Growth Ideas

In this briefing:

1. NIO’s (蔚来) Guidance Makes Selling upon Lock-Expiry More Compelling
2. Ctrip (CTRP): Overcame Two Difficulties in Q4, But Market Over-Reacted to “Global No. 1”
3. Polycab IPO: Largest Cables Player, Asset-Heavy Low ROE Model = Vulnerable to Govt Capex Slowdown

1. NIO’s (蔚来) Guidance Makes Selling upon Lock-Expiry More Compelling

NIO Inc (NIO US) fell 17% in its after-hour trading session post announcement of its Q4 results.  The company turned a gross profit in Q4 while the number of cars delivered in the full year 2018 was 11,348 has beaten their own 10,000 cars target. The company is currently trading 62% above its IPO price.

However, the worrying part lies in its guidance which could mean that pre-IPO investors have more compelling reasons to lock-in some profits upon lock-up expiry.

2. Ctrip (CTRP): Overcame Two Difficulties in Q4, But Market Over-Reacted to “Global No. 1”

* The recovery in 4Q2018 shows that CTRP has already survived the new law and the new competitor in 2018.
* We believe EPS will grow 12% in 2019.
* However, we believe the market has already over-reacted to the news last November that CTRP became the largest online travel agency.
* We set a target price of USD23.80, which is 32% below the market price.

3. Polycab IPO: Largest Cables Player, Asset-Heavy Low ROE Model = Vulnerable to Govt Capex Slowdown

• Polycab India (POLY IN) is the largest wires and cables manufacturer in India almost 2x the size of its next largest competitor. It is also present in electrical consumer durables and EPC projects.
• Company’s 14% revenue Cagr over FY14-18 was aided by government’s increased capex in rural and railway electrification.
• Despite large B2B exposure, company managed to defend gross margins over FY15-18 by passing on input cost variations to its customers. Operating margins have also been steady on the back of improving margins in the key wires and cables segment.
• High B2B nature of business results in 90+days of working capital cycle. Business is capex heavy (annual run rate Rs2.4bn over FY15-18). Company has the lowest asset turnover among its listed peers. It also generates the lowest amount of free cashflows among its peers.
• Investing most of the operating cash in the business would have been great if company was generating healthy ROE. But company’s ROE is in the sub 15% range and it would fall further after the planned Rs5bn primary issue.
• The asset-heavy and low ROE model makes Polycab more dependent on earnings growth to drive stock performance. This, in turn, makes it more vulnerable to any slowdown in government capex in electrification compared to peers.

In this briefing:

1. Huya Placement: Best Performing Live Streaming Stock but Beware Douyu Is Catching Up
2. MTG Co Ltd; Problems Stretch Far Beyond the New Chinese E-Commerce Legislation
3. Ruhnn (如涵) Trading Update – Worst First-Day Performance Out of Recent US ADR Listings
4. Naspers: Addressing the Discount (Again). New Moves to Realize Value Are Having an Impact
5. WICE: Expansion Phase Still Go On

1. Huya Placement: Best Performing Live Streaming Stock but Beware Douyu Is Catching Up

Huya, a leading live streaming player in China, announced share placement of USD 550 million after market close on April 3rd. In this insight, we will look at recent developments of Huya and score the deal in our ECM Framework.

2. MTG Co Ltd; Problems Stretch Far Beyond the New Chinese E-Commerce Legislation

• MTG revised their original targets for FY2019 and issued revised targets which were significantly below the original targets
• The share price has already been on the decline even prior to the notice of revised targets
• Declining inbound sales of its flagship brand ReFa is the main culprit for guidance reversion
• The impact of Chinese e-commerce legislation was significant due to limited exposure to pure inbound sales
• Parallel buyers, those who buy products to resell them in China: dominates MTG’s inbound sales
• MTG’s price difference in Japan duty-free purchases vs official sales channels in China
• The Troubles of MTG, Causing Panic Among Consensus
• Insider ownership and lack of free float keeping the share price above its fair value
• Price to book approaching 1.0x; limits the immediate downside risk

