Category

Bottom-Up Equities

Equity Bottom-Up: Z Holdings, Hoya Corp, CSC Financial, Starhub Ltd, Biocon Ltd, Ping An Insurance (H), Delta Electronics Thai, Hana Financial, Central Retail and more

By | Bottom-Up Equities, Daily Briefs

In today’s briefing:

  • Z Holdings [Alt Data]: PayPay Mall and PayPay Flea Market Continue to Disappoint
  • Hoya 1Q Results: Another Quarter Impacted by the Pandemic but Recovery Is Ahead
  • China Brokers: Regulator Encourages M&A Among Brokers and Mutual Fund Houses
  • Starhub (STH): Suffers from Seniors Go Digital?
  • Biocon: Covid-19 Respite Uncertain
  • Ping An Insurance – 1H20 Preview
  • DELTA: Covid-19 Impact Surprisingly Turned Positive
  • Hana Financial: Scores Well, Is Cheap, but Some Doubts Linger
  • Central Retail (CRC TB) – Buy for Looming Recovery

Z Holdings [Alt Data]: PayPay Mall and PayPay Flea Market Continue to Disappoint

By Supun Walpola

  • In our previous notes, we have continuously questioned Z Holdings (4689 JP)’ strategy of aggressively trying to expand its user growth in the maturing Japanese e-commerce market, highlighting that both Z’s new e-commerce platforms, PayPay Mall and PayPay Flea Market (which were launched last October), have struggled to get new users on board. 
  • Both PayPay Mall’s and PayPay Flea Market’s total website visits increased in 1Q FY03/21, however, falling download rankings and lagging engagement matrices suggest that both platforms are still struggling. We analyse PayPay Mall’s and PayPay Flea Market’s web traffic data and app rankings for 1Q FY03/21 below. 

Hoya 1Q Results: Another Quarter Impacted by the Pandemic but Recovery Is Ahead

By Shifara Samsudeen, ACMA, CGMA

  • Hoya reported its 1QFY03/21 results yesterday (28th July) which saw YoY decline in both revenue and operating profit due to the Covid-19 outbreak. The company’s earnings have been negatively impacted for the second consecutive quarter due to the ongoing pandemic.
  • However, the company’s revenue and operating profit beat consensus estimates by 1.2% and 62.2% respectively. According to Hoya, it has made significant temporary cost reductions to limit the impact of the reduction in marginal profit.

JPY (bn)

1QFY03/20

1QFY03/21

% YoY

Consensus

Actual Vs Consensus

Revenue

140.8

109.3

-22.37%

                               108.0

1.19%

Operating Profit

38.5

31.3

-18.70%

19.3

62.18%

OPM

27.34%

28.64%

 

17.87%

 

Pre-Tax Profit

37.0

31.9

-13.78%

24.0

32.75%

Pre-tax Margin

26.28%

29.19%

 

22.25%

 

Net Income

30.1

25.6

-14.95%

22.8

12.28%

Net Margin

21.38%

23.42%

 

21.11%

 

Source: Company Disclosures, Cap IQ
  • The Covid-19 outbreak has negatively impacted the Lifecare segment’s earnings which was partially offset by strong performance of the IT segment whose performance was driven by increasing demand for EUV mask blanks.
  • In our previous insight on the company, we highlighted that the company’s eyeglass/contact lenses revenue will be affected in 1QFY03/21 (June quarter) due to the ongoing Covid-19 outbreak which has caused lockdowns and restrictions of activities resulting in store closures.

China Brokers: Regulator Encourages M&A Among Brokers and Mutual Fund Houses

By Roger Xie

China’s top securities regulator is encouraging mergers and acquisitions among brokerages and mutual fund houses, the state-run China Securities Journal reported last week. The China Securities Regulatory Commission (CSRC) aims to solve the problem of competition among industry peers with the move, and the top securities watchdog also supports launching employee stock ownership and equity incentive plans. We believe it is policy maker’s intention to have a more institutionalized and internationalized industry, which will better serve China economic transformation. Based on valuation and favorite policy, brokerage and asset managers are in sweet spot for investors. 

According to Securities Association of China, there are 98 licensed brokerage firms in China. In 2019, the top-10 brokerage firms’ revenue only account 46% of industry-wide revenue. Their relevant profits account about 60% of industry-wide profit. Interestingly, top-10 brokerage firms in US account more than 70% of revenue and profit for the industry. We believe there are plenty of room for further consolidation in brokerage business. It is also reported in April that Citic Securities (H) (6030 HK) and CSC Financial (6066 HK), along with their major shareholders CITIC Group and Central Huijin, have started due diligence and a feasibility study on a potential merger of these two brokers. If the speculation has been realized, the combined CITICS and CSC Financial will become the largest brokerage firm in China with asset exceeding RMB 1trn. It will become No. 1 player in brokerage, margin financing, investment banking and asset management.

CSC Financial (6066 HK) is our top pick in Chinese broker sector. CSC Financial was ranked 4th by equity and bond underwriting ranking. It has a dominant position on the IPO underwriting volume and pipeline in ChiNext board, which has direct benefits from the ChiNext board reform. 


Starhub (STH): Suffers from Seniors Go Digital?

By Henry Soediarko

TPG Telecom Ltd (TPM AU) latest offering in Singapore, “Seniors Go Digital” commercial mobile plan for senior citizens at a promotional price of S$5 until 31 July 2021 sounds like a doomsday scenario for Starhub Ltd (STH SP) but it is worth mentioning that TPG does not have any coverage in the underground yet which may cause some (older) people to be confused. 

The financial impact is quite limited, and expecting a further short term pain in REITs due to the prolonged COVID-19, yield-hungry investors should switch from REITs to Starhub that still pays 7% yield at an undemanding valuation.  


Biocon: Covid-19 Respite Uncertain

By Nitin Mangal

Shares of Biocon Ltd (BIOS IN) escalated almost by 5.5% on Tuesday, 14th July after the Drugs Controller General of India (DCGI) approved to market Itolizumab for treating moderate-severe Covid-19 patients. However, the tables turned quick when the National Task force rejected the drug to be included in the clinical management protocols for Covid-19, causing a disheartening plummet of over 7% since Thursday. Given the current pandemic situation, this roller-coaster ride has created a haze-like situation for the company, filled with uncertainties.


Ping An Insurance – 1H20 Preview

By Thomas J. Monaco

*Weak Results Ahead: Ping An Insurance (2318.HK) [Ping An] is set to report 1H20 results on August 27, 2020. We anticipate COVID-19 to negatively impact Ping An’s multiple lines of business, which should aggregate to a YOY net income decline of 5% to CNY 69.8 bn, by our calculation; and

*Struggles By Insurance Unit: The slowdown in new business volume is anticipated to weigh on Ping An Life’s bottom-line. As such, we anticipate a 35% decline in the value of new business during 1H20. Credit insurance exposure is likely to be a drag down performance again, and Ping An P&C’s 1H20 combined ratio will be challenged and is due to increase to a tad under 100% – or barely profitable operationally.


DELTA: Covid-19 Impact Surprisingly Turned Positive

By Research Group at Country Group Securities

We maintain HOLD rating on DELTA with a new 2021E target price at Bt84.00, from Bt56.50, derived from 21.2xPE’21E, which is +1SD of its 5-years trading average.

•DELTA reported 2Q20 net profit at Bt2.0bn (+132%YoY, +136%QoQ). driven by cloud storage and data center-related businesses, as Covid-19 situation spurred work-from-home related services demand.
•We revised up our 2020-22 net profit forecasts by 105%, 23%, and 20%, respectively, in response to solid 2Q20 performance.
•DELTA revenue would be even more solid in 2H20E, given the recovery in EV related products. However, 2H20E earnings should slightly soften due to normalization in demand for data center-related business.
•On Friday, DELTA also announced a disposition and acquisition of the investments in the associated companies. We estimated it has limited at less than one percent of DELTA’s assets and earnings.

