Australia

In this briefing:

1. Double Bubble, Double Trouble?
2. 6G: Still a Remote Concept; Capable of Overcoming 5G Disappointment
3. May Chip Shipments Up, but Outlook Is Confused
4. Core Correlations Weekly – July 6th, 2020
5. Smartkarma Webinar

1. Double Bubble, Double Trouble?

A review of U.S. and global markets reveals that market leadership has narrowed to NASDAQ and Chinese stocks. If this is the start of a new bull, or a continuation of the old bull, can it rest on the narrow leadership of a handful of NASDAQ stocks and the Chinese market?

Is this just a double bubble, and does that imply double trouble ahead?

We are not sure. We are torn between Bob Farrell’s Rule No. 4:

Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways.

And Rule No. 7.

Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names.

Investors need to be aware of the tension between Rule No. 4, which raises the possibility of a stock bubble, and the risks posed by the narrow leadership warned by Rule No. 7. Tail-risk is high in both directions. In this environment, it is worthwhile to return to basics and re-visit investment objectives and risk tolerances in order to balance risk and reward. There are no perfect answers and each will be different.

Regardless of what direction the market takes, investors can count on a climate of high volatility in the near future.

2. 6G: Still a Remote Concept; Capable of Overcoming 5G Disappointment

In our previous insight, we spoke about 5G being a disappointment, a possible delay in 5G adoption, and how WiFi-6 could take its place. In this insight, we look at 6G, which is still a developing technology. 6G is the sixth generation of wireless technologies, with extreme coverage and capacity. 6G network systems are expected to support data rates at a speed of 1 terabit per second (Tbps), 8000 times faster than 5G, with an end-to-end latency of one microsecond. The increase in IoT applications triggered the expansion of 5G, and it is now stimulating the demand for the 6G networks as well. Our key points based on the first look at 6G, are:

• 6G is still a remote concept and will take another 15 years to be fully deployed (i.e. by 2035) since there are many necessary technological and technical advancements to be made before a 6G product is introduced to the market.
• Most developments and the initiation of projects come from the South Korean and Chinese players. In our opinion, South Korea could take the lead, as China is currently focusing on developing its 5G networks, and China’s Huawei is also having issues with the expansion of its 5G networks.
• South Korean mobile manufacturers like Samsung and LG are likely to benefit due to their increased initial commitments focusing on 6G, and this might give them an edge over Chinese and U.S. manufacturers like Apple or Huawei.
• The U.S. manufacturers have a head start in 6G semiconductor technology. However, given the reduced size requirement for base stations and, eventually, for mobile phones, we believe that Japanese MLCC players could closely compete with the U.S. chip manufacturers.

Previous related insights:

5G for the Next Big Turn of a New Decade 

Will 2020 See Successful Deployment of 5G? 

Lockdown To Accelerate WiFi 6: A Threat to Anticipated 5G Deployment? 

5G Delay and Disappointment – Will Murata Suffer? 

3. May Chip Shipments Up, but Outlook Is Confused

The SIA released the monthly WSTS semiconductor shipments statistics for May, and with it a statement that the chip market seemed resistant to COVID-19.  On the whole revenues have fallen back to trend thanks to the recent market collapse, but China’s response to that country’s outbreak shows what may be in store for other regions.

4. Core Correlations Weekly – July 6th, 2020

Demand

1. China Manufacturing PMI: Manufacturing PMI data from China continues to be healthy after posting a dip in February due to COVID. June data came in at 50.9 and showed sequential improvement over May’s 50.6.

2. Fundamental data points from China continue to show strength. Auto demand is likely to be up 4-5% YoY in June, and CRIC (China Real Estate Information Corporation) data shows property sales are up 14% YoY in June for the top 200 developers. Data for Jan-June FY20 has inflected into positive territory at 1% YTD.

Supply

1. Supply issues from Brazil in June were not as bad as initially feared. Brazil shipped out 30 million tons in June, recording a 1% YoY growth.

2. Inventory at the ports in China rose for the first time in three months.

5. Smartkarma Webinar

In this briefing:

1. Infigen’s White Knight on a Charger
2. Infigen Gets Iberdrola As Overbidder
3. SkyCity Placement: Past Performance and the Relative Value Trade
4. Uniti/OptiComm: High-Fibre Diet

1. Infigen’s White Knight on a Charger

Spanish renewables juggernaut Iberdrola SA (IBE SM) has launched a friendly white knight takeover bid for the Australian renewables company Infigen Energy (IFN AU) , valued at AUD 840.6 million (EUR 510 million), or AUD 0.86 per stapled security, 9.6x EV/2021e EBITDA (Capital IQ consensus).

