Equity Bottom-Up

In this briefing:

1. AEM Holdings: FY18 Results Solid; Decent FY19 Outlook; Upside Could Come from Huawei and Novoflex
2. IPO Stalker: SISB’s Growth Plans
3. Brazilian Payments Report: Cielo on the Defensive Against Disruptive Challengers

1. AEM Holdings: FY18 Results Solid; Decent FY19 Outlook; Upside Could Come from Huawei and Novoflex

Aem Holdings (AEM SP) reported solid FY18 results and gave a decent outlook for FY19. Customer concentration remains high (85%+ of revenues linked to one of biggest IT companies globally) but new growth opportunities with Huawei and Novoflex could potentially add meaningfully to earnings and customer diversification as of FY20.

The balance sheet remains strong (58M SGD net cash) and should be further utilized for M&A to complement the current product offering.

Given the large change in the shareholder register over the past twelve months (after Novo Tellus distributed the shares to its LPs) free float is now 83% with Aberdeen and UBS among the largest shareholders. The high free float and low market cap make AEM a prime takeover candidate the coming 2-3 years.

Fair Value of 2.1 SGD remains unchanged (based on just 2x revenue or 10x FY2020 EV/EBITDA).

2. IPO Stalker: SISB’s Growth Plans

SISB has been one of the best investments in our portfolio, rising 26% since we jumped in shortly after the IPO. Founder Kelvin Koh reiterated the strengths in his prospectus (English-Chinese language, affordability, own brand) and backs it up with:

• positive stats and trends. 7.8% CAGR in international students, growth in high net worth Thais (11.4% CAGR) and expat population (6.9% CAGR) all of which are supportive of the business.
• expansion plans both abroad and domestic. A Bt70m investment in the Thonburi site as well as talks to potentially set up new campuses in China and/or CLMV region.
• Financials. An almost sixfold jump in earnings from Bt18m in 2017 to Bt103.5m in 2018 primarily due to its high operating leverage and now debt-free status after the IPO.
• favorable operating environment. High availability of Caucasian teachers in Thailand and growing Chinese expat community due to China’s increasing environment.

3. Brazilian Payments Report: Cielo on the Defensive Against Disruptive Challengers

• The non-cash payments market continues to grow at a double-digit rate in Brazil, driven primarily by growing usage of credit and debit cards
• De-regulation and new entrants have brought challenges for the incumbents, especially for the largest player Cielo SA (CIEL3 BZ), with the challengers taking market share, squeezing margins and promoting better service for SME merchants in particular
• Competitive pressures continue in the Brazil payments market, reflected in the declining merchant discount rate (MDR), lower rental rates and sale prices for POS terminals, as well as pressure on the commissions for early payment of merchant receivables; the near-term prospects for Cielo remain challenging in our view
• Due to the ongoing headwinds, we expect Cielo to show negative earnings growth to 2021; management has announced that Cielo will defend its market share against the challengers; we see further downside risk to consensus earnings and the real risk of a greater than consensus 2019 DPS cut
• StoneCo Ltd (STNE US)and Pagseguro Digital Ltd (PAGS US) are two of the payment challengers in this de-regulated market, growing faster than the Brazilian non-cash transactions market and taking incumbents’ market share; we see StoneCo to be the preferred entity to PagSeguro, based on StoneCo’s higher revenue yielding SME segment of focus and on its more attractive PEG ratio valuation

In this briefing:

1. AEM Holdings: FY18 Results Solid; Decent FY19 Outlook; Upside Could Come from Huawei and Novoflex
2. IPO Stalker: SISB’s Growth Plans
3. Brazilian Payments Report: Cielo on the Defensive Against Disruptive Challengers
4. New J. Hutton Exploration Report (Week Ending 22/02/19)

1. AEM Holdings: FY18 Results Solid; Decent FY19 Outlook; Upside Could Come from Huawei and Novoflex

Aem Holdings (AEM SP) reported solid FY18 results and gave a decent outlook for FY19. Customer concentration remains high (85%+ of revenues linked to one of biggest IT companies globally) but new growth opportunities with Huawei and Novoflex could potentially add meaningfully to earnings and customer diversification as of FY20.

The balance sheet remains strong (58M SGD net cash) and should be further utilized for M&A to complement the current product offering.

Given the large change in the shareholder register over the past twelve months (after Novo Tellus distributed the shares to its LPs) free float is now 83% with Aberdeen and UBS among the largest shareholders. The high free float and low market cap make AEM a prime takeover candidate the coming 2-3 years.

Fair Value of 2.1 SGD remains unchanged (based on just 2x revenue or 10x FY2020 EV/EBITDA).

