Daily Briefs

In this briefing:

1. Hong Kong Connect Weekly: SMIC, Shandong Weigao, Xiaomi, Anta
2. SH/​SZ Connect Flow Weekly: Midea, China Intl Travel Service, Gree
3. Smartkarma Webinar
4. Big Apparel in Trouble: Renown Finally Goes Under

1. Hong Kong Connect Weekly: SMIC, Shandong Weigao, Xiaomi, Anta

In our weekly HK Connect Flow series, we aim to highlight key stocks and sectors which the mainland investors traded via the southbound Hong Kong Connect, as analyzed by our proprietary data engine.

Since the opening of Hong Kong Connect scheme in 2014, southbound Chinese money started to play an increasingly important role in the Hong Kong stock market. In a Hong Kong exchange report released in July 2019, the exchange highlighted that flows from mainland China accounted for 12% of the total trading volume in the market and is ahead of the US investors’ 10% and UK investors’ 7% share respectively. 

We split the stocks eligible for the Hong Kong Connect trade into three groups: HSCEI component stocks, stocks with a market capitalization between USD 1 billion and USD 5 billion, and stocks with a market capitalization between USD 500 million and USD 1 billion.

In this insight, we will highlight inflows into Semiconductor Manufacturing (981 HK) , Shandong Weigao Group Medical Polymer Co (1066 HK), and Xiaomi Corp (1810 HK), as well as outflows from Anta Sports Products (2020 HK). We note that Shandong Weigao announced last week that it plans to list its orthopedic segment on the STAR board. 

2. SH/​SZ Connect Flow Weekly: Midea, China Intl Travel Service, Gree

In our weekly Shanghai/Shenzhen Connect Ideas series, we aim to highlight key stocks and sectors which the mainland investors traded via the northbound Shanghai and Shenzhen Connect, as analyzed by our proprietary data engine and highlight interesting trade ideas.

In this insight, we will have an overview of the weekly inflows into the A-share market via Shanghai/Shenzhen connect, top inflow and top three outflow stocks. We will also cover inflows and holdings by sectors, after which we will highlight top five inflows and outflows on a relative basis for large-cap and mid-cap stocks: stocks with a market capitalization above $5 bn, and those between $1 bn and $5 bn.

In this insight, we will highlight inflows into Midea Group Co Ltd A (000333 CH), Beijing Oriental Yuhong A (002271 CH) , and Boe Technology Group (000725 CH) , as well as outflows from China International Travel Service (601888 CH) , and Gree Electric Appliances (000651 CH).

3. Smartkarma Webinar

In this Smartkarma Webinar, Thomas Schroeder will provide his technical outlook for markets. After the recent melt-up, markets are up against renewed concerns from: 

• A second wave of COVID-19 cases in the US
• Unexpected lockdowns in Beijing
• Diminished short-base after extensive covering
• Oversold levels on the Dollar Index (DXY) (DXY CURNCY), as well as,
• An acceleration in new capital raising

The webinar will be held on 17 June 2020 at 1700hrs Singapore/Hong Kong time.

4. Big Apparel in Trouble: Renown Finally Goes Under

Japan’s major apparel firms are in trouble as Onward Holding (8016 JP)’s decision to slash 50% of its stores and Sanyo Shokai (8011 JP)’s fight with activist shareholders both demonstrate.

For nearly 30 years, Renown (3606 JP)  was the worst of the bunch but it has at last been forced to file for bankruptcy protection, with wider implications for the apparel and department store sectors. Other apparel firms like Sanyo Shokai also look to be in trouble.

In the end, the crisis in the big apparel firms is also a crisis for department store apparel floors. Given that 30% of department store sales come from apparel and, other than cosmetics and jewellery, what profit there is in department stores also comes from clothing, this remains a serious problem. When Onward, Renown, Sanyo Shokai and others close down so many brands in so many department stores, the buildings themselves lose even more lustre, making it harder to find new tenants or wholesale suppliers. More closures and mergers may be on the cards (for details see below).

