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Value Investing

Brief Value Investing: Shin-Etsu Polymer (7970 JP) – Fake Plastic Governance and more

By | Daily Briefs, Value Investing

In this briefing:

  1. Shin-Etsu Polymer (7970 JP) – Fake Plastic Governance
  2. Sell Lenovo (992 HK) FY2020: Falling Revenue, Rising Debts
  3. EM Growth Vs Value: Maximum Divergence
  4. Aozora Bank  (8304 JP):  When Blue Skies Turn to Grey
  5. European Banks: Focus on Digital Banking Pioneers Trading at Attractive Valuations

1. Shin-Etsu Polymer (7970 JP) – Fake Plastic Governance

Smartkarma download 2

Shin Etsu Polymer (7970 JP)  is a diversified plastics company specialising in PVC and silicone rubber products. The poor quality of corporate governance, an inadequate capital allocation policy, and an overly diverse business portfolio obscures the company’s underlying value. 

The Precision Moulding division (70% of profits) benefits from exposure to semiconductor industry growth. It is a high margin business that piggy-backs on structural growth in end markets such as 5G, IoT, and AI. 

At 1x EV/Revenue, the Precision Moulding division alone could be worth ¥30b, which is more than the company’s entire enterprise value of ¥28b. Perhaps it is worth considerably more – other semiconductor equipment and materials peers trade at around 9-12x EV/EBIT – implying a divisional valuation of ¥45b to ¥60b. 

Shin-Etsu Polymer has a huge capital deployment opportunity, with a net cash balance sheet (60% of market cap), strong free cash generation (12% FCF yield) and so-far limited shareholder returns. 

Weak corporate governance, protected by a 52%-owned Shin Etsu Chemical (4063 JP), is a key barrier to realising a higher valuation and greater shareholder returns for minorities. 

With shareholders and regulators promoting corporate reorganisation, companies must reconsider these parent-child relationships. Now would be a good time for Shin-Etsu Chem to buy out the listed subsidiary and take full control. ROE has failed to reach 8% for many years, the stock trades below book value, and around a 5-year share price low versus the parent.  They may need some encouragement from an activist shareholder. 

2. Sell Lenovo (992 HK) FY2020: Falling Revenue, Rising Debts

Lenovo presents itself as a dynamic IT company, well positioned to benefit from the growth in connectivity. It talks about taking share and record profits. We think the reality is quite different. Lenovo is primarily a hardware manufacturer with commodity margins that grows via acquisitions. It has branched out into data centres and some tech services, but these remain limited and possibly loss making.  The problem is that both liabilities and funding costs are rising. The new US$1bn bond cost 5.875%, exceeding last year’s 4.5% operating return and above our forecast return for FY2021. Cashflow would have been negative without the fall in receivables and the endless fund raising suggests that the cash pile is not all that it seems. SELL.

3. EM Growth Vs Value: Maximum Divergence

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  • The nature of the COVID-19 induced sell-off has favoured Aggressive Growth strategies over Value this year.
  • During this period, the divergence in sector allocations between the two style groups has reached all-time wides. 
  • The largest differences in sector allocations are in Consumer Staples and Discretionary, where Aggressive Growth funds are more heavily invested.  Value investors are more exposed to Energy, Materials and Utilities.
  • On a country level, China is the prominent weight for both style groups, though Aggressive Growth funds hold 5.36% more, on average. The largest difference is in India, where Aggressive Growth funds rank it as their 2nd largest country exposure at 12.26%, compared to the 5th highest in Value funds at 5.83%.
  • On a stock level, there are some striking differences in allocations.  For example, 72% of Aggressive Growth funds own HDFC Bank (HDFCB IN) versus only 10% of Value funds. Conversely, 69% of Value funds hold China Construction Bank (601939 CH)  compared to just 7% of Aggressive Growth funds.

The analysis is taken from our Global Emerging Market research, which covers 222 GEM active strategies with combined AUM of $360bn

4. Aozora Bank  (8304 JP):  When Blue Skies Turn to Grey

8304 aozora 2020 0515 fy3 2020%20results

CY2020 has not been a good year for embattled Aozora Bank Ltd (8304 JP).  FY3/2020 actual results were well short of guidance, with falling net interest and fee income, rising General Administrative Expenses (GAE) and an 11-fold increase in credit costs all contributing to the disappointing performance.  FY3/2021 management guidance bravely calls for a modest improvement over FY3/2020 actual results, which we think represents a very challenging target in the current operating environment.  To add fuel to the flames, management has slashed the forecast dividend from ¥155/share to ¥122/share, the effect of which has been to send the share price tumbling.  The stock price has fallen 38.7% in the last three months alone, and is by far the worst-performing of the major bank stocks to date.  There are ominous signs scattered throughout the balance-sheet and financial statements that FY3/2021 will be a challenging year for the bank, yet foreign investors still own in aggregate a significant proportion of Aozora Bank’s outstanding shares.

Caveat Emptor!  (May the Buyer Beware!)

5. European Banks: Focus on Digital Banking Pioneers Trading at Attractive Valuations

Image 399939660101589994993615

  • European banks are at the deep value end of the equities spectrum, in the current investment climate
  • We are not, however, consigning the entire sector to the “basket case”, and we sift through the European banks universe looking for attractively valued banks with solid digital banking credentials
  • We focus on two banks that are well placed to strengthen their digital banking positions on the back of the acceleration in society’s digital shift, due to the Covid-19 pandemic
  • Aside from the challenger banks, CaixaBank SA (CABK SM) and Banco Bilbao Vizcaya Argentari (BBVA SM)  are both legacy banks that are leading the Spanish digital banking drive, with BBVA also a major player in Mexico, Turkey, USA and parts of South America
  • Our conclusion is that BBVA is our preferred pick, given its attractive valuations, and superior digital banking credentials across multiple geographies, and that is despite its relative weakness versus CaixaBank in capital adequacy and, to a lesser degree, in terms of credit quality
  • Risks to our view include increased competition in digital banking, as well as worse than expected credit losses in Spain, Mexico and Turkey and the latter two carry the risk of further MXN and TRY currency depreciation

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Brief Value Investing: Banorte (GFNORTEO MM) – Reasons to Be Fearful, Part I and more

By | Daily Briefs, Value Investing

In this briefing:

  1. Banorte (GFNORTEO MM) – Reasons to Be Fearful, Part I
  2. Shimane Bank (7150 JP):  A Paler Shade of Red

1. Banorte (GFNORTEO MM) – Reasons to Be Fearful, Part I

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  • Our key take aways from Grupo Financiero Banorte-O (GFNORTEO MF) ’s 1Q20 results are that management are potentially underestimating credit risk and liquidity risk, and rising market risk has already hit 1Q20 results
  • Cost of credit risk at Banorte has risen by 20bps to 2.2% in 1Q20, which seems to unrealistically benign compared to US banks, in the face of an expected sharp deterioration in credit quality
  • Liquidity risk has been mitigated by BanXico’s measures, and a continued increase in deposits, but this can change quickly in the current climate
  • Increased market risk has hit core capital this quarter contributing meaningfully to the net 55bps hit to CET1 ratio QoQ
  • Even with the four month grace period for consumer and SME borrowers, and given Banorte’s broad exposure to government credit, we believe that cost of risk could triple from its 2019 base of 2%, which would, on our estimates, mean a loss for FY2020
  • Risks to our view include a better than expected result on credit quality, especially in consumer, SME and non-federal government exposures

2. Shimane Bank (7150 JP):  A Paler Shade of Red

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Tiny, struggling Shimane Bank Ltd/ The (7150 JP), a Japanese secondary regional bank from Shimane Prefecture in the Chugoku Region of western Japan that in November of last year threw in its lot with Sbi Holdings (8473 JP) and is now a 34%-owned affiliate of the online financial specialist, has announced an upward revision to FY3/2020 earnings.  That’s the good news.  The bad news is that the upward revision is just ¥100 million, the bank is still predicting a consolidated net loss for FY3/2020 of close to ¥2.3 billion, the dividend remains suspended, credit costs and the bank’s non-performing loans are way up, the bank’s Overhead Ratio (OHR) is still not under control, and management has decided not to publish earnings guidance for FY3/2021.  Despite the infusion of new capital from the SBI Group, the stock price has fallen even further since our last Insight Shimane Bank (7150 JP):  And Behold, a Pale Knight to just over the ¥400 level.

