* Despite Managed Set of Results, Still A Miss: BOC Hong Kong Holdings (2388.HK) [BOCHK] reported 2H19 earnings results of HKD 15.6 bn substantially missing consensus forecasts – although HKD 645 mn or 13.1% ahead of 1H19 numbers. Given the reserve bleed on top of credit weakness which was attributed to mainland China, we calculate that the 2H19 bottom-line result was overstated by over 5%;
* Credit and NIMs to Weaken: BOCHK’s stated figures fail to tell the entire story. Net new problem loan growth amounted to HKD 2.0 bn or 74.4% linked period or 149% on annualized basis. This is alarming as we have yet to feel the impact of the corona virus on BOCHK’s results while its mainland China NPLs have already increased 157% HOH. 4Q19 net interest income actually declined 2% as the higher HIBOR rates was more than offset by USD rates while the NIM declined 6 bp to 1.66%. There is increasing pressure on asset sensitive balance sheets in response to a lagging HIBOR post the aggressive FRB moves.
Friday 27 March, after the close, activist-targeted name Katakura Industries (3001 JP)announced, with its yuho and annual meeting, a buyback of up to 2.5mm shares (7.1% of shares out) for up to JPY 2 billion.
The buyback will be conducted between 1 April 2020 and 31 March 2021.
There is a minor detail unspecified in the announcement (which is often specified) and the combination of the shareholder structure and trading patterns tells you what you need to know.
In this report, we analyze Korean Air Lines (003490 KS) with regards to the global COVID-19 outbreak which is likely to lead to a breach of debt covenants resulting in a need for a massive capital raise and government bailout.
South Korea’s government has already pledged loans of 300 billion won ($250 million) for the entire airlines in Korea. However, this is a TINY amount compared to the total amount needed to save this industry. This is also less than 1% of the $60 billion that the U.S. government has promised to its own air transport industry.
Going forward, a question mark about Korean Air is guessing which airliner that the Korean government will bail out since it seems clear that it will not be able to bail out all the airlines in Korea. Because of the dire situation right now, there has also been an idea of a potential merger between Korean Air Lines (003490 KS) and Asiana Airlines (020560 KS).
COVID-19 is a beast that will likely have the greatest-ever negative impact on the global airline industry in the past century. Many airlines are likely to become bankrupt in the next couple of years. There will be an intense industry consolidation. Korean Air faces an enormous challenge in the midst of this global COVID-19 pandemic, which is likely to lead to a breach of debt covenants resulting in a need for a massive capital raise and government bailout.
We initiate coverage of BG Container Glass PCL (BGC TB) with a BUY rating, based on a target price of Bt11.0, which is derived from 12.3xPE’20E, close to the average for the Asia ex-Japan Materials Sector.
The story:
Secured earnings with attractive dividend yield
Gross margin is in an expansion phase
Potential growth from M&As
Risks:
Raw material price fluctuation
Reliance on a few major customers
New innovative liquid container products
Background: BGC, a subsidiary of Bangkok Glass Public Company Limited, operates in the glass packaging business. The firm was established in 1974 and started production in Pathumthani in 1980. BGC is one of the largest glass container manufacturers in the ASEAN region with five glass packaging plants in Ayutthaya, Pathumthani, Khon Kaen, Prachinburi and Ratchaburi. Its combined maximum production capacity is 3,495 tons per day.
Semen Indonesia Persero Tbk (SMGR IJ) released a decent set of number for 2019, with a strong finish to the year. It also realised significant synergies from the acquistion of PT Solusi Bangun Indonesia Tbk (SMCB IJ) (Holcim Indonesia), which were reflected in the numbers, although higher finance costs related to the acquisition hit the bottom line for the year.
Apart from the obvious concerns over COVID-19, the company had a tough start to the year, with heavy rainfall and flooding impacting volume for January and February, which saw a decline of -4% for 2M20.
Next few months will be impacted by a COVID-19 induced slowdown, which will hit both retail (bagged) demand as bulk, as demand from larger projects declines due to delays to the start of new infrastructure projects, as well as existing ones.
The key message from the company’s call was one of maintaining a fortress balance sheet and attempting to maintain margins and cashflows. It has already restructured all its bridging loans related to its PT Solusi Bangun Indonesia Tbk (SMCB IJ) acquistion, which will mean significantly lower interest costs in 2020.
With the true impact and longevity of COVID-19 unknown, it is difficult to make sensible forecasts on the potential impact on the Indonesian economy and hence cement volumes for this year but safe to say volumes are likely to be lower than 2019.
Semen Indonesia Persero Tbk (SMGR IJ)’s share price is reflecting a doomsday scenario with the stock trading at close to book value and looks like an attractive entry point for long-term investors, who can stand the inevitable short-term volatility.
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Lack of Global Leadership During Pandemic: The current corona virus situation remains very fluid, and leadership is NOT inspiring confidence. National Security Communications report in UK exhibited a “reasonable” worst case scenario of the corona virus infecting 80% of the population with a 2%-3% fatality rate. The Center for Disease Control (CDC), however, confirmed that test kits sent to local US authorities were ineffective, which could likely explain the low infection count in the US. Moments after President Trump addressed the nation, California officials confirmed the first unconnected/untraced corona virus case.
Mainland China Was Already In a Financial Crisis Prior to the Virus: Mainland China has gone from one of the most unlevered countries prior to the Global Financial Crisis to amongst the highest on a debt/GDP basis. It had absolutely refused to address the credit quality and liquidity issues within its banking system. WMP/vehicles hold questionably valued assets funded on a short-term basis. The US/China trade rift has caused a major supply chain upheaval. A reasonable 5% decline in global tourism in 2020 world GDP will be negatively impacted by 70bps. There is already talk of major mainland Chinese airline defaults and bankruptcy – just under two months into this pandemic. Further, mainland China’s debt-laden developers were already facing a cash-crunch and developer problems are now exacerbated.
