IPOs and Catalysts/Events, Global Equity Research Ltd

Arun George

IPOs and Catalysts/Events

Uncompromised, Independent, Conflict-Free Research

Global Equity Research Ltd

Global Equity Research was started in 2017 by a group of experienced research professionals. It was founded on a passionate belief in the importance and the need for uncompromised, independent, conflict-free research. We aim to provide differentiated and actionable primary and bottom up fundamental research.

Event-Driven

<p><a href="https://www.smartkarma.com/entities/joyy-inc" target="_blank" data-smartkarma-citation="entities:285:1" rel="noopener">JOYY (YY US)</a> may be subject to a privatisation bid from Mr David Li (co-founder and Chairman) and Mr Jun Lei (founder and Chairman of <a href="https://www.smartkarma.com/entities/xiaomi-corp" target="_blank" data-smartkarma-citation="entities:24409:1" rel="noopener">Xiaomi Corp (1810 HK)</a>), its top two shareholders, according to Reuters report on 26 August. Mr David Li and Mr Jun Lei are looking to privatise Joyy at $75-$100 per ADS and finalise the deal by the end of 2021. Mr David Li and Mr Jun Lei aim to spin off Joyy's key asset, BIGO, and list it in Hong Kong, to take advantage of higher valuations, according to Reuters. On 27 August, Joyy said it has not received any formal takeover offers, according to Chinese media reports.  </p><p>Joyy shares are around 60% below their February peak due to weak guidance (3Q21 revenue guidance was around 16% below consensus), the delay of SAMR anti-trust approval for the YY Live disposal and ongoing policy uncertainty on Chinese tech.</p><p>As a reminder, on 16 November 2020, Joyy entered into a definitive agreement with <a href="https://www.smartkarma.com/entities/baidu-inc" target="_blank" data-smartkarma-citation="entities:179:1" rel="noopener">Baidu (BIDU US)</a> for the disposal of YY Live for $3.6 billion in cash, subject to certain adjustments. The sale was substantially completed on 8 February 2021 resulting in a $1.9 billion payment from Baidu. Notably, Joyy’s market cap of $4.9 billion is 7% below its net cash of $5.2 billion, which is the sum of the 2Q1 net cash of $3.9 billion and Baidu's remaining payment net of tax $1.4 billion.</p><p>As Joyy is incorporated in the Cayman Islands, for potential privatisation to succeed, shareholders representing two-thirds of shares present and voting need to approve the deal. Mr David Li represents 76.0% of the voting interest and has the two-thirds voting interest threshold needed to approve any potential privatisation deal.</p><div class="content-highlight"><p>Our SOTP and relative valuation suggest that the rumoured privatisation range of $75-100 per ADS is justifiable and reasonable. Our base-case SOTP valuation is $71.69 per ADS, which is a 16% premium to the last close price of $61.97 per ADS. Despite Joyy's insistence that no formal bid has been received, we would be buyers as the shares offer a favourable risk/reward profile to the emergence of a formal privatisation bid.</p></div>

