Growth Ideas

In this briefing:

1. Metropolis IPO: Priced to Leave Limited Upside
2. Japan Mobile: MVNO Data for Q3 Includes Slowest Growth Since 2014 but that Makes Sense for Rakuten
3. India Bulls Housing Finance- Can It Become Another HDFC? Signs Are Encouraging!!
4. SBS (2384) A Great Third Party Logistics Company Seeing Good Organic Growth as Well as Via M&A.
5. Drill Results Confirm High-Grade Mineralisation (Flash Note)

1. Metropolis IPO: Priced to Leave Limited Upside

We like Metropolis Health Services Limited (MHL IN) ’ track record of growing revenue/patient despite competition, premium pricing and strong margin defence. Margins have however, come under some pressure in 9MFY19. Its patient growth lags that of Dr Lal Pathlabs (DLPL IN)’s despite rapid network expansion. It is also at the highest risk from any government instituted pricing cap on pathology tests owing to (1) high share of institutional business and (2) premium pricing. Also, 51.6% of promoter stake will be pledged with lenders after the IPO. At the upper end of its price band, Metropolis is valued at 20.9x FY20F EV/EBITDA and 33.3x FY20F PE- at ~15% discount to Dr Lal. We see EPS compounding at 12% Cagr over FY18-21, lower than the 16% EPS Cagr of Dr Lal’s. We feel valuation leaves limited upside.

2. Japan Mobile: MVNO Data for Q3 Includes Slowest Growth Since 2014 but that Makes Sense for Rakuten

The Ministry of Industry Affairs and Communications (MIC, the regulator) released Q3 (Dec 2018) data for industry mobile virtual network operator (MVNO) subs today (29 March) characterized by continued declines in growth YoY (+15% in Q3 v 18% in Q2) and the lowest absolute net adds (+480K) since Q2 2014.  Growth for the largest consumer-focused MVNO Rakuten Inc (4755 JP) also appears to be the lowest since data has become available but that is not necessarily a sign of strength for the existing network operators as it makes sense for Rakuten to slow MVNO growth before its October real network launch.  

3. India Bulls Housing Finance- Can It Become Another HDFC? Signs Are Encouraging!!

This is the concluding part of our Housing Finance Companies (HFC) series where we elaborated the outlook of the mortgage industry in India along with initiating coverage on the best HFCs who we believe may continue to be the key beneficiaries of a long term secular growth in the Indian mortgage industry. (please click here, here and here ).

In this report we cover  Indiabulls Housing Finance (IHFL IN) , the third largest HFC in the country. The company is among the fastest growing HFCs whose loan portfolio has grown at a CAGR of 29% in the last 5 years ending FY18. And in spite of robust growth, the asset quality has remained steady.

Due to a strong track record of high capital adequacy, high liquidity coverage, high asset quality, improving operational efficiency and high return ratios, the company was recently awarded AAA rating by ICRA and CRISIL, the top 2 credit rating agencies in India.

From the parameters that are analyzed in detail in this report, we believe that the company in the long term has the potential to be in the league of HDFC Ltd., a benchmark in terms of corporate governance, robust asset management and wealth creation for shareholders.

4. SBS (2384) A Great Third Party Logistics Company Seeing Good Organic Growth as Well as Via M&A.

It is seeing decent organic growth, led by a focus on third party logistics (3PL). This will carry on. The recently acquired Ricoh Logistics should eventually see margins improve as it is integrated into SBS. This year’s operating profit forecast of Y9bn (+10%) is conservative. An increase of Y1bn this year will come from Ricoh Logistics alone, and then we have organic growth. In our view operating profit will be at least Y10bn. There is the unrealised profit on land, which add some Y85bn to a company whose market cap is Y71bn. Despite the outperformance over the last 12 months, this remains a decent long-term domestic buy, and one in which foreigners still own only 12%. The shares trade on 13x 12/19 assuming an operating profit of Y10bn. 

5. Drill Results Confirm High-Grade Mineralisation (Flash Note)

• Significant thick, high-grade Zn/Pb intersections with substantial by-products
• X-sections highlight ore thickness variability
• On schedule for maiden Resource mid-June incorporating both S. Nights and Wagga Tank
• Current drill programmes to be completed within a month
• Employing VMS structural and geochemical specialists for future exploration vectoring
• Maintain Speculative Buy Recommendation

In this briefing:

1. Hitachi Chemical (4217) Bad News All in the Price. Outlook on 12 Month View Is Bright. BUY
2. Dexin China (德信中国) Post IPO – Poor Trading Liquidity, Top Ten Placees Hold 76% of IPO Shares
3. Amarin Q4 2018 Conference Call–Strong Sales & High Confidence
4. Nexon M&A: Amazon & Comcast Enter the Race – It Ain’t Over Till Its Over!

