United States

In this briefing:

1. Weekly Oil Views: Rising Mideast Tensions Dwarfed by Demand Growth Worries
2. This Week in Blockchain & Cryptos: Visa, Ubisoft, GM, Target, FB & Apple Reveal Blockchain Plans
3. Hong Kong /Trade War/Huawei/Stimulus/Stink Bugs
4. What Would Happen If The Fed Cuts Rates?

1. Weekly Oil Views: Rising Mideast Tensions Dwarfed by Demand Growth Worries

Two oil tanker attacks on June 13 in the Gulf of Oman, a key waterway used for shipping oil to the world by seven major Middle Eastern producers, jolted the market. The US and Saudi Arabia blamed Iran, though the latter vehemently denied having any role.

The fact this followed a similar incident on May 12 involving four oil tankers off the UAE port of Fujairah, and amid increased attacks on Saudi infrastructure by the Iran-backed Houthi rebels in Yemen in recent weeks, points to a new high in geopolitical tensions in the Middle East.

And yet, benchmark Brent crude recorded its fourth successive weekly loss, closing at $62.01/barrel on Friday. The “fear premium” in crude was kept in check by oil market bears, who have rapidly soured over the prospect of global consumption growth this year amid economic headwinds unleashed by trade wars and tensions.

2. This Week in Blockchain & Cryptos: Visa, Ubisoft, GM, Target, FB & Apple Reveal Blockchain Plans

• Bitcoin saw a correction during the first week of June but has recovered quickly. Bitcoin’s leading indicators remain positive, giving a bullish outlook for the market.  
• A number of public companies, including Visa Inc (V US), UBISOFT Entertainment (UBI FP), Legal & General (LGEN LN),  General Motors Co (GM US), Target Corp (TGT US), Panalpina Welttransport Holding (PWTN SW), Facebook Inc A (FB US) and Apple Inc (AAPL US) revealed their blockchain plans/initiatives during the past two weeks. 
• In other news, Justin Sun, the founder of the cryptocurrency company Tron, was the winner of this year’s “Power Lunch” with Warren Buffet, while major Korean banks show an appetite for blockchain based solutions.

3. Hong Kong /Trade War/Huawei/Stimulus/Stink Bugs

China News That Matters

• Do you hear the people sing?
• The deadline is in my head
• A wealth of data on people, governments and companies
• So stimulating: Beijing pushes funding for big infrastructure
• Stink Bug vs Armyworm, amid food inflation battle 

4. What Would Happen If The Fed Cuts Rates?

As we look ahead to the FOMC meeting next week, the market has priced in three quarter-point rate cuts for 2019, with the first cut occurring at the July meeting.

A rate cut is not unexpected, as the bond market has pushed the Treasury yield curve down so far that only the 30-year Treasury bond is trading above the current Fed Funds target. It is likely too early for the Fed to cut rates at its June meeting next week, but if the market is discounting a July cut, the Fed is likely to signal it is either in agreement with that expectation or correct the market.

Rather than debate whether the Fed should cut rates, we consider the scenario of what might happen if it were to proceed with a July rate cut. What are the consequences for economic growth and the stock market?

We believe that while the Fed could decide to cut rates at its July FOMC meeting, the future path of interest rates and stock prices depends on the reasoning behind the rate cut. If the cut is in response to the eruption of a full-blown trade and economic cold war with China, it is likely to be the start of a protracted rate cut cycle, with bearish implications for equity prices. On the other hand, if the rate cut is an “insurance” cut designed to heed off further economic weakness in the face of a stalemated trade dispute, we expect the cut to be reversed relatively quickly because the global growth backdrop remains constructive. Equity prices would rise under such a scenario as the bullish implications of higher growth would overwhelm the bearish implications of higher interest rates.

In this briefing:

1. DouYu IPO: Bull/​​​​Bear DCF Scenarios
2. Douyu IPO: Cost Structure Disadvantage Vs. Huya Implies a Discount Not Premium Is Appropriate
3. Weekly Oil Views: Barry Didn’t Chase the Bears Away
4. CloudMinds IPO Initiation: Computer Says No
5. CloudMinds Inc Early Thoughts – Still Nascent

1. DouYu IPO: Bull/​​​​Bear DCF Scenarios

Douyu International Holdings (DOYU US) is a leading game live streaming platform in China with a focus on e-sports content. DouYu which announced its IPO price range of $11.50-14.00 per ADS, will price its IPO on 16 July. 