2. IPO Stalker: SISB’s Growth Plans

SISB has been one of the best investments in our portfolio, rising 26% since we jumped in shortly after the IPO. Founder Kelvin Koh reiterated the strengths in his prospectus (English-Chinese language, affordability, own brand) and backs it up with:

• positive stats and trends. 7.8% CAGR in international students, growth in high net worth Thais (11.4% CAGR) and expat population (6.9% CAGR) all of which are supportive of the business.
• expansion plans both abroad and domestic. A Bt70m investment in the Thonburi site as well as talks to potentially set up new campuses in China and/or CLMV region.
• Financials. An almost sixfold jump in earnings from Bt18m in 2017 to Bt103.5m in 2018 primarily due to its high operating leverage and now debt-free status after the IPO.
• favorable operating environment. High availability of Caucasian teachers in Thailand and growing Chinese expat community due to China’s increasing environment.

3. Brazilian Payments Report: Cielo on the Defensive Against Disruptive Challengers

• The non-cash payments market continues to grow at a double-digit rate in Brazil, driven primarily by growing usage of credit and debit cards
• De-regulation and new entrants have brought challenges for the incumbents, especially for the largest player Cielo SA (CIEL3 BZ), with the challengers taking market share, squeezing margins and promoting better service for SME merchants in particular
• Competitive pressures continue in the Brazil payments market, reflected in the declining merchant discount rate (MDR), lower rental rates and sale prices for POS terminals, as well as pressure on the commissions for early payment of merchant receivables; the near-term prospects for Cielo remain challenging in our view
• Due to the ongoing headwinds, we expect Cielo to show negative earnings growth to 2021; management has announced that Cielo will defend its market share against the challengers; we see further downside risk to consensus earnings and the real risk of a greater than consensus 2019 DPS cut
• StoneCo Ltd (STNE US)and Pagseguro Digital Ltd (PAGS US) are two of the payment challengers in this de-regulated market, growing faster than the Brazilian non-cash transactions market and taking incumbents’ market share; we see StoneCo to be the preferred entity to PagSeguro, based on StoneCo’s higher revenue yielding SME segment of focus and on its more attractive PEG ratio valuation

4. New J. Hutton Exploration Report (Week Ending 22/02/19)

• Azumah Resources (AZM AU) rated a Speculative BUY
• 99.5m at 2.2g/t Au complements ‘discovery hole’ (75m above) – 93.1m at 2.3g/t Au
• DDHs from current programme targeting down-dip from existing intercepts
• Key drill results expected over next few weeks
• 1Moz Reserve, 2.5Moz Resource
• US$1,77M NPV_5%, 1.6yr payback.
• US$886/oz AISC (all-in sustaining cost)
• Azumah Resources (AZM AU) , Emmerson Resources (ERM AU), Xanadu Mines (XAM AU), Kingston Resources (KSN AU), Oklo Resources (OKU AU), Blackham Resources (BLK AU), Dacian Gold Ltd (DCN AU), De Grey Mining (DEG AU), Austar Gold (AUL AU), Strategic Minerals PLC (SML LN), Asiamet Resources Ltd (ARS LN), Landore Resources Ltd (LND LN)

In this briefing:

1. Mexican Banks – Near Term Relief on Fees from the ABM Convention; Thoughts on January’s Bank Data
2. A Reality Check for Money Forward (3994 JP): Key Takeaways from Our Recent Visit
3. Small Cap Diary: Rajthanee Hospital, CAZ
4. Daewoong: Entering “Botox World”
5. New J Hutton – Exploration Report (Weeks Ending 22/03/19)

1. Mexican Banks – Near Term Relief on Fees from the ABM Convention; Thoughts on January’s Bank Data

• The Mexican president Andres Manuel Lopez Obrador (AMLO) announced at the annual Mexican bank association (ABM) convention on the 22nd March that there would be no cap or regulatory-enforced reduction in Mexican banking fee and commission charges
• AMLO stated that he expects fees to decline going forward, as a result of increased competition between banks; in the ABM convention, it was also announced that banks will charge zero commissions on the planned platform for digital payments
• This seems a better outcome on fees than the market expected – at least in the near term, as fees are still on the political agenda – and there was greater emphasis at the convention on how to achieve increased financial inclusion, via digital banking initiatives
• Yet we still believe that bank fees could be a bone of contention over the medium term, and we show the FY 2018 ratio of fees to revenues and to assets for eight banks, in the charts below
• The January 2019 Mexican banks data implies slower system loan growth going forward, yet credit quality remains healthy and credit spreads are holding steady
• Despite the volatile global markets, in the short term banks like Grupo Financiero Banorte-O (GFNORTEO MM) could benefit from the “fee relief”; longer term, we would highlight Gentera SAB De CV (GENTERA* MM EQUITY) as an attractive fundamental pick in Mexican banks

2. A Reality Check for Money Forward (3994 JP): Key Takeaways from Our Recent Visit

In our previous note, Money Forward (3994 JP): Solid Mid-Term Prospects for the Fintech Pro, but Overvalued, published July last year (2018), we suggested that Money Forward (3994 JP) (MF) was overvalued despite its strong growth profile. MF’s share price, which was at an all-time high (close to JPY6,000) around this time, fell below its IPO price (JPY3,000) in December, reinforcing our bearish view.

