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Value Investing

Brief Value Investing: Intesa Sanpaolo Offer for UBI Banca – Bold Step Towards Domestic Bank Consolidation and more

By | Daily Briefs, Value Investing

In this briefing:

  1. Intesa Sanpaolo Offer for UBI Banca – Bold Step Towards Domestic Bank Consolidation
  2. Banco Do Brasil (BBAS3 BZ): Actuarial Adjustments to Capital – Are We Nearly There?
  3. Page Industries (PAG IN)
  4. BNK Financial: Signals of Progress Are Underappreciated
  5. Key Changes In South Korea’s Beneficial Ownership Disclosure Rule: Legal Basis For Activism

1. Intesa Sanpaolo Offer for UBI Banca – Bold Step Towards Domestic Bank Consolidation

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  • Intesa Sanpaolo (ISP IM) has taken the initiative making an all share – allegedly not hostile, but clearly unsolicited – offer for Unione Di Banche Italiane (UBI IM), valuing UBI at 0.5x  its stated 2019YE PBV
  • Intesa has put forward a solid case for the UBI offer, and Intesa management is reassuring investors by committing to a dividend payment equivalent to a yield of 7.7% for 2020 and 2021
  • In order to allay antitrust concerns, Intesa has put in place an agreement with Banca Popolare Dell’Emilia Rom (BPE IM) to sell a pool of upto 500 going-concern branches as well as insurance operations to UnipolSai SpA (US IM), contingent on a successful offer
  • Although this offer does not directly address the consolidation of Italy’s “long tail” of small banks, Intesa CEO Carlo Messina sees it as the opportunity to create an “Italian champion” in European banking and potentially to act as a catalyst for further domestic consolidation
  • There has been an uncomfortable silence from UBI management and our sense is that CEO Victor Messiah, who had only just presented UBI Banca’s stand-alone 2020-22 Business Plan yesterday, will, we believe, need some convincing (a higher offer price?); the share price is tellingly trading at a slight premium to the implied offer price
  • In the wake of Intesa’s offer for UBI, Banco BPM SpA (BAMI IM) has one less potential high quality consolidation partner; yet we see the read-across for the rest of the Italian bank sector as positive; the need for domestic mergers with greater scale is clear, in order counter the drag of negative rates in the Eurozone
  • Risks to the deal include tougher than expected regulatory hurdles, a poor response by UBI shareholders relating to the offer as well as potential “poison pill” measures by UBI Banca management

2. Banco Do Brasil (BBAS3 BZ): Actuarial Adjustments to Capital – Are We Nearly There?

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  • Banco Do Brasil Sa (BBAS3 BZ)  delivered a solid 4Q19 to broadly comply with all aspects of its 2019 guidance, even if loan growth was at the lower end of the range
  • Credit quality trends are constructive, with new NPL formation very low and healthy NPL coverage
  • On the balance sheet, one fly in the ointment of the YE 2019 report is the lack of core capital build in terms of CET1, due mainly to the full implementation of Basel III, but more significantly due to actuarial adjustments
  • Banco do Brasil has reduced its discount rate on its pension fund liabilities, as domestic interest rates and sovereign bond yields have declined, since 2Q18 which has led to actuarial adjustments that have hit Banco do Brasil’s equity most recently in 4Q19
  • We have seen this movie before, at the publication of 2Q19 results; the difference now is that we believe the discount rate is close to where it needs to be, over the long term, with the current historically low Brazilian real interest rates likely to limit the risk of further downward adjustments
  • Banco Do Brasil Sa (BBAS3 BZ) is our core value pick in the big-cap LatAm banks; it is one of the most attractive of Brazilian and LatAm big-cap banks based on earnings and dividend yield
  • Risks to our assumptions for Banco do Brasil include significantly lower than expected Brazilian inflation driving interest – and discount – rates lower and hitting core capital with deductions, along with worse than expected credit quality and higher than expected opex 

3. Page Industries (PAG IN)

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We argue that the rich valuations enjoyed by Page Industries (PAG IN) are not recession-proof as once assumed by many. Even products like Innerwear are subject to headwinds when the broader economic environment and consumer sentiment turns down.  

Volume recovery remains the key for PAG IN. The investments made by PAG IN in technology and sales may not yield the desired results as the operating environment has changed compared to the previous slow down.  Trading at ~52x FY2021 consensus EPS estimates the room for further disappointments from PAG IN remains. 

4. BNK Financial: Signals of Progress Are Underappreciated

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Bnk Financial Group (138930 KS) scores well again with our PH Score™.  A PH Score™ of 9.5 reveals positive changes in Profitability, in Efficiency, in Capitalisation, in Asset Quality, and in Provisioning while the valuation variable was highly positive. 

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.

A low RSI and rock-bottom FV add to the attractiveness of shares. In fact, shares stands in the top quintile of opportunity globally by VFM from >2000 banks that we track.

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

The big plus is that fundamental trends are benign in a highly challenging market for eking out higher profitability. Efficiency improvements and growth in non-interest Income are so necessary, and tangible at BNK, given the strains on the top-line from soft Net Interest Income amidst modest Balance Sheet growth and the inexorable decline in NIM. However, BNK’s NIM erosion is mirrored -and matched- by a reduction in the NPL ratio. The sharp downward direction in the problem loan ratio cannot be underestimated. Credit costs are thus understandably on a downward trajectory, supporting squeezed Profitability in conjunction with aforementioned Efficiency gains and fee income progression.

It is common knowledge that South Korean banks are cheap. See South Korean Banks: You Back the Big Prices, Not the Favourites and South Korean Banks: Stuck in the Value Vault .  BNK is especially cheap, trading on a P/Book and FV of 0.29x and 3%, respectively, while the Earnings and Dividend Yields fetch 23% and 5.3%, respectively. A PH Score™ of 9.5 can serve as a tailwind.

5. Key Changes In South Korea’s Beneficial Ownership Disclosure Rule: Legal Basis For Activism

The amended Enforcement Decree of the Financial Investment Services and Capital Markets Act of Korea (the “Capital Markets Act”) went into effect starting on February 1, 2020. One major change made by this amendment (Article 154) is the clarification and improvement of the beneficial ownership disclosure rule which is a so-called “5% rule” in Korea. We think that this latest amendment provides a legal basis for institutional investor activism in South Korea.

The substantial shareholders whose minimum shareholding is 5 percent are required to disclose information including their investment intentions whether or not to influence company management and policies. Before the amendment, it was not clear whether institutional investors should be regarded as having an intention to influence management when exercising stewardship responsibilities such as publicly sending letters to management and filing shareholder proposals to (i) raise dividends, (ii) limit CEO pay, and/or (iii) dismiss directors who were found guilty of illegally damaging the firm. However, this latest amendment finally clarified it by creating a new criterion that is no longer categorized as either “influencing management” or “just a simple portfolio investment”. And then, it moved the aforementioned stewardship activities to this new category, which we named “investment with limited stewardship”. 

In our previous insight Two Notable Changes in National Pension Service of Korea: Activism Guideline and Delegation of Votes, we noted that NPS would pay particular attention to three major issues – (i) dividend policy, (ii) executive compensation scheme, and (iii) qualifications of directors – which are all closely linked to a company’s approach to capital allocation. The amended Capital Markets Act empowers institutional investors to exert more pressure on boards to resolve the exact same issues from (i) to (iii) as we described above.

Just a few clarifications. Regarding (i) dividend and (ii) executive compensation issues, it is true that the amended Capital Markets Act newly allowed institutional investors to exercise minority shareholder rights conferred by the law without changing their investment intentions to “influencing management”. However, state-run pension funds have already been allowed to do so even before the amendment. Also, this amendment added one clarifying sentence to Article 154-1, which stipulates that investors are now allowed to exercise minority shareholder rights to dismiss directors who were convicted of illegal actions and/or bringing irrecoverable damages to the company. Some local media reported that this is a major change, but this is not true. Article 385-2 and Article 402 of the Commercial Act of Korea have already provided such exception. That is, this latest revision of the Capital Markets Act aims at making those two Acts consistent with each other so that investors can be more vocal about (iii) qualifications of directors with no worries over conflicts of law. 

