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Value Investing

Brief Value Investing: NTT: Move into Renewable Energy Apparently on the Way and more

By | Daily Briefs, Value Investing

In this briefing:

  1. NTT: Move into Renewable Energy Apparently on the Way

1. NTT: Move into Renewable Energy Apparently on the Way

Nikkei%20chart%20on%20ntt

The Nikkei reports NTT (Nippon Telegraph & Telephone) (9432 JP)  will invest up to ¥1,000bn ($9.4bn) over the next ten years to enter the renewable energy market. Since the deregulation of utility markets in 2016, there has been occasional talk of telecom crossover although most efforts to date have focused on electricity resale to lower customer churn for mobile operators. NTT’s move is not completely unprecedented as Softbank Group entered the renewable energy market in 2011 although NTT’s effort appears to be an order of magnitude larger. 

NTT targets imply a business the size of Shikoku Electric Power Co (9507 JP)  by 2030. That company recorded electricity sales of ¥631bn in FY19 which represents c. 5% of NTT’s current revenue base. So, despite the rather large numbers being thrown around, this is more of an incremental move than transformative. There are some synergistic benefits as NTT should save on utility costs whilst the use of existing facilities for deployment should make the underlying assets more useful.

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Brief Value Investing: Aomori Bank  (8342 JP):  A Withered Oak in the Green Forest and more

By | Daily Briefs, Value Investing

In this briefing:

  1. Aomori Bank  (8342 JP):  A Withered Oak in the Green Forest
  2. Japanese Banks – Drowning in Liquidity
  3. Japanese Banks:  Ill Winds
  4. CyberAgent: Positive Outlook for Internet Advertising and ABEMA but Game Business Growth Is a Worry
  5. Yangzijiang Shipbuilding Must Be Clever to Prosper In A Government Regulated Industry (Part 2)

1. Aomori Bank  (8342 JP):  A Withered Oak in the Green Forest

8342 aomori 2020 0726 current%20guidance

1Q FY3/2021 results for Aomori Bank (8342 JP), the leading regional bank based in Aomori Prefecture at the very top of Japan’s main island of Honshu, showed a 10% YoY improvement in consolidated net profits despite a fall in overall revenues.  Dig a little deeper and it becomes evident that that result was achieved through heavy reliance on stock profits, bond trading and asset sales.

Aomori Bank (“Aomori” 青森 means “green forest” in Japanese) is a good example of the plight befalling many regional banks around Japan where the population is shrinking rapidly, young workers are leaving to find jobs elsewhere and the local economy is in long-term decline.  Net profit generation is poor, core earnings have been declining rapidly since FY3/2013, net interest margin has fallen to less than half what it was a decade ago, the overhead ratio is a worrying 84%, credit costs are rising exponentially and the bank has been forced to cut its FY3/2021 dividend from ¥60ps to ¥50ps to preserve capital.

The stock price is down 21% in the last six months and yet, on a forward-looking PER of 27.9x (using the bank’s own FY3/2021 guidance), this remains the 2nd-most demanding regional bank stock in the Tohoku Region (being beaten only by Michinoku Bank (8350 JP), also from Aomori Prefecture, on a staggering 62.7x).

Remarkably, aggregate ownership by foreign institutional investors is at an all-time high, and has been rising steadily for the last eight years.  We fail to understand the attraction.  Caveat Emptor!  (May the Buyer Beware) is our advice to any would-be investor in this bank stock.

2. Japanese Banks – Drowning in Liquidity

Windamee%20research 2020 0726 ill%20winds%20%20jba%20data av%20deps%20growth%20majors%20v%20reg%202001 2020

Spare a thought for the poor, embattled Japanese banker.  In this COVID-19-altered world, his biggest problem is that he has too much money.  Way, way too much money.  Money keeps piling in through the branch doors faster than he can put it to work, shovelling it out to customers as loans or investing it in minimal-return securities.

In our recent Insight Japanese Banks:  Ill Winds we noted that YoY loan growth for the major Japanese banks in June 2020 hit an all-time record high of +9.4%.  That’s the good news.  The bad news is that average deposits at the major banks rose +10.3% YoY in May and then a record +12.0% YoY in June, according to the Japanese Bankers Association (JBA).  Major corporates drew down on their credit lines as a precaution against a prolonged economic downturn and then parked the additional cash with their bankers for safe-keeping until needed.  The megabankers are drowning in cash: their loan to deposit ratios (LDR)  –  an important measure of overall efficiency  –  have collapsed to just 52%, whereas back in 2001 they were close to 98%.  In the meantime, margins remain under pressure amidst this hyper-liquidity, banks are struggling to make any profit on their domestic book, unrealised securities gains have been whittled away, and credit costs are rising exponentially.

