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Daily Briefs

Financials: Bank Negara Indonesia Persero and more

By | Daily Briefs, Financials

In today’s briefing:

  • Bank Negara Indonesia (BBNI IJ) – Revealing a New Digital Skin

Bank Negara Indonesia (BBNI IJ) – Revealing a New Digital Skin

By Angus Mackintosh

Bank Negara Indonesia Persero (BBNI IJ) revealed some interesting views on its strategy for expansion over the next few years at a webinar hosted by Daniel Tabbush on Smartkarma this week, driven to a large extent by the new senior management team at the bank.

Loan growth continues to be driven by lower risk areas such as corporate loans to top tier customers with the addition of some notable new high-profile clients.

Its micro KUR loans, SME loans, payroll, and consumer loans, mainly mortgages, also continue to grow, with medium-sized loans declining.

The cost of 3rd party funds continued to fall to an all-time low in 2Q2021 given the rapid decline in time deposit rates and increasing CASA.

Profitability also continued to improve in 2Q2021 with PPOP rising by 24.4%, whilst net profit increased by +12.8% YoY and +7% QoQ. Bank Negara Indonesia Persero (BBNI IJ) is optimistic on the outlook for returns, targeting higher ROEs in 2022, mainly driven by higher ROA.

Bank Negara Indonesia Persero (BBNI IJ) continued to push forward with its digital transformation and especially with mobile banking, where it now has the highest customer rating for its app versus its peers.

Bank Negara Indonesia (BBNI IJ) has also revealed that it is potentially open to opening a stand-alone digital bank through acquiring a smaller bank, which is a change from the previous strategy.

Bank Negara Indonesia Persero (BBNI IJ) continues to be a universal bank with around 70% of its business coming from wholesale lending. Management continues to see a huge opportunity in cross-selling its cash management businesses and other services.

Bank Negara Indonesia Persero (BBNI IJ) has revised its guidance somewhat to reflect this latest round of Emergency PPKM measures with loan growth downgraded slightly but net interest margin forecasts increased.

Valuations look appealing, with the bank trading on 0.7x FY2021E PBV and a forward FY22E PER of 6.5x. Bank Negara Indonesia (BBNI IJ) is often seen as the bank playing catch up with its peers but maybe this time is different. 


Before it’s here, it’s on Smartkarma

Indonesia: Bank Negara Indonesia Persero and more

By | Daily Briefs, Indonesia

In today’s briefing:

  • Bank Negara Indonesia (BBNI IJ) – Revealing a New Digital Skin

Bank Negara Indonesia (BBNI IJ) – Revealing a New Digital Skin

By Angus Mackintosh

Bank Negara Indonesia Persero (BBNI IJ) revealed some interesting views on its strategy for expansion over the next few years at a webinar hosted by Daniel Tabbush on Smartkarma this week, driven to a large extent by the new senior management team at the bank.

Loan growth continues to be driven by lower risk areas such as corporate loans to top tier customers with the addition of some notable new high-profile clients.

Its micro KUR loans, SME loans, payroll, and consumer loans, mainly mortgages, also continue to grow, with medium-sized loans declining.

The cost of 3rd party funds continued to fall to an all-time low in 2Q2021 given the rapid decline in time deposit rates and increasing CASA.

Profitability also continued to improve in 2Q2021 with PPOP rising by 24.4%, whilst net profit increased by +12.8% YoY and +7% QoQ. Bank Negara Indonesia Persero (BBNI IJ) is optimistic on the outlook for returns, targeting higher ROEs in 2022, mainly driven by higher ROA.

Bank Negara Indonesia Persero (BBNI IJ) continued to push forward with its digital transformation and especially with mobile banking, where it now has the highest customer rating for its app versus its peers.

Bank Negara Indonesia (BBNI IJ) has also revealed that it is potentially open to opening a stand-alone digital bank through acquiring a smaller bank, which is a change from the previous strategy.

Bank Negara Indonesia Persero (BBNI IJ) continues to be a universal bank with around 70% of its business coming from wholesale lending. Management continues to see a huge opportunity in cross-selling its cash management businesses and other services.

Bank Negara Indonesia Persero (BBNI IJ) has revised its guidance somewhat to reflect this latest round of Emergency PPKM measures with loan growth downgraded slightly but net interest margin forecasts increased.

