TMT and Internet Sectors

In this briefing:

1. The Hanergy Dilemma: Vote For The Scheme
2. CyberAgent (4751 JP) 2Q Earnings Update: AbemaTV Continues to Impress
3. China Tower: Onwards and Upwards (For Now).
4. Yunji IPO: Price Range Is a No-Go

1. The Hanergy Dilemma: Vote For The Scheme

The Scheme Document for Hanergy Thin Film Power (566 HK) has been dispatched with a court meeting tabled for the 18 May 2018.

The terms remain unchanged from the initial announcement on the 26 February – the proposal is one SPV share for each Scheme share.

The ultimate objective of the proposal is to list the company on a stock exchange in the PRC; however, it is not certain whether the A-share listing can be achieved.

The IFA, in a heavily disclaimed summary, recommends shareholders vote for the Scheme.

What’s New?

We now know the SPV is incorporated in the BVI. Hanergy is incorporated in Bermuda. Upon the Scheme becoming effective, the SPV will be 100% owned by independent shareholders who face “no restrictions … to sell or transfer their SPV shares in private through the over-the-counter trading“. Whatever price that may be.

An Increase in Independents

Independent shareholders of Hanergy now comprise 40.51% of shares out, up from 32.49% in the February announcement. The shares held by the Offeror – Hanergy Mobile Energy Holdings Limited – in concert with subsidiaries, has fallen to 40.14% (16.9bn shares) from 20.3bn, apparently after the enforcement of a share mortgage.  As a result of this adjustment, the 10% blocking stake at the court meeting has increased to 4.05% from 3.25%.

What to Do?

The questions remain as to the ease in which independent shareholders can sell unlisted shares, should the Scheme fail, under Bermuda Company Law and the Articles – a delisting procedure will commence if Hanergy does not resume trading before the end of July – or sell SPV shares should the Scheme pass, under BVI rules and the SPV constitution.

At a guess, from perusing various rules and regulations, there’s little to distinguish between the two.

For shareholders angling for A-share exposure, the SPV route appears preferable, or at least fast-tracks proceedings, as it silos independent shareholders into a separate entity. 

The Offeror has sought advice from its PRC legal advisers and according to the advice of the PRC legal advisers, it is not feasible to achieve the A-Share Listing if the Company has a large number of non PRC Independent Shareholders as it is the case currently. Further, the Offeror’s PRC legal advisers confirmed that it is feasible under the PRC laws and regulations for the A-Share Listco to make application for A-Share Listing if the Independent Shareholders hold the entire share capital of the SPV and the SPV is one of the shareholders of the A-Share Listco.

For the Offeror, the SPV facilitates the A-share application – although it does not guarantee its approval. And even if shareholders do not choose to exit the SPV AND the A-share listing is approved, the SPV’s holding into the A-share can theoretically be diluted via the introduction of new shareholders in a pre-IPO allotment.

Nevertheless, on account of this perceived accelerated A-share application submission under the SPV, I recommend shareholders vote for the Scheme.

2. CyberAgent (4751 JP) 2Q Earnings Update: AbemaTV Continues to Impress

Cyberagent Inc (4751 JP) reported 2Q FY09/19 financial results on Wednesday (24th April). CyberAgent reported revenue of ¥117.3bn (+7% YoY) and OP of ¥8.6bn (-25% YoY) for 2Q FY09/19. Both Revenue and OP were above consensus estimates of ¥113.6bn and ¥7.0bn respectively.

The slowdown in the Internet Advertisement business continues, as segment’s revenue was up by only 10.8% YoY in 2QFY09/19, compared to the average growth of around 20% YoY seen in the last two years. The Game business also remains sluggish, down 1% YoY, as the new hit game title, Dragalia Lost, failed to impress for the second consecutive quarter.

In the meantime, Media business revenue was up by 29% YoY, with growth seems to be coming mainly from the AbemaTV front; the number of AbemaTV premium subscribers was up 12% QoQ (an increase of around 43K in absolute terms).

We have revised our FY09/19E revenue expectation upwards for AbemaTV by around JPY4bn (which is around a 30% increase from our previous forecast of ¥12bn) to reflect robust growth in the number of subscribers and advertisement revenue. Our revenue and OP forecasts for the Internet Advertisement and Game businesses remain unchanged.

