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Brief Japan: Nitori: Expanding Through Diversification into New Categories and more

By | Daily Briefs, Japan

In this briefing:

  1. Nitori: Expanding Through Diversification into New Categories
  2. How Long Does It Take To Change One’s Behavior? Why Does This Matter in the Post COVID-19 World?
  3. Activist Target Katakura (3001 JP) Announces BIG Buyback
  4. Governments and Policies Adapting to Critical Known Unknown
  5. Costs of and Response to COVID-19

1. Nitori: Expanding Through Diversification into New Categories

Screenshot%202019 11 20%20at%2019.49.13

Nitori may have achieved 33 years of consecutive growth but the interiors retailer is worried about saturation in the home market and its attempts to make a big push overseas have stalled. To keep the engine running, Nitori has begun diversifying into consumer electronics, cosmetics and apparel.

2. How Long Does It Take To Change One’s Behavior? Why Does This Matter in the Post COVID-19 World?

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The main subject of this report is as follows: “How Long Does It Take To Change One’s Behavior? Why Does This Matter in the Post COVID-19 World?” Certainly, COVID-19 will change the way people behave. The longer that COVID-19 lasts and the longer that millions of people are under lockdown, their behaviors will change further, potentially making them into a habit and this would have a tremendous impact on the global economy. 

We are specifically interested in this topic because as millions of people around the world undergo “lockdown” for a period of one to three months, this could have an enormous behavior change once this lockdown period ends.

The change in behavior patterns (especially related to consumer spending) in the post COVID-19 world would also have a big impact on whether the global economy/stock market can turn around quickly (such as after the Great Financial Recession in 2008/2009) or whether the turnaround lasts longer (such as after the Internet tech/crash lasting for nearly 3 years from 2000 to 2002). 

3. Activist Target Katakura (3001 JP) Announces BIG Buyback

Screenshot%202020 03 27%20at%2010.14.41%20pm

Friday 27 March, after the close, activist-targeted name Katakura Industries (3001 JP)announced, with its yuho and annual meeting, a buyback of up to 2.5mm shares (7.1% of shares out) for up to JPY 2 billion. 

The buyback will be conducted between 1 April 2020 and 31 March 2021.

There is a minor detail unspecified in the announcement (which is often specified) and the combination of the shareholder structure and trading patterns tells you what you need to know. 

Details below.

4. Governments and Policies Adapting to Critical Known Unknown

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We argued in Lack of US market & macro volatility both reassuring and troubling that “the market’s willingness to look through domestic political and geopolitical events suggests that only a significant exogenous or endogenous shock currently beyond markets’ radar screens (an “unknown unknown”) is likely to really move the needle”.

That unknown unknown, a “black swan” event, has turned out to be a global viral pandemic on a scale not seen since the Spanish influenza pandemic of 1918-1919.

The coronavirus outbreak is now three months old but governments, central banks, corporates and households still face a critical known unknown, in our view, namely the total number people who had the coronavirus, acquired immunity and are no longer contagious and who currently carry the coronavirus and are thus potentially infectious.

This includes people who have not been clinically tested – more than 99.9% of the world’s population. We estimate that only 3.3 million people (4 out of every 10,000) have been tested for coronavirus, although testing data are patchy and often released with a lag. The main reason so few people have been tested is the still limited capacity to rapidly and reliably test a very large number of people.

In econometric terms that is a very small sample from which to extrapolate country-wide trends. One implication is that the actual mortality rate may be far smaller than reported.

The high number of tests-per-capita conducted in countries such as South Korea has been posited as an explanation for their relatively low number of coronavirus-related deaths. However, other factors have likely been at play, including the timing of clinical tests, demographics, national health systems’ capacity to treat infected patients and the timing and efficacy of self-isolation and self-distancing policies, including country “lockdowns”.

For now what policy-makers know they don’t know will likely continue to influence country-specific containment plans, as well as domestic measures to support economic growth while ensuring the functioning of financial markets.

5. Costs of and Response to COVID-19

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As the epicentre of the coronavirus pandemic shifts from Europe to the US and the number of deaths and infection cases reach new highs, the costs of the crisis are beginning to be revealed. In Singapore economic activity contracted in 1Q20 at a faster pace than at the worst point during the GFC while Chinese industrial profits were down 38% in the first two months of the year. Despite this we are cautiously optimistic that Asian economic activity led by China will pick-up in the second half of the year. We are much more worried about advanced economies where policy mis-management threatens to tip the world economy into recession.

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Brief Japan: Hitachi Chemicals – Is Antitrust a Concern? and more

By | Daily Briefs, Japan

In this briefing:

  1. Hitachi Chemicals – Is Antitrust a Concern?
  2. Softbank Vision Fund: Not Enthused About DoorDash IPO Filing but Vir Biotech Rally Could Be Positive
  3. London Shanghai Stock Connect – The Dampest of Squibs. Inteqres Viewpoint

1. Hitachi Chemicals – Is Antitrust a Concern?

This morning the Nikkei reported that Showa Denko’s tender offer for Hitachi Chemical would be delayed into March or later due to delays obtaining regulatory approval. This caused the shares to drop 1% on the day and 1.7% below the offer price. We spoke to Showa Denko to ascertain whether concern was warranted. Our thoughts below.

