Consumer

In this briefing:

1. PLANB: Solid Outlook for Music Marketing Business Under BNK48 Office
2. Titan Co Ltd (TTAN IN)
3. SCMA (SCMA IJ) – Biting the Digital Bullet – On the Ground in J-Town
4. Macq Media In The Crosshairs As Fairfax Merger Completes
5. IPO Trading Strategy: A Deep-Dive on Early Trade of Chinese Companies Listing in the US

1. PLANB: Solid Outlook for Music Marketing Business Under BNK48 Office

We maintain Plan B Media (PLANB TB) with a BUY rating, and the new target price of Bt8.30 derived from 1.5xPEG’2019E, which is the average of Thailand’s consumer discretionary sector or equivalent to 32xPE’19E

The story:

• Revising up net profit in 2018-20E by 2-11% mainly from BNK office
• Music and sports marketing drive earnings momentum north
• Plenty of opportunities to monetize underutilized capacity

Risks: Obstacles for renewing concession contracts with state-owned enterprises along with falling consumer spending and a share-price dilution effect on the back of then generally mandated raise in capital.

2. Titan Co Ltd (TTAN IN)

Titan Company Limited manufactures and sells watches, jewellery, eyewear, and other accessories and products in India and internationally. The company operates through four segments: Watches, Jewellery, Eyewear, and others. It is one of the few companies operating in organised jewellery retail industry of India. We visit stores & markets in Kochi (Kerela) and Chennai (Tamil Nadu), the biggest consumption markets to understand structural changes that have taken place in the industry, with an objective to tweak our revenue and margin estimates. We believe consensus might be underestimating growth from the jewellery segment which is the largest contributor with 81.60% of Sales as of FY2018. Our revenue estimates for FY19 and FY20 are 5.8% & 2.98% higher than consensus, primarily based on higher than expected market share gains from unorganised players. Our EBITDA margins for FY 19 & FY20 are 1% & 1.30% higher than consensus estimates primarily based on product mix which is in favour of studded jewellery and operating leverage as sales across stores pick up.  Our EPS for FY19 & FY20 is estimated at INR 18.60 and INR 24.26 per share which is higher than consensus by INR 2.47 and 4.05 per share for FY 19 and FY 20.  Based on an average forward multiple of 49x we arrive at a target price of INR 1187, representing a 30% potential return from current market price. 

3. SCMA (SCMA IJ) – Biting the Digital Bullet – On the Ground in J-Town

Media Partners Asia suggests that the advertising revenues for the Free-to-Air TV industry in Indonesia can grow +5.6% CAGR  between 2017-2023.

Internet companies are driving growth at the margin but also make-up 2/3rds of the 15% of total spend on digital advertising, which suggests only 5% lost from TV. 

Surya Citra Media Pt Tbk (SCMA IJ) is on the cusp of a significant move into the digital advertising and content space through Vidio.com, Kapanlagi.com, as well as its payments gateway Dana. 

The company will also enter a new advertising medium of outdoor billboards, where it will seek to consolidate the industry through acquisitions, with the aim of controlling 50% of this market. 

Surya Citra Media Pt Tbk (SCMA IJ) remains the best media proxy for advertising in Indonesia. It has seen its two main Free-to-Air stations SCTV and Indosiar command number 1 & 2 audience share positions over the last two months, giving an overall prime-time audience share YTD of 35%.  The company estimates that the core business can probably achieve growth of +10% over the next two years. The real kicker to growth for the company will come from its significant move into the digital and content space through a series of acquisitions, mainly from its parent Elang Mahkota Teknologi Tbk (EMTK IJ). These transactions are will be done at arm’s length so as to avoid any corporate governance concerns. According to CapIQ consensus, the company is trading on 16.7x FY19E PER and 15.1x FY20E PER, with forecast EPS growth of 8.6% and 10.6% for FY19E and FY20E respectively. The company also has a dividend yield of 3.9% for FY19E and generates an ROE of 32%.

4. Macq Media In The Crosshairs As Fairfax Merger Completes

Late last week, Australian media reported that preliminary discussions were underway between Nine Entertainment Co Holdings (NEC AU) and Macquarie Radio Network (MRN AU)’s second-largest shareholder, John Singleton. This development is not entirely unsurprising, just that formal discussions were deferred until the Nine/Fairfax Media (FXJ AU) merger was formally completed. 

In July, Nine and Fairfax entered into a Scheme Implementation Agreement in which the two companies would merge (albeit a Nine takeover) via a cash/scrip structure, in an A$4bn deal, creating Australia’s largest integrated media player. This included the acquisition of Fairfax’s 54.5% stake in MRN. The scheme was implemented on the 7 December. I discussed the merger in my insight Nine & Fairfax – Integrated Advertising.

In an interview with The Daily Telegraph last month (paywalled), John Singleton confirmed that he was ready to sell his 32% stake in MRN as he was not interested in being a small player in a big operation.

The Australian (paywalled) is reporting that Nine has offered $2/share (a 9.3% premium to the closing price of A$1.83 on December 4^th), with Singleton believed to be holding out for $2.15/share. In a further twist, Alan Jones, with 1.27% of MRN, is understood to have certain conditions/clauses attached to that stake should Singleton sell, which may make an offer tabled by Nine potentially untenable.  

For its part, Nine has confirmed it has held preliminary discussions regarding the outstanding shares, and further announcements will be made by Nine should these discussions progress to a transaction. MRN is currently trading at ~$1.90/share. 

5. IPO Trading Strategy: A Deep-Dive on Early Trade of Chinese Companies Listing in the US

Ahead of Tencent Music (TME US)‘s IPO today , we have done a deep-dive analysis on the past 28 major Chinese IPOs that have listed in the US. We note the following points

 A higher pop associated with a lower free float?

