Brief TMT & Internet: Softbank Reverse from Long to Short Target and more

In this briefing:

  1. Softbank Reverse from Long to Short Target
  2. King Yuan Electronics Co(2449 TT) – Time To Buy On Robust Demand For 5G, AI, and CMOS Image Sensor
  3. Leyou in Tencent’s Crosshairs
  4. ME2ZEN IPO – Trying for an IPO Again at a Lower IPO Price Range
  5. Yaskawa – Developed Market Deceleration Striking

1. Softbank Reverse from Long to Short Target

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Softbank Group (9984 JP) has witnessed a sharp rise from our recent 4,400 long entry and nearing the ideal 6,600 target representing the top end of the intermediate expanding wedge range. We made a bull call near lower wedge support at 2,800.

Recent breakout point at 5,900 will act as pivot support that will induce a reaction back upward.

RSI shows synergy with dual tops in this zone to mark key cycle tops which fits with a top near 6,600. RSI is also forming a rising wedge that has a better than 70% probability of breaking down amid bear divergence.

Macro pivots are 6,800 and 4,900 as the expanding wedge defines a clear range (6,800 and 2,500).

2. King Yuan Electronics Co(2449 TT) – Time To Buy On Robust Demand For 5G, AI, and CMOS Image Sensor

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In our view, KYEC embraces 5G migration cycle at infrastructure base stations and smartphones, as well as many other IoT devices, RF filter/PA, CMOS image sensors and server chips. We expect KYEC to post double digit YoY revenue growth in 2020. As such, we initiate coverage on KYEC with a Buy call and 12-month TP of TWD50.

3. Leyou in Tencent’s Crosshairs

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Leyou Technologies (1089 HK)’s long-drawn takeover saga has potentially taken its final twist. After market close on Friday, Leyou announced that Mr Yuk, Leyou’s controlling shareholder with a 69.2% stake, entered into a three months exclusivity agreement with Tencent Mobility, a wholly-owned subsidiary of Tencent Holdings (700 HK), to sell his stake. If the stake sale completes, it can result in the possible acquisition and privatization of Leyou by Tencent. 

Leyou has been subject to intense privatisation speculation with various suitors such as iDreamsky Technology Limited (1119 HK)/CVC, Zhejiang Century Huatong A (002602 CH), Sony Corp (6758 JP) and Tencent in pole position at different points in time since September 2019.

Ultimately, the previous negotiations collapsed as although Mr Yuk wants to sell his Leyou stake as evidenced by his long-drawn negotiations with the bidders, he is holding firm with his valuation. Warframe’s improving performance, Tencent’s deep-pockets and Mr Yuk’s stubbornness suggest that the chances of a deal getting done are high. At the last close price of HK$2.89 per share, our privatisation price estimate of HK$3.31 per share implies a gross spread of 14.4%.

4. ME2ZEN IPO – Trying for an IPO Again at a Lower IPO Price Range

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ME2ZEN (951211 KS) is getting ready to complete it IPO in the KOSDAQ exchange in August. ME2ZEN is a Hong Kong based company that makes casual and social casino games. This is a second time that ME2ZEN is trying to complete an IPO in Korea after a failed attempt in 4Q 2019.

Overall, applying a 9.5x P/E multiple to our estimated net profit of 43 billion won for the company in 2020 suggests an implied market cap of 409.9 billion won or implied price of 29,700 won per share, which represents a 24% upside to the mid-point (24,000 won) of the IPO price range. Given the relatively attractive upside, we would take this deal but if the IPO is priced at the high end, it would become less attractive.

There are three main reasons why ME2ZEN IPO is more attractive this time as compared to November 2019.

  • First, COVID-19 has resulted in a big capital inflow into the global games sector as millions of people around the world spend more time at home and play games. This has been a favorable trend for the global game industry.
  • Second, the IPO price range has been lowered.
  • Third, the company’s financials have gotten better with the company posting strong results in 2019 as well as in 1Q 2020. 

5. Yaskawa – Developed Market Deceleration Striking

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Yaskawa reported results today which surprised to the upside significantly at the OP level (¥6.2bn vs. consensus ¥3.7bn and LSR ¥6.7bn) but were in-line at the revenue level (¥90.8bn vs. consensus ¥91.3bn and LSR ¥98.4bn). Our forecasts were driven based on a variety of datapoints including regional breakdowns and identified but underestimated the extent of developed market weakness. We detected the strength in China as well and one of the key drivers of profitability appears to have been the seasonally high servomotor sales in China which we flagged previously. Inverter sales to the US oil and gas industry appear to have collapsed faster than expected dragging down revenues.

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