Daily TMT & Internet: HDC Holdings Stub Trade: Current Status & Trade Approach and more

In this briefing:

1. HDC Holdings Stub Trade: Current Status & Trade Approach
2. M1 Ltd (M1 SP): Take the Offer, Axiata Unlikely to Start a Bidding War
3. Korea M&A Spotlight: Will the Nexon Group Sell the Korean or the Japanese Company?
4. Japanese Telcos: What to Look for in 2019. Earnings May Surprise on the Upside.
5. A Pricey Deal in Hindsight, Walmart? India Reviews Policy – Amazon, Walmart May Need to Rejig Model

1. HDC Holdings Stub Trade: Current Status & Trade Approach

• HDC Holdings (012630 KS) and HDC-OP (294870 KS) price gap is now at a nearly record high. Holdco discount is now 60% to NAV. On a 20D MA, Holdco and Sub are currently below -1 σ.
• I initiated a stub trade on the duo on Dec 11. It paid off on a short term horizon until the duo reached within -0.5~0 σ on a 20D MA. Yield peaked at 4.6% on Dec 14. If you approached with a longer term horizon, things wouldn’t have been as enjoyable.
• The only possibly explainable factor for the recent price divergence is HDC I-Controls’ need to dump a 1.78% Holdco stake. 1.78% overhang risk is not enough to sustain this much divergence and current 60% Holdco discount.
• The duo has again entered < -1 σ territory at yesterday’s closing prices. I’d first make another short-term stub trade. I’d hold onto the position until they reach within -0.5~0 σ on a 20D MA with a loss cut at -5%. But a little longer term approach to hunt for a higher yield wouldn’t be a bad idea at this point.

2. M1 Ltd (M1 SP): Take the Offer, Axiata Unlikely to Start a Bidding War

M1 Ltd (M1 SP), the third largest telecom operator in Singapore, is subject to a bid. On 7 January 2019, Konnectivity launched a voluntary conditional offer (VGO) at S$2.06 cash per share. Konnectivity is jointly owned by Keppel Corp Ltd (KEP SP) and Singapore Press Holdings (SPH SP).

3. Korea M&A Spotlight: Will the Nexon Group Sell the Korean or the Japanese Company?

According to a local media outlet called Chosun Daily, it stated that one of the bankers in the deal (Deutsche Bank), already sent teaser letters of this deal to Tencent Holdings (700 HK) and KKR and in the teaser letter, it mentioned about potentially selling nearly 47% of Nexon Co Ltd (3659 JP) (Japan).

The question about whether or not Kim Jung-Joo decides to sell NXC Corp (Korea) or Nexon Co Ltd (3659 JP) (Japan) has important consequences not just for him and his family but also to the minority shareholders of Nexon Co Ltd (3659 JP). If Kim Jung-Joo decides to sell NXC Corp (Korea), there may not be much upside for the minority shareholders of Nexon Co Ltd (3659 JP) since current regulations do not require the buyers to pay potentially additional control premium to the minority shareholders as well. 

However, if Kim Jung-Joo decides to sell Nexon Co Ltd (3659 JP) (Japan), there may be an opportunity for the minority shareholders to gain from an additional control premium. We think that this is one of the reasons why Nexon Co Ltd (3659 JP) shares are up 13% YTD as some of the investors may think that there could be a higher probability that Kim Jung-Joo ends up selling Nexon Co Ltd (3659 JP) (Japan), instead of NXC Corp (Korea). 

4. Japanese Telcos: What to Look for in 2019. Earnings May Surprise on the Upside.

The Japanese telecom market was more volatile in 2018 than anticipated. However, Chris Hoare remains broadly positive on the sector for 2019. While pressure on the revenue line is intensifying, we do do not expect a price war to break out. In fact, we look for volatility to ease as the year progresses. Operators point to opex reductions and handset subsidy reductions to offset revenue weakness. We think that earnings are likely to surprise on to the upside. Over time we also look for dividend payout ratios to gradually rise, with the Softbank Corp (9434 JP) (KK) listing the long term catalyst.  For Softbank Group (9984 JP) (SB) we look for market confidence to improve on the Vision Fund strategy, as profitable exits/up-valuations of assets such as Uber are announced.

The sector is recovering from NTT Docomo’s (9437 JP) price cut announcements but we don’t think they will slash prices (cuts will be selective). Our top pick is now KDDI (9433 JP) which could actually benefit from Rakuten’s (4755 JP) entry (as the roaming partner). DoCoMo is most affected but there are plenty of cost cutting opportunities. NTT (Nippon Telegraph & Telephone) (9432 JP) has optimistic guidance with substantial opex and capex cost cuts planned. Our order of preference for the stocks is now: KDDI (Buy), followed in order by NTT (Buy), SB Group (Buy), DoCoMo (Buy) and SB Corp (Neutral). We do not currently cover Rakuten. 

5. A Pricey Deal in Hindsight, Walmart? India Reviews Policy – Amazon, Walmart May Need to Rejig Model

Would Wal Mart Stores (WMT US) have paid USD16 bn last year for Flipkart, a leading online Indian retailer, if the recent clarification on India’s policy on FDI in e-commerce were in place back then? Foreign owned online retailers in India ( Amazon.com Inc (AMZN US) , Wal Mart Stores (WMT US) and Alibaba Group Holding (BABA US)  ) will need to rejig their operating models and may face prospects of slower growth and even more distant breakeven targets, if the Indian Government is indeed determined to enforce its policy that e-commerce ‘Marketplaces’ operate only as platforms for third party vendors. Unsurprisingly, Amazon.com Inc (AMZN US) and Wal Mart Stores (WMT US) have reportedly teamed up to lobby the government on these regulations. 

The Indian Government had posted a one-page circular on Dec 26th giving further clarifications to its existing policy on foreign owned e-commerce entities. The detailing of policy specifics seems to be an attempt to enforce the existing policy restrictions on foreign owned online retailers; compliance has so far been sketchy. India do not allow majority foreign ownership in multi brand retail stores and online retailers are allowed to operate only as ‘Marketplaces’ and not as B2C entities. With national elections due in next few months, the Government cannot ignore demands from domestic lobby groups to reign in free play by deep pocketed foreign operators that have been hurting local retailers.

In the detailed note below, we present (1) an overview of the regulatory framework and restrictions under which online retailers operate in India (2) the updated policy and its impact on operating models of Amazon and Walmart in India (3) expectations for India’s e-commerce players. Also, there is a likely gainer from all these – a listed Indian player aspiring to trump global majors in India’s online retail turf.