Daily BriefsGrowth Ideas

Brief Growth Ideas: Edelweiss: A Deal Is Likely by 2H of July and more

In this briefing:

  1. Edelweiss: A Deal Is Likely by 2H of July
  2. ECM Weekly (27 June 2020) – Smoore, Ocumension, Hepalink, Immunotech, Sri Trang Gloves, Yum China HK
  3. E&D Co Valuation Analysis
  4. Korea Small Cap Gem #3: New Tree Co

1. Edelweiss: A Deal Is Likely by 2H of July

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As per an Economic Times (ET) article on Jun 24, Edelweiss Financial Services (EDEL IN) has already received first stage bidding from various PE investors and Bank of Singapore for acquiring a minority stake in Edelweiss’ advisory business. Second round bidding is likely to happen by mid-July. With SEBI extending the quarterly earnings announcement deadline, we now extend our anticipated timeline for a deal and earnings announcement to 2H of Jul from end of Jun earlier. Edelweiss’ stock has already moved up significantly (about 40% up move over the last 7-8 trading sessions) in anticipation of a deal announcement. We believe that the current valuations remain attractive, despite the up move.

Insight Flow:

  • Earnings Deadline Extended by SEBI
  • Favorable Shareholder Voting
  • Deal Progress & Outlook
  • Valuation

2. ECM Weekly (27 June 2020) – Smoore, Ocumension, Hepalink, Immunotech, Sri Trang Gloves, Yum China HK

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Aequitas Research puts out a weekly update on the deals that have been covered by the team recently along with updates for upcoming IPOs.

It has been a hectic week in the ECM space. In Hong Kong, Hygeia Healthcare Group (6078 HK) and Kangji Medical (9997 HK) will list on Monday while Shenzhen HepaLink Pharmaceutical (H) (HEPALINK HK) and Immunotech Biopharm (IMMBIO HK) launched their bookbuild earlier this week and will be listing the week after.

In Thailand, Sri Trang Gloves’ bookbuild closed mid-week and will debut next week. 

There are also more than a handful more approvals that have came through with PHIP filed on HKEX. We have covered most of the names in our notes this week:

As if those were not enough, four more property and construction management services companies filed their draft prospectus and, out of which, KWG Living Group and A-City Group stand out in terms of size as they are expecting to raise about US$400m each. Hillhouse-backed Genor Biopharma has also filed its draft prospectus (under the name JHBP (CY) Holdings) and was earlier expected to raise about US$200m in its IPO.

Beyond Hong Kong, we may start to see more listings come through in India soon as we are getting more newsflow of listings in the country. This week there was also the re-filing of Mindspace REIT.

For China ADRs, there was only Agora Inc. (API US)‘s listing on Friday, which did well, to say the least. Agora’s shares closed about 150% above its IPO price, which was already priced 11% above the original range. Clearly, I was wrong to focus on valuation and data disclosure and not see Agora for the potential it could achieve.

It has also been a busy week for placements and we are seeing deals not just from Australia but across Asia Pacific. Here are our coverage for the week:

 Accuracy Rate:

Our overall accuracy rate is 73% for IPOs and 66% for Placements 

(Performance measurement criteria is explained at the end of the note)

New IPO filings this week

  • KWG Living Group (Hong Kong, ~US$400m)
  • A-City Group Limited (Hong Kong, ~US$400m)
  • Genor Biopharma (JHBP (CY) Holdings) (Hong Kong, ~US$200m)
  • Roiserv Lifestyle Services (Hong Kong, >US$100m)
  • Jiayuan Services (Hong Kong, ~US$100m)

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.

News on Upcoming IPOs

NameInsight
Hong Kong
Archosaur Archosaur (祖龙娱乐) Pre-IPO – Short Life Cycle, Volatile Revenue, but It May Look Different Soon 
Archosaur Archosaur Games (祖龙娱乐) Pre-IPO – Dragon Raja Will Continue to Drive Revenue – Walkthrough & Thoughts 
Ant FinancialAnt Financial IPO Early Thought: Understand Fintech Empire, Growth & Risk Factors
ByteDance

ByteDance (字节跳动) IPO: How Jinri Toutiao Paves The Way for a Bigger Empire (Part 1)

ByteDance

ByteDance (字节跳动) Pre-IPO: Why Facebook Should Worry About TikTok 

ByteDance

ByteDance (字节跳动) IPO: Tiktok the No.1 Short Video App for a Good Reason (Part 2)

ByteDance

ByteDance (字节跳动) Pre-IPO: How Has It Done in 1H? 

