Bottom-Up Equities

In this briefing:

1. Shanghai/​Shenzhen Connect Ideas: Moutai Inflows Were Back, Tsingtao Too (2019-06-14)
2. HK Connect Ideas: Five Weeks of Inflows, Dalian Port Outflows (2019-06-14)
3. Bank of China – An SOE Bank that Is Not Immune
4. Mobile World Investment Corporation: Discount to Other Consumer Stocks Is Asymmetric

1. Shanghai/​Shenzhen Connect Ideas: Moutai Inflows Were Back, Tsingtao Too (2019-06-14)

In our weekly Shanghai/Shenzhen Connect Ideas series, we aim to help our investors understand the flow of northbound trades via the Shanghai and Shenzhen Connect, as analyzed by our proprietary data engine and highlight interesting trade ideas. 

We split the stocks eligible for the Shanghai/Shenzhen Connect trade into two groups: stocks with a market capitalization above USD 5 billion, as well as between USD 1 billion and USD 5 billion. 

In this insight, we will highlight the consecutive two weeks of inflow into the A-share market. We highlight the inflow reversal into Kweichow Moutai Co Ltd A (600519 CH), a leading premium hard liquor manufacturer, as well as Tsingtao Brewery Co Ltd A (600600 CH).

2. HK Connect Ideas: Five Weeks of Inflows, Dalian Port Outflows (2019-06-14)

In our weekly HK Connect Snippet series, we aim to help our investors understand the flow of southbound trades via the Hong Kong Connect, as analyzed by our proprietary data engine, and highlight interesting observations. 

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

In this insight, we will highlight the five weeks’ consecutive inflow into HK Stocks via the southbound trade, led by Financials sector. Inflows into Tencent have been consistently positive. We also highlight strong outflows from Dalian Port. In the mid-cap space, we highlight Man Wah, a furniture exporter. 

3. Bank of China – An SOE Bank that Is Not Immune

Rural banks come to mind. Medium-sized banks as well. But it is not one of the large four SOE banks that we to feel will have some of the highest impairment cost growth. Yet, Bank Of China (601988 CH) ranks second of the largest 10 listed China banks for impairment cost growth in 1Q19 YoY at a staggering 76%. And this can continue through 2Q19 and through 2019. The reason is simple: BOC’s impairment costs remain far lower than large peer banks. With the profit warning from Bank Of East Asia (23 HK; BEA) due to worsening China credit metrics, worsening industrial output data (just out) and the full effects of US-China trade war yet to hit, BOC may have to play catch-up with peers. This is also apparent with its HK subsidiary, where credit costs are lower than most all peer banks at just 10bps of loans in 2018; BEA was 2.4x higher. See valuation, fundamental and momentum (VFM) research done by our Smartkarma colleague Paul Hollingworth on BOC and BEA in the past.

4. Mobile World Investment Corporation: Discount to Other Consumer Stocks Is Asymmetric

My previous insight Top Consumer Themes in Vietnam noted some of the top consumer themes in Vietnam and how Phu Nhuan Jewelry Jsc (PNJ VN) and Mobile World Investment (MWG VN) stood out.  MWG is a stand out in the consumer space because of the following: 1) strong initiatives from management to seek new sources of growth, 2 ) historical favorable financial performance and 3) its current discount to consumer stocks and even the VN Index ( ex. premium for buying shares).  MWG”s financial growth has been outpacing many of its consumer peers in recent years, while other consumer stocks have begun to see single digit growth rates.

Consistent Financial Performance: MWG was able to surpass its growth target for 2018 and this marked the fifth consecutive year that MWG achieved its annual target.  Its 2018 revenue rose by 30.4%, which was driven by the strong growth of its consumer electronics products. MWG is positioned to continue delivering favorable growth ( above 20%) in the coming years and to improve margins as Baxhoaxanh’s operations become more mature.

Finding new sources of growth: The company is positioned to withstand the relative slowdown of the consumer electronics segment through company specific developments, while the favorable macro picture in Vietnam is also supportive of strong financial growth.  As traditional sources of growth begin to become exhausted, MWG can find new growth driven by the expansion of its Dien May Xanh stores and its new grocery stores ( Bax Hoa Xanh).

