Our positive outlook on global equities (both the MSCI ACWI and ACWI ex-US) remains intact and we believe a “buy the dip” strategy is warranted. We recommend taking advantage of recent weakness — where applicable — by adding exposure to cyclical Sectors.Today’s recommendations focus on autos, auto parts, and machinery which span the Consumer Discretionary and Manufacturing Sectors.
Aequitas Research puts out a weekly update on the deals that have been covered by Smartkarma Insight Providers recently, along with updates for upcoming IPOs.
Placements took a back seat this week and IPO activity came roaring back to life.
Starting in the US, the two highly anticipated IPOs, Luckin Coffee (LK US) and Douyu (DOYU US), filed their prospectus with the SEC. We have already shared our early thoughts on the companies. Look out for more insights as we crunch through the numbers in the following weeks leading up to its IPO launch.
Back in Hong Kong, Shenwan Hongyuan Group (H) (6806 HK) plunged 12% on its debut on Friday. As per Ke Yan, CFA, FRM‘s insight, risk-reward after the plunge implies that Shenwan is trading at a deeper discount to its A-share than it deserves. Considering that there had already been a big potion of adjusted free-float traded, stabilization can easily support the share price from here back to its IPO price.
Duiba Group (1753 HK) also opened its IPO for bookbuild this week. We heard that books are covered as of Friday. Valuation leaned on the expensive side as bankers probably took advantage of the strong rally in advertising peers to offer it at a higher valuation. We think that the IPO will only offer upside from the bottom end of the price range.
Activity is also picking up for Singapore and Malaysia after a long lull. ARA US Hospitality Trust (HOTEL SP) and Eagle Hospitality REIT filed their prospectus with MAS while ARA US Hospitality’s IPO is already taking orders for bookbuild. Sumeet Singh penned his thoughts on the REIT and its valuation in:
Our overall accuracy rate is 72.1% for IPOs and 64% for Placements
(Performance measurement criteria is explained at the end of the note)
New IPO filings
Ascentage Pharma (Hong Kong, re-filed)
Below is a snippet of our IPO tool showing upcoming events for the next week. The IPO tool is designed to provide readers with timely information on all IPO related events (Book open/closing, listing, initiation, lock-up expiry, etc) for all the deals that we have worked on. You can access the tool here or through the tools menu.
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
Eagle Hospitality Trust (EHT SP) (EHT) raised around US$565m via its IPO on SGX. The initial portfolio will comprise of 18 hotels in the US with an overall valuation of US$1.27bn.
I covered the company’s background and other fundamental aspects in my earlier insights:
Huawei Investment and Holding Co. Ltd. (“Huawei”), a parent of Huawei Technology (40978Z CH) , has been in the news on the Sino-US trade war from the arrest of the group’s chairman’s daughter in Canada to the accusation of Huawei on spying and dealing with Iran. The recent ban on Google’s future business with Huawei is unfortunate, and we see Huawei as a tool used by the Trump Administration to muster over China on the trade war.
We believe the trade war reflects a lack of trust between the US and China which, for sure, did not originate from Mr. Trump, but has been brewing for a long time. We expect the trade war to last a while at least until the next Presidential election in 2020. Huawei as a major competitor to Apple, and one of the forefront leaders in the 5G technology, will inevitably be in the eye of the storm. We advise bond investors to take a deep breath and look beyond this tit-for-tat war of rhetoric between the US and China, and focus on the long-term to determine Huawei’s ability to repay its bonds.
In a series of reports, we start by looking into the events that have led to the current situation, how the Huawei corporate body is structured, and how important Huawei is to China. Next, we look into how Huawei bonds have been trading versus peers, and how financial metrics determine Huawei’s debt repayment capability. Last, we conclude with our fair value of HUAWEI bonds. We expect declining profit margins in the near term but we believe the key to bondholders is the Chinese government support of the group.
