Kazuo Hirai, architest of Sony Corp (6758 JP)‘s remarkable recovery, announced today that he would be stepping down as Sony Chairman in Jun this year. The transition in leadership to former CFO Kenichiro Yoshida has been completed and was accomplished smoothly so we do not see any negative impact.
Recent concerns about Sony’s loss making smartphone unit also appear to be being addressed as the Nikkei reports that Sony would look to cut costs and headcount in half by Mar 2020. The English article is here and the slightly more detailed Japanese version is here.
In December (13 Dec after trading hours), the FT had an article noting that Germany’s leading property classifieds firm Scout24 AG (G24 GR) (also known for auto classifieds across Europe) was possibly looking to sell itself and that PE firms were lining up to bid. Silver Lake, which had bought British player ZPG (which operates property portals Zoopla and PrimeLocation) for $2.8bn in July 2018, was mentioned as a bidder. Once owned by Deutsche Telekom, control of Scout24 was sold to Blackstone and Hellman & Friedman LLC in 2013-14 (H&F spent €1.5 billion to take a 70% stake in 2013, and Blackstone bought a stake of undisclosed size in 2014), and they listed the company in 2015 with an initial market cap of €3.2 billion. The IPO was €1.16 billion and both sold down, with H&F fully exiting in a placement in 2016.
The share price had been doing well until Q3 last year when German lawmakers, anxious with skyrocketing property prices, started looking at revamping the structure of real estate transaction costs so that they were borne by sellers rather than loaded onto buyers. The shares fell.
source: investing.com
A combination of Blackstone and Hellman & Friedman LLC launched an non-LBO LBO for Scout24 AG (G24 GR) in mid-January at €43.50/share (€4.7 billion) which was about an 8% premium to the then-current market price, which had already been juiced because of speculation starting after the FT article in late December. The company rejected the Offer saying it was too low.
The two buyers came back in mid-February with a Takeover Offer priced at €46.00/share, 5.7% higher than January’s foray and 27% higher than the level pre-FT article; that was about 25x earnings and 28x 2019e cashflow, which is a bit lower than Silver Lake’s ZPG buy multiple. Both Scout24’s Management Board and Supervisory Board agreed to support the offer and said they believed that the transaction is in the best interest of the Company, and an Investment Agreement was signed between the three companies.
The unusual thing about this deal is that the two PE firms are looking to buy a minimum of 50% plus one share, and leave the company listed. The shares jumped to €46 and have been trading at just below to slightly through, leaving many to think that this was a setup for a strategic buyer or possibly Silver Lake to come in over the top.
The New News
Yesterday, the BidCo officially launched its Tender Offer at €46, due to run through 9th May.
Denso Corp (6902 JP) announced this month that it has invested in the Seattle-based connected vehicle services pioneer- Airbiquity Inc. Airbiquity is one of the leading companies in the connected vehicle services sector and has been one of the companies that has continuously developed automotive telematics technology. This investment made by Denso follows its investment made in Quadric.io this year ( Stake in Quadric.io Following Renesas; Denso Attempts to Keep Chip Makers Close to Achieve AD Aims). As we previously mentioned, Denso is in full swing in its development in the autonomous driving field and next-generation technologies development. Thus, it wouldn’t be a surprise to see Denso emerge as the first mover in next-generation technologies such as AD and connectivity solutions. According to Denso, its investment worth $5m in Airbiquity is expected to accelerate the development of over-the-air (OTA) systems for wirelessly updating automotive software from a remote location. OTA systems are methods of distributing new software, configuration settings, and providing updates to the electronic device in use, for instance, a car navigation system in a vehicle. These OTA systems which have been increasingly used to update the software of such multimedia products in a vehicle are now gaining more prominence given the emergence of next-generation technologies such as electrification, EV and connectivity. We also believe that Denso’s Stake in Airbiquity is likely to accelerate Denso’s transition in its business model to be a leading software solution provider. Thus, its series of investments such as in Tohoku Pioneer EG, JOLED, ThinCI, Quadric, and now Airbiquity are indicative of the decisiveness of its change in business model and moves towards achieving next-generation technology leadership.
Six weeks ago I wrote that Nissan’s governance outlook was “Foggy Now, Sunny Later.” I said “Governance changes are afoot, with a steady flow of developments likely coming in March, April, May, and June.”
The last couple of months have seen numerous media articles about the process of Nissan Motor (7201 JP) and Renault SA (RNO FP) rebuilding their relationship. There have been visits to Tokyo by Renault’s new chairman of the board of directors Jean-Dominique Senard, and visits to Paris and Amsterdam by the CEOs of Nissan and Mitsubishi Motors (7211 JP).
There have been many suggestions in French and European newspapers in the interim that Jean-Dominique Senard would be the obvious choice as a representative director of Nissan. There have been other articles out there in the Japanese press suggesting what conclusions the committee might come to as to what outcomes should result. The difference is notable. The French side still wants control. The Japanese/Nissan/committee side sees the need to fix governance.
Today there was a report in the FT suggesting that Renault “wants” to restart merger talks with Nissan and “aims to restart merger talks with Nissan within 12 months.” It should be noted that these two sentences are not exactly the same. It may still be that France wants Renault to do so, and therefore Renault aims to do so. The same article revealed past talks on Renault merging with FCA but France putting a stop to it and a current desire to acquire another automaker – perhaps FCA – after dealing with Nissan.
Also today, the long-awaited Nissan Special Committee for Improving Governance (SCIG) report was released. It outlines some of the issues of governance which existed under Ghosn- both the ones which got him the boot, and the structural governance issues which were “discovered” after he got the boot.
There are clear patches in the fog. Two things shine through immediately.
Governance weaknesses under Ghosn were inexcusably bad. Worse than previously reported.
The recommendations to the board now are, on the whole, pretty decent. Some are sine qua non changes – formation of nomination and compensation committees, whistleblower reporting to the audit committee and not the CEO, and greater checks and balances. Some are stronger in terms of the independence of Nissan from Renault: the committee recommends a majority of independent board members, an independent chairman, and no representative directors from Renault, Mitsubishi, or principal shareholders.
There are, however, other issues which were not addressed, which for Nissan’s sake probably should be addressed. Yesterday was a first step on what will be a 3-month procession of news about the way Nissan will address the SCIG report’s recommendations, the process by which it will choose new directors when it does not have an official nomination committee, and the AGM in June to propose and confirm new directors. Then they will start their jobs in July.
The fog looks to lift slowly. And one may anticipate some better weather beyond. But business concerns remain a threat, and while relations appear to be getting better after the departure of Carlos Ghosn and the arrival of Jean-Dominique Senard, it is not clear that a Franco-Japanese storm is not brewing in the distance.
More below.
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Cupid Ltd one of the largest manufacturers of condoms in India 9MFY19 revenue was largely as per our expectations, as there was some order slippages. As forecasted in our initiation report Cupid Ltd: Protecting the Needy, the company reported a 20% decline in revenue at Rs 505mn, which also resulted in lower profitability both at the operating as well as net level. EBITDA stood at INR 161.6 mn declining by 32.53% with EBITDA margin at 31.95%. PAT was INR 108.5 mn declining by 24.58% with PAT margin at 21.46%.
Despite this below-par performance in the 9MFY19, we are fairly positive on the future growth prospects of the company. As of March 2019, it has a healthy order book of INR 1300 m with Book to Bill ratio of 1.99 times on its TTM sales. We expect revenues to grow at 15% over FY18-19 and margins to improve in medium to long term horizon.
Having corrected by 67% from its peak, the stock currently trades at 10.20x its FY19 EPS and 8.34x its FY20 EPS; we believe that this provides a good entry point for this niche high margin healthcare company with attractive long term growth possibilities.
Have you ever wondered how a company secures the Chinese lucky number “8” as their ticker in Hong Kong? I’ll explain later on, but let’s just say that being the son of Li Ka Shing helps.