• Infigen is trading at AUD 0.88-0.90 (a three-year high), as the market attaches some probability to an improved bid, with 26.3 million shares traded in the last session vs. a 30-day average of 8.2 mn shares.

The offer is superior to that of Ayala, with just a minimum acceptance condition (50% plus one stapled security, on a fully diluted basis). The TCI Funds have agreed to sell 20% of Infigen stapled securities to Iberdrola, subject to FIRB’s approval and the offer being declared unconditional.

Iberdrola should have no problem to finance the bid from available cash & equivalent balances (EUR 2,868 million at 31 March 2020).

Iberdrola has the unanimous backing of the Board of Infigen “in the absence of a superior offer”. Infigen Energy had previously received an AUD777m offer from UAC Energy, a fully-owned subsidiary of Philippines-based conglomerate Ayala. The Board dubbed that offer as “opportunistic” and “highly conditional”. (See Infigen Energy’s Off-Market Takeover Offer ).  Infigen Energy’s Board has unanimously recommended shareholders to reject UAC Energy’s offer.

Iberdrola has the right to match any rival bid, therefore any competing bid will have to offer a significantly higher price.

There is a break fee of 1% of the offer, i.e. AUD 8.4 million (EUR 5.1 million). The offer is not subject to further due diligence or refinancing.

Iberdrola (S&P BBB+, stable) has the firepower to acquire Infigen and even increase the bid, although the interloper risk seems low.

While the offer from Iberdrola may not be overly generous, in my view, it is certain to complete and it is difficult to think of a competing bid.

2. Infigen Gets Iberdrola As Overbidder

When the proposed UAC Energy (a JV between AC Energy and Ayala Corporation (AC PM)) deal for Infigen Energy (IFN AU) was announced at A$0.80 on 2 June, it did not immediately garner board support, nor support from the lynchpin investor TCI, which had the power to make or break a takeover, and it seemed obvious there could be an overbidder. 

This morning, an overbidder arrived at A$0.86/share and a couple of the potential “hurdles” of a deal – financing, TCI’s willingness to sell, board support – have disappeared at the stroke of a pen.

Iberdrola SA (IBE SM) has announced a deal at A$0.86/share which is recommended by the Infigen board. The Implementation Agreement has been signed.

This morning…

• Iberdrola SA publicly announced that it had purchased 20% of Infigen Energy at A$0.86 from TCI.
• Iberdrola announced an Offer for Infigen at A$0.86/share.
• Infigen announced it recommended the Iberdrola Offer
• Infigen announced there would be no distribution for H2 2020 (half ending 30 June) because both bids’ pricing (UAC’s and Iberdrola’s) were contingent on distribution being declared. 

That changes the landscape. After the initial insight Infigen Energy Deal – Interesting Optionality, the shares gently drifted higher, trading as high as A$0.83 earlier this week. Today after the announcement, the shares jumped, opening and closing at A$0.88 and changing hands as high as A$0.90 during the day.

More below the fold.

3. SkyCity Placement: Past Performance and the Relative Value Trade

SkyCity launched an NZD 180 million institutional placement and an NZD 50 million share purchase plan this morning. In this note, we will take a look at the details of the capital raising and provide our thoughts on the deal. Although the stock has not gone anywhere in the past five years, we do think that the placement provides an interesting opportunity to profit from both business recovery and performance catch-up with peers.

4. Uniti/OptiComm: High-Fibre Diet

Fibre network operator OptiComm Ltd (OPC AU) was listed on the 22 August 2019 at $2.00/share, and promptly gained 50% on its debut. It continued this upward trajectory before closing at $5.02 last Friday.

Yesterday morning, Adelaide-based outfit Uniti Group Ltd (UWL AU) tabled a cash/scrip Offer by way of a Scheme, with a total consideration of A$5.20/share, including a $0.10/share fully franked dividend.

This backs out a 13.6x EV/EBITDA and 24.5x PER.  Plus a 160% gain for shareholders since listing. 

Shareholders are afforded five alternatives under the Scheme: an all-cash payment; an all-scrip settlement (3.4228 Uniti shares for every OptiComm share), or three different cash/scrip combos.

