Consumer

In this briefing:

1. Prabhat Dairy Ltd – Update: Revenues and Margins Continues to Increase in Line with Our Expectations
2. Swaraj Engines: Positive Outlook But Growth Is Slowing and Valuation Is Rich
3. GMO Internet (9447 JP) – Grossly or Modestly Overrated?
4. Halla Holdings Stub Trade: Downwardly Mean Reversion in Favor of Mando
5. GUNKUL (GUNKUL TB): Solar to Drive Top-Line Growth

1. Prabhat Dairy Ltd – Update: Revenues and Margins Continues to Increase in Line with Our Expectations

Prabhat Dairy Ltd’s quarterly result is in line with our expectation. In Q2 FY19, the company registered a growth of 8.53% YoY, EBITDA margin was 9.4% improving by 119 bps since the same period last year, EBITDA grew by 24.2% YOY; the profit margin was at 2.95%  improving by 60 bps YoY, Net Income grew by 35.86% YOY.  For more details about the company, please refer to our initiation report  Prabhat Dairy Ltd – An Emerging Star in the Indian Milky Way. B2B business contributed to 70% of revenue and the remaining 30% was driven by B2C business. Value Added Products contributed to 25% of revenue in Q2FY19.

The stock is trading at 16.3x its TTM EPS, 13.8x its FY19F EPS. Margins have improved over the past quarters due to lower cost of raw materials, we expect raw materials to continue to be lower than their historic average in short term. Lower cost of raw material along with the improving contribution from B2C will lead to higher margins in medium to long term. The company also wants to increase its B2C contribution aggressively from the current 30% to 50% by 2020.

We will monitor the stock closely to firm up our views further, albeit we remain positive on the long-term prospects of the company.

2. Swaraj Engines: Positive Outlook But Growth Is Slowing and Valuation Is Rich

Swaraj Engines (SWE IN) (SEL)is primarily manufacturing diesel engines for fitment into Swaraj tractors manufactured by Mahindra & Mahindra Ltd. (M&M). The Company is also supplying engine components to SML Isuzu Ltd used in the assembly of commercial vehicle engines. SEL was started as a joint venture between Punjab Tractor Ltd (now acquired by M&M Ltd) and Kirloskar Oil Engines Ltd. M&M holds 33.3% stake in SEL and is its key client.  

We are positive about the business because:

• SEL’s growth is correlated with M&M’s tractor business growth. SEL supplies engines to the Swaraj division of M&M. M&M expects tractor growth to be around 12% YoY in FY19E. We forecast SEL’s tractor engine volumes will grow at a CAGR of 12% for FY18-21E.
• The growth of the company is dependent on the monsoon and rural sentiments. We expect the profitability to improve with normal rainfall and government initiatives towards the rural sector. We expect the revenue/ EBITDA/ PAT CAGR for FY18-21E to be 14%/ 15%/ 14% respectively.
• SEL is debt free and a cash generating company. It has a healthy and stable ROCE and ROE. SEL has increased its capacity from 75,000 engines in FY16 to 120,000 engines in FY18. We expect the capacity utilisation to reach 97% by FY20E from 90% in 1HFY19. SEL funds its capex through internal accruals. We forecast a capex of Rs 600 mn for FY19E to FY21E considering the requirement of the additional capacity, R&D and testing costs for new and higher HP engines & for upgradation of engines according to the TREM IV emission norms for >50 HP engines.

We initiate coverage on SEL with a fair value objective of Rs 1,655/- over the next 12 months. This represents a potential upside of 15% from the closing price of Rs 1,435/- (as on 26-12-2018). We arrive at the fair value by applying PE multiple of 18x to EPS of Rs 87/- to the year ending December-20E and add cash of Rs 82/- per share. While the business outlook is good, we think the upside in the share price is limited due to rich valuation.

3. GMO Internet (9447 JP) – Grossly or Modestly Overrated?

Source: Japan Analytics

THE GMO INTERNET (9449 JP) STORY – GMO internet (GMO-i) has attracted much attention in the last eighteen months from an unusual trinity of value, activist and ‘cryptocurrency’ equity investors.

• VALUE– Many traditional, but mostly foreign, value investors have seen the persistent negative difference between GMO-i’s market capitalisation and the value of the company’s holdings in its eight listed consolidated subsidiaries as an opportunity to invest in GMO-i with a considerable ‘margin of safety’.
• ACTIVIST – Since July 2017, the activist investor, Oasis, has waged a so-far-unsuccessful campaign with the aim of improving GMO’s corporate governance, removing takeover defences, addressing a ‘secularly undervalued stock price we are not able to tolerate’ (sic), and redefining the role and influence of the company’s Chairman, President, Representative Director and largest shareholder, Masatoshi Kumagai.
• ‘CRYPTO!’ – In December 2017, GMO-i committed to spending more than ¥35b or 10% of non-current assets. The aim was threefold: to set up a bitcoin ‘mining’ headquarters in Switzerland (with the ‘mining’ operations being carried out at an undisclosed location in Scandinavia), to develop proprietary state-of-the-art 7nm-node ‘mining chips’, and, in due course, to sell GMO-branded and developed ‘mining’ machines. The move was hailed in the ‘crypto’ fraternity as GMO-i became the largest non-Chinese and the first well-established Internet conglomerate to make a major investment in ‘cryptocurrency’ infrastructure.

OUTSTANDING – Following the December 2017 announcement, trading volumes spiked into ‘Overtraded’ territory – as measured by our Volume Score. Many investors saw GMO-i shares as a safer way of gaining exposure to ‘cryptocurrencies’, even as the price of bitcoin began to subside. By early June 2018, GMO-i’s shares had reached a closing price of ¥3,020: up 157% from the low of the prior year and outperforming TOPIX by 135%. Whatever the primary driver of this outstanding performance, each of our trio of investor groups no doubt felt vindicated in their approach to the stock.

CRYPTO CLOSURE – On December 25th 2018, GMO-i’s shares reached a new 52-week low of ¥1,325, a decline of 56% from the June high. Year to date, GMO-i shares have now declined by 31%, underperforming TOPIX by nine percentage points. On the same day, GMO-i announced that the company would post an extraordinary ¥35.5b loss for the fourth quarter, incurring an impairment loss of ¥11.5b in relation to the closure of the Swiss ‘mining’ headquarters and a loss of ¥24b to cover the closure of the ‘mining chip’ and ‘mining machine’ development, manufacturing and sales businesses. GMO-i will continue to ‘mine’ bitcoin from its Tokyo headquarters and intends to relocate the ‘mining’ centre from Scandinavia to (sic) ‘a region that will allow us to secure cleaner and less expensive power supply, but we have not yet decided the details’. Unlisted subsidiary GMO Coin’s ‘cryptocurrency’ exchange will also continue to operate, and the previously-announced plans to launch a ¥-based ‘stablecoin’ in 2019 will proceed. In the two trading days following this announcement, the shares have recovered 13% to ¥1,505. 

RAIDING THE LISTCO PIGGY BANK – As we shall relate, this is the second time since listing that GMO-i has written off a significant new business venture which the company had commenced only a short time before. In both cases, the company was forced to sell stakes in its listed consolidated subsidiaries to offset the resulting losses. On this occasion, the sale of shares in GMO Financial (7177 JP) (GMO-F) on September 25 2018, and GMO Payment Gateway (3769 JP) (GMO-PG) on December 17 2018, raised a combined ¥55.6b and, after the deduction of the yet-to-be-determined tax on the realised gains, should more than offset the ‘crypto’ losses. According to CFO Yasuda, any surplus from this exercise will be used to pay down debt. Also discussed below and in keeping with this GMO-i ‘MO’, in 2015, the company twice sold shares in its listed subsidiaries to ‘smooth out’ less-than-desirable operating results.

4. Halla Holdings Stub Trade: Downwardly Mean Reversion in Favor of Mando

• Halla Holdings is falling nearly 5% today. Holdco said it’d give a ₩2,000 div per share. This is about 4.5% div yield at yesterday’s closing price. 5% drop today shouldn’t be much as an ex-dividend date price drop. Mando fell 5%. Mando was oversold relative to the other local auto stocks, particularly to Halla Holdings. They are still close to +1 σ on a 20D MA.
• Mando-Hella Elec has been another reason behind Holdco’s valuation divergence against Mando lately. I believe Mando-Hella is being overhyped. Mando-Hella-caused divergence should no longer be effective. I expect ‘downwardly’ mean reversion from now on. I’d go short Holdco and long Mando at this point.

5. GUNKUL (GUNKUL TB): Solar to Drive Top-Line Growth

• Good payout ratio, good growth in core profit, and strong long-term sales growth relative to its sector
• Acquisition of 49% stake in a 30MW solar farm in Malaysia with a commercial operation date (COD) set for 1Q20 to support revenue growth
• High volume of solar rooftop installation projects planned for Charoen Pokphand Foods Pub (CPF TB) and other private firms to boost GUNKUL’s construction revenue
• Attractive at 19CE* PEG ratio of 0.5 relative to ASEAN Industry at 1.6
• Risk: Lower than expected electricity demand, unfavorable weather conditions

* Consensus Estimates

In this briefing:

1. Last Week in Event SPACE: Familymart, Takeda, Harbin Electric, Motherson, Young Poong, NTT

1. Last Week in Event SPACE: Familymart, Takeda, Harbin Electric, Motherson, Young Poong, NTT

Last Week in Event SPACE …

• Bad banker analysis as Familymart Uny Holdings (8028 JP)‘s tender for Don Quijote Holdings (7532 JP) doesn’t even get close to the mark.
• Spooky action at a distance as the whole episode with Takeda Pharmaceutical (4502 JP)/Shire PLC (SHP LN) and index providers is baffling. 
• A possible offer for Harbin Electric Co Ltd H (1133 HK) could trigger corporate governance issues.

• Motherson Sumi Systems (MSS IN)‘s potential tilt for Leoni AG (LEO GR) is well telescoped and similarly should be well received.  

• NTT (Nippon Telegraph & Telephone) (9432 JP) has headroom to buy back shares from the government, but going forward there is still more on-market buying to do.

• Young Poong Corporation (000670 KS)‘s holding in Korea Zinc Co Ltd (010130 KS) accounts for an eye-watering ~200% of its market cap.

• A last-minute lump of coal in the stocking from MYOB Group Ltd (MYO AU)? 

• And analysing the trading patterns of 340+ TOPIX inclusions over the past five years.