Li Ka Shing is a name that hardly needs introduction in Hong Kong and Richard Li, Li Ka Shing’s youngest son and Chairman of PCCW Ltd (8 HK), follows suit. After being born into Hong Kong’s richest family, Richard Li was educated in the US where he worked various odd jobs at McDonald’s and as a caddy at a local golf course before enrolling at Menlo College and eventually withdrawing without a degree. As fate would have it, Mr. Li went on to set up STAR TV, Asia’s satellite-delivered cable TV service, at the tender age of 24. Three years after starting STAR TV, Richard Li sold the venture, which had amassed a viewer base of 45 million people, to Rupert Murdoch’s News Corp (NWS AU) for USD 1 billion in 1993. During the same year, Mr. Li founded the Pacific Century Group and began a streak of noteworthy acquisitions.
You may be starting to wonder what all of this has to do with a trade on PCCW Ltd (8 HK) and I don’t blame you. In the rest of this insight I will:
finish the historical overview of the Li family and PCCW
present my trade idea and rationale
give a detailed overview of the business units of PCCW and the associated performance of each
recap ALL of my stub trades on Smartkarma and the performance of each
We launched coverage of Dali Foods Group (3799 HK) in February with a Sell rating and a HK$4.18 target price. FY18 financial results, which were released late Tuesday March 26th, appear to confirm at least half of our negative thesis (slowing revenue growth), though the other half (margin compression) has failed to materialize so far.
Dali Foods appears to have met — just — the FY18 consensus EPS target of HK$0.307 per share. The company cut its Final dividend from HK$0.10 to HK$0.075 per share.
However, the pace of revenue growth plummeted in H218. From solid growth of +11.4% YoY in H118, H218 revenues actually declined by -0.6% YoY in the latter half of the year. This result was beyond even our pessimistic view and we believe bulls on the company will be forced to revisit their overly optimistic assumptions about double-digit revenue growth in 2019e.
Besides assuming slower revenue growth going forward, the other leg of our negative thesis on Dali Foods was the expectation of margin compression due to rising raw materials costs, specifically for paper and key food and beverage ingredients. Although H218 gross margin declined versus H217 (to 37.7% from 37.8%), it did so only marginally, and probably due to a change in product mix (ie, a decline in high-margin beverage sales).
After reviewing FY and H218 results, we see no reasons to change our negative view of Dali Foods, and our HK$4.18 price target (-26% potential downside) and Sell rating remain unchanged.
Market activity, both bonds and stocks, has been all about realigning expectations. Wednesday’s Fed announcement was more dovish than expected, and the market is now pricing in roughly 25bps of cuts by the end of 2019. Stocks reacted positively on Thursday, but then reversed (and then some) on Friday as global growth concerns became a little more serious. We continue to maintain our positive outlook. In today’s report we recap our bullish investment thesis and highlight attractive Groups and stocks within Consumer Staples, Materials, and Services.
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Xtep International (1368 HK) has announced a placing and top-up subscription of new shares event, creating a capital base which is 9% larger.
XTEP states that they have considered various ways of raising funds and consider that it would be in their best interests to raise equity funding through the placing and the subscription.
With the share price down 16% since the placement, we examine what this means for the company’s fundamentals and shareholders. We believe the results will prove to be mixed for management and shareholders alike. We highlight how we expect the stock ranking to react, given we the placement was only a few days back and this is yet to reflect. This special situation analysis may surprise you with the conclusions.
After a lacklustre week of range-bound trading, crude ended higher on Friday, though well off its session highs.
Crude was buoyed by strong investor cheer, which prompted an across-the-globe rally in the stock markets. The burst of euphoria was prompted by promising signs from the just-concluded high-level trade negotiations between the US and China in Beijing, though arguably throwing caution to the winds.
The American president fired his second tweet of the year at OPEC on Thursday. It was “very important that OPEC increase the flow of oil,” he said, because the price of oil was “getting too high.” The producers as well as market participants decided not to heed this time.
However, the pressure from Donald Trump is bound to intensify if Brent sustains a rally above $70, and OPEC and its Saudi leadership will not be able to continue ignoring it.
Aramco agreeing with the Public Investment Fund to buy 70% of petrochemicals giant Saudi Basic Industries Corp (SABIC AB) for $69.1 billion marks a new era for the companies. However, it does not mean that the Aramco IPO would be shelved, and directly or indirectly, we don’t expect it to derail Saudi Arabia’s strategy of actively managing oil supply through OPEC.
Our chart of the week shows that speculative bets on a price rally continue to return to Brent and WTI futures, but cautiously.
Sony Corp (6758 JP) is forming a bullish descending wedge/channel that once mature will chisel out an intermediate low with scope to clear medium term breakout resistance. The tactical low near 4,400 lies just above more strategic support.
Clear pivot points will help manage positioning within the bull wedge that is in the final innings.
The tactical buy level is not that far from strategic support with a more bullish macro lean.
MACD bull divergence is not only supportive into near term weakness but also points to a breakout above medium resistance. Risk lies with Sony not looking back after hitting our tactical low target.
So for the disastrous January and February combined, Tesla delivered about 24,900 cars, only a third of the cars it projected for the entire first quarter.
This explains the chaos and drama which dominated March as Tesla hurried through additional price cuts and layoffs, bungled the launch of a harried new online-sales strategy, and threw together a reveal of the disappointing and far-from-ready Model Y (see my reports Tesla’s Plan B 2.0; Y Not and Tesla: Now We Know the Y, But Not the How and Tesla Bonds Go Boom).
Less convincing were Tesla’s conveniently “leaked” teases over the past couple of weeks about a “massive increase in delivery volume” and “Vehicle Delivery Help Needed!” to get a remarkable 30,000 cars to customers the last 15 days of March. Especially since several price cuts already this year have yet to reignite fading demand even for Model 3, much less the aging Models S and X amid accelerating competition from stronger rivals and Tesla’s alarming quality and service troubles which are driving away customers.
We’ve seen this quarter-end movie too many times, and investors responded last week by selling off Tesla stock and bonds to six-month lows.
Thankfully, we are just days away from finding out Tesla’s deliveries for the quarter, which the company will likely report on or before Tuesday. I’m guessing it won’t be pretty.
Market concensus estimates have been falling like meteors the past couple of weeks, and still seem far too ambitious versus my estimates.
The fog lifts, slowly, on Nissan Motor (7201 JP), but merger talks will have to wait until the company gets its governance in order, and a full-on merger seems remote at best.
Both Mio Kato, CFA and Travis Lundy tackled a report in the FT suggesting that Renault “aims to restart merger talks with Nissan within 12 months” and the long-awaited release of Nissan’s Special Committee for Improving Governance (SCIG) report.
Governance weakness under Ghosn was inexcusably bad. Worse than previously reported. Ghosn unilaterally decided the compensation of directors, top management and himself, while Kelly held broad sway over essentially everyone else, acting as a gatekeeper even against auditors and the accounting department. And it appears that there is zero understanding at Renault that Renault itself is not blameless for bad governance at Nissan over the years. The SCIG recommendations to the board now are, on the whole, pretty decent.
If France and Renault “push” for a merger, Nissan will continue to push back for the foreseeable future. As the governance report shows, the house is nowhere near being in order. All that has happened is that the steps which need to take place for it to be put in order have been identified.
Where Mio and Travis diverge – click to both insights below – is that Mio thinks a breakup of the alliance is more likely than a merger near term, especially if Paris continues to ignore Nissan’s priorities and constantly push for a merger ASAP. He does not feel scale is quite as necessary as people seem to assume, as long as you have access to a strong supply chain.
