Bottom-Up Equities

Sony’s just concluded PS5 showcase finally revealed pricing at $500, with the digital version coming in at $400. These prices have been speculated on for some time and are not a real surprise though we did believe there was a possibility Sony would have tried to undercut Microsoft slightly. There were some small surprises in terms of exclusivity and the new PlayStation Plus Collection, however, and we discuss these below.

What happens when major events or actions are either overlooked or misunderstood? In today’s enlightening geo-political news coverage, one may not have time to contemplate or meditate on big transactions that can alter an industry which may lead to a transformation or secular change.  

For example, what happened when Softbank announced their $100Billion Vision Fund? They became the Whale in the venture capital world. The domino effect for many investors and valuations for many companies in their universe skyrocketed. But how many investors realized and profited from this unprecedented event. This phenomenon was quite unreal.  What if this phenomenon occurred in another industry?

Due to the COVID pandemic and various projections from experts, we believe many misunderstood a “Whale”  phenomenon that recently occurred in LNG vessels.

Furthermore, is it crazy to think that the future of infrastructure and industrial policies pulls forward?

Apple has come out with an announcement yesterday that they will launch a new iPad and no iPhone.  The good news is that BYD Electronics (285 HK)is included in Apple’s supplier list to manufacture around 20-30% of iPad, and investors have been expecting this – causing the ultra optimism reflected in the share price YTD performance, beating the peers and even Apple Inc (AAPL US) . 

Unless the new iPad is selling like hotcakes and the domestic wearables and 5G migration really helps to increase demand, it is hard to see why BYD Electronics’ share price run-up is justifiable. 

Major agribusiness outfit Wilmar International (WIL SP) announced on the 12 July 2019 that the China Securities Regulatory Commission (CSRC) had accepted Yihai Kerry Arawana Holdings (YKA) application for its proposed listing on the Shenzhen Stock Exchange (ChiNext Board).

YKA is one of the largest agribusiness and food processing companies in China. Its business activities span the processing and sales of kitchen food, feed ingredients, and oleochemicals in China. YKA is currently 99.99% held by Wilmar.

Should the listing take place, Wilmar envisages that there will be an IPO of new YKA shares of approximately 10.0% of the total pro-forma share capital of YKA on a post-money basis (immediately after the proposed IPO, Wilmar is anticipated to hold 89.99% of YKA).

After various updates, including a financial update on the 10 August, Wilmar announced yesterday it had received final registration approval from the CSRC. It is expected that the listing will take place by mid-October 2020, subject to market conditions.

Strategic investors, including mainly State-owned funds, sovereign wealth funds, and insurance companies, have been identified to subscribe for ~30% of the IPO Shares.

The key questions now are: where will YKA trade; and where should the non-YKA ops trade?

As always, more below the fold.

• Money Forward (3994 JP) provides online accounting software for Japan’s SMEs, providing all of the time-saving tools that small business owners need to grow. It is the Japanese version of Xero Ltd (XRO AU) or Quickbooks by Intuit Inc (INTU US) 
• Money Forward (MF) and its domestic peer freee (4478 JP) dominate the Japanese online market, which is growing in the region of 60-70% YoY.
• There is a huge addressable market with low online penetration. MF has the potential to build a strong competitive moat, in the absence of the global majors.
• Today, MF looks similar to Xero in 2013. If MF follows the same growth trajectory, investors could be looking at a 9-bagger.  

• As we near Q4, we look for superior prospects for a speedier ramp for Las Vegas Sands/
• LVS will report 3Q20 results October 21-26. Numbers could reveal early late September upticks in revenue and occupancy that could move shares.
• Our Asia panel of associates likes LVS best among peers for earlier ramp up beginning with strong Golden Week results on average win per gaming position and hotel REVPAR.

Despite the significant slowdown in gaming revenues from the lack of tourism arrivals, we forecast Bloomberry to achieve EBITDA break-even by 4Q20 due to cost rationalization measures coupled with a gradual increase in local play. Bloomberry’s EBITDA recovery could outpace that of its Macau peers assuming COVID-19 is contained within the Philippines.

Berli Jucker (BJC TB) was hit quite hard in 2Q2020 in both its core retail and packaging businesses after a reasonable performance in 1Q2020 before the lockdown in Thailand and Vietnam took hold and during a period when consumers began stocking up. 

The real impact on the company’s packaging business came in mid-April when the Thai government put an alcohol ban in place, which was lifted in mid-May but led breweries to close operations for 4-6 weeks. 

The ban was gradually lifted for retail stores initially followed by restaurants and bars and as a result, June saw recovery and July beer sales almost back to pre-COVID-19 levels. 

Berli Jucker (BJC TB) non-alcohol bottling saw positive momentum from strong growth in sales of Vitamin C drinks. It also saw a strong response to its new 500ml cans, which are popular for home beer consumption. 

The aluminium can division has also seen the benefits of new customers coming on stream and replacing the gap left by reduced demand from Carabao. It is also seeing some scale benefits as a result of this for its slim cans.

Berli Jucker (BJC TB)’s core retail business under Big C saw a serious impact from COVID-19 in 2Q2020 with total sales down by -11.4%, with SSSG -17% but excluding its B-to-B business, SSSG fell an even greater -21.1% in 2Q2020.

Berli Jucker (BJC TB) remains a well-rounded South East Asia recovery story through its packaging, with exposure to Thailand, Vietnam and Malaysia, as well as retail, with its number two position in Thailand in the hypermarket and supermarket space.

We upgrade from HOLD to BUY rating with a new target price of Bt16.5 based on 33xPE’21E (Previous TP is Bt12.5), which is close to the biggest home-improvement player in Thailand.

• We expect 3Q20 earnings to grow to Bt189m (+41%YoY, 29%QoQ) driven by a strong SSSG at 9%, turning profit of Surin branch after one month operation, and improving margin from higher retail sales contribution.
• We foresee SSSG at 9%YoY in 3Q20 mainly driven improving contribution from Ubon Ratchathani branch due to low base in 3Q19.
• We revised up our sales and net profit forecast by 5% and 12% in 2020E to factor in strong SSSG than our expectation.