Since then, Money Forward’s share price has picked up (closing at JPY4,400 on 26th March 2019), on the back of strong topline guidance for FY11/19E (+55%-65% YoY growth) and “aggressive” medium-term profit targets (positive EBITDA by FY11/21E).

However, following our recent conversation with MF’s IR team, we believe that the above guidance needs to be slightly toned down.

3. Small Cap Diary: Rajthanee Hospital, CAZ

We visited two small-cap companies from totally different industries today. These are the key highlights.

• Rajthanee Hospital, a small hospital chain based in Ayuthya, achieved 15.7% revenue growth CAGR since 2016 on the back of its proximity to industrial estates.
• CAZ has seen its backlog double to Bt2.5bn largely due to its good relations with major clients (PTT) and partners (Samsung and other Korean chaebol), which dole out projects in the oil & gas sector to it.
• Internally, CAZ follows a sophisticated cost control method sporting bar codes and GPS to track materials and dedicated cost-control staff.

4. Daewoong: Entering “Botox World”

Daewoong Pharmaceutical Co (069620 KS) has traded up over the past year in anticipation of the launch of its botulinum toxin product Jeuveau in the US and EU (known as Nabota in Korea). We think the probability of near-term (6-9 months) disappointment with the product launch is low, but that upside surprises beyond that stage are unlikely given Botox’s (product of Allergan Plc (AGN US)) strong brand recognition and marketing support. Now is the time to put the stock on the radar screen to pick up signs of a looming disappointment with Jeuveau’s uptake.

We tag this Insight as Bearish because we think there is little likelihood for Jeuveau to exceed consensus expectations post-launch.

5. New J Hutton – Exploration Report (Weeks Ending 22/03/19)

• Uranium Price has fallen 7% over the past two months
• Actively looking for uranium short positions
• Provide summarised watch list
• Wisdom from Samuel Longhorne Clemens
• Yellow Cake PLC (YCA LN), Berkeley Energy (BKY AU), Cameco Corp (CCO CN), Kazatomprom Natsionalnaya At (KZAP KZ), Jangada Mines PLC (JAN LN), Europa Metals Ltd (EUZ LN), Buxton Resources (BUX AU), Musgrave Minerals (MGV AU), Myanmar Metals (MYL AU), Archer Exploration (AXE AU), Canyon Resources (CAY AU), Catalyst Metals (CYL AU), Core Exploration (CXO AU), Exore Resources (ASX: ERX), Stavely Minerals (SVY AU), Tietto Minerals Ltd (TIE AU), Horizonte Minerals PLC (HZM LN), Bellevue Gold (ASX: BGL), Allegiance Coal (AHQ AU), First Au (ASX: FAU), Base Resources (BSE AU), Breaker Resources Nl (BRB AU)  

In this briefing:

1. LG Electronics – Boost from Higher Dividends, Air Motion Technology, & The War Against Huawei

1. LG Electronics – Boost from Higher Dividends, Air Motion Technology, & The War Against Huawei

• In this report, we provide an update on Lg Electronics (066570 KS), including the potential impact of the war on Huawei on the company, dividend policy, debt issue, sales of non-core assets, and the launch of new smartphones. 
• Although LG’s V50 ThinQ product is a bit disappointing, another new LG smartphone called G8ThinQ appears to be promising. This is one of the first smartphones to use “air motion” technology to activate some of the features including playing a song or video or adjusting volume (remember Tom Cruise in the movie Minority Report)? The airmotion technology could bring back the “thrill” of using a smartphone. 
• Many investors around the world are asking, “What companies will benefit from the continued war on Huawei by the US government?” LG Electronics, the 7th largest smartphone maker globally, could be one of the key beneficiaries of the war on Huawei. 
• LG Electronics recently announced that it will pay DPS of 750 won for its common shareholders in 2018, which is nearly twice as high the DPS of 400 won in 2017. 

