Tencent Cloud , Lucid and LG's Battery Recall

1. Tencent Cloud the Next AWS?

Tencent’s (TCEHY) share price dropped slightly but recouped its losses after the announcement by the Chinese Government on online gaming ruling over the weekend. This rule restricts minors to play online games except on Friday and weekends (only 3 hours a week!). The Chinese government has also slowed down the approval of new games. What exactly does this mean for the gaming industry?

Tencent is not only a social networking giant, it got its tentacles in music, web portals, e-commerce, mobile gaming, internet services, payment services, smartphones, and multiplayer online games. Tencent is also a majority shareholder in Epic Games, and owns Riot Games entirely, reaping profits from both Fortnite (About 350 Million Users) and League of Legends (115 Million Monthly Players) globally.

Tencent is the largest gaming company in China and these restrictions will likely result in a share price overhang for a long time.

Chinese authorities want to tackle addiction to online games. According to the National Press and Publication Administration, online gaming has an impact on both the physical and mental health of minors.

According to Canalys Chief Analyst Matthew Ball: “Access to on-demand compute resources proved to be vital during the quarter as the coronavirus crisis escalated,”. “Many businesses were able to maintain operations through remote working and access to data and applications, while students continued to learn via collaboration platforms. This demonstrated the growing importance of cloud services and the central role they have played in enabling digital transformation. Adapted from Canalys

Singular believes the growth of Cloud computing in the APAC region will be the main revenue driver for Tencent and Alibaba in the near future. The TAM (Total Addressable Market) for Cloud Computing in the APAC region to grow at 117% from USD$ 133 Billion to $288 Billion in five years according to studies by GlobaData

To provide context on how Amazon reaped more than $13.5 billion in annual operating profits with Amazon Web Services cloud computing (AWS), it now accounts for more than 63% of the entire company’s operating profits for the year, on annual AWS revenue of $45.3 billion, up nearly 30% year-over-year.

Key takeaways:

  • Tencent is currently the second-largest cloud computing company in China after Alibaba. Cloud computing will likely be the next revenue driver for these two tech giants. While the Chinese government has carried out various measures that impact tech companies in the country, we think Alibaba and Tencent are still attractive due to their cloud computing segment. Jeff Bezos stepped down as the CEO of Amazon and Andy Jassy from Amazon Web Services is promoted to be the new CEO, implying that Amazon will transition from an e-commerce company to cloud computing company in the future.

  • The Asia-Pacific cloud market is growing fast with the trend-setting shifting from basic IaaS, PaaS, and SaaS to value-added services, and Tencent is well-positioned to strengthen its cloud portfolio to grab this growing opportunity.

Tencent is planning a build the billion-dollar eSports arena which already has more viewers on a regular basis than the NA and the National Football League. Tencent is also a majority shareholder in Epic Games, and owns Riot Games entirely, reaping profits from both Fortnite (About 350 Million Users) and League of Legends (115 Million Monthly Players) globally.

2. LG CHEM (LGCLF) -Time to Long on Dips

LG Chem’s(LGCLF) share price fell sharply following GM’s decision to recall more than 140,000 vehicles to replace LG Chem’s battery packs. The defects on the battery packs have resulted in risks of fire accidents. LG Chem is a diversified petchem company that has higher exposure in specialty chemicals.

Around 70% of the company’s operating profit derives from petchem segment, while the remaining 30% is from non-petchem segment including rechargeable batteries, polarizers, advanced materials, biotech, etc. The company is currently trading at PE of 20.8x, which is cheaper compared to 2020 adjusted PE of 176.8x. The risks of fire accident are disappointing and resulted in share price overhang, but it might be a good entry point for investors to accumulate this stock. LG Chem also has plans to spin off LG Energy Solution – the battery subsidiary – and this IPO is expected to be one of South Korea’s largest listing and will raise $10bn - $20bn.

Key Takeaways

  • To address this issue, within 60 days, GM will launch a new advanced diagnostic software package to detect specific abnormalities that might indicate a damaged battery in Bolt EVs and EUVs.

  • LG Energy Solution battery plants in Holland and Hazel Park, Michigan, have resumed production. Additionally, LG ramped up capacity to provide more cells to GM.

American automaker General Motors expanded its recall of Chevrolet Bolt electric vehicles on Friday due to fire risks from battery manufacturing defects. The automaker said it would seek reimbursement from LG Chem, its battery cell manufacturing partner, for what it expects to be $1 billion worth of losses.

3. Lucid Group Inc.

Lucid Group (NASDAQ:LCID) introduces luxury electric to the EV space. The company’s mission is to inspire the adoption of sustainable transportation by creating the most captivating luxury electric vehicles in the world.

Lucid’s first product is Lucid Air which has a starting price of USD69,900. Image Source: Lucid Group Inc.

The company total deliveries plans are 20k in the year 2022E, 49k in 2023E, 90k in 2024E, 135k in 2025E and 251k in 2026E.

Key Takeaways

  • Lucid’s estimated revenues for 2022E and 2023E are USD2.219bn and USD5.532bn respectively.

  • The company is still making losses at EBITDA level (2022E EBITDA of -USD1.09bn and 2023E EBITDA of -USD637mn) but expects to turn profitable starting year 2024E.

  • Lucid plans to start with high-end cars, build the luxury brand, and then manufacture more affordable vehicles progressively in higher volumes.