Bottom-Up Equities

In this briefing:

1. PSL: Another Opportunity at the Bottom of Dry Bulk Cycle
2. China Internet Weekly (13Jul2020): Alibaba’s Freshippo and Ele.me Exploring Cities and Businesses
3. FMCG Is the Next Big Growth Driver & Battleground for China E-Commerce; Big Tech Moves In Force
4. HSBC – Not Quintessential Recovery Bank
5. CTG Duty Free Corp (601888 CH): Encouraging Initial Jul Duty Free Figures from New Hainan Policy

1. PSL: Another Opportunity at the Bottom of Dry Bulk Cycle

We initiate coverage of PSL with a BUY rating, based on a target price of Bt7.10, which is derived from 1.0xPBV’21E, its 10-year average.

The Story:

Risks:

2. China Internet Weekly (13Jul2020): Alibaba’s Freshippo and Ele.me Exploring Cities and Businesses

• Alibaba (BABA)’s Freshippo opened two “Freshippo-mini” stores in Beijing.
• Alibaba (BABA)’s Ele.me began to deliver goods other than cooked food.
• The smart phone shipment decreased by 16.6% YoY in June, worse than 11.8% YoY in May.

3. FMCG Is the Next Big Growth Driver & Battleground for China E-Commerce; Big Tech Moves In Force

At a time when overall retail e-commerce in China has already reached 44% penetration, e-commerce penetration for fast-moving consumer goods (“FMCG”) still lags behind tremendously. According to Euromonitor International, only 6.3% of fresh foods and 8.8% of alcoholic beverages were purchased online in 2019.

This gap represents a major growth opportunity as consumers, having grown accustomed to the convenience and safety of ordering FMCG products online, are now permanently shifting purchasing behaviors.

Already, Chinese Tech giants such as Alibaba and JD.com have moved in force – doubling down on their FMCG investments via Freshippo and JD Supermarket. Tencent is also making its own moves – investing in grocery startup Xingsheng Youxuan and valuing it at US$3bn.

Investors have taken note of this upcoming structural trend and have also moved in size. As seen in the chart below, companies with exposure to FMCG e-commerce have handily beat the broader market with names like Pinduoduo and Meituan Dianping doubling in value in just two months. Dada Nexus, an online grocery firm backed by JD.com, also chose to IPO in early June despite the COVID backdrop – its stock price has since soared by 100%+.

Read our previous FMCG E-Commerce Insights:

• Why Near Term Headwinds Don’t Matter: FMCG E-Comm Footholds to Thrive Post-COVID 
• JD 1Q20: Strong All-Around Beat as FMCG Resilience Shines, Look Towards the 618 Shopping Festival 

4. HSBC – Not Quintessential Recovery Bank

It is not easy to be excited about HSBC Holdings (HSBA LN) even if there are increasing signs of recovery in many areas where this global behemoth operates. And maybe that is the point: it is a global behemoth. It has demonstrated a poor ability at buying banks, at managing costs, and at benefitting from its unique footprint. Its sprawling operations make it a less leveraged, pure recovery play relative to domestic peers; and maybe this is the point, its leverage to recovery is muted by its shortcomings. A tiny domestic and fairly basic commercial bank, is a whole different story; there is less leakage, more recovery income can find its way to the bottom line. This is not HSBC. 

5. 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.

In this briefing:

1. China Internet Weekly (13Jul2020): Alibaba’s Freshippo and Ele.me Exploring Cities and Businesses
2. FMCG Is the Next Big Growth Driver & Battleground for China E-Commerce; Big Tech Moves In Force
3. HSBC – Not Quintessential Recovery Bank
4. CTG Duty Free Corp (601888 CH): Encouraging Initial Jul Duty Free Figures from New Hainan Policy
5. Hong Kong Exchanges & Clearing – Further To Run

1. China Internet Weekly (13Jul2020): Alibaba’s Freshippo and Ele.me Exploring Cities and Businesses

• Alibaba (BABA)’s Freshippo opened two “Freshippo-mini” stores in Beijing.
• Alibaba (BABA)’s Ele.me began to deliver goods other than cooked food.
• The smart phone shipment decreased by 16.6% YoY in June, worse than 11.8% YoY in May.

