Category

Consumer Sector

Brief Consumer: Nitori: Expanding Through Diversification into New Categories and more

By | Consumer Sector, Daily Briefs

In this briefing:

  1. Nitori: Expanding Through Diversification into New Categories
  2. Renault-Nissan-MitMot Alliance: MitCorp to Buy 10% of Renault? There’s An Easier Way
  3. ITC IN
  4. Cafe De Coral (341): Time to Go Long
  5. Trade/Investment Ideas for 2019/20 China ADR Listings

1. Nitori: Expanding Through Diversification into New Categories

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Nitori may have achieved 33 years of consecutive growth but the interiors retailer is worried about saturation in the home market and its attempts to make a big push overseas have stalled. To keep the engine running, Nitori has begun diversifying into consumer electronics, cosmetics and apparel.

2. Renault-Nissan-MitMot Alliance: MitCorp to Buy 10% of Renault? There’s An Easier Way

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Les Echos, the French media outlet with probably the most access to Bercy when it comes to Renault SA (RNO FP)/government/Alliance news, but also occasionally seen as the avenue for floating trial balloons, reports this morning that among the possible methods for putting the Alliance back on track would be to have Mitsubishi Corp (8058 JP) buy a 10% stake in Renault. 

This is quite along the lines of what I have long suggested for the past couple of years. There are good reasons for this. One is that Nissan Motor (7201 JP)‘s 15% stake in Renault doesn’t vote.  Another is that Mitsubishi Corp was effectively banished from control of Mitsubishi Motors (7211 JP) in 2016 after the third major scandal in 15 years practically necessitated a governance rescue. At the time, I proposed it would be Nissan and sure enough…

The goal here would be to effectively increase Japanese capital control of Renault so that there would be more seats on the board who could act against French state (l’APE) whim, and who could, in a pinch, sell a block to Nissan so Nissan would own 25% and allow them to block Renault’s voting rights in Nissan. For Renault it would give them a different large holder near but not in the Alliance. 

Renault shares jumped 7% in the five minutes after the article came out. The shares still trade at a tiny fraction of book value. 

What remains odd is that Nissan – Renault’s partner and the more profitable carmaker over the past nearly 20 years since the Renault capital injection into Nissan – still can’t vote its shares. But an outside Japanese trading company would buy 10% and make it all better because they had voting rights? I think this is an interesting step in the right direction, but not all the way there by any stretch. 

There is one relatively easy technical construction of capital holding that Renault could undertake to make life easier all around. It would not require Renault selling Nissan shares cheaply, and it would not require anyone to put up any more capital. Renault would keep the economic interest in its full stake, but doing this would get Nissan the vote on its Renault shares, making the entire Alliance cross-holding construct much more equitable.

I remain surprised they have not done so yet. 

As it is, I think the idea of MitCorp buying 10% of Renault is an interesting step in the right direction, but it is not all the way there by any stretch.

The OTHER step noted above would be all the way there.

As always, more below the fold.

3. ITC IN

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ITC Ltd (ITC IN) ‘s recent share price performance has been disappointing on all counts. The increase in Dividend Payout further re-iterates our view of ITC finding it a challenge to invest in other businesses, and therefore valuations now reflect that of global tobacco companies.  At current prices, the downside may be limited, but a Re-rating is unlikely. 

This Insight is labelled bearish, as we do not see any major PE Re-rating in the near term. 

4. Cafe De Coral (341): Time to Go Long

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The ongoing protests against China’s ruling power over Hong Kong were the chief reason why investors left Cafe de Coral. Fundamentally, the company is not out of the woods yet, however, with China’s lockdown is soon to be over and no overseas travel to start anytime soon, mainland Chinese tourists may flock to either Macau (therefore packing up Wynn Macau Ltd (1128 HK) and Melco International Development (200 HK) or Hong Kong.

Compared to the other chain restaurant names listed in Hong Kong Hang Seng Index (HSI INDEX) , Cafe de Coral is trading at the lowest valuation and it has the lowest exposure to hotpot menu. 

The soon-to-reopen China with pent up frustrations of being locked down and less likely able to travel overseas will provide the much-needed revenue increase for Cafe de Coral. Cover your shorts and start buying. 

5. Trade/Investment Ideas for 2019/20 China ADR Listings

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Since the start of 2019 till date, we have covered 96 IPOs. Despite the market turmoil over the past two months, over a third, or 40 IPOs remain above their listing price. 

In this insight, we’ll take at how some of the US ADR IPOs have been faring. 

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Brief Consumer: Beyond Meat (BYND US): 4Q2019- Whopper Rev Growth, Sober Margins & Super Marketing Spend and more

By | Consumer Sector, Daily Briefs

In this briefing:

  1. Beyond Meat (BYND US): 4Q2019- Whopper Rev Growth, Sober Margins & Super Marketing Spend
  2. The Panasonic & Tesla Split Continues: The Two End Their Joint Solar Cell Production
  3. Matahari Department Store (LPPF IJ) – About Turn and Back to the Core
  4. Health & Happiness (1112): No Soy Please and Still Cheap

1. Beyond Meat (BYND US): 4Q2019- Whopper Rev Growth, Sober Margins & Super Marketing Spend

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Beyond Meat Inc (BYND US) reported strong revenue growth in 4Q2019, thus ending the full year 2019 by tripling sales vs 2018; however, the operating gains from the rather robust gross margins at 34% (tad lower than 3Q19) was wiped away by a steep increase in marketing spend in 4Q2019. Management has guided that investment in marketing and R&D will continue at increased pace in 2020 as well. The focus for now seem to be to drive revenue growth by expanding presence across distribution channels and geographies as well launch more product lines. 

Beyond Meat’s reported 4Q19 operating losses may come as a disappointment to the street given it had reported 12% operating margins in 3Q19. But management has maintained its strong revenue growth outlook for 2020 and guided to further growth in capacity for 2021. It is gaining traction in the food service segment as they collaborate with leading QSRs in the US and has expanded to Europe. It plans to hit Asia by late 2020.  For details on 4Q 2019 results, Management call updates and our stock view, please read the segment below.

2. The Panasonic & Tesla Split Continues: The Two End Their Joint Solar Cell Production

Image 75244167121582876867359

On the 26th of February, it was reported that Tesla Motors (TSLA US) and Panasonic Corp (6752 JP) will end their joint solar cell production. Although the two companies will still operate their EV battery Gigafactory jointly, the two are increasingly parting ways. The news has it that Panasonic’s production of solar cells did not meet Tesla’s expected standards (mainly on price).

  • We expected Panasonic to reduce its reliance on Tesla – the news only confirms our thoughts, and we view this as positive for Panasonic. For Panasonic, the solar business seems to not have yielded the results expected. Thus, the decision to end production (especially with Tesla) makes sense.
  • Tesla, on the other hand, expects its solar energy business to do well, given the price competitiveness (on its Powerwall product) from sourcing from Chinese suppliers alongside economies of scale benefits. However, even if demand conditions are good, it seems questionable as to whether Tesla’s production would come in time to meet the demand (now that the JV is no more as well).
  • On a side note, Tesla recently partnered with CATL for prismatic batteries while Panasonic is developing cylindrical batteries for Toyota’s BEVs. Given the limited use of prismatic batteries in BEVs, we do not really think such moves by Tesla should pressure Panasonic or be seen as a downside for the latter.

3. Matahari Department Store (LPPF IJ) – About Turn and Back to the Core

Screenshot%202020 02 28%20at%208.16.03%20am

Matahari Department Store (LPPF IJ)‘s new CEO Terry O’Connor hosted a conference call for the company’s FY19 results yesterday afternoon. The surprise did not come in the numbers but in his forthright and adamant statements that he was making big changes to the company’s future strategy and addressing past missteps immediately. There is a full strategic review underway. Is this the catalyst investors have been waiting for to return to the stock? 

Firstly, the company will continue to address the company’s lingering inventory issues, which although improving will take another two quarters to put straight, as it streamlines its assortment and depth of products and flushes out products that should not be there.

Secondly, the company will abandon its speciality store strategy with no more speciality store openings. It will close its 361 Degrees International (1361 HK) stores, whilst monitoring its OVS stores. He stressed that this was not the brands they were abandoning but the format, which was not working for those brands.