ByteDance

ByteDance: The Unlisted Company’s Video Apps Leading the Market and Threatening Internet Giants 

ByteDance

ByteDance (字节跳动) Pre-IPO: Why Facebook Should Worry About TikTok 

ByteDance

ByteDance (字节跳动) Pre-IPO – Globally the Most Downloaded App for Jan 2020 Driven by India 

GTMH

GreenTown Mgt (绿城管理) Pre-IPO – Sacrificed Margins in Pursuit of Growth, Muddled by JVs 

GTMH

GreenTown Mgt (绿城管理) Pre-IPO – Peer Comparison and Preliminary Thoughts on Valuation 

Helenbergh

Helenbergh (海伦堡) Early Thoughts – The Usual Red Flag – Related Party Transactions

Kilcoy

Kilcoy Global Foods Pre-IPO – Rapid Earnings Growth on the Back of Margin Improvement 

Kilcoy

Kilcoy Global Foods Pre-IPO – A Lot of Things Still Remain Unexplained 

Megvii Megvii (旷视) Pre-IPO – Remarkable Growth (Part 1) 
Megvii Megvii (旷视) Pre-IPO – A Bet on the Future – Segments, Revenue Drivers and Growth Potential 
Megvii Megvii (旷视) Pre-IPO – The Real Race Is in Research – Founders’ Profile and Talent 
Megvii Megvii (旷视) Pre-IPO – Competitive Landscape and Peer Analysis 
Megvii Megvii (旷视) Pre-IPO –  Initial Thoughts on Valuation 
Nongfu Nongfu Spring Pre-IPO – The Positives – Leaves One Thirsty for More 
Nongfu Nongfu Spring Pre-IPO – The Negatives – Doesn’t Need to List or Expand Production Facilities 
Nongfu Nongfu Spring Pre-IPO – Peer Comparison – Superior Margins and Growth 
Nongfu Nongfu Spring (农夫山泉) IPO: Beverage for the Young, In-Store Photos 
Ocumension Ocumension (欧康维视) Pre-IPO: All Ready for a Great Listing Except a Block Buster 
Pop Mart Pop Mart Pre-IPO – The Negatives – Is It a Brand Owner or Just a Retailer? 
Pop Mart Pop Mart Pre-IPO – The Positives – Expanding Portfolio+Wider Distribution= Explosive Earnings Growth 
Smoore

Smoore Tech (麦克韦尔) IPO: Hidden E-Cigarette Player Behind the FEELM Technology 

Smoore

Smoore Tech (麦克韦尔) Pre-IPO: 6Y and 1H2019 Financials Show Technology Driven Growth 

Smoore

Smoore Intl (思摩尔国际) Pre-IPO: Tripling Capacity in Three Years 

Smoore

Smoore Intl (思摩尔国际) Pre-IPO: Thoughts on E-Cig Regulation 

Smoore

Smoore Intl (思摩尔国际) Pre-IPO: PHIP Updates, A Slow yet Encouraging Start in 2020 

Tasly Tasly Biopharm (天士力生物) IPO: Visible Growth from Approved Drug but Lacks Blockbusters 
Zhenro Svc Zhenro Services (正荣服务) Pre-IPO – Diversifying Away from Zhenro Property Group 
Zhenro Svc Zhenro Services (正荣服务) Pre-IPO – Peer Comparison and Thoughts on Valuation 
WeDoctor WeDoctor (微医) Pre-IPO -App Walk Through – The Online Medical Directory and More 
WeDoctor WeDoctor (微医) Pre-IPO – A More Focused Online Medical Svc Provider than Ping An Good Doctor 
India
ASK ASK Investment Managers Pre-IPO – Riding on a Wave of Wealth 
Anmol IndAnmol Industries Pre-IPO Quick Take – No Growth, Generous Payments to Founders
Bharat Hotel

Bharat Hotels Pre-IPO – Catching up with Peers 

Burger King

Burger King India Pre-IPO – Has Been Growing Fast and Plans to Grow Even Faster 

Burger King

Burger King India Pre-IPO – Peer Comparison Yields Interesting Nuggets on Profitability and Capex 

Bajaj En

Bajaj Energy Pre-IPO – Supposed to Deliver Steady Performance if Only Its Sole Client Would Let It 

CAMS CAMS Pre-IPO – Quasi Monopoly Status Muddled by Inconsistent Performance 
CMS InfoCMS Info Systems Pre-IPO – When a PE Sells to Another PE… Only One Gets the Timing Right
Crystal CropCrystal Crop Protection Pre-IPO – DRHP Raises More Questions than in Answers
ESAF SFB ESAF Small Finance Bank Pre-IPO – Growing Fast but Remains Highly Dependant on a Related Party 
Equitas SFB Equitas Small Finance Bank Pre-IPO – Another Forced Small Finance Bank Listing 
Equitas SFB Equitas Small Finance Bank Pre-IPO – Another Forced Small Finance Bank Listing 
Flemingo Flemingo Travel Retail Pre-IPO – Its a Different Business in Every Country
Emami Cem Emami Cement Pre-IPO – Still in Ramp Up Phase but Shares Pledge Might Lead to an Early IPO 
IRFC Indian Railway Finance Pre-IPO – Low Risk, Low Margin Business 
NSENSE IPO Preview- Not Only Fast..its Risky and Expensive
NSENational Stock Exchange Pre-IPO Review – Bigger, Better, Stronger but a Little Too Fast for Some
MazagonMazagon Dock IPO Preview: A Monopoly Submarine Yard in India with Captive Navy Spending
Mindspace Mindspace Business Parks REIT Pre-IPO – Decent Growth but Not All Assets Are Equal 
Mrs. BectorMrs. Bectors Food Specialities Pre-IPO Quick Take – Sales for Its Main Segment Have Been Sta