Caveat Emptor!  (May the Buyer Beware!) 

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Brief Value Investing: VTB Bank: The Dividend Is at Risk but a Greater Risk Is Not To Be Invested and more

By | Daily Briefs, Value Investing

In this briefing:

  1. VTB Bank: The Dividend Is at Risk but a Greater Risk Is Not To Be Invested
  2. Las Vegas Sands Exits Japan Race: Door Wide Open for Galaxy as Leading Bidder for Yokohama/Tokyo
  3. SMFG  (8316 JP):  The New Leader
  4. MUFG  (8306 JP):  Dealing With a New Order
  5. QH: Expect 2Q20 to Be the Bottom Quarter

1. VTB Bank: The Dividend Is at Risk but a Greater Risk Is Not To Be Invested

Shares in Vtb Bank Pjsc (VTBR RM) are cheap and trade as a short-dated bond or no-growth stock given the bank’s rich strategic franchise within a solid IG country framework which suggest that share valuation (currently a derisory PER) should resemble more a perpetual. Shares also may signal some concern with the future Dividend stream.

The franchise is indeed evolving into a strategic powerhouse. The lender commands a top position in areas such as M&A and DCM while accounting for almost a quarter of Russia’s mortgage market, a fifth of corporate Deposits, 17.5% of corporate and retail Loans, and 15.9% of total Assets.

Quarterly results reveal an uptick in CoR to 1.5% and some signals of increasing toxic asset migration with the mainly substandard “stage 2” bucket which receives most of the Provisioning. Loans to companies from industries most affected by the pandemic, as identified by the government, constitute 3% of VTB’s loans to corporates, though the lender has not yet noticed material deterioration in the financial condition of borrowers.  Quarterly credit losses of 42.9 billion rubles, versus 14.3 billion rubles a year earlier, included a 10 billion ruble “macro” adjustment based on a somewhat benign assumption of GDP growth for this year. It is also hard to model for CoR and NPLs in the best of times, let alone the worst of times.  The bank though commits itself to CIR of around 40% despite aggressive IT modernization and innovation, and a NIM of 3.4%, supported by a lower key rate and enhanced current account funding. These seem pretty gettable.

LTM dynamics were highly positive with enhanced trends in Profitability, in Liquidity, in Efficiency, in Capitalisation, and in Asset Quality. There was some slippage in NIM and Interest Spread on a LTM basis. The increased contribution of “Non-Core Income” was on the high side though bancassurance-driven Fee Income encouragingly gained in weight as a % of  RWAs and Operating Income while Liquidity improved on the back of robust Deposit growth.

VTB commands a stellar PH Score™ of 10, an underbought RSI signal, and a FV of 4%: shares thus find themselves in the top decile of our VFM rankings.

The PH Score™ is a fundamental momentum-quantamental score that scores banks according to changes in value-quality. The Score encompasses Profitability, Operating Efficiency, Liquidity, Capital, Asset Quality, and Coverage as well as a valuation variable. Scores lie between 0 and 10, with higher scores representing more positive signs. The PH Score™ was back tested over 2007-17 for global banks and conclusively shows progressively higher returns across quintiles ranked by Score. 

With VFM (Valuation, Fundamentals, Momentum), we score banks by PH Score™ , Technicals, and an additional Valuation filter.

VFM rankings position VTB  in the top quintile of opportunity globally. 

Trading at a 75% discount to BV, with a Franchise Value and Earnings Yield, of 4% and 49%, respectively, shares are relatively attractive on a global scale. We recognise that a Dividend Yield of 3.2% could be higher. A stellar PH Score™ can act as a tailwind.

We are mindful though that a bank is a bond equivalent or quasi utility with a dividend seen as a compensation for a leveraged structure. One could quite fairly ask: if I’m not going to receive the dividend, should I not buy the perpetual bonds? The executive at VTB has stated that it has not yet officially changed its plans to earmark 50% of its 2019 net profit under International Financial Reporting Standards for dividend payments, but could reduce dividend payouts on government-owned preference shares to deduct the cost of state support programs for COVID-19-hit borrowers. (Other jurisdictions should wake up to this implicit circular structure where the State funds Pandemic costs via bank dividends to the detriment of other shareholders).  The lender did not rule out (somewhat ominously but in a transparent way) the possibility that dividend reduction could also affect ordinary shares depending on how the crisis unfolds. A decision will be made in August prior to the General Meeting in September. A great deal can change in 3 months.

2. Las Vegas Sands Exits Japan Race: Door Wide Open for Galaxy as Leading Bidder for Yokohama/Tokyo

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  • Virus has produced cheap stocks in gaming sector for companies like LVS to see them as better bets than an immense, long development cycle for a Japan IR.
  • Q3/4 recovery cycle in Macau will be slow, but steady and Galaxy will quickly reach break-even.
  • Galaxy is king of cash in Macau with an estimated 6 years of liquidity on balance sheet.

3. SMFG  (8316 JP):  The New Leader

8316 smfg 2020 0515 fy3 2020%20results

Rising to the challenge of an increasingly difficult operating environment, Sumitomo Mitsui Financial (8316 JP) managed to marginally beat its FY3/2020 consolidated net profits target and, in doing so, wrested the long-held crown from principal megabank rival Mitsubishi UFJ Financial (MUFG) (8306 JP)  as Japan’s most profitable bank.

SMFG reported FY3/2020 consolidated recurring profits of ¥932.06 billion (down 17.9% YoY) and net profits of ¥703.88 billion (3.1%) on lower revenues of ¥5.314 trillion (down 7.3% YoY).  Key drivers of the lower YoY results were reduced net interest income (despite strong loan growth of 5.8% YoY), lower trading profits and marginally higher General Administrative Expenses (GAE), only partially offset by higher net fee income.  Core earnings fell 8.2% YoY to ¥625.04 billion.  However, the biggest single impact on reported profits was the substantial jump in credit costs, which rose 54.8% YoY from ¥110.26 billion (15 basis points) in FY3/2019 to ¥170.64 billion (21 basis points) in FY3/2020.  This caused Net Operating Profits (core earnings less credit costs) to decline 20.4% YoY to ¥454.39 billion: SMFG’s worst performance since FY3/2017.

SMFG has raised its dividend to ¥190/share from ¥180/share for both FY3/2020 and FY3/2021 and has promised a ¥100 billion share buyback and share cancellation in FY3/2021.  On what initially looks to be an extremely conservative consolidated net profits target for FY3/2021 of ¥400.0 billion (suggesting a YoY decline of 43.2%), the dividend payout ratio for FY3/2021 looks to be around 65%.  Given that this level of profits would return the No.1 position to arch-rival MUFG, we expect SMFG to work hard during FY3/2021 to ensure that an upward revision to its profit target is realizable.

SMFG’s share price is down 29.3% on a 12-months basis and is down 32.0% in just the last six months.  While we remain negative on the Japanese banking sector as a whole, and expect FY3/2021 to be an extremely challenging time for all Japanese banks as the true economic impact of COVID-19 on both Japan’s domestic economy and the global economy becomes increasingly apparent, we believe that investors may find some comfort in owning SMFG over other Japanese bank stocks.  We caution, however, that because of SMFG’s position as a liquid stock with high foreign ownership, further downside risk to the stock price from current levels is certainly possible if foreign institutional investors urgently need to raise cash in Japan to meet global redemptions over the next few months.