Thirdly, the company would reassess its omnichannel approach to online sales, which remain slow but this would not happen immediately with the immediate focus on getting the core department store business right. 

Matahari Department Store (LPPF IJ) will continue to expand and will open 4-6 new large-format stores in 2020, all to be opened before Lebaran. It will also focus on improving existing store design. 

Corona Virus has started to impact sales but mainly in areas such as Batam and Bali, which are impacted by falling tourism. The supply chain may be impacted by “a single-digit percentage” if manufacturing gets delayed much longer. 

This is a company with no debt and a forecast ROE of 55% for FY20E, trading on a forward PER of 6.2x and with a forecast dividend yield of 8.7%. Now that we have a number of positive catalysts for change, investors should now revisit the company’s fundamentals. 

4. Health & Happiness (1112): No Soy Please and Still Cheap

Image 52456268121582847562786

Health And Happiness (H&H) (1112 HK) subsidiary has agreed to purchase a stake in Else Nutrition, a plant-based alternative IMF made of almond, buckwheat, and tapioca. 

Else Nutrtion complements the existing product line in the company i.e. Biostime (children probiotics and infant milk formula), Swisse (adult nutrition and supplements), Healthy Times (organic food and formula for toddlers), Dodie (baby glass bottles and accessories), Good Gout (organic food for children), and Aurelia Probiotic Skincare.

In this difficult times in China, HH is better than most of its peers in China and Asia. It has 38% higher ROIC, 82% higher in gross margin, 84% higher in net margin yet it is trading at 25% lower than its peers. Yet its share price has underperformed compared to Ausnutria Dairy Corp (1717 HK) whose exposure to adult nutrition is very small. 

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Brief Consumer: The Panasonic & Tesla Split Continues: The Two End Their Joint Solar Cell Production and more

By | Consumer Sector, Daily Briefs

In this briefing:

  1. The Panasonic & Tesla Split Continues: The Two End Their Joint Solar Cell Production
  2. Matahari Department Store (LPPF IJ) – About Turn and Back to the Core
  3. Health & Happiness (1112): No Soy Please and Still Cheap

1. The Panasonic & Tesla Split Continues: The Two End Their Joint Solar Cell Production

Image 75244167121582876867359

On the 26th of February, it was reported that Tesla Motors (TSLA US) and Panasonic Corp (6752 JP) will end their joint solar cell production. Although the two companies will still operate their EV battery Gigafactory jointly, the two are increasingly parting ways. The news has it that Panasonic’s production of solar cells did not meet Tesla’s expected standards (mainly on price).

  • We expected Panasonic to reduce its reliance on Tesla – the news only confirms our thoughts, and we view this as positive for Panasonic. For Panasonic, the solar business seems to not have yielded the results expected. Thus, the decision to end production (especially with Tesla) makes sense.
  • Tesla, on the other hand, expects its solar energy business to do well, given the price competitiveness (on its Powerwall product) from sourcing from Chinese suppliers alongside economies of scale benefits. However, even if demand conditions are good, it seems questionable as to whether Tesla’s production would come in time to meet the demand (now that the JV is no more as well).
  • On a side note, Tesla recently partnered with CATL for prismatic batteries while Panasonic is developing cylindrical batteries for Toyota’s BEVs. Given the limited use of prismatic batteries in BEVs, we do not really think such moves by Tesla should pressure Panasonic or be seen as a downside for the latter.

2. Matahari Department Store (LPPF IJ) – About Turn and Back to the Core

Screenshot%202020 02 28%20at%208.16.03%20am

Matahari Department Store (LPPF IJ)‘s new CEO Terry O’Connor hosted a conference call for the company’s FY19 results yesterday afternoon. The surprise did not come in the numbers but in his forthright and adamant statements that he was making big changes to the company’s future strategy and addressing past missteps immediately. There is a full strategic review underway. Is this the catalyst investors have been waiting for to return to the stock? 

Firstly, the company will continue to address the company’s lingering inventory issues, which although improving will take another two quarters to put straight, as it streamlines its assortment and depth of products and flushes out products that should not be there.

Secondly, the company will abandon its speciality store strategy with no more speciality store openings. It will close its 361 Degrees International (1361 HK) stores, whilst monitoring its OVS stores. He stressed that this was not the brands they were abandoning but the format, which was not working for those brands.

Thirdly, the company would reassess its omnichannel approach to online sales, which remain slow but this would not happen immediately with the immediate focus on getting the core department store business right. 

Matahari Department Store (LPPF IJ) will continue to expand and will open 4-6 new large-format stores in 2020, all to be opened before Lebaran. It will also focus on improving existing store design. 

Corona Virus has started to impact sales but mainly in areas such as Batam and Bali, which are impacted by falling tourism. The supply chain may be impacted by “a single-digit percentage” if manufacturing gets delayed much longer. 

This is a company with no debt and a forecast ROE of 55% for FY20E, trading on a forward PER of 6.2x and with a forecast dividend yield of 8.7%. Now that we have a number of positive catalysts for change, investors should now revisit the company’s fundamentals. 

3. Health & Happiness (1112): No Soy Please and Still Cheap

Image 52456268121582847562786

Health And Happiness (H&H) (1112 HK) subsidiary has agreed to purchase a stake in Else Nutrition, a plant-based alternative IMF made of almond, buckwheat, and tapioca. 

Else Nutrtion complements the existing product line in the company i.e. Biostime (children probiotics and infant milk formula), Swisse (adult nutrition and supplements), Healthy Times (organic food and formula for toddlers), Dodie (baby glass bottles and accessories), Good Gout (organic food for children), and Aurelia Probiotic Skincare.

In this difficult times in China, HH is better than most of its peers in China and Asia. It has 38% higher ROIC, 82% higher in gross margin, 84% higher in net margin yet it is trading at 25% lower than its peers. Yet its share price has underperformed compared to Ausnutria Dairy Corp (1717 HK) whose exposure to adult nutrition is very small. 

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Brief Consumer: The Panasonic & Tesla Split Continues: The Two End Their Joint Solar Cell Production and more

By | Consumer Sector, Daily Briefs

In this briefing:

  1. The Panasonic & Tesla Split Continues: The Two End Their Joint Solar Cell Production
  2. Matahari Department Store (LPPF IJ) – About Turn and Back to the Core
  3. Health & Happiness (1112): No Soy Please and Still Cheap
  4. Trip.com – Pandemic

1. The Panasonic & Tesla Split Continues: The Two End Their Joint Solar Cell Production

Image 75244167121582876867359

On the 26th of February, it was reported that Tesla Motors (TSLA US) and Panasonic Corp (6752 JP) will end their joint solar cell production. Although the two companies will still operate their EV battery Gigafactory jointly, the two are increasingly parting ways. The news has it that Panasonic’s production of solar cells did not meet Tesla’s expected standards (mainly on price).

  • We expected Panasonic to reduce its reliance on Tesla – the news only confirms our thoughts, and we view this as positive for Panasonic. For Panasonic, the solar business seems to not have yielded the results expected. Thus, the decision to end production (especially with Tesla) makes sense.
  • Tesla, on the other hand, expects its solar energy business to do well, given the price competitiveness (on its Powerwall product) from sourcing from Chinese suppliers alongside economies of scale benefits. However, even if demand conditions are good, it seems questionable as to whether Tesla’s production would come in time to meet the demand (now that the JV is no more as well).
  • On a side note, Tesla recently partnered with CATL for prismatic batteries while Panasonic is developing cylindrical batteries for Toyota’s BEVs. Given the limited use of prismatic batteries in BEVs, we do not really think such moves by Tesla should pressure Panasonic or be seen as a downside for the latter.

2. Matahari Department Store (LPPF IJ) – About Turn and Back to the Core

Screenshot%202020 02 28%20at%208.16.03%20am

Matahari Department Store (LPPF IJ)‘s new CEO Terry O’Connor hosted a conference call for the company’s FY19 results yesterday afternoon. The surprise did not come in the numbers but in his forthright and adamant statements that he was making big changes to the company’s future strategy and addressing past missteps immediately. There is a full strategic review underway. Is this the catalyst investors have been waiting for to return to the stock? 

