Consumer

In this briefing:

1. Golden Agri:  Reduced Risk of El Niño Pushes Out CPO Price Recovery into 2020
2. Propertylink – CNI Shareholders To Vote On ESR’s Final Offer
3. M1 Ltd (M1 SG): A Clever Ploy to Put the Ball Firmly in Axiata’s Court
4. Maoyan Entertainment (猫眼娱乐) IPO: Turning Profitable, Thoughts on Valuation
5. Itochu Confirms Intent to Deepen Hold over Descente

1. Golden Agri:  Reduced Risk of El Niño Pushes Out CPO Price Recovery into 2020

INVESTMENT VIEW:
The Australian Bureau of Meteorology has just downgraded its risk of El Niño from ‘Alert’ to ‘Watch’, and as a result, we temper our optimism for a near-term rally in CPO prices.  Longer-term, we remain bullish on Golden Agri Resources (GGR SP), but higher CPO prices remain a key catalyst for our bullish call on the shares. 

2. Propertylink – CNI Shareholders To Vote On ESR’s Final Offer

ESR has now declared its Offer for Propertylink Group (PLG AU) “to be best and final“, and the Offer has been extended until the 28 February (unless further extended). 

After adjusting for the interim distribution of A$0.036/share (ex-date 28 December; payment 31 January), the amount payable by ESR under the Offer is A$1.164/share, cash.

The Target Statement issued back on the 20 November included a “fair and reasonable” opinion from KPMG,  together with unanimous PLG board support.

To recap: after PLG rebuffed an offer from Centuria Capital (CNI AU) in September, followed by PLG making an offer for Centuria Industrial Reit (CIP AU) – in which both CNI (23.5%) and PLG (17.3%) have sizeable stakes – ESR launched its offer for PLG. Adding to the cross-holdings, ESR also acquired major positions in both PLG (18.06% initially, now up to 19.9%) and CNI (14.9%).

ESR’s Offer is conditional on a minimum acceptance condition of 50.1%. CNI has a 19.5% stake and Vinva Investment Management 5%.

The next key event is CNI’s shareholder vote on the 31 January. This is not a vote to decide on tendering the shares held by CNI in PLG into ESR’s offer; but to give CNI’s board the authorisation to tender (or not to tender) those PLG shares. 

Although no definitive decision has been made public by CNI, calling the EGM to get shareholder approval and attaching a “fair & reasonable” opinion from an independent expert (Deloitte) to CNI’s EGM notice, can be construed as sending a strong signal CNI’s board will ultimately tender in its shares. According to the AFR (paywalled), CNI’s John Mcbain said: “We want to make sure when we do decide to vote, if we get shareholder approval, the timing is with us“. 

Assuming the resolution passes, CNI’s board decision on PLG shares will take place shortly afterwards. My bet is this turns unconditional the first week of Feb. The consideration under the Offer would then be paid 20 business days after the Offer becomes unconditional. Now trading with completion in mind at a gross/annualised spread of 0.8%/6.7%, assuming payment the first week of March.

3. M1 Ltd (M1 SG): A Clever Ploy to Put the Ball Firmly in Axiata’s Court

M1 Ltd (M1 SP), the third largest telecom operator in Singapore, is subject to a voluntary conditional offer (VGO) at S$2.06 cash per share from Keppel Corp Ltd (KEP SP) and Singapore Press Holdings (SPH SP) (KCL-SPH). KCL-SPH said on Tuesday that they wouldn’t increase their S$2.06 offer price “under any circumstances whatsoever.”

4. Maoyan Entertainment (猫眼娱乐) IPO: Turning Profitable, Thoughts on Valuation

Maoyan Entertainment (formerly Entertainment Plus) launched its institutional book building last Friday. We covered the company’s background, industry backdrop, financials, shareholders and the regulatory overhang in our previous two notes.

In this note, we will look at the recent development of the company, based on the data from the prospectus and our channel checks. We will also discuss the valuation of the company. 

Our Previous Insight on Maoyan Entertainment:

• Entertainment Plus (猫眼娱乐) IPO: The Engineered Movie Ticketing Leader that Runs Out of Steam (Part 1)
• Entertainment Plus (猫眼娱乐) IPO: The Coming Regulatory Bang Isn’t That Bad (Part 2)

5. Itochu Confirms Intent to Deepen Hold over Descente

Itochu (8001 JP) continues a battle of words and equity as it attempts to gain more control over sports firm Descente (8114 JP).

Meanwhile, Descente has brought in Wacoal (3591 JP) as a white knight and made a splash in the business media about its recent success.

Itochu insists that Descente needs Itochu’s management skills, particularly to build a stronger business in China and other overseas markets, and says the only way to make Descente listen is to buy more stock – more than its current nearly 30%.

In this briefing:

1. Maoyan Entertainment IPO Valuation: Press the Skip Button
2. Korean Stubs Spotlight: A Pair Trade Between Amorepacific Group & Shiseido
3. Hujiang Education (沪江教育) Pre-IPO – Spending More than It Earns
4. Panasonic Is Bonding with Toyota- A JV Plan for 2020
5. China Meidong (1268 HK): Standout Story in Gloomy Auto Dealership Sector; Luxury Brands Outperform

1. Maoyan Entertainment IPO Valuation: Press the Skip Button

Maoyan Entertainment (EPLUS HK) is the largest online movie ticketing service provider in China. The mid-point of Maoyan’s IPO price range of HK$14.8-20.4 per share implies a market value of $2.5 billion (HK$19.8 billion). Five cornerstone investors have agreed to buy $30 million or 10% of the offering at the IPO mid-point. The cornerstone investors are Imax China Holding (1970 HK), Hylink Digital Solutions, Prestige of The Sun, Welight Capital and Xiaomi Corp (1810 HK). 

