Bottom-Up Equities

Bajaj Finance Ltd (BAF IN) reported weaker than expected Q1FY22 earnings led by weakening asset quality and subdued growth due to adverse impact from the second wave of COVID. On the other hand, it reported strong advancement in its next phase transformation of becoming an app based fintech ecosystem. With this app based ecosystem, we think BAF is gearing up to be the next big fintech in the country. If all goes well, we won’t be surprised to see BAF getting bigger than Paytm, PhonePe, etc. over time. BAF has an inherent advantage over its peers in the form of a large vetted and wealthy customer base as well as in-house products that can be tailored as per customer requirements. BAF’s fintech peers, on the other hand, acquire customers through significant discounts and cash burn. Also, these peers have limited in-house products and have to rely mostly on third-party products that provide limited leeway for customization. While, BAF’s current valuations are around fair at 65-70x on a normalized profit base (i.e. ex of COVID impact), we think BAF still has potential to surprise on earnings growth led by its new Fintech avatar. 

China Communications Construction (1800 HK) has a fruitful 1H21 as reflected by impressive new contract growth and profit recovery. Driven by the strength at the domestic market, overall new contract addition reached Rmb685.1bn, a good 28.5% YoY growth. Such pace is the fastest when compared with the annual growth rate since FY15, and this solid project pipeline will translate into positive profit momentum over the next three years.

CCCC has also issued positive profit alert for 1H21, guiding for between 109.70% and 139.01% YoY growth in net profit. For 2Q21 standalone, the YoY growth should reach an even higher 1.4-2.1x. We see limited regulatory risks for CCCC given the infrastructure construction industry landscape and its centrally-owned SOE status. In our view, its ROE of 6.9% for FY21F and 7.5% for FY22F highly justify a re-rating in its P/B multiple which currently stands at 0.19x on a 12-month forward basis. 

Mazda results came in barely below our estimates but blew away consensus. Revenue hit ¥803bn (LSR ¥817bn and consensus ¥750bn) while OP hit ¥26.1bn (LSR¥28bn and consensus ¥5.2bn). We believe conditions in North America and Australia will continue to drive robust performance and 1Q was in fact held back by extremely weak volumes in Japan which should rebound. These positives could also result in upside surprises on dividends.

*Credibility Gap Widens: LIC Housing Finance (LICHF.IN) [LIC] reported FY 1Q22 bottom-line results of INR 1.5 bn, declining INR 2.5 bn (61.5%) linked quarter. Negative operating jaws, were the culprit, as costs increased INR 469 mn (21.1%) whilst revenues declined INR 2.6 bn (16.7%); and

*Very Negative Credit Delta: Despite the limited NCOs, net new NPLs at LIC still skyrocketed INR 44.7 bn or 190.3% on an annualized basis linked quarter significantly accelerating from a very high INR 12.6 bn (62.0%) during FY 4Q21. By our calculation, if the large blip in credit continues, LIC management ought to think about adding another INR 158 bn to the reserve – which amounts to 78% of stated equity at just 50% cover of NPLs.

Oriental Land (4661 JP) delivered 1QFY22 results late last week with revenue surpassing the consensus estimate by more than 42%. The company’s 1QFY22 operating loss was ¥8.8bn compared to the consensus operating loss estimate of ¥21.5bn.

We have been highlighting the fact that Oriental Land’s consensus estimates have been out of touch with reality since the beginning of the COVID-19 pandemic. Initially, consensus was late to downgrade earnings estimates and it took them till 4QFY21 to catch up.

Although, this time around they were quick to react as consensus estimates were lowered rather quickly after reimposing restrictions on park attendance.

Nevertheless, Japan’s rapid vaccination drive in preparation for Olympics would mean that attendance restrictions are likely to be very lifted soon. If Japan follows a similar trend to the US reopening story, Tokyo Disney Land, Disney Sea and Disney Hotels are likely likely to experience the guest numbers that’s never been seen before. Yet, the upside potential to Oriental Land shares are rather low as the company is currently trading at extremely expensive multiples. 

The field of high-value ophthalmic consumables has always been one of the focus of investors. Among them, Eyebright Medical Technology Beijing (688050 CH), which is committed to the R&D, production and commercialization of intraocular lens (IOL) and orthokeratology lens (OK lens) as its core products, attracts continuous attention. Since its listing in July 2020, the stock price of Eyebright had once been as high as RMB398.86/share. As of July 30, 2021, the share price of Eyebright was closed at RMB274.1/share, up about 717% compared with the issue price of RMB33.55/share, with the market value of RMB28.8 billion and P/E ratio of 200.66. So could Eyebright continue to support its high valuation? This insight mainly analyzed the industry characteristics, the business, and thoughts on valuation of Eyebright.

In our previous coverage on Religare Enterprises (RELG IN) in Religare Enterprises: Sustained Red Flags , we highlighted the red herrings that had tainted the group’s image and valuation as a whole. In the two years i.e. F17-19, REL has witnessed a bunch of malpractices and poor asset quality, which led to a demise in the value of stock. The distressed state of affairs had almost corrupted its NBFC arm, as RBI had placed a cap on the operations. The NBFC business was also tarnished by its auditors in the last few years, having constantly been on the receiving end of qualified opinions, several of them being repeated year on year. 

However, with the exit of ‘recognisable promoters’ and the entrance of the ‘new management’, REL has stepped up to clean itself, undergoing several measures to reinforce the confidence. Since most of the damage relating to the lending business is been done, and that other segments are doing better than ever including insurance IPO which just might be the savior, REL is set for a turnaround when one looks at the overall scheme of things.

Astra International (ASII IJ) announced its 1H2021 results with sales increasing by +20% YoY and headline net profit decreasing by -22% YoY but removing the impact of the Bank Permata (BNLI IJ) sale last year, net profit increased by an impressive +61% YoY.

The better numbers were driven by a strong improvement in the auto business, with car sales up +50% YoY and motorcycle sales +29% YoY.

