Brief TMT & Internet: KDDI Tender Offer for Kabu.com (8703 JP) Decided and more

In this briefing:

1. KDDI Tender Offer for Kabu.com (8703 JP) Decided
2. Robotics Earnings: Nabtesco and HDS Results Strong; Still No Reason to Own Fanuc
3. Stake in Quadric.io Following Renesas; Denso Attempts to Keep Chip Makers Close to Achieve AD Aims
4. Catch-Up Session with Intuch Group
5. Ecopro BM IPO: Valuation Analysis

1. KDDI Tender Offer for Kabu.com (8703 JP) Decided

Today after the close, KDDI Corp (9433 JP) announced its intention to conduct a Tender Offer for Kabu.Com Securities (8703 JP) through a made-for-purpose SPC. The deal is not terribly different in scope than the one discussed in KDDI Deal for Kabu.com (8703 JP) Coming? about two weeks ago.

The Tender Offer is to purchase a minimum of 45,758,400 shares at ¥559/share, which is a 5.67% premium to today’s close and a 46.3% premium to the undisturbed price of 23 January 2019. Obtaining the minimum would get the combination of KDDI and MUFJ Securities (which currently holds 52.96% of the shares outstanding, and will not tender) to 66.67% which would allow the combination to do a Two Step Squeezeout, which KDDI states in the document that it intends to do.

Anti-trust and regulatory approvals are required, and KDDI expects that the Tender Offer will commence in late April. This looks pretty easy as a deal, with few impediments. A rival bid is unlikely in the extreme, KDDI has a headstart with the shares of MUFG Bank which have committed to the deal.

There are a couple interesting aspects to this deal, and KDDI made several other announcements simultaneously which taken together show some of the extent of KDDI’s plans.

2. Robotics Earnings: Nabtesco and HDS Results Strong; Still No Reason to Own Fanuc

Following a long period of weakness, robotics related stocks are displaying stronger performance recently as 3Q results have come in weak, but generally done so with management reassurances that this is the bottom.

We had been negative on the sector for some time before turning more constructive in mid January following Yaskawa’s earnings. We concur with the general messaging that this is the bottom based on our analysis of order levels for the companies and regional trend breakdowns. We do not expect a particularly sharp rebound in orders and sales in the near future and believe there is still some risk of these stocks returning toward the lows over the course of the year. However, we believe that the next significant move should be upwards and longer term investors should be looking for entry timings.

3. Stake in Quadric.io Following Renesas; Denso Attempts to Keep Chip Makers Close to Achieve AD Aims

It was reported last Thursday that Denso Corp (6902 JP) through its wholly-owned subsidiary NSITEXE, Inc. acquired a stake in quadric.io, a fabless semiconductor start-up company based in Burlingame, California. It seems that the company has begun its planned investments for 2019. Last year, Denso increased its stake (from 0.5% to 5%) in chipmaker- Renesas Electronics (6723 JP) to support its progress of ADAS and related technology. We also mentioned in our insight, Denso Prepares for the Future; Investments in Tohoku Pioneer EG Following JOLED and ThinCI, that Denso has been making a series of investments to prepare itself for being the leading software solution provider alongside its hardware expertise, supporting its change in business model. Last year, NSITEXE invested in ThinCi, its partner, since 2016, in the development of a Data Flow Processor (DFP) designed to help autonomous vehicles make quick decisions in complicated and fast-evolving situations. Denso/NSITEXE’s investment in quadric.io has a similar goal. The investment in quadric.io is said to help the start-up in its development of edge processing units (EPUs), which are high-performance semiconductors that could be used as a foundation for enabling automated driving technology.

4. Catch-Up Session with Intuch Group

We caught up with Intuch Group this week to check how things were going on with them and their subsidiaries, AIS and Thaicom. It’s good to touch base, since it’s been a while, and many things have changed in the interim:

• Intuch self-congratulated themselves for a narrowing of their discount to NAV from 28% to 20% in 2018 while introducing three new investments and announced the breakeven of their shopping network, a joint venture with Hyundai.
• Wongnai, an online foodie guide and one of Intuch’s largest investments, underperformed our revenue forecast significantly, but managed to post impressive revenue growth nevertheless. While profitable, their rapid expansion also means they are unlikely to meet their own internal profitability expectations.
• Thaicom posted a loss in Q4 and almost non-existent earnings in 2018 largely due to asset impairments, but there is some hope in the future with the government’s various PPP (public-private partnership) schemes mentioned in the meeting.
• AIS, the Group’s flagship company, posted flat earnings of Bt30bn and is in the process of reversing a decline in revenue market share through aggressive push in enterprise and consumer services.

5. 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.