Quality-first, Business-perspective Strategy, Urbem (HK) Limited

Steven Chen

Quality-first, Business-perspective Strategy

Thematic (Sector/Industry)

<ul>
<li>Beaten-down industries often offer rare opportunities for investors to buy quality businesses at attractive prices;</li>
<li>We feel that the valuations of a few Hong Kong-based beauty service providers seem at least reasonable;</li>
<li>Then the question would be whether the "cheap" business is truly of high quality (i.e., a well-moated compounder);</li>
<li>As always, we advocate focusing solely on winners that are persistently profitable, high-return, and cash-rich;</li>
<li>We took a look at three such players in this space and concluded with only one of them worth an "investable" status.</li>
</ul>


Beaten-down industries often offer rare opportunities for investors to buy quality businesses at attractive prices;
We feel that the valuations of a few Hong Kong-based beauty service providers seem at least reasonable;
Then the question would be whether the "cheap" business is truly of high quality (i.e., a well-moated compounder);
As always, we advocate focusing solely on winners that are persistently profitable, high-return, and cash-rich;
We took a look at three such players in this space and concluded with only one of them worth an "investable" status.


A Look at Hong Kong's Beaten-Down Beauty Service Stocks

Pan-Asia Catalysts/Events, Quiddity Advisors

David Blennerhassett

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

<p>Last Week in Event SPACE ...</p><ul class=""><li class="">The spin-off/merger endorses <a href="https://www.smartkarma.com/entities/16963" target="_blank" data-smartkarma-citation="entities:16963:1">Hyundai Glovis Co Ltd (086280 KS</a>, however, the needle should swing back in <a href="https://www.smartkarma.com/entities/6089" target="_blank" data-smartkarma-citation="entities:6089:1">Hyundai Mobis Co Ltd (012330 KS)</a> favour once the Chung family sells their Glovis stake.</li><li class=""><a href="https://www.smartkarma.com/entities/741" target="_blank" data-smartkarma-citation="entities:741:1">iKang Healthcare Group (ADR) (KANG US)</a>'s recent set of financials suggest the Yunfeng/Alibaba US$20/ADS offer is light.</li><li class="">With FIRB approval now in the bag, it's not evident <a href="https://www.smartkarma.com/entities/21140" target="_blank">Unibail-Rodamco SE (UL NA)</a> will bump its offer for <a href="https://www.smartkarma.com/entities/896" target="_blank" data-smartkarma-citation="entities:896:1">Westfield Corp (WFD AU)</a>.</li><li class="">And is <a href="https://www.smartkarma.com/entities/26" target="_blank" data-smartkarma-citation="entities:26:1">Tencent Holdings Ltd (700 HK)</a> about to offload its stake in <a href="https://www.smartkarma.com/entities/3296" target="_blank" data-smartkarma-citation="entities:3296:1">HengTen Ltd (136 HK)</a>?</li></ul><table class="table table-striped"><tbody><tr><td><h2><strong>EVENTS</strong></h2></td></tr></tbody></table><p><strong><a href="https://www.smartkarma.com/entities/16963" target="_blank">Hyundai Glovis Co Ltd (086280 KS)</a> </strong>(Mkt Cap: $5.8bn; Liquidity: $28.6mn)</p><p>Mid-week it was <a href="https://dart.fss.or.kr/report/viewer.do?rcpNo=20180328000613&amp;dcmNo=6021683&amp;eleId=0&amp;offset=0&amp;length=0&amp;dtd=dart3.xsd" target="_blank" data-saferedirecturl="https://www.google.com/url?hl=en&amp;q=https://dart.fss.or.kr/report/viewer.do?rcpNo%3D20180328000613%26dcmNo%3D6021683%26eleId%3D0%26offset%3D0%26length%3D0%26dtd%3Ddart3.xsd&amp;source=gmail&amp;ust=1522390743441000&amp;usg=AFQjCNFB3Izt8LIv6dQCVyKeP0OBbSMxoQ">announced </a>that <a href="https://www.smartkarma.com/entities/6089" target="_blank" data-saferedirecturl="https://www.google.com/url?hl=en&amp;q=https://www.smartkarma.com/entities/6089&amp;source=gmail&amp;ust=1522390743441000&amp;usg=AFQjCNHZjPAqJmURIl1Oe78W1ZyNEPzSfw">Hyundai Mobis Co Ltd (012330 KS)</a> will first be split into an InvestmentCo (including the core parts unit) and OpCo (which has the module and after-sales parts unit), then the OpCo will be merged with <a href="https://www.smartkarma.com/entities/16963" target="_blank" data-saferedirecturl="https://www.google.com/url?hl=en&amp;q=https://www.smartkarma.com/entities/16963&amp;source=gmail&amp;ust=1522390743441000&amp;usg=AFQjCNFr_4T-5nb7bgErSFrMkK2BZsaX2A">Hyundai Glovis Co Ltd (086280 KS)</a>. Merger ratios aside, the surprise twist is that the Chung family has opted to absorb a large tax bill estimated at around ₩1tn stemming from this spin-off/merger deal.</p><ul class=""><li><strong>Who is getting a better deal?</strong> The profitability of the OpCo businesses to be merged with Glovis has more than double the profitability of the InvestmentCo ops of MOBIS, while the proposed synergies of the OpCo biz with Glovis' logistic ops need further convincing. Overall, the transaction should help the Chung family sell their shares in Glovis at higher levels than if there were no deal in the first place.</li></ul><ul><li>This spinoff/merger plan will seek shareholder approval on May 29. Objections should be submitted from May 14 to 28. The appraisal rights can be exercised from May 29 to June 18.  It may be difficult for disgruntled minority shareholders in Mobis to overturn this deal.</li><li><strong>The trade?</strong> The Chung family needs to move their wealth from Glovis. This means that a higher Glovis share price is better for the Chung family, therefore Glovis' outperformance vs. Mobis - Glovis was up 7% subsequent to the announcement against a 2% decline for Mobis - is likely to continue. Once the Chung family has sold their shares in Glovis, this trend could/should actually reverse.  I highly recommend you read both <a href="https://www.smartkarma.com/profiles/354" target="_blank" data-smartkarma-citation="accounts:354">Sanghyun Park</a> 's and <a href="https://www.smartkarma.com/profiles/342" target="_blank" data-smartkarma-citation="accounts:342">Douglas Kim</a>'s detailed insights tagged below. </li></ul><p><em>Links to:</em><br><em>Sanghyun's insight <a href="https://www.smartkarma.com/insights/hyundai-mobis-hyundai-glovis-spinoff-merger-summary-other-things" target="_blank" data-saferedirecturl="https://www.google.com/url?hl=en&amp;q=https://www.smartkarma.com/insights/hyundai-mobis-hyundai-glovis-spinoff-merger-summary-other-things&amp;source=gmail&amp;ust=1522390743441000&amp;usg=AFQjCNGGszSKwt5KGHtvgAiHV7d7M9H4GQ">Hyundai Mobis &amp; Hyundai Glovis Spinoff Merger Summary &amp; Other Things<br></a></em><em>My insight: <a href="https://foundry.smartkarma.com/insights/stubworld-mobis-glovis-spinoff-merger" target="_blank">Stubworld: Mobis &amp; Glovis Spinoff/Merger<br></a></em><em>Douglas' insight: <a href="https://www.smartkarma.com/insights/the-history-swap-ratio-and-reasons-behind-the-hyundai-mobis-spin-off-merger-with-hyundai-glovis" target="_blank">The History, Swap Ratio, and Reasons Behind the Hyundai Mobis Spin-Off &amp; Merger With Hyundai Glovis</a></em></p><p><strong><a href="https://www.smartkarma.com/entities/637" target="_blank">Toshiba Corp (6502 JP)</a></strong> (Mkt Cap: $18.9bn; Liquidity: $82.6mn)</p><p><a href="https://www.smartkarma.com/profiles/713" target="_blank" data-smartkarma-citation="accounts:713">Mio