Firstly, the company will continue to address the company’s lingering inventory issues, which although improving will take another two quarters to put straight, as it streamlines its assortment and depth of products and flushes out products that should not be there.

Secondly, the company will abandon its speciality store strategy with no more speciality store openings. It will close its 361 Degrees International (1361 HK) stores, whilst monitoring its OVS stores. He stressed that this was not the brands they were abandoning but the format, which was not working for those brands.

Thirdly, the company would reassess its omnichannel approach to online sales, which remain slow but this would not happen immediately with the immediate focus on getting the core department store business right. 

Matahari Department Store (LPPF IJ) will continue to expand and will open 4-6 new large-format stores in 2020, all to be opened before Lebaran. It will also focus on improving existing store design. 

Corona Virus has started to impact sales but mainly in areas such as Batam and Bali, which are impacted by falling tourism. The supply chain may be impacted by “a single-digit percentage” if manufacturing gets delayed much longer. 

This is a company with no debt and a forecast ROE of 55% for FY20E, trading on a forward PER of 6.2x and with a forecast dividend yield of 8.7%. Now that we have a number of positive catalysts for change, investors should now revisit the company’s fundamentals. 

3. Health & Happiness (1112): No Soy Please and Still Cheap

Image 52456268121582847562786

Health And Happiness (H&H) (1112 HK) subsidiary has agreed to purchase a stake in Else Nutrition, a plant-based alternative IMF made of almond, buckwheat, and tapioca. 

Else Nutrtion complements the existing product line in the company i.e. Biostime (children probiotics and infant milk formula), Swisse (adult nutrition and supplements), Healthy Times (organic food and formula for toddlers), Dodie (baby glass bottles and accessories), Good Gout (organic food for children), and Aurelia Probiotic Skincare.

In this difficult times in China, HH is better than most of its peers in China and Asia. It has 38% higher ROIC, 82% higher in gross margin, 84% higher in net margin yet it is trading at 25% lower than its peers. Yet its share price has underperformed compared to Ausnutria Dairy Corp (1717 HK) whose exposure to adult nutrition is very small. 

4. Trip.com – Pandemic

  • Lack of Global Leadership During Pandemic: The current corona virus situation remains very fluid, and leadership is NOT inspiring confidence. National Security Communications report in UK exhibited a “reasonable” worst case scenario of the corona virus infecting 80% of the population with a 2%-3% fatality rate. The Center for Disease Control (CDC), however, confirmed that test kits sent to local US authorities were ineffective, which could likely explain the low infection count in the US. Moments after President Trump addressed the nation, California officials confirmed the first unconnected/untraced corona virus case.   
  • Mainland China Was Already In a Financial Crisis Prior to the Virus: Mainland China has gone from one of the most unlevered countries prior to the Global Financial Crisis to amongst the highest on a debt/GDP basis. It had absolutely refused to address the credit quality and liquidity issues within its banking system. WMP/vehicles hold questionably valued assets funded on a short-term basis. The US/China trade rift has caused a major supply chain upheaval. A reasonable 5% decline in global tourism in 2020  world GDP  will be negatively impacted by 70bps. There is already talk of major mainland Chinese airline defaults and bankruptcy – just under two months into this pandemic. Further, mainland China’s debt-laden developers were already facing a cash-crunch and developer problems are now exacerbated. 
  • Jimmy Carter/Three Mile Island-Type Visit Required to Stem Fears: There are three things, in our view, which will signal that the corona virus is under control in manainland China: 1) President Xi Xinping visits Wuhan province; 2) A firm date is set for the “two sessions” – National People’s Congress, and the Chinese People’s Political Consultative Conference; and 3) Children in both Hong Kong and mainland China physically head back to school. 

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Brief Consumer: Youdao Gains 10 Million New Enrollments During the Virus; Q4 Results Boast Robust Momentum and more

By | Consumer Sector, Daily Briefs

In this briefing:

  1. Youdao Gains 10 Million New Enrollments During the Virus; Q4 Results Boast Robust Momentum
  2. Melco Resorts: This Asian Gaming Leader Will Ignite Fast Post Virus Recovery

1. Youdao Gains 10 Million New Enrollments During the Virus; Q4 Results Boast Robust Momentum

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Youdao is capitalizing on the current virus outbreak to raise awareness of its services and build brand value. The Company gained 10 million new enrollments after it offered free online courses to its users, and continues to convert users by cross-selling and upselling via low-cost trials.

The Company’s Q4 results indicate continued momentum in the business’ growth and we expect the Company to reap strong returns in the future from its current investments during the crisis.

2. Melco Resorts: This Asian Gaming Leader Will Ignite Fast Post Virus Recovery

Macau chart

  • Melco is well positioned, it’s taken a big virus related hit but offers a very cheap entry point relative to peers.
  • Virus duration unknown, but we see a strong upside forming late Q3 to Q4 2020 from a low base.

2019 performance in mass subsection will ramp fast, but VIP will take longer to rebuild.

Buy when everyone sells, sell when everyone buys…”Warren Buffett

 As global markets precipitously dive over mounting fears that the coronavirus will evolve into a pandemic, we are reminded of the above quote attributed to Warren Buffett. It seems appropriate at this juncture to watch valuations crumble by the day and bear in mind that no matter the damage ultimately inflicted on stocks, at one point or another, the outbreak will peak and finally end.

 SARS, Swine Flu, Ebola and others as frightening as they were, ultimately peaked and faded around a 6 month time frame. We make no such forecasts here other than to stipulate we are using it as a benchmark duration only. Nine months or more cannot be ruled out. All that can be ruled out is that we are clearly not experiencing a revisit of the medieval black plague which swept through Europe and Asia for years during the 14th century and the latter day early 20th century Spanish flu pandemic which killed millions. World health authorities possess an armory of weapons to battle the virus that simply did not exist before. But the coronavirus will take its toll at all events.

 So the penultimate question now for investors is the same one raised through war, depression, recession, global financial crises or mass health emergencies. Do you take money off the table, run and hide until events play out? Or do you make bets now when good stocks are cheap and getting cheaper, then grit your teeth and twist the cork on a bottle of good champagne and hold it in place until macro disasters dissipate and send your bets now soaring with profits? And in the aftermath will you bask in the adulation of peers commending your genius for following that very penetrating notion of Warren Buffett at the top of this insight?

 The Asian gaming sector is rife with bargains now for those strong of heart and conviction in the longer term valuations

 The Asia gaming sector in particular has taken a huge beating and may well experience a continuing fall until the health scare passes and valuations return, or exceed pre-virus levels. The action on gaming stocks at first news of the virus breakout, puzzled many observers. Investors not only stood pat, but did some buying, keeping the sector remarkably immune from the unfolding health disaster—temporarily.

 It did not last. We now have a sector, along with broader markets, taking a major beating. Valuations have plunged. The cause and effect of the Asian sector in particular clearly shows a straight line between the collapse of the Macau customer flow and the anticipated damage it will in the end inflict on earnings and valuations this year.

 Added to that we have two days of plunge suggesting capitulation. Yet the virus doesn’t play by traditional market rules. Have we indeed experienced capitulation after a long bull trend? Whether after a standard bubble or a virus black swan we note that the market has left Asia gaming stocks at lows that invite serious consideration as entry points now for those with the risk profile.

 We have applied the Buffett principal to the situation and concluded that yes, for reasons we will detail here, we think It’s time to buy and buy strongly in the Asian casino sector. Valuations tumbled, but fundamentals are unchanged. It is in the interim period, between now and such a time when the virus finally abates and disappears, that the sector can expect to be hammered.

  As the sector get cheaper, the temptation to buy on the deep dips would normally kick in. Thus far we have noted in trading volume and various options plays the ongoing sentiment remains: Take money off the table and get out. The assumption: There will be plenty of time ahead where the sector will be cheap enough to dive back in when the waves of selling pressure begin to abate.

 Regardless of that well- worn attitude we see much value right now in the sector.

Consider Melco Resorts & Entertainment Inc.

Melco volatility and virus has brought the stock down to a bargain price.

We have selected one stock we believe offers the longest and most vibrant ramp up post virus: Melco Resorts & Entertainment Inc. (NASDAQ: MLCO). Overall we believe there is money to be made across the Macau sector as all the stocks have had their recent run ups destroyed. We have selected Melco as representative of a stock we believe has dropped to a level that makes it extremely attractive because of a friendly entry price compared with industry peers.

