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Brief Multi-Strategy: HK Buyback League Table: Ronshine, China Star Ent, Consun and more

By | Daily Briefs, Multi Strategy

In this briefing:

  1. HK Buyback League Table: Ronshine, China Star Ent, Consun
  2. Compromised Immune Systems: People and Economies

1. HK Buyback League Table: Ronshine, China Star Ent, Consun

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Hong Kong Exchange publishes share repurchases by listed companies on a daily basis. In our weekly note, we will provide statistics on top repurchases over one week, one month, one quarter and one year periods ended on Apr 24.

In the past 7 days, the top 3 companies that repurchased the most shares from the market were Ronshine China Holdings (3301 HK) (HKD 41.5 million worth of buybacks), China Star Entertainment (326 HK) (HKD 16.2 million worth of buybacks), Consun Pharmaceutical (1681 HK) (HKD 8.6 million worth of buybacks).

In the past 30 days, the top 3 companies that repurchased the most shares from the market were Xiaomi Corporation (1810 HK) (HKD 499.5 million worth of buybacks), New World Development Co Ltd (17 HK) (HKD 293.3 million worth of buybacks), Ronshine China Holdings Limited (3301 HK) (HKD 99.8 million worth of buybacks).

In the past 90 days, the top 3 companies that repurchased the most shares from the market were Link Reit (823 HK) (HKD 952.2 million worth of buybacks), New World Development Co Ltd (17 HK) (HKD 550.9 million worth of buybacks), Xiaomi Corporation (1810 HK) (HKD 499.5 million worth of buybacks).

In the past 365 days, the top 3 companies that repurchased the most shares from the market were Hsbc Holdings Plc (5 HK) (HKD 7,813.7 million worth of buybacks), Link Reit (823 HK) (HKD 4,156.7 million worth of buybacks), Xiaomi Corporation (1810 HK) (HKD 3,413.8 million worth of buybacks).

2. Compromised Immune Systems: People and Economies

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“The non-normalisation of interest rates over the last decade has left the developed countries’ economic systems in a greatly weakened state. In our view, equity markets are panicking with regard to the virus because they are beginning to realise that central banks and governments are now firing blanks. The fragility of the underlying economy will be tested to the limit – like public health systems – during the course of the next year. Hence, it is essential to protect profits as much as possible.”
                Asianomics Special Report, COVID-19: A Perspective on Policy, 16 March 2020, p.8

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Brief Multi-Strategy: 🇯🇵 JAPAN • Results & Revisions 18th May – Panasonic, Komatsu, Terumo, Sundrug & The Corona Valley and more

By | Daily Briefs, Multi Strategy

In this briefing:

  1. 🇯🇵 JAPAN • Results & Revisions 18th May – Panasonic, Komatsu, Terumo, Sundrug & The Corona Valley
  2. The Bulls Are Losing Control, What’s Next?
  3. Thailand: Recession Will Be Severe, but Less so than the IMF/ADB Are Forecasting
  4. Ottogi Corp Chairman Ham Young-Joon Sells a 7.5% Stake in Ottogi Ramen
  5. Alibaba – No Softbank Placement Overhang, Going into HSI and HSCEI

1. 🇯🇵 JAPAN • Results & Revisions 18th May – Panasonic, Komatsu, Terumo, Sundrug & The Corona Valley

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Source • Japan Analytics

As this quarter’s results and revisions announcements wind down, in the DETAIL below, we shall review Monday’s updates:-

  • The balance between positive/neutral/negative of the 50 results announcements was 23:2:25
  • For the 24 revisions/initial forecasts, the split was 6:0:18, and the average Revision Score was -6.1

2. The Bulls Are Losing Control, What’s Next?

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Stock prices have been chopping sideways and gone nowhere in the past month. After a strong rally off the March low, the rally stalled repeatedly at the 61.8% Fibonacci retracement level while the stochastic recycled from an overbought condition. It is becoming evident that the bulls have lost control. That doesn’t mean, however, that the market is ready to go down. Instead, the sideways consolidation could continue for some time.

What’s next? Will we see further chop sideways, or have the bears seized control of the tape?

From an intermediate term and purely technical perspective, the stock market’s sideways action for the past month has stabilized our Asset Allocation Trend Model score, and readings have improved from bearish to neutral. In light of our cautious fundamental and macro outlook (see What’s The Next Market Narrative?), we believe that investment oriented accounts should maintain an underweight position in equities.

Traders should be flexible and open-minded about the short-term direction of the market. While the intermediate term outlook is still bearish, traders should be prepared for a period of range-bound sideways consolidation.

3. Thailand: Recession Will Be Severe, but Less so than the IMF/ADB Are Forecasting

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Both the IMF and ADB expect Thailand to be the worst-performing economy in Asia in 2020, respectively forecasting real GDP to decline 6.7% and 4.8% in 2020. Despite the undoubted vulnerability of Thailand to the collapse in global tourism, we think these estimates are overdone. Real GDP declined 1.8% YoY in 1Q 2020 (much better than the consensus expectation of -4% YoY), with real services exports declining 29.8% YoY, but real exports of goods still rising 2% YoY. The latter (also reflected in the 13.5% YoY growth in Thai exports to the US in 1Q 2020) shows that the real economy held up much better than much of the world.   

Although Thailand was the first country outside China to report a Covid-19 case, the country has contained its spread very effectively. There are just 118 active cases, 2857 have recovered and only 56 have died. With the curve clearly flattening, Thailand will be able to steadily ease the lockdown imposed in early-April. While 2Q 2020 will see a steep decline in real GDP, the economy should begin recovering in 3Q 2020. With CPI deflation at -3% YoY, there is room for the BoT to ease policy once the economy resumes normal functioning, and Thailand also has ample room for fiscal manoeuvre. In-bound tourism should gradually resume by August, and ramp up through the rest of the year, allowing real GDP to grow 3-4% YoY in 4Q 2020, and near-zero growth in 3Q 2020.

With 2Q 2020 seeing a more severe downturn (-16% YoY), we still expect Thailand’s real GDP to decline no more than 3.5% YoY in 2020 (much better than the NESDB’s official forecast of -5 to -6% in 2020), and rebound strongly to 5% real GDP growth in 2021.  Thailand has been the slowest-growing economy in Asia over the past 20 years, partly because of the sluggishness of fixed investment spending. With the latter slated to decline sharply this year as well, 2021 will see an investment-led rebound. The demographics (Thailand is already an ageing society) will constrain Thailand’s ability to grow more than 5% even in 2021. But given the likelihood of better outcomes this year than the gloomy consensus (and official forecasts), we would be moderately bullish about Thailand — particularly focusing on the large-cap companies with earnings from outside Thailand ( Siam Cement (SCC TB), CP FOODS (CPF TB), Banpu Public (BANPU TB)).  

4. Ottogi Corp Chairman Ham Young-Joon Sells a 7.5% Stake in Ottogi Ramen

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It was reported in the local media after the market close that the Ottogi Corporation (007310 KS) chairman Ham Young-Joon (born in 1959) sold a 7.48% stake in Ottogi Ramen for 23 billion won ($19 million).

The earnings and business outlook of Ottogi Corp remain rock-solid this year. Corporate governance, on the other hand, has been relatively poor for the company. However, this announcement of Chairman Ham selling a 7.48% stake in Ottogi Ramen for 23 billion won should have a mild positive boost on the potential for improved corporate transparency and share price of Ottogi Corp.

Valuations – Ottogi Corp currently has an EV of 2.1 trillion won. The company’s EBIT averaged 150 billion won. The company’s EBIT increased 8% YoY in 1Q 2020 and it is reasonable to estimate an EBIT of 160 billion won to 165 billion won in 2020, which would suggest an EV/EBIT ratio of 13x. On an EBITDA basis, Ottogi shares are trading at about 8x EV/EBITDA (2020E).

Capital has clearly been flowing into the top Korean F&B stocks pushing up share prices of Ottogi, CJ Cheiljedang, Nongshim, Orion Corp, and Samyang F&B this year. This strategy of overweighing on the F&B sector in the midst of the global COVID-19 pandemic has been a safe and sound strategy for many fund managers. 

