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Growth Ideas

Brief Growth Ideas: AKR Corporindo (AKRA IJ) – Time to Fill-Up the Tank? and more

By | Daily Briefs, Growth Ideas

In this briefing:

  1. AKR Corporindo (AKRA IJ) – Time to Fill-Up the Tank?
  2. E-Star Commercial Management Pre-IPO – Still Largely Reliant on Galaxy, Poor Disclosure Doesn’t Help
  3. Health & Happiness (1112): No Soy Please and Still Cheap

1. AKR Corporindo (AKRA IJ) – Time to Fill-Up the Tank?

Screenshot%202020 02 27%20at%203.13.50%20pm

A meeting with AKR Corporindo (AKRA IJ) management in Jakarta last week, confirmed that despite last year’s issues over subsidised fuel pricing, the company is set up for strong growth going forward driven by a number of factors. These include strong growth in non-subsidized fuel distribution, and a marked pick-up in land sales at its JIIPE Surabaya Industrial estate, as well as longer-term a number of JV projects with BP PLC (BP/ LN) including retail petroleum distribution and aviation fuel distribution to begin with, and it is exploring the possibility of LNG storage and distribution. AKR Corporindo (AKRA IJ) should be a defensive stock in this environment and the recent correction is a buying opportunity.

The company ceased to distribute subsidized diesel in May 2019 due to a change in the pricing formula which made it uneconomic to do so. The change in pricing was to be applied retrospectively, which the company is challenging. The company is making a provision for the charge for this in 2019, on the advice of its auditors. AKR Corporindo (AKRA IJ) will resume subsidized fuel distribution this year as the new Minister reversed the pricing change, making it more economical to cover costs and assure a decent margin. 

AKR Corporindo (AKRA IJ) has been growing sales of non-subsidized fuel, which generates twice the margin as that of subsidized fuel, which is going some way to offset the decline in Subsidized fuel. Despite the potential charge, management has confirmed that FY19 Net profit will not be lower than the recurrent profit in 2018 of IDR712bn, which should be taken positively.

The company is moving forward with Freeport Mcmoran (FCX US) ‘s new smelter at the company’s JIIPE industrial estate (100 ha plot), which will bring with it leasing revenues, revenues from utilities, and demand for land plots from supporting industries. AKR Corporindo (AKRA IJ) secured a deal with the local government to supply power directly to its customers on its estate and will build a 515MW power plant there. The pipeline in demand at JIIPE could see a further boost with a Taiwanese steelmaker conducting a feasibility study for a 200 ha plot in 2020. 

AKR Corporindo (AKRA IJ) is trading at close to a 3-year low and its valuations are also approaching very attractive levels, with the stock trading on 11.5x FY20E PER plus it pays a good dividend, with an FY20E yield of 3.5%. 

2. E-Star Commercial Management Pre-IPO – Still Largely Reliant on Galaxy, Poor Disclosure Doesn’t Help

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E-Star Commercial Management (ESCM HK) is looking to raise US$150m in its upcoming Hong Kong IPO.

ESCM is a commercial operational service provider focused on the Greater Bay Area (mostly in Shenzhen) although it does have a national presence. The company is ranked first and third in terms of the number of shopping centers and GFA in operation in Shenzhen, respectively.

The company has good long-term commercial properties under management (average of about 15 years). About half of the contracted GFA that has yet to commence operation and fully contribute to revenue. It will start between 2020 to 2023 which will drive revenue growth

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

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

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

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

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Brief Growth Ideas: AKR Corporindo (AKRA IJ) – Time to Fill-Up the Tank? and more

By | Daily Briefs, Growth Ideas

In this briefing:

  1. AKR Corporindo (AKRA IJ) – Time to Fill-Up the Tank?
  2. E-Star Commercial Management Pre-IPO – Still Largely Reliant on Galaxy, Poor Disclosure Doesn’t Help
  3. Health & Happiness (1112): No Soy Please and Still Cheap
  4. NetEase Earnings: Is NetEase Monetizing Mobile Gaming Traffic from the Virus Effectively?