Kato, CFA</a> addressed a Nikkei report discussing potential approval delays in the purchase of Toshiba Memory Corp by the Bain consortium. Given the intensifying friction between the US and China, exemplified by the tit for tat rejections of the mergers of <a href="https://www.smartkarma.com/entities/998" target="_blank" data-smartkarma-citation="entities:998:1">Broadcom Limited (AVGO US)</a> and <a href="https://www.smartkarma.com/entities/969" target="_blank" data-smartkarma-citation="entities:969:1">Qualcomm Inc (QCOM US)</a>, and <a href="https://www.smartkarma.com/entities/969" target="_blank" data-smartkarma-citation="entities:969:1">Qualcomm Inc (QCOM US)</a> and <a href="https://www.smartkarma.com/entities/9801" target="_blank" data-smartkarma-citation="entities:9801:1">NXP Semiconductors NV (NXPI US)</a> respectively, Mio believes the probability of a clean approval, even a delayed one, is relatively low.</p><ul class=""><li>While it's reasonable for the company to try and complete the deal as is, this ignores the possibility of onerous conditions from Chinese regulators involving the disposal of assets; or attempts to nudge sales towards Chinese companies.</li><li>Such conditions are unlikely to be palatable to Toshiba and Mio believes the probability of a Toshiba Memory IPO is increasingly likely. Factoring in recent market weakness, it isn't entirely a given that an IPO would value Toshiba Memory at significantly more than ¥20tn.</li></ul><p><em>(link to Mio's insight: <a href="https://www.smartkarma.com/insights/toshiba-will-chinese-approval-arrive-without-onerous-conditions-or-is-an-ipo-on-the-cards" target="_blank">Toshiba: Will Chinese Approval Arrive Without Onerous Conditions or Is an IPO on the Cards?</a>)</em></p><table class="table table-striped"><tbody><tr><td><h2><strong>M&amp;A</strong></h2></td></tr></tbody></table><p><strong><a href="https://www.smartkarma.com/entities/741" target="_blank">iKang Healthcare Group (ADR) (KANG US)</a></strong> (Mkt Cap: $1.4bn; Liquidity: $7mn)</p><p><a href="https://www.smartkarma.com/profiles/13" target="_blank" data-smartkarma-citation="accounts:13">Kemp Dolliver, CFA</a> re-assessed <a href="https://www.smartkarma.com/entities/741" target="_blank">iKang Healthcare Group (ADR) (KANG US)</a>’s valuation after the release of its <a href="http://ir.ikang.com/phoenix.zhtml?c=252997&amp;p=irol-newsArticle&amp;ID=2339417" target="_blank">December quarter results</a>.   </p><ul class=""><li>YTD results indicate the company is on track to register an EBITDA of US$90mn for FY18 (March year-end). That places a 16.9x EV/EBITDA for the Yunfeng and Alibaba US$20/ADS offer, while Kemp targets a 20-25x EBITDA fair value or an implied price range of US$24-30/ADS. </li><li>He believes this price range is fair given the earnings recovery and the window for backdoor re-listings opening a smidgen after <a href="https://www.smartkarma.com/entities/523" target="_blank">Qihoo 360 Technology Co (ADR) (QIHU US)</a> relisted <a href="https://www.smartkarma.com/entities/5750" target="_blank">Sjec Corp A (601313 CH)</a> on the 28 February.  </li></ul><p><em>(link to Kemp’s insight: <a href="https://www.smartkarma.com/insights/ikang-endgame-approaching-but-fair-price-is-distant" target="_blank">IKang: Endgame Approaching, But Fair Price Is Distant</a>)</em></p><p><strong><a href="https://www.smartkarma.com/entities/896" target="_blank">Westfield Corp (WFD AU)</a> </strong>(Mkt Cap: $13.6bn; Liquidity: $50.6mn)</p><p>Pranav discussed the <a href="https://www.smartkarma.com/entities/21974" target="_blank">Hammerson plc (HMSO LN)</a> rejection of <a href="https://www.smartkarma.com/entities/21497" target="_blank">Klépierre (LI FP)</a>'s 19.3x P/FFO approach and whether this would change the landscape for <a href="https://www.smartkarma.com/entities/21140" target="_blank">Unibail-Rodamco SE (UL NA)</a>’s cash/scrip offer for Westfield.