5. Alibaba – No Softbank Placement Overhang, Going into HSI and HSCEI

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In Mar 2020, Softbank Group (9984 JP) had announced that it would sell assets worth US$41bn in order to fund the repurchase of US$18bn worth of its own shares, with the balance amount to be used for debt repayments.

As per media reports it was expected to raise around US$14-15bn of that amount via selling down part of its 25.2% stake in Alibaba Group (BABA US). I had a look at the possible implications of the deal in my earlier insight, Alibaba’s Softbank Driven Placement – Sounds Big but May Not Be as Large in the End.

Softbank reported its results today and also provided some updates on its proposed financing through Alibaba shares.

In addition, Hang Seng Indexes today announced the results of its review regarding eligibility of weighted voting rights companies and secondary-listed companies for inclusion in the Hang Seng Index (HSI) and Hang Seng China Enterprise Index (HSCEI).

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Brief Multi-Strategy: Japan Proxy Season – Power to the People and more

By | Daily Briefs, Multi Strategy

In this briefing:

  1. Japan Proxy Season – Power to the People
  2. Legend Biotech IPO Initiation: Choosing Therapies À La CAR-T
  3. Exasol IPO Initiation: Crunching the Numbers
  4. Weekly Oil Views: Prices to Inch up in Lockstep with the World’s Reopening
  5. The Week That Was in [email protected] – BUY Staples, Indonesian Telcos, and Thai Brokers

1. Japan Proxy Season – Power to the People

Shareholders are the owners, and owners have the power. I doubt that John Lennon would have written a song about shareholders, but if he had, that is what he would have said.  

Shareholders would have been eagerly anticipating this year’s proxy season in Japan. Over the past three years, momentum had been building, with more and more shareholders exercising their right to put proposals to the will of the majority. 

COVID-19 has probably taken some of the wind out of the activists’ sails, at least for this year. Still, we count fourteen proposals delivered so far and we dig a little deeper into the upcoming votes at Takeda Pharmaceutical (4502 JP) , Shinsei Bank (8303 JP) , Mitsubishi Logistics (9301 JP) and Mitsui Mining & Smelting Co (5706 JP) 

2. Legend Biotech IPO Initiation: Choosing Therapies À La CAR-T

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Legend Biotech (BLG US) is one of the leading companies in developing CAR-T cell therapies in China, having received clearance for the first CAR-T cell therapy IND application by the NMPA. Legend is a majority-owned (76.9%) subsidiary of Genscript Biotech (1548 HK). Legend has filed for a Nasdaq IPO to raise proceeds $300 million, according to press reports. 

Legend’s lead product candidate is LCAR-B38M/JNJ-4528 which is being co-developed with Janssen, which is owned by Johnson & Johnson (JNJ US). LCAR-B38M refers to the product candidate being studied in China, and JNJ-4528, refers to the product candidate being studied in the rest of the world. Overall, we believe that the solid prospects for the lead product along with the strong shareholder register make the IPO worth a closer look. 

3. Exasol IPO Initiation: Crunching the Numbers

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Exasol (EXA GR) is a database technology company which enables customers to access and analyse data at high speed and scale. Exasol has launched its IPO on the Frankfurt Stock Exchange. The IPO price range has been set at €8.50-10.50 per share. The IPO will raise total proceeds of €78-97 million, out of which Exasol will receive gross proceeds of €50 million. The offering period starts on 15 May and ends on 20 May 2020. 

Like peers, Exasol will be impacted by the corona pandemic as customers reassess or postpone investments in IT infrastructure. Exasol is mitigating the potential top-line impact through a reduction in its cost base. While the timing of the IPO is not ideal, we think that on a longer-term view, Exasol fundamentals offer more positives than negatives. In combination with an attractive valuation, we would be tempted to participate in the IPO.

4. Weekly Oil Views: Prices to Inch up in Lockstep with the World’s Reopening

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As the world tiptoes out of the coronavirus lockdowns, Crude Oil (CRUDE OIL COMDTY) prices have begun their slow ascent.

The risk-off sentiment in the oil market in the first half of last week triggered by reports of fresh outbreaks in China, South Korea and Germany — economies in the process of reopening — had given way to optimism and tentative confidence in the second half.

All three managed to contain and control the clusters through rigorous tracking and testing and averted the need to snap back to stringent containment measures. While that is not necessarily a blueprint for how the rest of the reopening across the world will proceed, we offer a view on how it is likely to play out. Demand recovery is currently the most important piece in the oil market rebalancing puzzle. 

Meanwhile, the market is counting down to May 19, the day the June WTI contract expires. Will it go the same way as May, into negative territory? We have some clues for you.

5. The Week That Was in [email protected] – BUY Staples, Indonesian Telcos, and Thai Brokers

This past week’s offering of Insights across [email protected] is filled with another eclectic mix of differentiated, substantive and actionable insights from across South East Asia and includes macro, top-down and thematic pieces, as well as actionable equity bottom-up and credit insights.

Please find a brief summary below, with a fuller write up in the detailed section. We also include in the detailed section the past week’s relevant discussions in [email protected]

This week sees Smartkarma host its digital conference INSIGHT 2020, a Digital-First, Asia-focused Investment Conference in Support of COVID-19 Relief Efforts. For more details please refer to the following link:

INSIGHT 2020: https://www.smartkarma.com/home/insight2020/#form

Macro Insights

In CrossASEAN Strategy – The Penny Drops for Indonesia – Buy Staples, CrossASEAN Insight Provider Angus Mackintosh highlights a number of recent positives for Indonesia but continues to recommend a defensive approach with a positive view on staples and specifically Unilever Indonesia (UNVR IJ).

In Thai Corona Crisis (May): HomeComing and Back to Business Themes, our Thai guru Athaporn Arayasantiparb, CFA zeros in on Thailand’s moves to get back to business coming out from COVID-19 restrictions. 

In How Are Asian Investors Positioning Their Portfolios?,Michael J. Howell takes a look at Investors positioning and finds the potential for further upgrades to equity weightings ahead.

Equity Bottom-Up Insights

In PT Surya Citra Media Tbk (SCMA IJ) – Re-Runs Save the Day, CrossASEAN Insight Provider Angus Mackintosh revisits this leading Indonesian media player post a call with management. 

In XL Axiata (EXCL IJ) – Defensive Data Growth with a Fibre Twist,Angus Mackintosh circles back to XL Axiata (EXCL IJ) post its recent 1Q2020 results and a call with management.

In Sunpower (SPWG): Risk/Reward Rarely Been Better; Fair Value Remains at 1 SGD or 142% Upside, CrossASEAN Insight Provider Nicolas Van Broekhoven revisits this tech player and finds an attractive picture. 

In DRB Hi Com: Winner in COVID-19 Malaysian Auto Segment, CrossASEAN Insight Provider revisits this Malaysian auto player in light of the impact of COVID-19. 

In Permata Bank Q1 Announced; MTO Likely On Its Way,Travis Lundy circles back to Bank Permata (BNLI IJ) post it’s recent results. 

In Golden Land (GOLD TB): Delisting Offer,David Blennerhassett zooms in on the potential delisting offer for high-quality Thai property company Golden Land Property (GOLD TB).

In Singapore Air Rights Entitlements – Flow Dynamics,Travis Lundy provided his views on how investors should deal with Singapore Airlines (SIA SP) rights entitlements.

In CBG: The Best Pick Amid COVID-19 Outbreak, our friends at Country Group upgrade Carabao Group (CBG TB) from HOLD to BUY rating with a new target price of Bt110 based on 33x FY20E PER (Previous TP was Bt89), close to the average of the Thailand Beverage group.

In SCCC: Negative Outlook Should Already Priced In,Country Group maintains a BUY rating on Siam City Cement (SCCC TB) with new 2020E target price at Bt139.0 (from Bt229.00), derived from 14.2xPE’20E, which is currently trading of Asia ex. Japan materials peers. 