We still like DOHOME for its 1) cheapest valuation with high growth compared to peers; 2) the positioning of all its stores in locations of high potential demand; 3) plan to expand its store network by 60% within the next two years; and 4) the ample room to grow its margin.

Although counted as a drugstore, Genky DrugStores Co Ltd (9267 JP) is one of Japan’s most food-focused discount retailers. The chain has grown rapidly in recent years, with sales up 19% in FY2019 to June alone. It now plans to double that volume over the next three years.

Of these new stores, some will be pure supermarkets (of a discount variety) as the company moves beyond drugstores. Last month, Genky opened its first supermarket or “delicious drugstore” as it calls it.

As indicated in other insights here, the Japanese discount sector is on a roll and likely to continue to do so for the next decade thanks to vast unsatisfied demand from consumer households under pressure.

Genky looks like being one of the beneficiaries.

The much-anticipated acquisition by NVIDIA of Arm from Softbank was formally announced on Monday. The transaction is valued at $40 billion, an approximately equal combination of cash and NVIDIA stock.

On the surface the deal looks strategically solid from NVIDIA’s perspective. It places the company at the center of Arm’s one hundred and eighty billion connected device ecosystem. Perhaps even more importantly, it opens up the possibility of an outright assault on Intel’s data center dominance by adding Arm-based server processors to complement NVIDIA’s existing lineup of GPUs and interconnect.

Underneath the surface however, this deal is fraught with issues and risks. While Arm has been a very successful company, their growth is flatlining as smartphone sales stagnate. Furthermore, we see the rise of RISC-V as a very real threat to Arm’s business model in the coming years. Arm has never competed with its customers. Under NVIDIA ownership, this will be virtually impossible to avoid.

From a regulatory perspective, Arm IP moving under american ownership will raise the very real prospect that this technology will become a future weapon in the US-China trade and technology wars. In today’s environment, it’s difficult to see why China would agree to facilitate that possibility.

All in all we think this deal is not as good as it seems on the surface and that it will be practically impossible to get through the regulatory approval process. 

In this insight, we present our takeaways from attending Avenue Supermarts (DMART IN) ‘s virtual AGM. 

There is little doubt on the quality of Avenue Supermarts (DMART IN), the promoter’s pedigree helps it command rich valuations and is likely to remain so, however, investors will be better off waiting for an attractive entry point. At current levels, there is little room for disappointment, especially considering the path DMART has chosen, i.e. sticking to its core of traditional brick and mortar retail in spite of the changing competitive dynamics in Indian Grocery Retail. 

The domestic traffic of Shanghai International Airport (600009 CH) has seen the best pick-up momentum when compared with the other two key Chinese airports. Its domestic aircraft movement rose an impressive 16.2% YoY and domestic passenger traffic increased 0.4% YoY in Aug. Moreover, it sustained the leadership in freight throughput with Aug marked the fifth consecutive month that freight volume achieved a YoY growth.

We expect the outperformance of SIAC’s share price against Beijing Capital International Airport (BCIA) (694 HK) and Guangzhou Baiyun International Airport (600004 CH) to sustain in 2H20. This is to be driven by faster resumption of international flights, the release of pent-up passenger demand during the National Day holidays and continued improvement in freight traffic.

Yesterday’s meeting came out positive tone. The acquisition of COL will strengthen its omni-channel business and expand its customer base to B2B customers.

We maintain our BUY rating  with a new target price of Bt42.6, which is derived from a DCF (10% WACC, 2% TG). Our target price implies 26xPE’21E, which represents a 2% discount to the World Consumer Discretionary sector.

• HKEX (388 HK) August ADT remain robust, though slowdown from record high July ADT. Year-to-date, HKEx ADT has jumped 36.5% year-over-year
• Mega IPO and Chinese ADR homecoming have reshaped the landscape of Hong Kong capital market. We believe the structural change of listing offerings and investor profile could lift trading volume for long term.
• We expect that MSCI China A-share future will be approved by regulator near term. MSCI China A-share future could contribute additional 6% revenue for HKEX (388 HK) after its launch. We remain bullish on HKEX (388 HK) and reiterate TP of HKD 400. 

 *Blowout Quarter Not Sustainable: Mega Financial Holding (2886.TT) [Mega] reported 2Q20 profit of NTD 9.4 bn, increasing NTD 7.4 bn (384%) on a linked quarter basis.  The increase in profitability was led primarily by the NTD 9.1 bn (41.6x) increase in trading and other category, which appears to be led by MTM gains attributed to the decline in both US and Taiwanese interest rates. We view much of the gain as one-time in nature; and

 *Continued EPS Pressures: Earnings pressures abound, however, as the following acted as an offset to Mega’s improved bottom-line, as net interest income declined with the NIM drop far greater than peer; the across the board decline in fees; and an operating expense increases. We worry that the only earnings lever left for Mega to pull on is a continued reduction in loss provisions and that the dividend may be cut. 

*Kudos For Better Bottom-line:HSBC North America (5.HK/HSBA.LN) [HSBCNA] HSBCNA deserves some kudos for its positive 2Q20 earnings result of USD 48.7 mn during the height of the pandemic against a 1Q20 loss of USD 1.2 bn. The problem with these results, in our view, is that they appear incredibly managed, as revenues are increasingly reliant on lower quality capital markets revenue sources at 36.0% (27.6% in 1Q20). In other words, we do not believe 2Q20 these results are sustainable;

*Hong Kong Tax Rate Continues To Mask Management’s Global Mistakes: When your core subsidiary in Hong Kong has a statutory corporate tax rate of 16.5% and the organization is not subject to global taxation, low taxes can mask the many mistakes that HSBC makes – particularly in the USA; and

*HSBCNA Should Be Sold: HSBCNA is a chronic mess, and there is absolutely no need for HSBC to maintain a full commercial/retail banking presence in the US. It cannot earn a positive return under its current structure; credit is again about to fall off a cliff; does not earning; NIMs are among the lowest in the USA; and capital is shortly about to fall below regulatory guidance. Further, the bad acquisitions and regulatory headaches should spur management to cut and run in the US. Knowing HSBC management as we do, they will continue making the same mistakes over and over again.   