As of February 7, 2020, NPS and a few value-oriented institutional investors changed their investment intentions from “simple portfolio investment” to “investment with limited stewardship” for some of their invested stocks. We listed those stocks in the Detail section. We selected Daelim Industrial (000210 KS) as a primary entity of our insight because it is highly likely that NPS files shareholder proposals to raise its dividends and/or to remove Lee Hae-wook on the board. Though Lee Hae-wook is not yet convicted illegally damaging the firm, he is facing trial for alleged embezzlement and breach of duty on April 21, 2020. NPS holds 12.82% in Daelim Industrial (000210 KS).


Here is a summary of the key changes.

  • Institutional investors are required to report their investment intentions based on three criteria – (i) simple portfolio investment, (ii) investment with limited stewardship, and (iii) influencing management. The first two purposes are NOT considered to influence decision making of management, and thus, less strict rules on disclosure are applied. 
  • ALL stewardship activities that are not specified as “influencing management” in the Article 154-1 are now considered as “not influencing management”. 

Investment PurposeKey Issues to Address 
Influencing Management
  • Resignation and dismissal of directors 
  • Mergers and spin-offs
  • Acquisitions and transfer of business
  • Purchase and disposal of assets
  • Changes in Articles of Incorporation
  • Changes in share capital
  • Leasing all businesses or delegating business administration or entirely sharing the profit and loss with another person or entity
  • Dissolution of the company

*Regarding all the above issues, there are some conditions where an exception occurs. We elaborate on that in the Detail section. 

Not Seeking to Influence ManagementInvestment with Limited Stewardship

All issues that are not specified in either investment purposes, which include:

  • Dividend raises 
  • Executive compensation scheme 
  • Resignation and dismissal of directors only when they were found guilty of illegally damaging corporate value (based on the Commercial Act of Korea)
Simple Portfolio Investment

The most basic rights granted to shareholders no matter how many shares they own, such as: 

  • Voting rights
  • Dividend rights 
  • Rights offering 
  • Institutional investors (including state-run pension funds) are allowed to exercise minority shareholder rights to make changes to Articles of Incorporation of companies only when they target ALL companies in their portfolios based on the principles that are publicly disclosed.
  • Institutional investors are not required to change their investment intentions to “influencing management” when they send shareholder letters or publicly deliver their opinions to companies. However,  they have to do so when soliciting other minority shareholder to exercise voting rights by proxy to vote for or against the resolutions.
  • The amendment requires institutional investors whose investment purpose is “simple portfolio investment” to submit an official document that promises to only exercise the basic rights of shareholders. Otherwise, they should change their investment purpose to “investment with limited stewardship”. Recently, NPS and other institutional investors made such changes. Those updated disclosures indicate that they will exert more pressure on boards. 

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Brief Value Investing: Alibaba-Backed Zomato Buys Ubers’ Eats Business in India and more

By | Daily Briefs, Value Investing

In this briefing:

  1. Alibaba-Backed Zomato Buys Ubers’ Eats Business in India
  2. Toshiba – A Look at Toshiba Valuations in Light of the New Inflated Sales Issue
  3. Cosco Shipping (517 HK): Option Program Announced for Senior Management; Rally to Continue?
  4. European Banks: Screening for Value January 2020

1. Alibaba-Backed Zomato Buys Ubers’ Eats Business in India

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Uber (UBER US) announced on Monday that it would be selling its Uber Eats business in India to Zomato, a home-grown player with a leading market share in the country. However, Uber will reportedly own close to 10 % of Zomato after the sale. According to reported news, the Uber Eats’ India business was sold for a value of around $350m. It seems that Zomato (which is also a loss-making firm) is able to proceed with the deal given its recent financing round, where it raised around $150m from Ant Financial (in December 2019) and is expected to raise another $400m or so during the next few weeks.

In our opinion, the move seems to be a positive, especially for Zomato. Attempting to reduce losses and achieve profitability, Uber exited SEA last year, and its food delivery business in India is its latest unprofitable business exit.  For Zomato, the move helps its aggregate market share in the highly competitive online food business market in India, where competition will now be mainly with Swiggy.  

“We are proud to have pioneered restaurant discovery and to have created a leading food delivery business across India. This acquisition significantly strengthens our position in the category,” said Deepinder Goyal, Founder and CEO of Zomato.

2. Toshiba – A Look at Toshiba Valuations in Light of the New Inflated Sales Issue

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Over the weekend Toshiba made two announcements. One was that current President and COO Tsunakawa would be stepping down from those roles to take on a role as Chairman (though not Chairman of the board), concentrating power in the hands of CEO and now also President Kurumatani. The second was that the company had discovered that ¥20bn in sales generated by a subsidiary could not be confirmed. New Toshiba is starting to look like old Toshiba in ways that are not encouraging.

3. Cosco Shipping (517 HK): Option Program Announced for Senior Management; Rally to Continue?

This will be a very short and concise write-up and a follow up to an earlier insight on Cosco Ship Intl-517 HK: Trading at Negative EV & 25% Discount to Net Cash; Deep Value or Value Trap? 

Cosco International Holdings (517 HK) has been a value trap since my initial insight in May 2018. Shares have continued to drop and negative EV has doubled from -1.25B HKD to -2.4B HKD. Classic HK value trap. Please recall, 517 HK has been consistently profitable and paying dividends. Its capital allocation has just been horrendous.

I had singled out Cosco International Holdings (517 HK) as one of my top picks for 2020 in Overview of My Winners and Losers in 2019… And 5 High Conviction Ideas Going into 2020

YTD shares are now up more than 16% on high volume. What’s going on?

Management announced it will institute a share option program yesterday. This has been because of shareholder activism at its latest AGM. We believe should these options be implemented the share price can rally extremely hard as it finally aligns management with shareholders. Management does not really have to perform any rocket science to have the stock re-rate from negative EV to just 0 EV. God forbid investors might actually value its earnings stream at one point!

The share price is currently around 2.4 HKD and NET CASH on the balance sheet alone is 4 HKD (66% upside). Returning this cash to shareholders via a 75-80% payout ratio and share buybacks should propel the stock significantly higher. Expect newsflow to pick up the coming 60 days with 1) an SGM announcement and 2) FY2019 in March.

Given the track record of management in returning cash (note: they actually lowered their interim dividend in 2019 despite the massive cash hoard!), and the fact that its an SOE many investors will pass on this idea despite the market cap being over 500M HKD and ADTV at 1M USD recently. If we are wrong, the downside is still protected by the cash.

4. European Banks: Screening for Value January 2020

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  • High liquidity in markets and improving investor risk appetite appear to be driving the rotation into equities and especially value stocks, which includes European banks and financials
  • We also believe that the past years of tightening regulation, especially banks capital, is now going into reverse, with conduct-related fines imposed on the sector having declined sharply
  • We update our value screens on European banks in this report, adding another screen for dividend cover; among the European banks, we look for value and sustainable dividend yield based on these screens
  • We believe that Banco BPM SpA (BAMI IM), Banca Popolare Dell’Emilia Rom (BPE IM) and UniCredit SpA (UCG IM) stand out among our core coverage; Banco Bilbao Vizcaya Argentari (BBVA SM) and Banco De Sabadell Sa (SAB SM) in Spain and Banco Comercial Portugues Sa (BCP PL) in Portugal screen well
  • Outside of our core coverage, we highlight Danske Bank A/S (DANSKE DC) given its value, dividend yield and relatively healthy cover; also Bank of Ireland (BKIR ID) and, despite its lack of dividend yield, Eurobank Ergasias Sa (EUROB GA) is one to watch in Greece
  • Risks to our thesis are a protracted”risk-off” period in markets, potentially driven by heightened increased trade deal frictions, low GDP growth and increased geo-political tensions that drive investors away from equities into more traditional safe haven assets

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Brief Value Investing: Kirin: Activist Investor Seeks ¥600bn Buyback and a Nomination of an Independent Director and more

By | Daily Briefs, Value Investing

In this briefing:

  1. Kirin: Activist Investor Seeks ¥600bn Buyback and a Nomination of an Independent Director
  2. Tesco to Offload Its Thai & Malaysia Business: Generous Valuation but Value Is in the UK Business
  3. Bangkok Bank: Deal or No Deal, Shares Are Too Depressed
  4. BAT Malaysia: Trading Lower than 1997 Asian Financial Crisis, Cheapest in 27 Years, Div Yield at 11%
  5. Deep Dive Into Hanssem’s Money Making: Risks Becoming A Material Concern For Investors

1. Kirin: Activist Investor Seeks ¥600bn Buyback and a Nomination of an Independent Director

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It was reported that Franchise Partners has submitted a proposal to Kirin Holdings (2503 JP) asking the company to initiate a ¥600bn share buyback. They have also requested the appointment of one independent director to the board of directors.