In PTTEP: 1Q20 Results Above Our Expectation,Country Group circle back to Thailand’s largest Oil & Gas E&P company. 

In ASIAN: Foresee an Improvement YoY Thanks to Baht Weakness,Country Group circle back to ASIAN, which saw its profit skyrocket to Bt105m (76%YoY, 576%QoQ), the highest level in the past six quarters. 

In Back to Normal Operation from 2Q20E Onwards,Country Group revisit Tipco Asphalt (TASCO TB) which held an analysts meeting held yesterday and came out with a positive tone for the remaining quarters this year. 

In M: Expect 2Q20 Performance to Bottom Out,Country Group maintain their HOLD rating but cut their target price by 9% to Bt50 (25xPE’21E, a 20% premium to the Asia ex-Japan consumer staple sector). 

In AWC: Fastest-Growing Hotel Chain in Thailand,Country Group initiate coverage of Asset World Corporation (AWC TB) with a HOLD rating, based on a target price of Bt4.90, derived from a DCF methodology (WACC of 6.0%, terminal growth of 3%).

In SIS: Cheap Valuation with Solid Earnings Growth,Country Group circle back to Sis Distribution Thailand Pc (SIS TB) post its recent 1Q2020 results.  

In 1Q20 Core Earnings Grew from 50% Capacity Expansion in 2019,Country Group revisit B Grimm Power (BGRIM TB) following the release of 1Q2020 results. 

In SPCG: Stable Earnings,Country Group revisit Spcg Pcl (SPCG TB) and maintain a Neutral rating on SPCG with new 2020E target price at Bt18.80 (from Bt22.80), derived from a discounted cash flow valuation (WACC 7.3% and terminal growth of 1.0%). 

In QH: Expect 2Q20 to Be the Bottom Quarter,Country Group circle back to Quality Houses (QH TB) post its recent 1Q2020 earnings. 

Sector and Thematic Insights

In the third part in a series, Thai M&A (Part 3): Consolidating the Thai Wall Street, our Thai guru Athaporn Arayasantiparb, CFA looks at M&A in the Thai broking industry. 

In MSCI ASEAN May 20th Index Review – Big Turnover in Indonesia,Brian Freitas assesses the impact on the semi-annual review for its MSCI ASEAN Index constituents. 

Credit Insights

In Garuda Indonesia – Event Flash – Government Drafting USD 1 Bn Rescue Package,Lucror Analytics look at the most recent plans for a rescue package for Garuda Indonesia (Persero) (GIAA IJ).

In Bayan Resources – Earnings Flash – Q1 FY 2020 Results,Lucror Analytics look at the recent results from Bayan Resources (BYAN IJ).

In Olam – Earnings Flash – FY 2019 Results,Lucror Analytics revisit Olam International (OLAM SP) post the release of its earnings. 

In Lippo Karawaci – Event Flash – Investor Update,Lucror Analytics revisits Lippo Karawaci (LPKR IJ) post its recent results call. 

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Brief Multi-Strategy: 🇯🇵 JAPAN • Results & Revisions 20th May – Shimadzu, Amada, Funai Soken, Kobe Bussan and more

By | Daily Briefs, Multi Strategy

In this briefing:

  1. 🇯🇵 JAPAN • Results & Revisions 20th May – Shimadzu, Amada, Funai Soken, Kobe Bussan
  2. After Covid: The Future for Japanese Retail: Winners & Losers
  3. UK: Disinflation in Apr-20 Confirms Dovish Space
  4. Historical TOPIX Inclusions:  What Flavor Performs Best?
  5. Yeahka IPO: Valuation Insights

1. 🇯🇵 JAPAN • Results & Revisions 20th May – Shimadzu, Amada, Funai Soken, Kobe Bussan

2020 05 21 07 34 55

Shimadzu (7701 JP) 

Source • Japan Analytics

In the DETAIL below, we shall review yesterday’s announcements:-

  • The balance between positive/neutral/negative of the 771 results announcements was 32:10:35. The average change in Results Score was -0.6.
  • For the 44 revisions/initial forecasts, the split was 15:4:25, and the average Forecast/Revision Score was -4.2. 51% of companies reporting full-year results chose to make current year forecasts. 

2. After Covid: The Future for Japanese Retail: Winners & Losers

Persol

No one really knows what will happen after the initial shock of the coronavirus fades away. Many observers in Japan, expert and otherwise, are already predicting a completely new world in one way or another, but the reality is likely more prosaic.

What is certain is that the Japanese consumer economy will recover and it is just a question of when.

The most likely effect of the crisis is that it will catalyse a period of change already in process and which also happens to be one of the most dramatic and far-reaching seen so far in retail.

But there is one trend that may well reverse as more businesses go under or contract, providing relief for many retailers: the labour shortage and rise in wages.

The following offers an in-depth review of both the impact of the current crisis and implications as well as the long-term trends in Japanese retailing, providing insight into which sectors, formats and specific companies will win and lose in the next three years.

For a short read, we provide the conclusions and winners and losers first.

3. UK: Disinflation in Apr-20 Confirms Dovish Space

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  • UK inflation data slowed sharply in April, but the 110bp fall in the RPI was only 2bp more than I expected, as the index rounded down to stay at 292.6 instead.
  • Clothing’s record price decline, together with a surprise cheapening in financial services, weighed especially heavily on the CPI. That news was offset in the RPI by MIPs’ failure to fall as rates did, probably because of product churn.
  • Another slight decline remains likely in May, ahead of reaching my forecast trough of 0.5% y-o-y on the CPI in Jul-20. The depth of the decline and duration below-target provides the BoE with a clear dovish path, despite less bleak activity data.

4. Historical TOPIX Inclusions:  What Flavor Performs Best?

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When Stocks listed on JASDAQ, MOTHERS, and the Second Section of the Tokyo Stock Exchange aim at the big leagues and apply for reassignment to the First Section of the Tokyo Stock Exchange, when accepted, it causes significant events to occur.

The reassignment to the First Section of the TSE triggers inclusion into the TOPIX Index which means passive funds tracking TOPIX need to buy on an inclusion event.  This sounds minor, and technical, and horribly un-fundamental, but making money in the markets is often about choosing price and time and liquidity. These events present several interesting trading opportunities. 

The Quiddity team, especially Travis Lundy, has been covering such situations for 20 years and as a supplement to our insights on individual TOPIX inclusion cases, we are providing this thematic guide to help investors understand how the index inclusion parameters influence stock returns.  

In this insight, we provide our opinion on how to use inclusion parameters to identify situations with above-average return:risk characteristics. 

Read below to find out.  

5. Yeahka IPO: Valuation Insights

Forecasts

Yeahka Limited (9923 HK) is a leading payment-based technology platform in China. It is the second-largest non-bank independent QR Code payment service provider in China, with a 14.0% market share as measured by average daily transaction count in 2019, according to Oliver Wyman. Yeahka has launched a Hong Kong IPO to raise net proceeds of $148-197 million.

In our initiation note, we stated that peeling back the benefit of market growth, Yeahka’s fundamentals offer more positives than negatives. In our PHIP update note, we stated that the 2019 results, continues to reinforce our view and believe Yeahka is worth a look. Overall, we think that a reasonable valuation makes Yeahka tempting at the proposed pricing range.  

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Brief Multi-Strategy: U.S. Equity Strategy: Round Trip Back To Resistance and more

By | Daily Briefs, Multi Strategy

In this briefing:

  1. U.S. Equity Strategy: Round Trip Back To Resistance
  2. 🇯🇵 JAPAN • Results & Revisions 19th May – SEI, Kotobuki Spirits, Autobacs Seven
  3. UK: Still Defying Dismally Dire Expectations
  4. Semiconductor WFE. Supply Constrained For Now With An Upbeat Outlook For CY 2020 Overall
  5. Nongfu Spring Pre-IPO – Peer Comparison – Superior Margins and Growth

1. U.S. Equity Strategy: Round Trip Back To Resistance

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Our base case continues to be for near-term consolidation while the market determines the implications of states’ reopening (i.e., the “wait-and-see” phase). Until this consolidation period resolves below support or above resistance we are maintaining a relatively neutral stance considering the wide range of outcomes. Many major indexes are testing logical resistance and until we see breakouts it is hard to get too bullish. In this report we highlight attractive stocks from a RS perspective.

