Bottom-Up EquitiesDaily Briefs

Equity Bottom-Up: oRo Co Ltd, Sony Corp, Workman Co Ltd, ITC Ltd, HSBC Holdings, China Feihe, Binjiang Service Group, Ultrajaya Milk Ind & Trading, Jubilant Foodworks, Slack Technologies Inc and more

By September 10, 2020 No Comments

In today’s briefing:

  • One “Better” Quality Pick to Consider to Participate in the Future of Japan
  • The Xbox Series S – Minimalism Done Wrong
  • Japan’s Retail Star: Workman Thrives in Crisis
  • AGM Diaries | ITC – Some Things Never Change
  • StubWorld: Walking The Fine Line With HSBC
  • YST (1431) VS China Feihe (6186): Time to Close
  • Binjiang Service Group Update: Solid H1 2020, Accumulate on Sectoral Weakness
  • Ultrajaya Milk Ind & Trading (ULTJ IJ) – A Wholesome Performance
  • Postcard from the North East | Savings Now Running Out; Market Share Gains for Organised Players
  • Slack 2Q21 Earnings Recap: Too Much Slack in Billings

One “Better” Quality Pick to Consider to Participate in the Future of Japan

By Steven Chen

  • We view Warren Buffett’s move to invest in Japan’s largest trading companies as being indicative of the lack of reasonably-valued opportunities in the US as well as the size disadvantage of Berkshire Hathaway;
  • While being in no place to judge the superinvestor’s investment decision, we find better investment targets to “participate in the future of Japan,” especially for those who manage a smaller AUM than Berkshire;
  • In this article, we list one superior-quality business that serves the backbone of Japan’s economy (i.e., the SMEs);
  • Our investment strategy concentrates on quality from a business perspective and seeks long-term opportunities with a 10%-15% hurdle rate.

The Xbox Series S – Minimalism Done Wrong

By Mio Kato

So apparently after Sony decided to go with “RGB wireless router stuck on blue” as its design theme,

Microsoft decided to one-up them with a full-retro hybrid radio-iStove.

Xbox Series S     

1940s Tube Radio / Portable iStove

The price of the system was initially leaked and then confirmed as $300 which is aggressive pricing and could help Microsoft… but we view their strategy as flawed and, in some senses, unlucky due to what Sony and Nintendo are doing. We explain why below.


Japan’s Retail Star: Workman Thrives in Crisis

By Michael Causton

It hasn’t been easy selling clothing in the last six months or even in the months before, unless, that is, you are Workman Co Ltd (7564 JP).

The workwear to sports retailer delivered six straight months of sales growth peaking at 44% year-on-year thanks to low price cost performance, relentless expansion of private brands and investment in new franchisees.

Workman’s share price is up more than 3x since we first recommended the retailer in late 2018 but we have been fans of the company for more than a decade for its disciplined focus on low-cost operations, merchandise quality and efforts to understand and produce for its core customer target.

It also helps that Workman is a franchise operation and one that, like Benetton and McDonald’s and other successful franchises over time, buys the land its franchisees operate stores on. The franchise deal keeps costs way lower than competitors and also means personnel costs are for the most part variable while its competitors face fixed staff costs – a huge advantage especially now.

These are core qualities for a retailer and in all aspects, Workman continues to improve. Sales have risen as much as 44% a month since March and as explained below, there are very strong reasons to expect both sales and profit margins to grow much, much further. The share price may have dipped in recent days but the fundamentals remain strong: more growth is to come.


AGM Diaries | ITC – Some Things Never Change

By Pranav Bhavsar

We attended ITC’s virtual AGM that was held last week, seeking answers to some of the questions raised earlier in our previous insights. While the dividend yield could be attractive for income investors, value unlocking catalysts remain absent. 

Our previous coverage on ITC: 


StubWorld: Walking The Fine Line With HSBC

By David Blennerhassett

This week in StubWorld …

Shareholders are the big loser as the US, UK and China turn HSBC Holdings (5 HK) into a political football.

