ECM

In this briefing:

1. Woori Financials Placement – One Overhang Gone in a Well Flagged Deal, Another Remains
2. Up Fintech (Tiger Brokers) IPO Trading Update – First Day Volume Was Higher than Futu, Close to QTT
3. Wuxi Biologics Placement – Past Deals Have Done Well but Progressive Returns Are Getting Lower
4. Ruhnn (如涵) Pre-IPO Review- Significant Concentration Risk
5. Frontage Holding (方达控股) IPO: Updates from 2018 Numbers

1. Woori Financials Placement – One Overhang Gone in a Well Flagged Deal, Another Remains

Woori Bank (000030 KS) plans to raise US$233m by selling its entire stake in Woori Financial Group (316140 KS). 

The selldown has been well flagged as the company has been in the midst of converting to a Holdco, as a part of which it was given six months to sell this stake. The deal scores a marginal positive score on our framework owing to its earnings momentum and track record.

On the flip side, the government too has flagged its plans to sell its 18%+ stake, as soon as possible.

2. Up Fintech (Tiger Brokers) IPO Trading Update – First Day Volume Was Higher than Futu, Close to QTT

Up Fintech (TIGR US)‘s IPO was priced at US$8/share, above its range of US$5-7/ADS raising at total of US$111m, including the proceeds from the private placement with Interactive Brokers Group, Inc (IBKR US). 

In my earlier insights, I looked at the company’s background,  past financial performance, scored the deal on our IPO framework and compared it to Futu Holdings Ltd (FHL US): 

• Futu Holdings IPO Quick Note – Comparison with Tiger Brokers – Same Market, Different Economics
• Up Fintech (Tiger Brokers) Pre-IPO Quick Note – Much Too Reliant on IBKR
• Up Fintech (Tiger Brokers) IPO Quick Take – It’s Not like Futu, Won’t Perform like It Either

In this insight, I will re-visit some of the deal dynamics, comment on share price drivers and provide a table with implied valuations.

3. Wuxi Biologics Placement – Past Deals Have Done Well but Progressive Returns Are Getting Lower

Biologics holdings is looking to raise upto US$517m by selling a 4.2% stake in Wuxi Biologics (Cayman) Inc (2269 HK). This will be fourth placement by the company since it listed less than two years ago. Below is a link to our coverage of the listing and the earlier placement:

• Jun 2017 – US$500m: WuXi Biologics IPO Review – An Opportunity to Get Exposure to Biologics in China
• Dec 2017- US$550m: Wuxi Biologics Placement – Selldown Right when Lockup Expires Suggests Eagerness to Offload
• Mar 2018 – US$600m: Wuxi Biologics Placement – In Time for the Next Lock-Up, Returns Will Probably Not Match Prior Ones
• Jun 2018 – US$500m: Wuxi Biologics Placement – Probably Not a Surprise to Sell Again when Lock-Up Expires

Each of the past placement has been of a similar size and has generally done well. The company recently reported results which were ahead of street estimates. The deal scores a marginal positive score on our framework but there is still a lot more selling left once the 90-day lock-up expires.

4. Ruhnn (如涵) Pre-IPO Review- Significant Concentration Risk

Ruhnn Holding Ltd (RUHN US) is looking to raise about US$200m in its upcoming IPO.

The company is an internet key opinion leader (KOL) incubator in China. Revenue and GMV grew at impressive rates of 63% and 57% YoY in FY2018, respectively.

The idea of being able to leverage on KOLs influence over consumers to understand demand and retain consumers is interesting but Ruhnn has yet to demonstrate that it has a sustainable business model. 

Gross margin has deteriorated and losses widened as a percentage of revenue. Service fee paid to KOLs as a percentage of revenue has increased and showed little improvement in 9M FY2019.  The company depends heavily on the top KOL, Zhang Dayi, to generate revenue, almost half of the company’s GMV and revenue is generated from her.

5. Frontage Holding (方达控股) IPO: Updates from 2018 Numbers

Frontage Holding, a contract research organization subsidiary of A-share listed Hangzhou Tigermed Consulting (300347 CH), re-filed to list on the Hong Kong Stock Exchange recently. We have covered the company’s fundamentals in our previous insight here. In this insight, we will provide an updated analysis based on new data available from the new prospectus, as well as our thoughts on valuation.

