SPH - Initiation of Coverage - Technical Buy

SPH is Asia's leading media conglomerate, with increased diversification into new media to buttress its ailing print arms. It publishes flagship publications The Straits Times and the Business Times. It also publishes Lian He Zao Bao, Lian He Wan Bao, Shin Min Daily News, The New Paper and various Indian and Malay publications which boast tremendous viewership within Singapore

 In its earnings update for 1QFY21 ended Nov 2020, SPH reported that total circulation increased by 2% YOY with Digital Circulation up 42% YOY, accounting for 52% of total circulation, overtaking print. Advertising revenue has improved also thanks to a pick-up sentiment towards the end of 2020 while print and digital revenue dropped 36% and 8% YOY as companies reduce advertisement and promotions activities in light of a sluggish economy.

With most of the SG stock market not doing well, it is heartening to see SPH rise by more than 9% on Friday - which is rather unusual - such that it trades at between 0.65x of Book Value. SPH was also 5th on the SGX Top Volume charts on Friday and as can be seen from the chart, there is significant volume spike.

Entry: $1.36-$1.38

First Target price: $1.45-1.48

Second Target Price: $1.55-1.60 (CIMB projection of $1.60 if Coupang IPO goes ahead and based on Dividend Discount Model if SPH owns 1% of Coupang)

As the situation evolves, I will expound more on the fundamentals but the following report will suffice for now.

SgHuat members-only WhatsApp group was alerted of this trade when SPH was trading at $1.35. 

Investment thesis:

1. SPH's substantial past investment (as part of its venture capitalist arm) in an e-commerce and on-demand food delivery company Coupang in mid-2014 via a Special Purpose Vehicle. Coupang was valued at US$5 bn in June 2015 after SoftBank invested US$1 bn. It was founded in 2010 and has flourished rapidly to a planned S$66 bn listing on NYSE. Touted as the "Amazon" of S. Korea, it captures 25% of total online retail transaction volume in Korea in early 2020 and is South Korea's second largest B2C logistics company.  Coupang has demonstrated increased revenue (72% CAGR from 2018 to 2020) and operating loss has dwindled about 50% over the same period (US$1.1 bn to US$0.47 bn). To preserve earnings growth, Coupang has invested in various projects including Coupang Play, which is a video-streaming service as well as Coupang Logistics so as to bring its fulfilment network in-house (which will increase profit margins). Coupang Media Group, an in-house advertising platform, was also established recently.

2. As SPH has planted 40+ seeds as part of its venture capitalist arm ($100 mn venture capital fund; $5 mn SGD as maximum cheque size, with S$1-2 mn as the typical investment quantum), we expect upcoming positive catalysts to push SPH price back to its pre-COVID valuation and thus SPH can be thought of also as a long-term investment. SPH Ventures invests in early-growth technology companies globally which focuses on Series A portfolio companies. 

3. Pan-Asian e-commerce giant Qoo10 has bagged US$82 mn in a series A funding round led by SPH. Participants include eBay, Saban Capital, UVM 2 Venture Investments, Brookside Capital and Oak Investment Partners.

4. Well-diversified congolomerate. What SPH stands for: SgCarMart, FastJobs, SPH Reit (Clementi Mall, Paragon & Australian retail assets), Student Castle Oxford & Brighton, Woodleigh Residences (integrated development), etc.

Investment/Trading Risks:

1. In the second-half trading session, volume waned about 30%, though SPH continued to climb to 1.40. We are therefore expecting a significant re-tracement coming up, or an abortion of SPH's rise. Therefore, short-term traders are advised to watch market technical indicators for possible reversal of the uptrend. This can include a shooting star signal formed on the 1 hourly or 4 hourly charts.

2. Adverse profit guidance due to weaker or weaker than expected performance of the SPH print arms. Unfavourable market reaction to SPH announcement of its investment quantum in Coupang. Unexpectedly huge secular decline in SPH's print arms,  which is unable to be offset by gains in digital circulation, resulting in further worsening of PNL position.

3. Short-term risks which contra-players and short-term traders have to look out for, viz, profit-taking or sell-on-news effect which will mean an immediate re-pricing of SPH back to $1.25-1.30 as we wait for further announcements.

Further Readings:

Coverage on Coupang IPO on The Straits Times

Audited Results for Year Ended Aug 2020

1Q FY2021 Earnings Update

CIMB Coverage 

Investment Quantum in Coupang

Disclosures:

I disclose that I have a position of 5000 shares of SPH at $1.35.