While many Japanese bank stocks have risen by double-digits over the last three months, rising on a gentle tide of cautious investor optimism over the outlook for recovery in Japan’s manufacturing sector post-COVID-19, it remains a fact that Japanese banks have underperformed Topix virtually unchecked since 2015.  We expect this trend to continue.  “Caveat Emptor!” (May the Buyer Beware) remains our advice to would-be investors in Japanese bank stocks for FY3/2021 and beyond.

3. Japanese Banks:  Ill Winds

Windamee%20research 2020 0726 ill%20winds%20%20topix%20banks%20performance%202015 2020

It’s an ill wind that blows nobody any good, as the saying goes.  While Japanese industry is starting to count the economic cost of the coronavirus pandemic in terms of lost production and the global disruption to the supply chain, some Japanese banks have seen a remarkable surge in loan demand as major companies rush to secure lines of credit and draw down cash reserves in order to survive what is shaping up to be a prolonged economic recession.  Overall lending rose +6.8% YoY in June – the highest year-on-year increase recorded in the last 20 years, led by the megabanks and other major banks whose loan balances rose by an average of +9.4% YoY: a new all-time record.  Whether this is the start of a trend or is simply a short-term phenomenon remains to be seen, as is the question of whether these new loans are economically rational, depending on the interest rate applied.  ‘Profitless prosperity’ remains a clear and present danger for the Japanese banks post-COVID-19.

Be that as it may, the fundamental outlook for Japan’s banks has not improved in CY2020: if anything, the outlook for FY3/2021 and beyond is even more uncertain than it was prior to the coronavirus pandemic.  As we have frequently pointed out in past Insights, margins remain under downward pressure, many banks (both big and small) remain underwater on their core domestic businesses, and credit costs are rising across the board as Japanese banks brace for a new wave of corporate failures in the wake of the coronavirus pandemic.

While many Japanese bank stocks have risen by double-digits over the last three months, rising on a gentle tide of cautious investor optimism over the outlook for recovery in Japan’s manufacturing sector post-COVID-19, it remains a fact that Japanese banks have underperformed Topix virtually unchecked since 2015.  We expect this trend to continue.  “Caveat Emptor!” (May the Buyer Beware) remains our advice to would-be investors in Japanese bank stocks for FY3/2021 and beyond.

4. CyberAgent: Positive Outlook for Internet Advertising and ABEMA but Game Business Growth Is a Worry

Image 40214919161595484858296

Cyberagent Inc (4751 JP) reported its 3Q FY09/20 financial results after the market closed yesterday. It’s 3Q FY09/20 revenue was in line with consensus, but OP beat consensus by around 5%. We analyse CyberAgent’s 3Q FY09/20 results in detail below.

5. Yangzijiang Shipbuilding Must Be Clever to Prosper In A Government Regulated Industry (Part 2)

Dominating%20the%20seas

1. How did China’s shipbuilding industry develop?

2. Subsidies – “Lend to Mend and Prosper?” or Not?

3. Barriers to Entry – How will competitors rise post Covid?

4. How clever does one need to be in China’s shipping industry?

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Brief Value Investing: Japanese Banks – Drowning in Liquidity and more

By | Daily Briefs, Value Investing

In this briefing:

  1. Japanese Banks – Drowning in Liquidity
  2. Japanese Banks:  Ill Winds
  3. CyberAgent: Positive Outlook for Internet Advertising and ABEMA but Game Business Growth Is a Worry
  4. Yangzijiang Shipbuilding Must Be Clever to Prosper In A Government Regulated Industry (Part 2)
  5. Haichang Ocean Park Holdings Ltd: Timing Might Be Right for a Close Look on a Post Virus Bull Case

1. Japanese Banks – Drowning in Liquidity

Windamee%20research 2020 0726 ill%20winds%20%20jba%20data av%20deps%20growth%20majors%20v%20all%202001 2020

Spare a thought for the poor, embattled Japanese banker.  In this COVID-19-altered world, his biggest problem is that he has too much money.  Way, way too much money.  Money keeps piling in through the branch doors faster than he can put it to work, shovelling it out to customers as loans or investing it in minimal-return securities.

In our recent Insight Japanese Banks:  Ill Winds we noted that YoY loan growth for the major Japanese banks in June 2020 hit an all-time record high of +9.4%.  That’s the good news.  The bad news is that average deposits at the major banks rose +10.3% YoY in May and then a record +12.0% YoY in June, according to the Japanese Bankers Association (JBA).  Major corporates drew down on their credit lines as a precaution against a prolonged economic downturn and then parked the additional cash with their bankers for safe-keeping until needed.  The megabankers are drowning in cash: their loan to deposit ratios (LDR)  –  an important measure of overall efficiency  –  have collapsed to just 52%, whereas back in 2001 they were close to 98%.  In the meantime, margins remain under pressure amidst this hyper-liquidity, banks are struggling to make any profit on their domestic book, unrealised securities gains have been whittled away, and credit costs are rising exponentially.