4. MUFG  (8306 JP):  Dealing With a New Order

8306 mufg 2020 0515 credit%20costs

Mitsubishi UFJ Financial (MUFG) (8306 JP)has lost its long-held position as Japan’s most profitable megabank and, based on its FY3/2020 results announced on Friday 15 May 2020, is now down to the No.2 position having been eclipsed by Sumitomo Mitsui Financial (8316 JP).  Having revised its consolidated net profits target from ¥750 billion to ¥520 billion on 30 April 2020 (from an initial ¥900.0 billion on 15 May 2019), there were no surprises when MUFG reported consolidated net profits for FY3/2020 had fallen 39.5% YoY to ¥528.15 billion.  The megabank group chalked up two consecutive quarters of net losses as a result of impairment losses on foreign subsidiaries, but it was a combination of a fall in core earnings, rising GAE costs and, above all, a huge jump in credit costs from ¥5.82 billion (1bps) in FY3/2019 to ¥222.95 billion (21bps) in FY3/2020 that did the majority of the damage to reported earnings.

The dividend has been maintained at ¥25/share for FY3/2021 but there was no announcement of a share buyback (as we had warned in our previous Insight MUFG  (8306 JP):  Growing Pains Growing.  MUFG has set itself an ambitious consolidated net profit target of ¥520 billion (+4.1% YoY) which would put in back in the No.1 position ahead of SMFG.  We remain skeptical that this target can be achieved for a number of reasons .

MUFG’s share price is down 21.3% on a 12-months basis and is down 30.7% in the last six months.  A liquid stock with high foreign ownership, we see further downside risk to the stock price if foreign institutional investors urgently need to raise cash in Japan to meet global redemptions over the next few months.

Caveat Emptor!  (May the Buyer Beware!)

5. QH: Expect 2Q20 to Be the Bottom Quarter

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With strong earnings from a equity income provide an attractive dividend yield at 6%-7%. Therefore, we maintain our BUY rating with a new target price of Bt2.4 (down from Bt2.6) based on 10xPE’21E which its a five-years average.

  • The fall in 1Q20 earnings both YoY and QoQ was primarily pressured by weakening earnings from residential business which sunk 81%YoY to Bt80m. Meanwhile, equity income dropped only 5.6% YoY to Bt431m.
  • We expect 2Q20 earnings to soft down 25%YoY and 10%QoQ, given lower contribution from associated companies especially from HMPRO. Meanwhile, we expect residential transfer units to remain weak QoQ due to low visited rate, but likely to be the bottom quarter.
  • We maintain positive view in 2020-21E backed by stable equity income from associated companies (mostly from HMPRO) and several projects in pipeline worth over Bt48bn.

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Brief Value Investing: EM Growth Vs Value: Maximum Divergence and more

By | Daily Briefs, Value Investing

In this briefing:

  1. EM Growth Vs Value: Maximum Divergence
  2. Aozora Bank  (8304 JP):  When Blue Skies Turn to Grey
  3. European Banks: Focus on Digital Banking Pioneers Trading at Attractive Valuations
  4. Wharf Long to Test Macro Trend Inflection Barrier
  5. TRACKING TRAFFIC/Containers & Air Cargo: Box Rates Dip in April, Air Cargo Yields Double!

1. EM Growth Vs Value: Maximum Divergence

Image 80773995941590113845924

  • The nature of the COVID-19 induced sell-off has favoured Aggressive Growth strategies over Value this year.
  • During this period, the divergence in sector allocations between the two style groups has reached all-time wides. 
  • The largest differences in sector allocations are in Consumer Staples and Discretionary, where Aggressive Growth funds are more heavily invested.  Value investors are more exposed to Energy, Materials and Utilities.
  • On a country level, China is the prominent weight for both style groups, though Aggressive Growth funds hold 5.36% more, on average. The largest difference is in India, where Aggressive Growth funds rank it as their 2nd largest country exposure at 12.26%, compared to the 5th highest in Value funds at 5.83%.
  • On a stock level, there are some striking differences in allocations.  For example, 72% of Aggressive Growth funds own HDFC Bank (HDFCB IN) versus only 10% of Value funds. Conversely, 69% of Value funds hold China Construction Bank (601939 CH)  compared to just 7% of Aggressive Growth funds.

The analysis is taken from our Global Emerging Market research, which covers 222 GEM active strategies with combined AUM of $360bn

2. Aozora Bank  (8304 JP):  When Blue Skies Turn to Grey

8304 aozora 2020 0515 fy3 2020%20results

CY2020 has not been a good year for embattled Aozora Bank Ltd (8304 JP).  FY3/2020 actual results were well short of guidance, with falling net interest and fee income, rising General Administrative Expenses (GAE) and an 11-fold increase in credit costs all contributing to the disappointing performance.  FY3/2021 management guidance bravely calls for a modest improvement over FY3/2020 actual results, which we think represents a very challenging target in the current operating environment.  To add fuel to the flames, management has slashed the forecast dividend from ¥155/share to ¥122/share, the effect of which has been to send the share price tumbling.  The stock price has fallen 38.7% in the last three months alone, and is by far the worst-performing of the major bank stocks to date.  There are ominous signs scattered throughout the balance-sheet and financial statements that FY3/2021 will be a challenging year for the bank, yet foreign investors still own in aggregate a significant proportion of Aozora Bank’s outstanding shares.

Caveat Emptor!  (May the Buyer Beware!)

3. European Banks: Focus on Digital Banking Pioneers Trading at Attractive Valuations

Image 399939660101589994993615

  • European banks are at the deep value end of the equities spectrum, in the current investment climate
  • We are not, however, consigning the entire sector to the “basket case”, and we sift through the European banks universe looking for attractively valued banks with solid digital banking credentials
  • We focus on two banks that are well placed to strengthen their digital banking positions on the back of the acceleration in society’s digital shift, due to the Covid-19 pandemic
  • Aside from the challenger banks, CaixaBank SA (CABK SM) and Banco Bilbao Vizcaya Argentari (BBVA SM)  are both legacy banks that are leading the Spanish digital banking drive, with BBVA also a major player in Mexico, Turkey, USA and parts of South America
  • Our conclusion is that BBVA is our preferred pick, given its attractive valuations, and superior digital banking credentials across multiple geographies, and that is despite its relative weakness versus CaixaBank in capital adequacy and, to a lesser degree, in terms of credit quality
  • Risks to our view include increased competition in digital banking, as well as worse than expected credit losses in Spain, Mexico and Turkey and the latter two carry the risk of further MXN and TRY currency depreciation

4. Wharf Long to Test Macro Trend Inflection Barrier

Wharf%20w%20for%20sk

Wharf Holdings (4 HK) has formed a compelling bull wedge that has a 70% probability of breaking higher to test a tough resistance zone. Bull wedge patterns form when the medium term and short term cycles conflict and energy builds for a breakout.

Buy volumes have been poor and would need to improve on a breakout above wedge resistance to have any chance for a serious test on the 17 intermediate pivot barrier.

Pattern support lies at 13.40 and breakout resistance at 14.50. Above 14.50 targets 16.50 with 17 the formidable barrier to clear/reject that will dictate the macro trend.

The macro picture denotes a more bullish and compelling macro thesis/set up due largely to the triple lows in the weekly RSI and weekly MACD. Non confirmation of new price lows since 2018 shows an incredibly bullish undertone that would kick into gear once the 17 barrier is cleared.

