Equity Bottom-Up: Ping An Insurance (H), Spotify Technology SA, Astra International, Komatsu Ltd, ZOZO Inc, Synnex Thailand, China Southern Airlines, Indusind Bank, ZOZO Inc, Kao Corp, Genworth Financial Inc Cl A, Unilever Indonesia, Michinoku Bank and more

In today’s briefing:

  • Ping An Insurance [2318-HK]:  Momentum Stall
  • Spotify 2Q20 Earnings: Purple Haze
  • Astra International (ASII IJ) – Simmering Recovery Afoot
  • Komatsu and HCM – Komtrax Suggests Recovery In Store
  • Zozo – Nice Results but It’s Just a COVID Bump
  • SYNEX: Expect Earnings to Grow YoY in 2020 but Has Mostly Priced In
  • China Southern Airlines (1055 HK): Better Summer Yields Have Kicked In
  • IndusInd Bank – Much More Wood To Chop
  • The Zozo Revival: A New Private Brand of Many Names, Category Expansion, Merchants Return
  • Kao 2Q20 Results: Expecting Worse in the Third Quarter
  • Genworth Financial – Big MI Print, Uncertainties Persist
  • Unilever (UNVR): COVID-19 Beneficiary and Discount to HUVR
  • Michinoku Bank  (8350 JP):  Of Swallows and Summers

Ping An Insurance [2318-HK]:  Momentum Stall

By Steven Holden

  • Ping An Insurance (H) (2318 HK) is the 4th most widely held stock in China and the 2nd most widely held Financial company across the Asia Ex-Japan region. It is also the 2nd largest overweight position behind HDFC Bank (HDFCB IN) .
  • However, active fund ownership in Ping An Insurance (H) (2318 HK) is losing momentum after a 5-year boom in positioning. After hitting a peak at the end of 2019, average fund weights have fallen to 1.87% (from 2.5%) and the percentage of funds invested has dropped to 71.4% (from 74.5%). All of our positioning metrics have trended lower over the last 6-months. 
  • Whilst many investors still hold sizeable positions in Ping An Insurance (H) (2318 HK) , they can no longer rely on momentum to drive prices higher.   With so many funds overweight the stock, the investment case needs to be rock solid from here on in.

Spotify 2Q20 Earnings: Purple Haze

By Aaron Gabin

Purple haze, all in my brain
Lately things don’t seem the same
Actin’ funny, but I don’t know why
‘Scuse me while I kiss the sky

Spotify’s market cap has doubled since 1Q20 earnings. As far as we can tell, the business hasn’t improved, management has offered hazy explanations of how podcasting will improve the business. We don’t see a path to massive profitability (or any profitability) and think Spotify is grossly overvalued.

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.

Astra International (ASII IJ) – Simmering Recovery Afoot

By Angus Mackintosh

Astra International (ASII IJ) just released 1H2020 results with a revenue decline of -23% but a net profit increase of +16% helped by the well-timed sale of its stake in Bank Permata (BNLI IJ) to Bangkok Bank Public (BBL TB) booked in 2Q2020.

Taking out the sale of Bank Permata (BNLI IJ), net profit fell by -44% YoY largely due to weaker performance from automotive, heavy equipment, mining, and financial services. 

Car sales for Astra International (ASII IJ) were down -45% YoY due to COVID-19, with market share at 53% and in 2Q2020 car sales fell by 92% versus 1Q2020.

Motorcycle sales fell by -40% in IH2020 YoY and -80% in 2Q2020 versus 1Q2020, with increased market share of 77% in 1H2020.

Heavy Equipment and financing divisions both saw declines of -29% and 25% in net income respectively, although United Tractors (UNTR IJ) saw some support from its mining businesses.

The company’s palm oil business under Astra Agro Lestari (AALI IJ) performed extremely well given higher CPO prices, whilst the infrastructure business registered a loss due to lower toll-road revenues due to PSBB measures.

Unsurprisingly, management expressed caution on the outlook for the rest of the year but we would expect more colour on this from the analyst briefing on 12th August. 

We continue to like Astra International (ASII IJ) as one of our top recovery plays in Indonesia for FY21.  Jardine Cycle & Carriage (JCNC SP) also looks interesting at this juncture given the current 5-year high discount to NAV. 