While many Japanese bank stocks have risen by double-digits over the last three months, rising on a gentle tide of cautious investor optimism over the outlook for recovery in Japan’s manufacturing sector post-COVID-19, it remains a fact that Japanese banks have underperformed Topix virtually unchecked since 2015.  We expect this trend to continue.  “Caveat Emptor!” (May the Buyer Beware) remains our advice to would-be investors in Japanese bank stocks for FY3/2021 and beyond.

2. Japanese Banks:  Ill Winds

Windamee%20research 2020 0726 ill%20winds%20%20jba%20data av%20loan%20growth%20reg%20v%202ndreg%202017 2020

It’s an ill wind that blows nobody any good, as the saying goes.  While Japanese industry is starting to count the economic cost of the coronavirus pandemic in terms of lost production and the global disruption to the supply chain, some Japanese banks have seen a remarkable surge in loan demand as major companies rush to secure lines of credit and draw down cash reserves in order to survive what is shaping up to be a prolonged economic recession.  Overall lending rose +6.8% YoY in June – the highest year-on-year increase recorded in the last 20 years, led by the megabanks and other major banks whose loan balances rose by an average of +9.4% YoY: a new all-time record.  Whether this is the start of a trend or is simply a short-term phenomenon remains to be seen, as is the question of whether these new loans are economically rational, depending on the interest rate applied.  ‘Profitless prosperity’ remains a clear and present danger for the Japanese banks post-COVID-19.

Be that as it may, the fundamental outlook for Japan’s banks has not improved in CY2020: if anything, the outlook for FY3/2021 and beyond is even more uncertain than it was prior to the coronavirus pandemic.  As we have frequently pointed out in past Insights, margins remain under downward pressure, many banks (both big and small) remain underwater on their core domestic businesses, and credit costs are rising across the board as Japanese banks brace for a new wave of corporate failures in the wake of the coronavirus pandemic.

While many Japanese bank stocks have risen by double-digits over the last three months, rising on a gentle tide of cautious investor optimism over the outlook for recovery in Japan’s manufacturing sector post-COVID-19, it remains a fact that Japanese banks have underperformed Topix virtually unchecked since 2015.  We expect this trend to continue.  “Caveat Emptor!” (May the Buyer Beware) remains our advice to would-be investors in Japanese bank stocks for FY3/2021 and beyond.

3. CyberAgent: Positive Outlook for Internet Advertising and ABEMA but Game Business Growth Is a Worry

Image 40214919161595484858296

Cyberagent Inc (4751 JP) reported its 3Q FY09/20 financial results after the market closed yesterday. It’s 3Q FY09/20 revenue was in line with consensus, but OP beat consensus by around 5%. We analyse CyberAgent’s 3Q FY09/20 results in detail below.

4. Yangzijiang Shipbuilding Must Be Clever to Prosper In A Government Regulated Industry (Part 2)

Dominating%20the%20seas

1. How did China’s shipbuilding industry develop?

2. Subsidies – “Lend to Mend and Prosper?” or Not?

3. Barriers to Entry – How will competitors rise post Covid?

4. How clever does one need to be in China’s shipping industry?

5. Haichang Ocean Park Holdings Ltd: Timing Might Be Right for a Close Look on a Post Virus Bull Case

1 shanghai haichang ocean park photo courtesy legacy entertainment 2

  • A strong asset base in 6 major parks plus two amusement parks battered by long term bearish sentiment exacerbated by the virus crisis produces a low risk entry point.
  • The company’s 5 year annual growth trend pre-virus has moved from 10.3% to 49.84% in 2019. Much growth fueled by capex debt.
  • Trading at a 52-week low of -57.6% YTD, the stock will benefit from the concept of operating leverage as the virus crisis enters early stage of re-openings.

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Brief Value Investing: Japanese Banks:  Ill Winds and more

By | Daily Briefs, Value Investing

In this briefing:

  1. Japanese Banks:  Ill Winds
  2. CyberAgent: Positive Outlook for Internet Advertising and ABEMA but Game Business Growth Is a Worry
  3. Yangzijiang Shipbuilding Must Be Clever to Prosper In A Government Regulated Industry (Part 2)
  4. Haichang Ocean Park Holdings Ltd: Timing Might Be Right for a Close Look on a Post Virus Bull Case
  5. SINA Bullish Base and 45 Macro Hurdle

1. Japanese Banks:  Ill Winds

Windamee%20research 2020 0726 ill%20winds%20%20jba%20data av%20loan%20growth%20majors%20v%20all%202001 2020

