Brief TMT & Internet: The War on Huawei, Its Impact on TSMC, and the Invincible Spanish Armada and more

In this briefing:

1. The War on Huawei, Its Impact on TSMC, and the Invincible Spanish Armada
2. Koolearn: Marketing Expenses Have Taken Operating Profits Down the Drain
3. Last Week in GER Research: Softbank, TPG Telecom, Cstone Pharma, Ebang and Facebook

1. The War on Huawei, Its Impact on TSMC, and the Invincible Spanish Armada

Huawei is one of the largest telecom equipment companies in the world and it is also one of the top customers of Taiwan Semiconductor Manufacturing Company (TSMC) (2330 TT). There has been a war waged on Huawei by the US government administration. Most recently in January 2019, the US Justice Department announced 23 counts of indictments on Huawei related to the intellectual property theft, obstruction of justice, and fraud related to its evasion of US sanctions against Iran. The following are the major reasons why the US government has become so aggressive in targeting Huawei to prevent this company from selling its telecom equipment products in the US and in other allied countries:

• Serious concerns about Huawei’s equipment which can be used to conduct espionage
• The quest for 5G 
• Beyond 5G & Global technology leadership

HiSilicon Technologies, which is a fully owned company of Huawei, is one of the top five customers of TSMC. Of TSMC’s top five customers, both Apple and Huawei face significant headwinds which could reduce their sales growth rates. Although we do not have an exact figure of what percentage of TSMC’s sales that Apple and Huawei represent, we believe that is closer to about 25-30%. 

The current US administration is trying to slow down this excessive outsourcing of manufacturing out of the US. The US government’s war on Huawei is a reflection of the US government’s desire to slow down the progress of Huawei and China’s dominance of 5G services combined with threats of potential espionage. In the midst of all these intricate battles and concerns involving Huawei, TSMC is becoming negatively impacted as one of the main companies that produce chips for Huawei’s Hisilicon. 

2. Koolearn: Marketing Expenses Have Taken Operating Profits Down the Drain

• Koolearn updated its IPS prospectus and posted operating losses for 1H2019 (ended Nov. 2018).
• The company spent significantly on online promotion, but we believe that online promotion is not useful.
• We also believe online marketing expenditures are not a productive use of the Company’s cash, as Koolearn’s brand was already well known among consumers due to its parent company, New Oriental.

3. Last Week in GER Research: Softbank, TPG Telecom, Cstone Pharma, Ebang and Facebook

In this version of the GER weekly research wrap, we dig into the debt tender for Softbank Group (9984 JP) and assess the merger between TPG Telecom Ltd (TPM AU) and VHA. On the IPO front, we initiate on CStone Pharma (CSTONE HK) while we update on Ebang (EBANG HK) . Finally, we dig into the beat at Facebook Inc A (FB US) and assess whether there are further legs for the investment case. We also provide a list of upcoming catalysts for upcoming event-driven ideas. 

More details can be found below. 

Best of luck for the new week – Rickin, Venkat and Arun