1. AKR Corporindo (AKRA IJ) – Time to Fill-Up the Tank?

Screenshot%202020 02 27%20at%203.13.50%20pm

A meeting with AKR Corporindo (AKRA IJ) management in Jakarta last week, confirmed that despite last year’s issues over subsidised fuel pricing, the company is set up for strong growth going forward driven by a number of factors. These include strong growth in non-subsidized fuel distribution, and a marked pick-up in land sales at its JIIPE Surabaya Industrial estate, as well as longer-term a number of JV projects with BP PLC (BP/ LN) including retail petroleum distribution and aviation fuel distribution to begin with, and it is exploring the possibility of LNG storage and distribution. AKR Corporindo (AKRA IJ) should be a defensive stock in this environment and the recent correction is a buying opportunity.

The company ceased to distribute subsidized diesel in May 2019 due to a change in the pricing formula which made it uneconomic to do so. The change in pricing was to be applied retrospectively, which the company is challenging. The company is making a provision for the charge for this in 2019, on the advice of its auditors. AKR Corporindo (AKRA IJ) will resume subsidized fuel distribution this year as the new Minister reversed the pricing change, making it more economical to cover costs and assure a decent margin. 

AKR Corporindo (AKRA IJ) has been growing sales of non-subsidized fuel, which generates twice the margin as that of subsidized fuel, which is going some way to offset the decline in Subsidized fuel. Despite the potential charge, management has confirmed that FY19 Net profit will not be lower than the recurrent profit in 2018 of IDR712bn, which should be taken positively.

The company is moving forward with Freeport Mcmoran (FCX US) ‘s new smelter at the company’s JIIPE industrial estate (100 ha plot), which will bring with it leasing revenues, revenues from utilities, and demand for land plots from supporting industries. AKR Corporindo (AKRA IJ) secured a deal with the local government to supply power directly to its customers on its estate and will build a 515MW power plant there. The pipeline in demand at JIIPE could see a further boost with a Taiwanese steelmaker conducting a feasibility study for a 200 ha plot in 2020. 

AKR Corporindo (AKRA IJ) is trading at close to a 3-year low and its valuations are also approaching very attractive levels, with the stock trading on 11.5x FY20E PER plus it pays a good dividend, with an FY20E yield of 3.5%. 

2. E-Star Commercial Management Pre-IPO – Still Largely Reliant on Galaxy, Poor Disclosure Doesn’t Help

Image?1582850753

E-Star Commercial Management (ESCM HK) is looking to raise US$150m in its upcoming Hong Kong IPO.

ESCM is a commercial operational service provider focused on the Greater Bay Area (mostly in Shenzhen) although it does have a national presence. The company is ranked first and third in terms of the number of shopping centers and GFA in operation in Shenzhen, respectively.

The company has good long-term commercial properties under management (average of about 15 years). About half of the contracted GFA that has yet to commence operation and fully contribute to revenue. It will start between 2020 to 2023 which will drive revenue growth

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

Image 52456268121582847562786

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

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

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

4. NetEase Earnings: Is NetEase Monetizing Mobile Gaming Traffic from the Virus Effectively?

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NetEase misses FY19 revenue consensus estimates. Revenue was 7.1% lower than estimates at RMB59.2 billion while adjusted earnings beat by 6.5% at RMB120.48.

NetEase games had higher traffic during 1Q20 with users spending more time gaming. Users were also spending 40.7% more time gaming daily for a total of 159 minutes a day.

NetEase has a strong pipeline of games for 2020. Strong international titles such as Diablo Immortal, Harry Potter: Magic Awakened, Pokemon Quest could continue to drive traffic and revenue as well through in-game monetization for the period of the virus.

NetEase games could be effectively monetizing the increased traffic from the virus. According to Sensor Tower, NetEase’s mobile game Fantasy Westward Journey was the 6th highest-grossing iOS game yesterday and made US$27 million for the month of January. Along with two other mobile games within the Top 20 iOS highest-grossing list. With Youdao being one of NetEase growth drivers on top of gaming, the Company could be an appealing play during virus situation.