Apparel groups are in trouble, as Renown Inc (3606 JP)’s bankruptcy and Sanyo Shokai (8011 JP)’s boardroom battles exemplify, but World Co Ltd (3612 JP) always claimed it was in better shape – particularly just before relisting.

The Kobe-based firm has now admitted even its shopping mall chains need fixing, with a raft of closures due soon but, unlike competitors, it does have real growth businesses including its new Off Price chain, &Bridge and is in much better shape than competitors – but all things are relative, with the apparel sector showing clear signs of dysfunction with more closures and bankruptcies to follow.

Their demise will leave more room for the better-performing retailers and brands.

In this insight, we highlight seven major trading companies in Korea that could receive a greater positive boost from the global institutional investors who seek to find similar companies to the Japanese trading companies invested by Warren Buffett. The seven Korean trading companies mentioned in this insight have an average P/B multiple of 0.5x in 2020, which is 23% lower than the average P/B multiple of 0.7x for the five Japanese trading companies invested by Warren Buffett. These companies are as follows:

• Samsung C&T
• GS Corp
• Hanwha Corp
• POSCO International
• SK Networks
• LG International
• Hyundai Corp

Analyst meeting held yesterday came out with a negative tone. We expect crude switching to other alternative sources to significantly drag its 2021E earnings by 40%.

• TASCO reported on Friday that the company will stop crude procurement from Venezuela to comply with US request.
• As a result, the company has to cut run its refinery and intensively seek alternative crudes.
• During switching, the company expects to become a ‘trading company’ and focus more on retail sales and premium products.
• We expect its earnings to fall by 40% in 2021-22E as sale volume and margin decline in medium term.

We downgrade our rating to ‘SELL’ from ‘HOLD’ with a revised down target price to Bt15.0 (from Bt28.0), derived from 14xPE’21E which is equal to Asia ex Japan material peer.

*Ownership Waiver Received On Insurance: On September 14^th, ICICI Bank (ICICIBC.IN) [ICICI] announced that it had received an exemption on September 9^th under the provisions of Section 19 (2) of the Banking Regulation Act of 1949 (the Act), with respect to keeping its shareholdings in ICICI Lombard (ICICIGI.IN) [Lombard] and ICICI Prudential (IPRU.IN) [IPRU] above 30% for a period of three years;

*Exemption In Reality Provides Capital Relief: The exemption permits Lombard and/or IPRU to consider strategic options such as mergers and acquisitions or capital raise which have the potential of reducing the bank’s shareholding. According to ICICI, this exemption allows it to facilitate a strategy of dilution in its insurance subsidiaries as it pursues M&A/capital raising activities; and

*Capital Shortfall Persists: We do, however, find it odd that ICICI would dare mention anything about being well-capitalized, and that based on its operating profits and provisions already made that it expects to be well-positioned to absorb the stress arising out of the pandemic. No one asked. When we exclude the INR 15 bn raise, this intimates that ICICI is short another INR 45 bn in equity taking the unrealized losses and charges into account.

Alibaba Pictures (1060 HK) ticketing service revenues’ growth will be capped due to the COVID-19 safety precaution for longer than this year given there is not yet a vaccine let alone curing the world out of COVID-19.

Thanks to its standing as part of the Alibaba Group (9988 HK) , the management has decided to co-invest in Reality Shows productions alongside Youku that will shift its distribution channel from cinemas to home (Television) and personal (smartphone and tablet) entertainment. 

Alibaba Pictures is trading at 1.27x PBR, a 90% discount to iQIYI Inc (IQ US) , even before it books future revenues from the Reality Shows. Buy. 

Oriental Watch (398 HK)announced it is proposing to buy back a maximum of 83 million shares at 3 HKD (249M HKD). This represents a premium over 57% vs the average 30-day closing price on HKex. Once the shares are bought back they will be canceled which will reduce total shares outstanding from 570 million to 478 million. A Special General Meeting (SGM) will be needed to approve the transaction, details of which are pending an official Offer Document. The full transaction has been covered by David Blennerhassett Oriental Watch (398 HK): Conditional Partial Offer 

As long-time Oriental Watch followers let’s step back and assess what this means:

• The controlling family’s stake will rise over 30% (depending on uptake 30.85-36.10%) but they won’t have to make a mandatory general offer as they have requested an exemption from HKex. Minority investors need to approve the transaction: we would advise minorities to vote IN FAVOR.
• The founding family upping its stake at a significant premium to the latest stock price is bullish. 
• Even at 3 HKD, the shares trade far below their latest book value of 4.04 HKD.
• With increased ownership management is now more incentivized to keep on paying large dividends going forward. 
• Mr. Market has been perenially mispricing Oriental Watch at negative enterprise value or barely above net cash over the last 5 years. As discussed at length in various previous insights we think this is wrong and the latest transaction again highlights the underlying value.
• The company has returned 0.885 HKD/share in dividends over the past four years. When judging Oriental Watch’s share price performance please make sure you look up the total return on your Bloomberg.
• Mainland China Rolex sales have been seeing YoY SSS increases of 40-80% since April (depending month to month). Once HK opens up SSS comps become very easy after 2019 (riots) and 2020 (Covid-19). Please re-read our insight on Oriental Watch being a way to play Rolex in China Oriental Watch: Bet on Rolex Demand in China/HK and Collect 12% Dividends While Waiting 

Several years ago we wrote about PC Partners (1263 HK): A Poor Man’s Way into Nvidia New GPU Cycle; Trades at 3x PE and 11% Div Yield.

We see a similar trade coming up in 4Q20 and into 1Q21.

As demonstrated over the years covering PC Partners the stock is rarely a buy & hold. With Nvidia’s new RTX30 GPU launch (GTX3060/GTX3070/GTX3080 and GTX 3090) being spread out from October to December there is likely to be excitement around its performance and uptake.

Much different than in FY18 there is no large oversupply from a deflating crypto bubble. This means there is no old inventory to clear which should result in much better GPM and NPM for Pc Partners. Please also note that gearing for Pc Partner in 2018 was over 100% while the company will have a net cash position by the end of FY20.

