TMT/Internet

The Afterpay Touch (APT AU) stock has taken a beating recently following a lot of negative press about the Buy Now Pay Later (BNPL) industry. This included a Rebel Wilson ad pulled from Australian TV after complaints from consumer protection groups for playing down the risks of taking on debt. Here in New Zealand, there have been calls for greater regulation of BNPL with families struggling to afford basics while paying off the BNPL loans.

Now, Square Inc (SQ US) has announced that it plans to acquire Afterpay Touch (APT AU) in an all-stock deal that values Afterpay at a 30% premium to its last close. Afterpay Touch (APT AU) shareholders will receive 0.375 shares of Square Inc (SQ US) Class A common stock for each Afterpay share they hold on the record date. Square Inc (SQ US) may elect to pay 1% of total consideration in cash. The transaction values Afterpay Touch (APT AU) at A$39bn.

The transaction is expected to close in the first quarter of 2022 subject to shareholder approval, receipt of regulatory approvals and no material adverse effect in relation to Afterpay Touch (APT AU) or Square Inc (SQ US).

Square Inc (SQ US) intends to establish a secondary listing on the ASX to allow Afterpay Touch (APT AU) shareholders to trade Square Inc (SQ US) shares via CHESS Depositary Interests (CDIs) on the ASX. We expect the Square CDIs to be included in the S&P/ASX 200 (AS51 INDEX) replacing Afterpay Touch (APT AU), though the free float on the CDIs will be lower. 

Cartrade (0056989Z IN) is a leading online destination for auto consumers in India. CarWale and BikeWale, key brands owned by CarTrade, ranked number one on relative online search popularity when compared to their key competitors over the last three years, according to Google Trends data. CarTrade’s shareholders include Warburg Pincus (34.44% of fully diluted shares), Temasek (26.48%), JP Morgan (11.93%) and March Capital (7.09%). 

CarTrade is looking to raise Rs28 billion ($375 million) through an IPO in India, according to press reports. The IPO comprises a pure offer for sale of 18.53 million shares by its existing shareholders and promoters. The IPO is set to launch on 9 August.  

India was the fifth largest car market in the world in 2019 and is forecasted to become the third-largest auto market in the world as measured by volume in 2025, according to RedSeer. The COVID-19 pandemic has also resulted in a shift in preference towards used cars as people limit their use of public transportation. Indian auto OEMs spent only 14% of their total ad budgets on digital advertising, which is significantly lower than the global average of 42% in 2020, according to RedSeer. 

• In KOSDAQ, the top two potential stocks that KSIA may target on August 10th include KMW Co Ltd (032500 KS) and Seegene Inc (096530 KS). 
• In KOSPI, the top three potential stocks that KSIA may target on August 10th include Lotte Tour Development Co, Ltd. (032350 KS), LG Display (034220 KS), and Shinpoong Pharmaceutical (019170 KS).

About the stock: Firstsource Solutions (FSL) provides business process services to BFSI, communication, media, tech and healthcare.

• The company generates 68% revenues from the US and 31% from the UK
• FSL has witnessed healthy revenue improvement (up 19% YoY in FY21) and 100 bps improvement in EBIT margins in FY21

HSIE Results Daily Tech Mahindra: We maintain a BUY rating on Tech Mahindra (TechM), based on better-than-expected revenue performance, healthy net-new deal wins (in both telecom and enterprise segments), and in-line margins. TechM delivered 3.9% QoQ CC growth, which was broad-based across verticals. The focus on large deal wins (net-new TCV of USD 815mn), following a healthy Q4 (Telefonica deal), improves growth visibility. The key attributes that underscore our positive outlook are (1) the largest deal win in the healthcare vertical (patient care modernisation); (2) healthy growth in BPS; (3) increase in intake of freshers after six quarters; (4) improvement in 5G related deals (~50% of telecom deals are related to 5G); and (5) continued growth momentum in enterprise segment, led by technology, BFSI and manufacturing verticals.

Internet IPOs are turning out to be the theme of the year in India so far. In yet another instance, Cartrade (0056989Z IN), operator of Carwale, and Bikewale lately received SEBI’s nod of floating the public issue.

Cartrade, along with its subsidiaries, operates an automotive digital ecosystem which connects automobile customers, OEMs, dealers, banks, insurance companies and other stakeholders. The Group owns and operates under several brands: CarTrade, CarWale, Shriram Automall, BikeWale, etc. Through these platforms, the group enables new and used automobile customers, vehicle dealerships, automotive manufacturers and other businesses to buy and sell their vehicles.

While the auto tech platforms have several players in the Industry, CarTrade is the first one in the line to get listed. The company also reported in the DRHP that it is the only competitor to boast a positive net income, while also ranking number one on relative online search popularity when compared to their key competitors over the period from April 2020 to March 2021. 

However, on the flip side CarTrade also undergoes several shortfalls on the balance sheet end. A simple forensic check of DRHP reveal issues like aggressive revenue recognition, worrying cash yield, fragile earnings, etc.