Valuations look appealing, with the bank trading on 0.7x FY2021E PBV and a forward FY22E PER of 6.5x. Bank Negara Indonesia (BBNI IJ) is often seen as the bank playing catch up with its peers but maybe this time is different. 


Before it’s here, it’s on Smartkarma

TMT: L&F Co Ltd, Empired Ltd, Uber, Taiyo Yuden and more

By | Daily Briefs, TMT/Internet

In today’s briefing:

  • MSCI Korea November SAIR Additions: L&F, F&F, Krafton, & Kakao Games
  • Empired (EPD AU): Scheme Booklet Out. Meeting On The 25 October
  • TMT Weekly: 3 Things that Stood Out the Week of September 24, 2021
  • Index Rebalance & ETF Flow Recap: MONDE PM, ASX100/200, BUKA IJ, MSCI, AusNet, Sandfire

MSCI Korea November SAIR Additions: L&F, F&F, Krafton, & Kakao Games

By Sanghyun Park

The review period for MSCI November SAIR (semi-annual index review) is the last ten business days of October. The announcement date is November 11, and December 1 is the effective date.

(Source: MSCI)

Below are the inclusion requirements to be applied in this SAIR.

Requirements (× Interim cutoff)Semi-annualNote
Interim cutoff (estimate)₩3.00T
Full market cap requirementInterim cutoff x 1.50
For both outside IMI & Small-Cap→Std
Full market cap hurdle₩4.50T
Float market cap requirementInterim cutoff x 0.50 x 1.50
For outside IMI
Float-adjusted market cap hurdle₩2.25T
Float market cap requirementInterim cutoff x 0.50
For Small-Cap→Std
Float-adjusted market cap hurdle₩1.50T
Source: MSCI & Clepsydra Capital

The following five stocks are highly likely to be included in the Standard Index in this IR. They are currently above the full market cap threshold, which is estimated at ₩4.50T.

NameFull market capNote
Krafton Inc (259960 KS)₩24.13T Recent IPO (outside IMI)
SD Biosensor (137310 KS) ₩5.10T Recent IPO (outside IMI)
L&F Co Ltd (066970 KS) ₩6.58T Small-Cap→Std
F&F (383220 KS) ₩5.60T Small-Cap→Std
Kakao Games Corp (293490 KS) ₩5.10T
Source: KRX

Below are the recent major Korean IPOs. SD Biosensor, Krafton, and Hyundai Heavy Industries exceed the full market cap threshold for this IR. But Hyundai Heavy Industries fails to meet the minimum trading period of 3 months based on the effective date (December 1).

Recent major IPOsTickerListingMarket cap
SD Biosensor Inc13731007. 16₩5.10T
HK Inno.N Corp19594008. 09₩1.64T
Krafton Inc25996008. 10₩24.13T
Lotte Rental Co Ltd08986008. 19₩1.57T
Ajusteel Co Ltd13999008. 20₩0.55T
Iljin HySolus Co Ltd27194009. 01₩2.71T
Hyundai Heavy Industries Co Ltd32918009. 17₩8.81T
Source: KRX & DART

Among the top-cap stocks in the Korea Small Cap Index, only L&F and F&F meet the full market cap threshold based on the current share prices.

(Source: MSCI)

Then, we have Kakao Games, which was again dropped in the final step in the previous IR. This is because MSCI kept lowering the float rate of Kakao Games to an illogical level in the last IR. Currently, Kakao Games’ full market cap meets the requirement. So, again, the key is whether MSCI raises the float rate to 45%, the actual level.


Empired (EPD AU): Scheme Booklet Out. Meeting On The 25 October

By David Blennerhassett

Back on the 19 July, systems integrator Empired Ltd (EPD AU) entered into a Scheme with Capgemini SE (CGEMY US) at a price of A$1.35/share, a 64.6% premium to last close, and an all-time high. The Offer had the unanimous backing of Empired’s board. CEO Russell Baskerville, with 5.8% of Empired’s outstanding shares, intended to vote in favour of the Scheme.

The Scheme Booklet is now out. The Scheme Meeting will take place on the 25 October, with expected implementation on the 16 November. The Independent Expert concluded that the Scheme is fair and reasonable.