 Recovery from the virus disruption will be slow and steady but at some point in the process, pent up demand in mass will ignite and translate into a powerful earnings tide late this year. We like Melco’s low starting point, its quick response to the virus challenge, particularly in cutting Capex. The company announced it was postponing acquiring the second tranche of Crown Resorts(ASX:CWN) stock and making other judicious cuts which reduced its run rate during the crisis to around US$2.5M a day.

Macau has recovered from 2015 crackdowns and will find its way back by Q4 this year or before.

Furthermore, management has gone on record as promising to continue dividend payments for the knowable duration of the crisis. As a general sense, management is looking at a six month time line for a return to normal operations.

 Our thesis: Building a larger position pre-recovery at a smaller outlay. In theory you can now buy 3.5 shares of MLCO for every share of Las Vegas Sands Inc. (NYSE: LVS). You can also buy 6 shares of MLCO for every share of Wynn Resorts Ltd. at the price at writing. We expect the entire Macau gaming sector to ignite post recovery. All face the same headwinds, all will respond with similar forward momentum. But MLCO sits at a cheaper starting point with as sound a going forward recovery potential than any of its major peers.

 A quick glance at Melco (USD)

 Price at writing: $19.53

52wk range: $18.68 —$26.97

5 year high: Sept 2017: $31.21

Market cap: $8.982B

Beta: (5 yr monthly) 1.93

P/E: (ttm): 25.23

EPS: $0.77

Forward dividend and yield: $0.66 (3.38%)

 Our view: Based on its  global ambitions, surefooted asset allocation skills,  and operational flexibility, we believe MLCO has been undervalued even at its recent pre-virus highs.

 Pre-virus performance this month:

 Stock was at $22. 58

 This company’s 4Q19 and annual 2019 results are impressive:

 Q4 luck adjusted EBITDA hit a record, all time high propelled by a 17% increase in  the mass segment up 17% to $249M. Group wide EBITDA was $382M, but luck adjusted at $413M. MLCO played unlucky in Q4.

 A key metric we like: MLCO’s 2019 share of the Macau market rose 180bps to 16%—in a market showing a sector wide decline in VIP. Its properties proximity to the new light rail station is superior to many peers putting properties within 14 minutes of the ferry and 12 minutes from the airport. We believe this will contribute to an uptick in market share again once recovery begins probably in the back six months of this year.

 The company showed strong upsides in mass at all properties including its Manila operation yet at the same time it is facing market wide declines in VIP. The success of the Morpheus tower in Macau in premium mass in particular played a significant role in the solid performance.

City of Dreams Manila, a key player in vibrant growth in the Philippine gaming market.

 Capex going forward MLCO will continue to move ahead on its $1.35B investment in the Phase One expansion of Studio City, a project aimed directly at the heart of the mass and premium mass market segments by adding 600 rooms and a water park.

 Cyprus: MLCO’s EBITDA from its temporary casinos rose to $9M. The properties are a toe-dip into what is coming there in the integrated resort project with a large footprint expected to debut in late 2021. The property will be de facto the first ever, modern integrated casino resort built to service the European /Middle East market. City of Dreams Mediterranean will cost just over $617M to complete and the capex on the project will continue through the virus interregnum. The property will open with a modest game spread of 100 tables and 1,000 slot machines.

City of Dreams Cyprus coming in 2021 could be a game changer in Europe.

We think the Cyprus property will quickly absorb the capacity and provide a rationale to MLCO to scale. It will open with 500 rooms, but we note that the property will sit on 91 acres controlled by MLCO. It is a clear first mover advantage for the company in  the European facing market.

 Japan: MLCO has been among the most aggressive pursuers of one of the three Japan IR licenses to be issued late this year or early 2021. It has pivoted from an Osaka target to a Yokohama first strategy going head to head with Las Vegas Sands. In the last quarter it’s PL showed it had spent $18M on various initiatives in Japan. Our industry source on the ground in Tokyo believes that “it will be a tough down to the wire contest between the two companies. The estimates of sunk cost for a Yokohama IR have risen as high as $18B. It’s entirely possible that MLCO and LVS will wind up in some kind of joint venture with a third, Japan based partner.”

 MLCO cash and coronavirus burn rate

 At writing, MLCO is sitting on $900M in cash against $3B in long term debt exclusive of Studio City and the Cyprus project.

Management now estimates the burn rate during the virus challenge at $2.5M per day fixed expenses, inclusive of some cost cuts already made in both operations and capex expense.

 Their outlook at present foresees no substantive recovery beginning before Q3 this year. Cash reserves are considered more than adequate to meet that contingency. However, management sees a ramp up back to normalcy starting slower and not gaining powerful momentum until late in Q4 or early 1Q21. Our take: Most of the virus downside is already baked in.

 In effect management sees Q1 and Q2 as essentially lost in terms of contribution to annual results this year.

Lawrence Ho and President Duterte signals a continuing presence in a solid ramp up in Manila.

The takeaway

 Market consensus has put a $27.87 PT on the stock. Analysts believe that now within the virus context, it is trading at near fair value. My own view from an industry perspective is contrarian to these calls. I believe and have believed for two years that MLCO has remained undervalued trading in a very narrow range. Going through the history I found that much of the periodic downside volatility I discovered in the trade was related to unlucky play. And that was fueled by the company’s aggressive posture in marketing to VIPs and taking on a bit more risk in bad debts to support the arrival in 2018 of the Morpheus Tower $1.2B investment at City of Dreams.

 There is also the inherent volatility of the Macau market in general where since 2015, Beijing assaults on money laundering and junkets have bruised the VIP business. The macro China economic woes (pre-virus) likewise had their impact on the sector.

 CEO Lawrence Ho is among the industry’s most effective asset allocators. Yet his decisions at times, such as a sudden pull out from a highly touted deal in the Russian Far East., and a quick pivot to Cyprus have raised some eyebrows among investors. His more recent move to acquire James Packer’s stake in Crown Resorts for US$1.2B triggered several calls I had from hedge fund friends questioning the move on several grounds. Mostly they expressed concern about a growth trajectory in the Australian market with new capacity coming on line. Second, one associate, an admirer of Ho’s, questioned whether “Lawrence has the penchant to bite off more than he can chew”. He believes that these moves are part of what keeps the stock “hostage in a narrow range”.

 While I believe that MLCO may be fairly valued by traditional metrics, I think the potential of the stock based both on management effectiveness under pressure and the global vision of Lawrence Ho to move his asset base to places where he expects the highest risk/reward ratios is worth a premium to the stock.

 MLCO has always been relatively cheap among its peers for a company whose vision reaches beyond Asia. US based giants have fortress positions in Las Vegas. Ho has apparently bypassed opportunities there and pivoted to Cyprus and Australia beyond Macau and Manila. Therefore, in time, MLCO will be a strong contender in Asia and global in scope with its shares still “held hostage” as my hedge fund friend noted, by aspects of the company it has not valued.

 I believe post virus in full recovery mode in Macau, plus continuing strong growth trends in Manila and the possibilities both for the Cyprus project and Japan, that MLCO looks like it could be a $35 stock to me bought at a price now that could afford a larger opening position than many peers.

 

Everyone’s selling? Buy.

 

 

 

 

 

 

You are currently reading Executive Summaries of Smartkarma Insights.

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Brief Consumer: Youdao Gains 10 Million New Enrollments During the Virus; Q4 Results Boast Robust Momentum and more

By | Consumer Sector, Daily Briefs

In this briefing:

  1. Youdao Gains 10 Million New Enrollments During the Virus; Q4 Results Boast Robust Momentum
  2. Melco Resorts: This Asian Gaming Leader Will Ignite Fast Post Virus Recovery
  3. China Bright Culture (煜盛文化) IPO: A Hard Sell

1. Youdao Gains 10 Million New Enrollments During the Virus; Q4 Results Boast Robust Momentum

Image 44956541821582806253660

Youdao is capitalizing on the current virus outbreak to raise awareness of its services and build brand value. The Company gained 10 million new enrollments after it offered free online courses to its users, and continues to convert users by cross-selling and upselling via low-cost trials.

