Bottom-Up EquitiesDaily Briefs

Equity Bottom-Up: Nikola Corp, Great Wall Motor, ZTO Express, Recruit Holdings and more

In today’s briefing:

  • Nikola’s Founder Resigns – The Next Enron?
  • Great Wall Motor: Multiple Share Price Catalysts
  • TRACKING TRAFFIC/Chinese Express: ZTO HK Listing | August Pricing Still Weak | KEX IPO in Bangkok
  • 🇯🇵 JAPAN • Recruit (6098 JP) & The ‘New Workforce Paradigm’

Nikola’s Founder Resigns – The Next Enron?

By Douglas Kim

In this insight, we provide our thoughts on the resignation of Nikola Corp (NKLA US) founder Trevor Milton, who will be replaced by Stephen Girsky, a former GM executive who already sits on Nikola Corp’s board. On 10 September, a firm called  Hindenburg Research published a report that harshly criticized the company. We are interested in Nikola mainly because a Korean company called Hanwha Solutions (009830 KS)’s stock price has been highly impacted by Nikola’s share price recently.

In our view, Hindenburg Research makes legitimate criticism of Nikola Corp and its founder Trevor Milton. Nikola Corp has come out with a rebuttal but we do not believe this is enough to calm investors and customers. Regarding Nikola Corp, it all comes down to whether or not the company has its own unique hydrogen-based technology which it claims it does. Nikola Corp needs to hire a well-respected third party agent and give sufficient proof that its technology really works. 

Investors are waiting for the confirmation of an independent third party test of its technology. If the company is unwilling to provide such tests and continues to delay such tests, we believe this could have a further negative impact on Nikola Corp and its major investors including Hanwha Solutions. 


Great Wall Motor: Multiple Share Price Catalysts

By Michael Ting

Despite a 77% surge in share price YTD as at 18 Sept, we believe further share price upside is likely for Great Wall Motor (2333 HK) (GWM) due to a recovery within its SUV segment in addition to the secular growth in pickup trucks.  This current diversified offering coupled with GWM’s future JV with BMW AG to build electric vehicles in China result in both short and long term share price drivers.


TRACKING TRAFFIC/Chinese Express: ZTO HK Listing | August Pricing Still Weak | KEX IPO in Bangkok

By Daniel Hellberg

The express sector’s big news is that ZTO Express (ZTO US) is seeking an IPO in Hong Kong, as many large Chinese tech companies have done in recent months. We understand the rationale for this move, but still dislike the company’s deteriorating fundamentals and rich valuation. 

In August, express sector volume growth remained firm (+36.5% YoY), but revenue growth slowed (+17.9%, slowest since March) as average unit pricing tumbled. We believe the current price war will continue in the medium-term, eating into express companies’ margins and cash flow.

Outside of China, Kerry Express Thailand (KEX TB) has filed IPO documents. We believe this offering is worth watching, as KEX may be the only public ‘pure play’ on eCommerce logistics in SE Asia. A successful IPO should also boost sentiment toward Kerry Logistics Network (636 HK).

Conclusion: Owning independent market leader S.F. Holding (002352 CH) against short positions in any of the listed express companies aligned with Alibaba Group (BABA US) has been a winning strategy in 2020, and we see no reason to change course in the near-term. 


🇯🇵 JAPAN • Recruit (6098 JP) & The ‘New Workforce Paradigm’

By Campbell Gunn

“I don’t believe BlackRock will be ever 100% back in [the] office – maybe 60% or 70%, and maybe that’s a rotation of people. I don’t believe we’ll ever have a full cadre of people in [the] office [again]. It’s going to be a new workforce. It’s going to be a new paradigm, but I do believe it will be a better paradigm for the firm.”

Larry Fink, CEO, Blackrock Inc.

Thursday 17rh September 2020

Source for all charts: Japan Analytics

Recruit (6098 JP)– Since listing in October 2014 has been a key ‘Abe-era stock’ – rising by 284% from its February 2016 low. As a prime beneficiary of more flexible working practices and the rise of the temporary workforce in Japan.

PEAK TEMP – Using a sample of all currently-listed companies, the number of temporary workers has increased tenfold to 4.7 million since 2000 and ratio of ‘temps’ to full-time employees has more than quadrupled, reaching a peak of 23.2% in 2018. Much of the rise has come at consolidated subsidiaries – the number of temps at head offices has not changed materially since reaching one million in 2006. As in other countries, many Japanese manufacturing companies face a material reduction in demand which will eventually result in ‘reductions-in-force’  with temps bearing the initial brunt.  Also, tighter regulation on abuse of the working terms conditions offered to temporary workers has forced many companies to offer full-time employment to temp staff.

THE REVELATION OF WFH – The COVID-induced experience of working-from-home (WFH) has been a revelation for many office staff in central Tokyo who had previously endured tortuous two-hour-long-daily commutes on crowded trains. Many do not wish to return to the past ways of working and commuting, echoing Larry Fink thoughts above. For Japanese HR departments, WFH will require a substantial commitment in terms of IT infrastructure. In many companies, employees have to log out while in the office every time they leave their desk. It is unlikely that companies will make such an investment and extend such trust to temporary workers. With 20% of revenues generated in the US and a further 25% from ‘Other Regions’, Recruit is heavily exposed to global COVID and WFH trends. 

LESS OFFICE SPACE, LESS PAPERWORK, FEWER TEMPS – Overall, WFH will result in a decline in demand for CBD office space, but also will lead to less paperwork, more efficient working methods, and a reduction in the requirement for ‘temps’. This trend has now been given government-backing with the creation of a new Digital Agency by 2021.   

REVENUES ▲ – Recruit has grown revenues faster than any other larger Commercial Services company in Japan since 2013, outshining peers Persol (2181 JP) and Outsourcing (2427 JP).  

PROFITS ► – Recruit’s ‘bottom-lin’  has been much less impressive and since recovering from a period of losses in FY17, Comprehensive Income to Common (CITC) has failed to grow over the last three years.

MIDDLING MARGINS – Indeed, within the Employment and Staffing Services Peer Group, Recruit ranks eighteenth out sixty in terms of trailing CITC margin at 6.3%.

RELATIVE PRICE SCORE ▲ -Recruit accounts for 75% of its Peer Group’s market capitalisation and has been the prime driver taking both to new Relative Price Score highs in recent weeks.

RESULTS & REVISION SCORE ▼ – The trend in Rescuit and the Peer Group’s earning momentum since 2018 has been down, which COVID-19 has accelerated. 

In the DETAIL below,  we shall review Recruit’s financial performance and valuation and assess if Recruit is a ‘structural short’.


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