Pc Partner remains a poor man’s way to play Nvidia and key themes such as e-sports, AI, data centers, and overall gaming. We expect dividends to be reinstated for FY20. On our estimates, the company will achieve 8 billion HKD in FY20 sales and generate 272 million HKD in net profit (3.4% NPM). If we assume a 30% payout on that we get a 0.22 HKD/share full-year dividend or a 14% dividend yield. We expect the stock to reach 3 HKD in the coming 6 months. Upside could come from a bullish breakout in cryptocurrencies as crypto mining (which consumes massive GPU) comes back in vogue. The downside is capped by a very cheap valuation.

• Meituan (3690 HK) and Alibaba (BABA)’s Ele.me were criticized for exploiting food delivery riders.
• A Court determined that Ping An Healthcare (1833 HK)’s app, “Ping An Good Doctor”, infringed the trademark of Good Doctor Pharmaceutical Group.
• Tencent (700 HK) decided to close down its micro-blog.
• State Post expected that parcels will increase 37.4% YoY in China in August.

Our objective with this weekly is to highlight notable developments in the India internet and consumer sector focusing on public and private companies. The sub-sectors covered include payment providers, e-commerce retailers,  social media platforms and consumer companies.

• If Amazon.com Inc (AMZN US) ‘s investment in Reliance Retail materialises, it could be a possible death knell for Walmart (WMT US) owned Flipkart.
• Could Jio be Xiaomi Corp (1810 HK) ‘s latest worry in India?
• Ant Financial (1051260D CH) takes a back seat on investments in India, invests less than the committed amount in Zomato (ZOM IN) 
• PUBG is finding its way back to India, but without Tencent Holdings (700 HK). 
• India’s dual listing norms could potentially be hitting the wrong path. 

Our top pick within the Macau gaming space remains Sjm Holdings (880 HK) due to the expected opening of Grand Lisboa Palace in either late FY20 or early FY21. Using Melco Resorts & Entertainment (MLCO US) as an example whose share price outperformed the sector in FY19 by 19% due to GGR (gross gaming revenue) market share gains from the new Morpheus hotel, we believe SJM’s share price in FY21 may also see sector outperformance due to the earnings benefits of new capacity.

In our view, China Southern Airlines (1055 HK) will benefit from the mixed reform that it initiated on its logistics arm SA Logistics. SA Logistics will introduce 1-15 strategic shareholders to hold 49.5% stake and this should potentially improve its operating efficiency, provide financial resources for future expansion and generate cross-selling opportunities and synergy.

In 1H20, SA Logistics generated a profit of Rmb2.2bn, making it a key contributor to CSA (which recorded an Rmb8.2bn loss). Its 58% share of the total airfreight traffic in the Big Three Airlines is also an added strength. With the much smaller EA Logistics, the 45%-owned logistics arm of China Eastern Airlines Co (H) (670 HK), currently seeking an IPO on the Shanghai Stock Exchange, we believe an IPO of SA Logistics is likely an ultimate aim and this should be positive to the H-share holders in particular. 

*Monthly Stats Decent:Singapore Exchange (SGX.SP) [SGX] recently reported its August 2020 monthly market metrics. SGX’s market volumes increased 11% MOM (SGX Mainboard volumes increased 13% MOM), whist velocity was higher than previous months averages at 56%. That said, market volumes have begun to normalize after a strong rally post the COVID-19 valuation trough; 

*Taiwan A Standout: While MSCI Taiwan contracts declined 19% MOM, volumes on the new FTSE Taiwan Index did exhibit an increase of 3.3x – from 82 thousand contracts during July to 352 contracts this month. SGX accounted for 99.5% of the notional traded offshore on the MSCI Taiwan. To put this in perspective, the FTSE Taiwan contracts traded were 20% of the total Taiwan contracts traded versus just 5% in July; and   

* Deals Wave of Future: SGX is hopeful to achieve synergies from newly acquired subsidiaries, such as its additional 80% stake in BidFX,a cloud-based on-line F/X trading platform. SGX is going to have to be a bit more creative to generate revenue with the Hong Kong Exchanges & Clearing (388.HK) likely to be directly competing with the A50 – on of SGX’s bread and butter products. 

Positive news flow on Nintendo is increasing. Leaks regarding the new upgraded version of the Switch due next year are increasing and interesting, while the company has also asked suppliers to boost production of the Switch… again. There are also increasing signs of building third party support for the platform. What is pertinent is that this time it appears that third parties are finding some real success on the platform. We think this is underappreciated by the market and enables further upside.

We look at Sinotrans (598 HK) from the infrastructure REIT perspective given its numerous storage and logistics assets spreading all over China. At end-1H20, it owns over 10m sq.m. of land and over 4m sq.m. of warehouses/logistics centres with a total book cost of Rmb19.6bn. We believe these are significant assets for repackaging into a REIT to allow it to realise their underlying values.

Based on our assumptions, we estimate that a REIT issuance backed by its logistics assets will be able to boost its market cap by at least 16.5%. Moreover, this is only a conservative estimate as we think that the H-share will benefit more than the A-share. Moreover, Sinotrans can take this opportunity to cash in on these assets partially for funding its future investment in logistics infrastructure.  

YTD, Zoomlion’s share price is up 18%, but has lagged  Sany Heavy’s (600031.CH) 35% and its own A-share’s 19.8%.  We believe this has happened mainly due to Zoomlion’s relatively lagging earrings recovery since 2018. 

However, as we expected, Zoomlion’s earnings recovery accelerated in 2Q2020 with market demand moving onwards to late cycle products. In 2Q2020, Zoomlion reported a 90% yoy growth of net profit, vs. 78% yoy growth of Sany’s.

Moreover, Zoomlion plans to use most of the proceeds from A-share private placement on excavator and related components. It plans to gain market share in excavators and targets to be one of Top 5 suppliers in 5 years. As we’ve seen, local excavator brands successfully gained market shares from global leaders in the past few years and improved sector concentration. This strengthens our conviction that Zoomlion’s excavators would take some market share from smaller players and this will be an earnings driver in the next few years.

We believe Zoomlion would outperform Sany Heavy in 2H2020, especially after A-share placement adjustment.

We asked Keyence about the impact of COVID-19 on their business. They were not terribly helpful.

