In this briefing:
- Ebang IPO Preview: Balance Sheet Indicators Point to a Significant Slowdown
- Chinese Telcos: Rising Capex Expectations a Risk. Downgrade China Mob and China Tel to Neutral.
- Korea M&A Spotlight: Saudi Aramco Plans to Buy Up To 19.9% Stake in Hyundai Oilbank
- SEC and SK Hynix Breakouts
- The GER Weekly EVENTS Wrap: Pinduoduo, Softbank, Healthscope, M1, and Near-Term M&A Catalysts
1. Ebang IPO Preview: Balance Sheet Indicators Point to a Significant Slowdown
Ebang (EBANG HK) is a Chinese designer of bitcoin mining machines which are sold under the Ebit brand. Ebang refiled its draft prospectus with HKEX on 20 December 2018, but the IPO plans of cryptocurrency related companies are in a state of flux. Last week, the CEO of the Hong Kong Exchanges and Clearing, said that companies seeking to go public in Hong Kong should show consistency in their business models, in response to questions about the IPO applications of Bitmain Technologies Ltd (1374554D CH), Canaan Inc. (CANAAN HK) and Ebang.
While 1H18 results were strong, Ebang cautions that it experienced significant decreases in revenue and gross profit for 3Q18 compared to 2Q18. In the absence of any 3Q18 financial metrics, we scrutinised the financial accounts to find clues on the extent of the slowdown. Our analysis of the financial accounts’ leading indicators points to a rapid slowdown.
2. Chinese Telcos: Rising Capex Expectations a Risk. Downgrade China Mob and China Tel to Neutral.
We have been positive on the Chinese telcos, in part due to our thesis that peak 5G capex expectations were too high for China Mobile. That has largely played out as capex expectations have come down and the stock has performed well. The telcos see a steady state approach to 5G capex as the best way forward given the lack of a current business case. However, there are larger forces at work which imply higher capex – the need to support Huawei/ZTE (763 HK) given the moves against Chinese equipment manufacturers internationally, and the likelihood of economic stimulus packages.
We have downgraded China Mobile (941 HK) and China Telecom (728 HK) to Neutral as the risk now is that capex expectations start to rise again. China Unicom (762 HK) remains a BUY as it trades at a much lower multiple. We reiterate our preference for China Tower (788 HK) which is exposed positively to rising telecom capex.
We have increased our 2020 capex expectations for Chinese Telcos. China Mobile most affected (RMB bn)
3. Korea M&A Spotlight: Saudi Aramco Plans to Buy Up To 19.9% Stake in Hyundai Oilbank
It was announced today that Saudi Aramco plans to purchase up to 19.9% stake in Hyundai Oilbank for about 1.8 trillion won from Hyundai Heavy Industries Holdings (267250 KS) (HHIH), which would suggest nearly 9 trillion won in total value for Hyundai Oilbank. The following are the major highlights of the potential investment in Hyundai Oilbank by Saudi Aramco:
- Higher dividends for both Hyundai Oilbank and Hyundai Heavy Industries Holdings – At end of 2018, HHIH converted nearly 2 trillion won of capital surplus into retained earnings, which should allow the company to pay out higher dividends. HHIH has already declared that its long term plans include maintaining a 5% dividend yield and more than 70% dividend payout.
- Greater Investments in Robotics – HHIH is likely to use a big portion of the proceeds from the sale of its stake in Hyundai Oilbank to further invest in the robotics business.
- Our sum-of-the-parts valuation of Hyundai Heavy Industries Holdings suggests a value of 487,000 won, which is 28% higher than current share price.
4. SEC and SK Hynix Breakouts
Samsung Electronics (005930 KS) and SK Hynix Inc (000660 KS) have cleared key resistance levels that open the way for intermediate gains with a ST peak due in late January that will offer better entry points on weakness in February.
The rally from late December is moving into extended territory. Buy volumes have improved as has upside momentum.
This breakout has also induced a tactical buy signal in the Kospi 200 index above the pivotal 278 resistance but breadth is still mixed to weak. We need to see better upside action in the broader market for a sustainable rise in Korea.
Refer to our insight SK Hynix Met Our Short to Long Reverse Target from October 2018. We were a bit early on picking the low.
5. The GER Weekly EVENTS Wrap: Pinduoduo, Softbank, Healthscope, M1, and Near-Term M&A Catalysts
In this version of the GER weekly events wrap, we assess the recent lock-up expiry for Pinduoduo (PDD US) which may have led to a short squeeze. Secondly, we assess the debt tender for Softbank Group (9984 JP) which may be supporting the equity. Finally, we provide updates on bids for M1 Ltd (M1 SP) and Healthscope Ltd (HSO AU) as well as update a list of upcoming M&A and equity bottom-up catalysts.
The rest of our event-driven research can be found below.
Best of luck for the new week – Rickin, Venkat and Arun
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