2. Douyu IPO: Cost Structure Disadvantage Vs. Huya Implies a Discount Not Premium Is Appropriate

Douyu plans to list on the 16^th of July on Nasdaq. Proceeds of the IPO are expected to be utilised to expand on content genres offered and provide premium esports content, improve existing technologies and big data analytics, invest in marketing activities and for general corporate purposes. At the mid-point of the offer price range, the company will raise approx. USD572.8m to carry out the above-mentioned investment activities.

Douyu mainly competes with Huya in the game streaming landscape in China. Huya listed in the US in May 2018 and the company has managed to make an operating profit and raise its gross profits in the last year. Meanwhile, Douyu continues to struggle to make operating profits, having just achieved gross profit status in the last fiscal year. Even though the company has a higher user base than Huya, Douyu continues to suffer with regards to efficiently managing costs related to revenue sharing fees and content costs.

Huya’s topline and bottomline performance seems much more favourable to us than Douyu’s. According to our estimates, Douyu has an EV of USD3,498m, which iterates to an FY1 EV/sales multiple of 4.4x, which we believe is expensive compared to peers. In comparison, peers Huya and iQiyi are trading at cheaper multiples of 3.4x and 3.1x respectively. 

3. Weekly Oil Views: Barry Didn’t Chase the Bears Away

It is the Atlantic hurricane season and severe tropical storms in the US Gulf of Mexico, depending on the damage and disruption to oil facilities caused by them, can be expected to splash the market with bouts of bullishness.  

The approach of Tropical Storm Barry (which reached hurricane strength as it made landfall in Louisiana), helped by the report of an unexpectedly large weekly drawdown in US crude inventories, prompted a 4-4.5% spike in crude prices last Wednesday. But the rally stalled as the week drew to a close.

It may have been expectations of no major disruption to oil facilities in the wake of Barry as the picture on the storm became clearer, that put a lid on crude’s rise. But perhaps more significantly, the market remained focused on the oversupply prognosis of all three major forecasters — the EIA, OPEC and IEA — in their latest monthly reports last week.

The oil bears may have temporarily taken shelter from Barry, but with the disruption to crude and refined product facilities in and around the US Gulf expected to be minor (if any) and short-lived, we expect them to remain in control.

4. CloudMinds IPO Initiation: Computer Says No

CloudMinds (CMDS US) offers an end-to-end cloud robot system which is capable of operating consumer service robots, which include both in-house and third-party robots. It is backed by Softbank Group (9984 JP)’s Vision Fund, which is a 34.6% shareholder.

5. CloudMinds Inc Early Thoughts – Still Nascent

CloudMinds (CMDS UA) is looking to raise US$500m in its upcoming IPO in the US.

The idea of replacing day to day mundane tasks through robots and being able to leverage AI and cloud computing to improve their performance sounds incredible. FY2018 revenue growth has also been spectacular.

But, under the fold, the company is less like a cloud robotics company since it derives majority of revenue from smart devices with cloud computing capabilities. The lack of data disclosure is frustrating, as it has made revenue visibility poor since there is no way of telling which products (smart devices or robots) are selling well. 

In this briefing:

1. This Week in Blockchain & Cryptos: Visa, Ubisoft, GM, Target, FB & Apple Reveal Blockchain Plans
2. Hong Kong /Trade War/Huawei/Stimulus/Stink Bugs
3. What Would Happen If The Fed Cuts Rates?

1. This Week in Blockchain & Cryptos: Visa, Ubisoft, GM, Target, FB & Apple Reveal Blockchain Plans

• Bitcoin saw a correction during the first week of June but has recovered quickly. Bitcoin’s leading indicators remain positive, giving a bullish outlook for the market.  
• A number of public companies, including Visa Inc (V US), UBISOFT Entertainment (UBI FP), Legal & General (LGEN LN),  General Motors Co (GM US), Target Corp (TGT US), Panalpina Welttransport Holding (PWTN SW), Facebook Inc A (FB US) and Apple Inc (AAPL US) revealed their blockchain plans/initiatives during the past two weeks. 
• In other news, Justin Sun, the founder of the cryptocurrency company Tron, was the winner of this year’s “Power Lunch” with Warren Buffet, while major Korean banks show an appetite for blockchain based solutions.

2. Hong Kong /Trade War/Huawei/Stimulus/Stink Bugs

China News That Matters

• Do you hear the people sing?
• The deadline is in my head
• A wealth of data on people, governments and companies
• So stimulating: Beijing pushes funding for big infrastructure
• Stink Bug vs Armyworm, amid food inflation battle 

3. What Would Happen If The Fed Cuts Rates?

As we look ahead to the FOMC meeting next week, the market has priced in three quarter-point rate cuts for 2019, with the first cut occurring at the July meeting.