In this briefing:

1. Li Auto IPO Initiation: On a Charge
2. Government Fuels Japan Cashless Payments War
3. AREIT Pre-IPO – First Philippines REIT Listing Comes with Its Peculiarities
4. Japan Retail: Essentials Strong in May but in June Even Discretionary Bounces Back
5. 🇯🇵 JAPAN • Stress Tests Part 6: Currency Risk

1. Li Auto IPO Initiation: On a Charge

Lixiang Automotive (LIX CH)/Li Auto is the first company to successfully commercialise EREVs (extended-range electric vehicle) in China, the Li ONE. Li ONE is a six-seat, large premium electric SUV which began volume production and deliveries in November 2019 and December 2019, respectively. Li Auto is backed by Meituan Dianping (3690 HK) which owns 14.5% of ordinary shares (5.8% of voting power). It is seeking to raise $500 million through a Nasdaq IPO, according to press reports. 

2. Government Fuels Japan Cashless Payments War

In June, the government’s rebate scheme that simultaneously aimed to reduce the burden of its October 2019 tax increase while also promoting cashless payments, came to an end. But there’s more to come.

The initial scheme will be replaced in September by an entirely new one, this time to promote the My Number citizen registration system alongside, again, cashless payments.

The new scheme requires consumers to choose one provider only. This will push payment providers to compete with ever more ferocity and, by this time next year, we are likely to see just one or two winners and a whole bunch of losers.

3. AREIT Pre-IPO – First Philippines REIT Listing Comes with Its Peculiarities

AyalaLand Reit (AREIT) (AREIT PM), a subsidiary of Ayala Land Inc (ALI PM), aims to raise up to US$270 in its Philippines listing.

AREIT will be the first REIT listing for the Philippines. It will have an initial portfolio of three commercial buildings located in Metro Manila, Philippines. In addition, it will use the proceeds from the IPO to buy another asset from the sponsor, taking its total asset count to four. Its assets are relatively new, with long term leases and step-up rental escalation, which should provide stability to rentals. 

However, there are some peculiarities with the offering starting from the lack of provision of financial operational data for most of the assets.

4. Japan Retail: Essentials Strong in May but in June Even Discretionary Bounces Back

Retail sales slumped again in May, but only because people are not buying clothes, visiting department stores and shopping centres, or buying their lunches at convenience stores.

Although this led to another major drop in total sales, several sectors did very well and in June there was a surge in spending at some speciality chains and a return to some semblance of normality for many.

5. 🇯🇵 JAPAN • Stress Tests Part 6: Currency Risk

WHAT CURRENCY RISK? – It seems rather old-fashioned to raise the topic of currency risk in relation to potential stressors on Japanese listed companies. Compared to the thirty-five years to 2015, the last five years have been a period of benign calm in the USD/JPY exchange rate, aided and abetted by the action of central banks to eliminate interest rates and the functioning of the bond markets. Most observers expect this currency stability regime to continue and COVID-19 has so far only seen one short ‘blip’ to ¥102.36 on 9th March.

¥ BELOW 100 –  If we isolate only the 1,484 days in the last forty years when Yen has traded above ¥100, the average TOPIX index is 975. The three Yen ‘peaks’ we have highlighted above in 1995, 2011, and 2016 proved excellent entry points. The subsequent trough-to-peak performance was 43%, 139%, and 60%, respectively. The COVID-19-induced trough-to-peak is, so far, just 31%.

KEY DRIVER – Nevertheless, for an increasingly-global Japan, the USDJPY exchange rate remains a key driver of earnings. With a lag of six months, the peaks and troughs of the USDJPY exchange rate have coincided with turning points in the earnings cycle as measured by our Results & Revision Score. The six-month lag suggests that ignoring the impact of COVID-19, the exchange rate is mildly supportive of earnings momentum for the balance of 2020.

• CORRELATION ANALYSIS •

CORRELATIONS – Our analysis of the currency risk of specific companies will be in two parts. The first and simplest is to examine the long-term positive and negative correlations of each listed larger-capitalisation company against the US dollar and Euro for the split-adjusted share price. This analysis will yield some surprising results, including the positive US Dollar correlation of Nippon Express (9062 JP), while Nikon (7731 JP) is negatively correlated. 