JOYY (YY US) may be subject to a privatisation bid from Mr David Li (co-founder and Chairman) and Mr Jun Lei (founder and Chairman of Xiaomi Corp (1810 HK)), its top two shareholders, according to Reuters report on 26 August. Mr David Li and Mr Jun Lei are looking to privatise Joyy at $75-$100 per ADS and finalise the deal by the end of 2021. Mr David Li and Mr Jun Lei aim to spin off Joyy's key asset, BIGO, and list it in Hong Kong, to take advantage of higher valuations, according to Reuters. On 27 August, Joyy said it has not received any formal takeover offers, according to Chinese media reports.  Joyy shares are around 60% below their February peak due to weak guidance (3Q21 revenue guidance was around 16% below consensus), the delay of SAMR anti-trust approval for the YY Live disposal and ongoing policy uncertainty on Chinese tech.As a reminder, on 16 November 2020, Joyy entered into a definitive agreement with Baidu (BIDU US) for the disposal of YY Live for $3.6 billion in cash, subject to certain adjustments. The sale was substantially completed on 8 February 2021 resulting in a $1.9 billion payment from Baidu. Notably, Joyy’s market cap of $4.9 billion is 7% below its net cash of $5.2 billion, which is the sum of the 2Q1 net cash of $3.9 billion and Baidu's remaining payment net of tax $1.4 billion.As Joyy is incorporated in the Cayman Islands, for potential privatisation to succeed, shareholders representing two-thirds of shares present and voting need to approve the deal. Mr David Li represents 76.0% of the voting interest and has the two-thirds voting interest threshold needed to approve any potential privatisation deal.Our SOTP and relative valuation suggest that the rumoured privatisation range of $75-100 per ADS is justifiable and reasonable. Our base-case SOTP valuation is $71.69 per ADS, which is a 16% premium to the last close price of $61.97 per ADS. Despite Joyy's insistence that no formal bid has been received, we would be buyers as the shares offer a favourable risk/reward profile to the emergence of a formal privatisation bid.

Joyy’s Potential Privatisation by Top Two Shareholders

Equity Capital Markets

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<p><a href="https://www.smartkarma.com/entities/cloud-village-inc" target="_blank" data-smartkarma-citation="entities:33412:1" rel="noopener">Cloud Village (CLV HK)</a> is the second-largest online music platform after <a href="https://www.smartkarma.com/entities/tencent-music-entertainment" target="_blank" data-smartkarma-citation="entities:27255:1" rel="noopener">Tencent Music (TME US)</a> as measured by users and revenue in China. The cornerstone product is <em>NetEase Cloud Music</em> that delivers diverse music and music-inspired content and provides interactive community features. Cloud Village is braving the moribund Chinese IPO market by pre-marketing an HKEx IPO to raise around $1 billion, according to press reports. </p>
<p>In <a href="https://www.smartkarma.com/insights/cloud-village-netease-music-ipo-initiation-musical-shares" target="_blank" data-smartkarma-citation="insights:52266" rel="noopener">Cloud Village (NetEase Music) IPO Initiation: Musical Shares</a>, we stated that at first sight, Cloud Village performance seems poor as its high growth has come at the cost of negative gross margin and cash burn. However, Cloud Village is on the cusp of turning around its performance due to a fundamental change in its cost structure. We concluded that Cloud Village has the potential to shed its underdog status vs the much larger Tencent Music.  </p>
<p>In <a href="https://www.smartkarma.com/insights/cloud-village-netease-music-ipo-play-list" target="_blank" data-smartkarma-citation="insights:55506" rel="noopener">Cloud Village (NetEase Music) IPO: Play List</a>, we examined the 1Q21 results and the recent developments disclosed in the PHIP. We noted that while Cloud Village expects to remain unprofitable over the next three years, the 1Q21 results and the recent SAMR ruling on Tencent Music support our view that Cloud Village is on track to combine its high growth with an improving cost structure. </p>
</div><div><div><div class="content-highlight"><p>In this note, we present our forecasts and take the first look at Cloud Village's potential valuation range. </p></div></div></div>


Cloud Village (CLV HK) is the second-largest online music platform after Tencent Music (TME US) as measured by users and revenue in China. The cornerstone product is NetEase Cloud Music that delivers diverse music and music-inspired content and provides interactive community features. Cloud Village is braving the moribund Chinese IPO market by pre-marketing an HKEx IPO to raise around $1 billion, according to press reports. 
In Cloud Village (NetEase Music) IPO Initiation: Musical Shares, we stated that at first sight, Cloud Village performance seems poor as its high growth has come at the cost of negative gross margin and cash burn. However, Cloud Village is on the cusp of turning around its performance due to a fundamental change in its cost structure. We concluded that Cloud Village has the potential to shed its underdog status vs the much larger Tencent Music.  
In Cloud Village (NetEase Music) IPO: Play List, we examined the 1Q21 results and the recent developments disclosed in the PHIP. We noted that while Cloud Village expects to remain unprofitable over the next three years, the 1Q21 results and the recent SAMR ruling on Tencent Music support our view that Cloud Village is on track to combine its high growth with an improving cost structure. 
In this note, we present our forecasts and take the first look at Cloud Village's potential valuation range. 

