Daily BriefsTMT/Internet

TMT: Sea Ltd, Tencent, Simplex Holdings, Kakao Corp, Rhipe Ltd, Microstrategy Inc Cl A and more

In today’s briefing:

  • Sea Ltd (SE US) – The Runway Just Got Longer
  • SEA Ltd Placement -Momentum Is Very Strong but Last Deal Didn’t Do Well and It Doesn’t Need the Cash
  • China Gaming Restrictions Redux – Market Seems to Be in Denial
  • Sea Ltd Follow-On Offering: Asking Permission From Investors to Burn $4.0bn Per Year
  • Tencent Holdings – Modern Day Opium War
  • Simplex Holdings IPO – Simply Mediocre
  • Tencent: Temporary Freeze of New Game Approvals to Further Impact Slowing Games Business
  • Concerns Are Growing that Kakao Becomes a Political Scapegoat Ahead of the Presidential Election
  • Rhipe (RHP AU): Done Deal As Scheme Booklet Dispatched
  • Microstrategy (MSTR US): Bitcoin’s Mainstream/Fringes Balancing Act

Sea Ltd (SE US) – The Runway Just Got Longer

By Angus Mackintosh

Sea Ltd (SE US), South-East Asia’s largest market cap company, has announced that it aims to raise US$6.3bn in the largest equity offering of 2021. The deal will allow the company to accelerate its global expansion and give the company the financial firepower for potential acquisitions.

The company will offer 11m shares or a stake worth about US$3.8bn at the close on 8th September plus it intends to issue US$2.5bn in equity-linked debt to bring the total funds raised to circa US$6.8bn. 

Apart from continuing to grow its business in South-East Asia, the company is now expanding its e-commerce presence in South America, with a focus on Brazil, Mexico, Chile, and Colombia. 

According to local press reports, Shopee may also look to enter Eastern Europe, with Poland as its first target market.  Shopee has also launched a recruitment campaign for vendors to sell on what it called “Shopee India” and is ramping up hiring in the country. It has also been looking for office space in the country.

Sea Ltd (SE US) continues to grow its ShopeeFood business both in Indonesia and Vietnam and has seen a very strong performance and positive reception from users as well as driver communities in both markets. There has also been some talk of the company expanding food delivery into Malaysia, as it has already been advertising for drivers.

Assuming the completion of this fundraising goes smoothly Sea Ltd (SE US) will have a war chest of around US$13bn at its disposal to finance its ongoing expansion, though it is not yet clear what it needs this money for.

This may be seen as opportunistic fundraising in some camps but given its aspiration to expand globally into other emerging markets plus growing its digital finance and food delivery arms quite aggressively, this will certainly give the company the financial firepower to do so. 

We continue to take a positive view on Sea Ltd (SE US) which currently trades on 16x FY21E EV/Sales, 10.4x FY22E EV/Sales, and 7.8x FY23E EV/Sales, justified by sales growth of +105% YoY in FY2021, +47% YoY in FY22E, and +32.8% YoY growth in FY2023. 

SEA Ltd Placement -Momentum Is Very Strong but Last Deal Didn’t Do Well and It Doesn’t Need the Cash

By Sumeet Singh

Sea Ltd (SE US) plans to raise around US$3.5bn via an equity offering, along with another US$2.5bn via a convertible offering. The company last raised US$2.5bn in Dec 2020, which we covered in SEA Ltd Placement – New Business Needs New Money.

While the stock’s momentum and earnings growth is very strong, the last deal didn’t do particularly well in the near term.

In this note, we will talk about the deal dynamics and run the deal through our ECM framework.

Links to our prior SEA coverage:

China Gaming Restrictions Redux – Market Seems to Be in Denial

By Mio Kato

We said a couple of weeks ago that the restrictions on the gaming sector imposed by China were far more severe than the market reaction indicated. However, our view was mostly a call on the long-term impact of the gaming time restrictions on minors. The latest updates suggest that even the short-term outlook could get dire fast.

Sea Ltd Follow-On Offering: Asking Permission From Investors to Burn $4.0bn Per Year

By Oshadhi Kumarasiri

  • Singapore-based Internet company Sea Ltd (SE US), announced today that the company would offer 11.0m new ADSs (1.65m overallotment option) and convertible notes for a principal sum of $2.5bn ($375.0m overallotment option) via an underwritten public offering in New York.
  • Sea’s unprofitable businesses are growing at breakneck speeds. This puts immense pressure on the Gaming business to generate sufficient cash flows to facilitate the geographic expansion of Shopee and fintech growth in South East Asia.
  • Even though the Gaming business cash flows were somewhat enough to support Shopee’s growth in South East Asia, it is insufficient to maintain Sea’s unprofitable business growth in multiple businesses and multiple geographies.
  • This is Sea’s second follow-on equity offering in just 10 months and we think this is unlikely to be the last of such offers.