Moats are lame: MWG has been seeking new sources of growth rather than relying merely on its favorable market share and the high growth rates of various sectors in Vietnam.  Several consumer stocks that were less aggressive in this manner have seen single digit top-line growth in recent years.  Stocks in Vietnam are likely to face increasingly saturated markets in the future and innovation will be the key for companies to outperform during the 2020s-2030s ( not to mention the fact that Vietnam’s circa 30% discount to emerging Asia no longer exists).

It is imperative to note that MWG trades at a notable discount to other consumer stocks in Vietnam despite the company’s consistent financial performance and management’s initiative to identify new sources of growth.  The market appears to be undervaluing this unique initiative/ability from management and focusing more on the short term transitions taking place.

In this briefing:

1. NTT DoCoMo: Slow Take-Up for New Pricing Plans
2. Tencent (700 HK): Decides to Pay Less to Outside Game Distributors
3. HK Connect Ideas: Nine Weeks of Inflows, Sino Biopharm, Yadea, Anta, Aoyuan (2019-07-12)
4. IndusInd Bank – Excessive Loan Growth, Especially To Property Developers
5. Blockchain Delusion: Overstock

1. NTT DoCoMo: Slow Take-Up for New Pricing Plans

NTT Docomo Inc (9437 JP) says that initial take up for its new pricing plans has been slower than expectations, driven by the end of handset bundling and anticipation of Rakuten Mobile market entry later this year.  After a little more than a month, around 3mn subscribers had opted in, which is less than then 5mn that switched in the month following DoCoMo’s last major pricing change in 2014.  No early guidance changes are expected but this issue likely will attract a lot of attention at Q1 results later this month. 

2. Tencent (700 HK): Decides to Pay Less to Outside Game Distributors

• Tencent gave game distributors a new offer which reduces Tencent’s payment from 50% to 30%.
• We believe most distributors will have to accept the offer because Tencent is the largest game developer.
• We believe Tencent made the right decision as the Company needs to improve its margins.
• We also believe it is the right time as distributors do not have many new game sources after one year’s new game suspension.

3. HK Connect Ideas: Nine Weeks of Inflows, Sino Biopharm, Yadea, Anta, Aoyuan (2019-07-12)

In our weekly HK Connect Snippet series, we aim to help our investors understand the flow of southbound trades via the Hong Kong Connect, as analyzed by our proprietary data engine, and highlight interesting observations. 

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

In this insight, we would like to highlight the nine consecutive weeks of inflows from mainland China to Hong Kong stocks. We highlight the inflows into China Vanke Co Ltd (H) (2202 HK), Tencent Holdings (700 HK), Sino Biopharmaceutical (1177 HK), and outflows from Future Land Development Holdings (1030 HK), Sunac China Holdings (1918 HK), and WH Group (288 HK). In addition, we would highlight the trading opportunities on Meituan Dianping (3690 HK) and Xiaomi Corp (1810 HK)‘s likely inclusion into Hong Kong Connect this month. In the mid cap space, we highlighted Kingdee International Software (268 HK), China Aoyuan Property (3883 HK), Yadea Group Holdings (1585 HK) and Anta Sports Products (2020 HK).

4. IndusInd Bank – Excessive Loan Growth, Especially To Property Developers

Of India’s listed banks, there is only one that has seen credit growth higher than Indusind Bank (IIB IN) over the past three years: Yes Bank Ltd (YES IN). This is not particularly good company. Adding enormous amounts of credit risk amidst a frail economic environment can lead to high NPL growth. IndusInd Bank expanded its loans 111% over the past three years, where Yes Bank is the only listed bank higher, at 146%. Perhaps it is no wonder that IndusInd bank saw its NPLs up 132% last year, higher than all listed banks, other than Yes Bank at 200%. There are also concerns with what appears to be excessive substandard loans and over zealous growth in real estate developer loans.

5. Blockchain Delusion: Overstock

Blockchain delusion may have peaked, but it hasn’t gone away. Online US retailer Overstock, led by outspoken and controversial founder Patrick Byrne, continues to promote, actually evangelize, his company’s blockchain initiatives. Under his “Governement as a Service” moniker, Byrne vows to transform key pillars of society, from voting to land title management, from capital markets to currencies. Even more spectacularly, Byrne claims to have found “cold fusion on the blockchain side”. Is he correct? We think not and here’s why. 