Jimmy Carter/Three Mile Island-Type Visit Required to Stem Fears: There are three things, in our view, which will signal that the corona virus is under control in manainland China: 1) President Xi Xinping visits Wuhan province; 2) A firm date is set for the “two sessions” – National People’s Congress, and the Chinese People’s Political Consultative Conference; and 3) Children in both Hong Kong and mainland China physically head back to school.
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NetEase misses FY19 revenue consensus estimates. Revenue was 7.1% lower than estimates at RMB59.2 billion while adjusted earnings beat by 6.5% at RMB120.48.
NetEase games had higher traffic during 1Q20 with users spending more time gaming. Users were also spending 40.7% more time gaming daily for a total of 159 minutes a day.
NetEase has a strong pipeline of games for 2020. Strong international titles such as Diablo Immortal, Harry Potter: Magic Awakened, Pokemon Quest could continue to drive traffic and revenue as well through in-game monetization for the period of the virus.
NetEase games could be effectively monetizing the increased traffic from the virus. According to Sensor Tower, NetEase’s mobile game Fantasy Westward Journey was the 6th highest-grossing iOS game yesterday and made US$27 million for the month of January. Along with two other mobile games within the Top 20 iOS highest-grossing list. With Youdao being one of NetEase growth drivers on top of gaming, the Company could be an appealing play during virus situation.
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Friday 27 March, after the close, activist-targeted name Katakura Industries (3001 JP)announced, with its yuho and annual meeting, a buyback of up to 2.5mm shares (7.1% of shares out) for up to JPY 2 billion.
The buyback will be conducted between 1 April 2020 and 31 March 2021.
There is a minor detail unspecified in the announcement (which is often specified) and the combination of the shareholder structure and trading patterns tells you what you need to know.
In this report, we analyze Korean Air Lines (003490 KS) with regards to the global COVID-19 outbreak which is likely to lead to a breach of debt covenants resulting in a need for a massive capital raise and government bailout.
South Korea’s government has already pledged loans of 300 billion won ($250 million) for the entire airlines in Korea. However, this is a TINY amount compared to the total amount needed to save this industry. This is also less than 1% of the $60 billion that the U.S. government has promised to its own air transport industry.
Going forward, a question mark about Korean Air is guessing which airliner that the Korean government will bail out since it seems clear that it will not be able to bail out all the airlines in Korea. Because of the dire situation right now, there has also been an idea of a potential merger between Korean Air Lines (003490 KS) and Asiana Airlines (020560 KS).
COVID-19 is a beast that will likely have the greatest-ever negative impact on the global airline industry in the past century. Many airlines are likely to become bankrupt in the next couple of years. There will be an intense industry consolidation. Korean Air faces an enormous challenge in the midst of this global COVID-19 pandemic, which is likely to lead to a breach of debt covenants resulting in a need for a massive capital raise and government bailout.
We initiate coverage of BG Container Glass PCL (BGC TB) with a BUY rating, based on a target price of Bt11.0, which is derived from 12.3xPE’20E, close to the average for the Asia ex-Japan Materials Sector.
The story:
Secured earnings with attractive dividend yield
Gross margin is in an expansion phase
Potential growth from M&As
Risks:
Raw material price fluctuation
Reliance on a few major customers
New innovative liquid container products
Background: BGC, a subsidiary of Bangkok Glass Public Company Limited, operates in the glass packaging business. The firm was established in 1974 and started production in Pathumthani in 1980. BGC is one of the largest glass container manufacturers in the ASEAN region with five glass packaging plants in Ayutthaya, Pathumthani, Khon Kaen, Prachinburi and Ratchaburi. Its combined maximum production capacity is 3,495 tons per day.
Semen Indonesia Persero Tbk (SMGR IJ) released a decent set of number for 2019, with a strong finish to the year. It also realised significant synergies from the acquistion of PT Solusi Bangun Indonesia Tbk (SMCB IJ) (Holcim Indonesia), which were reflected in the numbers, although higher finance costs related to the acquisition hit the bottom line for the year.
Apart from the obvious concerns over COVID-19, the company had a tough start to the year, with heavy rainfall and flooding impacting volume for January and February, which saw a decline of -4% for 2M20.
Next few months will be impacted by a COVID-19 induced slowdown, which will hit both retail (bagged) demand as bulk, as demand from larger projects declines due to delays to the start of new infrastructure projects, as well as existing ones.
The key message from the company’s call was one of maintaining a fortress balance sheet and attempting to maintain margins and cashflows. It has already restructured all its bridging loans related to its PT Solusi Bangun Indonesia Tbk (SMCB IJ) acquistion, which will mean significantly lower interest costs in 2020.
With the true impact and longevity of COVID-19 unknown, it is difficult to make sensible forecasts on the potential impact on the Indonesian economy and hence cement volumes for this year but safe to say volumes are likely to be lower than 2019.
Semen Indonesia Persero Tbk (SMGR IJ)’s share price is reflecting a doomsday scenario with the stock trading at close to book value and looks like an attractive entry point for long-term investors, who can stand the inevitable short-term volatility.
Lonking Holdings (3339 HK) is currently an 11.6% yielding stock, based on a final DPS of HK$0.25 and a share price of HK$2.16. For FY20F, we see the stock to still sit on a decent 8.9% dividend yield, despite business disruption from the Covid-19 outbreak.
With a 43.7% YoY growth in reported profit, its FY19 result did not disappoint us, though the in-line core profit is relatively flat YoY. Gross margin has expanded on slightly lower revenue, indicating excellent cost control. We continue to hold that Lonking is well-positioned to capture the government’s post-outbreak infrastructure spending. Its net cash on hand of HK$0.63/share – some 29% of the share price – will help it navigate through the storm, in our view.
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NetEase misses FY19 revenue consensus estimates. Revenue was 7.1% lower than estimates at RMB59.2 billion while adjusted earnings beat by 6.5% at RMB120.48.