The Ethereum Blockchain: First Mover That Transformed the Blockchain

The Ethereum blockchain was launched in 2015 and is built on the decentralised and distributed architecture present in Bitcoin. Ethereum uses smart contracts which can be interconnected to interact with each other and hence create an operational platform.

The significance of the Ethereum platform is that it allows users to build applications running on the blockchain, similar to software running on a computer. Through running smart contracts on Ethereum Virtual Machine (EVM), mass consumption of decentralised apps is made possible.

Given that Ethereum is a decentralised network, clients will have the benefit of control over their data, with no central governing authority. Ethereum is a permission-free, public blockchain platform whereby all transactions recorded on it are visible and accessible by everyone. The blockchain uses a Proof of Work (PoW) consensus mechanism according to which all nodes need to agree on a ledger to access the entries recorded in the network.

The key benefit of Ethereum when compared with other blockchains is that it has a large network which has been tested through years of operation and billions of trading value. For instance, in the early part of 2020, the total value of cryptocurrencies invested in Ethereum smart contracts exceeded US$ 10bn.

However, on the other hand, due to this growing popularity, Ethereum transaction (gas) fees reached a record US$ 23 per transaction in February 2021. Previously, for most of 2020, gas fees were around US$ 2. Although gas fees hit a high of US$ 61.74 in May 2021, transaction fees had declined to reasonable levels in the subsequent month of June 2021 at an average of around US$ 2.15. However, the decline in gas prices is indicative of the decline in demand for Ethereum (the cryptocurrency).

Another key issue is that the growing demand has caused slower processing times whereby processing times are much slower than those of newer blockchains.

Ethereum’s open-ended and open-source nature has led to the creation of numerous dApps on the blockchain. In this report, we will be discussing some dApps which run on the Ethereum blockchain and how each of these have responded to the issues of high transaction fees and slow processing times on the blockchain.

These dApps and the sidechains that have evolved to support greater functionality for them create interesting new possibilities which we believe are currently underappreciated. In particular, we believe investor attention is too focused on what blockchains can currently enable rather than the overall direction in which blockchain technology is evolving. This is because despite the massive media attention on crypto and blockchain, the technology itself remains at the early stages of its development and deployment and thus many of the critical limitations it faces could be solved in time. It is thus more pertinent, we feel, to examine what some of these early dApps are trying to accomplish and some of the future possibilities that they hint at.

On 23 July, Jason Yap publised an excellent Insight titled BNPL Industry Through an ESG Lens. His knowledge of the “Buy Now, Pay Later” (BNPL) industry per se is well beyond mine, so I defer to his report for fundamentals on the industry and its companies.

I do, however, have a few thoughts to add regarding ESG. Whilst Jason is spot-on for ESG issues he covered, I want to: 1) point out a potential ESG positive related to inclusive finance and sustainable development, and 2) expand on a major ESG negative associated with advertising and marketing.

This is a deep dive into a few specific ESG issues, and hopefully complementary to Jason’s work.

In this weeks recap, we look at:

• potential changes to the MSCI indices after week 1 of the review period
• the changes that were announced as a part of the LQ45 August index rebalance
• the Li Auto Inc. (LI US) dual primary listing in Hong Kong and the implications from HSCEI index entry
• potential changes to the China focused indices as a result of the big market moves
• potential changes to the SSE STAR50 (STAR50 INDEX) at the September rebalance
• upcoming passive flows as a result of Gulf Energy Development Public Company (GULF TB)‘s offer for Intouch Holdings (INTUCH TB) 
• index entry possibilities for Krafton Inc (259960 KS) at the end of its bookbuilding period
• index Fast Entry possibilities for KakaoBank (1349010D KS) following the IPO allocations

Inflows to KraneShares CSI China Internet Fund (KWEB US) ETF continue even as the constituent stocks sell-off. There have also been large inflows to the Tracker Fund of Hong Kong Ltd (2800 HK) and Hang Seng H Share Index ETF (2828 HK) ETFs.

Tencent (700 HK) shares have lost 18% to HK$478.80 by the end of today’s close since the beginning of July 2021 and has lost 35.0% since its peak in February this year. Tencent’s shares continue to slide over regulatory scrutiny over Chinese internet stocks. The Chinese regulators have widened their crackdown on the country’s internet sector with the latest crackdown aimed at the county’s education sector.

Tencent has been making into headlines over the past few days with its music streaming arm Tencent Music (TME US) being ordered to give up exclusive music licensing rights alongside a fine, its investments in online education and tutoring platforms such as Yuanfudao being targeted by Beijing regulators and the company suspending new user registrations on WeChat.

As we have discussed in our previous insights, there is no sign that the Chinese regulators are slowing down with its antitrust crackdown on the country’s tech platforms and though the ongoing regulatory crackdown has already been priced into Tencent’s share price, we would strongly recommend being on the side lines as the ongoing probe could have a material impact on the company’s future earnings.

Keyence revenue growth surprised to the upside like peers with a 10.7% positive surprise vs. consensus. Just as importantly, OPM was also strong as the unusually high SG&A burden the company has been experiencing over the last two years continues to ease.

