Equity Bottom-Up

In this briefing:

1. Samsung Electronics Voluntary Red Flag on 1Q Earnings
2. China Zheshang Bank – A Look Beyond Doubling Impairment Costs
3. China Mobile 4Q18 Trends Improved Slightly. It Remains Most Exposed to 5G Capex Uncertainty.
4. China Telecom Mobile Business Recovered in 4Q. Broadly in Line with Expectations
5. China Unicom Weak 4Q18 Mobile Results Offset by Strength in Fixed Line Business

1. Samsung Electronics Voluntary Red Flag on 1Q Earnings

• SamE voluntarily red flagged its 1Q19 earnings even before 1Q ends. SamE mentioned two things: 1. Falling memory chip prices and 2. slowing demand for display panels. Given the ‘usual’ profit size of DP business, this should be all about memory chips, specifically server DRAM.
• Memory chip price falling should not be enough to explain this much 1Q profit loss. It must be that SamE has decided to reflect huge inventory losses and pay bills from Amazon and Google on the book in this first quarter. Of course, SamE wouldn’t want to talk about this explicitly.
• SamE shares aren’t reacting to this a lot right now. It is mainly because local street already heavily adjusted 1Q OP to as low as ₩6.5~7tril. This 1Q earnings shock factor must have been already reflected into the price. Even below ₩6tril level wouldn’t be taken as a huge surprise.
• SamE said last month that memory sales would be revived starting 2H this year. I think this is still a valid and crucial point. This suggests that server DRAM demand from Amazon and Google will likely be back starting 3Q19. This means SamE is confident that it can handle the server DRAM optimization issue by then.
• I’m still sticking to my previous OP forecast for FY19. It should be ₩8tril more than the current street consensus. At this, SamE Common is trading at a 8.73x PER. SamE is scheduled to deliver 1Q19 interim numbers next week on Apr 5.

2. China Zheshang Bank – A Look Beyond Doubling Impairment Costs

It should be no surprise to see China Zheshang Bank (2016 HK; “CZB”) reveal a dramatic rise of impairment costs in 4Q18. It is one of only few China banks to yet announced quarterly results, and here it reported profit at -12% YoY in 4Q18.  The doubling of impairment costs in the period goes to our long-standing concerns of continued credit tdeterioration in China and well more than headline figures suggest. This is partly based on our China corporate analysis of interest cover and debt/ebitda, which remain weak. It is also notable that CZB has been one of the faster growing banks in the country, putting its ‘unseasoned’ loans higher than many others; where we believe these banks are more likely to see higher impairment costs. Perhaps that is now coming through? And with RMB250bn of write-offs in December 2018 for China’s bank system, this suggests there will have to sizeable impairment costs to replenish balance sheet provisions.

3. China Mobile 4Q18 Trends Improved Slightly. It Remains Most Exposed to 5G Capex Uncertainty.

Chris Hoare downgraded China Mobile (941 HK) some time ago on rising concerns that 5G capex would be higher than expected. While China Unicom (762 HK) and China Telecom (728 HK) both laid out very modest 2019 5G capex plans, China Mobile did not.  And despite what we saw as reasonable results, earnings guidance was weak and the lack of a rising dividend payout suggests internal concerns over 5G spending.  We had seen China Mobile as a defensive stock, but recent strong performance and rising 5G worries led us to downgrade our recommendation. It remains at Reduce with a HK$75 target. 

4. China Telecom Mobile Business Recovered in 4Q. Broadly in Line with Expectations

China Telecom (728 HK), having delivered strong revenue growth but weak margins in 3Q18, delivered better 4Q numbers. Like its peers however, the business is under some pressure with ARPUs weak despite strong data growth.  We see the Chinese Telcos as vulnerable to policy demands for accelerated 5G spending. While the market may like the look of a joint roll-out of 5G with China Unicom (762 HK), that may be simplistic. Chris Hoare thinks the cost of a combined roll-out is likely to be even higher than China Mobile (941 HK). Recent price strength makes our Reduce recommendation clearer.

5. China Unicom Weak 4Q18 Mobile Results Offset by Strength in Fixed Line Business

China Unicom’s (762 HK) recent 4Q18 results were not great. The overall figures look ok due to strength in the fixed line business which offset weakness in mobile. However, they were the weakest of the three operators and the stock, which has had a strong run, now looks due for a pause. We have turned more cautious on the Chinese telcos on concerns that 5G spending could be higher than expected. Chris Hoare believes a major reason for the Chinese telcos outperforming in the past year has come from declining capex spending expectations. That trend may now start to reverse. While China Unicom has guided for only modest 5G capex in 2019 the focus will turn to 2020 where it is a much bigger issue and while we expect China Unicom to do a joint roll-out with China Telecom (728 HK) we expect the scale of the spending to be larger than an individual build. 

In this briefing:

1. Maxis Revenues Stabilizing. Ambitious Long Term Goals in Enterprise and Connectivity
2. BBTN: Indonesia Has Special Mention Problems Too
3. Westpac Banking: Looking Fragile

1. Maxis Revenues Stabilizing. Ambitious Long Term Goals in Enterprise and Connectivity

In late January, we upgraded our view on the Malaysian telecom sector after 6 years of being negative. We also and noted that Maxis was best placed to benefit from increased bundling and Enterprise opportunities (due to low cost access to Telekom Malaysia’s (T MK) (TM) fibre infrastructure).  We see signs the current round of results (4Q18) as being supportive of this view. While Maxis 4Q numbers were affected by one offs, the key is a return to service revenue growth while we think the market will view Maxis’ long term revenue guidance positively. Longer term, Maxis announced aggressive longer term revenue targets based on a move into Enterprise and fixed connectivity which should deliver significant revenue growth.

2. BBTN: Indonesia Has Special Mention Problems Too

Bank Tabungan Negara Persero (BBTN IJ) appears to have a nasty combination of high Special Mention Loans (SMLs) and elevated “past due but unimpaired Loans”.

The implication is that provisioning levels are insufficient in an environment of eroding asset quality.

But the bank continues to grow credit by around 20% YoY.

The bank is hugely exposed to the retail real estate market (91% of Loans).

In fact, the Indonesian Banking Sector is rife with high SMLs and in some cases elevated “past due but unimpaired Loans”.

SMLs are traditionally associated with Chinese under-reporting of underlying bad loans, and hence the production of a somewhat flattering Asset Quality picture.

Maybe, the health and valuation of the Indonesian Banking Sector needs to be reassessed with implications for IDR.