If it starts weak , we wouldn’t assume disaster – historically shares have broken above IPO price at some point during day one trade

Day one moves by pricing range – pops across the board

GER pricing view for Tencent music

Companies assessed in this report: X Financial (XYF US) , Qudian Inc (QD US) , Pinduoduo (PDD US) , Qutoutiao Inc (QTT US) , HUYA Inc (HUYA US) , Pintec Technology Holdings L (PT US) , 111 Inc (YI US) , Uxin Ltd (UXIN US) , BEST Inc (BSTI US) , Sunlands Online Education Gr (STG US) , Cango Inc (CANG US) , Huami Corp (HMI US) , Sea Ltd (SE US) , Aurora Mobile Ltd (JG US) , Viomi Technology Co Ltd (VIOT US) , Weidai Ltd (WEI US) , Jianpu Technology (JT US) , Greentree Hospitality (GHG US) , iQIYI Inc (IQ US), Sogou Inc (SOGO US) , Onesmart Education (ONE US) , CNFinance Holdings Ltd (1640496D US) , TuanChe Ltd (TC US) , NIO Inc (NIO US) , CooTek Cayman Inc (CTK US) , Niu Technologies (NIU US) , Mogu (MOGU US) , and Bilibili Inc (BILI US)

More details below 

In this briefing:

1. Goldwin Tops Sports Market Growth Through Store Investment
2. Hengan Intl. (1044 HK): Our Analysis Suggests that Bonitas’ Allegations Have Some Substance
3. Alpha Smart – Pre-IPO – PE Investors Recovered 56% of Their Cost in Two Years but Left It in Debt
4. BreadTalk (BREAD SP): As Din Tai Fung Opens in London, CEO Puts Out Target to Double Mkt Cap
5. Trade Me (TMZ NZ): Hellman & Friedman Could Again Counter-Bid Apax, but Modestly

1. Goldwin Tops Sports Market Growth Through Store Investment

Marketing of sports brands has become increasingly retail-led in the last decade and a focus on retailing has enabled Goldwin (8111 JP) to make serious gains while the two biggest domestic brands, Asics Corp (7936 JP) and Mizuno Corp (8022 JP), have been distracted by overseas expansion.

Goldwin took a close look at its beleaguered business 15 years ago and decided retail could be its salvation.

At current rates it will catch up with Mizuno’s domestic sales in a few years.

Overall, we are bullish about Goldwin but also the wider sports category because sports and sports fashion is in many ways one of the few consumer categories to be largely immune to a demographically challenged market like Japan – all age segments are buying into sports apparel, including the over 60s.

2. Hengan Intl. (1044 HK): Our Analysis Suggests that Bonitas’ Allegations Have Some Substance

Hengan Intl Group (1044 HK), China’s leading sanitary towel and nappy producer, has been targeted by a short seller, Bonitas Research. Hengan has denied Bonitas’ allegations to which Bonitas has responded that Hengan’s response was weak and evasive. The shares have continued to slide suggesting that investors are less than convinced with Hengan’s rebuttal.

3. Alpha Smart – Pre-IPO – PE Investors Recovered 56% of Their Cost in Two Years but Left It in Debt

Alpha Smart (ALS HK), the parent of Chinese menswear fashion retailer GXG, plans to raise US$300m in its Hong Kong IPO. L Catterton, LVMH’s investment arm, along with another PE investor, owns a 73% stake in the company. 

Earnings have been consistently growing with the highest contribution still coming from its flagship brand “GXG”. The recent expansion of the online channel has further aided sales growth, with ASL claiming to be the largest menswear retailer in terms of online sales.

Apart from a large dividend payout which covered half of the acquisition costs for L Capital, nothing much seems to have changed recently. In addition, operating cash flow has not kept pace with earnings due to a consistent increase in inventory. To add to that there are a few related party issues as well including some stores being run by former employees.

4. BreadTalk (BREAD SP): As Din Tai Fung Opens in London, CEO Puts Out Target to Double Mkt Cap

Breadtalk (BREAD SP) has been a great Singapore Inc story since its founding in 2000. The company, under the leadership of George Quek, has grown from a few bakery outlets to hundreds of outlets across Asia. Profitability at Breadtalk has been lackluster but shares remain cheap on an EV/EBITDA basis.

Meanwhile, the group has an aggressive target to achieve 8% NPM by 2020 which not a single sell-side analyst believes they can achieve. Over the past week, the CEO was quoted in a Business Times article saying that he wants to achieve a “1 billion SGD market cap” vs the 480 million SGD market cap currently. While this could be easily dismissed as marketing talk, this target is not unrealistic at all.

With the launch of its first Din Tai Fung outlet in London investors better take notice. One of the drivers of upside surprises might be the rapid roll-out of Din Tai Fung in the UK and the rest of Europe. The CEO is even keen to explore expansion in the US market and has done research trips to Texas, LA and New York.

With the shares having derated from 1.16 SGD in early August to 0.86 SGD recently the valuation (6.8x 2019 EV/EBITDA) is now attractive once again. My Fair Value estimate remains at 1.25 SGD (47% upside).

5. 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.

In this briefing:

1. FamilyMart: A Shrewd Head-Fake?
2. FamilyMart Tender Offer for Don Quijote Misses The Mark as Mr. Partridge Stands Pat
3. BAUTO (BAUTO MK): New Models to Keep Strong Sales Momentum
4. Anmol Industries Pre-IPO Quick Take – No Growth, Generous Payments to Founders
5. LG Holdings Stub Trade: Current Status & Trade Approach

1. FamilyMart: A Shrewd Head-Fake?

We think the failed tender but continued asset sale between Familymart Uny (8028 JP) and Don Quijote (7532 JP)  is astutely beneficial for Familymart Uny Holdings (8028 JP) and parent Itochu Corp (8001 JP) . More details below 

2. FamilyMart Tender Offer for Don Quijote Misses The Mark as Mr. Partridge Stands Pat

In October, the Nikkei leaked and Familymart Uny Holdings (8028 JP) immediately thereafter announced that Familymart would sell the rest of its GMS (and financing) subsidiary UNY to Don Quijote Holdings (7532 JP) (which bought 40% of the company in 2017) and would conduct a Tender Offer later in 2018 at a 20% premium to the then-current price to buy a stake in Don Quijote of just over 20%. The Tender Offer was announced November 6th. Familymart had arranged to borrow shares it did not manage to buy in the tender so that at the next record date it will have 20% of the voting rights by hook or by crook. 

Don Quijote shares jumped to the Tender Offer price the same day and then spent a day there before investors decided that the news and structure of the deal was better news for Don Quijote than Familymart had priced in. 

Results of the Tender Offer have just been announced. Familymart had been trying to buy 32,108,700 shares for JPY 212 billion. They just missed. They got 0.08% of the total desired, or 24,721 shares for just over JPY 163 million.

THEY GOT NOTHING.

I expect Familymart had zero idea this would happen. I expect their bankers are surprised as well. They should not have been. They analysed this badly. There was a decent chance they would find it difficult to dislodge shares from owners. 

In FamilyMart Tender for Don Quijote – Elmer vs Mr. Partridge? I recalled how “Old Turkey” (from Edwin Lefevre’s Reminiscences of a Stock Operator) did not want to lose his position while Elmer was eager to take profits.

“I couldn’t think of selling that stock.” “You couldn’t?” asked Elmer, beginning to look doubtful himself. It is a habit with most tip givers to be tip takers. “Why not?” And Elmer drew nearer. “Why, this is a bull market!” The old fellow said it as though he had given a long and detailed explanation. 

