Consumer

In this briefing:

1. GER Upcoming EVENTS Calendar
2. Emart: Attractive Entry Point, Undervalued Real Estate Assets, & Homeplus REIT IPO
3. Visit Note
4. Bank Mandiri (BMRI IJ) – Shape Shifting and Millenial Mortgages – On the Ground in J-Town
5. New Oriental (EDU): Educator License Not A Concern

1. GER Upcoming EVENTS Calendar

We have received requests to provide a calendar of upcoming catalysts for near-term M&A, stubs and erstwhile event-driven names. Below is a list of catalysts over the near-term for such names as below. If you are interested in importing this directly into Outlook or have any further requests, please let us know. 

Kind regards, Rickin Arun and Venkat

2. Emart: Attractive Entry Point, Undervalued Real Estate Assets, & Homeplus REIT IPO

Shares of E Mart Inc (139480 KS) are down 40% from their highs in March 2018 and we think this decline has been excessive. We believe the stock has bottomed and we expect a 20-30% upside on this stock over the next six months to one year (current share price is 193,500 won). At end of 3Q18, the company had 157 Emart hypermarkets and Traders warehouse supermarkets, of which 90% of their assets were owned by the company and 10% were leased. The company has the highest number of hypermarkets and warehouse supermarkets in Korea. The following are the major catalysts that could boost Emart shares by 20-30%+ in the next 6-12 months. 

• Renewed focus on the company’s real estate value
• Upcoming IPO of Homeplus REIT in 2019
• Push back against a steep increase in minimum wages
• Success of Pierrot Shopping and a gradual reduction of unprofitable hypermarkets

3. Visit Note

We recently visited Prataap Snacks (DIAMOND IN) in Indore, Madhya Pradesh. Our objective of interaction was to get some clarifications on standalone financials of the company. As of FY 2018, standalone revenue was at 10,309 mn vs 10,377 mn for consolidated entity. Contrary to management’s suggestion to look at consolidated financials, we prefer to look at standalone financials, since the parent company contributes to 99% of Sales as 100% of the assets.  Some of the issues that warrant attention are highlighted in this insight. Consensus financial data indicate an expectation of 44% growth in EPS for FY 2020. Our checks indicate an increasing competitive environment where both regional and national (MNC brands) are fighting for market share. The company is entering new product categories like sweet snacks. However, looking at growth expectations and cost structures discussed in this insight, investors would be better off looking for an alternative which is leaner. 

4. Bank Mandiri (BMRI IJ) – Shape Shifting and Millenial Mortgages – On the Ground in J-Town

A recent meeting with Bank Mandiri Persero (BMRI IJ) in Jakarta confirmed a positive outlook for loan growth and net interest margins for 2019, with continuing incremental improvements to credit quality, especially in the MidCap and SME space.

The bank is optimistic about loan growth in 2019 but with a shift in the shape of growth, with Midcap and SME loans moving into positive territory, a slight tempering of growth from large corporates. 

Microlending continues to be a significant growth driver, especially salary-based loans, which have huge potential and are relatively low risk.   

Mandiri is switching its focus on smaller sized mortgages and is even offering products specifically targeting millennials. It is also training staff in its branches to promote both mortgages and auto loans, which should help to boost growth in consumer loans.

The bank is investing heavily in growing both Mandiri Online mobile banking, as well as working closely with the major e-commerce players in Indonesia. 

Management is optimistic about the outlook for net interest margins and comfortable with its funding requirements, with good visibility on credit quality. 

Bank Mandiri Persero (BMRI IJ) remains a key proxy for the Indonesian banking sector, with an increasingly well-diversified portfolio and growing exposure to the potentially higher growth areas of microlending and consumer loans. The bank has fully embraced modern day banking with strong growth in Mandiri Online, which should help the bank grow its transactional business and its current and savings accounts (CASA). Its push to grow salary-based loans is another business with huge potential, given the low penetration of its corporate pay-roll accounts. According to Cap IQ consensus estimates, the bank trades on 12.5x FY19E PER and 11.0x FY20E PER, with forecast EPS growth of +16.5% and +11.8% for FY19E and FY20E.  The bank trades on 1.9x FY18E PBV with an FY18E ROE of 13.9%, which is forecast to rise to 15.5% by FY20E. Given its higher growth profile and rising ROE, the bank looks relatively attractive compared to peers. 

5. New Oriental (EDU): Educator License Not A Concern

• The Education Ministry of China promulgated Burden Relief Measures for Students in Primary and Secondary Schools (中小学生减负措施).
• The market is concerned about “Article 15” on the educator license.
• We note that a large number of teachers in part-time schools took the educator exam in November 2018.
• We expect that the incremental passers of the educator exam will be many more than the number of EDU’s vacancies, and that most of the passers will prefer to work for giants such as EDU or TAL (TAL) as opposed to other part-time schools.