• Management expects market conditions to revert to pre-COVID normal as the economy recovers. They see no material change in their business mix, growth drivers or competition. 
• Their business in China began to recover in the three months to June. Sales in all other regions were down, although activity has picked up recently with the easing of travel restrictions.
• As usual, they provided no guidance. 

The share price is sticking near the all-time high reached a month ago. Valuations suggest profit taking is in order. So do economic factors. It took three years for operating profit to recover from the Lehman Shock.

We have visited many of two interesting companies recently, namely Singha Hotels (SHR) and PTG Energy, the country’s second largest gas station operator.

• Singha Hotels‘ losses in H1’20 widened over six-fold YoY to Bt946m as revenues dropped 34% to just Bt1.5bn, and the company expects earnings to be flat in H2’20. The company could not cut costs as aggressively as Minor did, bleeding Bt120/month on fixed cash costs alone.
• Management clarified that most of their investments would be organic (refurbishment and improvements) rather than M&A due to the tougher operating conditions. In the long-run, UK based hotels would fall from 74% to 21% of portfolio, and homegrown, own-managed hotels would rise to 48% of the portfolio.
• PTG Energy reported H1’20 earnings of Bt717m, down 24% YoY, on the back of a 15% revenue decline to Bt51.4bn during the same period. The company put up a brave face talking about its strong MKM (marketing margin) even as volumes plunged more than 30% for key categories.
• We are rather bearish on the company, which appears to focus more on market share than profitability during this precarious period. They are investing some Bt3.5bn in capex and hoping to move up the rankings against key rivals.

Two days ago Nintendo released an announcement about Hyrule Warriors: Age of Calamity (Aka Zelda Musou). This is a tie-up with Koei Tecmo and will be essentially a Zelda skin on KT’s Dynasty Warriors series… except it isn’t. More below.

GLOBAL LEADER – Daikin is one of Japan’s few global enterprises, and the company is rightly proud of its status as the ‘world’s No.1 air-conditioning company’. Based on the company’s FY21 forecast, Japan represents only 23% of sales – over US$6 billion of revenues are to sourced from the Americas, one of the largest exposures of any non-auto company to that region. Daikin has benefited from its sole focus on A/C and a lack, as yet, of a viable Chinese competitor.

In the DETAIL section below,  we shall review Daikin’s financial performance, returns and valuation. We shall not attempt to forecast the prospects for the A/C industry or assess Daikin’s competitive position. Nevertheless, we expect A/C market growth to continue to exceed GDP growth and for Daikin to continue to gain market share globally, including through acquisitions. We expect the company to use the ¥183 billion increase in net debt in the last quarter to expand its global presence further.

PERFECTION – By bidding up Daikin’s shares by 50% in the last six months, the market has looked far beyond COVID-19 and has anticipated much of the company’s incremental medium-term growth. At a current EV/Peak OP of 20.3 times, Daikin has only been as expensive by this metric in 1996 and 2000.

Fortescue Metals (FMG AU) just got stronger for longer with the fundamental data that is coming out from China. In our previous insight, Fortescue: Time to Book Some Profit on the Name? We thought that the iron ore prices would fall based on increasing supply from Brazil and China commencing its tightening by controlling the property sector (see Li Tang‘s insight China Tightens Domestic Bond Issuance Threshold for Property Developers). China’s imports of 112.3 million tons for July, up 23.8% YoY (on the back of strong steel production growth), imply that China could import 140 million tons incrementally, thus absorbing the HoH increase in the supply of iron ore major Vale. 

China imported 1.07 billion tons in 2019 (the seaborne market was 1.6 bn tons).  YTD July 2020 imports are 659 million tons, up 11.8% YoY. We believe that if China imports 105-110 million tons a month, imports from China could be 1.184-1.210 bn tons for CY20, or 114-140 million tons incrementally. In a year that has seen steel production of the rest of the world decline (hence iron ore consumption), we might see the overall iron ore market grow solely due to China. 

Source: China Customs Data

We think the surge in Chinese demand will be very constructive for the iron ore price, which could remain north of 120$/ton for the rest of the year. Fortescue Metals (FMG AU) is the most direct play on iron ore prices. We forecast a robust free cash flow yield of 13% based on a 120$/ton average iron ore price. We also think that the company will pay out its entire free cash flow as dividends. 

Source: Internal Estimates, Company Filings

Dada Nexus Ltd (DADA US) recently reported Q2 results that showed strong YoY revenue growth at its two main business units and solid progress on raising margins. Still, Dada posted a net loss of 457 mn RMB on revenue of 1.32 bn RMB, and its shares in the US have fallen since it reported. 

An examination of average revenue per order in its Dada Now business line suggests the company actually handles little ‘real’ on-demand traffic. Instead, by volume it appears Dada Now mostly handles last-mile delivery duties for JD Logistics and traditional (2-4 day) express delivery firms. 

In this note we remind readers there is more to Dada than its hyped on-demand retail and on-demand delivery — and less, too. We say this because Dada still appears to have substantial exposure to traditional eCommerce fulfillment, which features slower growth, entrenched rivals, and thin margins. 

In a surprise move, leading Indonesian mass-market breadmaker, PT Nippon Indosari Corpindo Tbk (ROTI IJ), has decided to exit the Philippines, selling its 55% stake to its local partner Monde Nissin Corporation. 

PT Nippon Indosari Corpindo Tbk (ROTI IJ)  had only been operating in the Philippines for around four years but had yet to make a profit, given it has been ramping up operations and distribution. 

The onset of COVID-19 struck a blow to growth and added significant uncertainty to the outlook for the business, with a loss of IDR 38bn in 1H2020, representing only 3.1% of sales but -41% of net profit, representing a major drag to the bottom line. 

ROTI will divest this business for IDR76.8bn, which will result in a one-off loss of IDR26bn in 2020 but its disposal will have a significant positive impact on the company’s financials going forward, given it will no longer be a drag to consolidated margins and earnings. 

PT Nippon Indosari Corpindo Tbk. (ROTI) (ROTI IJ) will now solely focus on its Indonesian home market, where it sees significant upside from both further expansion into general trade but also geographically. It is in the process of expanding into Sumatra and Kalimantan with the completion of two new factories by year-end, opening up new markets for its products. 