Growth stock managers don’t like selling growth stocks until the growth stops growing. Don Quijote is still growing. And with UNY, Don Quijote may grow faster than previously expected. 

The announcement at the end of the Tender Offer Results announcement is also VERY telling. There was a plan to make Don Quijote an equity-method affiliate by buying in the Tender Offer, buying in the market, or borrowing lots of shares. There was a plan for Familymart to appoint directors to DQ.

There was a clearly-available trading strategy based on that. 

The new announcement puts that strategy into question. And Mr. Partridge might not be so inclined to call it a bull market. Since the launch of the deal, the markets have started the trip to Gehenna in a trug. From the one-month average prior to the Familymart bid news, Don Quijote is up 25%. Familymart is up 40%, the Nikkei 225 is down 10.7%, the TOPIX retail sector is down 5.5% but Familymart and Don Quijote have influenced that performance (without those two names, average performance is worse).

3. BAUTO (BAUTO MK): New Models to Keep Strong Sales Momentum

• Improving asset turnover, relatively strong analyst recommendations, and slow asset growth relative to its sector
• New launches in FY2019-20 e.g. CX-3 facelift and 7-seat SUV CX-8 should stimulate sales going forward. Sales were up by 24% in 1QFY19 YoY
• Equity income from JV with Mazda Motor (7261 JP) should increase as production volume ramps up to meet strong ASEAN demand. Production up by 40% YoY in FY2018
• Attractive at a 19CE* 0.4 PEG ratio versus ASEAN Consumer Discretionary at a PEG of 0.9 and BAUTO is net cash
• Risks: Regulations and sluggish consumer demand, FX risk JPY and PHP

* Consensus Estimates

4. Anmol Industries Pre-IPO Quick Take – No Growth, Generous Payments to Founders

Anmol Industries (ANMOL IN) plans to raise US$100m+ in its India IPO via a sell-down of secondary shares. As per Frost & Sullivan, Anmol is the fourth largest biscuit manufacturer in India, behind the likes of Britannia Industries (BRIT IN), Parle and Sunfeast (owned by ITC Ltd (ITC IN)).

In FY17, the company undertook a restructuring wherein it merged three of its operating entities and demerged its treasury operations. Owing to this one can’t really come up with a clear picture of its past performance.

The picture on the demerger is a lot clearer though, as it led to the founders getting US$38m worth of liquid investments. Furthermore, the founder’s employment arrangements seem to be designed in such a way to let them take 12% of the PATMI each year, with no strings attached and additional 13% of FY17 PATMI as salary.

5. LG Holdings Stub Trade: Current Status & Trade Approach

• LG Holdings (003550 KS) is mainly made up of LG Group’s 4 major listed subsidiaries. The four account for 76.85% of NAV, and 90.18% of holdings assets. The MC scatter chart shows that Holdings and the four are integrated.
• I initiated a stub trade on Sep 26, LG Group Restructuring: Holdings a CLEAR ‘LONG’ & LGE ‘Short’ in Market Neutral Setup. I went long Holdings and short Elec. This trade is delivering a 8.40% yield. Short-term wise on a 20D MA, a reverse stub trade seems to make sense. Holdings is now at +1 σ.
• I’d rather hunt for mean reversion on a longer horizon. Holdings breakup is now a distant possibility. Yearend dividend factor should be another plus. As a hedge, I’d go short Chem. It has fallen relatively less. Struggle in the Chinese battery market will be getting more attention.

In this briefing:

1. Belluna: Growing by Selling Gentility to the Expanding Older Market in Japan
2. Motherson In Merger Talks with One of Our Previously Short-Listed Candidates – Leoni
3. AALI (AALI IJ): Indonesian Biodiesel Mandate to Support CPO Price
4. LG Electronics Share Class: Long Pref/Short Common on a 4Y High Discount & Div Yield Gap
5. Tencent Music (TME): Both Live Video and Music Fairly Valued, No Action

1. Belluna: Growing by Selling Gentility to the Expanding Older Market in Japan

While Nissen and Senshukai (8165 JP) have hit new lows in the past five years, Belluna (9997 JP) has gone from strength to strength by sticking with printed catalogues and tying these to e-commerce and retail store expansion.

The company’s strategy is also helped by the core customer demographic being women over the age of 50, one of the few population segments that is still growing.

As a result, group sales have risen by 28.8% in five years and operating profit has almost doubled from ¥7.8 billion to ¥13 billion.

The acquisition of Sagami, a kimono retailer that suffered from lack of attention under Uny’s management, could also result in a boost to profits in the next year.

2. Motherson In Merger Talks with One of Our Previously Short-Listed Candidates – Leoni

On Friday, following news about entering merger/acquisition talks with Leoni AG (LEO GR), shares of Motherson Sumi Systems (MSS IN) closed up 3.1% up to INR166. Leoni’s stock, on the other hand, increased by 2.7% at Friday’s close, although the stock has been experiencing a declining trend over the past year. We mentioned in Two More Acquisitions on the Way for Motherson Sumi, that Leoni could be a potential acquisition target for Motherson in its wire harnessing segment, although on the higher end of the size spectrum. The company representatives have not commented on this acquisition news and the deal is not finalised yet. Thus, this could simply remain at the discussion stage with no real transaction taking place.

 Leoni has been experiencing a decline in its earnings during the recent quarters of FY2018, expecting negative free cashflows for FY2018E. However, recent news is that Leoni has recently been undertaking a comprehensive restructuring programme after cutting its earnings target for FY2018E and has appointed a new chief executive in September to lead these efforts. Further, it should be noted that Leoni is a well-established company in the auto components business and thus, could overcome its current struggles and be in a good position to exploit the long-term growth prospects of this market. Thus, acquiring Leoni is likely to strengthen Motherson’s position globally by providing the latter with increased coverage geographically and product wise. 

3. AALI (AALI IJ): Indonesian Biodiesel Mandate to Support CPO Price

• Current price offers a good entry point, relatively strong analyst recommendation, and low earnings expectation relative to its sector
• Successful execution of Indonesia’s biodiesel mandate should drive CPO demand for biodiesel blending, hence driving CPO prices
• Through strong partnerships with smaller estates AALI can increase external FFB (fresh fruit bunch) purchases, reducing fixed costs incurred by plantation
• Attractive at 19CE* 10% ROE/PB compared to ASEAN Consumer staples at 4.6% and AALI offers 4% dividend yield
• Risks: Low palm-based commodities and crude palm oil prices

* Consensus Estimates

4. LG Electronics Share Class: Long Pref/Short Common on a 4Y High Discount & Div Yield Gap

• LG Group’s tech affiliates will likely increase dividends this year. Local street expects a ₩500 yearend dividend for LGE Common, up 25% YoY. Pref will get ₩550. Dividend yield difference will be 1.28%p, highest since 2015. Price gap should be narrowing as we move towards the end of the year.
• On 20D moving average, we don’t seem to have an opening for stat arb. But on 2Y mean, we have room for mean reversion. This is a 6~7% potential yield. Improved street sentiments on LGE fundamentals next year will also push this mean reversion. I’d go long Pref and short Common at this point to hunt for this.