3. Ruhnn (如涵) Trading Update – Worst First-Day Performance Out of Recent US ADR Listings

Ruhnn Holding Ltd (RUHN US) raised US$125m at US$12.50 per share, the mid-point of the price range. We have previously analyzed the IPO in:

• Ruhnn (如涵) IPO Review – Expensive Influence
• Ruhnn (如涵) Pre-IPO Review- Significant Concentration Risk

In this insight, we will update on the deal dynamics, implied valuation, and include a valuation sensitivity table.

4. Naspers: Addressing the Discount (Again). New Moves to Realize Value Are Having an Impact

Naspers (NPN SJ) recently announced another attempt to reduce the holdco discount which has remained stubbornly high despite previous attempts by management to reduce it. Since the announcement there has been movement, so perhaps this time it really is different!

So what is being done? Naspers will spin off its international internet assets, which account for >99% of its value, into a newco. They will then list 25% of newco on the Euronext in Amsterdam by issuing these shares to Naspers’ shareholders. The intention is to create a vehicle which can attract increased foreign and tech investors without the complication of a South African listing. The company believes this has been a key factor behind the wide holdco discount. The move also reduces Naspers weighting in South African indices which is another contributing factor.

Alastair Jones sees the announcement as a positive, although there are still issues with the main listing being in South Africa. He still believes a buyback would be the most effective way to reduce the discount, but Naspers is also keen to keep investing. 

5. WICE: Expansion Phase Still Go On

We maintain BUY rating for WICE with a new target price of Bt5.20 (previous target price: 7.50), based on 29xPE’19E, its one year average trading range or 20% discount to Thai transportation sector.

The story:

• Cross broader business plays the key growth driver in 2019
• We revised down earnings in 2019-21E due to lower-than-expected margins

Risks:

• Stronger Baht vs major foreign currencies such as US dollar causes lower income in Baht terms as the main reporting currency is Baht
• Higher than expected in fluctuation in freight rates
• Intensity of freight forwarding businesses in both domestic and overseas

In this briefing:

1. MTG Co Ltd; Problems Stretch Far Beyond the New Chinese E-Commerce Legislation
2. Ruhnn (如涵) Trading Update – Worst First-Day Performance Out of Recent US ADR Listings
3. Naspers: Addressing the Discount (Again). New Moves to Realize Value Are Having an Impact
4. WICE: Expansion Phase Still Go On
5. Sony Corp: Key Takeaways from Our Recent Meeting with IR Team

1. MTG Co Ltd; Problems Stretch Far Beyond the New Chinese E-Commerce Legislation

• MTG revised their original targets for FY2019 and issued revised targets which were significantly below the original targets
• The share price has already been on the decline even prior to the notice of revised targets
• Declining inbound sales of its flagship brand ReFa is the main culprit for guidance reversion
• The impact of Chinese e-commerce legislation was significant due to limited exposure to pure inbound sales
• Parallel buyers, those who buy products to resell them in China: dominates MTG’s inbound sales
• MTG’s price difference in Japan duty-free purchases vs official sales channels in China
• The Troubles of MTG, Causing Panic Among Consensus
• Insider ownership and lack of free float keeping the share price above its fair value
• Price to book approaching 1.0x; limits the immediate downside risk

2. Ruhnn (如涵) Trading Update – Worst First-Day Performance Out of Recent US ADR Listings

Ruhnn Holding Ltd (RUHN US) raised US$125m at US$12.50 per share, the mid-point of the price range. We have previously analyzed the IPO in:

• Ruhnn (如涵) IPO Review – Expensive Influence
• Ruhnn (如涵) Pre-IPO Review- Significant Concentration Risk

In this insight, we will update on the deal dynamics, implied valuation, and include a valuation sensitivity table.