2. Softbank Vision Fund: Not Enthused About DoorDash IPO Filing but Vir Biotech Rally Could Be Positive

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Moving away from the sordid details on Vision Fund’s inner workings we tagged yesterday, we though there were a couple items out of the US worth mentioning. First, portfolio company DoorDash has confidentially filed for an IPO…we think the timing has more to do with last week’s bull market than this week’s Coronavirus reversal but the lackluster record of IPOs for loss-making companies likely means the chances of a valuation bump for Softbank as we saw before Uber and WeWork are less.  Second, Vir Biotech shares surged another 72% today, enough to outpace erosion in the Uber value and keep Vision Fund performance flat in a day markets fell 3-4%.  Monetisation of part or all of that stake would be positive for funding Vision Fund 2 and flattering to the P&L.  

3. London Shanghai Stock Connect – The Dampest of Squibs. Inteqres Viewpoint

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Despite the fanfare only one Chinese company listed (and raised money) in London after the announcement of the London Shanghai Connect.  There have been no listing of Chinese Depository Receipts by companies listed in London.  This is starting to look like a white elephant.  We have reviewed the successful Depository Receipt programmes around the world and conclude that the pull to issue Chinese Depository Receipts is only weak at present.  We do think that companies are reviewing the option of issuing CDRs but there is no intense pressure to do so.  By following the factors we have identified, authorities and exchanges could build a more successful programme.

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Brief Equities Bottom-Up: Nitori: Expanding Through Diversification into New Categories and more

By | Bottom-Up Equities, Daily Briefs

In this briefing:

  1. Nitori: Expanding Through Diversification into New Categories
  2. BOCHK – A Very Managed, Yet Poor Set of Numbers
  3. Activist Target Katakura (3001 JP) Announces BIG Buyback
  4. Korean Air Lines: COVID-19 Could Lead to Breach of Debt Covenants
  5. BGC: Stable Yield Play

1. Nitori: Expanding Through Diversification into New Categories

Screenshot%202019 11 20%20at%2019.49.13

Nitori may have achieved 33 years of consecutive growth but the interiors retailer is worried about saturation in the home market and its attempts to make a big push overseas have stalled. To keep the engine running, Nitori has begun diversifying into consumer electronics, cosmetics and apparel.

2. BOCHK – A Very Managed, Yet Poor Set of Numbers

* Despite Managed Set of Results, Still A Miss: BOC Hong Kong Holdings (2388.HK) [BOCHK] reported 2H19 earnings results of HKD 15.6 bn substantially missing consensus forecasts – although HKD 645 mn or 13.1% ahead of 1H19 numbers. Given the reserve bleed on top of credit weakness which was attributed to mainland China, we calculate that the 2H19 bottom-line result was overstated by over 5%;

* Credit and NIMs to Weaken: BOCHK’s stated figures fail to tell the entire story. Net new problem loan growth amounted to HKD 2.0 bn or 74.4% linked period or 149% on annualized basis. This is alarming as we have yet to feel the impact of the corona virus on BOCHK’s results while its mainland China NPLs have already increased 157% HOH. 4Q19 net interest income actually declined 2% as the higher HIBOR rates was more than offset by USD rates while the NIM declined 6 bp to 1.66%. There is increasing pressure on asset sensitive balance sheets in response to a lagging HIBOR post the aggressive FRB moves.

3. Activist Target Katakura (3001 JP) Announces BIG Buyback

Screenshot%202020 03 27%20at%2010.14.41%20pm

Friday 27 March, after the close, activist-targeted name Katakura Industries (3001 JP)announced, with its yuho and annual meeting, a buyback of up to 2.5mm shares (7.1% of shares out) for up to JPY 2 billion. 

The buyback will be conducted between 1 April 2020 and 31 March 2021.

There is a minor detail unspecified in the announcement (which is often specified) and the combination of the shareholder structure and trading patterns tells you what you need to know. 

Details below.

4. Korean Air Lines: COVID-19 Could Lead to Breach of Debt Covenants

Airlines debtratio

In this report, we analyze Korean Air Lines (003490 KS) with regards to the global COVID-19 outbreak which is likely to lead to a breach of debt covenants resulting in a need for a massive capital raise and government bailout. 

South Korea’s government has already pledged loans of 300 billion won ($250 million) for the entire airlines in Korea. However, this is a TINY amount compared to the total amount needed to save this industry. This is also less than 1% of the $60 billion that the U.S. government has promised to its own air transport industry. 