Travis thinks an outright merger is also unlikely, as the trust is not there, but is a big fan of the existing single platform design to lower costs and reduce parts count. There would be no need to replicate the R&D for parts and platforms across multiple marks, so he thinks the production alliance stays in place even if the capital alliance does not move further.
Sanghyun Park concluded the market had misinterpreted Amazon’s server DRAM demand cut in 4Q18. It wasn’t a sign of falling demand nor is there any convincing sign of server DRAM demand drop-off. It’s more a technical issue and by the time SamE gets the optimization issues right, server DRAM demand of Amazon and Google will return, stabilising DRAM prices.
And that demand may come sooner, potentially by the end of 2Q. This will lead to a ₩4tn quarterly addition to the current street consensus, which backs out a current PER of ~9x.
SamE is up since Micron announced it plans to reduce its output of DRAM and NAND by ~5% this year. From a Common-1P perspective, Sanghyun recommends going long the Common.
Aqila Ali discusses Denso Corp (6902 JP) investment in Airbiquity Inc, one of the leading companies in the connected vehicle services sector and one of the companies that has continuously developed automotive telematics technology. This proposal follows its investment in Quadric.io this year. Denso is in full swing in the development of its autonomous driving business and next-generation technologies development, and it wouldn’t be a surprise to see Denso emerge as the first mover in next-generation technologies such as AD and connectivity solutions. (link to Aqila’s insight: Denso Continues to Strengthen Its Investment CASE with Acquisitions)
Wesfarmers Ltd (WES AU) surprised the market and announced a non-binding proposal to acquire Lynas at A$2.25/share (cash) by way of a scheme. This is a 44.7% premium to the one-day price and a 36.4% premium to the 60-day price. However, it is a 0% premium to the price at which Lynas was trading on 3 December 2018, the day before the Malaysian government imposed two pre-conditions on the rolling over of the processing licence (later in 2019), and it is a 3.2% premium to the one-year average as of 4 December 2018. Lynas rejected the proposal the next day.
Lynas shares have, since mid-December, been trading as if there is significant risk to the renewal of their operating license in Malaysia.
This is a long-term bet by Wesfarmers. But seeing it through would require that Lynas shareholders decide once Malaysia has approved the renewal of their license that this business won’t be able to see better margins ahead the way there was a dream to see them a year ago. Travis did not think that the increased buying on the dip by Greencape Pty and FIL since the Dec 4th announcement are omens of a desire to sell at A$2.25.
A priori, the bid by Wesfarmers does not increase the likelihood of a good outcome on the Malaysian regulatory front. And it disappears if Lynas can’t sort its problems satisfactorily. Therefore, it is not clear what value the bid brings to Lynas shares today. If neither the outcome’s probabilities nor the outcome’s price levels change, the bid should have no material impact on Lynas shares.
At the time of his report, Travis thought this would be a short if the stock pops to the very high A$1 range or A$2.00 area. One caveat to shorting too low: if you think WES would conceivably bid quite a bit higher to enable Lynas to have a processing plant and battery plant at WES in Australia and maintain processing in Malaysia, that might be a different story.
The ACCC said will not oppose a tie in between IPH Ltd (IPH AU) and Xenith. Xenith acknowledged the ACCC decision resolves a major uncertainty, but stops short of supporting IPH’s offer as there still exist a number of concerns as detailed in its 19 March announcement.
None of these remaining concerns raised by Xenith appear deal-breakers, and Xenith’s general pushback fails to mention the benefits of leveraging off IPH’s Asia-based presence, IPH’s superior liquidity (versus QANTM limited liquidity), together with the certainty of value under IPH’s offer via the large cash portion.
With IPH’s 19.9% blocking stake, the QANTM/Xenith scheme is a non-starter. Xenith still should engage with IPH, whose offer provides a gross/annualised spread of 7.5%/24.5% – a decent risk/reward – assuming late July completion. The scheme meeting to decide on the QANTM Offer, scheduled for the 3 April, has now been postponed.
SOE State Power Investment Corporation (SPIC) is seeking to privatise China Power New Energy Development Co (735 HK) by way of a Scheme at $5.45/share, a 41.9% premium to last close and a 78.1% premium to the 30-day average. A scrip alternative (6 New shares for one Scheme shares) into an unlisted vehicle under SPIC is also available, but presumably just for SOE shareholders. China Three Gorges, CPNED’s largest shareholder with 27.10%, have given an irrevocable undertaking to vote for the Scheme and to elect the share alternative.
This looks like a pretty clean, straightforward privatization. It is priced above the highest close since its listing by way of introduction on the 18 July 2017, while the excitement over the potential injection of all nuclear power assets and businesses from State Nuclear Power Technology Company has been removed after the restructuring was cancelled in July last year.
Clarity is required as to whether China Three Gorges can vote at the court meeting. Based on the Code, it appears evident they cannot. In addition, the final dividend is expected to be added to the offer price, but again, the announcement is not explicit on this.
The stock is currently trading at an attractive gross/annualised spread of 7.5%/25.7% conservatively assuming a late July completion, and inclusive of the final dividend.
Merck KGaA (MRK GR) has launching an unsolicited, fully financed tender offer on VSM at $48/share cash, a 52% premium to VSM’s stock price on January 25, the day before it agreed to sell itself to Entegris Inc (ENTG US)‘s in an all-stock deal.
Conditions include a minimum acceptance threshold (a majority of shares), the rejection of ENTG’s offer, HSR/CFIUS clearance, plus the usual MACs. Merck does not rule out an increase in the Offer price.
The shareholder vote on the VSM/ENTG is scheduled for April 26th, 2019. The record date to vote is April 2, 2019. This means the last day to buy and participate was this past Friday.
Merck said “the Versum board’s hasty rejection of our proposal and unwillingness to engage in discussions with us has forced us to take this proposal directly to shareholders. … Tell the Versum board to start doing its job and put your interests first.”
A combination of Blackstone and Hellman & Friedman LLC launched an non-LBO LBO for Scout24 in mid-January at €43.50/share (€4.7bn), which was about an 8% premium to the then-current market price, which had already been juiced because of speculation starting after the FT article in late December. Scout24’s Board rejected the Offer. The two buyers came back in mid-February with a Takeover Offer priced at €46.00/share. Both Scout24’s Management Board and Supervisory Board agreed to support the offer. The BidCo has now officially launched its Tender Offer.
The unusual thing about this deal is that the two PE firms are looking to buy a minimum of 50% plus one share, and leave the company listed. The stock has been trading above terms since the new €46 bid. It appears the idea is that another bidder might come in over the top. Travis tends to think the occasional trading at just above €46 is due to arbitrageurs looking at this as a put option. Plus, the lack of additional noise means another bid may not be forthcoming.
Because Scout24 is basically a pure play inline classifieds business, it gets a decent multiple (17x 2019e EV/EBITDA). That said, it is not overwhelmingly expensive for a business which has strong network effects and significant ability to create niche marketplaces using existing technology/IP.
Travis would see nothing wrong with selling in the market here, but as an arb, he is still a buyer at €46.01/share.
Naspers announced the intended listing of its international internet assets on Euronext Amsterdam “no earlier than H2 2019“, together with a secondary, inward listing on the Johannesburg Stock Exchange. The Newco spin-off will include Naspers’ holdings in listcos Tencent and Mail.Ru (MAIL LI), together with ex-South African internet assets. Naspers will maintain a 75% stake in Newco plus Takealot, Media24, and net cash.
Newco’s discount is likely to be narrower than Naspers presently, on account of the smaller free float, and >$2.26bn of investment just from index funds. It will however, still be a Tencent holding vehicle, while Newco’s assets comprise ~94% of Nasper’s assets.
The remaining Naspers, post-spin off could have a wider discount – or “discounts on discounts”. It will be one layer removed from what investors are most interested in – the Tencent holding. As witnessed in other holdco restructurings, providing additional clarity on investments/holdings within a company via spin-offs does not necessarily translate to the parent company’s discount narrowing.