Cloud Village (NetEase Music) IPO: Valuation First-Look

Head of Research, IPOs & Placements, Aequitas Research

Sumeet Singh

Head of Research, IPOs & Placements

IPOs and Placements coverage across Asia Pacific

Aequitas Research

We cover all listing across the Asia Pacific along with follow-up placements. As of Dec 2020, our team had covered 539 IPOs with a hit rate of 73.5% and 685 placements with a hit rate of 66.8%.

We combine fundamental bottom-up views with our proprietary quantitative framework to provide a holistic coverage across new listings and placements. Our coverage includes pre-IPO notes before the deal is launched, follow-up analysis once the deal is live and post-listing trading analysis as well.

<p>Cloud Village Inc. (CVI), also known as NetEase Music, plans to raise around US$1bn in its Hong Kong IPO. The company has also obtained investments from Baidu and Alibaba, along with other investors.</p><p>As of Mar 21, it had 183m online music MAUs, 24m online music services monthly paying users, 438,000 social entertainment services monthly paying users. It had over 60m music tracks, of which more than 1m were created by registered independent artists. Its daily active users on average spent 76mins daily listening to music. </p><p>CVI’s revenue has grown 4.3x over FY18-20, to RMB4.9bn. There have been no signs of slowdown as its revenue increased by 102% in FY19 and was up another 111% in FY20. Both online music services and social entertainment services revenue have shown strong growth. Online music services revenue grew by 73% in 2019 and another 47.6% in 2020. Social entertainment services revenue was the largest driver of growth, as it grew by 344% in 2019 and was up another 320% in 2020. However, it remains a distant second player in the market and has yet to make a profit.</p><p>We covered various aspects of the deal in our previous notes, <a href="https://www.smartkarma.com/insights/cloud-village-netease-music-pre-ipo-was-in-the-slow-stream-playing-catch-up" target="_blank" rel="noopener">Cloud Village (NetEase Music) Pre-IPO - Was in the slow stream, playing catch-up ,</a> <a href="https://www.smartkarma.com/insights/cloud-village-netease-music-pre-ipo-tencent-music-peer-comp-regulatory-impact" target="_blank" rel="noopener">Cloud Village (NetEase Music) Pre-IPO - Tencent Music Peer Comp, Regulatory Impact </a>and <a href="https://www.smartkarma.com/insights/cloud-village-netease-music-pre-ipo-initial-thoughts-on-valuation" target="_blank" rel="noopener">Cloud Village (NetEase Music) Pre-IPO - Initial Thoughts on Valuation</a>.</p><p>In this note, we will talk about the PHIP updates.</p>

Cloud Village Inc. (CVI), also known as NetEase Music, plans to raise around US$1bn in its Hong Kong IPO. The company has also obtained investments from Baidu and Alibaba, along with other investors.As of Mar 21, it had 183m online music MAUs, 24m online music services monthly paying users, 438,000 social entertainment services monthly paying users. It had over 60m music tracks, of which more than 1m were created by registered independent artists. Its daily active users on average spent 76mins daily listening to music. CVI’s revenue has grown 4.3x over FY18-20, to RMB4.9bn. There have been no signs of slowdown as its revenue increased by 102% in FY19 and was up another 111% in FY20. Both online music services and social entertainment services revenue have shown strong growth. Online music services revenue grew by 73% in 2019 and another 47.6% in 2020. Social entertainment services revenue was the largest driver of growth, as it grew by 344% in 2019 and was up another 320% in 2020. However, it remains a distant second player in the market and has yet to make a profit.We covered various aspects of the deal in our previous notes, Cloud Village (NetEase Music) Pre-IPO - Was in the slow stream, playing catch-up , Cloud Village (NetEase Music) Pre-IPO - Tencent Music Peer Comp, Regulatory Impact and Cloud Village (NetEase Music) Pre-IPO - Initial Thoughts on Valuation.In this note, we will talk about the PHIP updates.