Cash and scrip are capped at A$407mn and 84mn Uniti shares, respectively, implying a 77%/23% cash/scrip split. 

Uniti will fund the Scheme via a A$270mn entitlement Offer and a three-year A$150mn debt facility. The institutional component, comprising ~A$152mn, has successfully completed.

This aggressive tilt for OptiComm is the latest in a string of acquisitions from Uniti, which itself was listed in February last year.  I would take the Offer with a more cash-heavy component.

More below the fold.

In this briefing:

1. ASX200 Index Review – A Handful of Changes

1. ASX200 Index Review – A Handful of Changes

S&P Dow Jones Indices announced changes to the S&P/ASX 200 (AS51 INDEX) today. The changes are effective at the open of trading on 22 June and passive funds will need to complete their rebalancing activity at or by the close on 19 June.

There are 5 additions in the review: Centuria Industrial Reit (CIP AU), Megaport Ltd (MP1 AU), Mesoblast Ltd (MSB AU), Oil Basins Ltd (OBL AU) and Perseus Mining (PRU AU).

There are 6 deletions in the review: Estia Health (EHE AU), Hub24 Ltd (HUB AU), Jumbo Interactive (JIN AU), Mayne Pharma (MYX AU), Pilbara Minerals (PLS AU) and Pinnacle Investment Management Group.

With only 6 days to implementation day there could be big moves ahead. As I type, the adds are down 2.61% on average while the deletes are 6.31% lower on average.

In this briefing:

1. 6G: Still a Remote Concept; Capable of Overcoming 5G Disappointment
2. May Chip Shipments Up, but Outlook Is Confused
3. Core Correlations Weekly – July 6th, 2020
4. Smartkarma Webinar
5. Australian Banks: Who Wants to Be a Millionaire? Tales Of “The Land Down Under”.

1. 6G: Still a Remote Concept; Capable of Overcoming 5G Disappointment

In our previous insight, we spoke about 5G being a disappointment, a possible delay in 5G adoption, and how WiFi-6 could take its place. In this insight, we look at 6G, which is still a developing technology. 6G is the sixth generation of wireless technologies, with extreme coverage and capacity. 6G network systems are expected to support data rates at a speed of 1 terabit per second (Tbps), 8000 times faster than 5G, with an end-to-end latency of one microsecond. The increase in IoT applications triggered the expansion of 5G, and it is now stimulating the demand for the 6G networks as well. Our key points based on the first look at 6G, are:

• 6G is still a remote concept and will take another 15 years to be fully deployed (i.e. by 2035) since there are many necessary technological and technical advancements to be made before a 6G product is introduced to the market.
• Most developments and the initiation of projects come from the South Korean and Chinese players. In our opinion, South Korea could take the lead, as China is currently focusing on developing its 5G networks, and China’s Huawei is also having issues with the expansion of its 5G networks.
• South Korean mobile manufacturers like Samsung and LG are likely to benefit due to their increased initial commitments focusing on 6G, and this might give them an edge over Chinese and U.S. manufacturers like Apple or Huawei.
• The U.S. manufacturers have a head start in 6G semiconductor technology. However, given the reduced size requirement for base stations and, eventually, for mobile phones, we believe that Japanese MLCC players could closely compete with the U.S. chip manufacturers.

Previous related insights:

5G for the Next Big Turn of a New Decade 

Will 2020 See Successful Deployment of 5G? 

Lockdown To Accelerate WiFi 6: A Threat to Anticipated 5G Deployment? 

5G Delay and Disappointment – Will Murata Suffer? 

2. May Chip Shipments Up, but Outlook Is Confused

The SIA released the monthly WSTS semiconductor shipments statistics for May, and with it a statement that the chip market seemed resistant to COVID-19.  On the whole revenues have fallen back to trend thanks to the recent market collapse, but China’s response to that country’s outbreak shows what may be in store for other regions.

3. Core Correlations Weekly – July 6th, 2020

Demand

1. China Manufacturing PMI: Manufacturing PMI data from China continues to be healthy after posting a dip in February due to COVID. June data came in at 50.9 and showed sequential improvement over May’s 50.6.

2. Fundamental data points from China continue to show strength. Auto demand is likely to be up 4-5% YoY in June, and CRIC (China Real Estate Information Corporation) data shows property sales are up 14% YoY in June for the top 200 developers. Data for Jan-June FY20 has inflected into positive territory at 1% YTD.