The Company’s Q4 results indicate continued momentum in the business’ growth and we expect the Company to reap strong returns in the future from its current investments during the crisis.

2. Melco Resorts: This Asian Gaming Leader Will Ignite Fast Post Virus Recovery

Macau chart

  • Melco is well positioned, it’s taken a big virus related hit but offers a very cheap entry point relative to peers.
  • Virus duration unknown, but we see a strong upside forming late Q3 to Q4 2020 from a low base.

2019 performance in mass subsection will ramp fast, but VIP will take longer to rebuild.

Buy when everyone sells, sell when everyone buys…”Warren Buffett

 As global markets precipitously dive over mounting fears that the coronavirus will evolve into a pandemic, we are reminded of the above quote attributed to Warren Buffett. It seems appropriate at this juncture to watch valuations crumble by the day and bear in mind that no matter the damage ultimately inflicted on stocks, at one point or another, the outbreak will peak and finally end.

 SARS, Swine Flu, Ebola and others as frightening as they were, ultimately peaked and faded around a 6 month time frame. We make no such forecasts here other than to stipulate we are using it as a benchmark duration only. Nine months or more cannot be ruled out. All that can be ruled out is that we are clearly not experiencing a revisit of the medieval black plague which swept through Europe and Asia for years during the 14th century and the latter day early 20th century Spanish flu pandemic which killed millions. World health authorities possess an armory of weapons to battle the virus that simply did not exist before. But the coronavirus will take its toll at all events.

 So the penultimate question now for investors is the same one raised through war, depression, recession, global financial crises or mass health emergencies. Do you take money off the table, run and hide until events play out? Or do you make bets now when good stocks are cheap and getting cheaper, then grit your teeth and twist the cork on a bottle of good champagne and hold it in place until macro disasters dissipate and send your bets now soaring with profits? And in the aftermath will you bask in the adulation of peers commending your genius for following that very penetrating notion of Warren Buffett at the top of this insight?

 The Asian gaming sector is rife with bargains now for those strong of heart and conviction in the longer term valuations

 The Asia gaming sector in particular has taken a huge beating and may well experience a continuing fall until the health scare passes and valuations return, or exceed pre-virus levels. The action on gaming stocks at first news of the virus breakout, puzzled many observers. Investors not only stood pat, but did some buying, keeping the sector remarkably immune from the unfolding health disaster—temporarily.

 It did not last. We now have a sector, along with broader markets, taking a major beating. Valuations have plunged. The cause and effect of the Asian sector in particular clearly shows a straight line between the collapse of the Macau customer flow and the anticipated damage it will in the end inflict on earnings and valuations this year.

 Added to that we have two days of plunge suggesting capitulation. Yet the virus doesn’t play by traditional market rules. Have we indeed experienced capitulation after a long bull trend? Whether after a standard bubble or a virus black swan we note that the market has left Asia gaming stocks at lows that invite serious consideration as entry points now for those with the risk profile.

 We have applied the Buffett principal to the situation and concluded that yes, for reasons we will detail here, we think It’s time to buy and buy strongly in the Asian casino sector. Valuations tumbled, but fundamentals are unchanged. It is in the interim period, between now and such a time when the virus finally abates and disappears, that the sector can expect to be hammered.

  As the sector get cheaper, the temptation to buy on the deep dips would normally kick in. Thus far we have noted in trading volume and various options plays the ongoing sentiment remains: Take money off the table and get out. The assumption: There will be plenty of time ahead where the sector will be cheap enough to dive back in when the waves of selling pressure begin to abate.

 Regardless of that well- worn attitude we see much value right now in the sector.

Consider Melco Resorts & Entertainment Inc.

Melco volatility and virus has brought the stock down to a bargain price.

We have selected one stock we believe offers the longest and most vibrant ramp up post virus: Melco Resorts & Entertainment Inc. (NASDAQ: MLCO). Overall we believe there is money to be made across the Macau sector as all the stocks have had their recent run ups destroyed. We have selected Melco as representative of a stock we believe has dropped to a level that makes it extremely attractive because of a friendly entry price compared with industry peers.

 Recovery from the virus disruption will be slow and steady but at some point in the process, pent up demand in mass will ignite and translate into a powerful earnings tide late this year. We like Melco’s low starting point, its quick response to the virus challenge, particularly in cutting Capex. The company announced it was postponing acquiring the second tranche of Crown Resorts(ASX:CWN) stock and making other judicious cuts which reduced its run rate during the crisis to around US$2.5M a day.

Macau has recovered from 2015 crackdowns and will find its way back by Q4 this year or before.

Furthermore, management has gone on record as promising to continue dividend payments for the knowable duration of the crisis. As a general sense, management is looking at a six month time line for a return to normal operations.

 Our thesis: Building a larger position pre-recovery at a smaller outlay. In theory you can now buy 3.5 shares of MLCO for every share of Las Vegas Sands Inc. (NYSE: LVS). You can also buy 6 shares of MLCO for every share of Wynn Resorts Ltd. at the price at writing. We expect the entire Macau gaming sector to ignite post recovery. All face the same headwinds, all will respond with similar forward momentum. But MLCO sits at a cheaper starting point with as sound a going forward recovery potential than any of its major peers.

 A quick glance at Melco (USD)

 Price at writing: $19.53

52wk range: $18.68 —$26.97

5 year high: Sept 2017: $31.21

Market cap: $8.982B

Beta: (5 yr monthly) 1.93

P/E: (ttm): 25.23

EPS: $0.77

Forward dividend and yield: $0.66 (3.38%)

 Our view: Based on its  global ambitions, surefooted asset allocation skills,  and operational flexibility, we believe MLCO has been undervalued even at its recent pre-virus highs.

 Pre-virus performance this month:

 Stock was at $22. 58

 This company’s 4Q19 and annual 2019 results are impressive:

 Q4 luck adjusted EBITDA hit a record, all time high propelled by a 17% increase in  the mass segment up 17% to $249M. Group wide EBITDA was $382M, but luck adjusted at $413M. MLCO played unlucky in Q4.

 A key metric we like: MLCO’s 2019 share of the Macau market rose 180bps to 16%—in a market showing a sector wide decline in VIP. Its properties proximity to the new light rail station is superior to many peers putting properties within 14 minutes of the ferry and 12 minutes from the airport. We believe this will contribute to an uptick in market share again once recovery begins probably in the back six months of this year.

 The company showed strong upsides in mass at all properties including its Manila operation yet at the same time it is facing market wide declines in VIP. The success of the Morpheus tower in Macau in premium mass in particular played a significant role in the solid performance.

City of Dreams Manila, a key player in vibrant growth in the Philippine gaming market.

 Capex going forward MLCO will continue to move ahead on its $1.35B investment in the Phase One expansion of Studio City, a project aimed directly at the heart of the mass and premium mass market segments by adding 600 rooms and a water park.

 Cyprus: MLCO’s EBITDA from its temporary casinos rose to $9M. The properties are a toe-dip into what is coming there in the integrated resort project with a large footprint expected to debut in late 2021. The property will be de facto the first ever, modern integrated casino resort built to service the European /Middle East market. City of Dreams Mediterranean will cost just over $617M to complete and the capex on the project will continue through the virus interregnum. The property will open with a modest game spread of 100 tables and 1,000 slot machines.

City of Dreams Cyprus coming in 2021 could be a game changer in Europe.

We think the Cyprus property will quickly absorb the capacity and provide a rationale to MLCO to scale. It will open with 500 rooms, but we note that the property will sit on 91 acres controlled by MLCO. It is a clear first mover advantage for the company in  the European facing market.

 Japan: MLCO has been among the most aggressive pursuers of one of the three Japan IR licenses to be issued late this year or early 2021. It has pivoted from an Osaka target to a Yokohama first strategy going head to head with Las Vegas Sands. In the last quarter it’s PL showed it had spent $18M on various initiatives in Japan. Our industry source on the ground in Tokyo believes that “it will be a tough down to the wire contest between the two companies. The estimates of sunk cost for a Yokohama IR have risen as high as $18B. It’s entirely possible that MLCO and LVS will wind up in some kind of joint venture with a third, Japan based partner.”