Komatsu and HCM – Komtrax Suggests Recovery In Store

By Mio Kato, CFA

Komatsu and HCM offer slightly different views on regional recovery paths with Komatsu suggesting developed market demand could recovery earlier while HCM points to regions such as India. China has been the strong point in the Apr-Jun quarter although Komatsu has capitalised on this better than HCM. Meanwhile, the domestic market has been surprisingly resilient. What should reassure investors is that Komatsu’s Komtrax data is pointing to normalisation across numerous countries from Jun onwards.

Zozo – Nice Results but It’s Just a COVID Bump

By Mio Kato, CFA

Zozo reported strong results with revenue up 19.4% to ¥33.7bn (consensus ¥32.1bn) and OP of ¥10.4bn (consensus ¥8.4bn). While results were strong, much of the OP beat was a result of restrained promotional spending and our analysis of the nature of growth suggests this is just the ecommerce bump from COVID and there is little evidence that the company has solved its saturation issue. Quite the opposite in fact as its new initiatives all appear to be mediocre or failing.

SYNEX: Expect Earnings to Grow YoY in 2020 but Has Mostly Priced In

By Research Group at Country Group Securities

We expect SYNEX earnings to grow 15%YoY in 2020E amid negative environment in overall spending induced by global widespread of coronavirus. This driven by huge IT product purchase fueled by Work-from-home buyers and  the company’s strategy that moving toward high-margin IOT related devices. However, we downgrade rating for SYNEX to HOLD as near-term positive factors were mostly priced after share price surged 48%MTD and 93% since our latest update on 8th May to trade at 17.2xPE’20E (+1 S.D. 5-year average), the last time seen in October 2018.

• Anticipating PC market recovery in 3Q20 onwards
• Shifting product mix toward high margin segment
• Maintain earnings growth forecast to grow 17%CAGR in 2020-22E

We downgrade SYNEX with HOLD rating and rollover target price to Bt10.10 (Previous TP Bt8.40) derived from 12.9xPE’21E, information and technology sector. The company still offer high dividend yield at 5% and still will be one of the first benefit takers from 5G network launch in late 2020.

China Southern Airlines (1055 HK): Better Summer Yields Have Kicked In

By Osbert Tang, CFA

With overseas travel being virtually impossible this summer, China visitors have turned to domestic travel, and this has benefited China Southern Airlines (1055 HK) most significantly. In Jul, the average one-way fare for the top 5 domestic routes in China operated by CSA has increased by 11.3% MoM. But, the monthly average figure has underestimated the momentum of summer fare recovery – the average fare for 31-Jul is 80.7% higher than that for 30-Jun, as fare has maintained a continued uptrend since end-Jun. 

The recent COVID-19 cases in Urumqi and Dalian are not expected to have a material impact on domestic air traffic, in our view, as collectively these two airports only account for 3.3% of China’s air passenger throughput. Moreover, CSA’s launch of Rmb3,699 all-you-can-fly package was well received, and was sold out in just two days. The stock’s current 0.73x P/B is inexpensive (-1 SD below average) as we are of the view that the worst is behind us.  

IndusInd Bank – Much More Wood To Chop

By Thomas J. Monaco

*Results Beat Not Indicative Of True Credit Picture: IndusInd Bank (IIB.IN) [IIB] reported FY 1Q21 results of INR 4.6 bn, exceeding FY 4Q20 results by INR 1.6 bn (52.6%). Three factors, in our view, drove improvement in bottom-line performance: a) an INR 2.0 bn (9.2%) in expenses due to lower business volumes, which pushed the cost/income ratio low by 800 bp to 59.4% over the period; b) an INR 1.8 bn (7.4%) decline in loan loss provisioning despite an incredible level of weakness noted in credit quality;  and c) an INR 960 mn (3.0%) increase in net interest income reflecting a 7 bp increase in the NIM to 4.59% led by a 40 bp decline in average deposit costs; and

*Reserves Need Substantial Support: Asset quality was weak, and remains a key risk given weak macro-environment. On a stated basis, gross NPLs at FY 1Q21 amounted to INR 51.0 bn, declining INR 477 mn (0.9%) linked quarter. Despite the absolute INR improvement, we find that NPL/TLs actually increased 8 bp to 2.53% over the period as the loan portfolio contracted INR 87.1 bn or 4.2%. By our calculation, net new NPLs (inclusive of NCOs) were of tantamount concern at INR 25.4 bn or at a 201.2% increase on an annualized basis. During the quarter, we note that IIB’s loan loss provision declined INR 1.8 bn (7.4%) to INR 22.6 bn. By our calculation, IIB’s loan loss reserve needs further support of INR 42 bn, which represents 9 quarters of bottom-line performance and 125% of its recent capital raise. 

