Tian Ge Interactive: will they become a listed shell?

Main topic this week:

  • Tian Ge Interactive – will we see a spin-off into A-shares, leaving their H-shares available for a backdoor listing?

Global Indices

This week saw broad based declines in global indices:

  • Japan’s Nikkei 225 dropped -6.0% this week to 15,599.66;
  • Hong Kong’s Hang Seng dropped -4.2% this week to 20,169.98;
  • China’s CSI 300 dropped -1.7% this week to 3,110.36;
  • London’s FTSE 100 dropped -1.6% this week to 6,021.09;
  • Toronto’s TSX dropped -1.0% this week to 13,901.77; and
  • New York’s S&P 500 dropped -1.2% this week to 2,071.22.

Chart 1: Japanese equities pose buy potential, esp. if Yen drops <100

Nikkei 225 vs. Yen.PNG

Chart 2: Chinese equities could drop further esp. if RMB depreciates

CSI 300 weakens while RMB strengthens.PNG

Chart 3: UK equities and Pound are cheap and show upside potential

FTSE 100 vs. GBP

Currencies

Japanese Yen depreciated following the BoJ NIRP announcement – this week’s trend lower towards 100/$ nears the level which the BoJ has issued  guidance on requiring Yen intervention to reverse the trends in an already export-dented currency situation.

British Pound trends lower as institutional capital has prepared for a ‘leave’ vote, yet we could see renewed interest in the GBP following the vote on June 23rd as the BoE could be required to intervene with monetary stimulus and lower interest rates – thus renewing demand for the Pound.

Chinese Renminbi has followed a trend of appreciation since it hit its all-time low at 6.04/$ – context is important in understand the direction of RMB appreciation:

CNY Historical.PNG

However, volatility in the RMB could persist through 2016 as the Chinese economy is bolstering for growth while geo-political uncertainty is a concern for Chinese export’s demand. Will we see another episode of RMB volatility this year?

CNH vs. CNY.PNG

Risk-free rates

German Bunds closed into negative territory on Tuesday at -4 basis points, closing on Thursday at -25 basis points, before recovering to 5 basis points by Friday.

US Treasuries closed the week 2% lower at 1.605%, closing the last year at a 29% drop ce last year.

UK 10-year yields closed slightly lower at 1.136%, dropping 8% in the week – a rather surprising feature given Brexit uncertainty.

Topic 1: Tian Ge Interactive

Introducing Tian Ge, an online live video streaming platform to 17.5 million monthly subscribers generating ca. US$90 million of revenues in 2015.

Tian Ge - Bloomberg.png

We could see Tian Ge delisting its H-shares and re-list as A-shares in China – exactly opposite to what Fu Zhengjun, Tian Ge founder and CEO, told Justina Lee of Bloomberg recently (Bloomberg article).

Since the company went public mid-2014, Tian Ge shares have gone up but then back down – a trend identical to its main business revenues and operating cash flow.

  • Tian Ge’s main business revenues dropped 30% drop from RMB692,159,000 in 2014:

Tian Ge - Profit by Segment.PNG

  • Operating cash flow dropped 40% in 2015, despite a series acquisitions:

Tian Ge - cash flow from operations.PNG

If Tian Ge were to spin-off its main asset (online entertainment) into an A-share listing, controlling interests could profit from a loftier valuation in the mainland. A previous H-share IPO would assure road show investors that while Mainland Chinese regulators clamp down on fictitious accounting records, Tian Ge has been screened by the microscopes of HKEx.

The company’s H-shares would prove valuable, especially when its main business (Online interactive entertainment service) has been stripped away and thus leaving its subsidiaries (Others), which record enough turnover to meet HKEx ongoing turnover requirements.

Earlier this year we saw Dalian Wanda look at paying out existing shareholders to pave the way for an A-share listing. The ‘China-premium’ is ‘real’, as A-share property developers trade at 29x P/E while H-share property developers trade at 6.5x P/E, according to a recent Bloomberg article.

Note: above information is from the company’s 2015 Annual Report.

 

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