2. Korean Stubs Spotlight: A Pair Trade Between Amorepacific Group & Shiseido

In this report, we provide an analysis of our pair trade idea between Amorepacific Group (002790 KS) and Shiseido Co Ltd (4911 JP). Our strategy will be to long Amorepacific Group (APG) and short Shiseido. As mentioned in our report, Korean Stubs Biweekly Sigma σ (#1): The Inaugural Edition, our base case strategy is to achieve gains of 8-10% on this pair trade. Our risk control is to close the trade if it generates 4-5% in combined losses. Cost of commissions are not included in the calculations and closing prices as of January 23rd are used in our pair trade. [Long APG – $0.5 million; Short Shiseido – $0.5 million for total of $1.0 million].

The following are the major catalysts that could boost APG shares higher than Shiseido shares within the next six to twelve months: 

• Amorepacific Group shares are extremely oversold and forming a base
• THAAD is no longer an issue
• Amorepacific Group’s NAV discount 
• Attractive relative valuations
• Amorepacific’s new headquarters building distraction out of the way
• Chinese tourists are coming back to Korea & slower growth rate of visitors to Japan

3. Hujiang Education (沪江教育) Pre-IPO – Spending More than It Earns

Hujiang Education (1414698D CH) (HET) is planning to raise US$200m in its upcoming IPO.

HET has grown its revenue at an impressive 73% CAGR from 2015 to 2017 and has been accompanied by gross margin expansion. The strong growth was supported by improving operating metrics such as an increase in student enrollment and average spending. 

However, HET has been making losses and continues to spend more than its net billing. It is unclear whether HET had already achieved break even for its proprietary courses before expanding into its CCtalk platform. But from its high level of expenses, it seems unsustainable for HET to be relying heavily on the sales and marketing spending to get users to purchase online courses.

In this insight, we will look into the company’s financial and operating performance, regulatory risks regarding K12 courses, aggressive spending on sales and marketing, and the performance of other online education companies.

4. Panasonic Is Bonding with Toyota- A JV Plan for 2020

It seems that Panasonic Corp (6752 JP) is planning for long term growth by concentrating on building its relationship with Toyota Motor (7203 JP) while witnessing its key customer, Tesla Motors (TSLA US), drifts away. Toyota and Panasonic are in discussion to form a JV by 2020E with the aim of mass manufacturing EV batteries with possible benefits from cost-cutting efforts. We mentioned in Tesla Drifting Away Could Leave Panasonic Struggling to Gain Traction in China, that Tesla is looking for Chinese local players to source its factory in China upon the refusal from Panasonic to join hands with them in investing in their Chinese factory. Panasonic, which seemed to have felt the pressure mounting from Tesla potentially distancing itself from them, given that the majority of their battery sales are currently dependent on Tesla, is now preparing itself for the future by building long terms plans with its not-so-new customer, Toyota. Panasonic entered a partnership agreement with Toyota back in 2017 to develop EV batteries including their traditional prismatic batteries while also aiming to develop new battery solutions for the growing and evolving EV market. Thus, its plan to form a JV with Toyota by 2020E displays the confidence Panasonic has in Toyota while also indicating that the former is paving a path for some steady growth in its battery business being supported by one of the leading automakers.

5. China Meidong (1268 HK): Standout Story in Gloomy Auto Dealership Sector; Luxury Brands Outperform

China Meidong Auto (1268 HK) has been on a rollercoaster ride in 2018. The stock price of Meidong started 2018 around 2.7 HKD and recently has been trading around 2.9 HKD.

Nice and steady ride? Not exactly, as it has swung from 4.3 HKD in June to 2.6 HKD in August. After analyzing how NPAT estimates evolved over the past year there should be no justifications for these wild swings. 

Meidong is likely to report solid FY18 results by late March vs industry peers which are expected to report a weak 2H18. While BMW dealers have been reportedly suffering in China during 2018, Meidong was fortunate to have other luxury brands pick up the slack.

FY19 should be another growth year for Meidong as 1) recently acquired BMW showrooms contribute their maiden results and 2) other luxury brands continue to perform despite overall doom and gloom in the Chinese auto market. Should the Chinese government launch car replacement stimulus measures this would be icing on the cake.

Fair Value lowered slightly from 4.7 HKD to 4.4 HKD (10x 2019E) on lower 2019 profit estimates, which leaves 52% upside excluding dividends.

In this briefing:

1. Orion Holdco Trade: Current Status & Trade Approach
2. Nexen Holdco Trade: Quick Reversion on Yesterday’s 2σ Price Divergence
3. U.S. Equity Strategy: Has “the Pullback” Begun?
4. New Oriental (EDU): Do Not Fear Q2 Record Losses, 27% Upside
5. Meet, Beat or Miss Q4 Estimates, Both Las Vegas Sands and Sands China Are Solid Bets

1. Orion Holdco Trade: Current Status & Trade Approach

• Orion sub is now falling 6% this morning. Holdco is currently down only 1.6%. They are currently above +2.2σ on a 20D MA. This is a 120D high. Price ratio wise, they are at 0.16549. This is a little above 120D mean. Holdco discount is now 50% to NAV.
• Sub’s 6% fall this morning should be due to the market speculation that 4Q numbers may be worse than expected. But there are still more signals of improving fundamentals going forward. Weaker 4Q numbers do not indicate that Sub is entering a dull cycle business wise.
• Current +2.2σ on a 20D MA is something rare to see. It should be rare even if we look much beyond 120 days. Given the market’s favorable sentiments on Sub’s mid-term outlook, current +2.2σ should be  held here and reverted pretty soon. I’d go long Sub and short Holdco until +0~0.5σ.