The Zozo Revival: A New Private Brand of Many Names, Category Expansion, Merchants Return

By Michael Causton

ZOZO (3092 JP)’s new plan to create a direct-to-consumer (DtoC) e-commerce platform this October, and fund the brands sold on it, is much more than just a major fashion retailer piling into the latest trend of exploiting social media influencer followships. Given the control Zozo will have over the brands, it is, in effect, revisiting its old ambition to launch private brands.

This time though it is building diversity through multiple brands which both allows it to target different segments and create a much less risky private brand venture, more akin to the music business model than fashion.

Zozo has had a rough ride recently, with faltering sales growth, lower profits, the sudden exit of its founder and confusion around its partial takeover by Z Holdings. With more stability, Zozo should be able to expand again through greater cross-category sales and brands of more varied positioning – and new types of customer for them – as well as growth overseas.

Zozo 1Q2020 Results. Source: Company Disclosures

1Q2020 results suggest Zozo is not only benefitting from the shift to online shopping (this is despite consumes spending less on fashion during the downturn when most online spending has been on daily needs and home decoration) but beginning to turn the corner and leave the chaotic last years of Maezawa’s reign behind it. There are still some worries, particularly falling average annual purchases among core users and some rising SG&A costs as shipment values fall but Zozo has some creative ideas for expansion:

  • Category Expansion: shoes, cosmetics etc.
  • The above-mentioned private brands
  • New segments like luxury
  • Selling these into more mainstream consumers through PayPay Mall
  • Overseas expansion, with those new private brands as a great shop window, particularly in China.

Zozo’s new stable management has also led to merchants to return to the platform: Right On Co Ltd (7445 JP) and Onward Holdings (8016 JP) have both now set up shop again, with the latter expecting ¥10 billion in sales from a new custom-suit service via Zozo. New merchants now also include brands in the luxury category including even LVMH (Loewe), as well as Stella McCartney and Marni.

The share price has doubled since March but, given the long-term potential, should prove a good investment on any buying opportunity.

Below are conclusions followed by analysis by section.

Kao 2Q20 Results: Expecting Worse in the Third Quarter

By Oshadhi Kumarasiri

More than six months on from the initial outbreak, the spread of COVID-19 is still gaining momentum with more than 16 million recorded cases and 600,000 deaths worldwide.

Kao Corp (4452 JP) downplayed the impact of COVID-19 on quarterly results initially. However, 2Q20 results, released yesterday (29th July 2020) was a reality check for Kao, possibly the most resilient Japanese cosmetic company among peers Shiseido Company (4911 JP), Kose Corp (4922 JP), Pola Orbis Holdings (4927 JP) and Fancl Corp (4921 JP).

It appears that Kao has overestimated its resilience, especially in a time where peers were much more sceptical. Kao’s significantly weak 2Q20 results compared to its expectations as of April 2020 has prompted the company to lower its 2020 revenue and OP guidance by 5% and 14% respectively from the lower end of the April 2020 guidance range.

Source: Company Disclosures

Genworth Financial – Big MI Print, Uncertainties Persist

By Thomas J. Monaco

*Poor Result Despite Mortgage Unit Gains: After the market close, Genworth Financial (GNW.US) [Genworth] reported 2Q20 adjusted earnings per share loss of USD 0.04, which was worse than consensus of USD 0.03 per share;

* AXA Settlement Increases Risk: Post-2Q20, Genworth announced that it had agreed to a settlement with AXA (AXA.FP). Under the terms of the settlement, Genworth has agreed to pay AXA approximately USD 521 mn, with USD 125 mn payable on July 23, 2020 and the balance deferred to 2022. As such, post payment the stated USD 554 mn in cash on Genworth’s balance sheet dwindles by USD 125 mn or 22.5% to USD 429 mn, while restricted cash amounts to USD 59mm. Unfortunately, there appears to be no mention of a liability cap on AXA’s future PPI losses; and

