XUNLEI LTD -ADS XNET
May 20, 2015 - 5:21am EST by
elehunter
2015 2016
Price: 10.64 EPS 0.21 0.48
Shares Out. (in M): 65 P/E 50.67 22.2
Market Cap (in $M): 692 P/FCF 62.60 18.7
Net Debt (in $M): -434 EBIT -12 7
TEV ($): 258 TEV/EBIT -22.2 39.7

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  • Internet
  • China
  • Turnaround

Description

 

Investment Thesis:

 

Xunlei Limited (XNET) is a relatively undiscovered gem in the coveted Chinese internet arena that offers U.S. investors a rare opportunity to invest alongside the “Steve Jobs of China” (Lei Jun) at a very attractive price.  Jun is the founder, CEO and 78% owner of privately held Xiaomi, the world’s fastest growing smartphone maker with an estimated value of $45 billion based on the latest funding round at the end of 2014.  Xunlei, of which Lei Jun indirectly controls 41% through Xiaomi and Kingsoft, is a turnaround story, and Jun is just the man for the job (see section below to find out why).  But what makes this stock especially interesting is that even in a muddle-through scenario, there is significant upside potential.  With nearly two thirds of the market cap in net cash ($7.00 per share in cash including proceeds from the pending sale of the online video business), the investor is paying under 5X what we think the company will earn in 2016 ($0.75 per share).  Given the growth of Xunlei’s mobile installed base, the valuable Xiaomi partnership, and the cash generative (FCF positive in each of the last 6 years), asset light business model, we think the stock could justifiably trade at a P/E of 12X which equates to a fair value of about $15 per share (40% upside).  But that’s not the real story; this is Lei Jun’s latest project, and to attempt to grasp the implications, we need to understand why he has been crowned the Steve Jobs of China.

 

The Legendary Lei Jun:

 

Unlike Jack Ma, the high profile founder of Alibaba who is now a household name in Silicon Valley, Lei Jun rarely travels outside China and is a relative unknown to most Westerners.  Lei Jun actually made his name earlier in his career at a firm he co-founded in 1992, Kingsoft.  Jun was instrumental in transforming Kingsoft from a struggling software company to a mobile pioneer, rolling out mobile internet applications in all of its mature businesses including online games, antivirus and office software.  From the time he rejoined the firm in 2011 (after a 4 year hiatus, which furthers the Steve Jobs comparison) to the present, the stock is up about 8X and now has a $5 billion market cap.  Jun helped orchestrate the spinoff of Cheetah Mobil (CMCM) in May 2014 (7 weeks before Xunlei’s IPO), and had a hand in its rise to one of the largest internet security software providers in China.  In just over a year post IPO the stock is up nearly 2.5X and now sports a $4 billion market cap.  Just to prove he is not a “one trick pony” (or two or three for that matter), Jun also co-founded the Chinese version of Facebook, YY Inc (YY).  YY is up nearly 6X since its IPO in 2012, and Jun’s $1M angel investment in 2005 is worth over $600M today with the current market cap at $3.5 billion. 

 

The Xiaomi Ecosystem:

 

So we have established that Lei Jun is the real deal, but what is the deal with Xiaomi?  The more we peel back the complex layers of Xiaomi, the more we begin to appreciate the genius of Lei Jun.  To the casual observer, Xiaomi is simply a low-cost smartphone company, and one that arrived late to the game (their first phone hitting the scene around the time of the iPhone 4S).  But as we look closer, we sense that their ambition appears to be much “grander”.  Like Google, the company values open source concepts: its Android operating system, MiUI, is available for other manufacturers’ Android devices.  Xiaomi has made TVs (MiTV), routers, air and water purifiers that all tie into MiUI.  Unlike Apple (Homekit), Samsung (SmartThings), and Google (Nest) who are offering software development kits so their customers can tie their own appliances into Android or iOS, Xiaomi is integrating everything itself and selling everything a customer needs on Mi.com.  So in some ways, it is the world’s first vertically integrated provider of the “Internet of Things”.  The level of devotion that Lei Jun has inspired in his customers was captured well in a recent The New York Times profile:

 

“Li Nan, vice president of the rival Meizu, which began in the early 2000s by making digital music players and aims at customers slightly older and wealthier than Xiaomi’s, likens the devotion of Xiaomi supporters to a religion.  “Xiaomi fans have a high level of organization,” he said. “They love Xiaomi. It’s a form of idolatry.”