• THE FOREIGN CURRENCY TRANSLATION ADJUSTMENT •

FCTA – The second part is perhaps more abstruse, however but is a more accurate estimation of the actual currency risk embedded in the business model.  The Foreign Currency Translation Adjustment (FCTA) is part of Other Comprehensive Income and has been disclosed in Japanese GAAP-based balance sheets and income statements since 2001 and 2011, respectively to measure the extent of each company’s global business and the embedded currency risk. The correlation of the aggregate FCTA for all non-financial companies is, as would be expected, reasonably tight. As these amounts are directly deducted from Net Assets for companies adopting JGAAP and from Shareholders’ Equity for those companies reporting under SEC or IFRS standards, the impact on valuations cannot be ignored. For example, the decline in the US dollar from ¥123 to ¥101 in 2016 resulted in a six-quarter ¥53 trillion negative FCTA adjustment, 65% of the gap between Net Income and CITC over that period.

CITC & NET INCOME – Comprehensive Income adds a series of adjustments to Net Income to reflect as-yet-unrealised changes from currency translations, securities valuation differences, pensions, and deferred hedges. These adjustments are subsequently ‘recycled’ as and when realisations occur. In aggregate over the last seven years, Comprehensive Income has exceeded Net Income by a cumulative ¥56 trillion or 7%. However, as Comprehensive Income is inherently a more volatile data series, it is eschewed or overlooked by most analysts despite the direct impact on Shareholders’ Equity. Nevertheless, Comprehensive Income illustrates that, as a result of increased globalisation and investments in marketable securities, the underlying earnings of Japanese corporates have become riskier than is implied by Net Income. In 2017, the FCTA resulted in an aggregate loss for Comprehensive Income to Common (CITC) and a corresponding decline in Shareholders’ Equity for non-financial Japanese companies.  In the last two reported quarters, the ‘gap’ between Net Income and CITC has begun to widen again as both Valuation Differences and the FCTA have turned negative.

FCTA BY SECTOR – Two-thirds of the total absolute FCTA over the last seven years comes from seven Sectors – Autos, Wholesale, Electrical Equipment, Technology Hardware, Machinery, Other Consumer Products and Telecommunications (Softbank Group). The least-exposed Sectors are Services, IT & Internet, Multi-Industry and Restaurants.

In the DETAIL section below, we shall look at the Accumulated Balance Sheet Foreign Currency Adjustments where Eisai Co Ltd (4523 JP) and Dic Corp (4631 JP) have the most significant amounts of positive and negative Accumulated FCTA’s relative to Equity, respectively.

Source • Japan Analytics

In this briefing:

1. The Week that Was in [email protected] – PAP Retains Power, Rising Sea Ltd, and Cratering Credit Risk
2. ME2ZEN IPO: Absence of Local Pension Funds Vs. Market Friendly Pricing
3. Chinese Airlines and Airports: Industry Loss Narrowed 10.1% QoQ in 2Q20 as Traffic Resumed
4. CTG Duty Free Corp (601888 CH): Encouraging Initial Jul Duty Free Figures from New Hainan Policy
5. SPX Buy Summer Weakness – 3,220 and 3,080 Direction Break Points – 3,200 Short Target

1. The Week that Was in [email protected] – PAP Retains Power, Rising Sea Ltd, and Cratering Credit Risk

Macro Insights

In Singapore’s Twin Surpluses: How Much Is Too Much?, CrossASEAN’s Cheif Economist Prasenjit K. Basu comments on Singapore’s standout current account and fiscal surpluses. 

Equity Bottom-Up Insights

In BCA – Most ROA to Claw Back, banking specialist Daniel Tabbush revisits Indonesia’s leading private bank and assesses the impact of COVID-19 so far with a focus on Bank Central Asia (BBCA IJ) versus its local and regional peers. 

In Company Visits: KTC, Taokaenoi (Treading Water),Athaporn Arayasantiparb, CFA provides feedback from recent company visits to Krungthai Card (KTC TB) and Taokaenoi Food & Marketing (TKN TB).

In EPG: One of the Most Solid Polymer Convertor in the Downstream Sector, our friends at Country Group zero in on Eastern Polymer Group (EPG TB).

In DOHOME: Fastest Growing Home-Improvement Player in Thailand,Country Group initiate coverage on Dohome PCL (DOHOME TB) with a HOLD rating based on a target price of Bt12.5. 

In RBF: Recent Jump in Share Price Leads to OvervaluationDr Andrew Stotz, CFA initiates coverage on RBF with a SELL recommendation based on a target price of Bt8.70, implying a downside of 13% from the current price. 