Supply

1. Supply issues from Brazil in June were not as bad as initially feared. Brazil shipped out 30 million tons in June, recording a 1% YoY growth.

2. Inventory at the ports in China rose for the first time in three months.

4. Smartkarma Webinar

5. Australian Banks: Who Wants to Be a Millionaire? Tales Of “The Land Down Under”.

At its height, in 1989, real estate in Tokyo sold for as much as $139,000 a square foot—more than 350 times as much as choice property in Manhattan. Such valuation made the land under the Imperial Palace in Tokyo notionally worth more than all the real estate in California. We know what happened to Japan shortly after as one of the biggest bubbles in History duly imploded.

Headlines like this can speak a thousand words.

Last year, a headline crossed the wires, sparking Deja Vu. The Australian Bureau of Statistics announced proudly that average Australian household wealth had exceeded one million dollars. Sure: one million dollars today is not what it used to be. After all, China is said to be printing billionaires by the day.

So how did come to pass? As you would expect, it’s about household wealth and not income. And yes, it’s mainly about property. The worry is that indirect exposure of superannuation, equities and the broader economy to the housing market is elevated. Australians have put all their eggs in one basket and bet the house on red or black. Many must be trying to cash in their chips.

Banks which are heavily exposed to mortgages (about 20% of mortgage borrowers are in stress) make up about a quarter of the ASX300. This is unhealthily high. (One thinks of pre-GFC concentration of UK banks in the FTSE). Some 60% of all lending by Oz financial institutions is to the property sector. Superannuation funds invest in the corporate bond market too, of which Australian banks make up approximately 30% of the issuance. Then Supers have deposits and bank equities too.

“Shovel-ready” construction always seems to fit nicely into a politician’s toolkit. Partly because it’s a lazy choice. Construction like anything can play a part in a balanced diversified economy. But construction represents around 8% of GDP in Australia and employs around one million inhabitants. This concentration is elevated in China as we know and in Canada as well as parts of Europe and the UK but not as high as in “the land down under”.

A shock to GDP (compounded by COVID) would hit the labour market, flowing into household wealth and back to GDP again. Australian household wealth is dependent of course on wages and employment which are are a function of GDP which is heavily exposed to the housing market. One could be forgiven for equating the Australian economic model to the housing and banking markets.

History rhymes. Ireland springs to mind. Australia’s household debt to GDP stands around 129% (BIS): big by any standard. In 2007, Ireland was around 100%. Australia’s household debt to disposable income is around 180% (RBA). Ireland stood at 200% in 2007. More than two thirds of the country’s net household wealth is invested in real estate. In 2008, that figure was 83% in Ireland. 

Ratings Agencies have modeled  how Australian banks might fair in an Ireland style property crash (mortgage defaults of 13% and house prices contraction of 43%). Almost half of bank profits would vanish. Bank shares would be mauled and so would both the stock market with its high exposure to financials and Superannuation funds. Then consumers or savers would feel rather less like a millionaire.

Litigation-weary Australian banks, at the epicentre of this scheme, do not score well on our quantamental PH Score model. This means that trends are far from benign relative to APAC and globally. Looking at the big picture, one notes that LDRs are sky-high ; Equity/Assets are low in some specific cases; and ROAs are generally modest.

What also sticks out is that Australian banks command a premium valuation relative to the world and the region despite the outsized risks. That’s a premium on a PER, FV, and PBV basis. They are not just extremely risky but are in fact dear.

In this briefing:

1. ASX200 Index Review – A Handful of Changes
2. Spring WSTS Semiconductor Forecast Gives Mixed Outlook

1. ASX200 Index Review – A Handful of Changes

S&P Dow Jones Indices announced changes to the S&P/ASX 200 (AS51 INDEX) today. The changes are effective at the open of trading on 22 June and passive funds will need to complete their rebalancing activity at or by the close on 19 June.

There are 5 additions in the review: Centuria Industrial Reit (CIP AU), Megaport Ltd (MP1 AU), Mesoblast Ltd (MSB AU), Oil Basins Ltd (OBL AU) and Perseus Mining (PRU AU).

There are 6 deletions in the review: Estia Health (EHE AU), Hub24 Ltd (HUB AU), Jumbo Interactive (JIN AU), Mayne Pharma (MYX AU), Pilbara Minerals (PLS AU) and Pinnacle Investment Management Group.