Our revised SOTP valuation for CyberAgent gives a FY1 target price of ¥4,750, which implies an upside of 10% from Wednesday’s close, with potential for further upside in the medium term.

3. China Tower: Onwards and Upwards (For Now).

China Tower (788 HK) recently reported strong 1Q19 results, boosted by the adoption of IFRS16 (big positive impact to EBITDA). Revenue growth has accelerated as the company laps price cuts in 1Q18.  With the higher EBITDA, we look for China Tower’s strong rally to continue as measured EV:EBITDA is lower and the company looks very cheap vs global peers. We remain buyers of the stock with a target price of HK$2.30, but recognize conditions may be ripe for prices to move even higher as the stock re-rates. It is a long way from their post IPO experience, when poor IPO disclosures pushed the stock to HK$1.00.

4. Yunji IPO: Price Range Is a No-Go

Yunji Inc. (YJ US) is a leading membership-based social e-commerce platform in China which primarily sells merchandise through its Yunji app. It announced its IPO price range of $11.00-13.00 per ADS. At the mid-point of the IPO price range, So-Young will raise net proceeds of $145.8 million, resulting in a fully diluted market cap of $2.7 billion.

In this briefing:

1. So-Young (新氧) IPO Review – Decent Upside from the Low-End

1. So-Young (新氧) IPO Review – Decent Upside from the Low-End

So-Young (SY US) is raising up to US$179m in its upcoming IPO. We have covered most aspects of the IPO in So-Young (新氧) Pre-IPO Review – Au Naturel.

In this insight, we will value the company business segments by parts, look at the deal dynamics, and run the deal through our IPO framework.

In this briefing:

1. So-Young (新氧) IPO Review – Decent Upside from the Low-End
2. Advantest Macro Breakout Cycle
3. Douyu (斗鱼直播) IPO: Leader At a Cost

1. So-Young (新氧) IPO Review – Decent Upside from the Low-End

So-Young (SY US) is raising up to US$179m in its upcoming IPO. We have covered most aspects of the IPO in So-Young (新氧) Pre-IPO Review – Au Naturel.

In this insight, we will value the company business segments by parts, look at the deal dynamics, and run the deal through our IPO framework.

2. Advantest Macro Breakout Cycle

Advantest Corp (6857 JP) has accelerated in a high momentum move after breaking out from the flat congestive pattern resistance at 2,730. The immediate rise is becoming stretched as the daily RSI pushes into overbought territory (near 80) with risk of a pullback to retrace some recent gains. 

Weekly MACD cycle is confirming a new up cycle.

Buy levels are outlined to accumulate Advantest on weakness. Macro projection implies a 30% rise is in store from the outlined buy support zone.

3. Douyu (斗鱼直播) IPO: Leader At a Cost

Douyu, a leading eSports live streaming platform in China, filed to raise up to USD 500 million via a listing in the US. In this insight, we will cover the following topic:

• Company background
• Key operating metrics of the company
• Shareholders and investors
• Our initial thoughts on valuation

In this briefing:

1. Rakuten: Update on the Mobile Business Generally Positive
2. Nexon: Continuing Question Marks
3. Nexon Sale: Market Talkings Update, Incl. Bid Schedule Extension
4. Global Indexes Are Consolidating, EM Is Breaking Down
5. Sell Lenovo: Talking Growth, Delivering Little

1. Rakuten: Update on the Mobile Business Generally Positive

Rakuten Inc (4755 JP) hosted a call with CTO Tareq Amin to update analysts and investors on recent progress. The company says cell site acquisition is moving ahead quickly and it an end-October mobile launch remains the target. As discussed previously, the next major milestone is the start of 1 July beta-testing so there was little that could be added this week although management did again run through key success factors like cost and operational efficiency from its cloud-based integrated network architecture. Mr. Amin teased a possible game-changing announcement next week, which is likely to come from the vendor side and we suspect has to do with 5G turnkey solutions. Coming out of quarterly results for all companies, the outlook has not meaningfully changed with incumbents confident that pricing changes are sufficient even with Rakuten promising disruption from a unique network and installed base of eCommerce/fintech users. 

2. Nexon: Continuing Question Marks

The Nexon Co Ltd (3659 JP) control-change saga plods on. 

