Backlash from Netflix Buybacks

NOVEMBER 23, 2011   THE WALL STREET JOURNAL

By JOHN JANNARONE

It is not Netflix's fault that investors priced its shares for perfection. But the Internet video company is to blame for managing its own balance sheet for the same flawless performance.

The former high-flier announced Monday night it had sold $200 million in new shares at $70 each and another $200 million in bonds convertible to stock at $85.80. Just months ago, the stock traded above $300. It is now at $72.

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Reuters

Netflix CEO Reed Hastings

Netflix is selling off stocks and bonds in an attempt to raise $400 million, illustrating how acquiring the video content is expensive, Deal Journal's Shira Ovide reports on Markets Hub. Photo: Getty Images.

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Netflix could easily have avoided this. The company has spent over $1 billion on share repurchases since 2007, leaving it with just $366 million in cash and $200 million in debt at the end of the third quarter. During that time, executives including chief executive Reed Hastings have been selling shares.

In buying back shares, Netflix failed to build a cash cushion against any slowdown in its heady growth rate. With expectations for healthy subscriber additions stretching into the future, the company locked into big contracts for streaming content. Since the start of 2011, the company has more than tripled such commitments to a whopping $3.5 billion, of which $2.9 billion is due in the next three years.

But everything changed this summer after the company raised prices and began bleeding subscribers. The company has not indicated subscriber losses have stopped and said it expects to lose money next year. Netflix has also said it expects free cash flow to lag net income over the next several quarters. In the year through September, the company's free cash flow was a modest $204 million, while buybacks totaled $200 million.

Netflix Inc. fell $2.50 a share Tuesday, or more than 3%, to $71.90, after the video-streaming and rental company said it's selling $400 million in stock and debt in order to raise funds. Rex Crum has details on Digits.

Unfortunately, dilutive stock and convertible issues have become Netflix's best option for raising cash to cover the potential outflows. The company sold $200 million in eight-year bonds in 2009, but those have a yield of about 7.3%, according to MarketAxess. So issuing more debt would mean large coupon payments. The newly-issued convertible doesn't include regular interest payments and won't mature until 2018.

What Netflix desperately needs is for streaming subscriber growth to resume. That should boost margins and cash flow, even though a portion of the content costs rise with viewership, because much of it was purchased for a fixed price. And if subscriptions improve, content owners could yet ask for higher fees in future deals, making a cash cushion crucial.

The lesson for growth companies is that buybacks can be risky—not just in large amounts, but at high prices. Netflix paid an average price of $45 a share for stock repurchased since 2007, below the current level of $72. But many of the recent purchases were at multiples of that price. If Netflix had refrained from aggressive buybacks until the business model was relatively steady, inevitable bumps in the road would have been much easier to ride out.

Write to John Jannarone at john.jannarone@wsj.com

重回三星供應鏈 璨圓傳搶走晶電大單

2011.11.28   【經濟日報╱記者詹惠珠／台北報導】

全球最大的LED TV廠三星出現轉單，韓國LED供應鏈廠商透露，璨圓光電（3061）重新接獲三星LED TV的背光源訂單，11月份璨圓LED TV出貨優於預期，未來三星LED TV訂單可望從晶電（2448）逐步轉回璨圓。

據透露，供應給三星LED TV的韓國封裝廠從10月起轉向璨圓採購，外傳是璨圓搶走晶電的訂單，未來這家韓國封裝廠將會逐步從向晶電採購，轉向璨圓採購。但晶電和璨圓都不願證實這項消息，晶電主管表示，同業的確有採取價格攻勢。

璨圓主管則表示，韓系客戶的訂單11月比10月還多，超過公司的預期。

據了解，早期璨圓曾是三星大部份藍光LED的供應商，但隨著璨圓與三星的競爭對手LG結盟，三星將訂單移轉到晶電，不過第四季開始，韓國的封裝廠又開始將三星LED TV使用的LED晶粒，轉向璨圓採購，且有逐月增加的現象，未來一旦LED TV的需求回溫，在擁有韓系二大LED TV的訂單加持下，璨圓可望成為受惠較大的LED磊晶廠。

