In this briefing:
- GLOW’s Done Deal As SPA (Almost) Completes
- Vodafone Idea Needs a 55% Price Increase to Return to Viability
- NASDAQ:GDS Placement – Visible Growth, Additional Ping An Investment
- Reason Why Amazon Canceled DRAM Order from Samsung: Short-Term Impact on Samsung
- Advantest (6857 JP): Memory Downturn Yet to Impact Advantest
1. GLOW’s Done Deal As SPA (Almost) Completes
The revised SPA between Engie SA (ENGI FP) and Global Power Synergy Company Ltd (GPSC TB) is expected to the close this week, triggering a mandatory Tender offer for Glow Energy Pcl (GLOW TB).
The revision was a remedial requirement (announced on the 27 Dec) after the Office of the Energy Regulatory Commission (ERC) resolved to approve, in principle, the proposed merger of GSPC and GLOW, provided GLOW sells Glow SPP1 before or at the same time as the merger. The ERC had previously rejected the merger on the 11 October.
The divestment of SPP1 to B Grimm Power (BGRIM TB) for Bt3.3bn (~2.5% of GLOW’s market cap at the time) was announced on the 22 February and was completed yesterday.
Subsequent to the SPP1 sale, the purchase price under the SPA was adjusted to Bt91.9906/share, a ~3% decline from the initial Bt94.892/share price under the original SPA.
My discussions with GLOW indicate the SPA is expected to complete this week – i.e. Engie crosses its 69.11% holding in GLOW to GPSC – and that the 247-3 and 247-4 forms will be submitted by GPSC in “around” 1-2 weeks after the close of the main transaction. The ERC signed off on the SPA last Friday.
Assuming late-May payment, this is currently trading at a gross/annualised spread of 1.6%/8.8%.
2. Vodafone Idea Needs a 55% Price Increase to Return to Viability
Underlying profitability continues to deteriorate at Vodafone Idea (IDEA IN) (IDEA). Chris Hoare has updated his liquidity analysis, and estimates that IDEA needs prices to rise by over 50% to hit cash flow break-even in the medium term. That needs market behavior to change from Jio in particular. Bulls will point to IDEA’s current capital raising and the large capital raising planned at Bharti Airtel (BHARTI IN) as signalling a possible end to hostilities. However, the math at IDEA is such that even a $3.5bn injection gives only temporary relief. What they really need are price increases. Without them (and even with the capital increase), Chris thinks IDEA runs out of cash in about 2 years. We retain our Reduce recommendation and cut our price target to INR16.
3. NASDAQ:GDS Placement – Visible Growth, Additional Ping An Investment
GDS Holding, the largest carrier-neutral, cloud-neutral data centre operator in China, is raising USD 400 million from a private placement. The deal was launched last night (US time) post the company’s results announcement. In this insight, we will cover:
- Details of the deal
- Key takeaways from its 4Q2018 results
- USD 150 million investment by Ping An
- Its shareholders
- The score in our Placement Framework
4. Reason Why Amazon Canceled DRAM Order from Samsung: Short-Term Impact on Samsung
- SamE shocked the market with 4Q results. OP was down nearly 30% YoY and even 20% from the already heavily adjusted street consensus of ₩13.4tril. The main reason was Amazon’s canceled order. Amazon canceled a significant portion of memory chips, mostly DRAM to be used in its IDCs.
- The market guessed that Amazon might have delayed purchase to further capitalize on falling prices. But Amazon had canceled DRAM order because there were fundamental flaws in SamE’s custom DRAM chips at chip design level.
- The street was expecting a bounce back for memory chip ASP in 2H this year. SamE’s technical issue may push it back further. Meanwhile, SamE’s next quarterly profit level can be even worse. Some in the local street already adjusted SamE’s 1Q OP down to slightly above ₩7tril. At this level, SamE’s FY19e PER would be at 11~12x. This is a very aggressive territory for SamE.
5. Advantest (6857 JP): Memory Downturn Yet to Impact Advantest
- Advantest Corporation (6857 JP), based in Japan, manufactures and sells semiconductor testing equipment and electronic measuring systems. The company generates a majority of its revenue outside of Japan, where its products are mostly sold in countries where semiconductor volume production processes are concentrated, including South Korea, Taiwan and China.
- The company’s revenues are highly correlated with memory demand and capital expenditure. The current oversupply in the DRAM and NAND memory markets has caused DRAM and NAND prices to decline. This has impacted the capital spending by large memory makers such as Samsung, Micron and SK Hynix.
- Advantest has witnessed its revenue and operating profits growing at double digits since the beginning of the current semiconductor cycle. However, with the oversupply, memory price declines and capex halts, we expect the company revenue and profits to deteriorate starting in FY03/2020.
- Based on our valuation, we believe Advantest is still overvalued at its current price of JPY2,510 per share. As the memory market has just started decelerating and the current cycle nears its worst, we feel the company share price will decline further with the gloomy outlook for company earnings.
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