This looks done. 

More below the fold.


TMT Weekly: 3 Things that Stood Out the Week of September 24, 2021

By Aaron Gabin

This week we take a look at IAC’s proposed acquisition of Meredith, Facebook’s weird week, and the insane valuation disconnect between Uber and DoorDash.

Obex’s fundamental research process is focused on secular change in the TMT and Consumer sectors. We seek to differentiate between fundamental business analysis and security analysis. Before deciding if a security’s pricing and positioning merit a long or short position, we analyze the four pillars of business fundamentals (Secular Factors, TAM, Competitive Advantage, Business Model) in order to determine if this is a “good” or “not so good” opportunity.


Index Rebalance & ETF Flow Recap: MONDE PM, ASX100/200, BUKA IJ, MSCI, AusNet, Sandfire

By Brian Freitas

In this weeks recap, we look at:

Events This Week

Click on the link under Detail to go to the Insight

Date

Index

Detail

29 September
NIFTY Next 50
30 September
Nikkei 225
30 September
HSI
30 September
HSCEI
30 September
HSTECH

Before it’s here, it’s on Smartkarma

Equity Bottom-Up: Bank Negara Indonesia Persero, Uber, Geely Auto and more

By | Bottom-Up Equities, Daily Briefs

In today’s briefing:

  • Bank Negara Indonesia (BBNI IJ) – Revealing a New Digital Skin
  • TMT Weekly: 3 Things that Stood Out the Week of September 24, 2021
  • Geely: Short-Term Pain, Zeekr Still the Key to Long-Term Peformance

Bank Negara Indonesia (BBNI IJ) – Revealing a New Digital Skin

By Angus Mackintosh

Bank Negara Indonesia Persero (BBNI IJ) revealed some interesting views on its strategy for expansion over the next few years at a webinar hosted by Daniel Tabbush on Smartkarma this week, driven to a large extent by the new senior management team at the bank.

Loan growth continues to be driven by lower risk areas such as corporate loans to top tier customers with the addition of some notable new high-profile clients.

Its micro KUR loans, SME loans, payroll, and consumer loans, mainly mortgages, also continue to grow, with medium-sized loans declining.

The cost of 3rd party funds continued to fall to an all-time low in 2Q2021 given the rapid decline in time deposit rates and increasing CASA.

Profitability also continued to improve in 2Q2021 with PPOP rising by 24.4%, whilst net profit increased by +12.8% YoY and +7% QoQ. Bank Negara Indonesia Persero (BBNI IJ) is optimistic on the outlook for returns, targeting higher ROEs in 2022, mainly driven by higher ROA.

Bank Negara Indonesia Persero (BBNI IJ) continued to push forward with its digital transformation and especially with mobile banking, where it now has the highest customer rating for its app versus its peers.

Bank Negara Indonesia (BBNI IJ) has also revealed that it is potentially open to opening a stand-alone digital bank through acquiring a smaller bank, which is a change from the previous strategy.

Bank Negara Indonesia Persero (BBNI IJ) continues to be a universal bank with around 70% of its business coming from wholesale lending. Management continues to see a huge opportunity in cross-selling its cash management businesses and other services.

Bank Negara Indonesia Persero (BBNI IJ) has revised its guidance somewhat to reflect this latest round of Emergency PPKM measures with loan growth downgraded slightly but net interest margin forecasts increased.

Valuations look appealing, with the bank trading on 0.7x FY2021E PBV and a forward FY22E PER of 6.5x. Bank Negara Indonesia (BBNI IJ) is often seen as the bank playing catch up with its peers but maybe this time is different. 


TMT Weekly: 3 Things that Stood Out the Week of September 24, 2021

By Aaron Gabin

This week we take a look at IAC’s proposed acquisition of Meredith, Facebook’s weird week, and the insane valuation disconnect between Uber and DoorDash.

Obex’s fundamental research process is focused on secular change in the TMT and Consumer sectors. We seek to differentiate between fundamental business analysis and security analysis. Before deciding if a security’s pricing and positioning merit a long or short position, we analyze the four pillars of business fundamentals (Secular Factors, TAM, Competitive Advantage, Business Model) in order to determine if this is a “good” or “not so good” opportunity.