2. 🇯🇵 JAPAN • Results & Revisions 19th May – SEI, Kotobuki Spirits, Autobacs Seven

2020 05 20 07 20 13

Source • Japan Analytics

STRAGGLERS – As we wind down this series of Insights, the ‘gap’ between our proxies for earnings and Total Market Cap is now the largest in fifteen years, courtesy of central bank liquidity injections. Our lagging Results Score has yet to breach the 2016 ‘low’, a creditable outcome but will do so by August. We still await annual results for ‘stragglers’ Recruit (6098 JP), Tokio Marine (8766 JP), Nissan Motor (7201 JP), Hitachi (6501 JP), Fujifilm (4901 JP), Toshiba (6502 JP), and Hikari Tsushin (9435 JP)

in the DETAIL below, we shall review Monday’s updates:-

  • The balance between positive/neutral/negative of the 51 results announcements was 21:3:27. The average change in Results Score was -1.1.
  • For the 24 revisions/initial forecasts, the split was 8:1:15, and the average Forecast/Revision Score was -5.4. Again less than 50% of companies reporting full-year results chose to make current year forecasts.

3. UK: Still Defying Dismally Dire Expectations

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  • The unemployment rate dipped back to 3.9% in March contrary to widespread expectations for a rise. Low response rates seem to have biased this down slightly.
  • Unfortunately, this surprise says more about the dire quality of forecasts than the economic state. There was never going to be an immediate surge under the ILO definition, and economists should know better, especially at the BoE.
  • A higher UR is inevitable, with vacancies currently pointing to 5.5-6.5%. Claims have risen much more, but applications need not continue (it is still only 60% in the US) nor qualify under the ILO definition. I remain much less gloomy short-term.

4. Semiconductor WFE. Supply Constrained For Now With An Upbeat Outlook For CY 2020 Overall

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With Applied Materials (AMAT US)’s  report last week, first quarter results are now complete for the top 5 semiconductor WFE companies globally. Combined revenues for the group amounted to $13.6 billion, down 11.6% sequentially but nonetheless up 8.3% YoY. While all reported challenges with shipping and logistics, AMAT and ASML Holding NV (ASML NA) were the most impacted in terms of missed shipments during the quarter. However, both companies still expect those shipments to be completed in the current or later quarters. 

In keeping with their peers in other segments of the semiconductor industry, current quarter and full year guidance was in short supply. Nonetheless, all five presented upbeat outlooks, noting strong CapEx spending plans, no order cancellations of any significance and particular strength in logic and foundry. Furthermore, capacity-related memory spending,  which had been a headwind for the past six quarters, would appear to have troughed and likely to be flat to slightly up through the remainder of the year. 

5. Nongfu Spring Pre-IPO – Peer Comparison – Superior Margins and Growth

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Nongfu Spring (NON HK) is looking to raise up to US$1bn in its Hong Kong listing. The company is the market leader in packaged drinking water in China.

Apart from packaged drinking water, it is also one of the leading players in tea, functional beverages and juice segments. 

Earnings growth has been relatively steady and the business remains highly cash generative. There is a lot to like in the business. 

Although, it has paid out generous dividends in 2019 and plans to payout more before listing. Thus, the need for listing is questionable, even more so if they try to pass it off as a primary issuance after paying out over US$2bn as dividends. Furthermore, the utilisation rates for its production facilities remain sub-par which calls into question the need to build further capacity. 

In my earlier note, I spoke about the company and its past performance:

In this note, I’ll compare the company to some of its listed peers.

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Brief Multi-Strategy: US-China Technology Battle Will Force Asia’s Hand When China Falls Short of Phase One Deal Goals and more

By | Daily Briefs, Multi Strategy

In this briefing:

  1. US-China Technology Battle Will Force Asia’s Hand When China Falls Short of Phase One Deal Goals
  2. Manufacturing Surge Is Tempering the Magnitude of Recession
  3. First Major Change in 30 Years of How Telecom Rates Are Set in Korea
  4. China Property Weekly: Real Estate Investment Rebounds,Mortgage Lending Rate Continues to Decline.
  5. SK Holdings: Strong Momentum from SK Biopharm IPO & Updated SoTP Valuation Analysis

1. US-China Technology Battle Will Force Asia’s Hand When China Falls Short of Phase One Deal Goals

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The fallout between the US and China from the COVID-19 pandemic could potentially unravel the Phase One trade deal signed earlier this year. Current economic conditions make it difficult for China to significantly ramp up imports from the US of agricultural, manufactured and energy products as stipulated in the agreement.

China’s imports from the US in Q1 were significantly lower compared to a year earlier, thereby implying that larger and lumpier purchases will be required in the future to meet Phase One targets of approximately $30bn per month. The strength of the economic recovery in China will ultimately determine the chances of reaching the aggregate $200bn of additional US imports by the end of next year.

China could potentially invoke the disaster clause in the Phase One deal to absolve herself of responsibility for failing to meet Phase One import targets, but it is not “force majeure” in nature. While both China and the US share common short-term goals in trying to revive their economies from the COVID-19 pandemic, deferring tough trade decisions could simply create a lingering sense of uncertainty that would be  detrimental to both companies and financial markets.

Global technological leadership remains the main battleground between China and the US. Future de-coupling in the realm of technology ecological systems will impact Asian supply chains, as well as the world economy due to its importance as a growth driver.

Hitherto, Asian technology supply chains have been to serve both Chinese and US finished goods manufacturers, but this may change as the US restricts China’s access to US-sourced technology. Asian supply chains may have to choose between two competing technological ecological systems, while global supply chains will also come under further strain.

2. Manufacturing Surge Is Tempering the Magnitude of Recession

We are revising up our forecast of Singapore’s real GDP growth in 2020, to +1.5% (from -1% previously) because of the remarkable resilience of manufacturing and NODX (non-oil domestic exports). Coupled with the massive 11% of GDP fiscal stimulus and mild monetary easing, Singapore’s recession in 1H 2020 will be much milder than we previously anticipated, with the stimulus (central to which is massive support for employers to retain employees this year) still likely to boost real GDP growth in 2H 2020. 

Singapore’s manufacturing sector had contracted for 15 months (4Q 2018 and right through 2019), but began recovering in January 2020 and hasn’t looked back in the subsequent 3 months. Non-oil domestic exports (NODX) have consequently grown 10.2% YoY in the latest 3 months (Feb-Apr 2020). Even amid the partial lockdown, NODX still managed to expand 9.7% YoY in April 2020, led by pharmaceuticals (+174.1% YoY) and food preparations (+66.3% YoY). In March 2020, manufacturing output expanded 16.5% YoY (far outpacing the implicit estimate of a 4% YoY contraction, on which the Advance estimate of 1Q 2020 GDP was based).  

Non-oil retained imports (NORI), normally an excellent 1-month leading indicator of NODX, expanded 38.1% YoY in April 2020, suggesting that May will be another strong month for NODX and manufacturing. Singapore’s cyclical manufacturing sector is clearly in a robust upswing. However, the services sector (much of it very dependent on inflows of foreign tourists) will remain deep in the doldrums. The trade data contains another reminder of this, with total trade declining 12.8% YoY in April 2020. Singapore’s services sector will contract very sharply in 2Q 2020; even with the ameliorative impact of the manufacturing surge, real GDP should still contract nearly 10% YoY in 2Q 2020. However, Singapore’s economy will be buoyed in 2H 2020 by the massive fiscal stimulus (11% of GDP), central to which is a Job Support program that pays 75% of all wages in 2020 for the tourism-related sectors, 50% for food-services and 25% of all 2020 wages for all other sector. With manufacturing holding up much better than expected in 1H 2020, we forecast +1.5% real GDP growth in 2020. We remain bullish on Singapore. The Singapore banks ( Oversea Chinese Banking Corp. (OCBC SP) , DBS Group Holdings (DBS SP) and United Overseas Bank (UOB SP) ) and benchmark property stock City Developments (CIT SP) provide good exposure to this theme. 