2. Nexen Holdco Trade: Quick Reversion on Yesterday’s 2σ Price Divergence

• Nexen Sub made a run yesterday. It climbed 6% yesterday. Holdco stayed flat with a 0.34% gain. This created a huge price divergence. The duo made nearly 2σ gap in one single day. They are now slightly below -1σ on a 20D MA. Holdco discount is 46% to NAV.
• This much divergence in a single day is very rare for the Nexen duo. Sub’s stronger 4Q numbers should have been already priced in. Yesterday was more of a sentimental boost, thanks to HMG. Short-term wise, further price pushing up on Sub is unlikely.
• The duo is well below 120D mean and 2Y mean on a 20D MA price ratio. Price divergence should be held back at the current level. I’d go for a quick reversion in favor of Holdco. Just, Holdco liquidity can be a major issue to many of us here.

3. U.S. Equity Strategy: Has “the Pullback” Begun?

The weight of the evidence suggests that the pullback has begun. This belief is supported by overbought conditions combined with the S&P 500, MSCI ACWI, and nearly all Sectors hitting logical resistance. Assuming the pullback continues, the next question is how deep or damaging will it be? In this report we highlight various market/technical indicators we are monitoring, as well as pointing out attractive set ups within Consumer Discretionary and Health Care Sectors.

4. New Oriental (EDU): Do Not Fear Q2 Record Losses, 27% Upside

• The record net losses were mainly due to a seasonally weak quarter and recognition of the impairment in a subsidiary.
• Q2 revenues did not slow down and management does not believe Q3 revenues will slow down.
• EDU will not be negatively impacted by the new law from the Ministry of Education.
• The P/E band suggests an upside of 27% and a price target of USD90.

5. Meet, Beat or Miss Q4 Estimates, Both Las Vegas Sands and Sands China Are Solid Bets

• LVS shot at Japan license enhanced by his role in lobbying US Justice Department’s reverse opinion on online gambling published last week. Read why in this insight.
• Owning Sands China makes a strong case based on an ROCE analysis vs. the hospitality sector.
• Owning both at current trade is one of the screaming bargains in the entire sector

In this briefing:

1. 2019 M&A/IPO Preview: Chinese Express Sector Quickly Building Out ‘Last-Mile’ & Int’l Capabilities
2. Leong Hup IPO Preview: A Game of Chicken
3. BGF Holdings Stub Trade: More Price Correction on Sub Is Still Ahead

1. 2019 M&A/IPO Preview: Chinese Express Sector Quickly Building Out ‘Last-Mile’ & Int’l Capabilities

A year ago we published a note that described how we expected corporate activity in China’s domestic express  sector to play out in 2018 (see 2018 M&A/IPO Activity Preview: Chinese Express, Logistics Sectors Hit by Slower Growth & BABA Vs JD). In this new piece, we look back at how things actually played out in the sector last year and look forward to 2019 and beyond. 

We’ve divided this year’s piece into four sections:

1. A quick review of our expectations from 2018, and how things actually played out
2. New (and ongoing) trends we expect to see in express sector M&A this year
3. The continued battle for leadership between Alibaba Group Holding (BABA US) and JD.com Inc (ADR) (JD US)
4. Potential IPO candidates for 2019 and beyond

We expect Chinese domestic express demand to continue to moderate in 2019, and in response we expect the express companies to increase their investments in ‘last-mile’ and international delivery, which will probably create a drag on profitability in the medium-term. Although we believe e-commerce giants Alibaba and JD.com would like their growing portfolios of logistics investments to become self-funding sooner rather than later, we foresee somewhat limited investor appetite for more large Chinese logistics IPOs in 2019, since many high-profile offerings have faltered since going public.

2. Leong Hup IPO Preview: A Game of Chicken

Leong Hup International (LEHUP MK) is one of the largest producers of poultry, eggs and livestock feeds in Southeast Asia. After an unusually quite 2018, Malaysia’s equity capital market is set for rebound with at least three issuers looking to raise up to $500 million from IPOs. Leong Hup is set to the be the first as it has started the search for cornerstone investors.

3. BGF Holdings Stub Trade: More Price Correction on Sub Is Still Ahead

• BGF Retail (282330 KS) was down 12% last week. BGF Co Ltd (027410 KS) was down only 4.5%. Finally, they are now above 20D MA. This happens for the first time since late Nov. But Holdco discount is still at 50%. Similarly, price ratio is still close to the yearly low.
• Usually, I’d close a position when I reach ±0.5~0 σ on 20D MA. In this case, Holdco discount is too harsh to do so. Sub price/price ratio has been negatively correlated. Valuation wise, Sub price correction isn’t over yet. PER on FY19e is around 20x. This is about 7% higher than GS Retail (007070 KS) even though GS Retail EBITDA margin is slightly higher.
• It also appears that sentiments on the entire retail sector won’t improve any time soon. The government is hinting a possible change on minimum wage. This is positive on Sub. But fundamentally, Korean CCSI is still on the decline. The newly implemented franchisee support measures will further worsen sentiments. I wouldn’t close this position yet.