In this briefing:

1. Lyft IPO: Valuation Analysis (Prudent Investment or Quasi-Gambling?)
2. Platinum Asset Management Placement –  Co-Founder Selling + Weak Earnings Momentum
3. Sun Car Insurance Agency (盛世大联) IPO: Over Valued Vs P&C Companies
4. Lyft IPO: Key Takeaways from In-Depth Interviews with Drivers
5. Wisetech Global Placement – Past Deal Did Well but Valuations Looks Stretched

1. Lyft IPO: Valuation Analysis (Prudent Investment or Quasi-Gambling?)

Our base case forecast is Case 2 (among three scenarios analysis), which suggests an implied market cap of $21 billion or $75 per share. Given that our intrinsic value of the company does not provide enough upside versus the likely IPO price, we would AVOID this deal. 

Even if the company is able to complete this IPO, raising nearly $2.0-2.5 billion, it is very possible that the company may need to come back to the market in two or three years in a secondary share offering, which would dilute the existing shareholders. This is probably the biggest risk I see with the Lyft IPO right now. 

Our base case financial forecast for Lyft assumes the following:

• Sales growth rate (CAGR from 2018 to 2030) – 26.6%
• Year in which Lyft turns operating profit positive – 2025
• Operating margin in 2030 – 15.0%

2. Platinum Asset Management Placement –  Co-Founder Selling + Weak Earnings Momentum

The co-founder of  Platinum Asset Management (PTM AU), Kerr Neilson, and Judith Neilson are looking to sell 30m shares of the company at a fixed price of A$5.00. 

The deal scores poorly on our framework due to its poor track record, large deal size, weak earnings momentum and relatively expensive valuation. The selldown comes after the company weak 1H FY19 results last month which could put pressure on share price in the near term.

3. Sun Car Insurance Agency (盛世大联) IPO: Over Valued Vs P&C Companies

Sun Car Insurance Agency is a leading automobile insurance agency and B2B2C automobile after-sales service provider in China. The company is listed in the NEEQ board since 2014 and is raising up to USD 167 million to list in Hong Kong. In this insight we cover:

• The company’s two major business lines, the automobile insurance agency and automobile butler services
• The industry backdrop
• The company’s shareholder
• Our thought on valuation

4. Lyft IPO: Key Takeaways from In-Depth Interviews with Drivers

• In-depth interviews with two full-time drivers reveal that Lyft Inc (0812823D US) has disrupted the incumbent Yellow Cab in NY City due to better take-home income economics for drivers.
• Bargaining and pricing power favor LYFT (vs. drivers) as LYFT could provide the volume (sufficient number of rides per day) for drivers.
• LYFT’s path to profitability depends on 1) the further scale-up of network effect 2) diversification of transportation-related business and 3) progress in autonomous cars’ unit cost economics.
• Given its track record as a disruptive force, investors could be willing to pay up (over 5.0x P/S multiple) for LYFT, making the IPO a hot deal.

5. Wisetech Global Placement – Past Deal Did Well but Valuations Looks Stretched

Wisetech Global (WTC AU) plans to raise US$177m/AUD250m in order to shore-up its balancesheet for future acquistiions. 

The company has done exceedingly well since listing and even its past fund raising delivered good returns. However, the deal scores a mixed score on our framework as valuations appear strecthed with the stock trading above analysts target price. Thus, the deal might warrant a large discount.

In this briefing:

1. New Century Hotel (浙江開元酒店) Pre-IPO – Improved Profitability Not Driven by Underlying Operations
2. Ab InBev Asia Pre-IPO – Quick Note – More like CR Beer Rather than Tsingtao

1. New Century Hotel (浙江開元酒店) Pre-IPO – Improved Profitability Not Driven by Underlying Operations

Zhejiang New Century Hotel Management Group (ZHEKAIH HK) (ZNCH) is looking to raise US$220m in its upcoming IPO. 

ZNCH is a hotel operator and manager with presence across China. The company grew its revenue by a modest 5% from 2015 to 2017 but made significant improvements in profitability. Gross profit, EBITDA and PATMI grew by 33%, 61%, and 132% CAGR over the same period.

However, the improved profitability has not been driven by underlying operations. The company seemed a tad too ambitious to be expanding via leasing hotel when it already has a large hotel management pipeline.

