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