Bottom-Up EquitiesDaily Briefs

Equity Bottom-Up: Kunlun Energy, Ping An Insurance (H), DBS, Advantest Corp, People’s Insurance Co. (PICC), Hoya Corp, Autobio Diagnostics Co Ltd and more

In today’s briefing:

  • Kunlun Energy (135 HK): A Fantastic 1Q21 at Kunlun Gas
  • Ping An Insurance – Totally Unnecessary
  • DBS – Archetypal Cost Management
  • DBS Group Holdings – Not Sure Whether To Laugh Or Cry
  • Advantest (6857 JP): Further Growth Ahead
  • PICC Group – Big Print
  • Hoya: Strong Demand for EUV Blanks/HDD Drives Better Than Expected 4QFY21 Results
  • Autobio Diagnostics (603658.CH) – The Turning Point Is Quietly Approaching

Kunlun Energy (135 HK): A Fantastic 1Q21 at Kunlun Gas

By Osbert Tang, CFA

The most important subsidiary and key source of earnings of Kunlun Energy (135 HK) – unlisted Kunlun Gas – reported a fantastic 42.9% YoY growth in earnings for 1Q21. Even relative to 1Q19, the net profit figure is still 30.8% higher. While gross margin contracted YoY, likely due to higher procurement costs, the exciting volume growth has offset the impact of cost inflation, in our view.

Kunlun Gas’ 1Q21 net profit already equals to 37.5% of its total in last year, indicating a very positive start for FY21. Moreover, it has a very comfortable gearing of 19.5% and good operating cash flow, meaning that there is no need for it to seek funding from parent Kunlun Energy. Hence, Kunlun Energy can pursue more value-enhancing acquisitions through its cash on hand. All in all, the result implies great start for Kunlun Energy in 1Q21 – Kunlun Gas accounted for 72% of Kunlun Energy’s net profit from continuing operations in last year. 

Ping An Insurance – Totally Unnecessary

By Thomas J. Monaco

*Pointless Shenzhen Deal: Ping An Insurance (2318.HK) [Ping An] has announced that it has agreed to invest CNY 37-51 bn in a restructured Founder Group, an unlisted mainland Chinese-controlled conglomerate. Under the proposal, Ping An will have own between 51.1%-70% of a newly formed entity called New Founder Group; and

*Enough On Its Plate: In our view, Ping An has far too much on its plate to worry about than purchasing another company’s mess. There are weak fundamentals at Ping An Life, poor profit metrics at Ping An Property & Casualty; and weak fundamentals at Ping An Bank. There are just so many IPOs and secondaries that Ping An can do with its FinTech investments to offset the insurer’s poor performance.

DBS – Archetypal Cost Management

By Daniel Tabbush

There is little that banks can do with very low rates to protect net profit. Banks have the most control over their costs, and DBS is managing these exceptionally well. Where net interest income pressure abates, but where fees, costs, provisions are doing well, profit can surge. 

DBS Group Holdings – Not Sure Whether To Laugh Or Cry

By Thomas J. Monaco

*Unbelievable: DBS Group Holdings (DBS.SP) [DBS] reported 1Q21 results of SGD 2.0 bn, increasing SGD 997 mn (98.5%) on a linked quarter basis. Results were driven primarily by two factors: a) loss provisions declined SGD 567 mn (98.3%) which is bizarre in light of its troubled Indian acquisition, Lakshmi Vilas Bank (LVB), risk is not controlled; and b) fee revenue growth of SGD 604 mn (52.8%) which includes an undisclosed level of non-operating gains;

*Watch Your Credit: We struggle continue to believe that DBS’ due diligence had actually caught all of LVB’s risk (see discussion below), and remain unconvinced that the moratorium exits are anything more than additional reliance on government schemes and relief programs. DBS has disclosed absolutely nothing about Shenzhen Rural Commercial Bank’s (SRCB) fundamentals. Net new NPLs continue to increase – up SGD 85 mn or increasing 5.6% on an annualized basis. Reserves should be shored up in the neighborhood of SGD 2.5bn to reflect this risk; and

**Deal Distractions Mount:  While SRCB dos not appear to be riddled with problems the way LVB is, no doubt there will be issues to contend with.  DBS apparently isn’t done with its shopping spree, being in the running for parts of Citigroup’s (C.US) consumer business in Asia. Frankly, DBS needs to focus on improving its own legacy issues before it starts both taking on those of other financial institutions.