</p><ul><li>However, Pranav believes Unibail-Rodamco and the Lowys are unlikely to change the terms of the offer. The generally weak market for the underlying assets, as addressed by <a href="https://www.smartkarma.com/profiles/25" target="_blank" data-smartkarma-citation="accounts:25">Travis Lundy</a> in his note (<a href="https://www.smartkarma.com/insights/westfield-unibail-rodamco-the-call-of-the-mall" target="_blank">Westfield-Unibail-Rodamco: The Call of the Mall</a>), should reduce the attractiveness of Westfield. The current implied &gt;1.2% spread looks fair.</li><li>The deal received FIRB <a href="https://www.asx.com.au/asxpdf/20180329/pdf/43svdsz051xpqg.pdf" target="_blank">approval</a> on the 29 March.</li></ul><p><em>(link to Pranav’s insight: <a href="https://www.smartkarma.com/insights/westfield-unibail-rodamco-will-shareholders-get-more" target="_blank">Westfield-Unibail-Rodamco: Will Shareholders Get More?</a>)</em></p><p><strong><a href="https://www.smartkarma.com/entities/1358" target="_blank" data-smartkarma-citation="entities:1358:1">Avanco Resources Ltd (AVB AU)</a></strong>(Mkt Cap: $293mn; Liquidity: $0.5mn)</p><p>Pranav also discussed <a href="https://www.smartkarma.com/entities/1138" target="_blank">OZ Minerals Ltd (OZL AU)</a>'s cash/scrip offer for <a href="https://www.smartkarma.com/entities/1358" target="_blank" data-smartkarma-citation="entities:1358:1">Avanco Resources Ltd (AVB AU)</a>. The A$0.085 in cash plus 0.009 OZL share per AVB share offer represented a 115% premium to the undisturbed price.</p><ul><li>~60% of the minimum acceptance condition is in the bag through pre-bid acceptance deeds or intentions to tender. This is a safe deal with payment expected in mid-May.</li></ul><p><em>(link to Pranav’s insight: <a href="https://www.smartkarma.com/insights/avanco-resources-smelts-good" target="_blank">Avanco Resources: Smelts Good</a>)</em></p><table class="table table-striped"><tbody><tr><td><h2>CCASS</h2></td></tr></tbody></table><p><strong><a href="https://www.smartkarma.com/entities/3296" target="_blank">HengTen Ltd (136 HK)</a></strong> (Mkt Cap: $3.2bn; Liquidity: $11.8mn)</p><p>14.7mn shares (19.7% of issued shares) transferred into CCASS, into HSBC, on the 19 March. This is almost an identical share count to that held by <a href="https://www.smartkarma.com/entities/26" target="_blank" data-smartkarma-citation="entities:26:1">Tencent Holdings Ltd (700 HK)</a>.</p><ul class=""><li>While the transfer could signify a pledge of sorts – though with a market value of (~$5bn) against Tencent's market cap of HK$4tn, this appears unlikely – my guess is that these shares will be placed out; or sold to <a href="https://www.smartkarma.com/entities/479" target="_blank" data-smartkarma-citation="entities:479:1">Evergrande Real Estate Group Limited (3333 HK)</a> , who teamed up with Tencent to take over HengTen back in 2015. As Evergrande already has &gt;50% in HengTen, it would not be required to make an MGO should it acquire Tencent's shares. </li><li>HengTen is not remotely cheap either at 245x and 24x PER and PBR. Net cash accounts for 96.6% of HengTen's book value.</li></ul><p><em>(link to my insight: <a href="https://www.smartkarma.com/insights/hengten-networks-notable-shareholding-movement" target="_blank">HengTen Networks - Notable Shareholding Movement</a>)  </em></p>