2. FMCG Is the Next Big Growth Driver & Battleground for China E-Commerce; Big Tech Moves In Force

At a time when overall retail e-commerce in China has already reached 44% penetration, e-commerce penetration for fast-moving consumer goods (“FMCG”) still lags behind tremendously. According to Euromonitor International, only 6.3% of fresh foods and 8.8% of alcoholic beverages were purchased online in 2019.

This gap represents a major growth opportunity as consumers, having grown accustomed to the convenience and safety of ordering FMCG products online, are now permanently shifting purchasing behaviors.

Already, Chinese Tech giants such as Alibaba and JD.com have moved in force – doubling down on their FMCG investments via Freshippo and JD Supermarket. Tencent is also making its own moves – investing in grocery startup Xingsheng Youxuan and valuing it at US$3bn.

Investors have taken note of this upcoming structural trend and have also moved in size. As seen in the chart below, companies with exposure to FMCG e-commerce have handily beat the broader market with names like Pinduoduo and Meituan Dianping doubling in value in just two months. Dada Nexus, an online grocery firm backed by JD.com, also chose to IPO in early June despite the COVID backdrop – its stock price has since soared by 100%+.

Read our previous FMCG E-Commerce Insights:

• Why Near Term Headwinds Don’t Matter: FMCG E-Comm Footholds to Thrive Post-COVID 
• JD 1Q20: Strong All-Around Beat as FMCG Resilience Shines, Look Towards the 618 Shopping Festival 

3. HSBC – Not Quintessential Recovery Bank

It is not easy to be excited about HSBC Holdings (HSBA LN) even if there are increasing signs of recovery in many areas where this global behemoth operates. And maybe that is the point: it is a global behemoth. It has demonstrated a poor ability at buying banks, at managing costs, and at benefitting from its unique footprint. Its sprawling operations make it a less leveraged, pure recovery play relative to domestic peers; and maybe this is the point, its leverage to recovery is muted by its shortcomings. A tiny domestic and fairly basic commercial bank, is a whole different story; there is less leakage, more recovery income can find its way to the bottom line. This is not HSBC. 

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. Hong Kong Exchanges & Clearing – Further To Run

* Solid Prospects: Hong Kong Exchanges & Clearing’s (388.HK) [HKEx] share price has increased HKD 152.40 (72.1%) since its pandemic panic trough of March 21, 2020. The run appears to price in the entire suite of US-listed mainland Chinese ADRs to be ambitiously shifted to HKEx along with market velocity. HKEx looks to be the beneficiary of derivatives and ETF business development, and the IPO listing share for HKEx;

*June Ahead of Expectations: HKEx June volumes were ahead of expectations in both the cash and the derivatives markets; and

*Just Pay The Dividend: HKEx is sitting on an enormous level of excess cash of over USD 3 bn which likely will be managed more properly when a less deal happy CEO takes over the helm by October 2021. 

In this briefing:

1. FMCG Is the Next Big Growth Driver & Battleground for China E-Commerce; Big Tech Moves In Force
2. HSBC – Not Quintessential Recovery Bank
3. CTG Duty Free Corp (601888 CH): Encouraging Initial Jul Duty Free Figures from New Hainan Policy
4. Hong Kong Exchanges & Clearing – Further To Run
5. AEON Financial Services – ASEAN Weakness Results In Dividend Cut

1. FMCG Is the Next Big Growth Driver & Battleground for China E-Commerce; Big Tech Moves In Force

At a time when overall retail e-commerce in China has already reached 44% penetration, e-commerce penetration for fast-moving consumer goods (“FMCG”) still lags behind tremendously. According to Euromonitor International, only 6.3% of fresh foods and 8.8% of alcoholic beverages were purchased online in 2019.

This gap represents a major growth opportunity as consumers, having grown accustomed to the convenience and safety of ordering FMCG products online, are now permanently shifting purchasing behaviors.

Already, Chinese Tech giants such as Alibaba and JD.com have moved in force – doubling down on their FMCG investments via Freshippo and JD Supermarket. Tencent is also making its own moves – investing in grocery startup Xingsheng Youxuan and valuing it at US$3bn.

Investors have taken note of this upcoming structural trend and have also moved in size. As seen in the chart below, companies with exposure to FMCG e-commerce have handily beat the broader market with names like Pinduoduo and Meituan Dianping doubling in value in just two months. Dada Nexus, an online grocery firm backed by JD.com, also chose to IPO in early June despite the COVID backdrop – its stock price has since soared by 100%+.

