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Value Investing

Brief Value Investing: European Banks at Q119: Big Banks, Greek Banks…a Quantamental Evaluation and more

By | Daily Briefs, Value Investing

In this briefing:

  1. European Banks at Q119: Big Banks, Greek Banks…a Quantamental Evaluation

1. European Banks at Q119: Big Banks, Greek Banks…a Quantamental Evaluation

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We take a look at a sample of European banks at Q119, and score them by financial strength (FUN), by trends and value-quality (PH Score) and by valuation (VAL).

We do not include a number of French and UK lenders on account of incomplete quarterly data but include some restated Italian financials. Where we have sufficient data, we carry out this ranking process and try to give a broad feel for opportunity and risk in the region. There are many others that we could have included.

We also wanted to see how Greek banks stand up relative to European peers. See Piraeus Bank: Risky but Too Cheap, Eurobank: Battle-Hardened and Transformation Bound. The same can be said of EM favourite, Sberbank Of Russia Pjsc (SBER LI) , which is currently in the bottom decile of our VFM rankings. See Sberbank: The Beast from the East when the lender was arguably a more attractive proposition.

For further detail and granularity on a number of the banks evaluated here, we would steer folks towards Italian Banks M&A – The Complex Italian Job by Victor Galliano and HSBC – A Thin Veil by Daniel Tabbush. CP has written previously about the upside and downside of Banco Bilbao Vizcaya Argentari (BBVA SM) and we feel that Victor Galliano provides the necessary expertise on this lender today as well as equally LATAM-heavy Banco Santander Sa (SAN SM). Some of the LATAM entities appear to be reporting pretty benign trends. Our colleague, Ercan Uysal, has some interesting insights into Turkish exposure at HSBC, BBVA, and others.

We only include one Scandinavian lender. We have been cautious on this market for a while now. See Nordic Banks: Underperformance or Something More Serious?  

Our individual VFM rankings are not included here. But they show that a number of European banks feature in the top decile globally such as Spanish lenders, Erste Bank (not included here), and CS. From a valuation and technical (oversold) viewpoint, low growth Europe cannot be dismissed out of hand if the price is deeply below intrinsic value.

Corporate activity continues to be a hot topic in Europe as well as negative rates and general Japanification scenarios. It would be instructive to hear Japanese guru, J. Brian Waterhouse‘s views on this. Corporate activity is a response to a generally low NIM, subpar profitability, quite high LDRs and CIRs, elevated NPLs, and a stagnant monetary policy situation all within a framework of stricter capital rules and tighter regulations. However, the merging of weak entities, such as the once proposed DB-Commerzbank tie-up, would not add value. Deutsche Bank Ag Registered (DBK GR) remains the canary in the coal mine or the elephant in the room. Its fate will impact and influence the European Banking System to a large degree. The German lender certainly casts a shadow over the region’s sector. Even now it has assets of $1.54 trillion, almost half Germany’s $3.4 trillion GDP. Not “too big to fail” but “far too big to fail”. I wonder when someone out there in the analyst community will actually say that its too cheap to ignore…such a career bet may just be too risky. 

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Brief Value Investing: NTT DoCoMo: Slow Take-Up for New Pricing Plans and more

By | Daily Briefs, Value Investing

In this briefing:

  1. NTT DoCoMo: Slow Take-Up for New Pricing Plans
  2. USD/Thai Baht Macro Cycle Low
  3. EGM Alliance Mineral (AMS SP): Galaxy Investment Approved by Shareholders. Next Stop: Full Takeover?
  4. Mexican Finance Minister Resigns – Policy Risks Rising?
  5. Thanachart and TMB: On the Defensive. An Insurance Policy for Challenging Times

1. NTT DoCoMo: Slow Take-Up for New Pricing Plans

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NTT Docomo Inc (9437 JP) says that initial take up for its new pricing plans has been slower than expectations, driven by the end of handset bundling and anticipation of Rakuten Mobile market entry later this year.  After a little more than a month, around 3mn subscribers had opted in, which is less than then 5mn that switched in the month following DoCoMo’s last major pricing change in 2014.  No early guidance changes are expected but this issue likely will attract a lot of attention at Q1 results later this month. 

2. USD/Thai Baht Macro Cycle Low

THB (USDTHB CURNCY) below 31 is flagging valuation concerns with high conviction chart bottoming signals. The macro cycle is due to bottom near the 30.50 level with risk toward the lower 30 area as the risk limit area. 

Micro and macro cycle bull divergence is maturing in the daily and weekly charts and forms when the trend is near a terminal point stemming from diminishing USD sell volumes and momentum (THB tends to spike into a low however) as the market finds itself very long the THB.

USD/THB macro cycle is etching out a cycle low at a time when intervention risk is rising to stem the Baht’s strength.

A USD cycle low will provide headwinds for the SET rally and front run an equity peak. Exports plays on our radar.

3. EGM Alliance Mineral (AMS SP): Galaxy Investment Approved by Shareholders. Next Stop: Full Takeover?

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Alliance Mineral Assets (AMS SP) hosted an EGM to ask its shareholders for approval to issue shares to competitor Galaxy Resources (GXY AU). See details in my previous insight Alliance Mineral (AMS SP): Galaxy Resources Now Largest Shareholder, Tick Tock Until Full Takeover?

The capital injection was approved by a majority of AMS’ investors and will make GXY the largest investor in AMS. AMS will also change its name to Alita Resources.

GXY paid 0.20 AUD/share which gives them an 11.81% stake in the company. Recently, AMS’ share price has been under continued selling pressure falling to 0.134 SGD, which equates to a market valuation of only 200M SGD. While sentiment among the lithium names is negative (for the bearish case read Lithium Market – Phlegmatic Growth, Terrible Investment! by Gaius King ) we note that Alliance has guaranteed offtake agreements for 50% of its production, has the highest quality spodumene available in the market and its contractual selling price is significantly higher ($700+) than its costs ($500-550). 

