In this briefing:
- Tencent Music IPO: Price Target Hit; Risk/Reward Now More Balanced and Key Next Steps
- Renesas: Visit Suggests Utilisation Rate Rebound Could Take Longer Than Sell-Side Expects
- Trade Me (TMZ NZ): Hellman & Friedman Could Again Counter-Bid Apax, but Modestly
- Telstra Dividend: Does the 22cps Dividend (7% Yield) Hold? We Think It Does.
- China Tower: Changing Our View to Positive. Low Cost Expansion Should Generate Better Returns
1. Tencent Music IPO: Price Target Hit; Risk/Reward Now More Balanced and Key Next Steps
Tencent Music Entertainment (TME US) rallied up 14% on day one of trade to hit our PT and closed up c8% on its first day of trade. Given the skepticism/ambivalence on the story, poor macro backdrop, weak recent listings from China in the US alongside a full-sized deal and a mid-December launch, this day one performance is a solid result in our view. We outline some further thoughts and next steps for the TME story below.
A recap of the trade: We recommended buying Tencent Music at the low end of the range ($13) and we estimated a base-case fair value of 14% upside. Tencent music rallied up 14% intraday on its first day of trade and closed up c8%. We think this is a fairly good result given the skepticism/ambivalence on the name alongside a weak macro backdrop and a mid-December deal-launch.
Historical week one trade provides mixed support for further gains:
Long-term – we prefer TME to Spotify but recent events give us pause on the cautious near-term view for Spotify:
Updated DCF Valuation:
GER view:
More details below…
2. Renesas: Visit Suggests Utilisation Rate Rebound Could Take Longer Than Sell-Side Expects
We visited Renesas Electronics (6723 JP) this week to discuss progress on inventory reduction and its likely ramp of utilisation rates/wafer throughput, as well as to gather further details on the IDT acquisition and its long -term strategy. On the whole, we continue to like the long-term picture, consider the stock to be undervalued and believe investors with long time horizons should be looking at the stock on the long side. However, our discussions suggested to us that while production cuts to reduce inventory should be completed this month or at worst in 1Q2019, a ramp in utilisation rates could take longer than is implied by consensus.
3. Trade Me (TMZ NZ): Hellman & Friedman Could Again Counter-Bid Apax, but Modestly
Trade Me (TME NZ), the largest online auction platform operating in New Zealand, has entered into a scheme implementation agreement with Apax Partners. Apax Partners has upped its bid for Trade Me from NZ$6.40 to $6.45 a share, to match Hellman & Friedman’s bid.
Hellman & Friedman has until the shareholder vote scheduled for April 2019, to make a binding offer which is superior to Apax Partners, according to press reports. While Hellman & Friedman will likely have one last roll of the dice with an improved bid, we continue to believe that that the formal “winning” bid is unlikely to present a material bump.
4. Telstra Dividend: Does the 22cps Dividend (7% Yield) Hold? We Think It Does.
Telstra’s (TLS AU) share price continues to drift downwards as more questions are asked about the dividend outlook. Optus has backed up its new mobile marketing campaign with big increases in data allowances across MBB (mobile broadband) price points. Reports suggest TPG (TPM AU) is still talking up ‘disruptive’ mobile data pricing despite its lack of network coverage and capacity. The ACCC (competition commission) is due to make a draft decision on the merger with VHA tomorrow (13 December) and it is known to favor a disruptive 4th MNO. We expect the merger to proceed.
5. China Tower: Changing Our View to Positive. Low Cost Expansion Should Generate Better Returns
At the time of the IPO we were quite negative on China Tower (788 HK) prospects. However, in recent calls and meetings our view has changed and become more constructive. Chris Hoare now believes that China Tower is managing to generate co-location growth outside the Master Services Agreement (MSA) and at a much lower level of capital intensity (perhaps up to 50%) than indicated in the IPO. Management has also proven to be more open to shareholders than expected and with lower capex, higher FCF generation we upgrade to a BUY with a HK$1.60 target price. The stock has started to move as the market has begun to understand the more positive outlook. It will be interesting to see if China Tower is allowed to retain these benefits long term.
Summary China Tower forecasts:
