Bottom-Up EquitiesDaily Briefs

Equity Bottom-Up: Rex International Holding, Xiaomi Corp, HKEX, New China Life Insurance, Investec Ltd and more

In today’s briefing:

  • Rex: Norway Oil Deal Increases Optionality to Create Shareholder Value
  • Xiaomi Beats Apple to Become No. 2 in the Global Smartphone Market in 2Q2021
  • Hong Kong Exchanges & Clearing – Take It When You Can Get It
  • New China Life: The Company’s Latest Strategy Is Taking It Nowhere
  • Investec Group: Deposit Base and Book Value Do Not Reflect Medium-Term Targets

Rex: Norway Oil Deal Increases Optionality to Create Shareholder Value

By Nicolas Van Broekhoven

Rex International Holding (REXI SP) has been trading up recently (+61% YTD) on the back of strong oil prices (consistently above 70 USD/bbl) and expectations that its 1H21 report in August will show shareholders the significant cash flow which is being produced from its Oman assets.

The deal to buy some of Repsol’s Norwegian assets (see previous insight) also increases optionality for Rex’s management to create value for shareholders should the SGX listing continue to trade at depressed levels. Rex has successfully completed a 60M USD bond sale to finance the transaction effectively reducing risk for equity holders.

Historically, Rex owned around a dozen exploration licenses in Norway but the Repsol transaction means they will now become a producer with corresponding cash flow. Once the transaction closes later this year that creates the option to consider an IPO of its Norwegian assets on the Oslo exchange in 2022/2023. Norwegian investors are very familiar with oil producers/exploration companies and might give Rex’s 90% owned subsidiary Lime Petroleum a better valuation. Rex would then hold a stake in the Yumna field (Oman) and a certain percentage in publicly listed Lime Petroleum. 

The eventual end-game has not changed: given the age of the principle shareholders we believe Rex will see a lot of corporate activity going forward. We are unsure of the timeframe and shape/form this takes (spin off, partial divestments, partial return of capital, one-off dividends, large share buybacks, 100% sale to different owners etc) but the latest Norway news increases the optionality for the better. 


Xiaomi Beats Apple to Become No. 2 in the Global Smartphone Market in 2Q2021

By Shifara Samsudeen, ACMA, CGMA

According to market analysis firm Canalys, the Chinese smartphone maker Xiaomi Corp (1810 HK)  has beaten iPhone maker Apple Inc (AAPL US)  to become the second-largest smartphone maker in the world based on the shipment volume in the second quarter of 2021 (preliminary estimates). The global smartphone shipment volume increased by 12% in 2Q2021 with Samsung Electronics (005930 KS)  claiming the largest share of 19% followed by Xiaomi with a 17% market share.

In our previous insight on Xiaomi’s 1Q2021 earnings, we highlighted that Xiaomi narrowed the market share gap with iPhone maker apple with a market share of 14.1% vs 15.1% for Apple in 1Q2021.


Hong Kong Exchanges & Clearing – Take It When You Can Get It

By Thomas J. Monaco

*Exemption Could Add To IPO Pipeline: Mainland China is planning to exempt companies seeking to list on Hong Kong Exchanges & Clearing (388.HK) [HKEX] from first seeking approval from the Cyberspace Administration of China (CAC). The idea behind the exemption is mainland Chinese Hong Kong IPOs were already subject to higher scrutiny and approval from the China Securities Regulatory Commission (CSRC); and 

*Risks Are Increasing: In addition to an extended valuation when ADT has begun to turn and having a new CEO with no exchange experience, HKEX needs to contend with the government’s examination of a stamp duty increase and mainland China’s contemplation of a new stock exchange to attract overseas-listed firms (including Hong Kong) which will bolster Shanghai’s status as a global financial center. 


New China Life: The Company’s Latest Strategy Is Taking It Nowhere

By Alec Tseung

Our bearish view on New China Life Insurance (1336 HK) is due to the following reasons:

  1. The company’s latest strategy undid many good results under the previous strategy (insurance quality and margin improvement).
  2. Its new strategy focuses on wealth management and senior care (and healthcare), in which the company has no competitive advantage and faces keen competition from strong incumbents.
  3. There’s no reason to invest in a mediocre life insurer with a mediocre wealth management business in China.

Investec Group: Deposit Base and Book Value Do Not Reflect Medium-Term Targets

By Paul Hollingworth

Investec Group dedicates itself to banking (consumer, corporate, and investment) plus wealth management (73% and 25%, respectively, of Operating Profit) across South Africa (59% of Operating Income) and the UK (41% of Operating Income), backed by a robust Deposit base.

AUM are growing forcefully: by 30% YoY. (32% expansion in South Africa and 26% in the UK). AUM is centred in the UK at £41.7bn while South Africa accounts for £16.7bn.

FY21/20 results show mediocre trends as at other South African banks. The system is marked by flat top-line growth, OPEX restraint, mild erosion of CIR, lower rates impacting NIM/Spread lower, moderate deterioration in Asset Quality, reduced Provisioning, though Liquidity and Capital Adequacy are moving in the right direction.

 A FV of 7%, a PBV of 0.59x, a Dividend Yield of 3.83%, and an Earnings Yield of 8.6% are not unappealing. INLis especially attractive based on the price paid by Standard Group to acquire Liberty (>1x BV). https://senspdf.jse.co.za/documents/SENS_20210715_S448730.pdf

The South African Deposit base is more or less rated in line with FirstRand which leaves the UK operation (47% of Deposits, 46% of Credit) valued at little or nothing.

In addition, if the medium-term ROE targets are met, the current PBV of 0.59x is too low. Given that current ROE stands at 5%, management aims to hit 11-15% in the UK and 15-18% in South Africa over the next few years. This will come from efficiency gains from cost-cutting and greater digitalization/technology adoption. Even a pre-pandemic ROE of 12% puts shares on a PER of just 5x.

 We believe that the bank, as elsewhere in South Africa, is resilient. It has a diversified model. The bank is making progress on simplifying the structure of the operation by demerging Ninety-One and exiting its Australian business.


Related tickers: Rex International Holding (REXI.SI), Xiaomi Corp (1810.HK), HKEX (0388.HK), New China Life Insurance (1336.HK)

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