The group was also a beneficiary of higher commodity prices in 1H2021, which boosted the performance of its heavy equipment and mining business under United Tractors (UNTR IJ) and its agribusiness under Astra Agro Lestari (AALI IJ), which saw net profit +14% YoY and +66% YoY respectively.  

The group consumer finance business saw a +13% increase in the amounts financed with an increase of +2% in net profit growth. Car finance saw a +2% increase and motorcycle finance a +3% YoY increase in net profit, while heavy equipment finance saw a +46% increase in the amounts financed by a -20% decrease in contribution due to a reduced loan portfolio. 

United Tractors (UNTR IJ) saw a +13% increase in net income with a +60% increase in Komatsu heavy equipment sales and helped by higher coal prices. Astra Agro Lestari (AALI IJ)saw a boost from higher crude palm oil prices, which rose +29% in 1H2021.

Keyence revenue growth surprised to the upside like peers with a 10.7% positive surprise vs. consensus. Just as importantly, OPM was also strong as the unusually high SG&A burden the company has been experiencing over the last two years continues to ease.

Mediatek Inc (2454 TT) delivered a strong set of 2Q21 results, beating sell-side consensus estimates on both the top and bottom-line and delivering numbers at the top-end of management’s guided ranges, which, in conjunction with a continued strong demand environment, has led to an increase in growth and profitability guidance for the remainder of FY2021.

Further short-term share price weakness, based on supply constraint concerns, along with a continuation of the earnings upgrade cycle, has resulted in MediaTek trading on a 13.8x NTM PE ratio, which is more than one standard deviation below its historical average trading range. MediaTek also currently trades on an extremely attractive 6.3% NTM dividend yield with little risk of a negative surprise to dividend payments given the ongoing earnings upgrades, and MediaTek having generated NT$28bn in Operating Cash Flow, during 2Q21, which helped its Net Cash balance increase further to NT$191bn, now 13% of its Market Cap. 

In this insight, we look at MediaTek’s 2Q21 results, its medium- and longer-term growth outlook and current valuation levels. This insight is also a follow-up from our more-detailed analysis of MediaTek (MediaTek: High-Quality 5G Beneficiary with a Tremendously Attractive Dividend Yield) last month.

Hong Kong Exchange publishes share repurchases by listed companies on a daily basis. In our weekly note, we will provide statistics on top repurchases over one week, one month, one quarter and one year periods ended on Jul 30.

In the past 7 days, the top 3 companies that repurchased the most shares from the market were  Xiaomi Corp (1810 HK) (HKD 196.9 million worth of buybacks), New World Development (17 HK) (HKD 170.2 million worth of buybacks), China Gas Holdings (384 HK) (HKD 86.6 million worth of buybacks).

Is MP Materials Corp (MP US) a way for investors to play the increasing demand for rare earth materials or will this play out similarly for the mine that has experienced its fair share of problems over the past few decades?

KDDI posted mixed Q1 results with revenue modestly below expectations but profitability higher. Recent operational trends remain unchanged as demonstrated by 18% growth in new DX business sales but a 3% decline in core mobile communication sales.  Profitability growth stands out especially as KDDI did that whilst lapping the toughest comps for FY20 when emergency coronavirus measures kept marketing spend down. With financial results on track to meet FY21 expectations, we remain at Buy.

Siloam International Hospital (SILO IJ) released its 1H2021 results and was able to sustain its positive momentum for revenue, EBITDA and net profit performance from 1Q2021 to 2Q2021.

The numbers have been driven both by testing and treatment for COVID but also a recovery in case bases as the fear of visiting hospitals subsided during the quarter.

Siloam International Hospital (SILO IJ) achieved a net profit margin of 8.0% in 2Q2021 compared with a negative 13.9% in 2Q2020. The company saw YoY EBITDA growth of +487%, booking IDR478bn in 2Q2021 compared with IDR82bn in 2Q2020.

The company conducted a total of 32,000  surgeries in 1H2021, only -10.2% lower than the number of surgeries conducted in pre-COVID 1H2019. Inpatient and outpatient numbers also saw significant improvements in 1H2021

 Of the 18 ramping up hospitals which were unprofitable in 2019, nine of these are now profitable, with a total positive EBITDA contribution of IDR150bn in 1H2021. 

Siloam International Hospital (SILO IJ) continues to strengthen its relationships with corporate and insurance clients, with a corporate loyalty program, as well as consulting services on health issues.

Neutral tone from yesterday analysts’ meeting. We reiterate our BUY rating with a target price at Bt155, derived from 0.65x PBV’21E,which is close to its 3-year average.

In this insight, we provide visual set-ups of the Korean stubs related pair-trades. We have included 40 pair trade set-ups of all the major Korean stubs related pairs (including regular and quasi holdcos and their respective opcos). We have provided YTD price chart comparisons of all the 40 pair trade set-ups below. 

The top six best performing holdcos (among the companies listed below) YTD are as follows:

• Doosan Corp (000150 KS) – up 86% YTD
• Hyosung Corporation (004800 KS) – Up 62.5% YTD
• Poongsan Corp (103140 KS) – Up 50.3% YTD
• Samyang Holdings (000070 KS) – Up 47.7% YTD
• Ecopro Co Ltd (086520 KS) – Up 34.8% YTD
• Orion Holdings (001800 KS) – Up 30.2% YTD

The top six best performing opcos (among the companies listed below) YTD are as follows:

• Hanwha Aerospace (012450 KS) – Up 73.8% YTD
• Doosan Heavy Industries & Construction (034020 KS) – Up 56.5% YTD
• Ecopro BM Co Ltd (247540 KS) – 54.7% YTD
• Aekyung Petrochem – Up 47.2% YTD
• Pan Ocean (028670 KS) – Up 40.6% YTD
• Poongsan Corp (103140 KS) – Up 36.7% YTD

• Hawkins (HWKN) has leveraged its storage capabilities to meet increased demand for specialty chemicals at a time when demand has increased. HWKN reported fiscal first quarter (June) results surpassing our expectations on the heels of higher pricing and volumes for multiple products.

• Ahead of the results we had been expecting some normalization in HWKN’s business due to loosened COVID-19 restrictions. Even though there was evidence of lower bleach demand, there was an increase across a multitude of the products HWKN sells, including those where there has been material increase in selling prices.