We think DELTA’s impressive performance has been largely priced in the 67% stock rally in July.

Background: Delta Electronics (Thailand) Public Company Limited, The company is a subsidiary of Delta Electronics, Inc. Delta Thailand is a manufacturer and exporter of power supplies and electronic equipment and parts, the company is one of the world-leading producers of power supplies and electronic components that include cooling fans, EMI filters, and solenoids. At present, the company has 2 main plants in Thailand one each in India (Rudrapur and Krishnagiri), Slovakia (Dubnica nad Váhom and Liptovsky Hradok) and Myanmar (Yangon).


Hana Financial: Scores Well, Is Cheap, but Some Doubts Linger

By Paul Hollingworth

Hana Financial (086790 KS) delivered positive fundamental momentum at Q220 on a LTM basis. It is not so common these days to find a bank which is actually improving its Profitability. Enhanced Asset Quality, improved Liquidity, stronger Provisioning, and better Efficiency were other highlights. Some erosion of Capital Adequacy was a negative.

While Asset Quality improved, it was somewhat of a surprise that Asset Write downs, mainly Loan Loss Provisions, expanded so forcefully.

In addition, Earnings Quality could have been better given the weight of “non Core Income” as a % of Pre-Tax Income. This exerts a downward pull on the CIR and inflates the bottom-line. 

“Core Income” was basically flat as “non-interest income” gains, from trading of securities and plenty of “other” items, partially offset a decrease in Net Interest Income.

Valuations are, however, far from dear and RSI is low enough. FV, PBV, and Dividend and Earnings Yields stand at 3%, 0.31x, 7.3% and 28%, respectively.

The PH Score™ is elevated at 10, supported by the valuation variable in part.

So on paper, Hana commands a trifecta of a low valuation, a subdued RSI, and a high PH Score™.

The PH Score™ is a fundamental momentum-quantamental score that scores banks according to changes in value-quality. The Score encompasses Profitability, Operating Efficiency, Liquidity, Capital, Asset Quality, and Coverage as well as a valuation variable. Scores lie between 0 and 10, with higher scores representing more positive signs. The PH Score™ was back tested over 2007-17 for global banks and conclusively shows progressively higher returns across quintiles ranked by Score. 


Central Retail (CRC TB) – Buy for Looming Recovery

By Angus Mackintosh

Central Retail (CRC TB) has been probably been the most impacted retail player in Thailand from COVID-19, given its heavy exposure to department stores, which were forced to close for a period.

CRC also has significant exposure to Italy through its department stores there, which were also closed for a time during that country’s lockdown. 

The company’s other retail exposure in Thailand through CP Foodhall, Tops, and Family Mart have proved relatively resilient, whilst BIGC in Vietnam has also fared well and should recover quickly. 

Now that Thailand is gradually emerging from the pandemic, we would expect a much better performance in 2H2020, with tailwinds from Italy and Vietnam. 

A looming recovery is not being reflected in the stock price, which has been nudging new lows since its IPO and underperforming its retail peers. Central Retail (CRC TB) trades on 25.0 FY21E PER and 21.0x FY22E PER, with forecast EPS growth +90% and +18% for FY21E and FY22E respectively. It also trades on 8.1x FY21E EV/EBITDA, which is a significant discount to peers. We would see this as a high-conviction recovery play. 


Before it’s here, it’s on Smartkarma

Equity Bottom-Up: Nissan Motor, Fujitec Co Ltd, HDFC Bank, Fanuc Corp, New Oriental Education, Kotak Mahindra Bank, Asian Seafoods Coldstorage, Kose Corp and more

By | Bottom-Up Equities, Daily Briefs

In today’s briefing:

  • Nissan – Two Strikes For the Alliance and a Zero Dividend
  • Fujitec – Love in an Elevator
  • HDFC Bank:  Finely Balanced
  • Fanuc – Single Stock Bubble Meet Single Stock Pin
  • New Oriental (EDU): Students Declined YoY for First Time in Seven Years
  • Kotak Mahindra Bank – Credit Falling Apart
  • ASIAN: Good Performance Has Already Priced In
  • KOSÉ 1QFY21 Earnings Preview: China Recovery Overlooked

Nissan – Two Strikes For the Alliance and a Zero Dividend

By Mio Kato, CFA

Following Mitsubishi Motors’ weak results and grim forecasts which drove the stock down 12.6% today, Nissan just reported relatively weak results and offered guidance which, while not quite as shocking as that of Mitsubishi Motors, leaves little to be optimistic about.


Fujitec – Love in an Elevator

By Mark Chadwick

Fujitec Co Ltd (6406 JP)  share price has outperformed the broader Japanese machinery sector over the past one year (39% versus 7%). Much of the outperformance was driven by activist interest in the name, with Asset Value Investors (AVI) revealing their aptly titled “Taking Fujitec to the next level” presentation. 

Another well-known activist, Oasis Investors, took things a step further by adding shareholder proposals to the June AGM agenda. Although shareholders rejected the proposed cancellation of treasury stock, Oasis can feel vindicated by the relatively high 33% of votes in favour of the proposal. Moreover, with a dramatic decrease in support for Fujitec’s CEO, Uchiyama-san, it seems that many minority shareholders are also becoming frustrated with management. 

With activists publicly calling for change, the stock looks a cheap and low risk play on governance reform. 


HDFC Bank:  Finely Balanced

By Steven Holden

  • HDFC Bank (HDFCB IN) is a well owned stock among global EM active managers.  Of the 250 funds in our analysis, 44.6% hold a position at an average weight of 0.87%.  It is the 10th most widely held stock across the whole of EM.
  • Whilst the long-term trend in ownership has been undoubtedly positive, this year has seen investment levels plateau and start to move lower.
  • Though on balance fund ownership fell, many active managers opened positions in HDFC Bank during the Q1 drop in prices.  This may provide support to the stock during any further weakness.  There are also plenty of previous owners who have the dry powder to buy in to HDFC Bank should the outlook improve.
  • But we can’t escape the fact that HDFC Bank is still an extremely well owned stock and one that is a defacto overweight versus the MSCI Emerging Markets index – this year’s underperformance has been costly.  This makes it an especially sensitive stock to hold when prices move south.

Analysis taken from Copley’s emerging market research, covering 250 global emerging market active strategies with combined AUM of $350bn.


Fanuc – Single Stock Bubble Meet Single Stock Pin

By Mio Kato, CFA

We have been harping on the excessive valuations in the FA sector for quite some time, and on Fanuc’s relative overvaluation vs. peers for even longer than that. In our view the case against Fanuc is stark and yesterday’s results highlight this further.


New Oriental (EDU): Students Declined YoY for First Time in Seven Years

By Ming Lu

  • Students declined YoY in 4Q20 for the first time since February 2013.
  • We believe revenue will decrease by 4% and the operating margin will decline by 2 percentage points in FY2021 (ended May 2021).
  • On the ground, students began to suspect whether English will be useful due to the tension between China and English-speaking countries.
  • The P/E band suggests the stock price will have a downside of 45% and the stock has risen for more than 3 months. Sell.

Kotak Mahindra Bank – Credit Falling Apart

By Thomas J. Monaco

* Flattish Results: Kotak Mahindra Bank (KMB.IN) [KMB] reported FY 1Q21 results of INR 12.4 bn, declining just INR 221 mn (1.7%) linked quarter. Although the stated quarter was flattish, if we exclude gains KMB’s operating result actually improved INR 2.0 bn (19.0%) to INR 12.5 mn; and

* Credit and Reserve Weakness: Linked quarter, we note that gross NPLs increased INR 5.9 bn (11.8%) and amounted to 2.70% of total loans – up 45 bp over the period. In fairness, loans outstanding did contract INR 157.5 bn or 7.2%. Loan loss provisions surprisingly declined INR 855 mn (8.2%) over the past 90 days – as credit quality and NCOs significantly worsened. By our calculation, reserves are light to the tune of INR 35 bn or about three quarters of bottom-line.   