The HUAWEI complex (HUAWEI 22s, 25s, 26s, and 27s), all guaranteed by Huawei, has dropped 2-3 points across the board to the mid 90 cents on a dollar since 17-May when the first news of Google’s ban broke. We expect more negative news on Huawei this year and expect asymmetric downside risk on the bonds. The fact that Google issued a statement on 20-May to continue its business with Huawei leads us to believe the dust has not settled. That said, we put our recommendation on all HUAWEI complex under “EVOLVING”. Any further sell-off on HUAWEI bonds will lead us to reconsider our recommendation.
Until very recently, the merger spread in the low to mid-single-digit range appeared to signal few problems with respect to Nvidia’s (NVDA US) proposed acquisition of Mellanox (MLNX US) moving to consummation by year-end as targeted. However, with one of the closing conditions of the deal being the receipt of antitrust clearance in China, the past two weeks have seen a significant widening of the merger spread to 14% amid a re-ratchetting up of trade tensions between the US and China. Financial media and pundits have been quick to reference Qualcom’s (QCOM US) failed bid for NXP Semiconductors (NXPI US) last year as why this bodes ill for the NVDA/MLNX transaction.
Below, we set out a case as to why the QCOM/NXPI may not be the right reference for the NVDA/MLNX transaction and why we believe the recently widened spread offers an attractive risk-reward opportunity for arbs with a potential IRR of at least 25%.
Unusal Spreads As of May 23, 2019
M&A Situation
Spread
Expected Close
Comment
CO/GNW
65%
Jun-19
Still waiting Canada, China SAFE approvals/Delay concern
FMF/STC
17%
Jun-19
Regulatory/Pricing Adjustment/Delay Risk
ILMN/PACB
16%
Jul-19
Potential Antitrust Complications in UK/Extended Review Period
NVDA/MLNX
14%
Dec-19
China Regulatory Concern
TMUS/S
12%
Jul-19
Potential antitrust complications/Extended review period
CNC/WCG
12%
Jun-20
Rumored Humana interest in CNC
4Q 2016-2Q 2019 Live US M&A Announced Deals (>$400 MN) & Spreads
Meten (MEDU US) recently filed for a US listing and is looking to raise US$100m.
Meten is a general English language training (ELT) service provider in China. It has grown its revenue at a decent 25.7% CAGR between FY2016 to FY2018 while margins made modest improvements.
However, its 1Q 2019 results signals near-term weakness across its major segments as the company seemed to be making strategic changes to its operations. The F-1 filing indicated that existing shareholders will sell in the IPO, suggesting their intention to exit or, at least, partially monetize their stake which could potentially affect sentiment going into the IPO.
Although Mallinckrodt’s bonds are trading at a significant discount to par, we recommend investors remain side-lined given our assessment of the probability of further price volatility.
Although we acknowledge the equity cushion given a conservative EV/EBITDA valuation of ~6x vs. total debt/EBITDA of ~ 5x, we expect continued price volatility.
Accordingly, we believe a more attractive entry point will present itself over the coming months at a lower price level. Despite this, we think that the business, or its individual segments, will remain a going concern with an eventual spin-off into separate entities as per management’s plan.
However, the issue is timing and we expect further volatility due to legal/regulatory risk which is difficult to quantify
Get Straight to the Source on Smartkarma
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
Aequitas Research puts out a weekly update on the deals that have been covered by Smartkarma Insight Providers recently, along with updates for upcoming IPOs.
Placements took a back seat this week and IPO activity came roaring back to life.
Starting in the US, the two highly anticipated IPOs, Luckin Coffee (LK US) and Douyu (DOYU US), filed their prospectus with the SEC. We have already shared our early thoughts on the companies. Look out for more insights as we crunch through the numbers in the following weeks leading up to its IPO launch.