(This insight covers specific insights & comments involving Stubs, Pairs, Arbitrage, share Classification and Events – or SPACE – in the past week)

Harbin Electric Co Ltd H (1133 HK) (Mkt Cap: $546mn; Liquidity: $0.4mn)

Power generation equipment manufacturer Harbin Electric Co Ltd H (1133 HK) is currently suspended pursuant to Hong Kong’s Codes on Takeovers and Mergers and Share Buy-backs, suggesting a privatisation offer from parent Harbin Electric Corporation (“HEC”) is pending. As HE is PRC incorporated, a privatisation by way of a merger by absorption may be proposed, similar to Advanced Semiconductor Mfg Corp Ltd. (3355 HK) as discussed in ASMC’s Merger By Absorption. 

• It is possible this suspension is not in relation to a takeover, but a major sale of assets, for example, from the parent to the sub. This would make sense given the recent share purchase by HEC (completed in January this year), and the fact HE is playing catch-up to Dongfang Electric Corporation (1072 HK) & Shanghai Electric Group Company (2727 HK). Arguably, launching a takeover shortly after subscribing for more shares is unusual.  Then again, when the two SOE railway behemoths CNR and CSR merged in 2015, a merger was disputed (at the time) when both were suspended on account of the fact CNR was only listed (on the HK exchange) in 2Q14.
• HE has perennially traded at discount to net cash. As at its last traded price, the discount to net cash (using the 2018 interim figure of HK$12.4bn, or HK$7.27/share) was 65%.
• “Fair” pricing to me would be something like the distribution of net cash to zero then taking over the company on PER. I simply don’t see this happening. And if it doesn’t, the fiduciary duty of independent directors will be tested/scrutinised if they recommend an offer to shareholders at any price less than the net cash/share of the company.

(link to my insight: Harbin Electric Expected To Be Privatised)  

Motherson Sumi Systems (MSS IN) (Mkt Cap: $7.7bn; Liquidity: $1.6mn)

Reportedly Motherson has entered merger/acquisition talks with Leoni AG (LEO GR), a leading provider of cables and cable systems for the automotive sector and other industries. Motherson has made four acquisitions so far in this business segment with the latest being PKC in 2017.

• Motherson has always aimed at strengthening this business area internationally, therefore the news about a merger with Leoni comes as no surprise and was mentioned as a potential acquisition target in LightStream Research‘s earlier insight Two More Acquisitions on the Way for Motherson Sumi. 
• Motherson has a strong balance sheet that could support this acquisition, although its ability to make further acquisitions in the short-to-medium term may be hampered – Leoni would be at the higher end of the price range for recent acquisitions. Should the acquisition go through, the company will be very well positioned to reach its US$18bn revenue target by 2020E, given that the combined revenue for FY2017 alone is ~US$13bn.
• Currently, Motherson is trading at an FY1 EV/EBITDA of 10x, slightly above peers such as Mahindra Cie Automotive (MACA IN) (9x) and below peers such as Bosch Ltd (BOS IN) (25x). If the deal goes through, Motherson’s FY1 EV/EBITDA of ~12x would be at a slight premium to local players, but still reasonable compared to international players. 

(link to Aqila Ali ‘s insight: Motherson In Merger Talks with One of Our Previously Short-Listed Candidates – Leoni)  

Kohlberg Kravis Roberts reduced its indicative offer to $3.40 from $3.77 on Thursday after sifting through MYOB’s books, with MYOB announcing:

Following completion of due diligence and finalisation of debt funding commitments, KKR has revised the offer price to $3.40 per share. …  The board has informed KKR that it is not in a position to recommend the revised proposal, however it remains in discussions with KKR regarding its proposal. (my emphasis)

• KKR’s revised non-binding proposal expired at 5pm on Friday, which came and went without any ASX announcement. Presumably, an announcement will be made before the market opens tomorrow (rendering this commentary redundant) with either MYOB grudgingly accepting the lower offer, or MYOB rejecting and KKR walking away (for now), or going hostile.
• Since the initial October proposal, MYOB’s peers (Hansen Technologies (HSN AU), Adacel Technologies (ADA AU), Bravura Solutions (BVS AU), Iress Ltd (IRE AU), Technology One (TNE AU), Xero Ltd (XRO AU) and Wisetech Global (WTC AU)) have traded down 17%, on average, while the ASX is down 10%. That backs out a possible adjusted-downside price range of $2.47-$2.68/share. Shares closed at $2.87 on Friday.

(link to my insight: Friday Deadline Looms As MYOB Snubs KKR’s Reduced Offer)

(link to my insight: StubWorld: Young Poong Blows Out, Again)  

Softbank Group (9984 JP) / Softbank Corp (9434 JP)

A forgettable trading debut for Japan’s largest-ever IPO, with Softbank Corp, closing at ¥1,282/share, down from the IPO price of ¥1,500, and closing at ¥1,316/share on Friday, the same day as its FTSE inclusion.

• At around 22% of NAV and 16% of GAV – by my calcs – Corp is a material % of Softbank Group (9984 JP). However as repeatedly seen when a conglomerate adds yet another listco to its stable (in Hong Kong, Wheelock & (20 HK) and Great Eagle Holdings (41 HK) spring to mind), a sustained narrowing in the holdco discount is often not the end result. Nor should it be. Softbank is effectively swapping shares for cash.
• The discount did narrow from the 2Q18 through to early October. Pelham Smithers‘ take on that narrowing is discussed in its insight Why SoftBank’s (9984 JP) Holdco Discount Is Narrowing.

With seven stocks promoted/reassigned from TSE2, MOTHERS, and JASDAQ in November 2018 leading to the same seven stocks being included in TOPIX at the end of December, Travis tested 340+ TOPIX inclusions over the past five years to see what really happens around TOPIX inclusions?

• If you own all but the smallest stocks (with a market cap of less than ¥15bn), odds are that, ON AVERAGE, they will underperform TOPIX from inclusion date or the day after, for many months.
• The larger the market cap, the more marked the AVERAGE underperformance immediately following inclusion. 
• For names in the ¥25-50bn sweet spot of “large enough to be “small cap” with somebody paying attention to it”, outperformance vs underperformance in the next 10 days is a 47/53 proposition. That is a bigger risk. It may be data-idiosyncratic, but it is not clear.
• In the case of the 7 names going into TOPIX at month-end this month, the averages would suggest one could still be long the four largest (at the time of Travis’ insight), but one would not want to be long the others; and one could sell long positions in all the names as of the close of the 27th or 28th and have it be an ex-ante expected net positive outcome vs TOPIX over the following 10-60 trading days.

(link to Travis’ insight: Historical TOPIX Inclusions:  How Do They Do Around Inclusion Date?)

Ke Yan, CFA, FRM provided an update on the HK Connect/southbound flow. Fullshare Holdings (607 HK), Shandong Gold Mining Co Ltd (1787 HK) and Shanghai Fosun Pharmaceutical (Group) (2196 HK) rounded out the top three inflows relative to their free float in the past seven days.  Shandong Gold remained in the top inflow list for the third consecutive week. Top outflows relative to the free float are Wuxi Biologics (Cayman) Inc (2269 HK), China Southern Airlines (1055 HK) and Sino Biopharmaceutical (1177 HK). 

(link to Ke Yan’s insight: Discover HK Connect: Mainlanders Are Buying Shandong Gold, and Pharmaceuticals (2018-12-17))  

Briefly …

• CJ Corp (001040 KS) announced both Common and Pref will get 0.15 class B pref shares for each share they already own. This new class B pref is convertible to Common with a 10-year duration, and it provides an extra 2% of the face value to what Common gets. Price ratio wise, 1P is currently close to the 2Y mean. This stock dividend should push 1P up, as should CJ’s announcement it would pay a cash dividend. The current div yield difference is a historic high at 1.53%. (link to Sanghyun Park ‘s insight: CJ Corp Share Class: Huge Net Gain Difference Between Common & Pref from Stock Dividend)  
• There are expectations of a ₩500 year-end dividend (up 25% YoY) for Lg Electronics (066570 KS) Common, or a dividend yield of 0.75%. Prefs will get ₩550 or a dividend yield of 2.03%. The yield spread would be 1.28%, the widest since 2015. There may be some narrowing in the spread as we head into year-end. (link to Sanghyun’s insight: LG Electronics Share Class: Long Pref/Short Common on a 4Y High Discount & Div Yield Gap)

• LCY Chemical Corp (1704 TT).  MOEA (Ministry of Economic Affairs) approval has now been received and LCY has applied for the delisting from the TWSE. The last trading day is the 23 Jan 2019 and the stock delists on the 30 Jan.  The settlement is expected to take place mid-Feb.
• Healthscope Ltd (HSO AU). In an ASX announcement on Friday Brookfield said: “based on its enquiries and financing discussions to date, it has no reason to believe it will not be willing and able to proceed with the proposal“. The exclusivity provisions have been extended to 18 January. Separately, Healthscope has also received correspondence from the BGH-AustralianSuper Consortium that it has indicated it is able to commence due diligence immediately. HSO’s board stated it will consider the correspondence. These are both positive developments.

Often these moves can easily be explained – the placement of new shares, rights issue, movements subsequent to a takeover, amongst others. For those mentioned below, I could not find an obvious reason for the CCASS move.   

In this briefing:

1. Hyosung Holdings: 10%p Drop in Discount to NAV Should Be Reverted Soon
2. Last Week in Event SPACE: Harbin Electric, MYOB, TMB Bank, Halla Holdings
3. Hotel Properties Ltd– Dissolution of Wheelock-OBS Partnership Could Pave Way for Privatization Offer
4. Prabhat Dairy Ltd – Update: Revenues and Margins Continues to Increase in Line with Our Expectations
5. Swaraj Engines: Positive Outlook But Growth Is Slowing and Valuation Is Rich

1. Hyosung Holdings: 10%p Drop in Discount to NAV Should Be Reverted Soon

• Hyosung Corporation (004800 KS) had fallen 16% just in two days. Holdco is now at a 50% discount to NAV. This is a 10%p drop from 10 days ago (Dec 19). Holdco price must have been overly corrected. The ongoing police investigation on Cho Hyun-joon’s alleged crime won’t lead to a delisting. 10%p drop in discount to NAV must be a price divergence, not a sensible price correction.
• Trade volume remained steady. Local hedge funds led the selling on Dec 27. Even they changed their position the following day. No short selling spike has been seen either. Hyosung is one of the highest yielding div holdco stocks. Hyosung Capital liquidation and Anyang Plant revaluation would be another short-term plus.
• I’d exploit this price divergence. It would soon revert to the Dec 19 discount level. It should at least stay at the peer average.

2. Last Week in Event SPACE: Harbin Electric, MYOB, TMB Bank, Halla Holdings

Last Week in Event SPACE …

• Just how will Harbin Electric Co Ltd H (1133 HK)‘s independent directors justify recommending an Offer to shareholders at a price which gave cash less cavalier than cash?
• MYOB Group Ltd (MYO AU)‘s directors grudgingly yet understandably enter an agreed deal with KKR.
• A TMB Bank PCL (TMB TB) / Thanachart Capital (TCAP TB) courtship is a possibility after an earlier Krung Thai Bank Pub (KTB TB) /TMB alliance failed. 