Going forward, a question mark about Korean Air is guessing which airliner that the Korean government will bail out since it seems clear that it will not be able to bail out all the airlines in Korea. Because of the dire situation right now, there has also been an idea of a potential merger  between Korean Air Lines (003490 KS) and Asiana Airlines (020560 KS)

COVID-19 is a beast that will likely have the greatest-ever negative impact on the global airline industry in the past century. Many airlines are likely to become bankrupt in the next couple of years. There will be an intense industry consolidation. Korean Air faces an enormous challenge in the midst of this global COVID-19 pandemic, which is likely to lead to a breach of debt covenants resulting in a need for a massive capital raise and government bailout.

5. BGC: Stable Yield Play

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We initiate coverage of BG Container Glass PCL (BGC TB) with a BUY rating, based on a target price of Bt11.0, which is derived from 12.3xPE’20E, close to the average for the Asia ex-Japan Materials Sector.

The story:

  • Secured earnings with attractive dividend yield
  • Gross margin is in an expansion phase
  • Potential growth from M&As

Risks:

  • Raw material price fluctuation
  • Reliance on a few major customers
  • New innovative liquid container products

Background: BGC, a subsidiary of Bangkok Glass Public Company Limited, operates in the glass packaging business. The firm was established in 1974 and started production in Pathumthani in 1980. BGC is one of the largest glass container manufacturers in the ASEAN region with five glass packaging plants in Ayutthaya, Pathumthani, Khon Kaen, Prachinburi and Ratchaburi. Its combined maximum production capacity is 3,495 tons per day.

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Brief Consumer: Nitori: Expanding Through Diversification into New Categories and more

By | Consumer Sector, Daily Briefs

In this briefing:

  1. Nitori: Expanding Through Diversification into New Categories
  2. Renault-Nissan-MitMot Alliance: MitCorp to Buy 10% of Renault? There’s An Easier Way
  3. ITC IN
  4. Cafe De Coral (341): Time to Go Long
  5. Trade/Investment Ideas for 2019/20 China ADR Listings

1. Nitori: Expanding Through Diversification into New Categories

Screenshot%202019 11 20%20at%2019.49.13

Nitori may have achieved 33 years of consecutive growth but the interiors retailer is worried about saturation in the home market and its attempts to make a big push overseas have stalled. To keep the engine running, Nitori has begun diversifying into consumer electronics, cosmetics and apparel.

2. Renault-Nissan-MitMot Alliance: MitCorp to Buy 10% of Renault? There’s An Easier Way

Screenshot%202020 03 26%20at%2011.51.50%20pm

Les Echos, the French media outlet with probably the most access to Bercy when it comes to Renault SA (RNO FP)/government/Alliance news, but also occasionally seen as the avenue for floating trial balloons, reports this morning that among the possible methods for putting the Alliance back on track would be to have Mitsubishi Corp (8058 JP) buy a 10% stake in Renault. 

This is quite along the lines of what I have long suggested for the past couple of years. There are good reasons for this. One is that Nissan Motor (7201 JP)‘s 15% stake in Renault doesn’t vote.  Another is that Mitsubishi Corp was effectively banished from control of Mitsubishi Motors (7211 JP) in 2016 after the third major scandal in 15 years practically necessitated a governance rescue. At the time, I proposed it would be Nissan and sure enough…

The goal here would be to effectively increase Japanese capital control of Renault so that there would be more seats on the board who could act against French state (l’APE) whim, and who could, in a pinch, sell a block to Nissan so Nissan would own 25% and allow them to block Renault’s voting rights in Nissan. For Renault it would give them a different large holder near but not in the Alliance. 

Renault shares jumped 7% in the five minutes after the article came out. The shares still trade at a tiny fraction of book value. 

What remains odd is that Nissan – Renault’s partner and the more profitable carmaker over the past nearly 20 years since the Renault capital injection into Nissan – still can’t vote its shares. But an outside Japanese trading company would buy 10% and make it all better because they had voting rights? I think this is an interesting step in the right direction, but not all the way there by any stretch. 

There is one relatively easy technical construction of capital holding that Renault could undertake to make life easier all around. It would not require Renault selling Nissan shares cheaply, and it would not require anyone to put up any more capital. Renault would keep the economic interest in its full stake, but doing this would get Nissan the vote on its Renault shares, making the entire Alliance cross-holding construct much more equitable.

I remain surprised they have not done so yet. 

As it is, I think the idea of MitCorp buying 10% of Renault is an interesting step in the right direction, but it is not all the way there by any stretch.

The OTHER step noted above would be all the way there.

As always, more below the fold.

3. ITC IN

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ITC Ltd (ITC IN) ‘s recent share price performance has been disappointing on all counts. The increase in Dividend Payout further re-iterates our view of ITC finding it a challenge to invest in other businesses, and therefore valuations now reflect that of global tobacco companies.  At current prices, the downside may be limited, but a Re-rating is unlikely. 

This Insight is labelled bearish, as we do not see any major PE Re-rating in the near term. 

4. Cafe De Coral (341): Time to Go Long

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The ongoing protests against China’s ruling power over Hong Kong were the chief reason why investors left Cafe de Coral. Fundamentally, the company is not out of the woods yet, however, with China’s lockdown is soon to be over and no overseas travel to start anytime soon, mainland Chinese tourists may flock to either Macau (therefore packing up Wynn Macau Ltd (1128 HK) and Melco International Development (200 HK) or Hong Kong.

