Bottom-Up Equities

In this briefing:

1. New Oriental (EDU): Stock Up 120% in 2019, But Still 23% Upside Due to Excellent Q2
2. SK Holdings SoTP Valuation Sensitivity Analysis
3. IndusInd Bank – NPL Formation Doubling
4. RHB Bank – Quiet Transformation

1. New Oriental (EDU): Stock Up 120% in 2019, But Still 23% Upside Due to Excellent Q2

• EDU’s stock price had risen more than 120% in 2019.
• The growth rate of both students and revenues accelerated in 2Q2020 (ended November 2019).
• The operating margin turned to 3% in 2Q2020 versus -5% in 2Q2019.
• The classroom-based business grew more rapidly than the online business and EDU has been utilizing learning centers more efficiently.
• We believe, in fiscal 2020 (ended May 2020), total revenues will grow 29% and the operating margin will improve to 14% versus 10% in F2019.
• The P/E band suggests an upside of 23%.

Our previous coverage on New Oriental:

• New Oriental (EDU): Operating Profits Up 54%, as a Main Competitor Goes Bankrupt
• New Oriental (EDU): Growth and Margin Recovered
• New Oriental (EDU): Do Not Fear Q2 Record Losses, 27% Upside
• New Oriental (EDU): Educator License Not A Concern
• New Oriental (EDU): Laws Harm Private Schools? Not This One

2. SK Holdings SoTP Valuation Sensitivity Analysis

3. IndusInd Bank – NPL Formation Doubling

Indusind Bank (IIB IN) is one of India’s fastest growing financials. This means that it has higher unseasoned loans than many. Where this occurs alongside weak or deteriorating economic conditions, it can see higher NPL formation. The numbers just out, are illustrative of how this can look. Our emphasis herein is on Pillar 3 detail of NPLs and also credit costs, but for an intriguing read of questionable accounting and disclosure, we refer to Hemindra Hazari‘s report IndusInd Bank’s Charge on Shareholder Funds: Obscurity Is the Best Policy?.

4. RHB Bank – Quiet Transformation

RHB Bank Bhd (RHBBANK MK) used to be far more focused on corporate loans and this has changed dramatically over the years, in favor of consumer loans and SME loans. The bank’s transformation is also evident in its digitalization program, which may be easier for a medium-sized, well-managed bank to affect, than for large banks or less able small banks. The result of the bank’s strategic shift is evident in many facets, including ROA and ROE. But we believe there is more to come. Better credit metrics than most is also a stand out feature, as is the RHB’s relatively low market capitalization level compared with assets.

In this briefing:

1. WeWork: Softbank Details Imply Slowing Top Line Growth and $1bn+ in Losses
2. BEM: Leading Mass Transit Operator Is About to Get Huge
3. Japan Airport Terminal – Ballooning Depreciation into an Uncertain Demand Environment
4. Doosan Heavy Industries – A Massive Restructuring & Big Political Event Catalyst
5. Hang Seng Bank – Lean on Me

1. WeWork: Softbank Details Imply Slowing Top Line Growth and $1bn+ in Losses

According to Softbank (indirectly), WeWork revenue growth continues to slow and losses to expand. We did not get any detailed financial data this quarter but its announcement of financial targets and a breakdown of WeWork’s impact on Softbank Q3 numbers give us enough to get a rough idea. The magnitude of near-term losses does explain why conversions for most recent investments/contribution of joint venture stakes and the tender offer for the minority shareholders don’t kick until April when (presumably) the situation has stabilised. Meanwhile, it also The appears the fair value for equity has declined from $7.8bn at Q2 (Sep) to $7.3bn as of December.

