Bottom-Up EquitiesDaily Briefs

Equity Bottom-Up: Honda Motor, M3 Inc, Oversea Chinese Banking Corp., Alibaba Group, Daifuku Co Ltd, Money Forward and more

In today’s briefing:

  • Honda – Profit Jump as Costs Are Suppressed
  • M3 Inc: Strong Earnings Momentum Continues
  • Oversea Chinese Banking Corp. – Solid
  • As Growth Accelerates, Alibaba’s CaiNiao Network Is Pushing Aside Commodity-Type Express Firms
  • Daifuku – A Little Underwhelming
  • Small Cap Growth: Money Forward (3994) – Transforming Japan’s Accounts

Honda – Profit Jump as Costs Are Suppressed

By Mio Kato

Honda delivered strong 2Q results with operating margins in particular surprising to the upside. There were some small concerns on earnings quality as a reduction in SG&A spend was a key driver of profitability and the sustainability of that trend is a question mark.

M3 Inc: Strong Earnings Momentum Continues

By Shifara Samsudeen, ACMA, CGMA

M3 Inc. reported its 2QFY03/21 results last week. Both revenue and operating profit grew significantly compared to the same quarter last year by 28.5% YoY and 65.8% YoY respectively. At the same time, both revenue and OP beat consensus estimates by 7.2% and 26.6% respectively.

Source: Company Disclosures, Cap IQ

We discuss the details below.

Oversea Chinese Banking Corp. – Solid

By Thomas J. Monaco

*Much Better Than Expected: Oversea Chinese Banking Corp. (OCBC.SP) [OCBC] posted 3Q20 net profit of SGD 1.0 bn, an SGD 298 mn (40.8%) increase on a linked quarter basis – well ahead of consensus. Two factors pushed the outperformance: 1) a somewhat justifiable SGD 400 mn (53.3%) decline in loss provisions (unlike DBS Group Holdings [DBS.SP]), as OCBC witnessed “negative”growth in net new NPLs; and 2) a 290 bp decline in its tax rate to 13.1%, which was additive to the bottom-line by SGD 36 mn or 3.6%;

*Credit Improving In Reality: By our calculation, given the SGD 99 mn in net recoveries, we find that new new NPL growth was actually negative on an annualized basis at 2.3%. While we are ecstatic to see negative growth in net new NPLs on the back of strong net recoveries of previously charged off loans, we continue to believe that credit risk will remain elevated. As such, we find that reserves should be bolstered by SGD 288 mn – 25% of pre-tax results, which is a far cry from where currently DBS is; and

*Insurance Weakness: Great Eastern Holdings (GE.SP) [Great Eastern] reported 3Q20 bottom-line results of SGD 287.9 mn, declining SGD 9.6 mn (3.2%) linked quarter. On an operating basis excluding market-related gains, the decline in profits was even more pronounced at SGD 24.6 mn or 9.4% over the period due to new business strain. New Business Embedded Value (NBEV) margins continued their descent to 37.0%  – down 1.1% linked quarter due a weaker Malaysian component. Management’s confidence is low and it anticipates the weaker economic environment to pose continued headwinds, and will reassess the dividend.

As Growth Accelerates, Alibaba’s CaiNiao Network Is Pushing Aside Commodity-Type Express Firms

By Daniel Hellberg

In the September quarter, revenue growth at Alibaba Group (BABA US)‘s logistics arm CaiNiao Network accelerated sharply, as the unit continued to grow faster than Alibaba, total eCommerce sales, and China’s express market.

How has CaiNiao Network managed to grow so much faster than eCommerce and associated logistics spending, and what does it mean for China’s listed express companies?

In this note we identify likely drivers of CaiNiao’s superior sales momentum. We also explain the threat CaiNiao’s strength poses to the five express companies in which Alibaba has invested.

In our view, CaiNiao’s growth will make it tougher for commodity-type express companies to breathe. These companies are already under pressure from declining margins and rising CapEx requirements. S.F. Holding (002352 CH), which operates mostly outside of Alibaba’s orbit and is thus insulated from many of these problems, remains the most attractive name in Chinese express, in our opinion, but BEST Inc (BEST US) is an interesting play on potential M&A in the sector. 

Daifuku – A Little Underwhelming

By Mio Kato

Although Daifuku beat consensus at both the revenue and OP lines in 2Q, the company did not raise guidance and order/sales trends are becoming a concern. With the EV/OP multiple at 33.4x, the lack of OP growth despite a relatively mild net impact from COVID create a sense of vulnerability for the stock.

Small Cap Growth: Money Forward (3994) – Transforming Japan’s Accounts

By Mark Chadwick

Money Forward (3994 JP) is a financial platform for both individuals and businesses. The adoption of cloud-based Software as a Service (SaaS) is driving rapid sales growth for business accounting software and, with penetration still at low levels, this trend is expected to continue. Money Forward operates under four main domains: MF Home (personal financial management), MF Business (cloud accounting), MF Finance (payment services / venture fund) and MF X (technology solutions).   

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