GXY is now ‘half-pregnant‘ and given the company’s low reserve life (less than 5 years) and AMS’ ongoing exploration program we predict it is only a matter of time before a full takeover of AMS is considered by GXY management. In this respect, we note that GXY’s new CEO, Simon Hay, just started his role on 01/07/19 and will surely need to consider GXY diminished market valuation and short mine life.

Should GXY fail to act we shouldn’t discount the possibility that larger players such as Wesfarmers Ltd (WES AU) could be looking to consolidate the space after its recent purchase of Kidman Resources (KDR AU)

Fair Value is reduced to 0.30 SGD (was 0.35 SGD before dilution effect).

4. Mexican Finance Minister Resigns – Policy Risks Rising?

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  • Carlos Urzua, Mexico’s finance minister, resigned yesterday citing many differences of opinion on public policy decisions and discrepancies in economic matters
  • President Andres Manuel Lopez Obrador (AMLO) stated that Urzua was not embracing the “transformation” by his administration
  • Urzua has been replaced by his deputy, the under-secretary of finance, Arturo Herrera who is seen as a technocratic (ex-World Bank), relatively safe pair of hands
  • The gorilla in the room remains Pemex, with its massive debt, and the possible construction of the “AMLO statement” refinery in Tabasco, which Urzua opposed
  • We fear that Herrera may be less able to re-direct AMLO away from his more populist policies, which points to the risk of an increasingly market-unfriendly Mexico going forward
  • At the start of the year, we thought that AMLO might be less bad than feared, and government bond prices suggested it was so; we now turn more cautious on Mexico
  • Although we retain our core positive recommendation in Mexican financials, Gentera SAB De CV (GENTERA* MM EQUITY) ,  we believe that Grupo Financiero Banorte-O (GFNORTEO MM) in particular is at risk of further de-rating due to its government lending business

5. Thanachart and TMB: On the Defensive. An Insurance Policy for Challenging Times

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The 140 billion Baht combination between Thanachart Capital (TCAP TB) and TMB Bank PCL (TMB TB) carries risks and opportunities and may divide opinion. The Thai government certainly wanted this to happen, providing tax incentives curiously to itself. (MOF is a key shareholder at TMB). We cannot but feel that a deal of this kind had to be done, mitigating risks in the overall credit market and to both standalone franchises. In addition, the medium-sized nature of the two players involved inhibits the top players from getting too far away from the pack.

TCAP has been over recent years a relatively profitable operation with a niche (HP) specialisation. Management has managed to report remarkably benign trends year after year (as measured by our PH Score). There would be concerns that the merged entity may see a dilution in this profitability along with core brand and management strengths, responsible for delivering such positive change. Having said that, a glance at both ROAs reveals not a huge difference. (1.5% vs 1.25%). TCAP has better margins but, again, not so much higher. (NIM at 3.15% vs 2.94%). 

The merger may actually reduce risk at TCAP. The capital base at TMB is more robust. Perhaps, TCAP was reaching a saturation point given the toppy state of the retail market and needed a change of direction and risk diversification. The combination will broaden the proposition and create a more diversified, better-funded, and capitalised operation with a balanced business model, more fit to compete with the market leaders. TCAP will no longer be a consumer finance company with a bit of SME and corporate credit, too small to be a big bank, but part of the sixth largest lender by Assets. TMB will no longer be a corporate credit provider with a shallow retail presence. TCAP gains from TMB’s corporate and SME focus while TMB gains from TCAP’s consumer specialisation. The combined entity thus moves towards a 50:50 entity balancing credit segments, and one assumes that management expertise from both respective banks will be utilised as it would make little sense for TMB to do HP given TCAP’s track record or for TCAP to major in SMEs. 

The main attraction would be on the funding side given TMB’s low-cost CASA and hybrid deposit base versus TCAP’s dependence on time deposits. TCAP also gains from TMB’s higher-rated mutual fund and asset management offering. TMB gains from TCAP’s brokerage/securities business. Naturally, there are scale benefits and efficiencies from synergies and rooting out duplication. The combined entity will command 12% of the credit market, especially in mortgages, doubling the client-base to >10mm. 

As always, the success will depend on people. Mergers, if poorly executed, can lead to poor allocation of human resources and cultural breakdown. TCAP and TMB will need to pool very different cultures and find a refreshed common ground. How will the new bank be branded? The size of the two banks is not hugely different: this means good people can come to the fore from both operations. The question though inevitably will be, at least from the start, who is taking over who and who will call the shots? The appointment of key executives and directors will signal where the bank is headed. There are five strategic players : Bank of Nova Scotia, TBank and TCAP on one side, and ING and MOF on the other. European shareholders at the helm with the MOF, Canadian investors, and private Thai interests. There is plenty of space here for debate.

There is the Thai economy to think about too. Athaporn Arayasantiparb, CFA , who like me has written about Thanachart Capital (TCAP TB), would provide a better steer on the domestic macro picture. From what I can glean, growth (as elsewhere) is going through a somewhat softer patch with tourism below target and exports (such a key component) impacted by trade disputes and a moderation in Chinese expansion. Of course, Thailand could benefit from the trade dispute. Maybe there will be a breakthrough on the investment side. The EEC is vital to kickstart infra-fuelled growth to offset softness elsewhere. Projects related to China have the potential to support expansion.

Elsewhere, the tax-base needs to be broadened without draconian measures. Government debt needs to be reined in somewhat. Despite inflation (swayed by drought-sensitive food and energy prices) reaching the lower end of target, the Central Bank raised rates last December to 1.75% though real rates are well behind levels in Indonesia and Malaysia.  While not targeted by the Central Bank, given its floating identity, the Baht remains disconcertingly overbought. The Central Bank is keen to stress its Financial Stability credentials and has taken macroprudential measures to enhance underwriting standards and dampen excessive exuberance with credit cards and consumer credit especially. In hindsight, greater restraint should have marked the last decade as risks have accumulated in an especially low real rate environment. Similar to Malaysia and South Korea, the system is weighed down by excessive household debt to such an extent that flags are now red. 