In this briefing:

1. Godrej Agrovet to Merge with Astec Lifesciences: An Arbitrage Opportunity Coupled with Concerns.
2. CCL Products Q2 FY19 Results Update- Moving up the Value Chain as Expected
3. Hansae Yes24 Holdings Stub Trade: Macy’s Lowered Guidance Will Revert Back 5Y High Holdco Discount
4. Accordia Golf Trust (AGT SP): MBK + ORIX + AGT = Time for Outperformance? 9.5% Dividend Yield
5. ZOZO – Buying a Stairway to Heaven

1. Godrej Agrovet to Merge with Astec Lifesciences: An Arbitrage Opportunity Coupled with Concerns.

Godrej Agrovet is a large conglomerate operating in various business verticals in the agriculture sector. It is looking to merge with Astec LifeSciences which is a pure agro-chemical company that focusses on Chemical molecule production and formulation for domestic and export markets. In this report, we analyze the implications of the merger as well as the impact on minority shareholders in both companies.

2. CCL Products Q2 FY19 Results Update- Moving up the Value Chain as Expected

Ccl Products India (CCLP IN) Q2 FY19 results were beyond our expectations. Although the revenues declined by 2% YoY in Q2 FY19 due to lower realization as the green coffee prices have declined by near 20% YoY in Q2 FY19, PAT increased by 41% YoY (against our expectation of 20% YoY growth) due to higher capacity utilization and improving share of value added products in the revenue mix.

We analyze the results.

3. Hansae Yes24 Holdings Stub Trade: Macy’s Lowered Guidance Will Revert Back 5Y High Holdco Discount

• Hansae Yes24 Holdings Co, Ltd. (016450 KS) is a small cap holdco stock in Korea. Hansae Co Ltd (105630 KS) takes up half of Holdco NAV. Sub is Korea’s largest clothing OEM company. Holdco is currently at a 50% discount to NAV. This is the highest in 5 years. Discount was up nearly 10%p in the last 2 months.
• Sub is taking a hit today. The share is down 5.56% now. Holdco is down only 1.21%. Macy’s unpleasant guidance revision is pulling down Sub price. We are now a little above -1 σ on a 20D MA. Sub shares have rebounded lately with the expectation on improving margins in the US. But weak holiday sales numbers in the US would be more than enough to kiss off this expectation.
• I’d initiate a stub trade even though the duo has narrowed the gap today. It is still a long way to get reverted back to where they were two months ago. 

4. Accordia Golf Trust (AGT SP): MBK + ORIX + AGT = Time for Outperformance? 9.5% Dividend Yield

Accordia Golf Trust (AGT SP) has not been a great success story since its IPO in August 2014. The stock went to market at a unit price of 0.97 SGD and was recently traded at 0.53 SGD. If we include the dividends received since the IPO (0.2387 SGD) the ‘real‘ adjusted price is still only 0.76 SGD.

In the past we have attended several management meetings and the 2017 company AGM but were disappointed on multiple occasions by management that either 1) did not care, 2) did not know how or 3) was held back by other corporate Japanese factors from creating shareholder value.

Over the last six months several new developments are potentially creating a cocktail that could finally create sustained value for AGT unitholders:

• Appointment of new CFO who assures investors no repeat of “membership deposit debacle”
• New five-year funding secured from two lenders
• MBK Partners buys ORIX Golf Management
• Value investor Hibiki Path Advisors buys 6.2% of the company
• Clear focus on acquisitions and using its balance sheet strength

With its 2019 financial year ending in March, investors can be hopeful that its dividend in FY20 can grow to a minimum of 5 SGD cents suggesting a yield of 9.5%. If management injects assets a higher DPU is possible.

5. ZOZO – Buying a Stairway to Heaven

ZOZO (3092 JP)

ONWARD AND OUT – ZOZO (3092 JP), formerly Start Today, has been the sixth-most-traded large capitalisation stock over the last ten trading days after Benefit One (2412 JP), Rizap (2928 JP), Takeda Pharmaceutical (4502 JP), Hoshizaki (6465 JP), and Workman Co Ltd (7564 JP). According to Nikkei XTECH, on 25th December apparel maker Onward (8016 JP) suspended selling of its products on ZOZOTOWN and will leave the platform altogether. Although Onward products are estimated to account for less than 3% of total transactions on the site, there are concerns that other apparel makers will follow suit as a result of the emerging direct competition on the site from ZOZO’s private label. Since reaching our 4.0 ‘Overbought’ threshold on 9th July 2018, ZOZO shares have corrected by 57% – the worst performance of any large cap from that date – as concerns mounted over the private brand strategy and the behaviour of CEO Yusaku Maezawa.  Since bottoming on 4th January, the shares have risen by 18% following positive comments from the CEO about sales over the New Year holiday period.    

PRIVATE-LABEL STRETCH GOALS– The ‘teething problems’ of ZOZO entering the private-label apparel business have been well-documented by Michael Causton in a recent Insight on Smartkarma. Michael rightly questions the feasibility of the company scaling a ¥200b apparel business within the next three years while targeting an additional incremental ¥400b in e-commerce revenue, particularly as it has taken ZOZO twenty years to reach the first ¥100b in annual revenues. In the DETAIL section below, we shall examine ZOZO’s current and possible future financial condition as it strives to become one of the top-ten global fashion retailers. 