A rate cut is not unexpected, as the bond market has pushed the Treasury yield curve down so far that only the 30-year Treasury bond is trading above the current Fed Funds target. It is likely too early for the Fed to cut rates at its June meeting next week, but if the market is discounting a July cut, the Fed is likely to signal it is either in agreement with that expectation or correct the market.

Rather than debate whether the Fed should cut rates, we consider the scenario of what might happen if it were to proceed with a July rate cut. What are the consequences for economic growth and the stock market?

We believe that while the Fed could decide to cut rates at its July FOMC meeting, the future path of interest rates and stock prices depends on the reasoning behind the rate cut. If the cut is in response to the eruption of a full-blown trade and economic cold war with China, it is likely to be the start of a protracted rate cut cycle, with bearish implications for equity prices. On the other hand, if the rate cut is an “insurance” cut designed to heed off further economic weakness in the face of a stalemated trade dispute, we expect the cut to be reversed relatively quickly because the global growth backdrop remains constructive. Equity prices would rise under such a scenario as the bullish implications of higher growth would overwhelm the bearish implications of higher interest rates.

In this briefing:

1. Douyu IPO: Cost Structure Disadvantage Vs. Huya Implies a Discount Not Premium Is Appropriate
2. Weekly Oil Views: Barry Didn’t Chase the Bears Away
3. CloudMinds IPO Initiation: Computer Says No
4. CloudMinds Inc Early Thoughts – Still Nascent
5. Douyu Vs Huya: 2Q Top Streamers Analysis

1. Douyu IPO: Cost Structure Disadvantage Vs. Huya Implies a Discount Not Premium Is Appropriate

Douyu plans to list on the 16^th of July on Nasdaq. Proceeds of the IPO are expected to be utilised to expand on content genres offered and provide premium esports content, improve existing technologies and big data analytics, invest in marketing activities and for general corporate purposes. At the mid-point of the offer price range, the company will raise approx. USD572.8m to carry out the above-mentioned investment activities.

Douyu mainly competes with Huya in the game streaming landscape in China. Huya listed in the US in May 2018 and the company has managed to make an operating profit and raise its gross profits in the last year. Meanwhile, Douyu continues to struggle to make operating profits, having just achieved gross profit status in the last fiscal year. Even though the company has a higher user base than Huya, Douyu continues to suffer with regards to efficiently managing costs related to revenue sharing fees and content costs.

Huya’s topline and bottomline performance seems much more favourable to us than Douyu’s. According to our estimates, Douyu has an EV of USD3,498m, which iterates to an FY1 EV/sales multiple of 4.4x, which we believe is expensive compared to peers. In comparison, peers Huya and iQiyi are trading at cheaper multiples of 3.4x and 3.1x respectively. 

2. Weekly Oil Views: Barry Didn’t Chase the Bears Away

It is the Atlantic hurricane season and severe tropical storms in the US Gulf of Mexico, depending on the damage and disruption to oil facilities caused by them, can be expected to splash the market with bouts of bullishness.  

The approach of Tropical Storm Barry (which reached hurricane strength as it made landfall in Louisiana), helped by the report of an unexpectedly large weekly drawdown in US crude inventories, prompted a 4-4.5% spike in crude prices last Wednesday. But the rally stalled as the week drew to a close.

It may have been expectations of no major disruption to oil facilities in the wake of Barry as the picture on the storm became clearer, that put a lid on crude’s rise. But perhaps more significantly, the market remained focused on the oversupply prognosis of all three major forecasters — the EIA, OPEC and IEA — in their latest monthly reports last week.

The oil bears may have temporarily taken shelter from Barry, but with the disruption to crude and refined product facilities in and around the US Gulf expected to be minor (if any) and short-lived, we expect them to remain in control.

3. CloudMinds IPO Initiation: Computer Says No

CloudMinds (CMDS US) offers an end-to-end cloud robot system which is capable of operating consumer service robots, which include both in-house and third-party robots. It is backed by Softbank Group (9984 JP)’s Vision Fund, which is a 34.6% shareholder.

4. CloudMinds Inc Early Thoughts – Still Nascent

CloudMinds (CMDS UA) is looking to raise US$500m in its upcoming IPO in the US.

The idea of replacing day to day mundane tasks through robots and being able to leverage AI and cloud computing to improve their performance sounds incredible. FY2018 revenue growth has also been spectacular.