This latest round of investor activism comes after Franchise Partners’ (October 2019) attempt to convince Kirin to concentrate on its beer business rather than diversifying into biochemicals and pharmaceuticals.

2. Tesco to Offload Its Thai & Malaysia Business: Generous Valuation but Value Is in the UK Business

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Tesco Plc, the UK’s biggest supermarket chain announced in December 2019 that they are considering the sale of its operations in Thailand and Malaysia after receiving interest from potential buyers.

On 6th February Bloomberg reported that Tesco has invited Central Group, TCC Group and Charoen Pokphand Group to participate in the second round of bidding while the report also states that Tesco’s Thailand and Malaysia businesses are expected to be valued at more than $7bn.

3. Bangkok Bank: Deal or No Deal, Shares Are Too Depressed

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Bangkok Bank Public (BBL TB) reported encouraging headline trends at FY19, materialised in a strong PH Score™ of 8.5. There were positive changes in Efficiency, in Capitalisation, in liquidity, in Asset Quality, and in Provisioning. 

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. 

Scores were well better than at Kasikornbank PCL (KBANK TB) especially but also at Siam Commercial Bank Pub Co (SCB TB) and Kiatnakin Bank (KKP TB) though illiquid Bank Of Ayudhya (BAY TB) came top.

There were though, under the hood, some concerns. While the NPL ratio was essentially stable, we note a virulent jump in “substandard loans” and a worrying increase in Special Mention Loans. With regards Earnings Quality, there was an outsized contribution of “other non-interest Income” which flattered the bottom-line and boosted Profitability ratios which have been under some downward pressure across Thailand for sometime.

We are not over-enthused about the Thai economy with rock-bottom rates amidst recessionary strains, exacerbated by the Wuhan Virus and trade dislocations, budget delays, high household debt, and unsustainable baht overvaluation despite recent softness. But one must look beyond the clouds and to a time in the not-so-distant future, when Chinese tourists return to Thailand and exports reinvigorate.

However, we believe that shares in Bangkok Bank Public (BBL TB) are undervalued and have some way to progress on the back of a successful deal for Permata. See Thinking About Bangkok Bank’s Buy of Permata by Travis Lundy who convincingly makes the case for a trade on Bank Permata (BNLI IJ) . We agree with Daniel Tabbush too that turnaround Permata adds value to BBL’s franchise though the market is not so sanguine about the deal, very probably influenced by recent transactions such as Danamon. We believe BBL offers strong relative performance upside based on Permata synergies and ASEAN diversification/opportunity while its own domestic business is not in bad shape. This may not be consensus given BBL’s languishing share price.

While the median P/B gap between Permata and BBL stands at 42bps over the last 12 months, today the difference is 79bps. If Permata re-rates towards the acquisition price of 1.77x P/Book, shares of BBL should rise from the current P/Book of 0.66x by at least 20% (based on median P/B) or towards Book Value (maybe optimistic) to maintain the current gap. Shares have a tailwind of both a high PH Score™ and the Permata acquisition price. Caveat is that the transaction does not get regulatory and shareholder approval. If that were to pass, BBL shares might move higher towards its median P/B as the market is hardly enthused with the deal and price while shares of Permata would sell-off. Either way, BBL shares seem protected by a deal or no deal. This may be a more conservative risk-adjusted bet than a pure punt on Permata.

4. BAT Malaysia: Trading Lower than 1997 Asian Financial Crisis, Cheapest in 27 Years, Div Yield at 11%

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Smoking is bad for you. Drinking alcohol is bad for you. Eating sugar is bad for you. Eating processed meat is bad for you. Fast food is bad for you. We can go on. The crucial additional words which are needed in each sentence above is “too much“. Doing anything in large quantities is likely not a wise decision. We do, however, believe in free choice and pointing out potential overreactions in public equity markets.

By writing about British American Tobacco (M) (ROTH MK) we are not advocating smoking, but are looking at a company that sells nicotine delivery devices in Malaysia and generates billions in tax revenues for the Malaysian state. The company has been listed since 1961 and is currently available at its cheapest level (in absolute terms) since 1993. Its share price is lower than the 2008 GFC or 1997 Asian Financial Crisis.

source: Refinitiv

The company over the past 20 years traded at a median P/E multiple of 18.3 and a median dividend yield of 6.2% Currently, shares are trading more than 2 sd below those averages with a P/E below 9.7 and a dividend yield over 11%.

BAT Malaysia has issues (mainly illegal imports), and doubts about its GLO product, but those are already discounted in the stock. Financial estimates for FY19, FY20, and FY21 are showing continued declines in profitability are already the expected consensus. Should Malaysia get serious about tackling rampant illicit cigarette imports, which cost taxpayers 6 billion MYR/year in lost revenue, the stock rebound could be violent.

Short-term pressure on British American Tobacco (M) (ROTH MK) share price is likely to remain as the company has been deleted from the MSCI Malaysia index (and consequently from the MSCI EM index). Kudos to Brian Freitas for pointing this out.

BAT Malaysia is releasing FY19 results on 20/2/20 and we believe risk/reward is attractive. BAT Malaysia has a market cap of 850M USD (3.5 B MYR) and ADTV of 2.6M USD (11.3M MYR).

5. Deep Dive Into Hanssem’s Money Making: Risks Becoming A Material Concern For Investors

Hanssem bm

We first started paying attention to Hanssem Co Ltd (009240 KS) given its low ownership stakes of controlling shareholders (31.3%), large amounts of treasury shares (25.1%), and the increased presence of institutional investors (National Pension Service of Korea 6.4% & Teton Capital Partners 8.6%). Also, the company saw a sharp fall in profits and stock prices last year. We thought that this stock might be vulnerable to activist investors and/or could be re-rated if the company cancels its treasury shares. As we conduct our research, we found possible risks associated with the company’s business models as well as appropriation of corporate opportunity and tunneling. Some risks have recently become a reality. This insight seeks to alert investors to those risks and suggest stewardship priorities. I will come back later with more research on South Korea’s housing market and Hanssem’s business valuations.  

Hanssem Co Ltd (009240 KS) is not just an interior furniture manufacturer or home improvement company. It has embarked on aggressive expansion plans to be a platform that brings suppliers, designers, architects, contractors, and consumers under the brand name of Hanssem Rehaus. Yet, it must be overly ambitious – Hanssem is facing a brand reputation crisis and litigation risks. Below explains how this Hanssen Rehaus model works.

  • Salespersons and designers who work at the Hanssem Rehaus flagship and agency stores are not employees of Hanssem but of local interior renovation stores. Those stores sign a cooperation agreement with Hanssem in order to rely on its strong brand reputations and operating resources. Instead, the stores are in charge of providing human resources, which helps Hanssem reduce labor costs. As a return, Hanssem provides them with an initial investment required for opening a new Rehaus agency store. After that, the stores have to bear 50% of the maintenance costs, while Hanssem pays another half. 
  • Customers sign a renovation contract with agency stores, not exactly Hanssem. Based on the contract, the stores place an order for products to Hanssem. Other than its own brand furniture, Hanssem purchases products (e.g. balcony windows, floor and wall tiles) from external manufacturers and then re-sell them to agency stores. 
  • Renovation contractors are matched with customers by agency stores. Each store has a pool of renovation contractors. Those contractors are freelancers and loosely managed by Hanssem.

What are the possible problems that may inevitably arise out of this business model? First, it is not clear who is responsible for addressing consumer complaints filed against contractors or designers. Neither of them are employed or supervised by Hanssem. However, customers sign the deal because of Hanssem’s brand reputations. Second, there must be conflicts of the interests of varied stakeholders when splitting revenue and costs. This issue is relevant to the Korea Fair Trade Commission’s recent decision to levy a fine of over 1 billion KRW against Hanssem Co Ltd (009240 KS) for abusing agencies. 