‘ZOSO’ & THE STAIRWAY TO HEAVEN – In addition to some notable purchases of modern art at record-breaking prices, CEO Maezawa also last year booked himself on Space X’s first flight to the moon. With apologies, the lyrics of the peerless song from Led Zeppelin’s untitled fourth album – known by fans as ‘Zoso’ after the symbol designed by Jimmy Page for the inner sleeve – come to mind:- 

There’s a lad(y) who’s sure
All that glitters is gold
And (s)he’s buying a stairway to heaven
When(s)he gets there (s)he knows
If the stores are all closed
With a word (s)he can get what (s)he came for.

In this briefing:

1. ASIC Review of Allocation in Equity Raising – Some Truths, Some Half-Truths – No Improvements
2. StubWorld: Time For A BGF Setup? An Unlikely Boost for Kingboard
3. M1 Ltd (M1 SP): Take the Offer, Axiata Unlikely to Start a Bidding War
4. Nissan: Overlooked Personnel Moves Suggest the Alliance Will Not Survive Long Term
5. China East Education (中国东方教育) Pre-IPO – The Company Known for Its Culinary School

1. ASIC Review of Allocation in Equity Raising – Some Truths, Some Half-Truths – No Improvements

Over 2017-18, the Australian Securities & Investments Commission (ASIC) undertook a review of allocation in equity raising transactions. The review involved large and mid-sized licensees (brokers), Issuers, International investors and other international regulators. The results of the review were published by ASIC in Dec 2018. This insight highlights some of the key findings.

It’s good to see that some of the standard practices of banks allocating more to existing clients and participants of earlier deals have at least been acknowledged. Even though some institutional investors have outright labelled the allocation process as a “black box”, ASIC doesn’t seem to want to do much about it.

The area where ASIC is more concerned is the messaging to investors which highlights the different definitions of “well-covered” across banks. Although, the banks seem to have mislead the regulator on interpretation of “real-demand” with ECM bankers saying that all orders are taken at face-value. That raises a whole new level of questions on the messaging around demand for the deal.

2. StubWorld: Time For A BGF Setup? An Unlikely Boost for Kingboard

This week in StubWorld …

• With concerns over its tender offer for BGF Retail (282330 KS) now behind it, now may be the time for a BGF Co Ltd (027410 KS) setup.
• Kingboard Chemical (148 HK) gets a boost after buying properties from its major shareholder, however, the implied yield is uninspiring.

Preceding my comments on BGF and KBC 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%.

3. M1 Ltd (M1 SP): Take the Offer, Axiata Unlikely to Start a Bidding War

M1 Ltd (M1 SP), the third largest telecom operator in Singapore, is subject to a bid. On 7 January 2019, Konnectivity launched a voluntary conditional offer (VGO) at S$2.06 cash per share. Konnectivity is jointly owned by Keppel Corp Ltd (KEP SP) and Singapore Press Holdings (SPH SP).

4. Nissan: Overlooked Personnel Moves Suggest the Alliance Will Not Survive Long Term

While most news coverage is intensely focused on former Chairman Carlos Ghosn’s first public statements, defence strategy and Japan’s rather arcane justice system, we believe that news regarding the sudden “leave” of two Nissan executives is worth paying attention to as it may have ramifications for the fate of the alliance overall. We discuss the details below.

5. China East Education (中国东方教育) Pre-IPO – The Company Known for Its Culinary School

China Xinhua Education (2779 HK) listed in Q1 of 2018 and we wrote in our insight that the founder had vocational schools that have been separated from China Xinhua that seemed to be his prized asset. Fast forward to December 2018, the prized asset has finally filed its draft prospectus under the entity China East Education (CEE HK) and it is looking to raise US$400m in its IPO.

In this insight, we will analyze the company’s financial and operating performance, compare it to listed education companies, and provide some questions we have for management.

In this briefing:

1. Japanese Telcos: What to Look for in 2019. Earnings May Surprise on the Upside.
2. HK Connect Discovery Weekly: CR Beer, Great Wall Motors, and Kingsoft (2019-01-07)
3. Tencent Music: Short Idea on Consumption Slowdown Angle
4. Geely: Worst Case Priced In, Waiting for Sector Headwinds to Abate
5. U.S. Equity Strategy: Oversold Rally Continues

1. Japanese Telcos: What to Look for in 2019. Earnings May Surprise on the Upside.

The Japanese telecom market was more volatile in 2018 than anticipated. However, Chris Hoare remains broadly positive on the sector for 2019. While pressure on the revenue line is intensifying, we do do not expect a price war to break out. In fact, we look for volatility to ease as the year progresses. Operators point to opex reductions and handset subsidy reductions to offset revenue weakness. We think that earnings are likely to surprise on to the upside. Over time we also look for dividend payout ratios to gradually rise, with the Softbank Corp (9434 JP) (KK) listing the long term catalyst.  For Softbank Group (9984 JP) (SB) we look for market confidence to improve on the Vision Fund strategy, as profitable exits/up-valuations of assets such as Uber are announced.