In this briefing:

1. LG Electronics – Boost from Higher Dividends, Air Motion Technology, & The War Against Huawei
2. Tesla. SEC Contempt Filing & Ludicrous Autopilot Claims Engulf Delusional Musk

1. LG Electronics – Boost from Higher Dividends, Air Motion Technology, & The War Against Huawei

• In this report, we provide an update on Lg Electronics (066570 KS), including the potential impact of the war on Huawei on the company, dividend policy, debt issue, sales of non-core assets, and the launch of new smartphones. 
• Although LG’s V50 ThinQ product is a bit disappointing, another new LG smartphone called G8ThinQ appears to be promising. This is one of the first smartphones to use “air motion” technology to activate some of the features including playing a song or video or adjusting volume (remember Tom Cruise in the movie Minority Report)? The airmotion technology could bring back the “thrill” of using a smartphone. 
• Many investors around the world are asking, “What companies will benefit from the continued war on Huawei by the US government?” LG Electronics, the 7th largest smartphone maker globally, could be one of the key beneficiaries of the war on Huawei. 
• LG Electronics recently announced that it will pay DPS of 750 won for its common shareholders in 2018, which is nearly twice as high the DPS of 400 won in 2017. 

2. Tesla. SEC Contempt Filing & Ludicrous Autopilot Claims Engulf Delusional Musk

The US Securities and Exchange Commission (SEC) requested a federal judge to hold Tesla CEO Elon Musk in contempt of court yesterday regarding recent misleading tweets about the company’s unit production volumes for 2019. This latest move comes not long after Musk bragged that he does not respect the SEC and that his tweets were not being censored by the Board according to the terms of the agreement reached with the SEC following his controversial “Am considering taking Tesla private at $420. Funding secured” tweet on August 8’th last.  

Separately, Musk has been talking up the capabilities of the company’s Autopilot technology, claiming that it will deliver “Full Self Driving” by the end of the year, that its in-house developed hardware is 2000% better than NVIDIA’s and that by the end of next year, it would be safe for somebody to fall asleep with Autopilot in control. We find these claims to be ludicrous and Elon Musk delusional in thinking that the SEC would stand idly by while he publicly admits to ignoring the terms of his settlement with them barely four months ago. 

In this briefing:

1. LG Electronics – Boost from Higher Dividends, Air Motion Technology, & The War Against Huawei
2. Tesla. SEC Contempt Filing & Ludicrous Autopilot Claims Engulf Delusional Musk
3. Indonesia Property – In Search of the End of the Rainbow – Part 2 –  Bumi Serpong Damai (BSDE IJ)

1. LG Electronics – Boost from Higher Dividends, Air Motion Technology, & The War Against Huawei

• In this report, we provide an update on Lg Electronics (066570 KS), including the potential impact of the war on Huawei on the company, dividend policy, debt issue, sales of non-core assets, and the launch of new smartphones. 
• Although LG’s V50 ThinQ product is a bit disappointing, another new LG smartphone called G8ThinQ appears to be promising. This is one of the first smartphones to use “air motion” technology to activate some of the features including playing a song or video or adjusting volume (remember Tom Cruise in the movie Minority Report)? The airmotion technology could bring back the “thrill” of using a smartphone. 
• Many investors around the world are asking, “What companies will benefit from the continued war on Huawei by the US government?” LG Electronics, the 7th largest smartphone maker globally, could be one of the key beneficiaries of the war on Huawei. 
• LG Electronics recently announced that it will pay DPS of 750 won for its common shareholders in 2018, which is nearly twice as high the DPS of 400 won in 2017. 

2. Tesla. SEC Contempt Filing & Ludicrous Autopilot Claims Engulf Delusional Musk

The US Securities and Exchange Commission (SEC) requested a federal judge to hold Tesla CEO Elon Musk in contempt of court yesterday regarding recent misleading tweets about the company’s unit production volumes for 2019. This latest move comes not long after Musk bragged that he does not respect the SEC and that his tweets were not being censored by the Board according to the terms of the agreement reached with the SEC following his controversial “Am considering taking Tesla private at $420. Funding secured” tweet on August 8’th last.  

Separately, Musk has been talking up the capabilities of the company’s Autopilot technology, claiming that it will deliver “Full Self Driving” by the end of the year, that its in-house developed hardware is 2000% better than NVIDIA’s and that by the end of next year, it would be safe for somebody to fall asleep with Autopilot in control. We find these claims to be ludicrous and Elon Musk delusional in thinking that the SEC would stand idly by while he publicly admits to ignoring the terms of his settlement with them barely four months ago. 

3. Indonesia Property – In Search of the End of the Rainbow – Part 2 –  Bumi Serpong Damai (BSDE IJ)

In this series under Smartkarma Originals, CrossASEAN Research insight providers Angus Mackintosh and Jessica Irene seek to determine whether or not we are close to the end of the rainbow and to a period of outperformance for the property sector. Our end conclusions will be based on a series of company visits to the major listed property companies in Indonesia, conversations with local banks, property agents, and other relevant channel checks. 

The second company we explore is leading township developer Bumi Serpong Damai (BSDE IJ), with exposure ranging from landed housing, shophouses, condominiums, as well as the defensive and growing buffer of nearly 20% of revenues coming from recurrent rental income.