Mediatek Inc (2454 TT) delivered a strong set of 2Q21 results, beating sell-side consensus estimates on both the top and bottom-line and delivering numbers at the top-end of management’s guided ranges, which, in conjunction with a continued strong demand environment, has led to an increase in growth and profitability guidance for the remainder of FY2021.

Further short-term share price weakness, based on supply constraint concerns, along with a continuation of the earnings upgrade cycle, has resulted in MediaTek trading on a 13.8x NTM PE ratio, which is more than one standard deviation below its historical average trading range. MediaTek also currently trades on an extremely attractive 6.3% NTM dividend yield with little risk of a negative surprise to dividend payments given the ongoing earnings upgrades, and MediaTek having generated NT$28bn in Operating Cash Flow, during 2Q21, which helped its Net Cash balance increase further to NT$191bn, now 13% of its Market Cap. 

In this insight, we look at MediaTek’s 2Q21 results, its medium- and longer-term growth outlook and current valuation levels. This insight is also a follow-up from our more-detailed analysis of MediaTek (MediaTek: High-Quality 5G Beneficiary with a Tremendously Attractive Dividend Yield) last month.

Hong Kong Exchange publishes share repurchases by listed companies on a daily basis. In our weekly note, we will provide statistics on top repurchases over one week, one month, one quarter and one year periods ended on Jul 30.

In the past 7 days, the top 3 companies that repurchased the most shares from the market were  Xiaomi Corp (1810 HK) (HKD 196.9 million worth of buybacks), New World Development (17 HK) (HKD 170.2 million worth of buybacks), China Gas Holdings (384 HK) (HKD 86.6 million worth of buybacks).

In this insight, we take a look at the monthly performance of the trading opportunities surrounding TOPIX Index Rebalance events. During the month, we witnessed the Inclusion Events of cloud-based business accounting software company Money Forward (3994 JP), water treatment technology company Nomura Micro Science (6254 JP), and printed circuit board manufacturer Meiko Electronics (6787 JP). 

Furthermore, as discussed by Travis Lundy in July TOPIX FFW Rebalancing Trade, there were quarterly float adjustments for some constituents of the TOPIX Index which opened up a few trading opportunities. 

Below is a closer look at each of these situations. 

About the stock: Coforge offers system integration, apps & BPO services to BFSI, travel & healthcare verticals

• Coforge’s revenues and PAT have grown at a CAGR of ~12% each over the past five years
• Healthy OCF, EBITDA (~75%) and robust return ratios (RoCE > 20%)

We recommend a BUY and assign 37x P/E multiple to its FY23E earnings of Rs 139.5/share which gives a TP of Rs 5,220 /share, implying an upside of 10% from CMP

In USD terms, revenue growth of 3.9% QoQ CC in 1QFY22 was above our estimate mainly on account of Communications (+2.9% v/s expectation of flat growth). The Enterprise business reported a growth of 4.7% QoQ CC. New deal wins fell 20% QoQ to USD815m (0.6x BTB), but stayed ahead of past trends, while the qualified pipeline remained at historical peaks. EBIT margin dipped by 130bp QoQ in 1QFY22 (led by wage hike, visa cost and seasonality in Communications), but was 90bp above our estimate.

Background: KPIT Technologies is leading is a global technology company providing software solutions that help mobility companies leapfrog towards autonomous, clean, smart and connected future. The major focus areas of the company are power train (Conventional and electrical), autonomous technology (vision and control systems), connectivity and diagnostics. The company’s focus sub verticals are Passenger cars, Commercial and Off-highway vehicles and New Mobility. KPIT derives 84.6% of its revenue from strategic top 21 clients.

We continue to remain positive and retain our BUY rating on the stock Target Price and Valuation: We value Birlasoft at Rs 475 i.e. 25x P/E on FY23E EPS Key triggers for future price performance: Revenue growth is expected to be achieved via client mining, cross sell,…

• The stock price has plunged since October 2020.
• Over the past few days, BABA became a casualty of the policy against tutoring companies.
• However, we believe the China online retail has been recovering.
• We also believe the stock has an upside of 27% in nine months.

On 28 July after the close, semiconductor & components test systems manufacturer Advantest Corp (6857 JP) reported Q1 results (with slides), revised its earnings forecast for the full year (revenues +10% vs end-April forecast for the year to 31 March 2022, OP and NP +17% and change), revised its “forecast” for its dividends, raising the H1 div from ¥38 to ¥50/share. This increase, even if the regular portion of the H2 div is kept flat, would raise the annual dividend to above the level of last year’s (which included a ¥10 commemorative dividend in H2). 

It also announced a plan to buy back shares – with a buyback program of up to 10 million shares (5.1% of shares out ex-treasury stock), spending up to ¥70 billion, with the program scheduled to run from 2 August 2021 through 24 March 2022. 