In this briefing:

1. TRADE IDEA: Amorepacific (002790 KS) Stub: A Beautiful Opportunity
2. Last Week in GER IPO Research: Leong Hup, China Tobacco, Futu and Weimob
3. Apple (AAPL): Reduces Prices in Mainland China – Right Action, But Not Enough
4. China Kepei Edu (科培教育) IPO – Regulation Poses Significant Near-Term Risks
5. The GER Weekly EVENTS Wrap: Don Quijote, M1, Healius and Upcoming M&A Catalysts

1. TRADE IDEA: Amorepacific (002790 KS) Stub: A Beautiful Opportunity

Take out an ad in a magazine or pay a one of the Wondergirls to post an Instagram photo of herself using our makeup? How do we get Americans and Europeans to want our bubble tea sleeping packs and panda-shaped palettes? All valid questions for K-beauty companies in the midst of a global expansion.

Korean beauty products powerhouse, Amorepacific is going through some growing pains at the moment. In the 3Q18 the group reported a YoY sales increase of 6% but OP tumbled 24% due to increased personnel and marketing costs. In a management policy statement last week, Chairman Suh outlined the problems the group is encountering as it copes with reaching customers in a world where online and offline customer interaction is changing. 

The stub is now trading at its widest discount to NAV in at least 3 years and has reached 22% discount to its Sum of the Parts NAV by my calculations. This level represents a level 1.5 standard deviations below its long-term average and also offers compelling value. 

In this insight I will detail:

• an actionable market-neutral trade idea
• an analysis of the various business units of Amorepacific
• reasons for the under-performance of Amorepacific parent and a sign of a rebound
• a recap of ALL my stub trade ideas on Smartkarma, including track record of performance

2. Last Week in GER IPO Research: Leong Hup, China Tobacco, Futu and Weimob

We slide into 2019 with GER’s recap of our latest IPO research. This week, we talk chicken as Arun initiates on the IPO Malaysian poultry producer Leong Hup International (LEHUP MK). Secondly, Venkat initiates on China Tobacco International (GHALPZ CH) with a cautious view. In addition, Arun initiates on online broker Futu Holdings Ltd (FHL US)  and we remind of Arun’s valuation piece on Weimob.com (2013 HK) . 

Quote of the week 

Are you insane?

-Sky news presenter to UK MP Boris Johnson ahead of the Brexit parliament vote planned for today

Best of luck for the week and new year- Rickin, Venkat and Arun

3. Apple (AAPL): Reduces Prices in Mainland China – Right Action, But Not Enough

• Tim Cook passed the buck to the weak sales in China. However, we believe China’s retailing is running well based on our visits to shopping malls with Apple stores.
• Luxury goods sold better in China than all other major markets in the world in 2018.
• We believe that the price reduction in Mainland China is just taking market share from Apple Stores in Hong Kong, but not from competitors.
• We also believe that the app review process is the fatal shortcoming for AAPL.

4. China Kepei Edu (科培教育) IPO – Regulation Poses Significant Near-Term Risks

China Kepei Education (1890 HK) is looking to raise up to US$122m in its upcoming IPO. 

Overall, the company has continued to show that its undergraduate program is the driver behind its growth. It grew its 8M 2018 revenue and gross profit both by about 24% YoY. However, there are significant near-term risks if the MOJ Draft for Comments gets implemented. It may result in Kepei registering its schools as for-profit private schools which would shrink its net profit margin.

In this insight, we will provide updates on the company’s 8M 2018 financials and operating performance, the potential impact of policy change and compare its valuation to other listed education peers. We will also run the deal through our framework.

5. The GER Weekly EVENTS Wrap: Don Quijote, M1, Healius and Upcoming M&A Catalysts

In this week’s GER M&A wrap, we highlight the dwindling likelihood of a follow-on deal for Don Quijote Holdings (7532 JP) , which is now trading below terms. Secondly, we take a contrarian view on the M1 Ltd (M1 SP) deal and contend there is less likely to be a bidding war. Finally, we update on rejected by Healius (HLS AU) and provide a comprehensive list of upcoming catalysts for near-term M&A deals. 

The rest of our event-driven research can be found below. 

Best of luck for the new week – Rickin, Venkat and Arun

In this briefing:

1. UFO Moviez-Q2FY19 Results Update
2. Som Distelleries-Q2FY19 Results Update
3. Tsuruha Holdings/Toyota Motor Pair on a Stronger JPY
4. CapitaLand Ltd – Premium Price for Ascendas-Singbridge
5. Full List of Korea’s Single-Sub Holdcos with Current Sigma % – Quick Thought on Amorepacific

1. UFO Moviez-Q2FY19 Results Update

Ufo Moviez India (UFOM IN) Q2FY19 results were in line with our expectations. While revenues declined by 4% YoY in Q2 FY19, PAT also declined by 4% YoY in the same period primarily due to the impact of D-Cinema sunset. We have mentioned in our earlier reports (click here and here) that the company is phasing out its distributor revenues from the Hollywood studio that may only last till FY20. We analyze the result.

2. Som Distelleries-Q2FY19 Results Update

Som Distilleries And Breweries (SDB IN) Q2FY19 results were in line with our expectations. While revenues witnessed a flat growth, PAT declined by 37% YoY in Q2 FY19 primarily due to seasonality impact on the beer volumes and higher depreciation on the new Karnataka plant. We analyze the results.