Last Week in Event SPACE ...The spin-off/merger endorses Hyundai Glovis Co Ltd (086280 KS, however, the needle should swing back in Hyundai Mobis Co Ltd (012330 KS) favour once the Chung family sells their Glovis stake.iKang Healthcare Group (ADR) (KANG US)'s recent set of financials suggest the Yunfeng/Alibaba US$20/ADS offer is light.With FIRB approval now in the bag, it's not evident Unibail-Rodamco SE (UL NA) will bump its offer for Westfield Corp (WFD AU).And is Tencent Holdings Ltd (700 HK) about to offload its stake in HengTen Ltd (136 HK)?EVENTSHyundai Glovis Co Ltd (086280 KS) (Mkt Cap: $5.8bn; Liquidity: $28.6mn)Mid-week it was announced that Hyundai Mobis Co Ltd (012330 KS) will first be split into an InvestmentCo (including the core parts unit) and OpCo (which has the module and after-sales parts unit), then the OpCo will be merged with Hyundai Glovis Co Ltd (086280 KS). Merger ratios aside, the surprise twist is that the Chung family has opted to absorb a large tax bill estimated at around ₩1tn stemming from this spin-off/merger deal.Who is getting a better deal? The profitability of the OpCo businesses to be merged with Glovis has more than double the profitability of the InvestmentCo ops of MOBIS, while the proposed synergies of the OpCo biz with Glovis' logistic ops need further convincing. Overall, the transaction should help the Chung family sell their shares in Glovis at higher levels than if there were no deal in the first place.This spinoff/merger plan will seek shareholder approval on May 29. Objections should be submitted from May 14 to 28. The appraisal rights can be exercised from May 29 to June 18.  It may be difficult for disgruntled minority shareholders in Mobis to overturn this deal.The trade? The Chung family needs to move their wealth from Glovis. This means that a higher Glovis share price is better for the Chung family, therefore Glovis' outperformance vs. Mobis - Glovis was up 7% subsequent to the announcement against a 2% decline for Mobis - is likely to continue. Once the Chung family has sold their shares in Glovis, this trend could/should actually reverse.  I highly recommend you read both Sanghyun Park 's and Douglas Kim's detailed insights tagged below. Links to: Sanghyun's insight Hyundai Mobis &amp; Hyundai Glovis Spinoff Merger Summary &amp; Other Things My insight: Stubworld: Mobis &amp; Glovis Spinoff/Merger Douglas' insight: The History, Swap Ratio, and Reasons Behind the Hyundai Mobis Spin-Off &amp; Merger With Hyundai GlovisToshiba Corp (6502 JP) (Mkt Cap: $18.9bn; Liquidity: $82.6mn)Mio Kato, CFA addressed a Nikkei report discussing potential approval delays in the purchase of Toshiba Memory Corp by the Bain consortium. Given the intensifying friction between the US and China, exemplified by the tit for tat rejections of the mergers of Broadcom Limited (AVGO US) and Qualcomm Inc (QCOM US), and Qualcomm Inc (QCOM US) and NXP Semiconductors NV (NXPI US) respectively, Mio believes the probability of a clean approval, even a delayed one, is relatively low.While it's reasonable for the company to try and complete the deal as is, this ignores the possibility of onerous conditions from Chinese regulators involving the disposal of assets; or attempts to nudge sales towards Chinese companies.Such conditions are unlikely to be palatable to Toshiba and Mio believes the probability of a Toshiba Memory IPO is increasingly likely. Factoring in recent market weakness, it isn't entirely a given that an IPO would value Toshiba Memory at significantly more than ¥20tn.(link to Mio's insight: Toshiba: Will Chinese Approval Arrive Without Onerous Conditions or Is an IPO on the Cards?)M&amp;AiKang Healthcare Group (ADR) (KANG US) (Mkt Cap: $1.4bn; Liquidity: $7mn)Kemp Dolliver, CFA re-assessed iKang Healthcare Group (ADR) (KANG US)’s valuation after the release of its December quarter results.   