Brief Equities Bottom-Up: Semen Indonesia Persero Tbk (SMGR IJ) – Its Not All Bad News After All and more

In this briefing:

  1. Semen Indonesia Persero Tbk (SMGR IJ) – Its Not All Bad News After All
  2. Korea Small Cap Gem #2: Hancom Inc
  3. Buy YY on Overseas Live Stream Land Grabs
  4. Cafe De Coral (341): Stay Away for Now
  5. BGRIM: Positive 2Q20 Earnings Outlook from Intact SPP Operations

1. Semen Indonesia Persero Tbk (SMGR IJ) – Its Not All Bad News After All

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Semen Indonesia Persero Tbk (SMGR IJ) hosted a call to run through its 1Q2020 results, which saw a marginal impact from COVID-19. What was more interesting were the company’s views on the outlook for the Indonesian cement market, which is likely to have a choppy few months. 

The achieved positive volume growth in 1Q2020 mainly due to the inclusion of PT Solusi Bangun Indonesia Tbk (SMCB IJ) and strong performance from the company’s Vietnamese operations. 

It saw profitability improve due to synergies and scale benefits on logistics and procurement specifically on PT Solusi Bangun Indonesia Tbk (SMCB IJ).  The company expects to maintain margins in 2020 versus FY19. 

COVID-19 has started to impact volume in April but even more so in May. Smaller operators are concentrating on their home markets and customers with solid credit record. This has opened up some gaps and opportunities which Semen Indonesia Persero Tbk (SMGR IJ) will look to fill. 

The company has improved its debt structure in 2H19, bring the average interest rates down and It is also looking to sell a 15% stake in PT Solusi Bangun Indonesia Tbk (SMCB IJ) to Japanese cement company Teiheiyo Cement Corporation. 

Semen Indonesia Persero Tbk (SMGR IJ) is trading on 7.8x FY21E EV/EBITDA is the 10-year average of 9.8x and a high of 14x forward EV/EBITDA. This a key recovery play once the government starts to reopen the economy.

2. Korea Small Cap Gem #2: Hancom Inc

Hancom stock

Hancom Inc (030520 KS) (“Hancom”) is the second company we introduce in our series Korea Small Cap Gem”. The company is best known for its Korean office software program which has survived more than 30 years against the mighty Microsoft office. In Korea, Hancom has maintained a nearly 30% share in the office software market with Microsoft having 70% market share for nearly 30 years. 

In 1Q 2020, the masks & protection equipment business generated 26.6 billion won in sales. The company has benefited greatly from selling more face masks due to COVID-19. Hancom Lifecare generated 20.2 billion won in sales (up 161% YoY) and 6.3 billion won in operating profit (up 1,498% YoY) in 1Q 2020, driven by the strong sales of KF94 face masks. 

One of the big concerns investors have had on this company in the past few years is why the company decided to enter the personal protection equipment (PPE) sector with a big acquisition in 2017. Now this investment has become a big homerun and it is likely that as the company’s ROE and operating margins improve again, many investors may attach higher valuation multiples on the company. So Hancom is well poised to benefit from a combination of higher multiples and increasing profits. If we assume EBIT of 50 billion won and 9x EV/EBIT multiple, this would suggest EV of 450 billion won, which would imply a market cap of 467 billion won (50%+ upside from current levels; price – 12,300 won as of 22 May 2020).

3. Buy YY on Overseas Live Stream Land Grabs

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JoYY reported a 1Q20 beat for earnings with revenue in-line with upgraded consensus estimates as the Company’s globalization strategy of expanding Bigo and Likee saw significant traction. We believe that the Company’s overseas expansion strategy is a more effective strategy compared to its domestic monetization strategy with YY Live.

We maintain our overweight on JoYY in light of its continued expansion into developed overseas markets with lower live streaming penetration rates,  which provides a more effective channel of growing its userbase especially with the COVID-19 still prevalent in various overseas markets.

4. Cafe De Coral (341): Stay Away for Now

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The new Security Law will spark more protests in Hong Kong that disrupt people’s day to day lives including the ability to go out and buy food. When Hong Kong was busy fighting COVID-19, the number of protests literally went to zero, and coupled with the continuously low infection rate, the hope for Cafe De Coral Holdings (341 HK) to start performing again is back to live. 

However, the new Security Law will inevitably bring the protesters back on the street, demonstrating against the Chinese government that hinders people to dine out and as the go-to family restaurant for middle-class Hong Kong residents, Cafe de Coral’s turnaround plan to focus on takeaways and home delivery may not materialize anytime soon.

For long-only investors, it is better to stay away from the company currently especially if they have made that 6% over a month. 

For long-short investors, this is the time to start shorting the company again due to potentially longer than expected social unrest that either deters people from dining out or causes the home delivery to be less smooth as the drivers need to avoid certain area packed with protests. 

5. BGRIM: Positive 2Q20 Earnings Outlook from Intact SPP Operations


Yesterday analyst meeting came out in a positive tone. Expect 2Q20E earnings to remain healthy backed by intact SPP operations and profit recognition from 633MWe project added in 2019.

  • Solid 2Q20 earnings outlook as higher SPP electricity volume sales to EGAT is expected to compensate the drop in IU sales.
  • Potential upside of 6% to our 2020E earnings forecast from lower gas price(-3% QoQ). we will factor it into our model after reviewing the possible FT adjustment next quarter
  • We maintain the neutral view on stock performance as BGRIM is trading at a 69x trailing PE. We believe the positive outlook of 2020-22E earnings growth from 633 MW projects COD in 2019 and 550 MWe in pipeline has already priced in.
  • Upside risk is expected from 1) Lower gas price extending till 2H20 without FT adjustment and 2) New project acquisitions.

We maintain the HOLD rating based on a target price of Bt47 derived using DCF valuation (6.9% WACC and 1% TG), implying 54x PE’20.

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