 

So in a sense, Xiaomi is taking a page out of Starbucks’ book: they are selling an experience.  Xiaomi wants to sell everything a person needs for their first house. 

 

Xiaomi Ecosystem Ownership Table

 

 

Xiaomi/Lei Jun

Kingsoft

Kingsoft (3888 HK)

29.9%

 

Kingsoft Cloud Group

24.5%

52.3%

Cheetah Mobile (CMCM)

0.5%

54.1%

Xunlei (XNET)

29.3%

11.7%

YY Inc (YY)

20.7%

 

21Vianet Group (VNET)

3.4% (10% voting)

11.6%19.9% voting

 

 

 

Xunlei’s Business Model:

 

The next logical question is where does Xunlei fit within this powerful ecosystem?  Let’s start with the core business.  Xunlei is a top 10 internet service provider in China with over 300 million monthly unique visitors.  The company operates a powerful internet platform based on cloud computing that provides users with quick and easy access to digital media content.  Its core acceleration services, including the top accelerator product in China with 84% market share, help users accelerate digital downloads of media files or file transmission over the internet (think of this as the Akamai of China).  China has the largest internet user base in the world with 650 million users as of year-end 2014 (growing at about a 10% CAGR over the past 5 yrs), yet the average peak connection speed was just 17.8 megabits per second, which ranked 95th globally in 4Q14 (Sources: CNNIC, Akamai).  China still has a long way to go, with an internet penetration rate at just 48% of the population in 2014 vs 95% in Sweden, 90% in the UK, 90% in the UK and 84% in the US.  Xunlei is well positioned to capitalize on China’s growing appetite for high speed internet access, and it has expanded into other online digital content access and consumption services including online video (Kankan) and other internet value added services (IVAS, mainly online games). 

 

Xunlei Accelerator is generally free of charge, while Xunlei also offers monthly or annual premium cloud acceleration subscription services, which serve as the major revenue source.  Since the introduction of paid subscription service in 2011, the number of paid users has leveled off at about 5 million, pressured by the Chinese government’s scrutiny on internet content (ie its anti-pornography campaign).

 

Portfolio Shuffling: In September 2014, Xunlei purchased a cloud-based storage business called Kuaipan from Kingsoft for $33 million.  Similar to Microsoft’s OneDrive or Google Drive, the targeted users are individual PC users and/or smartphone users, and this is a natural extension of Xunlei’s core accelerator product.  

 

On the other side of the ledger, Xunlei announced in late March 2015 that it entered a legally binding framework with Beijing Nesound International Media Corp to sell its 100% stake in Xunlei Kankan, its online video arm, for RMB 130M ($21M).  Xunlei’s Board approved it, and there is a high breakup fee of RMB 52M, so it’s likely to close in 2Q15.  Not only does this drastically improve profitability (Kankan is running annual losses of an estimated $20M), but it is a major step towards refocusing managements efforts towards mobility. 

 

Project Crystal: Xunlei launched an innovative plan in early 2014 that aimed to utilize the idle bandwidth and computing capacity of user devices to achieve better bandwidth economics and share those economics with users.  Essentially, participant users would be paid to contribute the upload bandwidth of their devices to the system when their devices were turned on.  The system would then identify all these devices and pre-load content to them for potential downloads.  When another user requested a download of specific content, the system would be able to locate and connect to an optimized set of data locations (other users’ devices) for downloading.  As of the last update (4Q14), 19% of the bandwidth that Xunlei used for its own acceleration services was crowd sourced (50% more than in the previous quarter).  So instead of buying this bandwidth from traditional carriers, Xunlei was able to supply 19% using Crystal technology.  Once Xunlei scales this up and adds third party sales (ie other internet content providers with bandwidth demand willing to pay Xunlei for the bandwidth crowd sourced through Crystal), Crystal could become a meaningful profit contributor. 