Assigning a 20-25% discount to the Newco and keeping the discount constant (optimistically) at Naspers, gives a negative ~7-13% return. I simply don’t see the value enhancement here, while there is no change in governance and no monetisation at the parent level.
Using a Sum of the Parts analysis, Curtis Lehnert calculated the current discount to NAV to be 37%, the widest level it has been since at least 2015, and approaching the -2 standard deviation level relative to its 6 month average.
The current dividend yield on PCCW was 6.62% vs. 5.55% for HKT. That 1% yield differential is also near the widest since HKT’s listing in 2011.
As Curtis notes, a catalyst for re-rating is hard to find. Still, he argues that the discount has widened out so much that the statistical advantages of mean reversion are in your favor.
Separately – and as expected – the composite document issuance for HKCIM has been delayed until (on or before) the 18 April.
Eclipx (ECX AU) has rallied after a market update confirming it will sell two divisions (Grays and Right2Drive) and use the proceeds to pay down corporate debt.
Ophir Energy (OPHR LN)‘s shareholders approvedMedco Energi Internasional T (MEDC IJ)‘s Offer. Completion of the Offer remains subject to the receipt of clearances from the relevant authorities in Tanzania and not losing all or substantially all of its Bualuang interests in Thailand.
The Offer docs for Healthscope Ltd (HSO AU) have been pushed out to the 24 April so as to incorporate the Scheme and Takeover Documents into a single integrated booklet.
CCASS
My ongoing series flags large moves (~10%) in CCASS holdings over the past week or so, moves which are often outside normal market transactions. These may be indicative of share pledges. Or potential takeovers. Or simply help understand volume swings.
Often these moves can easily be explained – the placement of new shares, rights issue, movements subsequent to a takeover, amongst others. For those mentioned below, I could not find an obvious reason for the CCASS move.
Payment for shares tendered during Subsequent Offer Period
C
Switzerland
Panalpina
Off Mkt
5-Apr
EGM
C
US
Red Hat, Inc.
Scheme
March/April
Deal lodged for approval with EU Regulators
C
Source: Company announcements. E = my estimates; C =confirmed
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Naspers (NPN SJ) recently announced another attempt to reduce the holdco discount which has remained stubbornly high despite previous attempts by management to reduce it. Since the announcement there has been movement, so perhaps this time it really is different!
So what is being done? Naspers will spin off its international internet assets, which account for >99% of its value, into a newco. They will then list 25% of newco on the Euronext in Amsterdam by issuing these shares to Naspers’ shareholders. The intention is to create a vehicle which can attract increased foreign and tech investors without the complication of a South African listing. The company believes this has been a key factor behind the wide holdco discount. The move also reduces Naspers weighting in South African indices which is another contributing factor.
Alastair Jones sees the announcement as a positive, although there are still issues with the main listing being in South Africa. He still believes a buyback would be the most effective way to reduce the discount, but Naspers is also keen to keep investing.
This article is a round up of the key takeaways from our recent meeting with Sony’s IR team. Our main focus was on the PlayStation and subsequent hardware and software developments, the company’s mobile phones business unit, the pictures unit as well as the semiconductor business.
In the gaming segment, Sony doesn’t see Stadia as a threat since Sony mainly caters to the core gaming segment. Sony does not expect cloud gaming to offer the same quality that consoles offer to core gamers anytime soon. For the time being, Stadia will most likely appeal to casual gamers.
In the pictures segment, Sony is developing a Spider-Verse sequel. A definite release date is yet to be confirmed, however, looking at the first movie’s success, we can expect a similar result for the sequel upon release.
The company also plans to hold onto its mobile communications segment even though it is expected to make losses in FY03/19 as well. For Sony, this segment is crucial in developing 5G technologies.
In the semiconductors segment, Sony expects a demand hike from the number of cameras used per phone. This is in spite of the mobile phone market itself slowing down. Sony expects to increase the ASPs of these sensors going forward as well.
We selectively visited a dozen companies in March and were most impressed with three of them (two of which we happily own):
SISB, Thailand’s only listed education stock, whose market cap has increased more than 30% since its IPO. The future potential growth they are currently working on in Cambodia and China will show up here and spruce the company’s already strong growth. Working in a favorable environment (Thailand’s affluent class is growing) also helps.
MINT, the country’s hotel chain giant and 20th largest chain in the world, sees great growth potential in Europe, where things are slowly turning around after they made two big acquisitions (NH Hotels and Tivoli). Synergies are also materializing with co-marketing and re-branding efforts.
After You, arguably the dessert chain with the highest margin in Thailand. No longer a newbie IPO stock, these guys boast collaboration with global giant Starbucks and branching out into new channels such as After You Durian.
Back in September 2017, Lawrence Ho, Summit Ascent Holdings (102 HK)‘s major shareholder, reduced his stake to 18.75% from 27.06% (at between $1.13-$1.60/share, but mainly at the low end of this range), according to Hong Kong Exchange disclosure of interest filings. The share price of this Russian integrated gaming play declined 34% to $1.06/share in the following five trading days. Who bought those shares was not disclosed – CCASS shows these shares moving out of VC Brokerage into at least 10 different brokerage accounts.
On the 15 December, Ho announced a complete exit from Summit, selling 17.37% of shares out. Concurrently Ho resigned from his NED and chairman positions. Those shares moved from VC Brokerage to Sun Hung Kai Investments on the 20 December 2017. Shares traded unchanged on the news.
At the same time, First Steamship (2601 TT)disclosed it held 12.67% on the 18 December 2017. Concurrently, Kuo Jen Hao was appointed as NED and Chairman of the Board, with effect from 28 December 2017. Kuo is also the chairman and the general manager of First Steamship. First Steamship gradually increased its stake to 19.11% as at 24 October 2018.
The New News
Yesterday, Summit Ascent announced it has been informed that First Steamship and Kuo are in talks to sell their entire shareholdings. No numbers were disclosed. This stake sale would not trigger an MGO and there was no reference to the release of an announcement pursuant to the Codes on Takeovers and Mergers and Share Buy-Backs in Hong Kong. Shares are up 24%.
With increased liquidity surrounding the news, this looks like a great opportunity to exit.
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Rakuten Inc (4755 JP) investee Pinterest Inc (PINS US) has filed its IPO prospectus implying a lower valuation than its last venture round but a robust increase in value since Rakuten led the Series C round in May 2012. We think an initial ¥4bn investment could be worth ¥25-30bn at the midpoint of the suggested IPO range.
As with Lyft, the absolute value again and shift to greater liquidity are positive as it gives Rakuten more financial flexibility as it ramps up investments in the mobile business.
Unlike Lyft, the Pinterest IPO value is down from the latest funding round which impacts paper profits that provide cover for spending on mobile albeit at a fraction of the upside from Lyft.
Pinterest doesn’t generate the same headlines as Lyft but a second IPO of a Rakuten investment as its cash needs expand can only be good news
* JD ever generated cash flows by accounts payable in direct sales, but cost control is necessary when the commission business grew faster than the direct sales business.
* We believe that the overwhelming majority of delivery men will stay with JD after the salary cut, as many small delivery companies went bankrupt in 2018.
* we believe JD will be able to control costs well and keep close-to-zero net margin in 2019.
In our Discover HK Connect series, we aim to help our investors understand the flow of southbound trades via the Hong Kong Connect, as analyzed by our proprietary data engine. We will discuss the stocks that experienced the most inflow and outflow by mainland investors in the past seven days.
We split the stocks eligible for the Hong Kong Connect trade into three groups: component stocks in the HSCEI index, stocks with a market capitalization between USD 1 billion and USD 5 billion, and stocks with a market capitalization between USD 500 million and USD 1 billion.
In this insight, we will highlight Air China and Great Wall Motor.
