TMT and Internet Sectors

In this briefing:

1. China Internet Weekly (13Jul2020): Alibaba’s Freshippo and Ele.me Exploring Cities and Businesses
2. FMCG Is the Next Big Growth Driver & Battleground for China E-Commerce; Big Tech Moves In Force
3. ME2ZEN IPO: Absence of Local Pension Funds Vs. Market Friendly Pricing
4. Softbank Reverse from Long to Short Target
5. King Yuan Electronics Co(2449 TT) – Time To Buy On Robust Demand For 5G, AI, and CMOS Image Sensor

1. China Internet Weekly (13Jul2020): Alibaba’s Freshippo and Ele.me Exploring Cities and Businesses

• Alibaba (BABA)’s Freshippo opened two “Freshippo-mini” stores in Beijing.
• Alibaba (BABA)’s Ele.me began to deliver goods other than cooked food.
• The smart phone shipment decreased by 16.6% YoY in June, worse than 11.8% YoY in May.

2. FMCG Is the Next Big Growth Driver & Battleground for China E-Commerce; Big Tech Moves In Force

At a time when overall retail e-commerce in China has already reached 44% penetration, e-commerce penetration for fast-moving consumer goods (“FMCG”) still lags behind tremendously. According to Euromonitor International, only 6.3% of fresh foods and 8.8% of alcoholic beverages were purchased online in 2019.

This gap represents a major growth opportunity as consumers, having grown accustomed to the convenience and safety of ordering FMCG products online, are now permanently shifting purchasing behaviors.

Already, Chinese Tech giants such as Alibaba and JD.com have moved in force – doubling down on their FMCG investments via Freshippo and JD Supermarket. Tencent is also making its own moves – investing in grocery startup Xingsheng Youxuan and valuing it at US$3bn.

Investors have taken note of this upcoming structural trend and have also moved in size. As seen in the chart below, companies with exposure to FMCG e-commerce have handily beat the broader market with names like Pinduoduo and Meituan Dianping doubling in value in just two months. Dada Nexus, an online grocery firm backed by JD.com, also chose to IPO in early June despite the COVID backdrop – its stock price has since soared by 100%+.

Read our previous FMCG E-Commerce Insights:

• Why Near Term Headwinds Don’t Matter: FMCG E-Comm Footholds to Thrive Post-COVID 
• JD 1Q20: Strong All-Around Beat as FMCG Resilience Shines, Look Towards the 618 Shopping Festival 

3. ME2ZEN IPO: Absence of Local Pension Funds Vs. Market Friendly Pricing

First, here is an overview of ME2ZEN’s second IPO attempt.

It plans to offer 3.2M shares (52% primary and 48% secondary). The total offering represents 28.74% of the total shares at a 14.94% capital increase rate.

Mirae is working as a sole banker with a firm commitment.

The indicative price band is at ₩21,000~27,000, which gives an implied market cap of ₩289.9~372.7bil.

July 30~31 will be for book-building, followed by the allotment on August 4. The following day will be a subscription. The payment date is August 7.

Once again, the float will be tight on this one. A total of 72.48% shares will be in a lock-up for one month to three years. Of those, 65.26% is for more than six months.

4. Softbank Reverse from Long to Short Target

Softbank Group (9984 JP) has witnessed a sharp rise from our recent 4,400 long entry and nearing the ideal 6,600 target representing the top end of the intermediate expanding wedge range. We made a bull call near lower wedge support at 2,800.

Recent breakout point at 5,900 will act as pivot support that will induce a reaction back upward.

RSI shows synergy with dual tops in this zone to mark key cycle tops which fits with a top near 6,600. RSI is also forming a rising wedge that has a better than 70% probability of breaking down amid bear divergence.

Macro pivots are 6,800 and 4,900 as the expanding wedge defines a clear range (6,800 and 2,500).

5. King Yuan Electronics Co(2449 TT) – Time To Buy On Robust Demand For 5G, AI, and CMOS Image Sensor

In our view, KYEC embraces 5G migration cycle at infrastructure base stations and smartphones, as well as many other IoT devices, RF filter/PA, CMOS image sensors and server chips. We expect KYEC to post double digit YoY revenue growth in 2020. As such, we initiate coverage on KYEC with a Buy call and 12-month TP of TWD50.