2. BEM: Leading Mass Transit Operator Is About to Get Huge

We initiate coverage of BEM with a HOLD rating, based on a target price of Bt11.70 derived from a sum-of-the-parts methodology, which implies 45xPE’20E, or a 10% premium to the Thailand transportation sector

The story:

Risks:  Concession termination, interest rate fluctuation and legal disputes

3. Japan Airport Terminal – Ballooning Depreciation into an Uncertain Demand Environment

Japan Airport Terminal’s operating position is interesting. The company has been making significant investments to expand its capacity for international flights, partly due to the upcoming Tokyo Olympics and thus has seen capex surge from a low of ¥4.8bn in FY03/15 to an expected ¥77bn this FY. This is likely to lead a significant surge in depreciation together with the potential for a significant increase in operating profit… if strong demand continues. Ultimately, this is the story that the coronavirus outbreak threatens, and we are concerned that the depreciation burden may be being underestimated by the market.

4. Doosan Heavy Industries – A Massive Restructuring & Big Political Event Catalyst

On February 18th, Doosan Heavy Industries (034020 KS) announced a massive restructuring plan, one of its biggest ever in its 58 years of history. As of the end of September 2019, the company had 6,784 employees, of which about 2,600 are 45 years old or more. This restructuring plan includes a voluntary ERP (early retirement program) for these 2,600 employees.

The United Future Party is pro-nuclear power and if they are able to win the General National Assembly election, it would certainly have a major positive impact on Doosan Heavy Industries (034020 KS). Nonetheless, there are still nearly two months left until the election and in Korea, that is like a lifetime in political ages and so much could change during this period.

5. Hang Seng Bank – Lean on Me

• Modest EPS Weakness Set to Continue: Hang Seng Bank (11.HK) [Hang Seng] reported 2H19 EPS results of HKD 5.79 per share – a decline of just 1% YOY – reflective of weaker overall revenues. NIMs disappointed despite the increase in HIBOR.  Additionally, credit costs and operating expenses were higher than expected.  The super normal profit cycle in Hong Kong now appears to have ended. 
• HSBC Needs Capital:With an above average CET1 ratio at 16.9%, which increased 50 bp linked period, there is a very high likelihood that Hang Seng’s dividend will remain intact – and even continue its upward ascent. For 2019, Hang Seng’s dividend per share rose 9% against 2% profit growth as the payout rose from 60% to 64%.  

In this briefing:

1. SK Holdings SoTP Valuation Sensitivity Analysis
2. IndusInd Bank – NPL Formation Doubling
3. RHB Bank – Quiet Transformation
4. TSMC. Setting The Stage For Record Growth In 2020 And Beyond

1. SK Holdings SoTP Valuation Sensitivity Analysis

2. IndusInd Bank – NPL Formation Doubling

Indusind Bank (IIB IN) is one of India’s fastest growing financials. This means that it has higher unseasoned loans than many. Where this occurs alongside weak or deteriorating economic conditions, it can see higher NPL formation. The numbers just out, are illustrative of how this can look. Our emphasis herein is on Pillar 3 detail of NPLs and also credit costs, but for an intriguing read of questionable accounting and disclosure, we refer to Hemindra Hazari‘s report IndusInd Bank’s Charge on Shareholder Funds: Obscurity Is the Best Policy?.

3. RHB Bank – Quiet Transformation

RHB Bank Bhd (RHBBANK MK) used to be far more focused on corporate loans and this has changed dramatically over the years, in favor of consumer loans and SME loans. The bank’s transformation is also evident in its digitalization program, which may be easier for a medium-sized, well-managed bank to affect, than for large banks or less able small banks. The result of the bank’s strategic shift is evident in many facets, including ROA and ROE. But we believe there is more to come. Better credit metrics than most is also a stand out feature, as is the RHB’s relatively low market capitalization level compared with assets.

4. TSMC. Setting The Stage For Record Growth In 2020 And Beyond

TSMC kicked off earnings season with a bang, racking up their highest ever quarterly revenues and closing out 2019 with the company’s highest ever annual CapEx spending. Expecting semi sales, excluding memory, to grow by 8% in 2020, they forecasted that foundry will grow by 17% and that TSMC will grow even more than that

During what was a strongly upbeat earnings call, they shrugged off concerns about geopolitics, lingering trade wars and even the threat of further changes to the US Export Administration Regulations (EAR) de minimis rules. Here’s a look in detail at what TSMC had to say. 