1. Hitachi Chemical (4217) Bad News All in the Price. Outlook on 12 Month View Is Bright. BUY

After the recent inspection issues, the company clearly needs to tighten compliance issues and is now talking about improving profitability over the next two years by getting rid of low profit and none core businesses.  Given the current valuations, the mid-term outlook and the renewed focus on profitability we would look to buy here. The internal issues that have hit the share price in the past appear behind them. We would look for an operating profit of about Y50bn to 3/20 which would put the shares on an EV/ebitda multiple of about 5x. The shares yield 3% and still trade at book.

2. Dexin China (德信中国) Post IPO – Poor Trading Liquidity, Top Ten Placees Hold 76% of IPO Shares

Dexin China Holdings (2019 HK) raised US$189m in at HK$2.80 per share, at the mid-point of its IPO price range. We have previously covered the IPO in:

• Dexin China (德信中国) Pre-IPO – Related Party Transactions and Partial Asset Listing
• Dexin China (德信中国) IPO Review – Key Issues Remain but 9M Results Showed Strong Growth.

In this insight, we will update on the deal dynamics, implied valuation, and include a valuation sensitivity table.

3. Amarin Q4 2018 Conference Call–Strong Sales & High Confidence

Q4 2018 Revenues Stronger Than Pre-Announcement on January 4th: Amarin released its Q4 2018 results today and held a conference call. Results of $77m in sales (+44% YoY), were stronger than the January 4th pre-announced range of $72m and $76m.  2019 revenue guidance of 50% growth to $350m was left unchanged, but management sounded very confident on the conference call (see details below). 

Q1 2019 Revenue Growth Appears Stronger than Expected: On the conference call, Amarin was asked whether Q1 revenues were tracking the prescription data, which indicates +50% YoY growth so far. Management said that sales looked about the same, despite revenues tending not to track prescriptions that closely in Q1 normally.   

FDA May Fast-Track Vascepa Label Expansion: While Amarin’s CEO, John Thero, is usually very conservative with guidance, today he explored the possibilities of fast-track treatment by the FDA for Vascepa’s label expansion for the first time. Amarin is still on course to file for this with the FDA by March-end. Fast-track treatment by the FDA would speed up the approval process to 6 months, versus 10 months, and if favorable, could have significant upside impact on 2019 revenues. 

Approval for Vascepa in Europe to be Sought This Year: Amarin disclosed for the first time that it would seek approval for Vascepa in Europe this year. This is highly significant because the cardiovascular disease (CVD) patient population is 22% higher than the US. Amarin confirmed that FDA approval for label expansion would speed up the approval process in Europe. 

Next Catalyst is the ACC Conference on March 18th: Amarin will be announcing “late-breaking” data from the Reduce-It clinical trial at the American College of Cardiology on March 18th. Because the Reduce-It trial results themselves were so powerful, we expect the ACC event to be of high interest among CVD specialists and investors. 

Amarin Remains an Attractive Take-Over Candidate: Given the high efficacy of Vascepa in the treatment of CVD patients, Amarin continues to be one of the most highly attractive take-over candidates in the pharmaceutical world. Management’s confidence on today’s call appears to be linked to a stronger than expected response to Vascepa among doctors since its block-buster trial results were announced last September. For details about our outlook on Amarin, please refer to our deep-dive report published last month: Amarin–2019’s Biggest Buyout Target for Big Pharma

4. Nexon M&A: Amazon & Comcast Enter the Race – It Ain’t Over Till Its Over!

In a surprising move, it was reported after the market close today that Amazon.com Inc (AMZN US) (market cap of US$804 billion) and Comcast (US$176 billion) will enter the race and have submitted initial bids to acquire Nexon Co Ltd (3659 JP)/NXC Corp. 

The entrance of Amazon and Comcast is a major positive surprise and it should have a strong positive impact on Nexon’s share price. Prior to the entrance of Amazon and Comcast in this M&A battle, the market was firmly leaning towards the consortium including Tencent, Netmarble Games, and MBK Partners to acquire NXC Corp/Nexon.

Now, Amazon and Comcast’s entrance into this M&A battle has made it a lot more exciting and uncertain. Nexon Co Ltd (3659 JP)‘s share price is up 19% YTD but its share price trend has been flattening out in February. In the next few weeks, we expect further boost to Nexon’s share price (15%+), mainly because a lot more investors will think that the Tencent consortium, Amazon, and Comcast will try to pay higher price to acquire NXC Corp/Nexon. Kudos to Nexon shareholders!

