Wangsu Technology Alert:False alarm
No white knight, expect speculators to retreat
In response to recent news articles suggesting Tencent taking a 10% stake inWangsu (Sina 26th Jan), Wangsu announced on 28 January that the companyhas not had any discussions with Tencent around this topic nor has thecompany received any such offers from Tencent. While we see some rationalethat Tencent may be interested in a strategic stake in Wangsu, given thestrong wording from Wangsu, such possibilities may be slimmer than what themarket may be hoping for (as reflected by the recent rally in its share price).
Without a white knight and with competition in the CDN market continuing tobe intense and the stock trading on FY17 PE of 40x, we retain our SELL.
Tencent would be a useful ally
Notwithstanding the news, we think Tencent would be a useful ally to Wangsudue the following: 1) the two can cross-sell into each other’s client base andimprove their product offerings, 2) the two combined would have strongerpurchasing power when negotiating bandwidth pricing with the telecomoperators, 3) industry competitive dynamics may be improved if the twoindustry heavyweights were to join forces, and 4) the ability to leverage offeach other’s resources, particularly in security software and the overseasnetwork PoPs.
What could deter the deal from happening?
We also see a few deterrents for such deal from happening which make usshunning away from the stock despite the appeal of potential M&A: 1) Wangsudoes not yet have a strong cloud offering and hence would not directly bolsterTencent’s cloud capabilities, 2) earnings visibility in the CDN market remainslow and current valuation of Wangus is not cheap, 3) Wangsu may want toremain independent given a significant portion of their customers are internetcompanies and siding with one internet giant could result in customer attritionof those from the other camps, 4) potential difference in personalities andstrategic directions between founders of the two businesses.