5. Tencent Music (TME): Both Live Video and Music Fairly Valued, No Action

• We believe that TME is fairly valued based on peer companies’ price / sales ratios.
• The Chinese internet peer companies as comparison bases in valuation have declined significantly more than indices, we believe it is not a concern that indices declined further.
• We believe that the main business of music will grow strongly in 2019 and 2020 due to the rapid growth of both the paying user base and ARPU (Average Revenues per User per month).

In this briefing:

1. BAUTO (BAUTO MK): New Models to Keep Strong Sales Momentum
2. Anmol Industries Pre-IPO Quick Take – No Growth, Generous Payments to Founders
3. LG Holdings Stub Trade: Current Status & Trade Approach
4. Belluna: Growing by Selling Gentility to the Expanding Older Market in Japan
5. Motherson In Merger Talks with One of Our Previously Short-Listed Candidates – Leoni

1. BAUTO (BAUTO MK): New Models to Keep Strong Sales Momentum

• Improving asset turnover, relatively strong analyst recommendations, and slow asset growth relative to its sector
• New launches in FY2019-20 e.g. CX-3 facelift and 7-seat SUV CX-8 should stimulate sales going forward. Sales were up by 24% in 1QFY19 YoY
• Equity income from JV with Mazda Motor (7261 JP) should increase as production volume ramps up to meet strong ASEAN demand. Production up by 40% YoY in FY2018
• Attractive at a 19CE* 0.4 PEG ratio versus ASEAN Consumer Discretionary at a PEG of 0.9 and BAUTO is net cash
• Risks: Regulations and sluggish consumer demand, FX risk JPY and PHP

* Consensus Estimates

2. Anmol Industries Pre-IPO Quick Take – No Growth, Generous Payments to Founders

Anmol Industries (ANMOL IN) plans to raise US$100m+ in its India IPO via a sell-down of secondary shares. As per Frost & Sullivan, Anmol is the fourth largest biscuit manufacturer in India, behind the likes of Britannia Industries (BRIT IN), Parle and Sunfeast (owned by ITC Ltd (ITC IN)).

In FY17, the company undertook a restructuring wherein it merged three of its operating entities and demerged its treasury operations. Owing to this one can’t really come up with a clear picture of its past performance.

The picture on the demerger is a lot clearer though, as it led to the founders getting US$38m worth of liquid investments. Furthermore, the founder’s employment arrangements seem to be designed in such a way to let them take 12% of the PATMI each year, with no strings attached and additional 13% of FY17 PATMI as salary.

3. LG Holdings Stub Trade: Current Status & Trade Approach

• LG Holdings (003550 KS) is mainly made up of LG Group’s 4 major listed subsidiaries. The four account for 76.85% of NAV, and 90.18% of holdings assets. The MC scatter chart shows that Holdings and the four are integrated.
• I initiated a stub trade on Sep 26, LG Group Restructuring: Holdings a CLEAR ‘LONG’ & LGE ‘Short’ in Market Neutral Setup. I went long Holdings and short Elec. This trade is delivering a 8.40% yield. Short-term wise on a 20D MA, a reverse stub trade seems to make sense. Holdings is now at +1 σ.
• I’d rather hunt for mean reversion on a longer horizon. Holdings breakup is now a distant possibility. Yearend dividend factor should be another plus. As a hedge, I’d go short Chem. It has fallen relatively less. Struggle in the Chinese battery market will be getting more attention.

4. Belluna: Growing by Selling Gentility to the Expanding Older Market in Japan

While Nissen and Senshukai (8165 JP) have hit new lows in the past five years, Belluna (9997 JP) has gone from strength to strength by sticking with printed catalogues and tying these to e-commerce and retail store expansion.

The company’s strategy is also helped by the core customer demographic being women over the age of 50, one of the few population segments that is still growing.

As a result, group sales have risen by 28.8% in five years and operating profit has almost doubled from ¥7.8 billion to ¥13 billion.

The acquisition of Sagami, a kimono retailer that suffered from lack of attention under Uny’s management, could also result in a boost to profits in the next year.

5. Motherson In Merger Talks with One of Our Previously Short-Listed Candidates – Leoni

On Friday, following news about entering merger/acquisition talks with Leoni AG (LEO GR), shares of Motherson Sumi Systems (MSS IN) closed up 3.1% up to INR166. Leoni’s stock, on the other hand, increased by 2.7% at Friday’s close, although the stock has been experiencing a declining trend over the past year. We mentioned in Two More Acquisitions on the Way for Motherson Sumi, that Leoni could be a potential acquisition target for Motherson in its wire harnessing segment, although on the higher end of the size spectrum. The company representatives have not commented on this acquisition news and the deal is not finalised yet. Thus, this could simply remain at the discussion stage with no real transaction taking place.

 Leoni has been experiencing a decline in its earnings during the recent quarters of FY2018, expecting negative free cashflows for FY2018E. However, recent news is that Leoni has recently been undertaking a comprehensive restructuring programme after cutting its earnings target for FY2018E and has appointed a new chief executive in September to lead these efforts. Further, it should be noted that Leoni is a well-established company in the auto components business and thus, could overcome its current struggles and be in a good position to exploit the long-term growth prospects of this market. Thus, acquiring Leoni is likely to strengthen Motherson’s position globally by providing the latter with increased coverage geographically and product wise. 