• HWKN reported revenue of $181.2 million compared to our estimate of $178.8 million. The increase in revenue was the result of higher industrial and water treatment revenue while health & nutrition revenue declined sequentially faster than we had expected.

• We are making changes to our earnings model to reflect the improvement in the underlying demand in HWKN’s businesses. This includes using a higher gross margin than we had originally modeled at the start of the fiscal year.

• The stock price has plunged since October 2020.
• Over the past few days, BABA became a casualty of the policy against tutoring companies.
• However, we believe the China online retail has been recovering.
• We also believe the stock has an upside of 27% in nine months.

We have discussed in our previous note that Jinxin Fertility will be a beneficiary for the China’s promotional policy for the third child. With the recent share price weakness and development on the policy front, we provide updates on the company and continue to believe that it is a name to hold for more favorable policy tailwinds to come. 

Capcom handily beat consensus estimates at 1Q with revenue of ¥48.4bn (+27.8%) and OP of ¥23.6bn (+37.4%). Consensus had been as low as ¥13.4bn in early May so the beat is significant. Yet, it failed to meet our ¥25-30bn on account of a write-off of some game assets (“several billion yen”) and deferring revenue for RE8 due to free DLC which we had not expected. Without those factors we believe OP would have come extremely close to ¥30bn. We remain confident that ¥60bn in OP is on the cards for the full year though it is plausible that Capcom could push out sales into next FY and come in slightly below that.

• US-based National Beverage has an atypical management culture that emphasizes long-term value creation;
• The business outperforms its publicly-traded peers across many dimensions;
• At the current level, the risk-reward ratio looks quite favorable for the company’s long-term shareholders.

CyberAgent Inc (4751 JP) reported its 3Q FY09/21 financial results after market on 28^th. CyberAgent’s revenue for the quarter increased 70.3% YoY while operating profit grew 23.2% YoY during the period. Revenue beat consensus by 8.9% while OP beat consensus by 53.9%. The company has once again revised its FY2021 forecasts upwards given that it has already reached its OP target for the year which was set in 2Q FY09/2021.

Spotify missed on MAUs again and lowered 2021 guidance. Not great for a subscription business built on a distant 10 year DCF built on subscriber trajectories. We have pushed Spotify as a short for a while and think its still a good short, especially as their spending on podcasting continues, even as usage is rolling over…oh yeah, and they still have no operating leverage. 

M3 Inc (2413 JP)  reported 1QFY03/2022 results on Wednesday which saw revenues growing 30.8% YoY while reported operating profit grew 38.2%YoY during the quarter (excl. the impact from stake disposal of Medlive Technology (2192 HK)). M3’s operating profits during 1QFY03/2022 benefitted from the IPO of Medlive Technology on Hong Kong Stock Exchange in July 2021 with a profit attribution of JPY9.1bn (19.6% of total revenues in 1Q and 36.9% of operating profits excl. Medlive IPO impact).

Source: Company disclosures

The reported revenue was 3.8% higher than consensus estimates while reported operating profits beat consensus by a huge margin of about 50%.

KPIT reported strong Q1FY22 earnings. Overall, the earnings growth was led by margin expansion (EBITDA margin expanded to 17.3% vs 13.4% YoY) and high-teens QoQ revenue growth. The guidance also remains robust. While the stock has more than quadrupled since our initiation note KPIT Technologies: A Pure Play on Automotive Technology in Jun 2020, we believe the upside potential still remains significant.

Indonesia’s leading bread company PT Nippon Indosari Corpindo (ROTI IJ) announced a strong set of results for 1H2021 with net Income up by +33.2%, despite a -7.0% YoY decline in sales. 

PT Nippon Indosari Corpindo( ROTI IJ)‘s 1H2021 return rate was improved to 10.4% versus 13.1% last year, as the company quickly anticipated changes in consumer shopping behaviour during the pandemic.

2Q2021 modern trade sales started to recover more than general trade, as the economy started to recover. The fact that malls have been shut in the latest emergency PPKM has been a positive for PT Nippon Indosari Corpindo Tbk. (ROTI) (ROTI IJ). 

1H2021 gross margin came under some pressure from rising wheat (flour) prices but ROTI was able to reduce overall operating expenses to offset this coupled with the fact that business no longer had the drag from SMFC in the Philippines.

An encouraging July 2021 indicates significantly increased sales per day for general and modern trade with sales per day hitting close to the record set in 4Q2019.

PT Nippon Indosari Corpindo (ROTI IJ) remains a core consumer staples holding in Indonesia. It trades on 24.1x FY21E PER and 20.7x PER, with forecast EPS growth of +29.1% and +21.5% for FY21E and FY22E respectively versus its 5-year average forward PER of 27.7x, which looks relatively attractive.

Cosmetics exports grew 32.8% YoY and 15% QoQ in 2Q21 to more than offset the weaknesses in the domestic cosmetics market which remained 26% and 31% below the pre-COVID level in April and May 2021 respectively.

The earnings season of the Japanese cosmetics commences with quarterly results from Pola Orbis Holdings (4927 JP) and Kose Corp (4922 JP) on 30^th July 2021. Kao Corp (4452 JP), Fancl Corp (4921 JP) and Shiseido Company (4911 JP) are scheduled to report their quarterly results early next week.

We analyse the 2Q21 cosmetic industry statistics, using the monthly data released by the Ministry of Economy, Trade and Industry (METI) and the Ministry of Finance.

After trading sideways during May/June 2021, bulls got excited as Alibaba Group (9988 HK) rallied by 10% in the last week of June to $229.4 per share. Unfortunately, the joy was cut short, as Xi Jinping’s government went back on the offence with a broadened crackdown on tech platforms, especially the US-listed Chinese tech companies like the recent ride-sharing IPO DiDi Chuxing (DIDI US). As a result, Alibaba’s share price dropped 15% to a new 52 week low. Before the dust settled the Chinese government introduced reforms to private education companies, preventing them from making profits from the after-school tutoring businesses.