YTD results indicate the company is on track to register an EBITDA of US$90mn for FY18 (March year-end). That places a 16.9x EV/EBITDA for the Yunfeng and Alibaba US$20/ADS offer, while Kemp targets a 20-25x EBITDA fair value or an implied price range of US$24-30/ADS. He believes this price range is fair given the earnings recovery and the window for backdoor re-listings opening a smidgen after Qihoo 360 Technology Co (ADR) (QIHU US) relisted Sjec Corp A (601313 CH) on the 28 February.  (link to Kemp’s insight: IKang: Endgame Approaching, But Fair Price Is Distant)Westfield Corp (WFD AU) (Mkt Cap: $13.6bn; Liquidity: $50.6mn)Pranav discussed the Hammerson plc (HMSO LN) rejection of Klépierre (LI FP)'s 19.3x P/FFO approach and whether this would change the landscape for Unibail-Rodamco SE (UL NA)’s cash/scrip offer for Westfield.However, Pranav believes Unibail-Rodamco and the Lowys are unlikely to change the terms of the offer. The generally weak market for the underlying assets, as addressed by Travis Lundy in his note (Westfield-Unibail-Rodamco: The Call of the Mall), should reduce the attractiveness of Westfield. The current implied &gt;1.2% spread looks fair.The deal received FIRB approval on the 29 March.(link to Pranav’s insight: Westfield-Unibail-Rodamco: Will Shareholders Get More?)Avanco Resources Ltd (AVB AU)(Mkt Cap: $293mn; Liquidity: $0.5mn)Pranav also discussed OZ Minerals Ltd (OZL AU)'s cash/scrip offer for Avanco Resources Ltd (AVB AU). The A$0.085 in cash plus 0.009 OZL share per AVB share offer represented a 115% premium to the undisturbed price.~60% of the minimum acceptance condition is in the bag through pre-bid acceptance deeds or intentions to tender. This is a safe deal with payment expected in mid-May.(link to Pranav’s insight: Avanco Resources: Smelts Good)CCASSHengTen Ltd (136 HK) (Mkt Cap: $3.2bn; Liquidity: $11.8mn)14.7mn shares (19.7% of issued shares) transferred into CCASS, into HSBC, on the 19 March. This is almost an identical share count to that held by Tencent Holdings Ltd (700 HK).While the transfer could signify a pledge of sorts – though with a market value of (~$5bn) against Tencent's market cap of HK$4tn, this appears unlikely – my guess is that these shares will be placed out; or sold to Evergrande Real Estate Group Limited (3333 HK) , who teamed up with Tencent to take over HengTen back in 2015. As Evergrande already has &gt;50% in HengTen, it would not be required to make an MGO should it acquire Tencent's shares. HengTen is not remotely cheap either at 245x and 24x PER and PBR. Net cash accounts for 96.6% of HengTen's book value.(link to my insight: HengTen Networks - Notable Shareholding Movement)  

Last Week in Event SPACE: Hyundai Glovis/Mobis, IKang, Westfield, HengTen

Hong Kong

Sau San Tong Holdings Limited, through its subsidiaries, sells a range of health and beauty products and provides a wide range of health and beauty services with emphasis on weight management at its slimming centers.

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Sau San Tong Holdings (8200 HK)

A Look at Hong Kong's Beaten-Down Beauty Service Stocks

The Hong Kong beauty service industry is among the hardest-hit throughout the pandemic. We recommend focusing solely on the highest-quality and...

Steven Chen

Last Week in Event SPACE: Hyundai Glovis/Mobis, IKang, Westfield, HengTen

Last Week in Event SPACE ... The spin-off/merger endorses Hyundai Glovis Co Ltd (086280 KS, however, the needle should swing back in Hyundai Mobis...

David Blennerhassett

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