3. Naspers: Addressing the Discount (Again). New Moves to Realize Value Are Having an Impact

Naspers (NPN SJ) recently announced another attempt to reduce the holdco discount which has remained stubbornly high despite previous attempts by management to reduce it. Since the announcement there has been movement, so perhaps this time it really is different!

So what is being done? Naspers will spin off its international internet assets, which account for >99% of its value, into a newco. They will then list 25% of newco on the Euronext in Amsterdam by issuing these shares to Naspers’ shareholders. The intention is to create a vehicle which can attract increased foreign and tech investors without the complication of a South African listing. The company believes this has been a key factor behind the wide holdco discount. The move also reduces Naspers weighting in South African indices which is another contributing factor.

Alastair Jones sees the announcement as a positive, although there are still issues with the main listing being in South Africa. He still believes a buyback would be the most effective way to reduce the discount, but Naspers is also keen to keep investing. 

4. WICE: Expansion Phase Still Go On

We maintain BUY rating for WICE with a new target price of Bt5.20 (previous target price: 7.50), based on 29xPE’19E, its one year average trading range or 20% discount to Thai transportation sector.

The story:

• Cross broader business plays the key growth driver in 2019
• We revised down earnings in 2019-21E due to lower-than-expected margins

Risks:

• Stronger Baht vs major foreign currencies such as US dollar causes lower income in Baht terms as the main reporting currency is Baht
• Higher than expected in fluctuation in freight rates
• Intensity of freight forwarding businesses in both domestic and overseas

5. Sony Corp: Key Takeaways from Our Recent Meeting with IR Team

This article is a round up of the key takeaways from our recent meeting with Sony’s IR team. Our main focus was on the PlayStation and subsequent hardware and software developments, the company’s mobile phones business unit, the pictures unit as well as the semiconductor business.

• In the gaming segment, Sony doesn’t see Stadia as a threat since Sony mainly caters to the core gaming segment. Sony does not expect cloud gaming to offer the same quality that consoles offer to core gamers anytime soon. For the time being, Stadia will most likely appeal to casual gamers.
• In the pictures segment, Sony is developing a Spider-Verse sequel. A definite release date is yet to be confirmed, however, looking at the first movie’s success, we can expect a similar result for the sequel upon release.
• The company also plans to hold onto its mobile communications segment even though it is expected to make losses in FY03/19 as well. For Sony, this segment is crucial in developing 5G technologies.
• In the semiconductors segment, Sony expects a demand hike from the number of cameras used per phone. This is in spite of the mobile phone market itself slowing down. Sony expects to increase the ASPs of these sensors going forward as well.

In this briefing:

1. Ctrip (CTRP): Overcame Two Difficulties in Q4, But Market Over-Reacted to “Global No. 1”
2. Polycab IPO: Largest Cables Player, Asset-Heavy Low ROE Model = Vulnerable to Govt Capex Slowdown

1. Ctrip (CTRP): Overcame Two Difficulties in Q4, But Market Over-Reacted to “Global No. 1”

* The recovery in 4Q2018 shows that CTRP has already survived the new law and the new competitor in 2018.
* We believe EPS will grow 12% in 2019.
* However, we believe the market has already over-reacted to the news last November that CTRP became the largest online travel agency.
* We set a target price of USD23.80, which is 32% below the market price.

2. Polycab IPO: Largest Cables Player, Asset-Heavy Low ROE Model = Vulnerable to Govt Capex Slowdown

• Polycab India (POLY IN) is the largest wires and cables manufacturer in India almost 2x the size of its next largest competitor. It is also present in electrical consumer durables and EPC projects.
• Company’s 14% revenue Cagr over FY14-18 was aided by government’s increased capex in rural and railway electrification.
• Despite large B2B exposure, company managed to defend gross margins over FY15-18 by passing on input cost variations to its customers. Operating margins have also been steady on the back of improving margins in the key wires and cables segment.
• High B2B nature of business results in 90+days of working capital cycle. Business is capex heavy (annual run rate Rs2.4bn over FY15-18). Company has the lowest asset turnover among its listed peers. It also generates the lowest amount of free cashflows among its peers.
• Investing most of the operating cash in the business would have been great if company was generating healthy ROE. But company’s ROE is in the sub 15% range and it would fall further after the planned Rs5bn primary issue.
• The asset-heavy and low ROE model makes Polycab more dependent on earnings growth to drive stock performance. This, in turn, makes it more vulnerable to any slowdown in government capex in electrification compared to peers.