 MLCO cash and coronavirus burn rate

 At writing, MLCO is sitting on $900M in cash against $3B in long term debt exclusive of Studio City and the Cyprus project.

Management now estimates the burn rate during the virus challenge at $2.5M per day fixed expenses, inclusive of some cost cuts already made in both operations and capex expense.

 Their outlook at present foresees no substantive recovery beginning before Q3 this year. Cash reserves are considered more than adequate to meet that contingency. However, management sees a ramp up back to normalcy starting slower and not gaining powerful momentum until late in Q4 or early 1Q21. Our take: Most of the virus downside is already baked in.

 In effect management sees Q1 and Q2 as essentially lost in terms of contribution to annual results this year.

Lawrence Ho and President Duterte signals a continuing presence in a solid ramp up in Manila.

The takeaway

 Market consensus has put a $27.87 PT on the stock. Analysts believe that now within the virus context, it is trading at near fair value. My own view from an industry perspective is contrarian to these calls. I believe and have believed for two years that MLCO has remained undervalued trading in a very narrow range. Going through the history I found that much of the periodic downside volatility I discovered in the trade was related to unlucky play. And that was fueled by the company’s aggressive posture in marketing to VIPs and taking on a bit more risk in bad debts to support the arrival in 2018 of the Morpheus Tower $1.2B investment at City of Dreams.

 There is also the inherent volatility of the Macau market in general where since 2015, Beijing assaults on money laundering and junkets have bruised the VIP business. The macro China economic woes (pre-virus) likewise had their impact on the sector.

 CEO Lawrence Ho is among the industry’s most effective asset allocators. Yet his decisions at times, such as a sudden pull out from a highly touted deal in the Russian Far East., and a quick pivot to Cyprus have raised some eyebrows among investors. His more recent move to acquire James Packer’s stake in Crown Resorts for US$1.2B triggered several calls I had from hedge fund friends questioning the move on several grounds. Mostly they expressed concern about a growth trajectory in the Australian market with new capacity coming on line. Second, one associate, an admirer of Ho’s, questioned whether “Lawrence has the penchant to bite off more than he can chew”. He believes that these moves are part of what keeps the stock “hostage in a narrow range”.

 While I believe that MLCO may be fairly valued by traditional metrics, I think the potential of the stock based both on management effectiveness under pressure and the global vision of Lawrence Ho to move his asset base to places where he expects the highest risk/reward ratios is worth a premium to the stock.

 MLCO has always been relatively cheap among its peers for a company whose vision reaches beyond Asia. US based giants have fortress positions in Las Vegas. Ho has apparently bypassed opportunities there and pivoted to Cyprus and Australia beyond Macau and Manila. Therefore, in time, MLCO will be a strong contender in Asia and global in scope with its shares still “held hostage” as my hedge fund friend noted, by aspects of the company it has not valued.

 I believe post virus in full recovery mode in Macau, plus continuing strong growth trends in Manila and the possibilities both for the Cyprus project and Japan, that MLCO looks like it could be a $35 stock to me bought at a price now that could afford a larger opening position than many peers.

 

Everyone’s selling? Buy.

 

 

 

 

 

 

3. China Bright Culture (煜盛文化) IPO: A Hard Sell

Image?1582790563

China Bright Culture launched the book building to raise up to USD 173 million via a listing on HKSE. 

In our previous notes, we covered the company’s fundamentals. We note that the company’s revenues largely depend on the success of its TV program. It had success in its early productions but the viewership varies accross its productions. It has also built up a strong production pipeline ahead of its listing.

We also discussed that despite its effort of building a pipeline, the regulatory environment is not favorable for TV program production companies recently. The company’s shares are mainly held by individual shareholders.

In this insight, we will look at the terms of the offering and provide our final thoughts on the deal. We think the deal is a hard sell with expensive valuation built on aggressive forecasts.

Our previous coverage on China Bright Culture

You are currently reading Executive Summaries of Smartkarma Insights.

Want to read on? Explore our tailored Smartkarma Solutions.

Brief Consumer: Youdao Gains 10 Million New Enrollments During the Virus; Q4 Results Boast Robust Momentum and more

By | Consumer Sector, Daily Briefs

In this briefing:

  1. Youdao Gains 10 Million New Enrollments During the Virus; Q4 Results Boast Robust Momentum
  2. Melco Resorts: This Asian Gaming Leader Will Ignite Fast Post Virus Recovery
  3. China Bright Culture (煜盛文化) IPO: A Hard Sell
  4. Mitra Adiperkasa (MAPI IJ) – Oversold Indonesian King of Retail – On the Ground in J-Town

1. Youdao Gains 10 Million New Enrollments During the Virus; Q4 Results Boast Robust Momentum

Image 44956541821582806253660

Youdao is capitalizing on the current virus outbreak to raise awareness of its services and build brand value. The Company gained 10 million new enrollments after it offered free online courses to its users, and continues to convert users by cross-selling and upselling via low-cost trials.

The Company’s Q4 results indicate continued momentum in the business’ growth and we expect the Company to reap strong returns in the future from its current investments during the crisis.

2. Melco Resorts: This Asian Gaming Leader Will Ignite Fast Post Virus Recovery

Macau chart

  • Melco is well positioned, it’s taken a big virus related hit but offers a very cheap entry point relative to peers.
  • Virus duration unknown, but we see a strong upside forming late Q3 to Q4 2020 from a low base.

2019 performance in mass subsection will ramp fast, but VIP will take longer to rebuild.

Buy when everyone sells, sell when everyone buys…”Warren Buffett

 As global markets precipitously dive over mounting fears that the coronavirus will evolve into a pandemic, we are reminded of the above quote attributed to Warren Buffett. It seems appropriate at this juncture to watch valuations crumble by the day and bear in mind that no matter the damage ultimately inflicted on stocks, at one point or another, the outbreak will peak and finally end.

 SARS, Swine Flu, Ebola and others as frightening as they were, ultimately peaked and faded around a 6 month time frame. We make no such forecasts here other than to stipulate we are using it as a benchmark duration only. Nine months or more cannot be ruled out. All that can be ruled out is that we are clearly not experiencing a revisit of the medieval black plague which swept through Europe and Asia for years during the 14th century and the latter day early 20th century Spanish flu pandemic which killed millions. World health authorities possess an armory of weapons to battle the virus that simply did not exist before. But the coronavirus will take its toll at all events.

 So the penultimate question now for investors is the same one raised through war, depression, recession, global financial crises or mass health emergencies. Do you take money off the table, run and hide until events play out? Or do you make bets now when good stocks are cheap and getting cheaper, then grit your teeth and twist the cork on a bottle of good champagne and hold it in place until macro disasters dissipate and send your bets now soaring with profits? And in the aftermath will you bask in the adulation of peers commending your genius for following that very penetrating notion of Warren Buffett at the top of this insight?

 The Asian gaming sector is rife with bargains now for those strong of heart and conviction in the longer term valuations

 The Asia gaming sector in particular has taken a huge beating and may well experience a continuing fall until the health scare passes and valuations return, or exceed pre-virus levels. The action on gaming stocks at first news of the virus breakout, puzzled many observers. Investors not only stood pat, but did some buying, keeping the sector remarkably immune from the unfolding health disaster—temporarily.

 It did not last. We now have a sector, along with broader markets, taking a major beating. Valuations have plunged. The cause and effect of the Asian sector in particular clearly shows a straight line between the collapse of the Macau customer flow and the anticipated damage it will in the end inflict on earnings and valuations this year.

 Added to that we have two days of plunge suggesting capitulation. Yet the virus doesn’t play by traditional market rules. Have we indeed experienced capitulation after a long bull trend? Whether after a standard bubble or a virus black swan we note that the market has left Asia gaming stocks at lows that invite serious consideration as entry points now for those with the risk profile.

 We have applied the Buffett principal to the situation and concluded that yes, for reasons we will detail here, we think It’s time to buy and buy strongly in the Asian casino sector. Valuations tumbled, but fundamentals are unchanged. It is in the interim period, between now and such a time when the virus finally abates and disappears, that the sector can expect to be hammered.