In this briefing:

1. HK Connect Ideas: Five Weeks of Inflows, Dalian Port Outflows (2019-06-14)
2. Bank of China – An SOE Bank that Is Not Immune
3. Mobile World Investment Corporation: Discount to Other Consumer Stocks Is Asymmetric
4. Revisiting Nagacorp: The News Is Good and Apt to Get Better, yet the Stock Is Still Cheap

1. HK Connect Ideas: Five Weeks of Inflows, Dalian Port Outflows (2019-06-14)

In our weekly HK Connect Snippet series, we aim to help our investors understand the flow of southbound trades via the Hong Kong Connect, as analyzed by our proprietary data engine, and highlight interesting observations. 

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

In this insight, we will highlight the five weeks’ consecutive inflow into HK Stocks via the southbound trade, led by Financials sector. Inflows into Tencent have been consistently positive. We also highlight strong outflows from Dalian Port. In the mid-cap space, we highlight Man Wah, a furniture exporter. 

2. Bank of China – An SOE Bank that Is Not Immune

Rural banks come to mind. Medium-sized banks as well. But it is not one of the large four SOE banks that we to feel will have some of the highest impairment cost growth. Yet, Bank Of China (601988 CH) ranks second of the largest 10 listed China banks for impairment cost growth in 1Q19 YoY at a staggering 76%. And this can continue through 2Q19 and through 2019. The reason is simple: BOC’s impairment costs remain far lower than large peer banks. With the profit warning from Bank Of East Asia (23 HK; BEA) due to worsening China credit metrics, worsening industrial output data (just out) and the full effects of US-China trade war yet to hit, BOC may have to play catch-up with peers. This is also apparent with its HK subsidiary, where credit costs are lower than most all peer banks at just 10bps of loans in 2018; BEA was 2.4x higher. See valuation, fundamental and momentum (VFM) research done by our Smartkarma colleague Paul Hollingworth on BOC and BEA in the past.

3. Mobile World Investment Corporation: Discount to Other Consumer Stocks Is Asymmetric

My previous insight Top Consumer Themes in Vietnam noted some of the top consumer themes in Vietnam and how Phu Nhuan Jewelry Jsc (PNJ VN) and Mobile World Investment (MWG VN) stood out.  MWG is a stand out in the consumer space because of the following: 1) strong initiatives from management to seek new sources of growth, 2 ) historical favorable financial performance and 3) its current discount to consumer stocks and even the VN Index ( ex. premium for buying shares).  MWG”s financial growth has been outpacing many of its consumer peers in recent years, while other consumer stocks have begun to see single digit growth rates.

Consistent Financial Performance: MWG was able to surpass its growth target for 2018 and this marked the fifth consecutive year that MWG achieved its annual target.  Its 2018 revenue rose by 30.4%, which was driven by the strong growth of its consumer electronics products. MWG is positioned to continue delivering favorable growth ( above 20%) in the coming years and to improve margins as Baxhoaxanh’s operations become more mature.

Finding new sources of growth: The company is positioned to withstand the relative slowdown of the consumer electronics segment through company specific developments, while the favorable macro picture in Vietnam is also supportive of strong financial growth.  As traditional sources of growth begin to become exhausted, MWG can find new growth driven by the expansion of its Dien May Xanh stores and its new grocery stores ( Bax Hoa Xanh).

Moats are lame: MWG has been seeking new sources of growth rather than relying merely on its favorable market share and the high growth rates of various sectors in Vietnam.  Several consumer stocks that were less aggressive in this manner have seen single digit top-line growth in recent years.  Stocks in Vietnam are likely to face increasingly saturated markets in the future and innovation will be the key for companies to outperform during the 2020s-2030s ( not to mention the fact that Vietnam’s circa 30% discount to emerging Asia no longer exists).

It is imperative to note that MWG trades at a notable discount to other consumer stocks in Vietnam despite the company’s consistent financial performance and management’s initiative to identify new sources of growth.  The market appears to be undervaluing this unique initiative/ability from management and focusing more on the short term transitions taking place.

4. Revisiting Nagacorp: The News Is Good and Apt to Get Better, yet the Stock Is Still Cheap

• Cambodia’s VIP gaming sector is showing vitality while slowing in other markets.
• Buoyed by the success of Nagaworld2, the company has launched a Naga3 project plan to be financed 50% by its principal owner and internal funding.
• Nagacorp is also betting on the Russian Far East with a project while Lawrence Ho has moved on concerned about higher gaming taxes there.

