January 2019

In this briefing:

1. Misumi Group (9962 JP): Another Downward Revision
2. JDI: Share Price Continues to Slide Following Weak Earnings Outlook Due to US-China Trade War
3. ACB: Quality at a Reasonable Price
4. Koito Outperforms in 3Q While Stanley Disappoints; Latter Still on Track to Achieve FY03/19E Target
5. Mexican Banks AMLO Effect; Less Bad than Feared?

1. Misumi Group (9962 JP): Another Downward Revision

Misumi Group sold off after announcing poor 3Q results and another downward revision to FY Mar-19 sales and profit guidance, but bounced right back to finish at ¥2,480 yesterday (January 31), which is 30x management’s new EPS estimate for this fiscal year. Price/book value (as of the end of December) is 3.6x. The indicated dividend was cut in line with guidance, maintaining management’s 25% payout ratio target but resulting in a dividend yield of 0.8%.

Operating and net profits are now expected to decline. Management is guiding for a 7.1% increase in sales in FY Mar-19 as a whole, but monthly data shows year-on-year growth dropping to 5.2%  in November and 3.1% in December. Factory Automation sales were unchanged in November and down 1.3% in December, 

In the three months to December, operating profit dropped 17.8% year-on-year on a 5.7% increase in sales, with Factory Automation profit down 16.9% and VONA profit down 35.4%. Inventory was up while receivables were down. Sales growth in China turned negative. 

The company continues to invest in production capacity, logistics and IT, aiming to expand its Factory Automation and VONA e-commerce businesses in Japan, Asia, America and Europe. The goal is to create a unified, cloud-based, rapid-response distribution system with the world’s largest components and production materials database. The anticipated success of this plan appears to explain both the rebound in the share price and relatively high current valuation, but with the China growth trajectory broken and the economic outlook uncertain, it may take longer and come with lower margins than originally expected.

2. JDI: Share Price Continues to Slide Following Weak Earnings Outlook Due to US-China Trade War

A Japanese newspaper recently reported that JDI is expected to post a consolidated loss for the current fiscal year. However, the company claims that the newspaper report was not based on any forecast made by JDI. The company has stated that it is currently calculating topline and bottomline for the third quarter and it expects the economic slowdown in China, prolonged user lifecycles for smartphones and the US China trade war to in fact have a greater than expected impact on the company’s financial performance. While its third quarter results are to be released in mid-February 2019, consensus expects the company to turnaround its losses to make an overall net profit for the year.

3. ACB: Quality at a Reasonable Price

Fundamental trends at Asia Commercial Bank/Vietnam (ACB VN) are benign and stand out within Vietnam’s improving banking universe. The bank has delivered on its objectives over the last year and key metrics/signals at 12M18 underline positive fundamental momentum and quality-value attributes, embodied in a high PH Score™.

ACB’s improvements reflect a sound macro backdrop (upgraded sovereign strength) as well as a strategy that is based on higher-margin consumer lending, and to a lesser extent SMEs, balanced by a rising CASA deposit base. More than 50% of the loan book stems from retail accounts, of which a third this relates to mortgages.

The bank targets greater efficiency, a digitalization drive (some 25% of transactions are on-line), and an expanding customer base, including SME payroll accounts.

Vietnam exhibits broad-based, mild-inflationary, growth. Reforms continue in the banking sector, privatisations and reducing red tape. However, economic distortions and capacity constraints remain, as do external and domestic risks and longer-term challenges. The robust economy though provides an opportunity for additional reforms to boost investment, ensure durable growth and resilient balance sheets, and reduce the external surplus.

Regarding banks, SOCBs need to be capitalized with government funds, and private sector and foreign ownership limits raised (lifting a 30% foreign investor limit to banking and aviation is underway). Vietnam needs to develop a macroprudential framework and to enhance data quality on balance sheet exposures to better monitor and manage risks, and to ensure that robust liquidity and crisis management frameworks are in place from a legal and operational perspective in order to mitigate financial sector risks. The broad picture though reflects an improved macro profile combined with progress at banks in writing off legacy problem assets and boosting capitalisation – especially in the case of ACB as well as ABB, ACB, Military Bank, OCB, TPbank, VIB, and Techcombank. However, (outperforming) Sacombank faces a risk from its problem assets while VP is constrained by risk from its consumer finance portfolio. 