In this series under Smartkarma Originals, CrossASEAN insight providers AngusMackintosh and Jessica Irene seek to determine whether or not we are close to the end of the rainbow and to a period of outperformance for the property sector. Our end conclusions will be based on a series of company visits to the major listed property companies in Indonesia, conversations with local banks, property agents, and other relevant channel checks.
In the seventh company in ongoing Smartkarma Originals series on the property space in Indonesia, we now look at Indonesia’s oldest Industrial Estate developer and operator Kawasan Industri Jababeka (KIJA IJ). The company’s largest and the original estate is in Cikarang to the East of Jakarta and comprises 1,239 hectares of industrial land bank and a masterplan of 5,600 ha.
The company has also expanded its presence to Kendal, close to Semarang in Central Java, where it has a joint venture with Singapore listed company Sembcorp Industries (SCI SP). This estate covers a total area of 2,700 ha to be developed in three phases over a period of 25 years and is focused on manufacturing in industries.
The company also has successfully installed a 140 MW gas-fired power station at its Cikarang, providing a recurrent stream utility-type earnings, which cushion against the volatility in its industrial estate and property earnings. After some issues with one of its boilers (non-recurrent) and issues early last year with PLN, this asset now looks set to provide a stable earnings stream for the company.
KIJA has also built a dry-port at Cikarang estate which has been increasing throughput by around +25% every year, providing its customers with the facility for customs clearance at a faster pace of that at the Tanjong Priok port, as well as logistics support.
After two difficult years where the company has been hit by a combination of problems at its power plant, foreign exchange write-downs, and slower demand for industrial plots, the company now looks set to see a strong recovery in earnings in 2019 and beyond.
The company has seen coverage from equity analysts dwindle, which means there are no consensus estimates but it looks attractive from both a PBV and an NAV basis trading on 0.85x FY19E PBV and at a 73% discount to NAV. If the company were to trade back to its historical mean from a PBV and PER point of view, this would imply an upside of 33% to IDR325, using a blend of the two measures. An absence of one-off charges in 2019 and a pick up in industrial sales should mean a significant recovery in earnings, putting the company on an FY19E PER multiple of 9.7x, which is by no means expensive given its strategic positioning and given that this is a recovery story.
At noon Sydney time Lynas Corp Ltd (LYC AU) held an investor briefing by webcast regarding comments made by the Malaysian Prime Minister in his first cabinet press conference on Friday 5 April 2019. Those comments were noted in the ASX regulatory update.
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The enlarged entity will have a combined portfolio value of S$6.7 bil, propelling the enlarged entity to become one of the biggest REITs in Singapore in terms of portfolio size.
Based on last traded prices, the combined entity will have an enlarged market capitalization of S$2.83 bil, making it the 11th biggest S-REIT in terms of market capitalization.
For OUE C-REIT, it enjoys fewer benefits from enlarged portfolio but a merger will alleviate concern on the CPPU timebomb.
For OUE H-TRUST, unitholders benefit more from an improve asset/sector diversification and also a potential cash payout.
For sponsor OUE LTD, it will find it easier to recycle assets in an enlarged REIT.
OUE C-REIT and OUE H-TRUST have announced trading halts this morning pending release of announcements. A clarification announcement on the merger is likely to be issued.
Below is a recap of the key IPO/placement research produced by the Global Equity Research team. This week, we update on the bevvy of placements offered by various companies. After placements by Pinduoduo (PDD US) and Sea Ltd (SE US) , we saw more offerings from HUYA Inc (HUYA US) , Bilibili Inc (BILI US) and Qutoutiao Inc (QTT US). We update on these three offerings and perhaps big picture, this could reflect a signalling inflection point in these shares. More details below
In addition, we have provided an updated calendar of upcoming catalysts for EVENT driven names below.
Best of luck for the new week – Arun, Venkat and Rickin
Graincorp Ltd A (GNC AU) said on Thursday it plans to spin off its malting and craft brewing distribution business (MaltCo). The proposed demerger, which will complete at the end of the year, would result in two independent ASX-listed companies – MaltCo and GrainCorp’s Grains and Oils businesses (New GrainCorp).
In the absence of an LTAP binding proposal, the GrainCorp Board to their credit has proposed an alternative way to create shareholder value or at least minimise a share price fall. Unfortunately, the proposed demerger is unlikely to be superior to the LTAP proposal, in our view.
On 5 April, Ap Eagers Ltd (APE AU) announced that it had lobbed an unsolicited all-scrip takeover for Automotive Holdings (AHG AU)/AHG. Under the proposal, AHG’s shareholders would receive 1 AP Eagers share for every 3.8 AHG share. In a 100% acquisition scenario, AP Eagers shareholders would own 75.5% of the merged AP Eagers-AHG.
Presumably, AP Eagers believes its proposal delivers fair value to both AP Eagers and AHG shareholders. While AP Eagers’ bid provides some relief for AHG shareholders, our analysis suggests that AP Eagers’ bid requires a bump to cross the finish line.
Here it is. The end – the culmination of years of effort and high balance sheet usage by hedge funds. Altaba Inc (AABA US) is going out with a whimper plus a little upside.
Reportedly plans for the sale of NHC have been abandoned with a focus on selling its Nexon Co Ltd (3659 JP)gaming unit.
We now have an agreed deal for Panalpina Welttransport Holding (PWTN SW) supported by the Ernst Göhner Foundation, the major activist shareholders, and Panalpina management.
Altaba will sell or distribute, in stages, its remaining net assets to shareholders, with a “pre-dissolution liquidating distribution to stockholders (in cash, Alibaba ADSs or a combination thereof), which Altaba currently expects will be made in the fourth quarter of 2019 and estimates will be in an amount between $52.12 and $59.63/share in cash and/or Alibaba ADSs (which estimates assume, among other things, an Alibaba Share price realized on sale and, if applicable, an Alibaba share value at the time of distribution, of $177.00/Alibaba share).”
As p55 of the preliminary proxy makes clear, based on the same US$177/share assumption of value realized or distributed per Alibaba share held, the total distributed would be in a range of $76.72 and $79.72 based on some other assumptions.
A larger portion of the remaining amount could take 12 months to arrive, and there could be other residual portions which will take longer (years), as discussed in the proxy and call transcript.
It looks like there is upside as the stock closed at US$72.76 (at the time of the insight). But there is less than you think simply because it will take time to get out of it. And discount rates of the first portion may be low, but discount rates applied to the later payments post-delisting and post court workout for the Holdback Amount could be higher.
Travis Lundy has opinions on what to do once you start getting into the arb risks. Do read his insight.
Sanghyun Park discussed Nexon sale after the FT reported bankers has stopped plans to sell the holding company NXC. The sale of NXC is probably the simplest exit path for Kim Jung-ju as it would be a more attractive tax outcome than selling Nexon Japan outright.
But there’s a lot of other stuff in NXC that suitors don’t want to, which ideally should be sold before selling NXC. There’s also the issue of whether a tender offer would be required whether the sale of NXC or Nexon – Travis concludes an offer would be required while Sanghyun does not.
Korean local news outlet reported thatTencent Holdings (700 HK)‘s US$6bn bond issuance may be a fund raising for a Nexon takeover. Still, South Korea would prefer keep Nexon’s ownership domestic, which may favour Kakao Games (1404796D KS) or PE outfit MBK.
Summit Ascent announced that First Steamship (the major shareholder) and Kuo Jen Hao (chairman) are in talks to sell their entire shareholdings. No numbers were disclosed. This stake sale would not trigger an MGO and there was no reference to the release of an announcement pursuant to the Codes on Takeovers and Mergers and Share Buy-Backs in Hong Kong. Shares are up 35%.
Summit is trading at a trailing PER of 267x. CapIQ forecasts point to a threefold increase in earnings in FY19, although I would advise caution on those numbers given the tight cluster of target prices; historically, target prices for Summit have been wide of the mark.