  As the sector get cheaper, the temptation to buy on the deep dips would normally kick in. Thus far we have noted in trading volume and various options plays the ongoing sentiment remains: Take money off the table and get out. The assumption: There will be plenty of time ahead where the sector will be cheap enough to dive back in when the waves of selling pressure begin to abate.

 Regardless of that well- worn attitude we see much value right now in the sector.

Consider Melco Resorts & Entertainment Inc.

Melco volatility and virus has brought the stock down to a bargain price.

We have selected one stock we believe offers the longest and most vibrant ramp up post virus: Melco Resorts & Entertainment Inc. (NASDAQ: MLCO). Overall we believe there is money to be made across the Macau sector as all the stocks have had their recent run ups destroyed. We have selected Melco as representative of a stock we believe has dropped to a level that makes it extremely attractive because of a friendly entry price compared with industry peers.

 Recovery from the virus disruption will be slow and steady but at some point in the process, pent up demand in mass will ignite and translate into a powerful earnings tide late this year. We like Melco’s low starting point, its quick response to the virus challenge, particularly in cutting Capex. The company announced it was postponing acquiring the second tranche of Crown Resorts(ASX:CWN) stock and making other judicious cuts which reduced its run rate during the crisis to around US$2.5M a day.

Macau has recovered from 2015 crackdowns and will find its way back by Q4 this year or before.

Furthermore, management has gone on record as promising to continue dividend payments for the knowable duration of the crisis. As a general sense, management is looking at a six month time line for a return to normal operations.

 Our thesis: Building a larger position pre-recovery at a smaller outlay. In theory you can now buy 3.5 shares of MLCO for every share of Las Vegas Sands Inc. (NYSE: LVS). You can also buy 6 shares of MLCO for every share of Wynn Resorts Ltd. at the price at writing. We expect the entire Macau gaming sector to ignite post recovery. All face the same headwinds, all will respond with similar forward momentum. But MLCO sits at a cheaper starting point with as sound a going forward recovery potential than any of its major peers.

 A quick glance at Melco (USD)

 Price at writing: $19.53

52wk range: $18.68 —$26.97

5 year high: Sept 2017: $31.21

Market cap: $8.982B

Beta: (5 yr monthly) 1.93

P/E: (ttm): 25.23

EPS: $0.77

Forward dividend and yield: $0.66 (3.38%)

 Our view: Based on its  global ambitions, surefooted asset allocation skills,  and operational flexibility, we believe MLCO has been undervalued even at its recent pre-virus highs.

 Pre-virus performance this month:

 Stock was at $22. 58

 This company’s 4Q19 and annual 2019 results are impressive:

 Q4 luck adjusted EBITDA hit a record, all time high propelled by a 17% increase in  the mass segment up 17% to $249M. Group wide EBITDA was $382M, but luck adjusted at $413M. MLCO played unlucky in Q4.

 A key metric we like: MLCO’s 2019 share of the Macau market rose 180bps to 16%—in a market showing a sector wide decline in VIP. Its properties proximity to the new light rail station is superior to many peers putting properties within 14 minutes of the ferry and 12 minutes from the airport. We believe this will contribute to an uptick in market share again once recovery begins probably in the back six months of this year.

 The company showed strong upsides in mass at all properties including its Manila operation yet at the same time it is facing market wide declines in VIP. The success of the Morpheus tower in Macau in premium mass in particular played a significant role in the solid performance.

City of Dreams Manila, a key player in vibrant growth in the Philippine gaming market.

 Capex going forward MLCO will continue to move ahead on its $1.35B investment in the Phase One expansion of Studio City, a project aimed directly at the heart of the mass and premium mass market segments by adding 600 rooms and a water park.

 Cyprus: MLCO’s EBITDA from its temporary casinos rose to $9M. The properties are a toe-dip into what is coming there in the integrated resort project with a large footprint expected to debut in late 2021. The property will be de facto the first ever, modern integrated casino resort built to service the European /Middle East market. City of Dreams Mediterranean will cost just over $617M to complete and the capex on the project will continue through the virus interregnum. The property will open with a modest game spread of 100 tables and 1,000 slot machines.

City of Dreams Cyprus coming in 2021 could be a game changer in Europe.

We think the Cyprus property will quickly absorb the capacity and provide a rationale to MLCO to scale. It will open with 500 rooms, but we note that the property will sit on 91 acres controlled by MLCO. It is a clear first mover advantage for the company in  the European facing market.

 Japan: MLCO has been among the most aggressive pursuers of one of the three Japan IR licenses to be issued late this year or early 2021. It has pivoted from an Osaka target to a Yokohama first strategy going head to head with Las Vegas Sands. In the last quarter it’s PL showed it had spent $18M on various initiatives in Japan. Our industry source on the ground in Tokyo believes that “it will be a tough down to the wire contest between the two companies. The estimates of sunk cost for a Yokohama IR have risen as high as $18B. It’s entirely possible that MLCO and LVS will wind up in some kind of joint venture with a third, Japan based partner.”

 MLCO cash and coronavirus burn rate

 At writing, MLCO is sitting on $900M in cash against $3B in long term debt exclusive of Studio City and the Cyprus project.

Management now estimates the burn rate during the virus challenge at $2.5M per day fixed expenses, inclusive of some cost cuts already made in both operations and capex expense.

 Their outlook at present foresees no substantive recovery beginning before Q3 this year. Cash reserves are considered more than adequate to meet that contingency. However, management sees a ramp up back to normalcy starting slower and not gaining powerful momentum until late in Q4 or early 1Q21. Our take: Most of the virus downside is already baked in.

 In effect management sees Q1 and Q2 as essentially lost in terms of contribution to annual results this year.

Lawrence Ho and President Duterte signals a continuing presence in a solid ramp up in Manila.

The takeaway

 Market consensus has put a $27.87 PT on the stock. Analysts believe that now within the virus context, it is trading at near fair value. My own view from an industry perspective is contrarian to these calls. I believe and have believed for two years that MLCO has remained undervalued trading in a very narrow range. Going through the history I found that much of the periodic downside volatility I discovered in the trade was related to unlucky play. And that was fueled by the company’s aggressive posture in marketing to VIPs and taking on a bit more risk in bad debts to support the arrival in 2018 of the Morpheus Tower $1.2B investment at City of Dreams.

 There is also the inherent volatility of the Macau market in general where since 2015, Beijing assaults on money laundering and junkets have bruised the VIP business. The macro China economic woes (pre-virus) likewise had their impact on the sector.

 CEO Lawrence Ho is among the industry’s most effective asset allocators. Yet his decisions at times, such as a sudden pull out from a highly touted deal in the Russian Far East., and a quick pivot to Cyprus have raised some eyebrows among investors. His more recent move to acquire James Packer’s stake in Crown Resorts for US$1.2B triggered several calls I had from hedge fund friends questioning the move on several grounds. Mostly they expressed concern about a growth trajectory in the Australian market with new capacity coming on line. Second, one associate, an admirer of Ho’s, questioned whether “Lawrence has the penchant to bite off more than he can chew”. He believes that these moves are part of what keeps the stock “hostage in a narrow range”.

 While I believe that MLCO may be fairly valued by traditional metrics, I think the potential of the stock based both on management effectiveness under pressure and the global vision of Lawrence Ho to move his asset base to places where he expects the highest risk/reward ratios is worth a premium to the stock.

 MLCO has always been relatively cheap among its peers for a company whose vision reaches beyond Asia. US based giants have fortress positions in Las Vegas. Ho has apparently bypassed opportunities there and pivoted to Cyprus and Australia beyond Macau and Manila. Therefore, in time, MLCO will be a strong contender in Asia and global in scope with its shares still “held hostage” as my hedge fund friend noted, by aspects of the company it has not valued.

 I believe post virus in full recovery mode in Macau, plus continuing strong growth trends in Manila and the possibilities both for the Cyprus project and Japan, that MLCO looks like it could be a $35 stock to me bought at a price now that could afford a larger opening position than many peers.

 

Everyone’s selling? Buy.

 

 

 

 

 

 

3. China Bright Culture (煜盛文化) IPO: A Hard Sell

Image?1582790563

China Bright Culture launched the book building to raise up to USD 173 million via a listing on HKSE. 