The reasoning is that in the Second Mid-Term Management Plan announced 24 May 2021, the total shareholder return ratio including treasury stock acquisition was targeted at a base rate of 50% or higher. The revision of the earnings forecast along with expected stronger operating cashflow prods the company to launch a buyback.  

So they have, and the dynamics are interesting because despite MSCI suggesting the company has 100% float, I see a Real World Float far, far below that. 

A short while ago, Krafton Inc (259960 KS) disclosed the results of its institutional book building and confirmed that the offer price has been set at KRW 498,000/share, the high end of the IPO range.

Bids came in for 1.157bn shares resulting in an oversubscription of 243 times the shares offered to institutions with domestics outbidding foreign investors in terms of number of shares. Bids at or above KRW 498,000 came from 95% of the shares that were bid for.

78% of the shares that were bid for came with a no lock-up commitment. Allocations that match the results of the bookbuilding will increase the free float of the stock making it easier for index Fast Entry. At the same time, there could be a lot of selling pressure as retail, institutions and pre-IPO investors all try to exit in the first few trading days.

Korea Stock Exchange Kospi 200 Index (KOSPI2 INDEX) Fast Entry at the September futures expiry should be easy. At the IPO price, Krafton Inc (259960 KS) should get MSCI Fast Entry if less than 30% of the institutional allocation is locked up, while the stock should get FTSE Fast Entry even with 50% of the institutional allocation locked up. If a higher percentage of shares is locked up, the stock will need to close higher on listing day to get index Fast Entry.

With a large number of shares not subject to lock-ups, there could be selling on listing day. The stock should then stabilize and move higher on expectation of passive buying from FTSE and MSCI trackers. The stock could then drift lower before picking up ahead of the inclusion in the Korea Stock Exchange Kospi 200 Index (KOSPI2 INDEX). 

The bidding for companies in Australia’s technology sector continues.

Trading and wealth management software provider Iress Ltd (IRE AU) announced this morning it had received a confidential, unsolicited, non-binding, and indicative proposal from Swedish PE outfit EQT Fund Management via a Scheme of Arrangement at a price range of between A$15.30 and A$15.50 cash per share.

EQT had previously fielded an Offer of A$14.80/share on the 18 June.

Iress’ board unanimously concluded that the Proposal was “conditional and did not represent compelling value for Iress shareholders“. But the board was:

prepared to provide it with access to limited non-public information so EQT can develop a proposal that is capable of being recommended to shareholders.

Iress closed up 15% today, but still 7% below the mid-point of the Indicative Offer price range.

Capcom handily beat consensus estimates at 1Q with revenue of ¥48.4bn (+27.8%) and OP of ¥23.6bn (+37.4%). Consensus had been as low as ¥13.4bn in early May so the beat is significant. Yet, it failed to meet our ¥25-30bn on account of a write-off of some game assets (“several billion yen”) and deferring revenue for RE8 due to free DLC which we had not expected. Without those factors we believe OP would have come extremely close to ¥30bn. We remain confident that ¥60bn in OP is on the cards for the full year though it is plausible that Capcom could push out sales into next FY and come in slightly below that.

As expected, Krafton’s IPO price has been confirmed at ₩498,000, the upper end of the indicative price band. So, Krafton gets to raise a total of ₩4.3T through this public offering, and its market cap reaches ₩24.4T.

The competitive rate for institutional subscriptions came out to be 243.2 to 1, similar to what has already been leaked from the market. Compared to the recent mega IPOs that easily exceeded 1,000 to 1, it can be seen that this IPO’s institutional participation rate was low. However, considering that this IPO has a substantially larger offering size and a very aggressive price, it can be concluded that the interest of institutions was higher than expected.

Looking at the application results for each type of institution below, we can find a very interesting fact.

1. First, a large number of foreign institutions with business relationships (i.e., major foreign investment institutions) participated in this subscription. The share of 23.5% by the number of participating institutions is significantly higher than the typical level for local IPOs. Of course, most of them applied based on actual demand, so their proportion of total subscription volume is only 5.4%. However, considering that all these quantities are actual demand, we can safely say that their participation level is quite high. This is a result consistent with what Mirase Asset (the bookrunner) has continuously leaked to the market about the active participation of many major overseas institutions.
2. Another point to note is that the number of participating local institutions is remarkably low, consistent with the initial forecast that most small and medium-sized institutions skipped this IPO due to scheduling conflicts with LG Energy Solutions.
3. Finally, institutions belonging to the category ‘Foreign others’ were quite aggressive in taking orders despite a small number of participating institutions. These are mainly local hot money managers, who are the most active in early profit realization trading. In other words, their aggressive move to secure Krafton IPO shares means that they are heavily betting on a short-term price increase due to the entry of local retailers immediately after Krafton’s listing.

On 29 July, Krafton announced its IPO book building results. The IPO price has been determined at 498,000 won, which was at the high end of the IPO price range. The demand ratio among the institutional investors was 243 to 1. Krafton will be raising $4.3 billion in this IPO. There were 621 institutional investors that participated in the IPO survey of which 447 were domestic investors and 174 were overseas investors. 