In this briefing:

1. Alibaba (BABA): Weakest Business Line Transfers Risk to Suppliers and Cuts Headcount, 38% Upside
2. Company Visits: The Best of March 2019
3. Ronshine (融信集团) Placement – Back for a Equity Raise
4. HK Connect Discovery – March Snapshot (WH Group, Air China)
5. Dongzheng Auto Finance (东正汽车金融) Trading Update – Could Be Worth Setting up a Trade

1. Alibaba (BABA): Weakest Business Line Transfers Risk to Suppliers and Cuts Headcount, 38% Upside

* Youku, the online TV subsidiary of BABA, is transforming its risk of loss to content providers.

* Youku is dismissing employees.

* We believe both of Youku’s decisions are positive for cost control and the operating margin will recover in FY2020.

* The P/E band suggests a price target HKD250, which is 38% upside above the market price.

2. Company Visits: The Best of March 2019

We selectively visited a dozen companies in March and were most impressed with three of them (two of which we happily own):

• SISB, Thailand’s only listed education stock, whose market cap has increased more than 30% since its IPO. The future potential growth they are currently working on in Cambodia and China  will show up here and spruce the company’s already strong growth. Working in a favorable environment (Thailand’s affluent class is growing) also helps.
• MINT, the country’s hotel chain giant and 20th largest chain in the world, sees great growth potential in Europe, where things are slowly turning around after they made two big acquisitions (NH Hotels and Tivoli). Synergies are also materializing with co-marketing and re-branding efforts.
• After You, arguably the dessert chain with the highest margin in Thailand. No longer a newbie IPO stock, these guys boast collaboration with global giant Starbucks and branching out into new channels such as After You Durian. 

3. Ronshine (融信集团) Placement – Back for a Equity Raise

Ronshine China Holdings (3301 HK) is looking to raise about US$122m in a top-up placement.

The deal scores marginally positive on our framework owing to its decent track record, and price and earnings momentum.

Its past deals have done well in the long run. Even though it did not perform well over the one-month period, its first week returns have tend to hold up above the deal price.

4. HK Connect Discovery – March Snapshot (WH Group, Air China)

This is a monthly version of our HK Connect Weekly note, in which I highlight Hong Kong-listed companies leading the southbound flow weekly. Over the past month, we have seen the flow turned from outflow in February to inflow in March. Chinese investors were also buying Consumer Staples and Consumer Discretionary stocks.

Our March Coverage of Hong Kong Connect southbound flow

• HK Connect Discovery Weekly: PICC, Xinyi Solar (2019-03-08)
• HK Connect Discovery Weekly: Eligibility Adjustment (2019-03-15)
• HK Connect Discovery Weekly: Mainland Investors Buying WH Group (2019-03-22)

5. Dongzheng Auto Finance (东正汽车金融) Trading Update – Could Be Worth Setting up a Trade

Dongzheng Automotive Finance (2718 HK) raised US$208m at a fixed price of HK$3.06 per share. We have covered the IPO extensively in:

• Dongzheng Auto Finance (东正汽车金融) Pre-IPO Review – Dependent on Dealership Network for Growth
• Dongzheng Auto Finance (东正汽车金融) IPO Review – Better off Buying the Parent
• Dongzheng Auto Finance (东正汽车金融) IPO Review – Relaunched at Lower Price

In this insight, we will update on the deal dynamics, implied valuation, and include a valuation sensitivity table.