But, under the fold, the company is less like a cloud robotics company since it derives majority of revenue from smart devices with cloud computing capabilities. The lack of data disclosure is frustrating, as it has made revenue visibility poor since there is no way of telling which products (smart devices or robots) are selling well. 

5. Douyu Vs Huya: 2Q Top Streamers Analysis

Douyu, one of the two major e-sports broadcasting company in China, launched its IPO to raise up to USD 944 million last week. In our previous insight, we covered the company’s fundamentals, the latest financial numbers, and a detailed comparison between Douyu and Huya. We also looked at the IPO valuations. 

In this insight, we will compare key metrics of top streamers on both platforms and try to answer two questions in this insight: 1) how dependent are both platforms on top streamers, and 2) what is the difference of operating metrics for top streamers on both platforms.

• Douyu (斗鱼直播) IPO: Leader At a Cost
• Douyu (斗鱼直播) IPO: Comparison with Huya (Part 2)
• Douyu (斗鱼直播) IPO: Latest Numbers Bode Well for Listing (Part 3)
• Douyu (斗鱼直播) IPO: Detailed E-Sports Broadcasting Comparison with Huya
• Douyu (斗鱼直播) IPO: Valuation Reasonable Even at High End

In this briefing:

1. Weekly Oil Views: Barry Didn’t Chase the Bears Away
2. CloudMinds IPO Initiation: Computer Says No
3. CloudMinds Inc Early Thoughts – Still Nascent
4. Douyu Vs Huya: 2Q Top Streamers Analysis
5. Blockchain Delusion: Overstock

1. Weekly Oil Views: Barry Didn’t Chase the Bears Away

It is the Atlantic hurricane season and severe tropical storms in the US Gulf of Mexico, depending on the damage and disruption to oil facilities caused by them, can be expected to splash the market with bouts of bullishness.  

The approach of Tropical Storm Barry (which reached hurricane strength as it made landfall in Louisiana), helped by the report of an unexpectedly large weekly drawdown in US crude inventories, prompted a 4-4.5% spike in crude prices last Wednesday. But the rally stalled as the week drew to a close.

It may have been expectations of no major disruption to oil facilities in the wake of Barry as the picture on the storm became clearer, that put a lid on crude’s rise. But perhaps more significantly, the market remained focused on the oversupply prognosis of all three major forecasters — the EIA, OPEC and IEA — in their latest monthly reports last week.

The oil bears may have temporarily taken shelter from Barry, but with the disruption to crude and refined product facilities in and around the US Gulf expected to be minor (if any) and short-lived, we expect them to remain in control.

2. CloudMinds IPO Initiation: Computer Says No

CloudMinds (CMDS US) offers an end-to-end cloud robot system which is capable of operating consumer service robots, which include both in-house and third-party robots. It is backed by Softbank Group (9984 JP)’s Vision Fund, which is a 34.6% shareholder.

3. CloudMinds Inc Early Thoughts – Still Nascent

CloudMinds (CMDS UA) is looking to raise US$500m in its upcoming IPO in the US.

The idea of replacing day to day mundane tasks through robots and being able to leverage AI and cloud computing to improve their performance sounds incredible. FY2018 revenue growth has also been spectacular.

But, under the fold, the company is less like a cloud robotics company since it derives majority of revenue from smart devices with cloud computing capabilities. The lack of data disclosure is frustrating, as it has made revenue visibility poor since there is no way of telling which products (smart devices or robots) are selling well. 

4. Douyu Vs Huya: 2Q Top Streamers Analysis

Douyu, one of the two major e-sports broadcasting company in China, launched its IPO to raise up to USD 944 million last week. In our previous insight, we covered the company’s fundamentals, the latest financial numbers, and a detailed comparison between Douyu and Huya. We also looked at the IPO valuations. 

In this insight, we will compare key metrics of top streamers on both platforms and try to answer two questions in this insight: 1) how dependent are both platforms on top streamers, and 2) what is the difference of operating metrics for top streamers on both platforms.

• Douyu (斗鱼直播) IPO: Leader At a Cost
• Douyu (斗鱼直播) IPO: Comparison with Huya (Part 2)
• Douyu (斗鱼直播) IPO: Latest Numbers Bode Well for Listing (Part 3)
• Douyu (斗鱼直播) IPO: Detailed E-Sports Broadcasting Comparison with Huya
• Douyu (斗鱼直播) IPO: Valuation Reasonable Even at High End

5. Blockchain Delusion: Overstock

Blockchain delusion may have peaked, but it hasn’t gone away. Online US retailer Overstock, led by outspoken and controversial founder Patrick Byrne, continues to promote, actually evangelize, his company’s blockchain initiatives. Under his “Governement as a Service” moniker, Byrne vows to transform key pillars of society, from voting to land title management, from capital markets to currencies. Even more spectacularly, Byrne claims to have found “cold fusion on the blockchain side”. Is he correct? We think not and here’s why. 