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Brief Value Investing: USD/Thai Baht Macro Cycle Low and more

By | Daily Briefs, Value Investing

In this briefing:

  1. USD/Thai Baht Macro Cycle Low
  2. EGM Alliance Mineral (AMS SP): Galaxy Investment Approved by Shareholders. Next Stop: Full Takeover?
  3. Mexican Finance Minister Resigns – Policy Risks Rising?
  4. Thanachart and TMB: On the Defensive. An Insurance Policy for Challenging Times
  5. Brazilian Pension Reform Moves Ahead; We Stick with Our Positive View on Banco Do Brasil

1. USD/Thai Baht Macro Cycle Low

THB (USDTHB CURNCY) below 31 is flagging valuation concerns with high conviction chart bottoming signals. The macro cycle is due to bottom near the 30.50 level with risk toward the lower 30 area as the risk limit area. 

Micro and macro cycle bull divergence is maturing in the daily and weekly charts and forms when the trend is near a terminal point stemming from diminishing USD sell volumes and momentum (THB tends to spike into a low however) as the market finds itself very long the THB.

USD/THB macro cycle is etching out a cycle low at a time when intervention risk is rising to stem the Baht’s strength.

A USD cycle low will provide headwinds for the SET rally and front run an equity peak. Exports plays on our radar.

2. EGM Alliance Mineral (AMS SP): Galaxy Investment Approved by Shareholders. Next Stop: Full Takeover?

Slide%20on%20nev%20lithium%20market%20july%202019

Alliance Mineral Assets (AMS SP) hosted an EGM to ask its shareholders for approval to issue shares to competitor Galaxy Resources (GXY AU). See details in my previous insight Alliance Mineral (AMS SP): Galaxy Resources Now Largest Shareholder, Tick Tock Until Full Takeover?

The capital injection was approved by a majority of AMS’ investors and will make GXY the largest investor in AMS. AMS will also change its name to Alita Resources.

GXY paid 0.20 AUD/share which gives them an 11.81% stake in the company. Recently, AMS’ share price has been under continued selling pressure falling to 0.134 SGD, which equates to a market valuation of only 200M SGD. While sentiment among the lithium names is negative (for the bearish case read Lithium Market – Phlegmatic Growth, Terrible Investment! by Gaius King ) we note that Alliance has guaranteed offtake agreements for 50% of its production, has the highest quality spodumene available in the market and its contractual selling price is significantly higher ($700+) than its costs ($500-550). 

GXY is now ‘half-pregnant‘ and given the company’s low reserve life (less than 5 years) and AMS’ ongoing exploration program we predict it is only a matter of time before a full takeover of AMS is considered by GXY management. In this respect, we note that GXY’s new CEO, Simon Hay, just started his role on 01/07/19 and will surely need to consider GXY diminished market valuation and short mine life.

Should GXY fail to act we shouldn’t discount the possibility that larger players such as Wesfarmers Ltd (WES AU) could be looking to consolidate the space after its recent purchase of Kidman Resources (KDR AU)

Fair Value is reduced to 0.30 SGD (was 0.35 SGD before dilution effect).

3. Mexican Finance Minister Resigns – Policy Risks Rising?

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  • Carlos Urzua, Mexico’s finance minister, resigned yesterday citing many differences of opinion on public policy decisions and discrepancies in economic matters
  • President Andres Manuel Lopez Obrador (AMLO) stated that Urzua was not embracing the “transformation” by his administration
  • Urzua has been replaced by his deputy, the under-secretary of finance, Arturo Herrera who is seen as a technocratic (ex-World Bank), relatively safe pair of hands
  • The gorilla in the room remains Pemex, with its massive debt, and the possible construction of the “AMLO statement” refinery in Tabasco, which Urzua opposed
  • We fear that Herrera may be less able to re-direct AMLO away from his more populist policies, which points to the risk of an increasingly market-unfriendly Mexico going forward
  • At the start of the year, we thought that AMLO might be less bad than feared, and government bond prices suggested it was so; we now turn more cautious on Mexico
  • Although we retain our core positive recommendation in Mexican financials, Gentera SAB De CV (GENTERA* MM EQUITY) ,  we believe that Grupo Financiero Banorte-O (GFNORTEO MM) in particular is at risk of further de-rating due to its government lending business

4. Thanachart and TMB: On the Defensive. An Insurance Policy for Challenging Times

Thailand%20household%20debt page 1

The 140 billion Baht combination between Thanachart Capital (TCAP TB) and TMB Bank PCL (TMB TB) carries risks and opportunities and may divide opinion. The Thai government certainly wanted this to happen, providing tax incentives curiously to itself. (MOF is a key shareholder at TMB). We cannot but feel that a deal of this kind had to be done, mitigating risks in the overall credit market and to both standalone franchises. In addition, the medium-sized nature of the two players involved inhibits the top players from getting too far away from the pack.

TCAP has been over recent years a relatively profitable operation with a niche (HP) specialisation. Management has managed to report remarkably benign trends year after year (as measured by our PH Score). There would be concerns that the merged entity may see a dilution in this profitability along with core brand and management strengths, responsible for delivering such positive change. Having said that, a glance at both ROAs reveals not a huge difference. (1.5% vs 1.25%). TCAP has better margins but, again, not so much higher. (NIM at 3.15% vs 2.94%). 