I continue to read all the news that’s fit to print in English, Japanese, and Korean if I can find some web service to translate the hangul. 

My continuing worry about the significant number of articles which get published is that the ‘updates’ provided are much more soap opera-esque than really significant news developments or even insightful commentary which could inform market observers and participants about the considerations which would influence a certain kind of pricing, or bidder strength, outcome, or even a decision by Mr Kim Jung-Ju to walk away from the current process and re-start it at some point in the future.

For this, I have a lower expectation of “certainty” on this situation than I expected I would have by now, and because of the passage of time, the NPV of the trade is slightly lower with a higher volatility of jump risk on eventual outcome than I expected it would have (I expected the components of the NPV to change – certainty would raise NPV while time-decay before announcement would drag on deal NPV, but the lack of certainty has added drag).

More comments about news evolution, content, and trading strategy are below.

3. Nexon Sale: Market Talkings Update, Incl. Bid Schedule Extension

This is the latest update on Nexon. We had two Nexon related news reports, put out by Seoul Economic Daily and Invest Chosun, in the past two days, especially in relation to the bid schedule. We also had some market speculations. This post is my summary of these report and market speculations.

4. Global Indexes Are Consolidating, EM Is Breaking Down

We remain constructive on global equities as the MSCI ACWI, ACWI ex-U.S., and EAFE indexes consolidate above their respective 200-day moving averages. On the other hand, the MSCI EM index is breaking below its 200-day moving average and is flirting with a breakdown below 56,000 support (local currency).  We see attractive Opportunities in Manufacturing & Materials in Europe, Japan and China, India, and Taiwan. 

5. Sell Lenovo: Talking Growth, Delivering Little

Today, Lenovo (992 HK) reported record revenue and rising growth.   The numbers however, tell a very different story.  We suspect revenue growth owes more to the consolidation of the Fujitsu operation than genuine organic growth. For all the talk of expanding into data centres, QonQ revenue is flat. We also note that deferred revenue is flat and core cashflow barely covers capex and investments leaving Lenovo to fund the dividend with debt.

We wonder how they will fund the US$0.8bn balance payment for Fujitsu in FY 2020.

In this briefing:

1. Shanghai/Shenzhen Connect Ideas: Technologies, Porks and Hard Liquors (2019-05-17)
2. SPINOFF: Three Announced but Unconfirmed HK Spinoffs: Legend, Kerry Logistics, Tianneng Power
3. HK Connect Ideas: ICBC and Tencent (2019-05-17)
4. ComfortDelgro: Can Surge Fares Mitigate Competitive Pressure From Ride Entrants?
5. Sprint Corp – One Regulatory Approval, Another to Go, How Likely?

1. Shanghai/Shenzhen Connect Ideas: Technologies, Porks and Hard Liquors (2019-05-17)

In our weekly Shanghai/Shenzhen Connect Ideas series, we aim to help our investors understand the flow of northbound trades via the Shanghai and Shenzhen Connect, as analyzed by our proprietary data engine and highlight interesting trade ideas. 

We split the stocks eligible for the Shanghai/Shenzhen Connect trade into two groups: stocks with a market capitalization above USD 5 billion, as well between USD 1 billion and USD 5 billion.

In this insight, we will highlight the consecutive two weeks of net outflow from the A-share market. We will also briefly discuss Hikvision, Muyuan, Moutai, and Wuliangye. 

2. SPINOFF: Three Announced but Unconfirmed HK Spinoffs: Legend, Kerry Logistics, Tianneng Power

Legend Holdings Corp H (3396 HK), Kerry Logistics Network (636 HK) and Tianneng Power Intl (819 HK) have made announcements they intend to spin-off certain divisions.

These spin-offs remain subject to Exchange approvals and market conditions.

While they are not yet “live” as situations, they deserve a look because spin-offs create new parent/subsidiary relationships, leading to Relative Value trade ideas going forward, which will be dependent on the spin-off’s liquidity and the % market cap held by the parent.

Using available information from the prospectus/red herrings and various HKEx announcements, it is also possible to back out a rudimentary implied stub value of the unlisted parent’s operations ahead of these spin-offs.