We met with the management of China Yongda Automobile Services Hldg (3669 HK) and came away with a bullish view. Luxury auto strength from 1H20 is carrying over into 2H20 driven by favorable government policy for auto consumption, ASP growth leading to potential gross margin expansion along with a solid model pipeline for the company’s key brands.

• RPA Holdings Inc (6572 JP) is the Japanese leader in the hottest area of enterprise tech, Robotic Process Automation. 
• Adoption of RPA in Japan is still low and there is a huge potential addressable market.
• RPA’s BizRobo platform has hit a growth wobble, but the larger, higher margin Robot Transformation segment is on fire. 
• The stock trades at an 80% discount to global peers.

With most of its revenues are generated from the greater Jakarta area, Blue Bird (BIRD IJ) is positively correlated to the COVID-19 spread and the regional government policies on PSBB (lockdown). 

In this insight, a discussion on empirical data that shows a correlation between traffic and share price and while the PSBB will hurt share price in the short run, it will not be for a long term and once it is reopened again, traffic will come back and workers back-to-office (WFH to WFO) have benefited Bluebird in the past few months. Bluebird is currently trading at 0.5x PBR (a 70% discount to the peers) and 5x EV/EBITDA (a 40% discount to the peers). Accumulate on weakness. 

• Chatwork Co Ltd (4448 JP)  is Japan’s leading business chat app provider with a ¥50bn market capitalization.  

• With 35% topline growth, the company’s future lies in conquering the SME market and then using that as a platform to launch additional value-added services.  

• Chatwork dominates within the SME chat market and competes head to head with Slack Technologies Inc (WORK US)  in Japan.  

We initiate coverage of GLOBAL with a HOLD rating, based on a target price of Bt20.5, which is derived from 33xPE’21E, close to the average of the Thailand home-improvement subsector.

The story:

• Capture potential growth of the ASEAN market.
• Renovation of stores suggests positive SSSG outlook.
• Store expansion will continue to drive long-term growth.

Risks:

• Economic slowdown
• Exchange-rate fluctuation
• Highly competitive industry

• We view Warren Buffett’s move to invest in Japan’s largest trading companies as being indicative of the lack of reasonably-valued opportunities in the US as well as the size disadvantage of Berkshire Hathaway;
• While being in no place to judge the superinvestor’s investment decision, we find better investment targets to “participate in the future of Japan,” especially for those who manage a smaller AUM than Berkshire;
• In this article, we list one superior-quality business that serves the backbone of Japan’s economy (i.e., the SMEs);
• Our investment strategy concentrates on quality from a business perspective and seeks long-term opportunities with a 10%-15% hurdle rate.

So apparently after Sony decided to go with “RGB wireless router stuck on blue” as its design theme,

Microsoft decided to one-up them with a full-retro hybrid radio-iStove.

Xbox Series S	1940s Tube Radio / Portable iStove

The price of the system was initially leaked and then confirmed as $300 which is aggressive pricing and could help Microsoft… but we view their strategy as flawed and, in some senses, unlucky due to what Sony and Nintendo are doing. We explain why below.

It hasn’t been easy selling clothing in the last six months or even in the months before, unless, that is, you are Workman Co Ltd (7564 JP).

The workwear to sports retailer delivered six straight months of sales growth peaking at 44% year-on-year thanks to low price cost performance, relentless expansion of private brands and investment in new franchisees.

Workman’s share price is up more than 3x since we first recommended the retailer in late 2018 but we have been fans of the company for more than a decade for its disciplined focus on low-cost operations, merchandise quality and efforts to understand and produce for its core customer target.

It also helps that Workman is a franchise operation and one that, like Benetton and McDonald’s and other successful franchises over time, buys the land its franchisees operate stores on. The franchise deal keeps costs way lower than competitors and also means personnel costs are for the most part variable while its competitors face fixed staff costs – a huge advantage especially now.

These are core qualities for a retailer and in all aspects, Workman continues to improve. Sales have risen as much as 44% a month since March and as explained below, there are very strong reasons to expect both sales and profit margins to grow much, much further. The share price may have dipped in recent days but the fundamentals remain strong: more growth is to come.

We attended ITC’s virtual AGM that was held last week, seeking answers to some of the questions raised earlier in our previous insights. While the dividend yield could be attractive for income investors, value unlocking catalysts remain absent. 

Our previous coverage on ITC: 

• HUVR Vs ITC | The Dancing Elephant and the Ostrich 
• ITC IN | No Catalyst for PE Re-Rating in the Near Term 

China Feihe (6186 HK) may have outperformed Health And Happiness (H&H) (1112 HK) but the pair trade of long Yuanshengtai Dairy Farm (1431 HK) and short China Feihe (6186 HK) have made 42% since the initiation in China Feihe (6186): Flying No More? .

The recent news that China Feihe is buying out YST has effectively collapsed the previously available valuation gap therefore it is time to also close the trade by selling YST and buy-to-cover China Feihe. 

Binjiang Service Group (3316 HK) posted a solid H1 2020 with a 31% YoY revenue growth and a  112% YoY net profit growth. In addition to the 31% YoY revenue growth, the company increased its operating margins by 860 bps (including a 400 bps gross profit margin expansion and reduction in SG&A by 460 bps). The share price performance of the stock and the sector though has been lackluster owing to regulatory overhang as elaborated in insight provider Li Tang‘s piece China Tightens Domestic Bond Issuance Threshold for Property Developers. Despite this, we think that over the long term, execution will lead to the share price increasing. The stock trades at a PE of 17.4x FY20 and 14.4x FY21 and has 28% of its market capitalization in cash. The company has also committed to paying at least 50% of its earnings (70% in 2019). If the company adheres to a 70% payout ratio on the basis that there are no significant acquisitions, it implies a dividend yield of close to 4%. We think that any policy-related weakness would be an excellent time to accumulate the stock.

Ultrajaya Milk Ind & Trading (ULTJ IJ) saw a more pronounced impact from COVID-19 in 2Q2020, with a decline in growth for UHT milk with UHT white milk seeing better performance than flavoured products. This can be attributed to people working and breakfasting from home with PSBB measures in place, which also drove higher demand for larger size packets.