In this briefing:

1. China Internet Weekly (15Jun2020): Virus Found in Another Wet Market, Online Retailers’ Tax Eyed
2. Korea Preferred Shares – An Eventful Week & Trade Ideas
3. XD Inc. (心动有限公司) Trade Idea – Lock-Up Expiry – Existing Shareholders May Look to Sell
4. Bitauto’s Privatisation Enters into a Definitive Agreement

1. China Internet Weekly (15Jun2020): Virus Found in Another Wet Market, Online Retailers’ Tax Eyed

• Panic buying restarted as four infections were found in a wholesale wet market in Beijing.
• Alibaba (BABA) announced they will recruit 5,000 employees for its cloud computing business.
• The tax authorities required all online retailers to check their taxes in three years.
• Xiaomi (1810) was the only company whose smartphone sales to end users did not decrease in 1Q20.

2. Korea Preferred Shares – An Eventful Week & Trade Ideas

Over the last week, Korean preferred shares have outperformed the ordinary shares by a huge margin. On most stocks, the narrowing discount was accompanied by a huge jump in volume on the preferred shares.

Is this the beginning of a trend where the discount on the preferred shares continues to narrow, or does this present an opportunity to sell out of the preferred shares and buy the ordinary shares? We recommend buying preferred shares that are trading at discounts of greater than 40% and near the wider end of their 2 year range, while switching out of preferred shares that are trading at discounts of less than 20% and are nearer to their tightest discounts over the last 2 years.

With the ban on short selling, implementation of a pure arbitrage strategy is difficult and would depend on long sell availability. However, the strategy can be implemented in names that have relatively liquid single stock futures.

3. XD Inc. (心动有限公司) Trade Idea – Lock-Up Expiry – Existing Shareholders May Look to Sell

XD Inc. (2400 HK)‘s IPO lock-up expired on Friday. We have earlier covered the IPO in:

• XD Inc. (心动有限公司) Pre-IPO – Sustainability in Question 
• XD Inc. (心动有限公司) Pre-IPO –  TapTap, Overseas Markets, and Thoughts on Valuation 
• XD Inc. (心动有限公司) IPO – Has Better Disclosure of Data but It Probably Won’t Help 
• XD Inc. (心动有限公司) Trading – Subscription Rate Pales in Comparison to CMGE 

In this insight, we will look at the potential sellers upon lock-up expiry and updates of how the company has performed since listing.

4. Bitauto’s Privatisation Enters into a Definitive Agreement

On 12 June, Bitauto Holdings Ltd Adr (BITA US) announced that it has entered into a definitive agreement for a privatisation proposal from Tencent Holdings (700 HK) and Hammer Capital. As a reminder, on 13 September 2019, Bitauto announced a non-binding privatisation proposal from Tencent and Hammer Capital for $16 per ADS. The bid is currently backed by shareholders who together account for 55.3% of the voting rights. 

In this briefing:

1. Korea Preferred Shares – An Eventful Week & Trade Ideas
2. XD Inc. (心动有限公司) Trade Idea – Lock-Up Expiry – Existing Shareholders May Look to Sell
3. Bitauto’s Privatisation Enters into a Definitive Agreement

1. Korea Preferred Shares – An Eventful Week & Trade Ideas

Over the last week, Korean preferred shares have outperformed the ordinary shares by a huge margin. On most stocks, the narrowing discount was accompanied by a huge jump in volume on the preferred shares.

Is this the beginning of a trend where the discount on the preferred shares continues to narrow, or does this present an opportunity to sell out of the preferred shares and buy the ordinary shares? We recommend buying preferred shares that are trading at discounts of greater than 40% and near the wider end of their 2 year range, while switching out of preferred shares that are trading at discounts of less than 20% and are nearer to their tightest discounts over the last 2 years.

With the ban on short selling, implementation of a pure arbitrage strategy is difficult and would depend on long sell availability. However, the strategy can be implemented in names that have relatively liquid single stock futures.

