Wangsu Technology:Expanding its global footprint with limited payoff in the short term

Not a bad deal strategically but limited earnings uplift potential in short term

    The proposed CDNetworks acquisition appears to be the right long-term fit forWangsu given that it provides a global presence and expertise in running amulti-region CDN network. The price paid appears reasonable, with theUS$185m price tag slightly lower than what KDDI, the current owner, paid fiveyears ago. That said, profitability is on a downward path, with CDNetworksbarely breaking even in 2016. Combined with the significant execution risk ofthe deal (Wangsu’s first major overseas acquisition) and concerns about thedomestic Chinese market, we believe that the market is likely to remainskeptical despite value starting to appear in the name. Maintaining Hold.

    Key aspects of the CDNW deal

    Wangsu will pay US$185m to KDDI for 97.8% of CDNetworks, implying anFY15EV/EBITDA of ~11x and P/E of 56x due to declining profitability. Grossmargin at 52% is higher than Wangsu’s (~42%), which implies someopportunities to take out costs. That said, Wangsu indicated that in the shortterm, it will not undertake any major restructuring. The deal is expected to betransacted on 24March, pending approval by a number of parties includingthe NDRC and SAFE in China and the Korea Fair Trade Commission. The stockremains suspended, awaiting the outcome of regulatory rulings.

    Execution risk is high

    Although CDNetworks seems like the right strategic fit and may operate betterunder Wangsu than KDDI (a large telecom operator in Japan), execution riskdoes appear high. It is the first major acquisition by Wangsu and there may besignificant cultural barriers between the businesses. It will also pit Wangsuagainst established rivals, such as AWS and Akamai, who have a moresignificant global presence and appear to be gaining ground againstCDNetworks. Lastly, Wangsu is yet to prove itself that it can stand on its ownagainst the larger, better resourced rivals in the domestic market.

    Valuation and risks

    We value Wangsu based on the mid-point of our peer-based P/E valuation andDCF. Risks relate to market share, tax rate, regulation and margins. See p.7.