NetEase games had higher traffic during 1Q20 with users spending more time gaming. Users were also spending 40.7% more time gaming daily for a total of 159 minutes a day.
NetEase has a strong pipeline of games for 2020. Strong international titles such as Diablo Immortal, Harry Potter: Magic Awakened, Pokemon Quest could continue to drive traffic and revenue as well through in-game monetization for the period of the virus.
NetEase games could be effectively monetizing the increased traffic from the virus. According to Sensor Tower, NetEase’s mobile game Fantasy Westward Journey was the 6th highest-grossing iOS game yesterday and made US$27 million for the month of January. Along with two other mobile games within the Top 20 iOS highest-grossing list. With Youdao being one of NetEase growth drivers on top of gaming, the Company could be an appealing play during virus situation.
Youdao is capitalizing on the current virus outbreak to raise awareness of its services and build brand value. The Company gained 10 million new enrollments after it offered free online courses to its users, and continues to convert users by cross-selling and upselling via low-cost trials.
The Company’s Q4 results indicate continued momentum in the business’ growth and we expect the Company to reap strong returns in the future from its current investments during the crisis.
Melco is well positioned, it’s taken a big virus related hit but offers a very cheap entry point relative to peers.
Virus duration unknown, but we see a strong upside forming late Q3 to Q4 2020 from a low base.
2019 performance in mass subsection will ramp fast, but VIP will take longer to rebuild.
“Buy when everyone sells, sell when everyone buys…”Warren Buffett
As global markets precipitously dive over mounting fears that the coronavirus will evolve into a pandemic, we are reminded of the above quote attributed to Warren Buffett. It seems appropriate at this juncture to watch valuations crumble by the day and bear in mind that no matter the damage ultimately inflicted on stocks, at one point or another, the outbreak will peak and finally end.
SARS, Swine Flu, Ebola and others as frightening as they were, ultimately peaked and faded around a 6 month time frame. We make no such forecasts here other than to stipulate we are using it as a benchmark duration only. Nine months or more cannot be ruled out. All that can be ruled out is that we are clearly not experiencing a revisit of the medieval black plague which swept through Europe and Asia for years during the 14th century and the latter day early 20th century Spanish flu pandemic which killed millions. World health authorities possess an armory of weapons to battle the virus that simply did not exist before. But the coronavirus will take its toll at all events.
So the penultimate question now for investors is the same one raised through war, depression, recession, global financial crises or mass health emergencies. Do you take money off the table, run and hide until events play out? Or do you make bets now when good stocks are cheap and getting cheaper, then grit your teeth and twist the cork on a bottle of good champagne and hold it in place until macro disasters dissipate and send your bets now soaring with profits? And in the aftermath will you bask in the adulation of peers commending your genius for following that very penetrating notion of Warren Buffett at the top of this insight?
The Asian gaming sector is rife with bargains now for those strong of heart and conviction in the longer term valuations
The Asia gaming sector in particular has taken a huge beating and may well experience a continuing fall until the health scare passes and valuations return, or exceed pre-virus levels. The action on gaming stocks at first news of the virus breakout, puzzled many observers. Investors not only stood pat, but did some buying, keeping the sector remarkably immune from the unfolding health disaster—temporarily.
It did not last. We now have a sector, along with broader markets, taking a major beating. Valuations have plunged. The cause and effect of the Asian sector in particular clearly shows a straight line between the collapse of the Macau customer flow and the anticipated damage it will in the end inflict on earnings and valuations this year.
Added to that we have two days of plunge suggesting capitulation. Yet the virus doesn’t play by traditional market rules. Have we indeed experienced capitulation after a long bull trend? Whether after a standard bubble or a virus black swan we note that the market has left Asia gaming stocks at lows that invite serious consideration as entry points now for those with the risk profile.
We have applied the Buffett principal to the situation and concluded that yes, for reasons we will detail here, we think It’s time to buy and buy strongly in the Asian casino sector. Valuations tumbled, but fundamentals are unchanged. It is in the interim period, between now and such a time when the virus finally abates and disappears, that the sector can expect to be hammered.
As the sector get cheaper, the temptation to buy on the deep dips would normally kick in. Thus far we have noted in trading volume and various options plays the ongoing sentiment remains: Take money off the table and get out. The assumption: There will be plenty of time ahead where the sector will be cheap enough to dive back in when the waves of selling pressure begin to abate.
Regardless of that well- worn attitude we see much value right now in the sector.
Consider Melco Resorts & Entertainment Inc.
Melco volatility and virus has brought the stock down to a bargain price.
We have selected one stock we believe offers the longest and most vibrant ramp up post virus: Melco Resorts & Entertainment Inc. (NASDAQ: MLCO). Overall we believe there is money to be made across the Macau sector as all the stocks have had their recent run ups destroyed. We have selected Melco as representative of a stock we believe has dropped to a level that makes it extremely attractive because of a friendly entry price compared with industry peers.
Recovery from the virus disruption will be slow and steady but at some point in the process, pent up demand in mass will ignite and translate into a powerful earnings tide late this year. We like Melco’s low starting point, its quick response to the virus challenge, particularly in cutting Capex. The company announced it was postponing acquiring the second tranche of Crown Resorts(ASX:CWN) stock and making other judicious cuts which reduced its run rate during the crisis to around US$2.5M a day.
Macau has recovered from 2015 crackdowns and will find its way back by Q4 this year or before.
Furthermore, management has gone on record as promising to continue dividend payments for the knowable duration of the crisis. As a general sense, management is looking at a six month time line for a return to normal operations.
Our thesis: Building a larger position pre-recovery at a smaller outlay. In theory you can now buy 3.5 shares of MLCO for every share of Las Vegas Sands Inc. (NYSE: LVS). You can also buy 6 shares of MLCO for every share of Wynn Resorts Ltd. at the price at writing. We expect the entire Macau gaming sector to ignite post recovery. All face the same headwinds, all will respond with similar forward momentum. But MLCO sits at a cheaper starting point with as sound a going forward recovery potential than any of its major peers.