Bumi Serpong Damai (BSDE IJ) has one of the largest land banks of any developer, with a land bank of over 4,000 ha, more than half of which is in its flagship township of BSD City in Serpong.

Given its breadth of exposure to the property segment, the company has the flexibility to switch its exposure between different segments depending on the health of the overall market. 

Its projects are well connected by toll-roads and railway but it is well positioned to benefit from new infrastructure such as the new MRT, LRT, as well as new toll road extensions, which will enhance the attractiveness of its developments.  

Management suggests that they will take a cautious start to the year ahead of the election but see a window for a pick-up in marketing sales in May, with the potential for a much better 2H19. 

Despite a run-up in the share price since the start of the year, valuations do not look challenging from a historical basis especially looking at its PBV. It also trades at a significant discount to NAV of 67%, as well as being below its 5 yr historical mean on a forward PER basis.

Catalysts ahead include a post-election pick-up in activity leading to more project launches, completion of infrastructure projects, aggressive mortgage lending by the banks, and a more dovish interest rate outlook. Valuations are already attractive but a rise in property market activity should also lead to earnings upgrades, which if sustained, may lead to property prices moving upwards.

In this briefing:

1. A Reality Check for Money Forward (3994 JP): Key Takeaways from Our Recent Visit
2. Small Cap Diary: Rajthanee Hospital, CAZ
3. Daewoong: Entering “Botox World”
4. New J Hutton – Exploration Report (Weeks Ending 22/03/22)
5. Orix Corporation: Osaka Casino Resort Partnership with MGM Stakes Out Earliest Claim Among Peers

1. A Reality Check for Money Forward (3994 JP): Key Takeaways from Our Recent Visit

In our previous note, Money Forward (3994 JP): Solid Mid-Term Prospects for the Fintech Pro, but Overvalued, published July last year (2018), we suggested that Money Forward (3994 JP) (MF) was overvalued despite its strong growth profile. MF’s share price, which was at an all-time high (close to JPY6,000) around this time, fell below its IPO price (JPY3,000) in December, reinforcing our bearish view.

Since then, Money Forward’s share price has picked up (closing at JPY4,400 on 26th March 2019), on the back of strong topline guidance for FY11/19E (+55%-65% YoY growth) and “aggressive” medium-term profit targets (positive EBITDA by FY11/21E).

However, following our recent conversation with MF’s IR team, we believe that the above guidance needs to be slightly toned down.

2. Small Cap Diary: Rajthanee Hospital, CAZ

We visited two small-cap companies from totally different industries today. These are the key highlights.

• Rajthanee Hospital, a small hospital chain based in Ayuthya, achieved 15.7% revenue growth CAGR since 2016 on the back of its proximity to industrial estates.
• CAZ has seen its backlog double to Bt2.5bn largely due to its good relations with major clients (PTT) and partners (Samsung and other Korean chaebol), which dole out projects in the oil & gas sector to it.
• Internally, CAZ follows a sophisticated cost control method sporting bar codes and GPS to track materials and dedicated cost-control staff.

3. Daewoong: Entering “Botox World”

Daewoong Pharmaceutical Co (069620 KS) has traded up over the past year in anticipation of the launch of its botulinum toxin product Jeuveau in the US and EU (known as Nabota in Korea). We think the probability of near-term (6-9 months) disappointment with the product launch is low, but that upside surprises beyond that stage are unlikely given Botox’s (product of Allergan Plc (AGN US)) strong brand recognition and marketing support. Now is the time to put the stock on the radar screen to pick up signs of a looming disappointment with Jeuveau’s uptake.

We tag this Insight as Bearish because we think there is little likelihood for Jeuveau to exceed consensus expectations post-launch.

4. New J Hutton – Exploration Report (Weeks Ending 22/03/22)

• Uranium Price has fallen 7% over the past two months
• Actively looking for uranium short positions
• Provide summarised watch list
• Wisdom from Samuel Longhorne Clemens
• Yellow Cake PLC (YCA LN), Berkeley Energy (BKY AU), Cameco Corp (CCO CN), Kazatomprom Natsionalnaya At (KZAP KZ), Jangada Mines PLC (JAN LN), Europa Metals Ltd (EUZ LN), Buxton Resources (BUX AU), Musgrave Minerals (MGV AU), Myanmar Metals (MYL AU), Archer Exploration (AXE AU), Canyon Resources (CAY AU), Catalyst Metals (CYL AU), Core Exploration (CXO AU), Exore Resources (ASX: ERX), Stavely Minerals (SVY AU), Tietto Minerals Ltd (TIE AU), Horizonte Minerals PLC (HZM LN), Bellevue Gold (ASX: BGL), Allegiance Coal (AHQ AU), First Au (ASX: FAU), Base Resources (BSE AU), Breaker Resources Nl (BRB AU)  

5. Orix Corporation: Osaka Casino Resort Partnership with MGM Stakes Out Earliest Claim Among Peers

• MGM Resorts International announced plans to partner 50/50 with Japan’s financial services operator, Orix, the first such deal made public.
• A bet on both or either company now at near their 52 week lows bears a good risk/yield proposition for investors in the consumer discretionary space.
• Japan’s IR’s will potentially grow into a US$15.8b to US$17.5B industry by 2024/5 or before. We expect the three licenses will go to partnerships between global gaming giants and Japan financial or game manufacturing partners.

