Brief Equities Bottom-Up: Slack (WORK): The Next-Gen Enterprise Aggregation Platform and more

In this briefing:

  1. Slack (WORK): The Next-Gen Enterprise Aggregation Platform
  2. The Political Crisis Between Japan & South Korea (Lessons from the Joseon White Porcelains & Cobalt)
  3. REIT Discover: Prime US REIT IPO Brief Review
  4. This Week in Blockchain & Cryptos: How Facebook Is Going to Monetise Libra
  5. Yaskawa: Poor 1Q Should Correct Expectations and Share Price But Start Searching for an Entry Point

1. Slack (WORK): The Next-Gen Enterprise Aggregation Platform

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Obex Capital Management’s investment process seeks to differentiate between fundamental business analysis and security analysis. Before deciding if a security’s pricing and positioning merit a long or short position, we analyze the four pillars of business fundamentals (Secular Factors, TAM, Competitive Advantage, Business Model) in order to determine if this is a “good” or “not so good” opportunity.

This case study evaluates Slack Technologies Inc (WORK US) business fundamentals, unit economics, valuation, investors, management and culture. The one page up front summary is meant to be used by investors as a road map to evaluate Slack’s progress over its first few quarters.

We start with a Best Working Thesis which reflects our initial conclusions from the case study. Key Questions positively answered would make us incrementally more bullish, while evidence of rising Thesis Threats may potentially puncture our view.

We lean bullish on Slack’s competitive positioning and open-ended growth opportunity, and despite recent history showing us that investors have been rewarded for buying richly valued SaaS companies, we would be inclined to wait for a better entry point.

2. The Political Crisis Between Japan & South Korea (Lessons from the Joseon White Porcelains & Cobalt)

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It has been more than 20 years that I’ve been covering the Korean markets and never has the political climate between Japan and South Korea been this terrible to the extent that the Japanese government has imposed the first round of significant economic sanctions on South Korea. 

In our view, there will likely be no major positive news next week that could dramatically result in the reconciliation between Japan and South Korea. Rather, we believe this heated political battle between Japan and South Korea appears to be just starting and that the Japanese government could impose the SECOND ROUND of economic sanctions on South Korea some time in August/September. 

While all these economic sanctions and restrictions of key chemical/semiconductor materials are occurring, the story of theJoseon white porcelains” came to my mind. All in all, the current restrictions of key chemical materials from Japan such as fluorine-containing polyimide, resists, and etching gas are reminiscent of the trade restrictions on imported items such as cobalt during the Joseon dynasty hundreds of years ago.  They are also a keen reminder that in order for Korea to have a vibrant, flourishing economy, excellent political relationships with its close, powerful neighbors including China and Japan is a must. 

3. REIT Discover: Prime US REIT IPO Brief Review

In this issue of REIT Discover, we take a look at the initial public offer (IPO) of Prime Us Reit (PRIME SP). The offer will close at noon on 15th July and trading of the units is expected to commence at 2pm on 19th July. The units are priced at US$0.88 each, representing an indicative distribution yield of 7.4% in 2019 and 7.6% in 2020, and a slight premium to book at 1.05x. The offering is expected to raise gross proceeds of US$813mn.

PRIME is a Class A US Office REIT. We like the high quality Class A and freehold office portfolio of 11 properties which boasts a high average occupancy of 96.7%. The portfolio is supported by relatively long leases with periodic rental step-up provisions for income visibility and organic growth. The detailed growth potential of PRIME deserves a deeper coverage in a separate insight. For now based on the ownership structure of the REIT and Manager, peer valuation and near-term risks, we gauge that the IPO seems fairly valued and may offer limited upside on the first day.   

 The Sponsor, KBS Asia Partners, is associated with KBS, one of the largest US commercial real estate managers with US$11.6 billion of assets currently under management. We recall that it was only recently in November 2017 that KBS partnered with Keppel Capital to list Class B Office REIT, Keppel-Kbs Us Reit (KORE SP) , on the SGX. Less than a year after listing, KORE announced a huge rights issue to fund an acquisition. We are cognizant of the fact that the management went ahead with a dilutive rights issue under turbulent market conditions and we view this management style as rather aggressive. We are therefore concerned about a déjà vu with PRIME in the near term.  We ascribe to this IPO a 2.5-star out of 5 stars rating.

4. This Week in Blockchain & Cryptos: How Facebook Is Going to Monetise Libra

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Facebook Inc A (FB US)‘s proposed cryptocurrency, Libra, released its whitepaper last month. Libra has currently launched a testnet for developers and is planning on officially launching the coin during the first half of 2020.  In this note, we take a deep dive into Libra’s main attributes and how Facebook is looking to monetise Libra. 

5. Yaskawa: Poor 1Q Should Correct Expectations and Share Price But Start Searching for an Entry Point

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Yaskawa Electric (6506 JP) reported 1Q earnings today, kicking off the season for the factory automation space in rather dour fashion with revenue down 16.2% YoY and OP down 58.2% YoY. Revenue was ¥107.4bn, 10% below consensus and we estimate about 4-5% below the company’s own plan, while OP was ¥7.2bn, about 30% below consensus.

The results look rather dire and are likely to pour cold water on hopes for a quick rebound for the sector. We are turning more constructive on the name but are increasingly concerned for peer Harmonic Drive Systems (6324 JP). We discuss the details below.

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