In this briefing:
- KRI (KRI MK): Continued Capacity Expansion to Meet Solid Demand
- Kalbe Farma (KLBF IJ): Navigating Through the New Pharma Dynamics
- GMO Internet (9447 JP) – Grossly or Modestly Overrated?
- 58.com Inc. (NYSE: WUBA): Regulatory Pressure Has Long Term Implications
- Tuan Sing: Beneficiary of Exuberant Demand for Prime Office Investment Properties
1. KRI (KRI MK): Continued Capacity Expansion to Meet Solid Demand
- More attractive to analysts, low price-to-sales, and low correlation with Western stock markets relative to its sector
- To meet strong demand, KRI recently commissioned Plant 17, which increased capacity by 1.5bn. Upcoming Plants 18 and 19 to commission in 2019 should add another 5.5bn or a 20% capacity increase
- High barriers to entry for medical gloves due to stringent compliance to regulatory requirement aids KPI market shares
- Trades above ASEAN Health Care at 19CE* 4.1x PB, in line with offering a better ROE
- Risks: Sudden jump in raw materials prices
* Consensus Estimates
2. Kalbe Farma (KLBF IJ): Navigating Through the New Pharma Dynamics
The healthcare industry in Indonesia has undergone a massive change since the introduction of the National Health Insurance (JKN) in 2014. Although the program allows for better healthcare access for over 200mn Indonesians, the industry dynamics have shifted and Kalbe Farma (KLBF IJ) is one of the companies that has been on the losing side during this adjustment period.
With the Health and Social Security (BPJS) deficit forecast to grow to IDR16t by end of 2018, and with a continuing roll out of coverage to 250mn people by end of 2019, all parties in the healthcare industry are expected to continue subsidizing the program. Hospitals and drug manufacturers have had to cope with relatively flat pricing from the INA-CBG (reimbursement) tariff since 2014, despite cost pressures stemming from the currency depreciation and inflation. KLBF has reported declines in its overall pharmaceutical margin, as well as low growth rates for its licensed and OTC (over the counter) drugs over the past five years.
Our recent meeting with the company revealed that to mitigate the JKN impact, KLBF has launched several strategies, including expanding into niche specialty products such as oncology and biosimilar drugs, as well as preventive and herbal supplements. We are also at a tipping point where KLBF’s non-OTC consumer health and nutritionals revenues are finally larger than the pharmaceutical revenues for the first time. In this insight, we will discuss whether the worst is already behind us, and if it is now time to take another look at the stock.
3. GMO Internet (9447 JP) – Grossly or Modestly Overrated?
Source: Japan Analytics
THE GMO INTERNET (9449 JP) STORY – GMO internet (GMO-i) has attracted much attention in the last eighteen months from an unusual trinity of value, activist and ‘cryptocurrency’ equity investors.
- VALUE– Many traditional, but mostly foreign, value investors have seen the persistent negative difference between GMO-i’s market capitalisation and the value of the company’s holdings in its eight listed consolidated subsidiaries as an opportunity to invest in GMO-i with a considerable ‘margin of safety’.
- ACTIVIST – Since July 2017, the activist investor, Oasis, has waged a so-far-unsuccessful campaign with the aim of improving GMO’s corporate governance, removing takeover defences, addressing a ‘secularly undervalued stock price we are not able to tolerate’ (sic), and redefining the role and influence of the company’s Chairman, President, Representative Director and largest shareholder, Masatoshi Kumagai.
- ‘CRYPTO!’ – In December 2017, GMO-i committed to spending more than ¥35b or 10% of non-current assets. The aim was threefold: to set up a bitcoin ‘mining’ headquarters in Switzerland (with the ‘mining’ operations being carried out at an undisclosed location in Scandinavia), to develop proprietary state-of-the-art 7nm-node ‘mining chips’, and, in due course, to sell GMO-branded and developed ‘mining’ machines. The move was hailed in the ‘crypto’ fraternity as GMO-i became the largest non-Chinese and the first well-established Internet conglomerate to make a major investment in ‘cryptocurrency’ infrastructure.
OUTSTANDING – Following the December 2017 announcement, trading volumes spiked into ‘Overtraded’ territory – as measured by our Volume Score. Many investors saw GMO-i shares as a safer way of gaining exposure to ‘cryptocurrencies’, even as the price of bitcoin began to subside. By early June 2018, GMO-i’s shares had reached a closing price of ¥3,020: up 157% from the low of the prior year and outperforming TOPIX by 135%. Whatever the primary driver of this outstanding performance, each of our trio of investor groups no doubt felt vindicated in their approach to the stock.