3. First Major Change in 30 Years of How Telecom Rates Are Set in Korea

Skt 1

On 20 May, there was an important announcement made regarding how the telecom rates are set in Korea. This would be the first major change in how the telecom rates are established in Korea in 30 years (since 1991). Under the revised laws (which has been approved by the National Assembly), the SK Telecom and KT Corp will be able to provide “widened telecom pay plans” for mobile services and fixed-line telephone services, respectively and they will be able to set their own pay plan rates. The previous plan which included a lot more government pressure has been in place for nearly 30 years. 

Overall, we believe this change will have a greater positive impact on SK Telecom than KT or LG Uplus as the concerns about one of the biggest risk factors on SK Telecom which has been the continued government pressure to lower rates could be modestly relieved. 

We discussed with SK Telecom and KT Corp today regarding the changes in how the telecom tariff rates are set. They mentioned that in the long run, these changes could have a positive impact on the Korean telecom sector since the government may have less pressure on setting the telecom rates in Korea. This change in setting telecom tariff rates has been discussed for more than a decade and finally, it was passed in the National Assembly. The near-term impact on the local telcos appears to be less certain since the tariff rates are already set for this year and the next rounds of changes in telecom rate changes are not likely until next year. 

4. China Property Weekly: Real Estate Investment Rebounds,Mortgage Lending Rate Continues to Decline.

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We are seeing clues of the potential formation of a new package of structural reforms involving rural land reform, hukou reform, key region city cluster policy/new FTZs, and related financing policy (e.g. infrastructure REITs) in this year.We expected those policies might change China real estate industry prospect soon.

As near the end of the April-May traditional peak season, many cities are issuing local property market support measures. Even though these are of moderate or mild strength, for example, eased access to low-interest home accumulation fund loans, they will bolster market sentiment. Meanwhile, home sales continue to improve in last week,this may be due to many large developers offering deeper discounts in the past few months and advancing presales in a bid to recoup funds, as well as stricter price controls in Tier 1 cities. 

China’s central bank keeps its benchmark lending rate steady on Wednesday and we expect monetary policy support to be more targeted such as targeted RRR-cuts.  We still expect deteriorating US-China trade relations, and the impact of COVID-19 will trigger more liquidity easing and indirectly provided support for China real estate industry.

  • China property investment rebounds in April likely continued see positive property investment data in May
  • 50 out of the 70 cities surveyed by the NBS reported rising home prices on a mom basis the highest number since September 2019
  • Rong 360 data shows that national mortgage lending rate continues to decline in May 
  • 30 cities home sales data shows gradual improvement in the first 17days of May 
  • More province and cities loosen hukou restriction to support the property market in May

5. SK Holdings: Strong Momentum from SK Biopharm IPO & Updated SoTP Valuation Analysis

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SK Holdings (034730 KS)‘s share price has been on a tear lately. SK Holdings’ share price is up 116% since 19 March, although it is still down 15% on a YTD basis. Yesterday, SK Holdings’ share price surged by 10.2% to 222,000 won, on the back of the SK Biopharm IPO filing. Plus, SK Holdings (034730 KS) announced yesterday that Ampak Fine Chemicals (a raw materials pharmaceutical production company of SK Pharmteco), has been selected by the U.S. Ministry of Health and Welfare as a key supplier of essential medical products needed in responding against the COVID-19 pandemic outbreak.

In this insight, we provide an updated sum-of-the-parts (SoTP) valuation on SK Holdings (034730 KS). Our base case valuation of SK Holdings is 304,269 won, which represents a 37% upside from current levels. 

In our base-case valuation analysis, the combined value of the listed companies is 9.9 trillion won. The combined value of the unlisted companies is 15.6 trillion won. In our base case, we have assumed 3.8 trillion won in value for SK Biopharm, which represents the high end of the IPO valuation level of 49,000 won. In our base case, the value of the company’s operations is estimated at 8.9 trillion won, using a 6x Operating profit of 1.5 trillion won in 2019. In addition, we used a 30% holdco discount in our base case.

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Brief Multi-Strategy: Lotte Chemical Is Buying Showa Denko Shares in Market: Now Holds 4.46% and more

By | Daily Briefs, Multi Strategy

In this briefing:

  1. Lotte Chemical Is Buying Showa Denko Shares in Market: Now Holds 4.46%
  2. Hong Kong Buybacks League Table: China Evergrande, Yanzhou Coal, Ronshine
  3. 🇯🇵 JAPAN • Results & Revisions 21st May – Skylark, Resorttrust, Makita
  4. Lessons Learnt from Q1 Collapse in Global GDP
  5. Jeju Air: A Rights Offering Size Representing 46% of Shares Outstanding

1. Lotte Chemical Is Buying Showa Denko Shares in Market: Now Holds 4.46%

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What a surprise. Lotte Chemical, once pursuing Hitachi Chemical, is now owning a 4.46% stake in Showa Denko, which beat Lotte in the Hitachi Chemical race.


Below is Lotte Chemical’s regulatory filing for the 1Q quarterly report. Here, it says that it owns a 4.46% stake.

(Source: DART)

How exactly did Lotte do it?

Lotte disclosed in the same regulatory filing that it had begun to buy Showa Denko shares on March 13. In March, it had amassed a total of 3.8M shares (2.54%) for ₩88.4bil. Then in April, it had bought other 2.87M shares (1.92%) for ₩73.3bil, bringing up the total to 6.67M shares (4.46%).

Block deals or bought directly in the market?

There have been no official words on how Lotte had obtained these shares. But the local street speculates that Lotte had purchased the shares in the market. Below is the latest news report that quotes one industry source saying that Lotte had acquired the shares directly in the market in small quantities from March to April this year.

(Source: The Asia Business Daily – May 22, 2020)

2. Hong Kong Buybacks League Table: China Evergrande, Yanzhou Coal, Ronshine

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Hong Kong Exchange publishes share repurchases by listed companies on a daily basis. In our weekly note, we will provide statistics on top repurchases over one week, one month, one quarter and one year periods ended on May 22.

In the past 7 days, the top 3 companies that repurchased the most shares from the market were Evergrande Real Estate Group (3333 HK) (HKD 301.7 million worth of buybacks), Yanzhou Coal Mining Co H (1171 HK) (HKD 73.3 million worth of buybacks), Ronshine China Holdings (3301 HK) (HKD 25.6 million worth of buybacks).

In the past 30 days, the top 3 companies that repurchased the most shares from the market were China Evergrande Group (3333 HK) (HKD 912.8 million worth of buybacks), Yanzhou Coal Mining Company Limited (1171 HK) (HKD 298.0 million worth of buybacks), Yichang Hec Changjiang Pharmaceutical Co., Ltd. (1558 HK) (HKD 120.9 million worth of buybacks).

In the past 90 days, the top 3 companies that repurchased the most shares from the market were China Evergrande Group (3333 HK) (HKD 912.8 million worth of buybacks), New World Development Co Ltd (17 HK) (HKD 571.5 million worth of buybacks), Xiaomi Corporation (1810 HK) (HKD 499.5 million worth of buybacks).

In the past 365 days, the top 3 companies that repurchased the most shares from the market were Hsbc Holdings Plc (5 HK) (HKD 7,813.7 million worth of buybacks), Link Reit (823 HK) (HKD 4,156.7 million worth of buybacks), Xiaomi Corporation (1810 HK) (HKD 3,413.8 million worth of buybacks).