• We continue to have a NEGATIVE view of the Krafton IPO post book building results. Our base case valuation of Krafton remains implied market cap of 23.0 trillion won or implied price of 445,942 won per share, which represents 10% lower than the IPO price of 498,000 won. 

• Gray market price of Krafton is 530,000 won, which is 6% higher than the IPO price of 498,000 won. 

• Overall, there were some big institutional investors (both overseas and domestic) that helped to push Krafton’s IPO price to the high end of the lowered IPO price range. Despite this positive, the lock-up periods and the demand ratios were relatively weak as compared to other major IPOs in the past year. 

• We do not expect any meaningful first day pop for the Krafton IPO. At best, we think there could be a 10-20% increase from the IPO price in the first few hours of trading on August 10th (IPO date). However, over a 6-12 months view, we believe that Krafton’s stock price will decline lower towards our base case intrinsic value of 455,942 won.

Spotify missed on MAUs again and lowered 2021 guidance. Not great for a subscription business built on a distant 10 year DCF built on subscriber trajectories. We have pushed Spotify as a short for a while and think its still a good short, especially as their spending on podcasting continues, even as usage is rolling over…oh yeah, and they still have no operating leverage. 

KPIT reported strong Q1FY22 earnings. Overall, the earnings growth was led by margin expansion (EBITDA margin expanded to 17.3% vs 13.4% YoY) and high-teens QoQ revenue growth. The guidance also remains robust. While the stock has more than quadrupled since our initiation note KPIT Technologies: A Pure Play on Automotive Technology in Jun 2020, we believe the upside potential still remains significant.

Coforge Ltd (COFORGE) reported strong organic revenue growth of 7% QoQ CC in 1QFY22, above our estimates of 3% QoQ CC. Including the two months of revenue contribution from SLK, revenue growth stood at 16% QoQ (USD), far higher than our exp. of 10.3% QoQ. Growth was driven by deal ramp-ups in the Americas (+30% QoQ, including the SLK impact). It reported another quarter of strong order intake of USD318m (the highest ever), implying 1.6x book-to-bill. This also included three large deals, with one USD105m deal win.

PropertyGuru and Bridgetown 2 announced, on 23rd Jul 2021, that they have entered into a business combination agreement which will see PropertyGuru go public in the US. The transaction will value PropertyGuru at an EV of US$1.35bn and equity value of US$1.78bn.

We have looked at the company’s prior listing attempt when it tried to list in Australia in 2019. In this note, we will comment on the current listing arrangement.

Link to our previous notes:

• PropertyGuru IPO – Powered by Singapore, Recharged by Vietnam but Dragged Down by Others
• PropertyGuru IPO – SOTP Leaves One Well Short of the Low-End
• PropertyGuru IPO – Agents Q&A Shows Its Stranglehold in S’pore; Throws up Some Interesting Nuggets

The last day of Krafton’s bookbuilding? Well, it was really a crazy day.

Investors’ concerns over increasingly expanding regulatory restrictions and the potential market intervention led to a rout of Chinese tech and education stocks over the last several trading sessions. The select 9 Chinese tech stocks I follow collectively lost USD320 billion in value over 20 July to 27 July.  While some of the regulatory risks were known from March 2021, ramifications of the potential value-destroying restrictions on the education companies, termination of Tencent Music (TME US)’s exclusive rights, and the suspension of new user registration for Tencent (700 HK)‘s Wechat spook the market. 

Tencent’s market cap has declined 19% during the seven-day period, which cannot be fully explained by the potential value lost from the recently announced regulatory measures, in my view.  Back in April (see Tencent (700 HK): Fintech Risk Is Lurking) I pointed out that Tencent shares could be overvalued by 20% on fintech risk alone.  The shares are down nearly 30% since then. I now believe the shares could be undervalued by 10%, notwithstanding the undefined regulatory risks ahead.  Having said that, catching a falling knife is not for the faint-hearted. 

These stocks rebounded on the US Wednesday trading session, possibly reflecting the sentiment “enough is enough.” Bloomberg reported that the securities regulator assured select investment bankers that the education policies are not to be for other industries.     

In this report, I summarize the announced regulatory events this year to date and share my thoughts on why the market may be over discounting Tencent’s value by looking at the potential value impact of Tencent’s fintech value (a reiteration from the April report) and the impact of the value decline of DiDi Chuxing (DIDI US) and Tencent Music.          

• AXT Inc. (AXTI) secured a new tier-one customer qualification for the second straight quarter creating a demand line up for the second half of the year that could help further grow revenue. AXTI reported second quarter results that were ahead of estimates and guidance, but it was the second customer win that is likely to gain most of the attention as the Company begins to enter production phase.

• The broader customer base has reduced AXTI’s dependence on specific customers. The expanded use cases for gallium arsenide (GaAs) and indium phosphide (InP) should provide AXTI with greater longevity to growing revenue. 

• AXTI reported second quarter revenue of $33.7 million which was $2.2 million higher than the top end of the guidance range AXTI had provided. 