In this briefing:

1. SPRC: Back to a Profitable Cycle in 2020

1. SPRC: Back to a Profitable Cycle in 2020

We initiate coverage of SPRC with a BUY rating and a 2020E target price of Bt11.60, derived from 1.3xPBV’20E, which represents a 13% premium to the Thailand energy average of 1.15x.

The story:

• Superior GRM as a result of partnership with Chevron
• To benefit from several turnaround projects including expansion
• IMO regulation to support refinery margin in 2020E

Risks:

• Raw material price fluctuation
• Foreign currency exchange rate fluctuation
• Unplanned shutdown of refinery

In this briefing:

1. Shanghai International Airport (600009 CH): Best of the Breed
2. HSBC – Move Along, There’s Nothing To See Here
3. Page Industries (PAG IN)
4. StubWorld: PCCW – The Good, The Bad …
5. Recruit Holdings 3Q Update: Risks Have Started to Materialise

1. Shanghai International Airport (600009 CH): Best of the Breed

We regard Shanghai International Airport Co, Ltd. (600009 CH) (SIAC) as the best airport play in China when compared with its peers like Beijing Capital International Airport (BCIA) (694 HK) and Guangzhou Baiyun International Airport (600004 CH) given its strong competitive position, its exposure to international traffic growth in the long term and growth in non-aeronautical revenue. 

Despite its premium P/B valuation, SIAC has a better ROE and stronger profit outlook. We think this justifies the stock’s higher P/B valuation than BCIA. In earnings terms, however, it is the least expensive amongst its peers on FY21 PER. Its high international exposure may be clouded by the Novel Coronavirus Pnemonia (NCP) outbreak, but we expect SIAC to be best positioned for the revival in international traffic over the long term. 

2. HSBC – Move Along, There’s Nothing To See Here

It was 20 years ago that HSBC Holdings (5 HK) bought CCF in France. The conservative Scottish lender paid USD10.6bn for the French bank that had shareholders’ equity of USD3.2bn in 1999. Perhaps this was another poor purchase, at an inflated price? We all know the more fabled story of Household International, which become HSBC Finance, and forever changed the face of HSBC Holdings. The results just out once again show how past poor decisions are not always historical events. HSBC recorded a USD7.3bn goodwill impairment charge for Europe, causing a loss during 4Q19.

3. Page Industries (PAG IN)

We argue that the rich valuations enjoyed by Page Industries (PAG IN) are not recession-proof as once assumed by many. Even products like Innerwear are subject to headwinds when the broader economic environment and consumer sentiment turns down.  

Volume recovery remains the key for PAG IN. The investments made by PAG IN in technology and sales may not yield the desired results as the operating environment has changed compared to the previous slow down.  Trading at ~52x FY2021 consensus EPS estimates the room for further disappointments from PAG IN remains. 

4. StubWorld: PCCW – The Good, The Bad …

5. Recruit Holdings 3Q Update: Risks Have Started to Materialise

• Recruit Holdings (6098 JP)’s 3Q FY03/20 results show early signs of the risks that we highlighted in our previous notes materialising. In our note, Global Labour Markets Are Starting to Slow Down – Time To “Lay Off” Recruit, we suggested that Recruit’s exposure to the Japanese and global labour markets is 84% and 71% of its consolidated revenue and EBITDA, hence, with global labour markets starting to slow down, and hiring stalls, Recruit’s growth could be hampered in the medium term. Recruit’s Staffing and HR Solutions revenue decreased by 3.3% YoY and 2.8% YoY respectively in FY03/20 (cf. +1.9% YoY and +7.7% YoY respectively in FY03/19). 

• In our note, Recruit Holdings [Alternative Data]: Should the Slowdown in Indeed Warrant a Discount?, we suggested that revenue growth of the HR Technology segment, which operates indeed.com (Indeed) and glassdoor.com (Glassdoor), would fall below 30% YoY (22%-28% YoY) for the first time in 3Q FY03/20. HR Technology segment revenue increased by c.28% in 3Q FY03/20. We believe most of this growth is due to better monetisation efforts at Glassdoor which could be maxing out soon, hence, HR Technology revenue growth is likely to be even lower over the next few quarters. 