3. Westpac Banking: Looking Fragile

Westpac Banking (WBC AU) is facing a class action suit regarding alleged irresponsible lending in home loans since 2011. This is the first class action against a major Australian bank since the publication of the royal commission’s final report.

The ramifications of the royal commission report remain a source of debate with elections coming up. But, in general, banks will not be allowed to conduct operations in a “business-as-usual way”. There will be consequences for credit provision.

Westpac’s Balance Sheet looks decidedly fragile as it stands. The bank is entering a slowdown from a position of weakness.

Exposures to Australia’s slowing economy (not unrelated of course to China), the dovish turn at the Central Bank, and in particular its bubbly housing market make us hyper cautious. The highly volatile Aussie dollar tumbled from levels above $0.7200 to below $0.7100 following reports that China banned coal imports from the country at a major port.

Despite the sinking share prices of Australia’s main banks, valuations may still be too high given the varied headwinds.

In this briefing:

1. China Zheshang Bank – A Look Beyond Doubling Impairment Costs
2. China Mobile 4Q18 Trends Improved Slightly. It Remains Most Exposed to 5G Capex Uncertainty.
3. China Telecom Mobile Business Recovered in 4Q. Broadly in Line with Expectations
4. China Unicom Weak 4Q18 Mobile Results Offset by Strength in Fixed Line Business
5. F&F: Time to Take Profits – Up 95% This Year Driven by MLB Baseball Hats Potential in China

1. China Zheshang Bank – A Look Beyond Doubling Impairment Costs

It should be no surprise to see China Zheshang Bank (2016 HK; “CZB”) reveal a dramatic rise of impairment costs in 4Q18. It is one of only few China banks to yet announced quarterly results, and here it reported profit at -12% YoY in 4Q18.  The doubling of impairment costs in the period goes to our long-standing concerns of continued credit tdeterioration in China and well more than headline figures suggest. This is partly based on our China corporate analysis of interest cover and debt/ebitda, which remain weak. It is also notable that CZB has been one of the faster growing banks in the country, putting its ‘unseasoned’ loans higher than many others; where we believe these banks are more likely to see higher impairment costs. Perhaps that is now coming through? And with RMB250bn of write-offs in December 2018 for China’s bank system, this suggests there will have to sizeable impairment costs to replenish balance sheet provisions.

2. China Mobile 4Q18 Trends Improved Slightly. It Remains Most Exposed to 5G Capex Uncertainty.

Chris Hoare downgraded China Mobile (941 HK) some time ago on rising concerns that 5G capex would be higher than expected. While China Unicom (762 HK) and China Telecom (728 HK) both laid out very modest 2019 5G capex plans, China Mobile did not.  And despite what we saw as reasonable results, earnings guidance was weak and the lack of a rising dividend payout suggests internal concerns over 5G spending.  We had seen China Mobile as a defensive stock, but recent strong performance and rising 5G worries led us to downgrade our recommendation. It remains at Reduce with a HK$75 target. 

3. China Telecom Mobile Business Recovered in 4Q. Broadly in Line with Expectations

China Telecom (728 HK), having delivered strong revenue growth but weak margins in 3Q18, delivered better 4Q numbers. Like its peers however, the business is under some pressure with ARPUs weak despite strong data growth.  We see the Chinese Telcos as vulnerable to policy demands for accelerated 5G spending. While the market may like the look of a joint roll-out of 5G with China Unicom (762 HK), that may be simplistic. Chris Hoare thinks the cost of a combined roll-out is likely to be even higher than China Mobile (941 HK). Recent price strength makes our Reduce recommendation clearer.

4. China Unicom Weak 4Q18 Mobile Results Offset by Strength in Fixed Line Business

China Unicom’s (762 HK) recent 4Q18 results were not great. The overall figures look ok due to strength in the fixed line business which offset weakness in mobile. However, they were the weakest of the three operators and the stock, which has had a strong run, now looks due for a pause. We have turned more cautious on the Chinese telcos on concerns that 5G spending could be higher than expected. Chris Hoare believes a major reason for the Chinese telcos outperforming in the past year has come from declining capex spending expectations. That trend may now start to reverse. While China Unicom has guided for only modest 5G capex in 2019 the focus will turn to 2020 where it is a much bigger issue and while we expect China Unicom to do a joint roll-out with China Telecom (728 HK) we expect the scale of the spending to be larger than an individual build. 

5. F&F: Time to Take Profits – Up 95% This Year Driven by MLB Baseball Hats Potential in China

F&F Co Ltd (007700 KS) shares have been soaring this year (up 95% YTD), versus KOSPI which is up only 5% YTD. F&F Co has been one of the top performing stocks in KOSPI this year. We believe it is time to take profits on this name and take it out of our model portfolio. 

One of the main reasons why F&F Co has been soaring this year has been due to the MLB (Major League Baseball) apparel business expansion in China. In February 2019, F&F Co secured the selling rights of the MLB branded apparel products in China from the MLB headquarters in the US. 

Baseball is becoming increasingly popular in China. According to the Chinese Baseball Association, more than 4 million Chinese play the game. The historical resistance to baseball is breaking down in China. For example, In April 2018, Tencent announced a deal to live stream 125 MLB games on platforms such as its its Tencent Sports app to Chinese audiences via their computers and mobile devices.

In this briefing:

1. F&F: Time to Take Profits – Up 95% This Year Driven by MLB Baseball Hats Potential in China
2. Fujitec (6406) Value Buy
3. Bank of Tianjin: 太好了, 不可能是真的
4. HK Connect Discovery Weekly: Mainland Investors Buying WH Group (2019-03-22)
5. Micron. Things May Be Getting Worse But They Are Still Remarkably Good.

1. F&F: Time to Take Profits – Up 95% This Year Driven by MLB Baseball Hats Potential in China

F&F Co Ltd (007700 KS) shares have been soaring this year (up 95% YTD), versus KOSPI which is up only 5% YTD. F&F Co has been one of the top performing stocks in KOSPI this year. We believe it is time to take profits on this name and take it out of our model portfolio. 

One of the main reasons why F&F Co has been soaring this year has been due to the MLB (Major League Baseball) apparel business expansion in China. In February 2019, F&F Co secured the selling rights of the MLB branded apparel products in China from the MLB headquarters in the US. 

Baseball is becoming increasingly popular in China. According to the Chinese Baseball Association, more than 4 million Chinese play the game. The historical resistance to baseball is breaking down in China. For example, In April 2018, Tencent announced a deal to live stream 125 MLB games on platforms such as its its Tencent Sports app to Chinese audiences via their computers and mobile devices.