In this briefing:

1. AALI (AALI IJ): Indonesian Biodiesel Mandate to Support CPO Price
2. LG Electronics Share Class: Long Pref/Short Common on a 4Y High Discount & Div Yield Gap
3. Tencent Music (TME): Both Live Video and Music Fairly Valued, No Action
4. Hyundai Motor & Hyundai Mobis Pair: Owner Buying Mobis May Create Divergence in Favor of Motor
5. Exuberance of Korean Retail Investors About Jim Rogers Becoming an Outside Director of Ananti

1. AALI (AALI IJ): Indonesian Biodiesel Mandate to Support CPO Price

• Current price offers a good entry point, relatively strong analyst recommendation, and low earnings expectation relative to its sector
• Successful execution of Indonesia’s biodiesel mandate should drive CPO demand for biodiesel blending, hence driving CPO prices
• Through strong partnerships with smaller estates AALI can increase external FFB (fresh fruit bunch) purchases, reducing fixed costs incurred by plantation
• Attractive at 19CE* 10% ROE/PB compared to ASEAN Consumer staples at 4.6% and AALI offers 4% dividend yield
• Risks: Low palm-based commodities and crude palm oil prices

* Consensus Estimates

2. LG Electronics Share Class: Long Pref/Short Common on a 4Y High Discount & Div Yield Gap

• LG Group’s tech affiliates will likely increase dividends this year. Local street expects a ₩500 yearend dividend for LGE Common, up 25% YoY. Pref will get ₩550. Dividend yield difference will be 1.28%p, highest since 2015. Price gap should be narrowing as we move towards the end of the year.
• On 20D moving average, we don’t seem to have an opening for stat arb. But on 2Y mean, we have room for mean reversion. This is a 6~7% potential yield. Improved street sentiments on LGE fundamentals next year will also push this mean reversion. I’d go long Pref and short Common at this point to hunt for this.

3. Tencent Music (TME): Both Live Video and Music Fairly Valued, No Action

• We believe that TME is fairly valued based on peer companies’ price / sales ratios.
• The Chinese internet peer companies as comparison bases in valuation have declined significantly more than indices, we believe it is not a concern that indices declined further.
• We believe that the main business of music will grow strongly in 2019 and 2020 due to the rapid growth of both the paying user base and ARPU (Average Revenues per User per month).

4. Hyundai Motor & Hyundai Mobis Pair: Owner Buying Mobis May Create Divergence in Favor of Motor

• Hyundai Motor Co (005380 KS) and Hyundai Mobis (012330 KS) are way more correlated than what internal sales dependency suggests. Their 2Y correlation coefficient is 0.84. The scatter chart shows they are clearly cointegrated.
• The owner family potentially buying Mobis shares may create divergence in favor of Motor. They need to sell their Motor shares to buy Mobis shares. The higher Motor price and the lower Mobis price are, the happier and wealthier they become.
• Current price ratio is a little below 2Y stat mean. I expect it to reach a +0.5~1 σ level on 2Y SD. This is a 4.5~9% yield. I’d go long Motor and short Mobis to hunt for this. 

5. Exuberance of Korean Retail Investors About Jim Rogers Becoming an Outside Director of Ananti

• After it was announced on 10 December that Jim Rogers was being considered an outside director of Ananti Inc (025980 KS), its share price has soared more than 100% in six business days. At current price of 21,000 won, market cap of Ananti is 1.7 trillion won ($1.5 billion). In six days, Jim Rogers has added more than $800 million in market cap to Ananti, which is now trading at more than 5.0x P/B, compared to 2.5x P/B only a week ago. We think the risk/reward of Ananti is no longer favorable given the steep share price increase.
• This is a classic “buy on rumor, sell on news” trading that could impact the share price. The fact is, Jim Rogers has not yet accepted to be an outside director of the company. Rather, he has been recommended to become an outside director to be decided on December 27th and there are only six more business days until this date. It is almost a given that Jim Rogers will be voted in as an outside director of Ananti. We think that there could be many investors that may be unloading their shares as we get closer to December 27th.
• In addition, there are many other companies that should benefit from a greater opening up of the North Korean economy to South Korea and rest of the world. We have listed the 30 key North Korean related stocks below. Hence, for those investors that want to get a greater exposure to the North Korea related stocks in South Korea, some of these other stocks may provide greater value than Ananti which has soared in price in such a short period of time.

In this briefing:

1. Motherson In Merger Talks with One of Our Previously Short-Listed Candidates – Leoni
2. AALI (AALI IJ): Indonesian Biodiesel Mandate to Support CPO Price
3. LG Electronics Share Class: Long Pref/Short Common on a 4Y High Discount & Div Yield Gap
4. Tencent Music (TME): Both Live Video and Music Fairly Valued, No Action
5. Hyundai Motor & Hyundai Mobis Pair: Owner Buying Mobis May Create Divergence in Favor of Motor

1. Motherson In Merger Talks with One of Our Previously Short-Listed Candidates – Leoni

On Friday, following news about entering merger/acquisition talks with Leoni AG (LEO GR), shares of Motherson Sumi Systems (MSS IN) closed up 3.1% up to INR166. Leoni’s stock, on the other hand, increased by 2.7% at Friday’s close, although the stock has been experiencing a declining trend over the past year. We mentioned in Two More Acquisitions on the Way for Motherson Sumi, that Leoni could be a potential acquisition target for Motherson in its wire harnessing segment, although on the higher end of the size spectrum. The company representatives have not commented on this acquisition news and the deal is not finalised yet. Thus, this could simply remain at the discussion stage with no real transaction taking place.

 Leoni has been experiencing a decline in its earnings during the recent quarters of FY2018, expecting negative free cashflows for FY2018E. However, recent news is that Leoni has recently been undertaking a comprehensive restructuring programme after cutting its earnings target for FY2018E and has appointed a new chief executive in September to lead these efforts. Further, it should be noted that Leoni is a well-established company in the auto components business and thus, could overcome its current struggles and be in a good position to exploit the long-term growth prospects of this market. Thus, acquiring Leoni is likely to strengthen Motherson’s position globally by providing the latter with increased coverage geographically and product wise. 

2. AALI (AALI IJ): Indonesian Biodiesel Mandate to Support CPO Price

• Current price offers a good entry point, relatively strong analyst recommendation, and low earnings expectation relative to its sector
• Successful execution of Indonesia’s biodiesel mandate should drive CPO demand for biodiesel blending, hence driving CPO prices
• Through strong partnerships with smaller estates AALI can increase external FFB (fresh fruit bunch) purchases, reducing fixed costs incurred by plantation
• Attractive at 19CE* 10% ROE/PB compared to ASEAN Consumer staples at 4.6% and AALI offers 4% dividend yield
• Risks: Low palm-based commodities and crude palm oil prices

* Consensus Estimates

3. LG Electronics Share Class: Long Pref/Short Common on a 4Y High Discount & Div Yield Gap

• LG Group’s tech affiliates will likely increase dividends this year. Local street expects a ₩500 yearend dividend for LGE Common, up 25% YoY. Pref will get ₩550. Dividend yield difference will be 1.28%p, highest since 2015. Price gap should be narrowing as we move towards the end of the year.
• On 20D moving average, we don’t seem to have an opening for stat arb. But on 2Y mean, we have room for mean reversion. This is a 6~7% potential yield. Improved street sentiments on LGE fundamentals next year will also push this mean reversion. I’d go long Pref and short Common at this point to hunt for this.

