Brief TMT & Internet: Tencent Music: A Case of Failing to Live up to Hyped Expectations and more

In this briefing:

1. Tencent Music: A Case of Failing to Live up to Hyped Expectations
2. TRADE IDEA – Amorepacific Stub (002790 KS): Buyback Helped, Close the Trade
3. Tencent Music (TME): Problems Come from Corporate Clients and In-House Contents, 35% Downside
4. Ruhnn (如涵) Pre-IPO Review- Significant Concentration Risk
5. Indian Mobile – ARPUs Inflect as the Worst May Be over for Bharti, Although Not for Vodafone IDEA

1. Tencent Music: A Case of Failing to Live up to Hyped Expectations

• One word to describe Tencent Music Entertainment’s (TME US) first conference call post IPO is uninspiring.
• Management does not provide concrete 2019/1Q19 guidance, but hints margin pressures persist largely due to investments in music contents.
• We expect that consensus still has to revise down TME’s 2019-20E net profits forecast by 17-26%.
• On our earnings forecast, TME unattractively trades at 46.3x/37x 2019-20E PE, a whopping 48-52% premium to peers average.

2. TRADE IDEA – Amorepacific Stub (002790 KS): Buyback Helped, Close the Trade

In my original insight on January 15, 2019 TRADE IDEA: Amorepacific (002790 KS) Stub: A Beautiful Opportunity, I proposed setting up a stub trade to profit from the mis-priced stub business of Amorepacific that was trading at its widest discount to NAV in at least three years. During the 65 calendar days that followed, Amorepacific Group (002790 KS) has gained 7.3% and the outperformed Amorepacific Corp (090430 KS) by 2.84%. The trade has reverted to average levels in a period of about two months and in this insight I will outline why I think the trade is over.

In this insight I will discuss:

• Performance of ALL my recommended stub trades
• a post-trade analysis on the Amorepacific stub

3. Tencent Music (TME): Problems Come from Corporate Clients and In-House Contents, 35% Downside

• Stripping music subscription revenues, we find TME’s revenues from corporate clients are not stable.
• We believe in-house products will negatively impact margin in 2019.
• We believe the main business line, social entertainment, will grow strongly. However, we also believe the market is over optimistic about the margin.
• We believe the stock price has downside of 35%.

4. Ruhnn (如涵) Pre-IPO Review- Significant Concentration Risk

Ruhnn Holding Ltd (RUHN US) is looking to raise about US$200m in its upcoming IPO.

The company is an internet key opinion leader (KOL) incubator in China. Revenue and GMV grew at impressive rates of 63% and 57% YoY in FY2018, respectively.

The idea of being able to leverage on KOLs influence over consumers to understand demand and retain consumers is interesting but Ruhnn has yet to demonstrate that it has a sustainable business model. 

Gross margin has deteriorated and losses widened as a percentage of revenue. Service fee paid to KOLs as a percentage of revenue has increased and showed little improvement in 9M FY2019.  The company depends heavily on the top KOL, Zhang Dayi, to generate revenue, almost half of the company’s GMV and revenue is generated from her.

5. Indian Mobile – ARPUs Inflect as the Worst May Be over for Bharti, Although Not for Vodafone IDEA

Chris Hoare sees increasing signs that the worst is over, at least for Bharti Airtel (BHARTI IN). ARPUs and therefore revenues are bottoming. The 3Q numbers were the first quarter where the market as a whole grew sequentially (+2.5% QoQ) since Jio launched. We expect profits to follow. Signs of stabilization are much clearer for Bharti, as the performance gap vs Vodafone Idea (IDEA IN) remains wide. Both Bharti and IDEA are raising around $3.5bn of new equity. However, as we wrote previously, we do not think this is enough for Vodafone IDEA and expect the company to continue to lose market share. By contrast, Bharti’s capital increase puts the company in a strong position going forward and allows investors to fully discount extreme stress scenarios.