In this briefing:

1. Japan Mobile: MVNO Data for Q3 Includes Slowest Growth Since 2014 but that Makes Sense for Rakuten
2. India Bulls Housing Finance- Can It Become Another HDFC? Signs Are Encouraging!!
3. SBS (2384) A Great Third Party Logistics Company Seeing Good Organic Growth as Well as Via M&A.
4. Drill Results Confirm High-Grade Mineralisation (Flash Note)
5. Mexican Banks – Near Term Relief on Fees from the ABM Convention; Thoughts on January’s Bank Data

1. Japan Mobile: MVNO Data for Q3 Includes Slowest Growth Since 2014 but that Makes Sense for Rakuten

The Ministry of Industry Affairs and Communications (MIC, the regulator) released Q3 (Dec 2018) data for industry mobile virtual network operator (MVNO) subs today (29 March) characterized by continued declines in growth YoY (+15% in Q3 v 18% in Q2) and the lowest absolute net adds (+480K) since Q2 2014.  Growth for the largest consumer-focused MVNO Rakuten Inc (4755 JP) also appears to be the lowest since data has become available but that is not necessarily a sign of strength for the existing network operators as it makes sense for Rakuten to slow MVNO growth before its October real network launch.  

2. India Bulls Housing Finance- Can It Become Another HDFC? Signs Are Encouraging!!

This is the concluding part of our Housing Finance Companies (HFC) series where we elaborated the outlook of the mortgage industry in India along with initiating coverage on the best HFCs who we believe may continue to be the key beneficiaries of a long term secular growth in the Indian mortgage industry. (please click here, here and here ).

In this report we cover  Indiabulls Housing Finance (IHFL IN) , the third largest HFC in the country. The company is among the fastest growing HFCs whose loan portfolio has grown at a CAGR of 29% in the last 5 years ending FY18. And in spite of robust growth, the asset quality has remained steady.

Due to a strong track record of high capital adequacy, high liquidity coverage, high asset quality, improving operational efficiency and high return ratios, the company was recently awarded AAA rating by ICRA and CRISIL, the top 2 credit rating agencies in India.

From the parameters that are analyzed in detail in this report, we believe that the company in the long term has the potential to be in the league of HDFC Ltd., a benchmark in terms of corporate governance, robust asset management and wealth creation for shareholders.

3. SBS (2384) A Great Third Party Logistics Company Seeing Good Organic Growth as Well as Via M&A.

It is seeing decent organic growth, led by a focus on third party logistics (3PL). This will carry on. The recently acquired Ricoh Logistics should eventually see margins improve as it is integrated into SBS. This year’s operating profit forecast of Y9bn (+10%) is conservative. An increase of Y1bn this year will come from Ricoh Logistics alone, and then we have organic growth. In our view operating profit will be at least Y10bn. There is the unrealised profit on land, which add some Y85bn to a company whose market cap is Y71bn. Despite the outperformance over the last 12 months, this remains a decent long-term domestic buy, and one in which foreigners still own only 12%. The shares trade on 13x 12/19 assuming an operating profit of Y10bn. 

4. Drill Results Confirm High-Grade Mineralisation (Flash Note)

• Significant thick, high-grade Zn/Pb intersections with substantial by-products
• X-sections highlight ore thickness variability
• On schedule for maiden Resource mid-June incorporating both S. Nights and Wagga Tank
• Current drill programmes to be completed within a month
• Employing VMS structural and geochemical specialists for future exploration vectoring
• Maintain Speculative Buy Recommendation

5. Mexican Banks – Near Term Relief on Fees from the ABM Convention; Thoughts on January’s Bank Data

• The Mexican president Andres Manuel Lopez Obrador (AMLO) announced at the annual Mexican bank association (ABM) convention on the 22nd March that there would be no cap or regulatory-enforced reduction in Mexican banking fee and commission charges
• AMLO stated that he expects fees to decline going forward, as a result of increased competition between banks; in the ABM convention, it was also announced that banks will charge zero commissions on the planned platform for digital payments
• This seems a better outcome on fees than the market expected – at least in the near term, as fees are still on the political agenda – and there was greater emphasis at the convention on how to achieve increased financial inclusion, via digital banking initiatives
• Yet we still believe that bank fees could be a bone of contention over the medium term, and we show the FY 2018 ratio of fees to revenues and to assets for eight banks, in the charts below
• The January 2019 Mexican banks data implies slower system loan growth going forward, yet credit quality remains healthy and credit spreads are holding steady
• Despite the volatile global markets, in the short term banks like Grupo Financiero Banorte-O (GFNORTEO MM) could benefit from the “fee relief”; longer term, we would highlight Gentera SAB De CV (GENTERA* MM EQUITY) as an attractive fundamental pick in Mexican banks

In this briefing:

1. Dexin China (德信中国) Post IPO – Poor Trading Liquidity, Top Ten Placees Hold 76% of IPO Shares
2. Amarin Q4 2018 Conference Call–Strong Sales & High Confidence
3. Nexon M&A: Amazon & Comcast Enter the Race – It Ain’t Over Till Its Over!
4. AIG Sells PICC: A Clean-Up Trade Cum Liquidity Event

1. Dexin China (德信中国) Post IPO – Poor Trading Liquidity, Top Ten Placees Hold 76% of IPO Shares

Dexin China Holdings (2019 HK) raised US$189m in at HK$2.80 per share, at the mid-point of its IPO price range. We have previously covered the IPO in:

• Dexin China (德信中国) Pre-IPO – Related Party Transactions and Partial Asset Listing
• Dexin China (德信中国) IPO Review – Key Issues Remain but 9M Results Showed Strong Growth.