2. Fujitec (6406) Value Buy

The shares are cheap. The company is cash rich and owns 10% in treasury stock; it owned more last year but has cancelled 4%. It has some Y6bn in long term investment. EV in our view is Y57bn vs the current market cap of Y110bn. With ebitda next year coming in at Y15bn, EV/ebitda is under 4x. The shares yield 3.4% and trade at book. They have slightly underperformed the market over the last 12 months. For now, we view this as a defensive buy. There remain many issues longer term as to its place in the global elevator world. A potential positive, however, is that in May the company will announce a new mid-term plan and in it, they will outline their view as regards to shareholder returns for the next three years. They are aware that they are very over capitalised, so greater returns are a real possibility.

3. Bank of Tianjin: 太好了, 不可能是真的

Bank Of Tianjin (1578 HK) results at first look quite encouraging with firmer profitability, enhanced efficiency, improved capital adequacy, and increased provisioning.

Valuations are optically attractive: p/book of 0.5x, franchise valuation of 7%, earnings yield of 17%, and a total return ratio of 2.5x. These metrics are within the bargain hunter space.

However, optimism fades fast on closer inspection.

“Underlying” Income decreased by 21% YoY as the bank was squeezed by higher funding costs and non-interest expenses. Expenses on wholesale funding increased by 30% YoY. Debt funding now represents 71% of Gross Loans. Debt now stands at 4.3x SH. Funds. This type of funding has exploded by 10x since 2014. At the same time, deposits declined YoY. Deposits have increased by a more sedate 18% since 2014.

PT Profit would have been CNY1.4bn rather than CNY5.2bn but for hefty gains on securities. Loan loss provisions almost tripled YoY.

Regarding the Balance Sheet, Special Mention Loans rose sharply (+25% YoY) and represent 2.8x NPLs. A 127% and 108% YoY increase in “doubtful loans” and “loss loans” puts some perspective on a seemingly respectable NPL ratio of 1.64% and a LLR/NPLs of 250%.

Thus, Bank Of Tianjin (1578 HK) is cheap for a reason. We are reluctant to recommend taking a position at this juncture given the ongoing stresses in source of funding and asset quality.

4. HK Connect Discovery Weekly: Mainland Investors Buying WH Group (2019-03-22)

In our Discover HK Connect series, we aim to help our investors understand the flow of southbound trades via the Hong Kong Connect, as analyzed by our proprietary data engine. We will discuss the stocks that experienced the most inflow and outflow by mainland investors in the past seven days.

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

In this insight, we highlight the WH Group, which led the inflows last week. 

5. Micron. Things May Be Getting Worse But They Are Still Remarkably Good.

On Thursday March 21’st 2019, Micron announced latest quarter (Q2FY19) revenues of $5.8 billion, at the bottom end of their forecast range and down 26% sequentially. The midrange of their forecast for the current quarter (Q3FY19) will see revenues drop another 17% sequentially to $4.8 billion, roughly equivalent to the same quarter two years ago. On the earnings call, CEO Sanjay Mehrotra stated that the company would be cutting back both DRAM and NAND production by ~5% in response to a further deterioration in the CY2019 demand outlook. Furthermore, he refused to be drawn as to whether or not the current quarter would be the downturn trough despite reiterating his belief in the widely anticipated 2H CY2019 recovery thesis.

The challenging environment notwithstanding, there were some key positives also from the earnings call. The company is taking decisive and unprecedented actions to reduce their bit supply, actions we believe will be matched by Samsung Electronics  and SK Hynix. Gross margin coming into this downturn was a historic high at 61% and NAND gross margins have remained in the high 30% range despite ASP’s falling for five of the past six quarters. Furthermore, as forecasted three months ago, Micron still expects DRAM bit shipments to increase in the current quarter.

Integrating the latest updates from company, we now model Micron revenues declining for two further quarters to reach a trough at $4.5 billion in the company’s Q4FY19. We further model net income in the trough quarter at $1 billion. Thereafter we model a return to modest, sustained growth in the following quarters. Yes, things may be getting worse for Micron but they are still remarkably good.

In this briefing:

1. Fujitec (6406) Value Buy
2. Bank of Tianjin: 太好了, 不可能是真的
3. HK Connect Discovery Weekly: Mainland Investors Buying WH Group (2019-03-22)
4. Micron. Things May Be Getting Worse But They Are Still Remarkably Good.
5. Zozo: Never Meet a Margin Call

1. Fujitec (6406) Value Buy

The shares are cheap. The company is cash rich and owns 10% in treasury stock; it owned more last year but has cancelled 4%. It has some Y6bn in long term investment. EV in our view is Y57bn vs the current market cap of Y110bn. With ebitda next year coming in at Y15bn, EV/ebitda is under 4x. The shares yield 3.4% and trade at book. They have slightly underperformed the market over the last 12 months. For now, we view this as a defensive buy. There remain many issues longer term as to its place in the global elevator world. A potential positive, however, is that in May the company will announce a new mid-term plan and in it, they will outline their view as regards to shareholder returns for the next three years. They are aware that they are very over capitalised, so greater returns are a real possibility.

2. Bank of Tianjin: 太好了, 不可能是真的

Bank Of Tianjin (1578 HK) results at first look quite encouraging with firmer profitability, enhanced efficiency, improved capital adequacy, and increased provisioning.

Valuations are optically attractive: p/book of 0.5x, franchise valuation of 7%, earnings yield of 17%, and a total return ratio of 2.5x. These metrics are within the bargain hunter space.

However, optimism fades fast on closer inspection.

“Underlying” Income decreased by 21% YoY as the bank was squeezed by higher funding costs and non-interest expenses. Expenses on wholesale funding increased by 30% YoY. Debt funding now represents 71% of Gross Loans. Debt now stands at 4.3x SH. Funds. This type of funding has exploded by 10x since 2014. At the same time, deposits declined YoY. Deposits have increased by a more sedate 18% since 2014.

PT Profit would have been CNY1.4bn rather than CNY5.2bn but for hefty gains on securities. Loan loss provisions almost tripled YoY.

Regarding the Balance Sheet, Special Mention Loans rose sharply (+25% YoY) and represent 2.8x NPLs. A 127% and 108% YoY increase in “doubtful loans” and “loss loans” puts some perspective on a seemingly respectable NPL ratio of 1.64% and a LLR/NPLs of 250%.

