Bottom-Up EquitiesDaily Briefs

Equity Bottom-Up: Modern Dental Group, Chindata Group, Yum China Holdings, Inc, Perennial Energy Holdings Ltd, Kose Corp, Kotak Mahindra Bank and more

In today’s briefing:

  • Modern Dental: A Turnaround Story with Tremendous Upside
  • Modern Dental Group (3600.HK) – Insights on Recent Rally of Stock Price and Future Outlook
  • Chindata Group: Data Centre Value
  • Yum China (YUMC and 9987.HK): Pizza Hut Recovered Faster than Market Expectation
  • Perennial Energy (2798 HK): Take Money Off The Table Into Potential MSCI Up Weight
  • KOSE: Losing Ground In Japan
  • Kotak Mahindra Bank Q4FY21 Results – Covid 2.0 Not Denting Its Asset Growth Strategy for Now

Modern Dental: A Turnaround Story with Tremendous Upside

By Sameer Taneja

Investment Thesis in Modern Dental

  1. We believe that Modern Dental Group (3600 HK)  has been a beneficiary of Covid as it has gained market share in the last 3 quarters globally in the dental prosthetics market. Q1 2021 showed 15-20% YoY revenue growth. Management guides revenue growth of not less than 10% for FY21 (vs. normalized high single-digit revenue growth from FY17-19) which we believe is conservative.
  2. The company has emerged leaner from Covid 19 as they completed a massive restructuring in 2020, resulting in EBITDA margin expansion to 25%  (from the 15-16% levels historically) in Q4 2020. We believe the company will maintain a 53%  gross profit margin and 25% EBITDA margin, and 16.5% Net profit margin through 2021, resulting in 410 mn HKD net profit for FY21. Based on this estimate, the stock trades on 9.2x PE FY21 despite the stellar run in share price in Q1 2021.
  3. With improving cash flows due to low Capex requirements (~90 mn HKD in FY21e and FY22e), we see Modern Dental Group (3600 HK) generate a free cash flow of 330 mn HKD in FY21e and 400+mn HKD in FY22e. At the very minimum, if the company adheres to its stated 30% dividend payout ratio, it will be net cash 52 mn HKD in FY21 and 338 mn HKD in FY22 ( almost 9% of the current market capitalization) from a net debt position of 158 mn HKD in FY20. 
  4. The company will use the excess cash on its balance sheet to raise the dividend payout ratio beyond 30%.  We also think management will continue to buy back stock subject to management stake not increasing by more than 5% every year.  The company has actively repurchased stock in 2020 and 2021. 

Trading at an undemanding valuation of 9.2x/8.7x PE FY21/22, we think there is an opportunity for at least 50% upside as peers in the similar industry of dental supply trade in the 20-25x range.  With a 30% payout ratio, there is also a decent dividend yield of 3.5% on the stock.

Modern Dental Group (3600.HK) – Insights on Recent Rally of Stock Price and Future Outlook

By Xinyao (Criss) Wang

Dentistry has always been one of the areas that investors are interested in. In the HKEX, there are also companies that focus on dental business such as Modern Dental Group (3600 HK), one of the world’s leading global dental prosthetic device providers. The Company’s share price rose from HK$1.44/share in the beginning of the year to HK$3.95/share on May 2, 2021, up 174%, and has been rising continuously in recent weeks, which was mainly driven by the positive financial results after the Company released its 2020 financial reports and previous relatively low valuation. This insight mainly analyzed the logic behind the rally of stock price, the future business prospects and investment suggestion of this Company.

Chindata Group: Data Centre Value

By Arun George

Chindata is a data centre operator. It is the largest carrier-neutral hyperscale data centre operator in Asia-Pacific emerging markets as measured by capacity in service, according to Frost & Sullivan. The MSCI May 2021 review period has just wrapped up, and Chindata is among the stocks with the highest probability of inclusion in the MSCI Standard index and the largest buying impact from passive funds – MSCI May 2021 Index Rebalance Preview: Let The Games Begin.  

After touching $23.65 per ADS on 26 Feb 2021, Chindata has derated and is down 45% YTD. The last close price of $13.19 per ADS is 2% below the IPO price of $13.50 per ADS. The Asia-Pacific hyperscale data centre market remains a structural growth market in part due to the increasing prevalence of outsourcing data centre services, rising client demand for higher power density, and increasing regulatory requirements on data security. Overall, we think that Chindata remains an attractive play on these favourable market dynamics and the shares are worth a closer look. 

