Bottom-Up EquitiesDaily Briefs

Equity Bottom-Up: Oriental Watch, PC Partner, Meituan Dianping, Snowflake Inc, Amazon.com Inc, Sjm Holdings, China Southern Airlines and more

By September 15, 2020 No Comments

In today’s briefing:

  • Oriental Watch: Forget the Tender, Management Is Bullish and Dividends to Accelerate
  • PC Partner: Poor-Man’s Play on Nvidia  (Part 2); Trades at 2x FY20 P/E and 14% Dividend Yield
  • China Internet Weekly (14Sep2020): Meituan & Ele.me Criticized as Sweatshop
  • Snowflake: Making It Rain
  • India Internet & Consumer Weekly | Amazon, Xiaomi, Zomato, PUBG, India’s Dual Listing Norms
  • Macau Gaming Stocks: How to Position Over the Next 6-12 Months
  • China Southern Airlines (1055 HK): Mixed Reform at Airfreight Logistics Is A Value Added Move

Oriental Watch: Forget the Tender, Management Is Bullish and Dividends to Accelerate

By Nicolas Van Broekhoven

Oriental Watch (398 HK)announced it is proposing to buy back a maximum of 83 million shares at 3 HKD (249M HKD). This represents a premium over 57% vs the average 30-day closing price on HKex. Once the shares are bought back they will be canceled which will reduce total shares outstanding from 570 million to 478 million. A Special General Meeting (SGM) will be needed to approve the transaction, details of which are pending an official Offer Document. The full transaction has been covered by David Blennerhassett Oriental Watch (398 HK): Conditional Partial Offer 

As long-time Oriental Watch followers let’s step back and assess what this means:

  • The controlling family’s stake will rise over 30% (depending on uptake 30.85-36.10%) but they won’t have to make a mandatory general offer as they have requested an exemption from HKex. Minority investors need to approve the transaction: we would advise minorities to vote IN FAVOR.
  • The founding family upping its stake at a significant premium to the latest stock price is bullish. 
  • Even at 3 HKD, the shares trade far below their latest book value of 4.04 HKD.
  • With increased ownership management is now more incentivized to keep on paying large dividends going forward. 
  • Mr. Market has been perenially mispricing Oriental Watch at negative enterprise value or barely above net cash over the last 5 years. As discussed at length in various previous insights we think this is wrong and the latest transaction again highlights the underlying value.
  • The company has returned 0.885 HKD/share in dividends over the past four years. When judging Oriental Watch’s share price performance please make sure you look up the total return on your Bloomberg.
  • Mainland China Rolex sales have been seeing YoY SSS increases of 40-80% since April (depending month to month). Once HK opens up SSS comps become very easy after 2019 (riots) and 2020 (Covid-19). Please re-read our insight on Oriental Watch being a way to play Rolex in China Oriental Watch: Bet on Rolex Demand in China/HK and Collect 12% Dividends While Waiting 

PC Partner: Poor-Man’s Play on Nvidia  (Part 2); Trades at 2x FY20 P/E and 14% Dividend Yield

By Nicolas Van Broekhoven

Several years ago we wrote about PC Partners (1263 HK): A Poor Man’s Way into Nvidia New GPU Cycle; Trades at 3x PE and 11% Div Yield.

We see a similar trade coming up in 4Q20 and into 1Q21.

As demonstrated over the years covering PC Partners the stock is rarely a buy & hold. With Nvidia’s new RTX30 GPU launch (GTX3060/GTX3070/GTX3080 and GTX 3090) being spread out from October to December there is likely to be excitement around its performance and uptake.

Much different than in FY18 there is no large oversupply from a deflating crypto bubble. This means there is no old inventory to clear which should result in much better GPM and NPM for Pc Partners. Please also note that gearing for Pc Partner in 2018 was over 100% while the company will have a net cash position by the end of FY20.

Pc Partner remains a poor man’s way to play Nvidia and key themes such as e-sports, AI, data centers, and overall gaming. We expect dividends to be reinstated for FY20. On our estimates, the company will achieve 8 billion HKD in FY20 sales and generate 272 million HKD in net profit (3.4% NPM). If we assume a 30% payout on that we get a 0.22 HKD/share full-year dividend or a 14% dividend yield. We expect the stock to reach 3 HKD in the coming 6 months. Upside could come from a bullish breakout in cryptocurrencies as crypto mining (which consumes massive GPU) comes back in vogue. The downside is capped by a very cheap valuation.


China Internet Weekly (14Sep2020): Meituan & Ele.me Criticized as Sweatshop

By Ming Lu

  • Meituan (3690 HK) and Alibaba (BABA)’s Ele.me were criticized for exploiting food delivery riders.
  • A Court determined that Ping An Healthcare (1833 HK)’s app, “Ping An Good Doctor”, infringed the trademark of Good Doctor Pharmaceutical Group.
  • Tencent (700 HK) decided to close down its micro-blog.
  • State Post expected that parcels will increase 37.4% YoY in China in August.

Snowflake: Making It Rain

By Aaron Gabin

We’ve looked into many IPOs over the last 20 years, and think Snowflake is one of the better ones we’ve come across. Its architectural competitive advantages vs. legacy data warehouse providers are simply insurmountable, and while the cloud platforms loom as eventual rivals, we think this management team knows how to carve out a defensible place amongst the cloud titans.

Obex’s fundamental research process is focused on secular change in the TMT and Consumer sectors. We seek to differentiate between fundamental business analysis and security analysis. Before deciding if a security’s pricing and positioning merit a long or short position, we analyze the four pillars of business fundamentals (Secular Factors, TAM, Competitive Advantage, Business Model) in order to determine if this is a “good” or “not so good” opportunity.


India Internet & Consumer Weekly | Amazon, Xiaomi, Zomato, PUBG, India’s Dual Listing Norms

By Pranav Bhavsar

Our objective with this weekly is to highlight notable developments in the India internet and consumer sector focusing on public and private companies. The sub-sectors covered include payment providers, e-commerce retailers,  social media platforms and consumer companies.


Macau Gaming Stocks: How to Position Over the Next 6-12 Months

By Michael Ting

Our top pick within the Macau gaming space remains Sjm Holdings (880 HK) due to the expected opening of Grand Lisboa Palace in either late FY20 or early FY21. Using Melco Resorts & Entertainment (MLCO US) as an example whose share price outperformed the sector in FY19 by 19% due to GGR (gross gaming revenue) market share gains from the new Morpheus hotel, we believe SJM’s share price in FY21 may also see sector outperformance due to the earnings benefits of new capacity.


China Southern Airlines (1055 HK): Mixed Reform at Airfreight Logistics Is A Value Added Move

By Osbert Tang, CFA

In our view, China Southern Airlines (1055 HK) will benefit from the mixed reform that it initiated on its logistics arm SA Logistics. SA Logistics will introduce 1-15 strategic shareholders to hold 49.5% stake and this should potentially improve its operating efficiency, provide financial resources for future expansion and generate cross-selling opportunities and synergy.

In 1H20, SA Logistics generated a profit of Rmb2.2bn, making it a key contributor to CSA (which recorded an Rmb8.2bn loss). Its 58% share of the total airfreight traffic in the Big Three Airlines is also an added strength. With the much smaller EA Logistics, the 45%-owned logistics arm of China Eastern Airlines Co (H) (670 HK), currently seeking an IPO on the Shanghai Stock Exchange, we believe an IPO of SA Logistics is likely an ultimate aim and this should be positive to the H-share holders in particular. 


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