CRYPTO CLOSURE – On December 25th 2018, GMO-i’s shares reached a new 52-week low of ¥1,325, a decline of 56% from the June high. Year to date, GMO-i shares have now declined by 31%, underperforming TOPIX by nine percentage points. On the same day, GMO-i announced that the company would post an extraordinary ¥35.5b loss for the fourth quarter, incurring an impairment loss of ¥11.5b in relation to the closure of the Swiss ‘mining’ headquarters and a loss of ¥24b to cover the closure of the ‘mining chip’ and ‘mining machine’ development, manufacturing and sales businesses. GMO-i will continue to ‘mine’ bitcoin from its Tokyo headquarters and intends to relocate the ‘mining’ centre from Scandinavia to (sic) ‘a region that will allow us to secure cleaner and less expensive power supply, but we have not yet decided the details’. Unlisted subsidiary GMO Coin’s ‘cryptocurrency’ exchange will also continue to operate, and the previously-announced plans to launch a ¥-based ‘stablecoin’ in 2019 will proceed. In the two trading days following this announcement, the shares have recovered 13% to ¥1,505.
RAIDING THE LISTCO PIGGY BANK – As we shall relate, this is the second time since listing that GMO-i has written off a significant new business venture which the company had commenced only a short time before. In both cases, the company was forced to sell stakes in its listed consolidated subsidiaries to offset the resulting losses. On this occasion, the sale of shares in GMO Financial (7177 JP) (GMO-F) on September 25 2018, and GMO Payment Gateway (3769 JP) (GMO-PG) on December 17 2018, raised a combined ¥55.6b and, after the deduction of the yet-to-be-determined tax on the realised gains, should more than offset the ‘crypto’ losses. According to CFO Yasuda, any surplus from this exercise will be used to pay down debt. Also discussed below and in keeping with this GMO-i ‘MO’, in 2015, the company twice sold shares in its listed subsidiaries to ‘smooth out’ less-than-desirable operating results.
In the DETAIL section below we will cover the following topics:-
I: THE GMO-i TRACK RECORD – TOP-DOWN v. BOTTOM UP
- BOTTOM LINE No. 1: NET INCOME
- BOTTOM LINE No.2 – COMPREHENSIVE INCOME
II: THE GMO-i BUSINESS MODEL – THROWING JELLY AT THE WALL
III: THE GMO-i BALANCE SHEET – NOT SO HAPPY RETURNS
IV: THE GMO-i CASH FLOW – DEBT-FUNDED CASH PILE
V: THE GMO-i VALUATION – TWO METHODS > SAME RESULT
- VALUATION METHOD No.1 – THE ‘LISTCO DISCOUNT’
- VALUATION METHOD No.2 – RESIDUAL INCOME
CONCLUSION – For those unable or unwilling to read further, we conclude that GMO-i ‘rump’ is a grossly-overrated business. Despite having started and spun off several valuable GMO Group entities, CEO Kumagai bears responsibility for two decades of serial and very poorly-timed ‘mal-investments’. As a result, the stock market has, except for the ‘cryptocurrency’-induced frenzy of the first six months of 2018, historically not accorded GMO-i any premium for future growth, and has correctly looked beyond the ‘siren song’ of the ‘HoldCo discount’. According to the two valuation methodologies described below, the company is, however, fairly valued at the current share price of ¥1,460. Investors looking for a return to the market-implied 3% perpetual growth rate of mid–2018 are likely to be as disappointed as those wishing for BTC to triple from here.
4. 58.com Inc. (NYSE: WUBA): Regulatory Pressure Has Long Term Implications
● We notice that Anjuke’s Oct.-Nov. traffic declined. We attribute this decline to the tightening of registration requirement in various cities, which will reduce the number of housing leads on WUBA platform;
● We, however, believe new home business will deliver strong revenue for WUBA this year, contributing Rmb2bn in revenues by our estimate;
● We rate the stock Buy and cut TP from US$84 to US$79.
5. Tuan Sing: Beneficiary of Exuberant Demand for Prime Office Investment Properties
Gaw Capital is said to be paying a CLSA-managed fund S$710 mn for 77 Robinson, which is just 3 minutes’ walk away from Tuan Sing-owned prime freehold office building, Robinson Point. This works out to around S$2,300 psf based on NLA. 77 Robinson has a balance lease of 74 years.
Evidently, institutional buying interest in Singapore’s prime commercial buildings remains strong as the Singapore office market is now still a “landlords’ market”. Grade A CBD office rents are expected to continue their upward growth trajectory into 2019. Tuan Sing is a beneficiary of the strong office rental upturn as its prime freehold commercial assets in Singapore – 18 Robinson, Robinson Point, and 896 Dunearn – make up more than two-third of its total property portfolio value. Tuan Sing’s share price is down 17% in the last six months and lately, the company has been busy buying back its own shares at around S$0.33-0.345/share.