In this briefing:

1. Tesla. SEC Contempt Filing & Ludicrous Autopilot Claims Engulf Delusional Musk
2. Indonesia Property – In Search of the End of the Rainbow – Part 2 –  Bumi Serpong Damai (BSDE IJ)
3. Baidu (BIDU): Stagnant in 4Q18, Wrong Change Feeds a 24% User Increase to Google

1. Tesla. SEC Contempt Filing & Ludicrous Autopilot Claims Engulf Delusional Musk

The US Securities and Exchange Commission (SEC) requested a federal judge to hold Tesla CEO Elon Musk in contempt of court yesterday regarding recent misleading tweets about the company’s unit production volumes for 2019. This latest move comes not long after Musk bragged that he does not respect the SEC and that his tweets were not being censored by the Board according to the terms of the agreement reached with the SEC following his controversial “Am considering taking Tesla private at $420. Funding secured” tweet on August 8’th last.  

Separately, Musk has been talking up the capabilities of the company’s Autopilot technology, claiming that it will deliver “Full Self Driving” by the end of the year, that its in-house developed hardware is 2000% better than NVIDIA’s and that by the end of next year, it would be safe for somebody to fall asleep with Autopilot in control. We find these claims to be ludicrous and Elon Musk delusional in thinking that the SEC would stand idly by while he publicly admits to ignoring the terms of his settlement with them barely four months ago. 

2. Indonesia Property – In Search of the End of the Rainbow – Part 2 –  Bumi Serpong Damai (BSDE IJ)

In this series under Smartkarma Originals, CrossASEAN Research insight providers Angus Mackintosh and Jessica Irene seek to determine whether or not we are close to the end of the rainbow and to a period of outperformance for the property sector. Our end conclusions will be based on a series of company visits to the major listed property companies in Indonesia, conversations with local banks, property agents, and other relevant channel checks. 

The second company we explore is leading township developer Bumi Serpong Damai (BSDE IJ), with exposure ranging from landed housing, shophouses, condominiums, as well as the defensive and growing buffer of nearly 20% of revenues coming from recurrent rental income.

Bumi Serpong Damai (BSDE IJ) has one of the largest land banks of any developer, with a land bank of over 4,000 ha, more than half of which is in its flagship township of BSD City in Serpong.

Given its breadth of exposure to the property segment, the company has the flexibility to switch its exposure between different segments depending on the health of the overall market. 

Its projects are well connected by toll-roads and railway but it is well positioned to benefit from new infrastructure such as the new MRT, LRT, as well as new toll road extensions, which will enhance the attractiveness of its developments.  

Management suggests that they will take a cautious start to the year ahead of the election but see a window for a pick-up in marketing sales in May, with the potential for a much better 2H19. 

Despite a run-up in the share price since the start of the year, valuations do not look challenging from a historical basis especially looking at its PBV. It also trades at a significant discount to NAV of 67%, as well as being below its 5 yr historical mean on a forward PER basis.

Catalysts ahead include a post-election pick-up in activity leading to more project launches, completion of infrastructure projects, aggressive mortgage lending by the banks, and a more dovish interest rate outlook. Valuations are already attractive but a rise in property market activity should also lead to earnings upgrades, which if sustained, may lead to property prices moving upwards.

3. Baidu (BIDU): Stagnant in 4Q18, Wrong Change Feeds a 24% User Increase to Google

• Baidu posted a weak result for 4Q2018.
• We believe it is a wrong decision to change Baidu into an in-house search engine.
• Alphabet Inc Cl C (GOOG US) ’s monthly active users in mainland China increased 24% QoQ in January 2019.
• We believe Baidu’s stock price has been fairly impacted.

In this briefing:

1. Small Cap Diary: Rajthanee Hospital, CAZ
2. Daewoong: Entering “Botox World”
3. New J Hutton – Exploration Report (Weeks Ending 22/03/22)
4. Orix Corporation: Osaka Casino Resort Partnership with MGM Stakes Out Earliest Claim Among Peers
5. Industrial Bank of Korea: Uninspiringly Cheap

1. Small Cap Diary: Rajthanee Hospital, CAZ

We visited two small-cap companies from totally different industries today. These are the key highlights.

