Daily BriefsTMT/Internet

TMT: Novatek Microelectronics Corp, Tencent Holdings, Trina Solar, oRo Co Ltd, Alibaba Group, NEC Corp, NTT Data Corp and more

In today’s briefing:

  • FTSE TWSE Taiwan 50 Index Rebalance Preview: Will Novatek Make It This Time?
  • Tencent – One If By Land
  • Trina Solar: Appraisal Rights Judgment Another Setback for Dissenters
  • oRo: Another Stock Capable of Making PM Suga’s Digitalisation Dream a Real
  • Alibaba: New E-Commerce Businesses Could Soon Turn Profitable but a Big Margin Improvement Unlikely
  • NEC (6701 JP): Avaloq Acquisition Positive for Earnings and Long-Term Growth
  • NTT Data – Should Benefit from Suga’s Digitalisation Drive While You Wait for an NTT Buyout

FTSE TWSE Taiwan 50 Index Rebalance Preview: Will Novatek Make It This Time?

By Brian Freitas

The FTSE TWSE Taiwan 50 Index is a market cap weighted index adjusted for free float and Foreign Ownership Limits and is designed to represent the performance of 50 of the largest and most liquid stocks that trade on the Taiwan stock market.

The next quarterly rebalance will be effective after the close of trading on 18 December and the changes will be announced on 4 December. The data used to determine changes to the index will use the closing prices on 23 November.

Using last market prices, we see Novatek Microelectronics Corp (3034 TT) at rank 40 and just making the cut for index inclusion, while Lite On Technology (2301 TT) at rank 57 is at risk of deletion. There is an extremely slim possibility of more than one change in this review.

Novatek Microelectronics Corp (3034 TT) finished at rank 41 at the September review and was not included in the index. The stock had traded as high as rank 36 a few days prior to review cut-off. Could the stock make it into the index this time around?

Tencent – One If By Land

By Thomas J. Monaco

*Simon Says: In Afterpay’s Touch’s (APT.AU) [Afterpay] latest move, it was announced that it will collaborate with Simon Property Group (SPG.US) in the US across it’s significant footprint of retail shopping malls  – over 200 across the country. This collaboration enables Afterpay to establish an in-store presence in the US where both companies will work side by side with retailers in Simon shopping malls;

*Tencent Tutelage: Afterpay is helping Tencent enter markets earlier and with Tencent’s (700.HK) tutelage likely will help Afterpay more deeply penetrate North America.  We fully anticipate that Tencent will help Afterpay enter the Asian markets – uncharted territory with a large young population – with the big prize obviously being mainland China. Tencent’s digital expertise should also help Afterpay to improve its technology platform (e.g. its digital wallet checkout experience and its shopping platform, plus customer led generation). It also wouldn’t surprise us if Tencent took up greater than its pro rata share of the capital raise; and

*Magic Fairy Dust: While no transaction particulars were disclosed, we calculate an average share purchase price of AUD 22.47 per share for the 5% stake or a hefty 6.8x P/BV for a company which is loss-making and where Tencent hasn’t control. Tencent has already earned 278% on this stake. 

Trina Solar: Appraisal Rights Judgment Another Setback for Dissenters

By David Blennerhassett

On the 23 September, the Grand Court of Cayman handed down a judgment on the appraisal rights assessment for Trina Solar (TSL US). This is the fifth judgment pertaining to Section 238 of the Companies Law (2020 Revision) to determine a fair value for dissenting shareholders. The other four were discussed in my early insight Homecoming For Chinese Companies: Appraisal Rights & Fair Value.

To Recap

On the 31 July 2016, TSL entered a definitive agreement for a going private transaction with Fortune Solar, a buyer group which included Jifan Gao, TSL’s chairman and CEO.  The merger price was US$11.60/ADS or US$0.232/share.

At an EGM on the 16 December 2016, TSL shareholders approved the merger, and it was completed on 13 March 2017.

Maso Capital and Blackwell dissented from the merger (Dissenting Shareholders) and a petition was heard between the 6 and 21 May 2019. Written closing submissions were filed on the 3 June 2019. 

Shanda Delays

On the 12 March 2019, the Privy Council heard an appeal from the judgment of the Cayman Court by Maso Capital and Shanda Games Ltd Spons Adr (GAME US). As that decision was pertinent to the TSL case, both TSL and Dissenting Shareholders agreed to delayed proceedings until the outcome of the appeal. The Privy Council advice was handed down on the 27 January this year. 