Back in Hong Kong, Shenwan Hongyuan Group (H) (6806 HK) plunged 12% on its debut on Friday. As per Ke Yan, CFA, FRM‘s insight, risk-reward after the plunge implies that Shenwan is trading at a deeper discount to its A-share than it deserves. Considering that there had already been a big potion of adjusted free-float traded, stabilization can easily support the share price from here back to its IPO price.
Duiba Group (1753 HK) also opened its IPO for bookbuild this week. We heard that books are covered as of Friday. Valuation leaned on the expensive side as bankers probably took advantage of the strong rally in advertising peers to offer it at a higher valuation. We think that the IPO will only offer upside from the bottom end of the price range.
Activity is also picking up for Singapore and Malaysia after a long lull. ARA US Hospitality Trust (HOTEL SP) and Eagle Hospitality REIT filed their prospectus with MAS while ARA US Hospitality’s IPO is already taking orders for bookbuild. Sumeet Singh penned his thoughts on the REIT and its valuation in:
Our overall accuracy rate is 72.1% for IPOs and 64% for Placements
(Performance measurement criteria is explained at the end of the note)
New IPO filings
Ascentage Pharma (Hong Kong, re-filed)
Below is a snippet of our IPO tool showing upcoming events for the next week. The IPO tool is designed to provide readers with timely information on all IPO related events (Book open/closing, listing, initiation, lock-up expiry, etc) for all the deals that we have worked on. You can access the tool here or through the tools menu.
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
Aequitas Research puts out a weekly update on the deals that have been covered by Smartkarma Insight Providers recently, along with updates for upcoming IPOs.
Placements took a back seat this week and IPO activity came roaring back to life.
Starting in the US, the two highly anticipated IPOs, Luckin Coffee (LK US) and Douyu (DOYU US), filed their prospectus with the SEC. We have already shared our early thoughts on the companies. Look out for more insights as we crunch through the numbers in the following weeks leading up to its IPO launch.
Back in Hong Kong, Shenwan Hongyuan Group (H) (6806 HK) plunged 12% on its debut on Friday. As per Ke Yan, CFA, FRM‘s insight, risk-reward after the plunge implies that Shenwan is trading at a deeper discount to its A-share than it deserves. Considering that there had already been a big potion of adjusted free-float traded, stabilization can easily support the share price from here back to its IPO price.
Duiba Group (1753 HK) also opened its IPO for bookbuild this week. We heard that books are covered as of Friday. Valuation leaned on the expensive side as bankers probably took advantage of the strong rally in advertising peers to offer it at a higher valuation. We think that the IPO will only offer upside from the bottom end of the price range.
Activity is also picking up for Singapore and Malaysia after a long lull. ARA US Hospitality Trust (HOTEL SP) and Eagle Hospitality REIT filed their prospectus with MAS while ARA US Hospitality’s IPO is already taking orders for bookbuild. Sumeet Singh penned his thoughts on the REIT and its valuation in:
Our overall accuracy rate is 72.1% for IPOs and 64% for Placements
(Performance measurement criteria is explained at the end of the note)
New IPO filings
Ascentage Pharma (Hong Kong, re-filed)
Below is a snippet of our IPO tool showing upcoming events for the next week. The IPO tool is designed to provide readers with timely information on all IPO related events (Book open/closing, listing, initiation, lock-up expiry, etc) for all the deals that we have worked on. You can access the tool here or through the tools menu.
The Tesla Motors (TSLA US) earnings call yesterday was rather interesting, not for the information that was intentionally disclosed, because there was little of substance, but rather for the interplay between Tesla management and analysts, who we feel are now subtly mocking the company and Musk. In particular, analysts were generously showering breadcrumbs over previous embarrassments such as the tent, 420 and the safety of autopilot and Musk at times appeared to be caught in two minds as to whether to answer the questions earnestly or to respond to the subtle digs. That he chose the former is in our opinion a sign of the desperate situation the company is in. Tesla’s reaction to questions seeking transparency on underlying demand was not unexpected:
We go through some strange looking numbers and the various contradictions in management’s statements below.