Geely: Short-Term Pain, Zeekr Still the Key to Long-Term Peformance

By Victoria Li

Share performance has been weak recently after Geely posted weak August sales data, especially the drop on Lynk&Co sales which was hurt by auto chips shortage. This is leading to downwards reversion of market consensus  estimates. Market questions on Zeekr 001 also made this model’s sales outlook blurry.

As we discussed in previous note, auto chips shortage issue may last for another 6 months. That means monthly sales data of Geely (including Lynk&Co) would remain weak and limit share performance upside.

Moreover local news reports  says Geely Group is starting smart phone business, which is a long term negative, in our view. This is because new business, no matter how profitable it might be, would divert the group company’s resources and management strategy focus away more or less from its core business-vehicle manufacturing. 

Questions about Zeekr 001 since released apparently generated negative impression on this model among potential customers, although management’s explanations indicated most of them were based on misunderstanding. Only strong sales data in the next few months could regain investors’ confidence. The good news is, factory production plan released online indicates Zeekr 001 monthly delivery might reach 6,000 in Dec 2021, which would help Geely (175.HK) regain positive momentum if it comes true.

Market concern on weak corporate sales data in the near term should have been priced in given the share price weakness of late. On the other hand, Zeekr 001 sales data might bring positive surprise. We suggest BUY on weakness.


Related tickers: Bank Negara Indonesia Persero (BBNI.JK), Uber (UBER.N), Geely Auto (0175.HK)

Before it’s here, it’s on Smartkarma

South Korea: Kakao Pay and more

By | Daily Briefs, South Korea

In today’s briefing:

  • Kakao Pay IPO Revised Prospectus Out: Key Revisions & Talking Points
  • Kakao Pay – A New Timeline for Its IPO

Kakao Pay IPO Revised Prospectus Out: Key Revisions & Talking Points

By Sanghyun Park

Key revisions

Kakao Pay submitted a revised registration statement (prospectus) on Friday afternoon. It plans to start bookbuilding on October 20-21 and subscription on the 25th. It then plans to go public in early November (tentatively November 3rd). However, Kakao Pay did not change the offering price.

The grace period for the registration statement to take effect is 15 business days. During this period, the Financial Supervisory Service (FSS) will undergo a final review. An issuer cannot do marketing during the grace period. After 15 business days from today (September 24th), it becomes October 20th. So, the start date of bookbuilding was decided on October 20th.

Contrary to expectations, Kakao Pay maintained its offering price at 60,000-90,000 won as before. The market capitalization based on the top of the indicative price band is 11.73 trillion won. The institutional allocation rate remains the same at 55-75%.

Kakao Pay added government regulatory risk to this revised report. It stated that it had suspended those services that violated the Financial Consumer Protection Act (the services concluded as financial product brokerage, not advertising).

However, Kakao Pay explained that the portion of sales of the discontinued services was only 1.2% of the total sales. Therefore, Kakao Pay said it did not feel the need to change its IPO valuation (the offering price).


Kakao Pay – A New Timeline for Its IPO

By Douglas Kim

Kakao Pay (377300 KS) provided a new timeline of its IPO after the market close today. The book building for the institutional investors will now start on 20 October. Previously, this was supposed to start on 29 September. Despite another delay in the IPO schedule, the company has maintained the IPO price range of 60,000 won to 90,000 won. The IPO base deal size ranges from $871 million to $1.3 billion.

According to the bankers’ valuation, the expected market cap of Kakao Pay is expected to range from 8.2 trillion won to 12.2 trillion won. Kakao Pay IPO is expected to start trading on 3 November. 

We maintain our base case valuation of EV of 10.1 trillion won, implied market cap of 12.2 trillion won, and target price per share of 89,739 won per share. This is based on an EV/S multiple of 10.6x using our estimated sales of 954 billion won for the company in 2022.
At the high end of the IPO price range (90,000 won), we see limited upside as compared to our base case valuation. On the other hand, at the low or mid end of the IPO price range (60,000 won to 75,000 won per share), we see a solid upside as compared to our target price. 

Before it’s here, it’s on Smartkarma

Industrials: Sembcorp Marine and more

By | Daily Briefs, Industrials

In today’s briefing:

  • Sembcorp Marine MGO – The Implied Option Tells You About the Market, And It’s The Wrong Price.

