Daily Consumer: China Kepei Edu (科培教育) Post-IPO – Tepid Demand Means Little Support if IPO Price Breaks and more

In this briefing:

1. China Kepei Edu (科培教育) Post-IPO – Tepid Demand Means Little Support if IPO Price Breaks
2. Global Ex-U.S. Equity Strategy: MSCI EM in Early Stages of Bottoming
3. GER Upcoming EVENTS and Earnings Calendar
4. KDDI Deal for Kabu.com (8703 JP) Coming?
5. Prataap Snacks Ltd – Q2 Results; Will Acquisition of Avadh Snacks Be a Game Changer for Prataap

1. China Kepei Edu (科培教育) Post-IPO – Tepid Demand Means Little Support if IPO Price Breaks

Kepei Education (1890 HK) has raised US$112m at HK$2.48 per share, just slightly above the mid-end of the IPO price range. We have previously covered the insight in: 

• China Kepei Edu (科培教育) Pre-IPO Review – A Well Run Private Higher Education Company
• China Kepei Edu (科培教育) IPO – Regulation Poses Significant Near-Term Risks

In this insight, we will update on the deal dynamics, implied valuation, and include a valuation sensitivity table.

2. Global Ex-U.S. Equity Strategy: MSCI EM in Early Stages of Bottoming

Our overall global outlook remains cautious and continued downward pressure on global equities remains our expectation. One bright spot is EM (more on this below), which continues to give us hope that global equities can bottom out.  We provide a technical appraisal of major markets and highlight actionable setups within the global Utilities and Staples Sectors.

3. GER Upcoming EVENTS and Earnings Calendar

Next week promises to be a large catalyst driven week, with Apple Inc (AAPL US), NTT Docomo Inc (9437 JP) and Tesla Motors (TSLA US) expected to report results, among others. We have provided a list below of the key equity catalysts for next week as well as potential drivers for M&A deals and stubs. If you are interested in importing this directly into Outlook or have any further requests, please let us know. 

Kind regards, Rickin Arun and Venkat

4. KDDI Deal for Kabu.com (8703 JP) Coming?

Yesterday morning, the Nikkei surprised everyone with an article saying KDDI Corp (9433 JP) was holding negotiations to acquire a stake of up to just under 50% in Kabu.Com Securities (8703 JP), which is the online brokerage entity of Mitsubishi UFJ Financial Group (8306 JP) with 1.1 million customers. 

Kabu.com shares were bid limit up all day long and closed at ¥462, which is a 10+ year closing high. 

The idea is not a new one. The mobile telecommunications market in Japan is mature, and one of the few ways Type 1 telecom providers can grow is by adding content through the “pipes.” 

KDDI already has an investment in an online banking 50/50 joint venture with MUFG called Jibun Bank (“My Bank” or “Myself Bank”) which it launched in 2008. KDDI established a smartphone-based asset management service with Daiwa Securities Group (8601 JP) just under a year ago, where KDDI owns 66.6% and Daiwa 33.4%. This was to attract younger customers to savings products accessible through an app in order to make those customers stickier over the long-term. KDDI also bought into Lifenet Insurance Co (7157 JP) in 2015 through a capital raise, and is now its largest shareholder at just over 25% (a decent (and recent) presentation of the company is here). About six months ago, KDDI injected ¥6bn (link is Japanese) into Japanese financial services company Finatext to help spark their new service of a ¥0 commission brokerage. I would note that Finatext and partner (now sub) NOWCAST launched an algorithmic personal asset management advisory service using for kabu.com Securities in 2016. 

Owning a stake in a broker would go a long ways towards providing comprehensive financial services access by smartphone under a KDDI-owned profit umbrella.

Is a deal like this feasible? Reasonable? Likely?

The two companies’ first response was pretty standard. This was the version from KDDI:

• 当社は、カブドットコム証券と金融事業においてさまざまな可能性を検討していますが、決まった事柄 はございません. 
• KDDI is considering various possibilities in financial business with kabu.com Securities, however, there is no determined facts. [a better translation of the Japanese is “however… no decisions have been made”]

This is pretty standard in Japanese corporate “clarifications.” There are, in fact, no ‘decisions’ unless a board meeting has been convened and put their stamp on it.

But the Japanese market will look at a comment like this and figure that where there is smoke there is fire.

5. Prataap Snacks Ltd – Q2 Results; Will Acquisition of Avadh Snacks Be a Game Changer for Prataap

In Q2 of FY19, the company has grown at 10.15% with revenue of INR 2.92 bn. EBITDA was INR 0.24 bn and EBITDA margin stood at 8.4%  down by 167 bps, Net profit stood at 0.113 bn with margins at 3.87% down by 102 bps. Raw materials cost has increased in the first half of the year leading to lower margins. 

The company has acquired 80% in Avadh Snacks, a Gujarat based snacks company for INR1.48 bn, we have discussed the implications in the report.

The stock is currently tradings at its 54x its FY18 EPS (Pre-acquisition) and 42x its FY19 EPS (post-acquisition), we believe the stock is currently overvalued but are positive on the long term prospects of the firm.