ASIAN: Good Performance Has Already Priced In

By Research Group at Country Group Securities

We downgrade our recommendation to ‘SELL’ from ‘BUY’ with a new target price for 2021E at Bt7.2 (from Bt6.0), derived from 12.3xPE’21E which equal to its 3-year trading average.

  • We expect 2Q20E earnings to reach the record level of Bt110m (400%YoY, 5%QoQ), supported by a spike demand in frozen and pet food during global lockdown. In addition, 2Q20E performance will benefit from the Thai Baht ‘s depreciation (YoY).
  • However, we believe earnings in the remaining quarters to weaken HoH as demand for frozen and pet food declines. Meanwhile, GPM to contract from baht appreciation HoH.
  • In short-term, we believe the stock price has already reflected a strong earnings in 1H20E and should pull back to its trading average.

KOSÉ 1QFY21 Earnings Preview: China Recovery Overlooked

By Oshadhi Kumarasiri

In this insight we provide a preview into Kose Corp (4922 JP)’s 1QFY21 results scheduled to be released on 31st July 2020. Our approach to forecast quarterly results is based on our alternative data analysis. It uses monthly exports and domestic production data to forecast the company’s revenue. We discuss the details below.


Before it’s here, it’s on Smartkarma

Equity Bottom-Up: Tesla Motors, Mitsubishi Motors, AIA Group Ltd, Rex International Holding, Koei Tecmo Holdings, Link REIT, HM Sampoerna, Xtep International, Bank Central Asia and more

By | Bottom-Up Equities, Daily Briefs

In today’s briefing:

  • Tesla – Short Side Risk-Reward Looking Juicy Again
  • Mitsubishi Motors – Small and Ugly
  • AIA – Expecting An Even Weaker 2Q20 Result
  • Rex Int: From Virtual Drilling Tech Play to Pumping Oil in Oman; Overlooked Bargain + M&A Candidate
  • Koei Tecmo – Two New Sangokushi Games on Deck
  • Link REIT – Moving Further Away From Its Core
  • Sampoerna (HMSP): Losing From Higher Excise Tax
  • Notes from the Silk Road: Xtep Int’l Holdings (1368 HK): Profit Warning Comes as No Surprise
  • Bank Central Asia – Hunkering Down Is Not Helping

Tesla – Short Side Risk-Reward Looking Juicy Again

By Mio Kato, CFA

Tesla is up almost eight times from its July 2019 and at its intraday high was actually a ten-bagger in just over 12 months. Some of this rally was driven by the company reporting a string of profitable quarters and the more recent surge appears to have been heavily driven by retail trading with Tesla consistently remaining among the most popular Robinhood stocks. With the most recent earnings beat actually driving a share price fall of about 11%, however, the stock is starting to look vulnerable. We examine valuations and the earnings quality below.


Mitsubishi Motors – Small and Ugly

By Mio Kato, CFA

Today Mitsubishi Motors released a set of rather shocking results, harsh-looking but still perhaps optimistic guidance and its new Mid-Term Business Plan – Small but Beautiful. We find the company’s current situation to be anything but beautiful given the deterioration of results in its key ASEAN market.


AIA – Expecting An Even Weaker 2Q20 Result

By Thomas J. Monaco

* Weak 1H20 Operational Results Expected: AIA (1299.HK) is set to report 1H20 interim results on August 20, 2020. As a follow-on to AIA’s very abbreviated and abysmal 1Q20 operating result that was impacted by regional COVID-19 restrictions and social distancing measures in Greater China and ASEAN new business sales, and expense overruns – accelerating the decline in the value of new business (VONB), should continue to be problematic for AIA;

* Watch The Investment Portfolio: Yields drive the bottom-line at life insurers. Rates have been reduced to all-time lows in most markets globally, and investment returns at AIA’s bottom-line will continue to be challenged. In addition, ratings agency downgrades are expected to negatively impact AIA solvency margins.  With over USD 220 bn in corporate debt issues likely on the verge of downgrade by the venerable ratings agencies (which is greater than the actual USD 147 bn downgraded during the GFC) the market must be prepared for substantive hits to AIA’s investment portfolio; and 

* Weak Disclosure:We continue to encourage AIA to dislcose its assumptions for how it calculates in VONB margins. 


Rex Int: From Virtual Drilling Tech Play to Pumping Oil in Oman; Overlooked Bargain + M&A Candidate

By Nicolas Van Broekhoven

Rex International Holding (REXI SP) will celebrate its 7th year of being listed on the SGX this Friday. Rex IPO’d late July 2013 at 0.50 SGD and within three months of its listing peaked at 0.88 SGD. The downfall was epic as oil prices tumbled from 110 USD/bbl in 2013 to just 25 USD/bbl in 2016. Rex would finally bottom at 0.008 SGD per share in 3Q2018.

The stock has recovered some of its losses but REX is still trading 60% lower than its IPO. Now, times may be changing and Mr. Market is sleeping.

What has changed? Why Own Rex?

Rex has brought its Yumna field offshore Oman in development and is producing oil. Ten days ago Rex has achieved a declaration of commerciality from the Oman government and even at 40 USD oil price cash flows could be 40M USD/year. Contrast this with an Enterprise Value of just 143M USD. This leaves the stock trading at just over 3x 2021 Cash Flow. Obviously, this remains a commodity play and price taker so if oil prices drop/rise this number would change.

Short term catalysts: move to SGX mainboard once cash flows are evident, qualified person report to quantify volume of oil in Yumna field. Longer-term, given the average age of the principal shareholders involved, Rex is likely to end up in the hands of Eni SpA (ENI IM) or Total Sa Spon Adr (TOT US). Both companies are already active in Oman. Its remaining Norway assets and Virtual Drilling technology are just gravy.

Fair Value: Asset development in Oman and asset monetization in Norway gives Fair Value of at least 0.36 SGD/share, or 100% upside. This is based on 6x 2021 cash flow est. M&A could significantly increase that value to acquirer given size of Block 50 in Oman. ADTV is well over 3M USD.

Key risks are: drop in oil price below 25 USD which makes Oman project uneconomical. The downside is mitigated by a clean balance sheet (zero debt and +/-60M USD net cash) + M&A potential.

Key upside: cut in O&G CapEx budgets creates a super spike in oil prices between 2022-2025. Recall, JP Morgan recently told its clients oil could spike to 190 USD by 2025. The principal owners are well into their 70’s and will want to monetize their combined 45% ownership in Rex at some point.


Koei Tecmo – Two New Sangokushi Games on Deck

By Mio Kato, CFA

KT delivered strong results yesterday with OP of ¥4.4bn exceeding consensus’ ¥3.6bn estimate by 22%. When we last wrote on KT back in April we suggested that consensus OP estimates for the FY (¥19.3bn) could be exceeded by 50%+. Since then consensus has risen to ¥22.4bn but we feel there is still more upside.


Link REIT – Moving Further Away From Its Core

By Thomas J. Monaco

 * New Transaction In London: On July 26, 2020, Link REIT (823.HK) announced its proposed acquisition of a Grade A office building, The Cabot at 25 Cabot Square at Canary Wharf in London for  GBP 371mn or HKD 3.68 bn –  5% lower than market expectations. The Cabot is Grade A freehold multi-let Canary Wharf office with over 44,000 sq. meters and is widely recognized landmark;

 * Deal Makes Close To No Sense: While the acquisition of The Cabot is mildly dividend accretive on its face at approximately 1.4%, this transaction makes little sense for Link REIT on a number of levels; and

 *Hong Kong Pressures Are Very Apparent: This transaction so far away from Link REIT’s core competencies speaks volumes as to where it believes its core Hong Kong retail business is heading. This doesn’t seem like smart diversification and smells more of panic leverage when one considers the thre price and location of this deal. 