3. Tsuruha Holdings/Toyota Motor Pair on a Stronger JPY

Running thorough ideas presented by Campbell Gunn in his stronger yen insight Japan: What to Buy & Sell if the ¥ Rises to 90 , we found a compelling pair trade set up in the form of long Tsuruha Holdings (3391 JP) and short Toyota Motor (7203 JP) as the relative chart is moving into an exhaustive low that sets up a good reaction rise to the tune of 20%.

In absolute terms we see Toyota Motor moving into a top while Tsuruha shows risk of a final low to work into this pair position but has a very compelling bullish chart set up as Toyota fade from resistance.

4. CapitaLand Ltd – Premium Price for Ascendas-Singbridge

CapitaLand Ltd announced yesterday that it will be acquiring Ascendas-Singbridge (“ASB”) from Temasek Holdings.

The agreed enterprise value for ASB was S$10,907 mil and the equity value of ASB payable to Temasek Holdings was S$6,036 mil.

This is a transaction that makes good strategic sense. CapitaLand and ASB’s businesses, sector and geographical exposures complement each other well.  Any tangible benefits from the synergies are likely to be seen over the mid to long term.  The increase in AUM and addition of new capital recycling platforms will make CapitaLand more appealing as a real estate fund manager to institutional investors and sovereign wealth funds.

However, the acquisition consideration for ASB is not cheap. CapitaLand is acquiring ASB at a price-to-book ratio of 1.15x. But this is a necessary step that CapitaLand has to take in order to execute its CapitaLand 3.0 strategy. 

From an investor’s perspective, concerns on the valuation of the deal, CapitaLand’s worsening credit metrics, and execution of the integration plan are likely to affect CapitaLand’s short-term share price performance. Management needs to demonstrate the ability to extract quantifiable synergistic value from the acquisition in order to justify the premium paid but this can only happen over the longer term.

5. Full List of Korea’s Single-Sub Holdcos with Current Sigma % – Quick Thought on Amorepacific

• This is the complete list of Korea’s single-sub holdcos with current sigma %. Three local holdcos are currently standing out: Amorepacific Group (002790 KS): +231.84% of σ, Hanjin Kal Corp (180640 KS): -113.10% of σ and Youngone Holdings (009970 KS): +86.63% of σ.
• Amorepacific appears very tempting for stub trade. The Amore duo now has the widest price divergence on a 20D MA among Korea’s single-sub holdcos. But I would wait on this name. Locally, signals of improving fundamentals are being heard on the local cosmetics stocks. Holdco has traditionally been more susceptible to fundamentals changes. It is very possible that Amore duo leads to upwardly mean reversion in favor of Holdco in the short-term.

In this briefing:

1. Mrs. Bectors Food Specialities Pre-IPO Quick Take – Sales for Its Main Segment Have Been Stagnant
2. Navitas (NVT AU): A Bid Priced to Go with a Reasonable Chance of a Competing Bid
3. Korea Single-Sub Holdco Daily Alert: Halla Is Ripe for Trade At -1.6σ, Amore Reduced to +0.8σ
4. Yaskawa Electric: We Are Probably Now Close to the Bottom for This LT Structural Growth Story
5. Starbucks (SBUX): Could Starbucks’ Beans Start to Lose Their Magic?

1. Mrs. Bectors Food Specialities Pre-IPO Quick Take – Sales for Its Main Segment Have Been Stagnant

Mrs Bectors Food Specialities (814506Z IN) (BFS) plans to raise around US$100m+ in its India IPO via a sell-down of secondary shares.

As per Technopak, BFS is one of the leading manufacturers in the non-glucose biscuit segment in Northern India. It is also one of the largest supplier of buns to the quick-service restaurants and a leading supplier of breads in Delhi NCR and Maharashtra. In addition to its Indian operations, exports account for 30% of the revenue.

Despite providing a host of numbers, the company has failed to provide clear statistics on the growth of revenue of its main segment, domestic biscuits. If one tries to back out this numbers from the other statistics it seems to imply that revenue has been flat for five years. Despite showing some revenue and PATMI growth over the past five years, cash flow from operations as well have been stagnant. 

2. Navitas (NVT AU): A Bid Priced to Go with a Reasonable Chance of a Competing Bid

Navitas Ltd (NVT AU), an Australian-listed education company, is subject to a revised bid. On 15 January 2019, the BGH Consortium bid against itself by offering a revised proposal of A$5.825 cash per share, 6% higher than its previous rejected offer.

3. Korea Single-Sub Holdco Daily Alert: Halla Is Ripe for Trade At -1.6σ, Amore Reduced to +0.8σ

• Halla has the widest gap now on a 20D MA. It is at -159% of σ. It was down 130pp yesterday alone. It is currently close to yearly mean. Poongsan is also below -1 σ, down 80pp yesterday. BGF and Nexen are above +1 σ.
• Amore quickly reduced the gap yesterday. It is at 78% of σ, down 150pp. Amore Holdco stayed relatively strong yesterday. Holdco is at 78% of σ. But I wouldn’t expect a further decline. Price ratio is still close to yearly low. Holdco discount can be misleading as its two unlisted holdings are severely undervalued.
• I’d trade Halla with a very short-term horizon for quick mean reversion. I wouldn’t look at long-term horizon on Halla. Single sub dependency is relatively low. Price ratio is a little above yearly mean. 46% holdco discount doesn’t seem to be particularly cheap either.
• BGF, I’d continue to hold onto my long position on Holdco. I explained it in the previous BGF insight. Nexen and Poongsan, I’d wait for a bit wider divergence.

