Brief TMT & Internet: Sell Lenovo: Profit Is an Illusion, Liabilities Are Rising and There Is Little Real Equity Value and more

In this briefing:

1. Sell Lenovo: Profit Is an Illusion, Liabilities Are Rising and There Is Little Real Equity Value
2. Thai Telcos Struggle as All Three Seek to Gain Share While Spectrum Risk Looms Again in 2019.
3. Lyft IPO Preview
4. Alps Alpine Buyback Proceeding Apace
5. Sea Ltd (SE US): Placement a Good Opportunity to Enter an Attractive Story

1. Sell Lenovo: Profit Is an Illusion, Liabilities Are Rising and There Is Little Real Equity Value

In Q3, Lenovo (992 HK) reported revenue growth – well ahead of market expectations, improved margins and US$1.9bn of cashflow.  This was a considerable surprise to us – and the market.  However, having analysed the results, most of the reported revenue and profit growth comes from the Fujitsu Ltd (6702 JP) acquisition. The rise in cashflow largely came from working capital, but also benefitted from the structure of the Fujitsu deal. We think real full-year cashflow after investment, US$0.8bn, will yet again, fail to cover finance costs and dividends, and Lenovo will need to borrow another US$400m.

2. Thai Telcos Struggle as All Three Seek to Gain Share While Spectrum Risk Looms Again in 2019.

Chris Hoare met the Thai telcos recently but did not come away particularly enthused. His view is that the market probably remains tough this year. The good news is that the low priced, limited speed with unlimited usage, offers have mostly been withdrawn. It will take 2-3 quarters for this to work through, as these were 12 month plans, but it does suggest improved data monetization as the year progresses. A lack of data monetization was the key reason behind the revenue slowdown in 2H18. However, with data usage now so high (around 10GB/month), and content services unlikely to lead to revenue growth in the foreseeable future, overall revenue recovery is likely to be modest. 

3. Lyft IPO Preview

Lyft Inc (LYFT US), a leading US based ride-hailing company, is getting ready for an IPO in the US in the next several weeks. One of the major positives of the Lyft IPO is the timing – Lyft should be able to complete its IPO ahead of its chief rival Uber which is expected to file its IPO later in 2019. 

The financials for Lyft will likely to change significantly in the next five to ten years, mainly due to the increased adoption of autonomous vehicles, which would reduce the need for Lyft to pay for the drivers. This cost can be eventually eliminated with full scale autonomous driving. Although we do not have figures as to exactly how much Lyft pays for all its drivers, in five to ten years when the fully autonomous vehicles are allowed, this could significantly change the basic economics of operating its ridesharing business. 

Potential shares dilution risk from additional rights offering a few years after this IPO is a serious risk for the company. Once Lyft completes its IPO in a few weeks, depending on the institutional investors’ demand for the deal, the company is likely to be infused with several billions of dollars from IPO proceeds. However, the IPO proceeds may not be enough and the company may need to conduct another large scale rights offering in a few years (for example in 2021 or 2022) which may be prior to the fully autonomous vehicles acceptance and regulatory approval by major countries around the world such as the United States.

4. Alps Alpine Buyback Proceeding Apace

Late last year, in the final run-up to the vote to determine whether Alpine (6816 JP) investors would subject themselves to a bad share exchange ratio or would choose to oblige Alps (6770 JP) to have another run at it in a different format, Alps announced a shareholder return policy which included buying back ¥40 billion of shares. 

It is to be noted that this meant that the combined entity was going to be left with less cash than the total deemed necessary by the two companies just a very short while before. Why? Because Alps – with the strong governance it has – obviously had the right amount – and Alpine also had the right amount (it needed substantial equity-funded cash as “working capital” because otherwise it would run a serious danger of business disruption and deterioration. So despite this severe business risk, the two companies effectively announced they would disburse 90% of Alpine’s cash on hand to shareholders POST-MERGER through the special dividend offered to sweeten the pot to get the merger through, and the ¥40 billion buyback. 

The merger, of course, went through, and the ¥28.4 billion* buyback is proceeding apace.

5. Sea Ltd (SE US): Placement a Good Opportunity to Enter an Attractive Story

Last Friday, Sea Ltd (SE US) unveiled plans to raise around $1 billion (based on the closing price on 28 February) through an underwritten public offering of 50 million ADS. The fundraising was inevitable due to the high cash burn and net cash position.