LED廠的10月營收多數下滑，只有璨圓和新世紀光電的10月營收逆勢上揚，主要就是受到LED TV的訂單挹注，新世紀有來自日本Sharp的訂單，璨圓則來自韓廠的訂單。

璨圓光電發言人傅珍珍表示，璨圓11月在LED TV的需求量的確有比較多，也超過公司的預期，至於最後的營收數字還是要等結算的數字。

傅珍珍表示，近期璨圓公告解散清算山東璨圓光電，外界誤解晶電的大陸布局有變，事實上並非如此，主要是因為璨圓與LG、東貝、瑞軒等合作的江蘇璨揚廠技術能力不錯，且量產提升快，加上璨圓山東從頭到尾都沒有營運，且與當初預期不同，因此璨圓董事會才作出結束的決策，將中國大陸生產重心放在江蘇揚州，山東廠對璨圓的影響微乎其微。

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Heavy Is the Crown for China's Land Kings

NOVEMBER 25, 2011   THE WALL STREET JOURNAL

By TOM ORLIK

In the boom years, it seemed the only constraint on growth for China's property developers was how much land they could acquire. Rapacious hoarding earned some the title of land kings. With the correction in China's property market now pushing land prices down, the crown is starting to feel heavy.

Nicole Wong, property analyst at CLSA, says developers China Overseas Land & Investment Ltd. and Longfor Group have already cut the prices of homes by 20% to 25% at projects in Shanghai. A fall in the real-estate market reduces the incentive for developers to invest in new projects, denting demand for land.

In October and November, land auctions at several major cities failed, with no bidders at some and only low prices offered at others. Prices nationwide for residential land were down 8% year-to-year in October while transaction volumes were down 37%, according to data from property agency Soufun.

That is bad news for developers, many of whom are sitting on large inventories of land purchased near the peak in September 2009. Land prices are volatile, but average prices for October are down 40% since then. Anyone who bought at the top could be looking at significant write-downs.

Something similar happened in 2008, when CC Land wrote down the value of its land bank by 12%, and China Vanke by 3.9%, according to calculations by Jinsong Du, a property analyst at Credit Suisse. It was only the boost from the government's stimulus policy—kick-starting the real-estate engine—that saved developers from recognizing bigger losses.

Those sitting on large land reserves are in the toughest spot. Zhejiang-based Greentown China Holdings, for instance, says only a tiny fraction of its stock of land gives cause for concern. But a land inventory nine times as big as sales for 2010, according to Credit Suisse data, still looks vulnerable if prices continue to fall. Reserves for China Overseas Land are smaller, though the company made substantial purchases in the second half of 2009 and first half of 2010 when prices were high.

Policy remains a wild card. If investment falls sharply and growth slows, the government could relax controls on the sector, buoying sales, encouraging developers to break ground on new projects, and pushing land prices back up. Barring such a shift, falling sales and land values mean some of China's former land kings could be in a royal mess.

Write to Tom Orlik at Thomas.orlik@wsj.com

China Herd Follows the Shorts

NOVEMBER 22, 2011   THE WALL STREET JOURNAL

By DUNCAN MAVIN And TOM ORLIK

Short sellers are apparently running the market for China stocks. But it ain't what they say so much as the fact they say it that has investors hitting the 'sell' button. With a market this vulnerable, investors must question the rationale for holding any but the bluest-chip overseas-listed Chinese companies.

The latest stock to fall under the short sellers' sword belongs to Nasdaq-listed advertising display firm Focus Media Holding Ltd. After short seller Muddy Waters alleged accounting shenanigans, the Shanghai-based company's shares fell 60% in an hour—barely enough time for most investors to digest the short's dense, 80-page report—before eventually closing down 39% on the day.