• AXTI is now on pace to earn approximately $0.38 per share in 2021 compared to our original estimate of $0.29 per share. The increase in revenue over the course of the year should leverage the fixed cost nature of AXTI’s business. We believe the broader foundation of tier-one customers could provide sustainable revenue base to maintain revenue at or above $30 million per quarter. 

• A10 Networks (ATEN) is benefiting from increased attention on network security. An increase in data traffic only intensifies the need for security, which is where ATEN is likely to win more customers. ATEN reported second quarter revenue growing by 12.7 percent from the year ago period even though a bigger portion of revenue is recurring.

• ATEN generated $59.2 million in revenue in the second quarter, up from $52.5 million in the year ago period. We had been expecting revenue of $58.2 million.

• The Company introduced cloud solutions and has been ramping sales of these solutions this year. Software remains a minority portion of revenue. The Company has been maintaining subdued revenue growth expectations this year as a result of the transition away from hardware.

• Leverage in the operating model coupled with growth in revenue for the remainder of the year is poised to point ATEN on a trajectory to post non-GAAP EPS of $0.70 in 2022.

• Our price target is now $17 from $13.50.

We assign a 22x P/E multiple to its FY23E earnings of Rs 20.8 per share to arrive at a TP of Rs 455 per share, implying an upside of 13% from CMP.

*What’s Up With WeChat: Mainland China appears to have taken additional action against Tencent Holdings (700.HK) [Tencent], following Monday’s regulatory edict. Tencent is suspending new user registrations for its WeChat services, as it is undergoing a “security technical upgrade” in accordance with relevant laws and regulations. WeChat is Tencent’s most important business, and dominates mainland Chinese social media; and 

*Pain Trade Coming:Tencent is widely expected pay a large fine. In addition, Tencent may have to give up its exclusive music rights and possibly dispose of Kuwo and Kugou. Further, we have no doubt that Tencent will also follow Alibaba Group (BABA.US) [Alibaba] in their formation of a financial holding company. For Tencent, WeChat Pay and the broader lending/deposit taking business are likely to be reined-in. At CNY 38.5 bn for full year 2020, FinTech represents a growing 28.8% of revenue – and is a key and growing component of Tencent’s current and future results. No matter what spin that Tencent wants to place on its other businesses, an FHC represents significant downside risks. Earnings will compress, as capital requirements increase.

China-based after-school tutoring stocks saw the bulk of their equity value evaporate as authorities decided to turn the regulatory heat on this sector and also requiring the players to operate as non-profits. As the after-tremors of this move reverberate across the investment space, are the multibillion-dollar valuations of India’s rapidly growing edtech players at risk? Well-known private equity players ranging from Sequoia Capital to Tiger Global have invested in India’s fast-growing online education players – notably, BYJU’S (1391510D IN)  (valued at USD16.5 Bn) and Unacademy (valued at USD 2Bn) amongst others.

In this insight, we discuss if India’s rapidly growing online education sector is vulnerable to regulatory risks similar to that faced by after-school tutoring companies in China and how this could potentially affect large online tutoring players like Byju’s and Unacademy. We also look at leading investors in this space – and how they could be impacted.

Krafton will close the bookbuilding today, which started on the 14th. Two days later, it will finalize and announce the offering price on the 29th.

Online press conference on the 26th

Krafton held an online press conference yesterday, where the CFO extensively commented on the bookbuilding atmosphere.

First of all, the CFO said that the response was particularly enthusiastic from overseas institutional investors. He said that they include a number of long-term funds.

This is a direct quote from Bae Dong-geun, CFO of Krafton. He said,

It is difficult to give a clear answer because the institutional bookbuilding has not been completed yet, but at this point (one day left until the bookbuilding deadline), I can confidently say that it was a success.

He further revealed that overseas institutions participated more aggressively in the subscription than local institutional investors, and this somewhat surprising trend was clearly seen in the actual pricing.

What the bankers are saying

Then, below are the actual results of bookbuilding being leaked by the bankers.

The bankers are also saying that the institutional mood confirmed during the two weeks of bookbuilding is obviously hotter than initially expected.

Of course, this news also reached the ears of domestic institutions.

The pricing for local institutional investors started on the 20th. And it is being said (or leaked by the bankers) that local institutions are placing orders using all available funds as their competitive sentiment must have been triggered by the aggressive participation of foreign institutions.