 

Mobility: Xunlei’s primary focus in 2015 is to transform from a primary PC-based company to a mobile internet-based company (hmmm, didn’t Lei Jun do exactly that with Kingsoft?).  The anchor of that mobility strategy is its relationship with Xiaomi.  Towards the end of 2014, Xunlei’s mobile acceleration software was officially adopted by Xiaomi’s latest operating system MiUI6.  Xunlei’s installed base was thus tied to Xiaomi’s installed base, which hit 55 million in 1Q15.  Xiaomi expects that number to reach 100 million by the end of 2015, quite an impressive growth trajectory.  One key metric that Xunlei is tracking is daily active users (DAU) which are running at about 20% of the installed user base.  While we’re in early innings here, we have the seeds of a turnaround in place.  The big question is what’s next in the Xunlei/Xiaomi partnership?  What will they do with the cash hoard?  Will they take advantage of the massive disparity in valuations of A shares vs US ADRs by going private and relisting in the A share market?  There are many possibilities here, and while the uncertainty level is high during this transition, and the many hypothetical portfolio/restructuring possibilities do require a leap of faith, we wanted to share this story with VIC and bring Lei Jun into the discussion Boards.  At a minimum, this is a pretty fascinating case study. 

 

 

 

Valuation:

 

The pending sale of Xunlei’s money-losing online video business Kankan (to close this summer for US $21M) should lift EPS from $0.48 to at least $0.75 in 2016.  The cash hoard should grow by about $80M to $515M by the end of 2016 with proceeds from the asset sale as well as internal cash generation (this is an asset light business model).  Discounting the cash by 25% to account for repatriation taxes (for a net $6 per share in cash) and applying a more reasonable multiple of 12X 2016 EPS, we get a fair value of $15 per share for about 40% upside.  Any strategic deals or successful internal restructuring efforts should lead to additional upside. 

 

The chart below is meant to shine a light on the value discrepancy between Xunlei and Lei Jun’s other major investments.  While there’s much work to do here, this project appears to be a great fit, especially in light of his success with Kingsoft. 

 

Xiaomi-Related Valuation Metrics

 

 

Mkt Cap ($ mm)

Enterprise Value ($ mm)

P/E net of cash (2016E)

EV/EBITDA (2016E)

EV/Sales (2016E)

Kingsoft (3888 HK)

5,077

4,775

21.3X

15.4X

3.7X

Cheetah Mobile (CMCM)

4,859

4,613

28.5X

22.2X

4.6X

YY Inc (YY)

3,555

3,372

12.2X

10.2X

2.9X

21Vianet Group (VNET)

1,286

1,813

43.8X

10.2X

2.1X

Xunlei (XNET)

692

258

8.3X

4.1X

1.4X

 

 

 

One other comp to keep in mind is US-listed company Box Inc (BOX), which is similar to the Dropbox model of online storage and content sharing, but the target customers are Fortune 500 companies looking for enterprise-wide storage and sharing solutions.  It has a $2.0 billion market cap ($1.7 billion enterprise value) and its revenue in the fiscal year ended 1/31/15 was $216M (not profitable at the EBITDA level), up 74% y/y. 

 

 

 

Risks:

 

  • Improvement in China’s broadband speed: Clearly a speedier national broadband network could reduce the advantages the company can provide to its customers, jeopardizing growth prospects for the firm.  This appears more of a distant risk, but it’s real. 
  • Internet purification: In April 2014, the Chinese government embarked on several initiatives designed to limit pornographic and non-authorized publications on the internet.  Since then, growth in subscriptions at Xunlei reversed amid rising complaints regarding less content and restricted functions.  This is an ongoing headwind, and Xunlei will need to adapt its content accordingly!
  • M&A risk: Xunlei is sitting on quite a cash hoard.  While Lei Jun’s involvement should be helpful in crafting an M&A strategy, there’s always risk that management will do a value-destructive deal. 

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

  • M&A: There are multiple possibilities here, but Lei Jun has got to be looking at Xunlei as a possible acquisition vehicle, with nearly two thirds of the market cap in unrestricted cash.  Assets could be folded in from Xiaomi or Kingsoft pretty easily.  Conversely, Kingsoft Cloud could use Xunlei as a shell to do a reverse takeover and get a U.S. listing. 
  • A share listing: Xunlei’s competitor Beijing Baofeng Technology (offers online audio and video entertainment) prepared for an IPO at the same time as Xunlei.  But instead of listing in the U.S., it pulled the IPO and more recently (3/26/15) listed in the A share market (300431 CH).  So while Xunlei’s stock is down 11% from its IPO, its market cap languishing under $700 million, Beijing Baofeng’s stock is up 41X and now sports a nearly $6 billion market cap.  Management of Xunlei must be thinking hard about taking the company private and re-listing in the A share market. 
  • Further portfolio/restructuring actions: Within the Xiaomi ecosystem, there are multiple synergistic relationships that have not yet been tapped.  For instance, Kingsoft and YY have their own online, web-based games with their own captive user bases – Xunlei could benefit from cross-selling opportunities.  We may also see more pruning – the online gaming division of Xunlei is off to a poor start and may be viewed as non-core. 
  • Earnings 5/20/15 after the close: I’d expect another messy quarter with Internet purification continuing to pressure subs and ad rates, but we may see more portfolio moves. 
    sort by    