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Brief Growth Ideas: Melco Resorts: This Asian Gaming Leader Will Ignite Fast Post Virus Recovery and more

By | Daily Briefs, Growth Ideas

In this briefing:

  1. Melco Resorts: This Asian Gaming Leader Will Ignite Fast Post Virus Recovery
  2. AEM Holdings (AEM SP): Stellar FY19 Results & On Its Way to Be 1 Billion SGD Market Cap

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

Macau chart

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

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

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

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

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

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

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

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

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

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

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

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

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

Consider Melco Resorts & Entertainment Inc.

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

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

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

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

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

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

 A quick glance at Melco (USD)

 Price at writing: $19.53

52wk range: $18.68 —$26.97

5 year high: Sept 2017: $31.21

Market cap: $8.982B

Beta: (5 yr monthly) 1.93

P/E: (ttm): 25.23

EPS: $0.77

Forward dividend and yield: $0.66 (3.38%)

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

 Pre-virus performance this month:

 Stock was at $22. 58

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

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

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

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

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

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

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

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

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

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

 MLCO cash and coronavirus burn rate

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

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

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

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

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

The takeaway

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

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

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

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

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

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

 

Everyone’s selling? Buy.

 

 

 

 

 

 

2. AEM Holdings (AEM SP): Stellar FY19 Results & On Its Way to Be 1 Billion SGD Market Cap

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AEM Holdings (AEM SP) posted stellar FY19 results and upped its 2020 guidance. Long-term the company’s TAM continues to rise and diversification away from core-client Intel Corp (INTC US) will gather pace in FY20-21.

Management must be bullish on its FY20-FY21 prospects if we believe Charlie Munger’s “show me the incentives and I will show you the outcome” motto. On 07/10/19 the board granted a Mega Grant of Performance Shares to both the Chairman and CEO to complete its Transformational Roadmap (aka diversify away from Intel). The options and share grants were priced at 1.14 SGD.

While investors in ASEAN SMIDcaps often have to worry about the alignment of the promoters and the interests of minorities we believe they are aligned at AEM. Free float is over 83% which also makes AEM a prime takeover candidate, but not before maximum value has been extracted by the current management team.

Net cash is over 107M SGD (18% of market cap) and should continue to grow as its record order book for FY2020 gets delivered. So far it sees no impact from Covid-19.

Our revised Fair Value is 3.7 SGD (previously 2.5 SGD) which equates to a market cap of 1 billion SGD but an EV of just 898M SGD. At this kind of valuation the stock would still only be trading at 14.8x 2020 EPS, a level easily justified by its fast growth, high margins and high ROE. Looking at its peers such as Cohu Inc (COHU US), Teradyne Inc (TER US), Chroma Ate Inc (2360 TT) or Pentamaster Corp (PENT MK) we note that they trade at an average P/E multiple of 23.9x, 13.5x EV/EBITDA and 3.4x P/B with a 1.8% dividend yield. 

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Brief Growth Ideas: Potential Trade Ideas – Asia-Pacific Companies that May Access Capital Markets and more

By | Daily Briefs, Growth Ideas

In this briefing:

  1. Potential Trade Ideas – Asia-Pacific Companies that May Access Capital Markets
  2. Activist Target Katakura (3001 JP) Announces BIG Buyback
  3. The RBI Policy Bazooka: A Comprehensive Policy Move to Fight the COVID-19 Pandemic
  4. BGC: Stable Yield Play
  5. M3 Inc: M&A Deals to Support Global Expansion While Medical Platform Offers Solid LT Growth

1. Potential Trade Ideas – Asia-Pacific Companies that May Access Capital Markets

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As global markets rebound and businesses start to feel impact of the virus outbreak, there will likely be companies looking to access capital markets to shore up their balance sheet. Singapore Airlines (SIA SP)‘s rights issue was a case in point.

In this insight, we will explore what are some Asia-Pacific companies that may breach their debt covenants and will likely look to raise capital in the near-term.

