Brief TMT & Internet: LG Uplus – CJ Hello Acquisition: Current Yield Is 10%, CJH Overhang Concerns Will Push It Up and more

In this briefing:

1. LG Uplus – CJ Hello Acquisition: Current Yield Is 10%, CJH Overhang Concerns Will Push It Up
2. ByteDance (字节跳动) IPO: Tiktok the No.1 Short Video App for a Good Reason (Part 2)
3. Delta’s Less-Than-Straightforward Tender Offer
4. Dreamtech IPO: Valuation Analysis

1. LG Uplus – CJ Hello Acquisition: Current Yield Is 10%, CJH Overhang Concerns Will Push It Up

• LG Uplus Corp (032640 KS) actually pays ₩800bil (not ₩1tril) for the controlling stake of CJ Hello (037560 KS) from CJ ENM (035760 KS). LG Uplus gets not all of the shares owned by CJ ENM. It gets a total 38,723,433 shares. This is 50% + 1 share. Cost per share is ₩20,659. This is a 107% premium.
• I suggested a long/short trade on LGU+/CJH starting this Monday on the grounds that their MC ratio should revert back to above 10. This trade is paying off very handsomely now. Current yield stands at 10.5%. But I wouldn’t close this position yet.
• CJ ENM still owns nearly 4% CJH stake. SKT owns 8.61%. Neither of them has any reason to retain these shares. LG Uplus doesn’t seem to be interested in getting any of these additional shares. This means one thing. It is very likely that CJH will suffer huge stock overhang concerns.
• Not only that, merger between them is inevitable. The LGU+/CJH MC ratio should be reverted back to 10. The MC ratio is now at 8.4. We still have more room on this. I expect it to reach at least near 9 level in very near future. I’d hold onto this position until then.

2. ByteDance (字节跳动) IPO: Tiktok the No.1 Short Video App for a Good Reason (Part 2)

In our first insight (link here) covering ByteDance, we discuss ByteDance’s app matrix, the differentiating factors of ByteDance and the key difference between its Jinri Toutiao app and Tencent News. 

In this insight, we will discuss in details its next blockbuster app, Tiktok. Similar to Jinri Toutiao, it is utilizing AI technology for content curation. In addition to that, the app also uses AI technology to beautify content producers. Compared to text-based content, the short-video content is more viral. 

In the next insight, we will look at the company’s overseas expansion, past series of financing and valuation. 

3. Delta’s Less-Than-Straightforward Tender Offer

On 1st August 2018, Delta Electronics Thai (DELTA TB) (“DELTA”) announced that Delta Electronics International (Singapore) (a wholly-owned subsidiary of Delta Electronics (2308 TT) “DEISG”) had made a conditional voluntary tender offer to acquire the remaining 70.97% stake in DELTA it does not own at Bt71/share, a 1.79% premium to last close (28% above its recent low), in a deal worth potentially up to US$2.1bn.

On Wednesday, DELTA announced that DEISG has successfully accomplished the conditions precedent requirements, that of the antitrust approvals being granted by authorities in US, Europe and China.

The transaction will now move to a tender offer, which is expected to be open for acceptances at the beginning of next month with the consideration potentially paid the second week of April.

But there are a number of unknowns to the tender offer:

• Will there be a maximum number of shares to be acquired, therefore shares tendered could be subject to possible pro-ration?
• Is it DEISG’s intention to delist DELTA?
• Will the full year dividend be netted, or not, from the Bt71/share offer?
• Will the indicative timetable be delayed, especially to factor in the FY18 dividend?

Currently trading at a gross/annualised spread (assuming 12 April payment and no dividend) of 0.4/1.4%, or 5%/22% if including a Bt3.30 FY18 dividend and mid-May payment, factoring in a one-month delay in the tender offer. That looks overly tight in the face of timing delays and actual consideration to be paid if indeed it comes out to be a partial offer.

4. Dreamtech IPO: Valuation Analysis

• The bookbuilding of the Dreamtech Co Ltd (192650 KS) IPO will start in about 6 business days. This report provides a valuation analysis of this company. Dreamtech makes modules and sensors for smartphones, auto vehicles, home appliances, and health care products. In late January 2019, the company reduced the IPO price range to 11,000 won to 13,000 won (from 13,400 won to 16,700 won previously). 
• The comps have better sales growth, net margin, and net profit growth than the company. However, Dreamtech has slightly better ROE and balance sheet strength than the comps. Therefore, we believe it is appropriate to put a 10-20% discount on the comps’ average P/E valuation of 17.6x in 2017 and 2018. 
• Our base case valuation of the company is 13,961 won, which is only 7% higher than the high end of the IPO price range (13,000 won). Thus, given the lack of enough upside, we would avoid this deal. However, if the deal is priced at the low end of the IPO price range (11,000 won), it could potentially be attractive. Our base case valuation is based on 15x P/E, which is a 15% discount to the average P/E multiples of its peers in 2017 and 2018. We also used net profit of 29.1 billion won, which is the average estimated net profit of the company in 2017 and 2018.