Carson Block, the man behind Muddy Waters, is no Meredith Whitney—the U.S. bank analyst whose word was enough to send financial stocks spiraling downward during the dark days of 2007 and 2008. But his reports seem to have the same kiss of death impact on valuations for the companies he targets.

There is now a mini-industry trying to find out which Chinese company will be the next focus of short-seller attacks. Hedge funds that discover what shorts are researching can get their positions in place, knowing that once the report is published, the stock is almost bound to fall. In the days before Muddy Waters published on Focus Media, a rapid build-up of short positions was an indication that word of the report's existence had leaked out.

There's an argument that the shorting trend is injecting a welcome dose of skepticism and analytic rigor into the market's view on the China story. In time, that should improve governance at Chinese companies and encourage investors to spend time distinguishing true value from fraud. For now though, with the herd mentality as strong on the way down as it was on the way up, value investors will have little luck. Against that backdrop, the only safe option may be to stay out of the market altogether.

Write to Tom Orlik at Thomas.orlik@wsj.com

Hot Money’s Hurried Exit from China

NOVEMBER 21, 2011   THE WALL STREET JOURNAL

Originally posted on Overheard:

More signs of bearish sentiment on China, this time from cross border capital flows.

Data released Monday showed China’s banks were net sellers of foreign currency in October (in Chinese). That’s unusual because China’s trade surplus, combined with inflows of direct investment, mean the mainland’s banks are almost always net buyers of foreign currency.

Indeed, the numbers normally suggest that in addition to the trade surplus, banks are buying up speculative capital flowing into the economy. Tuesday’s numbers suggest that now speculative capital might be exiting China. That makes sense givendiminished expectations of yuan appreciation, falling property prices and a deepening crisis in Europe pushing investors away from risky positions.

A comparison with past occasions when hot money has flowed out of China provides little reassurance. Netting out the trade surplus from banks’ FX purchases gives a rough approximation of the scale and direction of capital flows. The last time it turned negative was May 2010, when fears of a double dip downturn were on the rise. The time before: the eve of the financial crisis in August 2008.

– Tom Orlik

IPO Rush in Hong Kong

NOVEMBER 16, 2011   THE WALL STREET JOURNAL

By PRUDENCE HO And POLLY HUI

HONG KONG—Despite volatility that has made investors wary of buying, a wave of companies are rushing to complete initial public offerings here, pushing the local exchange's listing committee to take extra steps to clear the backlog.

A person familiar with the situation said Wednesday that Hong Kong's stock-exchange listing committee, which usually reviews IPO candidates each Thursday, will hold extra meetings in coming weeks to consider applications by companies wanting to list before the year is out. A Hong Kong stock-exchange spokesman declined to comment.

These IPOs, if given the green light, will come to a falling market. The Hang Seng Index fell 2% Wednesday, and is 6.2% lower over the past three months. It has fallen 18% since the start of the year.

Three Chinese firms moved forward with listing plans that could raise up to US$6.25 billion Wednesday, while a Hong Kong-owned trust holding mainly fixed-line telecom assets opened its offering to retail investors. The offering, which seeks to raise as much as US$1.4 billion, appeared to attract limited interest from retail buyers.

Since Nov, 9, PCCW Ltd., Hong Kong's dominant telecommunications company, has been taking orders from institutional investors for an IPO of a telecom trust named HKT Trust & HKT Ltd.

Hong Kong listing rules stipulate that every IPO has a retail tranche. The PCCW trust has allotted 10% to the public.

People at four local brokerages, Phillip Securities, KGI Securities, Haitong International Securities and Wing Fung Financial Group, said they had received few orders from clients seeking to buy units of the trust on margin, although order-taking for the deal runs until Nov. 21.

Margin financing, or the use of borrowed money to buy stocks, at these brokerages is often used to gauge investor appetite for IPOs by retail investors. At Phillip Securities, margin borrowing for the offering amounted to only 490,000 Hong Kong dollars, or about US$63,000.