A quick glance at Melco (USD)
Price at writing: $19.53
52wk range: $18.68 —$26.97
5 year high: Sept 2017: $31.21
Market cap: $8.982B
Beta: (5 yr monthly) 1.93
P/E: (ttm): 25.23
EPS: $0.77
Forward dividend and yield: $0.66 (3.38%)
Our view: Based on its global ambitions, surefooted asset allocation skills, and operational flexibility, we believe MLCO has been undervalued even at its recent pre-virus highs.
Pre-virus performance this month:
Stock was at $22. 58
This company’s 4Q19 and annual 2019 results are impressive:
Q4 luck adjusted EBITDA hit a record, all time high propelled by a 17% increase in the mass segment up 17% to $249M. Group wide EBITDA was $382M, but luck adjusted at $413M. MLCO played unlucky in Q4.
A key metric we like: MLCO’s 2019 share of the Macau market rose 180bps to 16%—in a market showing a sector wide decline in VIP. Its properties proximity to the new light rail station is superior to many peers putting properties within 14 minutes of the ferry and 12 minutes from the airport. We believe this will contribute to an uptick in market share again once recovery begins probably in the back six months of this year.
The company showed strong upsides in mass at all properties including its Manila operation yet at the same time it is facing market wide declines in VIP. The success of the Morpheus tower in Macau in premium mass in particular played a significant role in the solid performance.
City of Dreams Manila, a key player in vibrant growth in the Philippine gaming market.
Capex going forward MLCO will continue to move ahead on its $1.35B investment in the Phase One expansion of Studio City, a project aimed directly at the heart of the mass and premium mass market segments by adding 600 rooms and a water park.
Cyprus: MLCO’s EBITDA from its temporary casinos rose to $9M. The properties are a toe-dip into what is coming there in the integrated resort project with a large footprint expected to debut in late 2021. The property will be de facto the first ever, modern integrated casino resort built to service the European /Middle East market. City of Dreams Mediterranean will cost just over $617M to complete and the capex on the project will continue through the virus interregnum. The property will open with a modest game spread of 100 tables and 1,000 slot machines.
City of Dreams Cyprus coming in 2021 could be a game changer in Europe.
We think the Cyprus property will quickly absorb the capacity and provide a rationale to MLCO to scale. It will open with 500 rooms, but we note that the property will sit on 91 acres controlled by MLCO. It is a clear first mover advantage for the company in the European facing market.
Japan: MLCO has been among the most aggressive pursuers of one of the three Japan IR licenses to be issued late this year or early 2021. It has pivoted from an Osaka target to a Yokohama first strategy going head to head with Las Vegas Sands. In the last quarter it’s PL showed it had spent $18M on various initiatives in Japan. Our industry source on the ground in Tokyo believes that “it will be a tough down to the wire contest between the two companies. The estimates of sunk cost for a Yokohama IR have risen as high as $18B. It’s entirely possible that MLCO and LVS will wind up in some kind of joint venture with a third, Japan based partner.”
MLCO cash and coronavirus burn rate
At writing, MLCO is sitting on $900M in cash against $3B in long term debt exclusive of Studio City and the Cyprus project.
Management now estimates the burn rate during the virus challenge at $2.5M per day fixed expenses, inclusive of some cost cuts already made in both operations and capex expense.
Their outlook at present foresees no substantive recovery beginning before Q3 this year. Cash reserves are considered more than adequate to meet that contingency. However, management sees a ramp up back to normalcy starting slower and not gaining powerful momentum until late in Q4 or early 1Q21. Our take: Most of the virus downside is already baked in.
In effect management sees Q1 and Q2 as essentially lost in terms of contribution to annual results this year.
Lawrence Ho and President Duterte signals a continuing presence in a solid ramp up in Manila.
The takeaway
Market consensus has put a $27.87 PT on the stock. Analysts believe that now within the virus context, it is trading at near fair value. My own view from an industry perspective is contrarian to these calls. I believe and have believed for two years that MLCO has remained undervalued trading in a very narrow range. Going through the history I found that much of the periodic downside volatility I discovered in the trade was related to unlucky play. And that was fueled by the company’s aggressive posture in marketing to VIPs and taking on a bit more risk in bad debts to support the arrival in 2018 of the Morpheus Tower $1.2B investment at City of Dreams.
There is also the inherent volatility of the Macau market in general where since 2015, Beijing assaults on money laundering and junkets have bruised the VIP business. The macro China economic woes (pre-virus) likewise had their impact on the sector.
CEO Lawrence Ho is among the industry’s most effective asset allocators. Yet his decisions at times, such as a sudden pull out from a highly touted deal in the Russian Far East., and a quick pivot to Cyprus have raised some eyebrows among investors. His more recent move to acquire James Packer’s stake in Crown Resorts for US$1.2B triggered several calls I had from hedge fund friends questioning the move on several grounds. Mostly they expressed concern about a growth trajectory in the Australian market with new capacity coming on line. Second, one associate, an admirer of Ho’s, questioned whether “Lawrence has the penchant to bite off more than he can chew”. He believes that these moves are part of what keeps the stock “hostage in a narrow range”.
While I believe that MLCO may be fairly valued by traditional metrics, I think the potential of the stock based both on management effectiveness under pressure and the global vision of Lawrence Ho to move his asset base to places where he expects the highest risk/reward ratios is worth a premium to the stock.
MLCO has always been relatively cheap among its peers for a company whose vision reaches beyond Asia. US based giants have fortress positions in Las Vegas. Ho has apparently bypassed opportunities there and pivoted to Cyprus and Australia beyond Macau and Manila. Therefore, in time, MLCO will be a strong contender in Asia and global in scope with its shares still “held hostage” as my hedge fund friend noted, by aspects of the company it has not valued.