3. HK Connect Ideas: ICBC and Tencent (2019-05-17)

In our weekly HK Connect Ideas series, we aim to help our investors understand the flow of southbound trades via the Hong Kong Connect, as analyzed by our proprietary data engine, and highlight interesting trade ideas. 

We split the stocks eligible for the Hong Kong Connect trade into three groups: component stocks in the HSCEI index, stocks with a market capitalization between USD 1 billion and USD 5 billion, and stocks with a market capitalization between USD 500 million and USD 1 billion.

In this insight, we will highlight that inflows into ICBC (H) (1398 HK) were particularly strong last week, and inflow into Tencent still sustained from the prior week, thanks to newsflows pertaining to the strong sales of its newly approved mobile game. 

4. ComfortDelgro: Can Surge Fares Mitigate Competitive Pressure From Ride Entrants?

Earlier this month, ComfortDelgro (CD) said it will roll out dynamic pricing. How will it affect demand from commuters and ultimately drivers? This article has four parts:

• Thoughts on Dynamic Pricing 
• Interesting trends as Go-Jek enters Singapore
• Short Discussion on 1Q19 results
• Conclusions

5. Sprint Corp – One Regulatory Approval, Another to Go, How Likely?

Sprint Corp has received approval from the Federal Communications Commission for their merger with T-Mobile to proceed following concessions. Justice Department approval is the next hurdle with the eventual outcome still remaining uncertain.

We reiterate our previous recommendation that investors should look to exit the bonds at current levels to mitigate deal risk as we believe that if the merger fails the company may face liquidity issues over the medium term given their deteriorating fundamental performance.

Specifically, Sprint Corp continues to generate negative free cash flow, if the proposed merger fails, the company may ‘burn’ cash within a few years.

In this briefing:

1. StubWorld: Ai Ya! – Ayala Corp Tanking On Possible “Portfolio Rebalancing”

1. StubWorld: Ai Ya! – Ayala Corp Tanking On Possible “Portfolio Rebalancing”

This week in StubWorld …

• A potential placement from a key shareholder is just one of the rumours behind Ayala Corporation (AC PM)‘s recent underperformance.

Preceding my comments on Ayala, are the weekly setup/unwind tables for Asia-Pacific Holdcos.

These relationships trade with a minimum liquidity threshold of US$1mn on a 90-day moving average, and a % market capitalisation threshold – the $ value of the holding/opco held, over the parent’s market capitalisation, expressed in percent – of at least 20%.

In this briefing:

1. Nexon: Continuing Question Marks
2. Nexon Sale: Market Talkings Update, Incl. Bid Schedule Extension
3. Global Indexes Are Consolidating, EM Is Breaking Down
4. Sell Lenovo: Talking Growth, Delivering Little
5. Trump Pressures the Korean Government to Ban Huawei in Korea – The Biggest Gray Rhino Event of 2019?

1. Nexon: Continuing Question Marks

The Nexon Co Ltd (3659 JP) control-change saga plods on. 

I continue to read all the news that’s fit to print in English, Japanese, and Korean if I can find some web service to translate the hangul. 

My continuing worry about the significant number of articles which get published is that the ‘updates’ provided are much more soap opera-esque than really significant news developments or even insightful commentary which could inform market observers and participants about the considerations which would influence a certain kind of pricing, or bidder strength, outcome, or even a decision by Mr Kim Jung-Ju to walk away from the current process and re-start it at some point in the future.

For this, I have a lower expectation of “certainty” on this situation than I expected I would have by now, and because of the passage of time, the NPV of the trade is slightly lower with a higher volatility of jump risk on eventual outcome than I expected it would have (I expected the components of the NPV to change – certainty would raise NPV while time-decay before announcement would drag on deal NPV, but the lack of certainty has added drag).

More comments about news evolution, content, and trading strategy are below.

2. Nexon Sale: Market Talkings Update, Incl. Bid Schedule Extension

This is the latest update on Nexon. We had two Nexon related news reports, put out by Seoul Economic Daily and Invest Chosun, in the past two days, especially in relation to the bid schedule. We also had some market speculations. This post is my summary of these report and market speculations.

3. Global Indexes Are Consolidating, EM Is Breaking Down

We remain constructive on global equities as the MSCI ACWI, ACWI ex-U.S., and EAFE indexes consolidate above their respective 200-day moving averages. On the other hand, the MSCI EM index is breaking below its 200-day moving average and is flirting with a breakdown below 56,000 support (local currency).  We see attractive Opportunities in Manufacturing & Materials in Europe, Japan and China, India, and Taiwan. 

