In this briefing:
- Tesla’s Plan B 2.0; Y Not
- National People’s Congress/Political Loyalty/Trade War/Huawei Sues
- Meituan Dianping (3690 HK): Lock-Up Expiry – Good 4Q18 Required
- Global Capital Flows Show China’s Collapsing Export Markets Could Soon Revive
- ECM Weekly (9 March 2019) – Lyft, Shenwan Hongyuan, RHB Bank, Sea Ltd, Xinyi Solar, China Gas
1. Tesla’s Plan B 2.0; Y Not
Tesla Motors (TSLA US) has changed its mind, again, and now reportedly is putting on hold plans to close hundreds of its mostly newly opened stores and lay off thousands more employees–at least until the end of the month.
Employees, customers, suppliers, and investors still are reeling over Tesla’s startling decision, announced February 28th, to move immediately to online-only sales, a dramatic reversal of strategy still in place as of the 2018 10-K filing on February 19th in which the company had touted growth via recent store expansions and substantial additions planned globally going forward.
Tesla explained that even with now three substantial price cuts on all its cars and now three significant layoffs since last summer, it must slash costs even more to support the launch of its long overdue $35,000 base version of the flagship Model 3 (see my report Tesla’s New Plan: Buy Before You Try).
I warned clients that Tesla’s stunning strategy reversal seemed driven more by alarming cash consumption plus much weaker than expected sales and profit margins already apparent in what is shaping up to be a disastrous first quarter–troubling trends that may continue. However, as I noted, it also costs money to close stores, get out of leases (good luck with that), fire employees and redistribute remaining staff, and sell off fairly new equipment at steep losses.
Not to mention that shiny new Tesla stores suddenly going dark may appear ominously similar to retail stores going out of business seen increasingly all over the country–a bad look for Tesla, especially given customers already are spooked by its escalating quality, reliability, and service problems (see “Musk and Weird Q3 Developments Are Driving Investors to Telsa’s Rivals” and “Tesla – Dave’s Not Here, and Musk Won’t Leave” and “Tesla: Down to the Wire” and Tesla – Truth and Consequences).
Tesla probably hasn’t seen the light–it’s just received as of March 1st a desperately needed cash infusion by finally securing overdue funding for Tesla Shanghai Gigafactory 3 which has been under construction since January (see Tesla – Shanghai Surprise). Unfortunately, the four banks in Tesla’s new “China Loan Agreement,” which the company announced on Thursday with a rare 8-K filing, committed only to fund a one-year limited purpose loan for up to 3.5 billion yuan ($521 million). This is barely enough time or cash to get the Shanghai assembly plant up and running–much less also stave off the current cash crunch.
But Tesla must keep up appearances as well as bolster its liquidity through at least the end of the quarter as it gets ready to reveal Thursday evening the long-awaited Model Y–though I suspect this won’t result in a massive burst of cash from new reservations as Tesla hopes.
Years of robbing Peter to pay Paul hasn’t produced a sustainable growth model for Tesla, mostly because its business strategy still is better described as, “Wow, we didn’t see that coming.”
Continue reading for Bond Angle analysis.
2. National People’s Congress/Political Loyalty/Trade War/Huawei Sues
China News That Matters
- Still faster than most of the world
- Stick with Xi, if y’know what’s good for ya
- Trade deficit grows as war drags on
- I’ll see you and raise you: Huawei sues Washington
In my weekly digest China News That Matters, I will give you selected summaries, sourced from a variety of local Chinese-language and international news outlets, and highlight why I think the news is significant. These posts are meant to neither be bullish nor bearish, but help you separate the signal from the noise.
3. Meituan Dianping (3690 HK): Lock-Up Expiry – Good 4Q18 Required
Meituan Dianping (3690 HK)‘s shares currently trade 18% below its IPO price of HK$69.00 per share. Meituan will announce its 4Q18 results on Monday, 11 March 2019, after market close. Notably, Meituan’s six-month lock-up period expires on 19 March 2019.
We believe that should Meituan deliver a strong 4Q18; it will likely not experience Xiaomi Corp (1810 HK)’s share price collapse after the end of its six-month lock-up period.