In this briefing:

1. Tencent (700 HK): Decides to Pay Less to Outside Game Distributors
2. HK Connect Ideas: Nine Weeks of Inflows, Sino Biopharm, Yadea, Anta, Aoyuan (2019-07-12)
3. IndusInd Bank – Excessive Loan Growth, Especially To Property Developers
4. Blockchain Delusion: Overstock
5. WDC Impact from Toshiba Power Outage

1. Tencent (700 HK): Decides to Pay Less to Outside Game Distributors

• Tencent gave game distributors a new offer which reduces Tencent’s payment from 50% to 30%.
• We believe most distributors will have to accept the offer because Tencent is the largest game developer.
• We believe Tencent made the right decision as the Company needs to improve its margins.
• We also believe it is the right time as distributors do not have many new game sources after one year’s new game suspension.

2. HK Connect Ideas: Nine Weeks of Inflows, Sino Biopharm, Yadea, Anta, Aoyuan (2019-07-12)

In our weekly HK Connect Snippet series, we aim to help our investors understand the flow of southbound trades via the Hong Kong Connect, as analyzed by our proprietary data engine, and highlight interesting observations. 

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

In this insight, we would like to highlight the nine consecutive weeks of inflows from mainland China to Hong Kong stocks. We highlight the inflows into China Vanke Co Ltd (H) (2202 HK), Tencent Holdings (700 HK), Sino Biopharmaceutical (1177 HK), and outflows from Future Land Development Holdings (1030 HK), Sunac China Holdings (1918 HK), and WH Group (288 HK). In addition, we would highlight the trading opportunities on Meituan Dianping (3690 HK) and Xiaomi Corp (1810 HK)‘s likely inclusion into Hong Kong Connect this month. In the mid cap space, we highlighted Kingdee International Software (268 HK), China Aoyuan Property (3883 HK), Yadea Group Holdings (1585 HK) and Anta Sports Products (2020 HK).

3. IndusInd Bank – Excessive Loan Growth, Especially To Property Developers

Of India’s listed banks, there is only one that has seen credit growth higher than Indusind Bank (IIB IN) over the past three years: Yes Bank Ltd (YES IN). This is not particularly good company. Adding enormous amounts of credit risk amidst a frail economic environment can lead to high NPL growth. IndusInd Bank expanded its loans 111% over the past three years, where Yes Bank is the only listed bank higher, at 146%. Perhaps it is no wonder that IndusInd bank saw its NPLs up 132% last year, higher than all listed banks, other than Yes Bank at 200%. There are also concerns with what appears to be excessive substandard loans and over zealous growth in real estate developer loans.

4. Blockchain Delusion: Overstock

Blockchain delusion may have peaked, but it hasn’t gone away. Online US retailer Overstock, led by outspoken and controversial founder Patrick Byrne, continues to promote, actually evangelize, his company’s blockchain initiatives. Under his “Governement as a Service” moniker, Byrne vows to transform key pillars of society, from voting to land title management, from capital markets to currencies. Even more spectacularly, Byrne claims to have found “cold fusion on the blockchain side”. Is he correct? We think not and here’s why. 

5. WDC Impact from Toshiba Power Outage

Toshiba’s Mid-June power outage raised some alarm about potential product shortfalls for Western Digital (WDC).  This Insight evaluates the likely outcome of the event and finds that its timing in the industry cycle will dull its impact, if there is any impact at all.

In this briefing:

1. Bank of China – An SOE Bank that Is Not Immune
2. Mobile World Investment Corporation: Discount to Other Consumer Stocks Is Asymmetric
3. Revisiting Nagacorp: The News Is Good and Apt to Get Better, yet the Stock Is Still Cheap

1. Bank of China – An SOE Bank that Is Not Immune

Rural banks come to mind. Medium-sized banks as well. But it is not one of the large four SOE banks that we to feel will have some of the highest impairment cost growth. Yet, Bank Of China (601988 CH) ranks second of the largest 10 listed China banks for impairment cost growth in 1Q19 YoY at a staggering 76%. And this can continue through 2Q19 and through 2019. The reason is simple: BOC’s impairment costs remain far lower than large peer banks. With the profit warning from Bank Of East Asia (23 HK; BEA) due to worsening China credit metrics, worsening industrial output data (just out) and the full effects of US-China trade war yet to hit, BOC may have to play catch-up with peers. This is also apparent with its HK subsidiary, where credit costs are lower than most all peer banks at just 10bps of loans in 2018; BEA was 2.4x higher. See valuation, fundamental and momentum (VFM) research done by our Smartkarma colleague Paul Hollingworth on BOC and BEA in the past.