• Rajthanee Hospital, a small hospital chain based in Ayuthya, achieved 15.7% revenue growth CAGR since 2016 on the back of its proximity to industrial estates.
• CAZ has seen its backlog double to Bt2.5bn largely due to its good relations with major clients (PTT) and partners (Samsung and other Korean chaebol), which dole out projects in the oil & gas sector to it.
• Internally, CAZ follows a sophisticated cost control method sporting bar codes and GPS to track materials and dedicated cost-control staff.

2. Daewoong: Entering “Botox World”

Daewoong Pharmaceutical Co (069620 KS) has traded up over the past year in anticipation of the launch of its botulinum toxin product Jeuveau in the US and EU (known as Nabota in Korea). We think the probability of near-term (6-9 months) disappointment with the product launch is low, but that upside surprises beyond that stage are unlikely given Botox’s (product of Allergan Plc (AGN US)) strong brand recognition and marketing support. Now is the time to put the stock on the radar screen to pick up signs of a looming disappointment with Jeuveau’s uptake.

We tag this Insight as Bearish because we think there is little likelihood for Jeuveau to exceed consensus expectations post-launch.

3. New J Hutton – Exploration Report (Weeks Ending 22/03/22)

• Uranium Price has fallen 7% over the past two months
• Actively looking for uranium short positions
• Provide summarised watch list
• Wisdom from Samuel Longhorne Clemens
• Yellow Cake PLC (YCA LN), Berkeley Energy (BKY AU), Cameco Corp (CCO CN), Kazatomprom Natsionalnaya At (KZAP KZ), Jangada Mines PLC (JAN LN), Europa Metals Ltd (EUZ LN), Buxton Resources (BUX AU), Musgrave Minerals (MGV AU), Myanmar Metals (MYL AU), Archer Exploration (AXE AU), Canyon Resources (CAY AU), Catalyst Metals (CYL AU), Core Exploration (CXO AU), Exore Resources (ASX: ERX), Stavely Minerals (SVY AU), Tietto Minerals Ltd (TIE AU), Horizonte Minerals PLC (HZM LN), Bellevue Gold (ASX: BGL), Allegiance Coal (AHQ AU), First Au (ASX: FAU), Base Resources (BSE AU), Breaker Resources Nl (BRB AU)  

4. Orix Corporation: Osaka Casino Resort Partnership with MGM Stakes Out Earliest Claim Among Peers

• MGM Resorts International announced plans to partner 50/50 with Japan’s financial services operator, Orix, the first such deal made public.
• A bet on both or either company now at near their 52 week lows bears a good risk/yield proposition for investors in the consumer discretionary space.
• Japan’s IR’s will potentially grow into a US$15.8b to US$17.5B industry by 2024/5 or before. We expect the three licenses will go to partnerships between global gaming giants and Japan financial or game manufacturing partners.

5. Industrial Bank of Korea: Uninspiringly Cheap

Industrial Bank of Korea (IBK LX) looks relatively cheap and scores well on our VFM (Valuation, Fundamentals, Momentum) system.

The trademarked PH Score comes in at 8.2. P/Book is a lowly 0.42x. Earnings Yield stands at 20%. Franchise valuation is 7%. Total return Ratio lies at 1.4x. RSI is low.

2018 numbers were solid enough though deeper analysis shows that they were not as good as they seem to be:

• The specific IBK model is reliant on debt to fund SME growth and interest expense growth is running well ahead of expansion in interest income.
• The squeeze on the top-line, despite firm fee income growth, means that “underlying jaws” were negative. The CIR may be declining but OPEX growth remains somewhat elevated, and in excess of “underlying” income.
• PT Profit expansion of 23% YoY is flattered by high contributions from “other non-interest income” and gains on securities. Combined, these lower quality income streams make up 40% of PT Profit. This means that Profitability metrics (which are in excess of the Asian median) may not be as benign as they seem. In fact, we would argue that when one takes the aforementioned items into consideration, PT Profit was essentially flat at best.
• Insurance operations again reported a negative result.
• While Asset Quality looks relatively respectable, we note a 17% increase in “precautionary” or SMLs which were in excess of impaired loans or even NPLs. Regarding the latter, there may be some bad asset migration into the “loss” category: up 12% YoY.