*China Oceanwide Wasting Time: Genworth’s transaction with China Oceanwide (715.HK) appears increasingly in doubt following the 15th extension on June 30, 2020 due to China Oceanwide’s continued inability to fund this transaction. China Oceanwide is required to provide evidence of deal funding by August 31st

Unilever (UNVR): COVID-19 Beneficiary and Discount to HUVR

By Henry Soediarko

With Surabaya becomes the hotbed of COVID-19 replacing Jakarta, it seems that the pandemic in Indonesia is far from over and a little out of control thus providing an opportunity for Unilever Indonesia (UNVR IJ) to be the go-to home care hygiene solution provider.   

49% of Unilever’s revenue comes from Personal Care (Clear, Dove, Lifebuoy, Pepsodent, Sunlight, Rexona, Vaseline, Sunsilk) while Home Care contributes up to 21%. With a 54.7% gross margin and 33.9% operating profit margin, home and personal care is the company’s backbone, and considering Indonesia’s large middle-class income and increasing hygiene awareness, Unilever is positioned to benefit from it.
Research in the online shop (iprice.co.id) reveals that Unilever Lifebuoy’s hand wash pump is the most sought after product, ahead of the other skincare product such as Facial scrub, Hazeline, and Ponds.
Among the top 10 largest companies in Jakarta Stock Exchange Composite Index (JCI INDEX) , Unilever Indonesia (UNVR IJ) is the only one with exposure to hygiene-related products while the rest such as Indofood CBP Sukses (ICBP IJ) may be an indirect beneficiary from COVID-19 if lockdown will be applied again. 
For Long Short investors, the valuation gap between Hindustan Unilever (HUVR IN) and Unilever Indonesia (UNVR IJ) has further widened although fundamentally, there is no real difference between the two companies apart from the number of population. HUVR is trading at 66% premium to UNVR when their net income margin and debt to equity level is very similar. This is probably the time when Unilever Indonesia (UNVR IJ) will play catch up to Hindustan Unilever (HUVR IN) thus long UNVR and short HUVR. 

Michinoku Bank  (8350 JP):  Of Swallows and Summers

By J. Brian Waterhouse

1Q FY3/2021 results for Michinoku Bank (8350 JP), a small embattled regional bank from Aomori Prefecture at the very top of Japan’s main island of Honshu, were deceptively encouraging.  Consolidated net profits doubled YoY to ¥694 million, and were in sharp contrast to the heavy net losses of ¥4.59 billion incurred in FY3/2020 as a result of rising credit costs and a synthetic hedge that went disastrously wrong.  Indeed, 1Q FY3/2021 net profits exceeded management’s guidance for the entire financial year to end-March 2021 by a considerable margin.

That said, there are ‘red flags’ aplenty to be found in the balance-sheet that should warn off most cautious investors.  The clearest sign that all is not well is that the Resolution & Collection Corporation, the Bank of Japan’s ‘bad bank’ subsidiary, remains the largest shareholder in Michinoku Bank, with a ¥20 billion public funds injection from 2009 still outstanding.  Another is the fact that management has chosen not to revise interim or full-year guidance, despite the 1Q FY3/2021 results exceeding full-year guidance.  Digging into the balance-sheet numbers reveals substantial unrealised losses in the securities portfolio, a further decline in the capital ratio to under 8%, and a lop-sided balance-sheet where true deposit growth is minimal but lending is growing at +7.5% YoY as the bank has started lending massively at ultra-fine margins to local government entities to offset sharp decline in lending to non-banks, property developers and the manufacturing sector.

The stock price is down almost 39% in the last twelve months and is the 2nd-worst-performing regional bank stock so far this year, surpassed only by Kansai Mirai Financial (7321 JP).   Michinoku Bank remains by far the most demanding stock in terms of valuation of all the regional banks from the Tohoku Region.  Yet foreign institutional investors in aggregate continue to hold 7.4% of outstanding shares.  We fail to understand the attraction.  Caveat Emptor!  (May the Buyer Beware) is our advice to any would-be investor in this bank stock.

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