Get Straight to the Source on Smartkarma
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
Aequitas Research puts out a weekly update on the deals that have been covered by Smartkarma Insight Providers recently, along with updates for upcoming IPOs.
Placements took a back seat this week and IPO activity came roaring back to life.
Starting in the US, the two highly anticipated IPOs, Luckin Coffee (LK US) and Douyu (DOYU US), filed their prospectus with the SEC. We have already shared our early thoughts on the companies. Look out for more insights as we crunch through the numbers in the following weeks leading up to its IPO launch.
Back in Hong Kong, Shenwan Hongyuan Group (H) (6806 HK) plunged 12% on its debut on Friday. As per Ke Yan, CFA, FRM‘s insight, risk-reward after the plunge implies that Shenwan is trading at a deeper discount to its A-share than it deserves. Considering that there had already been a big potion of adjusted free-float traded, stabilization can easily support the share price from here back to its IPO price.
Duiba Group (1753 HK) also opened its IPO for bookbuild this week. We heard that books are covered as of Friday. Valuation leaned on the expensive side as bankers probably took advantage of the strong rally in advertising peers to offer it at a higher valuation. We think that the IPO will only offer upside from the bottom end of the price range.
Activity is also picking up for Singapore and Malaysia after a long lull. ARA US Hospitality Trust (HOTEL SP) and Eagle Hospitality REIT filed their prospectus with MAS while ARA US Hospitality’s IPO is already taking orders for bookbuild. Sumeet Singh penned his thoughts on the REIT and its valuation in:
Our overall accuracy rate is 72.1% for IPOs and 64% for Placements
(Performance measurement criteria is explained at the end of the note)
New IPO filings
Ascentage Pharma (Hong Kong, re-filed)
Below is a snippet of our IPO tool showing upcoming events for the next week. The IPO tool is designed to provide readers with timely information on all IPO related events (Book open/closing, listing, initiation, lock-up expiry, etc) for all the deals that we have worked on. You can access the tool here or through the tools menu.
The Tesla Motors (TSLA US) earnings call yesterday was rather interesting, not for the information that was intentionally disclosed, because there was little of substance, but rather for the interplay between Tesla management and analysts, who we feel are now subtly mocking the company and Musk. In particular, analysts were generously showering breadcrumbs over previous embarrassments such as the tent, 420 and the safety of autopilot and Musk at times appeared to be caught in two minds as to whether to answer the questions earnestly or to respond to the subtle digs. That he chose the former is in our opinion a sign of the desperate situation the company is in. Tesla’s reaction to questions seeking transparency on underlying demand was not unexpected:
We go through some strange looking numbers and the various contradictions in management’s statements below.
Lyft facing class action lawsuits. Luckin Coffee just filed to go public on NASDAQ and raised a $150M Series B round. USDA pilots online grocery program for SNAP recipients in NY.
Lyft: The red flag we raised about Lyft’s market share is playing out as it is facing two class-action lawsuits from investors claiming it exaggerated its U.S. market share at 39% in its S-1.
Starbucks: Luckin Coffee just filed to go public on the NASDAQ and raised a $150M Series B+ round, raising the threat this disruptive new entrant poses to Starbucks’ China growth story.
U.S. Dollar Stores: The fortress surrounding U.S. dollar stores could start to crumble as the USDA just launched a two-year pilot program to enable SNAP recipients in New York to buy groceries online from Amazon and Walmart.