5. TRACKING TRAFFIC/Containers & Air Cargo: Box Rates Dip in April, Air Cargo Yields Double!

Mid may vlsfo

Covid-19 and the measures put in place to slow its spread have wreaked havoc on ocean and air cargo markets in 2020. April data show a number of highly unusual market dynamics at work. 

Our model shows container rates dipped in April, falling 5% YoY. Despite this decline, we believe container rates are supported by an unusual equipment shortage. Furthermore, we believe carrier margins could remain stable in Q220 as ship fuel costs have declined sharply compared to 2019.

In air cargo, an unprecedented set of circumstances led to a  dramatic rise of yields (pricing) in April. In the case of two Taiwanese airlines with significant exposure to cargo, air cargo demand increased by just 3% YoY in April, but yields more than doubled, boosting segment revenues. 

Low fuel prices and an equipment shortage may continue to limit the deterioration of container shipping profitability in 2020. Meanwhile, even unprecedented price increases in air cargo are not enough to offset the dramatic declines of most airlines’ passenger revenues. 

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Brief Value Investing: Japan Telecoms: Drilling Down on Free Cash Flow and Shareholder Returns and more

By | Daily Briefs, Value Investing

In this briefing:

  1. Japan Telecoms: Drilling Down on Free Cash Flow and Shareholder Returns

1. Japan Telecoms: Drilling Down on Free Cash Flow and Shareholder Returns

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Japanese telcos have plenty of financial flexibility and political/social cover to maintain current policies on returns to shareholders. We expect modest annual increases in dividends to continue but the level of buybacks may be less than FY19 which were at historically high levels (we are not including Softbank Group’s policies here). The impact of Covid-19 on returns policy should be limited although pricing/service revenue growth may be under some pressure from government policies to promote telework and online education. We have seen evidence of this already as the incumbent annual student discount plan campaigns now include free data.  Despite Covid-19 and Rakuten mobile entry, the Japanese telcos remain a safe harbor for investors. 

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Brief Value Investing: European Banks: Focus on Digital Banking Pioneers Trading at Attractive Valuations and more

By | Daily Briefs, Value Investing

In this briefing:

  1. European Banks: Focus on Digital Banking Pioneers Trading at Attractive Valuations
  2. Wharf Long to Test Macro Trend Inflection Barrier
  3. TRACKING TRAFFIC/Containers & Air Cargo: Box Rates Dip in April, Air Cargo Yields Double!
  4. VTB Bank: The Dividend Is at Risk but a Greater Risk Is Not To Be Invested
  5. Las Vegas Sands Exits Japan Race: Door Wide Open for Galaxy as Leading Bidder for Yokohama/Tokyo

1. European Banks: Focus on Digital Banking Pioneers Trading at Attractive Valuations

Image 333236699161589994993618

  • European banks are at the deep value end of the equities spectrum, in the current investment climate
  • We are not, however, consigning the entire sector to the “basket case”, and we sift through the European banks universe looking for attractively valued banks with solid digital banking credentials
  • We focus on two banks that are well placed to strengthen their digital banking positions on the back of the acceleration in society’s digital shift, due to the Covid-19 pandemic
  • Aside from the challenger banks, CaixaBank SA (CABK SM) and Banco Bilbao Vizcaya Argentari (BBVA SM)  are both legacy banks that are leading the Spanish digital banking drive, with BBVA also a major player in Mexico, Turkey, USA and parts of South America
  • Our conclusion is that BBVA is our preferred pick, given its attractive valuations, and superior digital banking credentials across multiple geographies, and that is despite its relative weakness versus CaixaBank in capital adequacy and, to a lesser degree, in terms of credit quality
  • Risks to our view include increased competition in digital banking, as well as worse than expected credit losses in Spain, Mexico and Turkey and the latter two carry the risk of further MXN and TRY currency depreciation

2. Wharf Long to Test Macro Trend Inflection Barrier

Wharf%20w%20for%20sk

Wharf Holdings (4 HK) has formed a compelling bull wedge that has a 70% probability of breaking higher to test a tough resistance zone. Bull wedge patterns form when the medium term and short term cycles conflict and energy builds for a breakout.

Buy volumes have been poor and would need to improve on a breakout above wedge resistance to have any chance for a serious test on the 17 intermediate pivot barrier.

Pattern support lies at 13.40 and breakout resistance at 14.50. Above 14.50 targets 16.50 with 17 the formidable barrier to clear/reject that will dictate the macro trend.

The macro picture denotes a more bullish and compelling macro thesis/set up due largely to the triple lows in the weekly RSI and weekly MACD. Non confirmation of new price lows since 2018 shows an incredibly bullish undertone that would kick into gear once the 17 barrier is cleared.

3. TRACKING TRAFFIC/Containers & Air Cargo: Box Rates Dip in April, Air Cargo Yields Double!

Mid may vlsfo

Covid-19 and the measures put in place to slow its spread have wreaked havoc on ocean and air cargo markets in 2020. April data show a number of highly unusual market dynamics at work. 

Our model shows container rates dipped in April, falling 5% YoY. Despite this decline, we believe container rates are supported by an unusual equipment shortage. Furthermore, we believe carrier margins could remain stable in Q220 as ship fuel costs have declined sharply compared to 2019.

In air cargo, an unprecedented set of circumstances led to a  dramatic rise of yields (pricing) in April. In the case of two Taiwanese airlines with significant exposure to cargo, air cargo demand increased by just 3% YoY in April, but yields more than doubled, boosting segment revenues. 

Low fuel prices and an equipment shortage may continue to limit the deterioration of container shipping profitability in 2020. Meanwhile, even unprecedented price increases in air cargo are not enough to offset the dramatic declines of most airlines’ passenger revenues. 

4. VTB Bank: The Dividend Is at Risk but a Greater Risk Is Not To Be Invested

Shares in Vtb Bank Pjsc (VTBR RM) are cheap and trade as a short-dated bond or no-growth stock given the bank’s rich strategic franchise within a solid IG country framework which suggest that share valuation (currently a derisory PER) should resemble more a perpetual. Shares also may signal some concern with the future Dividend stream.

The franchise is indeed evolving into a strategic powerhouse. The lender commands a top position in areas such as M&A and DCM while accounting for almost a quarter of Russia’s mortgage market, a fifth of corporate Deposits, 17.5% of corporate and retail Loans, and 15.9% of total Assets.

Quarterly results reveal an uptick in CoR to 1.5% and some signals of increasing toxic asset migration with the mainly substandard “stage 2” bucket which receives most of the Provisioning. Loans to companies from industries most affected by the pandemic, as identified by the government, constitute 3% of VTB’s loans to corporates, though the lender has not yet noticed material deterioration in the financial condition of borrowers.  Quarterly credit losses of 42.9 billion rubles, versus 14.3 billion rubles a year earlier, included a 10 billion ruble “macro” adjustment based on a somewhat benign assumption of GDP growth for this year. It is also hard to model for CoR and NPLs in the best of times, let alone the worst of times.  The bank though commits itself to CIR of around 40% despite aggressive IT modernization and innovation, and a NIM of 3.4%, supported by a lower key rate and enhanced current account funding. These seem pretty gettable.

LTM dynamics were highly positive with enhanced trends in Profitability, in Liquidity, in Efficiency, in Capitalisation, and in Asset Quality. There was some slippage in NIM and Interest Spread on a LTM basis. The increased contribution of “Non-Core Income” was on the high side though bancassurance-driven Fee Income encouragingly gained in weight as a % of  RWAs and Operating Income while Liquidity improved on the back of robust Deposit growth.

VTB commands a stellar PH Score™ of 10, an underbought RSI signal, and a FV of 4%: shares thus find themselves in the top decile of our VFM rankings.