3. 🇯🇵 JAPAN • Results & Revisions 21st May – Skylark, Resorttrust, Makita

2020 05 22 06 43 17

Source • Japan Analytics

In the DETAIL below, we shall review yesterday’s announcements:-

  • The balance between positive/neutral/negative of the 54 results announcements was 18:7:29. The average change in Results Score was -2.1.
  • For the 24 revisions/initial forecasts, the split was 10:1:13, and the average Forecast/Revision Score was -3.3. Only one-third of companies reporting full-year results chose to make current year forecasts. 
  • 104 companies will announce results today, including FUJIFILM (4901 JP), Meiji (2269 JP), and Tokyu (9005 JP).  

4. Lessons Learnt from Q1 Collapse in Global GDP

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Global GDP growth, in year-on-year terms, slowed to -2.7% in Q12020  from +3.1% in Q4 2019 and in quarter-on-quarter terms to -4.5% from +0.6% in Q4, based on growth rates in 14 major economies accounting for close to 90% of world GDP.

Global GDP growth in Q1 was at its weakest in over thirty years, at least in quarter-on-quarter terms. By comparison the growth slowdown in 2008 was both less acute and more gradual even if it did gather pace in the second half of the year.

Almost two year’s worth of GDP growth was wiped out in Q1 2020 and the world was very much in recession for the first time since 2009, based on the IMF’s definition.

Global GDP in nominal terms was about $4.5trn lower than it would have been had real GDP growth remain unchanged in Q1 2020 at around 0.7% qoq, according to our estimates. That is a loss equivalent to somewhere between the annual GDP of Germany and Japan.

Among the 14 major economies which have so far released GDP data for Q1 only Chile recorded positive quarter-on-quarter growth.

The economies of Hong Kong and Japan were already in recession in Q1 and the European Union, United Kingdom, Canada and Thailand only narrowly missed being in recession, thanks to slightly above zero GDP growth in Q4 2019.

These major economies were already weak even before they were fully put into lockdown due to domestic growth headwinds not related to covid-19.

Nevertheless, unsurprisingly GDP growth contracted more sharply in Q1 in countries which instituted early and/or aggressive national lockdowns (e.g. many Asian economies and Eurozone economies, including Italy, France and Spain).

Conversely, economies which i) did not introduce national lockdowns (e.g. Sweden), ii) introduced them later (e.g. United Kingdom) or only partially (e.g. United States) or iii) introduced “softer” versions of lockdown (e.g. UK) recorded smaller GDP contractions.

5. Jeju Air: A Rights Offering Size Representing 46% of Shares Outstanding

Jeju c

  • After the market close today, Jeju Air (089590 KS), the biggest LCC (low-cost carrier) in Korea, announced a rights offering of 170 billion won (12.14 million shares). This represents about 46% of shares outstanding. Ak Holdings Inc (006840 KS), the holding company of the Aekyung Group, holds a 56.94% stake in Jeju Air. 
  • The consensus currently expects Jeju Air to turn positive 42.7 billion won in 2021 from an estimated net loss of 179.4 billion won in 2020. Considering the fact that the company already incurred a net loss of 101.4 billion won in 1Q 2020, the full-year consensus net loss estimate 179.4 billion won in 2020 appears too optimistic, especially considering the very poor 1Q 2020 earnings. 
  • Although Jeju Air’s share price is down nearly 50% since its highs in 2019, the stock price has recovered nicely (up 63%) since the recent lows in March 23rd. We think that the share price is still overvalued and we think there is more than 30% downside risk over the next six months. 

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Brief Multi-Strategy: What Gold Tells Us About Confidence and more

By | Daily Briefs, Multi Strategy

In this briefing:

  1. What Gold Tells Us About Confidence
  2. Short Interest Spiked for Meituan, HSBC and CR Beer
  3. The New “KOSPI Ex-KOSPI 200 Index” Outperforming KOSPI 200 Index In the Past Month
  4. UK: Scaling the Apr-20 Sales Hit to GDP
  5. India – Bets Are Off

1. What Gold Tells Us About Confidence

Image 885466702131590281993346

Last week, we highlighted a comment by Joe Wiesenthal at Bloomberg when he focused on the stock/gold ratio as a barometer of optimism and pessimism (see The Small Business Economic Barometer). We would go further to characterize the ratio as a barometer of investment confidence in human ingenuity.

It’s such a pure and simple expression of optimism versus pessimism. When you bet on stocks you’re betting on humans endeavoring to do productive things. When you bet on a shiny inert metal you’re betting on a shiny inert metal.

The chart of the stock/gold ratio surprisingly revealed that it peaked in the summer of 2018 and it has been falling ever since. Since that 2018 peak, both stock and gold prices have climbed, but gold has outpaced stocks. The decline in the stock/gold ratio is worrisome for long-term equity investors.

We believe the outlook for equities faces a number of long-term headwinds, namely de-globalization, rising protectionism and a difficult growth outlook. Gold represents an insurance policy against falling investment confidence. Investors should re-evaluate their portfolio allocation policy in light of these factors affecting asset returns over the next decade.

2. Short Interest Spiked for Meituan, HSBC and CR Beer

Image 95111850121590217455243

Hong Kong SFC reported on today for aggregate short position on May 15. The aggregate short value for equities increased by $313m (+0.6%) WoW and increased by $1,989m (+3.6%) over the preceding four weeks.

Most shorted stocks by aggregate short value of positions are Ping An Insurance (Group) Company Of China, Ltd./2318 HK($9,467m, -2.2% WoW), Tencent Holdings Limited/700 HK($3,021m, -3.3% WoW), Baba-Sw/9988 HK($1,835m, +5.1% WoW), Xiaomi Corporation/1810 HK($1,316m, +5.7% WoW), Semiconductor Manufacturing International Corporation/981 HK($1,067m, -0.6% WoW).

3. The New “KOSPI Ex-KOSPI 200 Index” Outperforming KOSPI 200 Index In the Past Month

Kospi%20ex kospi200%20a

The Korea Exchange introduced a new, strange-sounding index called “KOSPI Ex-KOSPI 200” on April 27th. In the past one month, this KOSPI Ex-KOSPI 200 index is up 8.51%, far outperforming KOSPI 200 index which is up 4.1%. in the same period. Over the past three months, KOSPI Ex-KOSPI 200 index is up 1.0%, again outperforming KOSPI 200 which is down 12.5% in the same period. Over a longer period (past one year), KOSPI Ex-KOSPI 200 index is down 10.9%, underperforming KOSPI 200 which is down 2.4% in the same period. 

So far, the new KOSPI Ex-KOSPI 200 index’s performance has been excellent since its launch on April 27th, 2020. This index has clearly benefited from the strong market rebound from the crushing market decline in February to the third week of March. 

The rebalancing for KOSPI Ex-KOSPI 200 index is conducted twice a year (June and December at the same regular rebalancing day of KOSPI 200, the last trading day of the June and December delivery month for KOSPI 200 futures contracts).

4. UK: Scaling the Apr-20 Sales Hit to GDP

Image 79441581031590155170188

  • Retail sales collapsed by 18% m-o-m in Apr-20 (15% ex-fuel), taking the total decline to 22%. The overall hit appears to closely coincide with the rise in universal credit declarations, rather than preceding it at all.
  • Although the April hit was 3.5 times the size of March, this average scaling factor is distorted by the abrupt turn around for supermarkets and department stores. The average scaling factor is otherwise about 1.8, and less in the hardest-hit areas.
  • I have trimmed my Q2 GDP forecast by another 1pp to -11.5% q-o-q, which contains an average scaling factor of 1.7. The BoE’s -25% Q2 projection requires something nearer 4x, with little payback, despite many businesses reopening.

5. India – Bets Are Off

Capture

A recession is now baked in the cake. Prospects of India getting to the next sustainable private investment-led business cycle upswing have receded and the likelihood in the interim of another twin debt crisis, led by rising bank non-performing loans and corporate indebtedness, has grown. India can ill-afford the Covid-19 stimulus spending binge it has embarked on. The risk is that public finances are shot to pieces and that all the painful work done to resolve the ad loans problem in the public banks sector and in the private corporate sector is undone.