In this insight, we will look at the company’s financial and operational performance, the drivers of its strong margin expansion, and include some questions for management.

2. Ab InBev Asia Pre-IPO – Quick Note – More like CR Beer Rather than Tsingtao

Anheuser Busch Inbev Sa/Nv (ABI BB) is looking to list its Asian operations in order to lighten its debt burden. The listing will probably be in Hong Kong and the company could raise around US$5bn at a valuation of around US$70bn.

In my earlier insight, Ab InBev Asia Pre-IPO – A Brief History of the Asia Pacific Operations – Eeking Out Growth in China, I looked at how the Asian operations of ABI have shaped up over the past few years.  

In this insight, I’ll do a quick comparison of the past financial performance of China Resources Beer Holdin (291 HK) and Tsingtao Brewery Co Ltd H (168 HK).

In this briefing:

1. Up Fintech (Tiger Brokers) IPO Trading Update – First Day Volume Was Higher than Futu, Close to QTT
2. Wuxi Biologics Placement – Past Deals Have Done Well but Progressive Returns Are Getting Lower
3. Ruhnn (如涵) Pre-IPO Review- Significant Concentration Risk
4. Frontage Holding (方达控股) IPO: Updates from 2018 Numbers
5. Tencent Music 4Q18 Quick Note – Growth on Track, Margins Could Drag – Stock Price Needs a Breather

1. Up Fintech (Tiger Brokers) IPO Trading Update – First Day Volume Was Higher than Futu, Close to QTT

Up Fintech (TIGR US)‘s IPO was priced at US$8/share, above its range of US$5-7/ADS raising at total of US$111m, including the proceeds from the private placement with Interactive Brokers Group, Inc (IBKR US). 

In my earlier insights, I looked at the company’s background,  past financial performance, scored the deal on our IPO framework and compared it to Futu Holdings Ltd (FHL US): 

• Futu Holdings IPO Quick Note – Comparison with Tiger Brokers – Same Market, Different Economics
• Up Fintech (Tiger Brokers) Pre-IPO Quick Note – Much Too Reliant on IBKR
• Up Fintech (Tiger Brokers) IPO Quick Take – It’s Not like Futu, Won’t Perform like It Either

In this insight, I will re-visit some of the deal dynamics, comment on share price drivers and provide a table with implied valuations.

2. Wuxi Biologics Placement – Past Deals Have Done Well but Progressive Returns Are Getting Lower

Biologics holdings is looking to raise upto US$517m by selling a 4.2% stake in Wuxi Biologics (Cayman) Inc (2269 HK). This will be fourth placement by the company since it listed less than two years ago. Below is a link to our coverage of the listing and the earlier placement:

• Jun 2017 – US$500m: WuXi Biologics IPO Review – An Opportunity to Get Exposure to Biologics in China
• Dec 2017- US$550m: Wuxi Biologics Placement – Selldown Right when Lockup Expires Suggests Eagerness to Offload
• Mar 2018 – US$600m: Wuxi Biologics Placement – In Time for the Next Lock-Up, Returns Will Probably Not Match Prior Ones
• Jun 2018 – US$500m: Wuxi Biologics Placement – Probably Not a Surprise to Sell Again when Lock-Up Expires

Each of the past placement has been of a similar size and has generally done well. The company recently reported results which were ahead of street estimates. The deal scores a marginal positive score on our framework but there is still a lot more selling left once the 90-day lock-up expires.

3. Ruhnn (如涵) Pre-IPO Review- Significant Concentration Risk

Ruhnn Holding Ltd (RUHN US) is looking to raise about US$200m in its upcoming IPO.

The company is an internet key opinion leader (KOL) incubator in China. Revenue and GMV grew at impressive rates of 63% and 57% YoY in FY2018, respectively.

The idea of being able to leverage on KOLs influence over consumers to understand demand and retain consumers is interesting but Ruhnn has yet to demonstrate that it has a sustainable business model. 

Gross margin has deteriorated and losses widened as a percentage of revenue. Service fee paid to KOLs as a percentage of revenue has increased and showed little improvement in 9M FY2019.  The company depends heavily on the top KOL, Zhang Dayi, to generate revenue, almost half of the company’s GMV and revenue is generated from her.