The IPO of the PCCW trust is meant to play on the demand by investors for yield. It offers yields of 7.5%-8.9%, more than the 4%-6% average available from listed real-estate investment trusts in Hong Kong.

But brokers and analysts said that because growth is likely to be limited in the fixed-line telecommunications business in Hong Kong, prospects for increasing cash flow at the trust are dim.

The poor performance of another recently listed trust, the yuan-denominated Hui Xian Real Estate Investment Trust, has also made some investors wary, they said. Hui Xian, which is controlled by Li Ka-shing, the father of PCCW Chief Executive Officer Richard Li raised US$1.6 billion in Hong Kong in an April IPO. It is currently trading 34% below its IPO price.

China's third-biggest insurer by premiums, New China Life Insurance Co., and Chinese brokerage Haitong Securities Co., also moved toward listing by the end of the year, people familiar with the situation said. New China Life got approval from the China Securities Regulatory Commission to list in Shanghai Wednesday, according to Xinhua, the Chinese state-run news service. Its IPO in Hong Kong will be vetted by the local listing committee on Thursday.

If the deal is approved, New China Life will join peers such as China Life Insurance Co. Ltd. and Ping An Insurance (Group) Co. of China Ltd. in having both Hong Kong and Shanghai listings.

Haitong Securities, whose IPO will be the latest by a domestic Chinese brokerage after Citic Securities Co. raised US$1.7 billion in a Hong Kong IPO in October, plans to seek Hong Kong listing approval Tuesday if it receives Chinese regulatory approval this week, people familiar with the situation said.

Another Chinese company, China Polymetallic Mining Ltd., started testing the market for interest in an IPO that could raise US$150 million-US$250 million. It hopes to list on the Hong Kong market on Dec. 15, according to a term sheet seen by Dow Jones Newswires. The company, which mines lead and zinc, plans to sell 500 million shares at between HK$2.34 and HK$3.90 per share. The price is equivalent to 4.9 to 8.1 times forecast 2012 earnings, the term sheet said. Deutsche Bank Asset Management, part of Deutsche Bank AG, and Morgan Stanley Private Equity own stakes in the miner.

The order-taking process will begin on Nov. 28.

—Wynne Wang in Shanghai contributed to this article.

Write to Prudence Ho at prudence.ho@dowjones.com

Big Relief For China's Small Banks

NOVEMBER 15, 2011   THE WALL STREET JOURNAL

By TOM ORLIK

Is the People's Bank of China providing some relief for cash-strapped smaller banks?

So much happens under the surface that it is difficult to say for sure. But there are tantalizing suggestions that the answer is yes.

Back in August, the People's Bank of China introduced new rules requiring the banks to add around 890 billion yuan ($140 billion) to reserves at the central bank, with installments spread over six months.

Yet the data for September—the latest available—show that for China's small and medium banks, reserves actually fell. The ratio of reserves to deposits for smaller banks also dipped, down to 17.8% from 18% in August, some way below the 19.5% that is ostensibly the regulated minimum.

That suggests for China Minsheng Bank,Shanghai Pudong Development Bank and others that together accounted for a third of new loans in the first three quarters, the new rules may have been relaxed even before they really came into effect.

Further evidence, the loan-to-deposit ratio has started to creep up. China's banks are supposed to maintain a loan-to-deposit ratio of 75%—part of the regulator's efforts to prevent lending running out of control. In fact, the loan-to-deposit ratio for small banks hit 83% in September from 81% in June, suggesting the restrictions have been allowed to slide.

That might explain why short-term interest rates in China's interbank market have been relatively subdued. Leaving aside a month-end peak, one-week interbank rates have been stable below 3.5% for the last two months. It's China's smaller banks, with a weaker deposit base, that are the main buyers in the money market. Stable rates suggest they are not scrambling for cash.