Read our previous FMCG E-Commerce Insights:

• Why Near Term Headwinds Don’t Matter: FMCG E-Comm Footholds to Thrive Post-COVID 
• JD 1Q20: Strong All-Around Beat as FMCG Resilience Shines, Look Towards the 618 Shopping Festival 

2. HSBC – Not Quintessential Recovery Bank

It is not easy to be excited about HSBC Holdings (HSBA LN) even if there are increasing signs of recovery in many areas where this global behemoth operates. And maybe that is the point: it is a global behemoth. It has demonstrated a poor ability at buying banks, at managing costs, and at benefitting from its unique footprint. Its sprawling operations make it a less leveraged, pure recovery play relative to domestic peers; and maybe this is the point, its leverage to recovery is muted by its shortcomings. A tiny domestic and fairly basic commercial bank, is a whole different story; there is less leakage, more recovery income can find its way to the bottom line. This is not HSBC. 

3. 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.

4. Hong Kong Exchanges & Clearing – Further To Run

* Solid Prospects: Hong Kong Exchanges & Clearing’s (388.HK) [HKEx] share price has increased HKD 152.40 (72.1%) since its pandemic panic trough of March 21, 2020. The run appears to price in the entire suite of US-listed mainland Chinese ADRs to be ambitiously shifted to HKEx along with market velocity. HKEx looks to be the beneficiary of derivatives and ETF business development, and the IPO listing share for HKEx;

*June Ahead of Expectations: HKEx June volumes were ahead of expectations in both the cash and the derivatives markets; and

*Just Pay The Dividend: HKEx is sitting on an enormous level of excess cash of over USD 3 bn which likely will be managed more properly when a less deal happy CEO takes over the helm by October 2021. 

5. AEON Financial Services – ASEAN Weakness Results In Dividend Cut

* Poor Operating Result:Aeon Financial Service (8570.JP) [AFS] reported a FY 1Q20 operating loss of JPY 0.8 bn, and a net loss of JPY 1.1 bn. The poor result was driven by JPY 30.7 bn in net loss provisions, as credit quality across AFS deteriorated well beyond expectations resultant of the global slowdown attributed to COVID-19;

* ASEAN Risk: Aeon Thana Sinsap (ATS.TB) [ATS], AFS’ 54.3% owned subsidiary) reported a 46% YOY decline results to THB 530 mn, as ATS temporarily closed 70 branches for about six weeks through mid-May due to COVID-19, and offered credit assistance to customers in line with the Bank of Thailand’s relief measures. Aeon Credit Service Berhad (ACSM.HK) reported results of MYR 26.3 mn  – declining 69% YOY in 1Q to MYR 26.3 mn. The Malaysian government’s Movement Control Order (MCO) to prevent the spread of COVID-19 had a negative impact on local business activities,

*Dividend Cut: FY 2/21 DPS guidance of JPY 23 is a sharp reduction in DPS – but in line with the projected profit decline and works out to a dividend payout ratio of 50%-100%. This was a negative surprise as AFS had made a convincing argument for dividend stability at the FY 2/20 earnings briefing. If a 2^nd wave of COVID-19 occurs, we’d expect the dividend to decline to zero.  

In this briefing:

1. Short YTO Express: Sharp Recovery in Volume Masks Effects of Intensifying Price War
2. Techtronics (669): American in Hong Kong
3. Mega Financial: Premium Rating for Eroding Fundamental Trends
4. Big Apparel in Trouble: Renown Finally Goes Under

1. Short YTO Express: Sharp Recovery in Volume Masks Effects of Intensifying Price War

After getting hit by Covid-19 in February and early March, Chinese express company YTO Express (600233 CH) has roared back to life, hitting a two-year high of 15.96 CNY on Friday, June 12. 

YTO’s apparent recovery from the depths of the pandemic (April parcel volume up 41% YoY) masks a ferocious price war in China’s express market. A newly-aggressive S.F. Holding (002352 CH) and a shift to low-priced shipments tied to discount eCommerce platform Pinduoduo (PDD US) have combined to put strong downward pressure on pricing. We see no near-term recovery for YTO.

YTO’s +51% move since March 22 puts the shares on approximately 33x 2020 diluted EPS and over three times book value. We see little room for strong growth in 2021 due to ongoing margin compression. Weaker than expected Q220 results (out in August) will dent shares over the next six months and recommend investors Short YTO against an equivalent Long position in SF Holding. 