Sampoerna (HMSP): Losing From Higher Excise Tax

By Henry Soediarko

The unsatisfactory 1H 2020 operating numbers that stemmed from lower revenue growth and higher excise taxes reduce operating cash flow, prompting the company to increase the amount of debt in the balance sheet that will further reduce the net income margin by 1.7 to 4% if the next six months’ operating numbers will not improve. With the shift in the consumers’ taste that reduces Dji-Sam-Soe’s (HMSP’s flagship product) sales, HMSP is not in the best position to outperform the potential weak consumption trend in the second half of 2020. If HMSP were to cut or forego dividends next year, it will accelerate the switch from HMSP to GGRM. 

HMSP’s operating numbers are also very volatile compared to the steady GGRM’s, yet the former seems to trade at a higher valuation in the Indonesian equity market compared to the latter albeit losing market share. Maintain underweight HMSP and overweight GGRM. 


Notes from the Silk Road: Xtep Int’l Holdings (1368 HK): Profit Warning Comes as No Surprise

By David Lepper

In April 2020, we highlighted that the head winds for XTEP in H1 2020 were likely to be strong; our reasoning was that Chinese sportswear is not a priority item on the consumer’s discretionary spend list of the average consumer given the current climate. However, once conditions improve and confidence returns so should the attractiveness of the product. With the company having released its expected profit warning, as it heads into its black-out period, we ask is it time to revisit the stock?


Bank Central Asia – Hunkering Down Is Not Helping

By Thomas J. Monaco

*Lower Costs and Under-Provisioning Support Result: Bank Central Asia’ (BBCA.IJ) [BCA] reported 2Q20 earnings results of IDR of 5.7 bn, declining IDR 924 mn (14.0%) linked quarter – and missing consensus forecasts. However, if we exclude securities gains we find that core operating results actually improved linked quarter by IDR 1.3 bn (30.2%) to IDR 5.8 bn. While BCA was – like most banks around the word – was ravaged by credit weakness, the story for the quarter is management’s ability to quickly rein-in costs; and

*Accelerating Credit Risk Supported By Lower Reserves: BCA’s NPLs increased IDR 2.5 bn (26.5%) linked quarter, and amount to 2.09% of total loans – up 18 bp over the period. 2020 guidance, however, remains unchanged at between 2.5-2.7%.NPL recognition of loans within the restructuring process/moratorium are throwing a wrench into BCA’s forecasts, however. As it stands, reserves were bled against both total loans and NPLs linked quarter (seemingly not taking potential losses of its forecast moratorium book into account) declined 25 bp and 45.3%, respectively, to 2.05% and 99.1%.


Before it’s here, it’s on Smartkarma

Equity Bottom-Up: Tencent Holdings, Beyond Meat Inc, Alibaba Group, Tesla Motors, Xtep International, Aomori Bank, Rex International Holding and more

By | Bottom-Up Equities, Daily Briefs

In today’s briefing:

  • Tencent – Well Timed Transaction
  • Smartkarma Webinar | Beyond Food: No Longer Impossible
  • China Internet Weekly (27Jul2020): Online Retail Continued to Accelerate in June
  • Tesla – Short Side Risk-Reward Looking Juicy Again
  • Notes from the Silk Road: Xtep Int’l Holdings (1368 HK): Profit Warning Comes as No Surprise
  • Aomori Bank  (8342 JP):  A Withered Oak in the Green Forest
  • Rex Int: From Virtual Drilling Tech Play to Pumping Oil in Oman; Overlooked Bargain + M&A Candidate

Tencent – Well Timed Transaction

By Thomas J. Monaco

*Another Material Developments At Afterpay: Afterpay Touch (APT.AU) confirmed another material development. The launch of its global rewards system called “Pulse” commenced in the US, and is set to be launched in the United Kingdom, Australia, and New Zealand in the coming months. In short, Afterpay is looking to reward regular users who pay on time (five purchases every six months) which turns the credit card model on its head, as it relies solely on increasing customer spend for points; 

*Other Recently Announced Positives: In addition to the update provided on Pulse, Afterpay has provided a solid update on its growth and traction post-deal; expressed its interest in a capital raise; and onboarded Apple Pay (AAPL.US) and Alphabet (GOOG.US) Google Pay; and

*Magic Fairy Dust: While no transaction particulars were disclosed, we calculate an average share purchase price of AUD 22.47 per share for the 5% stake or a hefty 6.8x P/BV for a company which is loss-making and where Tencent hasn’t control. Tencent has already earned 146% on this stake. 


Smartkarma Webinar | Beyond Food: No Longer Impossible

By Smartkarma Research

In this Smartkarma Webinar, we speak to David Huggins, CFA, Nutrition Portfolio Manager at Blackrock’s BGF Nutrition Fund. David will discuss current trends in food and nutrition, including plant-based protein, changing consumer behaviour, and the future of food technology.

The webinar will be hosted on Wednesday, 29/July/2020, 5.00pm SGT/HKT.

David is co-portfolio manager of the BGF Nutrition fund, a Blackrock sustainable thematic fund. Areas of expertise include nutrition, food & beverage, agriculture, and cannabis/CBD. He has a solid track record in public equity investing and is skilled in bottom-up investment analysis, modelling, and big-picture thinking. He graduated from the University of Bristol and is a CFA Charterholder.


China Internet Weekly (27Jul2020): Online Retail Continued to Accelerate in June

By Ming Lu

  • The growth rate of China online retail reached 19% YoY in June, higher than 15.6% YoY in May.
  • Chinese retailing e-commerce companies raised funds of RMB28.6 billion in 1H20, decreasing by 74.5% YoY.
  • Ministry of Human Resource and Social Security warned about “employee sharing”, which was started by Alibaba (BABA).

Tesla – Short Side Risk-Reward Looking Juicy Again

By Mio Kato, CFA

Tesla is up almost eight times from its July 2019 and at its intraday high was actually a ten-bagger in just over 12 months. Some of this rally was driven by the company reporting a string of profitable quarters and the more recent surge appears to have been heavily driven by retail trading with Tesla consistently remaining among the most popular Robinhood stocks. With the most recent earnings beat actually driving a share price fall of about 11%, however, the stock is starting to look vulnerable. We examine valuations and the earnings quality below.


Notes from the Silk Road: Xtep Int’l Holdings (1368 HK): Profit Warning Comes as No Surprise

By David Lepper

In April 2020, we highlighted that the head winds for XTEP in H1 2020 were likely to be strong; our reasoning was that Chinese sportswear is not a priority item on the consumer’s discretionary spend list of the average consumer given the current climate. However, once conditions improve and confidence returns so should the attractiveness of the product. With the company having released its expected profit warning, as it heads into its black-out period, we ask is it time to revisit the stock?


Aomori Bank  (8342 JP):  A Withered Oak in the Green Forest

By J. Brian Waterhouse

1Q FY3/2021 results for Aomori Bank (8342 JP), the leading regional bank based in Aomori Prefecture at the very top of Japan’s main island of Honshu, showed a 10% YoY improvement in consolidated net profits despite a fall in overall revenues.  Dig a little deeper and it becomes evident that that result was achieved through heavy reliance on stock profits, bond trading and asset sales.

Aomori Bank (“Aomori” 青森 means “green forest” in Japanese) is a good example of the plight befalling many regional banks around Japan where the population is shrinking rapidly, young workers are leaving to find jobs elsewhere and the local economy is in long-term decline.  Net profit generation is poor, core earnings have been declining rapidly since FY3/2013, net interest margin has fallen to less than half what it was a decade ago, the overhead ratio is a worrying 84%, credit costs are rising exponentially and the bank has been forced to cut its FY3/2021 dividend from ¥60ps to ¥50ps to preserve capital.

The stock price is down 21% in the last six months and yet, on a forward-looking PER of 27.9x (using the bank’s own FY3/2021 guidance), this remains the 2nd-most demanding regional bank stock in the Tohoku Region (being beaten only by Michinoku Bank (8350 JP), also from Aomori Prefecture, on a staggering 62.7x).