We also suspect that Hanssem Co Ltd (009240 KS)  has pocketed some cash at the expense of minority shareholders by using the same tricks as other Korean conglomerates. This might surprise foreign investors given that Hanssem has been run by a non-family CEO & Chairman for years. The thing is that its non-family top executives have also reaped benefits from such unfair trade practices. There are three private companies whose majority stakes are owned by founding families and executives as follows: 

  • Hanssem Effex (Top mgt. 32% / Family 25% / Hanssem 38%) polishes raw marble and supplies it to Hanssem. Marble dining tables and kitchen cabinets are one of the Hanssem’s flagship products. Within Hanssem Effex’s unconsolidated revenue, Hanssem-related revenue commands roughly a 45% share. It also started to provide high-end office furniture called Hanssem Viitz, which is led by a son of Choi Yang-ha, a former CEO & Chairman of Hanssem. 
  • Hanssem Nexus (Top mgt. 31% / Family 31% / Hanssem 37%) offers high-end European kitchen brands. Those brands inevitably compete with Hanssem’s own kitchen brand (KitchenBach). If a consumer can afford, he (or she) may likely choose global luxury brands. If visiting KitchenBach stores, you can see promotional flyers of Hanssem Nexus lying on the KitchenBach dining table. 
  • Hanssem Domus (Top mgt. 35% / Family 26% / Hanssem 38%) imports high-end sofas from overseas, mostly Europe. It also competes with Hanssem’s own sofa brands. Domus uses one entire floor of the Hanssem flagship stores, while Hanssem sofas are displayed downstairs. 

Why this matters especially now when Hanssem Co Ltd (009240 KS) struggles with growth and margins? Hanssem recently saw a big drop in revenue and profits partly due to a downturn of domestic housing markets, which I will cover later. As described above, Hanssem Effex, Hanssem Nexus, and Hanssem Domus offers high-end brands that possibly attract affluent consumers and/or ones with exquisite taste. This could help the company restore growth and improve margins. Hyundai Livart (079430 KS), a major competitor of Hanssem, has also been eager to bring overseas high-end brands to a domestic market so that it can capitalize on consumers’ increasing inclination to spend more on furnishing the house. Hyundai Livart’s luxury brands are run by itself, not by its subsidiaries or affiliates. Given that, it makes no sense that Hanssem does not wholly own those three companies but just gives up its business opportunities for the interests of controlling shareholders. 

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Brief Value Investing: Banco Do Brasil (BBAS3 BZ): Actuarial Adjustments to Capital – Are We Nearly There? and more

By | Daily Briefs, Value Investing

In this briefing:

  1. Banco Do Brasil (BBAS3 BZ): Actuarial Adjustments to Capital – Are We Nearly There?
  2. Page Industries (PAG IN)
  3. BNK Financial: Signals of Progress Are Underappreciated
  4. Key Changes In South Korea’s Beneficial Ownership Disclosure Rule: Legal Basis For Activism
  5. Notes from the Silk Road: Xtep Int’l Holdings (1368 HK): Q4 2019 Update – Is There Pricing Risk?

1. Banco Do Brasil (BBAS3 BZ): Actuarial Adjustments to Capital – Are We Nearly There?

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  • Banco Do Brasil Sa (BBAS3 BZ)  delivered a solid 4Q19 to broadly comply with all aspects of its 2019 guidance, even if loan growth was at the lower end of the range
  • Credit quality trends are constructive, with new NPL formation very low and healthy NPL coverage
  • On the balance sheet, one fly in the ointment of the YE 2019 report is the lack of core capital build in terms of CET1, due mainly to the full implementation of Basel III, but more significantly due to actuarial adjustments
  • Banco do Brasil has reduced its discount rate on its pension fund liabilities, as domestic interest rates and sovereign bond yields have declined, since 2Q18 which has led to actuarial adjustments that have hit Banco do Brasil’s equity most recently in 4Q19
  • We have seen this movie before, at the publication of 2Q19 results; the difference now is that we believe the discount rate is close to where it needs to be, over the long term, with the current historically low Brazilian real interest rates likely to limit the risk of further downward adjustments
  • Banco Do Brasil Sa (BBAS3 BZ) is our core value pick in the big-cap LatAm banks; it is one of the most attractive of Brazilian and LatAm big-cap banks based on earnings and dividend yield
  • Risks to our assumptions for Banco do Brasil include significantly lower than expected Brazilian inflation driving interest – and discount – rates lower and hitting core capital with deductions, along with worse than expected credit quality and higher than expected opex 

2. Page Industries (PAG IN)

Disappointments

We argue that the rich valuations enjoyed by Page Industries (PAG IN) are not recession-proof as once assumed by many. Even products like Innerwear are subject to headwinds when the broader economic environment and consumer sentiment turns down.  

Volume recovery remains the key for PAG IN. The investments made by PAG IN in technology and sales may not yield the desired results as the operating environment has changed compared to the previous slow down.  Trading at ~52x FY2021 consensus EPS estimates the room for further disappointments from PAG IN remains. 

3. BNK Financial: Signals of Progress Are Underappreciated

Bnkfg4q19e%28f%29%20%281%29 page 22

Bnk Financial Group (138930 KS) scores well again with our PH Score™.  A PH Score™ of 9.5 reveals positive changes in Profitability, in Efficiency, in Capitalisation, in Asset Quality, and in Provisioning while the valuation variable was highly positive. 

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.

A low RSI and rock-bottom FV add to the attractiveness of shares. In fact, shares stands in the top quintile of opportunity globally by VFM from >2000 banks that we track.

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

The big plus is that fundamental trends are benign in a highly challenging market for eking out higher profitability. Efficiency improvements and growth in non-interest Income are so necessary, and tangible at BNK, given the strains on the top-line from soft Net Interest Income amidst modest Balance Sheet growth and the inexorable decline in NIM. However, BNK’s NIM erosion is mirrored -and matched- by a reduction in the NPL ratio. The sharp downward direction in the problem loan ratio cannot be underestimated. Credit costs are thus understandably on a downward trajectory, supporting squeezed Profitability in conjunction with aforementioned Efficiency gains and fee income progression.

It is common knowledge that South Korean banks are cheap. See South Korean Banks: You Back the Big Prices, Not the Favourites and South Korean Banks: Stuck in the Value Vault .  BNK is especially cheap, trading on a P/Book and FV of 0.29x and 3%, respectively, while the Earnings and Dividend Yields fetch 23% and 5.3%, respectively. A PH Score™ of 9.5 can serve as a tailwind.

4. Key Changes In South Korea’s Beneficial Ownership Disclosure Rule: Legal Basis For Activism

The amended Enforcement Decree of the Financial Investment Services and Capital Markets Act of Korea (the “Capital Markets Act”) went into effect starting on February 1, 2020. One major change made by this amendment (Article 154) is the clarification and improvement of the beneficial ownership disclosure rule which is a so-called “5% rule” in Korea. We think that this latest amendment provides a legal basis for institutional investor activism in South Korea.

The substantial shareholders whose minimum shareholding is 5 percent are required to disclose information including their investment intentions whether or not to influence company management and policies. Before the amendment, it was not clear whether institutional investors should be regarded as having an intention to influence management when exercising stewardship responsibilities such as publicly sending letters to management and filing shareholder proposals to (i) raise dividends, (ii) limit CEO pay, and/or (iii) dismiss directors who were found guilty of illegally damaging the firm. However, this latest amendment finally clarified it by creating a new criterion that is no longer categorized as either “influencing management” or “just a simple portfolio investment”. And then, it moved the aforementioned stewardship activities to this new category, which we named “investment with limited stewardship”. 

In our previous insight Two Notable Changes in National Pension Service of Korea: Activism Guideline and Delegation of Votes, we noted that NPS would pay particular attention to three major issues – (i) dividend policy, (ii) executive compensation scheme, and (iii) qualifications of directors – which are all closely linked to a company’s approach to capital allocation. The amended Capital Markets Act empowers institutional investors to exert more pressure on boards to resolve the exact same issues from (i) to (iii) as we described above.