    Description

     

    Investment Thesis:

     

    Xunlei Limited (XNET) is a relatively undiscovered gem in the coveted Chinese internet arena that offers U.S. investors a rare opportunity to invest alongside the “Steve Jobs of China” (Lei Jun) at a very attractive price.  Jun is the founder, CEO and 78% owner of privately held Xiaomi, the world’s fastest growing smartphone maker with an estimated value of $45 billion based on the latest funding round at the end of 2014.  Xunlei, of which Lei Jun indirectly controls 41% through Xiaomi and Kingsoft, is a turnaround story, and Jun is just the man for the job (see section below to find out why).  But what makes this stock especially interesting is that even in a muddle-through scenario, there is significant upside potential.  With nearly two thirds of the market cap in net cash ($7.00 per share in cash including proceeds from the pending sale of the online video business), the investor is paying under 5X what we think the company will earn in 2016 ($0.75 per share).  Given the growth of Xunlei’s mobile installed base, the valuable Xiaomi partnership, and the cash generative (FCF positive in each of the last 6 years), asset light business model, we think the stock could justifiably trade at a P/E of 12X which equates to a fair value of about $15 per share (40% upside).  But that’s not the real story; this is Lei Jun’s latest project, and to attempt to grasp the implications, we need to understand why he has been crowned the Steve Jobs of China.

     

    The Legendary Lei Jun:

     

    Unlike Jack Ma, the high profile founder of Alibaba who is now a household name in Silicon Valley, Lei Jun rarely travels outside China and is a relative unknown to most Westerners.  Lei Jun actually made his name earlier in his career at a firm he co-founded in 1992, Kingsoft.  Jun was instrumental in transforming Kingsoft from a struggling software company to a mobile pioneer, rolling out mobile internet applications in all of its mature businesses including online games, antivirus and office software.  From the time he rejoined the firm in 2011 (after a 4 year hiatus, which furthers the Steve Jobs comparison) to the present, the stock is up about 8X and now has a $5 billion market cap.  Jun helped orchestrate the spinoff of Cheetah Mobil (CMCM) in May 2014 (7 weeks before Xunlei’s IPO), and had a hand in its rise to one of the largest internet security software providers in China.  In just over a year post IPO the stock is up nearly 2.5X and now sports a $4 billion market cap.  Just to prove he is not a “one trick pony” (or two or three for that matter), Jun also co-founded the Chinese version of Facebook, YY Inc (YY).  YY is up nearly 6X since its IPO in 2012, and Jun’s $1M angel investment in 2005 is worth over $600M today with the current market cap at $3.5 billion. 

     

    The Xiaomi Ecosystem:

     

    So we have established that Lei Jun is the real deal, but what is the deal with Xiaomi?  The more we peel back the complex layers of Xiaomi, the more we begin to appreciate the genius of Lei Jun.  To the casual observer, Xiaomi is simply a low-cost smartphone company, and one that arrived late to the game (their first phone hitting the scene around the time of the iPhone 4S).  But as we look closer, we sense that their ambition appears to be much “grander”.  Like Google, the company values open source concepts: its Android operating system, MiUI, is available for other manufacturers’ Android devices.  Xiaomi has made TVs (MiTV), routers, air and water purifiers that all tie into MiUI.  Unlike Apple (Homekit), Samsung (SmartThings), and Google (Nest) who are offering software development kits so their customers can tie their own appliances into Android or iOS, Xiaomi is integrating everything itself and selling everything a customer needs on Mi.com.  So in some ways, it is the world’s first vertically integrated provider of the “Internet of Things”.  The level of devotion that Lei Jun has inspired in his customers was captured well in a recent The New York Times profile:

     

    “Li Nan, vice president of the rival Meizu, which began in the early 2000s by making digital music players and aims at customers slightly older and wealthier than Xiaomi’s, likens the devotion of Xiaomi supporters to a religion.  “Xiaomi fans have a high level of organization,” he said. “They love Xiaomi. It’s a form of idolatry.”