One of the red flags that totally scared me off drinking Lyft’s Kool-Aid was the discrepancy I discovered with its reported U.S. market share. It turns out the skepticism I shared with you in my March 25 research report was warranted as Lyft is now facing two class-action lawsuits from investors claiming it exaggerated its U.S. market share at 39% in its prospectus. It will be interesting to see what happens, especially since Uber disclosed in its April 11 S-1 filing that it currently has over 65% of the ride-sharing category in the U.S. and Canada. But most red flags take much longer to play out. For example, back on January 15, I warned about the threat of the new disruptive entrant Luckin Coffee to Starbucks’ China growth story – but Starbucks’ stock has continued to climb since then, up 18.6% versus the 15.6% gain in NASDAQ. And the red flag just flashed brighter as in the past week, Luckin has raised a $150M Series B+ round, on top of the $200M it raised in December – and even more significantly, filed to IPO on NASDAQ. So it will be interesting to see whether its Starbucks’ China growth story comes under scrutiny from analysts when it reports its Q219 results today after market close. And a new red flag just developed for the U.S. dollar stores as the USDA has launched a two-year pilot program in New York state to enable SNAP recipients to buy groceries online from Amazon and Walmart.
Get Straight to the Source on Smartkarma
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
Aequitas Research puts out a weekly update on the deals that have been covered by Smartkarma Insight Providers recently, along with updates for upcoming IPOs.
Placements took a back seat this week and IPO activity came roaring back to life.
Starting in the US, the two highly anticipated IPOs, Luckin Coffee (LK US) and Douyu (DOYU US), filed their prospectus with the SEC. We have already shared our early thoughts on the companies. Look out for more insights as we crunch through the numbers in the following weeks leading up to its IPO launch.
Back in Hong Kong, Shenwan Hongyuan Group (H) (6806 HK) plunged 12% on its debut on Friday. As per Ke Yan, CFA, FRM‘s insight, risk-reward after the plunge implies that Shenwan is trading at a deeper discount to its A-share than it deserves. Considering that there had already been a big potion of adjusted free-float traded, stabilization can easily support the share price from here back to its IPO price.
Duiba Group (1753 HK) also opened its IPO for bookbuild this week. We heard that books are covered as of Friday. Valuation leaned on the expensive side as bankers probably took advantage of the strong rally in advertising peers to offer it at a higher valuation. We think that the IPO will only offer upside from the bottom end of the price range.
Activity is also picking up for Singapore and Malaysia after a long lull. ARA US Hospitality Trust (HOTEL SP) and Eagle Hospitality REIT filed their prospectus with MAS while ARA US Hospitality’s IPO is already taking orders for bookbuild. Sumeet Singh penned his thoughts on the REIT and its valuation in:
Our overall accuracy rate is 72.1% for IPOs and 64% for Placements
(Performance measurement criteria is explained at the end of the note)
New IPO filings
Ascentage Pharma (Hong Kong, re-filed)
Below is a snippet of our IPO tool showing upcoming events for the next week. The IPO tool is designed to provide readers with timely information on all IPO related events (Book open/closing, listing, initiation, lock-up expiry, etc) for all the deals that we have worked on. You can access the tool here or through the tools menu.
The Tesla Motors (TSLA US) earnings call yesterday was rather interesting, not for the information that was intentionally disclosed, because there was little of substance, but rather for the interplay between Tesla management and analysts, who we feel are now subtly mocking the company and Musk. In particular, analysts were generously showering breadcrumbs over previous embarrassments such as the tent, 420 and the safety of autopilot and Musk at times appeared to be caught in two minds as to whether to answer the questions earnestly or to respond to the subtle digs. That he chose the former is in our opinion a sign of the desperate situation the company is in. Tesla’s reaction to questions seeking transparency on underlying demand was not unexpected:
We go through some strange looking numbers and the various contradictions in management’s statements below.
Lyft facing class action lawsuits. Luckin Coffee just filed to go public on NASDAQ and raised a $150M Series B round. USDA pilots online grocery program for SNAP recipients in NY.
Lyft: The red flag we raised about Lyft’s market share is playing out as it is facing two class-action lawsuits from investors claiming it exaggerated its U.S. market share at 39% in its S-1.