(This insight covers specific insights & comments involving Stubs, Pairs, Arbitrage, share Classification and Events – or SPACE – in the past week)

As previously discussed in Harbin Electric Expected To Be Privatised, Harbin Electric (HE) has now announced a privatisation Offer from parent and 60.41%-shareholder Harbin Electric Corporation (“HEC”) by way of a merger by absorption. The Offer price of $4.56/share, an 82.4% premium to last close, is bang in line with that paid by HEC in January this year for new domestic shares. The Offer price has been declared final. 

• Of note, the Offer price is a 37% discount to HE’s net cash of $7.27/share as at 30 June 2018. Should the privatisation be successful, this Offer will cost HEC ~HK$3.08bn, following which it can pocket the remaining net cash of $9.3bn PLUS the power generation equipment manufacturer business thrown in for free.
• On pricing, “fair” to me would be something like the distribution of net cash to zero then taking over the company on a PER with respect to peers. That is not happening. It will be difficult to see how independent directors (and the IFA) can justify recommending an Offer to shareholders at any price below the net cash/share, especially when the underlying business is profit-generating.
• Dissension rights are available, however, there is no administrative guidance on the substantive as well as procedural rules as to how the “fair price” will be determined under PRC and HK Law.
• Trading at a gross/annualised spread of 15%/28% assuming end-July completion, based on the average timeline for merger by absorption precedents. As HEC is only waiting for approval from independent H-shareholders suggests this transaction may complete earlier than precedents. 

(link to my insight: Harbin Electric: The Price Is Not Right)  

KKR and MYOB entered into Scheme Implementation Agreement (SIA) at $3.40/share, valuing MYOB, on a market cap basis, at A$2bn. MYOB’s board unanimously recommends shareholders to vote in favour of the Offer, in the absence of a superior proposal. The Offer price assumes no full-year dividend is paid.

• On balance, MYOB’s board has made the right decision to accept KKR’s reduced Offer. The argument that MYOB is a “known turnaround story” is challenged as cloud-based accounting software providers Xero Ltd (XRO AU)  and Intuit Inc (INTU US) grab market share. This is also reflected in MYOB’s forecast 7% revenue growth in FY18 and follows a 10% decline in first-half profit, despite a 61% jump in online subscribers.
• And there is justification for KKR’s lowering the Offer price: the ASX is down 10% since KKR’s initial tilt, the ASX technology index is off by ~14%, a basket of listed Aussie peers are down 17%, while Xero, the most comparable peer, is down ~20%. The Scheme Offer is at a ~27% premium to the estimated adjusted (for the ASX index) downside price of $2.68/share.

• Bain was okay selling at $3.15/share to KKR and will be fine selling its remaining ~6.5% stake at $3.40. Presumably, MYOB sounded out the other major shareholders such as Fidelity, Yarra Funds Management, Vanguard etc as to their read on the revised $3.40 offer, before agreeing to the SIA with KKR.

• If the markets avoid further declines, this deal will probably get up. If the markets rebound, the outcome is less assured. This Tuesday marks the beginning of a new year and a renewed mandate for investors to take risk, especially an agreed deal; but the current 5.3% annualised spread is tight.

(link to my insight: MYOB Caves And Agrees To KKR’s Reduced Offer)

TMB Bank PCL (TMB TB) (Mkt Cap: $1.2bn; Liquidity: $7mn)

The Ministry of Finance, the major shareholder of TMB, confirmed that both Krung Thai Bank Pub (KTB TB) and Thanachart Capital (TCAP TB) had engaged in merger talks with TMB. Considering an earlier KTB/TMB courtship failed, it is more likely, but by no means guaranteed, that the deal with Thanachart will happen. Bloomberg is also reporting that Thanachart and TMB want to do a deal before the next elections, which is less than two months away.

• TMB is much bigger than Thanachart and therefore it may boil down to whether TMB wants to be the target or acquirer. In Athaporn Arayasantiparb, CFA‘s view, a deal with Thanachart would leave TMB as the acquirer rather than the target. But Thanachart’s management has a better track record than TMB.
• Both banks have undergone extensive deals before this one: 1) TMB acquired DBS Thai Danu and IFCT; and 2) Thanachart engineered an acquisition of the much bigger, but struggling, SCIB.
• A merger between the two would still leave them smaller than Bank Of Ayudhya (BAY TB) and would not change the bank rankings; but it would give TMB a bigger presence in asset management, hire-purchase finance and a re-entry into the securities business.

(link to Athaporn’s insight: Sathorn Series M: TMB-Thanachart Courtship)  

Halla Holdings (060980 KS) / Mando Corp (204320 KS)

Mando accounts for 45% of Halla’s NAV, which is currently trading at a 50% discount. Sanghyun Park believes the recent narrowing in the discount may be due to the hype attached to Mando-Hella Elec, which he believes is overdone; and recommends a short Holdco and long Mando. Using Sanghyun’s figures, I see the discount to NAV at 51%, 2STD above the 12-month average of ~47%.

(link to Sanghyun’s insight: Halla Holdings Stub Trade: Downwardly Mean Reversion in Favor of Mando)  

• LG Chem Ltd (051910 KS)‘s 1P is now at a 44.20% discount to Common. The dividend will be the same as last year of ₩6,000 despite lower earnings. The dividend yield for Common will be 1.68%, and 3.03% for 1P or a dividend yield difference of 1.35%, a four-year high. (link to Sanghyun’s insight: LG Chem Share Class: Another Pref to Watch as Div Yield Gap at 4Y High)  

• Glow Energy Pcl (GLOW TB). In a strange twist to the tale, the ERC agrees to approve Global Power Synergy Company Ltd (GPSC TB)‘s takeover of Glow under a revised plan in which they have to: 1) sell Glow SPP1, a power plant with 124MW capacity and 90 tons/hr of steam; and 2) allow clients such as Pa Daeng to change providers. This will reduce Glow’s market share within the MapTaPhut area, but Athaporn Arayasantiparb, CFA thinks the purchase price (Bt139bn according to Bangkok Post) will have to be revised downwards too.  For more on the original deal, see Deal Alert! GPSC Goes For the Jugular! and Anti-Trust Should Be A Non-Issue In The GPSC/Glow Deal.

• Unisem (M) (UNI MK). The Offer is now unconditional and will remain open to acceptances until the 7 January 2019.
• Stanmore Coal (SMR AU). The offer has been extended until the 22 January 2019.

Often these moves can easily be explained – the placement of new shares, rights issue, movements subsequent to a takeover, amongst others. For those mentioned below, I could not find an obvious reason for the CCASS move.   

3. Hotel Properties Ltd– Dissolution of Wheelock-OBS Partnership Could Pave Way for Privatization Offer

Hotel Properties (HPL SP)  (“HPL”) announced on Friday evening a significant change in its shareholdings relating to the HPL shares owned by 68 Holdings Pte Ltd. 

The restructuring of shareholding did not come as a surprise and was within expectations. 

Now, Wheelock holds only a significant minority interest of 22.53% and without a board seat in HPL. Wheelock’s influence in HPL has been reduced significantly. Without control, Wheelock’s investment in HPL is as good as any other non-strategic investment in quoted securities.

In the event that Wheelock Properties decides to sell its HPL shares, Mr Ong will be a likely buyer of the HPL shares. This will present a very good opportunity for Mr Ong to successfully privatise and delist HPL.

4. Prabhat Dairy Ltd – Update: Revenues and Margins Continues to Increase in Line with Our Expectations

Prabhat Dairy Ltd’s quarterly result is in line with our expectation. In Q2 FY19, the company registered a growth of 8.53% YoY, EBITDA margin was 9.4% improving by 119 bps since the same period last year, EBITDA grew by 24.2% YOY; the profit margin was at 2.95%  improving by 60 bps YoY, Net Income grew by 35.86% YOY.  For more details about the company, please refer to our initiation report  Prabhat Dairy Ltd – An Emerging Star in the Indian Milky Way. B2B business contributed to 70% of revenue and the remaining 30% was driven by B2C business. Value Added Products contributed to 25% of revenue in Q2FY19.

The stock is trading at 16.3x its TTM EPS, 13.8x its FY19F EPS. Margins have improved over the past quarters due to lower cost of raw materials, we expect raw materials to continue to be lower than their historic average in short term. Lower cost of raw material along with the improving contribution from B2C will lead to higher margins in medium to long term. The company also wants to increase its B2C contribution aggressively from the current 30% to 50% by 2020.

We will monitor the stock closely to firm up our views further, albeit we remain positive on the long-term prospects of the company.

5. Swaraj Engines: Positive Outlook But Growth Is Slowing and Valuation Is Rich

Swaraj Engines (SWE IN) (SEL)is primarily manufacturing diesel engines for fitment into Swaraj tractors manufactured by Mahindra & Mahindra Ltd. (M&M). The Company is also supplying engine components to SML Isuzu Ltd used in the assembly of commercial vehicle engines. SEL was started as a joint venture between Punjab Tractor Ltd (now acquired by M&M Ltd) and Kirloskar Oil Engines Ltd. M&M holds 33.3% stake in SEL and is its key client.  

We are positive about the business because:

• SEL’s growth is correlated with M&M’s tractor business growth. SEL supplies engines to the Swaraj division of M&M. M&M expects tractor growth to be around 12% YoY in FY19E. We forecast SEL’s tractor engine volumes will grow at a CAGR of 12% for FY18-21E.
• The growth of the company is dependent on the monsoon and rural sentiments. We expect the profitability to improve with normal rainfall and government initiatives towards the rural sector. We expect the revenue/ EBITDA/ PAT CAGR for FY18-21E to be 14%/ 15%/ 14% respectively.
• SEL is debt free and a cash generating company. It has a healthy and stable ROCE and ROE. SEL has increased its capacity from 75,000 engines in FY16 to 120,000 engines in FY18. We expect the capacity utilisation to reach 97% by FY20E from 90% in 1HFY19. SEL funds its capex through internal accruals. We forecast a capex of Rs 600 mn for FY19E to FY21E considering the requirement of the additional capacity, R&D and testing costs for new and higher HP engines & for upgradation of engines according to the TREM IV emission norms for >50 HP engines.

We initiate coverage on SEL with a fair value objective of Rs 1,655/- over the next 12 months. This represents a potential upside of 15% from the closing price of Rs 1,435/- (as on 26-12-2018). We arrive at the fair value by applying PE multiple of 18x to EPS of Rs 87/- to the year ending December-20E and add cash of Rs 82/- per share. While the business outlook is good, we think the upside in the share price is limited due to rich valuation.