Thus, Bank Of Tianjin (1578 HK) is cheap for a reason. We are reluctant to recommend taking a position at this juncture given the ongoing stresses in source of funding and asset quality.

3. HK Connect Discovery Weekly: Mainland Investors Buying WH Group (2019-03-22)

In our Discover HK Connect series, we aim to help our investors understand the flow of southbound trades via the Hong Kong Connect, as analyzed by our proprietary data engine. We will discuss the stocks that experienced the most inflow and outflow by mainland investors in the past seven days.

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

In this insight, we highlight the WH Group, which led the inflows last week. 

4. Micron. Things May Be Getting Worse But They Are Still Remarkably Good.

On Thursday March 21’st 2019, Micron announced latest quarter (Q2FY19) revenues of $5.8 billion, at the bottom end of their forecast range and down 26% sequentially. The midrange of their forecast for the current quarter (Q3FY19) will see revenues drop another 17% sequentially to $4.8 billion, roughly equivalent to the same quarter two years ago. On the earnings call, CEO Sanjay Mehrotra stated that the company would be cutting back both DRAM and NAND production by ~5% in response to a further deterioration in the CY2019 demand outlook. Furthermore, he refused to be drawn as to whether or not the current quarter would be the downturn trough despite reiterating his belief in the widely anticipated 2H CY2019 recovery thesis.

The challenging environment notwithstanding, there were some key positives also from the earnings call. The company is taking decisive and unprecedented actions to reduce their bit supply, actions we believe will be matched by Samsung Electronics  and SK Hynix. Gross margin coming into this downturn was a historic high at 61% and NAND gross margins have remained in the high 30% range despite ASP’s falling for five of the past six quarters. Furthermore, as forecasted three months ago, Micron still expects DRAM bit shipments to increase in the current quarter.

Integrating the latest updates from company, we now model Micron revenues declining for two further quarters to reach a trough at $4.5 billion in the company’s Q4FY19. We further model net income in the trough quarter at $1 billion. Thereafter we model a return to modest, sustained growth in the following quarters. Yes, things may be getting worse for Micron but they are still remarkably good.

5. Zozo: Never Meet a Margin Call

Yusaku Maezawa is once again in the news. This time due to speculation that he is auctioning off at least part of his art collection at Sotheby’s in Hong Kong on April 1st.

Following on from the share buyback that was conducted in May last year which:

• Allowed Maezawa to sell 6m out of his then 118.227m shares into a buyback that totalled just 6.35m shares.
• Led to a ¥38.3bn swing in net cash from +¥24.6bn to -¥13.8bn (the buyback totaled ¥24.4bn)
• Was conducted at the same time that share options for up to 31m shares were issued, of which Maezawa could have been allocated more than 90%.

this looks a lot like a sudden need to raise cash.

In this briefing:

1. Bank of Tianjin: 太好了, 不可能是真的
2. HK Connect Discovery Weekly: Mainland Investors Buying WH Group (2019-03-22)
3. Micron. Things May Be Getting Worse But They Are Still Remarkably Good.
4. Zozo: Never Meet a Margin Call
5. China New Higher Education: Negatives Mostly Baked-In

1. Bank of Tianjin: 太好了, 不可能是真的

Bank Of Tianjin (1578 HK) results at first look quite encouraging with firmer profitability, enhanced efficiency, improved capital adequacy, and increased provisioning.

Valuations are optically attractive: p/book of 0.5x, franchise valuation of 7%, earnings yield of 17%, and a total return ratio of 2.5x. These metrics are within the bargain hunter space.

However, optimism fades fast on closer inspection.

“Underlying” Income decreased by 21% YoY as the bank was squeezed by higher funding costs and non-interest expenses. Expenses on wholesale funding increased by 30% YoY. Debt funding now represents 71% of Gross Loans. Debt now stands at 4.3x SH. Funds. This type of funding has exploded by 10x since 2014. At the same time, deposits declined YoY. Deposits have increased by a more sedate 18% since 2014.

PT Profit would have been CNY1.4bn rather than CNY5.2bn but for hefty gains on securities. Loan loss provisions almost tripled YoY.

Regarding the Balance Sheet, Special Mention Loans rose sharply (+25% YoY) and represent 2.8x NPLs. A 127% and 108% YoY increase in “doubtful loans” and “loss loans” puts some perspective on a seemingly respectable NPL ratio of 1.64% and a LLR/NPLs of 250%.

Thus, Bank Of Tianjin (1578 HK) is cheap for a reason. We are reluctant to recommend taking a position at this juncture given the ongoing stresses in source of funding and asset quality.

2. HK Connect Discovery Weekly: Mainland Investors Buying WH Group (2019-03-22)

In our Discover HK Connect series, we aim to help our investors understand the flow of southbound trades via the Hong Kong Connect, as analyzed by our proprietary data engine. We will discuss the stocks that experienced the most inflow and outflow by mainland investors in the past seven days.

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

In this insight, we highlight the WH Group, which led the inflows last week. 

3. Micron. Things May Be Getting Worse But They Are Still Remarkably Good.

On Thursday March 21’st 2019, Micron announced latest quarter (Q2FY19) revenues of $5.8 billion, at the bottom end of their forecast range and down 26% sequentially. The midrange of their forecast for the current quarter (Q3FY19) will see revenues drop another 17% sequentially to $4.8 billion, roughly equivalent to the same quarter two years ago. On the earnings call, CEO Sanjay Mehrotra stated that the company would be cutting back both DRAM and NAND production by ~5% in response to a further deterioration in the CY2019 demand outlook. Furthermore, he refused to be drawn as to whether or not the current quarter would be the downturn trough despite reiterating his belief in the widely anticipated 2H CY2019 recovery thesis.

The challenging environment notwithstanding, there were some key positives also from the earnings call. The company is taking decisive and unprecedented actions to reduce their bit supply, actions we believe will be matched by Samsung Electronics  and SK Hynix. Gross margin coming into this downturn was a historic high at 61% and NAND gross margins have remained in the high 30% range despite ASP’s falling for five of the past six quarters. Furthermore, as forecasted three months ago, Micron still expects DRAM bit shipments to increase in the current quarter.

Integrating the latest updates from company, we now model Micron revenues declining for two further quarters to reach a trough at $4.5 billion in the company’s Q4FY19. We further model net income in the trough quarter at $1 billion. Thereafter we model a return to modest, sustained growth in the following quarters. Yes, things may be getting worse for Micron but they are still remarkably good.