Starbucks: Luckin Coffee just filed to go public on the NASDAQ and raised a $150M Series B+ round, raising the threat this disruptive new entrant poses to Starbucks’ China growth story.
U.S. Dollar Stores: The fortress surrounding U.S. dollar stores could start to crumble as the USDA just launched a two-year pilot program to enable SNAP recipients in New York to buy groceries online from Amazon and Walmart.
One of the red flags that totally scared me off drinking Lyft’s Kool-Aid was the discrepancy I discovered with its reported U.S. market share. It turns out the skepticism I shared with you in my March 25 research report was warranted as Lyft is now facing two class-action lawsuits from investors claiming it exaggerated its U.S. market share at 39% in its prospectus. It will be interesting to see what happens, especially since Uber disclosed in its April 11 S-1 filing that it currently has over 65% of the ride-sharing category in the U.S. and Canada. But most red flags take much longer to play out. For example, back on January 15, I warned about the threat of the new disruptive entrant Luckin Coffee to Starbucks’ China growth story – but Starbucks’ stock has continued to climb since then, up 18.6% versus the 15.6% gain in NASDAQ. And the red flag just flashed brighter as in the past week, Luckin has raised a $150M Series B+ round, on top of the $200M it raised in December – and even more significantly, filed to IPO on NASDAQ. So it will be interesting to see whether its Starbucks’ China growth story comes under scrutiny from analysts when it reports its Q219 results today after market close. And a new red flag just developed for the U.S. dollar stores as the USDA has launched a two-year pilot program in New York state to enable SNAP recipients to buy groceries online from Amazon and Walmart.
Luckin Coffee (LK US) reaped Starbucks’ growth strategy in China in 2018; however, after reading Luckin’s IPO files, we believe Luckin will not be a threat to Starbucks China after two years.
We believe Luckin’s cash balance after IPO will be used up in 3 years as maximum at current speed.
We believe Luckin will accelerate its usage of cash with the IPO funds.
We also believe it is hard for Luckin to control its costs or raise its product prices.
Get Straight to the Source on Smartkarma
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
Viva Biotech Holdings (1873 HK) is a leading global contract research organisation (CRO). It has launched its IPO to raise net proceeds of HK$1,232 million ($157 million), at the mid-point of the IPO price range.
Overall, with the caveat that Viva’s valuation is highly dependent on fair value gains (from its portfolio companies), we believe that Viva can just about justify the low-end of IPO price range
Hutchison-China Meditech, China-based AIM and NASDAQ dual listed pharmaceutical company, is seeking to raise up to USD 500 million via a Hong Kong listing. In this insight, we will discuss the following topics:
Company background
Progress of clinical trials of its three key drug candidates
Key licensing agreements
Key takeaways from its financials
Shareholders of the company
Get Straight to the Source on Smartkarma
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
Viva Biotech Holdings (1873 HK) is a leading global contract research organisation (CRO). It has launched its IPO to raise net proceeds of HK$1,232 million ($157 million), at the mid-point of the IPO price range.
Overall, with the caveat that Viva’s valuation is highly dependent on fair value gains (from its portfolio companies), we believe that Viva can just about justify the low-end of IPO price range
Hutchison-China Meditech, China-based AIM and NASDAQ dual listed pharmaceutical company, is seeking to raise up to USD 500 million via a Hong Kong listing. In this insight, we will discuss the following topics:
Company background
Progress of clinical trials of its three key drug candidates
The total e-commerce transaction market in Korea increased 29.3% CAGR in the past two years to 82.8 trillion won in 2018. Cafe24’s GMV grew 24.3% CAGR in the past two years to reach 8.0 trillion won in 2018. Despite the stiff competition, the fact that Cafe24 has been able to maintain its market share of about 10% in the past two years suggests strong loyalty of its existing customers as well as the company’s ability to attract new customers.