In this briefing:

1. COM7 (COM7 TB): Acquisition to Support Aggressive Expansion
2. TRACKING TRAFFIC/Chinese Express & Logistics: Parcel Pricing Weak, Again
3. Last Week in Event SPACE: Familymart, Takeda, Harbin Electric, Motherson, Young Poong, NTT
4. EM Relative Strength Is Bottoming: Overweight

1. COM7 (COM7 TB): Acquisition to Support Aggressive Expansion

• Improving asset turnover, good risk adjusted price momentum, and relatively strong analyst recommendations relative to its sector
• Larger distribution channel through acquisition of DNA Retail Link to add 95 more stores to current 518 stores
• New mobile product launches in 4Q18 and COM7’s focus on high margin products, such as Android smartphones, should support high earnings growth which was up 56% YoY in 3Q18
• Attractive at a 19CE* PEG of 0.9 versus ASEAN sector at a PEG of 2.7
• Risks: Lower-than-expected demand for new IT products, slower-than-expected store expansions

* Consensus Estimates

2. TRACKING TRAFFIC/Chinese Express & Logistics: Parcel Pricing Weak, Again

Tracking Traffic/Chinese Express & Logistics is the hub for our research on China’s express parcels and logistics sectors. Tracking Traffic/Chinese Express & Logistics features analysis of monthly Chinese express and logistics data, notes from our conversations with industry players, and links to company and thematic notes. 

This month’s issue covers the following topics:

3. Last Week in Event SPACE: Familymart, Takeda, Harbin Electric, Motherson, Young Poong, NTT

Last Week in Event SPACE …

• Bad banker analysis as Familymart Uny Holdings (8028 JP)‘s tender for Don Quijote Holdings (7532 JP) doesn’t even get close to the mark.
• Spooky action at a distance as the whole episode with Takeda Pharmaceutical (4502 JP)/Shire PLC (SHP LN) and index providers is baffling. 
• A possible offer for Harbin Electric Co Ltd H (1133 HK) could trigger corporate governance issues.

• Motherson Sumi Systems (MSS IN)‘s potential tilt for Leoni AG (LEO GR) is well telescoped and similarly should be well received.  

• NTT (Nippon Telegraph & Telephone) (9432 JP) has headroom to buy back shares from the government, but going forward there is still more on-market buying to do.

• Young Poong Corporation (000670 KS)‘s holding in Korea Zinc Co Ltd (010130 KS) accounts for an eye-watering ~200% of its market cap.

• A last-minute lump of coal in the stocking from MYOB Group Ltd (MYO AU)? 

• And analysing the trading patterns of 340+ TOPIX inclusions over the past five years.

(This insight covers specific insights & comments involving Stubs, Pairs, Arbitrage, share Classification and Events – or SPACE – in the past week)

Harbin Electric Co Ltd H (1133 HK) (Mkt Cap: $546mn; Liquidity: $0.4mn)

Power generation equipment manufacturer Harbin Electric Co Ltd H (1133 HK) is currently suspended pursuant to Hong Kong’s Codes on Takeovers and Mergers and Share Buy-backs, suggesting a privatisation offer from parent Harbin Electric Corporation (“HEC”) is pending. As HE is PRC incorporated, a privatisation by way of a merger by absorption may be proposed, similar to Advanced Semiconductor Mfg Corp Ltd. (3355 HK) as discussed in ASMC’s Merger By Absorption. 

• It is possible this suspension is not in relation to a takeover, but a major sale of assets, for example, from the parent to the sub. This would make sense given the recent share purchase by HEC (completed in January this year), and the fact HE is playing catch-up to Dongfang Electric Corporation (1072 HK) & Shanghai Electric Group Company (2727 HK). Arguably, launching a takeover shortly after subscribing for more shares is unusual.  Then again, when the two SOE railway behemoths CNR and CSR merged in 2015, a merger was disputed (at the time) when both were suspended on account of the fact CNR was only listed (on the HK exchange) in 2Q14.
• HE has perennially traded at discount to net cash. As at its last traded price, the discount to net cash (using the 2018 interim figure of HK$12.4bn, or HK$7.27/share) was 65%.
• “Fair” pricing to me would be something like the distribution of net cash to zero then taking over the company on PER. I simply don’t see this happening. And if it doesn’t, the fiduciary duty of independent directors will be tested/scrutinised if they recommend an offer to shareholders at any price less than the net cash/share of the company.

(link to my insight: Harbin Electric Expected To Be Privatised)  

Motherson Sumi Systems (MSS IN) (Mkt Cap: $7.7bn; Liquidity: $1.6mn)

Reportedly Motherson has entered merger/acquisition talks with Leoni AG (LEO GR), a leading provider of cables and cable systems for the automotive sector and other industries. Motherson has made four acquisitions so far in this business segment with the latest being PKC in 2017.

• Motherson has always aimed at strengthening this business area internationally, therefore the news about a merger with Leoni comes as no surprise and was mentioned as a potential acquisition target in LightStream Research‘s earlier insight Two More Acquisitions on the Way for Motherson Sumi. 
• Motherson has a strong balance sheet that could support this acquisition, although its ability to make further acquisitions in the short-to-medium term may be hampered – Leoni would be at the higher end of the price range for recent acquisitions. Should the acquisition go through, the company will be very well positioned to reach its US$18bn revenue target by 2020E, given that the combined revenue for FY2017 alone is ~US$13bn.
• Currently, Motherson is trading at an FY1 EV/EBITDA of 10x, slightly above peers such as Mahindra Cie Automotive (MACA IN) (9x) and below peers such as Bosch Ltd (BOS IN) (25x). If the deal goes through, Motherson’s FY1 EV/EBITDA of ~12x would be at a slight premium to local players, but still reasonable compared to international players. 

(link to Aqila Ali ‘s insight: Motherson In Merger Talks with One of Our Previously Short-Listed Candidates – Leoni)  

Kohlberg Kravis Roberts reduced its indicative offer to $3.40 from $3.77 on Thursday after sifting through MYOB’s books, with MYOB announcing:

Following completion of due diligence and finalisation of debt funding commitments, KKR has revised the offer price to $3.40 per share. …  The board has informed KKR that it is not in a position to recommend the revised proposal, however it remains in discussions with KKR regarding its proposal. (my emphasis)

• KKR’s revised non-binding proposal expired at 5pm on Friday, which came and went without any ASX announcement. Presumably, an announcement will be made before the market opens tomorrow (rendering this commentary redundant) with either MYOB grudgingly accepting the lower offer, or MYOB rejecting and KKR walking away (for now), or going hostile.
• Since the initial October proposal, MYOB’s peers (Hansen Technologies (HSN AU), Adacel Technologies (ADA AU), Bravura Solutions (BVS AU), Iress Ltd (IRE AU), Technology One (TNE AU), Xero Ltd (XRO AU) and Wisetech Global (WTC AU)) have traded down 17%, on average, while the ASX is down 10%. That backs out a possible adjusted-downside price range of $2.47-$2.68/share. Shares closed at $2.87 on Friday.

(link to my insight: Friday Deadline Looms As MYOB Snubs KKR’s Reduced Offer)

(link to my insight: StubWorld: Young Poong Blows Out, Again)  

Softbank Group (9984 JP) / Softbank Corp (9434 JP)

A forgettable trading debut for Japan’s largest-ever IPO, with Softbank Corp, closing at ¥1,282/share, down from the IPO price of ¥1,500, and closing at ¥1,316/share on Friday, the same day as its FTSE inclusion.

• At around 22% of NAV and 16% of GAV – by my calcs – Corp is a material % of Softbank Group (9984 JP). However as repeatedly seen when a conglomerate adds yet another listco to its stable (in Hong Kong, Wheelock & (20 HK) and Great Eagle Holdings (41 HK) spring to mind), a sustained narrowing in the holdco discount is often not the end result. Nor should it be. Softbank is effectively swapping shares for cash.
• The discount did narrow from the 2Q18 through to early October. Pelham Smithers‘ take on that narrowing is discussed in its insight Why SoftBank’s (9984 JP) Holdco Discount Is Narrowing.

With seven stocks promoted/reassigned from TSE2, MOTHERS, and JASDAQ in November 2018 leading to the same seven stocks being included in TOPIX at the end of December, Travis tested 340+ TOPIX inclusions over the past five years to see what really happens around TOPIX inclusions?

• If you own all but the smallest stocks (with a market cap of less than ¥15bn), odds are that, ON AVERAGE, they will underperform TOPIX from inclusion date or the day after, for many months.
• The larger the market cap, the more marked the AVERAGE underperformance immediately following inclusion. 
• For names in the ¥25-50bn sweet spot of “large enough to be “small cap” with somebody paying attention to it”, outperformance vs underperformance in the next 10 days is a 47/53 proposition. That is a bigger risk. It may be data-idiosyncratic, but it is not clear.
• In the case of the 7 names going into TOPIX at month-end this month, the averages would suggest one could still be long the four largest (at the time of Travis’ insight), but one would not want to be long the others; and one could sell long positions in all the names as of the close of the 27th or 28th and have it be an ex-ante expected net positive outcome vs TOPIX over the following 10-60 trading days.

(link to Travis’ insight: Historical TOPIX Inclusions:  How Do They Do Around Inclusion Date?)

Ke Yan, CFA, FRM provided an update on the HK Connect/southbound flow. Fullshare Holdings (607 HK), Shandong Gold Mining Co Ltd (1787 HK) and Shanghai Fosun Pharmaceutical (Group) (2196 HK) rounded out the top three inflows relative to their free float in the past seven days.  Shandong Gold remained in the top inflow list for the third consecutive week. Top outflows relative to the free float are Wuxi Biologics (Cayman) Inc (2269 HK), China Southern Airlines (1055 HK) and Sino Biopharmaceutical (1177 HK). 

(link to Ke Yan’s insight: Discover HK Connect: Mainlanders Are Buying Shandong Gold, and Pharmaceuticals (2018-12-17))  

Briefly …

• CJ Corp (001040 KS) announced both Common and Pref will get 0.15 class B pref shares for each share they already own. This new class B pref is convertible to Common with a 10-year duration, and it provides an extra 2% of the face value to what Common gets. Price ratio wise, 1P is currently close to the 2Y mean. This stock dividend should push 1P up, as should CJ’s announcement it would pay a cash dividend. The current div yield difference is a historic high at 1.53%. (link to Sanghyun Park ‘s insight: CJ Corp Share Class: Huge Net Gain Difference Between Common & Pref from Stock Dividend)  
• There are expectations of a ₩500 year-end dividend (up 25% YoY) for Lg Electronics (066570 KS) Common, or a dividend yield of 0.75%. Prefs will get ₩550 or a dividend yield of 2.03%. The yield spread would be 1.28%, the widest since 2015. There may be some narrowing in the spread as we head into year-end. (link to Sanghyun’s insight: LG Electronics Share Class: Long Pref/Short Common on a 4Y High Discount & Div Yield Gap)

• LCY Chemical Corp (1704 TT).  MOEA (Ministry of Economic Affairs) approval has now been received and LCY has applied for the delisting from the TWSE. The last trading day is the 23 Jan 2019 and the stock delists on the 30 Jan.  The settlement is expected to take place mid-Feb.
• Healthscope Ltd (HSO AU). In an ASX announcement on Friday Brookfield said: “based on its enquiries and financing discussions to date, it has no reason to believe it will not be willing and able to proceed with the proposal“. The exclusivity provisions have been extended to 18 January. Separately, Healthscope has also received correspondence from the BGH-AustralianSuper Consortium that it has indicated it is able to commence due diligence immediately. HSO’s board stated it will consider the correspondence. These are both positive developments.