Just a few clarifications. Regarding (i) dividend and (ii) executive compensation issues, it is true that the amended Capital Markets Act newly allowed institutional investors to exercise minority shareholder rights conferred by the law without changing their investment intentions to “influencing management”. However, state-run pension funds have already been allowed to do so even before the amendment. Also, this amendment added one clarifying sentence to Article 154-1, which stipulates that investors are now allowed to exercise minority shareholder rights to dismiss directors who were convicted of illegal actions and/or bringing irrecoverable damages to the company. Some local media reported that this is a major change, but this is not true. Article 385-2 and Article 402 of the Commercial Act of Korea have already provided such exception. That is, this latest revision of the Capital Markets Act aims at making those two Acts consistent with each other so that investors can be more vocal about (iii) qualifications of directors with no worries over conflicts of law. 

As of February 7, 2020, NPS and a few value-oriented institutional investors changed their investment intentions from “simple portfolio investment” to “investment with limited stewardship” for some of their invested stocks. We listed those stocks in the Detail section. We selected Daelim Industrial (000210 KS) as a primary entity of our insight because it is highly likely that NPS files shareholder proposals to raise its dividends and/or to remove Lee Hae-wook on the board. Though Lee Hae-wook is not yet convicted illegally damaging the firm, he is facing trial for alleged embezzlement and breach of duty on April 21, 2020. NPS holds 12.82% in Daelim Industrial (000210 KS).


Here is a summary of the key changes.

  • Institutional investors are required to report their investment intentions based on three criteria – (i) simple portfolio investment, (ii) investment with limited stewardship, and (iii) influencing management. The first two purposes are NOT considered to influence decision making of management, and thus, less strict rules on disclosure are applied. 
  • ALL stewardship activities that are not specified as “influencing management” in the Article 154-1 are now considered as “not influencing management”. 

Investment PurposeKey Issues to Address 
Influencing Management
  • Resignation and dismissal of directors 
  • Mergers and spin-offs
  • Acquisitions and transfer of business
  • Purchase and disposal of assets
  • Changes in Articles of Incorporation
  • Changes in share capital
  • Leasing all businesses or delegating business administration or entirely sharing the profit and loss with another person or entity
  • Dissolution of the company

*Regarding all the above issues, there are some conditions where an exception occurs. We elaborate on that in the Detail section. 

Not Seeking to Influence ManagementInvestment with Limited Stewardship

All issues that are not specified in either investment purposes, which include:

  • Dividend raises 
  • Executive compensation scheme 
  • Resignation and dismissal of directors only when they were found guilty of illegally damaging corporate value (based on the Commercial Act of Korea)
Simple Portfolio Investment

The most basic rights granted to shareholders no matter how many shares they own, such as: 

  • Voting rights
  • Dividend rights 
  • Rights offering 
  • Institutional investors (including state-run pension funds) are allowed to exercise minority shareholder rights to make changes to Articles of Incorporation of companies only when they target ALL companies in their portfolios based on the principles that are publicly disclosed.
  • Institutional investors are not required to change their investment intentions to “influencing management” when they send shareholder letters or publicly deliver their opinions to companies. However,  they have to do so when soliciting other minority shareholder to exercise voting rights by proxy to vote for or against the resolutions.
  • The amendment requires institutional investors whose investment purpose is “simple portfolio investment” to submit an official document that promises to only exercise the basic rights of shareholders. Otherwise, they should change their investment purpose to “investment with limited stewardship”. Recently, NPS and other institutional investors made such changes. Those updated disclosures indicate that they will exert more pressure on boards. 

5. Notes from the Silk Road: Xtep Int’l Holdings (1368 HK): Q4 2019 Update – Is There Pricing Risk?

Chart%201

  • We review the Q4 2019 sales update and how it relates to forecasts for the 2019 year.
  • Our stock rank system highlights some interesting facets for the periods ahead and how this may affect share price performance.
  • Our fundamental and technical review of fundamentals combined with an appreciation of comments by international players in recent weeks in the sportswear industry of late, means this a must-read for China Sportswear analysts.

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Brief Value Investing: Page Industries (PAG IN) and more

By | Daily Briefs, Value Investing

In this briefing:

  1. Page Industries (PAG IN)
  2. BNK Financial: Signals of Progress Are Underappreciated
  3. Key Changes In South Korea’s Beneficial Ownership Disclosure Rule: Legal Basis For Activism
  4. Notes from the Silk Road: Xtep Int’l Holdings (1368 HK): Q4 2019 Update – Is There Pricing Risk?
  5. Kirin: Activist Investor Seeks ¥600bn Buyback and a Nomination of an Independent Director

1. Page Industries (PAG IN)

Shareprice%201%20year

We argue that the rich valuations enjoyed by Page Industries (PAG IN) are not recession-proof as once assumed by many. Even products like Innerwear are subject to headwinds when the broader economic environment and consumer sentiment turns down.  

Volume recovery remains the key for PAG IN. The investments made by PAG IN in technology and sales may not yield the desired results as the operating environment has changed compared to the previous slow down.  Trading at ~52x FY2021 consensus EPS estimates the room for further disappointments from PAG IN remains. 

2. BNK Financial: Signals of Progress Are Underappreciated

Bnkfg4q19e%28f%29%20%281%29 page 24

Bnk Financial Group (138930 KS) scores well again with our PH Score™.  A PH Score™ of 9.5 reveals positive changes in Profitability, in Efficiency, in Capitalisation, in Asset Quality, and in Provisioning while the valuation variable was highly positive. 

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.

A low RSI and rock-bottom FV add to the attractiveness of shares. In fact, shares stands in the top quintile of opportunity globally by VFM from >2000 banks that we track.

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

The big plus is that fundamental trends are benign in a highly challenging market for eking out higher profitability. Efficiency improvements and growth in non-interest Income are so necessary, and tangible at BNK, given the strains on the top-line from soft Net Interest Income amidst modest Balance Sheet growth and the inexorable decline in NIM. However, BNK’s NIM erosion is mirrored -and matched- by a reduction in the NPL ratio. The sharp downward direction in the problem loan ratio cannot be underestimated. Credit costs are thus understandably on a downward trajectory, supporting squeezed Profitability in conjunction with aforementioned Efficiency gains and fee income progression.

It is common knowledge that South Korean banks are cheap. See South Korean Banks: You Back the Big Prices, Not the Favourites and South Korean Banks: Stuck in the Value Vault .  BNK is especially cheap, trading on a P/Book and FV of 0.29x and 3%, respectively, while the Earnings and Dividend Yields fetch 23% and 5.3%, respectively. A PH Score™ of 9.5 can serve as a tailwind.

3. Key Changes In South Korea’s Beneficial Ownership Disclosure Rule: Legal Basis For Activism

The amended Enforcement Decree of the Financial Investment Services and Capital Markets Act of Korea (the “Capital Markets Act”) went into effect starting on February 1, 2020. One major change made by this amendment (Article 154) is the clarification and improvement of the beneficial ownership disclosure rule which is a so-called “5% rule” in Korea. We think that this latest amendment provides a legal basis for institutional investor activism in South Korea.

The substantial shareholders whose minimum shareholding is 5 percent are required to disclose information including their investment intentions whether or not to influence company management and policies. Before the amendment, it was not clear whether institutional investors should be regarded as having an intention to influence management when exercising stewardship responsibilities such as publicly sending letters to management and filing shareholder proposals to (i) raise dividends, (ii) limit CEO pay, and/or (iii) dismiss directors who were found guilty of illegally damaging the firm. However, this latest amendment finally clarified it by creating a new criterion that is no longer categorized as either “influencing management” or “just a simple portfolio investment”. And then, it moved the aforementioned stewardship activities to this new category, which we named “investment with limited stewardship”. 

In our previous insight Two Notable Changes in National Pension Service of Korea: Activism Guideline and Delegation of Votes, we noted that NPS would pay particular attention to three major issues – (i) dividend policy, (ii) executive compensation scheme, and (iii) qualifications of directors – which are all closely linked to a company’s approach to capital allocation. The amended Capital Markets Act empowers institutional investors to exert more pressure on boards to resolve the exact same issues from (i) to (iii) as we described above.

