Daily BriefsTMT/Internet

TMT: Alibaba Group, Advantest Corp, Krafton Inc, Iress Ltd, Capcom Co Ltd, Spotify Technology SA, Kpit Technologies, NIIT Technologies and more

In today’s briefing:

  • Alibaba (BABA): Over Impacted Before Quarter Result
  • Breaking Down Advantest’s Big Buyback
  • Krafton IPO: Bookbuilding Results & Index Fast Entry
  • Iress (ASX AU) Bats Away EQT – For Now
  • Capcom – On Track for ¥60bn in OP This Year
  • Krafton Bookbuilding: Subscription/Lockup Data & Resulting Implications
  • Trading Strategy of Krafton IPO Post Bookbuilding Results
  • Spotify 2Q21: Podcasting Rolling Over?
  • KPIT Tech: Hitting All the Right Notes
  • Strong all-round delivery; valuation remains full

Alibaba (BABA): Over Impacted Before Quarter Result

By Ming Lu

  • The stock price has plunged since October 2020.
  • Over the past few days, BABA became a casualty of the policy against tutoring companies.
  • However, we believe the China online retail has been recovering.
  • We also believe the stock has an upside of 27% in nine months.

Breaking Down Advantest’s Big Buyback

By Travis Lundy

On 28 July after the close, semiconductor & components test systems manufacturer Advantest Corp (6857 JP) reported Q1 results (with slides), revised its earnings forecast for the full year (revenues +10% vs end-April forecast for the year to 31 March 2022, OP and NP +17% and change), revised its “forecast” for its dividends, raising the H1 div from ¥38 to ¥50/share. This increase, even if the regular portion of the H2 div is kept flat, would raise the annual dividend to above the level of last year’s (which included a ¥10 commemorative dividend in H2). 

It also announced a plan to buy back shares – with a buyback program of up to 10 million shares (5.1% of shares out ex-treasury stock), spending up to ¥70 billion, with the program scheduled to run from 2 August 2021 through 24 March 2022. 

The reasoning is that in the Second Mid-Term Management Plan announced 24 May 2021, the total shareholder return ratio including treasury stock acquisition was targeted at a base rate of 50% or higher. The revision of the earnings forecast along with expected stronger operating cashflow prods the company to launch a buyback.  

So they have, and the dynamics are interesting because despite MSCI suggesting the company has 100% float, I see a Real World Float far, far below that. 

Krafton IPO: Bookbuilding Results & Index Fast Entry

By Brian Freitas

A short while ago, Krafton Inc (259960 KS) disclosed the results of its institutional book building and confirmed that the offer price has been set at KRW 498,000/share, the high end of the IPO range.

Bids came in for 1.157bn shares resulting in an oversubscription of 243 times the shares offered to institutions with domestics outbidding foreign investors in terms of number of shares. Bids at or above KRW 498,000 came from 95% of the shares that were bid for.

78% of the shares that were bid for came with a no lock-up commitment. Allocations that match the results of the bookbuilding will increase the free float of the stock making it easier for index Fast Entry. At the same time, there could be a lot of selling pressure as retail, institutions and pre-IPO investors all try to exit in the first few trading days.

Korea Stock Exchange Kospi 200 Index (KOSPI2 INDEX) Fast Entry at the September futures expiry should be easy. At the IPO price, Krafton Inc (259960 KS) should get MSCI Fast Entry if less than 30% of the institutional allocation is locked up, while the stock should get FTSE Fast Entry even with 50% of the institutional allocation locked up. If a higher percentage of shares is locked up, the stock will need to close higher on listing day to get index Fast Entry.

With a large number of shares not subject to lock-ups, there could be selling on listing day. The stock should then stabilize and move higher on expectation of passive buying from FTSE and MSCI trackers. The stock could then drift lower before picking up ahead of the inclusion in the Korea Stock Exchange Kospi 200 Index (KOSPI2 INDEX)

Iress (ASX AU) Bats Away EQT – For Now

By David Blennerhassett

The bidding for companies in Australia’s technology sector continues.

Trading and wealth management software provider Iress Ltd (IRE AU) announced this morning it had received a confidential, unsolicited, non-binding, and indicative proposal from Swedish PE outfit EQT Fund Management via a Scheme of Arrangement at a price range of between A$15.30 and A$15.50 cash per share.