4. Koito Outperforms in 3Q While Stanley Disappoints; Latter Still on Track to Achieve FY03/19E Target

Koito Manufacturing (7276 JP) released its 3QFY03/19 earnings that saw revenue outpace consensus estimates by +2%, while Stanley Electric (6923 JP) ’s revenue fell below consensus estimates by -1%. While Koito witnessed revenue growth of 10% YoY, Stanley posted a decline in revenue for the quarter by -4% YoY. On profitability as well, Koito witnessed growth of +6% YoY, achieving an OPM of 12%. Stanley, on the other hand, experienced a decline in OP for the quarter by -7% YoY, although still managing to achieve a relatively higher OPM of 13%. Here again, Koito managed to beat consensus estimates by +1% while Stanley fell below consensus estimates by -3%. Our conservative estimates for 3Q looked a bit light for Koito while they were slightly high for Stanley.  Koito has been the company which usually disappoints the market with its earnings results, although it has proved otherwise this quarter.

That being said, it should be noted that, although Stanley’s three months ended results did not look particularly robust, its nine months ended results were quite favourable. The company witnessed the revenue grow 0.5% YoY (for the nine months ended 30^th Dec 2018) while OP grew by 5.9% YoY, supported by the steady growth in the high-margin LED headlamps. For Koito, on the other hand, the three months ended results seemed quite favourable, although the nine months ended results displayed a revenue decline of -5.1% YoY and OP decline of -2.4% YoY, citing the deconsolidation of its Chinese subsidiary and the decrease in the volume of automobile production in some of its business regions as the key reasons. Thus, the overall YTD financial performance of Stanley looks still attractive compared to that of Koito. Following the earnings release, Stanley opened -3.7% down on Thursday from Tuesday’s close, while Koito closed +4.8% up on Wednesday since Friday’s close.

5. Mexican Banks AMLO Effect; Less Bad than Feared?

• We take a contrarian bullish view on microfinance bank Gentera SAB De CV (GENTERA* MM EQUITY) , despite the AMLO headwinds, and a cautious stance on Grupo Financiero Banorte-O (GFNORTEO MM)
• AMLO push to increase financial inclusion in Mexico, focused on the low income and rural population, may add to bank sector costs at the margin without materially impacting revenues
• Early fears of increased intervention in the bank sector – such as capping fees and commissions – appear to have abated. Interest-free loans for micro-entrepreneurs have hit sentiment on microfinance and consumer finance stocks, especially Gentera SAB De CV (GENTERA* MM EQUITY); we believe, on a medium-term view, these concerns may be overdone
• We would be cautious on the Mexican big cap banks, and especially Grupo Financiero Banorte-O (GFNORTEO MM) ; we see downside risk to consensus estimates from overly-positive GFI acquisition synergies, and potential pressure on local government loan rates over the medium term
• We are neutral on Grupo Financiero Inbursa-O (GFINBURO MM)  and Banco Santander Mexico-B (BSMXB MM) , we like BBVA Bancomer long-dated unsecured bonds as an alternative to Mexican bank equity exposure

In this briefing:

1. Major Highlights of SK Telecom’s 4Q18 Earnings Conference Call
2. CyberAgent Cuts Its OP Guidance by JPY10bn; We Are Still Bullish
3. TDK Revises FY03/19 Guidance on the Back of US-China Trade Tensions
4. Alibaba (BABA): For Dec. Quarter, Focus on Profit Improvement, But Not Revenue Growth, 40% Upside