With only 6 days to implementation day there could be big moves ahead. As I type, the adds are down 2.61% on average while the deletes are 6.31% lower on average.

2. Spring WSTS Semiconductor Forecast Gives Mixed Outlook

The Spring WSTS semiconductor forecast has been announced and it is very similar at the top-line level to the organization’s Autumn forecast published six months ago.  At a more detailed level, though, there have been some significant changes that we explore here.

In this briefing:

1. Spring WSTS Semiconductor Forecast Gives Mixed Outlook

1. Spring WSTS Semiconductor Forecast Gives Mixed Outlook

The Spring WSTS semiconductor forecast has been announced and it is very similar at the top-line level to the organization’s Autumn forecast published six months ago.  At a more detailed level, though, there have been some significant changes that we explore here.

In this briefing:

1. May Chip Shipments Up, but Outlook Is Confused
2. Core Correlations Weekly – July 6th, 2020
3. Smartkarma Webinar
4. Australian Banks: Who Wants to Be a Millionaire? Tales Of “The Land Down Under”.
5. Afterpay Placement – We Would Sell Now, Maybe Buy Later, if It Corrects

1. May Chip Shipments Up, but Outlook Is Confused

The SIA released the monthly WSTS semiconductor shipments statistics for May, and with it a statement that the chip market seemed resistant to COVID-19.  On the whole revenues have fallen back to trend thanks to the recent market collapse, but China’s response to that country’s outbreak shows what may be in store for other regions.

2. Core Correlations Weekly – July 6th, 2020

Demand

1. China Manufacturing PMI: Manufacturing PMI data from China continues to be healthy after posting a dip in February due to COVID. June data came in at 50.9 and showed sequential improvement over May’s 50.6.

2. Fundamental data points from China continue to show strength. Auto demand is likely to be up 4-5% YoY in June, and CRIC (China Real Estate Information Corporation) data shows property sales are up 14% YoY in June for the top 200 developers. Data for Jan-June FY20 has inflected into positive territory at 1% YTD.

Supply

1. Supply issues from Brazil in June were not as bad as initially feared. Brazil shipped out 30 million tons in June, recording a 1% YoY growth.

2. Inventory at the ports in China rose for the first time in three months.

3. Smartkarma Webinar

4. Australian Banks: Who Wants to Be a Millionaire? Tales Of “The Land Down Under”.

At its height, in 1989, real estate in Tokyo sold for as much as $139,000 a square foot—more than 350 times as much as choice property in Manhattan. Such valuation made the land under the Imperial Palace in Tokyo notionally worth more than all the real estate in California. We know what happened to Japan shortly after as one of the biggest bubbles in History duly imploded.

Headlines like this can speak a thousand words.

Last year, a headline crossed the wires, sparking Deja Vu. The Australian Bureau of Statistics announced proudly that average Australian household wealth had exceeded one million dollars. Sure: one million dollars today is not what it used to be. After all, China is said to be printing billionaires by the day.

So how did come to pass? As you would expect, it’s about household wealth and not income. And yes, it’s mainly about property. The worry is that indirect exposure of superannuation, equities and the broader economy to the housing market is elevated. Australians have put all their eggs in one basket and bet the house on red or black. Many must be trying to cash in their chips.

Banks which are heavily exposed to mortgages (about 20% of mortgage borrowers are in stress) make up about a quarter of the ASX300. This is unhealthily high. (One thinks of pre-GFC concentration of UK banks in the FTSE). Some 60% of all lending by Oz financial institutions is to the property sector. Superannuation funds invest in the corporate bond market too, of which Australian banks make up approximately 30% of the issuance. Then Supers have deposits and bank equities too.

“Shovel-ready” construction always seems to fit nicely into a politician’s toolkit. Partly because it’s a lazy choice. Construction like anything can play a part in a balanced diversified economy. But construction represents around 8% of GDP in Australia and employs around one million inhabitants. This concentration is elevated in China as we know and in Canada as well as parts of Europe and the UK but not as high as in “the land down under”.

A shock to GDP (compounded by COVID) would hit the labour market, flowing into household wealth and back to GDP again. Australian household wealth is dependent of course on wages and employment which are are a function of GDP which is heavily exposed to the housing market. One could be forgiven for equating the Australian economic model to the housing and banking markets.