At current prices, Cafe24 trades at 42x P/E (2019E) and 29x P/E (2020E), using the consensus earnings estimates. If we apply the current P/E multiple (42x) to next year’s consensus earnings, it would suggest an implied market cap of 1.47 trillion won for Cafe24 (up 47% from current levels).
Koreacenter.com is one the key competitors to Cafe24. Koreacenter.com is expected to complete its IPO in the next few weeks. Local media have mentioned that Koreacenter.com’s value could be about 650 billion won to 700 billion won. The upcoming IPO of Koreacenter.com is likely to put some renewed spotlight on Cafe24 as well.
Get Straight to the Source on Smartkarma
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
Huawei Investment and Holding Co. Ltd. (“Huawei”), a parent of Huawei Technology (40978Z CH) , has been in the news on the Sino-US trade war from the arrest of the group’s chairman’s daughter in Canada to the accusation of Huawei on spying and dealing with Iran. The recent ban on Google’s future business with Huawei is unfortunate, and we see Huawei as a tool used by the Trump Administration to muster over China on the trade war.
We believe the trade war reflects a lack of trust between the US and China which, for sure, did not originate from Mr. Trump, but has been brewing for a long time. We expect the trade war to last a while at least until the next Presidential election in 2020. Huawei as a major competitor to Apple, and one of the forefront leaders in the 5G technology, will inevitably be in the eye of the storm. We advise bond investors to take a deep breath and look beyond this tit-for-tat war of rhetoric between the US and China, and focus on the long-term to determine Huawei’s ability to repay its bonds.
In a series of reports, we start by looking into the events that have led to the current situation, how the Huawei corporate body is structured, and how important Huawei is to China. Next, we look into how Huawei bonds have been trading versus peers, and how financial metrics determine Huawei’s debt repayment capability. Last, we conclude with our fair value of HUAWEI bonds. We expect declining profit margins in the near term but we believe the key to bondholders is the Chinese government support of the group.
The HUAWEI complex (HUAWEI 22s, 25s, 26s, and 27s), all guaranteed by Huawei, has dropped 2-3 points across the board to the mid 90 cents on a dollar since 17-May when the first news of Google’s ban broke. We expect more negative news on Huawei this year and expect asymmetric downside risk on the bonds. The fact that Google issued a statement on 20-May to continue its business with Huawei leads us to believe the dust has not settled. That said, we put our recommendation on all HUAWEI complex under “EVOLVING”. Any further sell-off on HUAWEI bonds will lead us to reconsider our recommendation.
Until very recently, the merger spread in the low to mid-single-digit range appeared to signal few problems with respect to Nvidia’s (NVDA US) proposed acquisition of Mellanox (MLNX US) moving to consummation by year-end as targeted. However, with one of the closing conditions of the deal being the receipt of antitrust clearance in China, the past two weeks have seen a significant widening of the merger spread to 14% amid a re-ratchetting up of trade tensions between the US and China. Financial media and pundits have been quick to reference Qualcom’s (QCOM US) failed bid for NXP Semiconductors (NXPI US) last year as why this bodes ill for the NVDA/MLNX transaction.
Below, we set out a case as to why the QCOM/NXPI may not be the right reference for the NVDA/MLNX transaction and why we believe the recently widened spread offers an attractive risk-reward opportunity for arbs with a potential IRR of at least 25%.
Unusal Spreads As of May 23, 2019
M&A Situation
Spread
Expected Close
Comment
CO/GNW
65%
Jun-19
Still waiting Canada, China SAFE approvals/Delay concern
FMF/STC
17%
Jun-19
Regulatory/Pricing Adjustment/Delay Risk
ILMN/PACB
16%
Jul-19
Potential Antitrust Complications in UK/Extended Review Period
NVDA/MLNX
14%
Dec-19
China Regulatory Concern
TMUS/S
12%
Jul-19
Potential antitrust complications/Extended review period
CNC/WCG
12%
Jun-20
Rumored Humana interest in CNC
4Q 2016-2Q 2019 Live US M&A Announced Deals (>$400 MN) & Spreads
Meten (MEDU US) recently filed for a US listing and is looking to raise US$100m.