4. Tencent Music (TME): Both Live Video and Music Fairly Valued, No Action

• We believe that TME is fairly valued based on peer companies’ price / sales ratios.
• The Chinese internet peer companies as comparison bases in valuation have declined significantly more than indices, we believe it is not a concern that indices declined further.
• We believe that the main business of music will grow strongly in 2019 and 2020 due to the rapid growth of both the paying user base and ARPU (Average Revenues per User per month).

5. Hyundai Motor & Hyundai Mobis Pair: Owner Buying Mobis May Create Divergence in Favor of Motor

• Hyundai Motor Co (005380 KS) and Hyundai Mobis (012330 KS) are way more correlated than what internal sales dependency suggests. Their 2Y correlation coefficient is 0.84. The scatter chart shows they are clearly cointegrated.
• The owner family potentially buying Mobis shares may create divergence in favor of Motor. They need to sell their Motor shares to buy Mobis shares. The higher Motor price and the lower Mobis price are, the happier and wealthier they become.
• Current price ratio is a little below 2Y stat mean. I expect it to reach a +0.5~1 σ level on 2Y SD. This is a 4.5~9% yield. I’d go long Motor and short Mobis to hunt for this. 

In this briefing:

1. Hyundai Motor & Hyundai Mobis Pair: Owner Buying Mobis May Create Divergence in Favor of Motor
2. Exuberance of Korean Retail Investors About Jim Rogers Becoming an Outside Director of Ananti
3. Takeda: Move Over Newton! Now It’s Spooky Action At a Distance
4. Discovery Management Will Likely Soon Be Helping Narrow the Share Class Spread
5. Satellite Companies Securing Agreements to Sell C-Band Spectrum

1. Hyundai Motor & Hyundai Mobis Pair: Owner Buying Mobis May Create Divergence in Favor of Motor

• Hyundai Motor Co (005380 KS) and Hyundai Mobis (012330 KS) are way more correlated than what internal sales dependency suggests. Their 2Y correlation coefficient is 0.84. The scatter chart shows they are clearly cointegrated.
• The owner family potentially buying Mobis shares may create divergence in favor of Motor. They need to sell their Motor shares to buy Mobis shares. The higher Motor price and the lower Mobis price are, the happier and wealthier they become.
• Current price ratio is a little below 2Y stat mean. I expect it to reach a +0.5~1 σ level on 2Y SD. This is a 4.5~9% yield. I’d go long Motor and short Mobis to hunt for this. 

2. Exuberance of Korean Retail Investors About Jim Rogers Becoming an Outside Director of Ananti

• After it was announced on 10 December that Jim Rogers was being considered an outside director of Ananti Inc (025980 KS), its share price has soared more than 100% in six business days. At current price of 21,000 won, market cap of Ananti is 1.7 trillion won ($1.5 billion). In six days, Jim Rogers has added more than $800 million in market cap to Ananti, which is now trading at more than 5.0x P/B, compared to 2.5x P/B only a week ago. We think the risk/reward of Ananti is no longer favorable given the steep share price increase.
• This is a classic “buy on rumor, sell on news” trading that could impact the share price. The fact is, Jim Rogers has not yet accepted to be an outside director of the company. Rather, he has been recommended to become an outside director to be decided on December 27th and there are only six more business days until this date. It is almost a given that Jim Rogers will be voted in as an outside director of Ananti. We think that there could be many investors that may be unloading their shares as we get closer to December 27th.
• In addition, there are many other companies that should benefit from a greater opening up of the North Korean economy to South Korea and rest of the world. We have listed the 30 key North Korean related stocks below. Hence, for those investors that want to get a greater exposure to the North Korea related stocks in South Korea, some of these other stocks may provide greater value than Ananti which has soared in price in such a short period of time.

3. Takeda: Move Over Newton! Now It’s Spooky Action At a Distance

Over the weekend I published Softbank Corp, Takeda, and Newton’s Three Laws of Motion. Newton’s Three Laws helpfully guide one to understanding the nature of interaction of forces and bodies and the motion which results. Later, Euler’s laws of motion applied a framework for rigid and continuum bodies, and since then “action at a distance” has been replaced be Einstein’s Theory of General Relativity.

After I wrote the bit about one part of the index impact, FTSE unhelpfully changed their mind on timing based on an unhelpful change by the LSE. On Monday, the TSE exercised its discretion – clearly stated in the TOPIX Index Guidebook on p4 (2nd sentence of the opening paragraph) as something it may do – to go its own course in how it will adapt index changes to the first couple of increases in share count due to mergers with foreign corporations.

If an event not specified in this document occurs, or if TSE determines that it is difficult to use the methods described in this document, TSE may use an alternative method of index calculation as it deems appropriate.

So with the changes at FTSE and now TOPIX and JPX Nikkei 400, we no longer have quite the same clarity of forces on the bodies, and therefore less clarity on the resulting motion. The LSE’s announced market change appears to have led the MSCI to change its deletion date for Shire as well, now also (along with FTSE) deleting Shire at the close of the 21st (announcement early this AM Asia time).

Investors have prepared based on the idea that there was a reasonably tight relationship – helped because it was a lot of force applied in a short period (selling and buying all done in a short period in January) between the particles. Now that relationship is being stretched. A lot. 

The problem resembles that which Einstein famously pooh-poohed as “Spooky Action At a Distance”. Schrödinger called this entanglement – and it turns out to be one of the weirder branches of quantum mechanics – a field broken wide open by Bell’s Theorem a decade after Einstein shuffled off this mortal coil* – and about which John Wheeler famously said, “If you are not completely confused by quantum mechanics, you do not understand it.”

I cheerfully say quantum mechanics completely baffles me. 

I less cheerfully say this whole episode with Takeda and index providers has baffled me too.

But it is important to note that the timing and implications are vastly different than expected just two trading days ago. And the difference is worth thinking about. When the FTSE/MSCI net sell of risk was just 3 days apart, there was a clear connection across that three day distance. Now, the 6-10 week spread of time between the FTSE/MSCI events, the weird two weeks of SETSqx illiquid purgatory just as everyone is full up of risk, then the walk through the Valley of the Shadow of Flowback before we get the first really good net index inclusion to cover the Shire risk people have been dumping for months means that the certainty of understanding the movement of the particle on the other side is substantially lower.

If it all works out well, it might just be Spooky Action At a Distance.

4. Discovery Management Will Likely Soon Be Helping Narrow the Share Class Spread

As share class trades go, Discovery has presented several opportunities over the years to take advantage of index changes, corporate events, and a management that has aggressively repurchased nonvoting DISCK shares versus voting DISCA shares.