     

    So in a sense, Xiaomi is taking a page out of Starbucks’ book: they are selling an experience.  Xiaomi wants to sell everything a person needs for their first house. 

     

    Xiaomi Ecosystem Ownership Table

     

     

    Xiaomi/Lei Jun

    Kingsoft

    Kingsoft (3888 HK)

    29.9%

     

    Kingsoft Cloud Group

    24.5%

    52.3%

    Cheetah Mobile (CMCM)

    0.5%

    54.1%

    Xunlei (XNET)

    29.3%

    11.7%

    YY Inc (YY)

    20.7%

     

    21Vianet Group (VNET)

    3.4% (10% voting)

    11.6%19.9% voting

     

     

     

    Xunlei’s Business Model:

     

    The next logical question is where does Xunlei fit within this powerful ecosystem?  Let’s start with the core business.  Xunlei is a top 10 internet service provider in China with over 300 million monthly unique visitors.  The company operates a powerful internet platform based on cloud computing that provides users with quick and easy access to digital media content.  Its core acceleration services, including the top accelerator product in China with 84% market share, help users accelerate digital downloads of media files or file transmission over the internet (think of this as the Akamai of China).  China has the largest internet user base in the world with 650 million users as of year-end 2014 (growing at about a 10% CAGR over the past 5 yrs), yet the average peak connection speed was just 17.8 megabits per second, which ranked 95th globally in 4Q14 (Sources: CNNIC, Akamai).  China still has a long way to go, with an internet penetration rate at just 48% of the population in 2014 vs 95% in Sweden, 90% in the UK, 90% in the UK and 84% in the US.  Xunlei is well positioned to capitalize on China’s growing appetite for high speed internet access, and it has expanded into other online digital content access and consumption services including online video (Kankan) and other internet value added services (IVAS, mainly online games). 

     

    Xunlei Accelerator is generally free of charge, while Xunlei also offers monthly or annual premium cloud acceleration subscription services, which serve as the major revenue source.  Since the introduction of paid subscription service in 2011, the number of paid users has leveled off at about 5 million, pressured by the Chinese government’s scrutiny on internet content (ie its anti-pornography campaign).

     

    Portfolio Shuffling: In September 2014, Xunlei purchased a cloud-based storage business called Kuaipan from Kingsoft for $33 million.  Similar to Microsoft’s OneDrive or Google Drive, the targeted users are individual PC users and/or smartphone users, and this is a natural extension of Xunlei’s core accelerator product.  

     

    On the other side of the ledger, Xunlei announced in late March 2015 that it entered a legally binding framework with Beijing Nesound International Media Corp to sell its 100% stake in Xunlei Kankan, its online video arm, for RMB 130M ($21M).  Xunlei’s Board approved it, and there is a high breakup fee of RMB 52M, so it’s likely to close in 2Q15.  Not only does this drastically improve profitability (Kankan is running annual losses of an estimated $20M), but it is a major step towards refocusing managements efforts towards mobility. 

     

    Project Crystal: Xunlei launched an innovative plan in early 2014 that aimed to utilize the idle bandwidth and computing capacity of user devices to achieve better bandwidth economics and share those economics with users.  Essentially, participant users would be paid to contribute the upload bandwidth of their devices to the system when their devices were turned on.  The system would then identify all these devices and pre-load content to them for potential downloads.  When another user requested a download of specific content, the system would be able to locate and connect to an optimized set of data locations (other users’ devices) for downloading.  As of the last update (4Q14), 19% of the bandwidth that Xunlei used for its own acceleration services was crowd sourced (50% more than in the previous quarter).  So instead of buying this bandwidth from traditional carriers, Xunlei was able to supply 19% using Crystal technology.  Once Xunlei scales this up and adds third party sales (ie other internet content providers with bandwidth demand willing to pay Xunlei for the bandwidth crowd sourced through Crystal), Crystal could become a meaningful profit contributor. 