We believe all of these interventions are messages about the direction of the government policy over the next few years and the government’s effort to bring equality through preventing monopolistic behaviour and address cybersecurity, data collection and privacy concerns could be broader policies of Xi Jinping’s government as the Chinese economy enters a new era of growth.

New economy stocks like Alibaba, Tencent, Vipshop and JD.com have never gone through a period of time that’s even remotely similar to the time frame it is about to go through in the next few years.

Therefore, we think bottom fishing Chinese e-commerce stocks during this regulatory crackdown and economic policy transition could be of high risk unless they get to a point where they are bargains on price to book multiples.

In this insight, we discuss some important points to make a note of, if you are considering bottom fishing Alibaba, one of the safest Chinese tech stocks in the market.

Investors’ concerns over increasingly expanding regulatory restrictions and the potential market intervention led to a rout of Chinese tech and education stocks over the last several trading sessions. The select 9 Chinese tech stocks I follow collectively lost USD320 billion in value over 20 July to 27 July.  While some of the regulatory risks were known from March 2021, ramifications of the potential value-destroying restrictions on the education companies, termination of Tencent Music (TME US)’s exclusive rights, and the suspension of new user registration for Tencent (700 HK)‘s Wechat spook the market. 

Tencent’s market cap has declined 19% during the seven-day period, which cannot be fully explained by the potential value lost from the recently announced regulatory measures, in my view.  Back in April (see Tencent (700 HK): Fintech Risk Is Lurking) I pointed out that Tencent shares could be overvalued by 20% on fintech risk alone.  The shares are down nearly 30% since then. I now believe the shares could be undervalued by 10%, notwithstanding the undefined regulatory risks ahead.  Having said that, catching a falling knife is not for the faint-hearted. 

These stocks rebounded on the US Wednesday trading session, possibly reflecting the sentiment “enough is enough.” Bloomberg reported that the securities regulator assured select investment bankers that the education policies are not to be for other industries.     

In this report, I summarize the announced regulatory events this year to date and share my thoughts on why the market may be over discounting Tencent’s value by looking at the potential value impact of Tencent’s fintech value (a reiteration from the April report) and the impact of the value decline of DiDi Chuxing (DIDI US) and Tencent Music.          

Kunlun Energy (135 HK) should have a decent operating performance in 1H21, with good growth achieved for natural gas sales, LPG sales, LNG terminal and also the exploration and production segment. Their performance all look to be ahead of the full-year guidance put forward in FY20 result announcement in Mar 2021 – this is encouraging.

Gas project M&A momentum stays decent and, with IRRs of 10-12%, the returns are ahead of the hurdle level of 8%. Following China Gas Holdings’ (384 HK)  Shiyan gas explosion, local governments now prefer large SOEs to invest in projects given their more stringent safety standards, and this is an advantage of Kunlun. The gas industry also entails less regulatory risks amid government’s heightened regulatory measures towards various industries lately. The recent pull-back has made valuations even more appealing, in our view.  

Nissan reported 1QFY22 results on Wednesday generating revenue of ¥2,008bn (-21.1% QoQ, +71% YoY) and OP of ¥75.7bn (for an OPM of 3.8% compared to OPM of -13.5% and -0.9% respectively in 1QFY21 and 4QFY21). The improvement of Nissan’s profitability compared to its previous quarter was mainly due decreases in SG&A expenses which were 12.8% of revenue compared to 15.1% and 21.9% respectively in 1QFY21 and 4QFY21. The reported revenue was 6.5% higher than consensus estimates while OP beat by ¥130bn, thanks in large part to the finance business.

The reaction of Tesla stock (-2.0%) to a strong earnings beat at 1Q suggests some fatigue in its attempts to maintain its “aspirational” valuations. We would not be surprised if its 10Q revealed poor earnings quality as stringency in accounting is not, in our view, a strong suit of Tesla. What is more interesting in our view is the progress of Ford’s Mustang Mach-E and the potential for the vehicle to further shatter misperceptions about Tesla having a technological lead in anything.

Rakuten shares are down 8% this week on credit concerns and delays in network expansion. The S&P credit downgrade is a lagging indicator but slower network deployment could have future consequences. A key theme for Rakuten Mobile this year is customer retention as it converts free trial users to revenue-generating subs and network quality is by far Rakuten’s biggest weakness. That mobile revenue is needed to offset aggressive marketing costs now that the pricing playing field has been defined. We expect peak operating losses over the next few quarters and that keeps us cautious on the story. We remain at Neutral.

BFI Finance Indonesia (BFIN IJ) announced a strong set of 1H2021 results, which saw YTD new bookings increase by +48.7% YoY and +7.5% QoQ in 2Q2021 We expect the company to continue to ramp up new bookings in 2H2021, and although the latest round of Emergency PKMM mobility restrictions may delay that recovery slightly, we remain upbeat about its future prospects.

Non-performing financing (NPF) continued to improve 1Q2021 and the company also saw its net credits loss (NCL) ratio increase with more repossession and collateral disposal activities.

BFI Finance Indonesia (BFIN IJ) quarterly net revenue was down by -18.2% YoY in 2Q2021 mainly driven by the drop in the average receivables balance and a slightly lower net interest spread.

The company continued to make progress on its loan restructuring with 89.2% of restructured loans reverting to normal status, 0.6% under grace period, and the remaining 10.2% granted second restructuring with strict review.

Angel Broking (ANGELBRK IN)‘s stock has risen >4x over the last four months on the back of strong growth in the digital broking industry in India. However, we think the stupendous growth of >17x in Angel’s active client base over the past couple of years may not sustain. While the shift to digital and discount broking is inevitable, the recent growth seems to be temporary and will likely reverse led by high customer churn. Cyclicality and heightened competition in the sector will further adversely impact the fundamentals and lead to de-rating of the stock once the euphoria in the sector subsides. The market is also pricing in high optimism around Angel’s potential to be a fintech platform. We again differ here based on our insights into Angel’s customer base, competitive scenario and nascent track record of Angel in the quasi-passive quant-based asset management and wealth management space.  

