Bottom-Up EquitiesDaily Briefs

Equity Bottom-Up: Tencent, Alibaba Group, Kunlun Energy, Nissan Motor, Tesla Motors, Rakuten Inc, BFI Finance Indonesia, Angel Broking, Hitachi Construction Machinery and more

In today’s briefing:

  • Tencent/NetEase: July Game Approval Analysis
  • Few Points to Consider Before Bottom Fishing Chinese Tech
  • Tencent (700 HK): When to Catch a Falling Knife
  • Kunlun Energy (135 HK): Positive Takeaways from Discussion with Company
  • Nissan Motor – Dependant on Its Finance Business
  • Tesla – Muted Response to Blowout “Earnings”
  • Rakuten Group (Neutral) – Credit Downgrade, Network Delays as Company Enters Toughest Stretch
  • BFI Finance Indonesia (BFIN IJ) – Recovery in Motion
  • Angel Broking: Riding the Digital Broking Wave in India, But It May Slip
  • HCM – Miss on Margins

Tencent/NetEase: July Game Approval Analysis

By Ke Yan, CFA, FRM

Recently the Chinese regulator National Press and Publication Administration (NPPA) announced the July batch of approvals for domestic games. 

In this insight, we will have a close look at the trend of domestic game approval for both Tencent and its key competitor, Netease. We will also have a review of domestic games approved in 2021 YTD. 

We are of the view that Netease Inc (Adr) (NTES US) has done better than Tencent Holdings (700 HK) in terms of games approved. 


Few Points to Consider Before Bottom Fishing Chinese Tech

By Oshadhi Kumarasiri

After trading sideways during May/June 2021, bulls got excited as Alibaba Group (9988 HK) rallied by 10% in the last week of June to $229.4 per share. Unfortunately, the joy was cut short, as Xi Jinping’s government went back on the offence with a broadened crackdown on tech platforms, especially the US-listed Chinese tech companies like the recent ride-sharing IPO DiDi Chuxing (DIDI US). As a result, Alibaba’s share price dropped 15% to a new 52 week low. Before the dust settled the Chinese government introduced reforms to private education companies, preventing them from making profits from the after-school tutoring businesses.

We believe all of these interventions are messages about the direction of the government policy over the next few years and the government’s effort to bring equality through preventing monopolistic behaviour and address cybersecurity, data collection and privacy concerns could be broader policies of Xi Jinping’s government as the Chinese economy enters a new era of growth.

New economy stocks like Alibaba, Tencent, Vipshop and JD.com have never gone through a period of time that’s even remotely similar to the time frame it is about to go through in the next few years.

Therefore, we think bottom fishing Chinese e-commerce stocks during this regulatory crackdown and economic policy transition could be of high risk unless they get to a point where they are bargains on price to book multiples.

In this insight, we discuss some important points to make a note of, if you are considering bottom fishing Alibaba, one of the safest Chinese tech stocks in the market.


Tencent (700 HK): When to Catch a Falling Knife

By Mitchell Kim

Investors’ concerns over increasingly expanding regulatory restrictions and the potential market intervention led to a rout of Chinese tech and education stocks over the last several trading sessions. The select 9 Chinese tech stocks I follow collectively lost USD320 billion in value over 20 July to 27 July.  While some of the regulatory risks were known from March 2021, ramifications of the potential value-destroying restrictions on the education companies, termination of Tencent Music (TME US)’s exclusive rights, and the suspension of new user registration for Tencent (700 HK)‘s Wechat spook the market. 

Tencent’s market cap has declined 19% during the seven-day period, which cannot be fully explained by the potential value lost from the recently announced regulatory measures, in my view.  Back in April (see Tencent (700 HK): Fintech Risk Is Lurking) I pointed out that Tencent shares could be overvalued by 20% on fintech risk alone.  The shares are down nearly 30% since then. I now believe the shares could be undervalued by 10%, notwithstanding the undefined regulatory risks ahead.  Having said that, catching a falling knife is not for the faint-hearted. 

These stocks rebounded on the US Wednesday trading session, possibly reflecting the sentiment “enough is enough.” Bloomberg reported that the securities regulator assured select investment bankers that the education policies are not to be for other industries.     

In this report, I summarize the announced regulatory events this year to date and share my thoughts on why the market may be over discounting Tencent’s value by looking at the potential value impact of Tencent’s fintech value (a reiteration from the April report) and the impact of the value decline of DiDi Chuxing (DIDI US) and Tencent Music.          


Kunlun Energy (135 HK): Positive Takeaways from Discussion with Company

By Osbert Tang, CFA

Kunlun Energy (135 HK) should have a decent operating performance in 1H21, with good growth achieved for natural gas sales, LPG sales, LNG terminal and also the exploration and production segment. Their performance all look to be ahead of the full-year guidance put forward in FY20 result announcement in Mar 2021 – this is encouraging.