Ultrajaya Milk Ind & Trading (ULTJ IJ) did not see the usual benefits this year from Lebaran with packaged tea hit particularly hard, given far fewer people travelling due to the Mudik ban (return to home village). Normally Teh Kotak is a popular drink to pick up for long journeys. 

July saw a slight pick-up in milk sales with some relaxation of PSBB measures from mid-June but it is too soon to read the performance for August. We would suggest a continuing rebound in sales of flavoured milk, as the population start to become more mobile again.

We also expect a gradual pick up in sales of Teh Kotak packet tea sales as employees return to working from the office again, albeit at a reduced intensity to start with.

Increased capacity for large size packets will also help to drive UHT white and flavoured milk growth, given greater demand due to WFH and schooling from home, especially for breakfasting.  

Ultrajaya Milk Ind & Trading (ULTJ IJ) is likely to see a marginally slower growth performance this year but a rebound in earnings should be expected in 2H2020, driven by a move to a “new normal” in Indonesia and a gradual opening up of the economy. It is unlikely that it will adjust prices higher in September this year, which may slow growth prospects slightly. Valuations remain attractive with the company trading on 16.4x FY21E PER versus its peer group average of 26x forward PER. Ultrajaya Milk Ind & Trading (ULTJ IJ) remains a core staple holding in Indonesia. 

This monthly insight aims to provide the narrative behind the monthly data points we have previously published. The monthly data points published are described in the following insights:

• Alternative Data | India Consumer Tracker – Recovery Continues 
• Alternative Data | India Consumer Tracker – Rural India Is Firing Recovery 

Other postcards written by us include the following:

• Postcard from Lucknow (India) | The Road to USD 5 Trillion 
• Postcard from Surat (India) | Studded Jewellery Unlikely to Aid in Margin Expansion for Titan 

If all other work from home beneficiaries used by SMBs continue to see explosive growth Zoom Video Communications Inc (ZM US) , DocuSign Inc (DOCU US) , Crowdstrike Holdings Inc (CRWD US) , but you see sharp deceleration, you may have a competition issue.

Games are now one of the best entertainment channels for many consumers. The global games market is estimated to grow faster than GDP growth for next few years (8.3% CAGR for 2014-2019), backed by its accessibility, affordability and interesting features from new technologies. Furthermore, the growth rate has been increased due to COVID this year.

Global per capita game spend and China per capita game spend were still only $24.2 per year and $23 per year respectively, as of 2018. Korea had the highest per capita spend of $227 and game spend in other countries, especially China, is expected to catch up given development of devices and IT networks, and increase in disposable income. 

Nexon is one of the largest game developers in Asia. In 2020, it has begun tapping into the huge opportunities of the mobile games market. When other games companies introduced mobile versions utilizing their PC IPs, the mobile versions were able to achieve 2~10x revenues compared to their PC versions.

Nexon’s share price has declined by 13% from the peak, since it had delayed the launch of a key mobile game (“DNF mobile”) on 11^th August. The street is expecting it to resume its launch sometime in September. There is a risk that its launch could be further delayed. However, Nexon can still grow its operating profit by 24% CAGR over 2019-2021E without “DNF mobile” and its valuation is not expensive. If “DNF mobile” is successfully launched in September, its operating profit is estimated to grow by 47% CAGR over 2019-2021E. 

Double Standard provides web marketing support services and content data by utilising big data for enterprises. The company operates under two main business segments, Big Data related business and Service Planning Development business. The company was founded in 2012 and listed its shares in 2015 through an initial public offering.

The company’s revenues have grown at double-digit rates over the past 4-5 years; however, we have observed that the company’s margins have declined over the past 4-5 quarters.

The company has entered into a business alliance with SBI Financial Services in December 2019 and at the same time, it also has increased its stake in one of its equity-affiliates, Aster’s. We expect these strategic moves to help boost the company’s top line and revive its deteriorating margins.

In this insight, we take a look at the company’s business, financials and valuation.

How Much “Gas Is Left In The Tank?”

At the beginning of summer, we suggested many follow our lead by investing in CGG. We shared our idea China Gold International – China’s Love of Gold – 3-5X Return on Capital on June 9. If you did follow my suggestion, your price was ~C$.55cents. Currently, CGG’s stock is trading at ~C$1.85 or greater than 3x return.

What do we do now? & What are we thinking?

Embattled by the entry of e-commerce to retail consumer electronics, Gome Electrical Appliances (493 HK), China’s largest electronic retailers with a Gross Merchandise Value (GMV) of CNY 136.1 billion is completely reliant on China’s social commerce growth to turnaround its struggling consumer electronics (brick and mortar) business.

We discuss China’s social commerce growth prospects and its impact on Gome Retail below.

The company benefits from its ties in MT with Alfamart and Indomart as it has higher hygiene perception and less chance of contact with another person which is appreciated during COVID-19. Sido Muncul (SIDO IJ) Q2 2020 had a nice surprise where consumers switched from Tolak Angin to other products such as Vitamin C 1000 powder drink and Ginger-flavor beverages.

Bintang Toedjoe’s clinical trial on red ginger may have a negative impact in the short term but it presents a long term opportunity in the long run that Tolak Angin and other SIDO’s products have an improved global acceptance, therefore, easier to sell in other countries. 

Post a share price increase from IDR 500 to 1400 in the past three years, the management feels that a 1 to 2 stock split is appropriate and it will happen sometime this month. This will create more liquidity and a share price that is affordable for retail investors (around IDR 700) thus a new entry point for investors who think they missed out on SIDO as the share price was deemed too expensive.

• Slower revenue recovery in Macau thus far post IVS resumption spotlights value of Melco Resorts & Entertainment Ltd. footprint in Manila.
• Manila properties now permitted to open to 30% capacity which should begin to improve VIP arrivals going forward from Golden Week.
• Melco shares have shown price resilience during pandemic headwinds that have, and continue to batter the sector.

We reiterate a ‘BUY’ rating with a new target price of Bt9.50 (from Bt8.5), based on 25xPE’21E which is equal to its three year trading average.