Often these moves can easily be explained – the placement of new shares, rights issue, movements subsequent to a takeover, amongst others. For those mentioned below, I could not find an obvious reason for the CCASS move.   

4. EM Relative Strength Is Bottoming: Overweight

Relative strength for MSCI EM is bottoming vs. MSCI EAFE despite continued global equity market weakness.  Although the MSCI EM’s price index remains in a downtrend, we are seeing signs of outperformance ona a relative strength basis and would add incremental exposure. In this report we highlight attractive and actionable themes within EM.

In this briefing:

1. Last Week in Event SPACE: Harbin Electric, MYOB, TMB Bank, Halla Holdings
2. Hotel Properties Ltd– Dissolution of Wheelock-OBS Partnership Could Pave Way for Privatization Offer
3. Prabhat Dairy Ltd – Update: Revenues and Margins Continues to Increase in Line with Our Expectations
4. Swaraj Engines: Positive Outlook But Growth Is Slowing and Valuation Is Rich
5. GMO Internet (9447 JP) – Grossly or Modestly Overrated?

1. Last Week in Event SPACE: Harbin Electric, MYOB, TMB Bank, Halla Holdings

Last Week in Event SPACE …

• Just how will Harbin Electric Co Ltd H (1133 HK)‘s independent directors justify recommending an Offer to shareholders at a price which gave cash less cavalier than cash?
• MYOB Group Ltd (MYO AU)‘s directors grudgingly yet understandably enter an agreed deal with KKR.
• A TMB Bank PCL (TMB TB) / Thanachart Capital (TCAP TB) courtship is a possibility after an earlier Krung Thai Bank Pub (KTB TB) /TMB alliance failed. 

(This insight covers specific insights & comments involving Stubs, Pairs, Arbitrage, share Classification and Events – or SPACE – in the past week)

As previously discussed in Harbin Electric Expected To Be Privatised, Harbin Electric (HE) has now announced a privatisation Offer from parent and 60.41%-shareholder Harbin Electric Corporation (“HEC”) by way of a merger by absorption. The Offer price of $4.56/share, an 82.4% premium to last close, is bang in line with that paid by HEC in January this year for new domestic shares. The Offer price has been declared final. 

• Of note, the Offer price is a 37% discount to HE’s net cash of $7.27/share as at 30 June 2018. Should the privatisation be successful, this Offer will cost HEC ~HK$3.08bn, following which it can pocket the remaining net cash of $9.3bn PLUS the power generation equipment manufacturer business thrown in for free.
• On pricing, “fair” to me would be something like the distribution of net cash to zero then taking over the company on a PER with respect to peers. That is not happening. It will be difficult to see how independent directors (and the IFA) can justify recommending an Offer to shareholders at any price below the net cash/share, especially when the underlying business is profit-generating.
• Dissension rights are available, however, there is no administrative guidance on the substantive as well as procedural rules as to how the “fair price” will be determined under PRC and HK Law.
• Trading at a gross/annualised spread of 15%/28% assuming end-July completion, based on the average timeline for merger by absorption precedents. As HEC is only waiting for approval from independent H-shareholders suggests this transaction may complete earlier than precedents. 

(link to my insight: Harbin Electric: The Price Is Not Right)  

KKR and MYOB entered into Scheme Implementation Agreement (SIA) at $3.40/share, valuing MYOB, on a market cap basis, at A$2bn. MYOB’s board unanimously recommends shareholders to vote in favour of the Offer, in the absence of a superior proposal. The Offer price assumes no full-year dividend is paid.

• On balance, MYOB’s board has made the right decision to accept KKR’s reduced Offer. The argument that MYOB is a “known turnaround story” is challenged as cloud-based accounting software providers Xero Ltd (XRO AU)  and Intuit Inc (INTU US) grab market share. This is also reflected in MYOB’s forecast 7% revenue growth in FY18 and follows a 10% decline in first-half profit, despite a 61% jump in online subscribers.
• And there is justification for KKR’s lowering the Offer price: the ASX is down 10% since KKR’s initial tilt, the ASX technology index is off by ~14%, a basket of listed Aussie peers are down 17%, while Xero, the most comparable peer, is down ~20%. The Scheme Offer is at a ~27% premium to the estimated adjusted (for the ASX index) downside price of $2.68/share.

• Bain was okay selling at $3.15/share to KKR and will be fine selling its remaining ~6.5% stake at $3.40. Presumably, MYOB sounded out the other major shareholders such as Fidelity, Yarra Funds Management, Vanguard etc as to their read on the revised $3.40 offer, before agreeing to the SIA with KKR.

• If the markets avoid further declines, this deal will probably get up. If the markets rebound, the outcome is less assured. This Tuesday marks the beginning of a new year and a renewed mandate for investors to take risk, especially an agreed deal; but the current 5.3% annualised spread is tight.

(link to my insight: MYOB Caves And Agrees To KKR’s Reduced Offer)

TMB Bank PCL (TMB TB) (Mkt Cap: $1.2bn; Liquidity: $7mn)

The Ministry of Finance, the major shareholder of TMB, confirmed that both Krung Thai Bank Pub (KTB TB) and Thanachart Capital (TCAP TB) had engaged in merger talks with TMB. Considering an earlier KTB/TMB courtship failed, it is more likely, but by no means guaranteed, that the deal with Thanachart will happen. Bloomberg is also reporting that Thanachart and TMB want to do a deal before the next elections, which is less than two months away.

• TMB is much bigger than Thanachart and therefore it may boil down to whether TMB wants to be the target or acquirer. In Athaporn Arayasantiparb, CFA‘s view, a deal with Thanachart would leave TMB as the acquirer rather than the target. But Thanachart’s management has a better track record than TMB.
• Both banks have undergone extensive deals before this one: 1) TMB acquired DBS Thai Danu and IFCT; and 2) Thanachart engineered an acquisition of the much bigger, but struggling, SCIB.
• A merger between the two would still leave them smaller than Bank Of Ayudhya (BAY TB) and would not change the bank rankings; but it would give TMB a bigger presence in asset management, hire-purchase finance and a re-entry into the securities business.

(link to Athaporn’s insight: Sathorn Series M: TMB-Thanachart Courtship)  

Halla Holdings (060980 KS) / Mando Corp (204320 KS)

Mando accounts for 45% of Halla’s NAV, which is currently trading at a 50% discount. Sanghyun Park believes the recent narrowing in the discount may be due to the hype attached to Mando-Hella Elec, which he believes is overdone; and recommends a short Holdco and long Mando. Using Sanghyun’s figures, I see the discount to NAV at 51%, 2STD above the 12-month average of ~47%.

(link to Sanghyun’s insight: Halla Holdings Stub Trade: Downwardly Mean Reversion in Favor of Mando)  

• LG Chem Ltd (051910 KS)‘s 1P is now at a 44.20% discount to Common. The dividend will be the same as last year of ₩6,000 despite lower earnings. The dividend yield for Common will be 1.68%, and 3.03% for 1P or a dividend yield difference of 1.35%, a four-year high. (link to Sanghyun’s insight: LG Chem Share Class: Another Pref to Watch as Div Yield Gap at 4Y High)  

• Glow Energy Pcl (GLOW TB). In a strange twist to the tale, the ERC agrees to approve Global Power Synergy Company Ltd (GPSC TB)‘s takeover of Glow under a revised plan in which they have to: 1) sell Glow SPP1, a power plant with 124MW capacity and 90 tons/hr of steam; and 2) allow clients such as Pa Daeng to change providers. This will reduce Glow’s market share within the MapTaPhut area, but Athaporn Arayasantiparb, CFA thinks the purchase price (Bt139bn according to Bangkok Post) will have to be revised downwards too.  For more on the original deal, see Deal Alert! GPSC Goes For the Jugular! and Anti-Trust Should Be A Non-Issue In The GPSC/Glow Deal.

• Unisem (M) (UNI MK). The Offer is now unconditional and will remain open to acceptances until the 7 January 2019.
• Stanmore Coal (SMR AU). The offer has been extended until the 22 January 2019.

Often these moves can easily be explained – the placement of new shares, rights issue, movements subsequent to a takeover, amongst others. For those mentioned below, I could not find an obvious reason for the CCASS move.   

2. Hotel Properties Ltd– Dissolution of Wheelock-OBS Partnership Could Pave Way for Privatization Offer

Hotel Properties (HPL SP)  (“HPL”) announced on Friday evening a significant change in its shareholdings relating to the HPL shares owned by 68 Holdings Pte Ltd. 

The restructuring of shareholding did not come as a surprise and was within expectations. 

Now, Wheelock holds only a significant minority interest of 22.53% and without a board seat in HPL. Wheelock’s influence in HPL has been reduced significantly. Without control, Wheelock’s investment in HPL is as good as any other non-strategic investment in quoted securities.

In the event that Wheelock Properties decides to sell its HPL shares, Mr Ong will be a likely buyer of the HPL shares. This will present a very good opportunity for Mr Ong to successfully privatise and delist HPL.

3. Prabhat Dairy Ltd – Update: Revenues and Margins Continues to Increase in Line with Our Expectations

Prabhat Dairy Ltd’s quarterly result is in line with our expectation. In Q2 FY19, the company registered a growth of 8.53% YoY, EBITDA margin was 9.4% improving by 119 bps since the same period last year, EBITDA grew by 24.2% YOY; the profit margin was at 2.95%  improving by 60 bps YoY, Net Income grew by 35.86% YOY.  For more details about the company, please refer to our initiation report  Prabhat Dairy Ltd – An Emerging Star in the Indian Milky Way. B2B business contributed to 70% of revenue and the remaining 30% was driven by B2C business. Value Added Products contributed to 25% of revenue in Q2FY19.