2. XD Inc. (心动有限公司) Trade Idea – Lock-Up Expiry – Existing Shareholders May Look to Sell

XD Inc. (2400 HK)‘s IPO lock-up expired on Friday. We have earlier covered the IPO in:

• XD Inc. (心动有限公司) Pre-IPO – Sustainability in Question 
• XD Inc. (心动有限公司) Pre-IPO –  TapTap, Overseas Markets, and Thoughts on Valuation 
• XD Inc. (心动有限公司) IPO – Has Better Disclosure of Data but It Probably Won’t Help 
• XD Inc. (心动有限公司) Trading – Subscription Rate Pales in Comparison to CMGE 

In this insight, we will look at the potential sellers upon lock-up expiry and updates of how the company has performed since listing.

3. Bitauto’s Privatisation Enters into a Definitive Agreement

On 12 June, Bitauto Holdings Ltd Adr (BITA US) announced that it has entered into a definitive agreement for a privatisation proposal from Tencent Holdings (700 HK) and Hammer Capital. As a reminder, on 13 September 2019, Bitauto announced a non-binding privatisation proposal from Tencent and Hammer Capital for $16 per ADS. The bid is currently backed by shareholders who together account for 55.3% of the voting rights. 

In this briefing:

1. FMCG Is the Next Big Growth Driver & Battleground for China E-Commerce; Big Tech Moves In Force
2. ME2ZEN IPO: Absence of Local Pension Funds Vs. Market Friendly Pricing
3. Softbank Reverse from Long to Short Target
4. King Yuan Electronics Co(2449 TT) – Time To Buy On Robust Demand For 5G, AI, and CMOS Image Sensor
5. Leyou in Tencent’s Crosshairs

1. FMCG Is the Next Big Growth Driver & Battleground for China E-Commerce; Big Tech Moves In Force

At a time when overall retail e-commerce in China has already reached 44% penetration, e-commerce penetration for fast-moving consumer goods (“FMCG”) still lags behind tremendously. According to Euromonitor International, only 6.3% of fresh foods and 8.8% of alcoholic beverages were purchased online in 2019.

This gap represents a major growth opportunity as consumers, having grown accustomed to the convenience and safety of ordering FMCG products online, are now permanently shifting purchasing behaviors.

Already, Chinese Tech giants such as Alibaba and JD.com have moved in force – doubling down on their FMCG investments via Freshippo and JD Supermarket. Tencent is also making its own moves – investing in grocery startup Xingsheng Youxuan and valuing it at US$3bn.

Investors have taken note of this upcoming structural trend and have also moved in size. As seen in the chart below, companies with exposure to FMCG e-commerce have handily beat the broader market with names like Pinduoduo and Meituan Dianping doubling in value in just two months. Dada Nexus, an online grocery firm backed by JD.com, also chose to IPO in early June despite the COVID backdrop – its stock price has since soared by 100%+.

Read our previous FMCG E-Commerce Insights:

• Why Near Term Headwinds Don’t Matter: FMCG E-Comm Footholds to Thrive Post-COVID 
• JD 1Q20: Strong All-Around Beat as FMCG Resilience Shines, Look Towards the 618 Shopping Festival 

2. ME2ZEN IPO: Absence of Local Pension Funds Vs. Market Friendly Pricing

First, here is an overview of ME2ZEN’s second IPO attempt.

It plans to offer 3.2M shares (52% primary and 48% secondary). The total offering represents 28.74% of the total shares at a 14.94% capital increase rate.

Mirae is working as a sole banker with a firm commitment.

The indicative price band is at ₩21,000~27,000, which gives an implied market cap of ₩289.9~372.7bil.

July 30~31 will be for book-building, followed by the allotment on August 4. The following day will be a subscription. The payment date is August 7.

Once again, the float will be tight on this one. A total of 72.48% shares will be in a lock-up for one month to three years. Of those, 65.26% is for more than six months.

3. Softbank Reverse from Long to Short Target

Softbank Group (9984 JP) has witnessed a sharp rise from our recent 4,400 long entry and nearing the ideal 6,600 target representing the top end of the intermediate expanding wedge range. We made a bull call near lower wedge support at 2,800.

Recent breakout point at 5,900 will act as pivot support that will induce a reaction back upward.