The sector is recovering from NTT Docomo’s (9437 JP) price cut announcements but we don’t think they will slash prices (cuts will be selective). Our top pick is now KDDI (9433 JP) which could actually benefit from Rakuten’s (4755 JP) entry (as the roaming partner). DoCoMo is most affected but there are plenty of cost cutting opportunities. NTT (Nippon Telegraph & Telephone) (9432 JP) has optimistic guidance with substantial opex and capex cost cuts planned. Our order of preference for the stocks is now: KDDI (Buy), followed in order by NTT (Buy), SB Group (Buy), DoCoMo (Buy) and SB Corp (Neutral). We do not currently cover Rakuten. 

2. HK Connect Discovery Weekly: CR Beer, Great Wall Motors, and Kingsoft (2019-01-07)

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

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

In the past week, there were only three and a half days trading on the Hong Kong Stock Exchange last week. Hence the flow numbers were not as significant as a typical 5 trading day week. Having said that, we find it interesting that the Chinese were buying China Resources Beer Holdin (291 HK), Great Wall Motor Company (H) (2333 HK). In addition, Yichang Hec Changjiang Pharm (1558 HK) is a rare health care stock that experienced inflow last week despite overall poor sector performance last week. 

3. Tencent Music: Short Idea on Consumption Slowdown Angle

• Tencent Music Entertainment (TME US)‘s social entertainment services (discretionary consumption in nature) face more headwinds due to ongoing China (macro) consumption slowdown.
• Moreover, high consensus earnings expectation would make material earnings downgrade a major narrative for TME throughout 2019, in our opinion.
• We initiative coverage on TME with Short/Sell recommendation, with 12-mo PT of US$9.80/ADR (representing a 25% downside potential).

4. Geely: Worst Case Priced In, Waiting for Sector Headwinds to Abate

Geely announced its Dec 2018 car sales volume at 93,333 units (down 39% yoy) and its FY2018 sales volume at 1.5mn units, 6% lower than our estimate of 1.59mn units.

Meanwhile management sets its FY2019 sales target at 1.51mn units, which surprised the market as the market consensus stood at around 1.8mn units. The stock price corrected by 11.3% on Jan 8th, right after the announcement.

In our view, it is reasonable for the management to give a cautious guidance for 2019E. After all, 2019E China’s auto sales volume might drop by 8% yoy.( China Auto Outlook 2019 – Keep Warm, Winter Is Here! )

However, would Geely’s aggressive new model launches sales offset the weak demand on existing models in 2019E? If not how bad it could be? In this report, we have done a scenario analysis. Our analysis shows that the possibility that Geely missing its 2019E guidance is low. Even assuming our worst case scenario, the stock would be at 7.1x P/E and no medium term downside from current levels. 

5. U.S. Equity Strategy: Oversold Rally Continues

A combination of, optimism surrounding U.S.-China trade talks, and Fed Chairman Powell’s comments have led to a continuation of the oversold bounce which began on 12/26, and the S&P 500 is now trading just below the 12/19 pre-Fed rate hike area. ~2,350 on the S&P 500 remains the support level to monitor. A retest of this low remains the most likely scenario, though it is far from a guarantee due to the potential for a “V” reversal. We examine an array of factors leading to our intact cautious outlook, and highlight attractive set-ups within Consumer Discretionary and Health Care Sectors.

In this briefing:

1. China Tobacco International IPO: Heavy Regulation, Declining Margins – A Bit Late to IPO Party
2. Korean Stubs Spotlight: A Pair Trade Between BGF Co. & BGF Retail
3. China Tobacco International (IPO): The Monopolist Will Not Recover
4. Hankook Tire Worldwide Stub Reverse Trade: Massive Price Divergence Is Created Today
5. A Round up of Some Japanese Equities Buys as We Begin the New Year.

1. China Tobacco International IPO: Heavy Regulation, Declining Margins – A Bit Late to IPO Party

China Tobacco International (GHALPZ CH) is a subsidiary and offshore unit of China National Tobacco Corp., a state-owned enterprise (SOE). The company procures tobacco leaves from regions around the world and exports tobacco leaf products and branded cigarettes to the duty-free outlets outside China’s customs area and in Southeast Asia.

The IPO is expected to raise US$100M and the company expects to use the proceeds to expand market share, acquire new cigarette brands, working capital, and other corporate purposes.                      

2. Korean Stubs Spotlight: A Pair Trade Between BGF Co. & BGF Retail

In this report, we provide an analysis of our pair trade idea between BGF Co Ltd (027410 KS) and Bgf Retail (282330 KS). Our strategy will be to be long BGF Co & Short BGF Retail. BGF Co Ltd (027410 KS)‘s share price plummeted by 48% in the past year while Bgf Retail (282330 KS) had a tiny gain of 0.7% in the same period. In the past year, BGF Co was down versus BGF Retail for pretty much the entire year. The BGF/BGF Retail share price ratio has been trending downwards since March 23rd, 2018. The current ratio is 0.037 and it is now close to approaching two σ. 