First Steamship bought in at $1.06 in December 2017, around the same price when this announcement was made. Should this sale complete, this would result in the third time the shares of the major shareholder have changed hands. This looks like a great opportunity to exit.
On the 20th March, MYO announcing receipt of a letter from KKR saying that the A$3.40 price was their “best and final offer”, making it clear under Truth in Takeovers language that Manikay was not going to get a higher price out of them. Manikay continued to buy shares on the 20th and the 21st, getting to 16.16% of the company as filed on the 22nd.
On Monday 1 April, MYOB announced a supplemental disclosure to the Scheme documents noting KKR’s final intention, and that the directors continued to unanimously recommend the Scheme.
Mid-week, Manikay caved and said intends to vote all its shares for the upcoming Scheme, subject to there being no proposal that we consider to be superior prior to the vote. This is now MUCH closer to being a done deal. It will trade tight.
Travis is a trifle surprised Manikay did not wait a little longer. They were able to increase their stake in the low A$3.30s because of the uncertainty of their intentions, and they could probably have gone close to 20% in the low 3.30s before saying “Yes.” That would have been a welcome extra profit.
Lifeboat market play Ezion has received a bail-out from Malaysia’sYinson Holdings (YNS MK) via a capitalisation of debt and option agreement. Ezion remains suspended.
On the surface, this looks like a bargain for Yinson which is ostensibly taking over Ezion for US$200mn. However, Yinson said that it is still negotiating with the designated lenders of the US$916mn debt on the terms and conditions..
Yinson’s business risks include contact risk, oil price fluctuations and the level of activities in the O&G industry. These risks do not change should the Ezion proposal complete.
The last time came on the heels of a long independent review by EY which found KCF had given up profit to the parent through a series of relatively unfair interested party transaction agreements.
At the end, the Bermudan Court of Appeals went against a Supreme Court decision which had decided that a replacement counterparty decision was prejudiced against minorities, and despite the April 2017 deal being not fair and not reasonable according to the IFA, the parent acquired ~10% (of the 28% it did not own) bringing their stake to 82.3%. A year later the parent acquired another 5.5% bringing them to almost 88%.
Now an offer at SGD 0.60/share (compared to the Revalued NTA of SGD 0.7086/share from the IFA report (p36) of two years ago gets closer to the mark, but crucially, it is designed to squeeze out minorities with the threat of delisting. Kingboard Laminates only needs 2.05% to oblige a delisting from the SGX. As far as Travis can tell, it would require more – at least 95% of shares – to oblige a mandatory squeezeout of minorities according to Section 102-103 of Bermuda Companies Act.
The deal is at a negligible premium and is far, far below Tangible Book Value Per Share (which is almost three times the offer price). Given that the acquirer bought a large stake in the company and offered perpetual capital of almost the current market cap at a significant premium to the MGO price, Travis thinks it an unattractive offer.
It is puzzling as to why the CEO would sell his shares at such a discount, especially when the company and Everbright co-own some of the assets.
While the stated intention of the Offeror is to keep the stock listed, and the MGO is presented almost as “technical”, it would be enormously to Everbright’s benefit to buy as many shares as they could down at this price level. It will go from being underwater on an equity affiliate stake purchase to having a huge writeup in value if Everbright consolidates the asset post MGO.
For that, Travis thinks there is a possibility of a bump just to make it more attractive, though the IFA report could come out with a not fair and reasonable result which shows NTA or NAV far, far higher than the Offer Price, which is not yet declared final.
In a mainly technical piece, I explained why China Three Gorges, China Power New Energy Development Co (735 HK)‘s largest shareholder with 27.1% is currently required to abstain from voting at the forthcoming court meeting, despite the misleading statement in the announcement that China Three Gorges has given an irrevocable undertaking to vote for the Scheme. (link to my insight: China Three Gorges’ Rebuttable Presumption)
What was once a tough deal is now an agreed deal. The deal is 2.375 shares of DSV for every share of Panalpina, which as of the previous Friday’s close had a value of CHF 195.80/share which is a 43% premium to the CHF 137/share, where Panalpina was trading the day before DSV’s first bid.
Panalpina is getting taken out at 28.1x reported 2018 EV/EBITDA multiple (pre-IFRS 16) calculated at a CHF 195.8 price. Panalpina shareholders will own ~23% of DSV shares out if all shares are exchanged and the Ernst Göhner Foundation will be the largest shareholder at ~11%.
69.9% of shares have irrevocably agreed to support the Exchange Offer. The customary condition is 80% to make it go through, meaning DSV needs another 10.1% out of the 30% extant (or just over one-third).
Travis expects there is another 10-15% held by arbitrageurs and 5-7% held by indexers already so this deal looks to me like it is done. He expects the Exchange Offer may settle as early as early-August. If it trades tight, he would get out because DSV is probably priced to a very good level.
Reuters reported that Alexey Mordashov’s Severgroup had reached an agreement to buy a 41.9% stake, excluding treasury shares, in Lenta from those TPG and European Bank for Reconstruction and Development, for a total of US$721mm, or US$18 per share or US$3.60 per GDR. That implies a price of US$1.75bn for the whole company. This was followed by Lenta announced confirming the cash offer. The Offer Price is an 8.11% premium to the last trade on 26 March – the undisturbed price, and a premium of 9.76% to the 6mo average price of US$3.28 for the GDRs.
The first 41.9% are sold conditional on FAS Clearance (presumably Mordashov has cleared this transaction with “the right people”) expected in May 2019, a few easily achieved conditions, and the condition of no sanctions being in play for any of the selling or buying parties.
Once cleared – expected in May 2019 – this becomes a straightforward offer with no minimum acceptances meaning that investors can sell shares into the deal or decide not to do so.
It’s not an attractive offer price, with the possibility of a bump if enough people complain. If you want to buy and hold, this deal is a put option.
Since announcing the intended listing of its international internet assets on Euronext Amsterdam “no earlier than H2 2019” – together with a secondary, inward listing on the Johannesburg Stock Exchange – I calculate Naspers discount to NAV has narrowed to 34.4% from 37.1%, the day before the announcement, placing the current discount a shade below the 12-month average.
The likelihood of NewCo trading at a tighter discount to where Naspers’ previously (& currently trades) is universally accepted. Naspers will benefit from that reduced discount via its 75% stake; but it is not known where Naspers’ own discount will trade after the spin-off.
There are indications the management want to see the group discount narrow to 30%, possibly down to the 20% level, which implies a significantly lower discount for Naspers, potentially around 10%. That would seem optimistic as investors focus more on the directly-held Tencent vehicle, and the fact Naspers is a holding company, holding a stake in another holding company.
Naspers’ discount may drift narrower on the expectation Naspers’ spin-off works its magic. Greater clarity on the option into Naspers or NewCo may provide an additional boost; but conversely, if such an option is limited, there is likely to be disappointment.
With Melco trading at a (then) 32% discount to NAV, Curtis Lehnert recommends a set-up trade on a dollar for dollar basis. The current level, as I write, is statistically the most attractive according to the Smartkarma Holdco Tool, sitting at -1.8 standard deviations from the 180 DMA.
Stub assets are minimal – around 8% of GAV – if excluding gaming licenses, goodwill and trademarks. Net cash is $6.4bn or $4.27/share.
Those stub assets are still loss-making, after deconsolidating out MLCO, to the tune of $386mn in EBITDA, but that was an improvement on (HK$682mn) figure in FY17.
Still, Curtis thinks now is the time to enter the trade to take advantage of both the statistical and fundamental supports to the trade.
For the month of March, ten new deals were discussed on Smartkarma with a cumulative deal size of US$22.3bn. This overall number includes Blackstone and Hellman & Friedman’s proposal for Scout24 AG (G24 GR) after the Tender Offer was officially launched in March. This deal was first proposed in mid-January – which was rejected by the board – and subsequently an improved offer was tabled, which was then supported.