Remarkably, aggregate ownership by foreign institutional investors is at an all-time high, and has been rising steadily for the last eight years.  We fail to understand the attraction.  Caveat Emptor!  (May the Buyer Beware) is our advice to any would-be investor in this bank stock.


Rex Int: From Virtual Drilling Tech Play to Pumping Oil in Oman; Overlooked Bargain + M&A Candidate

By Nicolas Van Broekhoven

Rex International Holding (REXI SP) will celebrate its 7th year of being listed on the SGX this Friday. Rex IPO’d late July 2013 at 0.50 SGD and within three months of its listing peaked at 0.88 SGD. The downfall was epic as oil prices tumbled from 110 USD/bbl in 2013 to just 25 USD/bbl in 2016. Rex would finally bottom at 0.008 SGD per share in 3Q2018.

The stock has recovered some of its losses but REX is still trading 60% lower than its IPO. Now, times may be changing and Mr. Market is sleeping.

What has changed? Why Own Rex?

Rex has brought its Yumna field offshore Oman in development and is producing oil. Ten days ago Rex has achieved a declaration of commerciality from the Oman government and even at 40 USD oil price cash flows could be 40M USD/year. Contrast this with an Enterprise Value of just 143M USD. This leaves the stock trading at just over 3x 2021 Cash Flow. Obviously, this remains a commodity play and price taker so if oil prices drop/rise this number would change.

Short term catalysts: move to SGX mainboard once cash flows are evident, qualified person report to quantify volume of oil in Yumna field. Longer-term, given the average age of the principal shareholders involved, Rex is likely to end up in the hands of Eni SpA (ENI IM) or Total Sa Spon Adr (TOT US). Both companies are already active in Oman. Its remaining Norway assets and Virtual Drilling technology are just gravy.

Fair Value: Asset development in Oman and asset monetization in Norway gives Fair Value of at least 0.36 SGD/share, or 100% upside. This is based on 6x 2021 cash flow est. M&A could significantly increase that value to acquirer given size of Block 50 in Oman. ADTV is well over 3M USD.

Key risks are: drop in oil price below 25 USD which makes Oman project uneconomical. The downside is mitigated by a clean balance sheet (zero debt and +/-60M USD net cash) + M&A potential.

Key upside: cut in O&G CapEx budgets creates a super spike in oil prices between 2022-2025. Recall, JP Morgan recently told its clients oil could spike to 190 USD by 2025. The principal owners are well into their 70’s and will want to monetize their combined 45% ownership in Rex at some point.


Before it’s here, it’s on Smartkarma

Brief Equities Bottom-Up: Tesla – Short Side Risk-Reward Looking Juicy Again and more

By | Bottom-Up Equities, Daily Briefs

In this briefing:

  1. Tesla – Short Side Risk-Reward Looking Juicy Again
  2. Notes from the Silk Road: Xtep Int’l Holdings (1368 HK): Profit Warning Comes as No Surprise
  3. Smartkarma Webinar
  4. China Internet Weekly (27Jul2020): Online Retail Continued to Accelerate in June
  5. Aomori Bank  (8342 JP):  A Withered Oak in the Green Forest

1. Tesla – Short Side Risk-Reward Looking Juicy Again

Image 50497740681595827407792

Tesla is up almost eight times from its July 2019 and at its intraday high was actually a ten-bagger in just over 12 months. Some of this rally was driven by the company reporting a string of profitable quarters and the more recent surge appears to have been heavily driven by retail trading with Tesla consistently remaining among the most popular Robinhood stocks. With the most recent earnings beat actually driving a share price fall of about 11%, however, the stock is starting to look vulnerable. We examine valuations and the earnings quality below.

2. Notes from the Silk Road: Xtep Int’l Holdings (1368 HK): Profit Warning Comes as No Surprise

Picture2

In April 2020, we highlighted that the head winds for XTEP in H1 2020 were likely to be strong; our reasoning was that Chinese sportswear is not a priority item on the consumer’s discretionary spend list of the average consumer given the current climate. However, once conditions improve and confidence returns so should the attractiveness of the product. With the company having released its expected profit warning, as it heads into its black-out period, we ask is it time to revisit the stock?

3. Smartkarma Webinar

In this Smartkarma Webinar, we speak to David Huggins, CFA, Nutrition Portfolio Manager at Blackrock’s BGF Nutrition Fund. David will discuss current trends in food and nutrition, including plant-based protein, changing consumer behaviour, and the future of food technology.

The webinar will be hosted on Wednesday, 29/July/2020, 5.00pm SGT/HKT.



David is co-portfolio manager of the BGF Nutrition fund, a Blackrock sustainable thematic fund. Areas of expertise include nutrition, food & beverage, agriculture, and cannabis/CBD. He has a solid track record in public equity investing and is skilled in bottom-up investment analysis, modelling, and big-picture thinking. He graduated from the University of Bristol and is a CFA Charterholder.

4. China Internet Weekly (27Jul2020): Online Retail Continued to Accelerate in June

Image 5550758721595741867654

  • The growth rate of China online retail reached 19% YoY in June, higher than 15.6% YoY in May.
  • Chinese retailing e-commerce companies raised funds of RMB28.6 billion in 1H20, decreasing by 74.5% YoY.
  • Ministry of Human Resource and Social Security warned about “employee sharing”, which was started by Alibaba (BABA).

5. Aomori Bank  (8342 JP):  A Withered Oak in the Green Forest

8342 aomori 2020 0726 current%20guidance

1Q FY3/2021 results for Aomori Bank (8342 JP), the leading regional bank based in Aomori Prefecture at the very top of Japan’s main island of Honshu, showed a 10% YoY improvement in consolidated net profits despite a fall in overall revenues.  Dig a little deeper and it becomes evident that that result was achieved through heavy reliance on stock profits, bond trading and asset sales.

Aomori Bank (“Aomori” 青森 means “green forest” in Japanese) is a good example of the plight befalling many regional banks around Japan where the population is shrinking rapidly, young workers are leaving to find jobs elsewhere and the local economy is in long-term decline.  Net profit generation is poor, core earnings have been declining rapidly since FY3/2013, net interest margin has fallen to less than half what it was a decade ago, the overhead ratio is a worrying 84%, credit costs are rising exponentially and the bank has been forced to cut its FY3/2021 dividend from ¥60ps to ¥50ps to preserve capital.

The stock price is down 21% in the last six months and yet, on a forward-looking PER of 27.9x (using the bank’s own FY3/2021 guidance), this remains the 2nd-most demanding regional bank stock in the Tohoku Region (being beaten only by Michinoku Bank (8350 JP), also from Aomori Prefecture, on a staggering 62.7x).

Remarkably, aggregate ownership by foreign institutional investors is at an all-time high, and has been rising steadily for the last eight years.  We fail to understand the attraction.  Caveat Emptor!  (May the Buyer Beware) is our advice to any would-be investor in this bank stock.

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Brief Equities Bottom-Up: Notes from the Silk Road: Xtep Int’l Holdings (1368 HK): Profit Warning Comes as No Surprise and more

By | Bottom-Up Equities, Daily Briefs

In this briefing:

  1. Notes from the Silk Road: Xtep Int’l Holdings (1368 HK): Profit Warning Comes as No Surprise
  2. Smartkarma Webinar
  3. China Internet Weekly (27Jul2020): Online Retail Continued to Accelerate in June
  4. Aomori Bank  (8342 JP):  A Withered Oak in the Green Forest
  5. Kunlun Energy (135 HK): Positive Implications from PetroChina and Sinopec Pipelines Disposal

1. Notes from the Silk Road: Xtep Int’l Holdings (1368 HK): Profit Warning Comes as No Surprise

Picture1

In April 2020, we highlighted that the head winds for XTEP in H1 2020 were likely to be strong; our reasoning was that Chinese sportswear is not a priority item on the consumer’s discretionary spend list of the average consumer given the current climate. However, once conditions improve and confidence returns so should the attractiveness of the product. With the company having released its expected profit warning, as it heads into its black-out period, we ask is it time to revisit the stock?