     

    Mobility: Xunlei’s primary focus in 2015 is to transform from a primary PC-based company to a mobile internet-based company (hmmm, didn’t Lei Jun do exactly that with Kingsoft?).  The anchor of that mobility strategy is its relationship with Xiaomi.  Towards the end of 2014, Xunlei’s mobile acceleration software was officially adopted by Xiaomi’s latest operating system MiUI6.  Xunlei’s installed base was thus tied to Xiaomi’s installed base, which hit 55 million in 1Q15.  Xiaomi expects that number to reach 100 million by the end of 2015, quite an impressive growth trajectory.  One key metric that Xunlei is tracking is daily active users (DAU) which are running at about 20% of the installed user base.  While we’re in early innings here, we have the seeds of a turnaround in place.  The big question is what’s next in the Xunlei/Xiaomi partnership?  What will they do with the cash hoard?  Will they take advantage of the massive disparity in valuations of A shares vs US ADRs by going private and relisting in the A share market?  There are many possibilities here, and while the uncertainty level is high during this transition, and the many hypothetical portfolio/restructuring possibilities do require a leap of faith, we wanted to share this story with VIC and bring Lei Jun into the discussion Boards.  At a minimum, this is a pretty fascinating case study. 

     

     

     

    Valuation:

     

    The pending sale of Xunlei’s money-losing online video business Kankan (to close this summer for US $21M) should lift EPS from $0.48 to at least $0.75 in 2016.  The cash hoard should grow by about $80M to $515M by the end of 2016 with proceeds from the asset sale as well as internal cash generation (this is an asset light business model).  Discounting the cash by 25% to account for repatriation taxes (for a net $6 per share in cash) and applying a more reasonable multiple of 12X 2016 EPS, we get a fair value of $15 per share for about 40% upside.  Any strategic deals or successful internal restructuring efforts should lead to additional upside. 

     

    The chart below is meant to shine a light on the value discrepancy between Xunlei and Lei Jun’s other major investments.  While there’s much work to do here, this project appears to be a great fit, especially in light of his success with Kingsoft. 

     

    Xiaomi-Related Valuation Metrics

     

     

    Mkt Cap ($ mm)

    Enterprise Value ($ mm)

    P/E net of cash (2016E)

    EV/EBITDA (2016E)

    EV/Sales (2016E)

    Kingsoft (3888 HK)

    5,077

    4,775

    21.3X

    15.4X

    3.7X

    Cheetah Mobile (CMCM)

    4,859

    4,613

    28.5X

    22.2X

    4.6X

    YY Inc (YY)

    3,555

    3,372

    12.2X

    10.2X

    2.9X

    21Vianet Group (VNET)

    1,286

    1,813

    43.8X

    10.2X

    2.1X

    Xunlei (XNET)

    692

    258

    8.3X

    4.1X

    1.4X

     

     

     

    One other comp to keep in mind is US-listed company Box Inc (BOX), which is similar to the Dropbox model of online storage and content sharing, but the target customers are Fortune 500 companies looking for enterprise-wide storage and sharing solutions.  It has a $2.0 billion market cap ($1.7 billion enterprise value) and its revenue in the fiscal year ended 1/31/15 was $216M (not profitable at the EBITDA level), up 74% y/y. 

     

     

     

    Risks:

     

     

    I do not hold a position with the issuer such as employment, directorship, or consultancy.
    I and/or others I advise hold a material investment in the issuer's securities.

    Catalyst

    Messages


    SubjectPiracy software
    Entry05/20/2015 08:53 PM
    MemberChalkbaggery

    Correct me if I'm wrong, but isn't Xunlei's business model based on user subscription for faster download on porn, Japanese Anime, and US TV shows / movies? All the other add-on / initiatives are just fluff and contribute nothing to the bottom-line, aren't you really playing for the Chinese investors over-paying in the midst of hysterical exuberance?

    The idea probably works because the sentiment in China right now is quite asinine and might flush through to the US. But aside from the relisting angle / greater fool theory, how can the business actually turn itself around?

    Additionally, what's stopping Lei Jun from privatizing Xunlei at below market price?


    SubjectRe: Piracy software
    Entry05/21/2015 01:52 PM
    Membertyler939

    Just so I am clear, if he wanted to re list in Shanghai, which makes absolutely perfect sense to do given the valuation disparity and ability to raise cash, we can and should expect to be bought out and have absolutely no way of participating in the upside.  Is there any reason to stay listed here?