Compared to the other chain restaurant names listed in Hong Kong Hang Seng Index (HSI INDEX) , Cafe de Coral is trading at the lowest valuation and it has the lowest exposure to hotpot menu. 

The soon-to-reopen China with pent up frustrations of being locked down and less likely able to travel overseas will provide the much-needed revenue increase for Cafe de Coral. Cover your shorts and start buying. 

5. Trade/Investment Ideas for 2019/20 China ADR Listings

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Since the start of 2019 till date, we have covered 96 IPOs. Despite the market turmoil over the past two months, over a third, or 40 IPOs remain above their listing price. 

In this insight, we’ll take at how some of the US ADR IPOs have been faring. 

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Brief Consumer: Beyond Meat (BYND US): 4Q2019- Whopper Rev Growth, Sober Margins & Super Marketing Spend and more

By | Consumer Sector, Daily Briefs

In this briefing:

  1. Beyond Meat (BYND US): 4Q2019- Whopper Rev Growth, Sober Margins & Super Marketing Spend
  2. The Panasonic & Tesla Split Continues: The Two End Their Joint Solar Cell Production
  3. Matahari Department Store (LPPF IJ) – About Turn and Back to the Core
  4. Health & Happiness (1112): No Soy Please and Still Cheap

1. Beyond Meat (BYND US): 4Q2019- Whopper Rev Growth, Sober Margins & Super Marketing Spend

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Beyond Meat Inc (BYND US) reported strong revenue growth in 4Q2019, thus ending the full year 2019 by tripling sales vs 2018; however, the operating gains from the rather robust gross margins at 34% (tad lower than 3Q19) was wiped away by a steep increase in marketing spend in 4Q2019. Management has guided that investment in marketing and R&D will continue at increased pace in 2020 as well. The focus for now seem to be to drive revenue growth by expanding presence across distribution channels and geographies as well launch more product lines. 

Beyond Meat’s reported 4Q19 operating losses may come as a disappointment to the street given it had reported 12% operating margins in 3Q19. But management has maintained its strong revenue growth outlook for 2020 and guided to further growth in capacity for 2021. It is gaining traction in the food service segment as they collaborate with leading QSRs in the US and has expanded to Europe. It plans to hit Asia by late 2020.  For details on 4Q 2019 results, Management call updates and our stock view, please read the segment below.

2. The Panasonic & Tesla Split Continues: The Two End Their Joint Solar Cell Production

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On the 26th of February, it was reported that Tesla Motors (TSLA US) and Panasonic Corp (6752 JP) will end their joint solar cell production. Although the two companies will still operate their EV battery Gigafactory jointly, the two are increasingly parting ways. The news has it that Panasonic’s production of solar cells did not meet Tesla’s expected standards (mainly on price).

  • We expected Panasonic to reduce its reliance on Tesla – the news only confirms our thoughts, and we view this as positive for Panasonic. For Panasonic, the solar business seems to not have yielded the results expected. Thus, the decision to end production (especially with Tesla) makes sense.
  • Tesla, on the other hand, expects its solar energy business to do well, given the price competitiveness (on its Powerwall product) from sourcing from Chinese suppliers alongside economies of scale benefits. However, even if demand conditions are good, it seems questionable as to whether Tesla’s production would come in time to meet the demand (now that the JV is no more as well).
  • On a side note, Tesla recently partnered with CATL for prismatic batteries while Panasonic is developing cylindrical batteries for Toyota’s BEVs. Given the limited use of prismatic batteries in BEVs, we do not really think such moves by Tesla should pressure Panasonic or be seen as a downside for the latter.

3. Matahari Department Store (LPPF IJ) – About Turn and Back to the Core

Screenshot%202020 02 28%20at%208.16.03%20am

Matahari Department Store (LPPF IJ)‘s new CEO Terry O’Connor hosted a conference call for the company’s FY19 results yesterday afternoon. The surprise did not come in the numbers but in his forthright and adamant statements that he was making big changes to the company’s future strategy and addressing past missteps immediately. There is a full strategic review underway. Is this the catalyst investors have been waiting for to return to the stock? 

Firstly, the company will continue to address the company’s lingering inventory issues, which although improving will take another two quarters to put straight, as it streamlines its assortment and depth of products and flushes out products that should not be there.

Secondly, the company will abandon its speciality store strategy with no more speciality store openings. It will close its 361 Degrees International (1361 HK) stores, whilst monitoring its OVS stores. He stressed that this was not the brands they were abandoning but the format, which was not working for those brands.

Thirdly, the company would reassess its omnichannel approach to online sales, which remain slow but this would not happen immediately with the immediate focus on getting the core department store business right. 

Matahari Department Store (LPPF IJ) will continue to expand and will open 4-6 new large-format stores in 2020, all to be opened before Lebaran. It will also focus on improving existing store design. 