In this briefing:

1. Polycab IPO: Largest Cables Player, Asset-Heavy Low ROE Model = Vulnerable to Govt Capex Slowdown
2. Nio (蔚来) Lock-Up Expiry – Scattered Pre-IPO Investors to Be the Sellers
3. Rakuten: Lyft IPO Provides Timely Support for Mobile Deployment

1. Polycab IPO: Largest Cables Player, Asset-Heavy Low ROE Model = Vulnerable to Govt Capex Slowdown

• Polycab India (POLY IN) is the largest wires and cables manufacturer in India almost 2x the size of its next largest competitor. It is also present in electrical consumer durables and EPC projects.
• Company’s 14% revenue Cagr over FY14-18 was aided by government’s increased capex in rural and railway electrification.
• Despite large B2B exposure, company managed to defend gross margins over FY15-18 by passing on input cost variations to its customers. Operating margins have also been steady on the back of improving margins in the key wires and cables segment.
• High B2B nature of business results in 90+days of working capital cycle. Business is capex heavy (annual run rate Rs2.4bn over FY15-18). Company has the lowest asset turnover among its listed peers. It also generates the lowest amount of free cashflows among its peers.
• Investing most of the operating cash in the business would have been great if company was generating healthy ROE. But company’s ROE is in the sub 15% range and it would fall further after the planned Rs5bn primary issue.
• The asset-heavy and low ROE model makes Polycab more dependent on earnings growth to drive stock performance. This, in turn, makes it more vulnerable to any slowdown in government capex in electrification compared to peers.

2. Nio (蔚来) Lock-Up Expiry – Scattered Pre-IPO Investors to Be the Sellers

NIO Inc (NIO US)‘s lock-up will expire next week on the 11th of March. Shareholding breakdown suggests that there will be overhang upon lock-up expiry due to the large number of scattered pre-IPO shareholders. 

In this insight, we will look at the principal and pre-IPO investors and analyze who and how many shares would likely be sold upon lock-up expiry.

3. Rakuten: Lyft IPO Provides Timely Support for Mobile Deployment

The publication of Lyft’s IPO prospectus is a clear positive for Rakuten Inc (4755 JP) . As a pure investment, Rakuten’s return on its Lyft investments could be 273-366% or ¥101-136 per share based on the $20-25bn valuation range reported by the press. There has been a lot of focus on the investment gains Rakuten should accrue but the real upside is a timely boost to liquidity plus accounting cover as mobile investment accelerates.  Whether one believes Rakuten can succeed in mobile or not, it has the capital and paper profits to support a splashy introduction and spending is already accelerating.

In this briefing:

1. Polycab IPO: Largest Cables Player, Asset-Heavy Low ROE Model = Vulnerable to Govt Capex Slowdown
2. Nio (蔚来) Lock-Up Expiry – Scattered Pre-IPO Investors to Be the Sellers
3. Rakuten: Lyft IPO Provides Timely Support for Mobile Deployment
4. LYFT Pre-IPO – Drivers and Shared Rides Hold the Key But the Numbers Are Missing

1. Polycab IPO: Largest Cables Player, Asset-Heavy Low ROE Model = Vulnerable to Govt Capex Slowdown

• Polycab India (POLY IN) is the largest wires and cables manufacturer in India almost 2x the size of its next largest competitor. It is also present in electrical consumer durables and EPC projects.
• Company’s 14% revenue Cagr over FY14-18 was aided by government’s increased capex in rural and railway electrification.
• Despite large B2B exposure, company managed to defend gross margins over FY15-18 by passing on input cost variations to its customers. Operating margins have also been steady on the back of improving margins in the key wires and cables segment.
• High B2B nature of business results in 90+days of working capital cycle. Business is capex heavy (annual run rate Rs2.4bn over FY15-18). Company has the lowest asset turnover among its listed peers. It also generates the lowest amount of free cashflows among its peers.
• Investing most of the operating cash in the business would have been great if company was generating healthy ROE. But company’s ROE is in the sub 15% range and it would fall further after the planned Rs5bn primary issue.
• The asset-heavy and low ROE model makes Polycab more dependent on earnings growth to drive stock performance. This, in turn, makes it more vulnerable to any slowdown in government capex in electrification compared to peers.