The average premium to last close for the new deals announced in March was 18%, while the average for the first quarter of 2019 is 33%.
Delta Electronics Thai (DELTA TB)‘s results of the CVTO have been announced. 42.85% of shares tendered, therefore the offeror held 63.78% of shares at the close of the offer. The MSCI downweight occurred at the close Thursday, however shares popped 17.5%.
My ongoing series flags large moves (~10%) in CCASS holdings over the past week or so, moves which are often outside normal market transactions. These may be indicative of share pledges. Or potential takeovers. Or simply help understand volume swings.
Often these moves can easily be explained – the placement of new shares, rights issue, movements subsequent to a takeover, amongst others. For those mentioned below, I could not find an obvious reason for the CCASS move.
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In its final report into a fatal accident involving a Tesla Model S being driven in Autopilot Mode by one Joshua Brown, the NHTSA included the controversial finding that having Autopilot engaged reduced accident rates by 40%. Now, after battling both the NHTSA and Tesla for almost two years to get access to the underlying dataset, independent US-based consulting firm QCS has published a detailed report casting serious doubt on the methodology, statistics and science behind this 40% safer claim.
Meanwhile on March 2’nd 2019, in a carbon copy of the circumstances which claimed the life of Joshua Brown almost three years ago, another Tesla driver lost his life when his Model 3 crashed into a semi-trailer as it legitimately crossed his line of travel to make a right-hand turn at an uncontrolled intersection. At the time of the accident, it was unknown whether Autopilot was engaged or not. If it transpires that it was engaged, it will represent a serious blow to Tesla’s credibility not least in part due to the company’s claims that its self-driving technology is continuously learning and improving based on the experiences and data collected on a daily basis from its ever-growing fleet of vehicles on the road.
Until now, on the one-month anniversary on this latest fatality, Tesla’s silence on the matter remains deafening.
In the middle of last week, Russia’s largest chain of hypermarkets Lenta Ltd (LNTA LI)announced that it was aware that there were ongoing discussions between Luna (TPG’s holding entity, which owns 34.13% of Lenta’s capital) and Alexey Mordashov’s Severgroup, for Luna to sell its stake in Lenta to the Russian conglomerate. A day later, Lenta announced the company was aware of discussions between Severgroup and the EBRD (7.40% holder).
Reuters reported last night that Severgroup had reached an agreement to buy a 41.9% stake, excluding treasury shares, in Lenta from those two sellers, for a total of US$721mm, or US$18 per share or US$3.60 per GDR. That implies a price of US$1.75bn for the whole company.
Later last night, Lenta announced on its website (full press release here) a cash offer for all the shares had been proposed. The Offer has a pre-condition dealing with the above-mentioned transactions being approved by those who need to approve.
The Offer Price is an 8.11% premium to the last trade on 26 March – the undisturbed price, and a premium of 9.76% to the 6mo average price of US$3.28 for the GDRs.
CVC is looking to raise about US$353m through the sale of about 648m Map Aktif Adiperkasa PT (MAPA IJ) shares in the follow-on offering.
Map Aktif (MAPA) is a sports, leisure, and kids retailer in Indonesia. It is a subsidiary of Mitra Adiperkasa (MAPI IJ). The selldown might not be totally unexpected as CVC planned to exit its investment by 2020. However, post this selldown it will still have 192m share left.
In addition, we have provided an updated calendar of upcoming catalysts for EVENT driven names below.
Best of luck for the new week – Arun, Venkat and Rickin
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We recently visited Toyota at its Toyota city headquarters and spent some time discussing this very topic. We believe this move is being made with an eye towards China in particular and to an extent the US. We would also highlight the continuing development of Toyota’s relationship with Suzuki. As the automakers move slowly towards what is likely to be an eventual union, the sharing of hybrid technology with Suzuki could have a significant impact on the medium-term prospects of both automakers.
Visitors to Macao will notice the gaudy designs of new properties like Studio City and the City of Dreams owned by Melco. Few will know that the Melco of today traces its roots back almost 100 years when it was named The Macau Electric Lighting Company. Melco was listed in Hong Kong in 1927 when it was still managing the electricity supply service for the island of Macau, which it had done since 1906. After the CEM was established in 1972 to supply power in Macau, Melco changed its name to Melco International Development Limited and became a subsidiary of Stanley Ho’s real estate holding company, Shun Tak Holdings (242 HK). With the burden of supplying electricity off its shoulders, the company did what any logical Hong Kong firm would do when its business disappears, it bought real estate.
To this day, Melco International Development (200 HK) still maintains ownership of one of these classic Hong Kong destinations which I will take a closer look at in my note. In the rest of this insight I will:
finish the historical overview of Melco
present my trade idea and rationale
give a detailed overview of the business units of Melco International
recap ALL of my stub trades on Smartkarma and the performance of each
BabyTree (1761.HK)’s reported results for FY2018 continues to be impacted by the ‘shift in e-commerce strategy’ post collaboration with Alibaba Group Holding (BABA US) (also a key investor). China’s leading parenting community platform that went public in November 2018 has announced a revenue decline of 4% during 2H2018; its e-commerce revenues were down 70% as its being ‘integrated’ with Alibaba. This is expected to be completed by 2Q2019. While the details of the collaboration (and revenue share, if any) are not given, Management has stated that Alibaba will manage the back-end e-commerce at a reduced cost and better efficiency while it will ‘manage’ users. Despite the fall in revenues, gross profits were up 18% helped by growth in advertisement revenues which now account for 85% of the total. Advertising as a revenue source has limited long term growth and valuation potential compared to e-commerce. The stock is up 25% since results announcement on March 27th, likely enthused by Net profit for FY2018 at Rmb526.2 mn and EPS of Rmb0.29 (implied current Year P/E of 23x). Key risk will be failure to revive e-commerce revenues post ‘integration’.
BabyTree also announced its first global foray – it has invested USD8mn in Healofy, amongst the top 3 leading parenting apps in India currently. India’s online Parenting app segment has numerous players and revenue generation/growth may not be easy in the near term for Healofy. However, our analysis suggests that India’s overcrowded parenting app segment is now witnessing consolidation and this funding could probably help Healofy solidify its ranking amongst top 3 parenting platforms in India. In this context, BabyTree’s foray into India seems well timed. Healofy could potentially follow BabyTree’s operating model and fit into Alibaba Group Holding (BABA US) ‘s India e-commerce strategy (Refer our earlier report Alibaba’s India Game Plan – More than Meets the Eye; Investor Day Analysis (Part II) ).
In the detailed report that follows, we briefly comment on BabyTree’s reported 2018 results and also present a quick overview of India Parenting App segment – key players, investors and why we think it may be on a consolidation mode.
We continue to believe that equities in Europe and the UK are bottoming with the STOXX Europe 600 index breaking topside its 14-month downtrend. Helping lead the turnaround is the Personal & Household Goods supersector. We believe outperformance is set to continue and several stocks are actionable at current levels within our int’l Group CD-28 Apparel, Accessory & Luxury Goods, Europe: LVMH Moet Hennessy Louis Vuitton SE (MC-FR), Christian Dior SE (CDI-FR), Kering SA (KER-FR), Hermes International SCA (RMS-FR), adidas AG (ADS-DE), Moncler SpA (MONC-IT), PUMA SE (PUM-DE), and Bjorn Borg AB (BORG-SE). Add exposure.
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In our Discover SZ/SH Connect series, we aim to help our investors understand the flow of northbound trades via the Shanghai Connect and Shenzhen Connect, as analyzed by our proprietary data engine. We will discuss the stocks that experienced the most inflow and outflow by offshore investors in the past seven days.