2. Techtronics (669): American in Hong Kong

Techtronic Industries Co Ltd. (669 HK) is an OEM and has its own brand for many DIY tooling kits for the American market (77% of the business) and has flourished over the years as they have profited from the labor arbitrage between the US and the Chinese wages differential. The stock has ADTV of USD 57 million, a market cap of USD 17.45 billion, and its share price is 3.8% lower from its 52 weeks high. 

With the heightened tension between US and China, social unrest in the US and potentially bringing more productions to the US which will reduce the company’s margin, Techtronic Industries Co Ltd. (669 HK) ‘s current market valuation at 28x PER may not hold and investors should expect a potential downside of between 36-50%. 

3. Mega Financial: Premium Rating for Eroding Fundamental Trends

Mega Financial Holding Co., (2886 TT) is a stock which catches our attention. Located in a fashionable jurisdiction, for many of the right reasons given pandemic response and fiscal legroom, a positive GDP, as well as its technological prowess, the bank exhibits just the kind of combination which  suggests that a period of relative under performance lies ahead. A rock bottom PH Score™ , a high RSI, and a rich valuation function as an underweight or short trifecta. Maybe, something else is at work but based on our model, anchored by number dynamics, we see more risk than opportunity for the share price.

It must be emphasised that Taiwan is a low PH Score™ space trading at a premium to other regional markets. One of the problems with premium markets is that they are susceptible to bad news or events which can surprise. It is hardly as if geopolitical risk is not present.

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. HSBC – Not Quintessential Recovery Bank
2. CTG Duty Free Corp (601888 CH): Encouraging Initial Jul Duty Free Figures from New Hainan Policy
3. Hong Kong Exchanges & Clearing – Further To Run
4. AEON Financial Services – ASEAN Weakness Results In Dividend Cut
5. King Yuan Electronics Co(2449 TT) – Time To Buy On Robust Demand For 5G, AI, and CMOS Image Sensor

1. HSBC – Not Quintessential Recovery Bank

It is not easy to be excited about HSBC Holdings (HSBA LN) even if there are increasing signs of recovery in many areas where this global behemoth operates. And maybe that is the point: it is a global behemoth. It has demonstrated a poor ability at buying banks, at managing costs, and at benefitting from its unique footprint. Its sprawling operations make it a less leveraged, pure recovery play relative to domestic peers; and maybe this is the point, its leverage to recovery is muted by its shortcomings. A tiny domestic and fairly basic commercial bank, is a whole different story; there is less leakage, more recovery income can find its way to the bottom line. This is not HSBC. 

2. 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.

3. Hong Kong Exchanges & Clearing – Further To Run

* Solid Prospects: Hong Kong Exchanges & Clearing’s (388.HK) [HKEx] share price has increased HKD 152.40 (72.1%) since its pandemic panic trough of March 21, 2020. The run appears to price in the entire suite of US-listed mainland Chinese ADRs to be ambitiously shifted to HKEx along with market velocity. HKEx looks to be the beneficiary of derivatives and ETF business development, and the IPO listing share for HKEx;

*June Ahead of Expectations: HKEx June volumes were ahead of expectations in both the cash and the derivatives markets; and

*Just Pay The Dividend: HKEx is sitting on an enormous level of excess cash of over USD 3 bn which likely will be managed more properly when a less deal happy CEO takes over the helm by October 2021. 

4. AEON Financial Services – ASEAN Weakness Results In Dividend Cut

* Poor Operating Result:Aeon Financial Service (8570.JP) [AFS] reported a FY 1Q20 operating loss of JPY 0.8 bn, and a net loss of JPY 1.1 bn. The poor result was driven by JPY 30.7 bn in net loss provisions, as credit quality across AFS deteriorated well beyond expectations resultant of the global slowdown attributed to COVID-19;

* ASEAN Risk: Aeon Thana Sinsap (ATS.TB) [ATS], AFS’ 54.3% owned subsidiary) reported a 46% YOY decline results to THB 530 mn, as ATS temporarily closed 70 branches for about six weeks through mid-May due to COVID-19, and offered credit assistance to customers in line with the Bank of Thailand’s relief measures. Aeon Credit Service Berhad (ACSM.HK) reported results of MYR 26.3 mn  – declining 69% YOY in 1Q to MYR 26.3 mn. The Malaysian government’s Movement Control Order (MCO) to prevent the spread of COVID-19 had a negative impact on local business activities,

*Dividend Cut: FY 2/21 DPS guidance of JPY 23 is a sharp reduction in DPS – but in line with the projected profit decline and works out to a dividend payout ratio of 50%-100%. This was a negative surprise as AFS had made a convincing argument for dividend stability at the FY 2/20 earnings briefing. If a 2^nd wave of COVID-19 occurs, we’d expect the dividend to decline to zero.  