4. Global Capital Flows Show China’s Collapsing Export Markets Could Soon Revive
- Capital flows are strongly Granger causal
- Gross capital flows lead World shipping activity by 4 months
- Capital flows have been slowly rising since June 2018: in February they jumped
- Reinforces out pro-Asia and pro-China investment message
5. ECM Weekly (9 March 2019) – Lyft, Shenwan Hongyuan, RHB Bank, Sea Ltd, Xinyi Solar, China Gas
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.
It has been a fairly hectic week. We have been busy writing on upcoming IPOs, post-IPO events, and, to top it all off, there were four placements (Sea Ltd, RHB Bank, Xinyi Solar, and China Gas) this week.
Hong Kong’s ECM activity seems to be picking up momentum. Starting off with approvals, Viva Biotech (1577881D HK) and Dongzheng Automotive Finance (2718 HK) filed their respective PHIP on HKEX. Ke Yan, CFA, FRM had previously written on Viva Biotech here while we are currently working on Dongzheng Automotive Finance (2718 HK) and also heard that Dongzheng Auto Finance had already kicked off pre-marketing on Monday.
For upcoming IPOs with completed bookbuilds, Yincheng International Holding (1902 HK) traded flat on debut (expected for a small and leveraged developer) while Zhejiang New Century Hotel Management Group (1158 HK), which had Ctrip and GreenTree as cornerstone investors, will list next Monday.
As for early coverage on IPOs, Sumeet Singh had already given a broad overview of ESR Cayman (ESR HK)‘s business. He will be following up with more detailed analyses in the coming weeks.
In the US, Futu Holdings Ltd (FHL US) debuted well on Friday, trading up to as high as US$17 per share before closing just above US$15 but still well above the IPO price. We had been slightly more conservative because it is not exactly a very exciting company doing something groundbreaking but the management background in tech appears strong and there are no corporate governance issues.Sumeet Singh will update on trading liquidity and post-IPO analysis next week.
For pipeline IPOs, we heard that Ehang is planning its US IPO and it is looking to raise about US$500m. This is the Chinese drone manufacturer which made waves just over a year ago with a video of a team testing its autonomous aerial vehicle shown in the video below. Suffice to say, if and when the IPO launches, it will be interesting.
Ruhnn had also filed for IPO this week and we heard that pre-marketing will start next week while bookbuild will likely launch end of the month. This is an Alibaba-backed e-commerce influencer platform and we will be analyzing the company soon.
We had also been exploring potential trade ideas surrounding lock-up expiry such as Nio (蔚来) Lock-Up Expiry – Scattered Pre-IPO Investors to Be the Sellers and Meituan Dianping (美团点评): Thoughts Before Lock-Up Expiry. NIO’s lock-up expiry had been an unfortunate case of poor outlook guidance in Q4 coinciding with lock-up expiry coming on the week after (11th March).
Accuracy Rate:
Our overall accuracy rate is 72.1% for IPOs and 63.6% for Placements
(Performance measurement criteria is explained at the end of the note)
New IPO filings
- Ruhnn (the U.S, ~US$200m)
- Sun Car Insurance (Hong Kong, >US$100m)
- Sichuan Languang Justbon Services (Hong Kong, ~US$100m)
- Mabpharm (Hong Kong, re-filed)
- Intellicentrics (Hong Kong, CLSA sole-sponsor, likely to be <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
- Chinese drone maker EHang plans US IPO
- Airport REIT could finance Singapore’s massive infrastructure ambitions
- PNB MetLife Insurance IPO likely in Q2FY20
Smartkarma Community’s this week Analysis on Upcoming IPO
- Lyft IPO Preview
- Lyft IPO Preview: Maybe We’ll Just Walk?
- LYFT Pre-IPO – Drivers and Shared Rides Hold the Key But the Numbers Are Missing
- Embassy Office Parks REIT – Comparison with AIT and a Look at the Required Yield
- Shenwan Hongyuan (申万宏源) A+H: A Commoditized Broker Business
- Polycab IPO: Largest Cables Player, Asset-Heavy Low ROE Model = Vulnerable to Govt Capex Slowdown
- Hyundai Autoever IPO Valuation Analysis
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