• We didn’t find anything exciting to look forward to on the long side from Recruit’s 3Q FY03/20 results. We believe that the market would start discounting Recruit over the next few quarters as risks (that we have highlighted above) would become more obvious. Thus, with its valuation also at an all-time high, we believe it is a good time to short Recruit. 

In this briefing:

1. BEM: Leading Mass Transit Operator Is About to Get Huge
2. Japan Airport Terminal – Ballooning Depreciation into an Uncertain Demand Environment
3. Doosan Heavy Industries – A Massive Restructuring & Big Political Event Catalyst
4. Hang Seng Bank – Lean on Me
5. Intesa SanPaolo Swoops on UBI for a Win-Win Deal

1. BEM: Leading Mass Transit Operator Is About to Get Huge

We initiate coverage of BEM with a HOLD rating, based on a target price of Bt11.70 derived from a sum-of-the-parts methodology, which implies 45xPE’20E, or a 10% premium to the Thailand transportation sector

The story:

Risks:  Concession termination, interest rate fluctuation and legal disputes

2. Japan Airport Terminal – Ballooning Depreciation into an Uncertain Demand Environment

Japan Airport Terminal’s operating position is interesting. The company has been making significant investments to expand its capacity for international flights, partly due to the upcoming Tokyo Olympics and thus has seen capex surge from a low of ¥4.8bn in FY03/15 to an expected ¥77bn this FY. This is likely to lead a significant surge in depreciation together with the potential for a significant increase in operating profit… if strong demand continues. Ultimately, this is the story that the coronavirus outbreak threatens, and we are concerned that the depreciation burden may be being underestimated by the market.

3. Doosan Heavy Industries – A Massive Restructuring & Big Political Event Catalyst

On February 18th, Doosan Heavy Industries (034020 KS) announced a massive restructuring plan, one of its biggest ever in its 58 years of history. As of the end of September 2019, the company had 6,784 employees, of which about 2,600 are 45 years old or more. This restructuring plan includes a voluntary ERP (early retirement program) for these 2,600 employees.

The United Future Party is pro-nuclear power and if they are able to win the General National Assembly election, it would certainly have a major positive impact on Doosan Heavy Industries (034020 KS). Nonetheless, there are still nearly two months left until the election and in Korea, that is like a lifetime in political ages and so much could change during this period.

4. Hang Seng Bank – Lean on Me

• Modest EPS Weakness Set to Continue: Hang Seng Bank (11.HK) [Hang Seng] reported 2H19 EPS results of HKD 5.79 per share – a decline of just 1% YOY – reflective of weaker overall revenues. NIMs disappointed despite the increase in HIBOR.  Additionally, credit costs and operating expenses were higher than expected.  The super normal profit cycle in Hong Kong now appears to have ended. 
• HSBC Needs Capital:With an above average CET1 ratio at 16.9%, which increased 50 bp linked period, there is a very high likelihood that Hang Seng’s dividend will remain intact – and even continue its upward ascent. For 2019, Hang Seng’s dividend per share rose 9% against 2% profit growth as the payout rose from 60% to 64%.  

5. Intesa SanPaolo Swoops on UBI for a Win-Win Deal

Intesa Sanpaolo (ISP IM) today announced one of the largest and certainly one of the boldest bank takeovers in Europe in the past ten years in an all-share deal for Unione Di Banche Italiane (UBI IM), Italy’s 5th largest lender and probably the strongest among the second tier.

The thing is, it’s hostile/unsolicited.

And it’s all shares – which is relatively unusual – executed through a Voluntary Public Exchange Offer.

Various media are reporting that the deal was launched without informing UBI’s board, on the day after UBI presented its 2022 Strategic Plan (which among other things included cutting 2000+ jobs, the closure of 175 branches in the next three years, and a plan for a 40% payout ratio). 