Corona Virus has started to impact sales but mainly in areas such as Batam and Bali, which are impacted by falling tourism. The supply chain may be impacted by “a single-digit percentage” if manufacturing gets delayed much longer. 

This is a company with no debt and a forecast ROE of 55% for FY20E, trading on a forward PER of 6.2x and with a forecast dividend yield of 8.7%. Now that we have a number of positive catalysts for change, investors should now revisit the company’s fundamentals. 

4. Health & Happiness (1112): No Soy Please and Still Cheap

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Health And Happiness (H&H) (1112 HK) subsidiary has agreed to purchase a stake in Else Nutrition, a plant-based alternative IMF made of almond, buckwheat, and tapioca. 

Else Nutrtion complements the existing product line in the company i.e. Biostime (children probiotics and infant milk formula), Swisse (adult nutrition and supplements), Healthy Times (organic food and formula for toddlers), Dodie (baby glass bottles and accessories), Good Gout (organic food for children), and Aurelia Probiotic Skincare.

In this difficult times in China, HH is better than most of its peers in China and Asia. It has 38% higher ROIC, 82% higher in gross margin, 84% higher in net margin yet it is trading at 25% lower than its peers. Yet its share price has underperformed compared to Ausnutria Dairy Corp (1717 HK) whose exposure to adult nutrition is very small. 

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Brief Equities Bottom-Up: Gouxuan Hi Tech: Valuation Decoupled From Fundamentals and more

By | Bottom-Up Equities, Daily Briefs

In this briefing:

  1. Gouxuan Hi Tech: Valuation Decoupled From Fundamentals

1. Gouxuan Hi Tech: Valuation Decoupled From Fundamentals

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Guoxuan High-Tech Co Ltd (002074 CH) is lithium battery producers for electric commercial and passenger vehicles. The company has a market cap of US$4B and is listed in Shenzhen stock exchange. The stock has rallied in the last month on the news that Volkswagen is in discussion to invest 20% stake in the company.

The company has been burning cash and leveraging its balance sheet. The recent rally does not appear to be grounded in fundamentals but appears to have been primarily driven in anticipation of funding to deleverage the balance sheet. We believe that in the absence of a turnaround strategy the company will face headwinds if the negotiations with Volkswagen fail. In such situation we expect the stocks to revert back to its long-term mean valuations, a drop of 50% from current levels.

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Brief Growth Ideas: Nitori: Expanding Through Diversification into New Categories and more

By | Daily Briefs, Growth Ideas

In this briefing:

  1. Nitori: Expanding Through Diversification into New Categories
  2. Potential Trade Ideas – Asia-Pacific Companies that May Access Capital Markets
  3. Activist Target Katakura (3001 JP) Announces BIG Buyback
  4. The RBI Policy Bazooka: A Comprehensive Policy Move to Fight the COVID-19 Pandemic
  5. BGC: Stable Yield Play

1. Nitori: Expanding Through Diversification into New Categories

Screenshot%202019 11 20%20at%2019.49.13

Nitori may have achieved 33 years of consecutive growth but the interiors retailer is worried about saturation in the home market and its attempts to make a big push overseas have stalled. To keep the engine running, Nitori has begun diversifying into consumer electronics, cosmetics and apparel.

2. Potential Trade Ideas – Asia-Pacific Companies that May Access Capital Markets

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As global markets rebound and businesses start to feel impact of the virus outbreak, there will likely be companies looking to access capital markets to shore up their balance sheet. Singapore Airlines (SIA SP)‘s rights issue was a case in point.

In this insight, we will explore what are some Asia-Pacific companies that may breach their debt covenants and will likely look to raise capital in the near-term.

3. Activist Target Katakura (3001 JP) Announces BIG Buyback

Screenshot%202020 03 27%20at%2010.14.41%20pm

Friday 27 March, after the close, activist-targeted name Katakura Industries (3001 JP)announced, with its yuho and annual meeting, a buyback of up to 2.5mm shares (7.1% of shares out) for up to JPY 2 billion. 

The buyback will be conducted between 1 April 2020 and 31 March 2021.

There is a minor detail unspecified in the announcement (which is often specified) and the combination of the shareholder structure and trading patterns tells you what you need to know. 

Details below.

4. The RBI Policy Bazooka: A Comprehensive Policy Move to Fight the COVID-19 Pandemic

After the much needed nation-wide lock-down India announced this Tuesday (Mar 24), and subsequent fiscal stimulus of INR 1,70,000cr for the under-privileged by the Government, today RBI announced a comprehensive monetary and regulatory boost for the economy to help strive through these unprecedented times under the COVID-19 pandemic.

Key Policy Announcements:

  • Policy rate (Repo Rate) cut by 75bp to 4.4%
  • Reverse Repo Rate cut by 90bp to 4.0% (note that this was cut more than policy rate to discourage excess liquidity being parked with RBI)
  • Cash Reserve Ratio (CRR) cut by 100bp to 3.0%
  • Mandatory investments of funds raised from RBI’s LTRO (Long-term Repo Operation) auction into corporate bonds to boost liquidity in the bonds market where yields have spiked on the back of panic selling and resultant illiquidity. To allay any mark-to-market concerns, these bond investments will be allowed to be classified as held-to-maturity (HTM).
  • Regulatory measures that include three month moratorium on term loans and three month interest deferral on working capital (WC) loans

Overall, the policy package announced by RBI was quite comprehensive and will be positive for the broader Indian economy, thereby helping Indian financials cope through this unprecedented COVID-19 pandemic.