I believe post virus in full recovery mode in Macau, plus continuing strong growth trends in Manila and the possibilities both for the Cyprus project and Japan, that MLCO looks like it could be a $35 stock to me bought at a price now that could afford a larger opening position than many peers.
AEM Holdings (AEM SP) posted stellar FY19 results and upped its 2020 guidance. Long-term the company’s TAM continues to rise and diversification away from core-client Intel Corp (INTC US) will gather pace in FY20-21.
Management must be bullish on its FY20-FY21 prospects if we believe Charlie Munger’s “show me the incentives and I will show you the outcome” motto. On 07/10/19 the board granted a Mega Grant of Performance Shares to both the Chairman and CEO to complete its Transformational Roadmap (aka diversify away from Intel). The options and share grants were priced at 1.14 SGD.
While investors in ASEAN SMIDcaps often have to worry about the alignment of the promoters and the interests of minorities we believe they are aligned at AEM. Free float is over 83% which also makes AEM a prime takeover candidate, but not before maximum value has been extracted by the current management team.
Net cash is over 107M SGD (18% of market cap) and should continue to grow as its record order book for FY2020 gets delivered. So far it sees no impact from Covid-19.
Our revised Fair Value is 3.7 SGD (previously 2.5 SGD) which equates to a market cap of 1 billion SGD but an EV of just 898M SGD. At this kind of valuation the stock would still only be trading at 14.8x 2020 EPS, a level easily justified by its fast growth, high margins and high ROE. Looking at its peers such as Cohu Inc (COHU US), Teradyne Inc (TER US), Chroma Ate Inc (2360 TT) or Pentamaster Corp (PENT MK) we note that they trade at an average P/E multiple of 23.9x, 13.5x EV/EBITDA and 3.4x P/B with a 1.8% dividend yield.
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Youdao is capitalizing on the current virus outbreak to raise awareness of its services and build brand value. The Company gained 10 million new enrollments after it offered free online courses to its users, and continues to convert users by cross-selling and upselling via low-cost trials.
The Company’s Q4 results indicate continued momentum in the business’ growth and we expect the Company to reap strong returns in the future from its current investments during the crisis.
Melco is well positioned, it’s taken a big virus related hit but offers a very cheap entry point relative to peers.
Virus duration unknown, but we see a strong upside forming late Q3 to Q4 2020 from a low base.
2019 performance in mass subsection will ramp fast, but VIP will take longer to rebuild.
“Buy when everyone sells, sell when everyone buys…”Warren Buffett
As global markets precipitously dive over mounting fears that the coronavirus will evolve into a pandemic, we are reminded of the above quote attributed to Warren Buffett. It seems appropriate at this juncture to watch valuations crumble by the day and bear in mind that no matter the damage ultimately inflicted on stocks, at one point or another, the outbreak will peak and finally end.
SARS, Swine Flu, Ebola and others as frightening as they were, ultimately peaked and faded around a 6 month time frame. We make no such forecasts here other than to stipulate we are using it as a benchmark duration only. Nine months or more cannot be ruled out. All that can be ruled out is that we are clearly not experiencing a revisit of the medieval black plague which swept through Europe and Asia for years during the 14th century and the latter day early 20th century Spanish flu pandemic which killed millions. World health authorities possess an armory of weapons to battle the virus that simply did not exist before. But the coronavirus will take its toll at all events.
So the penultimate question now for investors is the same one raised through war, depression, recession, global financial crises or mass health emergencies. Do you take money off the table, run and hide until events play out? Or do you make bets now when good stocks are cheap and getting cheaper, then grit your teeth and twist the cork on a bottle of good champagne and hold it in place until macro disasters dissipate and send your bets now soaring with profits? And in the aftermath will you bask in the adulation of peers commending your genius for following that very penetrating notion of Warren Buffett at the top of this insight?
The Asian gaming sector is rife with bargains now for those strong of heart and conviction in the longer term valuations
The Asia gaming sector in particular has taken a huge beating and may well experience a continuing fall until the health scare passes and valuations return, or exceed pre-virus levels. The action on gaming stocks at first news of the virus breakout, puzzled many observers. Investors not only stood pat, but did some buying, keeping the sector remarkably immune from the unfolding health disaster—temporarily.
It did not last. We now have a sector, along with broader markets, taking a major beating. Valuations have plunged. The cause and effect of the Asian sector in particular clearly shows a straight line between the collapse of the Macau customer flow and the anticipated damage it will in the end inflict on earnings and valuations this year.
Added to that we have two days of plunge suggesting capitulation. Yet the virus doesn’t play by traditional market rules. Have we indeed experienced capitulation after a long bull trend? Whether after a standard bubble or a virus black swan we note that the market has left Asia gaming stocks at lows that invite serious consideration as entry points now for those with the risk profile.
We have applied the Buffett principal to the situation and concluded that yes, for reasons we will detail here, we think It’s time to buy and buy strongly in the Asian casino sector. Valuations tumbled, but fundamentals are unchanged. It is in the interim period, between now and such a time when the virus finally abates and disappears, that the sector can expect to be hammered.
As the sector get cheaper, the temptation to buy on the deep dips would normally kick in. Thus far we have noted in trading volume and various options plays the ongoing sentiment remains: Take money off the table and get out. The assumption: There will be plenty of time ahead where the sector will be cheap enough to dive back in when the waves of selling pressure begin to abate.
Regardless of that well- worn attitude we see much value right now in the sector.
Consider Melco Resorts & Entertainment Inc.
Melco volatility and virus has brought the stock down to a bargain price.
We have selected one stock we believe offers the longest and most vibrant ramp up post virus: Melco Resorts & Entertainment Inc. (NASDAQ: MLCO). Overall we believe there is money to be made across the Macau sector as all the stocks have had their recent run ups destroyed. We have selected Melco as representative of a stock we believe has dropped to a level that makes it extremely attractive because of a friendly entry price compared with industry peers.
