In this briefing:
- XL Axiata (EXCL IJ) – The Crown Prince of Data – On the Ground in J-Town
- Tencent Music 4Q18 Quick Note – Growth on Track, Margins Could Drag – Stock Price Needs a Breather
- Lyft IPO: Valuation Analysis (Prudent Investment or Quasi-Gambling?)
- Linkbal (6046 JP) SmallCap Growth Stock: Offering This Morning, TOPIX Inclusion Late Summer 2019?
- U.S. Equity Strategy: Positive Outlook Intact; Tech Leading
1. XL Axiata (EXCL IJ) – The Crown Prince of Data – On the Ground in J-Town
A conversation with the management of Xl Axiata (EXCL IJ) following news that the company has started putting up prices in earnest for its existing customers revealed a more positive outlook for ARPUs and margins in 2019. 2018 was a difficult year with the impact of compulsory SIM registration in the first half plus a more intense competitive environment at the same time.
4Q18 results already reflected a better picture with QoQ growth for the quarter in service revenue, data revenue, and EBITDA confirming a positive trend established in the previous quarter.
Competition from other major players such a Telekomunikasi Indonesia (TLKM IJ), Indosat Tbk PT (ISAT IJ) and Hutchison has become more rational with the latter two operators raising prices in 2019 paving the way for Xl Axiata (EXCL IJ)‘s recent increases in renewal packages versus acquisition products previously.
The availability of cheap but highly functional locally Chinese smartphones and XL’s own Xtream 4G handsets continues to drive data growth which now makes up 82% of services revenues for XL.
4G subscribers, which now make up more than 55% of XL’s subs, also consume far more data than those using 3G. XL has been successfully monetising its more data-centric subscriber base in 2H18, reflected in its higher ARPU’s, which increased from IDR32,000 in 3Q18 to IDR33,000 in 4Q18.
The increasing push by content players such as iFlix, Vidio.com, and other OTT players and digital advertisers into the mobile space will only increase the appetite for data in the mobile space.
The wild card on the competition front is Smartfren Telecom (FREN IJ) owner by Sinar Mas Group, which continues to push out aggressive data packages, although this had been tempered this year after it was hauled up by the regulator for breaking the pre-paid SIM rules.
After a tough start to 2018, Xl Axiata (EXCL IJ) began to more effectively monetise its data and more importantly its 4G advantage in 2H18 and more holistically in 1Q19. If this momentum continues this year, it looks set to move back to headline profitability. Valuations look attractive, with the company trading on an EV/EBITDA of 4.2x FY19E, according to Capital IQ consensus estimates. After moving into profitability in 2019, it is forecast to see EPS growth of +63% and +68% for FY20E and FY21E respectively, implying an FY21E PER of 14.8x. Given the improvement in data pricing and strong growth in data, especially from 4G subscribers, consensus estimates appear conservative with room for upgrades to earnings estimates.
2. Tencent Music 4Q18 Quick Note – Growth on Track, Margins Could Drag – Stock Price Needs a Breather
Tencent Music Entertainment (TME US) reported its full year results today, post US market close. Revenue growth was slightly ahead of estimates as paying ratio continue to improve for both online music (subscription revenue) and social entertainment (live streaming). Growth for the latter continued to be driven more by ARPU rather than user growth.
The concerning bit in the results was the decline in gross margins as the company continues to invest in more content.
My previous insights on TME’s IPO:
- The company’s performance: Tencent Music Pre-IPO Review – The Final Countdown – Growth Doesn’t Seem to Be Slowing Down,
- The working of the apps: Tencent Music Pre-IPO – This Is How We Do It – A Quick Look at How the Apps Work,
- Industry dynamic: Tencent Music Pre-IPO – Industry – Don’t Cry – In 2010 a Little Red Dot Almost Overtook the Dragon, and
- Peer analysis: Tencent Music Pre-IPO – Quick Peer Analysis – If I Was You, I’d Wanna Be Me Too – Bigger and Faster,
- Valuations overview: Tencent Music Pre-IPO – Valuations Estimates – Leaving on a Jet Plane – $30bn Was Quite Stretched.
