Bottom-Up EquitiesDaily Briefs

Equity Bottom-Up: Koei Tecmo Holdings, Daikin Industries, Fortescue Metals, Dada Nexus Ltd, PT Nippon Indosari Corpindo Tbk. (ROTI), China Yongda Automobile Services Hldg, RPA Holdings Inc, Blue Bird, Chatwork Co Ltd, Siam Global House and more

By September 11, 2020 No Comments

In today’s briefing:

  • Koei Tecmo – The Market Is Sleeping on the Zelda Musou Nintendo Tie-Up for Switch but Shouldn’t
  • 🇯🇵 JAPAN • Daikin (6367 JP) – Perfect Pricing
  • Fortescue Metals: Iron Ore Stronger for Longer
  • Dada-Nexus: More — And Less — Than Meets the Eye
  • PT Nippon Indosari Corpindo (ROTI IJ) – ROTI’s Exit from Philippines a Positive
  • China Yongda Automobile Services – Accelerating into 2H20
  • Small Cap Growth: RPA (6572) – The Digital Workforce
  • Bluebird (BIRD): Correlated with PSBB, Beneficiary of WFH to WFO Switch
  • Small Cap Growth: Chatwork (4448) – It’s Good to Chat.
  • GLOBAL: Home-Improvement Player Eyes Opportunities in ASEAN

Koei Tecmo – The Market Is Sleeping on the Zelda Musou Nintendo Tie-Up for Switch but Shouldn’t

By Mio Kato

Two days ago Nintendo released an announcement about Hyrule Warriors: Age of Calamity (Aka Zelda Musou). This is a tie-up with Koei Tecmo and will be essentially a Zelda skin on KT’s Dynasty Warriors series… except it isn’t. More below.


🇯🇵 JAPAN • Daikin (6367 JP) – Perfect Pricing

By Campbell Gunn

Source: Daikin

GLOBAL LEADER – Daikin is one of Japan’s few global enterprises, and the company is rightly proud of its status as the ‘world’s No.1 air-conditioning company’. Based on the company’s FY21 forecast, Japan represents only 23% of sales – over US$6 billion of revenues are to sourced from the Americas, one of the largest exposures of any non-auto company to that region. Daikin has benefited from its sole focus on A/C and a lack, as yet, of a viable Chinese competitor.

In the DETAIL section below,  we shall review Daikin’s financial performance, returns and valuation. We shall not attempt to forecast the prospects for the A/C industry or assess Daikin’s competitive position. Nevertheless, we expect A/C market growth to continue to exceed GDP growth and for Daikin to continue to gain market share globally, including through acquisitions. We expect the company to use the ¥183 billion increase in net debt in the last quarter to expand its global presence further.

PERFECTION – By bidding up Daikin’s shares by 50% in the last six months, the market has looked far beyond COVID-19 and has anticipated much of the company’s incremental medium-term growth. At a current EV/Peak OP of 20.3 times, Daikin has only been as expensive by this metric in 1996 and 2000.


Fortescue Metals: Iron Ore Stronger for Longer

By Sameer Taneja

Fortescue Metals (FMG AU) just got stronger for longer with the fundamental data that is coming out from China. In our previous insight, Fortescue: Time to Book Some Profit on the Name? We thought that the iron ore prices would fall based on increasing supply from Brazil and China commencing its tightening by controlling the property sector (see Li Tang‘s insight China Tightens Domestic Bond Issuance Threshold for Property Developers). China’s imports of 112.3 million tons for July, up 23.8% YoY (on the back of strong steel production growth), imply that China could import 140 million tons incrementally, thus absorbing the HoH increase in the supply of iron ore major Vale. 

China imported 1.07 billion tons in 2019 (the seaborne market was 1.6 bn tons).  YTD July 2020 imports are 659 million tons, up 11.8% YoY. We believe that if China imports 105-110 million tons a month, imports from China could be 1.184-1.210 bn tons for CY20, or 114-140 million tons incrementally. In a year that has seen steel production of the rest of the world decline (hence iron ore consumption), we might see the overall iron ore market grow solely due to China. 

Source: China Customs Data

We think the surge in Chinese demand will be very constructive for the iron ore price, which could remain north of 120$/ton for the rest of the year. Fortescue Metals (FMG AU) is the most direct play on iron ore prices. We forecast a robust free cash flow yield of 13% based on a 120$/ton average iron ore price. We also think that the company will pay out its entire free cash flow as dividends. 

Mkt Cap

(mn USD) 

Iron Ore Px per ton
FY21 OCF
OCF Yield (%)
Debt

EBITDA

(mn USD)

EV-EBITDA
Capex
FCF
FCF Yield (%) 
40,029
130
9,406
23%
739
13,039
3.1
(3,200)
6,206
16%
40,029
120
8,508
21%
739
11,763
3.5
(3,200)
5,308
13%
40,029
110
7,611
19%
739
10,487
3.9
(3,200)
4,411
11%
40,029
100
6,714
17%
739
9,214
4.4
(3,200)
3,514
9%
40,029
95
6,266
16%
739
8,572
5
(3,200)
3,066
8%
40,029
90
5,817
15%
739
7,934
5.1
(3,200)
2,617
7%
40,029
80
4,919
12%
739
6,658
6.1
(3,200)
1,719
4%
40,029
70
4,018
10%
739
5,318
7.7
(3,200)
818
2%
40,029
60
3,118
8%
739
4,108
9.9
(3,200)
(82)
0%
40,029
50
2,217
6%
739
2,829
14.4
(3,200)
(983)
-2%
40,029
40
1,317
3%
739
1,553
26.3
(3,200)
(1,883)
-5%

Source: Internal Estimates, Company Filings


Dada-Nexus: More — And Less — Than Meets the Eye

By Daniel Hellberg

Dada Nexus Ltd (DADA US) recently reported Q2 results that showed strong YoY revenue growth at its two main business units and solid progress on raising margins. Still, Dada posted a net loss of 457 mn RMB on revenue of 1.32 bn RMB, and its shares in the US have fallen since it reported. 

