Daily Consumer: Mahindra & Mahindra Ltd- 2QFY19 – New Launches Cause Margin Pain, Benefits to Follow and more

In this briefing:

1. Mahindra & Mahindra Ltd- 2QFY19 – New Launches Cause Margin Pain, Benefits to Follow
2. Fosun Tourism IPO Trading Update – Low Traded Volume and Fair Value Indicate It Has a Long Way to Go
3. Japan Display: Squeezing Up 36% As Chinese Investment Could Solve Balance Sheet Troubles
4. Hyundai Motor Share Class: Time for 1P to Catch Up
5. Starbucks (SBUX): China Strategy Reaped by Luckin’s Parasitical Tactic, a Visit and Case Study

1. 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.

2. 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.

3. 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.

4. 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.

5. Starbucks (SBUX): China Strategy Reaped by Luckin’s Parasitical Tactic, a Visit and Case Study

• We believe Luckin copies SBUX’s site selection, but chooses low rental places close to Starbucks shops.
• Starbucks plans to add delivery business to raise margins and comparable store sales, but Luckin has focused on delivery since inception.
• Starbucks needs the China market as its growth momentum, but we believe Luckin’s parasitical tactic will be a major resistance.