Brief TMT & Internet: Tesla’s Plan B 2.0; Y Not and more

In this briefing:

1. Tesla’s Plan B 2.0; Y Not
2. Last Week in GER Event-Driven Research: Myob, Rakuten, Delta, Graincorp and Hopewell Holding
3. Meituan Dianping (3690 HK): Lock-Up Expiry – Good 4Q18 Required
4. HHI – DSME Acquisition: Current Situation & Trade Approach
5. Omron into the Nikkei 225, Pioneer Out

1. Tesla’s Plan B 2.0; Y Not

Employees, customers, suppliers, and investors still are reeling over Tesla’s startling decision, announced February 28th, to move immediately to online-only sales, a dramatic reversal of strategy still in place as of the 2018 10-K filing on February 19th in which the company had touted growth via recent store expansions and substantial additions planned globally going forward. 

Tesla explained that even with now three substantial price cuts on all its cars and now three significant layoffs since last summer, it must slash costs even more to support the launch of its long overdue $35,000 base version of the flagship Model 3 (see my report Tesla’s New Plan: Buy Before You Try).

I warned clients that Tesla’s stunning strategy reversal seemed driven more by alarming cash consumption plus much weaker than expected sales and profit margins already apparent in what is shaping up to be a disastrous first quarter–troubling trends that may continue. However, as I noted, it also costs money to close stores, get out of leases (good luck with that), fire employees and redistribute remaining staff, and sell off fairly new equipment at steep losses.

Not to mention that shiny new Tesla stores suddenly going dark may appear ominously similar to retail stores going out of business seen increasingly all over the country–a bad look for Tesla, especially given customers already are spooked by its escalating quality, reliability, and service problems (see “Musk and Weird Q3 Developments Are Driving Investors to Telsa’s Rivals” and “Tesla – Dave’s Not Here, and Musk Won’t Leave” and “Tesla: Down to the Wire” and Tesla – Truth and Consequences).

Tesla probably hasn’t seen the light–it’s just received as of March 1st a desperately needed cash infusion by finally securing overdue funding for Tesla Shanghai Gigafactory 3 which has been under construction since January (see Tesla – Shanghai Surprise). Unfortunately, the four banks in Tesla’s new “China Loan Agreement,” which the company announced on Thursday with a rare 8-K filing, committed only to fund a one-year limited purpose loan for up to 3.5 billion yuan ($521 million). This is barely enough time or cash to get the Shanghai assembly plant up and running–much less also stave off the current cash crunch.

But Tesla must keep up appearances as well as bolster its liquidity through at least the end of the quarter as it gets ready to reveal Thursday evening the long-awaited Model Y–though I suspect this won’t result in a massive burst of cash from new reservations as Tesla hopes.

Years of robbing Peter to pay Paul hasn’t produced a sustainable growth model for Tesla, mostly because its business strategy still is better described as, “Wow, we didn’t see that coming.”

Continue reading for Bond Angle analysis.

2. Last Week in GER Event-Driven Research: Myob, Rakuten, Delta, Graincorp and Hopewell Holding

In this version of the GER weekly EVENTS research wrap, we contend that investors should cash out on the MYOB Group Ltd (MYO AU) deal and assess the NAV discount potential for Rakuten Inc (4755 JP) post the IPO launch of Lyft Inc (0812823D US) – of which Rakuten has a 13% stake. Moreover, we dig into the deals for Delta Electronics Thai (DELTA TB) , Graincorp Ltd A (GNC AU) and Hopewell Holdings (54 HK)

More details can be found below. 

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

3. Meituan Dianping (3690 HK): Lock-Up Expiry – Good 4Q18 Required

Meituan Dianping (3690 HK)‘s shares currently trade 18% below its IPO price of HK$69.00 per share. Meituan will announce its 4Q18 results on Monday, 11 March 2019, after market close. Notably, Meituan’s six-month lock-up period expires on 19 March 2019.

4. HHI – DSME Acquisition: Current Situation & Trade Approach

• The DSME deal between HHI and KDB was officially finalized last Friday. We will then have the following four step process. Schedule detail is yet to come out. HHI intermediate holdco is named Korea Shipbuilding & Offshore Engineering, or KSOE.
• HHI went south by nearly 4% last Friday when the deal was finalized. DSME stayed flat. Why did this happen? There was another story we heard last Friday. HHI and Korea Eximbank agreed that the ₩2.3tril CBs wouldn’t be converted into DSME shares and disposed any time soon. Not only that, there will be a downwardly interest adjustment to help ease DSME’s financial burden.
• This agreement immediately sparked a speculation that HHI must have pledged Korea Eximbank some sort of DSME valuation pushings. This is like a value transfer rather from HHI to DSME. I’d wrap the current HHI long/DSEM short position at this point. Short-term, I expect DSME outperforming HHI. Longer term, I still doubt what value transfer from who to who. I’d rather stay away from both.

5. Omron into the Nikkei 225, Pioneer Out

Friday 8 March after the close, the Nikkei announced that because the third party share sale of Pioneer Corp (6773 JP)  had been completed, it would be deleted from the Nikkei 225 Average (and the Nikkei 500 Index). Omron Corp (6645 JP) will replace Pioneer in the Nikkei 225 Average, with a deemed par value of 50 yen per share.

The date for this index deletion and inclusion event is the 15th of March, as per the schedule of the February 19th announcement as to how the Pioneer event would be treated. 

This affords special sits/events followers a couple of different events to look at.