2. Smartkarma Webinar

In this Smartkarma Webinar, we speak to David Huggins, CFA, Nutrition Portfolio Manager at Blackrock’s BGF Nutrition Fund. David will discuss current trends in food and nutrition, including plant-based protein, changing consumer behaviour, and the future of food technology.

The webinar will be hosted on Wednesday, 29/July/2020, 5.00pm SGT/HKT.



David is co-portfolio manager of the BGF Nutrition fund, a Blackrock sustainable thematic fund. Areas of expertise include nutrition, food & beverage, agriculture, and cannabis/CBD. He has a solid track record in public equity investing and is skilled in bottom-up investment analysis, modelling, and big-picture thinking. He graduated from the University of Bristol and is a CFA Charterholder.

3. China Internet Weekly (27Jul2020): Online Retail Continued to Accelerate in June

Image 88942528431595741867654

  • The growth rate of China online retail reached 19% YoY in June, higher than 15.6% YoY in May.
  • Chinese retailing e-commerce companies raised funds of RMB28.6 billion in 1H20, decreasing by 74.5% YoY.
  • Ministry of Human Resource and Social Security warned about “employee sharing”, which was started by Alibaba (BABA).

4. Aomori Bank  (8342 JP):  A Withered Oak in the Green Forest

8342 aomori 2020 0726 net%20credit%20costs

1Q FY3/2021 results for Aomori Bank (8342 JP), the leading regional bank based in Aomori Prefecture at the very top of Japan’s main island of Honshu, showed a 10% YoY improvement in consolidated net profits despite a fall in overall revenues.  Dig a little deeper and it becomes evident that that result was achieved through heavy reliance on stock profits, bond trading and asset sales.

Aomori Bank (“Aomori” 青森 means “green forest” in Japanese) is a good example of the plight befalling many regional banks around Japan where the population is shrinking rapidly, young workers are leaving to find jobs elsewhere and the local economy is in long-term decline.  Net profit generation is poor, core earnings have been declining rapidly since FY3/2013, net interest margin has fallen to less than half what it was a decade ago, the overhead ratio is a worrying 84%, credit costs are rising exponentially and the bank has been forced to cut its FY3/2021 dividend from ¥60ps to ¥50ps to preserve capital.

The stock price is down 21% in the last six months and yet, on a forward-looking PER of 27.9x (using the bank’s own FY3/2021 guidance), this remains the 2nd-most demanding regional bank stock in the Tohoku Region (being beaten only by Michinoku Bank (8350 JP), also from Aomori Prefecture, on a staggering 62.7x).

Remarkably, aggregate ownership by foreign institutional investors is at an all-time high, and has been rising steadily for the last eight years.  We fail to understand the attraction.  Caveat Emptor!  (May the Buyer Beware) is our advice to any would-be investor in this bank stock.

5. Kunlun Energy (135 HK): Positive Implications from PetroChina and Sinopec Pipelines Disposal

Image 39933314531595755948408

We see positive implications for Kunlun Energy (135 HK) from the disposal of oil and gas pipelines to PipeChina by its parent Petrochina Co Ltd H (857 HK) and China Petroleum & Chemical (386 HK) at 1.2x and 1.4x P/B, respectively. Kunlun is still in negotiation with PipeChina on the disposal of its own pipelines. Assuming 1.2x P/B for Kunlun’s pipeline assets, Kunlun will be valued at HK$9.0 per share. If Kunlun is to receive the consideration all in cash, this will equal to HK$4.48/share, or a significant 69% of its share price. 

Even without considering the disposal, we still value Kunlun at HK$8.30/share. Kunlun is trading on an inexpensive 1.1x P/B, still 1 SD below the historical average of 1.27x. The potential for a special dividend after the disposal and an alignment of its valuation closer to the gas utilities sector should warrant the stock a higher valuation relative to the current level, in our view.

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Brief Equities Bottom-Up: Smartkarma Webinar and more

By | Bottom-Up Equities, Daily Briefs

In this briefing:

  1. Smartkarma Webinar
  2. China Internet Weekly (27Jul2020): Online Retail Continued to Accelerate in June
  3. Aomori Bank  (8342 JP):  A Withered Oak in the Green Forest
  4. Kunlun Energy (135 HK): Positive Implications from PetroChina and Sinopec Pipelines Disposal
  5. Tencent – Well Timed Transaction

1. Smartkarma Webinar

In this Smartkarma Webinar, we speak to David Huggins, CFA, Nutrition Portfolio Manager at Blackrock’s BGF Nutrition Fund. David will discuss current trends in food and nutrition, including plant-based protein, changing consumer behaviour, and the future of food technology.

The webinar will be hosted on Wednesday, 29/July/2020, 5.00pm SGT/HKT.



David is co-portfolio manager of the BGF Nutrition fund, a Blackrock sustainable thematic fund. Areas of expertise include nutrition, food & beverage, agriculture, and cannabis/CBD. He has a solid track record in public equity investing and is skilled in bottom-up investment analysis, modelling, and big-picture thinking. He graduated from the University of Bristol and is a CFA Charterholder.

2. China Internet Weekly (27Jul2020): Online Retail Continued to Accelerate in June

Image 88942528431595741867654

  • The growth rate of China online retail reached 19% YoY in June, higher than 15.6% YoY in May.
  • Chinese retailing e-commerce companies raised funds of RMB28.6 billion in 1H20, decreasing by 74.5% YoY.
  • Ministry of Human Resource and Social Security warned about “employee sharing”, which was started by Alibaba (BABA).

3. Aomori Bank  (8342 JP):  A Withered Oak in the Green Forest

8342 aomori 2020 0726 current%20guidance

1Q FY3/2021 results for Aomori Bank (8342 JP), the leading regional bank based in Aomori Prefecture at the very top of Japan’s main island of Honshu, showed a 10% YoY improvement in consolidated net profits despite a fall in overall revenues.  Dig a little deeper and it becomes evident that that result was achieved through heavy reliance on stock profits, bond trading and asset sales.

Aomori Bank (“Aomori” 青森 means “green forest” in Japanese) is a good example of the plight befalling many regional banks around Japan where the population is shrinking rapidly, young workers are leaving to find jobs elsewhere and the local economy is in long-term decline.  Net profit generation is poor, core earnings have been declining rapidly since FY3/2013, net interest margin has fallen to less than half what it was a decade ago, the overhead ratio is a worrying 84%, credit costs are rising exponentially and the bank has been forced to cut its FY3/2021 dividend from ¥60ps to ¥50ps to preserve capital.

The stock price is down 21% in the last six months and yet, on a forward-looking PER of 27.9x (using the bank’s own FY3/2021 guidance), this remains the 2nd-most demanding regional bank stock in the Tohoku Region (being beaten only by Michinoku Bank (8350 JP), also from Aomori Prefecture, on a staggering 62.7x).

Remarkably, aggregate ownership by foreign institutional investors is at an all-time high, and has been rising steadily for the last eight years.  We fail to understand the attraction.  Caveat Emptor!  (May the Buyer Beware) is our advice to any would-be investor in this bank stock.

4. Kunlun Energy (135 HK): Positive Implications from PetroChina and Sinopec Pipelines Disposal

Image 39933314531595755948408

We see positive implications for Kunlun Energy (135 HK) from the disposal of oil and gas pipelines to PipeChina by its parent Petrochina Co Ltd H (857 HK) and China Petroleum & Chemical (386 HK) at 1.2x and 1.4x P/B, respectively. Kunlun is still in negotiation with PipeChina on the disposal of its own pipelines. Assuming 1.2x P/B for Kunlun’s pipeline assets, Kunlun will be valued at HK$9.0 per share. If Kunlun is to receive the consideration all in cash, this will equal to HK$4.48/share, or a significant 69% of its share price. 