The merger may actually reduce risk at TCAP. The capital base at TMB is more robust. Perhaps, TCAP was reaching a saturation point given the toppy state of the retail market and needed a change of direction and risk diversification. The combination will broaden the proposition and create a more diversified, better-funded, and capitalised operation with a balanced business model, more fit to compete with the market leaders. TCAP will no longer be a consumer finance company with a bit of SME and corporate credit, too small to be a big bank, but part of the sixth largest lender by Assets. TMB will no longer be a corporate credit provider with a shallow retail presence. TCAP gains from TMB’s corporate and SME focus while TMB gains from TCAP’s consumer specialisation. The combined entity thus moves towards a 50:50 entity balancing credit segments, and one assumes that management expertise from both respective banks will be utilised as it would make little sense for TMB to do HP given TCAP’s track record or for TCAP to major in SMEs. 

The main attraction would be on the funding side given TMB’s low-cost CASA and hybrid deposit base versus TCAP’s dependence on time deposits. TCAP also gains from TMB’s higher-rated mutual fund and asset management offering. TMB gains from TCAP’s brokerage/securities business. Naturally, there are scale benefits and efficiencies from synergies and rooting out duplication. The combined entity will command 12% of the credit market, especially in mortgages, doubling the client-base to >10mm. 

As always, the success will depend on people. Mergers, if poorly executed, can lead to poor allocation of human resources and cultural breakdown. TCAP and TMB will need to pool very different cultures and find a refreshed common ground. How will the new bank be branded? The size of the two banks is not hugely different: this means good people can come to the fore from both operations. The question though inevitably will be, at least from the start, who is taking over who and who will call the shots? The appointment of key executives and directors will signal where the bank is headed. There are five strategic players : Bank of Nova Scotia, TBank and TCAP on one side, and ING and MOF on the other. European shareholders at the helm with the MOF, Canadian investors, and private Thai interests. There is plenty of space here for debate.

There is the Thai economy to think about too. Athaporn Arayasantiparb, CFA , who like me has written about Thanachart Capital (TCAP TB), would provide a better steer on the domestic macro picture. From what I can glean, growth (as elsewhere) is going through a somewhat softer patch with tourism below target and exports (such a key component) impacted by trade disputes and a moderation in Chinese expansion. Of course, Thailand could benefit from the trade dispute. Maybe there will be a breakthrough on the investment side. The EEC is vital to kickstart infra-fuelled growth to offset softness elsewhere. Projects related to China have the potential to support expansion.

Elsewhere, the tax-base needs to be broadened without draconian measures. Government debt needs to be reined in somewhat. Despite inflation (swayed by drought-sensitive food and energy prices) reaching the lower end of target, the Central Bank raised rates last December to 1.75% though real rates are well behind levels in Indonesia and Malaysia.  While not targeted by the Central Bank, given its floating identity, the Baht remains disconcertingly overbought. The Central Bank is keen to stress its Financial Stability credentials and has taken macroprudential measures to enhance underwriting standards and dampen excessive exuberance with credit cards and consumer credit especially. In hindsight, greater restraint should have marked the last decade as risks have accumulated in an especially low real rate environment. Similar to Malaysia and South Korea, the system is weighed down by excessive household debt to such an extent that flags are now red. 

5. Brazilian Pension Reform Moves Ahead; We Stick with Our Positive View on Banco Do Brasil

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  • Brazil’s pension reform agenda moves closer to approval, with  its passage through the special commission of the lower house last week
  • We expect the Chamber of Deputies vote to be a positive one this week, as the voting intention indications seem to be constructive
  • The passage of pension reform is set to be followed with other economic reforms, such as tax code reform and an accelerated privatization program
  • Brazilian equities, especially blue chips, have re-rated and we think there is more to come, although in banks we would be selective
  • We believe that Banco Do Brasil Sa (BBAS3 BZ) stands out among the Brazilian big-cap banks, based on its attractive valuations, improving ROE and its potential to improve its CET1 ratio through non-core disposals

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Brief Value Investing: Budweiser APAC: Looking at 1Q2019 & Beyond – Is the Best in the Past? and more

By | Daily Briefs, Value Investing

In this briefing:

  1. Budweiser APAC: Looking at 1Q2019 & Beyond – Is the Best in the Past?
  2. Japan Display: Shrinking of Mobile Arm a Necessary Move but Capital Raise Vital
  3. China Citic Bank: Risk and Opportunity
  4. European Banks at Q119: Big Banks, Greek Banks…a Quantamental Evaluation

1. Budweiser APAC: Looking at 1Q2019 & Beyond – Is the Best in the Past?

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Budweiser Brewing Company APAC (0338867D HK), the Asia Pacific division of Anheuser Busch Inbev Sa/Nv (ABI BB) filed its PHIP update last week. It reports a volume decline in 1Q2019 (YoY basis) even as it managed revenue growth (excluding currency losses) and operating margin growth (helped by lower SG&A costs). The company has positioned itself as the largest Asia Pacific play on beer in the region with demand growth potential; it could, however, face tougher market conditions going forward in China, its largest & most important market. This could mean that Budweiser Brewing Company APAC (0338867D HK)may find it difficult to beat its own historical performance in terms of organic volume growth rate and market share gains; however, it could defend/grow margins given scope for cost efficiencies and premiumization. Its IPO is closely watched given the company’s potential large market cap, attractive industry/ segment positioning and performance metrics. We are sanguine about Budweiser APAC’s investment worthiness based on its operational highlights and competitive strengths and await deal terms on pricing and valuations. 

We had analysed Budweiser APAC’s key Asia Pacific markets and noted that they are in a maturing phase in our earlier report Budweiser APAC IPO: Rising Tide Lifts All Boats – Beer Peers on a Valuation High. We also highlighted in a later report Thai Beverage, Carlsberg Brewery & Heineken Malaysia Bhd: Budweiser APAC’s Zippy Sweet SE Asia Peers that the best beer markets in Asia are in South East Asia, a region where Budweiser is notable by its near absence. Also, look out for a list of issues, in the note below, that investors may discuss with Budweiser APAC management.