Cloud Village (NetEase Music) Pre-IPO - Mixed PHIP Update, Updated Thoughts on Valuation

Overseas Chinese Equities, Aequitas Research

Ming Lu

Overseas Chinese Equities

Equity Bottom-Up

<ul class="">
<li>The new rule for tutoring school damaged the prices of Chinese education equities.</li>
<li>The market focuses on the “non-profit” requirement, but we believe “Article 13” is more important.</li>
<li>We believe the authorities try to block all the ways that a tutoring school can continue.</li>
<li>We do not believe this is a “low-price opportunity” after the stock price plunge.</li>
<li>Please also see <a href="https://www.smartkarma.com/insights/tal-education-tal-last-summer-for-physical-tutoring-school" target="_blank" data-smartkarma-citation="insights:53714" rel="noopener">TAL Education (TAL): Last Summer for Physical Tutoring School</a> on June 28 before the price plunge.</li>
</ul>


The new rule for tutoring school damaged the prices of Chinese education equities.
The market focuses on the “non-profit” requirement, but we believe “Article 13” is more important.
We believe the authorities try to block all the ways that a tutoring school can continue.
We do not believe this is a “low-price opportunity” after the stock price plunge.
Please also see TAL Education (TAL): Last Summer for Physical Tutoring School on June 28 before the price plunge.


TAL Education (TAL): In New Rule on Tutoring School, “Article 13” Harsher Than “Non-Profit”

<ul class="">
<li>We do not believe the juveniles will reduce internet usage in the future.</li>
<li>The authorities forbid tutoring schools so that juveniles have more time to spend on internet.</li>
<li>Parents went back to their office so they cannot stop their children from using internet.</li>
</ul>


We do not believe the juveniles will reduce internet usage in the future.
The authorities forbid tutoring schools so that juveniles have more time to spend on internet.
Parents went back to their office so they cannot stop their children from using internet.


Tencent (700 HK): Juvenile Internet Usage Will Not Decrease

China

Baidu, Inc. operates an Internet search engine. The Company offers algorithmic search, enterprise search, news, MP3, and image searches, voice assistance, online storage, and navigation services. Baidu serves clients globally.

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Baidu (BIDU US)

Joyy’s Potential Privatisation by Top Two Shareholders

Joyy's rumoured privatisation bid is at $75-$100 per ADS. Our base-case SOTP valuation is $71.69, a 16% premium to the last close. Consequently,...

Arun George

Cloud Village (NetEase Music) IPO: Valuation First-Look

Cloud Village is braving the moribund Chinese IPO market by pre-marketing an HKEx IPO to raise around $1 bn. In this note, we present our forecasts...

Arun George

Cloud Village (NetEase Music) Pre-IPO - Mixed PHIP Update, Updated Thoughts on Valuation

Cloud Village Inc. (CVI), also known as NetEase Music, plans to raise around US$1bn in its Hong Kong IPO. The company has also obtained investments...

Sumeet Singh

TAL Education (TAL): In New Rule on Tutoring School, “Article 13” Harsher Than “Non-Profit”

The market focuses on the “non-profit” requirement, but we believe “Article 13” is fatal. We believe the authorities try to block all the way that...

Ming Lu

Tencent (700 HK): Juvenile Internet Usage Will Not Decrease

The authorities forbid tutoring schools so that juveniles have more time to spend on internet. Parents went back to their office so that they...

Ming Lu

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