In this briefing:
- JD.com (JD): Lawsuit Over, Price Falling Back to First Trading Day, Defensive in Bear Market
- M1 Offer Coming – Market Odds Suggest a Bump But…
- Weimob IPO: Prospectus Point to Mixed Fundamentals
- India Generic Drugs: Antitrust Suit Could Cost Billions
- Duzonbizon: Capitalizing on the Growth of Cloud Based CRM Software in Korea
1. JD.com (JD): Lawsuit Over, Price Falling Back to First Trading Day, Defensive in Bear Market
- Minnesotan Authorities declined to charge the founder of JD.
- JD’s stock price has already plunged 52% in 2018. We believe JD is a defensive equity for portfolios, as the NASDAQ Composite just plunged 50% at most in the financial crisis of 2008.
- Compared to 2014, today’s JD has a higher market share in the larger e-commerce market. However, JD’s stock price is at the same level as the first trading day in 2014.
- JD continued to generate operating cash inflows in 2018 as previous years despite of its zero net margins.
- We are not concerned about the programmer layoff in December, as we believe JD overly invested in “hi-tech” that will not bring revenues in the near future.
- Based on historical Price / GMV, we believe there is an upside of 270% for JD’s stock price.
2. M1 Offer Coming – Market Odds Suggest a Bump But…
Singapore telecom firm M1 announced on the 28th of December 2018 that Konnectivity Pte. Ltd. (a company jointly owned by Keppel Corp Ltd (KEP SP) and Singapore Press Holdings (SPH SP)) had made a Voluntary Conditional General Offer following the satisfaction of the pre-condition (IMDA approval) mentioned in the pre-conditional offer made in September.
The offer is to buy a minimum of 16.69% of the total share capital of M1 at a price of S$2.06 in order to increase the collective holding of the acquirer and its related parties from the current level of 33.32% to 50+% of fully-diluted shares (current shares out + 26.826mm Options + ~2.1mm Award shares).
The Offerors will buy all shares tendered if they get to a minimum of 50+%.
The other terms and conditions of this deal will be set out in the offer document which is expected to be despatched in mid-January 2019 (14-21 days from 28 December).
The offer price of S$2.06 translated to a premium of 26.4% to the undisturbed price before the trading halt for the pre-conditional offer. At the time of writing, the stock is trading at S$2.10 which is higher than the proposed Offer Price, indicating the market is expecting a bump or an overbid.
We’ll see.
3. Weimob IPO: Prospectus Point to Mixed Fundamentals
Weimob.com (1260480D CH) is a combination of a SaaS software and an adtech (targeted marketing) business. It is backed by Tencent Holdings (700 HK), which is 3% shareholder and its largest customer. Weimob has started book building to raise gross proceeds of $108-135 million. Cornerstone investors which include a close associate of Tencent and Huifu Payment Limited (1806 HK) have agreed to purchase $42 million worth of shares in the offering.
The prospectus provides 1H18 results and selective disclosure on the first nine months of 2018. Overall, we believe that Weimob’s fundamentals are mixed and any prospective IPO multiple needs to be adjusted for the material capitalisation of expenses.
4. India Generic Drugs: Antitrust Suit Could Cost Billions
This Insight builds on our previous Insight, India Generic Drugs: US Antitrust Inquiry Widens by discussing estimated potential liabilities and details contained in court filings. Public comments by one of the plaintiffs (47 states) suggest the defendants’ aggregate liability could exceed US$6 billion, the largest previous settlement on record. There is not enough information to apportion potential liability by company, but some companies are better-positioned to bear the cost of a settlement than others. The process could drag on for an undetermined period of time (which helps the defendants). At the same time, the overhang will keep a lid on generic drug prices in the US market.
Among Indian generic companies, Dr. Reddy’S Laboratories (DRRD IN), Aurobindo Pharma (ARBP IN),Cadila Healthcare (CDH IN), and Glenmark Pharmaceuticals (GNP IN) have the highest risk based on their market caps and exposure to the US market.
5. Duzonbizon: Capitalizing on the Growth of Cloud Based CRM Software in Korea
Duzonbizon (012510 KS) (also spelled “Douzonbizon”), is a leading beneficiary of the expanding cloud based CRM software market in Korea. The Korean public cloud market is expected to grow from 2.0 trillion won in 2018 to 2.4 trillion won in 2019. In the case of the domestic public cloud market, SaaS will continue to be strong. One of the catalysts that could positively impact the cloud industry in Korea is that there could be a change in the regulations which may allow many of the government related offices to start using private cloud services starting in 2019.
The company has very little competition in the Lite ERP segment, where it has a near monopoly position. The customers that use this product are typically small companies with annual sales of less than 10 billion won to 20 billion won. Other major competitors have not chosen to aggressively fight against Duzonbizon in this segment. The company’s cloud business is based on providing cloud-based ERP products. The company has been able to significantly increase its total sales by providing the ERP products as a cloud based service. The customers can reduce costs on servers and personnel by relying on the company’s cloud based ERP software and services.
Duzonbizon is currently trading at 29x P/E (2019E) and 24x P/E (2020E), using consensus earnings estimates. The company’s P/E valuation multiples have been rising in the past several years and the valuation multiples have ranged in the 20-40x. While the company’s valuation multiples are relatively higher than the KOSPI market average, they are lower than the global CRM software leaders such as Salesforce.Com Inc (CRM US), which is currently trading at 49x P/E. Despite the recent volatility in Duzonbizon’s share price in the past few months, we are positive on the stock over the next one year and we think the stock could climb by an additional 20-30% over the next year. We believe that the company has a very strong business moat with a very loyal customer base. We want to start 2019 recommending a solid, emerging growth company in the Korean tech space and so we believe that Duzonbizon is a good company to start off with.
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