The stock is trading at 16.3x its TTM EPS, 13.8x its FY19F EPS. Margins have improved over the past quarters due to lower cost of raw materials, we expect raw materials to continue to be lower than their historic average in short term. Lower cost of raw material along with the improving contribution from B2C will lead to higher margins in medium to long term. The company also wants to increase its B2C contribution aggressively from the current 30% to 50% by 2020.

We will monitor the stock closely to firm up our views further, albeit we remain positive on the long-term prospects of the company.

4. Swaraj Engines: Positive Outlook But Growth Is Slowing and Valuation Is Rich

Swaraj Engines (SWE IN) (SEL)is primarily manufacturing diesel engines for fitment into Swaraj tractors manufactured by Mahindra & Mahindra Ltd. (M&M). The Company is also supplying engine components to SML Isuzu Ltd used in the assembly of commercial vehicle engines. SEL was started as a joint venture between Punjab Tractor Ltd (now acquired by M&M Ltd) and Kirloskar Oil Engines Ltd. M&M holds 33.3% stake in SEL and is its key client.  

We are positive about the business because:

• SEL’s growth is correlated with M&M’s tractor business growth. SEL supplies engines to the Swaraj division of M&M. M&M expects tractor growth to be around 12% YoY in FY19E. We forecast SEL’s tractor engine volumes will grow at a CAGR of 12% for FY18-21E.
• The growth of the company is dependent on the monsoon and rural sentiments. We expect the profitability to improve with normal rainfall and government initiatives towards the rural sector. We expect the revenue/ EBITDA/ PAT CAGR for FY18-21E to be 14%/ 15%/ 14% respectively.
• SEL is debt free and a cash generating company. It has a healthy and stable ROCE and ROE. SEL has increased its capacity from 75,000 engines in FY16 to 120,000 engines in FY18. We expect the capacity utilisation to reach 97% by FY20E from 90% in 1HFY19. SEL funds its capex through internal accruals. We forecast a capex of Rs 600 mn for FY19E to FY21E considering the requirement of the additional capacity, R&D and testing costs for new and higher HP engines & for upgradation of engines according to the TREM IV emission norms for >50 HP engines.

We initiate coverage on SEL with a fair value objective of Rs 1,655/- over the next 12 months. This represents a potential upside of 15% from the closing price of Rs 1,435/- (as on 26-12-2018). We arrive at the fair value by applying PE multiple of 18x to EPS of Rs 87/- to the year ending December-20E and add cash of Rs 82/- per share. While the business outlook is good, we think the upside in the share price is limited due to rich valuation.

5. GMO Internet (9447 JP) – Grossly or Modestly Overrated?

Source: Japan Analytics

THE GMO INTERNET (9449 JP) STORY – GMO internet (GMO-i) has attracted much attention in the last eighteen months from an unusual trinity of value, activist and ‘cryptocurrency’ equity investors.

• VALUE– Many traditional, but mostly foreign, value investors have seen the persistent negative difference between GMO-i’s market capitalisation and the value of the company’s holdings in its eight listed consolidated subsidiaries as an opportunity to invest in GMO-i with a considerable ‘margin of safety’.
• ACTIVIST – Since July 2017, the activist investor, Oasis, has waged a so-far-unsuccessful campaign with the aim of improving GMO’s corporate governance, removing takeover defences, addressing a ‘secularly undervalued stock price we are not able to tolerate’ (sic), and redefining the role and influence of the company’s Chairman, President, Representative Director and largest shareholder, Masatoshi Kumagai.
• ‘CRYPTO!’ – In December 2017, GMO-i committed to spending more than ¥35b or 10% of non-current assets. The aim was threefold: to set up a bitcoin ‘mining’ headquarters in Switzerland (with the ‘mining’ operations being carried out at an undisclosed location in Scandinavia), to develop proprietary state-of-the-art 7nm-node ‘mining chips’, and, in due course, to sell GMO-branded and developed ‘mining’ machines. The move was hailed in the ‘crypto’ fraternity as GMO-i became the largest non-Chinese and the first well-established Internet conglomerate to make a major investment in ‘cryptocurrency’ infrastructure.

OUTSTANDING – Following the December 2017 announcement, trading volumes spiked into ‘Overtraded’ territory – as measured by our Volume Score. Many investors saw GMO-i shares as a safer way of gaining exposure to ‘cryptocurrencies’, even as the price of bitcoin began to subside. By early June 2018, GMO-i’s shares had reached a closing price of ¥3,020: up 157% from the low of the prior year and outperforming TOPIX by 135%. Whatever the primary driver of this outstanding performance, each of our trio of investor groups no doubt felt vindicated in their approach to the stock.

CRYPTO CLOSURE – On December 25th 2018, GMO-i’s shares reached a new 52-week low of ¥1,325, a decline of 56% from the June high. Year to date, GMO-i shares have now declined by 31%, underperforming TOPIX by nine percentage points. On the same day, GMO-i announced that the company would post an extraordinary ¥35.5b loss for the fourth quarter, incurring an impairment loss of ¥11.5b in relation to the closure of the Swiss ‘mining’ headquarters and a loss of ¥24b to cover the closure of the ‘mining chip’ and ‘mining machine’ development, manufacturing and sales businesses. GMO-i will continue to ‘mine’ bitcoin from its Tokyo headquarters and intends to relocate the ‘mining’ centre from Scandinavia to (sic) ‘a region that will allow us to secure cleaner and less expensive power supply, but we have not yet decided the details’. Unlisted subsidiary GMO Coin’s ‘cryptocurrency’ exchange will also continue to operate, and the previously-announced plans to launch a ¥-based ‘stablecoin’ in 2019 will proceed. In the two trading days following this announcement, the shares have recovered 13% to ¥1,505. 

RAIDING THE LISTCO PIGGY BANK – As we shall relate, this is the second time since listing that GMO-i has written off a significant new business venture which the company had commenced only a short time before. In both cases, the company was forced to sell stakes in its listed consolidated subsidiaries to offset the resulting losses. On this occasion, the sale of shares in GMO Financial (7177 JP) (GMO-F) on September 25 2018, and GMO Payment Gateway (3769 JP) (GMO-PG) on December 17 2018, raised a combined ¥55.6b and, after the deduction of the yet-to-be-determined tax on the realised gains, should more than offset the ‘crypto’ losses. According to CFO Yasuda, any surplus from this exercise will be used to pay down debt. Also discussed below and in keeping with this GMO-i ‘MO’, in 2015, the company twice sold shares in its listed subsidiaries to ‘smooth out’ less-than-desirable operating results.

In this briefing:

1. FamilyMart Tender Offer for Don Quijote Misses The Mark as Mr. Partridge Stands Pat

1. FamilyMart Tender Offer for Don Quijote Misses The Mark as Mr. Partridge Stands Pat

In October, the Nikkei leaked and Familymart Uny Holdings (8028 JP) immediately thereafter announced that Familymart would sell the rest of its GMS (and financing) subsidiary UNY to Don Quijote Holdings (7532 JP) (which bought 40% of the company in 2017) and would conduct a Tender Offer later in 2018 at a 20% premium to the then-current price to buy a stake in Don Quijote of just over 20%. The Tender Offer was announced November 6th. Familymart had arranged to borrow shares it did not manage to buy in the tender so that at the next record date it will have 20% of the voting rights by hook or by crook. 

Don Quijote shares jumped to the Tender Offer price the same day and then spent a day there before investors decided that the news and structure of the deal was better news for Don Quijote than Familymart had priced in. 

Results of the Tender Offer have just been announced. Familymart had been trying to buy 32,108,700 shares for JPY 212 billion. They just missed. They got 0.08% of the total desired, or 24,721 shares for just over JPY 163 million.

THEY GOT NOTHING.

I expect Familymart had zero idea this would happen. I expect their bankers are surprised as well. They should not have been. They analysed this badly. There was a decent chance they would find it difficult to dislodge shares from owners. 

In FamilyMart Tender for Don Quijote – Elmer vs Mr. Partridge? I recalled how “Old Turkey” (from Edwin Lefevre’s Reminiscences of a Stock Operator) did not want to lose his position while Elmer was eager to take profits.

“I couldn’t think of selling that stock.” “You couldn’t?” asked Elmer, beginning to look doubtful himself. It is a habit with most tip givers to be tip takers. “Why not?” And Elmer drew nearer. “Why, this is a bull market!” The old fellow said it as though he had given a long and detailed explanation. 

Growth stock managers don’t like selling growth stocks until the growth stops growing. Don Quijote is still growing. And with UNY, Don Quijote may grow faster than previously expected. 

The announcement at the end of the Tender Offer Results announcement is also VERY telling. There was a plan to make Don Quijote an equity-method affiliate by buying in the Tender Offer, buying in the market, or borrowing lots of shares. There was a plan for Familymart to appoint directors to DQ.

There was a clearly-available trading strategy based on that. 

The new announcement puts that strategy into question. And Mr. Partridge might not be so inclined to call it a bull market. Since the launch of the deal, the markets have started the trip to Gehenna in a trug. From the one-month average prior to the Familymart bid news, Don Quijote is up 25%. Familymart is up 40%, the Nikkei 225 is down 10.7%, the TOPIX retail sector is down 5.5% but Familymart and Don Quijote have influenced that performance (without those two names, average performance is worse).

In this briefing:

1. Halla Holdings Stub Trade: Downwardly Mean Reversion in Favor of Mando
2. GUNKUL (GUNKUL TB): Solar to Drive Top-Line Growth
3. ASAP: Weak Profitability Priced In, While Growth Still Intact
4. New Pride Rights Offer: Tempting but Tricky
5. Maruti Suzuki- Q2FY19 Results Update

1. Halla Holdings Stub Trade: Downwardly Mean Reversion in Favor of Mando

• Halla Holdings is falling nearly 5% today. Holdco said it’d give a ₩2,000 div per share. This is about 4.5% div yield at yesterday’s closing price. 5% drop today shouldn’t be much as an ex-dividend date price drop. Mando fell 5%. Mando was oversold relative to the other local auto stocks, particularly to Halla Holdings. They are still close to +1 σ on a 20D MA.
• Mando-Hella Elec has been another reason behind Holdco’s valuation divergence against Mando lately. I believe Mando-Hella is being overhyped. Mando-Hella-caused divergence should no longer be effective. I expect ‘downwardly’ mean reversion from now on. I’d go short Holdco and long Mando at this point.

2. GUNKUL (GUNKUL TB): Solar to Drive Top-Line Growth

• Good payout ratio, good growth in core profit, and strong long-term sales growth relative to its sector
• Acquisition of 49% stake in a 30MW solar farm in Malaysia with a commercial operation date (COD) set for 1Q20 to support revenue growth
• High volume of solar rooftop installation projects planned for Charoen Pokphand Foods Pub (CPF TB) and other private firms to boost GUNKUL’s construction revenue
• Attractive at 19CE* PEG ratio of 0.5 relative to ASEAN Industry at 1.6
• Risk: Lower than expected electricity demand, unfavorable weather conditions

* Consensus Estimates

3. ASAP: Weak Profitability Priced In, While Growth Still Intact

We maintain a BUY rating on ASAP with new 2019E target price of Bt3.80 (from Bt6.50), derived from 19.6xPE, which is 1.0x PEG of earnings growth in 2019-20E.