Yum China (YUMC and 9987.HK): Pizza Hut Recovered Faster than Market Expectation

By Roger Xie

  • Yum China Holdings, Inc (YUMC US) delivered 21Q1 result better than market expectation. Helped by a low base for comparison (Pandemic peak in China in 20Q1), Yum China revenue is up 46% year-over-year or 11% vs 19Q1, operating profit is up 250% year-over-year or 13% vs 19Q1. The positive surprise is that Pizza Hut is starting to fully reap the benefits of multiple years of revitalization efforts. Pizza Hut’s restaurant delivered margin of 15.3% in 21Q1 (the highest level since 2017), which drives operating profit up 20% vs 19Q1. 
  • Yum China management expects non-linear recovery of SSS (Same Store Sale) as dine-in traffic still well below 2019 level. The resurgence of COVID-19 cases early this year has put Chinese restaurant sector under pressure. Several cities have returning to citywide quarantines, and travel volume during the early period of Chinese New Year is down 70%. Given Yum China’s resilience in its KFC brand and the faster recovery in Pizza Hut, we feel more confident that the company can sustain a midteens restaurant margin over the next few years and even achieve high teens over the longer period. 
  • Management’s guidance on growth strategy also shows Yum China’s agility to navigate through the uncertainty. 1) Yum China is dedicated to opening another 1,000 stores in 2021, and reach around more than 11,000 stores in China by year end; 2) Growing its portfolio to include diversified restaurant offerings; 3) Digital strategy: Delivery and takeaway now account for 55%/40% of KFC/PH revenue. We continue to believe Yum China Holdings, Inc (YUMC US) offers investors better reward/risk potential in China restaurant sector. Our raised TP for Yum Chin is US$72, which is based on 30x 2021e P/E. 

Perennial Energy (2798 HK): Take Money Off The Table Into Potential MSCI Up Weight

By Sameer Taneja

Perennial Energy Holdings Ltd (2798 HK) has had a stellar run over the last year, with the share price up over 680% since January 3rd, 2020.  We firmly believe that with forward earnings at around 30x PE FY21 and 19x PE FY22,  it’s time to take money off the table from this name. We do understand that there is some anticipation of the stocks inclusion in the MSCI, which has been written about by fellow insight provider Brian Freitas in his insight yesterday MSCI May 21 Index Rebalance Preview: Review Period Is a Wrap. We would take this opportunity to sell into strength.

There is better value for money in owning Shougang Fushan Resources (639 HK), which I have written about in my insight Shougang Fushan: Deep Value Play with Coking Coal Price Move Upside. Trading at 2.5x EV-EBITDA with a 10% dividend yield Shougang Fushan Resources (639 HK) offers way more stability and margin of safety to Perennial Energy Holdings Ltd (2798 HK).

KOSE: Losing Ground In Japan

By Oshadhi Kumarasiri

Kose Corp (4922 JP) delivered 4QFY21 results on 30th April 2021 with revenue and operating profit falling broadly in line with the revised company guidance and consensus estimates.

Kose’s revenue declined 4.3% YoY in 4QFY21, compared to 26.5%, 21.2% and 5.6% YoY in 1QFY21, 2QFY21 and 3QFY21 respectively.

The company’s 4QFY21 operating profit was ¥2.2bn, compared to ¥1.1bn in 1QFY21, ¥2.9bn in 2QFY21 and ¥7.1bn in 3QFY21.

The company is shifting to a December year-end from 2021. For the next calendar year (9 months period from April-December 2021) Kose guided for ¥230bn in revenue and ¥20bn in OP, compared to consensus estimates of ¥245bn and ¥26.8bn respectively.

Kotak Mahindra Bank Q4FY21 Results – Covid 2.0 Not Denting Its Asset Growth Strategy for Now

By Saumya Agarwal

Kotak Mahindra Bank closed the Financial year FY21 with robust profit numbers, a benign asset quality and ample provision cover. The Bank which had treaded cautiously amid the first wave of the pandemic, is now ready to step the pedal on asset growth, despite the current second wave, and is looking at driving growth in secured asset classes.

Related tickers: Modern Dental Group (3600.HK), Modern Dental Group (3600.HK), Yum China Holdings, Inc (YUMC.N), Kose Corp (4922.T), Kotak Mahindra Bank (KTKM.NS)

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