In this insight, we will update on the deal dynamics, implied valuation, and include a valuation sensitivity table.

2. Amarin Q4 2018 Conference Call–Strong Sales & High Confidence

Q4 2018 Revenues Stronger Than Pre-Announcement on January 4th: Amarin released its Q4 2018 results today and held a conference call. Results of $77m in sales (+44% YoY), were stronger than the January 4th pre-announced range of $72m and $76m.  2019 revenue guidance of 50% growth to $350m was left unchanged, but management sounded very confident on the conference call (see details below). 

Q1 2019 Revenue Growth Appears Stronger than Expected: On the conference call, Amarin was asked whether Q1 revenues were tracking the prescription data, which indicates +50% YoY growth so far. Management said that sales looked about the same, despite revenues tending not to track prescriptions that closely in Q1 normally.   

FDA May Fast-Track Vascepa Label Expansion: While Amarin’s CEO, John Thero, is usually very conservative with guidance, today he explored the possibilities of fast-track treatment by the FDA for Vascepa’s label expansion for the first time. Amarin is still on course to file for this with the FDA by March-end. Fast-track treatment by the FDA would speed up the approval process to 6 months, versus 10 months, and if favorable, could have significant upside impact on 2019 revenues. 

Approval for Vascepa in Europe to be Sought This Year: Amarin disclosed for the first time that it would seek approval for Vascepa in Europe this year. This is highly significant because the cardiovascular disease (CVD) patient population is 22% higher than the US. Amarin confirmed that FDA approval for label expansion would speed up the approval process in Europe. 

Next Catalyst is the ACC Conference on March 18th: Amarin will be announcing “late-breaking” data from the Reduce-It clinical trial at the American College of Cardiology on March 18th. Because the Reduce-It trial results themselves were so powerful, we expect the ACC event to be of high interest among CVD specialists and investors. 

Amarin Remains an Attractive Take-Over Candidate: Given the high efficacy of Vascepa in the treatment of CVD patients, Amarin continues to be one of the most highly attractive take-over candidates in the pharmaceutical world. Management’s confidence on today’s call appears to be linked to a stronger than expected response to Vascepa among doctors since its block-buster trial results were announced last September. For details about our outlook on Amarin, please refer to our deep-dive report published last month: Amarin–2019’s Biggest Buyout Target for Big Pharma

3. Nexon M&A: Amazon & Comcast Enter the Race – It Ain’t Over Till Its Over!

In a surprising move, it was reported after the market close today that Amazon.com Inc (AMZN US) (market cap of US$804 billion) and Comcast (US$176 billion) will enter the race and have submitted initial bids to acquire Nexon Co Ltd (3659 JP)/NXC Corp. 

The entrance of Amazon and Comcast is a major positive surprise and it should have a strong positive impact on Nexon’s share price. Prior to the entrance of Amazon and Comcast in this M&A battle, the market was firmly leaning towards the consortium including Tencent, Netmarble Games, and MBK Partners to acquire NXC Corp/Nexon.

Now, Amazon and Comcast’s entrance into this M&A battle has made it a lot more exciting and uncertain. Nexon Co Ltd (3659 JP)‘s share price is up 19% YTD but its share price trend has been flattening out in February. In the next few weeks, we expect further boost to Nexon’s share price (15%+), mainly because a lot more investors will think that the Tencent consortium, Amazon, and Comcast will try to pay higher price to acquire NXC Corp/Nexon. Kudos to Nexon shareholders!

4. AIG Sells PICC: A Clean-Up Trade Cum Liquidity Event

AIG is selling its USD 450 million stakes in PICC today after market close. The deal scores negatively in our ECM Framework. 

We like the fact that it will increase the free-float significantly and hence there will be a liquidity event, meanwhile, we are also concerned that the deal size is large compared to its liquidity.

In this briefing:

1. Futu Holdings IPO – Given the Team, Execution, and Backers, Might Be Worth a Look at the Low-End

1. Futu Holdings IPO – Given the Team, Execution, and Backers, Might Be Worth a Look at the Low-End

Futu Holdings Ltd (FHL US) plans to raise upto US$130m in its US listing. The deal has been downsized from its earlier indicative size of US$300m and the valuation too has been downsized by almost the same extent to around US$1.2-1.5bn.