- First take on the IPO pricing: Tencent Music Pre-IPO Updates – Welcome to the Jungle – Rumoured Asking Valuations More Reasonable
- IPO valuation update: Tencent Music IPO – Don’t Stop Me Now – 9M18 Updates, Outlook and Price Limits
- Some more information on Ultimate Music acquisition: Tencent Music IPO – A Little Less Conversation – A Little More Information on Ultimate Music
- Trading strategies: Tencent Music IPO – Firework – Trading Strategies
3. Lyft IPO: Valuation Analysis (Prudent Investment or Quasi-Gambling?)
Our base case forecast is Case 2 (among three scenarios analysis), which suggests an implied market cap of $21 billion or $75 per share. Given that our intrinsic value of the company does not provide enough upside versus the likely IPO price, we would AVOID this deal.
Even if the company is able to complete this IPO, raising nearly $2.0-2.5 billion, it is very possible that the company may need to come back to the market in two or three years in a secondary share offering, which would dilute the existing shareholders. This is probably the biggest risk I see with the Lyft IPO right now.
Our base case financial forecast for Lyft assumes the following:
- Sales growth rate (CAGR from 2018 to 2030) – 26.6%
- Year in which Lyft turns operating profit positive – 2025
- Operating margin in 2030 – 15.0%
4. Linkbal (6046 JP) SmallCap Growth Stock: Offering This Morning, TOPIX Inclusion Late Summer 2019?
On November 13th last year, Linkbal Inc (6046 JP) announced it was looking to move from MOTHERS to the TSE First Section. The stock rallied. At the same time the company said that it was preparing to file an application for the move.
On March 5th, the company announced a forthcoming tachiaigai bunbai offering designed to increase the float. That tachiaigai bunbai offering (designed for retail investors only) takes place this morning after an announcement the company would oversee the offer of 970,000 shares (about 5% of the company but about 180% of the float currently held by public retail investors) at a price of ¥905/share (1,000 shares max per buyer), which is a 3% discount to yesterday’s close of ¥933 yen.
This will get it most of the way towards meeting the requirements, but likely not all the way. An inclusion is still months off. And there would likely be another sale to increase shareholder count by 800-1000 before then, whether in the form of a Public Offering/Uridashi or in the form of another tachiaigai bunbai.
Given where we are on timing, as shown in Historical TOPIX Inclusions: How Do They Do Around Inclusion Date? this would seem an interesting bet. Given the company’s prodigious growth in sales and profits, even though it is small, more people will look at it.
5. U.S. Equity Strategy: Positive Outlook Intact; Tech Leading
The S&P 500 is working through 2,817 resistance and our technical work continues to support an overall positive outlook. As markets improve in Europe and in EM countries, U.S. markets in turn should get a tailwind of improved global equity market conditions. In today’s report we highlight attractive Groups and stocks within Technology: Large- and Mid-Cap Semiconductors Large/Mid-Cap Semi Equip. (TE-04), Software, Enterprise Applications (TE-42), and Software, Design Solutions (TE-46). List of charts included: Intel Corp (INTC US) $TSM, Texas Instruments (TXN US), Analog Devices (ADI US) Xilinx Inc (XLNX US) Advanced Micro Devices (AMD US) Microchip Technology (MCHP US) Skyworks Solutions (SWKS US) Marvell Technology Group Ltd (MRVL US) On Semiconductor (ON US) Monolithic Power Systems, Inc (MPWR US) ASML Holding NV (ASML NA) , Applied Materials (AMAT US)Lam Research (LRCX US) Teradyne Inc (TER US)Mks Instruments (MKSI US)Microsoft Corp (MSFT US)Oracle Corp (ORCL US)Sap Se Sponsored Adr (SAP US)Now Inc (DNOW US)Workday Inc Class A (WDAY US) .
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