2. Mobile World Investment Corporation: Discount to Other Consumer Stocks Is Asymmetric

My previous insight Top Consumer Themes in Vietnam noted some of the top consumer themes in Vietnam and how Phu Nhuan Jewelry Jsc (PNJ VN) and Mobile World Investment (MWG VN) stood out.  MWG is a stand out in the consumer space because of the following: 1) strong initiatives from management to seek new sources of growth, 2 ) historical favorable financial performance and 3) its current discount to consumer stocks and even the VN Index ( ex. premium for buying shares).  MWG”s financial growth has been outpacing many of its consumer peers in recent years, while other consumer stocks have begun to see single digit growth rates.

Consistent Financial Performance: MWG was able to surpass its growth target for 2018 and this marked the fifth consecutive year that MWG achieved its annual target.  Its 2018 revenue rose by 30.4%, which was driven by the strong growth of its consumer electronics products. MWG is positioned to continue delivering favorable growth ( above 20%) in the coming years and to improve margins as Baxhoaxanh’s operations become more mature.

Finding new sources of growth: The company is positioned to withstand the relative slowdown of the consumer electronics segment through company specific developments, while the favorable macro picture in Vietnam is also supportive of strong financial growth.  As traditional sources of growth begin to become exhausted, MWG can find new growth driven by the expansion of its Dien May Xanh stores and its new grocery stores ( Bax Hoa Xanh).

Moats are lame: MWG has been seeking new sources of growth rather than relying merely on its favorable market share and the high growth rates of various sectors in Vietnam.  Several consumer stocks that were less aggressive in this manner have seen single digit top-line growth in recent years.  Stocks in Vietnam are likely to face increasingly saturated markets in the future and innovation will be the key for companies to outperform during the 2020s-2030s ( not to mention the fact that Vietnam’s circa 30% discount to emerging Asia no longer exists).

It is imperative to note that MWG trades at a notable discount to other consumer stocks in Vietnam despite the company’s consistent financial performance and management’s initiative to identify new sources of growth.  The market appears to be undervaluing this unique initiative/ability from management and focusing more on the short term transitions taking place.

3. Revisiting Nagacorp: The News Is Good and Apt to Get Better, yet the Stock Is Still Cheap

• Cambodia’s VIP gaming sector is showing vitality while slowing in other markets.
• Buoyed by the success of Nagaworld2, the company has launched a Naga3 project plan to be financed 50% by its principal owner and internal funding.
• Nagacorp is also betting on the Russian Far East with a project while Lawrence Ho has moved on concerned about higher gaming taxes there.

In this briefing:

1. HK Connect Ideas: Nine Weeks of Inflows, Sino Biopharm, Yadea, Anta, Aoyuan (2019-07-12)
2. IndusInd Bank – Excessive Loan Growth, Especially To Property Developers
3. Blockchain Delusion: Overstock
4. WDC Impact from Toshiba Power Outage
5. Slack (WORK): The Next-Gen Enterprise Aggregation Platform

1. HK Connect Ideas: Nine Weeks of Inflows, Sino Biopharm, Yadea, Anta, Aoyuan (2019-07-12)

In our weekly HK Connect Snippet series, we aim to help our investors understand the flow of southbound trades via the Hong Kong Connect, as analyzed by our proprietary data engine, and highlight interesting observations. 

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

In this insight, we would like to highlight the nine consecutive weeks of inflows from mainland China to Hong Kong stocks. We highlight the inflows into China Vanke Co Ltd (H) (2202 HK), Tencent Holdings (700 HK), Sino Biopharmaceutical (1177 HK), and outflows from Future Land Development Holdings (1030 HK), Sunac China Holdings (1918 HK), and WH Group (288 HK). In addition, we would highlight the trading opportunities on Meituan Dianping (3690 HK) and Xiaomi Corp (1810 HK)‘s likely inclusion into Hong Kong Connect this month. In the mid cap space, we highlighted Kingdee International Software (268 HK), China Aoyuan Property (3883 HK), Yadea Group Holdings (1585 HK) and Anta Sports Products (2020 HK).