4. Zozo: Never Meet a Margin Call

Yusaku Maezawa is once again in the news. This time due to speculation that he is auctioning off at least part of his art collection at Sotheby’s in Hong Kong on April 1st.

Following on from the share buyback that was conducted in May last year which:

• Allowed Maezawa to sell 6m out of his then 118.227m shares into a buyback that totalled just 6.35m shares.
• Led to a ¥38.3bn swing in net cash from +¥24.6bn to -¥13.8bn (the buyback totaled ¥24.4bn)
• Was conducted at the same time that share options for up to 31m shares were issued, of which Maezawa could have been allocated more than 90%.

this looks a lot like a sudden need to raise cash.

5. China New Higher Education: Negatives Mostly Baked-In

• China New Higher Education’s (CNHE) share price has more than halved since my bearish note in June last year.
• The fall in share price was caused by a few factors, namely uncertainties caused by regulations, a negative report by a short-seller, and below-consensus earnings.
• Market expectations of the education provider’s growth have come down, providing us an opportunity to relook at the stock.

In this briefing:

1. HK Connect Discovery Weekly: Mainland Investors Buying WH Group (2019-03-22)
2. Micron. Things May Be Getting Worse But They Are Still Remarkably Good.
3. Zozo: Never Meet a Margin Call
4. China New Higher Education: Negatives Mostly Baked-In
5. Indonesia Property – In Search of the End of the Rainbow – Part 5 –  Summarecon Agung (SMRA IJ)

1. HK Connect Discovery Weekly: Mainland Investors Buying WH Group (2019-03-22)

In our Discover HK Connect series, we aim to help our investors understand the flow of southbound trades via the Hong Kong Connect, as analyzed by our proprietary data engine. We will discuss the stocks that experienced the most inflow and outflow by mainland investors in the past seven days.

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

In this insight, we highlight the WH Group, which led the inflows last week. 

2. Micron. Things May Be Getting Worse But They Are Still Remarkably Good.

On Thursday March 21’st 2019, Micron announced latest quarter (Q2FY19) revenues of $5.8 billion, at the bottom end of their forecast range and down 26% sequentially. The midrange of their forecast for the current quarter (Q3FY19) will see revenues drop another 17% sequentially to $4.8 billion, roughly equivalent to the same quarter two years ago. On the earnings call, CEO Sanjay Mehrotra stated that the company would be cutting back both DRAM and NAND production by ~5% in response to a further deterioration in the CY2019 demand outlook. Furthermore, he refused to be drawn as to whether or not the current quarter would be the downturn trough despite reiterating his belief in the widely anticipated 2H CY2019 recovery thesis.

The challenging environment notwithstanding, there were some key positives also from the earnings call. The company is taking decisive and unprecedented actions to reduce their bit supply, actions we believe will be matched by Samsung Electronics  and SK Hynix. Gross margin coming into this downturn was a historic high at 61% and NAND gross margins have remained in the high 30% range despite ASP’s falling for five of the past six quarters. Furthermore, as forecasted three months ago, Micron still expects DRAM bit shipments to increase in the current quarter.

Integrating the latest updates from company, we now model Micron revenues declining for two further quarters to reach a trough at $4.5 billion in the company’s Q4FY19. We further model net income in the trough quarter at $1 billion. Thereafter we model a return to modest, sustained growth in the following quarters. Yes, things may be getting worse for Micron but they are still remarkably good.

3. Zozo: Never Meet a Margin Call

Yusaku Maezawa is once again in the news. This time due to speculation that he is auctioning off at least part of his art collection at Sotheby’s in Hong Kong on April 1st.

Following on from the share buyback that was conducted in May last year which:

• Allowed Maezawa to sell 6m out of his then 118.227m shares into a buyback that totalled just 6.35m shares.
• Led to a ¥38.3bn swing in net cash from +¥24.6bn to -¥13.8bn (the buyback totaled ¥24.4bn)
• Was conducted at the same time that share options for up to 31m shares were issued, of which Maezawa could have been allocated more than 90%.

this looks a lot like a sudden need to raise cash.

4. China New Higher Education: Negatives Mostly Baked-In

• China New Higher Education’s (CNHE) share price has more than halved since my bearish note in June last year.
• The fall in share price was caused by a few factors, namely uncertainties caused by regulations, a negative report by a short-seller, and below-consensus earnings.
• Market expectations of the education provider’s growth have come down, providing us an opportunity to relook at the stock.

5. Indonesia Property – In Search of the End of the Rainbow – Part 5 –  Summarecon Agung (SMRA IJ)

In this series under Smartkarma Originals, CrossASEAN insight providers AngusMackintosh 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 fifth company that we explore is Summarecon Agung (SMRA IJ), a township developer with over 40 years of track record and a combined development area of over 2,700ha. The company benefits from its exposure to the popular Serpong district, but an over expansion, coupled with tightening property regulations caused its balance sheet to suffer in the following years. Earnings have declined by -19% Cagr over the past five years as a consequence of lower margins and burgeoning debt levels.

The company has plans to divest its retail mall division, which can serve as a positive catalyst in the near term. Improving sentiment and better interest rate environment, as well as positive regulatory tailwinds should be a driver to SMRA’s share price this year. We see a 44% upside to our target price of IDR1,408 per share.

Summary of this insight:

• The success of SMRA’s first township, Kelapa Gading, paved way for the next six township development. The same township model is replicated to its Serpong, Bekasi, Bandung, Karawang, Makassar, and soon Bogor. 
• During the height of the property boom, every cluster launch in the Serpong area is 2-3x oversubscribed. Buyers were a mix of speculators and end-users, and both were happy customers benefiting from over 400% land price appreciation over the course of 2009-2013. Land ASP in 2009 was just below IDR3mn versus IDR12-15mn in 2013.
• Driven by the positive momentum of the property boom, SMRA ambitiously launched three new townships at the trough of the property market (2015-2018), growing its total township development area by more than a third. Poor cashflow management, stemming from the over-expansion during the property downturn took a massive toll on the balance sheet. SMRA turned from net cash in 2013 to holding IDR8.6tn of debt in 9M18 (1.2x gearing) with interest costs making up a chunky 49% of EBIT. 
• We have also seen a massive shift to the end-user market since 2014, as the company started to sell more smaller houses and affordable apartments rather than land lots and shophouses. At the peak, shophouses and land lots made up more than 50% of the company’s development revenues. As of 9M18, that number has declined to a mere 7% of revenues, while 93% comes from houses and apartments. Housing units launched in 2016-2017 are 36% cheaper than units launched in 2011-2014, as the company downsized in the area.