Preceding my comments on HSBC are at the top of the weekly setup/unwind tables for Asia-Pacific Holdcos.

These relationships trade with a minimum liquidity threshold of US$1mn on a 90-day moving average, and a % market capitalisation threshold – the $ value of the holding/opco held, over the parent’s market capitalisation, expressed in percent – of at least 20%.


YST (1431) VS China Feihe (6186): Time to Close

By Henry Soediarko

China Feihe (6186 HK) may have outperformed Health And Happiness (H&H) (1112 HK) but the pair trade of long Yuanshengtai Dairy Farm (1431 HK) and short China Feihe (6186 HK) have made 42% since the initiation in China Feihe (6186): Flying No More? .

The recent news that China Feihe is buying out YST has effectively collapsed the previously available valuation gap therefore it is time to also close the trade by selling YST and buy-to-cover China Feihe. 


Binjiang Service Group Update: Solid H1 2020, Accumulate on Sectoral Weakness

By Sameer Taneja

Binjiang Service Group (3316 HK) posted a solid H1 2020 with a 31% YoY revenue growth and a  112% YoY net profit growth. In addition to the 31% YoY revenue growth, the company increased its operating margins by 860 bps (including a 400 bps gross profit margin expansion and reduction in SG&A by 460 bps). The share price performance of the stock and the sector though has been lackluster owing to regulatory overhang as elaborated in insight provider Li Tang‘s piece China Tightens Domestic Bond Issuance Threshold for Property Developers. Despite this, we think that over the long term, execution will lead to the share price increasing. The stock trades at a PE of 17.4x FY20 and 14.4x FY21 and has 28% of its market capitalization in cash. The company has also committed to paying at least 50% of its earnings (70% in 2019). If the company adheres to a 70% payout ratio on the basis that there are no significant acquisitions, it implies a dividend yield of close to 4%. We think that any policy-related weakness would be an excellent time to accumulate the stock.


Ultrajaya Milk Ind & Trading (ULTJ IJ) – A Wholesome Performance

By Angus Mackintosh

Ultrajaya Milk Ind & Trading (ULTJ IJ) saw a more pronounced impact from COVID-19 in 2Q2020, with a decline in growth for UHT milk with UHT white milk seeing better performance than flavoured products. This can be attributed to people working and breakfasting from home with PSBB measures in place, which also drove higher demand for larger size packets.

Ultrajaya Milk Ind & Trading (ULTJ IJ) did not see the usual benefits this year from Lebaran with packaged tea hit particularly hard, given far fewer people travelling due to the Mudik ban (return to home village). Normally Teh Kotak is a popular drink to pick up for long journeys. 

July saw a slight pick-up in milk sales with some relaxation of PSBB measures from mid-June but it is too soon to read the performance for August. We would suggest a continuing rebound in sales of flavoured milk, as the population start to become more mobile again.

We also expect a gradual pick up in sales of Teh Kotak packet tea sales as employees return to working from the office again, albeit at a reduced intensity to start with.

Increased capacity for large size packets will also help to drive UHT white and flavoured milk growth, given greater demand due to WFH and schooling from home, especially for breakfasting.  

Ultrajaya Milk Ind & Trading (ULTJ IJ) is likely to see a marginally slower growth performance this year but a rebound in earnings should be expected in 2H2020, driven by a move to a “new normal” in Indonesia and a gradual opening up of the economy. It is unlikely that it will adjust prices higher in September this year, which may slow growth prospects slightly. Valuations remain attractive with the company trading on 16.4x FY21E PER versus its peer group average of 26x forward PER. Ultrajaya Milk Ind & Trading (ULTJ IJ) remains a core staple holding in Indonesia. 



Slack 2Q21 Earnings Recap: Too Much Slack in Billings

By Aaron Gabin

If all other work from home beneficiaries used by SMBs continue to see explosive growth Zoom Video Communications Inc (ZM US) , DocuSign Inc (DOCU US) , Crowdstrike Holdings Inc (CRWD US) , but you see sharp deceleration, you may have a competition issue.

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.


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