Meten is a general English language training (ELT) service provider in China. It has grown its revenue at a decent 25.7% CAGR between FY2016 to FY2018 while margins made modest improvements.
However, its 1Q 2019 results signals near-term weakness across its major segments as the company seemed to be making strategic changes to its operations. The F-1 filing indicated that existing shareholders will sell in the IPO, suggesting their intention to exit or, at least, partially monetize their stake which could potentially affect sentiment going into the IPO.
Although Mallinckrodt’s bonds are trading at a significant discount to par, we recommend investors remain side-lined given our assessment of the probability of further price volatility.
Although we acknowledge the equity cushion given a conservative EV/EBITDA valuation of ~6x vs. total debt/EBITDA of ~ 5x, we expect continued price volatility.
Accordingly, we believe a more attractive entry point will present itself over the coming months at a lower price level. Despite this, we think that the business, or its individual segments, will remain a going concern with an eventual spin-off into separate entities as per management’s plan.
However, the issue is timing and we expect further volatility due to legal/regulatory risk which is difficult to quantify
Earlier this year Gap Inc/The (GPS US) announced its plan to spin-off its underperforming brands. Under which the company intends to separate into two new companies. The original company, Gap Inc will keep ownership of their lower priced fast fashion brand Old Navy while the new company will focus on revitalizing the company’s mainstay brand Gap and other major brands such as Banana Republic, Athleta, Intermix and Hill City. However, the transaction is still pending final approvals by Gap Inc’s board of directors and SEC. But the company intends to complete the transaction by 2020.
Gap Inc’s share price rose more than 15% immediately after the news, but since then the price has fallen more than 24% despite a positive return from S&P 500 during that time.
Source: Cap IQ
Source: Cap IQ
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Hutchison-China Meditech, China-based AIM and NASDAQ dual listed pharmaceutical company, is seeking to raise up to USD 500 million via a Hong Kong listing. In this insight, we will discuss the following topics:
Company background
Progress of clinical trials of its three key drug candidates
The total e-commerce transaction market in Korea increased 29.3% CAGR in the past two years to 82.8 trillion won in 2018. Cafe24’s GMV grew 24.3% CAGR in the past two years to reach 8.0 trillion won in 2018. Despite the stiff competition, the fact that Cafe24 has been able to maintain its market share of about 10% in the past two years suggests strong loyalty of its existing customers as well as the company’s ability to attract new customers.
At current prices, Cafe24 trades at 42x P/E (2019E) and 29x P/E (2020E), using the consensus earnings estimates. If we apply the current P/E multiple (42x) to next year’s consensus earnings, it would suggest an implied market cap of 1.47 trillion won for Cafe24 (up 47% from current levels).
Koreacenter.com is one the key competitors to Cafe24. Koreacenter.com is expected to complete its IPO in the next few weeks. Local media have mentioned that Koreacenter.com’s value could be about 650 billion won to 700 billion won. The upcoming IPO of Koreacenter.com is likely to put some renewed spotlight on Cafe24 as well.
ARA US Hospitality Trust (HOTEL SP) (ARAHT) plans to raise up to US$450m via its IPO on SGX. The initial portfolio comprises of 38 hotels in the US and was recently purchased by ARA from Lone Star.
I covered the company background and other fundamental aspects in my earlier insight:
We consider the tone of HCM’s setsumeikai to have been largely positive. While guidance looked very weak, on a constant currency basis the company expects earnings to grow with strong results in the mining and value chain businesses offsetting potential weakness in China and Europe. While unit sales in China look a little frothy with local manufacturers becoming very aggressive on pricing, on the whole we believe the market has prematurely priced in a downturn while we expect mining demand to support continued strong results.
Get Straight to the Source on Smartkarma
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