HCM announced slightly concerning 1Q results yesterday as despite a strong revenue beat (12% above consensus), OP missed by 10%. This is a result of gross margin continuing to undershoot and it is unclear when this issue might be resolved.

*What’s Up With WeChat: Mainland China appears to have taken additional action against Tencent Holdings (700.HK) [Tencent], following Monday’s regulatory edict. Tencent is suspending new user registrations for its WeChat services, as it is undergoing a “security technical upgrade” in accordance with relevant laws and regulations. WeChat is Tencent’s most important business, and dominates mainland Chinese social media; and 

*Pain Trade Coming:Tencent is widely expected pay a large fine. In addition, Tencent may have to give up its exclusive music rights and possibly dispose of Kuwo and Kugou. Further, we have no doubt that Tencent will also follow Alibaba Group (BABA.US) [Alibaba] in their formation of a financial holding company. For Tencent, WeChat Pay and the broader lending/deposit taking business are likely to be reined-in. At CNY 38.5 bn for full year 2020, FinTech represents a growing 28.8% of revenue – and is a key and growing component of Tencent’s current and future results. No matter what spin that Tencent wants to place on its other businesses, an FHC represents significant downside risks. Earnings will compress, as capital requirements increase.

• The market is looking for a signal of an easing of regulatory pressures on China BigTech
• Alibaba Group (BABA US) is in the eye of the regulatory storm, first with the crackdown on the Ant IPO, then with the anti-trust restrictions on Big Tech and more recently with China regulatory bodies focusing on US listed China tech
• The share price is now close to the pandemic low of March 2020, having fallen a further 20% since the end of April
• Alibaba valuations are compelling, even versus its China BigTech peers, and, less surprisingly, compared to Amazon.com Inc (AMZN US)
• Alibaba’s market capitalization to revenue discount to its core peers has narrowed somewhat, as Chinese regulators have extended their focus on BigTech beyond the Alibaba group, but remains elevated
• Furthermore, Alibaba’s premium to Amazon in terms of market capitalization to revenue has totally dissipated
• We stick with our positive view on Alibaba and we believe that, even though regulatory risks have yet to recede, the secular growth story – albeit dented – in China tech still holds and that in the case of Alibaba, its modest valuations stand out
• Risks to our positive view on Alibaba include further regulatory hurdles, such as market share limitations and tighter controls on big data, as well as client loss as a result of these regulatory limitations

While Edelweiss has faced significant provisioning led losses over the past one and half years, we believe the worst is behind us now. Edelweiss had significantly cleaned up its book in Q4FY20 and in the most recent reported quarter i.e. Q4FY21, it further took significant provisioning to account for adverse impact of COVID second wave and any additional stress. Going forward, we expect Edelweiss’ asset quality to improve largely assisted by significant clean-up in the past few quarters. Additionally, the residential real estate market seems to have bottomed out with liquidity coming back to the market and demand turning favorable post COVID. In line with our original thesis, Edelweiss has also significantly accelerated its shift towards fee based business model over the past couple of years. All in all, we expect significant re-rating in the stock over the next 1 to 2 years.

• Management under some investor criticism that six months after death of visionary founder. no Asian target yet in sight.
• Cash proceeds from sale of Las Vegas assets and prospects for rising recovery on tap post pandemic should give clarity on use of proceeds for acquisition or development.
• Macau and Singapore Capex totals US$4b which still leaves plentiful cash in the drawer for next Asian move. Stock still sits in a dead pool due to pandemic news flow. Its undervalued.

Bandhan Bank Ltd (BANDHAN IN) is a fine example, reiterating our ability to deliver “qualitative” alpha that is backed with rigorous primary research and channel checks (YTD BANDHAN -26% vs NIFTY at +12%). Our work done on Bandhan stands as a testimony proving our ability to cover channels not just for consumer names but also financials where in spite of wide coverage, primary checks are able to provide the required edge. 

Our earlier coverage on Bandhan includes 

• India Channel Insight | Bandhan, Hero, Bata, Nestle 
• Bandhan Bank (BANDHAN IN) | Pain in Assam Likely to Continue 
• Bandhan Bank (BANDHAN IN) | On Ground Narrative from Assam and West Bengal 

Intel held a technology roadmap update yesterday…the key changes were literally in name only. We’ll believe Intel jumping 5 nodes in 4 years when we see it.

The bank’s cost of funds remains very low at 1.10%, which gives it an advantage over its competitors. Its NPL ratio also remains manageable at 2.4%, which is lower than the industry average.

Mitsubishi Motor reported 1QFY22 results on 27^th July which saw revenues of ¥432bn (-14% QoQ, +88% YoY) and OP of ¥10.6bn (OPM of 2.5% compared to the OPM of -1.7% in 4QFY21).

The reported revenue was 4.1% higher than consensus estimates while OP beat consensus estimates for a loss of ¥6.9bn. This is the first datapoint for Japanese automotive earnings this quarter and points to our call for broad beats across the industry being correct.

Guidance was revised up from ¥30bn in OP to ¥40bn but remains conservative.

We maintain BUY rating with a lower target price of Bt37 (-14% from Previous TP) based on 30xPE’1H22E, closed to Consumer Discretionary Sector.

Softbank has been touting Vision Fund’s IPO flywheel for almost all of 2021 but expect that to fade as the reality of China’s crackdown sinks in. It’s stake in Didi is worth $8bn as of Friday down from $10.6bn invested at the parent and $12bn total whilst other recent IPOs (YMM -28% on 23 July, ZME -35%, DDL -8%) are also under pressure. The good news is Vision Fund China assets are <10% of total China exposure and Alibaba has been through the regulatory wringer already. That limits China downside but it does call into question Vision Fund hopes for valuation gains from liquidity events. There is a direct read across with Zuoyebang and VIPThink which are banned from going public whilst three of the largest private investments remaining in Vision Fund 1 (Bytedance, ele.me and Guazi) are likely to remain on the sidelines. We expect the holding company discount is likely to remain in the 44% range.

