Bottom-Up EquitiesDaily Briefs

Equity Bottom-Up: Nexteer Automotive, China Communications Construction, Beyond Meat, BeiGene Ltd, Lasertec Corp, TeamSpirit Inc, Wuxi Rural Commercial Bank Co and more

In today’s briefing:

  • Nexteer (1316): Time to Book Some Profit
  • China Comm Const (1800 HK): Positive Takeaways from Call with Company
  • Beyond Meat (BYND US): Beaten Down Stock in an Upbeat Segment. What, Now?
  • BeiGene: Novartis Grabs Tislelizumab Rights
  • Lasertec (6920 JP): Overbought, Take Profits
  • Japan Small Cap Growth: TeamSpirit (4397) – Expect Brighter Second Half
  • Wuxi Rural Commercial Bank: In a Consolidating Space, Wuxi Rural Can Be a Winner

Nexteer (1316): Time to Book Some Profit

By Henry Soediarko

Nexter’s share price has moved in tandem with Geely Auto (175 HK) in the past half a year, which particularly have benefited from the rumor that they entered into a partnership with Baidu (BIDU US) to develop autonomous vehicles although it was denied by the companies yesterday. 

The management has repeatedly stated last year that they will make an effort to further grow the business in China but it will take some time and as per the latest interim report in 2020, the revenue from China still has not surpassed the US. Nexter bought a stake in Tactile Mobility, the leading tactile virtual sensing, and data company based in Israel, which will be a key element to win a mandate in autonomous vehicle projects. The stock may see another leg up tomorrow but after a 71% return (prior to today’s) in 6 months, it is time to sell to lock in some profit


China Comm Const (1800 HK): Positive Takeaways from Call with Company

By Osbert Tang, CFA

We had a call with China Communications Construction (1800 HK) with positive takeaways. We see management taking action to address the issues of high gearing and slow cash payback, good progress in infrastructure REIT issuance, potential improvement in profitability and limited impact of the Sino-US tension. The company is also exploring various options to support its share prices.

After a 13% rebound since the exclusion from MSCI global indexes, there still exists significant upside potential for CCCC, in our view. Its 12-month forward P/B multiple of 0.21x remains cheap. With improvement in profitability and a narrowing in the H-A discount, we expect re-rating to continue – a return to 1SD below historical average P/B will imply 66% upside.  


Beyond Meat (BYND US): Beaten Down Stock in an Upbeat Segment. What, Now?

By Devi Subhakesan

In this note, we discuss the operational and investment outlook going forward as the stock hits the lower end of historical trading range. Beyond Meat (BYND US)‘s share price has been sliding since its weak 3QFY20 results and is nearly 60% below its highs of October 2020; YoY, the stock is up 6%. We also look into its upcoming quarterly results and why the share price of the leading player in Plant-based protein has slipped even as customer interest and demand for alternative protein has been higher than ever. 

Alternative Protein segment has gained significant traction over the last year as consumers increasingly sought out healthier eating options, including reducing consumption of animal products. However, established players like Beyond Meat (BYND US) and Impossible Foods Inc (1249597D US), that have meaningful exposure to Institutional sales were caught in a bind as pandemic-led restrictions hit regular operations of F&B retail players. Efforts to pivot by repackaging and redirecting the products to retail at discounted prices wasn’t good enough to make up for the shortfall leading to a weak third quarter. Going forward, expect sales growth to stabilise and normalise across segments.


BeiGene: Novartis Grabs Tislelizumab Rights

By Kemp Dolliver, CFA

BeiGene has outlicensed ex-China rights to its PD-1 tislelizumab to Novartis on favorable terms, validating the competitive position of this compound in a crowded market. Further, the agreement marks a growing trend of Chinese companies outlicensing products to multinationals, which can have a leveraged benefit on their P&Ls and valuations.


Lasertec (6920 JP): Overbought, Take Profits

By Scott Foster

Lasertec has produced stupendous results, but is it worth 104x management’s EPS guidance for FY Jun-21 and 96x cash flow per share? As the company aims to more than double R&D spending to 12% of sales, we think a substantial amount of short-term profit is likely to be traded for long-term sales growth, and that the shares are due for some profit taking.