2. Nio (蔚来) Lock-Up Expiry – Scattered Pre-IPO Investors to Be the Sellers

NIO Inc (NIO US)‘s lock-up will expire next week on the 11th of March. Shareholding breakdown suggests that there will be overhang upon lock-up expiry due to the large number of scattered pre-IPO shareholders. 

In this insight, we will look at the principal and pre-IPO investors and analyze who and how many shares would likely be sold upon lock-up expiry.

3. Rakuten: Lyft IPO Provides Timely Support for Mobile Deployment

The publication of Lyft’s IPO prospectus is a clear positive for Rakuten Inc (4755 JP) . As a pure investment, Rakuten’s return on its Lyft investments could be 273-366% or ¥101-136 per share based on the $20-25bn valuation range reported by the press. There has been a lot of focus on the investment gains Rakuten should accrue but the real upside is a timely boost to liquidity plus accounting cover as mobile investment accelerates.  Whether one believes Rakuten can succeed in mobile or not, it has the capital and paper profits to support a splashy introduction and spending is already accelerating.

4. LYFT Pre-IPO – Drivers and Shared Rides Hold the Key But the Numbers Are Missing

Lyft Inc (0812823D US) plans to list in the US at a valuation of US$20-25bn, as per media reports. 

Overall growth numbers have been great but some of the numbers are missing like the quarterly driver numbers, the number of shared riders versus single riders, organic growth in major cities, and progress of Canada operations, to name a few.

In my view, without the quarterly active driver numbers and the full picture of the extent of shared rides, one can’t develop an accurate picture of the business.

In this briefing:

1. Ruhnn (如涵) Trading Update – Worst First-Day Performance Out of Recent US ADR Listings
2. Naspers: Addressing the Discount (Again). New Moves to Realize Value Are Having an Impact
3. WICE: Expansion Phase Still Go On
4. Sony Corp: Key Takeaways from Our Recent Meeting with IR Team
5. Alibaba (BABA): Weakest Business Line Transfers Risk to Suppliers and Cuts Headcount, 38% Upside

1. Ruhnn (如涵) Trading Update – Worst First-Day Performance Out of Recent US ADR Listings

Ruhnn Holding Ltd (RUHN US) raised US$125m at US$12.50 per share, the mid-point of the price range. We have previously analyzed the IPO in:

• Ruhnn (如涵) IPO Review – Expensive Influence
• Ruhnn (如涵) Pre-IPO Review- Significant Concentration Risk

In this insight, we will update on the deal dynamics, implied valuation, and include a valuation sensitivity table.

2. Naspers: Addressing the Discount (Again). New Moves to Realize Value Are Having an Impact

Naspers (NPN SJ) recently announced another attempt to reduce the holdco discount which has remained stubbornly high despite previous attempts by management to reduce it. Since the announcement there has been movement, so perhaps this time it really is different!

So what is being done? Naspers will spin off its international internet assets, which account for >99% of its value, into a newco. They will then list 25% of newco on the Euronext in Amsterdam by issuing these shares to Naspers’ shareholders. The intention is to create a vehicle which can attract increased foreign and tech investors without the complication of a South African listing. The company believes this has been a key factor behind the wide holdco discount. The move also reduces Naspers weighting in South African indices which is another contributing factor.

Alastair Jones sees the announcement as a positive, although there are still issues with the main listing being in South Africa. He still believes a buyback would be the most effective way to reduce the discount, but Naspers is also keen to keep investing. 