In our previous notes, we covered the company’s fundamentals. We note that the company’s revenues largely depend on the success of its TV program. It had success in its early productions but the viewership varies accross its productions. It has also built up a strong production pipeline ahead of its listing.

We also discussed that despite its effort of building a pipeline, the regulatory environment is not favorable for TV program production companies recently. The company’s shares are mainly held by individual shareholders.

In this insight, we will look at the terms of the offering and provide our final thoughts on the deal. We think the deal is a hard sell with expensive valuation built on aggressive forecasts.

Our previous coverage on China Bright Culture

4. Mitra Adiperkasa (MAPI IJ) – Oversold Indonesian King of Retail – On the Ground in J-Town

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A meeting with Mitra Adiperkasa (MAPI IJ) management in Jakarta last week revealed a relatively upbeat outlook for this leading Indonesian retailer, despite the lingering Corona Virus fears. Implausible though it may seem, Indonesia has officially had no confirmed cases of the virus to date. 

Assuming that Indonesia remains virus-free, any potential impact from Corona would likely come from supply chain disruption in the company sports and leisure segment under Map Aktif Adiperkasa PT (MAPA IJ), given that 30%-40% of its sports shoes are manufactured in China but inventories should help cushion any impact. 

The company has less exposure in its fashion segment given that 60% comes from Inditex in Spain which has a highly diversified manufacturing capacity outside China in locations such as Morocco, Portugal, Turkey, and Bangladesh. 

The company expanded its store area quite aggressively in 2019 and will slow expansion in 2020, with a continuing focus on sports& leisure and Starbucks. It will also add selective new brands such as Boots Health & Pharmacy and a number of brands from Amorepacific Corp (090430 KS) in 2020. 

Mitra Adiperkasa (MAPI IJ) continues to take an omnichannel approach, working with all the major e-tailers such as Tokopedia and Bukalapak but also through its own MapeMall and a number of its own mono-brand sites.

The recent Corona Virus driven correction looks overdone, with valuations on a forward PER basis on a 3-year low, despite the fact that there has been minimal impact on the company to date. This presents an interesting buying opportunity in our view.

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Brief Consumer: Dark Clouds Over Erawan and more

By | Consumer Sector, Daily Briefs

In this briefing:

  1. Dark Clouds Over Erawan

1. Dark Clouds Over Erawan

Img 3181

We recently visited Erawan and Global Green Chemicals (GGC TB) this week. Let’s just say the companies are having a hard time even before the coronavirus outbreak.

  • Erawan reported flat EBITDA and 14% earnings decline in 2019 on barely rising revenues. Especially weak was the economy segment which saw an 11% in RevPar
  • The one-time hotel star also implied a decline of 40-50% during the period of the coronavirus outbreak, which only started in January 2020. This is likely to push them into a heavy loss for 2020. The stock was down 7% on the day of the meeting alone.
  • GGC reported an EBITDA decline of almost 60% in 2019 primarily due to decline in product prices. The company is still pursuing suppliers over the missing product.

You are currently reading Executive Summaries of Smartkarma Insights.

Want to read on? Explore our tailored Smartkarma Solutions.

Brief Consumer: Dark Clouds Over Erawan and more

By | Consumer Sector, Daily Briefs

In this briefing:

  1. Dark Clouds Over Erawan
  2. Wanda Sports: Ironman Offer Seems Expensive But Would Do Well for Solvency If Goes Through

1. Dark Clouds Over Erawan

Img 3181

We recently visited Erawan and Global Green Chemicals (GGC TB) this week. Let’s just say the companies are having a hard time even before the coronavirus outbreak.

  • Erawan reported flat EBITDA and 14% earnings decline in 2019 on barely rising revenues. Especially weak was the economy segment which saw an 11% in RevPar
  • The one-time hotel star also implied a decline of 40-50% during the period of the coronavirus outbreak, which only started in January 2020. This is likely to push them into a heavy loss for 2020. The stock was down 7% on the day of the meeting alone.
  • GGC reported an EBITDA decline of almost 60% in 2019 primarily due to decline in product prices. The company is still pursuing suppliers over the missing product.

2. Wanda Sports: Ironman Offer Seems Expensive But Would Do Well for Solvency If Goes Through

Image 10917786821582724215877

Bloomberg reported last week that Wanda Sports Group (WSG US) (Wanda) is planning to sell its Ironman brand (under which it operates IRONMAN and IRONMAN 70.3 triathlon events globally) for $1bn. Bloomberg’s report stated that Wanda Sports is working with an adviser to determine whether or not to proceed with the sale, adding that the company has already had discussions with interested private equity buyers.

Source: Youtube

At an EV/Revenue multiple of 10x (versus the peer average of 5x) the expected $1bn valuation for Ironman seems to be on the expensive side. Hence, there is a good chance that the transaction would eventually go through at a lower price. However, it is doubtful as to whether Wanda would be willing to sell Ironman at a lower price, given that proceeds are presumably expected to cover its loan commitments worth c.$1bn maturing over the next two years.

You are currently reading Executive Summaries of Smartkarma Insights.

Want to read on? Explore our tailored Smartkarma Solutions.

Brief Consumer: Dark Clouds Over Erawan and more

By | Consumer Sector, Daily Briefs

In this briefing:

  1. Dark Clouds Over Erawan
  2. Wanda Sports: Ironman Offer Seems Expensive But Would Do Well for Solvency If Goes Through
  3. DRB Hi Com (DRB): Value Unlocking-Part II

1. Dark Clouds Over Erawan

Img 3181

We recently visited Erawan and Global Green Chemicals (GGC TB) this week. Let’s just say the companies are having a hard time even before the coronavirus outbreak.

  • Erawan reported flat EBITDA and 14% earnings decline in 2019 on barely rising revenues. Especially weak was the economy segment which saw an 11% in RevPar
  • The one-time hotel star also implied a decline of 40-50% during the period of the coronavirus outbreak, which only started in January 2020. This is likely to push them into a heavy loss for 2020. The stock was down 7% on the day of the meeting alone.
  • GGC reported an EBITDA decline of almost 60% in 2019 primarily due to decline in product prices. The company is still pursuing suppliers over the missing product.

2. Wanda Sports: Ironman Offer Seems Expensive But Would Do Well for Solvency If Goes Through

Image 10917786821582724215877

Bloomberg reported last week that Wanda Sports Group (WSG US) (Wanda) is planning to sell its Ironman brand (under which it operates IRONMAN and IRONMAN 70.3 triathlon events globally) for $1bn. Bloomberg’s report stated that Wanda Sports is working with an adviser to determine whether or not to proceed with the sale, adding that the company has already had discussions with interested private equity buyers.

Source: Youtube

At an EV/Revenue multiple of 10x (versus the peer average of 5x) the expected $1bn valuation for Ironman seems to be on the expensive side. Hence, there is a good chance that the transaction would eventually go through at a lower price. However, it is doubtful as to whether Wanda would be willing to sell Ironman at a lower price, given that proceeds are presumably expected to cover its loan commitments worth c.$1bn maturing over the next two years.

3. DRB Hi Com (DRB): Value Unlocking-Part II

Image?1582282673

This is the second part of the unlocking value of DRB Hi Com, highlighting the potential value unearthed from Puspakom (the vehicle inspection business) and Pos Malaysia (POSM MK)

Pos Malaysia has a sizeable logistics and courier asset including 3020 delivery vehicles and 6600 motorcycles. With Grab (0967655D SP) keeps on increasing its service offering, it is not impossible to form a partnership in the delivery channels, which sees Pos Malaysia carry less PPE in the balance sheet, therefore, increases ROE. Its courier and logistics business is also ready to benefit from the growing e-commerce activities in Malaysia. 

Puspakom is a vehicle inspection company in Malaysia that is wholly owned by DRB and also offers motor insurance and driver license renewal – an area of business that My E.G. Services (MYEG MK) normally is interested in due to its high margin nature. 

Proton has a couple of catalysts in the pipeline including higher demand for SUVs, margin improvement once X70 is assembled domestically (from currently CBU to CKD), and UMW (owns Perodua) may potentially lag behind in sales due to a lack of potential product launch in SUVs, therefore, DRB is still a buy. Any share price weakness due to temporary uncertainty in the political scene should provide a chance to accumulate. It is also trading on the lower end of its 52-week range. 

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