4. Frontage Holding (方达控股) IPO: Updates from 2018 Numbers

Frontage Holding, a contract research organization subsidiary of A-share listed Hangzhou Tigermed Consulting (300347 CH), re-filed to list on the Hong Kong Stock Exchange recently. We have covered the company’s fundamentals in our previous insight here. In this insight, we will provide an updated analysis based on new data available from the new prospectus, as well as our thoughts on valuation.

5. Tencent Music 4Q18 Quick Note – Growth on Track, Margins Could Drag – Stock Price Needs a Breather

Tencent Music Entertainment (TME US) reported its full year results today, post US market close. Revenue growth was slightly ahead of estimates as paying ratio continue to improve for both online music (subscription revenue) and social entertainment (live streaming). Growth for the latter continued to be driven more by ARPU rather than user growth. 

The concerning bit in the results was the decline in gross margins as the company continues to invest in more content. 

My previous insights on TME’s IPO:

• The company’s performance: Tencent Music Pre-IPO Review – The Final Countdown – Growth Doesn’t Seem to Be Slowing Down,
• The working of the apps: Tencent Music Pre-IPO – This Is How We Do It – A Quick Look at How the Apps Work,
• Industry dynamic: Tencent Music Pre-IPO – Industry – Don’t Cry – In 2010 a Little Red Dot Almost Overtook the Dragon, and
• Peer analysis: Tencent Music Pre-IPO – Quick Peer Analysis – If I Was You, I’d Wanna Be Me Too – Bigger and Faster,
• Valuations overview: Tencent Music Pre-IPO – Valuations Estimates – Leaving on a Jet Plane – $30bn Was Quite Stretched.
• First take on the IPO pricing: Tencent Music Pre-IPO Updates – Welcome to the Jungle – Rumoured Asking Valuations More Reasonable
• IPO valuation update: Tencent Music IPO – Don’t Stop Me Now – 9M18 Updates, Outlook and Price Limits
• Some more information on Ultimate Music acquisition: Tencent Music IPO – A Little Less Conversation – A Little More Information on Ultimate Music
• Trading strategies: Tencent Music IPO – Firework – Trading Strategies

In this briefing:

1. Ab InBev Asia Pre-IPO – Quick Note – More like CR Beer Rather than Tsingtao

1. Ab InBev Asia Pre-IPO – Quick Note – More like CR Beer Rather than Tsingtao

Anheuser Busch Inbev Sa/Nv (ABI BB) is looking to list its Asian operations in order to lighten its debt burden. The listing will probably be in Hong Kong and the company could raise around US$5bn at a valuation of around US$70bn.

In my earlier insight, Ab InBev Asia Pre-IPO – A Brief History of the Asia Pacific Operations – Eeking Out Growth in China, I looked at how the Asian operations of ABI have shaped up over the past few years.  

In this insight, I’ll do a quick comparison of the past financial performance of China Resources Beer Holdin (291 HK) and Tsingtao Brewery Co Ltd H (168 HK).

In this briefing:

1. Ab InBev Asia Pre-IPO – Quick Note – More like CR Beer Rather than Tsingtao
2. Hyundai Autoever IPO Preview

1. Ab InBev Asia Pre-IPO – Quick Note – More like CR Beer Rather than Tsingtao

Anheuser Busch Inbev Sa/Nv (ABI BB) is looking to list its Asian operations in order to lighten its debt burden. The listing will probably be in Hong Kong and the company could raise around US$5bn at a valuation of around US$70bn.

In my earlier insight, Ab InBev Asia Pre-IPO – A Brief History of the Asia Pacific Operations – Eeking Out Growth in China, I looked at how the Asian operations of ABI have shaped up over the past few years.  

In this insight, I’ll do a quick comparison of the past financial performance of China Resources Beer Holdin (291 HK) and Tsingtao Brewery Co Ltd H (168 HK).