1. Major Highlights of SK Telecom’s 4Q18 Earnings Conference Call

• SK Telecom (017670 KS) reported disappointing 4Q18 earnings results. SK Telecom’s revenue of 4,351.7 billion won was 0.2% lower than consensus and its operating profit of 225 billion won was 23% lower than the consensus in 4Q18. Despite the disappointing 4Q18 results (especially due to lower operating income and lack of flow through of SK Hynix dividends to SKT), we remain positive on SK Telecom.
• We believe that SK Telecom’s 10,000 won DPS in 2018 is a disappointment. However, we believe the stage has been set for higher DPS policy, linking SK Hynix’s dividends to SK Telecom and as mentioned in the conference call numerous times, this is likely to be announced in the AGM in March. In terms of amount, we believe 13,000 won to 15,000 won appears to be reasonable in 2019. 
• The company’s comment about its sales and profits improving starting in 2H 2019 is consistent with its previous statement in the third quarter conference call. However, the company’s statement about its revenue target of more than 1 trillion won growth YoY in 2019 is new and positive. In 2018, SK Telecom generated consolidated sales of 16.9 trillion won, down 3.7% YoY. If the company is able to generate revenue of 17.9 trillion won in 2019, this would represent a growth of 5.9% YoY. The current consensus estimate of the company’s sales is 17.47 trillion won in 2019. Thus, the company has basically guided the 2019 sales target by 2.5% higher than the current consensus estimate.

2. CyberAgent Cuts Its OP Guidance by JPY10bn; We Are Still Bullish

Cyberagent Inc (4751 JP) reported 1Q FY09/19 financial results on Wednesday (30^th January) after the market close. CyberAgent reported revenue of JPY110.8bn (+13.2%YoY) and OP of JPY5.3bn (-35.2%YoY) for 1Q FY09/19.

Revenue and OP both missed consensus (JPY111.7bn and JPY8.2bn respectively). This was mostly due to low OP from the Game business due to increased advertising expenditure for new titles. OP margin of the Internet Advertisement business also fell due to upfront investments for expansion. Media business, driven by AbemaTV, demonstrated strong topline growth driven by robust increase in the number of AbemaTV premium users but continued to make losses due to heavy investment in content development.

CyberAgent revised down its full-year FY03/19E OP guidance to JPY20bn from JPY30bn previously, but we continue to remain positive about the company’s long term performance, driven by the prospects of its passive TV business (see Mio Kato‘s previous note on this Cyberagent: Aggressive Plans for Passive TV).

CyberAgent’s share price closed at JPY3,500 on Thursday (31st January) down 16% from its previous close. CyberAgent’s share price has been on a bearish trend for the last two quarters, down 49% from an all-time high of JPY6,800 in July. We believe this presents an ideal buying opportunity for the stock. Our SOTP valuation for CyberAgent gives a FY1 target price of JPY4,480 which implies a 28% upside to the current market price.

For details on Cyberagent’s business model please see our previous notes CyberAgent: Hot Internet Media Stock Up ~50% YTD (Part 1) and CyberAgent (Part II): Medium-Term Prospects Are Priced In; Positive Long-Term Outlook .

3. TDK Revises FY03/19 Guidance on the Back of US-China Trade Tensions

• TDK revised its FY03/19E guidance following the 3QFY03/19 earnings release, which underperformed both consensus and LSR expectations. 
• The company has been affected by the US-China trade war and the deceleration of the Chinese economy in the third quarter. 
• Revenue guidance for FY03/19E has been decreased to JPY1,370bn from JPY1,420bn (-3.5%) projected in October 2018. OP guidance for the year has been reduced to JPY110bn compared to the previous expectation of JPY120bn (-8.3%).
• On our estimates, TDK is currently trading at a FY1 PE of 12x, lower than its historical median of 16.4x.

4. Alibaba (BABA): For Dec. Quarter, Focus on Profit Improvement, But Not Revenue Growth, 40% Upside

• For the December quarter results, the market is focusing on the slowdown of the revenue growth, but we notice that the growth rate of operating profits recovered.
• In two of our previous reports, we mentioned BABA’s efforts on cost control in the second half of 2018. Now we can see the results.
• We believe the most important risk is the significant operating losses in the minor business “digital media”.
• The P/E band suggests that the stock price has an upside of 40%.

In this briefing:

1. Shanghai/Shenzhen Connect – $8.5 Bn of Inflow in January (Kweichow Moutai, Gree, Midea)
2. HK Connect Discovery – January Snapshot
3. India Banks – Consumer and Mortgage Also a Risk
4. MacroAsia (MAC PM) – Company Visit Highlights Short-Term Headwinds but Core Business on Solid Ground
5. ZOZO: Earthbound

1. Shanghai/Shenzhen Connect – $8.5 Bn of Inflow in January (Kweichow Moutai, Gree, Midea)

In our Discover SZ/SH Connect series, we aim to help our investors understand the flow of northbound trades via the Shanghai Connect and Shenzhen Connect, as analyzed by our proprietary data engine. We will discuss the stocks that experienced the most inflow and outflow by offshore investors in the past seven days.