Even without considering the disposal, we still value Kunlun at HK$8.30/share. Kunlun is trading on an inexpensive 1.1x P/B, still 1 SD below the historical average of 1.27x. The potential for a special dividend after the disposal and an alignment of its valuation closer to the gas utilities sector should warrant the stock a higher valuation relative to the current level, in our view.

5. Tencent – Well Timed Transaction

*Another Material Developments At Afterpay: Afterpay Touch (APT.AU) confirmed another material development. The launch of its global rewards system called “Pulse” commenced in the US, and is set to be launched in the United Kingdom, Australia, and New Zealand in the coming months. In short, Afterpay is looking to reward regular users who pay on time (five purchases every six months) which turns the credit card model on its head, as it relies solely on increasing customer spend for points; 

*Other Recently Announced Positives: In addition to the update provided on Pulse, Afterpay has provided a solid update on its growth and traction post-deal; expressed its interest in a capital raise; and onboarded Apple Pay (AAPL.US) and Alphabet (GOOG.US) Google Pay; and

*Magic Fairy Dust: While no transaction particulars were disclosed, we calculate an average share purchase price of AUD 22.47 per share for the 5% stake or a hefty 6.8x P/BV for a company which is loss-making and where Tencent hasn’t control. Tencent has already earned 146% on this stake. 

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Brief Equities Bottom-Up: Bank of Baroda – BOBbing and Weaving and more

By | Bottom-Up Equities, Daily Briefs

In this briefing:

  1. Bank of Baroda – BOBbing and Weaving
  2. LIC Housing Finance – Capital Concerns
  3. Edelweiss: A Deal Is Likely by 2H of July
  4. Korea Small Cap Gem #3: New Tree Co

1. Bank of Baroda – BOBbing and Weaving

* Ex-DTA, Results Were Awful: Were it not for the enormous utilization of deferred tax assets (DTA) of INR 22.3 bn, Bank of Baroda (BOB.IN) [BOB] would have reported significant losses for FY 4Q20. BOB has yet to take a decision on the new tax rate which could potentially impact near term earnings. FY 4Q20 results amounted to a positive INR 5.1 bn. Driving BOB’s results during the period, we find that net interest income declined INR 3.3 bn (4.6%) on the back of a 20 bp decline in the NIM to 2.9%; and an INR 920 mn ( 1.9%) decline in fee revenues; 

* Bad Credit and Weak Cover: Despite the INR 37 bn (5.1%) decline in Stage 3 loans linked quarter, NPLs still amount to a hefty INR 694 bn or 10.1% at FY 4Q20 – down from 11.2% in FY 3Q20. We remain uncomfortable with the the level of coverage given the balance sheet risk as we head into a debilitating crisis whilst BOB has yet to provide INR 15 bn on DHFL exposure (which it classified as fraud). We calculate that BOB’s reserves are too low by INR 290 bn or 61% – which begs the question how povisions can be lowered and how the accountants allowed the utilization of the DTA; and

*Regulatory Capital Ratios About To Be Challenged: BOB has yet to provide Rs15bn on DHFL exposure (which it classified as fraud); adjusted for this, CET 1 ratio would have declined further by 15 bp (post-tax) to 9.3%. CET1 declines an 290 bp if it provided for our calculated reserve shortfall.

2. LIC Housing Finance – Capital Concerns

* Poor Results, and Should Be Worse Down The Line: LIC Housing Finance (LICHF.IN) (LIC Housing) reported a weak FY 4Q20 bottom-line of INR 4.2 bn – declining INR 1.8 bn (29.5%) linked quarter. While profitable, the poor results were driven by an INR 1.2 bn (9.5%) decline in net interest income resultant of 32 bp NIM contraction to 2.10%; an INR 907 mn (65.6%) increase in operating expenses led by other expenses which included a one-time INR 400 mn CSR expense; and an increase in its tax rate to 49.0% (from 19.8%);

* Credit Concerns Remain Heightened: Linked quarter, Stage 3 loans increased INR 3.4 bn (6.1%) and increased 10 bp over the period to 2.83% of total loans – somewhat offset by the 2.4% increase in lending., although we are unclear how much of an impact of the standstill. The moratorium accounts for 25% of the loan portfolio. In our view, managing coverage lower in order to produce earnings in front of a capital raise is not wise as we head into the most significant global downturn since the GFC. With the stated annualized net new NPL increase of 24.5%, we find that LIC Housing’s loss reserves are too low by INR 48.1 bn or nearly 2x stated reserves; and

* Anticipating Additional Capital: Leverage at LIC Housing is a concern – prior to accounting to our calculated  reserve shortfall. Inclusive of the reserve shortfall, we estimate that LIC Housing exceeds the current regulatory cap.

3. Edelweiss: A Deal Is Likely by 2H of July

Image 56655051621593321735571

As per an Economic Times (ET) article on Jun 24, Edelweiss Financial Services (EDEL IN) has already received first stage bidding from various PE investors and Bank of Singapore for acquiring a minority stake in Edelweiss’ advisory business. Second round bidding is likely to happen by mid-July. With SEBI extending the quarterly earnings announcement deadline, we now extend our anticipated timeline for a deal and earnings announcement to 2H of Jul from end of Jun earlier. Edelweiss’ stock has already moved up significantly (about 40% up move over the last 7-8 trading sessions) in anticipation of a deal announcement. We believe that the current valuations remain attractive, despite the up move.

Insight Flow:

  • Earnings Deadline Extended by SEBI
  • Favorable Shareholder Voting
  • Deal Progress & Outlook
  • Valuation

4. Korea Small Cap Gem #3: New Tree Co

Pandora

New Tree Co is the third company we introduce in our “Korea Small Cap Gem” series. New Tree is one of the best up-and-coming companies in the “inner beauty” product segment, especially for eatable collagen products. They also have some outstanding health and diet food supplement products that should continue to thrive in the next few years.

Millions of people in Korea often believe that eating foods that are rich in collagen such as 족발 (pigs’ feet) helps to beautify their skin. Other foods that help the body to produce collagen include bone broth, chicken, fish, egg whites, and citrus fruits. Because of the positive association with beautifying the skin and producing collagen, this is where the company’s Evercollagen has achieved a big success.

Valuation – We believe that the company’s P/E multiples to rise to the 14 to 16x range over the next 12 months which would be closer to the industry average and as investors attach higher valuation multiple to this company, given the company’s superior sales and net profit growth compared to its competitors. If we assume a 15x P/E based on the net profit of 22.6 billion won, this would suggest an implied market cap of 339 billion won (37,375 won per share), which would be a 32% upside from current levels (28,300 won per share).  

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Brief Equities Bottom-Up: Kunlun Energy (135 HK): Positive Implications from PetroChina and Sinopec Pipelines Disposal and more

By | Bottom-Up Equities, Daily Briefs

In this briefing:

  1. Kunlun Energy (135 HK): Positive Implications from PetroChina and Sinopec Pipelines Disposal
  2. Tencent – Well Timed Transaction
  3. Yamato Benefits as Failed E-Commerce Delivery Rates Cut by Half During Crisis
  4. Hamamatsu Photonics (6965 JP): Set Up for Disappointment
  5. Intel. Deja Vu All Over Again With 7nm Delayed One Year. Long TSMC.

1. Kunlun Energy (135 HK): Positive Implications from PetroChina and Sinopec Pipelines Disposal

Valuation%20of%20pipeline%20assets

We see positive implications for Kunlun Energy (135 HK) from the disposal of oil and gas pipelines to PipeChina by its parent Petrochina Co Ltd H (857 HK) and China Petroleum & Chemical (386 HK) at 1.2x and 1.4x P/B, respectively. Kunlun is still in negotiation with PipeChina on the disposal of its own pipelines. Assuming 1.2x P/B for Kunlun’s pipeline assets, Kunlun will be valued at HK$9.0 per share. If Kunlun is to receive the consideration all in cash, this will equal to HK$4.48/share, or a significant 69% of its share price. 