Just a few clarifications. Regarding (i) dividend and (ii) executive compensation issues, it is true that the amended Capital Markets Act newly allowed institutional investors to exercise minority shareholder rights conferred by the law without changing their investment intentions to “influencing management”. However, state-run pension funds have already been allowed to do so even before the amendment. Also, this amendment added one clarifying sentence to Article 154-1, which stipulates that investors are now allowed to exercise minority shareholder rights to dismiss directors who were convicted of illegal actions and/or bringing irrecoverable damages to the company. Some local media reported that this is a major change, but this is not true. Article 385-2 and Article 402 of the Commercial Act of Korea have already provided such exception. That is, this latest revision of the Capital Markets Act aims at making those two Acts consistent with each other so that investors can be more vocal about (iii) qualifications of directors with no worries over conflicts of law. 

As of February 7, 2020, NPS and a few value-oriented institutional investors changed their investment intentions from “simple portfolio investment” to “investment with limited stewardship” for some of their invested stocks. We listed those stocks in the Detail section. We selected Daelim Industrial (000210 KS) as a primary entity of our insight because it is highly likely that NPS files shareholder proposals to raise its dividends and/or to remove Lee Hae-wook on the board. Though Lee Hae-wook is not yet convicted illegally damaging the firm, he is facing trial for alleged embezzlement and breach of duty on April 21, 2020. NPS holds 12.82% in Daelim Industrial (000210 KS).


Here is a summary of the key changes.

  • Institutional investors are required to report their investment intentions based on three criteria – (i) simple portfolio investment, (ii) investment with limited stewardship, and (iii) influencing management. The first two purposes are NOT considered to influence decision making of management, and thus, less strict rules on disclosure are applied. 
  • ALL stewardship activities that are not specified as “influencing management” in the Article 154-1 are now considered as “not influencing management”. 

Investment PurposeKey Issues to Address 
Influencing Management
  • Resignation and dismissal of directors 
  • Mergers and spin-offs
  • Acquisitions and transfer of business
  • Purchase and disposal of assets
  • Changes in Articles of Incorporation
  • Changes in share capital
  • Leasing all businesses or delegating business administration or entirely sharing the profit and loss with another person or entity
  • Dissolution of the company

*Regarding all the above issues, there are some conditions where an exception occurs. We elaborate on that in the Detail section. 

Not Seeking to Influence ManagementInvestment with Limited Stewardship

All issues that are not specified in either investment purposes, which include:

  • Dividend raises 
  • Executive compensation scheme 
  • Resignation and dismissal of directors only when they were found guilty of illegally damaging corporate value (based on the Commercial Act of Korea)
Simple Portfolio Investment

The most basic rights granted to shareholders no matter how many shares they own, such as: 

  • Voting rights
  • Dividend rights 
  • Rights offering 
  • Institutional investors (including state-run pension funds) are allowed to exercise minority shareholder rights to make changes to Articles of Incorporation of companies only when they target ALL companies in their portfolios based on the principles that are publicly disclosed.
  • Institutional investors are not required to change their investment intentions to “influencing management” when they send shareholder letters or publicly deliver their opinions to companies. However,  they have to do so when soliciting other minority shareholder to exercise voting rights by proxy to vote for or against the resolutions.
  • The amendment requires institutional investors whose investment purpose is “simple portfolio investment” to submit an official document that promises to only exercise the basic rights of shareholders. Otherwise, they should change their investment purpose to “investment with limited stewardship”. Recently, NPS and other institutional investors made such changes. Those updated disclosures indicate that they will exert more pressure on boards. 

4. Notes from the Silk Road: Xtep Int’l Holdings (1368 HK): Q4 2019 Update – Is There Pricing Risk?

Chart%201

  • We review the Q4 2019 sales update and how it relates to forecasts for the 2019 year.
  • Our stock rank system highlights some interesting facets for the periods ahead and how this may affect share price performance.
  • Our fundamental and technical review of fundamentals combined with an appreciation of comments by international players in recent weeks in the sportswear industry of late, means this a must-read for China Sportswear analysts.

5. Kirin: Activist Investor Seeks ¥600bn Buyback and a Nomination of an Independent Director

Image 52504927731581668163982

It was reported that Franchise Partners has submitted a proposal to Kirin Holdings (2503 JP) asking the company to initiate a ¥600bn share buyback. They have also requested the appointment of one independent director to the board of directors.

This latest round of investor activism comes after Franchise Partners’ (October 2019) attempt to convince Kirin to concentrate on its beer business rather than diversifying into biochemicals and pharmaceuticals.

You are currently reading Executive Summaries of Smartkarma Insights.

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Brief Value Investing: Toshiba – A Look at Toshiba Valuations in Light of the New Inflated Sales Issue and more

By | Daily Briefs, Value Investing

In this briefing:

  1. Toshiba – A Look at Toshiba Valuations in Light of the New Inflated Sales Issue
  2. Cosco Shipping (517 HK): Option Program Announced for Senior Management; Rally to Continue?
  3. European Banks: Screening for Value January 2020

1. Toshiba – A Look at Toshiba Valuations in Light of the New Inflated Sales Issue

Image 42622465141579672163296

Over the weekend Toshiba made two announcements. One was that current President and COO Tsunakawa would be stepping down from those roles to take on a role as Chairman (though not Chairman of the board), concentrating power in the hands of CEO and now also President Kurumatani. The second was that the company had discovered that ¥20bn in sales generated by a subsidiary could not be confirmed. New Toshiba is starting to look like old Toshiba in ways that are not encouraging.

2. Cosco Shipping (517 HK): Option Program Announced for Senior Management; Rally to Continue?

This will be a very short and concise write-up and a follow up to an earlier insight on Cosco Ship Intl-517 HK: Trading at Negative EV & 25% Discount to Net Cash; Deep Value or Value Trap? 

Cosco International Holdings (517 HK) has been a value trap since my initial insight in May 2018. Shares have continued to drop and negative EV has doubled from -1.25B HKD to -2.4B HKD. Classic HK value trap. Please recall, 517 HK has been consistently profitable and paying dividends. Its capital allocation has just been horrendous.

I had singled out Cosco International Holdings (517 HK) as one of my top picks for 2020 in Overview of My Winners and Losers in 2019… And 5 High Conviction Ideas Going into 2020

YTD shares are now up more than 16% on high volume. What’s going on?

Management announced it will institute a share option program yesterday. This has been because of shareholder activism at its latest AGM. We believe should these options be implemented the share price can rally extremely hard as it finally aligns management with shareholders. Management does not really have to perform any rocket science to have the stock re-rate from negative EV to just 0 EV. God forbid investors might actually value its earnings stream at one point!

The share price is currently around 2.4 HKD and NET CASH on the balance sheet alone is 4 HKD (66% upside). Returning this cash to shareholders via a 75-80% payout ratio and share buybacks should propel the stock significantly higher. Expect newsflow to pick up the coming 60 days with 1) an SGM announcement and 2) FY2019 in March.

Given the track record of management in returning cash (note: they actually lowered their interim dividend in 2019 despite the massive cash hoard!), and the fact that its an SOE many investors will pass on this idea despite the market cap being over 500M HKD and ADTV at 1M USD recently. If we are wrong, the downside is still protected by the cash.

