IFR Asia – December 08, 2018

(Jacob Rumans) #1

fears of an economic slowdown.
Asian markets slumped
further on Thursday after
the arrest in Canada, and
likely extradition to the US,
of the chief financial officer
of Chinese tech giant Huawei
Technologies reignited
concerns about US-China
tensions. Hong Kong’s Hang
Seng Index fell 2.5%.


HIGHER GROWTH
Tencent Music is marketing
82m American depositary
shares (50% primary/50%
secondary) in an indicative
price range of US$13–$15 each
to raise US$1.07bn–$1.23bn.
There is a 15% greenshoe.
The price range represents
a 2020 P/E of 22.4–25.8 and a
2020 EV/sales of 3.8–4.4. It also
points to an equity valuation,
on a diluted basis using the
treasury stock method, of
US$22bn–$25.4bn.
Spotify Technology, the
obvious public comparable and
an 8.9% shareholder in Tencent
Music following a strategic
cross-investment last year,
trades at 2.9x and 2.4x EV/sales
for 2019 and 2020 on consensus
estimates.
As of last Tuesday, Spotify


had a market capitalisation of
US$24bn.
The premium valuation
may be warranted by Tencent
Music’s superior growth.
Tencent also has better gross/
operating margins and, unlike
Spotify, is profitable at the
operating level.
In the nine months ended
September, Tencent Music
reported a net profit of
Rmb2.71bn (US$394m) on
revenue of Rmb13.59bn,
surging from the Rmb785m
and Rmb7.4bn it reported in
the same period a year ago.
Tencent Music also has
a broader, more diversified
business.
It had 880 million monthly
active users at September 30,
comprising 655m for its online
music services and 225m for its
social entertainment services
such as karaoke and live
streaming. But there are only
24.9 million and 9.9 million
paying customers for the two
business units, respectively,
putting premium subscriptions
at just 3.8% and 4.4%.
Spotify, by comparison,
saw its MAUs grow 28% year
on year to 191 million in the
latest quarter, with premium

subscriptions growing by 40%
to 87 million.
Rohit Kulkarni, head of
private investment research
at SharesPost, believes that
Tencent Music could garner a
mid-to-high single-digit EV/sales
multiple of revenue over time,
thanks to a combination of
high growth, profitability, and
diversification.
“Fundamentally, Tencent
Music is more diversified than
Spotify,” Kulkarni told IFR.
“Because of the end markets
they serve, they have the
potential to create a super app
for entertainment.”

SMALL FLOAT
The offering represents just
a 5% stake in Tencent Music.
Market conditions have got
tougher for large internet
companies, prompting
secondary sellers to reduce the
amount of stock they plan to
sell.
When banks pitched for
the deal early this year, they
estimated the float could raise
up to US$4bn on assumptions
that about 10%–15% of the
company would be sold at a
valuation of about US$30bn.
However, Tencent Music

has limited funding needs, so
is reluctant to sell more stock
than is necessary to fund near-
term plans.
“Some of the existing
shareholders aren’t as
motivated to sell at the current
valuation,” said another banker
close to the deal. “Tencent
Music also sees a lot of value.”
Post-IPO, Tencent Holdings
will maintain 61% control of
the company.
Alongside the IPO, Tencent
Holdings will purchase
HK$250m (US$32m) shares
from Tencent Music through a
concurrent private placement.
Tencent Holdings will
distribute these shares to its
own shareholders through
an assured entitlement
distribution.
Tencent Music plans to
use the primary proceeds on
content, product development,
marketing and for strategic and
general corporate purposes.
Pricing of the deal is slated
for December 11 and the shares
are due to start trading on
December 12.
Bank of America Merrill Lynch,
Deutsche Bank, Goldman Sachs, JP
Morgan and Morgan Stanley are
leading the transaction. „

For daily news stories
visit http://www.ifrasia.com

emerging markets, especially
after its current account deficit
widened in the third quarter
to its largest since the second
quarter of 2014, at 3.4% of
GDP.
Michael Kushma, chief
investment officer for global
fixed income at Morgan Stanley
Investment Management,
argues that forced selling
may have left Indonesia
undervalued.
“I think that was just a
technical mismatch, that the
market was too long,” said
Kushma, speaking on the
sidelines of Morgan Stanley’s
Asia Pacific Summit in
Singapore on November 29.
“They [other investors] had
thought the same way we did,
got too long and then for risk
management purposes reduced
their positions. They may have
liked it or have not liked it, but


they sold down at levels we
thought were wrong.”

ROOM FOR OPTIMISM
Indonesia began marketing
the new bonds at respective
initial price guidance of 4.75%
area, 5.10% area and 5.65%
area on Monday morning.
Compared to the country’s
2023s, 2028s and 2048s, which
were trading at around 4.362%,
4.647% and 5.196% at the
time of marketing, new issue
premiums were seen at around
10bp for the new February
2024s and 2029s, and around
15bp for the 2049s.
The banker on the deal
was keen to note that the
comparables did not move at
announcement, a sign that
investors were not selling
existing holdings to buy new
bonds.
The new bonds were quoted

steady to slightly higher than
reoffer the following day at
cash prices of 99.8, 99.8 and
99.625, respectively.
Morgan Stanley’s Kushma
thinks that Indonesian credit
could be set to rebound, thanks
to responsible economic
policies and successive
domestic rate increases.
“They’ve raised rates
continuously all year long in
a proactive manner, not just
delivering what the market
wanted but getting ahead of the
curve so to speak in terms of
surprising the market with rate
hikes and they’re very focused
on stabilisation of the currency,
the stabilisation of the external
balance,” said Kushma.
“It all suggests that when the
external environment turns,
and it could be turning ... at
some point these countries
which have done good actions

like Indonesia should be
rewarded for taking the actions
they have.”
Indonesia sold a ¥100bn
(US$911m) multi-tranche
Samurai bond in May and,
a month before that, a dual-
tranche offering of US dollar
and euro notes to raise
US$2.2bn, taking advantage of
a rating upgrade from Moody’s
that month.
The sovereign also issued
Asia’s first Green sovereign
bond in February, in the form
of a US$1.25bn five-year sukuk
that came alongside a regular
US$1.75bn 10-year sukuk.
The new bonds have
expected ratings of Baa2/BBB–/
BBB, in line with the sovereign.
ANZ, Citigroup, DBS, Deutsche
Bank and Goldman Sachs were
joint bookrunners. Bahana,
Danareksa and Trimegah were co-
managers. „
Free download pdf