LIC

Life Insurance Corporation of India Pre-IPO – Early Take on India’s Largest IPO 

Lodha

Lodha Developers Pre-IPO – Second Time Lucky but Not Really that Much Affordable
LodhaLodha Developers IPO: Presence in Affordable Segment Saves Lodha the Blushes in a Sluggish Mkt
Penna Cem Penna Cement – Aggressive Expansion Plans Even Though Past Performance Has Been Tepid 
PNB MetPNB Metlife Pre-IPO Quick Take – Doesn’t Stack up Well Versus Its Larger Peers
Samhi Hotels Samhi Hotels Pre-IPO – Assets and Borrowings Are Growing, but Earnings Haven’t Kept Pace 
UTI AMC

UTI Asset Management Company Pre-IPO – Well past Its Remote Glory Days 

Malaysia
Mr DIY Mr D.I.Y. Pre-IPO – Largest Home Improvement Retailer in Malaysia 
Mr DIY Mr D.I.Y. Pre-IPO – Store Walk-Through and Thoughts on Value Proposition 
Mr DIY Mr D.I.Y. Pre-IPO – Peer Comparison – Small Stores with Dominant Market Share  
Mr DIY Mr D.I.Y. Pre-IPO – Assumptions and Thoughts on Valuation 
QSRQSR Brands Pre-IPO – As Healthy as Fast Food
Thailand
PTTOR PTT Oil and Retail IPO – F&B Business Is the Profit Driver 
SCGP SCGP Pre-IPO – Shift to Packaging Has Been Aiding Margins but Acquisition Drove up Leverage 
The U.S
CDP CDP Holdings Pre-IPO Review – Highly Reliant on Best Inc. 
CloudMindsCloudMinds Inc Early Thoughts – Still Nascent

3. E&D Co Valuation Analysis

E&d 2

Our base case valuation multiple for E&D Co is 19x P/E. Using this multiple and applying to our estimated net profit of 13.8 billion won, this results in an implied market cap of 263 billion won or 25,309 won per share. This represents a 63% upside from current levels. Given the strong upside, we have a positive view of this stock over a one year view.

The 19x P/E valuation multiple represents a 20% discount to the bankers’ valuation multiple of 23.8x. A key reason why the company continues to trade at a steep discount to its peers is that the market is still not uncertain as to how long the company will be able to maintain its excellent sales and profit growth. As such, as the company continues to post excellent results, our 20% valuation discount to its peers may actually be too conservative.

We forecast the company to generate 96.2 billion won in sales (up 65% YoY) and an operating profit of 21.2 billion won (up 116% YoY) in 2020. We estimate the company’s sales growth to decline to 27% YoY in 2021. One of the key catalysts of the company’s surging growth in sales and profits has been the fact that the fine dust issue has emerged one of the biggest social problems in Korea and other parts of the world. There have been increased regulations on diesel and obsolete vehicles, increasing the mandatory installation of the emission reduction devices. 

4. Korea Small Cap Gem #3: New Tree Co

Pandora

New Tree Co is the third company we introduce in our “Korea Small Cap Gem” series. New Tree is one of the best up-and-coming companies in the “inner beauty” product segment, especially for eatable collagen products. They also have some outstanding health and diet food supplement products that should continue to thrive in the next few years.

Millions of people in Korea often believe that eating foods that are rich in collagen such as 족발 (pigs’ feet) helps to beautify their skin. Other foods that help the body to produce collagen include bone broth, chicken, fish, egg whites, and citrus fruits. Because of the positive association with beautifying the skin and producing collagen, this is where the company’s Evercollagen has achieved a big success.

Valuation – We believe that the company’s P/E multiples to rise to the 14 to 16x range over the next 12 months which would be closer to the industry average and as investors attach higher valuation multiple to this company, given the company’s superior sales and net profit growth compared to its competitors. If we assume a 15x P/E based on the net profit of 22.6 billion won, this would suggest an implied market cap of 339 billion won (37,375 won per share), which would be a 32% upside from current levels (28,300 won per share).  

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