3. WICE: Expansion Phase Still Go On

We maintain BUY rating for WICE with a new target price of Bt5.20 (previous target price: 7.50), based on 29xPE’19E, its one year average trading range or 20% discount to Thai transportation sector.

The story:

• Cross broader business plays the key growth driver in 2019
• We revised down earnings in 2019-21E due to lower-than-expected margins

Risks:

• Stronger Baht vs major foreign currencies such as US dollar causes lower income in Baht terms as the main reporting currency is Baht
• Higher than expected in fluctuation in freight rates
• Intensity of freight forwarding businesses in both domestic and overseas

4. Sony Corp: Key Takeaways from Our Recent Meeting with IR Team

This article is a round up of the key takeaways from our recent meeting with Sony’s IR team. Our main focus was on the PlayStation and subsequent hardware and software developments, the company’s mobile phones business unit, the pictures unit as well as the semiconductor business.

• In the gaming segment, Sony doesn’t see Stadia as a threat since Sony mainly caters to the core gaming segment. Sony does not expect cloud gaming to offer the same quality that consoles offer to core gamers anytime soon. For the time being, Stadia will most likely appeal to casual gamers.
• In the pictures segment, Sony is developing a Spider-Verse sequel. A definite release date is yet to be confirmed, however, looking at the first movie’s success, we can expect a similar result for the sequel upon release.
• The company also plans to hold onto its mobile communications segment even though it is expected to make losses in FY03/19 as well. For Sony, this segment is crucial in developing 5G technologies.
• In the semiconductors segment, Sony expects a demand hike from the number of cameras used per phone. This is in spite of the mobile phone market itself slowing down. Sony expects to increase the ASPs of these sensors going forward as well.

5. Alibaba (BABA): Weakest Business Line Transfers Risk to Suppliers and Cuts Headcount, 38% Upside

* Youku, the online TV subsidiary of BABA, is transforming its risk of loss to content providers.

* Youku is dismissing employees.

* We believe both of Youku’s decisions are positive for cost control and the operating margin will recover in FY2020.

* The P/E band suggests a price target HKD250, which is 38% upside above the market price.

In this briefing:

1. Sony Corp: Key Takeaways from Our Recent Meeting with IR Team
2. Alibaba (BABA): Weakest Business Line Transfers Risk to Suppliers and Cuts Headcount, 38% Upside
3. Company Visits: The Best of March 2019
4. Ronshine (融信集团) Placement – Back for a Equity Raise
5. HK Connect Discovery – March Snapshot (WH Group, Air China)

1. Sony Corp: Key Takeaways from Our Recent Meeting with IR Team

This article is a round up of the key takeaways from our recent meeting with Sony’s IR team. Our main focus was on the PlayStation and subsequent hardware and software developments, the company’s mobile phones business unit, the pictures unit as well as the semiconductor business.

• In the gaming segment, Sony doesn’t see Stadia as a threat since Sony mainly caters to the core gaming segment. Sony does not expect cloud gaming to offer the same quality that consoles offer to core gamers anytime soon. For the time being, Stadia will most likely appeal to casual gamers.
• In the pictures segment, Sony is developing a Spider-Verse sequel. A definite release date is yet to be confirmed, however, looking at the first movie’s success, we can expect a similar result for the sequel upon release.
• The company also plans to hold onto its mobile communications segment even though it is expected to make losses in FY03/19 as well. For Sony, this segment is crucial in developing 5G technologies.
• In the semiconductors segment, Sony expects a demand hike from the number of cameras used per phone. This is in spite of the mobile phone market itself slowing down. Sony expects to increase the ASPs of these sensors going forward as well.

2. Alibaba (BABA): Weakest Business Line Transfers Risk to Suppliers and Cuts Headcount, 38% Upside

* Youku, the online TV subsidiary of BABA, is transforming its risk of loss to content providers.

* Youku is dismissing employees.

* We believe both of Youku’s decisions are positive for cost control and the operating margin will recover in FY2020.