5. BGC: Stable Yield Play

Image 54507809981585281304916

We initiate coverage of BG Container Glass PCL (BGC TB) with a BUY rating, based on a target price of Bt11.0, which is derived from 12.3xPE’20E, close to the average for the Asia ex-Japan Materials Sector.

The story:

  • Secured earnings with attractive dividend yield
  • Gross margin is in an expansion phase
  • Potential growth from M&As

Risks:

  • Raw material price fluctuation
  • Reliance on a few major customers
  • New innovative liquid container products

Background: BGC, a subsidiary of Bangkok Glass Public Company Limited, operates in the glass packaging business. The firm was established in 1974 and started production in Pathumthani in 1980. BGC is one of the largest glass container manufacturers in the ASEAN region with five glass packaging plants in Ayutthaya, Pathumthani, Khon Kaen, Prachinburi and Ratchaburi. Its combined maximum production capacity is 3,495 tons per day.

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Brief Growth Ideas: Matahari Department Store (LPPF IJ) – About Turn and Back to the Core and more

By | Daily Briefs, Growth Ideas

In this briefing:

  1. Matahari Department Store (LPPF IJ) – About Turn and Back to the Core
  2. AKR Corporindo (AKRA IJ) – Time to Fill-Up the Tank?
  3. E-Star Commercial Management Pre-IPO – Still Largely Reliant on Galaxy, Poor Disclosure Doesn’t Help
  4. Health & Happiness (1112): No Soy Please and Still Cheap

1. Matahari Department Store (LPPF IJ) – About Turn and Back to the Core

Screenshot%202020 02 28%20at%208.16.03%20am

Matahari Department Store (LPPF IJ)‘s new CEO Terry O’Connor hosted a conference call for the company’s FY19 results yesterday afternoon. The surprise did not come in the numbers but in his forthright and adamant statements that he was making big changes to the company’s future strategy and addressing past missteps immediately. There is a full strategic review underway. Is this the catalyst investors have been waiting for to return to the stock? 

Firstly, the company will continue to address the company’s lingering inventory issues, which although improving will take another two quarters to put straight, as it streamlines its assortment and depth of products and flushes out products that should not be there.

Secondly, the company will abandon its speciality store strategy with no more speciality store openings. It will close its 361 Degrees International (1361 HK) stores, whilst monitoring its OVS stores. He stressed that this was not the brands they were abandoning but the format, which was not working for those brands.

Thirdly, the company would reassess its omnichannel approach to online sales, which remain slow but this would not happen immediately with the immediate focus on getting the core department store business right. 

Matahari Department Store (LPPF IJ) will continue to expand and will open 4-6 new large-format stores in 2020, all to be opened before Lebaran. It will also focus on improving existing store design. 

Corona Virus has started to impact sales but mainly in areas such as Batam and Bali, which are impacted by falling tourism. The supply chain may be impacted by “a single-digit percentage” if manufacturing gets delayed much longer. 

This is a company with no debt and a forecast ROE of 55% for FY20E, trading on a forward PER of 6.2x and with a forecast dividend yield of 8.7%. Now that we have a number of positive catalysts for change, investors should now revisit the company’s fundamentals. 

2. AKR Corporindo (AKRA IJ) – Time to Fill-Up the Tank?

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A meeting with AKR Corporindo (AKRA IJ) management in Jakarta last week, confirmed that despite last year’s issues over subsidised fuel pricing, the company is set up for strong growth going forward driven by a number of factors. These include strong growth in non-subsidized fuel distribution, and a marked pick-up in land sales at its JIIPE Surabaya Industrial estate, as well as longer-term a number of JV projects with BP PLC (BP/ LN) including retail petroleum distribution and aviation fuel distribution to begin with, and it is exploring the possibility of LNG storage and distribution. AKR Corporindo (AKRA IJ) should be a defensive stock in this environment and the recent correction is a buying opportunity.

The company ceased to distribute subsidized diesel in May 2019 due to a change in the pricing formula which made it uneconomic to do so. The change in pricing was to be applied retrospectively, which the company is challenging. The company is making a provision for the charge for this in 2019, on the advice of its auditors. AKR Corporindo (AKRA IJ) will resume subsidized fuel distribution this year as the new Minister reversed the pricing change, making it more economical to cover costs and assure a decent margin. 

AKR Corporindo (AKRA IJ) has been growing sales of non-subsidized fuel, which generates twice the margin as that of subsidized fuel, which is going some way to offset the decline in Subsidized fuel. Despite the potential charge, management has confirmed that FY19 Net profit will not be lower than the recurrent profit in 2018 of IDR712bn, which should be taken positively.