2. IndusInd Bank – Excessive Loan Growth, Especially To Property Developers

Of India’s listed banks, there is only one that has seen credit growth higher than Indusind Bank (IIB IN) over the past three years: Yes Bank Ltd (YES IN). This is not particularly good company. Adding enormous amounts of credit risk amidst a frail economic environment can lead to high NPL growth. IndusInd Bank expanded its loans 111% over the past three years, where Yes Bank is the only listed bank higher, at 146%. Perhaps it is no wonder that IndusInd bank saw its NPLs up 132% last year, higher than all listed banks, other than Yes Bank at 200%. There are also concerns with what appears to be excessive substandard loans and over zealous growth in real estate developer loans.

3. Blockchain Delusion: Overstock

Blockchain delusion may have peaked, but it hasn’t gone away. Online US retailer Overstock, led by outspoken and controversial founder Patrick Byrne, continues to promote, actually evangelize, his company’s blockchain initiatives. Under his “Governement as a Service” moniker, Byrne vows to transform key pillars of society, from voting to land title management, from capital markets to currencies. Even more spectacularly, Byrne claims to have found “cold fusion on the blockchain side”. Is he correct? We think not and here’s why. 

4. WDC Impact from Toshiba Power Outage

Toshiba’s Mid-June power outage raised some alarm about potential product shortfalls for Western Digital (WDC).  This Insight evaluates the likely outcome of the event and finds that its timing in the industry cycle will dull its impact, if there is any impact at all.

5. Slack (WORK): The Next-Gen Enterprise Aggregation Platform

Obex Capital Management’s investment process seeks to differentiate between fundamental business analysis and security analysis. Before deciding if a security’s pricing and positioning merit a long or short position, we analyze the four pillars of business fundamentals (Secular Factors, TAM, Competitive Advantage, Business Model) in order to determine if this is a “good” or “not so good” opportunity.

This case study evaluates Slack Technologies Inc (WORK US) business fundamentals, unit economics, valuation, investors, management and culture. The one page up front summary is meant to be used by investors as a road map to evaluate Slack’s progress over its first few quarters.

We start with a Best Working Thesis which reflects our initial conclusions from the case study. Key Questions positively answered would make us incrementally more bullish, while evidence of rising Thesis Threats may potentially puncture our view.

We lean bullish on Slack’s competitive positioning and open-ended growth opportunity, and despite recent history showing us that investors have been rewarded for buying richly valued SaaS companies, we would be inclined to wait for a better entry point.

In this briefing:

1. Mobile World Investment Corporation: Discount to Other Consumer Stocks Is Asymmetric
2. Revisiting Nagacorp: The News Is Good and Apt to Get Better, yet the Stock Is Still Cheap

1. Mobile World Investment Corporation: Discount to Other Consumer Stocks Is Asymmetric

My previous insight Top Consumer Themes in Vietnam noted some of the top consumer themes in Vietnam and how Phu Nhuan Jewelry Jsc (PNJ VN) and Mobile World Investment (MWG VN) stood out.  MWG is a stand out in the consumer space because of the following: 1) strong initiatives from management to seek new sources of growth, 2 ) historical favorable financial performance and 3) its current discount to consumer stocks and even the VN Index ( ex. premium for buying shares).  MWG”s financial growth has been outpacing many of its consumer peers in recent years, while other consumer stocks have begun to see single digit growth rates.

Consistent Financial Performance: MWG was able to surpass its growth target for 2018 and this marked the fifth consecutive year that MWG achieved its annual target.  Its 2018 revenue rose by 30.4%, which was driven by the strong growth of its consumer electronics products. MWG is positioned to continue delivering favorable growth ( above 20%) in the coming years and to improve margins as Baxhoaxanh’s operations become more mature.

Finding new sources of growth: The company is positioned to withstand the relative slowdown of the consumer electronics segment through company specific developments, while the favorable macro picture in Vietnam is also supportive of strong financial growth.  As traditional sources of growth begin to become exhausted, MWG can find new growth driven by the expansion of its Dien May Xanh stores and its new grocery stores ( Bax Hoa Xanh).

Moats are lame: MWG has been seeking new sources of growth rather than relying merely on its favorable market share and the high growth rates of various sectors in Vietnam.  Several consumer stocks that were less aggressive in this manner have seen single digit top-line growth in recent years.  Stocks in Vietnam are likely to face increasingly saturated markets in the future and innovation will be the key for companies to outperform during the 2020s-2030s ( not to mention the fact that Vietnam’s circa 30% discount to emerging Asia no longer exists).

It is imperative to note that MWG trades at a notable discount to other consumer stocks in Vietnam despite the company’s consistent financial performance and management’s initiative to identify new sources of growth.  The market appears to be undervaluing this unique initiative/ability from management and focusing more on the short term transitions taking place.