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Brief Japan: 🇯🇵 JAPAN • Results & Revisions 18th May – Panasonic, Komatsu, Terumo, Sundrug & The Corona Valley and more

By | Daily Briefs, Japan

In this briefing:

  1. 🇯🇵 JAPAN • Results & Revisions 18th May – Panasonic, Komatsu, Terumo, Sundrug & The Corona Valley
  2. Softbank Starts on Its ¥4.5trln Capital Plan – A Model for Bullishness
  3. Softbank Group Q4: Details of Asset Restructuring Are Becoming Clear as Vision Fund Losses Mount
  4. Japan Proxy Season – Power to the People
  5. Softbank Group: A Third Buyback Provides Cover for More Bad News

1. 🇯🇵 JAPAN • Results & Revisions 18th May – Panasonic, Komatsu, Terumo, Sundrug & The Corona Valley

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Source • Japan Analytics

As this quarter’s results and revisions announcements wind down, in the DETAIL below, we shall review Monday’s updates:-

  • The balance between positive/neutral/negative of the 50 results announcements was 23:2:25
  • For the 24 revisions/initial forecasts, the split was 6:0:18, and the average Revision Score was -6.1

2. Softbank Starts on Its ¥4.5trln Capital Plan – A Model for Bullishness

Screenshot%202020 05 18%20at%207.31.35%20pm

A bit over a year ago in early February 2019, Softbank Group (9984 JP) CEO Masayoshi Son went on a rant during the FYQ3 results announcement, saying that Softbank shares were too cheap compared to their investments. Softbank at that time announced a large buyback, (discussed in Softbank Buyback More Than It Appears To Be). The shares had closed the previous day at something like ¥4200 but they popped dramatically the next day and kept going up, rising 40+% over the next nine weeks. 

That marked a 19-year high.

Subsequently, results were not great, directors left, the shares fell, an IPO for WeWork was envisaged, and then later in the year dis-envisaged, then all hell broke loose as WeWork could not raise external funds, other Vision Fund investments slumped, articles were written questioning governance at the Vision Fund, directors left, there was a $7bn OP loss in Q2 with VF writedowns, and Masayoshi Son went on stage at Q2 earnings to suggest he had made mistakes.

Q3 looked like it was going to be bad but they kitchen-sinked Q2 and left the cleanup to Q4. 

The Q4 number was bad. There was a further large writedown and a total of ¥1.9trln impact on OP in the past year from these writedowns. Kirk Boodry wrote about what he expected in losses in Softbank Group: Deep Dive into Vision Fund’s $10bn in Expected Valuation Losses for This Quarter which is worth a read, and the Q4/FY results are covered by Kirk in Softbank Group Q4: Details of Asset Restructuring Are Becoming Clear as Vision Fund Losses Mount. Document links are…

  • Recognition of Special Losses in Subsidiaries and Associates here.
  • Difference between Forecasts and Actual Financial Results here.
  • FY19 Earnings Results here
  • Presentation here

Capital Changes

In early February 2020, someone let slip in the western press that Elliott Management had bought close to US$3bn of Softbank shares, and had met numerous times with Son-san and Softbank management. The expectation was that there was a) disappointment with the valuation and the huge 50+% discount to NAV, b) an expectation that by liquidating some assets and buying back stock, that could be remedied, and c) that improving stewardship processes at the Vision Fund the returns might be better and public appreciation of the assets therein might reflect in a lower discount to NAV. 

On 13 March, after global markets had started falling sharply Softbank Group (9984 JP)‘s board of directors announce a resolution to execute a buyback programme to buy back up to 145 million shares (7% of shares out) spending up to ¥500 billion over the following year. 

10 days later with markets in quasi-free-fall (and Softbank’s share price at its local nadir and at a 70% discount to NAV), the board announced a ¥4.5 trillion (USD 41 billion) Program to Repurchase Shares and Reduce Debt which would reduce assets, reduce debt, and buy back up to ¥2 trillion of shares. This was explicitly in addition to the then-current buyback noted above, but it had not started. 

The NEW News

The company announced on Friday 15 May after the close that it had repurchased 53.9mm shares for ¥234bn, adding to the 4.7mm shares bought in March with ¥16bn. It appears that the company bought back no shares from 1 May to 15 May. That left roughly ¥250bn to go on the ¥500bn programme. 

This morning 18 May 2020, the company announced that it was launching another buyback programme to buy back up to 135 million shares (6.7%) for up to ¥500bn programme. This is part of the above-noted ¥4.5trln Program to Repurchase Shares and Reduce Debt. 

The assumption til now has been that there would be some sales of shares, or margin loans taken out, or Mandatory Exchangeable structure, of or against Alibaba Group (BABA US) and/or T Mobile Us Inc (TMUS US) as the company announced a margin loan against a chunk of Softbank Corp (9434 JP) shares earlier this spring. 

The OTHER News this morning is that after 13 years as a director, former Alibaba CEO and Chairman Jack Ma is leaving the board, to be replaced by 1 internal and 2 external directors. This immediately increased speculation that Softbank intends to sell more Alibaba shares, but given how much capital Alibaba needs/wants to raise AND how much the combined total value of Alibaba Group (BABA US) and T Mobile Us Inc (TMUS US) shares held at US$167bn (not to mention a position of roughly $10bn in Softbank Corp (9434 JP) which could be sold and still maintain consolidated ownership), the actual sale of assets to execute the whole program might be limited to a relatively small portion of the BABA position given Masayoshi Son’s clear public regret with regard to previous BABA selldowns. I had (publicly) expected an exchangeable securities offering.

The THIRD Bit of News, now out early in the afternoon, is an article in the Wall Street Journal saying that Softbank may sell its stake in T Mobile Us Inc (TMUS US) (or a significant part of its stake) to Deutsche Telekom Ag (DTE GR) “at a slight discount.” While there is a shareholder agreement which locks up Softbank, because DT already owns 44%, one might expect they could get around this. That would be a very large win for Softbank. If Softbank sold $20bn to DT and $10bn to the public in the form of a Mandatory Exchangeable Security as they did with Alibaba shares a few years ago, that would a) increase share liquidity, b) eventually increase float, and c) cement DT’s consolidation on TMUS. Given the end of March price was about US$85, any price above that might be considered a ‘small win’ for Softbank.  At $85 it would be $26bn and adding the $5bn raised from the margin loan on Softbank Corp shares, they’d only need to do US$10bn in BABA shares. 

The FOURTH Bit of News comes today in the Earnings Announcement, which is that Softbank will raise US$11.5bn by hedging Alibaba shares in a combined collar plus forward transaction which resembles, in risk terms, the METS transaction from a few years ago, however unlike the METS transaction it reduces maturity peg risk for counterparts, allowing tighter pricing.  It appears from the document this is, in effect, complete. 

Assuming the fourth is done and the third is real, the question is about the size of the third – can they get the whole thing out? If not, what other asset might be for sale? And when?

What IS interesting however is that the combined news gives us clarity on the funding for the buyback, and a shareholder structure, float structure, and buyback structure is proposed below. 

3. Softbank Group Q4: Details of Asset Restructuring Are Becoming Clear as Vision Fund Losses Mount

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Softbank Group (9984 JP) Q4 and FY19 results came in slightly worse than its pre-announced guidance.  This was the largest loss in Softbank’s history driven by an inflection to cumulative losses for Vision Fund and continued repercussions from the collapse of WeWork, now worth $2.9bn vs 7.3bn last quarter.  Investors had been warned in advance, however, and announced buybacks that account for 26% of shares are more relevant to the share price especially as the initial efforts to fund those efforts have been identified. 

4. Japan Proxy Season – Power to the People

Shareholders are the owners, and owners have the power. I doubt that John Lennon would have written a song about shareholders, but if he had, that is what he would have said.  

Shareholders would have been eagerly anticipating this year’s proxy season in Japan. Over the past three years, momentum had been building, with more and more shareholders exercising their right to put proposals to the will of the majority. 