In 🇯🇵 JAPAN • New Post Bubble $ High + Results & Revisions ​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​01/​​​08 , Campbell Gunn writes that: As the market factors in the possibility of a return to commodity inflation and digests another State of Emergency, the Technology Hardware Sector joins Electrical Equipment and Machinery in Overbought territory. 

Management is guiding for flat orders this fiscal year and while this is probably conservative, it would be not be inconsistent with the orders trend in recent years. New orders jumped 80% in FY Jun-20, but were up only 4% the year before.

Lasertec’s fundamentals are sound. This is a trading idea.


Japan Small Cap Growth: TeamSpirit (4397) – Expect Brighter Second Half

By Mark Chadwick

Q1 trading update 

TeamSpirit Inc (4397 JP)  released Q1 results on 12 Jan, which were generally in line with previously released guidance for the full year. Covid restrictions continue to be a negative headwind on contracting new clients, which is impacting top line growth rates.  This seems especially true of small and mid-sized companies, where growth has stalled badly, and we believe competition may be heating up in that segment. In response, Team Spirit is shifting its sales focus towards larger enterprises and this mix improvement is a bright spot in the Q1 report, with the number of enterprise licences jumping 44% YoY. The share price remains around 30% below its 52-week high.  

Million Yen
1Q20
2Q20
3Q20
4Q20
1Q21
Sales
552
606
631
654
671
Sales growth 
40%
35%
39%
26%
22%
Operating Profit
44
84
106
50
71
Operating margin
8%
14%
17%
8%
11%
Net Income
14
42
55
142
36

 


Wuxi Rural Commercial Bank: In a Consolidating Space, Wuxi Rural Can Be a Winner

By Paul Hollingworth

As is often cited, China maintains certain advantages over other parts of the world regarding the terrible weight of C19 that is so devastating other parts of the globe and in relation to the interrelated current macro picture.

Jiangsu-based Wuxi Rural Commercial Bank Co (600908 CH) is specialized in SMEs, Corporate and Retail lending, e-banking, Trade Finance, Credit Cards, and FX services. The bank last year took a stake in another rural lender. China has a total of 1,641 rural banks in 31 provinces. Rural commercial banks were originally rural credit cooperatives. 

Given greater capital constraints and asset quality concerns surrounding the specific space, shares carry a higher risk/reward profile. (Anhui rural banks, Jiangxi Ganzhou Commercial Bank, Jilin Tonghua Rural Commercial Bank, and a rural credit union in Heilongjiang province are examples of how not to function). The brunt of the asset quality pressures in China might not have come through yet because of the still existing moratorium on the repayment of loans as well as its interest payments- but this applies to most jurisdictions with arguably greater pain.

The CBIRC has ordered rural banks to boost capital, merge with other institutions (something Wuxi Rural has already instigated), or introduce strategic investors to mitigate financial risks. Regulators are also looking into converting certain high-risk rural banks into branches for larger state-owned or joint-stock banks. If a bank is deemed severely distressed, local regulators will be able to push for a restructuring, assist in a takeover or shut down the bank entirely. The sector is thus ripe with opportunity as well as risk.

2020 was indeed a year of deeper “National Service” but countering a growing coterie of high-profile detractors, the System may be one of the world’s more resilient ecosystems.

Recent results show positive fundamental momentum and trends with improvement in Profitability, in Efficiency, and in NIM and Spread, while Capital Adequacy, and Liquidity (though LDR is low) showed some erosion though headline Asset Quality (excluding the “substandard” bucket) and Provisioning were pretty stable. Growth in “Core Income” was solid, especially in underpenetrated Fee Income while Net Interest Income expansion was underpinned by forceful credit expansion.

A FV of 8%, a PBV of 0.95x, an Earnings Yield of 11.4%, and a Dividend Yield of 3.1% are not unappealing. The bank commands both an above-average PH Score™ and VFM ranking. Wuxi Rural Commercial also has a “3 year off, 1 year on” profile, positioned in the global top decile:  shares have performed relatively well over the last 12 months after a long period of poor performance which can be a benign combination for investors.


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