* The P/E band suggests a price target HKD250, which is 38% upside above the market price.

3. Company Visits: The Best of March 2019

We selectively visited a dozen companies in March and were most impressed with three of them (two of which we happily own):

• SISB, Thailand’s only listed education stock, whose market cap has increased more than 30% since its IPO. The future potential growth they are currently working on in Cambodia and China  will show up here and spruce the company’s already strong growth. Working in a favorable environment (Thailand’s affluent class is growing) also helps.
• MINT, the country’s hotel chain giant and 20th largest chain in the world, sees great growth potential in Europe, where things are slowly turning around after they made two big acquisitions (NH Hotels and Tivoli). Synergies are also materializing with co-marketing and re-branding efforts.
• After You, arguably the dessert chain with the highest margin in Thailand. No longer a newbie IPO stock, these guys boast collaboration with global giant Starbucks and branching out into new channels such as After You Durian. 

4. Ronshine (融信集团) Placement – Back for a Equity Raise

Ronshine China Holdings (3301 HK) is looking to raise about US$122m in a top-up placement.

The deal scores marginally positive on our framework owing to its decent track record, and price and earnings momentum.

Its past deals have done well in the long run. Even though it did not perform well over the one-month period, its first week returns have tend to hold up above the deal price.

5. HK Connect Discovery – March Snapshot (WH Group, Air China)

This is a monthly version of our HK Connect Weekly note, in which I highlight Hong Kong-listed companies leading the southbound flow weekly. Over the past month, we have seen the flow turned from outflow in February to inflow in March. Chinese investors were also buying Consumer Staples and Consumer Discretionary stocks.

Our March Coverage of Hong Kong Connect southbound flow

• HK Connect Discovery Weekly: PICC, Xinyi Solar (2019-03-08)
• HK Connect Discovery Weekly: Eligibility Adjustment (2019-03-15)
• HK Connect Discovery Weekly: Mainland Investors Buying WH Group (2019-03-22)

In this briefing:

1. LYFT Pre-IPO – Drivers and Shared Rides Hold the Key But the Numbers Are Missing
2. HSBC – Meteoric Rise in Credit Costs
3. Quick Read of 2019 Government Work Report – Bulls and Bears

1. LYFT Pre-IPO – Drivers and Shared Rides Hold the Key But the Numbers Are Missing

Lyft Inc (0812823D US) plans to list in the US at a valuation of US$20-25bn, as per media reports. 

Overall growth numbers have been great but some of the numbers are missing like the quarterly driver numbers, the number of shared riders versus single riders, organic growth in major cities, and progress of Canada operations, to name a few.

In my view, without the quarterly active driver numbers and the full picture of the extent of shared rides, one can’t develop an accurate picture of the business.

2. HSBC – Meteoric Rise in Credit Costs

The five-fold rise in HSBC Holdings (5 HK)’s latest quarterly credit costs compared with the first quarter of the year should not surprise our readers.  It was always the case that the bank’s provision expenses were too low, not only in the first quarter of the year, but even through the third quarter. This is where following of lower headline bad loan figures wholly misleads. What really matters now is where credit costs will move in coming quarters and years. We offer long-perspective on this suggesting sizeable costs in 2019, where HSBC is now indicating “normalisation of credit costs going forward.” We note further observations from the bank’s granular disclosures that point toward worsening credit metrics, further supporting the notion of ‘normalisation’ or what we can simply call far higher credit costs. In any case, we do not believe most are expecting a wholesale rise in provision costs at HSBC, from current levels. 

3. Quick Read of 2019 Government Work Report – Bulls and Bears

The Premier Li Keqiang had just conducted an annual Government Work Report in the two session conference (两会) in Beijing this morning. In this insight, we will briefly walk through key points of his report and identify bulls and bears in the market.

While the theme of cost reduction benefits manufacturing companies, it will negative for some infrastructure service providers, such as telecom companies.

The full text in Chinese can be accessed here.