In this briefing:

1. New J Hutton – Exploration Report (Weeks Ending 22/03/22)
2. Orix Corporation: Osaka Casino Resort Partnership with MGM Stakes Out Earliest Claim Among Peers
3. Industrial Bank of Korea: Uninspiringly Cheap
4. Cupid Ltd: Attractive Valuation Post Significant Correction
5. Cracking the Keyence Conundrum

1. New J Hutton – Exploration Report (Weeks Ending 22/03/22)

• Uranium Price has fallen 7% over the past two months
• Actively looking for uranium short positions
• Provide summarised watch list
• Wisdom from Samuel Longhorne Clemens
• Yellow Cake PLC (YCA LN), Berkeley Energy (BKY AU), Cameco Corp (CCO CN), Kazatomprom Natsionalnaya At (KZAP KZ), Jangada Mines PLC (JAN LN), Europa Metals Ltd (EUZ LN), Buxton Resources (BUX AU), Musgrave Minerals (MGV AU), Myanmar Metals (MYL AU), Archer Exploration (AXE AU), Canyon Resources (CAY AU), Catalyst Metals (CYL AU), Core Exploration (CXO AU), Exore Resources (ASX: ERX), Stavely Minerals (SVY AU), Tietto Minerals Ltd (TIE AU), Horizonte Minerals PLC (HZM LN), Bellevue Gold (ASX: BGL), Allegiance Coal (AHQ AU), First Au (ASX: FAU), Base Resources (BSE AU), Breaker Resources Nl (BRB AU)  

2. Orix Corporation: Osaka Casino Resort Partnership with MGM Stakes Out Earliest Claim Among Peers

• MGM Resorts International announced plans to partner 50/50 with Japan’s financial services operator, Orix, the first such deal made public.
• A bet on both or either company now at near their 52 week lows bears a good risk/yield proposition for investors in the consumer discretionary space.
• Japan’s IR’s will potentially grow into a US$15.8b to US$17.5B industry by 2024/5 or before. We expect the three licenses will go to partnerships between global gaming giants and Japan financial or game manufacturing partners.

3. Industrial Bank of Korea: Uninspiringly Cheap

Industrial Bank of Korea (IBK LX) looks relatively cheap and scores well on our VFM (Valuation, Fundamentals, Momentum) system.

The trademarked PH Score comes in at 8.2. P/Book is a lowly 0.42x. Earnings Yield stands at 20%. Franchise valuation is 7%. Total return Ratio lies at 1.4x. RSI is low.

2018 numbers were solid enough though deeper analysis shows that they were not as good as they seem to be:

• The specific IBK model is reliant on debt to fund SME growth and interest expense growth is running well ahead of expansion in interest income.
• The squeeze on the top-line, despite firm fee income growth, means that “underlying jaws” were negative. The CIR may be declining but OPEX growth remains somewhat elevated, and in excess of “underlying” income.
• PT Profit expansion of 23% YoY is flattered by high contributions from “other non-interest income” and gains on securities. Combined, these lower quality income streams make up 40% of PT Profit. This means that Profitability metrics (which are in excess of the Asian median) may not be as benign as they seem. In fact, we would argue that when one takes the aforementioned items into consideration, PT Profit was essentially flat at best.
• Insurance operations again reported a negative result.
• While Asset Quality looks relatively respectable, we note a 17% increase in “precautionary” or SMLs which were in excess of impaired loans or even NPLs. Regarding the latter, there may be some bad asset migration into the “loss” category: up 12% YoY.

4. Cupid Ltd: Attractive Valuation Post Significant Correction

Cupid Ltd one of the largest manufacturers of condoms in India 9MFY19 revenue was largely as per our expectations, as there was some order slippages. As forecasted in our initiation report Cupid Ltd: Protecting the Needy, the company reported a 20% decline in revenue at Rs 505mn, which also resulted in lower profitability both at the operating as well as net level. EBITDA stood at INR 161.6 mn declining by 32.53% with EBITDA margin at 31.95%. PAT was INR 108.5 mn declining by 24.58% with PAT margin at 21.46%.

Despite this below-par performance in the 9MFY19, we are fairly positive on the future growth prospects of the company. As of March 2019, it has a healthy order book of INR 1300 m with Book to Bill ratio of  1.99 times on its TTM sales. We expect revenues to grow at 15% over FY18-19 and margins to improve in medium to long term horizon.

Having corrected by 67% from its peak, the stock currently trades at 10.20x its FY19 EPS and 8.34x its FY20 EPS; we believe that this provides a good entry point for this niche high margin healthcare company with attractive long term growth possibilities.

5. Cracking the Keyence Conundrum

Keyence Corp (6861 JP) has long been a standout within the Japanese machinery sector for its exceptional margins, with only Fanuc Corp (6954 JP) and perhaps Smc Corp (6273 JP)  really operating in the same the stratosphere. But while Fanuc has faded, with its OPM now struggling to stay over 30% and SMC has only recently peaked its head over the 30% level, Keyence has been powering ahead and is on the cusp of recording five straight years over 50% OPM.

With relatively limited disclosures to go along with such stellar performance it is understandable then that some investors are concerned that the story is too good to be true, and even the FT has written a series of articles with a slightly critical bent: 1 2 34

Having recently visited the company, we analyse below, the nature of its competitive advantages by comparing it with its most similar peer Cognex Corp (CGNX US).