The announcement by Intesa Sanpaolo is laudatory of UBI:

Intesa Sanpaolo considers UBI Banca amongst the best Italian banks. UBI Banca has local entrenchment in the most dynamic regions of the country, enjoys outstanding results that have been achieved thanks to the excellent job of both its CEO and its management team, and has a sound Business Plan. All this can continue to be achieved and be indeed further enhanced in the combined Group. UBI Banca stands out for its similarities with Intesa Sanpaolo, specifically as regards the business model and the corporate values – many UBI Banca managers have had previous job experience at the Intesa Sanpaolo Group. In view of the shared corporate values in terms of sustainability and inclusion and social and environmental responsibility, a new unit of the combined Group’s Impact Bank will be based in Brescia and in Bergamo. The presence of the large number of Italian shareholders of UBI Banca, specifically the foundations, among the shareholders of the combined Group would reinforce the shared values, including in terms of shareholder base.

The Intesa announcement is here, and the UBI 2022 Strategic Plan is here.

Early days, and UBI is trading 5% through terms almost immediately, on what could be short-covering given the declared shorts in the name. 

More discussion below.

In this briefing:

1. Notes from the Silk Road: XTep Int’l Holdings (1368 HK): Negative Earnings Watch in Place
2. AP Moller Maersk (MAERSKb): Assessing the Stock Price Development
3. HDFC AMC
4. Luckin Coffee (LK) On the Ground: Lost Residential and Office Consumers Due to Epidemic
5. Banco Do Brasil (BBAS3 BZ): Actuarial Adjustments to Capital – Are We Nearly There?

1. Notes from the Silk Road: XTep Int’l Holdings (1368 HK): Negative Earnings Watch in Place

• XTep has followed Anta Sports Products (2020 HK) lead of 17^th February and finally updated investors on the situation they are facing relating to the coronavirus disease 2019 (COVID-19) outbreak in China.
• We examine the implications of the earnings outlook and timing. 
• We question if the latest release should change our stance on the company.

2. AP Moller Maersk (MAERSKb): Assessing the Stock Price Development

While the market was looking brighter in the latter half of 2019, when most of the liner companies posted profits, it has taken a U-turn since then. Stocks have been on a downwards trajectory since the beginning of 2020 amid the war rhetoric between the US and Iran in January and the negative news of the virus thereafter. In the short term, we expect volatility in liner company stock prices as the news flow surrounding the virus ebbs and flows; this also encourages investors to take positions in companies, including APMM which offers a favourable risk-reward.

3. HDFC AMC

HDFC Asset Management Co Ltd (HDFCAMC IN)  is our preferred Asset Management play in spite of rich valuations thanks to the HDFC Parentage. With a focus on Individual Investor, HDFC AMC has carved out a unique space in the asset management industry, which offers substantial revenue visibility backed with strong industry tailwinds. 

A strong fund management team, high market share in B30 cities, and growth in preference for Equity as an asset class by individual investors are some of the key catalysts which could help maintain AAUM Growth.

Our Target Price based on 45x FY21 EPS works out INR 3,334.50 offering a mere 3% return over the previous close of INR 3,244. Investors with a short term horizon will be better off waiting for an attractive entry point that can provide a more attractive return.

However, the HDFC Parentage and strong structural tailwinds in the Industry keep us bullish on this stock. 

4. Luckin Coffee (LK) On the Ground: Lost Residential and Office Consumers Due to Epidemic

• LK has lost office consumers, as very few employees are in their offices.
• LK also lost resident consumers, as delivery men cannot enter communities.
• We believe LK can hardly survive the epidemic.