4. Sell Lenovo: Talking Growth, Delivering Little

Today, Lenovo (992 HK) reported record revenue and rising growth.   The numbers however, tell a very different story.  We suspect revenue growth owes more to the consolidation of the Fujitsu operation than genuine organic growth. For all the talk of expanding into data centres, QonQ revenue is flat. We also note that deferred revenue is flat and core cashflow barely covers capex and investments leaving Lenovo to fund the dividend with debt.

We wonder how they will fund the US$0.8bn balance payment for Fujitsu in FY 2020.

5. Trump Pressures the Korean Government to Ban Huawei in Korea – The Biggest Gray Rhino Event of 2019?

The Huawei crisis has finally erupted in Korea. The Huawei crisis will now likely be one of the most important events facing the Korean economy in the coming months. Chosun Daily reported yesterday that the US government has requested the Korean government for an “eventual ban” of Huawei products in Korea. In the past several weeks, the US government has privately communicated to the Korean government that there could be severe security issues if Korea continues to use Huawei products. 

It is clear that if the South Korean government takes a firm stance to ban Huawei products, the Chinese government will certainly retaliate against this. 

In our view, it is highly unlikely for the Korean government to make any changes to the current stance on Huawei in the next several months, mainly because of the Moon Jae-In administration’s attempts to maintain a close relationship with the Chinese government. The more likely scenario is that this issue gets extended until next year after the South Korean National Assembly election in April 2020, mainly due to the enormous political consequences if the status quo is changed.

For the prudent investors in the Korean stock market, if they believe that this Huawei crisis will morph into something bigger, it may make sense to become more cautious in key sectors of the Korean economy, including the cosmetics, apparel, and hotels & leisure which the Chinese government can really cause some damage quickly with a few damaging words from Xi Jinping.

In this briefing:

1. Nexon Sale: Sort Out Recent Reports from Local Sources on Key Issues

1. Nexon Sale: Sort Out Recent Reports from Local Sources on Key Issues

We are still hearing many ‘reports (or stories?)’ about Nexon sale. I guess we again need to sort them out on each key issue. I need to tell you that this sorting work is mostly based on my personal judgments after having read publicly available local sources.

In this briefing:

1. Nexon Sale: Sort Out Recent Reports from Local Sources on Key Issues
2. So-Young IPO: Unattractive Valuation

1. Nexon Sale: Sort Out Recent Reports from Local Sources on Key Issues

We are still hearing many ‘reports (or stories?)’ about Nexon sale. I guess we again need to sort them out on each key issue. I need to tell you that this sorting work is mostly based on my personal judgments after having read publicly available local sources.

2. So-Young IPO: Unattractive Valuation

So-Young (SY US) is a leading Chinese plastic surgery platform. It announced its IPO price range of $11.80-13.80 per ADS. At the mid-point of the IPO price range, So-Young will raise net proceeds of $150.8 million, resulting in a fully diluted market cap of $1.4 billion.

In this briefing:

1. Nexon Sale: Sort Out Recent Reports from Local Sources on Key Issues
2. So-Young IPO: Unattractive Valuation
3. DouYu IPO Preview: A Second-Best Choice

1. Nexon Sale: Sort Out Recent Reports from Local Sources on Key Issues

We are still hearing many ‘reports (or stories?)’ about Nexon sale. I guess we again need to sort them out on each key issue. I need to tell you that this sorting work is mostly based on my personal judgments after having read publicly available local sources.

2. So-Young IPO: Unattractive Valuation

So-Young (SY US) is a leading Chinese plastic surgery platform. It announced its IPO price range of $11.80-13.80 per ADS. At the mid-point of the IPO price range, So-Young will raise net proceeds of $150.8 million, resulting in a fully diluted market cap of $1.4 billion.

3. DouYu IPO Preview: A Second-Best Choice

Douyu International Holdings (DOYU US) is a leading game live streaming platform in China with a focus on e-sports content. It is backed by Tencent Holdings (700 HK), an 40.1% shareholder and seeking to raise $500 million through an NYSE IPO.