2. Japan Display: Shrinking of Mobile Arm a Necessary Move but Capital Raise Vital

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On Wednesday 12 Jun Japan Display (6740 JP) announced some of the details of its restructuring measures:

  • The Hakusan facility will have production suspended from Jul until Sep (media articles have suggested it was already effectively suspended anyway). At that point the company will reassess whether a restart is viable and potentially book a ¥40-50bn valuation loss (book value ¥100bn) and a further ¥10-20bn in additional shut down costs.
  • The Mobara facility will close its back end V2 processing line which is on the books at ¥300m.
  • The company has invited applications for voluntary retirement from 1,200 of a 4,635 strong workforce. The applications will be received from 29 Jul to 27 Aug and employment will cease on 30 Sep. In addition, the overseas sales office will see headcount reduction of a few dozen. JDI will also negotiate with JOLED regarding officially transferring employees who are currently dispatched to JOLED. This is expected to cost roughly ¥9bn and result in annual cost savings of about ¥20bn.
  • A variety of compensation reductions for board members and senior management ranging between 15-60% and a 15% cut in bonuses for all employees for the summer bonus (and possibly the winter bonus depending on conditions). These cost savings are not included in the ¥20bn annual cost savings noted above.
  • Outside director Takahisa Hashimoto will become Chairman and current CFO Minoru Kikuoka will take on the CEO role. Current CEO and Chairman Yoshiyuki Tsukizaki will depart and the executive officer structure will be revamped.

These are painful but necessary reforms and better adapt the company for its and Apple Inc (AAPL US)‘s new normal.

Following, this news, on Thu the 13th reports surfaced that the Suwa consortium would miss the deadline (Fri the 14th) for finalising its agreement to inject capital into JDI and indeed, over the weekend it became clear that Tpk Holding (3673 TT) had backed out of the deal. We believe that JDI has finally taken serious enough measures to stabilise operations even without a  significant recovery in Apple’s sales. It’s balance sheet, however, is clearly in dire straits without more capital.

3. China Citic Bank: Risk and Opportunity

Although more speculative and risky than the “Big Four” SOEs, China Citic Bank Corp (601998 CH) stands out according to our rankings as a potentially rewarding combination of fundamental strength, fundamental trends, and valuation.

Fundamental strength lies in a robust top-line, less affected by funding growth strains elsewhere, and positive underlying “jaws”. However, the official NPL ratio is the highest out of our listed sample and credit growth is subdued. Lingering asset quality issues include the growth of doubtful loans and SMLs while Debt/Equity is high.

Regarding fundamental trends, the bank commands a PH Score of 8.5, placing it in the top quartile globally.

Regarding valuation, shares appear appealing, trading on a P/Book, FV, Total Return Ratio, Earnings Yield, and Dividend Yield, respectively, of 0.45x, 7%, 3.8x, 23.5%, and 6.0%, respectively. That looks like deep value, reflecting in part risk of growth and growth of risk.

The aforementioned valuations and an oversold RSI signal would seem to price in a great deal of bad news and/or a dire future. And there has been plenty of negative news on Chinese financials of late.

We would also highlight that Citic Ltd, holder of 59% of China Citic Bank, is trading on a discount to NAV of some 49%. That means that the parent’s share price reflects the bank’s valuation while the market assigns no -or negative- value to other Group assets.

4. European Banks at Q119: Big Banks, Greek Banks…a Quantamental Evaluation

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We take a look at a sample of European banks at Q119, and score them by financial strength (FUN), by trends and value-quality (PH Score) and by valuation (VAL).

We do not include a number of French and UK lenders on account of incomplete quarterly data but include some restated Italian financials. Where we have sufficient data, we carry out this ranking process and try to give a broad feel for opportunity and risk in the region. There are many others that we could have included.

We also wanted to see how Greek banks stand up relative to European peers. See Piraeus Bank: Risky but Too Cheap, Eurobank: Battle-Hardened and Transformation Bound. The same can be said of EM favourite, Sberbank Of Russia Pjsc (SBER LI) , which is currently in the bottom decile of our VFM rankings. See Sberbank: The Beast from the East when the lender was arguably a more attractive proposition.

For further detail and granularity on a number of the banks evaluated here, we would steer folks towards Italian Banks M&A – The Complex Italian Job by Victor Galliano and HSBC – A Thin Veil by Daniel Tabbush. CP has written previously about the upside and downside of Banco Bilbao Vizcaya Argentari (BBVA SM) and we feel that Victor Galliano provides the necessary expertise on this lender today as well as equally LATAM-heavy Banco Santander Sa (SAN SM). Some of the LATAM entities appear to be reporting pretty benign trends. Our colleague, Ercan Uysal, has some interesting insights into Turkish exposure at HSBC, BBVA, and others.

We only include one Scandinavian lender. We have been cautious on this market for a while now. See Nordic Banks: Underperformance or Something More Serious?  

Our individual VFM rankings are not included here. But they show that a number of European banks feature in the top decile globally such as Spanish lenders, Erste Bank (not included here), and CS. From a valuation and technical (oversold) viewpoint, low growth Europe cannot be dismissed out of hand if the price is deeply below intrinsic value.

Corporate activity continues to be a hot topic in Europe as well as negative rates and general Japanification scenarios. It would be instructive to hear Japanese guru, J. Brian Waterhouse‘s views on this. Corporate activity is a response to a generally low NIM, subpar profitability, quite high LDRs and CIRs, elevated NPLs, and a stagnant monetary policy situation all within a framework of stricter capital rules and tighter regulations. However, the merging of weak entities, such as the once proposed DB-Commerzbank tie-up, would not add value. Deutsche Bank Ag Registered (DBK GR) remains the canary in the coal mine or the elephant in the room. Its fate will impact and influence the European Banking System to a large degree. The German lender certainly casts a shadow over the region’s sector. Even now it has assets of $1.54 trillion, almost half Germany’s $3.4 trillion GDP. Not “too big to fail” but “far too big to fail”. I wonder when someone out there in the analyst community will actually say that its too cheap to ignore…such a career bet may just be too risky. 