An examination of average revenue per order in its Dada Now business line suggests the company actually handles little ‘real’ on-demand traffic. Instead, by volume it appears Dada Now mostly handles last-mile delivery duties for JD Logistics and traditional (2-4 day) express delivery firms. 

In this note we remind readers there is more to Dada than its hyped on-demand retail and on-demand delivery — and less, too. We say this because Dada still appears to have substantial exposure to traditional eCommerce fulfillment, which features slower growth, entrenched rivals, and thin margins. 


PT Nippon Indosari Corpindo (ROTI IJ) – ROTI’s Exit from Philippines a Positive

By Angus Mackintosh

In a surprise move, leading Indonesian mass-market breadmaker, PT Nippon Indosari Corpindo Tbk (ROTI IJ), has decided to exit the Philippines, selling its 55% stake to its local partner Monde Nissin Corporation. 

PT Nippon Indosari Corpindo Tbk (ROTI IJ)  had only been operating in the Philippines for around four years but had yet to make a profit, given it has been ramping up operations and distribution. 

The onset of COVID-19 struck a blow to growth and added significant uncertainty to the outlook for the business, with a loss of IDR 38bn in 1H2020, representing only 3.1% of sales but -41% of net profit, representing a major drag to the bottom line. 

ROTI will divest this business for IDR76.8bn, which will result in a one-off loss of IDR26bn in 2020 but its disposal will have a significant positive impact on the company’s financials going forward, given it will no longer be a drag to consolidated margins and earnings. 

PT Nippon Indosari Corpindo Tbk. (ROTI) (ROTI IJ) will now solely focus on its Indonesian home market, where it sees significant upside from both further expansion into general trade but also geographically. It is in the process of expanding into Sumatra and Kalimantan with the completion of two new factories by year-end, opening up new markets for its products. 

PT Nippon Indosari Corpindo Tbk. (ROTI) (ROTI IJ)‘s exit from its loss-making Philippines operations should be a positive catalyst, given it will allow investors to focus on its core Indonesian operations, which are performing well. The company looks attractive from a valuation perspective trading on 18.4x FY21E PER versus its 3-year average of 29x forward PER. 


China Yongda Automobile Services – Accelerating into 2H20

By Michael Ting

We met with the management of China Yongda Automobile Services Hldg (3669 HK) and came away with a bullish view. Luxury auto strength from 1H20 is carrying over into 2H20 driven by favorable government policy for auto consumption, ASP growth leading to potential gross margin expansion along with a solid model pipeline for the company’s key brands.


Small Cap Growth: RPA (6572) – The Digital Workforce

By Mark Chadwick

  • RPA Holdings Inc (6572 JP) is the Japanese leader in the hottest area of enterprise tech, Robotic Process Automation. 
  • Adoption of RPA in Japan is still low and there is a huge potential addressable market.
  • RPA’s BizRobo platform has hit a growth wobble, but the larger, higher margin Robot Transformation segment is on fire. 
  • The stock trades at an 80% discount to global peers.

Bluebird (BIRD): Correlated with PSBB, Beneficiary of WFH to WFO Switch

By Henry Soediarko

With most of its revenues are generated from the greater Jakarta area, Blue Bird (BIRD IJ) is positively correlated to the COVID-19 spread and the regional government policies on PSBB (lockdown). 

In this insight, a discussion on empirical data that shows a correlation between traffic and share price and while the PSBB will hurt share price in the short run, it will not be for a long term and once it is reopened again, traffic will come back and workers back-to-office (WFH to WFO) have benefited Bluebird in the past few months. Bluebird is currently trading at 0.5x PBR (a 70% discount to the peers) and 5x EV/EBITDA (a 40% discount to the peers). Accumulate on weakness


Small Cap Growth: Chatwork (4448) – It’s Good to Chat.

By Mark Chadwick

  • Chatwork Co Ltd (4448 JP)  is Japan’s leading business chat app provider with a ¥50bn market capitalization.  

  • With 35% topline growth, the company’s future lies in conquering the SME market and then using that as a platform to launch additional value-added services.  

  • Chatwork dominates within the SME chat market and competes head to head with Slack Technologies Inc (WORK US)  in Japan.  


GLOBAL: Home-Improvement Player Eyes Opportunities in ASEAN

By Research Group at Country Group Securities

We initiate coverage of GLOBAL with a HOLD rating, based on a target price of Bt20.5, which is derived from 33xPE’21E, close to the average of the Thailand home-improvement subsector.

The story:

  • Capture potential growth of the ASEAN market.
  • Renovation of stores suggests positive SSSG outlook.
  • Store expansion will continue to drive long-term growth.

Risks:

  • Economic slowdown
  • Exchange-rate fluctuation
  • Highly competitive industry

Before it’s here, it’s on Smartkarma