2. Activist Target Katakura (3001 JP) Announces BIG Buyback

Screenshot%202020 03 27%20at%2010.14.41%20pm

Friday 27 March, after the close, activist-targeted name Katakura Industries (3001 JP)announced, with its yuho and annual meeting, a buyback of up to 2.5mm shares (7.1% of shares out) for up to JPY 2 billion. 

The buyback will be conducted between 1 April 2020 and 31 March 2021.

There is a minor detail unspecified in the announcement (which is often specified) and the combination of the shareholder structure and trading patterns tells you what you need to know. 

Details below.

3. The RBI Policy Bazooka: A Comprehensive Policy Move to Fight the COVID-19 Pandemic

After the much needed nation-wide lock-down India announced this Tuesday (Mar 24), and subsequent fiscal stimulus of INR 1,70,000cr for the under-privileged by the Government, today RBI announced a comprehensive monetary and regulatory boost for the economy to help strive through these unprecedented times under the COVID-19 pandemic.

Key Policy Announcements:

  • Policy rate (Repo Rate) cut by 75bp to 4.4%
  • Reverse Repo Rate cut by 90bp to 4.0% (note that this was cut more than policy rate to discourage excess liquidity being parked with RBI)
  • Cash Reserve Ratio (CRR) cut by 100bp to 3.0%
  • Mandatory investments of funds raised from RBI’s LTRO (Long-term Repo Operation) auction into corporate bonds to boost liquidity in the bonds market where yields have spiked on the back of panic selling and resultant illiquidity. To allay any mark-to-market concerns, these bond investments will be allowed to be classified as held-to-maturity (HTM).
  • Regulatory measures that include three month moratorium on term loans and three month interest deferral on working capital (WC) loans

Overall, the policy package announced by RBI was quite comprehensive and will be positive for the broader Indian economy, thereby helping Indian financials cope through this unprecedented COVID-19 pandemic.

4. BGC: Stable Yield Play

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We initiate coverage of BG Container Glass PCL (BGC TB) with a BUY rating, based on a target price of Bt11.0, which is derived from 12.3xPE’20E, close to the average for the Asia ex-Japan Materials Sector.

The story:

  • Secured earnings with attractive dividend yield
  • Gross margin is in an expansion phase
  • Potential growth from M&As

Risks:

  • Raw material price fluctuation
  • Reliance on a few major customers
  • New innovative liquid container products

Background: BGC, a subsidiary of Bangkok Glass Public Company Limited, operates in the glass packaging business. The firm was established in 1974 and started production in Pathumthani in 1980. BGC is one of the largest glass container manufacturers in the ASEAN region with five glass packaging plants in Ayutthaya, Pathumthani, Khon Kaen, Prachinburi and Ratchaburi. Its combined maximum production capacity is 3,495 tons per day.

5. M3 Inc: M&A Deals to Support Global Expansion While Medical Platform Offers Solid LT Growth

Image 128160654151585249401232

  • m3 Inc. (TSE: 2413) provides various medical-related services to physicians and healthcare professionals in Japan and overseas. The company operates m3.com, its key platform alongside several other websites and platforms aimed at providing different services such as information provision, marketing services, medical health records and career solutions.
  • The company has grown its top line from JPY51bn in FY03/2015 to JPY113bn in FY03/2019 while its operating profits have more than doubled during this period
  • M3’s key segment, Medical Platform offers primarily marketing related services to its member physicians and we expect the segment to remain a key pillar of growth over the next couple of years for the company.
  • At the same time, the Overseas business has grown at the highest CAGR over the last five years and the company has grown its overseas business mostly through partnerships and acquisitions which have helped the company expand into new business verticals and markets.
  • The company has a strong balance sheet with zero debt which we believe will continue to support further M&A activity for the company.

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Brief Growth Ideas: Activist Target Katakura (3001 JP) Announces BIG Buyback and more

By | Daily Briefs, Growth Ideas

In this briefing:

  1. Activist Target Katakura (3001 JP) Announces BIG Buyback
  2. The RBI Policy Bazooka: A Comprehensive Policy Move to Fight the COVID-19 Pandemic
  3. BGC: Stable Yield Play
  4. M3 Inc: M&A Deals to Support Global Expansion While Medical Platform Offers Solid LT Growth
  5. Tencent (700 HK): Advertisers Get Significant Traffic from WeChat Mini-Program

1. Activist Target Katakura (3001 JP) Announces BIG Buyback

Screenshot%202020 03 27%20at%2010.14.41%20pm

Friday 27 March, after the close, activist-targeted name Katakura Industries (3001 JP)announced, with its yuho and annual meeting, a buyback of up to 2.5mm shares (7.1% of shares out) for up to JPY 2 billion. 