The PH Score™ is a fundamental momentum-quantamental score that scores banks according to changes in value-quality. The Score encompasses Profitability, Operating Efficiency, Liquidity, Capital, Asset Quality, and Coverage as well as a valuation variable. Scores lie between 0 and 10, with higher scores representing more positive signs. The PH Score™ was back tested over 2007-17 for global banks and conclusively shows progressively higher returns across quintiles ranked by Score. 

With VFM (Valuation, Fundamentals, Momentum), we score banks by PH Score™ , Technicals, and an additional Valuation filter.

VFM rankings position VTB  in the top quintile of opportunity globally. 

Trading at a 75% discount to BV, with a Franchise Value and Earnings Yield, of 4% and 49%, respectively, shares are relatively attractive on a global scale. We recognise that a Dividend Yield of 3.2% could be higher. A stellar PH Score™ can act as a tailwind.

We are mindful though that a bank is a bond equivalent or quasi utility with a dividend seen as a compensation for a leveraged structure. One could quite fairly ask: if I’m not going to receive the dividend, should I not buy the perpetual bonds? The executive at VTB has stated that it has not yet officially changed its plans to earmark 50% of its 2019 net profit under International Financial Reporting Standards for dividend payments, but could reduce dividend payouts on government-owned preference shares to deduct the cost of state support programs for COVID-19-hit borrowers. (Other jurisdictions should wake up to this implicit circular structure where the State funds Pandemic costs via bank dividends to the detriment of other shareholders).  The lender did not rule out (somewhat ominously but in a transparent way) the possibility that dividend reduction could also affect ordinary shares depending on how the crisis unfolds. A decision will be made in August prior to the General Meeting in September. A great deal can change in 3 months.

5. Las Vegas Sands Exits Japan Race: Door Wide Open for Galaxy as Leading Bidder for Yokohama/Tokyo

Pic 1

  • Virus has produced cheap stocks in gaming sector for companies like LVS to see them as better bets than an immense, long development cycle for a Japan IR.
  • Q3/4 recovery cycle in Macau will be slow, but steady and Galaxy will quickly reach break-even.
  • Galaxy is king of cash in Macau with an estimated 6 years of liquidity on balance sheet.

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Brief Value Investing: Wharf Long to Test Macro Trend Inflection Barrier and more

By | Daily Briefs, Value Investing

In this briefing:

  1. Wharf Long to Test Macro Trend Inflection Barrier
  2. TRACKING TRAFFIC/Containers & Air Cargo: Box Rates Dip in April, Air Cargo Yields Double!
  3. VTB Bank: The Dividend Is at Risk but a Greater Risk Is Not To Be Invested
  4. Las Vegas Sands Exits Japan Race: Door Wide Open for Galaxy as Leading Bidder for Yokohama/Tokyo
  5. SMFG  (8316 JP):  The New Leader

1. Wharf Long to Test Macro Trend Inflection Barrier

Wharf%20w%20for%20sk

Wharf Holdings (4 HK) has formed a compelling bull wedge that has a 70% probability of breaking higher to test a tough resistance zone. Bull wedge patterns form when the medium term and short term cycles conflict and energy builds for a breakout.

Buy volumes have been poor and would need to improve on a breakout above wedge resistance to have any chance for a serious test on the 17 intermediate pivot barrier.

Pattern support lies at 13.40 and breakout resistance at 14.50. Above 14.50 targets 16.50 with 17 the formidable barrier to clear/reject that will dictate the macro trend.

The macro picture denotes a more bullish and compelling macro thesis/set up due largely to the triple lows in the weekly RSI and weekly MACD. Non confirmation of new price lows since 2018 shows an incredibly bullish undertone that would kick into gear once the 17 barrier is cleared.

2. TRACKING TRAFFIC/Containers & Air Cargo: Box Rates Dip in April, Air Cargo Yields Double!

Mid may vlsfo

Covid-19 and the measures put in place to slow its spread have wreaked havoc on ocean and air cargo markets in 2020. April data show a number of highly unusual market dynamics at work. 

Our model shows container rates dipped in April, falling 5% YoY. Despite this decline, we believe container rates are supported by an unusual equipment shortage. Furthermore, we believe carrier margins could remain stable in Q220 as ship fuel costs have declined sharply compared to 2019.

In air cargo, an unprecedented set of circumstances led to a  dramatic rise of yields (pricing) in April. In the case of two Taiwanese airlines with significant exposure to cargo, air cargo demand increased by just 3% YoY in April, but yields more than doubled, boosting segment revenues. 

Low fuel prices and an equipment shortage may continue to limit the deterioration of container shipping profitability in 2020. Meanwhile, even unprecedented price increases in air cargo are not enough to offset the dramatic declines of most airlines’ passenger revenues. 

3. VTB Bank: The Dividend Is at Risk but a Greater Risk Is Not To Be Invested

Shares in Vtb Bank Pjsc (VTBR RM) are cheap and trade as a short-dated bond or no-growth stock given the bank’s rich strategic franchise within a solid IG country framework which suggest that share valuation (currently a derisory PER) should resemble more a perpetual. Shares also may signal some concern with the future Dividend stream.

The franchise is indeed evolving into a strategic powerhouse. The lender commands a top position in areas such as M&A and DCM while accounting for almost a quarter of Russia’s mortgage market, a fifth of corporate Deposits, 17.5% of corporate and retail Loans, and 15.9% of total Assets.

Quarterly results reveal an uptick in CoR to 1.5% and some signals of increasing toxic asset migration with the mainly substandard “stage 2” bucket which receives most of the Provisioning. Loans to companies from industries most affected by the pandemic, as identified by the government, constitute 3% of VTB’s loans to corporates, though the lender has not yet noticed material deterioration in the financial condition of borrowers.  Quarterly credit losses of 42.9 billion rubles, versus 14.3 billion rubles a year earlier, included a 10 billion ruble “macro” adjustment based on a somewhat benign assumption of GDP growth for this year. It is also hard to model for CoR and NPLs in the best of times, let alone the worst of times.  The bank though commits itself to CIR of around 40% despite aggressive IT modernization and innovation, and a NIM of 3.4%, supported by a lower key rate and enhanced current account funding. These seem pretty gettable.

LTM dynamics were highly positive with enhanced trends in Profitability, in Liquidity, in Efficiency, in Capitalisation, and in Asset Quality. There was some slippage in NIM and Interest Spread on a LTM basis. The increased contribution of “Non-Core Income” was on the high side though bancassurance-driven Fee Income encouragingly gained in weight as a % of  RWAs and Operating Income while Liquidity improved on the back of robust Deposit growth.

VTB commands a stellar PH Score™ of 10, an underbought RSI signal, and a FV of 4%: shares thus find themselves in the top decile of our VFM rankings.

The PH Score™ is a fundamental momentum-quantamental score that scores banks according to changes in value-quality. The Score encompasses Profitability, Operating Efficiency, Liquidity, Capital, Asset Quality, and Coverage as well as a valuation variable. Scores lie between 0 and 10, with higher scores representing more positive signs. The PH Score™ was back tested over 2007-17 for global banks and conclusively shows progressively higher returns across quintiles ranked by Score. 

With VFM (Valuation, Fundamentals, Momentum), we score banks by PH Score™ , Technicals, and an additional Valuation filter.

VFM rankings position VTB  in the top quintile of opportunity globally. 

Trading at a 75% discount to BV, with a Franchise Value and Earnings Yield, of 4% and 49%, respectively, shares are relatively attractive on a global scale. We recognise that a Dividend Yield of 3.2% could be higher. A stellar PH Score™ can act as a tailwind.