RSI shows synergy with dual tops in this zone to mark key cycle tops which fits with a top near 6,600. RSI is also forming a rising wedge that has a better than 70% probability of breaking down amid bear divergence.

Macro pivots are 6,800 and 4,900 as the expanding wedge defines a clear range (6,800 and 2,500).

4. King Yuan Electronics Co(2449 TT) – Time To Buy On Robust Demand For 5G, AI, and CMOS Image Sensor

In our view, KYEC embraces 5G migration cycle at infrastructure base stations and smartphones, as well as many other IoT devices, RF filter/PA, CMOS image sensors and server chips. We expect KYEC to post double digit YoY revenue growth in 2020. As such, we initiate coverage on KYEC with a Buy call and 12-month TP of TWD50.

5. Leyou in Tencent’s Crosshairs

Leyou Technologies (1089 HK)’s long-drawn takeover saga has potentially taken its final twist. After market close on Friday, Leyou announced that Mr Yuk, Leyou’s controlling shareholder with a 69.2% stake, entered into a three months exclusivity agreement with Tencent Mobility, a wholly-owned subsidiary of Tencent Holdings (700 HK), to sell his stake. If the stake sale completes, it can result in the possible acquisition and privatization of Leyou by Tencent. 

Leyou has been subject to intense privatisation speculation with various suitors such as iDreamsky Technology Limited (1119 HK)/CVC, Zhejiang Century Huatong A (002602 CH), Sony Corp (6758 JP) and Tencent in pole position at different points in time since September 2019.

In this briefing:

1. XD Inc. (心动有限公司) Trade Idea – Lock-Up Expiry – Existing Shareholders May Look to Sell
2. Bitauto’s Privatisation Enters into a Definitive Agreement

1. XD Inc. (心动有限公司) Trade Idea – Lock-Up Expiry – Existing Shareholders May Look to Sell

XD Inc. (2400 HK)‘s IPO lock-up expired on Friday. We have earlier covered the IPO in:

• XD Inc. (心动有限公司) Pre-IPO – Sustainability in Question 
• XD Inc. (心动有限公司) Pre-IPO –  TapTap, Overseas Markets, and Thoughts on Valuation 
• XD Inc. (心动有限公司) IPO – Has Better Disclosure of Data but It Probably Won’t Help 
• XD Inc. (心动有限公司) Trading – Subscription Rate Pales in Comparison to CMGE 

In this insight, we will look at the potential sellers upon lock-up expiry and updates of how the company has performed since listing.

2. Bitauto’s Privatisation Enters into a Definitive Agreement

On 12 June, Bitauto Holdings Ltd Adr (BITA US) announced that it has entered into a definitive agreement for a privatisation proposal from Tencent Holdings (700 HK) and Hammer Capital. As a reminder, on 13 September 2019, Bitauto announced a non-binding privatisation proposal from Tencent and Hammer Capital for $16 per ADS. The bid is currently backed by shareholders who together account for 55.3% of the voting rights. 

In this briefing:

1. ME2ZEN IPO: Absence of Local Pension Funds Vs. Market Friendly Pricing
2. Softbank Reverse from Long to Short Target
3. King Yuan Electronics Co(2449 TT) – Time To Buy On Robust Demand For 5G, AI, and CMOS Image Sensor
4. Leyou in Tencent’s Crosshairs
5. ME2ZEN IPO – Trying for an IPO Again at a Lower IPO Price Range

1. ME2ZEN IPO: Absence of Local Pension Funds Vs. Market Friendly Pricing

First, here is an overview of ME2ZEN’s second IPO attempt.

It plans to offer 3.2M shares (52% primary and 48% secondary). The total offering represents 28.74% of the total shares at a 14.94% capital increase rate.

Mirae is working as a sole banker with a firm commitment.

The indicative price band is at ₩21,000~27,000, which gives an implied market cap of ₩289.9~372.7bil.

July 30~31 will be for book-building, followed by the allotment on August 4. The following day will be a subscription. The payment date is August 7.

Once again, the float will be tight on this one. A total of 72.48% shares will be in a lock-up for one month to three years. Of those, 65.26% is for more than six months.