In this briefing:

1. CloudMinds Inc Early Thoughts – Still Nascent
2. Douyu Vs Huya: 2Q Top Streamers Analysis
3. Blockchain Delusion: Overstock
4. Are Risky Assets Overvalued?
5. Trade War/Hong Kong/Shipbuilding/Rubbish

1. CloudMinds Inc Early Thoughts – Still Nascent

CloudMinds (CMDS UA) is looking to raise US$500m in its upcoming IPO in the US.

The idea of replacing day to day mundane tasks through robots and being able to leverage AI and cloud computing to improve their performance sounds incredible. FY2018 revenue growth has also been spectacular.

But, under the fold, the company is less like a cloud robotics company since it derives majority of revenue from smart devices with cloud computing capabilities. The lack of data disclosure is frustrating, as it has made revenue visibility poor since there is no way of telling which products (smart devices or robots) are selling well. 

2. Douyu Vs Huya: 2Q Top Streamers Analysis

Douyu, one of the two major e-sports broadcasting company in China, launched its IPO to raise up to USD 944 million last week. In our previous insight, we covered the company’s fundamentals, the latest financial numbers, and a detailed comparison between Douyu and Huya. We also looked at the IPO valuations. 

In this insight, we will compare key metrics of top streamers on both platforms and try to answer two questions in this insight: 1) how dependent are both platforms on top streamers, and 2) what is the difference of operating metrics for top streamers on both platforms.

• Douyu (斗鱼直播) IPO: Leader At a Cost
• Douyu (斗鱼直播) IPO: Comparison with Huya (Part 2)
• Douyu (斗鱼直播) IPO: Latest Numbers Bode Well for Listing (Part 3)
• Douyu (斗鱼直播) IPO: Detailed E-Sports Broadcasting Comparison with Huya
• Douyu (斗鱼直播) IPO: Valuation Reasonable Even at High End

3. Blockchain Delusion: Overstock

Blockchain delusion may have peaked, but it hasn’t gone away. Online US retailer Overstock, led by outspoken and controversial founder Patrick Byrne, continues to promote, actually evangelize, his company’s blockchain initiatives. Under his “Governement as a Service” moniker, Byrne vows to transform key pillars of society, from voting to land title management, from capital markets to currencies. Even more spectacularly, Byrne claims to have found “cold fusion on the blockchain side”. Is he correct? We think not and here’s why. 

4. Are Risky Assets Overvalued?

US stocks are significantly overvalued and we should expect lower than average returns going forward, unless there is going to be a substantial increase in earnings growth.

In the credit space, corporate bonds are expensive, and leveraged loans unattractive.

As risky assets become less attractive and expensive, that leaves investors mostly with Government Bonds.

5. Trade War/Hong Kong/Shipbuilding/Rubbish

China News That Matters

• Trump complains about Chinese shopping
• Hong Kong crisis – deal “dead”, but not withdrawn
• When we could be diving for pearls
• Where there’s muck, there’s brass

In this briefing:

1. Douyu Vs Huya: 2Q Top Streamers Analysis
2. Blockchain Delusion: Overstock
3. Are Risky Assets Overvalued?
4. Trade War/Hong Kong/Shipbuilding/Rubbish
5. Budweiser Brewing Company APAC IPO (Cancelled) – Quick Trades on the Not so Subtle Butterfly Effect

1. Douyu Vs Huya: 2Q Top Streamers Analysis

Douyu, one of the two major e-sports broadcasting company in China, launched its IPO to raise up to USD 944 million last week. In our previous insight, we covered the company’s fundamentals, the latest financial numbers, and a detailed comparison between Douyu and Huya. We also looked at the IPO valuations. 

In this insight, we will compare key metrics of top streamers on both platforms and try to answer two questions in this insight: 1) how dependent are both platforms on top streamers, and 2) what is the difference of operating metrics for top streamers on both platforms.