3. European Banks: Screening for Value January 2020

Capture2

  • High liquidity in markets and improving investor risk appetite appear to be driving the rotation into equities and especially value stocks, which includes European banks and financials
  • We also believe that the past years of tightening regulation, especially banks capital, is now going into reverse, with conduct-related fines imposed on the sector having declined sharply
  • We update our value screens on European banks in this report, adding another screen for dividend cover; among the European banks, we look for value and sustainable dividend yield based on these screens
  • We believe that Banco BPM SpA (BAMI IM), Banca Popolare Dell’Emilia Rom (BPE IM) and UniCredit SpA (UCG IM) stand out among our core coverage; Banco Bilbao Vizcaya Argentari (BBVA SM) and Banco De Sabadell Sa (SAB SM) in Spain and Banco Comercial Portugues Sa (BCP PL) in Portugal screen well
  • Outside of our core coverage, we highlight Danske Bank A/S (DANSKE DC) given its value, dividend yield and relatively healthy cover; also Bank of Ireland (BKIR ID) and, despite its lack of dividend yield, Eurobank Ergasias Sa (EUROB GA) is one to watch in Greece
  • Risks to our thesis are a protracted”risk-off” period in markets, potentially driven by heightened increased trade deal frictions, low GDP growth and increased geo-political tensions that drive investors away from equities into more traditional safe haven assets

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Brief Value Investing: BNK Financial: Signals of Progress Are Underappreciated and more

By | Daily Briefs, Value Investing

In this briefing:

  1. BNK Financial: Signals of Progress Are Underappreciated
  2. Key Changes In South Korea’s Beneficial Ownership Disclosure Rule: Legal Basis For Activism
  3. Notes from the Silk Road: Xtep Int’l Holdings (1368 HK): Q4 2019 Update – Is There Pricing Risk?
  4. Kirin: Activist Investor Seeks ¥600bn Buyback and a Nomination of an Independent Director
  5. Tesco to Offload Its Thai & Malaysia Business: Generous Valuation but Value Is in the UK Business

1. BNK Financial: Signals of Progress Are Underappreciated

Bnkfg4q19e%28f%29%20%281%29 page 10

Bnk Financial Group (138930 KS) scores well again with our PH Score™.  A PH Score™ of 9.5 reveals positive changes in Profitability, in Efficiency, in Capitalisation, in Asset Quality, and in Provisioning while the valuation variable was highly positive. 

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.

A low RSI and rock-bottom FV add to the attractiveness of shares. In fact, shares stands in the top quintile of opportunity globally by VFM from >2000 banks that we track.

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

The big plus is that fundamental trends are benign in a highly challenging market for eking out higher profitability. Efficiency improvements and growth in non-interest Income are so necessary, and tangible at BNK, given the strains on the top-line from soft Net Interest Income amidst modest Balance Sheet growth and the inexorable decline in NIM. However, BNK’s NIM erosion is mirrored -and matched- by a reduction in the NPL ratio. The sharp downward direction in the problem loan ratio cannot be underestimated. Credit costs are thus understandably on a downward trajectory, supporting squeezed Profitability in conjunction with aforementioned Efficiency gains and fee income progression.

It is common knowledge that South Korean banks are cheap. See South Korean Banks: You Back the Big Prices, Not the Favourites and South Korean Banks: Stuck in the Value Vault .  BNK is especially cheap, trading on a P/Book and FV of 0.29x and 3%, respectively, while the Earnings and Dividend Yields fetch 23% and 5.3%, respectively. A PH Score™ of 9.5 can serve as a tailwind.

2. Key Changes In South Korea’s Beneficial Ownership Disclosure Rule: Legal Basis For Activism

The amended Enforcement Decree of the Financial Investment Services and Capital Markets Act of Korea (the “Capital Markets Act”) went into effect starting on February 1, 2020. One major change made by this amendment (Article 154) is the clarification and improvement of the beneficial ownership disclosure rule which is a so-called “5% rule” in Korea. We think that this latest amendment provides a legal basis for institutional investor activism in South Korea.

The substantial shareholders whose minimum shareholding is 5 percent are required to disclose information including their investment intentions whether or not to influence company management and policies. Before the amendment, it was not clear whether institutional investors should be regarded as having an intention to influence management when exercising stewardship responsibilities such as publicly sending letters to management and filing shareholder proposals to (i) raise dividends, (ii) limit CEO pay, and/or (iii) dismiss directors who were found guilty of illegally damaging the firm. However, this latest amendment finally clarified it by creating a new criterion that is no longer categorized as either “influencing management” or “just a simple portfolio investment”. And then, it moved the aforementioned stewardship activities to this new category, which we named “investment with limited stewardship”. 

In our previous insight Two Notable Changes in National Pension Service of Korea: Activism Guideline and Delegation of Votes, we noted that NPS would pay particular attention to three major issues – (i) dividend policy, (ii) executive compensation scheme, and (iii) qualifications of directors – which are all closely linked to a company’s approach to capital allocation. The amended Capital Markets Act empowers institutional investors to exert more pressure on boards to resolve the exact same issues from (i) to (iii) as we described above.

Just a few clarifications. Regarding (i) dividend and (ii) executive compensation issues, it is true that the amended Capital Markets Act newly allowed institutional investors to exercise minority shareholder rights conferred by the law without changing their investment intentions to “influencing management”. However, state-run pension funds have already been allowed to do so even before the amendment. Also, this amendment added one clarifying sentence to Article 154-1, which stipulates that investors are now allowed to exercise minority shareholder rights to dismiss directors who were convicted of illegal actions and/or bringing irrecoverable damages to the company. Some local media reported that this is a major change, but this is not true. Article 385-2 and Article 402 of the Commercial Act of Korea have already provided such exception. That is, this latest revision of the Capital Markets Act aims at making those two Acts consistent with each other so that investors can be more vocal about (iii) qualifications of directors with no worries over conflicts of law. 

As of February 7, 2020, NPS and a few value-oriented institutional investors changed their investment intentions from “simple portfolio investment” to “investment with limited stewardship” for some of their invested stocks. We listed those stocks in the Detail section. We selected Daelim Industrial (000210 KS) as a primary entity of our insight because it is highly likely that NPS files shareholder proposals to raise its dividends and/or to remove Lee Hae-wook on the board. Though Lee Hae-wook is not yet convicted illegally damaging the firm, he is facing trial for alleged embezzlement and breach of duty on April 21, 2020. NPS holds 12.82% in Daelim Industrial (000210 KS).


Here is a summary of the key changes.

  • Institutional investors are required to report their investment intentions based on three criteria – (i) simple portfolio investment, (ii) investment with limited stewardship, and (iii) influencing management. The first two purposes are NOT considered to influence decision making of management, and thus, less strict rules on disclosure are applied. 
  • ALL stewardship activities that are not specified as “influencing management” in the Article 154-1 are now considered as “not influencing management”. 

Investment PurposeKey Issues to Address 
Influencing Management
  • Resignation and dismissal of directors 
  • Mergers and spin-offs
  • Acquisitions and transfer of business
  • Purchase and disposal of assets
  • Changes in Articles of Incorporation
  • Changes in share capital
  • Leasing all businesses or delegating business administration or entirely sharing the profit and loss with another person or entity
  • Dissolution of the company

*Regarding all the above issues, there are some conditions where an exception occurs. We elaborate on that in the Detail section. 

Not Seeking to Influence ManagementInvestment with Limited Stewardship

All issues that are not specified in either investment purposes, which include:

  • Dividend raises 
  • Executive compensation scheme 
  • Resignation and dismissal of directors only when they were found guilty of illegally damaging corporate value (based on the Commercial Act of Korea)
Simple Portfolio Investment

The most basic rights granted to shareholders no matter how many shares they own, such as: 

  • Voting rights
  • Dividend rights 
  • Rights offering 
  • Institutional investors (including state-run pension funds) are allowed to exercise minority shareholder rights to make changes to Articles of Incorporation of companies only when they target ALL companies in their portfolios based on the principles that are publicly disclosed.
  • Institutional investors are not required to change their investment intentions to “influencing management” when they send shareholder letters or publicly deliver their opinions to companies. However,  they have to do so when soliciting other minority shareholder to exercise voting rights by proxy to vote for or against the resolutions.
  • The amendment requires institutional investors whose investment purpose is “simple portfolio investment” to submit an official document that promises to only exercise the basic rights of shareholders. Otherwise, they should change their investment purpose to “investment with limited stewardship”. Recently, NPS and other institutional investors made such changes. Those updated disclosures indicate that they will exert more pressure on boards. 

3. Notes from the Silk Road: Xtep Int’l Holdings (1368 HK): Q4 2019 Update – Is There Pricing Risk?

Chart%201

  • We review the Q4 2019 sales update and how it relates to forecasts for the 2019 year.
  • Our stock rank system highlights some interesting facets for the periods ahead and how this may affect share price performance.
  • Our fundamental and technical review of fundamentals combined with an appreciation of comments by international players in recent weeks in the sportswear industry of late, means this a must-read for China Sportswear analysts.