2. Revisiting Nagacorp: The News Is Good and Apt to Get Better, yet the Stock Is Still Cheap

• Cambodia’s VIP gaming sector is showing vitality while slowing in other markets.
• Buoyed by the success of Nagaworld2, the company has launched a Naga3 project plan to be financed 50% by its principal owner and internal funding.
• Nagacorp is also betting on the Russian Far East with a project while Lawrence Ho has moved on concerned about higher gaming taxes there.

In this briefing:

1. REIT Discover: Prime US REIT IPO Brief Review
2. This Week in Blockchain & Cryptos: How Facebook Is Going to Monetise Libra
3. Yaskawa: Poor 1Q Should Correct Expectations and Share Price But Start Searching for an Entry Point
4. Samsung Situation: Stella Chemifa Dilemma & Recent Price Movement
5. Maoyan Entertainment: Tencent Collaboration Is a Temporary Reprieve

1. REIT Discover: Prime US REIT IPO Brief Review

In this issue of REIT Discover, we take a look at the initial public offer (IPO) of Prime Us Reit (PRIME SP). The offer will close at noon on 15^th July and trading of the units is expected to commence at 2pm on 19^th July. The units are priced at US$0.88 each, representing an indicative distribution yield of 7.4% in 2019 and 7.6% in 2020, and a slight premium to book at 1.05x. The offering is expected to raise gross proceeds of US$813mn.

PRIME is a Class A US Office REIT. We like the high quality Class A and freehold office portfolio of 11 properties which boasts a high average occupancy of 96.7%. The portfolio is supported by relatively long leases with periodic rental step-up provisions for income visibility and organic growth. The detailed growth potential of PRIME deserves a deeper coverage in a separate insight. For now based on the ownership structure of the REIT and Manager, peer valuation and near-term risks, we gauge that the IPO seems fairly valued and may offer limited upside on the first day.   

 The Sponsor, KBS Asia Partners, is associated with KBS, one of the largest US commercial real estate managers with US$11.6 billion of assets currently under management. We recall that it was only recently in November 2017 that KBS partnered with Keppel Capital to list Class B Office REIT, Keppel-Kbs Us Reit (KORE SP) , on the SGX. Less than a year after listing, KORE announced a huge rights issue to fund an acquisition. We are cognizant of the fact that the management went ahead with a dilutive rights issue under turbulent market conditions and we view this management style as rather aggressive. We are therefore concerned about a déjà vu with PRIME in the near term.  We ascribe to this IPO a 2.5-star out of 5 stars rating.

2. This Week in Blockchain & Cryptos: How Facebook Is Going to Monetise Libra

Facebook Inc A (FB US)‘s proposed cryptocurrency, Libra, released its whitepaper last month. Libra has currently launched a testnet for developers and is planning on officially launching the coin during the first half of 2020.  In this note, we take a deep dive into Libra’s main attributes and how Facebook is looking to monetise Libra. 

3. Yaskawa: Poor 1Q Should Correct Expectations and Share Price But Start Searching for an Entry Point

Yaskawa Electric (6506 JP) reported 1Q earnings today, kicking off the season for the factory automation space in rather dour fashion with revenue down 16.2% YoY and OP down 58.2% YoY. Revenue was ¥107.4bn, 10% below consensus and we estimate about 4-5% below the company’s own plan, while OP was ¥7.2bn, about 30% below consensus.

The results look rather dire and are likely to pour cold water on hopes for a quick rebound for the sector. We are turning more constructive on the name but are increasingly concerned for peer Harmonic Drive Systems (6324 JP). We discuss the details below.

4. Samsung Situation: Stella Chemifa Dilemma & Recent Price Movement

Samsung LJY is still in Japan. What is he still doing there? Apparently, he is trying to secure etching gas as much as possible. Now, it’s all about etching gas. In this post, I will do some checkups on LJY’s current Japan trip and the recent price movement on Samsung.

5. Maoyan Entertainment: Tencent Collaboration Is a Temporary Reprieve

Maoyan Entertainment (1896 HK) is the largest online movie ticketing service provider in China. Since Tuesday, Maoyan shares rallied around 20% on the back of news that Maoyan has deepened its relationship with Tencent Holdings (700 HK).