• Douyu (斗鱼直播) IPO: Leader At a Cost
• Douyu (斗鱼直播) IPO: Comparison with Huya (Part 2)
• Douyu (斗鱼直播) IPO: Latest Numbers Bode Well for Listing (Part 3)
• Douyu (斗鱼直播) IPO: Detailed E-Sports Broadcasting Comparison with Huya
• Douyu (斗鱼直播) IPO: Valuation Reasonable Even at High End

2. Blockchain Delusion: Overstock

Blockchain delusion may have peaked, but it hasn’t gone away. Online US retailer Overstock, led by outspoken and controversial founder Patrick Byrne, continues to promote, actually evangelize, his company’s blockchain initiatives. Under his “Governement as a Service” moniker, Byrne vows to transform key pillars of society, from voting to land title management, from capital markets to currencies. Even more spectacularly, Byrne claims to have found “cold fusion on the blockchain side”. Is he correct? We think not and here’s why. 

3. Are Risky Assets Overvalued?

US stocks are significantly overvalued and we should expect lower than average returns going forward, unless there is going to be a substantial increase in earnings growth.

In the credit space, corporate bonds are expensive, and leveraged loans unattractive.

As risky assets become less attractive and expensive, that leaves investors mostly with Government Bonds.

4. Trade War/Hong Kong/Shipbuilding/Rubbish

China News That Matters

• Trump complains about Chinese shopping
• Hong Kong crisis – deal “dead”, but not withdrawn
• When we could be diving for pearls
• Where there’s muck, there’s brass

5. Budweiser Brewing Company APAC IPO (Cancelled) – Quick Trades on the Not so Subtle Butterfly Effect

The announcement of the cancellation of the IPO, will impact some of the listed names across Asia-Pac, apart from the more obvious impact on the parent, Anheuser Busch Inbev Sa/Nv (ABI BB). Not to mention, souring of sentiment for some of the bigger deals in the pipeline.

I’ve covered the IPO over the past few months and taken a quick look at some of the M&A prospects across Asia. In this insight, I’ll talk about some of the follow-on effects from the IPO cancellation, starting with the not so obvious and ending with the obvious.

Links to my earlier insights:

• A brief history: Ab InBev Asia Pre-IPO – A Brief History of the Asia Pacific Operations – Eeking Out Growth in China
• Comparison with peers: Ab InBev Asia Pre-IPO – Quick Note – More like CR Beer Rather than Tsingtao
• 2018 and 1Q19 performance updates: Ab InBev Asia Pre-IPO – On Its Way to Potentially Being the Biggest HK IPO This Year
• Analysis of the application proof: Budweiser Brewing Company APAC Pre-IPO – It Will Be a US$5bn+ Raise Owing to Its Clean Balance Sheet
• Country performance and updated peer comparison: Budweiser Brewing Company APAC Limited Pre-IPO – Country Performance and Updated Peer Comparison
• Valuation analysis: Budweiser Brewing Company APAC Pre-IPO – Refining Valuation for the Diverging Growth Prospects
• Index impact: Budweiser Brewing Company APAC Pre-IPO – Quick Take on Likely Index Impact
• PHIP updates: Budweiser Brewing Company APAC Pre-IPO – PHIP Updates Further Indicate the Need for Split Valuations
• Valuations: Budweiser Brewing Company APAC IPO – Looks Reasonable at the Low End. It Should Go into MSCI, Early
• Index inclusion timeline and quick thoughts on M&A possibilities: Budweiser Brewing APAC IPO – Valuation Corrigendum, Index Inclusion Timeline and Quick Take on M&A

In this briefing:

1. This Week in Blockchain & Cryptos: Visa, Ubisoft, GM, Target, FB & Apple Reveal Blockchain Plans
2. Hong Kong /Trade War/Huawei/Stimulus/Stink Bugs
3. What Would Happen If The Fed Cuts Rates?
4. The RealReal IPO Preview: The Devil Wears Prada, Chanel, Louis Vuitton, Gucci, & Secondhand Too!

1. This Week in Blockchain & Cryptos: Visa, Ubisoft, GM, Target, FB & Apple Reveal Blockchain Plans

• Bitcoin saw a correction during the first week of June but has recovered quickly. Bitcoin’s leading indicators remain positive, giving a bullish outlook for the market.  
• A number of public companies, including Visa Inc (V US), UBISOFT Entertainment (UBI FP), Legal & General (LGEN LN),  General Motors Co (GM US), Target Corp (TGT US), Panalpina Welttransport Holding (PWTN SW), Facebook Inc A (FB US) and Apple Inc (AAPL US) revealed their blockchain plans/initiatives during the past two weeks. 
• In other news, Justin Sun, the founder of the cryptocurrency company Tron, was the winner of this year’s “Power Lunch” with Warren Buffet, while major Korean banks show an appetite for blockchain based solutions.