The more news that comes out, the worse it seems to get for Didi Global. A coalition of regulators descended on Didi headquarters last Friday as the company’s decision to go public despite Cyberspace Administration (CAC) admonishments it should wait have been taken as a challenge to the government. We expect management saw an opportunity to grab a high valuation with super Q1 numbers which in turn was sweetened by a lucrative options award and that may have made them complacent. We don’t know where regulators will take this but we do feel confident in saying that there are no quick fixes here – too many regulators are involved now and it will likely take months for the company to get out from under this level of scrutiny.

For our next Corporate Webinar with are glad to welcome the management team of Elite Commercial REIT (ELITE SP): 

• Shaldine Wang, CEO
• Jonathan Edmunds, CIO
• Joel Cheah, CFO

Elite Commercial REIT is the first and only UK-focused listed REIT in Singapore. Listed on SGX-ST in February 2020, Elite has been established with the principal strategy of investing, directly or indirectly, in commercial and real estate-related assets in the UK.

In their upcoming webinar, Shaldine will share a short company presentation after which, she, together with Jonathan and Joel, will engage in a fireside chat with Smartkarma Insight Provider Sumeet Singh. This will be followed by a live Q&A session.

Although the Singapore government has brought back the phase 2 heightened alert requirement that prohibits dining-in just last week, the co-chair of the multi-ministry task force, Lawrence Wong, announced today that the Singapore government will review the COVID-19 restrictions in early August only for the vaccinated people. 

As the restrictions are potentially going to be eased off including allowing dining-in, the coming back of the working in the office rather than from home, and the ability to travel overseas are back again, there will be an increase in the mobility rate and Comfortdelgro Corp (CD SP) is the main beneficiary through the higher traffic in the domestic travel (through MRT and busses) and also the overseas trip through higher taxi ridership. 

• The new rule for tutoring school damaged the prices of Chinese education equities.
• The market focuses on the “non-profit” requirement, but we believe “Article 13” is more important.
• We believe the authorities try to block all the ways that a tutoring school can continue.
• We do not believe this is a “low-price opportunity” after the stock price plunge.
• Please also see TAL Education (TAL): Last Summer for Physical Tutoring School on June 28 before the price plunge.

Koei Tecmo posted some stellar results today with ¥20.5bn in revenue (consensus ¥14.5) and OP of ¥9.7bn (consensus ¥5.9bn), putting the company on track to hit our ¥34-39bn FY OP target vs. consensus at ¥28.5bn. ¥8.7bn in income below the OP line was also a notable positive surprise thanks to strong investment income. How much of this is priced in though?

NIO remained its No.1 position in local emerging EV brand YTD by delivering 41,956 cars. ES6 is the best seller with 46% volume contribution. It appears that Tesla’s Model Y hasn’t had any obvious negative impact yet as we worried before.

However, we still concerned on NIO’s outlook because:

1) Xpeng P7 (sedan) overtook NIO ES6 (SUV) became best seller model among local emerging EV brands’ product pool.

2) Increasing acceptance on smart EVs and increasing sales contribution from younger generations would reduce market share upside on NIO’s ES6 and EC6  if NIO has no improvement on autonomous driving and other smart EV functions.

3) Model Y launched standard range version on 8th July, which takes down the entry level price to Rmb276k, vs. ES6’s 348k.  It might divert NIO’s client base.

Indonesia’s leading low-cost tile producer Arwana Citramulia (ARNA IJ) released a strong set of results for 1H2021, with revenues increasing by +25.2% YoY driven by decent organic growth, new capacity plus continuing improvements in product mix.

Arwana Citramulia (ARNA IJ) continues to increase its production capacity whilst operating at very high rates of capacity utilisation above 100%. 

The company has started production of its new higher-end ARNA brand 60cmx60cm tiles, which compete for head-on with Chinese imports but where Arwana has cost advantages, faster turnaround times, and can provide better terms for customers.

We continue to view Arwana Citramulia (ARNA IJ) as one of the best quality industrial companies in Indonesia, which will continue to see the positive tailwind of better product mix and lower gas prices in 2H2021, suggesting more to come on margin improvements in the second half.

Nidec’s share price jumped 2.4% to ¥1,300 on Wednesday, July 21 – the last trading day before Japan’s national holidays, when the company announced results for 1Q of FY Mar-22 – but fell back 3.2% to ¥12,580 today.

This reflects the positives and negatives facing the company as it ramps up production of EV motors and drive systems.

Results for the three months to June looked good, with operating profit up 60% year-on-year on a 33% increase in sales. 1Q sales, operating profit and net profit were all about 56% of 1H guidance.

On top of that, Nidec and Hon Hai announced plans to establish a joint venture to develop Nidec E-axle traction motor systems for EVs made by Hon Hai subsidiary Foxtron Vehicle Technologies.

However, competitor Hitachi (6501 JP) announced plans to build EV component factories in Japan China and the U.S. to expand capacity by about 6 times; and price competition in China is severe.

At 53x management’s EPS guidance and 50x our own EPS estimate for FY Mar-22, and 40x our estimate for FY Mar-24, a lot of potential growth is already in the price.

We reiterate our previous conclusion: Guidance is probably conservative, but the shares are still overvalued.

*Limited Impact: Singapore Exchange (SGX.SG) [SGX] announced that it was acquiring MaxxTrader from FlexTrade Systems for USD 125mn plus. This is SGX’s third acquisition after BidFX and Scientific Beta in 2020. This deal is expected to provide SGX with the ability to leverage this franchise to set up an ECN FX marketplace as targeted under its medium-term plan; and

*Distractions:As SGX needs to contend with a greater than expected impact from Hong Hong Exchanges & Clearing (388.HK) competitive pressures for derivatives volumes, and the earlier-than-expected launch of HKEX’s MSCI China A index futures – on top of weaker equity volumes and fees, it continues to do numerous tiny bolt-on deals which appear to be more of a distraction than their worth.