We split the stocks eligible for the northbound trade into three groups: those with a market capitalization of above USD 5 billion, and those with a market capitalization between USD 1 billion and USD 5 billion.

We note that offshore investors were buying all GICS sectors, and had a strong preference for Consumer Staples, Financials and Consumer Discretionary names. We estimate that total inflow into A-share market via northbound trade amounted to USD 8.5 bn in January.

Stocks with strong inflows (by quantum) were Kweichow Moutai Co Ltd A (600519 CH), Gree Electric Appliances Inc Of Zhuhai (000651 CH), and Midea Group Co Ltd A (000333 CH). Please read this note together with our coverage for December flow and our coverage for January northbound flow. 

2. HK Connect Discovery – January Snapshot

This is a monthly version of our HK Connect Weekly note, in which I highlight Hong Kong-listed companies leading the southbound flow weekly. Over the past month, we have seen the flow turning from outflow to inflow. Our previous insights published in Jan can be found in the links below. In this insight, we will focus on the month flow to get a bigger picture vs the weekly flow.

Our January Coverage of Hong Kong Connect southbound flow

• HK Connect Discovery Weekly: CR Beer, Great Wall Motors, and Kingsoft (2019-01-07)
• HK Connect Discovery Weekly: China Tower, Tencent, New China Life (2019-01-11)
• HK Connect Discovery Weekly: Tencent, Kingsoft, and Yichang HEC (2019-01-18)
• HK Connect Discovery Weekly: CRRC, Car Inc/ UCar (2019-01-25)

3. India Banks – Consumer and Mortgage Also a Risk

As new numbers are released, we have a better glimpse of where we are in the bad loan cycle, and the data is not reassuring. And we see that it is not only about risk with infrastructure or corporate loans in India, even if these are the most well-known credit risks. Housing loans are not immune from the economic malaise that remains in place. Non-bank financial company (NBFC) Can Fin Homes (CANF IN) shows exceptionally high quarterly bad loan growth in the latest period. Recalling our note on HDFC Bank, consumer loans more generally, may not be as robust as most believe.  And there are others.

4. MacroAsia (MAC PM) – Company Visit Highlights Short-Term Headwinds but Core Business on Solid Ground

We met with MacroAsia management in Manila to discuss their most recent 3Q18 results and outlook for the coming year. The key takeaways were that: growth from LTP would be underpinned by business from PAL Express’s new A321 Neo and turboprop fleet; the ground handling and catering businesses will see growth from mid-March as PAL contracts with Sky Kitchen and Sky Logistics are terminated and awarded to MacroAsia; and lastly, that margin pressure due to cost inflation in the catering business should normalize during the second half as agreements are renegotiated.

Our estimated FY18 NPAT of P948mn is broadly in-line with management guidance and implies a valuation of 23.5x trailing P/E. We still that despite the recent fall in share price, this valuation will come under pressure until the company can demonstrate a return to earnings growth after a challenging year.

5. ZOZO: Earthbound

DOWN AND OUT – ZOZO (3092 JP)‘s third-quarter results which were announced yesterday, saw a 28% quarter-on-quarter increase in sales and trailing-twelve-month (TTM) revenues increased by 25%. Elsewhere the wheels are gradually coming off. In ZOZO most important quarter of the year, Operating Income rose by just 8.2% year-on-year and Net Income by 9.5%. As we mentioned in our previous Insight, Buying a Stairway to Heaven, ZOZO required at least ¥46b in revenues and ¥15b in operating income to meet their full-year forecasts. ¥36b and ¥10b failed to reach this high hurdle and, for the first time since listing, ZOZO has been required to revise down the company’s earnings forecasts. Revenues have been revised down by 20%, OPerating Income by 34% and Net Income by 36% compared to the company’s previous forecasts. Compared to the trailing-twelve-month number the revisions are +1% and -11%, respectively.  

DOWNSIDE RISK – If ZOZO has entered an era of low or no-growth, a revaluation fo the business to reflect such a reality could see the company’s shares fall by up to 50%