The following are the major catalysts that could boost BGF Co shares higher than BGF Retail shares within the next six months. 

• Temporary relief from big market fears, seasonality, & trading volume 

• Market’s concerns about the size of tender offer rather than the value of BGF Co post tender offer in 2018 
• NAV discount to its intrinsic value at an all-time high – Our NAV analysis of BGF Co suggests that it is trading at a 51% discount to its NAV, which is close to its all time highest discount. Typically, the Korean holdcos trade at a 20-40% discount to their intrinsic value so it is unusual for the holdco to trade with so much discount. 
• Government is likely to slow down the minimum wage hikes 

• Potential increases in brand usage fees

3. China Tobacco International (IPO): The Monopolist Will Not Recover

• China Tobacco International (HK) Co. Ltd. plans to go public on the Hong Kong Stock Exchange.
• The state-owned company holds monopolistic positions in tobacco leaf export, tobacco leaf import, and cigarette export.
• Both revenue growth and margins declined year-over-year in the first three quarters of 2018.
• We believe the China cigarette market will not recover, as all signals suggest weak demand.

4. Hankook Tire Worldwide Stub Reverse Trade: Massive Price Divergence Is Created Today

• Hankook Tire Worldwide (000240 KS) is another local single sub dependent holdco in Korea. Hankook Tire (161390 KS) accounts for nearly 90% of the sub holdings. Holdco is now at a 35% discount to NAV. This is substantially better than the local peer average.
• Sub is taking a harsh hit now mainly on concerns over 4Q results. It is currently down 7% today. In contrast, Holdco is holding steady. It is rather up 1%. This is creating a massive price divergence. As of now, they are close to +3 σ on a 20D MA.
• Holdco’s real world float is much less than 10% of total shares. This often serves to help Holdco stave off market volatility like today’s. But this much divergence is a rare one. Sub’s current PER on FY19e is at 7x. This is 20% less than its usual level. It should be that Sub is being oversold.
• I’d make a very short-term trade at this point. I’d go short Holdco and long Sub for a quick mean reversion.

5. A Round up of Some Japanese Equities Buys as We Begin the New Year.

Please see some recent buy ideas, all very cheap, that we believe offer decent longer term growth and have had a dreadful December. We have written on all recently and below is a summary of the main points as well as an some valuation metrics. All are sensibly priced in our view now. 

In this briefing:

1. Selamat Sempurna (SMSM IJ) – Truly Industrious – On the Ground in J-Town

1. Selamat Sempurna (SMSM IJ) – Truly Industrious – On the Ground in J-Town

A company visit in Jakarta revealed that it continues to focus on growing its higher margin heavy-duty filter revenues, with an ongoing emphasis on growing its export business. 

Selamat Sempurna (SMSM IJ) should be a beneficiary of the US-China Trade War given much lower tariffs for Indonesian produced filters versus those from China. It has already seen a marked pick-up in enquiries from potential US customers. 

Its domestic filter business continues to see strong growth, especially heavy-duty filter sales, which are benefitting from demand from commercial vehicles and heavy equipment demand, with higher unit costs and replacement rates in this space.

The company’s body-maker division is seeing even higher rates of growth than filters and decent visibility, with demand coming from heavy equipment customers such as United Tractors (UNTR IJ).

The company should be a beneficiary of the imposition of B20 standards for Indonesia, which will require companies to change filters more regularly.

It was also recently granted ISO14001:2015 Environmental Management System, which should be positive from an environmental and ESG perspective. This is important for its US and European sales in the long-term. 

Selamat Sempurna (SMSM IJ) continues to be one of the few attractive industrial companies in Indonesia, with a very strong long-term record on sales growth and profitability. Its domestic filter business continues to see strong growth, with a significant tailwind from its body-maker division. It is also focused on growing both its export sales and at the same time its higher-margin heavy-duty filter business. According to Bloomberg Consensus Estimates, the company trades on 12.4x FY19E PER and 10.9x FY20E PER, with forecast EPS CAGR of 15% for FY19E and FY20E respectively. 

In this briefing:

1. CCL Products Q2 FY19 Results Update- Moving up the Value Chain as Expected
2. Hansae Yes24 Holdings Stub Trade: Macy’s Lowered Guidance Will Revert Back 5Y High Holdco Discount
3. Accordia Golf Trust (AGT SP): MBK + ORIX + AGT = Time for Outperformance? 9.5% Dividend Yield
4. ZOZO – Buying a Stairway to Heaven
5. GER Upcoming EVENTS Calendar

1. CCL Products Q2 FY19 Results Update- Moving up the Value Chain as Expected

Ccl Products India (CCLP IN) Q2 FY19 results were beyond our expectations. Although the revenues declined by 2% YoY in Q2 FY19 due to lower realization as the green coffee prices have declined by near 20% YoY in Q2 FY19, PAT increased by 41% YoY (against our expectation of 20% YoY growth) due to higher capacity utilization and improving share of value added products in the revenue mix.