The story:

• Trimmed 2018-20F earnings forecast by 35%
• Not a falling knife, but fallen angel
• Potential disruptor in car rental industry
• Expect a 20% CAGR for earnings in 2019-20E

Risks:

• Contract termination of airport space leases
• Participating in a highly competitive industry
• Cash-flow management will be a challenge in a growth phase

4. New Pride Rights Offer: Tempting but Tricky

• New Pride Corp (900100 KS) announced a ₩36.2bil rights offer. This is a public offering, so there won’t be subscription rights to trade. Pricing will be done as 3-day VWAP on Jan 9~11 at a 30% discount.
• Supposedly, we can have ample opportunity to arb trade. This may be what the company is hoping. Simply, we wait until Jan 16~17 (subscription period) and see the spread. At this much discount, there must be a huge spread opening.
• Proration risk can be much more annoying than a usual stockholder offering. In the previous public offering event by New Pride, subscription rate went as high as 370 to 1. It should be way much lower this time. But still this is risky enough.

5. Maruti Suzuki- Q2FY19 Results Update

Maruti Suzuki’s Q2FY19 results were below our expectations. Sales grew by only 2% YoY in Q2FY19 led by a 3.7% increase in realization per unit. But the volumes declined by 1.5% YoY in the same period. We analyze the results.

In this briefing:

1. Hotel Properties Ltd– Dissolution of Wheelock-OBS Partnership Could Pave Way for Privatization Offer
2. Prabhat Dairy Ltd – Update: Revenues and Margins Continues to Increase in Line with Our Expectations
3. Swaraj Engines: Positive Outlook But Growth Is Slowing and Valuation Is Rich
4. GMO Internet (9447 JP) – Grossly or Modestly Overrated?
5. Halla Holdings Stub Trade: Downwardly Mean Reversion in Favor of Mando

1. Hotel Properties Ltd– Dissolution of Wheelock-OBS Partnership Could Pave Way for Privatization Offer

Hotel Properties (HPL SP)  (“HPL”) announced on Friday evening a significant change in its shareholdings relating to the HPL shares owned by 68 Holdings Pte Ltd. 

The restructuring of shareholding did not come as a surprise and was within expectations. 

Now, Wheelock holds only a significant minority interest of 22.53% and without a board seat in HPL. Wheelock’s influence in HPL has been reduced significantly. Without control, Wheelock’s investment in HPL is as good as any other non-strategic investment in quoted securities.

In the event that Wheelock Properties decides to sell its HPL shares, Mr Ong will be a likely buyer of the HPL shares. This will present a very good opportunity for Mr Ong to successfully privatise and delist HPL.

2. Prabhat Dairy Ltd – Update: Revenues and Margins Continues to Increase in Line with Our Expectations

Prabhat Dairy Ltd’s quarterly result is in line with our expectation. In Q2 FY19, the company registered a growth of 8.53% YoY, EBITDA margin was 9.4% improving by 119 bps since the same period last year, EBITDA grew by 24.2% YOY; the profit margin was at 2.95%  improving by 60 bps YoY, Net Income grew by 35.86% YOY.  For more details about the company, please refer to our initiation report  Prabhat Dairy Ltd – An Emerging Star in the Indian Milky Way. B2B business contributed to 70% of revenue and the remaining 30% was driven by B2C business. Value Added Products contributed to 25% of revenue in Q2FY19.

The stock is trading at 16.3x its TTM EPS, 13.8x its FY19F EPS. Margins have improved over the past quarters due to lower cost of raw materials, we expect raw materials to continue to be lower than their historic average in short term. Lower cost of raw material along with the improving contribution from B2C will lead to higher margins in medium to long term. The company also wants to increase its B2C contribution aggressively from the current 30% to 50% by 2020.

We will monitor the stock closely to firm up our views further, albeit we remain positive on the long-term prospects of the company.

3. Swaraj Engines: Positive Outlook But Growth Is Slowing and Valuation Is Rich

Swaraj Engines (SWE IN) (SEL)is primarily manufacturing diesel engines for fitment into Swaraj tractors manufactured by Mahindra & Mahindra Ltd. (M&M). The Company is also supplying engine components to SML Isuzu Ltd used in the assembly of commercial vehicle engines. SEL was started as a joint venture between Punjab Tractor Ltd (now acquired by M&M Ltd) and Kirloskar Oil Engines Ltd. M&M holds 33.3% stake in SEL and is its key client.  

We are positive about the business because:

• SEL’s growth is correlated with M&M’s tractor business growth. SEL supplies engines to the Swaraj division of M&M. M&M expects tractor growth to be around 12% YoY in FY19E. We forecast SEL’s tractor engine volumes will grow at a CAGR of 12% for FY18-21E.
• The growth of the company is dependent on the monsoon and rural sentiments. We expect the profitability to improve with normal rainfall and government initiatives towards the rural sector. We expect the revenue/ EBITDA/ PAT CAGR for FY18-21E to be 14%/ 15%/ 14% respectively.
• SEL is debt free and a cash generating company. It has a healthy and stable ROCE and ROE. SEL has increased its capacity from 75,000 engines in FY16 to 120,000 engines in FY18. We expect the capacity utilisation to reach 97% by FY20E from 90% in 1HFY19. SEL funds its capex through internal accruals. We forecast a capex of Rs 600 mn for FY19E to FY21E considering the requirement of the additional capacity, R&D and testing costs for new and higher HP engines & for upgradation of engines according to the TREM IV emission norms for >50 HP engines.

We initiate coverage on SEL with a fair value objective of Rs 1,655/- over the next 12 months. This represents a potential upside of 15% from the closing price of Rs 1,435/- (as on 26-12-2018). We arrive at the fair value by applying PE multiple of 18x to EPS of Rs 87/- to the year ending December-20E and add cash of Rs 82/- per share. While the business outlook is good, we think the upside in the share price is limited due to rich valuation.

4. GMO Internet (9447 JP) – Grossly or Modestly Overrated?

Source: Japan Analytics

THE GMO INTERNET (9449 JP) STORY – GMO internet (GMO-i) has attracted much attention in the last eighteen months from an unusual trinity of value, activist and ‘cryptocurrency’ equity investors.

• VALUE– Many traditional, but mostly foreign, value investors have seen the persistent negative difference between GMO-i’s market capitalisation and the value of the company’s holdings in its eight listed consolidated subsidiaries as an opportunity to invest in GMO-i with a considerable ‘margin of safety’.
• ACTIVIST – Since July 2017, the activist investor, Oasis, has waged a so-far-unsuccessful campaign with the aim of improving GMO’s corporate governance, removing takeover defences, addressing a ‘secularly undervalued stock price we are not able to tolerate’ (sic), and redefining the role and influence of the company’s Chairman, President, Representative Director and largest shareholder, Masatoshi Kumagai.
• ‘CRYPTO!’ – In December 2017, GMO-i committed to spending more than ¥35b or 10% of non-current assets. The aim was threefold: to set up a bitcoin ‘mining’ headquarters in Switzerland (with the ‘mining’ operations being carried out at an undisclosed location in Scandinavia), to develop proprietary state-of-the-art 7nm-node ‘mining chips’, and, in due course, to sell GMO-branded and developed ‘mining’ machines. The move was hailed in the ‘crypto’ fraternity as GMO-i became the largest non-Chinese and the first well-established Internet conglomerate to make a major investment in ‘cryptocurrency’ infrastructure.

OUTSTANDING – Following the December 2017 announcement, trading volumes spiked into ‘Overtraded’ territory – as measured by our Volume Score. Many investors saw GMO-i shares as a safer way of gaining exposure to ‘cryptocurrencies’, even as the price of bitcoin began to subside. By early June 2018, GMO-i’s shares had reached a closing price of ¥3,020: up 157% from the low of the prior year and outperforming TOPIX by 135%. Whatever the primary driver of this outstanding performance, each of our trio of investor groups no doubt felt vindicated in their approach to the stock.

CRYPTO CLOSURE – On December 25th 2018, GMO-i’s shares reached a new 52-week low of ¥1,325, a decline of 56% from the June high. Year to date, GMO-i shares have now declined by 31%, underperforming TOPIX by nine percentage points. On the same day, GMO-i announced that the company would post an extraordinary ¥35.5b loss for the fourth quarter, incurring an impairment loss of ¥11.5b in relation to the closure of the Swiss ‘mining’ headquarters and a loss of ¥24b to cover the closure of the ‘mining chip’ and ‘mining machine’ development, manufacturing and sales businesses. GMO-i will continue to ‘mine’ bitcoin from its Tokyo headquarters and intends to relocate the ‘mining’ centre from Scandinavia to (sic) ‘a region that will allow us to secure cleaner and less expensive power supply, but we have not yet decided the details’. Unlisted subsidiary GMO Coin’s ‘cryptocurrency’ exchange will also continue to operate, and the previously-announced plans to launch a ¥-based ‘stablecoin’ in 2019 will proceed. In the two trading days following this announcement, the shares have recovered 13% to ¥1,505. 

RAIDING THE LISTCO PIGGY BANK – As we shall relate, this is the second time since listing that GMO-i has written off a significant new business venture which the company had commenced only a short time before. In both cases, the company was forced to sell stakes in its listed consolidated subsidiaries to offset the resulting losses. On this occasion, the sale of shares in GMO Financial (7177 JP) (GMO-F) on September 25 2018, and GMO Payment Gateway (3769 JP) (GMO-PG) on December 17 2018, raised a combined ¥55.6b and, after the deduction of the yet-to-be-determined tax on the realised gains, should more than offset the ‘crypto’ losses. According to CFO Yasuda, any surplus from this exercise will be used to pay down debt. Also discussed below and in keeping with this GMO-i ‘MO’, in 2015, the company twice sold shares in its listed subsidiaries to ‘smooth out’ less-than-desirable operating results.

5. Halla Holdings Stub Trade: Downwardly Mean Reversion in Favor of Mando

• Halla Holdings is falling nearly 5% today. Holdco said it’d give a ₩2,000 div per share. This is about 4.5% div yield at yesterday’s closing price. 5% drop today shouldn’t be much as an ex-dividend date price drop. Mando fell 5%. Mando was oversold relative to the other local auto stocks, particularly to Halla Holdings. They are still close to +1 σ on a 20D MA.
• Mando-Hella Elec has been another reason behind Holdco’s valuation divergence against Mando lately. I believe Mando-Hella is being overhyped. Mando-Hella-caused divergence should no longer be effective. I expect ‘downwardly’ mean reversion from now on. I’d go short Holdco and long Mando at this point.