Sembcorp Marine MGO – The Implied Option Tells You About the Market, And It’s The Wrong Price.

By Travis Lundy

As expected, on 22 September 2021, Temasek announced its Mandatory General Offer for shares of Sembcorp Marine (SMM SP)

As suggested in Sembcorp Marine Rights Done – The MGO Option It Is, Temasek ended up at 46.6% which triggers an offer to remain in compliance with Rule 14.1 of the Takeover Code.  

For each Offer Share: S$0.08 in cash (the “Offer Price”).  The Offer Price is final and the Offeror will not revise the Offer Price or any other terms of the MGO.

There are conditions of which one must take note.

Pursuant to Rule 14.2 of the Code, if the Offeror Concert Party Group does not hold more than 50% of the issued Shares when the MGO is made, the MGO is required to be made conditional upon the Offeror Concert Party Group receiving such number of acceptances which would result in the Offeror Concert Party Group holding more than 50% of the voting rights attributable to the share capital of the Company.

IF the Offer garners shares which would take it above 50%, then it would become Unconditional. Until then, the offer is not unconditional, or complete, if it does not get to 50%. 

Importantly, the Offer will last 28 days and “if the MGO becomes unconditional as to acceptances before the Closing Date or even if the MGO becomes unconditional as to acceptances on the Closing Date itself, there will not be any extension of the Closing Date and Shareholders who do not accept the MGO by the Closing Date will not be able to do so after the Closing Date.

No extension. At all. 

The proposal I made on the 19th when the shares were S$0.084 the previous close was that the stock would probably fall once shares were delivered, but that once fallen, the shares would have much better upside vs downside skew if they reached S$0.079-0.081. The shares actually popped on delivery, but a day later we still closed S$0.081. 

This situation leaves us with an interesting profile. 

More details below. 


Before it’s here, it’s on Smartkarma

Financials: Kakao Pay, HDFC Bank and more

By | Daily Briefs, Financials

In today’s briefing:

  • Kakao Pay – A New Timeline for Its IPO
  • Deafening Silence from Media and Sell-Side on HDFC Bank’s ‘Processing Fee’ Scandal

Kakao Pay – A New Timeline for Its IPO

By Douglas Kim

Kakao Pay (377300 KS) provided a new timeline of its IPO after the market close today. The book building for the institutional investors will now start on 20 October. Previously, this was supposed to start on 29 September. Despite another delay in the IPO schedule, the company has maintained the IPO price range of 60,000 won to 90,000 won. The IPO base deal size ranges from $871 million to $1.3 billion.

According to the bankers’ valuation, the expected market cap of Kakao Pay is expected to range from 8.2 trillion won to 12.2 trillion won. Kakao Pay IPO is expected to start trading on 3 November. 

We maintain our base case valuation of EV of 10.1 trillion won, implied market cap of 12.2 trillion won, and target price per share of 89,739 won per share. This is based on an EV/S multiple of 10.6x using our estimated sales of 954 billion won for the company in 2022.
At the high end of the IPO price range (90,000 won), we see limited upside as compared to our base case valuation. On the other hand, at the low or mid end of the IPO price range (60,000 won to 75,000 won per share), we see a solid upside as compared to our target price. 

Deafening Silence from Media and Sell-Side on HDFC Bank’s ‘Processing Fee’ Scandal

By Hemindra Hazari

“hush money”: money paid to someone to prevent them from disclosing embarrassing or discreditable information – Concise Oxford English Dictionary

HDFC Bank (HDFCB IN) , India’s most valuable bank, has been found to be levying ‘processing fees’ on prospective retail customers who submitted spurious documents for availing a loan from the bank. On July 28, 2021, the noted HDFC Bank whistle blower who uses the pseudonym ‘Madanlal Dahariya’ tweeted  that when prospective retail customers seeking a loan submitted false or misleading documents such as fake Permanent Account Numbers (PAN), dual PANs, forged Income Tax returns, and spurious salary slips/balance sheets, HDFC Bank did not report these individuals to the concerned authorities. Instead, the bank decided to convert this into a fee-enhancing opportunity, by calling these individuals and allegedly threatening to report them if they did not pay a ‘processing fee’ to the Bank. The whistle blower even uploaded samples of the fee receipts issued by HDFC Bank to such prospective retail customers.