It’s an ill wind that blows nobody any good, as the saying goes.  While Japanese industry is starting to count the economic cost of the coronavirus pandemic in terms of lost production and the global disruption to the supply chain, some Japanese banks have seen a remarkable surge in loan demand as major companies rush to secure lines of credit and draw down cash reserves in order to survive what is shaping up to be a prolonged economic recession.  Overall lending rose +6.8% YoY in June – the highest year-on-year increase recorded in the last 20 years, led by the megabanks and other major banks whose loan balances rose by an average of +9.4% YoY: a new all-time record.  Whether this is the start of a trend or is simply a short-term phenomenon remains to be seen, as is the question of whether these new loans are economically rational, depending on the interest rate applied.  ‘Profitless prosperity’ remains a clear and present danger for the Japanese banks post-COVID-19.

Be that as it may, the fundamental outlook for Japan’s banks has not improved in CY2020: if anything, the outlook for FY3/2021 and beyond is even more uncertain than it was prior to the coronavirus pandemic.  As we have frequently pointed out in past Insights, margins remain under downward pressure, many banks (both big and small) remain underwater on their core domestic businesses, and credit costs are rising across the board as Japanese banks brace for a new wave of corporate failures in the wake of the coronavirus pandemic.

While many Japanese bank stocks have risen by double-digits over the last three months, rising on a gentle tide of cautious investor optimism over the outlook for recovery in Japan’s manufacturing sector post-COVID-19, it remains a fact that Japanese banks have underperformed Topix virtually unchecked since 2015.  We expect this trend to continue.  “Caveat Emptor!” (May the Buyer Beware) remains our advice to would-be investors in Japanese bank stocks for FY3/2021 and beyond.

2. CyberAgent: Positive Outlook for Internet Advertising and ABEMA but Game Business Growth Is a Worry

Image 40214919161595484858296

Cyberagent Inc (4751 JP) reported its 3Q FY09/20 financial results after the market closed yesterday. It’s 3Q FY09/20 revenue was in line with consensus, but OP beat consensus by around 5%. We analyse CyberAgent’s 3Q FY09/20 results in detail below.

3. Yangzijiang Shipbuilding Must Be Clever to Prosper In A Government Regulated Industry (Part 2)

Dominating%20the%20seas

1. How did China’s shipbuilding industry develop?

2. Subsidies – “Lend to Mend and Prosper?” or Not?

3. Barriers to Entry – How will competitors rise post Covid?

4. How clever does one need to be in China’s shipping industry?

4. Haichang Ocean Park Holdings Ltd: Timing Might Be Right for a Close Look on a Post Virus Bull Case

1 shanghai haichang ocean park photo courtesy legacy entertainment 2

  • A strong asset base in 6 major parks plus two amusement parks battered by long term bearish sentiment exacerbated by the virus crisis produces a low risk entry point.
  • The company’s 5 year annual growth trend pre-virus has moved from 10.3% to 49.84% in 2019. Much growth fueled by capex debt.
  • Trading at a 52-week low of -57.6% YTD, the stock will benefit from the concept of operating leverage as the virus crisis enters early stage of re-openings.

5. SINA Bullish Base and 45 Macro Hurdle

Sina Corp (Class A) (SINA US) is forming a base but upside momentum is lacking and places a pivotal cap/inflection near the 45 resistance level. We outlined buy support and tactical breakout resistance.

RSI and MACD have recovered to sell zones but price action has struggled to keep pace for a case of bearish variance (underlying weak but bullish on a pullback). Note RSI sell resistance at 70+.

Bull divergence is maturing but appears to early to ignite a full on rally with 45 acting as the inflection level. Gap higher needs to clear 40.75 to see upside follow through (long trigger) to challenge 45.

Price is forming a bull wedge that is in sync with bull divergence. Macro is turning more bullish on the back of selling exhaustion, bull divergences maturing and price support at 30.

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Brief Value Investing: Concordia Financial Group (7186 JP):  Blame It on the Junior and more

By | Daily Briefs, Value Investing

In this briefing:

  1. Concordia Financial Group (7186 JP):  Blame It on the Junior
  2. How We Think About China? Dragon, Baby Elephants & The Milkman Renaissance
  3. NTT: Move into Renewable Energy Apparently on the Way
  4. The Silver Lining and STAR in China’s Shipbuilding Cloud

1. Concordia Financial Group (7186 JP):  Blame It on the Junior

7186 concordiafg 2020 0627 npp 1

Concordia Financial Group, Ltd (7186 JP), or CFG, is the holding company for one of Japan’s largest regional banks, the Bank of Yokohama (BoY), and a small Tokyo-based secondary regional bank, Higashi-Nippon Bank (HNPB).  Two years on from a lending scandal at HNPB that forced the HNPB president to step down, growth at CFG continues to be dogged by ongoing problems with the group’s junior partner.  HNPB reported a consolidated net loss in FY3/2020 and is now expected to record a further net loss in FY3/2021.

