In today’s briefing:
- Mercari – US GMV Is Downside Risk but Profitability Is a Larger Upside Risk
- UMC (UMC.US, 2303.TT): 1Q22 Earnings Preview- Continuous Growth
- HCM – Buy for the Commodity Upswing
- Microsoft’s Activision Acquisition Is a Stupendous Deal
- BayCurrent: Strong Earnings and an Upgrade to Guidance; Drop in Multiples Offers a Good Entry Point
- Microsoft – Thinking Through the ATVI Acquisition Further
- Shift: Strong Earnings Momentum to Continue with Expanding Software Testing into Metaverse Market
- Teladoc (TDOC US): Membership Add and Expanding Product Penetration to Drive 25–30% Top Line Growth
- Review of Current Short Ideas
- Aier Eye Hospital Group (300015.CH) – More than Just Bribery Scandal
Mercari – US GMV Is Downside Risk but Profitability Is a Larger Upside Risk
- Mercari is down 33% since 22 November, actually underperforming the 31% decline in Mothers.
- YoY numbers for the US may only modestly beat the 20% growth target for the year and this reset of expectations may have been the driver of the decline.
- However, we expect significant upside surprises on profitability and that is our focus.
UMC (UMC.US, 2303.TT): 1Q22 Earnings Preview- Continuous Growth
- It is continuing to raise wafer price, and revenue/GM to reach ~NT$58billion/~39% and NT$60billion/~41.5% in 4Q21/1Q22 respectively.
- It will plan to add 5-8k 28nm production capacity in 12A Tainan during 2H22, and we consider it is to secure customers’ demands.
- We do not see any sign to deteriorate for the 2nd half at this moment.
HCM – Buy for the Commodity Upswing
- Hitachi Construction Machinery continues to trade under ¥3,000 following the revelation that it would not be bought out by Hitachi.
- There was little new at its conference call following the Itochu stake purchase announcement save some potential positives on the logistics front.
- Nevertheless, with the stock trading at five-year lows vs. TOPIX and Komatsu, and consensus looking light we are extremely bullish here.
Microsoft’s Activision Acquisition Is a Stupendous Deal
- A blizzard of cost synergies we conservatively estimate at $500MM from lower distribution commissions, hosting costs, and cutting ATVI’s highly paid C-Suite.
- Multiple strategic benefits: Catalyzes Microsoft’s XCloud streaming game service and Game Pass subscription offering….potentially offers greater leverage for app store negotiations with Apple and Google.
- Accretive on valuation alone…MSFT is paying a 10% discount to ATVI’s 23x average forward PE from last few years. MSFT’s 11x forward P/S vs. ATVI’s 5.5x revalues ATVI’s revenues 2x.
BayCurrent: Strong Earnings and an Upgrade to Guidance; Drop in Multiples Offers a Good Entry Point
- Baycurrent Consulting (6532 JP) reported 3QFY02/2022 results last week. Revenue for the quarter increased 39.0% YoY to JPY15.0bn while OP increased 57.5% YoY to JPY3.7bn.
- The company has revised both its revenue and OP guidance upwards for full-year FY02/2022E to JPY56.5bn and JPY21bn respectively.
- The company has already met 73.5% and 72.7% of its revenue and OP target, we expect earnings beat for the full-year as fourth quarter is the strongest.
Microsoft – Thinking Through the ATVI Acquisition Further
- Our initial thoughts on Microsoft’s bid for Activision Blizzard were on the sceptical side given various signs of trouble at the company.
- In contrast the majority of commentary on the deal has been somewhere between positive and euphoric though there are monopoly concerns from customers.
- Yet the more we examine the implications the less we like this deal for Microsoft.
Shift: Strong Earnings Momentum to Continue with Expanding Software Testing into Metaverse Market
- Shift reported its 1QFY08/2022 results last week. Revenue for the quarter increased 51.5% YoY to JPY14.3bn while OP more than tripled to JPY1.95bn vs JPY548m a year ago.
- Both Enterprise and Entertainment segments saw strong growth in revenue as well as improvement in GPM during the period.
- Shift’s share price gained 7.4% following its earnings announcement and we expect the company’s strong earnings momentum to continue over the next few years.
Teladoc (TDOC US): Membership Add and Expanding Product Penetration to Drive 25–30% Top Line Growth
- Teladoc Health, Inc. (TDOC US), the whole-person virtual care industry leader in scale, clinical breadth, and outcomes, reported 70% revenue CAGR over the last three years.
- The company expects 25% annual expansion in revenue per member, which together with 1–5% per year growth in membership will lead to 25–30% revenue CAGR during 2021–2024.
- Teladoc has a strong growth opportunity amid a large TAM of 298 million total insured lives in the U.S., of which the company has penetrated just 30%.
Review of Current Short Ideas
- This presentation runs through six current short ideas presented on a Smartkarma webinar on 22nd December.
- These are: Atkore (ATKR), Danaher (DHR), Service Corp International (SCI), ABM Industries (ABM), Monro (MNRO), and Renewable Fuels (REGI).
- The presentation also summarizes Two Rivers’ short idea generation process.
Aier Eye Hospital Group (300015.CH) – More than Just Bribery Scandal
- According to public news, the recent bribery scandal of Aier Eye Hospital Group (300015 CH) has raised widespread concern. Shenzhen stock Exchange also issued a letter of inquiry.
- The development model based on M&A funds helps rapid expansion, but also leads to profit orientation and large goodwill balance, indicating potential risks.
- The biggest risk is the revolutionary technology/drugs to disrupt the business value of Aier’s medical services. So, Aier could be a short-term trade, but not a long-term hold.
Related tickers: Mercari Inc (4385.T), United Microelectron Sp Adr (UMC.N), Hitachi Construction Machinery (6305.T), Microsoft Corp (MSFT.O), Baycurrent Consulting (6532.T), Microsoft Corp (MSFT.O), Shift Inc (3697.T), Teladoc Health, Inc. (TDOC.N), Aier Eye Hospital Group (300015.SZ)
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