We analyze the results.

2. Hansae Yes24 Holdings Stub Trade: Macy’s Lowered Guidance Will Revert Back 5Y High Holdco Discount

• Hansae Yes24 Holdings Co, Ltd. (016450 KS) is a small cap holdco stock in Korea. Hansae Co Ltd (105630 KS) takes up half of Holdco NAV. Sub is Korea’s largest clothing OEM company. Holdco is currently at a 50% discount to NAV. This is the highest in 5 years. Discount was up nearly 10%p in the last 2 months.
• Sub is taking a hit today. The share is down 5.56% now. Holdco is down only 1.21%. Macy’s unpleasant guidance revision is pulling down Sub price. We are now a little above -1 σ on a 20D MA. Sub shares have rebounded lately with the expectation on improving margins in the US. But weak holiday sales numbers in the US would be more than enough to kiss off this expectation.
• I’d initiate a stub trade even though the duo has narrowed the gap today. It is still a long way to get reverted back to where they were two months ago. 

3. Accordia Golf Trust (AGT SP): MBK + ORIX + AGT = Time for Outperformance? 9.5% Dividend Yield

Accordia Golf Trust (AGT SP) has not been a great success story since its IPO in August 2014. The stock went to market at a unit price of 0.97 SGD and was recently traded at 0.53 SGD. If we include the dividends received since the IPO (0.2387 SGD) the ‘real‘ adjusted price is still only 0.76 SGD.

In the past we have attended several management meetings and the 2017 company AGM but were disappointed on multiple occasions by management that either 1) did not care, 2) did not know how or 3) was held back by other corporate Japanese factors from creating shareholder value.

Over the last six months several new developments are potentially creating a cocktail that could finally create sustained value for AGT unitholders:

• Appointment of new CFO who assures investors no repeat of “membership deposit debacle”
• New five-year funding secured from two lenders
• MBK Partners buys ORIX Golf Management
• Value investor Hibiki Path Advisors buys 6.2% of the company
• Clear focus on acquisitions and using its balance sheet strength

With its 2019 financial year ending in March, investors can be hopeful that its dividend in FY20 can grow to a minimum of 5 SGD cents suggesting a yield of 9.5%. If management injects assets a higher DPU is possible.

4. ZOZO – Buying a Stairway to Heaven

ZOZO (3092 JP)

ONWARD AND OUT – ZOZO (3092 JP), formerly Start Today, has been the sixth-most-traded large capitalisation stock over the last ten trading days after Benefit One (2412 JP), Rizap (2928 JP), Takeda Pharmaceutical (4502 JP), Hoshizaki (6465 JP), and Workman Co Ltd (7564 JP). According to Nikkei XTECH, on 25th December apparel maker Onward (8016 JP) suspended selling of its products on ZOZOTOWN and will leave the platform altogether. Although Onward products are estimated to account for less than 3% of total transactions on the site, there are concerns that other apparel makers will follow suit as a result of the emerging direct competition on the site from ZOZO’s private label. Since reaching our 4.0 ‘Overbought’ threshold on 9th July 2018, ZOZO shares have corrected by 57% – the worst performance of any large cap from that date – as concerns mounted over the private brand strategy and the behaviour of CEO Yusaku Maezawa.  Since bottoming on 4th January, the shares have risen by 18% following positive comments from the CEO about sales over the New Year holiday period.    

PRIVATE-LABEL STRETCH GOALS– The ‘teething problems’ of ZOZO entering the private-label apparel business have been well-documented by Michael Causton in a recent Insight on Smartkarma. Michael rightly questions the feasibility of the company scaling a ¥200b apparel business within the next three years while targeting an additional incremental ¥400b in e-commerce revenue, particularly as it has taken ZOZO twenty years to reach the first ¥100b in annual revenues. In the DETAIL section below, we shall examine ZOZO’s current and possible future financial condition as it strives to become one of the top-ten global fashion retailers. 

‘ZOSO’ & THE STAIRWAY TO HEAVEN – In addition to some notable purchases of modern art at record-breaking prices, CEO Maezawa also last year booked himself on Space X’s first flight to the moon. With apologies, the lyrics of the peerless song from Led Zeppelin’s untitled fourth album – known by fans as ‘Zoso’ after the symbol designed by Jimmy Page for the inner sleeve – come to mind:- 

There’s a lad(y) who’s sure
All that glitters is gold
And (s)he’s buying a stairway to heaven
When(s)he gets there (s)he knows
If the stores are all closed
With a word (s)he can get what (s)he came for.

5. GER Upcoming EVENTS Calendar

We have received requests to provide a calendar of upcoming catalysts for near-term M&A, stubs and erstwhile event-driven names. Below is a list of catalysts over the near-term for such names as below. If you are interested in importing this directly into Outlook or have any further requests, please let us know. 