• We expects warehouse operation to peak in 4Q20E, led by seasonality of logistic services and recovery of automotive and dangerous goods segments.
• Meanwhile, barge terminal operation will add more growth from 3Q20 onwards.
• In 2021, the company to realize more profit from new automated cold storage (4Q20), build to suit project (4Q20), and automated document storage (1Q21).
• Management aims to broaden its service to B2C logistic, which we expect ‘JWD Store It’ and ‘JWD cold chain express’ to be a driver in 2021 together with capacity expansion.

In this insight, we provide the fundamental analysis of Burning Rock Biotech (BNR US) include business background, business model, major products and technology platforms, investment thesis, risk and valuation as well as the China precision oncology diagnostics market overview. 

In summary, as the leading player with No.1 market share (27% by volume),  Burning Rock is the key long term beneficiary to ride on the the large and fast growing NGS (next-generation sequencing) based cancer genotyping market (30% CAGR to reach US$4.5bn in 2030) in China, with its top market position in both central lab (17.5% share) and in hospital (80% share) segments,  robust portfolio of NGS-based cancer tests, advanced proprietary technologies, and tremendous potential in early cancer detection segment.

We expect Burning Rock to deliver 42% CAGR revenue growth from 2020-2025, break-even by 2024. Our DCF valuation suggests an intrinsic value of US$34.00 with potential upside of 37%. We suggest investors to build/accumulate position upon market pullback. 

Our objective with this weekly is to highlight notable developments in the India internet and consumer sector focusing on public and private companies. The sub-sectors covered include payment providers, e-commerce retailers,  social media platforms and consumer companies.

• Tencent Holdings (700 HK) ‘s battles with Indian authorities as they ban PUBG over rising tensions between India and China. India was PUBG’s largest market accounting for 29% of the application’s total downloads.
• Paytm (PAYTM IN) trims its losses by 40% in India with a marginal increase in its revenues as it sees a growing user base in India but Google Pay and BharatPe are rising up as competition.
• Hennes & Mauritz Ab (HMB SS) loses its India head, Janne Einola while the company works its way through strong headwinds.
• After Jio Platforms is it Reliance Retail for Reliance Industries (RIL IN) ? Silver Lake Partners further plans to invest USD 1 billion in Reliance Industries (RIL IN) ‘s retail arm.

The Trump administration is considering whether or not to add Semiconductor Manufacturing International Corp. (SMIC, 981 HK) to the Commerce Department’s “Entity List” – the same mechanism that was used to restrict the export of American technology to Huawei. 

This would cause SMIC a great deal of inconvenience and further undercut American semiconductor production equipment (SPE) sales to China. A sword is hanging over the share prices of SMIC itself and leading American SPE makers including Applied Materials (AMAT), Lam Research (LRCX) and KLA (KLAC). 

Another act of economic war intended to cripple China’s high-tech industries, it would also convince the Chinese government – if any further convincing is necessary – that eliminating dependence on American technology is an absolute necessity.

Some form of retaliation also seems likely. Has anyone calculated the valuations of American listed companies assuming no further growth in sales in China, declining sales in China, or no sales in China at all? Not only high-tech is at risk.

Potential beneficiaries include Japanese and European SPE makers including Tokyo Electron (8035 JP), Lasertec (6920 JP), Screen Holdings (7735 JP) and ASM International (ASM). American commentators have claimed that semiconductors cannot be produced without American technology, but that is not true.

Nevertheless, the immediate concern is the impact of the U.S-China trade war on semiconductor capital spending, which in the short to medium term at least is negative for all concerned.

The Malaysian government has slowly opened up the economy particularly the F&B sector that suffered due to lack of patronage in the bars and restaurants although both Heineken Malaysia (HEIM MK) and Carlsberg Brewery Malaysia (CAB MK) ‘s online sales initiatives have bear fruit hence the 1H result is not that bad. Heineken’s revenue is down 50% in Q2 while Carlsberg is down 40%. 

After making a 7.3% return from the initiation trade during the difficult MCO period, there seems to be no clear visible catalyst besides the reopening of the economy that will make both brands’ sales grow equally well. In addition, the valuation gap between the two has also collapsed; Heineken used to trade at a 25% PER discount to Carlsberg but currently, it’s only 9%. Thus it is recommended that investors should close the Long Heineken and Short Carlsberg trade and take a profit. 

• Alibaba (BABA) reopened the Freshippo store where an employee tested positive of coronavirus.
• Alibaba (BABA) will raise its stake in YTO (600233 CN) from 10.5% to 22.5%.
• India banned Tencent (700 HK)’s game, PUBG Mobile Lite.
• GSX Edutech (GSX)’s revenue increased by 367% YoY in 2Q20.

Not surprisingly, online travel agency (OTA) Tongcheng-Elong Holdings Ltd (780 HK) reported substantial YoY declines in revenue and earnings in Q220, though market conditions and results were better than in Q120, when Covid19 and the government’s response brought travel to a halt.

Tongcheng-ELong’s revenue mix has changed as a result of the pandemic, in both positive and negative ways. While it’s positive to see increased revenue from advertising and continued strength in its position in smaller cities, we believe the cessation of international travel hurts profitability. In addition, high fixed operating expenses also hit earnings in the second quarter.

As domestic travel normalized in the months following the peak of the pandemic in China, Tongcheng-ELong’s shares have rallied by over 60%. Given the moderating pace of the recovery in Chinese travel demand, and stubbornly high operating expenses, we do not expect Tongcheng-ELong’s earnings to suddenly ‘snap back’ in H220.

There are vast differences with how Bank Central Asia (BBCA IJ) and Bank Danamon Indonesia (BDMN IJ) are faring in the current environment. Much of this will be due balance sheet structure, and especially liability distribution. But there are other factors that support profitability at BCA well beyond its loan or deposit mix: operating costs. BCA is typically considered one of the best-managed banks in Asia or the world and the contrast to domestic peer BDMI may be another reminder. 

After the Australian government blocked Kirin’s proposed sale of Lion Dairy & Drinks (LDD) to China Mengniu Dairy Co (2319 HK) in late August, Kirin Holdings (2503 JP) announced that it has terminated the agreed-upon contract with China Mengniu Dairy and is reassessing its plans for the Lion Dairy and Drinks business.

Last week, Blomberg reported, citing unnamed sources, that Kirin is restarting conversations with those who previously conveyed interest in buying the business.