The buyback will be conducted between 1 April 2020 and 31 March 2021.

There is a minor detail unspecified in the announcement (which is often specified) and the combination of the shareholder structure and trading patterns tells you what you need to know. 

Details below.

2. The RBI Policy Bazooka: A Comprehensive Policy Move to Fight the COVID-19 Pandemic

After the much needed nation-wide lock-down India announced this Tuesday (Mar 24), and subsequent fiscal stimulus of INR 1,70,000cr for the under-privileged by the Government, today RBI announced a comprehensive monetary and regulatory boost for the economy to help strive through these unprecedented times under the COVID-19 pandemic.

Key Policy Announcements:

  • Policy rate (Repo Rate) cut by 75bp to 4.4%
  • Reverse Repo Rate cut by 90bp to 4.0% (note that this was cut more than policy rate to discourage excess liquidity being parked with RBI)
  • Cash Reserve Ratio (CRR) cut by 100bp to 3.0%
  • Mandatory investments of funds raised from RBI’s LTRO (Long-term Repo Operation) auction into corporate bonds to boost liquidity in the bonds market where yields have spiked on the back of panic selling and resultant illiquidity. To allay any mark-to-market concerns, these bond investments will be allowed to be classified as held-to-maturity (HTM).
  • Regulatory measures that include three month moratorium on term loans and three month interest deferral on working capital (WC) loans

Overall, the policy package announced by RBI was quite comprehensive and will be positive for the broader Indian economy, thereby helping Indian financials cope through this unprecedented COVID-19 pandemic.

3. BGC: Stable Yield Play

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We initiate coverage of BG Container Glass PCL (BGC TB) with a BUY rating, based on a target price of Bt11.0, which is derived from 12.3xPE’20E, close to the average for the Asia ex-Japan Materials Sector.

The story:

  • Secured earnings with attractive dividend yield
  • Gross margin is in an expansion phase
  • Potential growth from M&As

Risks:

  • Raw material price fluctuation
  • Reliance on a few major customers
  • New innovative liquid container products

Background: BGC, a subsidiary of Bangkok Glass Public Company Limited, operates in the glass packaging business. The firm was established in 1974 and started production in Pathumthani in 1980. BGC is one of the largest glass container manufacturers in the ASEAN region with five glass packaging plants in Ayutthaya, Pathumthani, Khon Kaen, Prachinburi and Ratchaburi. Its combined maximum production capacity is 3,495 tons per day.

4. M3 Inc: M&A Deals to Support Global Expansion While Medical Platform Offers Solid LT Growth

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  • m3 Inc. (TSE: 2413) provides various medical-related services to physicians and healthcare professionals in Japan and overseas. The company operates m3.com, its key platform alongside several other websites and platforms aimed at providing different services such as information provision, marketing services, medical health records and career solutions.
  • The company has grown its top line from JPY51bn in FY03/2015 to JPY113bn in FY03/2019 while its operating profits have more than doubled during this period
  • M3’s key segment, Medical Platform offers primarily marketing related services to its member physicians and we expect the segment to remain a key pillar of growth over the next couple of years for the company.
  • At the same time, the Overseas business has grown at the highest CAGR over the last five years and the company has grown its overseas business mostly through partnerships and acquisitions which have helped the company expand into new business verticals and markets.
  • The company has a strong balance sheet with zero debt which we believe will continue to support further M&A activity for the company.

5. Tencent (700 HK): Advertisers Get Significant Traffic from WeChat Mini-Program

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  • YH Life had 8.9 million monthly active users (MAU) on the WeChat mini-program, about 3.8 times its independent app.
  • Miss Fresh’s mini-program MAU was 3.4 times its own app.
  • Suning is the largest physical store chain for household appliance in China. The WeChat mini-program MAU is close to its own app.

