In this briefing:
- Hujiang Education (沪江教育) Pre-IPO – Spending More than It Earns
- Panasonic Is Bonding with Toyota- A JV Plan for 2020
- China Meidong (1268 HK): Standout Story in Gloomy Auto Dealership Sector; Luxury Brands Outperform
- Golden Agri: Reduced Risk of El Niño Pushes Out CPO Price Recovery into 2020
- Propertylink – CNI Shareholders To Vote On ESR’s Final Offer
1. Hujiang Education (沪江教育) Pre-IPO – Spending More than It Earns
Hujiang Education (1414698D CH) (HET) is planning to raise US$200m in its upcoming IPO.
HET has grown its revenue at an impressive 73% CAGR from 2015 to 2017 and has been accompanied by gross margin expansion. The strong growth was supported by improving operating metrics such as an increase in student enrollment and average spending.
However, HET has been making losses and continues to spend more than its net billing. It is unclear whether HET had already achieved break even for its proprietary courses before expanding into its CCtalk platform. But from its high level of expenses, it seems unsustainable for HET to be relying heavily on the sales and marketing spending to get users to purchase online courses.
In this insight, we will look into the company’s financial and operating performance, regulatory risks regarding K12 courses, aggressive spending on sales and marketing, and the performance of other online education companies.
2. Panasonic Is Bonding with Toyota- A JV Plan for 2020
It seems that Panasonic Corp (6752 JP) is planning for long term growth by concentrating on building its relationship with Toyota Motor (7203 JP) while witnessing its key customer, Tesla Motors (TSLA US), drifts away. Toyota and Panasonic are in discussion to form a JV by 2020E with the aim of mass manufacturing EV batteries with possible benefits from cost-cutting efforts. We mentioned in Tesla Drifting Away Could Leave Panasonic Struggling to Gain Traction in China, that Tesla is looking for Chinese local players to source its factory in China upon the refusal from Panasonic to join hands with them in investing in their Chinese factory. Panasonic, which seemed to have felt the pressure mounting from Tesla potentially distancing itself from them, given that the majority of their battery sales are currently dependent on Tesla, is now preparing itself for the future by building long terms plans with its not-so-new customer, Toyota. Panasonic entered a partnership agreement with Toyota back in 2017 to develop EV batteries including their traditional prismatic batteries while also aiming to develop new battery solutions for the growing and evolving EV market. Thus, its plan to form a JV with Toyota by 2020E displays the confidence Panasonic has in Toyota while also indicating that the former is paving a path for some steady growth in its battery business being supported by one of the leading automakers.
3. China Meidong (1268 HK): Standout Story in Gloomy Auto Dealership Sector; Luxury Brands Outperform
China Meidong Auto (1268 HK) has been on a rollercoaster ride in 2018. The stock price of Meidong started 2018 around 2.7 HKD and recently has been trading around 2.9 HKD.
Nice and steady ride? Not exactly, as it has swung from 4.3 HKD in June to 2.6 HKD in August. After analyzing how NPAT estimates evolved over the past year there should be no justifications for these wild swings.
Meidong is likely to report solid FY18 results by late March vs industry peers which are expected to report a weak 2H18. While BMW dealers have been reportedly suffering in China during 2018, Meidong was fortunate to have other luxury brands pick up the slack.
FY19 should be another growth year for Meidong as 1) recently acquired BMW showrooms contribute their maiden results and 2) other luxury brands continue to perform despite overall doom and gloom in the Chinese auto market. Should the Chinese government launch car replacement stimulus measures this would be icing on the cake.
Fair Value lowered slightly from 4.7 HKD to 4.4 HKD (10x 2019E) on lower 2019 profit estimates, which leaves 52% upside excluding dividends.
4. Golden Agri: Reduced Risk of El Niño Pushes Out CPO Price Recovery into 2020
INVESTMENT VIEW:
The Australian Bureau of Meteorology has just downgraded its risk of El Niño from ‘Alert’ to ‘Watch’, and as a result, we temper our optimism for a near-term rally in CPO prices. Longer-term, we remain bullish on Golden Agri Resources (GGR SP), but higher CPO prices remain a key catalyst for our bullish call on the shares.
5. Propertylink – CNI Shareholders To Vote On ESR’s Final Offer
ESR has now declared its Offer for Propertylink Group (PLG AU) “to be best and final“, and the Offer has been extended until the 28 February (unless further extended).
After adjusting for the interim distribution of A$0.036/share (ex-date 28 December; payment 31 January), the amount payable by ESR under the Offer is A$1.164/share, cash.
The Target Statement issued back on the 20 November included a “fair and reasonable” opinion from KPMG, together with unanimous PLG board support.
To recap: after PLG rebuffed an offer from Centuria Capital (CNI AU) in September, followed by PLG making an offer for Centuria Industrial Reit (CIP AU) – in which both CNI (23.5%) and PLG (17.3%) have sizeable stakes – ESR launched its offer for PLG. Adding to the cross-holdings, ESR also acquired major positions in both PLG (18.06% initially, now up to 19.9%) and CNI (14.9%).
ESR’s Offer is conditional on a minimum acceptance condition of 50.1%. CNI has a 19.5% stake and Vinva Investment Management 5%.
The next key event is CNI’s shareholder vote on the 31 January. This is not a vote to decide on tendering the shares held by CNI in PLG into ESR’s offer; but to give CNI’s board the authorisation to tender (or not to tender) those PLG shares.
Although no definitive decision has been made public by CNI, calling the EGM to get shareholder approval and attaching a “fair & reasonable” opinion from an independent expert (Deloitte) to CNI’s EGM notice, can be construed as sending a strong signal CNI’s board will ultimately tender in its shares. According to the AFR (paywalled), CNI’s John Mcbain said: “We want to make sure when we do decide to vote, if we get shareholder approval, the timing is with us“.
Assuming the resolution passes, CNI’s board decision on PLG shares will take place shortly afterwards. My bet is this turns unconditional the first week of Feb. The consideration under the Offer would then be paid 20 business days after the Offer becomes unconditional. Now trading with completion in mind at a gross/annualised spread of 0.8%/6.7%, assuming payment the first week of March.
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