EQT had previously fielded an Offer of A$14.80/share on the 18 June.

Iress’ board unanimously concluded that the Proposal was “conditional and did not represent compelling value for Iress shareholders“. But the board was:

prepared to provide it with access to limited non-public information so EQT can develop a proposal that is capable of being recommended to shareholders.

Iress closed up 15% today, but still 7% below the mid-point of the Indicative Offer price range.

As always, more below the fold.

Capcom – On Track for ¥60bn in OP This Year

By Mio Kato

Capcom handily beat consensus estimates at 1Q with revenue of ¥48.4bn (+27.8%) and OP of ¥23.6bn (+37.4%). Consensus had been as low as ¥13.4bn in early May so the beat is significant. Yet, it failed to meet our ¥25-30bn on account of a write-off of some game assets (“several billion yen”) and deferring revenue for RE8 due to free DLC which we had not expected. Without those factors we believe OP would have come extremely close to ¥30bn. We remain confident that ¥60bn in OP is on the cards for the full year though it is plausible that Capcom could push out sales into next FY and come in slightly below that.

Krafton Bookbuilding: Subscription/Lockup Data & Resulting Implications

By Sanghyun Park

As expected, Krafton’s IPO price has been confirmed at ₩498,000, the upper end of the indicative price band. So, Krafton gets to raise a total of ₩4.3T through this public offering, and its market cap reaches ₩24.4T.

PricingLowHigh (final)
Base deal size₩3,461.7B₩4,309.8B
– Institutional allotment₩1,903.9B₩2,370.4B
Implied market cap₩19,559.2B₩24,351.2B
– Discount30.93%14.01%
Source: DART

The competitive rate for institutional subscriptions came out to be 243.2 to 1, similar to what has already been leaked from the market. Compared to the recent mega IPOs that easily exceeded 1,000 to 1, it can be seen that this IPO’s institutional participation rate was low. However, considering that this IPO has a substantially larger offering size and a very aggressive price, it can be concluded that the interest of institutions was higher than expected.

By investor typeInstitution%Demand%
Local publicly raised funds23137.20%445,792,00038.52%
Local brokerages/investment advisories182.90%28,393,0002.45%
Local pensions, funds managing proprietary assets, banks, and insurance companies9415.14%242,965,00020.99%
Local others (mostly discretionary investment companies – local hedge funds)10416.75%234,982,00020.30%
Foreign (foreign IPO funds & hedge funds)14623.51%62,498,4975.40%
Foreign others (mostly local hot money)284.51%142,697,00012.33%
Subscription rate243.15 to 1
Source: DART

Looking at the application results for each type of institution below, we can find a very interesting fact.

  1. First, a large number of foreign institutions with business relationships (i.e., major foreign investment institutions) participated in this subscription. The share of 23.5% by the number of participating institutions is significantly higher than the typical level for local IPOs. Of course, most of them applied based on actual demand, so their proportion of total subscription volume is only 5.4%. However, considering that all these quantities are actual demand, we can safely say that their participation level is quite high. This is a result consistent with what Mirase Asset (the bookrunner) has continuously leaked to the market about the active participation of many major overseas institutions.
  2. Another point to note is that the number of participating local institutions is remarkably low, consistent with the initial forecast that most small and medium-sized institutions skipped this IPO due to scheduling conflicts with LG Energy Solutions.
  3. Finally, institutions belonging to the category ‘Foreign others’ were quite aggressive in taking orders despite a small number of participating institutions. These are mainly local hot money managers, who are the most active in early profit realization trading. In other words, their aggressive move to secure Krafton IPO shares means that they are heavily betting on a short-term price increase due to the entry of local retailers immediately after Krafton’s listing.
  • The category ‘Foreign’ indicates foreign institutional investors with transaction records. They are foreign institutional investors who have a business relationship with the underwriter or of whom the underwriter acquirer is aware of the identity. So, these foreign institutions can be considered well-established overseas institutions actually based overseas.
  • In contrast, the category ‘Foreign others’ indicates foreign institutional investors without transaction records. Most of them are local hot money only whose legal office is registered overseas.

The “Unspecified” category usually indicates that they want the shares above the high end. With that in mind, 37.4% have gone for the upper end or above. The other 57.5% selected 75-100% of the upper end. So, most of the orders (95%) are priced at 75-100% of the upper end or higher. Unlike the initial concerns, we can say the institutional pricing is quite aggressive.