Our previous coverage on Luckin Coffee:

• Starbucks (SBUX): Luckin (LK) Not a Concern Anymore According to Its IPO Form
• Starbucks (SBUX): China Strategy Reaped by Luckin’s Parasitical Tactic, a Visit and Case Study

5. Banco Do Brasil (BBAS3 BZ): Actuarial Adjustments to Capital – Are We Nearly There?

• Banco Do Brasil Sa (BBAS3 BZ)  delivered a solid 4Q19 to broadly comply with all aspects of its 2019 guidance, even if loan growth was at the lower end of the range
• Credit quality trends are constructive, with new NPL formation very low and healthy NPL coverage
• On the balance sheet, one fly in the ointment of the YE 2019 report is the lack of core capital build in terms of CET1, due mainly to the full implementation of Basel III, but more significantly due to actuarial adjustments
• Banco do Brasil has reduced its discount rate on its pension fund liabilities, as domestic interest rates and sovereign bond yields have declined, since 2Q18 which has led to actuarial adjustments that have hit Banco do Brasil’s equity most recently in 4Q19
• We have seen this movie before, at the publication of 2Q19 results; the difference now is that we believe the discount rate is close to where it needs to be, over the long term, with the current historically low Brazilian real interest rates likely to limit the risk of further downward adjustments
• Banco Do Brasil Sa (BBAS3 BZ) is our core value pick in the big-cap LatAm banks; it is one of the most attractive of Brazilian and LatAm big-cap banks based on earnings and dividend yield
• Risks to our assumptions for Banco do Brasil include significantly lower than expected Brazilian inflation driving interest – and discount – rates lower and hitting core capital with deductions, along with worse than expected credit quality and higher than expected opex 

In this briefing:

1. JUUL’s Demise to Drive Japan Tobacco’s E-Vapor & T-Vapor Growth & Ensures Long Term Survival

1. JUUL’s Demise to Drive Japan Tobacco’s E-Vapor & T-Vapor Growth & Ensures Long Term Survival

• • As youth vaping became a trend and the term “Juuling” became a part of American high school life, Juul became the most popular e-cigarette in the US with over 70% market share.
  • JUUL Labs, the producer of Juul, is an American e-cigarette company with over $2.0bn in revenue.
  • The success of Juul in the e-cigaratte market even attracted the interest of Altria, who sells Marlboro and many other cigarette brands in the US.
  • Altria acquired a 35% stake in Juul Labs for $12.8bn on December 20, 2018, giving Juul Labs a valuation of more than $36.0bn
  • Juul Labs and Altria’s honeymoon was over even before it started as adults, health and safety organisations and politicians became increasingly concerned about the “Juuling” epidemic within teenagers in the US.
  • According to the company, Juul is about giving adult smokers a less harmful alternative to cigarettes. It also insists that it never marketed or knowingly sold its trendy e-cigarettes and flavoured nicotine pods to teenagers. But in reality, Juul was never about helping the adult smokers as it turned a blind eye as to who is purchasing its e-cigarettes and nicotine pods.
  • Since Juul Labs ignored the fact that Juul and teenage vaping has become an epidemic, its success was short lived. The company is now buried under a mountain of investigations, subpoenas and lawsuits.
  • Towards the end of last year, Juul announced that it will cut 650 jobs, freeze hiring and stop broadcast, print and digital advertising for its products. These initiatives are expected to save around $1.0bn of costs in 2020.
  • Under these circumstances, Juul’s valuation was cut 35% by Altria and certain unidentified sources suggest that Juul itself has decreased the valuation to $24.0bn. The initial investors such as Tiger Global and Fidelity Investments have also decreased their valuations of the company by more than 50%. ($19.0bn and $16.4bn respectively).
  • Now, Juul is kept on a short leash by the US regulatory bodies and as a result it had to suspend sales of its non-tobacco, non-menthol-based flavours in the US.
  • Amidst these bans, Juul was pushing to enter new markets in Europe, the Middle East, Africa, South America and Asia.
  • However, it was reported last week that Juul was pulling back from overseas expansion and we believe Juul’s troubles in the US market plays into the hands of other vaping brands such as Japan Tobacco’s Logic and Ploom.