What is appalling, but not at all surprising, is that even though ‘Madanlal Dahariya’ tweeted this development on July 28, 2021, nobody in the business media and sell-side research – many of whom diligently report on the most mundane of issues pertaining to HDFC Bank – demonstrated any inclination to verify this story. This is especially strange since many journalists follow the whistle blower on Twitter.

On August 24, 2021, this analyst, after making his own enquiries, sent a questionnaire to HDFC Bank mentioning the senior executives who reportedly originated this scheme many years ago and the charging of fees to prospective retail customers who had provided spurious documents. He asked whether it was accurate that the Reserve Bank of India was querying the bank on these incidents. On September 21, 2021, HDFC Bank responded and stated that the bank reported all such instances of spurious documents to the credit bureaus; there were very few cases where the bank had levied a fee of 2% of the loan amount to prospective customers; and the bank has since ceased such practices. Pertinently, HDFC Bank did not refute any of the allegations cited in the questionnaire.

The issue is whether banks can engage in extracting ‘processing fees’ from retail customers who submit false documents, instead of reporting the incident to the concerned authorities such as the Income Tax department (for false PAN, dual PAN etc) or the concerned state investigative agencies. Many of these violations are liable for criminal prosecution under the Indian Penal Code, 1860. Indeed, the bank’s own conduct of levying a fee to customers and not reporting it to the concerned state agencies could be construed as abetment of a criminal offence.

Stakeholders, the banking regulator, the Income Tax authorities and other state agencies have to take this issue extremely seriously as it pertains to a prominent Indian bank. HDFC Bank’s board of directors have to also conduct an internal investigation to determine whether this practice was the conduct of a few rogue employees or it was a business strategy to generate higher fees, as the whistle blower alleges in the tweets.  The RBI, the Income Tax department and other concerned state agencies also have to conduct their own investigations to determine how HDFC Bank was levying fees to non-customers without rendering any service, and instead for not reporting these incidents to the government agencies.

These incidents appear to be a legacy issue, and this analyst is confident that Sashidhar Jagdishan, the present Chief Executive Officer (CEO), HDFC Bank will immediately address the issue. However, if this practice is found to have been widespread in HDFC Bank, no banking regulator in the world can permit any bank to indulge in such activities without severe penalties. Therefore, in such a case, the RBI must impose stringent penalties such as restricting profitable business for a lengthy time span, as a lesson to the shareholders and the board of directors for not exercising the necessary due diligence.


Before it’s here, it’s on Smartkarma

Japan: Softbank Group, PHC Holdings, Kusuri No Aoki, Oracle Corp Japan and more

By | Daily Briefs, Japan

In today’s briefing:

  • Softbank – Buyback Hopes Drift Further Away
  • PHC Holdings IPO: Valuation Insights
  • Japan’s Governance: Unclear Mid-Term Management Plan Update: Kusuri No Aoki Holdings (3549)
  • Japan’s Governance: TSE Market Reclassification Update: Oracle Japan (4716)

Softbank – Buyback Hopes Drift Further Away

By Mio Kato

The Nikkei had an interesting article on Softbank today detailing its increasing interest in software, especially enterprise software. We actually view this as potentially positive but it does have its risks and some of these are apparent in the names Softbank has invested in. At the same time, we believe Softbank’s interest in this new sector also makes buybacks less likely.


PHC Holdings IPO: Valuation Insights

By Arun George

PHC Holdings (6523 JP) is a leading diversified diagnostic, life sciences and medical device company serving global markets. PHC shareholders include KKR & Co Inc (KKR US) (owns 48.0% of PHC), Mitsui & Co Ltd (8031 JP) (21.1%), Life Science Institute (13.2%) and Panasonic Corp (6752 JP) (11.3%).

At the indicative price of JPY3,700 per share, PHC will have a market cap of JPY452 billion (US$4.1 billion). PHC plans to raise JPY172 billion ($1.57 billion) by offering 5.8 million primary shares (JPY22 billion raise) and 40.7 million secondary shares (JPY150 billion raise). 