The stage is set for a further uptick in lending in the final months of the year. The impact will be partially offset by the contraction in off balance sheet lending, which fell sharply in the third quarter. But behind the scenes, China is shifting policy to support growth.

Write to Tom Orlik at Thomas.orlik@wsj.com

China’s Subsiding Land Prices

NOVEMBER 14, 2011   THE WALL STREET JOURNal

Falling land prices are increasing the pain of China’s property tightening.

Transaction volume for China’s residential land. Click for larger image.

In recent weeks auctions in Chengdu, Jinan and Nanjing have delivered disappointing results, with no bids at some and only low prices offered by buyers at others, the official Xinhua News Agency reported Monday. (Here in Chinese)

That gels with residential land sales data collected by real estate agency Soufun from local land bureaus. Average price per square meter was 1,384 yuan ($218) in October. That’s way down from a peak of 2,307 yuan in September 2009. Weak transaction volume as developers cut back on purchases suggests prices have further to fall.

That’s bad news for local government, who received almost 40% of their income from land sales in 2010. If prices fall, officials will be forced to sell higher volumes of land to make ends meet.

It’s also bad news for developers, many of whom are sitting on large volumes of undeveloped land whose value may have to be written down. Jinsong Du, property analyst at Credit Suisse, says that China Overseas Land, which made substantial purchases at the top of the market at the end 2009 and beginning 2010, could be particularly at risk.

– Tom Orlik

Exclusive Deal Floats Groupon

NOVEMBER 5, 2011   THE WALL STREET JOURNAL

By ROLFE WINKLER

Behind every bubble, there is a clever investment banker. This time around, it's Morgan Stanley.

Even by dot-com standards, Groupon's initial public offering is puny in terms of the number of shares it actually sold to the public. According to Dealogic, dating back to 1995 just three U.S. tech companies floated a smaller percentage of their shares in their IPOs. Palm sold 4.7% of its shares in a $1 billion offering; Portal Software sold 6.2% in a tiny $64 million offering, and Ciena sold 6.2% in a $132 million offering. Then comes Groupon, which sold 6.3% this week as part of its $805 million offering.

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European Pressphoto Agency

Morgan Stanley has led the IPOs of Groupon, LinkedIn and Pandora Media.

That is well below the median of 21% for the 50 largest technology IPOs dating back to 1995, according to Dealogic.

Groupon's limited float strategy isn't new. Two of this year's other big Internet IPOs,LinkedIn and Pandora Media also sold a limited number of shares, just 9.4% of the total outstanding for both companies. Those deals were also led by Morgan Stanley.

Considering doubts about Groupon's business model, in order to ensure a strong first day's trading, the underwriters not only limited the free-float, but they also scaled back their original valuation target.

At Friday's close of trading, Groupon shares were at $26.11 apiece, 31% above the IPO price. That puts Groupon's market capitalization at about $17 billion, or roughly eight times next year's likely revenue. That is steep, considering that the daily-deals Internet company is still unprofitable and that growth appears to be slowing quickly.

Meanwhile, Groupon's main competitive advantage—its huge sales force—is being eaten away by rivals like Google and LivingSocial.

Indeed, slowing growth threatens the business model. After a daily deal is sold, Groupon holds onto the share of revenue that is owed to merchants for a period of time and uses that cash to feed its marketing machine. That works only when the business is growing, meaning that payments from new deals are coming in faster than payments on old deals are going out.

Groupon's IPO proceeds, which could fund a lot of marketing costs, take the pressure off on that front.

For the time being, the limited supply of shares should help prop up the price. The flip side is that a huge overhang of shares will come available for sale after the lockup period preventing insider sales expires next May.

The next big Internet IPO expected is online game company Zynga. Considering that it also faces slowing growth and rival Electronic Arts is suddenly chipping away at its dominance, perhaps investors should expect Zynga to limit its share float as well.

Morgan Stanley is leading that deal, too. Considering its success staging high-priced IPOs thus far, it has a strong pitch to lead the granddaddy of them all: Facebook.