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Brief Value Investing: MergerTalk: UnitedTech/Raytheon – It’s The UTX Share Price That Needs Adjusting, Not The Terms and more

By | Daily Briefs, Value Investing

In this briefing:

  1. MergerTalk: UnitedTech/Raytheon – It’s The UTX Share Price That Needs Adjusting, Not The Terms

1. MergerTalk: UnitedTech/Raytheon – It’s The UTX Share Price That Needs Adjusting, Not The Terms

Utx3

Reaction to the proposed ‘merger of equals’ between aerospace giant United Technologies (UTX US) and US defense  contractor Raytheon Company (RTN US) announced at the beginning iof the week, has so far been met with an underwhelming reaction by the market.  While the strategic rationale for the deal sounds reasonable to us (although we acknowledge that our viewpoint is not universally accepted). Nor do we have any qualms about the terms of the offer.  So what is the issue here?

We believe the major complicating factor in this situation is that United Technologies is a company in the process of  transitioning itself from being a multi-industrial conglomerate to one focused on Aerospace & Defense, which is not properly reflected in its share price. This has significant ramifications for an all-stock deal in which the substantially undervalued United Technologies stock is effectively the currency of choice for this merger. The mispricing of UTX stock (which we assess should be trading ~15%-40% higher than the prevailing price) serves to misrepresent the value of the offer to Raytheon shareholders and needs to be corrected. Below, we offer a detailed assessment of how we arrive at this conclusion.  

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Brief Value Investing: MergerTalk: UnitedTech/Raytheon – It’s The UTX Share Price That Needs Adjusting, Not The Terms and more

By | Daily Briefs, Value Investing

In this briefing:

  1. MergerTalk: UnitedTech/Raytheon – It’s The UTX Share Price That Needs Adjusting, Not The Terms
  2. Xinhua Winshare (811 HK): Secured 6.2% Yield Rock Solid in the Waves

1. MergerTalk: UnitedTech/Raytheon – It’s The UTX Share Price That Needs Adjusting, Not The Terms

Utx3

Reaction to the proposed ‘merger of equals’ between aerospace giant United Technologies (UTX US) and US defense  contractor Raytheon Company (RTN US) announced at the beginning iof the week, has so far been met with an underwhelming reaction by the market.  While the strategic rationale for the deal sounds reasonable to us (although we acknowledge that our viewpoint is not universally accepted). Nor do we have any qualms about the terms of the offer.  So what is the issue here?

We believe the major complicating factor in this situation is that United Technologies is a company in the process of  transitioning itself from being a multi-industrial conglomerate to one focused on Aerospace & Defense, which is not properly reflected in its share price. This has significant ramifications for an all-stock deal in which the substantially undervalued United Technologies stock is effectively the currency of choice for this merger. The mispricing of UTX stock (which we assess should be trading ~15%-40% higher than the prevailing price) serves to misrepresent the value of the offer to Raytheon shareholders and needs to be corrected. Below, we offer a detailed assessment of how we arrive at this conclusion.  

2. Xinhua Winshare (811 HK): Secured 6.2% Yield Rock Solid in the Waves

Earnings

Xinhua Winshare Publishing&Media (811 HK) provides a state of calm amid the current market volatility through its stable earnings stream from book publishing and distribution.  Supported by such earnings, the company has been paying annual DPS of Rmb0.30 consecutively for nine years since 2010. At 6.2% prospective dividend yield, XW’s share is currently attractively priced, in our view. Its publishing and distribution businesses are domestically focused, not affected by the US-China trade war and do not expose to the slowdown in China’s economy. While such businesses are not expected to generate significant capital gain in the near term, upside may come in the long term from positive demographic trend and the company’s strategic initiatives. 

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Brief Value Investing: MergerTalk: UnitedTech/Raytheon – It’s The UTX Share Price That Needs Adjusting, Not The Terms and more

By | Daily Briefs, Value Investing

In this briefing:

  1. MergerTalk: UnitedTech/Raytheon – It’s The UTX Share Price That Needs Adjusting, Not The Terms
  2. Xinhua Winshare (811 HK): Secured 6.2% Yield Rock Solid in the Waves
  3. Italian Banks M&A – The Complex Italian Job

1. MergerTalk: UnitedTech/Raytheon – It’s The UTX Share Price That Needs Adjusting, Not The Terms

Utx3

Reaction to the proposed ‘merger of equals’ between aerospace giant United Technologies (UTX US) and US defense  contractor Raytheon Company (RTN US) announced at the beginning iof the week, has so far been met with an underwhelming reaction by the market.  While the strategic rationale for the deal sounds reasonable to us (although we acknowledge that our viewpoint is not universally accepted). Nor do we have any qualms about the terms of the offer.  So what is the issue here?

We believe the major complicating factor in this situation is that United Technologies is a company in the process of  transitioning itself from being a multi-industrial conglomerate to one focused on Aerospace & Defense, which is not properly reflected in its share price. This has significant ramifications for an all-stock deal in which the substantially undervalued United Technologies stock is effectively the currency of choice for this merger. The mispricing of UTX stock (which we assess should be trading ~15%-40% higher than the prevailing price) serves to misrepresent the value of the offer to Raytheon shareholders and needs to be corrected. Below, we offer a detailed assessment of how we arrive at this conclusion.  

2. Xinhua Winshare (811 HK): Secured 6.2% Yield Rock Solid in the Waves

Earnings

Xinhua Winshare Publishing&Media (811 HK) provides a state of calm amid the current market volatility through its stable earnings stream from book publishing and distribution.  Supported by such earnings, the company has been paying annual DPS of Rmb0.30 consecutively for nine years since 2010. At 6.2% prospective dividend yield, XW’s share is currently attractively priced, in our view. Its publishing and distribution businesses are domestically focused, not affected by the US-China trade war and do not expose to the slowdown in China’s economy. While such businesses are not expected to generate significant capital gain in the near term, upside may come in the long term from positive demographic trend and the company’s strategic initiatives. 