In my earlier insights, Futu Holdings Pre-IPO – Great Metrics but in a Commoditised Industry and Futu Holdings Pre-IPO – FY18 Updates And Quick Thoughts on Valuation, I looked at the company’s background and past financial performance.

 In this insight, I’ll run the deal through our IPO framework and comment on valuations. At the low-end the deal might be worth looking into, although free-float might end up being very small owing to US$30m being taken up Tencent which would leave just about US$100m as free-float.

In this briefing:

1. India Bulls Housing Finance- Can It Become Another HDFC? Signs Are Encouraging!!
2. SBS (2384) A Great Third Party Logistics Company Seeing Good Organic Growth as Well as Via M&A.
3. Drill Results Confirm High-Grade Mineralisation (Flash Note)
4. Mexican Banks – Near Term Relief on Fees from the ABM Convention; Thoughts on January’s Bank Data
5. Viva Biotech (维亚生物) IPO: Warning Signs from 2018 Numbers (Part 2)

1. India Bulls Housing Finance- Can It Become Another HDFC? Signs Are Encouraging!!

This is the concluding part of our Housing Finance Companies (HFC) series where we elaborated the outlook of the mortgage industry in India along with initiating coverage on the best HFCs who we believe may continue to be the key beneficiaries of a long term secular growth in the Indian mortgage industry. (please click here, here and here ).

In this report we cover  Indiabulls Housing Finance (IHFL IN) , the third largest HFC in the country. The company is among the fastest growing HFCs whose loan portfolio has grown at a CAGR of 29% in the last 5 years ending FY18. And in spite of robust growth, the asset quality has remained steady.

Due to a strong track record of high capital adequacy, high liquidity coverage, high asset quality, improving operational efficiency and high return ratios, the company was recently awarded AAA rating by ICRA and CRISIL, the top 2 credit rating agencies in India.

From the parameters that are analyzed in detail in this report, we believe that the company in the long term has the potential to be in the league of HDFC Ltd., a benchmark in terms of corporate governance, robust asset management and wealth creation for shareholders.

2. SBS (2384) A Great Third Party Logistics Company Seeing Good Organic Growth as Well as Via M&A.

It is seeing decent organic growth, led by a focus on third party logistics (3PL). This will carry on. The recently acquired Ricoh Logistics should eventually see margins improve as it is integrated into SBS. This year’s operating profit forecast of Y9bn (+10%) is conservative. An increase of Y1bn this year will come from Ricoh Logistics alone, and then we have organic growth. In our view operating profit will be at least Y10bn. There is the unrealised profit on land, which add some Y85bn to a company whose market cap is Y71bn. Despite the outperformance over the last 12 months, this remains a decent long-term domestic buy, and one in which foreigners still own only 12%. The shares trade on 13x 12/19 assuming an operating profit of Y10bn. 

3. Drill Results Confirm High-Grade Mineralisation (Flash Note)

• Significant thick, high-grade Zn/Pb intersections with substantial by-products
• X-sections highlight ore thickness variability
• On schedule for maiden Resource mid-June incorporating both S. Nights and Wagga Tank
• Current drill programmes to be completed within a month
• Employing VMS structural and geochemical specialists for future exploration vectoring
• Maintain Speculative Buy Recommendation

4. Mexican Banks – Near Term Relief on Fees from the ABM Convention; Thoughts on January’s Bank Data

• The Mexican president Andres Manuel Lopez Obrador (AMLO) announced at the annual Mexican bank association (ABM) convention on the 22nd March that there would be no cap or regulatory-enforced reduction in Mexican banking fee and commission charges
• AMLO stated that he expects fees to decline going forward, as a result of increased competition between banks; in the ABM convention, it was also announced that banks will charge zero commissions on the planned platform for digital payments
• This seems a better outcome on fees than the market expected – at least in the near term, as fees are still on the political agenda – and there was greater emphasis at the convention on how to achieve increased financial inclusion, via digital banking initiatives
• Yet we still believe that bank fees could be a bone of contention over the medium term, and we show the FY 2018 ratio of fees to revenues and to assets for eight banks, in the charts below
• The January 2019 Mexican banks data implies slower system loan growth going forward, yet credit quality remains healthy and credit spreads are holding steady
• Despite the volatile global markets, in the short term banks like Grupo Financiero Banorte-O (GFNORTEO MM) could benefit from the “fee relief”; longer term, we would highlight Gentera SAB De CV (GENTERA* MM EQUITY) as an attractive fundamental pick in Mexican banks

5. Viva Biotech (维亚生物) IPO: Warning Signs from 2018 Numbers (Part 2)

Viva Biotechnology, a China-based drug discovery company, is seeking to raise USD 200m to list on the Hong Kong Stock Exchange. It has recently obtained approval for listing by the Hong Kong Stock Exchange. In our previous insight (link here), we discussed the company’s fundamentals, its unique business model, its shareholders, and our thoughts on its valuation.