    SubjectRe: Piracy software
    Entry05/21/2015 04:08 PM
    Memberelehunter

    Chalkbaggery, this is a legitimate question, but not for Xunlei, more for the video streaming companies like Yoku.  Downloading and video streaming products are going away with the Kankan sale.  The perception of this company as a pure play on porn is just wrong, but admittedly the company has done a very poor job articulating its strategy.  There is currently no Investor Relations contact, which only exacerbates the problem. 

    Our call is based on three things:

    1) Business model transition: the recent acquisition of Kuaipan and the divestiture of Kankan showed the strategic direction that the company is pursuing.  What Xunlei has retained is cloud service and mobile-focused business (ie digital content access), storage and sharing, as well as its content delivery technology.  Its client base, as a result, expands from the media content viewers or downloaders to more broad-based daily digital content users from Xiaomi. 

    2) Valuation: no doubt there are a lot of insanely priced stocks in China (and in the U.S. for that matter).  That is exactly why this is appealing.  Investors are paying next to nothing for a potentially very valuable call option, while downside is hedged by the large cash balance which is effectively controlled by Jun Lei.  We may not love the core business here, but to be able to buy a Jun Lei-controlled vehicle at such a low price, in a market that is this frothy is pretty amazing. 

    3) Xiami ecosystem: There are two layers of benefits, one is the direct ownership by Xiaomi and Kingsoft, who collectively own more than Xunlei's cofounders and have 3 members on Xunlei's Board.  Second is the benefits from both the upstream and downstream of the ecosystem.  The most obvious benefit is from the active and growing user base of Xiaomi. 


    SubjectRe: Re: Piracy software
    Entry05/22/2015 11:57 AM
    Membertyler939

    Elehunter, I really thought my question was a fair one.  Why would you expect him to  stick around here when he can go to Shanghai where he is much better known and would get a much better multiple, most of which would accrue to him?  I  know you put this as a risk factor, but I think it deserves a little more discussion. Maybe three are obvious reasons I am not aware of. Thanks.


    SubjectRe: Re: Re: Piracy software
    Entry05/26/2015 12:00 AM
    Memberelehunter

    Hey Tyler939, you're absolutely right, this question is a fair one.  I was out of pocket for the long weekend and did not have enough time to get back to you with a fleshed out response.  First off, one reason Lei may not want to take this private and relist in Shanghai is time.  We can use Focus Media (FMCN) as a case study, but we can't be 100% sure how long it actually took for them to get through the administrative process - what we do know is the company was taken private in May 2013, and is just now, 2 years later, on the cusp of a backdoor listing via Jiangsu Hongda (002211 CH on Bloomberg).  This process apparently began soon after the Carlisle-led LBO, it was just a lengthy endeavor. 

     

    Admittedly this is not enough of a headwind, considering the massive valuation arbitrage.  So let's assume we have another FMCN situation on our hands.  What protection do we have as shareholders of XNET?  If you look at the F-1A filed 6/12/14, http://ir.xunlei.com/phoenix.zhtml?c=246964&p=irol-sec&secCat01.1_rs=21&secCat01.1_rc=20 you'll find a section called "Mergers and similar arrangements" where the actual mechanics of a merger are laid out.  To take the company private, 75% of shareholders that vote (either in person or via proxy) must approve the deal.  If we look at the 20F filed 4/20/15 we find that as of 3/31/15, 40.6% of the outstanding shares are effectively controlled by insiders (including Vantage Point Global and IDG Technology) and another 39.1% is controlled by the Xiaomi ecosystem (through Xiaomi and Kingsoft), so if these two groups work together, they essentially can take this private with zero input from minority shareholders.

     

    The second part of the question: is there any way of participating in the upside if Xunlei exits the Nasdaq and relists in Shanghai?  Well, the answer is no, but remember that there is a public HK-listed stock that is one of the largest owners of Xunlei: Kingsoft (3888 HK).  Its market cap is nearly $5 billion and its 11% stake in Xunlei is worth about $70 million, so it really wouldn't move the needle much. 

     

    So yes, this is a major risk to the thesis, and a risk to all U.S. listed Chinese companies with major valuation discounts to their A-share listed counterparts.  On the flipside, knowing about this 75% shareholder vote threshold, would it be feasible to build a blocking position here and force a pretty significant premium in a management-led buyout?  I don't see any poison pill that would prevent that. 


    SubjectUpdate
    Entry10/20/2017 02:30 AM
    Membermarwari25

    Do you have any updated views on Xunlei? 

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