In PHC Holdings IPO Initiation: Sugar High, we opined that at first glance, PHC offers solid growth, stable and healthy margins along with solid cash generation. However, on an organic basis, the revenue has declined in each of the last two financial years. The strong growth in the recent first quarter was largely due to low comps and an unsustainable revenue boost from COVID-19 related products. We concluded that PHC’s fundamentals are mixed and we are inclined to watch this IPO from the sidelines.

Our valuation analysis suggests that PHC is fully valued at the indicative price. In combination with the mixed fundamentals, we would pass on the IPO. 


Japan’s Governance: Unclear Mid-Term Management Plan Update: Kusuri No Aoki Holdings (3549)

By Aki Matsumoto

In my previous article “Japan’s Governance: Unclear Medium-Term Management Plan – Kusuri No Aoki (3549)”, I wrote a review of the company after attending its 4Q results analyst meeting. In this article, I wrote that the possibility of equity financing in the near future was undeniable in order to achieve the same number of new store openings as in the previous fiscal year in response to the decrease in operating cash flow due to the deterioration of working capital, and that it would be difficult to find differentiation in product strategy in the drugstore industry where competition is becoming increasingly fierce and companies are focusing on food products. In the drugstore industry, where competition is becoming increasingly fierce and companies are focusing on food products, it is unclear whether a half-baked pricing strategy will work. This is an update along with a summary of the previous articles.


Japan’s Governance: TSE Market Reclassification Update: Oracle Japan (4716)

By Aki Matsumoto

In relation to my previous articles “Update on “Transitional Measures” for TSE Market Reorganization” and “TOPIX Reform Update”, I would like to update you on a noteworthy disclosure. On September 21, Oracle Corporation Japan (4716) made a disclosure titled “Announcement of Application for Selection of New Market Category “Standard Market.”” Currently, many listed companies have released “Notice of Application for Selection of New Market Classification”. The reason why Oracle Corporation Japan (4716)’s disclosure attracted attention is that the company, which is currently listed on the TSE 1st Section, has applied for the new market segment “Standard Market”. As you know, under the new market classification, the market will be reorganized into three markets: Prime Market, Standard Market, and Growth Market. The current TSE 1st Section is roughly equivalent to the Prime Market, the TSE 2nd Section and the JASDAQ Market are roughly equivalent to the Standard Market, and the TSE Mothers Market is roughly equivalent to the Growth Market. Oracle Corporation Japan, which is currently listed on the TSE 1st Section, chose to list on the Standard Market, which is considered to be the equivalent of the TSE 2nd Section and the JASDAQ Market, which is different from what most listed companies are doing.


Before it’s here, it’s on Smartkarma

India: HDFC Bank, Reliance Industries and more

By | Daily Briefs, India

In today’s briefing:

  • Deafening Silence from Media and Sell-Side on HDFC Bank’s ‘Processing Fee’ Scandal
  • Global Energy Sector Improving — Buying Reliance Industries Ltd, Several Others

Deafening Silence from Media and Sell-Side on HDFC Bank’s ‘Processing Fee’ Scandal

By Hemindra Hazari

“hush money”: money paid to someone to prevent them from disclosing embarrassing or discreditable information – Concise Oxford English Dictionary

HDFC Bank (HDFCB IN) , India’s most valuable bank, has been found to be levying ‘processing fees’ on prospective retail customers who submitted spurious documents for availing a loan from the bank. On July 28, 2021, the noted HDFC Bank whistle blower who uses the pseudonym ‘Madanlal Dahariya’ tweeted  that when prospective retail customers seeking a loan submitted false or misleading documents such as fake Permanent Account Numbers (PAN), dual PANs, forged Income Tax returns, and spurious salary slips/balance sheets, HDFC Bank did not report these individuals to the concerned authorities. Instead, the bank decided to convert this into a fee-enhancing opportunity, by calling these individuals and allegedly threatening to report them if they did not pay a ‘processing fee’ to the Bank. The whistle blower even uploaded samples of the fee receipts issued by HDFC Bank to such prospective retail customers.

What is appalling, but not at all surprising, is that even though ‘Madanlal Dahariya’ tweeted this development on July 28, 2021, nobody in the business media and sell-side research – many of whom diligently report on the most mundane of issues pertaining to HDFC Bank – demonstrated any inclination to verify this story. This is especially strange since many journalists follow the whistle blower on Twitter.