2. Hyundai Autoever IPO Preview

• Hyundai Autoever is ready to complete its IPO in March 2019. Established in 2000, Hyundai Autoever is the IT service arm of the Hyundai Motor Group. Hyundai Autoever is expected to play a key role in the Hyundai Motor Group’s push to become a leading global player of autonomous driving in the coming decade. 
• The IPO price range is between 40,000 won and 44,000 won. The IPO base deal size is from $125 million to $138 million. According to the bankers’ valuation, the expected market cap is expected to range from 840 billion won to 924 billion won. 
• The bankers used four companies including Samsung SDS, POSCO ICT, Lotte Data Comm, and Shinsegae I&C to value Hyundai Autoever. Using the annualized net profit of the comps in 2018, the bankers derived an average P/E multiple of 24x for the peers. Then the bankers took the annualized net profit of Hyundai Autoever in 2018 (52.2 billion won) and applied the peers average P/E multiple of 24x to derive the implied market cap of 1.25 trillion won. After applying additional IPO discount of 26.4% – 33.1%, the bankers derived the IPO price range of 40,000 to 44,000 won. 

In this briefing:

1. Ab InBev Asia Pre-IPO – Quick Note – More like CR Beer Rather than Tsingtao
2. Hyundai Autoever IPO Preview
3. Hyundai Autoever IPO Pricing: Likely to Be a Dull Event Given No Growth Story & Glovis Merger

1. Ab InBev Asia Pre-IPO – Quick Note – More like CR Beer Rather than Tsingtao

Anheuser Busch Inbev Sa/Nv (ABI BB) is looking to list its Asian operations in order to lighten its debt burden. The listing will probably be in Hong Kong and the company could raise around US$5bn at a valuation of around US$70bn.

In my earlier insight, Ab InBev Asia Pre-IPO – A Brief History of the Asia Pacific Operations – Eeking Out Growth in China, I looked at how the Asian operations of ABI have shaped up over the past few years.  

In this insight, I’ll do a quick comparison of the past financial performance of China Resources Beer Holdin (291 HK) and Tsingtao Brewery Co Ltd H (168 HK).

2. Hyundai Autoever IPO Preview

• Hyundai Autoever is ready to complete its IPO in March 2019. Established in 2000, Hyundai Autoever is the IT service arm of the Hyundai Motor Group. Hyundai Autoever is expected to play a key role in the Hyundai Motor Group’s push to become a leading global player of autonomous driving in the coming decade. 
• The IPO price range is between 40,000 won and 44,000 won. The IPO base deal size is from $125 million to $138 million. According to the bankers’ valuation, the expected market cap is expected to range from 840 billion won to 924 billion won. 
• The bankers used four companies including Samsung SDS, POSCO ICT, Lotte Data Comm, and Shinsegae I&C to value Hyundai Autoever. Using the annualized net profit of the comps in 2018, the bankers derived an average P/E multiple of 24x for the peers. Then the bankers took the annualized net profit of Hyundai Autoever in 2018 (52.2 billion won) and applied the peers average P/E multiple of 24x to derive the implied market cap of 1.25 trillion won. After applying additional IPO discount of 26.4% – 33.1%, the bankers derived the IPO price range of 40,000 to 44,000 won. 

3. Hyundai Autoever IPO Pricing: Likely to Be a Dull Event Given No Growth Story & Glovis Merger

• Hyundai Autoever offers a total 3,510,000 shares. Split is 9.9% primary and 90.1% secondary. Shares are preliminarily priced at ₩40,000~44,000. This puts the company value at ₩840~924bil. Bookbuilding will be Mar 13~14.
• Valuation is a bit aggressive. It is being heard that local institutions are not particularly excited about this IPO mainly because of Autoever’s 90% captive business. That is, growth story isn’t looking fancy. At a 17x PER on Autoever’s FY19 expected earnings, it is sitting in the middle of the indicative price band. There shouldn’t be much room to play around.
• The major shareholder was expected to sell as much as 50% of their shares through secondary distribution. Actual offering size is much smaller. This sparks the speculation that Autoever will soon be merged with Glovis. Much smaller offering size may be for facilitating the merger. It can pave a less controversial path for another merger attempt with Mobis.
• But this speculation can render this IPO meaningless though. I expect this IPO will be a dull event. I wouldn’t avoid it completely though. Stable income stream and connected car are are still something worthy. I’d buy them at the right price. Low end should be the right price.

In this briefing:

1. Ab InBev Asia Pre-IPO – Quick Note – More like CR Beer Rather than Tsingtao
2. Hyundai Autoever IPO Preview
3. Hyundai Autoever IPO Pricing: Likely to Be a Dull Event Given No Growth Story & Glovis Merger
4. HLX02: Innovation Could Overtake

1. Ab InBev Asia Pre-IPO – Quick Note – More like CR Beer Rather than Tsingtao

Anheuser Busch Inbev Sa/Nv (ABI BB) is looking to list its Asian operations in order to lighten its debt burden. The listing will probably be in Hong Kong and the company could raise around US$5bn at a valuation of around US$70bn.