• SMRA has the second biggest retail mall portfolio in our coverage after Pakuwon Jati (PWON IJ) with 258,000sqm net leasable area (NLA). The three malls generate about IDR1.3tn revenue per year, returning 42% EBITDA margin. About 40% of tenants in Bekasi and Serpong are up for a rental renewal in the next three years, and this could serve as a potential upside on the average rental rates. 

• Pros: Bank Indonesia (BI)’s move to loosen mortgage regulations last year, and plans to reduce luxury taxes and allow for friendlier foreign ownership scheme should give a breath of fresh air over the medium term. SMRA targets 18% presales growth in 2019, but they have been missing their presales target by an average of 22% over the past three years. We expect a more modest 5% presales recovery this year.
• Pros: Margin on houses show a massive improvement from 51% in 2014 to 59% in 9M18. The improvement brings up the consolidated property development margin by 600bps YoY. As a segment, this is the first margin uptick since 2014, leading to 44% YoY EBIT growth and 115% YoY NPAT growth in 9M18.
• Cons: The stellar property development growth, however, is diluted by the poor performances from the investment property division that recorded 14% YoY EBIT decline. Despite some improvements on the gross margin level and healthy topline growth, opex has doubled YoY, leading to 700bps reduction in the EBITDA margin. 
• Recommendation & catalyst: SMRA has underperformed the JCI by a steep 71% over the past 36 months as earnings and presales continue to disappoint. Discount to NAV, PE, and PB valuation are standing at -1 standard deviation below mean. Improving risk appetite for high beta stocks, better interest rate environment, accomodative policies from the government, and potential pick up of activity after the election are a few of the key catalysts for the stock and sector re-rating. The divestment of its retail arm should also help to clear some debt off the balance sheet and unlock value. We have a BUY recommendation.

In this briefing:

1. After Zozo: Onward Sets Sights on Digital Renaissance
2. Snippets #21: Bremain, TMB Rights Issue
3. Tisco – A Bright Bank in a Dim Rate World
4. Tencent (700 HK): The Worst Part Online Game Recovered in Q4 Before Restarting License Approval
5. Is There Still a Bright Future for FutureBright?

1. After Zozo: Onward Sets Sights on Digital Renaissance

Onward Holdings (8016 JP) made a bold stand against price discounts in January when it announced plans to stop selling on ZOZO (3092 JP) but the timing was not ideal as Onward lowered its FY2018 sales guidance shortly thereafter..

With Zozo no longer a partner, Onward is investing in the growth of its own e-commerce business and has installed a new 50-person digital strategy group to make this happen.

If the plan works, Onward could finally break away from its dependence on the contracting department store apparel market but the journey to reach this goal will be a long one.

2. Snippets #21: Bremain, TMB Rights Issue

These are the five developments/news flows/trends and their potential impact on Thai equities you should be aware of in recent weeks: 

• Reversing Brexit. A special report highlighting the possible reversal of Brexit should have limited impact on Thai equities, though a few names like SSI, Thai Union, and Minor do float up on the screen.
• TMB announces a 5 for 1 rights issue at Bt2.07/sh, which could raise US$570m of new capital for their acquisition of Thanchart and imply a 65-35 split of ownership between the two banks.
• Politically motivated wage hike. Some of the political campaigns by smaller parties are even more populist than the major parties, implying wage increases between 10-30% from current levels. This could really destabilize Thailand’s long-term prospects as an investment base. 
• Italian-Thai Chairman thrown into prison. Premchai Karnasutra, who killed one of Thailand’s last 9 black leopards, is sentenced to 16 months in jail. Share prices actually rose!
• Bangkok’s third airport! The Navy is putting up the UTaPao airport construction up for bid. Front runners include the CP-led consortium, which includes ITD, but contenders include the BTS-STEC consortium and another smaller one.

3. Tisco – A Bright Bank in a Dim Rate World

The Fed’s comments may be a surprise to many, but we hope not to our readers. Granular US bank data has indicated for some time, that rising rates were more driven by policy than by demand.  As the world now braces for rate cuts and slower growth, there remain a handful of small banks in Asia Pacific that offer respite. Thailand’s Tisco Financial Group (TISCO TB) ranks as having one of the highest dividend yields in Asia Pacific at 7.8%. Where Tisco remains small, growth prospects are far better than for mainstream banks Bangkok Bank Public (BBL TB), Siam Commercial Bank Pub Co (SCB TB) and Kasikornbank PCL (KBANK TB). Additionally, Tisco has seen a steady rise in profitability with ROA now at 2.31% from 1.84% two years ago and from 1.30% in 2014. This profile of rising and high returns, while still small in a local context, and with one of the best dividend yields anywhere, make it a bright spot in a low rate world.

4. Tencent (700 HK): The Worst Part Online Game Recovered in Q4 Before Restarting License Approval

• The worst business, online game, recovered in 4Q2018, because small competitors died.
• The growth rate of game broadcast also bounced up in 4Q2018, as an important competitor Panda TV went bankrupt.
• In fact, games are only a small part of Tencent and other businesses have been growing strongly.
• The re-organization in October 2018 controlled expenses well.
• The 5-year P/E band suggests that Tencent’s stock price has upside of 26%.

5. Is There Still a Bright Future for FutureBright?

Almost 12 months after posting our initial thesis on Future Bright Holdings (703 HK)Gambling on a Bright Future, we review FutureBright’s most recent results, raising questions on whether stalling improvement in the core restaurant business performance warrants taking chips off the table while waiting for key catalysts to materialise.