In this briefing:

1. IndusInd Bank – Excessive Loan Growth, Especially To Property Developers
2. Blockchain Delusion: Overstock
3. WDC Impact from Toshiba Power Outage
4. Slack (WORK): The Next-Gen Enterprise Aggregation Platform
5. The Political Crisis Between Japan & South Korea (Lessons from the Joseon White Porcelains & Cobalt)

1. IndusInd Bank – Excessive Loan Growth, Especially To Property Developers

Of India’s listed banks, there is only one that has seen credit growth higher than Indusind Bank (IIB IN) over the past three years: Yes Bank Ltd (YES IN). This is not particularly good company. Adding enormous amounts of credit risk amidst a frail economic environment can lead to high NPL growth. IndusInd Bank expanded its loans 111% over the past three years, where Yes Bank is the only listed bank higher, at 146%. Perhaps it is no wonder that IndusInd bank saw its NPLs up 132% last year, higher than all listed banks, other than Yes Bank at 200%. There are also concerns with what appears to be excessive substandard loans and over zealous growth in real estate developer loans.

2. Blockchain Delusion: Overstock

Blockchain delusion may have peaked, but it hasn’t gone away. Online US retailer Overstock, led by outspoken and controversial founder Patrick Byrne, continues to promote, actually evangelize, his company’s blockchain initiatives. Under his “Governement as a Service” moniker, Byrne vows to transform key pillars of society, from voting to land title management, from capital markets to currencies. Even more spectacularly, Byrne claims to have found “cold fusion on the blockchain side”. Is he correct? We think not and here’s why. 

3. WDC Impact from Toshiba Power Outage

Toshiba’s Mid-June power outage raised some alarm about potential product shortfalls for Western Digital (WDC).  This Insight evaluates the likely outcome of the event and finds that its timing in the industry cycle will dull its impact, if there is any impact at all.

4. Slack (WORK): The Next-Gen Enterprise Aggregation Platform

Obex Capital Management’s investment process seeks to differentiate between fundamental business analysis and security analysis. Before deciding if a security’s pricing and positioning merit a long or short position, we analyze the four pillars of business fundamentals (Secular Factors, TAM, Competitive Advantage, Business Model) in order to determine if this is a “good” or “not so good” opportunity.

This case study evaluates Slack Technologies Inc (WORK US) business fundamentals, unit economics, valuation, investors, management and culture. The one page up front summary is meant to be used by investors as a road map to evaluate Slack’s progress over its first few quarters.

We start with a Best Working Thesis which reflects our initial conclusions from the case study. Key Questions positively answered would make us incrementally more bullish, while evidence of rising Thesis Threats may potentially puncture our view.

We lean bullish on Slack’s competitive positioning and open-ended growth opportunity, and despite recent history showing us that investors have been rewarded for buying richly valued SaaS companies, we would be inclined to wait for a better entry point.

5. The Political Crisis Between Japan & South Korea (Lessons from the Joseon White Porcelains & Cobalt)

It has been more than 20 years that I’ve been covering the Korean markets and never has the political climate between Japan and South Korea been this terrible to the extent that the Japanese government has imposed the first round of significant economic sanctions on South Korea. 

In our view, there will likely be no major positive news next week that could dramatically result in the reconciliation between Japan and South Korea. Rather, we believe this heated political battle between Japan and South Korea appears to be just starting and that the Japanese government could impose the SECOND ROUND of economic sanctions on South Korea some time in August/September. 

While all these economic sanctions and restrictions of key chemical/semiconductor materials are occurring, the story of the “Joseon white porcelains” came to my mind. All in all, the current restrictions of key chemical materials from Japan such as fluorine-containing polyimide, resists, and etching gas are reminiscent of the trade restrictions on imported items such as cobalt during the Joseon dynasty hundreds of years ago.  They are also a keen reminder that in order for Korea to have a vibrant, flourishing economy, excellent political relationships with its close, powerful neighbors including China and Japan is a must. 

In this briefing:

1. Revisiting Nagacorp: The News Is Good and Apt to Get Better, yet the Stock Is Still Cheap

1. Revisiting Nagacorp: The News Is Good and Apt to Get Better, yet the Stock Is Still Cheap

• Cambodia’s VIP gaming sector is showing vitality while slowing in other markets.
• Buoyed by the success of Nagaworld2, the company has launched a Naga3 project plan to be financed 50% by its principal owner and internal funding.
• Nagacorp is also betting on the Russian Far East with a project while Lawrence Ho has moved on concerned about higher gaming taxes there.