Valuations Proposed

TSL’s proposed valuation method was based on the price of shares bought and sold as at the EGM date; or the negotiated merger price. TSL argued that subsequent to the Shanda decision that the Court must determine fair value by reference to the price at which the relevant shares would be exchanged between a willing buyer and willing seller in an arms-length transaction based on publicly available information. 

Dissenting Shareholders argued for a DCF methodology.

The Decision And The Blended Assessment

The judge rejected the Shanda decision as being overriding and conclusive, not least as it would make s.238 void. But that the reference to what is fair requires that all relevant facts and matters be considered and that the:

… sum selected properly reflects the true monetary worth to the shareholder of what he has lost, undistorted by the limitation and flaws of particular valuation methodologies and fairly balancing, where appropriate, the competing, reasonably reliable alternative approaches to valuation relied on the parties.

The Court concluded the fair value should be determined with reference to the merger price (45%), the adjusted market price (30%); and 25% to the DCF valuation.

Given the adjusted market price is below the merger price; and the input for the DCF calculations preferred by the judge was primarily provided by TSL’s own expert, the final fair price (which was not detailed in the judgment) is expected to result in a marginal uplift (at best) over and above the merger price.

As always, more below the fold.

oRo: Another Stock Capable of Making PM Suga’s Digitalisation Dream a Real

By Shifara Samsudeen, ACMA, CGMA

oRo is a Japanese company which offers cloud and digital transformation solutions to corporates. The company was incorporated in Japan in 1999 and listed its shares in the year 2000.

The company’s revenues have grown at double-digit rates over the past few years with increased adoption of cloud services in Japan alongside growth in e-commerce in the country. oRo’s revenues were negatively impacted during the first half of the year due to the Covid-19 outbreak and as a result, we expect a slowdown in revenue and margin growth in 2020E. According to the company, the business conditions have recovered since June, and we remain positive on the company’s future prospects driven by favourable growth in cloud services and e-commerce adoption in Japan.

Alibaba: New E-Commerce Businesses Could Soon Turn Profitable but a Big Margin Improvement Unlikely

By Supun Walpola

Improving marginal profitability both at the segment level and the consolidated level suggests that benefits from Alibaba’s upfront investments in new businesses are gradually starting to materialise. Our linear model suggests an OP margin improvement of around 400-500bps in the medium-term (from 18%-19% currently to around 21%-23%).

However, negative marginal profitability of the Cloud Computing, and Innovation Initiatives and Other segments continue to put pressure on consolidated margins. We believe it would be unlikely for the OP margin to recover to the pre-FY03/18 level of 30%+ anytime soon.

We remain positive about Alibaba’s longer-term prospects as its e-commerce initiatives outside of Taobao and Tmall are getting closer to making profits, however, we believe the company’s medium-term valuation would still be driven by its steady growth profile rather than a margin improvement. Nevertheless, given that Alibaba is trading close to an all-time high, and looks fairly priced compared to its trading history, we would wait for a pullback to enter.

NEC (6701 JP): Avaloq Acquisition Positive for Earnings and Long-Term Growth

By Scott Foster

  • The acquisition of Swiss financial software company Avaloq should make a meaningful contribution to NEC’s Public Solutions division as it expands its digital government services business in Europe, Asia-Pacific and elsewhere. 
  • It follows the acquisition of KMD, a Danish software and IT company specializing in digital government, in 2019, and Northgate Public Services of the UK, which provides software and services to the public sector, in 2018.
  • The deal is valued at CHF2.05 billion (¥236 billion), or 3.4x Aviloq’s 2019 sales and 21x EBITDA. Avaloq’s EBITDA/Sales ratio was 16% in 2019, compared with 9.5% for NEC in FY Mar-20.
  • Aviloq’s own growth potential and synergies with NEC’s overall business justify the price, in our view. Last December, Aviloq renewed and expanded its 10-year relationship with DBS Bank.
  • We remain bullish on NEC, targeting more than 30% potential upside to ¥8,000 on the basis of historical valuation ranges.

NTT Data – Should Benefit from Suga’s Digitalisation Drive While You Wait for an NTT Buyout

By Mio Kato

There were some pointed questions regarding NTT Data at NTT’s investor day held on the 2nd of October, with suggestions that NTT should sell off NTT Data due to a lack of synergy between the two companies. We believe that would be entirely the wrong direction to go at this juncture, regardless of historical performance, and believe that NTT could turn NTT Data into a wholly owned subsidiary once it tidies up its balance sheet following the Docomo deal.

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