History rhymes. Ireland springs to mind. Australia’s household debt to GDP stands around 129% (BIS): big by any standard. In 2007, Ireland was around 100%. Australia’s household debt to disposable income is around 180% (RBA). Ireland stood at 200% in 2007. More than two thirds of the country’s net household wealth is invested in real estate. In 2008, that figure was 83% in Ireland. 

Ratings Agencies have modeled  how Australian banks might fair in an Ireland style property crash (mortgage defaults of 13% and house prices contraction of 43%). Almost half of bank profits would vanish. Bank shares would be mauled and so would both the stock market with its high exposure to financials and Superannuation funds. Then consumers or savers would feel rather less like a millionaire.

Litigation-weary Australian banks, at the epicentre of this scheme, do not score well on our quantamental PH Score model. This means that trends are far from benign relative to APAC and globally. Looking at the big picture, one notes that LDRs are sky-high ; Equity/Assets are low in some specific cases; and ROAs are generally modest.

What also sticks out is that Australian banks command a premium valuation relative to the world and the region despite the outsized risks. That’s a premium on a PER, FV, and PBV basis. They are not just extremely risky but are in fact dear.

5. Afterpay Placement – We Would Sell Now, Maybe Buy Later, if It Corrects

Afterpay Touch (APT AU) aims to raise around US$700m (A$1bn) via mix of selling primary and secondary shares.

We’ve covered two prior deals in the name:

• US$70m raise in Aug 2018: Afterpay Touch Placement: Strong Momentum but Valuation Is Rich
• US$208m raise in Jun 2019: Afterpay Touch Placement – Still Expensive

The deal scores well on our framework given the company’s recent share price performance. However, the shares have run-up quite A LOT!

In this briefing:

1. It’s A Big, Beautiful ‘V’

1. It’s A Big, Beautiful ‘V’

• V-shaped rebound confirmed. Global Liquidity Index (GLI) rises again to 85.1 (‘normal’ range 0-100). In US$ terms Global Liquidity could soar by 30-40% in 2020 to some US$190 trillion
• US Fed Liquidity Index hits 90.3 and Balance Sheet likely to test US$10 trillion in 2020
• This will push the equity/ liquidity ratio down to near historic lows at 0.37 times. It shows how skewed portfolios are towards ‘safety’ and by corollary by how much investors’ mood is depressed
• Yield curves have further to steepen. US curve could add 150bp of steepening
• Capital flows into US dollar show clear signs of rolling over. Gold/ Euro attractive

In this briefing:

1. Core Correlations Weekly – July 6th, 2020
2. Smartkarma Webinar
3. Australian Banks: Who Wants to Be a Millionaire? Tales Of “The Land Down Under”.
4. Afterpay Placement – We Would Sell Now, Maybe Buy Later, if It Corrects
5. Smartkarma Webinar

1. Core Correlations Weekly – July 6th, 2020

Demand

1. China Manufacturing PMI: Manufacturing PMI data from China continues to be healthy after posting a dip in February due to COVID. June data came in at 50.9 and showed sequential improvement over May’s 50.6.

2. Fundamental data points from China continue to show strength. Auto demand is likely to be up 4-5% YoY in June, and CRIC (China Real Estate Information Corporation) data shows property sales are up 14% YoY in June for the top 200 developers. Data for Jan-June FY20 has inflected into positive territory at 1% YTD.

Supply

1. Supply issues from Brazil in June were not as bad as initially feared. Brazil shipped out 30 million tons in June, recording a 1% YoY growth.

2. Inventory at the ports in China rose for the first time in three months.

2. Smartkarma Webinar

3. Australian Banks: Who Wants to Be a Millionaire? Tales Of “The Land Down Under”.

At its height, in 1989, real estate in Tokyo sold for as much as $139,000 a square foot—more than 350 times as much as choice property in Manhattan. Such valuation made the land under the Imperial Palace in Tokyo notionally worth more than all the real estate in California. We know what happened to Japan shortly after as one of the biggest bubbles in History duly imploded.

Headlines like this can speak a thousand words.

Last year, a headline crossed the wires, sparking Deja Vu. The Australian Bureau of Statistics announced proudly that average Australian household wealth had exceeded one million dollars. Sure: one million dollars today is not what it used to be. After all, China is said to be printing billionaires by the day.