Our previous coverage on Tencent:

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Brief Growth Ideas: AEM Holdings (AEM SP): Stellar FY19 Results & On Its Way to Be 1 Billion SGD Market Cap and more

By | Daily Briefs, Growth Ideas

In this briefing:

  1. AEM Holdings (AEM SP): Stellar FY19 Results & On Its Way to Be 1 Billion SGD Market Cap
  2. China Bright Culture (煜盛文化) IPO: A Hard Sell

1. AEM Holdings (AEM SP): Stellar FY19 Results & On Its Way to Be 1 Billion SGD Market Cap

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AEM Holdings (AEM SP) posted stellar FY19 results and upped its 2020 guidance. Long-term the company’s TAM continues to rise and diversification away from core-client Intel Corp (INTC US) will gather pace in FY20-21.

Management must be bullish on its FY20-FY21 prospects if we believe Charlie Munger’s “show me the incentives and I will show you the outcome” motto. On 07/10/19 the board granted a Mega Grant of Performance Shares to both the Chairman and CEO to complete its Transformational Roadmap (aka diversify away from Intel). The options and share grants were priced at 1.14 SGD.

While investors in ASEAN SMIDcaps often have to worry about the alignment of the promoters and the interests of minorities we believe they are aligned at AEM. Free float is over 83% which also makes AEM a prime takeover candidate, but not before maximum value has been extracted by the current management team.

Net cash is over 107M SGD (18% of market cap) and should continue to grow as its record order book for FY2020 gets delivered. So far it sees no impact from Covid-19.

Our revised Fair Value is 3.7 SGD (previously 2.5 SGD) which equates to a market cap of 1 billion SGD but an EV of just 898M SGD. At this kind of valuation the stock would still only be trading at 14.8x 2020 EPS, a level easily justified by its fast growth, high margins and high ROE. Looking at its peers such as Cohu Inc (COHU US), Teradyne Inc (TER US), Chroma Ate Inc (2360 TT) or Pentamaster Corp (PENT MK) we note that they trade at an average P/E multiple of 23.9x, 13.5x EV/EBITDA and 3.4x P/B with a 1.8% dividend yield. 

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

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

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

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

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

Our previous coverage on China Bright Culture

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Brief Growth Ideas: China Bright Culture (煜盛文化) IPO: A Hard Sell and more

By | Daily Briefs, Growth Ideas

In this briefing:

  1. China Bright Culture (煜盛文化) IPO: A Hard Sell
  2. NetEase (NTES): Again, Our 4Q2019 Estimate Closer to Result Than Consensus

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

Image?1582790563

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

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

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

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

Our previous coverage on China Bright Culture

2. NetEase (NTES): Again, Our 4Q2019 Estimate Closer to Result Than Consensus

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  • The game revenue growth slowed down in 4Q2019. However, we believe it will jump up in 1Q2020 due to the boring life caused by the epidemic.
  • Margin was stable in 4Q2019 due to a one-time increase of marketing expenses. We believe the operating margin will improve significantly in 1Q2020.
  • Based on peer companies’ P/E ratios, we believe the stock will rise 13% in one year.

Our previous coverage on NetEase:

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Brief Growth Ideas: China Bright Culture (煜盛文化) IPO: A Hard Sell and more

By | Daily Briefs, Growth Ideas

In this briefing:

  1. China Bright Culture (煜盛文化) IPO: A Hard Sell
  2. NetEase (NTES): Again, Our 4Q2019 Estimate Closer to Result Than Consensus
  3. Mitra Adiperkasa (MAPI IJ) – Oversold Indonesian King of Retail – On the Ground in J-Town

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

Image?1582790563

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

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

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

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

Our previous coverage on China Bright Culture

2. NetEase (NTES): Again, Our 4Q2019 Estimate Closer to Result Than Consensus

Image 78034613951582785368188

  • The game revenue growth slowed down in 4Q2019. However, we believe it will jump up in 1Q2020 due to the boring life caused by the epidemic.
  • Margin was stable in 4Q2019 due to a one-time increase of marketing expenses. We believe the operating margin will improve significantly in 1Q2020.
  • Based on peer companies’ P/E ratios, we believe the stock will rise 13% in one year.