• The market is looking for a signal of an easing of regulatory pressures on China BigTech
• Alibaba Group (BABA US) is in the eye of the regulatory storm, first with the crackdown on the Ant IPO, then with the anti-trust restrictions on Big Tech and more recently with China regulatory bodies focusing on US listed China tech
• The share price is now close to the pandemic low of March 2020, having fallen a further 20% since the end of April
• Alibaba valuations are compelling, even versus its China BigTech peers, and, less surprisingly, compared to Amazon.com Inc (AMZN US)
• Alibaba’s market capitalization to revenue discount to its core peers has narrowed somewhat, as Chinese regulators have extended their focus on BigTech beyond the Alibaba group, but remains elevated
• Furthermore, Alibaba’s premium to Amazon in terms of market capitalization to revenue has totally dissipated
• We stick with our positive view on Alibaba and we believe that, even though regulatory risks have yet to recede, the secular growth story – albeit dented – in China tech still holds and that in the case of Alibaba, its modest valuations stand out
• Risks to our positive view on Alibaba include further regulatory hurdles, such as market share limitations and tighter controls on big data, as well as client loss as a result of these regulatory limitations

Indonesian e-commerce unicorn, Bukalapak (BUKA IJ) is expected to price its IPO at the top end of the offer range, which implies a market cap and EV of $6.0bn and $4.4bn respectively.

We like the way Bukalapak has placed itself in a relatively low competitive subsector within the Indonesian e-commerce market. However, it appears that it is extremely difficult to generate sufficient merchant commissions and advertising revenue from Bukalapak’s subsector of e-commerce. Although we are worried about the fact that Bukalapak may not be profitable in the medium term (inability to generate sufficient revenue), there are plenty of investors willing to invest in Bukalapak based on the company’s revenue potential.

Having said that, we still don’t anticipate Bukalapak to generate generous gains on its trading debut due to the extremely high IPO valuation. Nevertheless, there could be some upside on trading debut, but we think risks rewards are not sufficiently skewed to the upside trade this IPO with any conviction.

Meituan (3690 HK) impulsive decline does warn of lower levels after a bounce with a focus on selling a near term bounce. Spike in sell volume is a negative. Oversold RSI does warn of a reaction bounce for brave traders. 

Trend resistance now lies at 280 as the forward level to clear. As long as this barrier remains intact the trend is down.

Intel held a technology roadmap update yesterday…the key changes were literally in name only. We’ll believe Intel jumping 5 nodes in 4 years when we see it.

We continue to see a mixed market, and weak market dynamics lead us to be cautious. One of the primary issues is weak breadth; the large-cap indexes (S&P 500 and Nasdaq) remain bullish despite being held up by a relatively small number of mega-cap growth stocks, a condition that can persist for weeks or months. Ultimately, as long as there continues to be an absence of breakdowns at the index and Sector level we remain constructive overall.

SK hynix held its second quarter earnings call on Tuesday, July 27, reporting a 22% sequential revenue increase and significant improvements in profits.  The company’s outlook for the remainder of the year is very bullish.

About the stock: Zensar Technologies (Zensar) offers application & IMS services to hi-tech, manufacturing, retail and BFSI.

• Zensar has grown organically and inorganically over the years
• Net debt free and healthy double digit return ratio (with RoCE of 19%)

Softbank has been touting Vision Fund’s IPO flywheel for almost all of 2021 but expect that to fade as the reality of China’s crackdown sinks in. It’s stake in Didi is worth $8bn as of Friday down from $10.6bn invested at the parent and $12bn total whilst other recent IPOs (YMM -28% on 23 July, ZME -35%, DDL -8%) are also under pressure. The good news is Vision Fund China assets are <10% of total China exposure and Alibaba has been through the regulatory wringer already. That limits China downside but it does call into question Vision Fund hopes for valuation gains from liquidity events. There is a direct read across with Zuoyebang and VIPThink which are banned from going public whilst three of the largest private investments remaining in Vision Fund 1 (Bytedance, ele.me and Guazi) are likely to remain on the sidelines. We expect the holding company discount is likely to remain in the 44% range.

Tencent short call from 620 targeted 560 and the break below 560 set in motion a fresh sell signal that is showing increasing bear pressure below recent support  at 510 with 410/20 the next major support zone in our cross hairs.

Today’s gap is important if we cannot muster an uptick to close or partially close, we will head lower with higher momentum.

RSI is nearing oversold levels and due to bottom Tuesday or Wednesday and bounce into late July ahead of a more turbulent August cycle.

Paytm (PAYTM IN), formally known as One97 Communications, is India’s largest payments platform based on the number of consumers, number of merchants, number of transactions and revenue as of 31 March 2021, according to RedSeer. Paytm has an overall payments transaction volume market share of 40%, and wallet payments transaction market share of 65-70% in India as of FY21, according to RedSeer. Paytm’s shareholders include Ant Financial Services Group (6688 HK) (29.6% of outstanding shares), Softbank Vision Fund (18.3%), Alibaba Group (BABA US) (7.2%) and Berkshire Hathaway Inc Cl B (BRK/B US) (2.8%).  

Paytm plans to raise up to Rs166.0 billion ($2.2 billion) with a primary/secondary split of 50%/50%, according to the DHRP filing. 

The Indian Government is highly supportive of digital payments and in 2016, introduced demonetisation efforts through the launch of Unified Payment Interface (UPI) to reduce the reliance on cash. However, India continues to be a cash-driven economy which underscores the opportunity. Due to government initiatives, improving technology, growing awareness, digital payments by value in India are expected to more than double from $20 trillion in FY21 to $40-50 trillion by FY26, according to RedSeer. 