5. Satellite Companies Securing Agreements to Sell C-Band Spectrum

Satellite companies attempting to convince the Federal Communications Commission to allow them to sell C-band spectrum they license from the U.S. have begun talks to secure customers, sources told CTFN.

In this briefing:

1. Exuberance of Korean Retail Investors About Jim Rogers Becoming an Outside Director of Ananti
2. Takeda: Move Over Newton! Now It’s Spooky Action At a Distance
3. Discovery Management Will Likely Soon Be Helping Narrow the Share Class Spread
4. Satellite Companies Securing Agreements to Sell C-Band Spectrum
5. Nio Surged 31% in November; Will Momentum Continue Through 2019?

1. Exuberance of Korean Retail Investors About Jim Rogers Becoming an Outside Director of Ananti

• After it was announced on 10 December that Jim Rogers was being considered an outside director of Ananti Inc (025980 KS), its share price has soared more than 100% in six business days. At current price of 21,000 won, market cap of Ananti is 1.7 trillion won ($1.5 billion). In six days, Jim Rogers has added more than $800 million in market cap to Ananti, which is now trading at more than 5.0x P/B, compared to 2.5x P/B only a week ago. We think the risk/reward of Ananti is no longer favorable given the steep share price increase.
• This is a classic “buy on rumor, sell on news” trading that could impact the share price. The fact is, Jim Rogers has not yet accepted to be an outside director of the company. Rather, he has been recommended to become an outside director to be decided on December 27th and there are only six more business days until this date. It is almost a given that Jim Rogers will be voted in as an outside director of Ananti. We think that there could be many investors that may be unloading their shares as we get closer to December 27th.
• In addition, there are many other companies that should benefit from a greater opening up of the North Korean economy to South Korea and rest of the world. We have listed the 30 key North Korean related stocks below. Hence, for those investors that want to get a greater exposure to the North Korea related stocks in South Korea, some of these other stocks may provide greater value than Ananti which has soared in price in such a short period of time.

2. Takeda: Move Over Newton! Now It’s Spooky Action At a Distance

Over the weekend I published Softbank Corp, Takeda, and Newton’s Three Laws of Motion. Newton’s Three Laws helpfully guide one to understanding the nature of interaction of forces and bodies and the motion which results. Later, Euler’s laws of motion applied a framework for rigid and continuum bodies, and since then “action at a distance” has been replaced be Einstein’s Theory of General Relativity.

After I wrote the bit about one part of the index impact, FTSE unhelpfully changed their mind on timing based on an unhelpful change by the LSE. On Monday, the TSE exercised its discretion – clearly stated in the TOPIX Index Guidebook on p4 (2nd sentence of the opening paragraph) as something it may do – to go its own course in how it will adapt index changes to the first couple of increases in share count due to mergers with foreign corporations.

If an event not specified in this document occurs, or if TSE determines that it is difficult to use the methods described in this document, TSE may use an alternative method of index calculation as it deems appropriate.

So with the changes at FTSE and now TOPIX and JPX Nikkei 400, we no longer have quite the same clarity of forces on the bodies, and therefore less clarity on the resulting motion. The LSE’s announced market change appears to have led the MSCI to change its deletion date for Shire as well, now also (along with FTSE) deleting Shire at the close of the 21st (announcement early this AM Asia time).

Investors have prepared based on the idea that there was a reasonably tight relationship – helped because it was a lot of force applied in a short period (selling and buying all done in a short period in January) between the particles. Now that relationship is being stretched. A lot. 

The problem resembles that which Einstein famously pooh-poohed as “Spooky Action At a Distance”. Schrödinger called this entanglement – and it turns out to be one of the weirder branches of quantum mechanics – a field broken wide open by Bell’s Theorem a decade after Einstein shuffled off this mortal coil* – and about which John Wheeler famously said, “If you are not completely confused by quantum mechanics, you do not understand it.”

I cheerfully say quantum mechanics completely baffles me. 

I less cheerfully say this whole episode with Takeda and index providers has baffled me too.

But it is important to note that the timing and implications are vastly different than expected just two trading days ago. And the difference is worth thinking about. When the FTSE/MSCI net sell of risk was just 3 days apart, there was a clear connection across that three day distance. Now, the 6-10 week spread of time between the FTSE/MSCI events, the weird two weeks of SETSqx illiquid purgatory just as everyone is full up of risk, then the walk through the Valley of the Shadow of Flowback before we get the first really good net index inclusion to cover the Shire risk people have been dumping for months means that the certainty of understanding the movement of the particle on the other side is substantially lower.

If it all works out well, it might just be Spooky Action At a Distance.

3. Discovery Management Will Likely Soon Be Helping Narrow the Share Class Spread

As share class trades go, Discovery has presented several opportunities over the years to take advantage of index changes, corporate events, and a management that has aggressively repurchased nonvoting DISCK shares versus voting DISCA shares.

4. Satellite Companies Securing Agreements to Sell C-Band Spectrum

Satellite companies attempting to convince the Federal Communications Commission to allow them to sell C-band spectrum they license from the U.S. have begun talks to secure customers, sources told CTFN.

5. Nio Surged 31% in November; Will Momentum Continue Through 2019?

• NIO Inc (NIO US) surged 30.7% in November after reporting steady growth in production and following certain notable investors such as Baillie Gifford & Co (largest investor in Tesla Motors (TSLA US) after Elon Musk) acquiring a stake in the company creating a bullish view on the company.
• The EV start-up delivered 3,089 vehicles in November, registering a more than 96% increase from October, indicating a smooth flow in its production line of ES8. The latter was something its rival, Tesla, took long to establish. The company has reached a total production of more than 10,000 units thus far.
• On the 15^th of December which is the company’s ‘Nio Day’, Nio hopes to launch its ES6, a 5-seater, two-row, high-performance premium electric SUV that will have a longer range and at a lower price than its three-row seven-passenger ES8. Production and delivery of ES6 are expected to begin in 2019.
• Q3 FY2018 results although slightly below the company’s expectations was an improvement compared to the previous quarter and acted as a tailwind in increasing investor confidence in the company. Sales increased to USD214m in Q3 from USD 46 in Q2. Though the company has not yet generated any profits, operating losses as a % of revenues have declined to -191.2% in Q3 cf.-4,077% in Q2.
• For Q4 FY2019E the company expects to deliver 6,700 to 7,000 vehicles more than double the total deliveries during Q3, forecasting revenue between USD 418.5-436 m, at 95-100% increase from Q3. The company has not guided on OP.
• Although the company is still fighting for profits, which seems to be normal for a start-up, it should be noted that the company has a quite steady cash reserve to fund its operation and ramp up production of its to-be-released ES6 model. In our opinion, if the launch of ES6 is as successful as ES8 and the company avoids production delays like Tesla, then it may break even or even make profits within a shorter time period than which Tesla took (almost 8 years). That said, Nio’s stock is likely to witness further surges through 2019 following its recovery since November.