So how did come to pass? As you would expect, it’s about household wealth and not income. And yes, it’s mainly about property. The worry is that indirect exposure of superannuation, equities and the broader economy to the housing market is elevated. Australians have put all their eggs in one basket and bet the house on red or black. Many must be trying to cash in their chips.

Banks which are heavily exposed to mortgages (about 20% of mortgage borrowers are in stress) make up about a quarter of the ASX300. This is unhealthily high. (One thinks of pre-GFC concentration of UK banks in the FTSE). Some 60% of all lending by Oz financial institutions is to the property sector. Superannuation funds invest in the corporate bond market too, of which Australian banks make up approximately 30% of the issuance. Then Supers have deposits and bank equities too.

“Shovel-ready” construction always seems to fit nicely into a politician’s toolkit. Partly because it’s a lazy choice. Construction like anything can play a part in a balanced diversified economy. But construction represents around 8% of GDP in Australia and employs around one million inhabitants. This concentration is elevated in China as we know and in Canada as well as parts of Europe and the UK but not as high as in “the land down under”.

A shock to GDP (compounded by COVID) would hit the labour market, flowing into household wealth and back to GDP again. Australian household wealth is dependent of course on wages and employment which are are a function of GDP which is heavily exposed to the housing market. One could be forgiven for equating the Australian economic model to the housing and banking markets.

History rhymes. Ireland springs to mind. Australia’s household debt to GDP stands around 129% (BIS): big by any standard. In 2007, Ireland was around 100%. Australia’s household debt to disposable income is around 180% (RBA). Ireland stood at 200% in 2007. More than two thirds of the country’s net household wealth is invested in real estate. In 2008, that figure was 83% in Ireland. 

Ratings Agencies have modeled  how Australian banks might fair in an Ireland style property crash (mortgage defaults of 13% and house prices contraction of 43%). Almost half of bank profits would vanish. Bank shares would be mauled and so would both the stock market with its high exposure to financials and Superannuation funds. Then consumers or savers would feel rather less like a millionaire.

Litigation-weary Australian banks, at the epicentre of this scheme, do not score well on our quantamental PH Score model. This means that trends are far from benign relative to APAC and globally. Looking at the big picture, one notes that LDRs are sky-high ; Equity/Assets are low in some specific cases; and ROAs are generally modest.

What also sticks out is that Australian banks command a premium valuation relative to the world and the region despite the outsized risks. That’s a premium on a PER, FV, and PBV basis. They are not just extremely risky but are in fact dear.

4. Afterpay Placement – We Would Sell Now, Maybe Buy Later, if It Corrects

Afterpay Touch (APT AU) aims to raise around US$700m (A$1bn) via mix of selling primary and secondary shares.

We’ve covered two prior deals in the name:

• US$70m raise in Aug 2018: Afterpay Touch Placement: Strong Momentum but Valuation Is Rich
• US$208m raise in Jun 2019: Afterpay Touch Placement – Still Expensive

The deal scores well on our framework given the company’s recent share price performance. However, the shares have run-up quite A LOT!

5. Smartkarma Webinar

In this Smartkarma Webinar, David Blennerhassett will discuss the hostile situation between Cromwell Property (CMW AU) and ARA Asset Management, further described in Cromwell/ARA: A Festering Relationship.

In this briefing:

1. Semiconductor OSAT. Strong Q1 Results, Weak Q2, Cautious H2 2020 Outlook & Good News For ASE & JCET

1. Semiconductor OSAT. Strong Q1 Results, Weak Q2, Cautious H2 2020 Outlook & Good News For ASE & JCET

First quarter combined revenues for the top ten Outsourced Semiconductor Assembly Test (OSAT) companies grew by 23.5% YoY to reach $5.9 billion. Sequentially, their revenues declined 7.4%, in line with normal seasonality. For the second quarter, the companies that provided forecasts anticipate revenues being down around 10% sequentially, well below what we would expect seasonally. As for the second half, most expressed optimism that the impacted sectors, namely automotive, industrial and communications would return to normal, albeit with all of the usual caveats around uncertainty related to the progress of the COVID-19 pandemic. 

Separately there was good news for both global OSAT #1 player Advanced Semiconductor Engr (2311 TT) and #1 China player Jiangsu Changjiang Electronics Tech Co (600584 CH) during the  quarter with the former finally getting relief from China from the onerous conditions of its merger with Siliconware Precision Industries (Adr) (SPIL US) and the latter turning a FY 2019 profit after  making a major loss the previous year.