The company is moving forward with Freeport Mcmoran (FCX US) ‘s new smelter at the company’s JIIPE industrial estate (100 ha plot), which will bring with it leasing revenues, revenues from utilities, and demand for land plots from supporting industries. AKR Corporindo (AKRA IJ) secured a deal with the local government to supply power directly to its customers on its estate and will build a 515MW power plant there. The pipeline in demand at JIIPE could see a further boost with a Taiwanese steelmaker conducting a feasibility study for a 200 ha plot in 2020. 

AKR Corporindo (AKRA IJ) is trading at close to a 3-year low and its valuations are also approaching very attractive levels, with the stock trading on 11.5x FY20E PER plus it pays a good dividend, with an FY20E yield of 3.5%. 

3. E-Star Commercial Management Pre-IPO – Still Largely Reliant on Galaxy, Poor Disclosure Doesn’t Help

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E-Star Commercial Management (ESCM HK) is looking to raise US$150m in its upcoming Hong Kong IPO.

ESCM is a commercial operational service provider focused on the Greater Bay Area (mostly in Shenzhen) although it does have a national presence. The company is ranked first and third in terms of the number of shopping centers and GFA in operation in Shenzhen, respectively.

The company has good long-term commercial properties under management (average of about 15 years). About half of the contracted GFA that has yet to commence operation and fully contribute to revenue. It will start between 2020 to 2023 which will drive revenue growth

4. Health & Happiness (1112): No Soy Please and Still Cheap

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Health And Happiness (H&H) (1112 HK) subsidiary has agreed to purchase a stake in Else Nutrition, a plant-based alternative IMF made of almond, buckwheat, and tapioca. 

Else Nutrtion complements the existing product line in the company i.e. Biostime (children probiotics and infant milk formula), Swisse (adult nutrition and supplements), Healthy Times (organic food and formula for toddlers), Dodie (baby glass bottles and accessories), Good Gout (organic food for children), and Aurelia Probiotic Skincare.

In this difficult times in China, HH is better than most of its peers in China and Asia. It has 38% higher ROIC, 82% higher in gross margin, 84% higher in net margin yet it is trading at 25% lower than its peers. Yet its share price has underperformed compared to Ausnutria Dairy Corp (1717 HK) whose exposure to adult nutrition is very small. 

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Brief China: E-Star Commercial Management Pre-IPO – Still Largely Reliant on Galaxy, Poor Disclosure Doesn’t Help and more

By | China, Daily Briefs

In this briefing:

  1. E-Star Commercial Management Pre-IPO – Still Largely Reliant on Galaxy, Poor Disclosure Doesn’t Help
  2. Health & Happiness (1112): No Soy Please and Still Cheap
  3. Gouxuan Hi Tech: Valuation Decoupled From Fundamentals
  4. London Shanghai Stock Connect – The Dampest of Squibs. Inteqres Viewpoint

1. E-Star Commercial Management Pre-IPO – Still Largely Reliant on Galaxy, Poor Disclosure Doesn’t Help

Image?1582850753

E-Star Commercial Management (ESCM HK) is looking to raise US$150m in its upcoming Hong Kong IPO.

ESCM is a commercial operational service provider focused on the Greater Bay Area (mostly in Shenzhen) although it does have a national presence. The company is ranked first and third in terms of the number of shopping centers and GFA in operation in Shenzhen, respectively.

The company has good long-term commercial properties under management (average of about 15 years). About half of the contracted GFA that has yet to commence operation and fully contribute to revenue. It will start between 2020 to 2023 which will drive revenue growth

2. Health & Happiness (1112): No Soy Please and Still Cheap

Image 52456268121582847562786

Health And Happiness (H&H) (1112 HK) subsidiary has agreed to purchase a stake in Else Nutrition, a plant-based alternative IMF made of almond, buckwheat, and tapioca. 

Else Nutrtion complements the existing product line in the company i.e. Biostime (children probiotics and infant milk formula), Swisse (adult nutrition and supplements), Healthy Times (organic food and formula for toddlers), Dodie (baby glass bottles and accessories), Good Gout (organic food for children), and Aurelia Probiotic Skincare.

In this difficult times in China, HH is better than most of its peers in China and Asia. It has 38% higher ROIC, 82% higher in gross margin, 84% higher in net margin yet it is trading at 25% lower than its peers. Yet its share price has underperformed compared to Ausnutria Dairy Corp (1717 HK) whose exposure to adult nutrition is very small. 

3. Gouxuan Hi Tech: Valuation Decoupled From Fundamentals

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Guoxuan High-Tech Co Ltd (002074 CH) is lithium battery producers for electric commercial and passenger vehicles. The company has a market cap of US$4B and is listed in Shenzhen stock exchange. The stock has rallied in the last month on the news that Volkswagen is in discussion to invest 20% stake in the company.

