Holdco/Synthetic Sub Trade: Current Status & Trade Approach
2. Pinduoduo (拼多多) Placement – Not a Good Sign
3. Korean & Taiwanese Governments May Restrict the Use of Huawei Telecom Equipment Products

1. CJ Corp Holdco/Synthetic Sub Trade: Current Status & Trade Approach

• CJ Corp is a three-sub holdco. CJ Cheiljedang and CJ ENM, account for three fourth of the holdings. CJ Olive Networks accounts for 10%. Olive Young’s growth has slowed down substantially. There is nearly nothing in Holdco’s stub. Holdco price should now be virtually pegged to the two listed subs.
• It’d be safe to do a stub trade with a synthetic sub. I synthesize the four listed subs on a ratio of 50:40:7:3 (CJ Cheiljedang, CJ ENM, CJ CGV and CJ FW). It’d be also fine to do a simpler one with 55:45 on CJ Cheiljedang and CJ ENM only.
• Holdco/Synthetic Sub are now at -0.25σ on a 20D MA. Normally, I wouldn’t make any move at this point. But things still look a bit tempting in favor of Holdco. We are now seeing a much higher price volatility on Korea’s media content stocks including CJ ENM.
• Generally, a higher sub price volatility leads to a higher holdco valuation relative to sub. In addition, this Olive Networks IPO story is being re-ignited by local investors lately. I expect Holdco to hit a +2σ level which we saw late December. I’d go long Holdco and short the synthetic sub even at this point.

2. Pinduoduo (拼多多) Placement – Not a Good Sign

Pinduoduo (PDD US) is looking to raise about US$1.5bn in its follow-up offering. The placement is a mix of primary and secondary selldown.

The deal scores poorly on our framework due to its large deal size and expensive valuation relative to peers. We find that the timing of the placement to be peculiar and the large overhang post-offering is a worry. Banyan’s selldown in this placement suggested that principal shareholders may progressively look to exit their stakes contrary to our previous assumption and their shares will add pressure to the share price in the near-term.

3. Korean & Taiwanese Governments May Restrict the Use of Huawei Telecom Equipment Products

• It was announced on February 7th that the South Korean National Assembly will start to discuss the threats that Huawei’s products may pose on the South Korean national security. The National Assembly will specifically discuss about banning all Huawei products for government telecommunication networks. This is the first time that the issue of Huawei products potentially posing a national security threat will be discussed in the South Korea National Assembly. 
• Taiwan is also another major country that is seriously thinking about banning all Huawei’s 5G related telecom equipment. In late January, the local Taiwanese news outlets reported that the Taiwanese government may announce a ban of Huawei’s telecom equipment by the end of March. At this time, the Taiwanese government may also announce a “blacklist” of Chinese companies that may pose national security threat. The companies that could potentially be included in this “blacklist” include Huawei, Hikvision, Lenovo, and Zhejiang Dahua Technology Co. 
• It remains to be seen how the Taiwanese government may decide on this case but this could have an enormous repercussion on not just on Huawei but also on Taiwan Semiconductor Manufacturing Company (TSMC) (2330 TT) since Huawei is a major customer of TSMC.