Aggregate foreign ownership in CFG remains high at around 31.5% as investors view CFG as a liquid alternative to the ‘crowded trade’ of simply buying megabanks for exposure to the Japanese financial sector.  However, CFG continues to significantly underperform the Topix Banks Index, with its share price down over 21% in the last six months. CFG is by far the worst-performing of the 4 remaining regional banks with market capitalisations greater than US$3bn.  This is despite a cash dividend payment policy of 33% of net profits, a total shareholder return policy target of 50%, frequent share buybacks, and regular share cancellations.

Except for a brief rally in early March, the Topix Banks Index has notably underperformed Topix all year.  Within the regional banking sector, we much prefer Chiba Bank (8331 JP) to CFG for its strong, scandal-free management and long-standing profits ‘track record’.

2. How We Think About China? Dragon, Baby Elephants & The Milkman Renaissance

China%20fortune%20500

  1. China is extremely complicated and hard to understand. Requires a “magnifying glass”
  2. Change is hard to accept – “When Trees are Tall, They Start Feeling WIND”
  3. What is the New Global Era?
  4. 14 Thoughts on the China Conundrum

3. NTT: Move into Renewable Energy Apparently on the Way

Nikkei%20chart%20on%20ntt

The Nikkei reports NTT (Nippon Telegraph & Telephone) (9432 JP)  will invest up to ¥1,000bn ($9.4bn) over the next ten years to enter the renewable energy market. Since the deregulation of utility markets in 2016, there has been occasional talk of telecom crossover although most efforts to date have focused on electricity resale to lower customer churn for mobile operators. NTT’s move is not completely unprecedented as Softbank Group entered the renewable energy market in 2011 although NTT’s effort appears to be an order of magnitude larger. 

NTT targets imply a business the size of Shikoku Electric Power Co (9507 JP)  by 2030. That company recorded electricity sales of ¥631bn in FY19 which represents c. 5% of NTT’s current revenue base. So, despite the rather large numbers being thrown around, this is more of an incremental move than transformative. There are some synergistic benefits as NTT should save on utility costs whilst the use of existing facilities for deployment should make the underlying assets more useful.

4. The Silver Lining and STAR in China’s Shipbuilding Cloud

Image 68140559431593061846337

  1. Father, a Risk Taker to the conservative son – What’s next? Does the apple fall from the tree?
  2. Inflection point for shipbuilding in China – Fruits of consolidation & Chinese capital
  3. Beauty to China shipbuilding corruption
  4. Bet on LNG and clean energy vessels
  5. Best of Korean and Japanese ship technology in China

 

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Brief Value Investing: Suruga Bank (8358 JP):  One Step Back, but Several Steps Forward and more

By | Daily Briefs, Value Investing

In this briefing:

  1. Suruga Bank (8358 JP):  One Step Back, but Several Steps Forward

1. Suruga Bank (8358 JP):  One Step Back, but Several Steps Forward

8358 suruga 2020 0614%20npls

FY3/2020 consolidated results were slightly below guidance and FY3/2021 guidance suggests consolidated net profits may fall as much as 76% YoY to just ¥6bn, with a ¥3.5bn net loss in 1H FY3/2021 as a result of further precautionary provisioning.  That said, Suruga Bank Ltd (8358 JP) reached some important milestones in FY3/2020 on the long, slow road to recovery after the catastrophic ‘share house’ scandal.

Management is now focusing on a new business model that includes more corporate business in a bid to stabilise and diversify revenues.  Market reaction has remained mixed to date, as shown in the high volatility of the share price from one day to the next.  Nevertheless, the stock has risen over 20% since our last Insight Suruga Bank (8358 JP):  Swimming Against the Tide in early April 2020: a considerably better performance than that of several much larger regional banks that are also widely held by foreign investors.  Suruga Bank remains one of the most heavily-traded Japanese bank stocks, and is regularly one of the Top 5 Japanese bank stocks in terms of daily trading volume behind only the three megabanks and Resona Holdings (8308 JP).

Risks remain, and we continue to warn that this is a stock for players of the Long Game only.  Nevertheless, the positives are increasing while the negatives are gradually starting to diminish.