4. Kirin: Activist Investor Seeks ¥600bn Buyback and a Nomination of an Independent Director

Image 52504927731581668163982

It was reported that Franchise Partners has submitted a proposal to Kirin Holdings (2503 JP) asking the company to initiate a ¥600bn share buyback. They have also requested the appointment of one independent director to the board of directors.

This latest round of investor activism comes after Franchise Partners’ (October 2019) attempt to convince Kirin to concentrate on its beer business rather than diversifying into biochemicals and pharmaceuticals.

5. Tesco to Offload Its Thai & Malaysia Business: Generous Valuation but Value Is in the UK Business

Image 39299355671581644766563

Tesco Plc, the UK’s biggest supermarket chain announced in December 2019 that they are considering the sale of its operations in Thailand and Malaysia after receiving interest from potential buyers.

On 6th February Bloomberg reported that Tesco has invited Central Group, TCC Group and Charoen Pokphand Group to participate in the second round of bidding while the report also states that Tesco’s Thailand and Malaysia businesses are expected to be valued at more than $7bn.

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Brief Value Investing: Cosco Shipping (517 HK): Option Program Announced for Senior Management; Rally to Continue? and more

By | Daily Briefs, Value Investing

In this briefing:

  1. Cosco Shipping (517 HK): Option Program Announced for Senior Management; Rally to Continue?
  2. European Banks: Screening for Value January 2020

1. Cosco Shipping (517 HK): Option Program Announced for Senior Management; Rally to Continue?

This will be a very short and concise write-up and a follow up to an earlier insight on Cosco Ship Intl-517 HK: Trading at Negative EV & 25% Discount to Net Cash; Deep Value or Value Trap? 

Cosco International Holdings (517 HK) has been a value trap since my initial insight in May 2018. Shares have continued to drop and negative EV has doubled from -1.25B HKD to -2.4B HKD. Classic HK value trap. Please recall, 517 HK has been consistently profitable and paying dividends. Its capital allocation has just been horrendous.

I had singled out Cosco International Holdings (517 HK) as one of my top picks for 2020 in Overview of My Winners and Losers in 2019… And 5 High Conviction Ideas Going into 2020

YTD shares are now up more than 16% on high volume. What’s going on?

Management announced it will institute a share option program yesterday. This has been because of shareholder activism at its latest AGM. We believe should these options be implemented the share price can rally extremely hard as it finally aligns management with shareholders. Management does not really have to perform any rocket science to have the stock re-rate from negative EV to just 0 EV. God forbid investors might actually value its earnings stream at one point!

The share price is currently around 2.4 HKD and NET CASH on the balance sheet alone is 4 HKD (66% upside). Returning this cash to shareholders via a 75-80% payout ratio and share buybacks should propel the stock significantly higher. Expect newsflow to pick up the coming 60 days with 1) an SGM announcement and 2) FY2019 in March.

Given the track record of management in returning cash (note: they actually lowered their interim dividend in 2019 despite the massive cash hoard!), and the fact that its an SOE many investors will pass on this idea despite the market cap being over 500M HKD and ADTV at 1M USD recently. If we are wrong, the downside is still protected by the cash.

2. European Banks: Screening for Value January 2020

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  • High liquidity in markets and improving investor risk appetite appear to be driving the rotation into equities and especially value stocks, which includes European banks and financials
  • We also believe that the past years of tightening regulation, especially banks capital, is now going into reverse, with conduct-related fines imposed on the sector having declined sharply
  • We update our value screens on European banks in this report, adding another screen for dividend cover; among the European banks, we look for value and sustainable dividend yield based on these screens
  • We believe that Banco BPM SpA (BAMI IM), Banca Popolare Dell’Emilia Rom (BPE IM) and UniCredit SpA (UCG IM) stand out among our core coverage; Banco Bilbao Vizcaya Argentari (BBVA SM) and Banco De Sabadell Sa (SAB SM) in Spain and Banco Comercial Portugues Sa (BCP PL) in Portugal screen well
  • Outside of our core coverage, we highlight Danske Bank A/S (DANSKE DC) given its value, dividend yield and relatively healthy cover; also Bank of Ireland (BKIR ID) and, despite its lack of dividend yield, Eurobank Ergasias Sa (EUROB GA) is one to watch in Greece
  • Risks to our thesis are a protracted”risk-off” period in markets, potentially driven by heightened increased trade deal frictions, low GDP growth and increased geo-political tensions that drive investors away from equities into more traditional safe haven assets

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Brief Value Investing: European Banks: Screening for Value January 2020 and more

By | Daily Briefs, Value Investing

In this briefing:

  1. European Banks: Screening for Value January 2020

1. European Banks: Screening for Value January 2020

Capture2

  • High liquidity in markets and improving investor risk appetite appear to be driving the rotation into equities and especially value stocks, which includes European banks and financials
  • We also believe that the past years of tightening regulation, especially banks capital, is now going into reverse, with conduct-related fines imposed on the sector having declined sharply
  • We update our value screens on European banks in this report, adding another screen for dividend cover; among the European banks, we look for value and sustainable dividend yield based on these screens
  • We believe that Banco BPM SpA (BAMI IM), Banca Popolare Dell’Emilia Rom (BPE IM) and UniCredit SpA (UCG IM) stand out among our core coverage; Banco Bilbao Vizcaya Argentari (BBVA SM) and Banco De Sabadell Sa (SAB SM) in Spain and Banco Comercial Portugues Sa (BCP PL) in Portugal screen well
  • Outside of our core coverage, we highlight Danske Bank A/S (DANSKE DC) given its value, dividend yield and relatively healthy cover; also Bank of Ireland (BKIR ID) and, despite its lack of dividend yield, Eurobank Ergasias Sa (EUROB GA) is one to watch in Greece
  • Risks to our thesis are a protracted”risk-off” period in markets, potentially driven by heightened increased trade deal frictions, low GDP growth and increased geo-political tensions that drive investors away from equities into more traditional safe haven assets

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Brief Value Investing: European Banks: Screening for Value January 2020 and more

By | Daily Briefs, Value Investing

In this briefing:

  1. European Banks: Screening for Value January 2020
  2. Maruti Suzuki (MSIL IN)

1. European Banks: Screening for Value January 2020

Capture2

  • High liquidity in markets and improving investor risk appetite appear to be driving the rotation into equities and especially value stocks, which includes European banks and financials
  • We also believe that the past years of tightening regulation, especially banks capital, is now going into reverse, with conduct-related fines imposed on the sector having declined sharply
  • We update our value screens on European banks in this report, adding another screen for dividend cover; among the European banks, we look for value and sustainable dividend yield based on these screens
  • We believe that Banco BPM SpA (BAMI IM), Banca Popolare Dell’Emilia Rom (BPE IM) and UniCredit SpA (UCG IM) stand out among our core coverage; Banco Bilbao Vizcaya Argentari (BBVA SM) and Banco De Sabadell Sa (SAB SM) in Spain and Banco Comercial Portugues Sa (BCP PL) in Portugal screen well
  • Outside of our core coverage, we highlight Danske Bank A/S (DANSKE DC) given its value, dividend yield and relatively healthy cover; also Bank of Ireland (BKIR ID) and, despite its lack of dividend yield, Eurobank Ergasias Sa (EUROB GA) is one to watch in Greece
  • Risks to our thesis are a protracted”risk-off” period in markets, potentially driven by heightened increased trade deal frictions, low GDP growth and increased geo-political tensions that drive investors away from equities into more traditional safe haven assets

2. Maruti Suzuki (MSIL IN)

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We visited three dealers of Maruti Suzuki India (MSIL IN) in Hyderabad with an objective to understand post-festival demand scenario and estimate a possible volume outlook for Q4 and FY2021.

For MSIL, consensus growth expectations on earnings seem to be factoring in a sharp recovery in FY21, which the current checks do not seem to indicate. Therefore there is a high probability of consensus estimates being highly optimistic especially considering the current demand environment and hence the volume recovery in Q3 could remain short-lived. 
This insight is labelled bearish as we do not expect double-digit growth in the near term along a high probability of consensus estimates not being met. Additional checks in rural & multiple locations could lead to deeper insights. 

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