We split the stocks eligible for the northbound trade into three groups: those with a market capitalization of above USD 5 billion, and those with a market capitalization between USD 1 billion and USD 5 billion.
We note that in March, northbound inflows turned more cautious vs strong inflows in February (link to our Feb note) and January (link to our Jan note). Nevertheless we see strong inflows into Healthcare sector, led by Jiangsu Hengrui Medicine Co., (600276 CH). We also highlight Universal Scientific Industrial Shanghai (601231 CH 环旭电子) in the mid cap space that attracted strong northbound inflows.
Tesla’s 1Q delivery details released yesterday suggests one of three possible reasons for the dramatic drop across the company’s product lineup – either the impact of the federal tax credit phaseout is beginning to hit Tesla’s sales, the sales reflect an aging product portfolio or a combination of both. We suspect that it might be a combination of the two.
Excitement over a new product typically lasts for 6-12 months, then should show a stabilizing pattern. To be honest, the Model 3 should now be a mid-cycle product in the minds of consumers since the car has been around since mid 2017, although analysts’ clock began ticking on the product in 2Q18 given their P&L focus. We are now in the 10th month following normalization of the Model 3 production which would suggest that we should be anticipating a Model 3 delivery range of 50-65,000 units based on delivery patterns for the past 3 quarters, but we also believe investors should keep in mind that for Tesla the federal tax credit phaseout kicked in on January 1, 2019. The combination of these two factors could have very well led to a drop in deliveries in 1Q, with a 4Q18 front-load effect. This seems to be especially noticeable on the drop in the deliveries of Models S&X that few analysts on the street seem to have focused on following Tesla’s press release. We believe what is sorely needed for Tesla as a brand is a product portfolio refresh, not Model Y launch at this point.
Given the above, we would be inclined to model in a 200-250k units of the Model 3 deliveries in 2019 at this point, which would be conservative compared to the 360-400k units that Tesla is currently guiding. The wild card would be if China demand for the Model 3 exceeds the initial indications of about 10k units per quarter (see JL Warren Capital’s Tesla China Q1 Delivery Revision ), which should be included in the 1Q shipment figures that were released by the company.
Tesla: Global Deliveries 1Q19
(Units)
1Q18
4Q18
1Q19
QoQ
YoY
Model 3
8,180
63,359
50,900
-19.7%
522.2%
Models S&X
21,800
27,550
12,100
-56.1%
-44.5%
Total
29,980
90,909
63,000
-30.7%
110.1%
Source: Company Data
U.S. federal tax credit for EVs begin to phase out for EV manufacturers once the OEM hits cumulative sales of 200k units, and Tesla achieved this landmark back in July 2018. The actual phaseout for the company began on January 1, 2019. Granted we have been concerned about Tesla’s aging product portfolio for the past year (see Tesla: A Few Thoughts on Ageing Products Before 1Q Earnings Announcement, April 10, 2018), we also believe that the drop in the Models S&X deliveries in 1Q19 is highly likely to have been exacerbated by the tax credit phaseout and/or other factors.
Tesla also admitted it delivered half of its total deliveries for the entire quarter in the last nine days of March, blaming “challenges encountered” for delays in getting cars to buyers in Europe and China. But even adding cars “in transit” doesn’t cover the shortfall versus guidance and market expectations.
It also doesn’t ease investors’ concerns about cooling demand for Model 3 in the US, or the alarming drop-off in sales for Models S and X, well, everywhere.
Preceding my comments on Naspers are the weekly setup/unwind tables for Asia-Pacific Holdcos.
These relationships trade with a minimum liquidity threshold of US$1mn on a 90-day moving average, and a % market capitalisation threshold – the $ value of the holding/opco held, over the parent’s market capitalisation, expressed in percent – of at least 20%.
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* JD ever generated cash flows by accounts payable in direct sales, but cost control is necessary when the commission business grew faster than the direct sales business.
* We believe that the overwhelming majority of delivery men will stay with JD after the salary cut, as many small delivery companies went bankrupt in 2018.
* we believe JD will be able to control costs well and keep close-to-zero net margin in 2019.
In our Discover HK Connect series, we aim to help our investors understand the flow of southbound trades via the Hong Kong Connect, as analyzed by our proprietary data engine. We will discuss the stocks that experienced the most inflow and outflow by mainland investors in the past seven days.
We split the stocks eligible for the Hong Kong Connect trade into three groups: component stocks in the HSCEI index, stocks with a market capitalization between USD 1 billion and USD 5 billion, and stocks with a market capitalization between USD 500 million and USD 1 billion.
In this insight, we will highlight Air China and Great Wall Motor.
In this series under Smartkarma Originals, CrossASEAN insight providers AngusMackintosh and Jessica Irene seek to determine whether or not we are close to the end of the rainbow and to a period of outperformance for the property sector. Our end conclusions will be based on a series of company visits to the major listed property companies in Indonesia, conversations with local banks, property agents, and other relevant channel checks.
In the seventh company in ongoing Smartkarma Originals series on the property space in Indonesia, we now look at Indonesia’s oldest Industrial Estate developer and operator Kawasan Industri Jababeka (KIJA IJ). The company’s largest and the original estate is in Cikarang to the East of Jakarta and comprises 1,239 hectares of industrial land bank and a masterplan of 5,600 ha.
The company has also expanded its presence to Kendal, close to Semarang in Central Java, where it has a joint venture with Singapore listed company Sembcorp Industries (SCI SP). This estate covers a total area of 2,700 ha to be developed in three phases over a period of 25 years and is focused on manufacturing in industries.
The company also has successfully installed a 140 MW gas-fired power station at its Cikarang, providing a recurrent stream utility-type earnings, which cushion against the volatility in its industrial estate and property earnings. After some issues with one of its boilers (non-recurrent) and issues early last year with PLN, this asset now looks set to provide a stable earnings stream for the company.
KIJA has also built a dry-port at Cikarang estate which has been increasing throughput by around +25% every year, providing its customers with the facility for customs clearance at a faster pace of that at the Tanjong Priok port, as well as logistics support.
After two difficult years where the company has been hit by a combination of problems at its power plant, foreign exchange write-downs, and slower demand for industrial plots, the company now looks set to see a strong recovery in earnings in 2019 and beyond.
The company has seen coverage from equity analysts dwindle, which means there are no consensus estimates but it looks attractive from both a PBV and an NAV basis trading on 0.85x FY19E PBV and at a 73% discount to NAV. If the company were to trade back to its historical mean from a PBV and PER point of view, this would imply an upside of 33% to IDR325, using a blend of the two measures. An absence of one-off charges in 2019 and a pick up in industrial sales should mean a significant recovery in earnings, putting the company on an FY19E PER multiple of 9.7x, which is by no means expensive given its strategic positioning and given that this is a recovery story.
At noon Sydney time Lynas Corp Ltd (LYC AU) held an investor briefing by webcast regarding comments made by the Malaysian Prime Minister in his first cabinet press conference on Friday 5 April 2019. Those comments were noted in the ASX regulatory update.
The enlarged entity will have a combined portfolio value of S$6.7 bil, propelling the enlarged entity to become one of the biggest REITs in Singapore in terms of portfolio size.
Based on last traded prices, the combined entity will have an enlarged market capitalization of S$2.83 bil, making it the 11th biggest S-REIT in terms of market capitalization.
For OUE C-REIT, it enjoys fewer benefits from enlarged portfolio but a merger will alleviate concern on the CPPU timebomb.
For OUE H-TRUST, unitholders benefit more from an improve asset/sector diversification and also a potential cash payout.
For sponsor OUE LTD, it will find it easier to recycle assets in an enlarged REIT.
OUE C-REIT and OUE H-TRUST have announced trading halts this morning pending release of announcements. A clarification announcement on the merger is likely to be issued.
Get Straight to the Source on Smartkarma
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