In this briefing:

1. Amarin–Our Talks With The CEO & An Update on New Trial Data Released at ACC Conference
2. Lasertec (6920 JP): Pricing in Long-Term Growth
3. Micron: Things Are Bad, and Getting Worse!
4. Brazilian Political Turmoil Adds to Market Volatility, and Concerns on Pension Reform
5. Hankyu Invests ¥1.75 Billion in Hankyu Men’s Tokyo

1. Amarin–Our Talks With The CEO & An Update on New Trial Data Released at ACC Conference

• Strong Q1 to Come: We recently had a call with Amarin’s CEO, John Thero, and update our model with quarterly estimates. Q1 should see revenue growth of +55% YoY to $68m, an operating loss of -$30m, and EPS of  -$0.09. Consensus is at $66m, -$38m, and -$0.12, respectively. 
• ACC Event Leads to Stock Drop: Amarin released “late-breaking” results from its Reduce-It trial at the American College of Cardiology (ACC) conference last Monday. While the data was considered “landmark” by doctors in attendance, the stock has fallen by nearly 14% since the event, showing a clear disconnect between the market and the medical community. 
• New Data Upgrades Risk Reduction to 30% & Shows Strong Prevention of CVD Recurrence: The key data at the ACC showed that Vascepa has a 30% relative risk reduction (RRR) rate for total CVD events (initially, it was 25% RRR rate for “major adverse” CVD events). Additionally, it was discovered that Vascepa reduced secondary CVD events by 32%, third events by 31%, and fourth events by 48%. 50% of patients who have experienced a cardiovascular event have a recurrence within one year, while 75% have recurrences within three years.  
• New Data Should Fast-Track Label Expansion & Impact Earnings Significantly: Doctors on a panel discussion after Amarin’s presentation at the ACC were dazzled by the data, saying that it will change the way CVD is treated in the US. We got the sense that this should lead to the FDA giving Vascepa “fast-track” (6 months vs regular 10 months) treatment for label expansion, which will surely lead to higher revenues this year and an expanded market henceforth.  
• New Prescriptions up 62% YTD: Amarin’s CEO, John Thero, told us he has more talks with doctors about Vascepa these days than he does with investors, which highlights increasing interest in the US medical community over Vascepa and explains the new prescription growth of +62% year-to-date. Successful label expansion by the FDA should widen Vascepa’s addressable market by nearly 20x.  
• Our Talks With CEO Point to a Strong Q1: The first quarter is seasonally slow, but our impressions from our talk with CEO John Thero is that the company is most likely outperforming its internal targets for Q1 growth. Amarin assumes 53% sales growth for the full year, but has stated that Q1 should be “seasonally slower”. Weekly prescription data show that Vascepa is growing over 50% in the seasonally slow Q1. Sales should pick up from Q2 and surge in the usual peak season of Q4.
• 2019 Revenues should Reach $500m (+120% YoY): We see 2019 revenues of $503m, with operating profit of $88m (17.5% operating margin) and EPS of $0.23. Consensus sees sales of $363m (guidance is at $350m), with an operating loss of -$58m and EPS of -$0.17. 
• Buyout Possibilities Remain High: We continue to see Amarin as one of the most attractive buy-out candidates among big pharma companies in the CVD field. Because Vascepa is a treatment taken in conjunction with statin medication like Lipitor, Pfizer appears like the most likely suitor, although there many others. 
• For more details about Amarin, its Reduce-It trial, and potential global sales, please refer to this in-depth report Amarin–2019’s Biggest Buyout Target for Big Pharma

2. Lasertec (6920 JP): Pricing in Long-Term Growth

Lasertec hit a new high in the semiconductor stock rally that followed Micron Technology’s March 20 earnings call. On Friday, March 22 (March 21 was a holiday in Japan), Lasertec was up 8.4% to ¥4,900. At this price, the shares are selling at 42x our EPS estimate for FY Jun-19, 36x our estimate for FY Jun-20 and 31x our estimate for FY Jun-21. On a 5-year view, earnings growth could bring the projected P/E multiple down to 21x, in our estimation.

Following strong 1H results, management left FY Jun-19 sales and profit guidance unchanged, but raised semiconductor-related orders guidance by 13% while cutting  orders guidance for FPD-related and other products by nearly 40%. Total new orders guidance was raised from ¥37 billion to ¥39 billion, compared with sales guidance of ¥28 billion, implying an increase in the order backlog from ¥39.9 billion to ¥50.9 billion.

With this in mind, we have raised our sales and profit estimates for FY Jun-20 and added new, higher estimates for FY Jun-21 and beyond. Rising demand for EUV mask blank and mask defect inspection equipment should drive an increase in total sales from ¥29 billion this fiscal year to ¥38 billion in FY Jun-21, and approximately ¥50 billion in FY Jun-23. Over the same period, operating profit should rise from ¥7.0 billion to ¥9.5 billion, and then to approximately ¥14 billion.

Risks for investors include the potential delay or reduction of orders and shipments (as just happened with FPD inspection equipment), high volatility in quarterly orders, sales and profits, and extended valuations.

3. Micron: Things Are Bad, and Getting Worse!

Today’s Micron earnings call underscored how difficult the memory business is getting, and the company’s guidance indicated that this is only the start of it.  Revenues for 2FQ19 were down 26% Q/Q at $5.8 billion, and the company projects 3QF19 revenues to fall to $4.8 billion.

4. Brazilian Political Turmoil Adds to Market Volatility, and Concerns on Pension Reform

• Brazil’s Ex-President Michel Temer has been arrested as part of the on-going CarWash (Lava Jato) criminal investigation, on bribery and corruption charges
• We believe that this increases the near-term downside risk to the BOVESPA index and blue chips, including the large cap banks
• This will also, we believe, heighten the negative “noise” around pension reform, potentially increasing the complexity of the reform process; even if this development alone should not serve to derail it, in our view
• Large cap Brazilian banks’ share prices have come under pressure recently, and we would expect the market correction to continue in the short term
• Nonetheless, we still see potential for Banco Do Brasil Sa (BBAS3 BZ) to re-rate over the medium term, and narrow the PBV gap with its core peers, Itau Unibanco Holding Sa (ITUB4 BZ) and Banco Bradesco Sa (BBDC4 BZ), as Banco do Brasil’s own internal restructuring takes effect

5. Hankyu Invests ¥1.75 Billion in Hankyu Men’s Tokyo

Hankyu Hanshin has outperformed the department store sector in the last few years and continues to invest to lock in its dominance of the Osaka market.

It is now about to unveil a major new update to its Tokyo store, creating a more luxurious Men’s Emporium.

The investment is an example of how the better department stores are repositioning individual buildings to better meet target market needs and find relevance in an e-commerce age.

In this briefing:

1. Zozo: Never Meet a Margin Call
2. China New Higher Education: Negatives Mostly Baked-In
3. Indonesia Property – In Search of the End of the Rainbow – Part 5 –  Summarecon Agung (SMRA IJ)
4. Kosmos Energy: The Standout Internationally-Focused E&P Company
5. Tesla: Would the Last One Off the Sinking Ship Please Turn Off the Lights?

1. Zozo: Never Meet a Margin Call

Yusaku Maezawa is once again in the news. This time due to speculation that he is auctioning off at least part of his art collection at Sotheby’s in Hong Kong on April 1st.