Kind regards, Rickin Arun and Venkat

In this briefing:

1. StubWorld: Time For A BGF Setup? An Unlikely Boost for Kingboard
2. M1 Ltd (M1 SP): Take the Offer, Axiata Unlikely to Start a Bidding War
3. Nissan: Overlooked Personnel Moves Suggest the Alliance Will Not Survive Long Term
4. China East Education (中国东方教育) Pre-IPO – The Company Known for Its Culinary School
5. Japanese Telcos: What to Look for in 2019. Earnings May Surprise on the Upside.

1. StubWorld: Time For A BGF Setup? An Unlikely Boost for Kingboard

This week in StubWorld …

• With concerns over its tender offer for BGF Retail (282330 KS) now behind it, now may be the time for a BGF Co Ltd (027410 KS) setup.
• Kingboard Chemical (148 HK) gets a boost after buying properties from its major shareholder, however, the implied yield is uninspiring.

Preceding my comments on BGF and KBC 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%.

2. M1 Ltd (M1 SP): Take the Offer, Axiata Unlikely to Start a Bidding War

M1 Ltd (M1 SP), the third largest telecom operator in Singapore, is subject to a bid. On 7 January 2019, Konnectivity launched a voluntary conditional offer (VGO) at S$2.06 cash per share. Konnectivity is jointly owned by Keppel Corp Ltd (KEP SP) and Singapore Press Holdings (SPH SP).

3. Nissan: Overlooked Personnel Moves Suggest the Alliance Will Not Survive Long Term

While most news coverage is intensely focused on former Chairman Carlos Ghosn’s first public statements, defence strategy and Japan’s rather arcane justice system, we believe that news regarding the sudden “leave” of two Nissan executives is worth paying attention to as it may have ramifications for the fate of the alliance overall. We discuss the details below.

4. China East Education (中国东方教育) Pre-IPO – The Company Known for Its Culinary School

China Xinhua Education (2779 HK) listed in Q1 of 2018 and we wrote in our insight that the founder had vocational schools that have been separated from China Xinhua that seemed to be his prized asset. Fast forward to December 2018, the prized asset has finally filed its draft prospectus under the entity China East Education (CEE HK) and it is looking to raise US$400m in its IPO.

In this insight, we will analyze the company’s financial and operating performance, compare it to listed education companies, and provide some questions we have for management.

5. Japanese Telcos: What to Look for in 2019. Earnings May Surprise on the Upside.

The Japanese telecom market was more volatile in 2018 than anticipated. However, Chris Hoare remains broadly positive on the sector for 2019. While pressure on the revenue line is intensifying, we do do not expect a price war to break out. In fact, we look for volatility to ease as the year progresses. Operators point to opex reductions and handset subsidy reductions to offset revenue weakness. We think that earnings are likely to surprise on to the upside. Over time we also look for dividend payout ratios to gradually rise, with the Softbank Corp (9434 JP) (KK) listing the long term catalyst.  For Softbank Group (9984 JP) (SB) we look for market confidence to improve on the Vision Fund strategy, as profitable exits/up-valuations of assets such as Uber are announced.

The sector is recovering from NTT Docomo’s (9437 JP) price cut announcements but we don’t think they will slash prices (cuts will be selective). Our top pick is now KDDI (9433 JP) which could actually benefit from Rakuten’s (4755 JP) entry (as the roaming partner). DoCoMo is most affected but there are plenty of cost cutting opportunities. NTT (Nippon Telegraph & Telephone) (9432 JP) has optimistic guidance with substantial opex and capex cost cuts planned. Our order of preference for the stocks is now: KDDI (Buy), followed in order by NTT (Buy), SB Group (Buy), DoCoMo (Buy) and SB Corp (Neutral). We do not currently cover Rakuten. 

In this briefing:

1. Emart: Attractive Entry Point, Undervalued Real Estate Assets, & Homeplus REIT IPO
2. Visit Note
3. Bank Mandiri (BMRI IJ) – Shape Shifting and Millenial Mortgages – On the Ground in J-Town
4. New Oriental (EDU): Educator License Not A Concern
5. ASIC Review of Allocation in Equity Raising – Some Truths, Some Half-Truths – No Improvements

1. Emart: Attractive Entry Point, Undervalued Real Estate Assets, & Homeplus REIT IPO

Shares of E Mart Inc (139480 KS) are down 40% from their highs in March 2018 and we think this decline has been excessive. We believe the stock has bottomed and we expect a 20-30% upside on this stock over the next six months to one year (current share price is 193,500 won). At end of 3Q18, the company had 157 Emart hypermarkets and Traders warehouse supermarkets, of which 90% of their assets were owned by the company and 10% were leased. The company has the highest number of hypermarkets and warehouse supermarkets in Korea. The following are the major catalysts that could boost Emart shares by 20-30%+ in the next 6-12 months. 