In this briefing:

1. JUUL’s Demise to Drive Japan Tobacco’s E-Vapor & T-Vapor Growth & Ensures Long Term Survival
2. TRACKING TRAFFIC/Chinese Express: December & Q4 Numbers Confirm Sharp Shift in Express Market Share

1. JUUL’s Demise to Drive Japan Tobacco’s E-Vapor & T-Vapor Growth & Ensures Long Term Survival

• • As youth vaping became a trend and the term “Juuling” became a part of American high school life, Juul became the most popular e-cigarette in the US with over 70% market share.
  • JUUL Labs, the producer of Juul, is an American e-cigarette company with over $2.0bn in revenue.
  • The success of Juul in the e-cigaratte market even attracted the interest of Altria, who sells Marlboro and many other cigarette brands in the US.
  • Altria acquired a 35% stake in Juul Labs for $12.8bn on December 20, 2018, giving Juul Labs a valuation of more than $36.0bn
  • Juul Labs and Altria’s honeymoon was over even before it started as adults, health and safety organisations and politicians became increasingly concerned about the “Juuling” epidemic within teenagers in the US.
  • According to the company, Juul is about giving adult smokers a less harmful alternative to cigarettes. It also insists that it never marketed or knowingly sold its trendy e-cigarettes and flavoured nicotine pods to teenagers. But in reality, Juul was never about helping the adult smokers as it turned a blind eye as to who is purchasing its e-cigarettes and nicotine pods.
  • Since Juul Labs ignored the fact that Juul and teenage vaping has become an epidemic, its success was short lived. The company is now buried under a mountain of investigations, subpoenas and lawsuits.
  • Towards the end of last year, Juul announced that it will cut 650 jobs, freeze hiring and stop broadcast, print and digital advertising for its products. These initiatives are expected to save around $1.0bn of costs in 2020.
  • Under these circumstances, Juul’s valuation was cut 35% by Altria and certain unidentified sources suggest that Juul itself has decreased the valuation to $24.0bn. The initial investors such as Tiger Global and Fidelity Investments have also decreased their valuations of the company by more than 50%. ($19.0bn and $16.4bn respectively).
  • Now, Juul is kept on a short leash by the US regulatory bodies and as a result it had to suspend sales of its non-tobacco, non-menthol-based flavours in the US.
  • Amidst these bans, Juul was pushing to enter new markets in Europe, the Middle East, Africa, South America and Asia.
  • However, it was reported last week that Juul was pulling back from overseas expansion and we believe Juul’s troubles in the US market plays into the hands of other vaping brands such as Japan Tobacco’s Logic and Ploom.

2. TRACKING TRAFFIC/Chinese Express: December & Q4 Numbers Confirm Sharp Shift in Express Market Share

Headline express parcel delivery volume increased by 24.3% YoY in December, and average pricing increased by 1.9% YoY. In the main inter-city segment, which accounts for the bulk of the listed express companies’ business, volume growth was even stronger (+32.4% YoY). However, these headline figures fail to illustrate dramatic shifts in market share, and December’s nominal price increase contradicts what was reported by most companies.

Chinese express delivery leader S.F. Holding (002352 CH) reported another month of strong volume growth in December. SF grew far faster than its three China-listed peers in December, and in Q419 its parcel volumes grew significantly faster than any other listed express company. SF’s volume share gains appeared to accelerate during the fourth quarter.

We believe SF’s share gains are sustainable and unlikely to undermine profitability. Furthermore, it appears some smaller listed express companies may be stepping back from the battle for volume share. In our view, these developments are positive for SF. However, investors in recent months have failed to recognize these changes, and we retain our BUY rating on SF and our CNY 57.30 price target.

In this briefing:

1. Japan Airport Terminal – Ballooning Depreciation into an Uncertain Demand Environment
2. Doosan Heavy Industries – A Massive Restructuring & Big Political Event Catalyst
3. Hang Seng Bank – Lean on Me
4. Intesa SanPaolo Swoops on UBI for a Win-Win Deal
5. Notes from the Silk Road: XTep Int’l Holdings (1368 HK): Negative Earnings Watch in Place

1. Japan Airport Terminal – Ballooning Depreciation into an Uncertain Demand Environment

Japan Airport Terminal’s operating position is interesting. The company has been making significant investments to expand its capacity for international flights, partly due to the upcoming Tokyo Olympics and thus has seen capex surge from a low of ¥4.8bn in FY03/15 to an expected ¥77bn this FY. This is likely to lead a significant surge in depreciation together with the potential for a significant increase in operating profit… if strong demand continues. Ultimately, this is the story that the coronavirus outbreak threatens, and we are concerned that the depreciation burden may be being underestimated by the market.