In this briefing:

1. Takeda: Move Over Newton! Now It’s Spooky Action At a Distance
2. Discovery Management Will Likely Soon Be Helping Narrow the Share Class Spread
3. Satellite Companies Securing Agreements to Sell C-Band Spectrum
4. Nio Surged 31% in November; Will Momentum Continue Through 2019?
5. Start Your Engines: SoftBank Corp (9434 JP) Is Off to the Races

1. Takeda: Move Over Newton! Now It’s Spooky Action At a Distance

Over the weekend I published Softbank Corp, Takeda, and Newton’s Three Laws of Motion. Newton’s Three Laws helpfully guide one to understanding the nature of interaction of forces and bodies and the motion which results. Later, Euler’s laws of motion applied a framework for rigid and continuum bodies, and since then “action at a distance” has been replaced be Einstein’s Theory of General Relativity.

After I wrote the bit about one part of the index impact, FTSE unhelpfully changed their mind on timing based on an unhelpful change by the LSE. On Monday, the TSE exercised its discretion – clearly stated in the TOPIX Index Guidebook on p4 (2nd sentence of the opening paragraph) as something it may do – to go its own course in how it will adapt index changes to the first couple of increases in share count due to mergers with foreign corporations.

If an event not specified in this document occurs, or if TSE determines that it is difficult to use the methods described in this document, TSE may use an alternative method of index calculation as it deems appropriate.

So with the changes at FTSE and now TOPIX and JPX Nikkei 400, we no longer have quite the same clarity of forces on the bodies, and therefore less clarity on the resulting motion. The LSE’s announced market change appears to have led the MSCI to change its deletion date for Shire as well, now also (along with FTSE) deleting Shire at the close of the 21st (announcement early this AM Asia time).

Investors have prepared based on the idea that there was a reasonably tight relationship – helped because it was a lot of force applied in a short period (selling and buying all done in a short period in January) between the particles. Now that relationship is being stretched. A lot. 

The problem resembles that which Einstein famously pooh-poohed as “Spooky Action At a Distance”. Schrödinger called this entanglement – and it turns out to be one of the weirder branches of quantum mechanics – a field broken wide open by Bell’s Theorem a decade after Einstein shuffled off this mortal coil* – and about which John Wheeler famously said, “If you are not completely confused by quantum mechanics, you do not understand it.”

I cheerfully say quantum mechanics completely baffles me. 

I less cheerfully say this whole episode with Takeda and index providers has baffled me too.

But it is important to note that the timing and implications are vastly different than expected just two trading days ago. And the difference is worth thinking about. When the FTSE/MSCI net sell of risk was just 3 days apart, there was a clear connection across that three day distance. Now, the 6-10 week spread of time between the FTSE/MSCI events, the weird two weeks of SETSqx illiquid purgatory just as everyone is full up of risk, then the walk through the Valley of the Shadow of Flowback before we get the first really good net index inclusion to cover the Shire risk people have been dumping for months means that the certainty of understanding the movement of the particle on the other side is substantially lower.

If it all works out well, it might just be Spooky Action At a Distance.

2. Discovery Management Will Likely Soon Be Helping Narrow the Share Class Spread

As share class trades go, Discovery has presented several opportunities over the years to take advantage of index changes, corporate events, and a management that has aggressively repurchased nonvoting DISCK shares versus voting DISCA shares.

3. Satellite Companies Securing Agreements to Sell C-Band Spectrum

Satellite companies attempting to convince the Federal Communications Commission to allow them to sell C-band spectrum they license from the U.S. have begun talks to secure customers, sources told CTFN.

4. Nio Surged 31% in November; Will Momentum Continue Through 2019?

• NIO Inc (NIO US) surged 30.7% in November after reporting steady growth in production and following certain notable investors such as Baillie Gifford & Co (largest investor in Tesla Motors (TSLA US) after Elon Musk) acquiring a stake in the company creating a bullish view on the company.
• The EV start-up delivered 3,089 vehicles in November, registering a more than 96% increase from October, indicating a smooth flow in its production line of ES8. The latter was something its rival, Tesla, took long to establish. The company has reached a total production of more than 10,000 units thus far.
• On the 15^th of December which is the company’s ‘Nio Day’, Nio hopes to launch its ES6, a 5-seater, two-row, high-performance premium electric SUV that will have a longer range and at a lower price than its three-row seven-passenger ES8. Production and delivery of ES6 are expected to begin in 2019.
• Q3 FY2018 results although slightly below the company’s expectations was an improvement compared to the previous quarter and acted as a tailwind in increasing investor confidence in the company. Sales increased to USD214m in Q3 from USD 46 in Q2. Though the company has not yet generated any profits, operating losses as a % of revenues have declined to -191.2% in Q3 cf.-4,077% in Q2.
• For Q4 FY2019E the company expects to deliver 6,700 to 7,000 vehicles more than double the total deliveries during Q3, forecasting revenue between USD 418.5-436 m, at 95-100% increase from Q3. The company has not guided on OP.
• Although the company is still fighting for profits, which seems to be normal for a start-up, it should be noted that the company has a quite steady cash reserve to fund its operation and ramp up production of its to-be-released ES6 model. In our opinion, if the launch of ES6 is as successful as ES8 and the company avoids production delays like Tesla, then it may break even or even make profits within a shorter time period than which Tesla took (almost 8 years). That said, Nio’s stock is likely to witness further surges through 2019 following its recovery since November.

5. Start Your Engines: SoftBank Corp (9434 JP) Is Off to the Races

The price has been set. The book building is done. Like watching a sleek race car aligned on the starting grid, the world eagerly awaits the start of trading for Softbank Corp (9434 JP) on Wednesday, 19 December. 

We are also eager to see the stock go live. It’s not only nostalgia for the stock code “9434” to be brought back into the race, but it will be helpful to be able to compare the stock and to gain better insights into the domestic Japanese telecom industry.

That said, the past few weeks have been full of drama, and some of the drama has longer-term implications. In this insight, we take a more detailed look at some of the challenges facing SoftBank Corp. and some of the concerns that may give investors pause, or at least some things to keep in mind, over the months ahead.

Specifically, we look at issues related to:

• Network outages
• Huawei network equipment
• Corporate governance
• Regulatory headwinds
• Competitive threats