Even without considering the disposal, we still value Kunlun at HK$8.30/share. Kunlun is trading on an inexpensive 1.1x P/B, still 1 SD below the historical average of 1.27x. The potential for a special dividend after the disposal and an alignment of its valuation closer to the gas utilities sector should warrant the stock a higher valuation relative to the current level, in our view.

2. Tencent – Well Timed Transaction

*Another Material Developments At Afterpay: Afterpay Touch (APT.AU) confirmed another material development. The launch of its global rewards system called “Pulse” commenced in the US, and is set to be launched in the United Kingdom, Australia, and New Zealand in the coming months. In short, Afterpay is looking to reward regular users who pay on time (five purchases every six months) which turns the credit card model on its head, as it relies solely on increasing customer spend for points; 

*Other Recently Announced Positives: In addition to the update provided on Pulse, Afterpay has provided a solid update on its growth and traction post-deal; expressed its interest in a capital raise; and onboarded Apple Pay (AAPL.US) and Alphabet (GOOG.US) Google Pay; and

*Magic Fairy Dust: While no transaction particulars were disclosed, we calculate an average share purchase price of AUD 22.47 per share for the 5% stake or a hefty 6.8x P/BV for a company which is loss-making and where Tencent hasn’t control. Tencent has already earned 146% on this stake. 

3. Yamato Benefits as Failed E-Commerce Delivery Rates Cut by Half During Crisis

Redeliveries%202

Delivering parcels from online stores has got a whole lot easier for Japan’s ever-valiant courier drivers. In the past six months, the rate of parcels needing to be redelivered has dropped by half.

This figure will no doubt rise again once the crisis abates and people return to work, but the figure is falling longer-term as couriers, led by Yamato Holdings (9064 JP),  and vendors all work on new solutions to alleviate the problem. The simplest is to avoid the issue altogether by just dropping parcels off regardless of whether there is anyone at home.

Japan’s improving efficiency and increasing number of delivery solutions are necessary given the increased flow of online orders and should help improve operating margins. In May alone, Yamato recorded receipt of 165 million packages, a 20% increase on 2019. In the first two months of FY2020, Yamato handled 320 million packages, up 16.3% overall.

4. Hamamatsu Photonics (6965 JP): Set Up for Disappointment

Hamamatsu%20op

  • Guidance was cut after disappointing 1H results, but management’s new forecast for FY Sep-20 does not include the impact of COVID-19.
  • Instead, management notes that the pandemic could reduce 2H sales by another 10% – 15%. In our estimation, this would lead to a 25% – 34% decline in FY Sep-20 net profit.
  • Management’s plan for the following two years remains unchanged. It implies a sharp rebound taking operating profit well above its FY Sep-18 peak.
  • This plan is based on capacity expansion and demand forecasts made before the outbreak of COVID-19. But capital spending is now being postponed.
  • The share price has rebounded by 47% since March. The projected P/E ratios implied by management’s plan are 33x for FY Sep-22 and 28x for FY Sep-23. The 5-year historical P/E range is 22x – 38x. 
  • As infections continue to rise and lockdowns are reimposed, management’s plan looks over-optimistic, at least for the coming syear.
  • 3Q results should be announced in early August.

5. Intel. Deja Vu All Over Again With 7nm Delayed One Year. Long TSMC.

Image 75934535721595574819733

Intel’s by now all-too-familiar earnings beat this week was completely overshadowed by the veritable bombshell the company dropped regarding its 7nm process roadmap. CEO Bob Swan announced that yields were about twelve months behind where they should be and that the first 7nm product ramp would be delayed by about six months. The announcement comes just over two years after Intel revealed that their 10nm process would be delayed for the same reason. 

Intel’s share price fell more than 10% in after-hours trading, losing a further 6% by Friday’s close. In sharp contrast, AMD and TSMC, the two companies most likely to benefit from Intel’s misfortune, recorded share price increases of 16.5% and 9.7% respectively in the same trading session. 

CEO Bob Swan valiantly sought to calm investor fears with soothing words about contingency plans involving outsourcing manufacturing to foundry. In his closing summary he went so far as to say that “we feel pretty good about where we are”. Bizarrely, he even seemed at one stage to suggest that this state of affairs was a good for the company. The reality is very different indeed. Here’s our analysis of what Intel had to say, the implications for the company and, most likely, for TSMC.

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Brief Equities Bottom-Up: LIC Housing Finance – Capital Concerns and more

By | Bottom-Up Equities, Daily Briefs

In this briefing:

  1. LIC Housing Finance – Capital Concerns
  2. Edelweiss: A Deal Is Likely by 2H of July
  3. Korea Small Cap Gem #3: New Tree Co

1. LIC Housing Finance – Capital Concerns

* Poor Results, and Should Be Worse Down The Line: LIC Housing Finance (LICHF.IN) (LIC Housing) reported a weak FY 4Q20 bottom-line of INR 4.2 bn – declining INR 1.8 bn (29.5%) linked quarter. While profitable, the poor results were driven by an INR 1.2 bn (9.5%) decline in net interest income resultant of 32 bp NIM contraction to 2.10%; an INR 907 mn (65.6%) increase in operating expenses led by other expenses which included a one-time INR 400 mn CSR expense; and an increase in its tax rate to 49.0% (from 19.8%);

* Credit Concerns Remain Heightened: Linked quarter, Stage 3 loans increased INR 3.4 bn (6.1%) and increased 10 bp over the period to 2.83% of total loans – somewhat offset by the 2.4% increase in lending., although we are unclear how much of an impact of the standstill. The moratorium accounts for 25% of the loan portfolio. In our view, managing coverage lower in order to produce earnings in front of a capital raise is not wise as we head into the most significant global downturn since the GFC. With the stated annualized net new NPL increase of 24.5%, we find that LIC Housing’s loss reserves are too low by INR 48.1 bn or nearly 2x stated reserves; and

* Anticipating Additional Capital: Leverage at LIC Housing is a concern – prior to accounting to our calculated  reserve shortfall. Inclusive of the reserve shortfall, we estimate that LIC Housing exceeds the current regulatory cap.

2. Edelweiss: A Deal Is Likely by 2H of July

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As per an Economic Times (ET) article on Jun 24, Edelweiss Financial Services (EDEL IN) has already received first stage bidding from various PE investors and Bank of Singapore for acquiring a minority stake in Edelweiss’ advisory business. Second round bidding is likely to happen by mid-July. With SEBI extending the quarterly earnings announcement deadline, we now extend our anticipated timeline for a deal and earnings announcement to 2H of Jul from end of Jun earlier. Edelweiss’ stock has already moved up significantly (about 40% up move over the last 7-8 trading sessions) in anticipation of a deal announcement. We believe that the current valuations remain attractive, despite the up move.

Insight Flow:

  • Earnings Deadline Extended by SEBI
  • Favorable Shareholder Voting
  • Deal Progress & Outlook
  • Valuation

3. Korea Small Cap Gem #3: New Tree Co

Pandora

New Tree Co is the third company we introduce in our “Korea Small Cap Gem” series. New Tree is one of the best up-and-coming companies in the “inner beauty” product segment, especially for eatable collagen products. They also have some outstanding health and diet food supplement products that should continue to thrive in the next few years.

Millions of people in Korea often believe that eating foods that are rich in collagen such as 족발 (pigs’ feet) helps to beautify their skin. Other foods that help the body to produce collagen include bone broth, chicken, fish, egg whites, and citrus fruits. Because of the positive association with beautifying the skin and producing collagen, this is where the company’s Evercollagen has achieved a big success.

Valuation – We believe that the company’s P/E multiples to rise to the 14 to 16x range over the next 12 months which would be closer to the industry average and as investors attach higher valuation multiple to this company, given the company’s superior sales and net profit growth compared to its competitors. If we assume a 15x P/E based on the net profit of 22.6 billion won, this would suggest an implied market cap of 339 billion won (37,375 won per share), which would be a 32% upside from current levels (28,300 won per share).  

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