2. Hong Kong /Trade War/Huawei/Stimulus/Stink Bugs

China News That Matters

• Do you hear the people sing?
• The deadline is in my head
• A wealth of data on people, governments and companies
• So stimulating: Beijing pushes funding for big infrastructure
• Stink Bug vs Armyworm, amid food inflation battle 

3. What Would Happen If The Fed Cuts Rates?

As we look ahead to the FOMC meeting next week, the market has priced in three quarter-point rate cuts for 2019, with the first cut occurring at the July meeting.

A rate cut is not unexpected, as the bond market has pushed the Treasury yield curve down so far that only the 30-year Treasury bond is trading above the current Fed Funds target. It is likely too early for the Fed to cut rates at its June meeting next week, but if the market is discounting a July cut, the Fed is likely to signal it is either in agreement with that expectation or correct the market.

Rather than debate whether the Fed should cut rates, we consider the scenario of what might happen if it were to proceed with a July rate cut. What are the consequences for economic growth and the stock market?

We believe that while the Fed could decide to cut rates at its July FOMC meeting, the future path of interest rates and stock prices depends on the reasoning behind the rate cut. If the cut is in response to the eruption of a full-blown trade and economic cold war with China, it is likely to be the start of a protracted rate cut cycle, with bearish implications for equity prices. On the other hand, if the rate cut is an “insurance” cut designed to heed off further economic weakness in the face of a stalemated trade dispute, we expect the cut to be reversed relatively quickly because the global growth backdrop remains constructive. Equity prices would rise under such a scenario as the bullish implications of higher growth would overwhelm the bearish implications of higher interest rates.

4. The RealReal IPO Preview: The Devil Wears Prada, Chanel, Louis Vuitton, Gucci, & Secondhand Too!

The RealReal (REAL US), the largest online marketplace for authenticated, consigned luxury goods in the world, is getting ready for an IPO in the next few weeks. 

The consumers that own luxury goods such as a Prada bag but want to sell it can mail it to the company or drop it off at The RealReal stores. The RealReal would then authenticate the Prada bag and resell it. 

The company generated revenue of $207.4 million (up 54.9% YoY), gross profit of $136.9 million (up 56.2% YoY), and operating loss of $73.9 million in 2018 (from operating loss of $51.8 million in 2017). 

The RealReal is doing a very good job in generating repeat buyers. The RealReal repeat buyers as a percentage of GMV improved from 78% in 2015 to 80.7% in 2017 and 82.2% in 2018.

In this briefing:

1. Blockchain Delusion: Overstock
2. Are Risky Assets Overvalued?
3. Trade War/Hong Kong/Shipbuilding/Rubbish
4. Budweiser Brewing Company APAC IPO (Cancelled) – Quick Trades on the Not so Subtle Butterfly Effect
5. WDC Impact from Toshiba Power Outage

1. Blockchain Delusion: Overstock

Blockchain delusion may have peaked, but it hasn’t gone away. Online US retailer Overstock, led by outspoken and controversial founder Patrick Byrne, continues to promote, actually evangelize, his company’s blockchain initiatives. Under his “Governement as a Service” moniker, Byrne vows to transform key pillars of society, from voting to land title management, from capital markets to currencies. Even more spectacularly, Byrne claims to have found “cold fusion on the blockchain side”. Is he correct? We think not and here’s why. 

2. Are Risky Assets Overvalued?

US stocks are significantly overvalued and we should expect lower than average returns going forward, unless there is going to be a substantial increase in earnings growth.

In the credit space, corporate bonds are expensive, and leveraged loans unattractive.

As risky assets become less attractive and expensive, that leaves investors mostly with Government Bonds.

3. Trade War/Hong Kong/Shipbuilding/Rubbish

China News That Matters

• Trump complains about Chinese shopping
• Hong Kong crisis – deal “dead”, but not withdrawn
• When we could be diving for pearls
• Where there’s muck, there’s brass

4. Budweiser Brewing Company APAC IPO (Cancelled) – Quick Trades on the Not so Subtle Butterfly Effect

The announcement of the cancellation of the IPO, will impact some of the listed names across Asia-Pac, apart from the more obvious impact on the parent, Anheuser Busch Inbev Sa/Nv (ABI BB). Not to mention, souring of sentiment for some of the bigger deals in the pipeline.

I’ve covered the IPO over the past few months and taken a quick look at some of the M&A prospects across Asia. In this insight, I’ll talk about some of the follow-on effects from the IPO cancellation, starting with the not so obvious and ending with the obvious.