In this insight, we look at its latest prospectus and review our valuation for Viva Biotech.

In this briefing:

1. Coromandel International: Doing the Fieldwork Before the Harvest.

1. Coromandel International: Doing the Fieldwork Before the Harvest.

Coromandel International (CRIN IN) is an agri-solutions company that is the 5^th largest Agro-chemical company in the country. It is India’s largest private sector Phosphatic fertilizer company, India’s largest Single Super Phosphate (SSP) company, and India’s largest organic manure company. It is India’s fourth largest agro-chemical manufacturer and has an R&D base to create and refine its product offerings as well as a retail chain with over 800 stores to act as a one-stop-solution for farmers.

Key Growth Drivers:

• Strong Agri growth levers are driven by population growth, governmental policies, Indian soil composition, and nutrient deficiency. 
• Crop Protection segment has a growing export market as well as expiring agro-chemical patents present new market opportunities.
• Branding as well as a growing retail chain fuel growth in the domestic markets. 

Valuation:

Earnings Per Share is 22.57 in FY 17-18, 24.75 in FY 18-19E and 29 in FY 19-20E. P/E ratio is 23.33 in FY 17-18, 21 in FY 18-19E and 20.5 in FY 19-20E. EV/EBITDA is 13.69 in FY 17-18, 14.38 in FY 18-19E and 15.09 in FY 19-20E. The company is fairly valued given a high growth outlook, improving efficiencies and future market potential.

In this briefing:

1. Coromandel International: Doing the Fieldwork Before the Harvest.
2. Yahoo Japan’s JV with OYO Could Be Big, If Tokyo Is Ready to “Co-Live”

1. Coromandel International: Doing the Fieldwork Before the Harvest.

Coromandel International (CRIN IN) is an agri-solutions company that is the 5^th largest Agro-chemical company in the country. It is India’s largest private sector Phosphatic fertilizer company, India’s largest Single Super Phosphate (SSP) company, and India’s largest organic manure company. It is India’s fourth largest agro-chemical manufacturer and has an R&D base to create and refine its product offerings as well as a retail chain with over 800 stores to act as a one-stop-solution for farmers.

Key Growth Drivers:

• Strong Agri growth levers are driven by population growth, governmental policies, Indian soil composition, and nutrient deficiency. 
• Crop Protection segment has a growing export market as well as expiring agro-chemical patents present new market opportunities.
• Branding as well as a growing retail chain fuel growth in the domestic markets. 

Valuation:

Earnings Per Share is 22.57 in FY 17-18, 24.75 in FY 18-19E and 29 in FY 19-20E. P/E ratio is 23.33 in FY 17-18, 21 in FY 18-19E and 20.5 in FY 19-20E. EV/EBITDA is 13.69 in FY 17-18, 14.38 in FY 18-19E and 15.09 in FY 19-20E. The company is fairly valued given a high growth outlook, improving efficiencies and future market potential.

2. Yahoo Japan’s JV with OYO Could Be Big, If Tokyo Is Ready to “Co-Live”

• OYO, the largest budget hotel network in India, announced a JV with Yahoo Japan (4689 JP) to expand its co-living rental service, “OYO Living”, to Japan. OYO will own 66.1% while YJ will own the remainder of the JV, named “Oyo Technology & Hospitality Japan”. 

• Rebranded as “OYO Life”, the service would be the first of its kind, in the virtually non-existent co-living market in Japan. In Japan, apartments are usually compact single-occupier units as opposed to shared spaces, which might pose a problem for OYO’s co-living model. 

• Assuming the model is a success and OYO Life could ramp up its capacity to around 150,000 beds in Tokyo, which is around 5% of the total apartment stock in central Tokyo, this would contribute around ¥3bn (2% of net income in FY03/18) to Yahoo Japan’s net income. There is potential for further gains, however, this would depend on how ready Tokyo is to move into a “Co-Living” culture in masses.

In this briefing:

1. Coromandel International: Doing the Fieldwork Before the Harvest.
2. Yahoo Japan’s JV with OYO Could Be Big, If Tokyo Is Ready to “Co-Live”
3. PRM: Thai Largest Tanker Fleets Assured of Consistent Growth

1. Coromandel International: Doing the Fieldwork Before the Harvest.

Coromandel International (CRIN IN) is an agri-solutions company that is the 5^th largest Agro-chemical company in the country. It is India’s largest private sector Phosphatic fertilizer company, India’s largest Single Super Phosphate (SSP) company, and India’s largest organic manure company. It is India’s fourth largest agro-chemical manufacturer and has an R&D base to create and refine its product offerings as well as a retail chain with over 800 stores to act as a one-stop-solution for farmers.