In this briefing:

1. BAUTO (BAUTO MK): New Models to Keep Strong Sales Momentum
2. Anmol Industries Pre-IPO Quick Take – No Growth, Generous Payments to Founders
3. LG Holdings Stub Trade: Current Status & Trade Approach
4. Belluna: Growing by Selling Gentility to the Expanding Older Market in Japan

1. BAUTO (BAUTO MK): New Models to Keep Strong Sales Momentum

• Improving asset turnover, relatively strong analyst recommendations, and slow asset growth relative to its sector
• New launches in FY2019-20 e.g. CX-3 facelift and 7-seat SUV CX-8 should stimulate sales going forward. Sales were up by 24% in 1QFY19 YoY
• Equity income from JV with Mazda Motor (7261 JP) should increase as production volume ramps up to meet strong ASEAN demand. Production up by 40% YoY in FY2018
• Attractive at a 19CE* 0.4 PEG ratio versus ASEAN Consumer Discretionary at a PEG of 0.9 and BAUTO is net cash
• Risks: Regulations and sluggish consumer demand, FX risk JPY and PHP

* Consensus Estimates

2. Anmol Industries Pre-IPO Quick Take – No Growth, Generous Payments to Founders

Anmol Industries (ANMOL IN) plans to raise US$100m+ in its India IPO via a sell-down of secondary shares. As per Frost & Sullivan, Anmol is the fourth largest biscuit manufacturer in India, behind the likes of Britannia Industries (BRIT IN), Parle and Sunfeast (owned by ITC Ltd (ITC IN)).

In FY17, the company undertook a restructuring wherein it merged three of its operating entities and demerged its treasury operations. Owing to this one can’t really come up with a clear picture of its past performance.

The picture on the demerger is a lot clearer though, as it led to the founders getting US$38m worth of liquid investments. Furthermore, the founder’s employment arrangements seem to be designed in such a way to let them take 12% of the PATMI each year, with no strings attached and additional 13% of FY17 PATMI as salary.

3. LG Holdings Stub Trade: Current Status & Trade Approach

• LG Holdings (003550 KS) is mainly made up of LG Group’s 4 major listed subsidiaries. The four account for 76.85% of NAV, and 90.18% of holdings assets. The MC scatter chart shows that Holdings and the four are integrated.
• I initiated a stub trade on Sep 26, LG Group Restructuring: Holdings a CLEAR ‘LONG’ & LGE ‘Short’ in Market Neutral Setup. I went long Holdings and short Elec. This trade is delivering a 8.40% yield. Short-term wise on a 20D MA, a reverse stub trade seems to make sense. Holdings is now at +1 σ.
• I’d rather hunt for mean reversion on a longer horizon. Holdings breakup is now a distant possibility. Yearend dividend factor should be another plus. As a hedge, I’d go short Chem. It has fallen relatively less. Struggle in the Chinese battery market will be getting more attention.

4. Belluna: Growing by Selling Gentility to the Expanding Older Market in Japan

While Nissen and Senshukai (8165 JP) have hit new lows in the past five years, Belluna (9997 JP) has gone from strength to strength by sticking with printed catalogues and tying these to e-commerce and retail store expansion.

The company’s strategy is also helped by the core customer demographic being women over the age of 50, one of the few population segments that is still growing.

As a result, group sales have risen by 28.8% in five years and operating profit has almost doubled from ¥7.8 billion to ¥13 billion.

The acquisition of Sagami, a kimono retailer that suffered from lack of attention under Uny’s management, could also result in a boost to profits in the next year.

In this briefing:

1. GMO Internet (9447 JP) – Grossly or Modestly Overrated?
2. Halla Holdings Stub Trade: Downwardly Mean Reversion in Favor of Mando
3. GUNKUL (GUNKUL TB): Solar to Drive Top-Line Growth
4. ASAP: Weak Profitability Priced In, While Growth Still Intact
5. New Pride Rights Offer: Tempting but Tricky

1. GMO Internet (9447 JP) – Grossly or Modestly Overrated?

Source: Japan Analytics

THE GMO INTERNET (9449 JP) STORY – GMO internet (GMO-i) has attracted much attention in the last eighteen months from an unusual trinity of value, activist and ‘cryptocurrency’ equity investors.

• VALUE– Many traditional, but mostly foreign, value investors have seen the persistent negative difference between GMO-i’s market capitalisation and the value of the company’s holdings in its eight listed consolidated subsidiaries as an opportunity to invest in GMO-i with a considerable ‘margin of safety’.
• ACTIVIST – Since July 2017, the activist investor, Oasis, has waged a so-far-unsuccessful campaign with the aim of improving GMO’s corporate governance, removing takeover defences, addressing a ‘secularly undervalued stock price we are not able to tolerate’ (sic), and redefining the role and influence of the company’s Chairman, President, Representative Director and largest shareholder, Masatoshi Kumagai.
• ‘CRYPTO!’ – In December 2017, GMO-i committed to spending more than ¥35b or 10% of non-current assets. The aim was threefold: to set up a bitcoin ‘mining’ headquarters in Switzerland (with the ‘mining’ operations being carried out at an undisclosed location in Scandinavia), to develop proprietary state-of-the-art 7nm-node ‘mining chips’, and, in due course, to sell GMO-branded and developed ‘mining’ machines. The move was hailed in the ‘crypto’ fraternity as GMO-i became the largest non-Chinese and the first well-established Internet conglomerate to make a major investment in ‘cryptocurrency’ infrastructure.

OUTSTANDING – Following the December 2017 announcement, trading volumes spiked into ‘Overtraded’ territory – as measured by our Volume Score. Many investors saw GMO-i shares as a safer way of gaining exposure to ‘cryptocurrencies’, even as the price of bitcoin began to subside. By early June 2018, GMO-i’s shares had reached a closing price of ¥3,020: up 157% from the low of the prior year and outperforming TOPIX by 135%. Whatever the primary driver of this outstanding performance, each of our trio of investor groups no doubt felt vindicated in their approach to the stock.

CRYPTO CLOSURE – On December 25th 2018, GMO-i’s shares reached a new 52-week low of ¥1,325, a decline of 56% from the June high. Year to date, GMO-i shares have now declined by 31%, underperforming TOPIX by nine percentage points. On the same day, GMO-i announced that the company would post an extraordinary ¥35.5b loss for the fourth quarter, incurring an impairment loss of ¥11.5b in relation to the closure of the Swiss ‘mining’ headquarters and a loss of ¥24b to cover the closure of the ‘mining chip’ and ‘mining machine’ development, manufacturing and sales businesses. GMO-i will continue to ‘mine’ bitcoin from its Tokyo headquarters and intends to relocate the ‘mining’ centre from Scandinavia to (sic) ‘a region that will allow us to secure cleaner and less expensive power supply, but we have not yet decided the details’. Unlisted subsidiary GMO Coin’s ‘cryptocurrency’ exchange will also continue to operate, and the previously-announced plans to launch a ¥-based ‘stablecoin’ in 2019 will proceed. In the two trading days following this announcement, the shares have recovered 13% to ¥1,505. 

RAIDING THE LISTCO PIGGY BANK – As we shall relate, this is the second time since listing that GMO-i has written off a significant new business venture which the company had commenced only a short time before. In both cases, the company was forced to sell stakes in its listed consolidated subsidiaries to offset the resulting losses. On this occasion, the sale of shares in GMO Financial (7177 JP) (GMO-F) on September 25 2018, and GMO Payment Gateway (3769 JP) (GMO-PG) on December 17 2018, raised a combined ¥55.6b and, after the deduction of the yet-to-be-determined tax on the realised gains, should more than offset the ‘crypto’ losses. According to CFO Yasuda, any surplus from this exercise will be used to pay down debt. Also discussed below and in keeping with this GMO-i ‘MO’, in 2015, the company twice sold shares in its listed subsidiaries to ‘smooth out’ less-than-desirable operating results.

2. Halla Holdings Stub Trade: Downwardly Mean Reversion in Favor of Mando

• Halla Holdings is falling nearly 5% today. Holdco said it’d give a ₩2,000 div per share. This is about 4.5% div yield at yesterday’s closing price. 5% drop today shouldn’t be much as an ex-dividend date price drop. Mando fell 5%. Mando was oversold relative to the other local auto stocks, particularly to Halla Holdings. They are still close to +1 σ on a 20D MA.
• Mando-Hella Elec has been another reason behind Holdco’s valuation divergence against Mando lately. I believe Mando-Hella is being overhyped. Mando-Hella-caused divergence should no longer be effective. I expect ‘downwardly’ mean reversion from now on. I’d go short Holdco and long Mando at this point.

3. GUNKUL (GUNKUL TB): Solar to Drive Top-Line Growth

• Good payout ratio, good growth in core profit, and strong long-term sales growth relative to its sector
• Acquisition of 49% stake in a 30MW solar farm in Malaysia with a commercial operation date (COD) set for 1Q20 to support revenue growth
• High volume of solar rooftop installation projects planned for Charoen Pokphand Foods Pub (CPF TB) and other private firms to boost GUNKUL’s construction revenue
• Attractive at 19CE* PEG ratio of 0.5 relative to ASEAN Industry at 1.6
• Risk: Lower than expected electricity demand, unfavorable weather conditions

* Consensus Estimates

4. ASAP: Weak Profitability Priced In, While Growth Still Intact

We maintain a BUY rating on ASAP with new 2019E target price of Bt3.80 (from Bt6.50), derived from 19.6xPE, which is 1.0x PEG of earnings growth in 2019-20E.

The story:

• Trimmed 2018-20F earnings forecast by 35%
• Not a falling knife, but fallen angel
• Potential disruptor in car rental industry
• Expect a 20% CAGR for earnings in 2019-20E

Risks:

• Contract termination of airport space leases
• Participating in a highly competitive industry
• Cash-flow management will be a challenge in a growth phase

5. New Pride Rights Offer: Tempting but Tricky

• New Pride Corp (900100 KS) announced a ₩36.2bil rights offer. This is a public offering, so there won’t be subscription rights to trade. Pricing will be done as 3-day VWAP on Jan 9~11 at a 30% discount.
• Supposedly, we can have ample opportunity to arb trade. This may be what the company is hoping. Simply, we wait until Jan 16~17 (subscription period) and see the spread. At this much discount, there must be a huge spread opening.
• Proration risk can be much more annoying than a usual stockholder offering. In the previous public offering event by New Pride, subscription rate went as high as 370 to 1. It should be way much lower this time. But still this is risky enough.