By priceInstitution%Demand%
Above high end599.50%279,666,00024.16%
75-100% of high end24639.61%665,029,82357.46%
50-75% of high end10.16%1,0000.00%
25-50% of high end00.00%00.00%
0-25% of high end71.13%11,370,0000.98%
75-100% of median10.16%1,0000.00%
50-75% of median00.00%00.00%
25-50% of median30.48%77,0000.01%
0-25% of median10516.91%48,077,0004.15%
Low end or below274.35%37,0000.00%
Source: DART

Trading Strategy of Krafton IPO Post Bookbuilding Results

By Douglas Kim

On 29 July, Krafton announced its IPO book building results. The IPO price has been determined at 498,000 won, which was at the high end of the IPO price range. The demand ratio among the institutional investors was 243 to 1. Krafton will be raising $4.3 billion in this IPO. There were 621 institutional investors that participated in the IPO survey of which 447 were domestic investors and 174 were overseas investors. 

Institutional Investors Demand Breakdown of Krafton IPO Bookbuilding Results
Domestic Investors    
 Asset mgmt companiesBrokeragesPension funds/insurance/banksOthers
No. of companies2311894104
 Overseas Investors   
No. of companies14628  
Total (No. of companies)621   
Total Demand243.1   
Note: (A)* refers to overseas investment mgmt companies that have records of trading with the brokers involved in this deal.
(B)** refers to overseas investment mgmt companies that do not have records of trading with the brokers involved in this deal.
Source: Company data   
  • We continue to have a NEGATIVE view of the Krafton IPO post book building results. Our base case valuation of Krafton remains implied market cap of 23.0 trillion won or implied price of 445,942 won per share, which represents 10% lower than the IPO price of 498,000 won. 

  • Gray market price of Krafton is 530,000 won, which is 6% higher than the IPO price of 498,000 won. 

  • Overall, there were some big institutional investors (both overseas and domestic) that helped to push Krafton’s IPO price to the high end of the lowered IPO price range. Despite this positive, the lock-up periods and the demand ratios were relatively weak as compared to other major IPOs in the past year. 

  • We do not expect any meaningful first day pop for the Krafton IPO. At best, we think there could be a 10-20% increase from the IPO price in the first few hours of trading on August 10th (IPO date). However, over a 6-12 months view, we believe that Krafton’s stock price will decline lower towards our base case intrinsic value of 455,942 won.

Spotify 2Q21: Podcasting Rolling Over?

By Aaron Gabin

Spotify missed on MAUs again and lowered 2021 guidance. Not great for a subscription business built on a distant 10 year DCF built on subscriber trajectories. We have pushed Spotify as a short for a while and think its still a good short, especially as their spending on podcasting continues, even as usage is rolling over…oh yeah, and they still have no operating leverage. 

Obex’s fundamental research process is focused on secular change in the TMT and Consumer sectors. We seek to differentiate between fundamental business analysis and security analysis. Before deciding if a security’s pricing and positioning merit a long or short position, we analyze the four pillars of business fundamentals (Secular Factors, TAM, Competitive Advantage, Business Model) in order to determine if this is a “good” or “not so good” opportunity.  

KPIT Tech: Hitting All the Right Notes

By Ankit Agrawal, CFA

KPIT reported strong Q1FY22 earnings. Overall, the earnings growth was led by margin expansion (EBITDA margin expanded to 17.3% vs 13.4% YoY) and high-teens QoQ revenue growth. The guidance also remains robust. While the stock has more than quadrupled since our initiation note KPIT Technologies: A Pure Play on Automotive Technology in Jun 2020, we believe the upside potential still remains significant.

Strong all-round delivery; valuation remains full

By Motilal Oswal

Coforge Ltd (COFORGE) reported strong organic revenue growth of 7% QoQ CC in 1QFY22, above our estimates of 3% QoQ CC. Including the two months of revenue contribution from SLK, revenue growth stood at 16% QoQ (USD), far higher than our exp. of 10.3% QoQ. Growth was driven by deal ramp-ups in the Americas (+30% QoQ, including the SLK impact). It reported another quarter of strong order intake of USD318m (the highest ever), implying 1.6x book-to-bill. This also included three large deals, with one USD105m deal win.

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