Our previous coverage on NetEase:

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

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

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

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

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

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

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

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Brief Growth Ideas: PTTGC: Virus Outbreak to Dampen Petrochemicals Demand in 1H20 and more

By | Daily Briefs, Growth Ideas

In this briefing:

  1. PTTGC: Virus Outbreak to Dampen Petrochemicals Demand in 1H20

1. PTTGC: Virus Outbreak to Dampen Petrochemicals Demand in 1H20

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Analyst meeting yesterday came out with a neutral tone for its 2020 performance. 1H20 outlook seems bearish, pressured by virus outbreak. Meanwhile, we view commodity market to recover in 2H20.

• Management expects overall petrochemical products to remain soft in 1H20, eroded by coronavirus concern. However, it was expected to recover in the 2H20.
• We expect the company’s revenue to recover, starting in 1Q20 after major planed turnaround in 2019.
• The olefin projects (PO/polyols) with a capacity of 1.1 MTA (+10%) are on track and expected to COD by 4Q20E.
• In short term, we expect commodity market to be highly volatile from continuation in global infection and uncertainty in OPEC cut run decision.

We maintain our ‘HOLD’ recommendation but cut our target price to Bt50.0 (from Bt59), to reflect weak outlook in petrochemical market. Our target price based on 10.2xPE’20E, which is equal -0.5SD to its 5 year average.

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Brief Growth Ideas: PTTGC: Virus Outbreak to Dampen Petrochemicals Demand in 1H20 and more

By | Daily Briefs, Growth Ideas

In this briefing:

  1. PTTGC: Virus Outbreak to Dampen Petrochemicals Demand in 1H20
  2. Hygeia Healthcare (海吉亚) Pre-IPO: The Making of Jinxin in the Oncology Segment

1. PTTGC: Virus Outbreak to Dampen Petrochemicals Demand in 1H20

Picture1

Analyst meeting yesterday came out with a neutral tone for its 2020 performance. 1H20 outlook seems bearish, pressured by virus outbreak. Meanwhile, we view commodity market to recover in 2H20.

• Management expects overall petrochemical products to remain soft in 1H20, eroded by coronavirus concern. However, it was expected to recover in the 2H20.
• We expect the company’s revenue to recover, starting in 1Q20 after major planed turnaround in 2019.
• The olefin projects (PO/polyols) with a capacity of 1.1 MTA (+10%) are on track and expected to COD by 4Q20E.
• In short term, we expect commodity market to be highly volatile from continuation in global infection and uncertainty in OPEC cut run decision.

We maintain our ‘HOLD’ recommendation but cut our target price to Bt50.0 (from Bt59), to reflect weak outlook in petrochemical market. Our target price based on 10.2xPE’20E, which is equal -0.5SD to its 5 year average.

2. Hygeia Healthcare (海吉亚) Pre-IPO: The Making of Jinxin in the Oncology Segment

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Hygeia Healthcare Group, a leading oncology specialized healthcare group, is planning to raise to USD 500 million via a Hong Kong listing. 

The company operates its own hospitals, provides third-party radiotherapy service and manages partner hospitals. The company’s recent growth has been driven by ramping up of its self-owned hospitals that were opened during the track record period. Its track record of ramping up newly established hospitals has been amazing. 

The company also has an ambitious expansion plan for the next three years, including the expansion of existing facilities and establishing greenfield hospitals. We estimate that the expansion of 3 existing hospitals will add 51% GFA and 95-123% bed capacity. Greenfield hospitals will increase GFA and bed capacity by 126% and 214-280% respectively.

The company is backed by reputable healthcare investors. Our preliminary valuation of USD 1.1 billion implies that there is an upside from its pre-IPO valuation. 


If you have not read our 2019 IPO Analytic Series, please have a look:

Aequitas Research 2019 IPO Analytics

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