Daily CONS: Weichai Power(2338.HK)： Fuel Cell Not the Answer (Yet), More Boldness Needed on All-Electric and more

In this briefing:

1. Weichai Power(2338.HK)： Fuel Cell Not the Answer (Yet), More Boldness Needed on All-Electric
2. Mahindra & Mahindra Ltd- 2QFY19 – New Launches Cause Margin Pain, Benefits to Follow
3. Fosun Tourism IPO Trading Update – Low Traded Volume and Fair Value Indicate It Has a Long Way to Go
4. Japan Display: Squeezing Up 36% As Chinese Investment Could Solve Balance Sheet Troubles
5. Hyundai Motor Share Class: Time for 1P to Catch Up

1. Weichai Power(2338.HK)： Fuel Cell Not the Answer (Yet), More Boldness Needed on All-Electric

Weichai Power, China’s largest independent Diesel engine producer, has been looking for a new core business to survive in long term downward trend of its current core business (Diesel engine for commercial vehicle and construction machines) since 2012 when it acquired 25% stake of KION Group AG (KGX GR). By now Weichai owns KION (materials handling equipment), Dematics (integrated automated supply chain technology, directly own ed by KION),  Power Solutions International (PSIX US) (cleantech engine). It also has stakes in Ballard Power Systems (BLDP CN) (PEM fuel cell products), Ceres Power Holdings (CWR LN) (fuel cell technology and engineering). Lately, Weichai entered into an agreement with Westport Fuel System (WPRT.US) to develop and commercialise HPDI 2.0.

It seems Weichai decides to put its chip on fuel cell and low-emission engines. However, our analysis shows all the above investment would not be enough to secure Weichai’s market outlook in the next 5-10 years. 

This note focus on an evaluation of Weichai’s technology choices on a 5-10 year time horizon. We will discuss the company’s 12-months view in another note.   

2. Mahindra & Mahindra Ltd- 2QFY19 – New Launches Cause Margin Pain, Benefits to Follow

• Mahindra & Mahindra (MM IN) reported 2QFY19 PAT of Rs 17,788 mn vs our estimate of Rs 15,240 mn. The revenues were 2.5% lower than estimated. EBITDA was Rs 18,493 mn as against our estimate of Rs 20,721 mn. EBITDA margins were  14.5% against our estimate of 15.8%.  Overall the performance was lower than our expectation.
• EBITDA margins were impacted due to higher raw material cost and higher launch cost related to Marazzo (7/8 seater utility vehicle). We expect the margins to remain under pressure for the 2HFY19E as the Company has lined up more new model launches.
• The shift in the festive season from 2Q to 3Q impacted the tractor sales volume in this quarter. M&M management expects the tractor industry to growth in the range of 12-14% YoY in FY19E where M&M is expected to grow at 12.5% YoY in FY19E.
• We have lowered EPS estimates for FY20E by 8%. Over FY18-21E, we expect revenue and PAT to grow at CAGR 14% and 13% respectively. We expect EBITDA margin to expand from 14.8% in FY18 to 15.5% in FY21E.
• Our EPS estimates for FY20E & 21E stand at Rs 47.3/- & Rs 53.7/- respectively. We have maintained the PE multiple of 17x with an EPS of Rs 47.2/- for the year ending September- 20E and valued its share in the subsidiaries at Rs 315/- to arrive at the fair value estimate of Rs 1,115/- for the next 12 months.

3. Fosun Tourism IPO Trading Update – Low Traded Volume and Fair Value Indicate It Has a Long Way to Go

Fosun Tourism (1992 HK)‘s IPO was priced at the low-end, HKD15.60/share. The retail tranche was undersubscribed while the institutional tranche was said to be moderately over-subscribed. I have covered most aspects of the deal in my earlier insights:

• Fosun Tourism Pre-IPO – No Improvement or Major Changes in Club Med Since the Acquisition
• Fosun Tourism IPO – Fair Value Is Probably Below Low-End

In this insight, I’ll provide an update on the deal dynamics, valuations and provide a table with the implied valuations at different share price levels.

4. Japan Display: Squeezing Up 36% As Chinese Investment Could Solve Balance Sheet Troubles

As we mentioned in a comment in  Japan Display: Cost Structure Improvement Is Good but Shipment Delay and IPhone XR Cloud Outlook the NHK reported last night that JDI was in talks with a Chinese consortium to secure something in the region of ¥50bn in funding (more than its market cap yesterday) for a more than 33% stake in the company. The Nikkei shed light on the identities of some of the consortium this morning mentioning investment fund Silk Road, Minth Group Ltd (425 HK) and  Shenzhen O Film Tech Co A (002456 CH). Bloomberg has also mentioned that the consortium could invest a further ¥500bn to establish a new facility in China for the production of OLED panels.

We spoke to the company this morning to get colour on these announcements.

5. Hyundai Motor Share Class: Time for 1P to Catch Up

• 1P (005385 KS) was supposed to make a catchup move yesterday relative to 2P (005387 KS). But it didn’t. Price ratio is currently well below -1 σ. Div yield difference is at 0.53%p. This is close to yearly high. At this level, 1P has no other way but to catch up with 2P.
• In my previous insight, I suggested holding onto 1P/2P long/short position. This trade hasn’t performed well. We are at a 5.07% loss at yesterday’s closing. I’d still hold onto this position for the same reasonings as before.
• Tricky one is the recently announced hydrogen cell investment. This may be seen as something boosting Common and likely 2P. Hydrogen cell investment should rather be considered as a signal that the HMG-government relation has vastly improved. This suggests that the restructuring may get accelerated. Anything positively affecting the restructuring should be positive on 1P.