5. King Yuan Electronics Co(2449 TT) – Time To Buy On Robust Demand For 5G, AI, and CMOS Image Sensor

In our view, KYEC embraces 5G migration cycle at infrastructure base stations and smartphones, as well as many other IoT devices, RF filter/PA, CMOS image sensors and server chips. We expect KYEC to post double digit YoY revenue growth in 2020. As such, we initiate coverage on KYEC with a Buy call and 12-month TP of TWD50.

In this briefing:

1. Techtronics (669): American in Hong Kong
2. Mega Financial: Premium Rating for Eroding Fundamental Trends
3. Big Apparel in Trouble: Renown Finally Goes Under

1. Techtronics (669): American in Hong Kong

Techtronic Industries Co Ltd. (669 HK) is an OEM and has its own brand for many DIY tooling kits for the American market (77% of the business) and has flourished over the years as they have profited from the labor arbitrage between the US and the Chinese wages differential. The stock has ADTV of USD 57 million, a market cap of USD 17.45 billion, and its share price is 3.8% lower from its 52 weeks high. 

With the heightened tension between US and China, social unrest in the US and potentially bringing more productions to the US which will reduce the company’s margin, Techtronic Industries Co Ltd. (669 HK) ‘s current market valuation at 28x PER may not hold and investors should expect a potential downside of between 36-50%. 

2. Mega Financial: Premium Rating for Eroding Fundamental Trends

Mega Financial Holding Co., (2886 TT) is a stock which catches our attention. Located in a fashionable jurisdiction, for many of the right reasons given pandemic response and fiscal legroom, a positive GDP, as well as its technological prowess, the bank exhibits just the kind of combination which  suggests that a period of relative under performance lies ahead. A rock bottom PH Score™ , a high RSI, and a rich valuation function as an underweight or short trifecta. Maybe, something else is at work but based on our model, anchored by number dynamics, we see more risk than opportunity for the share price.

It must be emphasised that Taiwan is a low PH Score™ space trading at a premium to other regional markets. One of the problems with premium markets is that they are susceptible to bad news or events which can surprise. It is hardly as if geopolitical risk is not present.

3. 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. CTG Duty Free Corp (601888 CH): Encouraging Initial Jul Duty Free Figures from New Hainan Policy
2. Hong Kong Exchanges & Clearing – Further To Run
3. AEON Financial Services – ASEAN Weakness Results In Dividend Cut
4. King Yuan Electronics Co(2449 TT) – Time To Buy On Robust Demand For 5G, AI, and CMOS Image Sensor
5. Revisiting Mitr Phol Group: Erawan and Banpu

1. 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.

2. Hong Kong Exchanges & Clearing – Further To Run

* Solid Prospects: Hong Kong Exchanges & Clearing’s (388.HK) [HKEx] share price has increased HKD 152.40 (72.1%) since its pandemic panic trough of March 21, 2020. The run appears to price in the entire suite of US-listed mainland Chinese ADRs to be ambitiously shifted to HKEx along with market velocity. HKEx looks to be the beneficiary of derivatives and ETF business development, and the IPO listing share for HKEx;

*June Ahead of Expectations: HKEx June volumes were ahead of expectations in both the cash and the derivatives markets; and

*Just Pay The Dividend: HKEx is sitting on an enormous level of excess cash of over USD 3 bn which likely will be managed more properly when a less deal happy CEO takes over the helm by October 2021. 