Recovery from the virus disruption will be slow and steady but at some point in the process, pent up demand in mass will ignite and translate into a powerful earnings tide late this year. We like Melco’s low starting point, its quick response to the virus challenge, particularly in cutting Capex. The company announced it was postponing acquiring the second tranche of Crown Resorts(ASX:CWN) stock and making other judicious cuts which reduced its run rate during the crisis to around US$2.5M a day.
Macau has recovered from 2015 crackdowns and will find its way back by Q4 this year or before.
Furthermore, management has gone on record as promising to continue dividend payments for the knowable duration of the crisis. As a general sense, management is looking at a six month time line for a return to normal operations.
Our thesis: Building a larger position pre-recovery at a smaller outlay. In theory you can now buy 3.5 shares of MLCO for every share of Las Vegas Sands Inc. (NYSE: LVS). You can also buy 6 shares of MLCO for every share of Wynn Resorts Ltd. at the price at writing. We expect the entire Macau gaming sector to ignite post recovery. All face the same headwinds, all will respond with similar forward momentum. But MLCO sits at a cheaper starting point with as sound a going forward recovery potential than any of its major peers.
A quick glance at Melco (USD)
Price at writing: $19.53
52wk range: $18.68 —$26.97
5 year high: Sept 2017: $31.21
Market cap: $8.982B
Beta: (5 yr monthly) 1.93
P/E: (ttm): 25.23
EPS: $0.77
Forward dividend and yield: $0.66 (3.38%)
Our view: Based on its global ambitions, surefooted asset allocation skills, and operational flexibility, we believe MLCO has been undervalued even at its recent pre-virus highs.
Pre-virus performance this month:
Stock was at $22. 58
This company’s 4Q19 and annual 2019 results are impressive:
Q4 luck adjusted EBITDA hit a record, all time high propelled by a 17% increase in the mass segment up 17% to $249M. Group wide EBITDA was $382M, but luck adjusted at $413M. MLCO played unlucky in Q4.
A key metric we like: MLCO’s 2019 share of the Macau market rose 180bps to 16%—in a market showing a sector wide decline in VIP. Its properties proximity to the new light rail station is superior to many peers putting properties within 14 minutes of the ferry and 12 minutes from the airport. We believe this will contribute to an uptick in market share again once recovery begins probably in the back six months of this year.
The company showed strong upsides in mass at all properties including its Manila operation yet at the same time it is facing market wide declines in VIP. The success of the Morpheus tower in Macau in premium mass in particular played a significant role in the solid performance.
City of Dreams Manila, a key player in vibrant growth in the Philippine gaming market.
Capex going forward MLCO will continue to move ahead on its $1.35B investment in the Phase One expansion of Studio City, a project aimed directly at the heart of the mass and premium mass market segments by adding 600 rooms and a water park.
Cyprus: MLCO’s EBITDA from its temporary casinos rose to $9M. The properties are a toe-dip into what is coming there in the integrated resort project with a large footprint expected to debut in late 2021. The property will be de facto the first ever, modern integrated casino resort built to service the European /Middle East market. City of Dreams Mediterranean will cost just over $617M to complete and the capex on the project will continue through the virus interregnum. The property will open with a modest game spread of 100 tables and 1,000 slot machines.
City of Dreams Cyprus coming in 2021 could be a game changer in Europe.
We think the Cyprus property will quickly absorb the capacity and provide a rationale to MLCO to scale. It will open with 500 rooms, but we note that the property will sit on 91 acres controlled by MLCO. It is a clear first mover advantage for the company in the European facing market.
Japan: MLCO has been among the most aggressive pursuers of one of the three Japan IR licenses to be issued late this year or early 2021. It has pivoted from an Osaka target to a Yokohama first strategy going head to head with Las Vegas Sands. In the last quarter it’s PL showed it had spent $18M on various initiatives in Japan. Our industry source on the ground in Tokyo believes that “it will be a tough down to the wire contest between the two companies. The estimates of sunk cost for a Yokohama IR have risen as high as $18B. It’s entirely possible that MLCO and LVS will wind up in some kind of joint venture with a third, Japan based partner.”
MLCO cash and coronavirus burn rate
At writing, MLCO is sitting on $900M in cash against $3B in long term debt exclusive of Studio City and the Cyprus project.
Management now estimates the burn rate during the virus challenge at $2.5M per day fixed expenses, inclusive of some cost cuts already made in both operations and capex expense.
Their outlook at present foresees no substantive recovery beginning before Q3 this year. Cash reserves are considered more than adequate to meet that contingency. However, management sees a ramp up back to normalcy starting slower and not gaining powerful momentum until late in Q4 or early 1Q21. Our take: Most of the virus downside is already baked in.
In effect management sees Q1 and Q2 as essentially lost in terms of contribution to annual results this year.
Lawrence Ho and President Duterte signals a continuing presence in a solid ramp up in Manila.
The takeaway
Market consensus has put a $27.87 PT on the stock. Analysts believe that now within the virus context, it is trading at near fair value. My own view from an industry perspective is contrarian to these calls. I believe and have believed for two years that MLCO has remained undervalued trading in a very narrow range. Going through the history I found that much of the periodic downside volatility I discovered in the trade was related to unlucky play. And that was fueled by the company’s aggressive posture in marketing to VIPs and taking on a bit more risk in bad debts to support the arrival in 2018 of the Morpheus Tower $1.2B investment at City of Dreams.
There is also the inherent volatility of the Macau market in general where since 2015, Beijing assaults on money laundering and junkets have bruised the VIP business. The macro China economic woes (pre-virus) likewise had their impact on the sector.