Tencent Holdings – Modern Day Opium War

By Thomas J. Monaco

*Being “Seriously Dealt” With: No sooner than Tencent Holdings’ (700.HK) [Tencent] virtual call ended with a competitor dismissing new gaming restrictions did the mainland Chinese regulator haul in gaming industry executives for a complete dressing down. It’s probably fair to say, Tencent’s recent hubris was their Jack Ma moment. It kind of makes one wonder what the authorities have planned next for Tencent. As the screws continue to tighten, the question becomes whether or not Tencent can narrow the regulatory discount, or whether these issues will remain a persistent overhang?; 

*As We’ve Just Learned – Ignoring It, Doesn’t Make It Go Away: Mainland China’s crackdown on capital markets activities has rapidly expanded under the broad narrative of “financial stability”. There remains no doubt, in our view, that Tencent will follow Alibaba Group (BABA.US) [Alibaba] in the formation of a financial holding company. It’s pretty surprising that Tencent refuses to discuss this matter when financial services are the largest component of earnings and growth; and 

*Prior To The War On Gaming, Results Have Already Deteriorated: Tencent’s 2Q21 GAAP net income declined CNY 5.2 bn (10.8%) linked quarter – and were of poor quality. Results were challenged by: cost of revenue increase; operating expense increase; losses in associates; higher impairment charges; and weaker online games. Were it not for the artificially lower tax rate, results would have been even more challenged.    

Simplex Holdings IPO – Simply Mediocre

By Mio Kato

Simplex aims to relist on TSE1 this month after being taken private by Carlyle Group in 2013 following a period of consistent margin deterioration. While the deal does not appear to be priced particularly egregiously, we feel there are several red flags worth noting.

Tencent: Temporary Freeze of New Game Approvals to Further Impact Slowing Games Business

By Shifara Samsudeen, ACMA, CGMA

The government of China announced last week a set of rules aimed at the country’s gaming sector in order to reduce the long-term impact of gaming on the country’s younger population (those under 18 years of age). Those new rules on limiting the mobile gaming time, we think was taken lightly by the market, however, regulators continue to ramp up regulation and tighten their grip on the mobile gaming sector. Executives from Tencent (700 HK) , NetEase (9999 HK)  and other mobile gaming companies were called in for a meeting on Wednesday and were instructed to end their “Solitary focus of pursuing profit” in order to prevent minors from getting addicted to games. This no doubt will require gaming companies to change their game rules and designs that induce addiction and at the same time, changes to operating models that will severely impact revenue and margins of games.

As China tackles to bring down gaming addiction among minor users, SCMP reports that the Chinese regulators will temporarily freeze approvals for new online games.

Concerns Are Growing that Kakao Becomes a Political Scapegoat Ahead of the Presidential Election

By Sanghyun Park

Today’s drop in Kakao’s share price has a different meaning than yesterday. Yesterday too, Kakao fell more than Naver, but it was not as much of a difference as today. Kakao is currently down 6.5%, while Naver is stopping the decline at 2.32%.

Yesterday, a rather abstract view emerged that government-level regulations on big tech had begun in Korea, similar to China. Therefore, the market focused on understanding the short-term impact of the actual application and interpretation of the Financial Consumer Protection Act announced by the Financial Services Commission on big tech financial platform businesses.

So yesterday, the stock prices of Kakao and Naver, two of Korea’s major big tech companies, fell together with a modest difference. This is because they all provide financial platform services that are highly likely to violate the Financial Consumer Protection Act in the immediate term.

  • But today, other concerns are spreading in the market. The FSC’s decision is not to tame big tech in the Chinese style but to publicize big tech regulations externally as a political tool that can greatly benefit the ruling party ahead of the presidential election scheduled for March 9 of next year.
  • The important point here is that the local market speculates that the ruling party specifically targets Kakao as a political scapegoat.

Rhipe (RHP AU): Done Deal As Scheme Booklet Dispatched

By David Blennerhassett

Back on the 1 July, rhipe Ltd (RHP AU), a provider of cloud-based subscription software-as-a-service licenses,  announced a non-binding indicative proposal from Norway’s Crayon Group Holdings. 

Less than a week later, rhipe entered into a Scheme Implementation Deed.

The Scheme consideration is A$2.50/share, less any permitted special dividend.

rhipe’s board said it intended to declare a fully franked special dividend, to be paid before the Scheme’s implementation date.

The Scheme Booklet is now out. The Scheme Meeting will be held on the 11 October, with an expected implementation date on the 3 November. The special dividend record date is the 18 October. 

This looks done.

Microstrategy (MSTR US): Bitcoin’s Mainstream/Fringes Balancing Act

By David Blennerhassett

That trade worked out well.

In my note Microstrategy (MSTR US): “Crypto Through The Tulips” back on the 28 June, I recommended shorting Microstrategy Inc Cl A (MSTR US) and going long bitcoin.

MSTR is up 2.3% since, against 30% for BTC.

MSTR has a tendency to issue paper to buy more bitcoins when the stock is at a large premium to its Bitcoin holdings.  As per its 21 June 21 announcement, MSTR said it held 105,085 bitcoins. That figure remains unchanged.

MSTR’s share price was US$123 prior to its initial announcement on the 11 August 2020 it was “adopting Bitcoin as a primary treasury reserve asset“.

The current implied value for MSTR’s stub ops – selling business intelligence software – is US$158/share, having touched US$141/share, suggesting value was emerging.

Yet is MSTR the ideal proxy for bitcoin? And just how much legitimacy should be attached to El Salvador giving bitcoin the status of legal tender?

More below the fold.

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