3. Italian Banks M&A – The Complex Italian Job

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  • The Italian bank system’s lack of concentration makes it, on paper at least, ripe for M&A consolidation, and open to cross-border M&A
  • The reality is, we believe, more complicated; Italian banks, exposed to the “triple jeopardy” of challenges, are viewed with caution by other Eurozone banks
  • Prospective Italian banking M&A activity has more recently been domestic, due largely to Italian-specific challenges, which have acted as “poison pills”, and are still a drag on bank M&A domestically
  • Investors are concerned that intra-Italian bank M&A results in a “dilution” of returns, balance sheet erosion and credit risk concentration; this flies in the face of ongoing de-risking of balance sheets, that are still a work in progress
  • In the Italian bank M&A map, we see, in general terms, that Intesa Sanpaolo (ISP IM) and UniCredit SpA (UCG IM) are the potential acquirers; Unione Di Banche Italiane (UBI IM), Banco BPM SpA (BAMI IM) and Banca Popolare Dell’Emilia Rom (BPE IM) are both potential acquirers of smaller banks and possible targets or merger candidates; Banca Monte Dei Paschi Di Sien (BMPS IM) is in consolidation limbo, government-controlled and with yet more de-risking to do; Banca Carige (CRG IM) and Credito Valtellinese Sc (CVAL IM) are, we believe, confined to being acquisition targets for banks with high risk appetites
  • Italian bank stock valuations are, in our view, driven by the challenged domestic macro-economic and political outlook; yet we would highlight, for the longer term, UniCredit SpA (UCG IM) as the quality name with an attractive dividend yield and higher payout potential, with Unione Di Banche Italiane (UBI IM) and Banco BPM SpA (BAMI IM) as the higher risk, deep value stock picks

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Brief Value Investing: MergerTalk: UnitedTech/Raytheon – It’s The UTX Share Price That Needs Adjusting, Not The Terms and more

By | Daily Briefs, Value Investing

In this briefing:

  1. MergerTalk: UnitedTech/Raytheon – It’s The UTX Share Price That Needs Adjusting, Not The Terms
  2. Xinhua Winshare (811 HK): Secured 6.2% Yield Rock Solid in the Waves
  3. Italian Banks M&A – The Complex Italian Job
  4. Fishing in Muddy Waters: Radico Khaitan Hits a Low as India Spirits Stumbles. Look for Value

1. MergerTalk: UnitedTech/Raytheon – It’s The UTX Share Price That Needs Adjusting, Not The Terms

Utx3

Reaction to the proposed ‘merger of equals’ between aerospace giant United Technologies (UTX US) and US defense  contractor Raytheon Company (RTN US) announced at the beginning iof the week, has so far been met with an underwhelming reaction by the market.  While the strategic rationale for the deal sounds reasonable to us (although we acknowledge that our viewpoint is not universally accepted). Nor do we have any qualms about the terms of the offer.  So what is the issue here?

We believe the major complicating factor in this situation is that United Technologies is a company in the process of  transitioning itself from being a multi-industrial conglomerate to one focused on Aerospace & Defense, which is not properly reflected in its share price. This has significant ramifications for an all-stock deal in which the substantially undervalued United Technologies stock is effectively the currency of choice for this merger. The mispricing of UTX stock (which we assess should be trading ~15%-40% higher than the prevailing price) serves to misrepresent the value of the offer to Raytheon shareholders and needs to be corrected. Below, we offer a detailed assessment of how we arrive at this conclusion.  

2. Xinhua Winshare (811 HK): Secured 6.2% Yield Rock Solid in the Waves

Earnings

Xinhua Winshare Publishing&Media (811 HK) provides a state of calm amid the current market volatility through its stable earnings stream from book publishing and distribution.  Supported by such earnings, the company has been paying annual DPS of Rmb0.30 consecutively for nine years since 2010. At 6.2% prospective dividend yield, XW’s share is currently attractively priced, in our view. Its publishing and distribution businesses are domestically focused, not affected by the US-China trade war and do not expose to the slowdown in China’s economy. While such businesses are not expected to generate significant capital gain in the near term, upside may come in the long term from positive demographic trend and the company’s strategic initiatives. 

3. Italian Banks M&A – The Complex Italian Job

Capture6

  • The Italian bank system’s lack of concentration makes it, on paper at least, ripe for M&A consolidation, and open to cross-border M&A
  • The reality is, we believe, more complicated; Italian banks, exposed to the “triple jeopardy” of challenges, are viewed with caution by other Eurozone banks
  • Prospective Italian banking M&A activity has more recently been domestic, due largely to Italian-specific challenges, which have acted as “poison pills”, and are still a drag on bank M&A domestically
  • Investors are concerned that intra-Italian bank M&A results in a “dilution” of returns, balance sheet erosion and credit risk concentration; this flies in the face of ongoing de-risking of balance sheets, that are still a work in progress
  • In the Italian bank M&A map, we see, in general terms, that Intesa Sanpaolo (ISP IM) and UniCredit SpA (UCG IM) are the potential acquirers; Unione Di Banche Italiane (UBI IM), Banco BPM SpA (BAMI IM) and Banca Popolare Dell’Emilia Rom (BPE IM) are both potential acquirers of smaller banks and possible targets or merger candidates; Banca Monte Dei Paschi Di Sien (BMPS IM) is in consolidation limbo, government-controlled and with yet more de-risking to do; Banca Carige (CRG IM) and Credito Valtellinese Sc (CVAL IM) are, we believe, confined to being acquisition targets for banks with high risk appetites
  • Italian bank stock valuations are, in our view, driven by the challenged domestic macro-economic and political outlook; yet we would highlight, for the longer term, UniCredit SpA (UCG IM) as the quality name with an attractive dividend yield and higher payout potential, with Unione Di Banche Italiane (UBI IM) and Banco BPM SpA (BAMI IM) as the higher risk, deep value stock picks