In Valuation Is Approaching an Expensive Zone our friends at Country Group downgrade Com7 PCL (COM7 TB) to a HOLD rating after rolling over 2021E target price to Bt29.30.

In TFG: Weak 2Q20E but Strong Outlook in Medium to Long Term,Country Group maintain a BUY rating on Thai Foods Group Public Company (TFG TB) with a new 2021E target price at Bt5.95.

Sector and Thematic Insights

2. ME2ZEN IPO: Absence of Local Pension Funds Vs. Market Friendly Pricing

First, here is an overview of ME2ZEN’s second IPO attempt.

It plans to offer 3.2M shares (52% primary and 48% secondary). The total offering represents 28.74% of the total shares at a 14.94% capital increase rate.

Mirae is working as a sole banker with a firm commitment.

The indicative price band is at ₩21,000~27,000, which gives an implied market cap of ₩289.9~372.7bil.

July 30~31 will be for book-building, followed by the allotment on August 4. The following day will be a subscription. The payment date is August 7.

Once again, the float will be tight on this one. A total of 72.48% shares will be in a lock-up for one month to three years. Of those, 65.26% is for more than six months.

3. Chinese Airlines and Airports: Industry Loss Narrowed 10.1% QoQ in 2Q20 as Traffic Resumed

The Civil Aviation Administration of China (CAAC) announced that the overall loss of the aviation industry was Rmb34.3bn in 2Q20, a reduction of Rmb3.8bn, or 10.1%, QoQ. Since the record loss of Rmb24.6bn for the industry in Feb, the monthly loss has reduced for every consecutive month.  For Jun, the loss was Rmb7.6bn, a reduction of Rmb3.8bn or 33.3%, MoM. We take the loss reduction positively as this indicated the continued recovery of the airlines industry – losses for airlines have trimmed by Rmb1.5bn MoM in Jun. 

Our key takeaways are: 1.) the continued MoM trimming of loss is encouraging, and with the peak seasons in Jul and Aug, we believe financial performance will further improve; 2.) the COVID-19 cases related to the Xinfadi Agricultural Trading Market in Beijing since 11-Jun have limited impact on the traffic and profitability nationally; 3.) solid freighter traffic will stay as a partial mitigation to lower passenger traffic in the near term. We uphold our preference for China Southern Airlines (1055 HK) among the Chinese airlines due to its domestic exposure and for Shanghai International Airport Co, Ltd. (600009 CH) among the Chinese airports, partly due to its good exposure to cargo traffic.  

4. CTG Duty Free Corp (601888 CH): Encouraging Initial Jul Duty Free Figures from New Hainan Policy

The average of Rmb64m daily duty free sales in Hainan Island for 1-7 Jul, as released by the China Customs, is 72% higher than the daily sales of the Hainan outlets of China Tourism Group Duty Free Corp Ltd (601888 CH) (CTGDF) in FY19. In our view, this is a positive reflection of the outlook of the company’s duty free business as driven by the favourable duty free policy put into effect on 1 Jul. The increase in the number of categories of high-valued duty free items will also have positive impact to CTGDF’s margin going forward.

Our forecasts suggested that CTGDF’s core EPS will reach a CAGR of 26% between FY19 and FY22. We believe that such projections, as based on the 1-7 Jul figures, are likely to be conservative as during such period: 1.) visitors from Beijing are still significantly affected by travel restriction due to the capital’s COVID-19 cases; 2.) most schools have not yet started the summer vacation; and 3.) the average spending of ~Rmb10,000 is still far from the new quota of Rmb100,000 annually.

5. SPX Buy Summer Weakness – 3,220 and 3,080 Direction Break Points – 3,200 Short Target

S&P 500 (SPX INDEX) is teetering on a more bullish break point that will define a wave 5 thrust higher or secondary pullback within the summer flat corrective range with support near 2,950.

3,220 and 3,080 will act as key break points for a continued rally or second part of a summer pullback cycle (the later is the favored sequence for a pullback from 3,200).

July cycle peak should align with increased virus cases/concerns and overshadow liquidity over the summer.

ISM, demand and growth data spikes have come off of low bases but due to deteriorate as US re opening faces significant speed bumps.

Macro remains bullish on weakness until liquidly support fades.