Brief TMT & Internet: Ecopro BM IPO: Valuation Analysis and more

In this briefing:

1. Ecopro BM IPO: Valuation Analysis
2. Cypress Semiconductor. The Perfect Acquisition Target.
3. Softbank Buyback More Than It Appears To Be
4. Korea Circuit Long Support for Press Above Overhead Barriers
5. Last Week in GER Research: Softbank, Pinduoduo, and Koolearn

1. Ecopro BM IPO: Valuation Analysis

• The bookbuilding of the Ecopro BM Co Ltd (247540 KS) IPO starts on February 14th. Ecopro BM Co Ltd (247540 KS) specializes in making cathode active materials for rechargeable batteries that are used in EVs and electrical energy storage systems (ESS). Ecopro BM is the second largest global player after Sumitomo in the NCA high nickel-based cathode materials with market share of nearly 35%.
• Our base case valuation of the company suggests a market cap of 1.2 trillion won or implied price per share of 56,003 won, which is 31% higher than the high end of the IPO price range of 42,900 won. Therefore, we would take this deal. We used an estimated P/E of 25.3x (10% premium to the comps’ average of 23x) and an estimated net profit of 49.3 billion won in 2019 to derive our base case valuation. The high end of the valuation sensitivity analysis is 67,764 won, which would be 58% higher than the high end of the IPO price range of 42,900 won. 
• Ecopro BM has stronger sales growth and operating margins than its peers. However, its peers have stronger balance sheet with slightly higher returns on equity. We would give special points to the company’s stronger sales growth which is an indication of greater customer demand. Therefore, we think it is appropriate to provide a 10-20% premium valuation to Ecopro BM versus its peers based on the P/E analysis. 

2. Cypress Semiconductor. The Perfect Acquisition Target.

There’s a lot to like about Cypress Semiconductor. Since taking the helm back in August 2016, CEO Hassane El-Khoury has led the company through a series of strategic realignments as part of his Cypress 3.0 initiative. While some of those moves were initially counterintuitive, they are now proving prescient as the company demonstrates far more resilience in the face of the current downturn compared to any period in its history.

Cypress offers exposure to the high growth automotive and IoT markets, industrial and consumer to a slightly lesser degree. Their product portfolio is the #1 market leader in new fewer than seven key segments, up from #3 just two years ago. On the latest earnings call, the company reported annual revenues of $2.48 billion for 2018, a 7% YoY increase. The company’s financial model targets a growth CAGR of 7-9% through 2021 and is well on track to achieve that goal. 

Like many of its peers, last year’s downturn saw Cypress share price fall more than 30% from its 52-week high at the trough. Currently, after a 6.63% rise on the back of solid earnings and reasonable outlook, its stock currently trades at $14.79, a 21.6% discount to the 52-week high. It also comes with an impressive dividend yield of 3.5% annualized as of December 31’st 2018.

We believe that the company would be an excellent acquisition target for the likes of Qualcomm whose failed bid for NXP last year thwarted its attempt to expand into the market for automotive semiconductors. We expect any such takeover offer would instantly add ~30% to the company’s share price. 

3. Softbank Buyback More Than It Appears To Be

Softbank Group (9984 JP) last week announced its Q3 results. The stock popped 15+% quickly that day and stayed up all day long, closing at +17.7%. The next day was up small. Over the two days volume was 74.1 million shares. 

I expect the shares were up for two reasons.

1. People figured out Son-san could sell as well as buy. And the sale of NVIDIA Corp (NVDA US) shares was done very well. 
2. Softbank announced a buyback of ¥600 billion – its largest buyback ever. 

The first was surprisingly well-executed. The ownership and transfers of assets from Softbank to the Softbank Vision Fund are sometimes tough to follow, and this should give non-Softbank SVF investors some pause, but Softbank’s ability to get leverage on assets is good, and the collar transaction was – in the eyes of this former derivatives strategist – very well done.

The US$15bn+ gain in market cap over the next two days was probably 10 times the net income impact of the savings on the NVIDIA trade, which means investors are paying 10x earnings for the same thing to incrementally happen every year vs what they thought was going to happen before Thursday. Financial trading businesses have generally traded over time in the high single digit PERs because of the variability of results, so the jump was a little more than it should have been for that, especially if you think some years the “right” jump because of better-than-market execution will have less impact than $2.9bn.

So the rest was either due to other business going well, or the share buyback. At ¥600 billion and at Friday’s closing price, it is about 7 days worth of volume using the 3-month volume average prior to the earnings release and 8.6 days of volume using a one-year average. That means they could buy 10% of ADV every day for 70-86 trading days and complete the buyback, or it means they could buy 3.4% of the volume every trading day. 

That doesn’t seem like a lot. But it is.

4. Korea Circuit Long Support for Press Above Overhead Barriers

Korea Circuit (007810 KS) exhibits the ability to make headway through triple resistance barriers on the back of higher degree divergence that has been forming since late 2017.

Overhead resistance barriers, represented by old floor support levels, once cleared, would open up the intermediate up cycle for Korea Circuit. A failure to clear these important levels would induce a fresh test of recent basing lows.

RSI pocket support helps fine tune a pullback level to take a long bet.

Risk to reward is attractive on a dip near support for a 6:1 ratio (reward to risk).

There are some major hurdles on the way up represented by old floor supports.

5. Last Week in GER Research: Softbank, Pinduoduo, and Koolearn

In this version of the GER weekly research wrap, we remind of our work on Softbank Group (9984 JP) before its 20% share rally which may have been prognosticated by its sweeping debt tender. Secondly, Arun updates on his excellent and contrarian call on Pinduoduo (PDD US) after its follow on placement announcement – of which he takes a more moderated view with the shares up 60% since IPO launch. Finally, we update on the IPO of Koolearn (1373356D HK) which provided an update to its prospectus.  A calendar of upcoming catalysts is also attached. 

More details can be found below. 

Best of luck for the new week – Rickin, Venkat and Arun