In my earlier insight, Ab InBev Asia Pre-IPO – A Brief History of the Asia Pacific Operations – Eeking Out Growth in China, I looked at how the Asian operations of ABI have shaped up over the past few years.  

In this insight, I’ll do a quick comparison of the past financial performance of China Resources Beer Holdin (291 HK) and Tsingtao Brewery Co Ltd H (168 HK).

2. Hyundai Autoever IPO Preview

• Hyundai Autoever is ready to complete its IPO in March 2019. Established in 2000, Hyundai Autoever is the IT service arm of the Hyundai Motor Group. Hyundai Autoever is expected to play a key role in the Hyundai Motor Group’s push to become a leading global player of autonomous driving in the coming decade. 
• The IPO price range is between 40,000 won and 44,000 won. The IPO base deal size is from $125 million to $138 million. According to the bankers’ valuation, the expected market cap is expected to range from 840 billion won to 924 billion won. 
• The bankers used four companies including Samsung SDS, POSCO ICT, Lotte Data Comm, and Shinsegae I&C to value Hyundai Autoever. Using the annualized net profit of the comps in 2018, the bankers derived an average P/E multiple of 24x for the peers. Then the bankers took the annualized net profit of Hyundai Autoever in 2018 (52.2 billion won) and applied the peers average P/E multiple of 24x to derive the implied market cap of 1.25 trillion won. After applying additional IPO discount of 26.4% – 33.1%, the bankers derived the IPO price range of 40,000 to 44,000 won. 

3. Hyundai Autoever IPO Pricing: Likely to Be a Dull Event Given No Growth Story & Glovis Merger

• Hyundai Autoever offers a total 3,510,000 shares. Split is 9.9% primary and 90.1% secondary. Shares are preliminarily priced at ₩40,000~44,000. This puts the company value at ₩840~924bil. Bookbuilding will be Mar 13~14.
• Valuation is a bit aggressive. It is being heard that local institutions are not particularly excited about this IPO mainly because of Autoever’s 90% captive business. That is, growth story isn’t looking fancy. At a 17x PER on Autoever’s FY19 expected earnings, it is sitting in the middle of the indicative price band. There shouldn’t be much room to play around.
• The major shareholder was expected to sell as much as 50% of their shares through secondary distribution. Actual offering size is much smaller. This sparks the speculation that Autoever will soon be merged with Glovis. Much smaller offering size may be for facilitating the merger. It can pave a less controversial path for another merger attempt with Mobis.
• But this speculation can render this IPO meaningless though. I expect this IPO will be a dull event. I wouldn’t avoid it completely though. Stable income stream and connected car are are still something worthy. I’d buy them at the right price. Low end should be the right price.

4. HLX02: Innovation Could Overtake

The oncology treatment landscape in China is evolving rapidly as the government has prioritized access to innovative drugs to meet this significant unmet need. In particular, investors considering the Shanghai Henlius Biotech (1566213D HK) listing should be aware of the emergence of a drug that potentially is superior to Roche Holding AG (ROG SW)‘s Herceptin (and Shanghai Henlius’ HLX02) for the treatment of patients with HER2-positive breast cancer (and ultimately HER2-positive gastric cancer). While there should be good demand for cheaper alternatives to Herceptin, the availability of a superior alternative potentially shortens the lifecycle of Herceptin biosimilars. 

China has only recently “modernized” its drug approval and reimbursement, so there is little precedent to rely upon to estimate the speed and magnitude of changes in the market. As brokers rollout forecasts for the company and HLX02, investors should ask if the numbers somehow reflect this risk.

We do not have a view of the offering, but tag this Insight as Bearish because we are highlighting a potential risk.

In this briefing:

1. Wuxi Biologics Placement – Past Deals Have Done Well but Progressive Returns Are Getting Lower
2. Ruhnn (如涵) Pre-IPO Review- Significant Concentration Risk
3. Frontage Holding (方达控股) IPO: Updates from 2018 Numbers
4. Tencent Music 4Q18 Quick Note – Growth on Track, Margins Could Drag – Stock Price Needs a Breather
5. Lyft IPO: Valuation Analysis (Prudent Investment or Quasi-Gambling?)