Advantest (6857 JP): Further Growth Ahead

By Scott Foster

Advantest achieved record orders and sales in FY Mar-21 and operating profit rose 20.5% to the highest level in 15 years. On top of that management is guiding for another 20% increase in operating profit in FY Mar-22. Are we looking at the peak?

That will not be clear for another two quarters at least. In the meantime, the 1.2 Book-to-Bill ratio recorded in 2H of FY Mar-21, strong demand for both SoC and memory test systems, and much improved mechatronics and service margins suggest that FY Mar-22 guidance may be conservative.

That would be consistent with last fiscal year, when guidance was raised twice but still fell short of the company’s actual performance. We expect demand for test equipment to continue to rise as IC shortages are overcome.

We maintain our ¥12,000 share price target, which indicates upside potential of 16%.

PICC Group – Big Print

By Thomas J. Monaco

*Improving Profitability: PICC Group (1339.HK) [People’s] reported 1Q21 net profit after tax of CNY 10.0 bn, increasing by a whopping CNY 8.7 bn mn (6.7x) on a linked quarter basis. The linked quarter improvement can be attributed both to the PICC Life and PICC P&C (2328.HK) whose bottom-line’s improved CNY 4.4 bn (vs a loss of CNY 1.8 bn in 4Q20) and CNY 3.8 bn (156.3%) – accounting for 61% and 27% of the group’s earnings;  and 

*PICC P&C Posts Big Expense Improvement: PICC P&C (2328.HK) reported a 1Q21 net profit of CNY 8.9 bn, increasing 156.3% linked quarter. The overall combined ratio declined from 101.3% in 4Q20 to 95.7%. Compositionally, the overall expense ratio decreased 650 bp linked quarter to 25.4%, while the loss ratio increased 90 bp to 70.3%, reflecting a change in auto insurer’s cost structure after implementing pricing reforms. 

Hoya: Strong Demand for EUV Blanks/HDD Drives Better Than Expected 4QFY21 Results

By Shifara Samsudeen, ACMA, CGMA

Hoya Corp (7741 JP)  reported its 4QFY03/21 and full-year FY03/2021 results on Friday. The company’s revenue for the fourth quarter grew 12% YoY while operating profit grew 33% YoY during the period. The growth in revenue and OP was driven by strong demand for EUV blanks and 3.5-inch HDD substrates for data centers.

Hoya’s revenues for FY03/2021 declined 5% YoY due to the adverse impact from Covid-19, however, operating profit for the year grew 13.2% YoY compared to FY03/2020. Both revenue and OP for FY03/2021 beat consensus estimates as well as the company’s own guidance.

Hoya’s 4QFY03/2020 earnings were affected by the Covid-19 outbreak and a fine related to a settlement with the US Department of Justice. Following the Covid-19 outbreak, Hoya’s earnings declined YoY during the first two quarters of FY03/2021 and earnings started recovering since the December quarter.

Autobio Diagnostics (603658.CH) – The Turning Point Is Quietly Approaching

By Xinyao (Criss) Wang

Recently, Autobio Diagnostics Co Ltd (603658 CH) released the 2020 and 2021Q1 financial results. In 2020, the revenue was RMB2.98 billion, up 11.15% YoY. Net income was RMB757 million, down 3.79% YoY. In 2021Q1, Autobio achieved revenue of RMB817 million, up 48.44% YoY, and net income was RMB175 million, up 91.23% YoY. Due to the COVID-19, the performance of Autobio was affected in 2020, but the sales recovered gradually quarter by quarter. In 2021Q1, the domestic pandemic was basically stable with occasional regional recurrence, and the frequency of routine diagnosis and treatment in medical institutions recovered to about 80%-90% of the normal situation, so Autobio also achieved a rapid growth. Obviously, the Company is gradually getting rid of the adverse impact brought by COVID-19, and its leading position in IVD (chemiluminescence) has not changed. With the recovery of routine diagnosis and treatment in medical institutions, Autobio’s performance is expected to get back on track.

Related tickers: Kunlun Energy (0135.HK), Ping An Insurance (H) (2318.HK), DBS (DBSM.SI), DBS (DBSM.SI), Advantest Corp (6857.T), People’s Insurance Co. (PICC) (1339.HK), Hoya Corp (7741.T)

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