3. AEON Financial Services – ASEAN Weakness Results In Dividend Cut

* Poor Operating Result:Aeon Financial Service (8570.JP) [AFS] reported a FY 1Q20 operating loss of JPY 0.8 bn, and a net loss of JPY 1.1 bn. The poor result was driven by JPY 30.7 bn in net loss provisions, as credit quality across AFS deteriorated well beyond expectations resultant of the global slowdown attributed to COVID-19;

* ASEAN Risk: Aeon Thana Sinsap (ATS.TB) [ATS], AFS’ 54.3% owned subsidiary) reported a 46% YOY decline results to THB 530 mn, as ATS temporarily closed 70 branches for about six weeks through mid-May due to COVID-19, and offered credit assistance to customers in line with the Bank of Thailand’s relief measures. Aeon Credit Service Berhad (ACSM.HK) reported results of MYR 26.3 mn  – declining 69% YOY in 1Q to MYR 26.3 mn. The Malaysian government’s Movement Control Order (MCO) to prevent the spread of COVID-19 had a negative impact on local business activities,

*Dividend Cut: FY 2/21 DPS guidance of JPY 23 is a sharp reduction in DPS – but in line with the projected profit decline and works out to a dividend payout ratio of 50%-100%. This was a negative surprise as AFS had made a convincing argument for dividend stability at the FY 2/20 earnings briefing. If a 2^nd wave of COVID-19 occurs, we’d expect the dividend to decline to zero.  

4. King Yuan Electronics Co(2449 TT) – Time To Buy On Robust Demand For 5G, AI, and CMOS Image Sensor

In our view, KYEC embraces 5G migration cycle at infrastructure base stations and smartphones, as well as many other IoT devices, RF filter/PA, CMOS image sensors and server chips. We expect KYEC to post double digit YoY revenue growth in 2020. As such, we initiate coverage on KYEC with a Buy call and 12-month TP of TWD50.

5. Revisiting Mitr Phol Group: Erawan and Banpu

We visited three companies in the Mitr Phol Group, namely hotel chain Erawan, the  and Thailand’s largest coal producer Banpu. This is a quick run-down.

• Erawan reported net loss of Bt77m in Q1’20 and EBITDA contraction of 63% to Bt224m. The company closed its Thai hotels since April and Manila-based ones since May 19.
• Cost cutting: The company plans to cut lease payments by 20-30% and also postpone debt repayments to the banks. They also plan to cut investments by 50%.
• Banpu Power reported healthy EBITDA of Bt1.77bn (up 10% YoY) on the back of Bt1.84bn  (+5% YoY) buoyed by stronger demand for power and steam in China needed to operate hospitals. However, its one-time core power plant BLCP contributed a loss of Bt70m due to translation losses. The hidden crown jewel is Banpu NEXT, the renewable business, which just needs time to appreciated.
• The parent company Banpu reported an EBITDA of US$134m, down 42% YoY, and earnings of Bt55m. The coal business, just like other energy segments (oil, gas), performed poorly, but Banpu made the most of it by negotiating down the price of Barnett in the United States, a deal that will be concluded towards the end of this year.

In this briefing:

1. Mega Financial: Premium Rating for Eroding Fundamental Trends
2. Big Apparel in Trouble: Renown Finally Goes Under

1. Mega Financial: Premium Rating for Eroding Fundamental Trends

Mega Financial Holding Co., (2886 TT) is a stock which catches our attention. Located in a fashionable jurisdiction, for many of the right reasons given pandemic response and fiscal legroom, a positive GDP, as well as its technological prowess, the bank exhibits just the kind of combination which  suggests that a period of relative under performance lies ahead. A rock bottom PH Score™ , a high RSI, and a rich valuation function as an underweight or short trifecta. Maybe, something else is at work but based on our model, anchored by number dynamics, we see more risk than opportunity for the share price.

It must be emphasised that Taiwan is a low PH Score™ space trading at a premium to other regional markets. One of the problems with premium markets is that they are susceptible to bad news or events which can surprise. It is hardly as if geopolitical risk is not present.

