In this briefing:
- NIO (NIO US): Lock-Up Expiry – This Could Get Messy
- SIS: 4Q18 Result Broke the Record
- Renesas: Factory Stoppage Announcement Should Correct Premature Rebound Expectations
- Samsung’s NXP Acquisition: Story Again Resurfaces, Trade Approach on SamE Common/1P
- Korea M&A Spotlight: POSCO or SK to Acquire KCFT for About 1 Trillion Won?
1. NIO (NIO US): Lock-Up Expiry – This Could Get Messy
Yesterday, NIO Inc (NIO US)’s share tumbled 20% on the back of poor 1Q19 guidance. NIO warned that deliveries of ES8, its electric SUV, have been sluggish so far in 2019 and scrapped plans to build its Shanghai Manufacturing Plant. NIO blamed the slump on uncertainty over government subsidies for electric vehicles, China’s slowing economy and disruption caused by the Chinese New Year holidays.
The weak guidance could not come at a worse time as its six-month lock-up period expires on 11 March 2019. We continue to remain bears on NIO and believe that the lock-up expiry will lead to further share price weakness.
2. SIS: 4Q18 Result Broke the Record
SIS’s 4Q18 net profit was Bt149m (+77%YoY, +16%QoQ), a record high level. The impressive 2018 result was much better than our forecast and accounts for 131% of our full-year forecast.
- A YoY and QoQ earnings growth were backed by an all-time high level of gross margin at 6.7% mainly driven by higher sales contribution from data center related products and others (security and surveillance) segments. 2018 net profit was at Bt468 (+58%YoY), buoyed by a record high sales and margin
- We maintain a positive outlook toward its 2019-20E earnings driven by 1) solid growth for high margin segments: enterprise, security and surveillance on the back of strong outlook for IT investment by private sector along the mega-trend of digitalization.
- Announced Bt0.55 of dividend payment or equivalent to 4.7% yield (XD on 3th May 2019
We maintain a BUY rating for SIS with our new target price of Bt15.0 derived from 10xPE’19E, its average trading range in the past five years or a 30% discount to the Thai Info Tech sector.
3. Renesas: Factory Stoppage Announcement Should Correct Premature Rebound Expectations
We commented previously on 13 Dec 2018 that:
We visited Renesas Electronics (6723 JP) this week to discuss progress on inventory reduction and its likely ramp of utilisation rates/wafer throughput, as well as to gather further details on the IDT acquisition and its long -term strategy. On the whole, we continue to like the long-term picture, consider the stock to be undervalued and believe investors with long time horizons should be looking at the stock on the long side. However, our discussions suggested to us that while production cuts to reduce inventory should be completed this month or at worst in 1Q2019, a ramp in utilisation rates could take longer than is implied by consensus.
Following this comment Renesas Electronics (6723 JP) traded directionally with the market though in very volatile fashion, first dropping 17% before rebounding 69%. Now, with Nikkei reporting that the company would halt production at most facilities during the year and for as much as two months in some cases, the stock is once again giving up its gains and is limit down -14%. This leaves it just 10% above where we previously commented on the stock and as it approaches the ¥500 level again we feel it is becoming interesting again. We examine the potential financial impact from the production halts below.
4. Samsung’s NXP Acquisition: Story Again Resurfaces, Trade Approach on SamE Common/1P
- Local street began to speculate on this story since early last year when Lee Jae-yong got released from prison. NXP was widely considered as Lee’s first M&A attempt since his release. This could make sense both symbolically and business fundamentally. He needed something big to justify to general public about him being back in Samsung’s top position. Business wise, NXP would be a home-run in terms of fulfilling the three goals for non-memory business.
- Korea’s local street began to speculate on this since early last year when Lee Jae-yong got released from prison. This story was reignited earlier this year when the news broke that Samsung’s M&A head Sohn Young-kwon privately met NXP CEO Rick Clemmer. This morning Invest Chosun reported that Samsung may make a big announcement in the pretty near future.
- I suggested going long 1P/short Common last week on the grounds that falling memory prices would be pressing down Common more harshly. Now we are hearing a more elaborate story about NXP acquisition. Circumstantially, I don’t think this NXP takeover story will go unnoticed by the market. This should be more of a Common price pusher than Pref. I’d wrap my current position at this point.
5. Korea M&A Spotlight: POSCO or SK to Acquire KCFT for About 1 Trillion Won?
It was reported in numerous local Korean media yesterday that POSCO (005490 KS) and SK Group are leading contenders to acquire a Korean company called KCFT (KCF Technology) for about 1 trillion won. KCFT specializes in making copper foil and thin film products, especially for the lithium ion batteries sector. KCFT’s major customers include Samsung SDI, LG Chem, NEC, and Panasonic.
The KKR private equity firm is the seller of KCFT. In February 2018, KKR acquired a 100% stake of LS Mtron’s copper foil and thin film business for 300 billion won and after this acquisition, renamed it KCFT. It has been reported that should these groups (POSCO or SK) low bid for KCFT, KKR may opt for an IPO of KCFT instead.
If POSCO is able to acquire KCFT, this should help to accelerate the POSCO Group’s expansion of the rechargeable battery related materials business and enhance its vertical integration of this business. If the deal gets completed at about 1 trillion won, this would represent a P/S of about 3.3x and P/E of about 25x, using 2018 figures.
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