1. Wuxi Biologics Placement – Past Deals Have Done Well but Progressive Returns Are Getting Lower

Biologics holdings is looking to raise upto US$517m by selling a 4.2% stake in Wuxi Biologics (Cayman) Inc (2269 HK). This will be fourth placement by the company since it listed less than two years ago. Below is a link to our coverage of the listing and the earlier placement:

• Jun 2017 – US$500m: WuXi Biologics IPO Review – An Opportunity to Get Exposure to Biologics in China
• Dec 2017- US$550m: Wuxi Biologics Placement – Selldown Right when Lockup Expires Suggests Eagerness to Offload
• Mar 2018 – US$600m: Wuxi Biologics Placement – In Time for the Next Lock-Up, Returns Will Probably Not Match Prior Ones
• Jun 2018 – US$500m: Wuxi Biologics Placement – Probably Not a Surprise to Sell Again when Lock-Up Expires

Each of the past placement has been of a similar size and has generally done well. The company recently reported results which were ahead of street estimates. The deal scores a marginal positive score on our framework but there is still a lot more selling left once the 90-day lock-up expires.

2. Ruhnn (如涵) Pre-IPO Review- Significant Concentration Risk

Ruhnn Holding Ltd (RUHN US) is looking to raise about US$200m in its upcoming IPO.

The company is an internet key opinion leader (KOL) incubator in China. Revenue and GMV grew at impressive rates of 63% and 57% YoY in FY2018, respectively.

The idea of being able to leverage on KOLs influence over consumers to understand demand and retain consumers is interesting but Ruhnn has yet to demonstrate that it has a sustainable business model. 

Gross margin has deteriorated and losses widened as a percentage of revenue. Service fee paid to KOLs as a percentage of revenue has increased and showed little improvement in 9M FY2019.  The company depends heavily on the top KOL, Zhang Dayi, to generate revenue, almost half of the company’s GMV and revenue is generated from her.

3. Frontage Holding (方达控股) IPO: Updates from 2018 Numbers

Frontage Holding, a contract research organization subsidiary of A-share listed Hangzhou Tigermed Consulting (300347 CH), re-filed to list on the Hong Kong Stock Exchange recently. We have covered the company’s fundamentals in our previous insight here. In this insight, we will provide an updated analysis based on new data available from the new prospectus, as well as our thoughts on valuation.

4. Tencent Music 4Q18 Quick Note – Growth on Track, Margins Could Drag – Stock Price Needs a Breather

Tencent Music Entertainment (TME US) reported its full year results today, post US market close. Revenue growth was slightly ahead of estimates as paying ratio continue to improve for both online music (subscription revenue) and social entertainment (live streaming). Growth for the latter continued to be driven more by ARPU rather than user growth. 

The concerning bit in the results was the decline in gross margins as the company continues to invest in more content. 

My previous insights on TME’s IPO:

• The company’s performance: Tencent Music Pre-IPO Review – The Final Countdown – Growth Doesn’t Seem to Be Slowing Down,
• The working of the apps: Tencent Music Pre-IPO – This Is How We Do It – A Quick Look at How the Apps Work,
• Industry dynamic: Tencent Music Pre-IPO – Industry – Don’t Cry – In 2010 a Little Red Dot Almost Overtook the Dragon, and
• Peer analysis: Tencent Music Pre-IPO – Quick Peer Analysis – If I Was You, I’d Wanna Be Me Too – Bigger and Faster,
• Valuations overview: Tencent Music Pre-IPO – Valuations Estimates – Leaving on a Jet Plane – $30bn Was Quite Stretched.
• First take on the IPO pricing: Tencent Music Pre-IPO Updates – Welcome to the Jungle – Rumoured Asking Valuations More Reasonable
• IPO valuation update: Tencent Music IPO – Don’t Stop Me Now – 9M18 Updates, Outlook and Price Limits
• Some more information on Ultimate Music acquisition: Tencent Music IPO – A Little Less Conversation – A Little More Information on Ultimate Music
• Trading strategies: Tencent Music IPO – Firework – Trading Strategies

5. Lyft IPO: Valuation Analysis (Prudent Investment or Quasi-Gambling?)

Our base case forecast is Case 2 (among three scenarios analysis), which suggests an implied market cap of $21 billion or $75 per share. Given that our intrinsic value of the company does not provide enough upside versus the likely IPO price, we would AVOID this deal. 

