IPOs and Catalysts/Events, Global Equity Research Ltd

Arun George

IPOs and Catalysts/Events

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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.

Equity Capital Markets

<a href="https://www.smartkarma.com/entities/26978" target="_blank" data-smartkarma-citation="entities:26978:1">Inke Inc (3700 HK)</a> is a Chinese live streaming platform which operates the Inke app. At the mid-point of the IPO price range of HK$3.85-$5 per share, Inke will raise $174 million, resulting in a market cap of $1.2 billion. Cornerstone investors, <a href="https://www.smartkarma.com/entities/8343" target="_blank" data-smartkarma-citation="entities:8343:1">Focus Media Network Ltd (8112 HK)</a> and <a href="https://www.smartkarma.com/entities/26793" target="_blank" data-smartkarma-citation="entities:26793:1">Bilibili Inc (BILI US)</a>, will take up 23% of the shares being offered.In <a href="https://www.smartkarma.com/insights/inke-ipo-preview-not-quite-right" target="_blank" data-smartkarma-citation="insights:19204">Inke IPO Preview: Not Quite Right </a>we outlined our bearish view on Inke’s fundamentals. Based on new disclosure in the updated prospectus, we remain bearish and would recommend not participating in the Inke IPO at the proposed pricing range because:<ol>
<li>The 1Q18 trading update points to lower revenue and profits vs 4Q17. Average gross billings per paying user (AGBPPU) decreased from 673 in 4Q17 to 540 in 1Q18. Inke notes that the average AGBPPU further “slightly decreased” in April and May 2018. Profitability in 1Q18 was likely materially lower than 4Q17 due to significant marketing expenses to promote “new business and product offerings”.</li>
<li>Inke’s earnings quality is poor as 90%+ gross billings arise from a mere 3% of paying users. High-rollers are a small group of paying users which have disproportionally large spending power. Based on new disclosure, Inke’s high-rollers are paying users with annual gross billings above RMB5,000 and accounted for 3.3% of total paying users in 1Q18. Notably, high-rollers share of gross billings has steadily risen from 69% in 2016 to 94% in 1Q18. Worryingly, high-rollers’ increasing share of gross billings has come from fewer and fewer high-rollers. The number of high-rollers has decreased from 97,000 in 2016 to 61,000 in 1Q18.</li>
<li>Based on our estimates and at IPO mid-point, Inke trades at a 2019 P/E of 7.6x and PEG of 0.39x. This P/E compares to the median Chinese live streaming companies’ P/E of 14.8x. While Inke seems a bargain on a P/E basis, the low proposed P/E reflects Inke's lower earnings quality and growth vs Chinese live streaming peers.</li>
<li>Notably, Inke's 2019 PEG of 0.39x is a significant premium to YY's 2019 PEG of 0.16x. We believe this premium is unwarranted in the context of YY's superior scale, growth and margins. </li>
</ol><div class="content-highlight">Our overall view is not to participate in the Inke IPO at the proposed price range</div>

Inke Inc (3700 HK) is a Chinese live streaming platform which operates the Inke app. At the mid-point of the IPO price range of HK$3.85-$5 per share, Inke will raise $174 million, resulting in a market cap of $1.2 billion. Cornerstone investors, Focus Media Network Ltd (8112 HK) and Bilibili Inc (BILI US), will take up 23% of the shares being offered.In Inke IPO Preview: Not Quite Right we outlined our bearish view on Inke’s fundamentals. Based on new disclosure in the updated prospectus, we remain bearish and would recommend not participating in the Inke IPO at the proposed pricing range because:
The 1Q18 trading update points to lower revenue and profits vs 4Q17. Average gross billings per paying user (AGBPPU) decreased from 673 in 4Q17 to 540 in 1Q18. Inke notes that the average AGBPPU further “slightly decreased” in April and May 2018. Profitability in 1Q18 was likely materially lower than 4Q17 due to significant marketing expenses to promote “new business and product offerings”.
Inke’s earnings quality is poor as 90%+ gross billings arise from a mere 3% of paying users. High-rollers are a small group of paying users which have disproportionally large spending power. Based on new disclosure, Inke’s high-rollers are paying users with annual gross billings above RMB5,000 and accounted for 3.3% of total paying users in 1Q18. Notably, high-rollers share of gross billings has steadily risen from 69% in 2016 to 94% in 1Q18. Worryingly, high-rollers’ increasing share of gross billings has come from fewer and fewer high-rollers. The number of high-rollers has decreased from 97,000 in 2016 to 61,000 in 1Q18.
Based on our estimates and at IPO mid-point, Inke trades at a 2019 P/E of 7.6x and PEG of 0.39x. This P/E compares to the median Chinese live streaming companies’ P/E of 14.8x. While Inke seems a bargain on a P/E basis, the low proposed P/E reflects Inke's lower earnings quality and growth vs Chinese live streaming peers.
Notably, Inke's 2019 PEG of 0.39x is a significant premium to YY's 2019 PEG of 0.16x. We believe this premium is unwarranted in the context of YY's superior scale, growth and margins. 
Our overall view is not to participate in the Inke IPO at the proposed price range

Hong Kong

Cornerstone Financial Holdings Limited operates as a holding company. The Company, through its subsidiaries, delivers elevator digital frames, retail chain advertisements, and other advertisement contents. Cornerstone Financial Holdings serves customers in Hong Kong.

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Cornerstone Financial Holdings (8112 HK)

Inke IPO Valuation: Cheap for a Reason

Inke Inc (3700 HK) is a Chinese live streaming platform which operates the Inke app. At the mid-point of the IPO price range of HK$3.85-$5 per...

Arun George

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