Key Growth Drivers:

• Strong Agri growth levers are driven by population growth, governmental policies, Indian soil composition, and nutrient deficiency. 
• Crop Protection segment has a growing export market as well as expiring agro-chemical patents present new market opportunities.
• Branding as well as a growing retail chain fuel growth in the domestic markets. 

Valuation:

Earnings Per Share is 22.57 in FY 17-18, 24.75 in FY 18-19E and 29 in FY 19-20E. P/E ratio is 23.33 in FY 17-18, 21 in FY 18-19E and 20.5 in FY 19-20E. EV/EBITDA is 13.69 in FY 17-18, 14.38 in FY 18-19E and 15.09 in FY 19-20E. The company is fairly valued given a high growth outlook, improving efficiencies and future market potential.

2. Yahoo Japan’s JV with OYO Could Be Big, If Tokyo Is Ready to “Co-Live”

• OYO, the largest budget hotel network in India, announced a JV with Yahoo Japan (4689 JP) to expand its co-living rental service, “OYO Living”, to Japan. OYO will own 66.1% while YJ will own the remainder of the JV, named “Oyo Technology & Hospitality Japan”. 

• Rebranded as “OYO Life”, the service would be the first of its kind, in the virtually non-existent co-living market in Japan. In Japan, apartments are usually compact single-occupier units as opposed to shared spaces, which might pose a problem for OYO’s co-living model. 

• Assuming the model is a success and OYO Life could ramp up its capacity to around 150,000 beds in Tokyo, which is around 5% of the total apartment stock in central Tokyo, this would contribute around ¥3bn (2% of net income in FY03/18) to Yahoo Japan’s net income. There is potential for further gains, however, this would depend on how ready Tokyo is to move into a “Co-Living” culture in masses.

3. PRM: Thai Largest Tanker Fleets Assured of Consistent Growth

We initiate coverage of PRM with a BUY rating, based on a target price of Bt7.70, derived from a PEG ratio of 0.9x, which is the average for the Asia ex-japan transportation sector, implying 22.0x PE’19E.

The story:

• Secured revenue from domestic trading business
• IMO 2020 implementation to propel floating storage demand
• Recovery in T/C rate should prompt international trading turnaround

Risks:  Lower-than-expected domestic oil consumption and trading activities in ASEAN, foreign currency and fuel cost fluctuations

In this briefing:

1. Denso Continues to Strengthen Its Investment CASE with Acquisitions
2. CanSino Biologics (康希诺) IPO Trading Update – Time to Cash Out
3. Nissan Governance Structure Report Out: Fog Dissipating Slowly. Sunny in Summer. Storms Next Winter?
4. A Reality Check for Money Forward (3994 JP): Key Takeaways from Our Recent Visit
5. Small Cap Diary: Rajthanee Hospital, CAZ

1. Denso Continues to Strengthen Its Investment CASE with Acquisitions

Denso Corp (6902 JP) announced this month that it has invested in the Seattle-based connected vehicle services pioneer- Airbiquity Inc. Airbiquity is one of the leading companies in the connected vehicle services sector and has been one of the companies that has continuously developed automotive telematics technology. This investment made by Denso follows its investment made in Quadric.io this year ( Stake in Quadric.io Following Renesas; Denso Attempts to Keep Chip Makers Close to Achieve AD Aims). As we previously mentioned, Denso is in full swing in its development in the autonomous driving field and next-generation technologies development. Thus, it wouldn’t be a surprise to see Denso emerge as the first mover in next-generation technologies such as AD and connectivity solutions. According to Denso, its investment worth $5m in Airbiquity is expected to accelerate the development of over-the-air (OTA) systems for wirelessly updating automotive software from a remote location. OTA systems are methods of distributing new software, configuration settings, and providing updates to the electronic device in use, for instance, a car navigation system in a vehicle. These OTA systems which have been increasingly used to update the software of such multimedia products in a vehicle are now gaining more prominence given the emergence of next-generation technologies such as electrification, EV and connectivity. We also believe that Denso’s Stake in Airbiquity is likely to accelerate Denso’s transition in its business model to be a leading software solution provider. Thus, its series of investments such as in Tohoku Pioneer EG, JOLED, ThinCI, Quadric, and now Airbiquity are indicative of the decisiveness of its change in business model and moves towards achieving next-generation technology leadership.