2. 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. Hong Kong Exchanges & Clearing – Further To Run
2. AEON Financial Services – ASEAN Weakness Results In Dividend Cut
3. King Yuan Electronics Co(2449 TT) – Time To Buy On Robust Demand For 5G, AI, and CMOS Image Sensor
4. Revisiting Mitr Phol Group: Erawan and Banpu
5. MM2 Asia Ltd: A Bet on Pent up Demand in the Post Virus Asia Entertainment Sector

1. Hong Kong Exchanges & Clearing – Further To Run

* Solid Prospects: Hong Kong Exchanges & Clearing’s (388.HK) [HKEx] share price has increased HKD 152.40 (72.1%) since its pandemic panic trough of March 21, 2020. The run appears to price in the entire suite of US-listed mainland Chinese ADRs to be ambitiously shifted to HKEx along with market velocity. HKEx looks to be the beneficiary of derivatives and ETF business development, and the IPO listing share for HKEx;

*June Ahead of Expectations: HKEx June volumes were ahead of expectations in both the cash and the derivatives markets; and

*Just Pay The Dividend: HKEx is sitting on an enormous level of excess cash of over USD 3 bn which likely will be managed more properly when a less deal happy CEO takes over the helm by October 2021. 

2. AEON Financial Services – ASEAN Weakness Results In Dividend Cut

* Poor Operating Result:Aeon Financial Service (8570.JP) [AFS] reported a FY 1Q20 operating loss of JPY 0.8 bn, and a net loss of JPY 1.1 bn. The poor result was driven by JPY 30.7 bn in net loss provisions, as credit quality across AFS deteriorated well beyond expectations resultant of the global slowdown attributed to COVID-19;

* ASEAN Risk: Aeon Thana Sinsap (ATS.TB) [ATS], AFS’ 54.3% owned subsidiary) reported a 46% YOY decline results to THB 530 mn, as ATS temporarily closed 70 branches for about six weeks through mid-May due to COVID-19, and offered credit assistance to customers in line with the Bank of Thailand’s relief measures. Aeon Credit Service Berhad (ACSM.HK) reported results of MYR 26.3 mn  – declining 69% YOY in 1Q to MYR 26.3 mn. The Malaysian government’s Movement Control Order (MCO) to prevent the spread of COVID-19 had a negative impact on local business activities,

*Dividend Cut: FY 2/21 DPS guidance of JPY 23 is a sharp reduction in DPS – but in line with the projected profit decline and works out to a dividend payout ratio of 50%-100%. This was a negative surprise as AFS had made a convincing argument for dividend stability at the FY 2/20 earnings briefing. If a 2^nd wave of COVID-19 occurs, we’d expect the dividend to decline to zero.  

3. King Yuan Electronics Co(2449 TT) – Time To Buy On Robust Demand For 5G, AI, and CMOS Image Sensor

In our view, KYEC embraces 5G migration cycle at infrastructure base stations and smartphones, as well as many other IoT devices, RF filter/PA, CMOS image sensors and server chips. We expect KYEC to post double digit YoY revenue growth in 2020. As such, we initiate coverage on KYEC with a Buy call and 12-month TP of TWD50.

4. Revisiting Mitr Phol Group: Erawan and Banpu

We visited three companies in the Mitr Phol Group, namely hotel chain Erawan, the  and Thailand’s largest coal producer Banpu. This is a quick run-down.

• Erawan reported net loss of Bt77m in Q1’20 and EBITDA contraction of 63% to Bt224m. The company closed its Thai hotels since April and Manila-based ones since May 19.
• Cost cutting: The company plans to cut lease payments by 20-30% and also postpone debt repayments to the banks. They also plan to cut investments by 50%.
• Banpu Power reported healthy EBITDA of Bt1.77bn (up 10% YoY) on the back of Bt1.84bn  (+5% YoY) buoyed by stronger demand for power and steam in China needed to operate hospitals. However, its one-time core power plant BLCP contributed a loss of Bt70m due to translation losses. The hidden crown jewel is Banpu NEXT, the renewable business, which just needs time to appreciated.
• The parent company Banpu reported an EBITDA of US$134m, down 42% YoY, and earnings of Bt55m. The coal business, just like other energy segments (oil, gas), performed poorly, but Banpu made the most of it by negotiating down the price of Barnett in the United States, a deal that will be concluded towards the end of this year.

5. MM2 Asia Ltd: A Bet on Pent up Demand in the Post Virus Asia Entertainment Sector

• Live entertainment audiences in China and other Asian nations will continue to grow exponentially post virus.
• This small cap, diverse entertainment company hits the demo jackpot with music and cinema product among every key vertical: live concerts and events, streaming, digital.
• Live attendance at entertainment venues now imprisoned by virus crisis, but that could change fast and this penny stock already has a viable footprint in key segments.

In this briefing:

1. Big Apparel in Trouble: Renown Finally Goes Under

1. 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).