*Kick In The Pants: On July 21, 2021, HSBC Holdings plc (5.HK/HSBA.LN) [HSBC] and many of the other major Hong Banks finally had the epiphany of declining mortgages to borrowers on two of Evergrande Group’s (3333.HK) residential developments in Hong Kong. On July 22, 2021, the Hong Kong Monetary Authority (HKMA) hauled HSBC and its colleagues in to explain the no lend decision on Evergrande’s two Hong Kong in process property  developments. Wouldn’t you know it, this subtle re-think request caused the banks to reverse course; and

*Daisy Chain:This move by the HKMA and clearly prompted by authorities in mainland China intimates that Evergrande poses significant systemic risk for mainland China. Government officials in Shenyang are prompting SOEs to increase their ownership in Shengjing Bank (2966.HK), which is 36% owned by Evergrande and lent it an estimated USD 15.5 bn.    

We remain short Intel. The growth and margin picture is still deteriorating. We don’t think Pat Gelsinger is capable of turning this ship around…and we think the proposed acquisition of Global Foundries may accelerate Intel’s demise.

• We do not believe the juveniles will reduce internet usage in the future.
• The authorities forbid tutoring schools so that juveniles have more time to spend on internet.
• Parents went back to their office so they cannot stop their children from using internet.

ICICI Bank Ltd (ICICIBC IN) ’s 1QFY2022 results on July 24, 2021 highlight the need for shareholders to re-examine the bank’s retail asset strategy. ICICI Bank’s strategy was to focus on retail assets to compensate for the bulky poor-quality corporate assets that it had earlier emphasised. However, the broad economic slowdown even prior to the Covid-19 pandemic impacted all segments of the economy, and the pandemic dealt small and medium enterprises, and indeed the whole informal sector, a severe blow. A section of organised sector employees too lost their jobs or experienced pay cuts. All these developments affected retail assets of banks. Unlike HDFC Bank (HDFCB IN) , which started shifting from retail assets, ICICI Bank surged ahead in retail lending even when retail asset profits declined in FY2021, and this strategy continued in 1QFY2022 despite a drastic fall in retail profits.

Apparently the board of directors has taken a view that the bank has to continue to grow the overall balance sheet despite the weak economic conditions, and that, since corporate credit remains weak, the only other avenue is to grow retail assets. It is precisely this strategy that shareholders need to review and debate with the management. The past two years’ data from both ICICI Bank and HDFC Bank reveal that, on account of deteriorating retail asset quality, the contribution of retail profits before tax (PBT) to overall PBT is declining, and in 1QFY2022 it has fallen steeply. From ICICI Bank’s surge in retail assets in FY2021 and 1QFY2022, it appears that the bank believes that the past two years’ data are an anomaly, and that retail asset quality will bounce back.

According to ICICI Bank, additions to gross NPAs are expected to be lower in 2QFY2022, and further improve in 2HFY2022. Given the state of the Indian economy, it may be more prudent for ICICI Bank to curtail its asset growth, de-emphasise retail loans and focus on treasury and select corporate credit to boost profitability.      

iFAST (IFAST SP)  reported its 2Q2021 results on Friday (23^rd July) which saw revenues increasing 31.7% YoY while reported operating profit grew 46.0% YoY during the quarter. The net revenue from B2B segment increased 32.9% YoY while net revenue from B2C segment grew 30.5% YoY during 2Q2021 driven by increased investment subscription from customers in exchange-listed securities, service fee from currency conversion administration services and net inflows from clients in unit trusts (UTs). iFast’s assets under administration (AUA) grew 57.3% YoY to SG$17.54bn as at the end of June 2021 from SG$16.11bn as at the end of March 2021.

Down nearly 30% since January 28, the shares are now selling at 17x management’s EPS guidance for FY Mar-21 and 13x our EPS estimate for FY Mar-24, when management expects 5G-related sales and profits to peak.

Premature concern over the next cyclical downturn appears to have been discounted. Delays to 5G roll-outs caused by the pandemic should also be in the price.

Over the coming three years, sales should rise by more than 20% and operating profit by more than 30%, driven by 5G and growing economies of scale in the company’s other businesses.

Buy back in for the long term.

Just a monster quarter. The type Facebook used to print in 2015. We’ve been pushing Snap as a core long since the beginning of the pandemic. We continue to push Snap as a core long…and are probably even more bullish today then we were a year ago. Facebook’s market cap is 10x Snap’s. We would bet that gap closes rapidly.

We maintain BEM with a BUY rating with a target price of Bt9.90 derived from SOTP methodology, which is equivalent to 49.5xPE’22E, 30% discount to Thai transportation sector. A discount due to huge net loss of Airport of Thailand.

Tune in for our Flash Webinar as we look at recent developments at Evergrande Real Estate Group (3333 HK). The highly indebted real estate company saw its share price jump from four-year lows on the resolution of a dispute with a Chinese bank, but trouble for China’s largest property developer seems far from over. Join us for a discussion with Insight Providers Travis Lundy and  Charles Macgregor on the current situation and where the company goes from here.

The flash webinar will be hosted on Friday, 23 July 2021, 4.00pm SGT/HKT.

Travis Lundy has 20+ years of experience in Asia doing alternative strategies (i.e. non-delta1 non long-only) in fixed income, equity derivatives, and activist/catalyst/event-driven and long-short equity strategies, with most of that time spent managing money.

Charles Macgregor is an industry veteran with over 35 years of experience. As Head of Asia, he is responsible for the Asian credit research product at Lucror, which he joined in 2013. Previously, he had worked for Deutsche Asset Management, where he was Head of Credit Research, Asia-Pacific and Co-Chair of their Global Credit Methodology Committee. He also worked at Moody’s, where he was a Senior Credit Officer and a member of their New Instruments Committee and Symbols & Definitions Committee.

The ban on dining-in as part of the stricter measures by the Singapore government starting today until next month has caused some fears in the market and ComfortDelgro is not spared. Singapore is on target to reach 2/3 of the country fully vaccinated by the 9th of Aug 2021 during the National Day hence there should be some restrictions easing as the Singapore government has to open the economy at some stage which means more mobility and reinstatement of dining-in among others. The government has mentioned that Singapore will live alongside COVID-19 as it expects to shift from pandemic to endemic. 