COVID-19 has probably taken some of the wind out of the activists’ sails, at least for this year. Still, we count fourteen proposals delivered so far and we dig a little deeper into the upcoming votes at Takeda Pharmaceutical (4502 JP) , Shinsei Bank (8303 JP) , Mitsubishi Logistics (9301 JP) and Mitsui Mining & Smelting Co (5706 JP) 

5. Softbank Group: A Third Buyback Provides Cover for More Bad News

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Softbank Group (9984 JP) announced a third major buyback on the eve of its Q4 report. This brings total commitments to ¥3 trillion ($28bn) and represents 30% of market cap assuming an average cost of ¥5,000/share.  With shares up 22% from the first buyback announcement and 44% from the second, it is surprising on the surface to see Softbank lining up a third program. News that Jack Ma has resigned from the board may be one trigger of softer sentiment although that more likely reflects Softbank plans to sell a large chunk of its Alibaba stake to fund these initiatives. We think it is more likely that Vision Fund news will get worse before it gets better (we’ll see in a few hours)  but a healthy boost to shareholder returns should keep investors onside and the share price up. 

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Brief Japan: SMFG  (8316 JP):  The New Leader and more

By | Daily Briefs, Japan

In this briefing:

  1. SMFG  (8316 JP):  The New Leader
  2. Softbank – Ma Follows Yanai and Schwartz Out the Door as PIF Looks to Collateralise Vision Fund
  3. MUFG  (8306 JP):  Dealing With a New Order
  4. A Second Major Wave of New COVID-19 Cases? – Watch Texas & Florida
  5. Providing Crack To An Addict Is Not A Sustainable Global Strategy

1. SMFG  (8316 JP):  The New Leader

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Rising to the challenge of an increasingly difficult operating environment, Sumitomo Mitsui Financial (8316 JP) managed to marginally beat its FY3/2020 consolidated net profits target and, in doing so, wrested the long-held crown from principal megabank rival Mitsubishi UFJ Financial (MUFG) (8306 JP)  as Japan’s most profitable bank.

SMFG reported FY3/2020 consolidated recurring profits of ¥932.06 billion (down 17.9% YoY) and net profits of ¥703.88 billion (3.1%) on lower revenues of ¥5.314 trillion (down 7.3% YoY).  Key drivers of the lower YoY results were reduced net interest income (despite strong loan growth of 5.8% YoY), lower trading profits and marginally higher General Administrative Expenses (GAE), only partially offset by higher net fee income.  Core earnings fell 8.2% YoY to ¥625.04 billion.  However, the biggest single impact on reported profits was the substantial jump in credit costs, which rose 54.8% YoY from ¥110.26 billion (15 basis points) in FY3/2019 to ¥170.64 billion (21 basis points) in FY3/2020.  This caused Net Operating Profits (core earnings less credit costs) to decline 20.4% YoY to ¥454.39 billion: SMFG’s worst performance since FY3/2017.

SMFG has raised its dividend to ¥190/share from ¥180/share for both FY3/2020 and FY3/2021 and has promised a ¥100 billion share buyback and share cancellation in FY3/2021.  On what initially looks to be an extremely conservative consolidated net profits target for FY3/2021 of ¥400.0 billion (suggesting a YoY decline of 43.2%), the dividend payout ratio for FY3/2021 looks to be around 65%.  Given that this level of profits would return the No.1 position to arch-rival MUFG, we expect SMFG to work hard during FY3/2021 to ensure that an upward revision to its profit target is realizable.

SMFG’s share price is down 29.3% on a 12-months basis and is down 32.0% in just the last six months.  While we remain negative on the Japanese banking sector as a whole, and expect FY3/2021 to be an extremely challenging time for all Japanese banks as the true economic impact of COVID-19 on both Japan’s domestic economy and the global economy becomes increasingly apparent, we believe that investors may find some comfort in owning SMFG over other Japanese bank stocks.  We caution, however, that because of SMFG’s position as a liquid stock with high foreign ownership, further downside risk to the stock price from current levels is certainly possible if foreign institutional investors urgently need to raise cash in Japan to meet global redemptions over the next few months.

2. Softbank – Ma Follows Yanai and Schwartz Out the Door as PIF Looks to Collateralise Vision Fund

In the face of monster losses from bets gone sour, the activity surrounding Softbank is looking increasingly… interesting. Over the weekend and early this morning we found out that the PIF, Saudi Arabias SWF was looking to raise USD10bn in margin loans potentially backed by its Vision Fund holdings (the PIF has denied this) and that Alibaba founder Jack Ma would be resigning from Softbank’s board. Curiouser and curiouser…

3. MUFG  (8306 JP):  Dealing With a New Order

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Mitsubishi UFJ Financial (MUFG) (8306 JP)has lost its long-held position as Japan’s most profitable megabank and, based on its FY3/2020 results announced on Friday 15 May 2020, is now down to the No.2 position having been eclipsed by Sumitomo Mitsui Financial (8316 JP).  Having revised its consolidated net profits target from ¥750 billion to ¥520 billion on 30 April 2020 (from an initial ¥900.0 billion on 15 May 2019), there were no surprises when MUFG reported consolidated net profits for FY3/2020 had fallen 39.5% YoY to ¥528.15 billion.  The megabank group chalked up two consecutive quarters of net losses as a result of impairment losses on foreign subsidiaries, but it was a combination of a fall in core earnings, rising GAE costs and, above all, a huge jump in credit costs from ¥5.82 billion (1bps) in FY3/2019 to ¥222.95 billion (21bps) in FY3/2020 that did the majority of the damage to reported earnings.

The dividend has been maintained at ¥25/share for FY3/2021 but there was no announcement of a share buyback (as we had warned in our previous Insight MUFG  (8306 JP):  Growing Pains Growing.  MUFG has set itself an ambitious consolidated net profit target of ¥520 billion (+4.1% YoY) which would put in back in the No.1 position ahead of SMFG.  We remain skeptical that this target can be achieved for a number of reasons .

MUFG’s share price is down 21.3% on a 12-months basis and is down 30.7% in the last six months.  A liquid stock with high foreign ownership, we see further downside risk to the stock price if foreign institutional investors urgently need to raise cash in Japan to meet global redemptions over the next few months.

Caveat Emptor!  (May the Buyer Beware!)

4. A Second Major Wave of New COVID-19 Cases? – Watch Texas & Florida

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In this insight, we discuss how watching Texas and Florida closely could provide some of the leading clues to the potential for a second major wave of new COVID-19 cases and deaths in the U.S.

Now, the key thing to look out for is the second major wave of new COVID-19 cases, carefully tracking regions where they are “re-opening” for business again, and reducing their social distancing measures. If these regions such as Texas and Florida are able to reduce the infection rates in the midst of reduced social distancing measures, then this means that they are winning the war on COVID-19, and the probability increases for continued improvement in the economy and the stock market. 

The data from key states such as Texas is not good (in terms of rising new cases of COVID-19) plus we have big countries such as Russia, India, and Saudi Arabia that have experienced surging new cases of COVID-19 in the past month. In addition, for some reason, the great value investor Warren Buffett has not “bought the dip” in the recent stock market decline, and all of these data points add suspicions on the recent market rebound. 

5. Providing Crack To An Addict Is Not A Sustainable Global Strategy

*Staring Into The Abyss: Although the market has rebounded since March, we were very close to looking into the abyss with the S&P 500 closing in on 2000 (or lower). The problems with market structure remain in place, despite the wall of liquidity thrown at markets by central bankers across the globe – posing an existential crisis;

*Tail Wagging The Dog: The remote tail risk for single sector/security/levered ETFs/ETNs has been known for some time now following the VIX blowup in 2018  – but the USO ETF blow-up was even more spectacular given the multiplier impact on the global economy.  An even bigger problem resides in broader market ETFs as there is no restriction on liquidity and the resulting order imbalances could result in the inability of ETFs to provide the required physical exposure to underlying securities; and  

*Regulatory Screws Too Tighten: Unfortunately, significantly more financial sector regulation is coming to address the existential threats of massive liquidity.

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