4. Yaskawa Electric: We Are Probably Now Close to the Bottom for This LT Structural Growth Story

Following Yaskawa’s second downward revision at 3Q earnings, we are shifting towards a more positive stance on the stock, even from a long-term perspective. We had been negative on the stock from late 2017 and as the stock tumbled we maintained that it was still too early buy for the long-term, though by mid-late 2018 we did (incorrectly) feel that there was the potential for a short term rally due to the severity of underperformance.

With the stock selling off harshly in the recent market fall but rebounding following its weak earnings we feel that much of the bad news is now priced in and expectations have corrected to the point where this is once again interesting on the long side.

5. Starbucks (SBUX): Could Starbucks’ Beans Start to Lose Their Magic?

Three key emerging risks to the Starbucks’ growth story: 1) New entrant poses a threat to China growth story; 2) New CEO is missing the magic of the beans; and 3) New Uber partnership could erode Starbucks’ brand equity.

In our January 8 research note, we cautioned that Starbucks had outperformed the NASDAQ by 37% since we turned positive on August 8 but we were concerned about two new developments that we viewed as red flags: shelving of Reserve coffee bar expansion and aggressive China expansion plans of Luckin Coffee. While we do not believe this represents a short opportunity, we do believe it foreshadows emerging risks to Starbucks’ long-term growth story.

In this briefing:

1. Hanon Systems (018880): Overvalued Stocks in The Low Margin Sector
2. Hyosung Holdings: Current Status & Trade Approach
3. Sumber Alfaria Trijaya (AMRT IJ) – Flying off the Shelves – On the Ground in J-Town
4. ECM Weekly (19 January 2019) – China Kepei, Mrs. Bectors Food, Xiaomi, Ayala Corp
5. Mitsubishi Selling off Stake in Aeon, Ministop in Limbo

1. Hanon Systems (018880): Overvalued Stocks in The Low Margin Sector

The recent negative sales in the Chinese auto industry and Nissan’s case of Carlos Ghosn removal could put additional pressure on the already thin margin of auto supplier industry. One of the Carlos Ghosn early contribution to Nissan was to cut cost and outsource the auto parts maker to a wide variety of suppliers including to Hanon Systems (018880 KS) . Nissan’s new management may want to undo some of Carlos Ghosn’ legacy including changing the selection criteria of parts supplier.

Hanon’s global peers also experienced a decrease in the inventory turnover and most of them have been priced at PER <10 but Hanon is still trading at 24x PER while its sales growth and profitability is still in low single digit? Facing the onset of the slowdown in the Chinese auto industry, won’t it be another headwind for Hanon Systems?

2. Hyosung Holdings: Current Status & Trade Approach

• Local institutions are busy scooping up Hyosung Corporation (004800 KS) shares lately. The owner risk is now gone. There are increasing signs of improving fundamentals on all of the four major subs. Some are already expecting ₩5,000 per share. This is a 9.2% annual div yield at the last closing price.
• Discount is also attractive. It is now at 46% to NAV. With this much div yield, discount should be much below the local peer average of 40%.
• I’d continue to long Holdco. Hedge would be tricky. Heavy is up 15% YTD. I admit that there is no clear cointegrated relationship between them. But Heavy’s recent rally is more of a speculative money pushing up on the hydrogen vehicle theme. I’d pick Heavy for a hedge.

3. Sumber Alfaria Trijaya (AMRT IJ) – Flying off the Shelves – On the Ground in J-Town

Leading Indonesian mini-mart operator Sumber Alfaria Trijaya Tbk P (AMRT IJ) (Alfamart) has undergone quite a dramatic transformation over the past 12 months, with a dramatic slowdown in its new store buildout paving the way for a significant pick up in SSSG and a reduction in debt. 

The company plans to start to step up its store openings selectively over the next year, with 500 new stores planned and fewer closures. Last year it only opened net 200 new stores having opened 1200 stores the previous year.

The market segment continues to see consolidation, with supermarkets and hypermarts suffering and mini-markets continuing to gain ground as the “pantry of the middle-class”.

The company continues to grow its fee-income business, which is highly profitable, with increasing collaboration with utilities, finance companies, and e-commerce players to name but a few. 

After a difficult 2017, Sumber Alfaria Trijaya Tbk P (AMRT IJ) looks to be well and truly back on a growth trajectory, with a rationalisation of its stores, a slow down in its expansion, reduced gearing, and a focus on operational efficiencies. The Mini-market continues to win out in the retail space and is increasingly being used as a distribution network for e-commerce companies. The growth in fee-service from bill payment and other services will be positive for the bottom line. The stock is by no means cheap on a PE basis but provides quite unique exposure to what is still a high-growth area of the economy. According to Capital IQ consensus estimates, the company trades on 51x FY19E PER and 44x FY20E PER, with forecast EPS growth of +30% and +16% for FY19E and FY20E respectively. 

4. ECM Weekly (19 January 2019) – China Kepei, Mrs. Bectors Food, Xiaomi, Ayala Corp

Aequitas Research puts out a weekly update on the deals that have been covered by Smartkarma Insight Providers recently, along with updates for upcoming IPOs.