2. Softbank Reverse from Long to Short Target

Softbank Group (9984 JP) has witnessed a sharp rise from our recent 4,400 long entry and nearing the ideal 6,600 target representing the top end of the intermediate expanding wedge range. We made a bull call near lower wedge support at 2,800.

Recent breakout point at 5,900 will act as pivot support that will induce a reaction back upward.

RSI shows synergy with dual tops in this zone to mark key cycle tops which fits with a top near 6,600. RSI is also forming a rising wedge that has a better than 70% probability of breaking down amid bear divergence.

Macro pivots are 6,800 and 4,900 as the expanding wedge defines a clear range (6,800 and 2,500).

3. King Yuan Electronics Co(2449 TT) – Time To Buy On Robust Demand For 5G, AI, and CMOS Image Sensor

In our view, KYEC embraces 5G migration cycle at infrastructure base stations and smartphones, as well as many other IoT devices, RF filter/PA, CMOS image sensors and server chips. We expect KYEC to post double digit YoY revenue growth in 2020. As such, we initiate coverage on KYEC with a Buy call and 12-month TP of TWD50.

4. Leyou in Tencent’s Crosshairs

Leyou Technologies (1089 HK)’s long-drawn takeover saga has potentially taken its final twist. After market close on Friday, Leyou announced that Mr Yuk, Leyou’s controlling shareholder with a 69.2% stake, entered into a three months exclusivity agreement with Tencent Mobility, a wholly-owned subsidiary of Tencent Holdings (700 HK), to sell his stake. If the stake sale completes, it can result in the possible acquisition and privatization of Leyou by Tencent. 

Leyou has been subject to intense privatisation speculation with various suitors such as iDreamsky Technology Limited (1119 HK)/CVC, Zhejiang Century Huatong A (002602 CH), Sony Corp (6758 JP) and Tencent in pole position at different points in time since September 2019.

5. ME2ZEN IPO – Trying for an IPO Again at a Lower IPO Price Range

ME2ZEN (951211 KS) is getting ready to complete it IPO in the KOSDAQ exchange in August. ME2ZEN is a Hong Kong based company that makes casual and social casino games. This is a second time that ME2ZEN is trying to complete an IPO in Korea after a failed attempt in 4Q 2019.

In this briefing:

1. Bitauto’s Privatisation Enters into a Definitive Agreement

1. Bitauto’s Privatisation Enters into a Definitive Agreement

On 12 June, Bitauto Holdings Ltd Adr (BITA US) announced that it has entered into a definitive agreement for a privatisation proposal from Tencent Holdings (700 HK) and Hammer Capital. As a reminder, on 13 September 2019, Bitauto announced a non-binding privatisation proposal from Tencent and Hammer Capital for $16 per ADS. The bid is currently backed by shareholders who together account for 55.3% of the voting rights. 

In this briefing:

1. Softbank Reverse from Long to Short Target
2. King Yuan Electronics Co(2449 TT) – Time To Buy On Robust Demand For 5G, AI, and CMOS Image Sensor
3. Leyou in Tencent’s Crosshairs
4. ME2ZEN IPO – Trying for an IPO Again at a Lower IPO Price Range
5. Yaskawa – Developed Market Deceleration Striking

1. Softbank Reverse from Long to Short Target

Softbank Group (9984 JP) has witnessed a sharp rise from our recent 4,400 long entry and nearing the ideal 6,600 target representing the top end of the intermediate expanding wedge range. We made a bull call near lower wedge support at 2,800.

Recent breakout point at 5,900 will act as pivot support that will induce a reaction back upward.

RSI shows synergy with dual tops in this zone to mark key cycle tops which fits with a top near 6,600. RSI is also forming a rising wedge that has a better than 70% probability of breaking down amid bear divergence.

Macro pivots are 6,800 and 4,900 as the expanding wedge defines a clear range (6,800 and 2,500).

2. King Yuan Electronics Co(2449 TT) – Time To Buy On Robust Demand For 5G, AI, and CMOS Image Sensor

In our view, KYEC embraces 5G migration cycle at infrastructure base stations and smartphones, as well as many other IoT devices, RF filter/PA, CMOS image sensors and server chips. We expect KYEC to post double digit YoY revenue growth in 2020. As such, we initiate coverage on KYEC with a Buy call and 12-month TP of TWD50.