We are mindful though that a bank is a bond equivalent or quasi utility with a dividend seen as a compensation for a leveraged structure. One could quite fairly ask: if I’m not going to receive the dividend, should I not buy the perpetual bonds? The executive at VTB has stated that it has not yet officially changed its plans to earmark 50% of its 2019 net profit under International Financial Reporting Standards for dividend payments, but could reduce dividend payouts on government-owned preference shares to deduct the cost of state support programs for COVID-19-hit borrowers. (Other jurisdictions should wake up to this implicit circular structure where the State funds Pandemic costs via bank dividends to the detriment of other shareholders).  The lender did not rule out (somewhat ominously but in a transparent way) the possibility that dividend reduction could also affect ordinary shares depending on how the crisis unfolds. A decision will be made in August prior to the General Meeting in September. A great deal can change in 3 months.

4. Las Vegas Sands Exits Japan Race: Door Wide Open for Galaxy as Leading Bidder for Yokohama/Tokyo

Pic 1

  • Virus has produced cheap stocks in gaming sector for companies like LVS to see them as better bets than an immense, long development cycle for a Japan IR.
  • Q3/4 recovery cycle in Macau will be slow, but steady and Galaxy will quickly reach break-even.
  • Galaxy is king of cash in Macau with an estimated 6 years of liquidity on balance sheet.

5. SMFG  (8316 JP):  The New Leader

8316 smfg 2020 0515 fy3 2020%20results

Rising to the challenge of an increasingly difficult operating environment, Sumitomo Mitsui Financial (8316 JP) managed to marginally beat its FY3/2020 consolidated net profits target and, in doing so, wrested the long-held crown from principal megabank rival Mitsubishi UFJ Financial (MUFG) (8306 JP)  as Japan’s most profitable bank.

SMFG reported FY3/2020 consolidated recurring profits of ¥932.06 billion (down 17.9% YoY) and net profits of ¥703.88 billion (3.1%) on lower revenues of ¥5.314 trillion (down 7.3% YoY).  Key drivers of the lower YoY results were reduced net interest income (despite strong loan growth of 5.8% YoY), lower trading profits and marginally higher General Administrative Expenses (GAE), only partially offset by higher net fee income.  Core earnings fell 8.2% YoY to ¥625.04 billion.  However, the biggest single impact on reported profits was the substantial jump in credit costs, which rose 54.8% YoY from ¥110.26 billion (15 basis points) in FY3/2019 to ¥170.64 billion (21 basis points) in FY3/2020.  This caused Net Operating Profits (core earnings less credit costs) to decline 20.4% YoY to ¥454.39 billion: SMFG’s worst performance since FY3/2017.

SMFG has raised its dividend to ¥190/share from ¥180/share for both FY3/2020 and FY3/2021 and has promised a ¥100 billion share buyback and share cancellation in FY3/2021.  On what initially looks to be an extremely conservative consolidated net profits target for FY3/2021 of ¥400.0 billion (suggesting a YoY decline of 43.2%), the dividend payout ratio for FY3/2021 looks to be around 65%.  Given that this level of profits would return the No.1 position to arch-rival MUFG, we expect SMFG to work hard during FY3/2021 to ensure that an upward revision to its profit target is realizable.

SMFG’s share price is down 29.3% on a 12-months basis and is down 32.0% in just the last six months.  While we remain negative on the Japanese banking sector as a whole, and expect FY3/2021 to be an extremely challenging time for all Japanese banks as the true economic impact of COVID-19 on both Japan’s domestic economy and the global economy becomes increasingly apparent, we believe that investors may find some comfort in owning SMFG over other Japanese bank stocks.  We caution, however, that because of SMFG’s position as a liquid stock with high foreign ownership, further downside risk to the stock price from current levels is certainly possible if foreign institutional investors urgently need to raise cash in Japan to meet global redemptions over the next few months.

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Brief Value Investing: SMFG  (8316 JP):  The New Leader and more

By | Daily Briefs, Value Investing

In this briefing:

  1. SMFG  (8316 JP):  The New Leader
  2. MUFG  (8306 JP):  Dealing With a New Order
  3. QH: Expect 2Q20 to Be the Bottom Quarter
  4. Sunpower (SPWG): Risk/Reward Rarely Been Better; Fair Value Remains at 1 SGD or 142% Upside.
  5. Mazda – A Simple Case Why This Should Not Be At Its All Time Low Ratio Vs Topix, PB and EV/Sales

1. SMFG  (8316 JP):  The New Leader

8316 smfg 2020 0515 peer%20valuations

Rising to the challenge of an increasingly difficult operating environment, Sumitomo Mitsui Financial (8316 JP) managed to marginally beat its FY3/2020 consolidated net profits target and, in doing so, wrested the long-held crown from principal megabank rival Mitsubishi UFJ Financial (MUFG) (8306 JP)  as Japan’s most profitable bank.

SMFG reported FY3/2020 consolidated recurring profits of ¥932.06 billion (down 17.9% YoY) and net profits of ¥703.88 billion (3.1%) on lower revenues of ¥5.314 trillion (down 7.3% YoY).  Key drivers of the lower YoY results were reduced net interest income (despite strong loan growth of 5.8% YoY), lower trading profits and marginally higher General Administrative Expenses (GAE), only partially offset by higher net fee income.  Core earnings fell 8.2% YoY to ¥625.04 billion.  However, the biggest single impact on reported profits was the substantial jump in credit costs, which rose 54.8% YoY from ¥110.26 billion (15 basis points) in FY3/2019 to ¥170.64 billion (21 basis points) in FY3/2020.  This caused Net Operating Profits (core earnings less credit costs) to decline 20.4% YoY to ¥454.39 billion: SMFG’s worst performance since FY3/2017.

SMFG has raised its dividend to ¥190/share from ¥180/share for both FY3/2020 and FY3/2021 and has promised a ¥100 billion share buyback and share cancellation in FY3/2021.  On what initially looks to be an extremely conservative consolidated net profits target for FY3/2021 of ¥400.0 billion (suggesting a YoY decline of 43.2%), the dividend payout ratio for FY3/2021 looks to be around 65%.  Given that this level of profits would return the No.1 position to arch-rival MUFG, we expect SMFG to work hard during FY3/2021 to ensure that an upward revision to its profit target is realizable.

SMFG’s share price is down 29.3% on a 12-months basis and is down 32.0% in just the last six months.  While we remain negative on the Japanese banking sector as a whole, and expect FY3/2021 to be an extremely challenging time for all Japanese banks as the true economic impact of COVID-19 on both Japan’s domestic economy and the global economy becomes increasingly apparent, we believe that investors may find some comfort in owning SMFG over other Japanese bank stocks.  We caution, however, that because of SMFG’s position as a liquid stock with high foreign ownership, further downside risk to the stock price from current levels is certainly possible if foreign institutional investors urgently need to raise cash in Japan to meet global redemptions over the next few months.

2. MUFG  (8306 JP):  Dealing With a New Order

8306 mufg 2019 0731%20gaijin

Mitsubishi UFJ Financial (MUFG) (8306 JP)has lost its long-held position as Japan’s most profitable megabank and, based on its FY3/2020 results announced on Friday 15 May 2020, is now down to the No.2 position having been eclipsed by Sumitomo Mitsui Financial (8316 JP).  Having revised its consolidated net profits target from ¥750 billion to ¥520 billion on 30 April 2020 (from an initial ¥900.0 billion on 15 May 2019), there were no surprises when MUFG reported consolidated net profits for FY3/2020 had fallen 39.5% YoY to ¥528.15 billion.  The megabank group chalked up two consecutive quarters of net losses as a result of impairment losses on foreign subsidiaries, but it was a combination of a fall in core earnings, rising GAE costs and, above all, a huge jump in credit costs from ¥5.82 billion (1bps) in FY3/2019 to ¥222.95 billion (21bps) in FY3/2020 that did the majority of the damage to reported earnings.

