Brief TMT & Internet: QTT Placement: Liquidity Warrants a Quick Trade and more

In this briefing:

1. QTT Placement: Liquidity Warrants a Quick Trade
2. Optex (6914 JP): Factory Automation Slowdown in the Price
3. Sumco: Well Positioned to Expand Capacity Faster than Its Competitors if Demand Picks Up
4. Nexon to Increase Focus on Mobile Gaming Amidst Talks of Possible Sale of the Company
5. Nexon Controlling Stake Sale: Tax Situation Assessment & Tender Implications

1. QTT Placement: Liquidity Warrants a Quick Trade

Qutoutiao Inc (QTT US) announced a USD 100 million share sales by the company and its shareholders, slightly more than two weeks after the lock-up expiration on March 13th.  In this insight, we will provide our quick thought on the deal. 

2. Optex (6914 JP): Factory Automation Slowdown in the Price

According to management, weak demand for factory automation sensors had a significant negative impact on sales and profits in 1Q of FY Dec-19. Also, in our estimation, it is likely to cause 1H results to fall short of guidance. But this should be in the share price, which has dropped by nearly 50% from its 52-week high. 

In the year to December 2018, operating profit was up only 2.1% on a 7.0% increase in sales, largely due to an increase in machine vision marketing expenses. In January and February 2019, factory automation orders and sales dropped abruptly as customers sought to reduce excess inventories. In March, some new orders were received for delivery in May, indicating that the situation may stabilize in 2H. Demand for security and automatic door sensors continues to grow at low single-digit rates.

For FY Dec-19 as a whole, management is guiding for a 6.2% increase in operating profit on a 7.2% increase in sales. Our forecast is for flat operating profit on a 2% increase in sales. Sales and profit growth should pick up over the following two years, in our estimation, but remain in single digits.

At ¥1,765 (Friday, March 29, closing price), Optex is selling at 18x our EPS estimate for FY Dec-19 and 17x our estimate for FY Dec-20. Over the past 5 years, the P/E has ranged from 13x to 36x. On a trailing 12-month basis, Japan Analytics calculates 5% upside to a no-growth valuation, which is in line with our forecast for this fiscal year. This suggests: buy either for the bounce or for the long term. 

3. Sumco: Well Positioned to Expand Capacity Faster than Its Competitors if Demand Picks Up

• The semiconductor silicon wafer market saw continued growth in demand for all wafer diameters supported by applications for servers, data centers, automobiles and IoT applications.
• While the demand for semiconductors, data centers and other IoT applications are declining, Sumco expects firm demand from power semiconductors, sensors and automotive uses. The management expects the demand from the 5G market also to aid in top-line growth.
• Sumco has posted an extraordinary loss following the early termination of a long-term polysilicon purchasing agreement. The long-term contract with Osaka Titanium is expected to end in March 2019. We expect this move to help Sumco switch to cheaper polysilicon which in turn should help reduce costs. That being said, some of the long-term contracts for polysilicon are still continuing, and there is still significant inventory built-up so this impact could take four to five years to be fully realised.
• Having visited the company recently, Sumco still has more potential brownfield capacity available, which we believe can be used in the event the demand picks up enabling the company to add new capacity faster than its competitors and enjoy the benefits from growing demand and increasing prices.

4. Nexon to Increase Focus on Mobile Gaming Amidst Talks of Possible Sale of the Company

• The global gaming market is transitioning towards mobile gaming, which currently captures around 50% of market share. This has resulted in Korean gaming company Nexon slowly shifting its focus towards mobile games.
• Over the year’s Nexon’s mobile gaming segment has grown faster than the PC online segment. When looking at the five-year revenue CAGR between the two business segments, the PC online segment has grown at a CAGR of 9.4% over FY2013-18 while the mobile games segment has grown at a double digit CAGR of 14.1% over the same period.
• For the mobile gaming segment, in the future, Nexon’s primary focus includes developing mobile games based on IPs of older PC games.
• The company has a steady line up of mobile games planned for FY2019, with ten titles set to release in the first half.
• On our estimates, Nexon seems over-valued, currently trading at a FY1 EV/OP of 9.6x compared to its five-year historical median of 7.7x.

5. Nexon Controlling Stake Sale: Tax Situation Assessment & Tender Implications

This post looks at the tax situations that Nexon’s Kim may be facing for each of the two options and the signals that he may be sending with regard to his decision. Also, this post discusses how each option may impact on mandatory tender offer which is a crucial point for current massive short buildup on Nexon Japan shares.