3. Leyou in Tencent’s Crosshairs

Leyou Technologies (1089 HK)’s long-drawn takeover saga has potentially taken its final twist. After market close on Friday, Leyou announced that Mr Yuk, Leyou’s controlling shareholder with a 69.2% stake, entered into a three months exclusivity agreement with Tencent Mobility, a wholly-owned subsidiary of Tencent Holdings (700 HK), to sell his stake. If the stake sale completes, it can result in the possible acquisition and privatization of Leyou by Tencent. 

Leyou has been subject to intense privatisation speculation with various suitors such as iDreamsky Technology Limited (1119 HK)/CVC, Zhejiang Century Huatong A (002602 CH), Sony Corp (6758 JP) and Tencent in pole position at different points in time since September 2019.

4. ME2ZEN IPO – Trying for an IPO Again at a Lower IPO Price Range

ME2ZEN (951211 KS) is getting ready to complete it IPO in the KOSDAQ exchange in August. ME2ZEN is a Hong Kong based company that makes casual and social casino games. This is a second time that ME2ZEN is trying to complete an IPO in Korea after a failed attempt in 4Q 2019.

5. Yaskawa – Developed Market Deceleration Striking

Yaskawa reported results today which surprised to the upside significantly at the OP level (¥6.2bn vs. consensus ¥3.7bn and LSR ¥6.7bn) but were in-line at the revenue level (¥90.8bn vs. consensus ¥91.3bn and LSR ¥98.4bn). Our forecasts were driven based on a variety of datapoints including regional breakdowns and identified but underestimated the extent of developed market weakness. We detected the strength in China as well and one of the key drivers of profitability appears to have been the seasonally high servomotor sales in China which we flagged previously. Inverter sales to the US oil and gas industry appear to have collapsed faster than expected dragging down revenues.

In this briefing:

1. Just Eat Takeaway / GrubHub (JET LN / GRUB US): Will Prosus (PRX NA) Spoil the Dinner Party?

1. Just Eat Takeaway / GrubHub (JET LN / GRUB US): Will Prosus (PRX NA) Spoil the Dinner Party?

The way Prosus let Just Eat go during the bidding war seemed like a strategic retreat. This move led to speculation that Prosus was pulling back so it could make a bolder move for the combined Just Eat Takeaway (JET LN) at a later stage. Fall in the share price of the combined group would have been a good opportunity to acquire JET. The COVID-19 crisis put paid those plans. During the lockdown, British people ate a lot of delivered food. Just Eat business flourished. 

Now with a bid on Grubhub Inc (GRUB US) on the tape, if Prosus wants JET it has to make its move very soon. Below I analyse the financial ability of Prosus to bid on JET.

In this briefing:

1. Just Eat Takeaway / GrubHub (JET LN / GRUB US): Will Prosus (PRX NA) Spoil the Dinner Party?
2. Saltlux IPO Valuation Analysis

1. Just Eat Takeaway / GrubHub (JET LN / GRUB US): Will Prosus (PRX NA) Spoil the Dinner Party?

The way Prosus let Just Eat go during the bidding war seemed like a strategic retreat. This move led to speculation that Prosus was pulling back so it could make a bolder move for the combined Just Eat Takeaway (JET LN) at a later stage. Fall in the share price of the combined group would have been a good opportunity to acquire JET. The COVID-19 crisis put paid those plans. During the lockdown, British people ate a lot of delivered food. Just Eat business flourished. 

Now with a bid on Grubhub Inc (GRUB US) on the tape, if Prosus wants JET it has to make its move very soon. Below I analyse the financial ability of Prosus to bid on JET.

2. Saltlux IPO Valuation Analysis

In this insight, we provide a valuation analysis of Saltlux (SLTX KS). In addition, we provide additional fundamental details of the company, competitors, as well as the market outlook for AI & Big Data services.

In our view, Saltlux has one of the best technologies in the AI/Big Data sector in Korea. In terms of business model, it is closer to Mindslab and Daumsoft which are privately held. The fact that Saltlux has larger sales than these two competitors is impressive. We think there is likely to be a big acquisition premium on Saltlux going forward.