The dividend has been maintained at ¥25/share for FY3/2021 but there was no announcement of a share buyback (as we had warned in our previous Insight MUFG  (8306 JP):  Growing Pains Growing.  MUFG has set itself an ambitious consolidated net profit target of ¥520 billion (+4.1% YoY) which would put in back in the No.1 position ahead of SMFG.  We remain skeptical that this target can be achieved for a number of reasons .

MUFG’s share price is down 21.3% on a 12-months basis and is down 30.7% in the last six months.  A liquid stock with high foreign ownership, we see further downside risk to the stock price if foreign institutional investors urgently need to raise cash in Japan to meet global redemptions over the next few months.

Caveat Emptor!  (May the Buyer Beware!)

3. QH: Expect 2Q20 to Be the Bottom Quarter

Image 49594308521589541458867

With strong earnings from a equity income provide an attractive dividend yield at 6%-7%. Therefore, we maintain our BUY rating with a new target price of Bt2.4 (down from Bt2.6) based on 10xPE’21E which its a five-years average.

  • The fall in 1Q20 earnings both YoY and QoQ was primarily pressured by weakening earnings from residential business which sunk 81%YoY to Bt80m. Meanwhile, equity income dropped only 5.6% YoY to Bt431m.
  • We expect 2Q20 earnings to soft down 25%YoY and 10%QoQ, given lower contribution from associated companies especially from HMPRO. Meanwhile, we expect residential transfer units to remain weak QoQ due to low visited rate, but likely to be the bottom quarter.
  • We maintain positive view in 2020-21E backed by stable equity income from associated companies (mostly from HMPRO) and several projects in pipeline worth over Bt48bn.

4. Sunpower (SPWG): Risk/Reward Rarely Been Better; Fair Value Remains at 1 SGD or 142% Upside.

Image?1589507150

Covid-19 has demonstrated that investors, and some analysts, can be wrong in their assessment of the pandemic’s impact on companies. Sunpower Group (SPWG SP) is a prime example on SGX.
1Q20 EBITDA was essentially flat despite the quarter including a shutdown of the Chinese economy for multiple weeks. China is recovering rapidly since April yet Sunpower is now 30% cheaper YTD. This discrepancy can’t be explained.
Many HK and A-share listed companies have rallied strongly as it is clear that the Chinese economy is on the rebound. As already shown during the trade war in FY18-FY19 Sunpower is driven by domestic demand hence a domestic recovery in China should propel Sunpower to new highs not new 52-week lows.
We expect Mr. Market to realize its mistake and start re-rating Sunpower sharply higher sooner rather than later. If SGX investors cannot understand these very simple facts the board of Sunpower should consider moving its listing to HK at some point in the future.
My Fair Value estimate remains 1 SGD (based on 15x FY21 EPS and company meeting its FY21 NPAT targets as communicated in CB2 prospectus). This leaves another +/- 142% upside from its recent 0.41-0.42 SGD range. Risk/reward at Sunpower has rarely been this good.

5. Mazda – A Simple Case Why This Should Not Be At Its All Time Low Ratio Vs Topix, PB and EV/Sales

Image 26470841361589458274459

Mazda reported earnings during the market which had already been flagged due to its earlier guidance revision. While volumes were weak for the quarter and the first half of next year will almost certainly be loss-making, the 1% YoY volume growth in China for April was a ray of hope that conditions could normalise faster than expected barring a second COVID wave. Given this backdrop and significant improvements in many of the company’s financial metrics this cycle, we believe the stock price hitting all-time lows across a variety of valuation metrics is unwarranted.

 

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Brief Value Investing: TRACKING TRAFFIC/Container Shipping: Shortage of Empties Creates Surprisingly Tight Conditions and more

By | Daily Briefs, Value Investing

In this briefing:

  1. TRACKING TRAFFIC/Container Shipping: Shortage of Empties Creates Surprisingly Tight Conditions
  2. Fidea Holdings (8713 JP): Shrinking, Sinking
  3. Bank of the Ryukyus (8399 JP): Tourist Trapped
  4. Bank of Kochi (8416 JP): Harbinger

1. TRACKING TRAFFIC/Container Shipping: Shortage of Empties Creates Surprisingly Tight Conditions

April20 vlsfo

Our monthly index suggests average container rates in March increased by 7.6% YoY despite measurably weak trade activity in key export and import markets. Although we believe overall container shipping revenues declined  in March (on lower volumes), unit pricing has held up surprisingly well due to a developing equipment shortage.

What’s behind the equipment shortage? Weak North American imports from previous months and slower turnaround times resulted in a sharp decline in the export of empty containers in March (-35% YoY, mainly to Asia). The resulting shortage of empties in key cargo origins means that even though there is plenty of space on ships, there is nevertheless an equipment shortage that appears to be contributing to tight market conditions. In the near-term this is positive for container carriers, container leasing companies, and probably Asian container manufacturers, too.

Bunker (ship fuel) prices in mid-April were down sharply compared to mid-March (-30%) and April 2019 (-38%). With fuel equivalent to 15-20% of a typical container carrier’s revenue, the sharp drop in bunker prices is a good thing for carrier profitability. If the equipment shortage we noted above is not resolved quickly, we believe carrier profitability in Q2 2020 could beat low expectations.

Conclusion: Container shipping rates appear to be holding up much better than expected due to a developing equipment shortage, which may take some time to resolve. Carriers also benefit from sharply lower fuel prices, and near-term profitability may surprise on the upside. In addition to container carriers like Evergreen Marine Corp (2603 TT) and Danish giant Ap Moeller – Maersk A/S (MAERSKB DC), we believe container leasing companies like Triton International (TRTN US) and even container manufacturers (Singamas Container Hldgs (716 HK), China International Marine Cntnrs Gp (2039 HK) could benefit from an equipment shortage in the near-term. 

2. Fidea Holdings (8713 JP): Shrinking, Sinking

Akita%20pref%20loan&dep%20mkt%20shares

Fidea Holdings (8713 JP), a bank holding company based in Miyagi Prefecture in Japan’s northern Tohoku Region, has a load of problems.  Its performance ratios are poor, its deposit base is declining, its loan portfolio is shrinking and its share price has fallen below ¥100.  Now it has slashed its earnings guidance for FY3/2020 by 64%, citing trading losses incurred by its Treasury Division in reducing group exposure to equities and REITs. Yet foreign institutional investors continue to own 16% of outstanding shares.  We fail to understand why.  Caveat Emptor!  (May the Buyer Beware!)

3. Bank of the Ryukyus (8399 JP): Tourist Trapped

8399 ryukyus 2019 0419 peervaluations

Tourism is one of the most important industries in the Ryukyu Islands, home to regional bank Bank Of The Ryukyus (8399 JP).  When the tourist industry is effectively shut down, as it has under the ongoing coronavirus pandemic, the local economy suffers immensely.   The bank has recently issued a profit warning, citing rising credit costs as it moves to support an increasing number of small businesses struggling to keep up their loan and interest repayments.  We expect the prefecture’s two other local banks, namely Bank Of Okinawa (8397 JP) and the unlisted Okinawa Kaiho Bank, to announce similar measures in the next few weeks prior to the announcement of FY3/2020 results after the end of Golden Week in early May.  Foreign institutional investors hold just under 18% of outstanding shares.  Caveat Emptor!  (May the Buyer Beware!)

4. Bank of Kochi (8416 JP): Harbinger

8416 kochi 2020 0419 loandepmktshares

An obscure little secondary regional bank from Shikoku with notably low performance ratios, Bank Of Kochi (8416 JP) should be on nobody’s ‘must have’ shopping-list for Japanese bank stocks.  For proof of this, one need look no further than its list of major shareholders: the Resolution & Collection Corporation, a subsidiary of the Deposit Insurance Corporation and thus the Bank of Japan’s ‘bad bank’ 2nd-tier subsidiary, is by far its largest shareholder with 42.4% of outstanding shares and the sole holder of the bank’s No.1 series of preference shares. ‘Red flags’ rarely come any bigger.