The company has been burning cash and leveraging its balance sheet. The recent rally does not appear to be grounded in fundamentals but appears to have been primarily driven in anticipation of funding to deleverage the balance sheet. We believe that in the absence of a turnaround strategy the company will face headwinds if the negotiations with Volkswagen fail. In such situation we expect the stocks to revert back to its long-term mean valuations, a drop of 50% from current levels.

4. London Shanghai Stock Connect – The Dampest of Squibs. Inteqres Viewpoint

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Despite the fanfare only one Chinese company listed (and raised money) in London after the announcement of the London Shanghai Connect.  There have been no listing of Chinese Depository Receipts by companies listed in London.  This is starting to look like a white elephant.  We have reviewed the successful Depository Receipt programmes around the world and conclude that the pull to issue Chinese Depository Receipts is only weak at present.  We do think that companies are reviewing the option of issuing CDRs but there is no intense pressure to do so.  By following the factors we have identified, authorities and exchanges could build a more successful programme.

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Brief Consumer: The Panasonic & Tesla Split Continues: The Two End Their Joint Solar Cell Production and more

By | Consumer Sector, Daily Briefs

In this briefing:

  1. The Panasonic & Tesla Split Continues: The Two End Their Joint Solar Cell Production
  2. Matahari Department Store (LPPF IJ) – About Turn and Back to the Core
  3. Health & Happiness (1112): No Soy Please and Still Cheap

1. The Panasonic & Tesla Split Continues: The Two End Their Joint Solar Cell Production

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On the 26th of February, it was reported that Tesla Motors (TSLA US) and Panasonic Corp (6752 JP) will end their joint solar cell production. Although the two companies will still operate their EV battery Gigafactory jointly, the two are increasingly parting ways. The news has it that Panasonic’s production of solar cells did not meet Tesla’s expected standards (mainly on price).

  • We expected Panasonic to reduce its reliance on Tesla – the news only confirms our thoughts, and we view this as positive for Panasonic. For Panasonic, the solar business seems to not have yielded the results expected. Thus, the decision to end production (especially with Tesla) makes sense.
  • Tesla, on the other hand, expects its solar energy business to do well, given the price competitiveness (on its Powerwall product) from sourcing from Chinese suppliers alongside economies of scale benefits. However, even if demand conditions are good, it seems questionable as to whether Tesla’s production would come in time to meet the demand (now that the JV is no more as well).
  • On a side note, Tesla recently partnered with CATL for prismatic batteries while Panasonic is developing cylindrical batteries for Toyota’s BEVs. Given the limited use of prismatic batteries in BEVs, we do not really think such moves by Tesla should pressure Panasonic or be seen as a downside for the latter.

2. Matahari Department Store (LPPF IJ) – About Turn and Back to the Core

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Matahari Department Store (LPPF IJ)‘s new CEO Terry O’Connor hosted a conference call for the company’s FY19 results yesterday afternoon. The surprise did not come in the numbers but in his forthright and adamant statements that he was making big changes to the company’s future strategy and addressing past missteps immediately. There is a full strategic review underway. Is this the catalyst investors have been waiting for to return to the stock? 

Firstly, the company will continue to address the company’s lingering inventory issues, which although improving will take another two quarters to put straight, as it streamlines its assortment and depth of products and flushes out products that should not be there.

Secondly, the company will abandon its speciality store strategy with no more speciality store openings. It will close its 361 Degrees International (1361 HK) stores, whilst monitoring its OVS stores. He stressed that this was not the brands they were abandoning but the format, which was not working for those brands.

Thirdly, the company would reassess its omnichannel approach to online sales, which remain slow but this would not happen immediately with the immediate focus on getting the core department store business right. 

Matahari Department Store (LPPF IJ) will continue to expand and will open 4-6 new large-format stores in 2020, all to be opened before Lebaran. It will also focus on improving existing store design. 

Corona Virus has started to impact sales but mainly in areas such as Batam and Bali, which are impacted by falling tourism. The supply chain may be impacted by “a single-digit percentage” if manufacturing gets delayed much longer. 

This is a company with no debt and a forecast ROE of 55% for FY20E, trading on a forward PER of 6.2x and with a forecast dividend yield of 8.7%. Now that we have a number of positive catalysts for change, investors should now revisit the company’s fundamentals. 

3. Health & Happiness (1112): No Soy Please and Still Cheap

Image 52456268121582847562786

Health And Happiness (H&H) (1112 HK) subsidiary has agreed to purchase a stake in Else Nutrition, a plant-based alternative IMF made of almond, buckwheat, and tapioca. 

Else Nutrtion complements the existing product line in the company i.e. Biostime (children probiotics and infant milk formula), Swisse (adult nutrition and supplements), Healthy Times (organic food and formula for toddlers), Dodie (baby glass bottles and accessories), Good Gout (organic food for children), and Aurelia Probiotic Skincare.

In this difficult times in China, HH is better than most of its peers in China and Asia. It has 38% higher ROIC, 82% higher in gross margin, 84% higher in net margin yet it is trading at 25% lower than its peers. Yet its share price has underperformed compared to Ausnutria Dairy Corp (1717 HK) whose exposure to adult nutrition is very small. 

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