Accuracy Rate:

Our overall accuracy rate is 71.9% for IPOs and 64.1% for Placements 

(Performance measurement criteria is explained at the end of the note)

New IPO filings

• Shenwan Hongyuang Group (Hong Kong, >US$1bn)
• Tai Hing Holdings (Hong Kong, ~US$200m)
• Changsha Broad Homes Industrial Group (Hong Kong, >US$100m)
• Shanghai Gench Education (Hong Kong, >US$100m)
• China Yunfang Holdings (Hong Kong, ~US$100m)

Below is a snippet of our IPO tool showing upcoming events for the next week. The IPO tool is designed to provide readers with timely information on all IPO related events (Book open/closing, listing, initiation, lock-up expiry, etc) for all the deals that we have worked on. You can access the tool here or through the tools menu.

News on Upcoming IPOs

• IPO drought to end as Polycab, Chalet Hotels, others gear up for share sales
• EaseMyTrip plans to raise Rs 1,500 crore through IPO
• World’s most valuable startup, Bytedance, takes a hit from China’s slowdown
• China’s largest online ticketing site lowers IPO ambition
• Luckin Coffee Reportedly Seeks IPO in Hong Kong
• Chinese-backed Data Centre Giant Aims for Hong Kong IPO

Smartkarma Community’s this week Analysis on Upcoming IPO

• China Kepei Edu (科培教育) IPO – Regulation Poses Significant Near-Term Risks 
• Leong Hup IPO Preview: A Game of Chicken
• Mrs. Bectors Food Specialities Pre-IPO Quick Take – Sales for Its Main Segment Have Been Stagnant
• Chunbo Co. IPO Preview: Valuation Analysis

List of pre-IPO Coverage on Smartkarma

5. Mitsubishi Selling off Stake in Aeon, Ministop in Limbo

Mitsubishi has finally given up its hope of convincing Aeon to merge Ministop (9946 JP) with Lawson and is selling its stake in the largest retail group.

There will be no change to the extensive supply relationship between the two companies and Mitsubishi’s food wholesale arm, Mitsubishi Shokuhin (7451 JP).

While Aeon seems to have spurned Mitsubishi for now, it is hard to see how Aeon will progress in the convenience store sector without Mitsubishi’s help. In the short-term Ministop looks like a poor investment but Aeon may have to sell to Mitsubishi eventually and will want a good price for it.

In this briefing:

1. Meituan Dianping: Core Business Progress Toward Profitability an Overlooked Story?
2. Onward Quits Zozo: Another Dent in Zozo’s Reputation
3. Workman Vs. Decathlon: The Upcoming Battle for Japan’s Sports Market
4. Amorepacific Group and Corp Pair Trade
5. StubWorld: CK Infra/Power Assets, Amorepacific, JCNC

1. Meituan Dianping: Core Business Progress Toward Profitability an Overlooked Story?

• Our deep-dive segment profitability analysis reveals that Meituan Dianping’s (3690 HK) core business (combined food delivery and in-store, hotel & travel) has made good progress toward profitability.
• The ballooning consolidated operating losses mainly stem from new initiatives (particularly car hailing and Mobike).
• Furthermore, lower S&M expenses to sales ratio plus food delivery’s higher take rate suggests that competition with Ele.me is more manageable than anticipated.
• Our SOTP yields intrinsic value of HK$61.07/share, that represents 37% upside potential. 

2. Onward Quits Zozo: Another Dent in Zozo’s Reputation

ZOZO (3092 JP) has been hit from all sides recently, with a major sell-off by investors disturbed by Zozo’s execution of its private brand launch and the resulting impact on the company’s reputation among merchants and consumers alike.

Last month it launched a new campaign which, on the surface, was all about helping customers give back to society, but which drew an immediate negative response from some merchants.

One of these, Onward Holdings, withdrew all its brands from sale on Zozo. This is another damaging dent in Zozo’s reputation. 

3. Workman Vs. Decathlon: The Upcoming Battle for Japan’s Sports Market

Decathlon is a category killer sans pareil and will finally open its first store in Japan in March. If Decathlon implements its store roll out well, the French sports retailer will cause a major disruption in Japan’s sports market.

Large domestic sports retailers like Xebio Holdings (8281 JP) and Alpen Co Ltd (3028 JP) will be gearing up to compete in some categories but are far behind in private label development and cost performance, and the major sports brands will have to accelerate their plans for retail stores while reviewing pricing (downwards). Sports firms like Mizuno (8022 JP), with relatively low perceived brand value, could face challenges in the newly polarised market that will emerge from Decathlon’s entry.

A major source of competition for Decathlon will come from a more unlikely retailer: the uniforms to outdoor apparel/gear firm, Workman (7564 JP). While still small, Workman is already manoeuvring to hinder Decathlon’s growth in Japan, and looks like having establishment backing to do so – and echoes the growth of Uniqlo after Gap entered the Japanese market in the 1990s and the rise and rise of Nitori (9843 JP) after IKEA’s launch in 2006.

Both Gap and IKEA have relatively small operations in Japan today compared to their early potential. Decathlon will need to expand rapidly if it is to gain sufficient share to stop Workman emerging with a clear lead in its market. 

4. Amorepacific Group and Corp Pair Trade

This insight delves into make or break levels for a pair trade in being long Amorepacific Group (002790 KS) (APG) over Amorepacific Corp (090430 KS) (APC) with key hurdles/targets and floor support.

Curtis Lehnert puts forth the fundamental argument in TRADE IDEA: Amorepacific (002790 KS) Stub: A Beautiful Opportunity and we thought pivotal chart points would help round out this trade idea.

Holding floor support is vital for this trade to work. In absolute terms both APG and APC display similarly weak chart structures with risk of a final bout of weakness. APG displays a more depressed chart reading however.