• Renewed focus on the company’s real estate value
• Upcoming IPO of Homeplus REIT in 2019
• Push back against a steep increase in minimum wages
• Success of Pierrot Shopping and a gradual reduction of unprofitable hypermarkets

2. Visit Note

We recently visited Prataap Snacks (DIAMOND IN) in Indore, Madhya Pradesh. Our objective of interaction was to get some clarifications on standalone financials of the company. As of FY 2018, standalone revenue was at 10,309 mn vs 10,377 mn for consolidated entity. Contrary to management’s suggestion to look at consolidated financials, we prefer to look at standalone financials, since the parent company contributes to 99% of Sales as 100% of the assets.  Some of the issues that warrant attention are highlighted in this insight. Consensus financial data indicate an expectation of 44% growth in EPS for FY 2020. Our checks indicate an increasing competitive environment where both regional and national (MNC brands) are fighting for market share. The company is entering new product categories like sweet snacks. However, looking at growth expectations and cost structures discussed in this insight, investors would be better off looking for an alternative which is leaner. 

3. Bank Mandiri (BMRI IJ) – Shape Shifting and Millenial Mortgages – On the Ground in J-Town

A recent meeting with Bank Mandiri Persero (BMRI IJ) in Jakarta confirmed a positive outlook for loan growth and net interest margins for 2019, with continuing incremental improvements to credit quality, especially in the MidCap and SME space.

The bank is optimistic about loan growth in 2019 but with a shift in the shape of growth, with Midcap and SME loans moving into positive territory, a slight tempering of growth from large corporates. 

Microlending continues to be a significant growth driver, especially salary-based loans, which have huge potential and are relatively low risk.   

Mandiri is switching its focus on smaller sized mortgages and is even offering products specifically targeting millennials. It is also training staff in its branches to promote both mortgages and auto loans, which should help to boost growth in consumer loans.

The bank is investing heavily in growing both Mandiri Online mobile banking, as well as working closely with the major e-commerce players in Indonesia. 

Management is optimistic about the outlook for net interest margins and comfortable with its funding requirements, with good visibility on credit quality. 

Bank Mandiri Persero (BMRI IJ) remains a key proxy for the Indonesian banking sector, with an increasingly well-diversified portfolio and growing exposure to the potentially higher growth areas of microlending and consumer loans. The bank has fully embraced modern day banking with strong growth in Mandiri Online, which should help the bank grow its transactional business and its current and savings accounts (CASA). Its push to grow salary-based loans is another business with huge potential, given the low penetration of its corporate pay-roll accounts. According to Cap IQ consensus estimates, the bank trades on 12.5x FY19E PER and 11.0x FY20E PER, with forecast EPS growth of +16.5% and +11.8% for FY19E and FY20E.  The bank trades on 1.9x FY18E PBV with an FY18E ROE of 13.9%, which is forecast to rise to 15.5% by FY20E. Given its higher growth profile and rising ROE, the bank looks relatively attractive compared to peers. 

4. New Oriental (EDU): Educator License Not A Concern

• The Education Ministry of China promulgated Burden Relief Measures for Students in Primary and Secondary Schools (中小学生减负措施).
• The market is concerned about “Article 15” on the educator license.
• We note that a large number of teachers in part-time schools took the educator exam in November 2018.
• We expect that the incremental passers of the educator exam will be many more than the number of EDU’s vacancies, and that most of the passers will prefer to work for giants such as EDU or TAL (TAL) as opposed to other part-time schools.

5. ASIC Review of Allocation in Equity Raising – Some Truths, Some Half-Truths – No Improvements

Over 2017-18, the Australian Securities & Investments Commission (ASIC) undertook a review of allocation in equity raising transactions. The review involved large and mid-sized licensees (brokers), Issuers, International investors and other international regulators. The results of the review were published by ASIC in Dec 2018. This insight highlights some of the key findings.

It’s good to see that some of the standard practices of banks allocating more to existing clients and participants of earlier deals have at least been acknowledged. Even though some institutional investors have outright labelled the allocation process as a “black box”, ASIC doesn’t seem to want to do much about it.

The area where ASIC is more concerned is the messaging to investors which highlights the different definitions of “well-covered” across banks. Although, the banks seem to have mislead the regulator on interpretation of “real-demand” with ECM bankers saying that all orders are taken at face-value. That raises a whole new level of questions on the messaging around demand for the deal.

In this briefing:

1. JD.com (JD): Lawsuit Over, Price Falling Back to First Trading Day, Defensive in Bear Market

1. JD.com (JD): Lawsuit Over, Price Falling Back to First Trading Day, Defensive in Bear Market

• Minnesotan Authorities declined to charge the founder of JD.
• JD’s stock price has already plunged 52% in 2018. We believe JD is a defensive equity for portfolios, as the NASDAQ Composite just plunged 50% at most in the financial crisis of 2008.
• Compared to 2014, today’s JD has a higher market share in the larger e-commerce market. However, JD’s stock price is at the same level as the first trading day in 2014.
• JD continued to generate operating cash inflows in 2018 as previous years despite of its zero net margins.
• We are not concerned about the programmer layoff in December, as we believe JD overly invested in “hi-tech” that will not bring revenues in the near future.
• Based on historical Price / GMV, we believe there is an upside of 270% for JD’s stock price.