2. Doosan Heavy Industries – A Massive Restructuring & Big Political Event Catalyst

On February 18th, Doosan Heavy Industries (034020 KS) announced a massive restructuring plan, one of its biggest ever in its 58 years of history. As of the end of September 2019, the company had 6,784 employees, of which about 2,600 are 45 years old or more. This restructuring plan includes a voluntary ERP (early retirement program) for these 2,600 employees.

The United Future Party is pro-nuclear power and if they are able to win the General National Assembly election, it would certainly have a major positive impact on Doosan Heavy Industries (034020 KS). Nonetheless, there are still nearly two months left until the election and in Korea, that is like a lifetime in political ages and so much could change during this period.

3. Hang Seng Bank – Lean on Me

• Modest EPS Weakness Set to Continue: Hang Seng Bank (11.HK) [Hang Seng] reported 2H19 EPS results of HKD 5.79 per share – a decline of just 1% YOY – reflective of weaker overall revenues. NIMs disappointed despite the increase in HIBOR.  Additionally, credit costs and operating expenses were higher than expected.  The super normal profit cycle in Hong Kong now appears to have ended. 
• HSBC Needs Capital:With an above average CET1 ratio at 16.9%, which increased 50 bp linked period, there is a very high likelihood that Hang Seng’s dividend will remain intact – and even continue its upward ascent. For 2019, Hang Seng’s dividend per share rose 9% against 2% profit growth as the payout rose from 60% to 64%.  

4. Intesa SanPaolo Swoops on UBI for a Win-Win Deal

Intesa Sanpaolo (ISP IM) today announced one of the largest and certainly one of the boldest bank takeovers in Europe in the past ten years in an all-share deal for Unione Di Banche Italiane (UBI IM), Italy’s 5th largest lender and probably the strongest among the second tier.

The thing is, it’s hostile/unsolicited.

And it’s all shares – which is relatively unusual – executed through a Voluntary Public Exchange Offer.

Various media are reporting that the deal was launched without informing UBI’s board, on the day after UBI presented its 2022 Strategic Plan (which among other things included cutting 2000+ jobs, the closure of 175 branches in the next three years, and a plan for a 40% payout ratio). 

The announcement by Intesa Sanpaolo is laudatory of UBI:

Intesa Sanpaolo considers UBI Banca amongst the best Italian banks. UBI Banca has local entrenchment in the most dynamic regions of the country, enjoys outstanding results that have been achieved thanks to the excellent job of both its CEO and its management team, and has a sound Business Plan. All this can continue to be achieved and be indeed further enhanced in the combined Group. UBI Banca stands out for its similarities with Intesa Sanpaolo, specifically as regards the business model and the corporate values – many UBI Banca managers have had previous job experience at the Intesa Sanpaolo Group. In view of the shared corporate values in terms of sustainability and inclusion and social and environmental responsibility, a new unit of the combined Group’s Impact Bank will be based in Brescia and in Bergamo. The presence of the large number of Italian shareholders of UBI Banca, specifically the foundations, among the shareholders of the combined Group would reinforce the shared values, including in terms of shareholder base.

The Intesa announcement is here, and the UBI 2022 Strategic Plan is here.

Early days, and UBI is trading 5% through terms almost immediately, on what could be short-covering given the declared shorts in the name. 

More discussion below.

5. Notes from the Silk Road: XTep Int’l Holdings (1368 HK): Negative Earnings Watch in Place

• XTep has followed Anta Sports Products (2020 HK) lead of 17^th February and finally updated investors on the situation they are facing relating to the coronavirus disease 2019 (COVID-19) outbreak in China.
• We examine the implications of the earnings outlook and timing. 
• We question if the latest release should change our stance on the company.