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Brief Value Investing: Suruga Bank (8358 JP):  One Step Back, but Several Steps Forward and more

By | Daily Briefs, Value Investing

In this briefing:

  1. Suruga Bank (8358 JP):  One Step Back, but Several Steps Forward
  2. BYD: Component Carve-Outs More Interesting than Core Business

1. Suruga Bank (8358 JP):  One Step Back, but Several Steps Forward

8358 suruga 2020 0614%20npls

FY3/2020 consolidated results were slightly below guidance and FY3/2021 guidance suggests consolidated net profits may fall as much as 76% YoY to just ¥6bn, with a ¥3.5bn net loss in 1H FY3/2021 as a result of further precautionary provisioning.  That said, Suruga Bank Ltd (8358 JP) reached some important milestones in FY3/2020 on the long, slow road to recovery after the catastrophic ‘share house’ scandal.

Management is now focusing on a new business model that includes more corporate business in a bid to stabilise and diversify revenues.  Market reaction has remained mixed to date, as shown in the high volatility of the share price from one day to the next.  Nevertheless, the stock has risen over 20% since our last Insight Suruga Bank (8358 JP):  Swimming Against the Tide in early April 2020: a considerably better performance than that of several much larger regional banks that are also widely held by foreign investors.  Suruga Bank remains one of the most heavily-traded Japanese bank stocks, and is regularly one of the Top 5 Japanese bank stocks in terms of daily trading volume behind only the three megabanks and Resona Holdings (8308 JP).

Risks remain, and we continue to warn that this is a stock for players of the Long Game only.  Nevertheless, the positives are increasing while the negatives are gradually starting to diminish.

2. BYD: Component Carve-Outs More Interesting than Core Business

Image 20777525521592818631886

BYD’s earnings recovery is still facing challenges this year. China’s NEV sales remain much weaker than ICE models in the past few months. In May 2020, China’s PV (passenger vehicle) sales grew by 7% yoy, while NEV sales dropped by -28% yoy. Moreover BYD’s NEV sales recovery trend is weaker than sector average, partly because of the launch of local produced Tesla Model 3.

However, BYD’s valuation re-rating is being triggered with recent successful Round A and A+ financing of BYD’s subsidiary-BYD Semiconductor, who produces IGBT for EVs. A-share investors might focus on BYD’s components carve-outs in the next few years, rather than its own financial performance.

Based on BYD’s latest moves, the company might carve out its EV IGBT, EV battery, powertrain and auto lights in the future. EV battery might come first. Components carve outs would bring BYD cash inflow. In addition,  current listed leading IGBT supplier is valuated at 190x P/E 2020E (Bloomberg). This is triggering valuation rerating on BYD.

We maintain BUY on BYD (1211.HK), and BYD (002594.CH) would have better performance.

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Brief Value Investing: Suruga Bank (8358 JP):  One Step Back, but Several Steps Forward and more

By | Daily Briefs, Value Investing

In this briefing:

  1. Suruga Bank (8358 JP):  One Step Back, but Several Steps Forward
  2. BYD: Component Carve-Outs More Interesting than Core Business
  3. Cielo (CIEL3 BZ) & Facebook (FB US), Did They Jump the Gun?: WhatsApp Payments Suspended in Brazil

1. Suruga Bank (8358 JP):  One Step Back, but Several Steps Forward

8358 suruga 2020 0614%20npls

FY3/2020 consolidated results were slightly below guidance and FY3/2021 guidance suggests consolidated net profits may fall as much as 76% YoY to just ¥6bn, with a ¥3.5bn net loss in 1H FY3/2021 as a result of further precautionary provisioning.  That said, Suruga Bank Ltd (8358 JP) reached some important milestones in FY3/2020 on the long, slow road to recovery after the catastrophic ‘share house’ scandal.

Management is now focusing on a new business model that includes more corporate business in a bid to stabilise and diversify revenues.  Market reaction has remained mixed to date, as shown in the high volatility of the share price from one day to the next.  Nevertheless, the stock has risen over 20% since our last Insight Suruga Bank (8358 JP):  Swimming Against the Tide in early April 2020: a considerably better performance than that of several much larger regional banks that are also widely held by foreign investors.  Suruga Bank remains one of the most heavily-traded Japanese bank stocks, and is regularly one of the Top 5 Japanese bank stocks in terms of daily trading volume behind only the three megabanks and Resona Holdings (8308 JP).

Risks remain, and we continue to warn that this is a stock for players of the Long Game only.  Nevertheless, the positives are increasing while the negatives are gradually starting to diminish.

2. BYD: Component Carve-Outs More Interesting than Core Business

Image 20777525521592818631886

BYD’s earnings recovery is still facing challenges this year. China’s NEV sales remain much weaker than ICE models in the past few months. In May 2020, China’s PV (passenger vehicle) sales grew by 7% yoy, while NEV sales dropped by -28% yoy. Moreover BYD’s NEV sales recovery trend is weaker than sector average, partly because of the launch of local produced Tesla Model 3.

However, BYD’s valuation re-rating is being triggered with recent successful Round A and A+ financing of BYD’s subsidiary-BYD Semiconductor, who produces IGBT for EVs. A-share investors might focus on BYD’s components carve-outs in the next few years, rather than its own financial performance.