CEO Lawrence Ho is among the industry’s most effective asset allocators. Yet his decisions at times, such as a sudden pull out from a highly touted deal in the Russian Far East., and a quick pivot to Cyprus have raised some eyebrows among investors. His more recent move to acquire James Packer’s stake in Crown Resorts for US$1.2B triggered several calls I had from hedge fund friends questioning the move on several grounds. Mostly they expressed concern about a growth trajectory in the Australian market with new capacity coming on line. Second, one associate, an admirer of Ho’s, questioned whether “Lawrence has the penchant to bite off more than he can chew”. He believes that these moves are part of what keeps the stock “hostage in a narrow range”.
While I believe that MLCO may be fairly valued by traditional metrics, I think the potential of the stock based both on management effectiveness under pressure and the global vision of Lawrence Ho to move his asset base to places where he expects the highest risk/reward ratios is worth a premium to the stock.
MLCO has always been relatively cheap among its peers for a company whose vision reaches beyond Asia. US based giants have fortress positions in Las Vegas. Ho has apparently bypassed opportunities there and pivoted to Cyprus and Australia beyond Macau and Manila. Therefore, in time, MLCO will be a strong contender in Asia and global in scope with its shares still “held hostage” as my hedge fund friend noted, by aspects of the company it has not valued.
I believe post virus in full recovery mode in Macau, plus continuing strong growth trends in Manila and the possibilities both for the Cyprus project and Japan, that MLCO looks like it could be a $35 stock to me bought at a price now that could afford a larger opening position than many peers.
AEM Holdings (AEM SP) posted stellar FY19 results and upped its 2020 guidance. Long-term the company’s TAM continues to rise and diversification away from core-client Intel Corp (INTC US) will gather pace in FY20-21.
Management must be bullish on its FY20-FY21 prospects if we believe Charlie Munger’s “show me the incentives and I will show you the outcome” motto. On 07/10/19 the board granted a Mega Grant of Performance Shares to both the Chairman and CEO to complete its Transformational Roadmap (aka diversify away from Intel). The options and share grants were priced at 1.14 SGD.
While investors in ASEAN SMIDcaps often have to worry about the alignment of the promoters and the interests of minorities we believe they are aligned at AEM. Free float is over 83% which also makes AEM a prime takeover candidate, but not before maximum value has been extracted by the current management team.
Net cash is over 107M SGD (18% of market cap) and should continue to grow as its record order book for FY2020 gets delivered. So far it sees no impact from Covid-19.
Our revised Fair Value is 3.7 SGD (previously 2.5 SGD) which equates to a market cap of 1 billion SGD but an EV of just 898M SGD. At this kind of valuation the stock would still only be trading at 14.8x 2020 EPS, a level easily justified by its fast growth, high margins and high ROE. Looking at its peers such as Cohu Inc (COHU US), Teradyne Inc (TER US), Chroma Ate Inc (2360 TT) or Pentamaster Corp (PENT MK) we note that they trade at an average P/E multiple of 23.9x, 13.5x EV/EBITDA and 3.4x P/B with a 1.8% dividend yield.
A meeting with Mitra Adiperkasa (MAPI IJ) management in Jakarta last week revealed a relatively upbeat outlook for this leading Indonesian retailer, despite the lingering Corona Virus fears. Implausible though it may seem, Indonesia has officially had no confirmed cases of the virus to date.
Assuming that Indonesia remains virus-free, any potential impact from Corona would likely come from supply chain disruption in the company sports and leisure segment under Map Aktif Adiperkasa PT (MAPA IJ), given that 30%-40% of its sports shoes are manufactured in China but inventories should help cushion any impact.
The company has less exposure in its fashion segment given that 60% comes from Inditex in Spain which has a highly diversified manufacturing capacity outside China in locations such as Morocco, Portugal, Turkey, and Bangladesh.
The company expanded its store area quite aggressively in 2019 and will slow expansion in 2020, with a continuing focus on sports& leisure and Starbucks. It will also add selective new brands such as Boots Health & Pharmacy and a number of brands from Amorepacific Corp (090430 KS) in 2020.
Mitra Adiperkasa (MAPI IJ) continues to take an omnichannel approach, working with all the major e-tailers such as Tokopedia and Bukalapak but also through its own MapeMall and a number of its own mono-brand sites.
The recent Corona Virus driven correction looks overdone, with valuations on a forward PER basis on a 3-year low, despite the fact that there has been minimal impact on the company to date. This presents an interesting buying opportunity in our view.
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A meeting with Mitra Adiperkasa (MAPI IJ) management in Jakarta last week revealed a relatively upbeat outlook for this leading Indonesian retailer, despite the lingering Corona Virus fears. Implausible though it may seem, Indonesia has officially had no confirmed cases of the virus to date.
Assuming that Indonesia remains virus-free, any potential impact from Corona would likely come from supply chain disruption in the company sports and leisure segment under Map Aktif Adiperkasa PT (MAPA IJ), given that 30%-40% of its sports shoes are manufactured in China but inventories should help cushion any impact.
The company has less exposure in its fashion segment given that 60% comes from Inditex in Spain which has a highly diversified manufacturing capacity outside China in locations such as Morocco, Portugal, Turkey, and Bangladesh.
The company expanded its store area quite aggressively in 2019 and will slow expansion in 2020, with a continuing focus on sports& leisure and Starbucks. It will also add selective new brands such as Boots Health & Pharmacy and a number of brands from Amorepacific Corp (090430 KS) in 2020.
Mitra Adiperkasa (MAPI IJ) continues to take an omnichannel approach, working with all the major e-tailers such as Tokopedia and Bukalapak but also through its own MapeMall and a number of its own mono-brand sites.
The recent Corona Virus driven correction looks overdone, with valuations on a forward PER basis on a 3-year low, despite the fact that there has been minimal impact on the company to date. This presents an interesting buying opportunity in our view.