Even if the company is able to complete this IPO, raising nearly $2.0-2.5 billion, it is very possible that the company may need to come back to the market in two or three years in a secondary share offering, which would dilute the existing shareholders. This is probably the biggest risk I see with the Lyft IPO right now. 

Our base case financial forecast for Lyft assumes the following:

• Sales growth rate (CAGR from 2018 to 2030) – 26.6%
• Year in which Lyft turns operating profit positive – 2025
• Operating margin in 2030 – 15.0%

In this briefing:

1. Hyundai Autoever IPO Preview
2. Hyundai Autoever IPO Pricing: Likely to Be a Dull Event Given No Growth Story & Glovis Merger
3. HLX02: Innovation Could Overtake

1. Hyundai Autoever IPO Preview

• Hyundai Autoever is ready to complete its IPO in March 2019. Established in 2000, Hyundai Autoever is the IT service arm of the Hyundai Motor Group. Hyundai Autoever is expected to play a key role in the Hyundai Motor Group’s push to become a leading global player of autonomous driving in the coming decade. 
• The IPO price range is between 40,000 won and 44,000 won. The IPO base deal size is from $125 million to $138 million. According to the bankers’ valuation, the expected market cap is expected to range from 840 billion won to 924 billion won. 
• The bankers used four companies including Samsung SDS, POSCO ICT, Lotte Data Comm, and Shinsegae I&C to value Hyundai Autoever. Using the annualized net profit of the comps in 2018, the bankers derived an average P/E multiple of 24x for the peers. Then the bankers took the annualized net profit of Hyundai Autoever in 2018 (52.2 billion won) and applied the peers average P/E multiple of 24x to derive the implied market cap of 1.25 trillion won. After applying additional IPO discount of 26.4% – 33.1%, the bankers derived the IPO price range of 40,000 to 44,000 won. 

2. Hyundai Autoever IPO Pricing: Likely to Be a Dull Event Given No Growth Story & Glovis Merger

• Hyundai Autoever offers a total 3,510,000 shares. Split is 9.9% primary and 90.1% secondary. Shares are preliminarily priced at ₩40,000~44,000. This puts the company value at ₩840~924bil. Bookbuilding will be Mar 13~14.
• Valuation is a bit aggressive. It is being heard that local institutions are not particularly excited about this IPO mainly because of Autoever’s 90% captive business. That is, growth story isn’t looking fancy. At a 17x PER on Autoever’s FY19 expected earnings, it is sitting in the middle of the indicative price band. There shouldn’t be much room to play around.
• The major shareholder was expected to sell as much as 50% of their shares through secondary distribution. Actual offering size is much smaller. This sparks the speculation that Autoever will soon be merged with Glovis. Much smaller offering size may be for facilitating the merger. It can pave a less controversial path for another merger attempt with Mobis.
• But this speculation can render this IPO meaningless though. I expect this IPO will be a dull event. I wouldn’t avoid it completely though. Stable income stream and connected car are are still something worthy. I’d buy them at the right price. Low end should be the right price.

3. HLX02: Innovation Could Overtake

The oncology treatment landscape in China is evolving rapidly as the government has prioritized access to innovative drugs to meet this significant unmet need. In particular, investors considering the Shanghai Henlius Biotech (1566213D HK) listing should be aware of the emergence of a drug that potentially is superior to Roche Holding AG (ROG SW)‘s Herceptin (and Shanghai Henlius’ HLX02) for the treatment of patients with HER2-positive breast cancer (and ultimately HER2-positive gastric cancer). While there should be good demand for cheaper alternatives to Herceptin, the availability of a superior alternative potentially shortens the lifecycle of Herceptin biosimilars. 

China has only recently “modernized” its drug approval and reimbursement, so there is little precedent to rely upon to estimate the speed and magnitude of changes in the market. As brokers rollout forecasts for the company and HLX02, investors should ask if the numbers somehow reflect this risk.

We do not have a view of the offering, but tag this Insight as Bearish because we are highlighting a potential risk.