Based on BYD’s latest moves, the company might carve out its EV IGBT, EV battery, powertrain and auto lights in the future. EV battery might come first. Components carve outs would bring BYD cash inflow. In addition,  current listed leading IGBT supplier is valuated at 190x P/E 2020E (Bloomberg). This is triggering valuation rerating on BYD.

We maintain BUY on BYD (1211.HK), and BYD (002594.CH) would have better performance.

3. Cielo (CIEL3 BZ) & Facebook (FB US), Did They Jump the Gun?: WhatsApp Payments Suspended in Brazil

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  • A week after the announcement that Facebook Inc A (FB US) owned WhatsApp launched its payments app in Brazil, the Brazil Central Bank (BCB) has suspended its operation
  • Cielo SA (CIEL3 BZ) is adversely impacted as the app’s first and so far sole payments processor in Brazil; Mastercard and Visa have also been ordered by BCB to suspend domestic WhatsApp app payments
  • BCB has stated that its action is to ensure a proper functioning and competitive market in payments going forward; the anti-trust body CADE sees the WhatsApp-Cielo tie up as a “joint venture” which needs to be reviewed
  • Last week it seemed that Cielo SA (CIEL3 BZ) had an edge versus the competition in the crowded payments space with the WhatsApp deal; the BCB’s suspension and review leaves Cielo SA (CIEL3 BZ) shares exposed to the downside, but should act as some short term support for other Brazilian acquirers and sub-acquirers
  • Risks to our negative view on Cielo SA (CIEL3 BZ) include a fast resolution and a reversal of the suspension, and better than expected merchant acquiring market share for Cielo

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Brief Value Investing: CyberAgent: Positive Outlook for Internet Advertising and ABEMA but Game Business Growth Is a Worry and more

By | Daily Briefs, Value Investing

In this briefing:

  1. CyberAgent: Positive Outlook for Internet Advertising and ABEMA but Game Business Growth Is a Worry
  2. Yangzijiang Shipbuilding Must Be Clever to Prosper In A Government Regulated Industry (Part 2)
  3. Haichang Ocean Park Holdings Ltd: Timing Might Be Right for a Close Look on a Post Virus Bull Case
  4. SINA Bullish Base and 45 Macro Hurdle
  5. European Banks: Balance Sheet Assessments in the Face of Adversity

1. CyberAgent: Positive Outlook for Internet Advertising and ABEMA but Game Business Growth Is a Worry

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Cyberagent Inc (4751 JP) reported its 3Q FY09/20 financial results after the market closed yesterday. It’s 3Q FY09/20 revenue was in line with consensus, but OP beat consensus by around 5%. We analyse CyberAgent’s 3Q FY09/20 results in detail below.

2. Yangzijiang Shipbuilding Must Be Clever to Prosper In A Government Regulated Industry (Part 2)

Dominating%20the%20seas

1. How did China’s shipbuilding industry develop?

2. Subsidies – “Lend to Mend and Prosper?” or Not?

3. Barriers to Entry – How will competitors rise post Covid?

4. How clever does one need to be in China’s shipping industry?

3. Haichang Ocean Park Holdings Ltd: Timing Might Be Right for a Close Look on a Post Virus Bull Case

1 shanghai haichang ocean park photo courtesy legacy entertainment 2

  • A strong asset base in 6 major parks plus two amusement parks battered by long term bearish sentiment exacerbated by the virus crisis produces a low risk entry point.
  • The company’s 5 year annual growth trend pre-virus has moved from 10.3% to 49.84% in 2019. Much growth fueled by capex debt.
  • Trading at a 52-week low of -57.6% YTD, the stock will benefit from the concept of operating leverage as the virus crisis enters early stage of re-openings.

4. SINA Bullish Base and 45 Macro Hurdle

Sina Corp (Class A) (SINA US) is forming a base but upside momentum is lacking and places a pivotal cap/inflection near the 45 resistance level. We outlined buy support and tactical breakout resistance.

RSI and MACD have recovered to sell zones but price action has struggled to keep pace for a case of bearish variance (underlying weak but bullish on a pullback). Note RSI sell resistance at 70+.

Bull divergence is maturing but appears to early to ignite a full on rally with 45 acting as the inflection level. Gap higher needs to clear 40.75 to see upside follow through (long trigger) to challenge 45.

Price is forming a bull wedge that is in sync with bull divergence. Macro is turning more bullish on the back of selling exhaustion, bull divergences maturing and price support at 30.

