In this briefing:
- Bearish U.S. Outlook Intact
- Pasona Non-Grata
- Selamat Sempurna (SMSM IJ) – Truly Industrious – On the Ground in J-Town
- Sea Ltd: A Surprise Winner in Cut-Throat E-Commerce Battle?
- Discover SZ/SH Connect: Foreigners Were Buying Industries and Financials in December
1. Bearish U.S. Outlook Intact
Wednesday’s rally in U.S. equities was likely nothing more than a brief bear market rally, as confirmed by Thursday’s sell-off. All the major averages remain in downtrends and there continues to be an absence of bottoming patterns. Concerns that we have highlighted over the past several months continue to lead us to our intact cautious outlook. In this report we highlight important technical levels and indicators, and highlight a bright spot for investors within the Consumer Staples Sector.
2. Pasona Non-Grata
PASONA NON-GRATA
Source: Japan Analytics
ROUND TRIP – Temporary staffing company Pasona (2168 JP)‘s shares have completed a year-long ’round trip’ after reaching Overbought territory one year ago following the launch of an ‘engagement campaign’ by the activist investor, Oasis. In May 2018, the company took advantage of its elevated share price to sell 2.3m shares (of which 2m were Treasury Shares), prompting a sharp correction in the share price. In recent months, the shares have languished as the company’s business performance has begun to deteriorate, reaching an 18-month low of 1,008 on 25th December, before rebounding 12% to close the year at ¥1,126.
HOLDCO DISCOUNT – According to the Smartkarma HoldCo Monitor, Pasona has the largest ‘ListCo as a % of Market Cap’ percentage at 365%, and the second-largest ‘Discount to Net Asset Value’ (78%) of the 77 companies that are tracked. With Pasona’s interim results due to be released on Friday 11th, January, the Insight will look at the company’s recent business performance, offer some guidelines for valuing the company and make two stock-specific recommendations. The format follows that of our recent Insight on GMO Internet.
3. Selamat Sempurna (SMSM IJ) – Truly Industrious – On the Ground in J-Town
Indonesia has a shortage of good quality industrial companies but Selamat Sempurna (SMSM IJ) is most certainly an exception to this rule, with a track record of consistent long-term growth and strong corporate governance. After a slower 1H18 due to seasonal factors, the company saw a very strong performance in 3Q18, which looks set to continue into 2019.
A company visit in Jakarta revealed that it continues to focus on growing its higher margin heavy-duty filter revenues, with an ongoing emphasis on growing its export business.
Selamat Sempurna (SMSM IJ) should be a beneficiary of the US-China Trade War given much lower tariffs for Indonesian produced filters versus those from China. It has already seen a marked pick-up in enquiries from potential US customers.
Its domestic filter business continues to see strong growth, especially heavy-duty filter sales, which are benefitting from demand from commercial vehicles and heavy equipment demand, with higher unit costs and replacement rates in this space.
The company’s body-maker division is seeing even higher rates of growth than filters and decent visibility, with demand coming from heavy equipment customers such as United Tractors (UNTR IJ).
The company should be a beneficiary of the imposition of B20 standards for Indonesia, which will require companies to change filters more regularly.
It was also recently granted ISO14001:2015 Environmental Management System, which should be positive from an environmental and ESG perspective. This is important for its US and European sales in the long-term.
Selamat Sempurna (SMSM IJ) continues to be one of the few attractive industrial companies in Indonesia, with a very strong long-term record on sales growth and profitability. Its domestic filter business continues to see strong growth, with a significant tailwind from its body-maker division. It is also focused on growing both its export sales and at the same time its higher-margin heavy-duty filter business. According to Bloomberg Consensus Estimates, the company trades on 12.4x FY19E PER and 10.9x FY20E PER, with forecast EPS CAGR of 15% for FY19E and FY20E respectively.
4. Sea Ltd: A Surprise Winner in Cut-Throat E-Commerce Battle?
- A big takeaway from our conversations with Indo e-commerce industry sources is that they vouch for Shopee’s (Sea Ltd’s (SE US) e-commerce arm) MS gains story in the country.
- Indo e-commerce market has been enjoying super growth period (94% CAGR in 2015-18E) despite three major challenges (logistics, payment and highly subsidized market).
- With SE’s fund raising a matter of when, not if (2H20 as most likely timetable), Shopee’s tremendous progress in key metrics (MS, take rate) provides comfort.
- Assuming fair valuation of US$3 bn (vs. US$1.4 bn implied in SE’s ADR price) for Shopee, 12-mo PT for SE works out to be US$15.73/ADR, representing 43% upside potential.
5. Discover SZ/SH Connect: Foreigners Were Buying Industries and Financials in December
In our Discover SZ/SH Connect series, we aim to help our investors understand the flow of northbound trades via the Shanghai Connect and Shenzhen Connect, as analyzed by our proprietary data engine. We will discuss the stocks that experienced the most inflow and outflow by offshore investors in the past seven days.
We split the stocks eligible for the northbound trade into three groups: those with a market capitalization of above USD 5 billion, and those with a market capitalization between USD 1 billion and USD 5 billion.
We note that offshore investors were buying industries and financials in December. Interesting stocks in the north bound trades are Han’S Laser Technology In A (002008 CH), Muyuan Foodstuff Co Ltd A (002714 CH) and Hangzhou Tigermed Consulting (300347 CH) .
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