Brief TMT & Internet: Telstra: Earnings Under Pressure in FY19 but Move to Mobile Should Lead to Gains from FY20. and more

In this briefing:

1. Telstra: Earnings Under Pressure in FY19 but Move to Mobile Should Lead to Gains from FY20.
2. Up Fintech (Tiger Brokers) Pre-IPO Quick Note – Much Too Reliant on IBKR
3. JD.com (JD): The Real Main Business Grew 46% YoY, and Not 20% YoY in 4Q2018
4. Optorun (6235) Orders Bottoming and 5G Will Benefit the Company Considerably. BUY
5. Sea Ltd: Further Share Re-Rating After a 35% Daily Gain? Why Not?

1. Telstra: Earnings Under Pressure in FY19 but Move to Mobile Should Lead to Gains from FY20.

Recently, Telstra (TLS AU) reported 1H19 numbers which showed declines in revenue, EBITDA and net profit.  That seems to have put the brakes on a decent share price recovery (Telstra shares had risen 14% to their recent peak YTD). And with the weak numbers, Telstra cut its interim dividend to 8cps. The result was well telegraphed to the market so did not come as a huge surprise, although Ian Martin had hoped the dividend would not be cut. Our view remains that Telstra is working to get through two years of change, with 2019 seen as the bottom for earnings. There are plenty of risks ahead and, with dividend support reduced, we have put Telstra back on a Hold recommendation with a target price of $A$3.30. The three year outlook is promising as Telstra switches the focus to mobile, delivers on its T22 strategy and works through several NBN related issues. 

Telstra summary P&L  – a three year view

2. Up Fintech (Tiger Brokers) Pre-IPO Quick Note – Much Too Reliant on IBKR

Up Fintech (TIGR US) plans to raise up to US$150m in its US listing. The company counts Xiaomi Corp (1810 HK) and Interactive Brokers Group, Inc (IBKR US) as its main investors.

While TIGR has grown at a stupendous pace over the past three years, it has been able to do so owing to IBKR doing most of the heavy lifting of execution and clearing. While its trying to change that now, nearly all the revenue is still being driven by its IBKR affiliation.

I’ve covered some of the aspects of TIGR’s model in Futu Holdings IPO Quick Note – Comparison with Tiger Brokers – Same Market, Different Economics. In this insight, I’ll take a quick look at the company’s performance and the issues highlighted above. 

3. JD.com (JD): The Real Main Business Grew 46% YoY, and Not 20% YoY in 4Q2018

• We believe the real main business line is service (commission), but not product (direct sales).
• In 4Q2018, service revenues grew by 46% YoY, but nominal main business line, product, grew only 20%.
• JD raised its commission rate in 2018, as demonstrating  that the company still has the bargaining power over retailers.
• Historical GMV numbers suggest significant upside.

4. Optorun (6235) Orders Bottoming and 5G Will Benefit the Company Considerably. BUY

Given the slowdown in Apple orders, which are only part of the story here, the shares have been a dreadful performer. They have underperformed TOPIX by 40% over the last 12 months and are 40% off their July 2018 high. They now trade on 11x this year’s numbers (and yield 2.7%), which we believe to be conservative. With the roll out of 5G orders next year will surely be up as well. We would buy at current levels.

5. Sea Ltd: Further Share Re-Rating After a 35% Daily Gain? Why Not?

• The biggest positive surprise from Sea Ltd’s (SE US) conference call is strong 2019 adjusted sales guidance: 82%-97% YoY growth for Garena (digital entertainment division) and 117-127% YoY growth for Shopee (e-commerce arm).
• Management expects first positive quarterly EBITDA for Shopee Taiwan operations in 1Q19, indicating there is a path to profitability for Shopee’s business model.
• Another great news: management expresses high confidence that Shopee’s S&M expenses in terms of absolute dollars would trend down in 2019, vs. 2018.
• After a 35% daily share gain on 27 Feb, SE trades at 4.1x 2019E P/adjusted revenue excl. 1P sales, yet still a whopping 49% discount to Pinduoduo’s (PDD US) 8.1x P/S.