While mall operators such as Capitaland (CAPL SP) and City Developments (CIT SP) have to give some form of rent relief to their tenants, Comfortdelgro Corp (CD SP)does not need to give relief to its drivers and mobility does not seem to drastically decrease. Investors should expect some restrictions on easing measures during the National Day period that will lift Comfortdelgro Corp (CD SP) share price. 

Wood flooring manufacturer Nature Home Holding Company (2083 HK) is currently suspended “pursuant to the Code of Takeovers and Mergers“.

On the 13 July, Nature Home announced a positive profit alert, in which it expects 1H21 profit to match or exceed that of 1H19’s.

As discussed in Squeeze Box: The Port Congestion Contagion, after the Covid fallout entrenched itself, people stuck at home in the US and elsewhere started buying stuff. Lots of it.

Nature Home’s revenue is still predominantly sourced from China, But there has been a noticeable shift since FY18, with exports taking up a larger percentage. 

More below the fold.

For our next Smartkarma Corporate Webinar, we are glad to welcome SISB Public Company Limited (SISB TB) ’s CEO and Co-Founder, Khun Kelvin Koh.

SISB is a leading provider and manager of Singapore International Schools in Thailand. Founded in 2001, SISB currently owns and manages five campuses, which adopt the Singapore and UK curricula as the foundation for teaching and learning. The SISB name is inspired by its first campus, Singapore International School of Bangkok, which pioneered the Singapore education curriculum in Thailand.

In this Webinar, Kelvin will share a short company presentation and engage in a fireside chat with Smartkarma Insight Provider Dr. Andrew Stotz, CFA, followed by a live Q&A session.

The Corporate Webinar will be hosted on Tuesday, 3 August, 17:00 SGT / 16:00 ICT

Corporate Webinars by Smartkarma Corporate Solutions feature discussions with IROs and Executives, discussing their companies, the challenges they face, and the opportunities in their sectors and markets.

China managers are losing faith in Xiaomi Corp (1810 HK). From peak ownership of 32.5% of funds back in December 2020, active China managers have closed positions in Xiaomi Corp (1810 HK) en masse.  Average holding weights have dropped from 0.77% to 0.37% over the same period, with the net underweight rising to -1.17%.

This leaves sentiment in Xiaomi Corp (1810 HK)  among the worst in the China universe at present.

Analysis taken from our China research, which covers 116 active China managers with combined AUM of $68bn

• HKEX (388 HK) June ADT (Average Daily Turnover) has been cooled off from recent high growth, delivering 16% year-over-year growth in the month. This is partially due to the high base from last year and the renewed worry about Beijing’s crackdown of big tech in China. For the 1st half in 2021, HKEx ADT has grown an amazing 60% year-over-year. But the volume on derivative market is more muted than investors expect. We expect HKEx will deliver an in-line interim  result on upcoming August 11th.
• On the IPO market, HKEx has completed 14 IPO deals in Q2 2021 and raised HK$ 76 billion. The new economy companies have accounted more than 70% of the IPO deals. The significant ones include JD Logistics (2618 HK) , Nayuki Holdings (2150 HK) , Linklogis (9959 HK) and Trip.com (9961 HK). We are the believer that HKEx will play a key role on offshore China listings. Ongoing regulatory uncertainty is likely to accelerate the Chinese ADS’ to diversify their listing risk and to benefit HKEx as a preferred offshore listing venue. 
• On the technology front, HKEx has introduced the new digital platform FINI ( Fast Interface for New Issuance) to speed up the IPO process. The new initiative will shorten the time-consuming paper subscriptions and cut IPO process from pricing to listing from T+5 to T+2. This will improve efficiency of pricing and capital usage. And FINI will likely be rolled out in Q4 2022. We remain bullish on HKEX (388 HK) and have TP HKD 550. 

The RPA market has been growing rapidly, attracting new entrants and existing software companies introducing RPA offerings.  These risks and others may not be factored into revenue and earnings estimates and valuation multiples for this recent IPO with a market cap that exceeds $30bn.

We downgrade our recommendation to HOLD rating, from BUY, with new target price of Bt445.00, -19% from Bt553.00 previously, valued from Sum of the Parts valuation, divided to i) Petrochemical and CBM businesses at Bt334/share, derived from 10.6x PE, which is -1 SD of SCC’s 5 years trading average, and, ii) Packaging business at Bt111/share, derived from 15% conglomerate discounted to 21.3xPE valuation. We maintained valuation in Packaging part but de-rated valuation in Petrochemical and CBM part given the soften petrochemical outlook.

• NETGEAR (NTGR) surprised to the downside citing slower than anticipated sell through of products in the second quarter causing a buildup of channel inventory. The second quarter is seasonally the slowest time of the year, but this year it included Amazon Prime Day, which could have played a role in how much inventory retailers were willing to stock. Unfortunately for NTGR, Prime Day was towards the very end of the quarter giving the Company very little time to react. 

• The fallout from the disappointing second quarter revenue leads to the third quarter experiencing a sequential decline in revenue versus a seasonal lift. 

• We have lowered our estimates for the rest of the year bringing our non-GAAP EPS down to $2.89 from $3.50. 

• Our price target is now $43 from $54 to reflect the weakness in the third quarter and the reduced valuation the shares would likely receive until NTGR proves the inventory situation is a one-quarter event. 

*Solid Result, But Challenges Ahead: Bank Central Asia (BBCA.IJ) [BCA] reported 2Q21 results of IDR 7.4 tn, improving IDR 376 mn (5.3%) on a linked quarter basis. BCA’s positive operating results were highlighted by non-interest income growth and a decline in operating expenses; and

*Credit Challenges Persist, As Credit Break Re-Accelerates: By our calculation, we find that 2Q21 net new NPLs amounted to IDR 2.4 tn for an annualized rate of increase of 92.4%, comparing very unfavorably with 1Q21’s IDR 742 bn and 28.7%, respectively. Despite the recent acceleration in net new NPL formation, we calculate that loss reserves are likely right where they need to be given the uptick in special mention and lack of full clarity with the restructuring portfolio. Although, we worry the softness in current macro conditions.