Krafton appears to be doing the PR rounds regarding investor interest in its IPO. The Nikkei and various other news outlets had some positive sounding stories. If Krafton does indeed manage to price at the top end of its range or above we think that would be a fantastic opportunity for investors…

Krafton IPO = PUBG + SPAC? In some ways, the key thesis of the Krafton IPO is the continued success of PUBG + emphasis on M&As to grow the business in overseas markets. In that respect, Krafton is telling the investors to trust the company to make excellent acquisitions that could add long-term value for the company. This is probably a tough sell for many investors and this remains a major reason on the poor investors’ response on the Krafton IPO.

In addition, Chinese government’s huge crackdown on the US listed Internet companies and the for-profit education sector further raise significant concerns that this crackdown could expand to other sectors such as games which would negatively impact Krafton. Overall, continue to maintain an AVOID rating of this IPO. 

Koei Tecmo posted some stellar results today with ¥20.5bn in revenue (consensus ¥14.5) and OP of ¥9.7bn (consensus ¥5.9bn), putting the company on track to hit our ¥34-39bn FY OP target vs. consensus at ¥28.5bn. ¥8.7bn in income below the OP line was also a notable positive surprise thanks to strong investment income. How much of this is priced in though?

About the stock: Persistent System (Persistent) offers cloud, data, product & design led services to BFSI, healthcare & hi tech verticals.

• Persistent has shown a healthy turnaround in dollar revenue growth of 13% YoY in FY21 and margin expansion of 248 bps
• Net debt free and healthy double digit return ratio (with RoCE of 20%)

• IBM’s almost at par with the market performance over the course of 2021 could prove to be short-lived.
• In spite of the glimpse of hope in the Q2 2021 results, the financial situation of IBM remains quite challenging.
• IBM still lacks a solid strategy in how to turn around its infrastructure business, while Red Hat is still expected to do all the heavy lifting.

• Snowflake is the leading cloud-computing data warehouse company that will play an integral role in the future of Artificial Intelligence.
• This article discusses five key competitive advantages that make Snowflake unique and able to dominate its industry for an extensive period.
• Snowflake recently announced an ambitious plan of achieving $10B in Revenue by 2028. We evaluate the possibility and future growth estimates.
• I discuss the competitive dynamics and future risks for investors to watch for those looking into purchasing Snowflake.

We recommend a BUY rating on the stock and assign a 35x P/E multiple to its FY23E earnings of Rs 96/share, which gives a TP of Rs 3,400/share, implying an upside potential of 12% from CMP.

We remain short Intel. The growth and margin picture is still deteriorating. We don’t think Pat Gelsinger is capable of turning this ship around…and we think the proposed acquisition of Global Foundries may accelerate Intel’s demise.

• We do not believe the juveniles will reduce internet usage in the future.
• The authorities forbid tutoring schools so that juveniles have more time to spend on internet.
• Parents went back to their office so they cannot stop their children from using internet.

iFAST (IFAST SP)  reported its 2Q2021 results on Friday (23^rd July) which saw revenues increasing 31.7% YoY while reported operating profit grew 46.0% YoY during the quarter. The net revenue from B2B segment increased 32.9% YoY while net revenue from B2C segment grew 30.5% YoY during 2Q2021 driven by increased investment subscription from customers in exchange-listed securities, service fee from currency conversion administration services and net inflows from clients in unit trusts (UTs). iFast’s assets under administration (AUA) grew 57.3% YoY to SG$17.54bn as at the end of June 2021 from SG$16.11bn as at the end of March 2021.

My colleague, Ming Lu has also looked at the company’s recent performance in:

• Kuaishou (1024 HK): Short Video Market Expanding, But Express Version Not Profitable

• Kuaishou (1024 HK): Expanding Ad Mkt for 2020 and Anime Plan for 2021, but Needs Reasonable Price

• Kuaishou (1024 HK): Q4, Higher Growth , Higher Margin, User Base Closer to TikTok, But Overvalued

• Kuaishou (1024 HK): Positive Operating Data in 1Q21, But Not Enough

• Kuaishou (1024 HK): 1Q21, Still in a Time of Change

Asia market long ideas into weakness are challenging with short themes dominating in Japan, HK and Korea (next to buckle). ASX banks tops our long list followed by bottom digging in HK tech. Taiwan is resting on bull/bear support.

A clear bear lean is noted in Asia and parts of Europe compared to the US powerhouse upcycle that is near a tactical topping zone. Our cycle work calls for a ST US top today/Monday for a dip and then upside re test in late July with August seasonality turning bearish. Asia will front run a US top.

Just a monster quarter. The type Facebook used to print in 2015. We’ve been pushing Snap as a core long since the beginning of the pandemic. We continue to push Snap as a core long…and are probably even more bullish today then we were a year ago. Facebook’s market cap is 10x Snap’s. We would bet that gap closes rapidly.

MPHL grew 6.3% QoQ USD in Q1, outperforming our (4%) and street estimates. EBIT margin was a miss at 15.9% due to the pandemic impact