In this briefing:
- JDI – LG Display to Benefit from Apple’s Mini-LED Adoption but Buy JDI Instead
- OneConnect IPO: Valuation Requires Another Markdown
- Freee K.K. IPO: The King of Cloud Accounting in Japan Seems Reasonably Valued (Incl. Quantamental)
- Nuflare – Shift to Multibeam Is the Risk but Will Being Part of Toshiba Really Help?
- OneConnect Financial IPO – Even the Sizeable Down Round Might Not Be Enough
News is that Apple will be adopting mini LED technology for its next generation of Macbook Pro and Ipad Pro models. LG Display and General Interface Solutions are mentioned as key suppliers but we feel there may be a better play on this news.
OneConnect Financial Technology (OCFT US) is the largest technology-as-a-service platform for financial institutions in China, as measured by the number of customers. At the mid-point of the IPO price range, OneConnect will raise net proceeds of $438 million at a valuation of $4.8 billion. This valuation marked a down round from the $7.5 billion valuation when OneConnect raised $650 million from investors, including Softbank Group (9984 JP)’s Vision Fund and SBI Holdings.
In our initiation note, we stated that that OneConnect’s fundamentals struggle to establish a clear path to profitability, and we would be inclined to sit out this IPO. Overall, our valuation analysis suggests that despite the down round, we stick to our initial view to sit out this IPO.
3. Freee K.K. IPO: The King of Cloud Accounting in Japan Seems Reasonably Valued (Incl. Quantamental)
Freee offers cloud-based online accounting and HR/Payroll software to small and medium businesses (SMBs) in Japan. The company operates a subscription-based revenue model and the adoption of cloud-based accounting and HR software among SMBs is still at a nascent stage compared to other Western markets. According to the company, it is the market leader in accounting/HR software for SMBs in Japan and the growing Japanese market offers the company the potential togrow its top-line significantly over the years.
The company has been very profitable at the gross profit line with gross margin reaching almost 80% in 1QFY06/2020. However, the company has not yet begun making operating profits and we believe the operating losses are mainly due to increased spending on sales and marketing to acquire customers. Freee’s paying user base has increased over the years alongside a steady rise in ARPU resulting in rapid expansion in the company’s top-line. Our quantamental analysis on the company reveals that it will start generating profits over the next two years with sales and marketing expenses declining as a percentage of revenue over the next 1-2 years.
Freee has filed for an IPO onthe TSE to raise funds of US$307m at the midpoint of the company’s indicative IPO price range of JPY1,800-2,000 per share. We believe the company is fairly valued including at the high-end of the IPO price range.
With the announcement of Murakami’s interest in Nuflare, we examined the details surrounding the company’s challenges in developing multibeam mask writers as these seem to be the key swing factor in determining whether earnings are likely to trend as the company has outlined in its release or whether sellside analysts have it right, and the company is likely to suffer steadily declining earnings.
OneConnect Financial Technology (OC) plans to raise around US$500m in its US listing. OC is a part of Ping An group. It provides cloud-native technology applications and technology-enabled services to financial institutions. As of September 30, 2019, it had over 3,700 customers including all of China’s major banks, 99% of its city commercial banks, and 46% of its insurance companies.
In my previous notes,OneConnect Financial Pre-IPO – The Positives – Prospects Appear Promising and OneConnect Financial Pre-IPO – The Negatives – Previous Valuation Might Have Been Too Demanding, I spoke about the company’s products, its past growth and the heady valuation of its previous note.
In this note, I’ll run the deal through our ECM framework and talk about valuations.