2. CanSino Biologics (康希诺) IPO Trading Update – Time to Cash Out

CanSino Biologics raised USD 148 million at HKD 22/share, at the high end of its guided price range. We have previously covered the IPO in the following note: 

• CanSino Biologics (康希诺) IPO: Promising Pre-Clinical Results but Vaccine Scandal Weighs (Part 1)
• CanSino Biologics (康希诺) IPO: Thoughts on Valuation (Part 2)
• CanSino Biologics (康希诺) IPO: Valuation Update (Part 3)
• CanSino Biologics (康希诺) IPO: Valuation Attractive, Lilly Asia Doubling Up (Part 4)

In this insight, we will update on the deal dynamics, implied valuation, and include a valuation sensitivity table.

3. Nissan Governance Structure Report Out: Fog Dissipating Slowly. Sunny in Summer. Storms Next Winter?

Six weeks ago I wrote that Nissan’s governance outlook was “Foggy Now, Sunny Later.” I said “Governance changes are afoot, with a steady flow of developments likely coming in March, April, May, and June.”

The last couple of months have seen numerous media articles about the process of Nissan Motor (7201 JP) and Renault SA (RNO FP) rebuilding their relationship. There have been visits to Tokyo by Renault’s new chairman of the board of directors Jean-Dominique Senard, and visits to Paris and Amsterdam by the CEOs of Nissan and Mitsubishi Motors (7211 JP). 

There have been many suggestions in French and European newspapers in the interim that Jean-Dominique Senard would be the obvious choice as a representative director of Nissan. There have been other articles out there in the Japanese press suggesting what conclusions the committee might come to as to what outcomes should result. The difference is notable. The French side still wants control. The Japanese/Nissan/committee side sees the need to fix governance.

Today there was a report in the FT suggesting that Renault “wants” to restart merger talks with Nissan and “aims to restart merger talks with Nissan within 12 months.” It should be noted that these two sentences are not exactly the same. It may still be that France wants Renault to do so, and therefore Renault aims to do so. The same article revealed past talks on Renault merging with FCA but France putting a stop to it and a current desire to acquire another automaker – perhaps FCA – after dealing with Nissan. 

Also today, the long-awaited Nissan Special Committee for Improving Governance (SCIG) report was released. It outlines some of the issues of governance which existed under Ghosn- both the ones which got him the boot, and the structural governance issues which were “discovered” after he got the boot. 

There are clear patches in the fog. Two things shine through immediately. 

1. Governance weaknesses under Ghosn were inexcusably bad. Worse than previously reported.
2. The recommendations to the board now are, on the whole, pretty decent. Some are sine qua non changes – formation of nomination and compensation committees, whistleblower reporting to the audit committee and not the CEO, and greater checks and balances. Some are stronger in terms of the independence of Nissan from Renault: the committee recommends a majority of independent board members, an independent chairman, and no representative directors from Renault, Mitsubishi, or principal shareholders.

There are, however, other issues which were not addressed, which for Nissan’s sake probably should be addressed. Yesterday was a first step on what will be a 3-month procession of news about the way Nissan will address the SCIG report’s recommendations, the process by which it will choose new directors when it does not have an official nomination committee, and the AGM in June to propose and confirm new directors. Then they will start their jobs in July. 

The fog looks to lift slowly. And one may anticipate some better weather beyond. But business concerns remain a threat, and while relations appear to be getting better after the departure of Carlos Ghosn and the arrival of Jean-Dominique Senard, it is not clear that a Franco-Japanese storm is not brewing in the distance.

More below.

4. A Reality Check for Money Forward (3994 JP): Key Takeaways from Our Recent Visit

In our previous note, Money Forward (3994 JP): Solid Mid-Term Prospects for the Fintech Pro, but Overvalued, published July last year (2018), we suggested that Money Forward (3994 JP) (MF) was overvalued despite its strong growth profile. MF’s share price, which was at an all-time high (close to JPY6,000) around this time, fell below its IPO price (JPY3,000) in December, reinforcing our bearish view.

Since then, Money Forward’s share price has picked up (closing at JPY4,400 on 26th March 2019), on the back of strong topline guidance for FY11/19E (+55%-65% YoY growth) and “aggressive” medium-term profit targets (positive EBITDA by FY11/21E).

However, following our recent conversation with MF’s IR team, we believe that the above guidance needs to be slightly toned down.

5. Small Cap Diary: Rajthanee Hospital, CAZ

We visited two small-cap companies from totally different industries today. These are the key highlights.

• Rajthanee Hospital, a small hospital chain based in Ayuthya, achieved 15.7% revenue growth CAGR since 2016 on the back of its proximity to industrial estates.
• CAZ has seen its backlog double to Bt2.5bn largely due to its good relations with major clients (PTT) and partners (Samsung and other Korean chaebol), which dole out projects in the oil & gas sector to it.
• Internally, CAZ follows a sophisticated cost control method sporting bar codes and GPS to track materials and dedicated cost-control staff.