5. European Banks: Balance Sheet Assessments in the Face of Adversity

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  • In this report, we look at balance sheet strength and loan loss provisioning “readiness” and the planned EU pandemic recovery fund
  • EU leaders have yet to finalise the block’s pandemic recovery fund, with an intra-group dispute over the size of the grants for the recovery fund
  • For the banks, even with the recovery package, we believe that balance sheet resilience remains important over the medium term, given the adverse outlook
  • We believe that ultimately the recovery fund will be approved, with some concessions to the “Frugal Four
  • We expect weaker balance sheet Southern Europe banks to re-rate in the near term on the back of constructive recovery package news, as the fund should serve to support economic activity and help limit the worsening of credit quality
  • Based on our screens, Unicredit is the best “all-rounder”, BNP scores well on value and credit quality, with Banco Sabadell standing out for its deep value
  • Risks to our positive view on these banks include the risk of a heavily diluted recovery fund, worse than expected credit quality due to a tougher than expected macro-economic performance due the pandemic as well as an increase in political tensions between EU member states

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Brief Value Investing: Yangzijiang Shipbuilding Must Be Clever to Prosper In A Government Regulated Industry (Part 2) and more

By | Daily Briefs, Value Investing

In this briefing:

  1. Yangzijiang Shipbuilding Must Be Clever to Prosper In A Government Regulated Industry (Part 2)
  2. Haichang Ocean Park Holdings Ltd: Timing Might Be Right for a Close Look on a Post Virus Bull Case
  3. SINA Bullish Base and 45 Macro Hurdle
  4. European Banks: Balance Sheet Assessments in the Face of Adversity
  5. How The CAR Rental Elephant May Potentially Evolve? Part 2

1. Yangzijiang Shipbuilding Must Be Clever to Prosper In A Government Regulated Industry (Part 2)

Dominating%20the%20seas

1. How did China’s shipbuilding industry develop?

2. Subsidies – “Lend to Mend and Prosper?” or Not?

3. Barriers to Entry – How will competitors rise post Covid?

4. How clever does one need to be in China’s shipping industry?

2. Haichang Ocean Park Holdings Ltd: Timing Might Be Right for a Close Look on a Post Virus Bull Case

1 shanghai haichang ocean park photo courtesy legacy entertainment 2

  • A strong asset base in 6 major parks plus two amusement parks battered by long term bearish sentiment exacerbated by the virus crisis produces a low risk entry point.
  • The company’s 5 year annual growth trend pre-virus has moved from 10.3% to 49.84% in 2019. Much growth fueled by capex debt.
  • Trading at a 52-week low of -57.6% YTD, the stock will benefit from the concept of operating leverage as the virus crisis enters early stage of re-openings.

3. SINA Bullish Base and 45 Macro Hurdle

Sina Corp (Class A) (SINA US) is forming a base but upside momentum is lacking and places a pivotal cap/inflection near the 45 resistance level. We outlined buy support and tactical breakout resistance.

RSI and MACD have recovered to sell zones but price action has struggled to keep pace for a case of bearish variance (underlying weak but bullish on a pullback). Note RSI sell resistance at 70+.

Bull divergence is maturing but appears to early to ignite a full on rally with 45 acting as the inflection level. Gap higher needs to clear 40.75 to see upside follow through (long trigger) to challenge 45.

Price is forming a bull wedge that is in sync with bull divergence. Macro is turning more bullish on the back of selling exhaustion, bull divergences maturing and price support at 30.

4. European Banks: Balance Sheet Assessments in the Face of Adversity

Image 55465450331595261689440

  • In this report, we look at balance sheet strength and loan loss provisioning “readiness” and the planned EU pandemic recovery fund
  • EU leaders have yet to finalise the block’s pandemic recovery fund, with an intra-group dispute over the size of the grants for the recovery fund
  • For the banks, even with the recovery package, we believe that balance sheet resilience remains important over the medium term, given the adverse outlook
  • We believe that ultimately the recovery fund will be approved, with some concessions to the “Frugal Four
  • We expect weaker balance sheet Southern Europe banks to re-rate in the near term on the back of constructive recovery package news, as the fund should serve to support economic activity and help limit the worsening of credit quality
  • Based on our screens, Unicredit is the best “all-rounder”, BNP scores well on value and credit quality, with Banco Sabadell standing out for its deep value
  • Risks to our positive view on these banks include the risk of a heavily diluted recovery fund, worse than expected credit quality due to a tougher than expected macro-economic performance due the pandemic as well as an increase in political tensions between EU member states

5. How The CAR Rental Elephant May Potentially Evolve? Part 2

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  1. Will CAR & China Vehicle/Mobility Industry Catch Up or Advance Past Developed Markets?
  2. If Warburg Pincus, eHi/TRIP.Com/SAIC & Others See Value in CAR, Why Shouldn’t We?
  3. Barriers to Entry Are High. Getting Harder To Build a Mobility Business.

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