Bank of Kochi may be useful to investors, however, as a harbinger of things to come for other Japanese banks that have ‘form’ when it comes to straying into “other investments” such as foreign currency derivatives, REITs and investment trusts, such as Michinoku Bank (8350 JP), First Bank of Toyama (7184 JP), Nanto Bank (8367 JP), Tochigi Bank (8550 JP) and Senshu Ikeda Holdings (8714 JP).  Bank of Kochi released a statement earlier this month that its securities losses for FY3/2020 have now risen an astonishing 20-fold from the position at the end of December 2019 to ¥709 million (US$6.5 million).  Curiously, the bank does not have a lot of domestic corporate equities, but it does hold a considerable number of shares in other small Japanese banks, as well as a growing exposure to “alternative investments” in foreign currencies.  Oh dear.

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Brief Value Investing: MUFG  (8306 JP):  Dealing With a New Order and more

By | Daily Briefs, Value Investing

In this briefing:

  1. MUFG  (8306 JP):  Dealing With a New Order
  2. QH: Expect 2Q20 to Be the Bottom Quarter
  3. Sunpower (SPWG): Risk/Reward Rarely Been Better; Fair Value Remains at 1 SGD or 142% Upside.
  4. Mazda – A Simple Case Why This Should Not Be At Its All Time Low Ratio Vs Topix, PB and EV/Sales
  5. Seino Holdings (9076) – Delivering Cash Back in BIG BUYBACK, May Be an MBO Candidate

1. MUFG  (8306 JP):  Dealing With a New Order

8306 mufg 2020 0515 core%20profits

Mitsubishi UFJ Financial (MUFG) (8306 JP)has lost its long-held position as Japan’s most profitable megabank and, based on its FY3/2020 results announced on Friday 15 May 2020, is now down to the No.2 position having been eclipsed by Sumitomo Mitsui Financial (8316 JP).  Having revised its consolidated net profits target from ¥750 billion to ¥520 billion on 30 April 2020 (from an initial ¥900.0 billion on 15 May 2019), there were no surprises when MUFG reported consolidated net profits for FY3/2020 had fallen 39.5% YoY to ¥528.15 billion.  The megabank group chalked up two consecutive quarters of net losses as a result of impairment losses on foreign subsidiaries, but it was a combination of a fall in core earnings, rising GAE costs and, above all, a huge jump in credit costs from ¥5.82 billion (1bps) in FY3/2019 to ¥222.95 billion (21bps) in FY3/2020 that did the majority of the damage to reported earnings.

The dividend has been maintained at ¥25/share for FY3/2021 but there was no announcement of a share buyback (as we had warned in our previous Insight MUFG  (8306 JP):  Growing Pains Growing.  MUFG has set itself an ambitious consolidated net profit target of ¥520 billion (+4.1% YoY) which would put in back in the No.1 position ahead of SMFG.  We remain skeptical that this target can be achieved for a number of reasons .

MUFG’s share price is down 21.3% on a 12-months basis and is down 30.7% in the last six months.  A liquid stock with high foreign ownership, we see further downside risk to the stock price if foreign institutional investors urgently need to raise cash in Japan to meet global redemptions over the next few months.

Caveat Emptor!  (May the Buyer Beware!)

2. QH: Expect 2Q20 to Be the Bottom Quarter

Image 49594308521589541458867

With strong earnings from a equity income provide an attractive dividend yield at 6%-7%. Therefore, we maintain our BUY rating with a new target price of Bt2.4 (down from Bt2.6) based on 10xPE’21E which its a five-years average.

  • The fall in 1Q20 earnings both YoY and QoQ was primarily pressured by weakening earnings from residential business which sunk 81%YoY to Bt80m. Meanwhile, equity income dropped only 5.6% YoY to Bt431m.
  • We expect 2Q20 earnings to soft down 25%YoY and 10%QoQ, given lower contribution from associated companies especially from HMPRO. Meanwhile, we expect residential transfer units to remain weak QoQ due to low visited rate, but likely to be the bottom quarter.
  • We maintain positive view in 2020-21E backed by stable equity income from associated companies (mostly from HMPRO) and several projects in pipeline worth over Bt48bn.

3. Sunpower (SPWG): Risk/Reward Rarely Been Better; Fair Value Remains at 1 SGD or 142% Upside.

Image?1589507150

Covid-19 has demonstrated that investors, and some analysts, can be wrong in their assessment of the pandemic’s impact on companies. Sunpower Group (SPWG SP) is a prime example on SGX.
1Q20 EBITDA was essentially flat despite the quarter including a shutdown of the Chinese economy for multiple weeks. China is recovering rapidly since April yet Sunpower is now 30% cheaper YTD. This discrepancy can’t be explained.
Many HK and A-share listed companies have rallied strongly as it is clear that the Chinese economy is on the rebound. As already shown during the trade war in FY18-FY19 Sunpower is driven by domestic demand hence a domestic recovery in China should propel Sunpower to new highs not new 52-week lows.
We expect Mr. Market to realize its mistake and start re-rating Sunpower sharply higher sooner rather than later. If SGX investors cannot understand these very simple facts the board of Sunpower should consider moving its listing to HK at some point in the future.
My Fair Value estimate remains 1 SGD (based on 15x FY21 EPS and company meeting its FY21 NPAT targets as communicated in CB2 prospectus). This leaves another +/- 142% upside from its recent 0.41-0.42 SGD range. Risk/reward at Sunpower has rarely been this good.

4. Mazda – A Simple Case Why This Should Not Be At Its All Time Low Ratio Vs Topix, PB and EV/Sales

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Mazda reported earnings during the market which had already been flagged due to its earlier guidance revision. While volumes were weak for the quarter and the first half of next year will almost certainly be loss-making, the 1% YoY volume growth in China for April was a ray of hope that conditions could normalise faster than expected barring a second COVID wave. Given this backdrop and significant improvements in many of the company’s financial metrics this cycle, we believe the stock price hitting all-time lows across a variety of valuation metrics is unwarranted.

 

5. Seino Holdings (9076) – Delivering Cash Back in BIG BUYBACK, May Be an MBO Candidate

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Seino Holdings (9076 JP), based in Gifu Prefecture (two prefectures east of Kyoto, directly north of Nagoya), is a combination transportation logistics company and car dealer, with a few other local specialties tacked on.

It has 10 auto sales branches in Gifu, Shiga (next door between Gifu and Kyoto), Aichi (just south), and Tokyo, plus a unit in the Philippines, and together they sell about US$1bn of autos a year. 

Most of its transportation business is warehouses/logistics and truck transport but in the last couple of years it has started executing a “modal shift” to increase domestic transport by rail and ship. It has started working with partners to reduce its carbon footprint in everything it does. 

The NEW News

Yesterday, the company reported its full-year earnings (Japanese only) to March 31, with revenue +1.4%yoy, OP -5.7%, and Net Profit +21%.

Somewhat unusually, it provided a forecast for the year to March 31, 2021. And it isn’t pretty. Revenue is scheduled to drop 10.4%, OP is scheduled to drop nearly 55%, and Net Profit is guided to fall 71%. Given the quantum of this move, and given the fact that few of their customers seem willing to forecast their own revenues, this guidance has to be seen as speculative at best, even though it is the kind of company with extremely stable revenues normally. 

To mitigate the potential damage from this, the company announced (also only in Japanese) a large buyback today. A very large buyback.

It is up to 20 million shares for up to 20 billion yen, to be executed between 14 May 2020 and 23 December 2020. The oddly-specific end-date is somewhat unusual, but it is possible this leaves room to buy back more shares if needed in fiscal Q4 if the shares remain under pressure. This is, after all, a VERY cash-rich company. 

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