4. Fishing in Muddy Waters: Radico Khaitan Hits a Low as India Spirits Stumbles. Look for Value

Popular%20brand%20owner

According to the global Industry data published this week Radico Khaitan (RDCK IN), an India based popular alcoholic beverages maker, owns 2 of the top 12 fastest growing spirits brands globally in 2018. However, the stock is down 30% YTD trading close to its 52-week low as the spectre of regional alcohol ban rears its head in two states in India, including Andhra Pradesh, one of the bigger markets for alcoholic beverages in the country. Radico Khaitan had reported strong growth in sales, margins and profits for the quarter and year ended March 31st 2019. The proposed liquor ban, when implemented, will hurt Radico Khaitan’s revenue growth, operating margins and net profit (expect full year impact in FY2021). However, based on our earnings/valuations analysis, the YTD stock slide seems to fully factor in the potential earnings downside. Any further stock decline could be opportunities for investors looking for favourable entry points. Regulatory issues – taxes/regional bans – will continue to be the key sector risks.

In the note below, we look at (1) likely earnings scenario for Radico Khaitan (RDCK IN) after factoring in possible volume/revenue impact from expected state alcohol ban and (2) implied valuations at the revised earnings levels and potential stock upside (3) Radico Khaitan’s earnings and operational track record. We include few data points on India spirits market fundamentals and also present the list of top spirits brands for 2018, ranked by absolute volume growth.

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Brief Value Investing: Renesas: Factory Automation and Aircon Inventory Adjustments to Take Time and more

By | Daily Briefs, Value Investing

In this briefing:

  1. Renesas: Factory Automation and Aircon Inventory Adjustments to Take Time

1. Renesas: Factory Automation and Aircon Inventory Adjustments to Take Time

Renesas%20wafer%20input

We spoke to Renesas Electronics (6723 JP) today to gauge conditions regarding their inventory and the shorter than expected production stoppage in May – the stoppage only lasted 30-40% of the duration it was supposed to. In addition we assessed the company’s take on the recently announced offer for Cypress Semiconductor (CY US) by key competitor Infineon Technologies Ag (IFX GR), and gained some read-through to business conditions in the automotive and factory automation sectors, among others.

  • Internal inventory levels have reached healthy levels and further “unseasonal” production stoppages are unlikely.
  • Channel inventory for FA and end product inventory for aircons in China are still high.
  • Toyota is outperforming other auto manufacturers, particularly in China.
  • Infineon’s acquisition of Cypress Semiconductor puts the former Fujitsu MCU business under its umbrella giving it a better chance to penetrate Japanese manufacturers.
  • PB is at a five year low.

It appears that 2Q could flush out the remaining bad news and while a strong recovery is not yet in sight, we are probably moving through the bottom here.

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Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.



Brief Value Investing: Renesas: Factory Automation and Aircon Inventory Adjustments to Take Time and more

By | Daily Briefs, Value Investing

In this briefing:

  1. Renesas: Factory Automation and Aircon Inventory Adjustments to Take Time
  2. Banco Do Brasil (BBAS3 BZ): Neoenergia IPO Kicks off Non-Core Disposals

1. Renesas: Factory Automation and Aircon Inventory Adjustments to Take Time

Renesas%20wafer%20input

We spoke to Renesas Electronics (6723 JP) today to gauge conditions regarding their inventory and the shorter than expected production stoppage in May – the stoppage only lasted 30-40% of the duration it was supposed to. In addition we assessed the company’s take on the recently announced offer for Cypress Semiconductor (CY US) by key competitor Infineon Technologies Ag (IFX GR), and gained some read-through to business conditions in the automotive and factory automation sectors, among others.

  • Internal inventory levels have reached healthy levels and further “unseasonal” production stoppages are unlikely.
  • Channel inventory for FA and end product inventory for aircons in China are still high.
  • Toyota is outperforming other auto manufacturers, particularly in China.
  • Infineon’s acquisition of Cypress Semiconductor puts the former Fujitsu MCU business under its umbrella giving it a better chance to penetrate Japanese manufacturers.
  • PB is at a five year low.

It appears that 2Q could flush out the remaining bad news and while a strong recovery is not yet in sight, we are probably moving through the bottom here.

2. Banco Do Brasil (BBAS3 BZ): Neoenergia IPO Kicks off Non-Core Disposals

  • Neoenergia registered its IPO on June 6th; Banco Do Brasil Sa (BBAS3 BZ) is expected to raise between BRL1.64bn and BRL1.92bn from its 9.35% stake
  • We estimate that the Banco do Brasil capital contribution from the Neoenergia stake disposal should be small, but it should serve to add to positive sentiment for non-core disposals
  • More importantly, its 49.9% stake in Banco Votorantim is also up for sale and its returns are improving; we estimate that BVoto’s disposal would be the biggest capital relief contribution of its non-core sales 
  • Banco Patagonia Sa (BPAT AR), in which Banco do Brasil has an 80.4% stake, is more of a challenge for disposal given the approaching Argentinian presidential election – and the uncertain outcome – in October 2019, but could be slated for sale in early 2020
  • Banco do Brasil management has added the 10.1% stake in reinsurance company IRB Brasil Resseguros S/A (IRBR3 BZ) to its list of non-core disposals
  • Overall, we see that these key disposals in total, through capital gains and RWA reduction in the case of the banks, should bring between 93bps to 100bps of capital relief to Banco do Brasil’s CET1 ratio; even if we exclude the BPAT disposal, we estimate capital build from the other disposals could reach 75bps of CET1

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Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.