On August 24, 2021, this analyst, after making his own enquiries, sent a questionnaire to HDFC Bank mentioning the senior executives who reportedly originated this scheme many years ago and the charging of fees to prospective retail customers who had provided spurious documents. He asked whether it was accurate that the Reserve Bank of India was querying the bank on these incidents. On September 21, 2021, HDFC Bank responded and stated that the bank reported all such instances of spurious documents to the credit bureaus; there were very few cases where the bank had levied a fee of 2% of the loan amount to prospective customers; and the bank has since ceased such practices. Pertinently, HDFC Bank did not refute any of the allegations cited in the questionnaire.

The issue is whether banks can engage in extracting ‘processing fees’ from retail customers who submit false documents, instead of reporting the incident to the concerned authorities such as the Income Tax department (for false PAN, dual PAN etc) or the concerned state investigative agencies. Many of these violations are liable for criminal prosecution under the Indian Penal Code, 1860. Indeed, the bank’s own conduct of levying a fee to customers and not reporting it to the concerned state agencies could be construed as abetment of a criminal offence.

Stakeholders, the banking regulator, the Income Tax authorities and other state agencies have to take this issue extremely seriously as it pertains to a prominent Indian bank. HDFC Bank’s board of directors have to also conduct an internal investigation to determine whether this practice was the conduct of a few rogue employees or it was a business strategy to generate higher fees, as the whistle blower alleges in the tweets.  The RBI, the Income Tax department and other concerned state agencies also have to conduct their own investigations to determine how HDFC Bank was levying fees to non-customers without rendering any service, and instead for not reporting these incidents to the government agencies.

These incidents appear to be a legacy issue, and this analyst is confident that Sashidhar Jagdishan, the present Chief Executive Officer (CEO), HDFC Bank will immediately address the issue. However, if this practice is found to have been widespread in HDFC Bank, no banking regulator in the world can permit any bank to indulge in such activities without severe penalties. Therefore, in such a case, the RBI must impose stringent penalties such as restricting profitable business for a lengthy time span, as a lesson to the shareholders and the board of directors for not exercising the necessary due diligence.


Global Energy Sector Improving — Buying Reliance Industries Ltd, Several Others

By Joe Jasper

Crude oil prices display bullish short-term reversals, resulting in bullish price and RS reversals for global Energy stocks — add exposure. From a macro perspective, despite some mild price deterioration recently on major indexes around the globe, our outlook remains unchanged and we remain neutral yet constructive overall. Market dynamics remain largely constructive and we continue to see attractive opportunities in many countries/regions such as Japan, China (Shanghai Composite), Europe, India, and Canada, to name a few.


Before it’s here, it’s on Smartkarma

Health Care: PHC Holdings and more

By | Daily Briefs, Healthcare

In today’s briefing:

  • PHC Holdings IPO: Valuation Insights

PHC Holdings IPO: Valuation Insights

By Arun George

PHC Holdings (6523 JP) is a leading diversified diagnostic, life sciences and medical device company serving global markets. PHC shareholders include KKR & Co Inc (KKR US) (owns 48.0% of PHC), Mitsui & Co Ltd (8031 JP) (21.1%), Life Science Institute (13.2%) and Panasonic Corp (6752 JP) (11.3%).

At the indicative price of JPY3,700 per share, PHC will have a market cap of JPY452 billion (US$4.1 billion). PHC plans to raise JPY172 billion ($1.57 billion) by offering 5.8 million primary shares (JPY22 billion raise) and 40.7 million secondary shares (JPY150 billion raise). 

In PHC Holdings IPO Initiation: Sugar High, we opined that at first glance, PHC offers solid growth, stable and healthy margins along with solid cash generation. However, on an organic basis, the revenue has declined in each of the last two financial years. The strong growth in the recent first quarter was largely due to low comps and an unsustainable revenue boost from COVID-19 related products. We concluded that PHC’s fundamentals are mixed and we are inclined to watch this IPO from the sidelines.

Our valuation analysis suggests that PHC is fully valued at the indicative price. In combination with the mixed fundamentals, we would pass on the IPO. 


Before it’s here, it’s on Smartkarma