Following on from the share buyback that was conducted in May last year which:

• Allowed Maezawa to sell 6m out of his then 118.227m shares into a buyback that totalled just 6.35m shares.
• Led to a ¥38.3bn swing in net cash from +¥24.6bn to -¥13.8bn (the buyback totaled ¥24.4bn)
• Was conducted at the same time that share options for up to 31m shares were issued, of which Maezawa could have been allocated more than 90%.

this looks a lot like a sudden need to raise cash.

2. China New Higher Education: Negatives Mostly Baked-In

• China New Higher Education’s (CNHE) share price has more than halved since my bearish note in June last year.
• The fall in share price was caused by a few factors, namely uncertainties caused by regulations, a negative report by a short-seller, and below-consensus earnings.
• Market expectations of the education provider’s growth have come down, providing us an opportunity to relook at the stock.

3. Indonesia Property – In Search of the End of the Rainbow – Part 5 –  Summarecon Agung (SMRA IJ)

In this series under Smartkarma Originals, CrossASEAN insight providers AngusMackintosh 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 fifth company that we explore is Summarecon Agung (SMRA IJ), a township developer with over 40 years of track record and a combined development area of over 2,700ha. The company benefits from its exposure to the popular Serpong district, but an over expansion, coupled with tightening property regulations caused its balance sheet to suffer in the following years. Earnings have declined by -19% Cagr over the past five years as a consequence of lower margins and burgeoning debt levels.

The company has plans to divest its retail mall division, which can serve as a positive catalyst in the near term. Improving sentiment and better interest rate environment, as well as positive regulatory tailwinds should be a driver to SMRA’s share price this year. We see a 44% upside to our target price of IDR1,408 per share.

Summary of this insight:

• The success of SMRA’s first township, Kelapa Gading, paved way for the next six township development. The same township model is replicated to its Serpong, Bekasi, Bandung, Karawang, Makassar, and soon Bogor. 
• During the height of the property boom, every cluster launch in the Serpong area is 2-3x oversubscribed. Buyers were a mix of speculators and end-users, and both were happy customers benefiting from over 400% land price appreciation over the course of 2009-2013. Land ASP in 2009 was just below IDR3mn versus IDR12-15mn in 2013.
• Driven by the positive momentum of the property boom, SMRA ambitiously launched three new townships at the trough of the property market (2015-2018), growing its total township development area by more than a third. Poor cashflow management, stemming from the over-expansion during the property downturn took a massive toll on the balance sheet. SMRA turned from net cash in 2013 to holding IDR8.6tn of debt in 9M18 (1.2x gearing) with interest costs making up a chunky 49% of EBIT. 
• We have also seen a massive shift to the end-user market since 2014, as the company started to sell more smaller houses and affordable apartments rather than land lots and shophouses. At the peak, shophouses and land lots made up more than 50% of the company’s development revenues. As of 9M18, that number has declined to a mere 7% of revenues, while 93% comes from houses and apartments. Housing units launched in 2016-2017 are 36% cheaper than units launched in 2011-2014, as the company downsized in the area.

• SMRA has the second biggest retail mall portfolio in our coverage after Pakuwon Jati (PWON IJ) with 258,000sqm net leasable area (NLA). The three malls generate about IDR1.3tn revenue per year, returning 42% EBITDA margin. About 40% of tenants in Bekasi and Serpong are up for a rental renewal in the next three years, and this could serve as a potential upside on the average rental rates. 

• Pros: Bank Indonesia (BI)’s move to loosen mortgage regulations last year, and plans to reduce luxury taxes and allow for friendlier foreign ownership scheme should give a breath of fresh air over the medium term. SMRA targets 18% presales growth in 2019, but they have been missing their presales target by an average of 22% over the past three years. We expect a more modest 5% presales recovery this year.
• Pros: Margin on houses show a massive improvement from 51% in 2014 to 59% in 9M18. The improvement brings up the consolidated property development margin by 600bps YoY. As a segment, this is the first margin uptick since 2014, leading to 44% YoY EBIT growth and 115% YoY NPAT growth in 9M18.
• Cons: The stellar property development growth, however, is diluted by the poor performances from the investment property division that recorded 14% YoY EBIT decline. Despite some improvements on the gross margin level and healthy topline growth, opex has doubled YoY, leading to 700bps reduction in the EBITDA margin. 
• Recommendation & catalyst: SMRA has underperformed the JCI by a steep 71% over the past 36 months as earnings and presales continue to disappoint. Discount to NAV, PE, and PB valuation are standing at -1 standard deviation below mean. Improving risk appetite for high beta stocks, better interest rate environment, accomodative policies from the government, and potential pick up of activity after the election are a few of the key catalysts for the stock and sector re-rating. The divestment of its retail arm should also help to clear some debt off the balance sheet and unlock value. We have a BUY recommendation.

4. Kosmos Energy: The Standout Internationally-Focused E&P Company

We think that Kosmos Energy (KOS US) offers everything that is required from an internationally focused E&P company. It has a highly rated management team, strong balance sheet and free cash flow generation from its existing producing assets, low risk / high value near field exploration potential, selective high risk / reward frontier exploration in which it has a proven track record, it has done recent value accretive acquisitions with room for more, it has demonstrated the ability to farm-down its assets on multiple occasions and is currently in the process of a major asset sell down, which could surprise the market to the upside. Despite this the stock trades on a significant discount to risked NAV, making it a potential acquisition target and has plenty of catalysts coming up this year to close the valuation gap.  

5. Tesla: Would the Last One Off the Sinking Ship Please Turn Off the Lights?

Roughly nine months ago, as Elon Musk was bizarrely attacking one of the heroes of the Thai rescue mission, we noted in Tesla: As Musk’s Reputation Disintegrates, The Only Positive for the Stock Is Disappearing that

We think it is pertinent to identify the moment when the crowd turns… and we think it just happened.

concluding that

Our main point is that there is now significantly more risk of being long and wrong on Tesla, not just in terms of portfolio performance, but in terms of career risk. With Tesla’s rising profile and increasingly bizarre behaviour the ability to justify being long and wrong is diminishing rapidly.

Since then, the roller-coaster ride has, if anything, been even more volatile and the vehemence of both bulls and bears has not decreased.

With recent developments such as the collapse in unit volumes following the reduction of subsidies for Tesla, the departure of CFO Deepak Ahuja and the underwhelming Model Y reveal, we highlight what we believe are the most important indicators of failure amongst the deluge of bad news, below.