Brief TMT & Internet: Malaysian Telcos: Look for Improvements to Continue in 2019. and more

In this briefing:

1. Malaysian Telcos: Look for Improvements to Continue in 2019.
2. HK Connect Discovery – March Snapshot (WH Group, Air China)
3. Dongzheng Auto Finance (东正汽车金融) Trading Update – Could Be Worth Setting up a Trade
4. U.S. Equity Strategy: Be Long & Carry On
5. BabyTree(1761.HK) FY18 Results: E-Com Further Hit by ‘integration’ with Alibaba; India Foray Timely

1. Malaysian Telcos: Look for Improvements to Continue in 2019.

The 4Q18 numbers released by the Malaysia wireless operators, showed stable trends vs 3Q. Market service revenue growth of -1.1% YoY was stable, with Maxis (MAXIS MK) the only operator able to slightly increase its market share (again). While 2H18 marked a small break in the Malaysian wireless sector recovery, guidance for 2019 looks broadly encouraging.

• Axiata (AXIATA MK) expects a “promising 2019” with revenue and profit growth momentum (across the board),
• Maxis guides for a slight improvement of revenues, albeit with EBITDA declining due to new business opportunities, and
• DIGI (DIGI MK) which is a bit more cautious, expects flat revenues.

Data usage is already very high in Malaysia, but we expect growth to continue (at a slower pace) supported by youthful demographics (younger people use more video on mobile). The Malaysian operators have done a reasonable job at monetizing data growth so far. 

Chris Hoare turned more positive on Malaysian telcos in early 2019 as affordability has improved and there is a new profitable growth opportunity in fibre wholesale (with Telekom Malaysia (T MK) being forced to offer at low prices). Operating trends have also improved and we expect this to continue. In January, we upgraded Axiata to Buy and both Maxis and Digi to Neutral. None of them are “cheap” with Maxis (MAXIS MK) and DIGI (DIGI MK) on 11-13x EV:EBITDA, and Axiata on a more reasonable 6.5x.

2. HK Connect Discovery – March Snapshot (WH Group, Air China)

This is a monthly version of our HK Connect Weekly note, in which I highlight Hong Kong-listed companies leading the southbound flow weekly. Over the past month, we have seen the flow turned from outflow in February to inflow in March. Chinese investors were also buying Consumer Staples and Consumer Discretionary stocks.

Our March Coverage of Hong Kong Connect southbound flow

• HK Connect Discovery Weekly: PICC, Xinyi Solar (2019-03-08)
• HK Connect Discovery Weekly: Eligibility Adjustment (2019-03-15)
• HK Connect Discovery Weekly: Mainland Investors Buying WH Group (2019-03-22)

3. Dongzheng Auto Finance (东正汽车金融) Trading Update – Could Be Worth Setting up a Trade

Dongzheng Automotive Finance (2718 HK) raised US$208m at a fixed price of HK$3.06 per share. We have covered the IPO extensively in:

• Dongzheng Auto Finance (东正汽车金融) Pre-IPO Review – Dependent on Dealership Network for Growth
• Dongzheng Auto Finance (东正汽车金融) IPO Review – Better off Buying the Parent
• Dongzheng Auto Finance (东正汽车金融) IPO Review – Relaunched at Lower Price

In this insight, we will update on the deal dynamics, implied valuation, and include a valuation sensitivity table.

4. U.S. Equity Strategy: Be Long & Carry On

Both the cap- and equal-weighted S&P 500 are trading at highs not seen since early October 2018 – a positive indication in itself. Additionally, key risk-on areas we highlighted in last week’s Compass (small-caps, Financials/Banks, and Transports) have outperformed off the recent lows – a welcomed sight for risk sentiment, and confirms out positive outlook. In today’s report we highlight attractive bottom-fishing opportunities within the Financials Sector, and attractive Groups and stocks within Large- and Small-Cap Railroads, and Internet Software

5. BabyTree(1761.HK) FY18 Results: E-Com Further Hit by ‘integration’ with Alibaba; India Foray Timely

BabyTree (1761.HK)’s reported results for FY2018 continues to be impacted by the ‘shift in e-commerce strategy’ post collaboration with Alibaba Group Holding (BABA US) (also a key investor).  China’s leading parenting community platform that went public in November 2018 has announced a revenue decline of 4% during 2H2018; its e-commerce revenues were down 70% as its being ‘integrated’ with Alibaba. This is expected to be completed by 2Q2019. While the details of the collaboration (and revenue share, if any) are not given, Management has stated that Alibaba will manage the back-end e-commerce at a reduced cost and better efficiency while it will ‘manage’ users. Despite the fall in revenues, gross profits were up 18% helped by growth in advertisement revenues which now account for 85% of the total. Advertising as a revenue source has limited long term growth and valuation potential compared to e-commerce. The stock is up 25% since results announcement on March 27th, likely enthused by Net profit for FY2018 at Rmb526.2 mn and EPS of Rmb0.29 (implied current Year P/E of 23x). Key risk will be failure to revive e-commerce revenues post ‘integration’.

BabyTree also announced its first global foray – it has invested USD8mn in Healofy, amongst the top 3 leading parenting apps in India currently. India’s online Parenting app segment has numerous players and revenue generation/growth may not be easy in the near term for Healofy. However,  our analysis suggests that India’s overcrowded parenting app segment is now witnessing consolidation and this funding could probably help Healofy solidify its ranking amongst top 3 parenting platforms in India. In this context, BabyTree’s foray into India seems well timed. Healofy could potentially follow BabyTree’s operating model and fit into Alibaba Group Holding (BABA US) ‘s India e-commerce strategy (Refer our earlier report Alibaba’s India Game Plan – More than Meets the Eye; Investor Day Analysis (Part II) ).  

In the detailed report that follows, we briefly comment on BabyTree’s reported 2018 results and also present a quick overview of India Parenting App segment – key players, investors and why we think it may be on a consolidation mode.