Links to my earlier insights:

• A brief history: Ab InBev Asia Pre-IPO – A Brief History of the Asia Pacific Operations – Eeking Out Growth in China
• Comparison with peers: Ab InBev Asia Pre-IPO – Quick Note – More like CR Beer Rather than Tsingtao
• 2018 and 1Q19 performance updates: Ab InBev Asia Pre-IPO – On Its Way to Potentially Being the Biggest HK IPO This Year
• Analysis of the application proof: Budweiser Brewing Company APAC Pre-IPO – It Will Be a US$5bn+ Raise Owing to Its Clean Balance Sheet
• Country performance and updated peer comparison: Budweiser Brewing Company APAC Limited Pre-IPO – Country Performance and Updated Peer Comparison
• Valuation analysis: Budweiser Brewing Company APAC Pre-IPO – Refining Valuation for the Diverging Growth Prospects
• Index impact: Budweiser Brewing Company APAC Pre-IPO – Quick Take on Likely Index Impact
• PHIP updates: Budweiser Brewing Company APAC Pre-IPO – PHIP Updates Further Indicate the Need for Split Valuations
• Valuations: Budweiser Brewing Company APAC IPO – Looks Reasonable at the Low End. It Should Go into MSCI, Early
• Index inclusion timeline and quick thoughts on M&A possibilities: Budweiser Brewing APAC IPO – Valuation Corrigendum, Index Inclusion Timeline and Quick Take on M&A

5. WDC Impact from Toshiba Power Outage

Toshiba’s Mid-June power outage raised some alarm about potential product shortfalls for Western Digital (WDC).  This Insight evaluates the likely outcome of the event and finds that its timing in the industry cycle will dull its impact, if there is any impact at all.

In this briefing:

1. Hong Kong /Trade War/Huawei/Stimulus/Stink Bugs
2. What Would Happen If The Fed Cuts Rates?
3. The RealReal IPO Preview: The Devil Wears Prada, Chanel, Louis Vuitton, Gucci, & Secondhand Too!

1. Hong Kong /Trade War/Huawei/Stimulus/Stink Bugs

China News That Matters

• Do you hear the people sing?
• The deadline is in my head
• A wealth of data on people, governments and companies
• So stimulating: Beijing pushes funding for big infrastructure
• Stink Bug vs Armyworm, amid food inflation battle 

2. What Would Happen If The Fed Cuts Rates?

As we look ahead to the FOMC meeting next week, the market has priced in three quarter-point rate cuts for 2019, with the first cut occurring at the July meeting.

A rate cut is not unexpected, as the bond market has pushed the Treasury yield curve down so far that only the 30-year Treasury bond is trading above the current Fed Funds target. It is likely too early for the Fed to cut rates at its June meeting next week, but if the market is discounting a July cut, the Fed is likely to signal it is either in agreement with that expectation or correct the market.

Rather than debate whether the Fed should cut rates, we consider the scenario of what might happen if it were to proceed with a July rate cut. What are the consequences for economic growth and the stock market?

We believe that while the Fed could decide to cut rates at its July FOMC meeting, the future path of interest rates and stock prices depends on the reasoning behind the rate cut. If the cut is in response to the eruption of a full-blown trade and economic cold war with China, it is likely to be the start of a protracted rate cut cycle, with bearish implications for equity prices. On the other hand, if the rate cut is an “insurance” cut designed to heed off further economic weakness in the face of a stalemated trade dispute, we expect the cut to be reversed relatively quickly because the global growth backdrop remains constructive. Equity prices would rise under such a scenario as the bullish implications of higher growth would overwhelm the bearish implications of higher interest rates.

3. The RealReal IPO Preview: The Devil Wears Prada, Chanel, Louis Vuitton, Gucci, & Secondhand Too!

The RealReal (REAL US), the largest online marketplace for authenticated, consigned luxury goods in the world, is getting ready for an IPO in the next few weeks. 

The consumers that own luxury goods such as a Prada bag but want to sell it can mail it to the company or drop it off at The RealReal stores. The RealReal would then authenticate the Prada bag and resell it. 

The company generated revenue of $207.4 million (up 54.9% YoY), gross profit of $136.9 million (up 56.2% YoY), and operating loss of $73.9 million in 2018 (from operating loss of $51.8 million in 2017). 

The RealReal is doing a very good job in generating repeat buyers. The RealReal repeat buyers as a percentage of GMV improved from 78% in 2015 to 80.7% in 2017 and 82.2% in 2018.