The Wall Street Journal has published an article saying Vision Fund head Rajeev Misra waged a frankly bizarre campaign to sabotage potential executive competitors in the run up to creation of Vision Fund. This is the second major negative story on the internal workings of Vision Fund this month and whilst Softbank and Mr. Misra have denied this and whether the stories are true or not, the added noise only makes it harder to attract outside investment for Vision Fund 2. This plays against market concerns on the coronavirus, which has knocked 7% off the value of the Vision Fund’s public portfolio since last week. Softbank shares trade at a 46% discount to the public value of its holdings and we don’t expect that to change very much without a share buyback announcement.
Analyst meeting yesterday came out with a neutral tone for its 2020 performance. 1H20 outlook seems bearish, pressured by virus outbreak. Meanwhile, we view commodity market to recover in 2H20.
• Management expects overall petrochemical products to remain soft in 1H20, eroded by coronavirus concern. However, it was expected to recover in the 2H20.
• We expect the company’s revenue to recover, starting in 1Q20 after major planed turnaround in 2019.
• The olefin projects (PO/polyols) with a capacity of 1.1 MTA (+10%) are on track and expected to COD by 4Q20E.
• In short term, we expect commodity market to be highly volatile from continuation in global infection and uncertainty in OPEC cut run decision.
We maintain our ‘HOLD’ recommendation but cut our target price to Bt50.0 (from Bt59), to reflect weak outlook in petrochemical market. Our target price based on 10.2xPE’20E, which is equal -0.5SD to its 5 year average.
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Chinese express parcel volume declined by 16.4% YoY in January, mainly due to the timing of the long Lunar New Year (LNY) holiday, which began on January 24th (LNY began on February 5th last year). We do not believe the measures put in place to slow the spread of COVID-19 had much impact on January’s numbers; instead, their impact will likely be seen in February numbers.
Headline unit pricing actually improved slightly (+0.3% YoY) last month, but this increase is misleading, as it is mainly the result of strong volume growth of high-priced international shipments. Inter-city express pricing declined by 5.4% YoY in January, but at the individual company level unit pricing declined by as much as 21% YoY. We believe domestic inter-city express pricing remains under intense pressure, and that margins at most carriers will continue to decline as a result.
S.F. Holding (002352 CH) continues to separate itself from its competitors in China’s express sector. In January, SF reported a remarkable 40% YoY increase in parcel volume, evidence of continued strong market share gains. More importantly, SF is gaining share profitably: the company recently reported preliminary 2019 earnings results that exceeded consensus expectations on the back of rising margins.
We continue to rate SF Holding ‘Buy’, with a target price of 57.30 RMB per share, which is based on 15 times our 2021E EBITDA estimate. With 18% upside from its closing price on February 26th, SF Holding is our only recommended exposure in the Chinese express sector.
In this insight, we provide visual set-ups of the Korean stubs related pair-trades. We have included 38 pair trade set-ups of all the major Korean stubs related pairs (including regular and quasi holdcos and their respective opcos). We have noticed in the past that the pair trade strategy can particularly bear fruits after/during periods when the market volatility is relatively high, which is the case right now so it may be worthwhile to pay particular attention to some of these pair trades.
We have provided 3 months price chart comparisons of all the 38 pair trade set-ups below. Of these, the five set-ups that are particularly noteworthy (the ones that have shown the biggest gap in the past 3 months) are as follows:
LG Corp vs. LG Chem
Hanjin Kal vs. Korean Air Lines
Halla Holdings vs. Mando Corp
SK Telecom vs. SK Hynix
Hanwha Solutions vs. Hanwha Corp
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Chinese express parcel volume declined by 16.4% YoY in January, mainly due to the timing of the long Lunar New Year (LNY) holiday, which began on January 24th (LNY began on February 5th last year). We do not believe the measures put in place to slow the spread of COVID-19 had much impact on January’s numbers; instead, their impact will likely be seen in February numbers.
Headline unit pricing actually improved slightly (+0.3% YoY) last month, but this increase is misleading, as it is mainly the result of strong volume growth of high-priced international shipments. Inter-city express pricing declined by 5.4% YoY in January, but at the individual company level unit pricing declined by as much as 21% YoY. We believe domestic inter-city express pricing remains under intense pressure, and that margins at most carriers will continue to decline as a result.
S.F. Holding (002352 CH) continues to separate itself from its competitors in China’s express sector. In January, SF reported a remarkable 40% YoY increase in parcel volume, evidence of continued strong market share gains. More importantly, SF is gaining share profitably: the company recently reported preliminary 2019 earnings results that exceeded consensus expectations on the back of rising margins.
We continue to rate SF Holding ‘Buy’, with a target price of 57.30 RMB per share, which is based on 15 times our 2021E EBITDA estimate. With 18% upside from its closing price on February 26th, SF Holding is our only recommended exposure in the Chinese express sector.
In this insight, we provide visual set-ups of the Korean stubs related pair-trades. We have included 38 pair trade set-ups of all the major Korean stubs related pairs (including regular and quasi holdcos and their respective opcos). We have noticed in the past that the pair trade strategy can particularly bear fruits after/during periods when the market volatility is relatively high, which is the case right now so it may be worthwhile to pay particular attention to some of these pair trades.
We have provided 3 months price chart comparisons of all the 38 pair trade set-ups below. Of these, the five set-ups that are particularly noteworthy (the ones that have shown the biggest gap in the past 3 months) are as follows:
We recently visited Erawan and Global Green Chemicals (GGC TB) this week. Let’s just say the companies are having a hard time even before the coronavirus outbreak.
Erawan reported flat EBITDA and 14% earnings decline in 2019 on barely rising revenues. Especially weak was the economy segment which saw an 11% in RevPar
The one-time hotel star also implied a decline of 40-50% during the period of the coronavirus outbreak, which only started in January 2020. This is likely to push them into a heavy loss for 2020. The stock was down 7% on the day of the meeting alone.
GGC reported an EBITDA decline of almost 60% in 2019 primarily due to decline in product prices. The company is still pursuing suppliers over the missing product.
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