5. StubWorld: CK Infra/Power Assets, Amorepacific, JCNC

This week in StubWorld …

• What’s up with Ck Infrastructure Holdings (1038 HK) reducing its stake in Power Assets Holdings (6 HK)?
• Trading around its lowest implied stub inside the past five years, improving sentiment toward cosmetic stocks should support an Amorepacific Group (002790 KS) setup.

Preceding my comments on CKI/PAH, Amorepacific and JCNC are the weekly setup/unwind tables for Asia-Pacific Holdcos.

These relationships trade with a minimum liquidity threshold of US$1mn on a 90-day moving average, and a % market capitalisation threshold – the $ value of the holding/opco held, over the parent’s market capitalisation, expressed as a % – of at least 20%.

In this briefing:

1. Courts Asia To Be Taken Over By Nojima
2. Hankook Tire Worldwide Stub Trade: Another Quick Mean Reversion The Other Way Around
3. Arcs, Valor and Retail Partners Form First Nationwide Supermarket Alliance
4. JKN: Prime Content Distributor Eyes Big Opportunities in ASEAN Market
5. Korean Air – Six Important Catalysts

1. Courts Asia To Be Taken Over By Nojima

Courts Asia Ltd (COURTS SP), a leading electrical, consumer electronics and furniture retailer in predominantly Singapore and Malaysia, has announced a voluntary conditional offer from Nojima Corp (7419 JP) at $0.205/share, a 34.9% premium to the last closing price.

The key condition to the Offer is the valid acceptances of 50% of shares out. Singapore Retail Group, with 73.8%, has given an irrevocable to tender. Once tendered, this offer will become unconditional.

CAL’s share price has endured a steady decline since touching $1.14 back in May 2015. It traded above the Offer price as recently as late-July 2018.

However, the controlling shareholder, which has maintained its stake since CAL’s listing in 2012, is cashing in. Nojima has stated it will exercise its right to compulsorily acquisition if acceptances reach 90%; and it does not intend to support any action or take steps to maintain the listing status of the company in the event its suspended due to free float requirements. I would look to cash out also. Consideration under the Offer may be remitted as early as the fourth week of Feb.

2. Hankook Tire Worldwide Stub Trade: Another Quick Mean Reversion The Other Way Around

• Hankook Tire Worldwide (000240 KS) is again in an interesting position. Its sub, Hankook Tire (161390 KS), is up 2.2% today, putting the duo at -2.2σ. Sub had lost nearly 10% on Jan 2~10 mainly on weakening outlook. Sub has then fully recovered this 10% loss this week. This is putting Holdco at a severely undervalued position on a 20D MA. Holdco discount is now at 41% to NAV.
• I initiated a reverse stub trade on this duo on Jan 8. It started at a 0.44953 price ratio. We are now at 0.38882. We would have enjoyed 15% tasteful yield if we had held onto this position up to this day. We have no apparent signal of improving fundamentals on Sub. It appears that Sub’s recent gain should be the work of bargain hunters. Holdco discount is at the local peer average. Price ratio is at yearly mean.
• Importantly, this is the first time that price ratio is hitting below -2σ since late September last year. We should expect another quick mean reversion at this level. Just, this time it will be the other way. I’d go long Holdco and go short Sub now.

3. Arcs, Valor and Retail Partners Form First Nationwide Supermarket Alliance

The supermarket sector is the most fragmented and uncompetitive of all retail sectors, a situation encouraged by major suppliers and not ideal for consumers.

Despite some effort from the likes of Aeon, consolidation has failed to materialise beyond a few in-group mergers.

Yet pressure on supermarkets to consolidate has been building due to depopulation in the regions, competitive pressures from other food retailers such as convenience stores and drugstore chains, as well as the emerging online food services.

Change is now coming. The biggest industry consolidation yet was announced last month, a precedent-setting alliance between three major supermarkets, Arcs Co Ltd (9948 JP), Valor Holdings (9956 JP) and Retail Partners (8167 JP), carving up a large chunk of the country into three regional fiefdoms.

4. JKN: Prime Content Distributor Eyes Big Opportunities in ASEAN Market

We initiate coverage of JKN with a BUY rating, based on a target price of Bt8.80, pegged to the the 14.8xPE’19E mean of the Asia ex-Japan Consumer Discretionary Sector.

The story:

• Plenty of opportunities in the ASEAN market
• Harvest season is imminent
• New contracts with three new channels confirm 2019 domestic growth
• Mild recovery for domestic digital TV industry in 2019E

Risks: Heavy reliance on a few major customers, probability it will have to set provisions for doubtful debts and potential inability to renew contracts with customers.

5. Korean Air – Six Important Catalysts

Shares of Korean Air Lines (003490 KS) are down nearly 60% since its highs in 2010 and we believe this decline has been excessive. The stock has started to recover and we expected continued outperformance this year. We like both Korean Air (Common) (003490 KS) and Korean Air (Pref) (003495) at current levels. However, we think Korean Air (Pref) has a higher upside. We are including Korean Air (Pref) (003495) in our model stock portfolio. The following are the major catalysts that could boost Korean Air (Common) and Korean Air (Pref) shares by 20-30%+ in the next 6-12 months. 

• Increasing possibility of a breakthrough in corporate governance with potential help from KCGI & NPS
• Cheap valuation/Increasing interests from both value funds and hedge funds 
• Reduced political conflict between China & South Korea
• Turnaround of the aerospace business unit
• Huge investment plan by the Incheon International Airport to expand facilities by 2023
• Current ratio of Korean Air Pref/Common is below the 1 sigma level