Gas project M&A momentum stays decent and, with IRRs of 10-12%, the returns are ahead of the hurdle level of 8%. Following China Gas Holdings’ (384 HK)  Shiyan gas explosion, local governments now prefer large SOEs to invest in projects given their more stringent safety standards, and this is an advantage of Kunlun. The gas industry also entails less regulatory risks amid government’s heightened regulatory measures towards various industries lately. The recent pull-back has made valuations even more appealing, in our view.  


Nissan Motor – Dependant on Its Finance Business

By Mio Kato

Nissan reported 1QFY22 results on Wednesday generating revenue of ¥2,008bn (-21.1% QoQ, +71% YoY) and OP of ¥75.7bn (for an OPM of 3.8% compared to OPM of -13.5% and -0.9% respectively in 1QFY21 and 4QFY21). The improvement of Nissan’s profitability compared to its previous quarter was mainly due decreases in SG&A expenses which were 12.8% of revenue compared to 15.1% and 21.9% respectively in 1QFY21 and 4QFY21. The reported revenue was 6.5% higher than consensus estimates while OP beat by ¥130bn, thanks in large part to the finance business.

In ¥bn

Revenue

OP

OPM

Actual Results – 1QFY22

2,008

              76

3.8%

Consensus – 1QFY22

1,886

–            55

-2.9%

Surprise

6.5%

NM

6.7% points

 

 

 

 

Guidance – FY22

9,750

150

1.5%

Consensus – FY22

          9,114

            4.6

0.1%

Difference

7.0%

3183%

1.5% points

Source: Company disclosures, CapIQ

Tesla – Muted Response to Blowout “Earnings”

By Mio Kato

The reaction of Tesla stock (-2.0%) to a strong earnings beat at 1Q suggests some fatigue in its attempts to maintain its “aspirational” valuations. We would not be surprised if its 10Q revealed poor earnings quality as stringency in accounting is not, in our view, a strong suit of Tesla. What is more interesting in our view is the progress of Ford’s Mustang Mach-E and the potential for the vehicle to further shatter misperceptions about Tesla having a technological lead in anything.


Rakuten Group (Neutral) – Credit Downgrade, Network Delays as Company Enters Toughest Stretch

By Kirk Boodry

Rakuten shares are down 8% this week on credit concerns and delays in network expansion. The S&P credit downgrade is a lagging indicator but slower network deployment could have future consequences. A key theme for Rakuten Mobile this year is customer retention as it converts free trial users to revenue-generating subs and network quality is by far Rakuten’s biggest weakness. That mobile revenue is needed to offset aggressive marketing costs now that the pricing playing field has been defined. We expect peak operating losses over the next few quarters and that keeps us cautious on the story. We remain at Neutral.


BFI Finance Indonesia (BFIN IJ) – Recovery in Motion

By Angus Mackintosh

BFI Finance Indonesia (BFIN IJ) announced a strong set of 1H2021 results, which saw YTD new bookings increase by +48.7% YoY and +7.5% QoQ in 2Q2021 We expect the company to continue to ramp up new bookings in 2H2021, and although the latest round of Emergency PKMM mobility restrictions may delay that recovery slightly, we remain upbeat about its future prospects.

Non-performing financing (NPF) continued to improve 1Q2021 and the company also saw its net credits loss (NCL) ratio increase with more repossession and collateral disposal activities.

BFI Finance Indonesia (BFIN IJ) quarterly net revenue was down by -18.2% YoY in 2Q2021 mainly driven by the drop in the average receivables balance and a slightly lower net interest spread.

The company continued to make progress on its loan restructuring with 89.2% of restructured loans reverting to normal status, 0.6% under grace period, and the remaining 10.2% granted second restructuring with strict review.

BFI Finance Indonesia (BFIN IJ) continues to focus on its core market of non-dealer 4W collateralised loans, which made up 64% of total receivables in 1H2021 versus 59% of total in 1H2020.

The company now has 325 branches, consisting of 223 full branches and 102 kiosks. As part of its rationalisation, it closed a total of 82 outlets in 1H2021, with 78 of these kiosks and the rest branches.

BFI Finance Indonesia (BFIN IJ) maintains a well-diversified funding base from bank borrowings, bonds & medium term notes, joint-financing, and equity.

The most recent ramp up in cases is having an impact on business with a decline in new bookings in July versus June outlined within.

We continue to see BFI Finance Indonesia (BFIN IJ) as the most interesting multi finance company in Indonesia, with a strong risk management culture and with the potential to generate a significantly higher ROEs once the market recovers. 


Angel Broking: Riding the Digital Broking Wave in India, But It May Slip

By Ankit Agrawal, CFA

Angel Broking (ANGELBRK IN)‘s stock has risen >4x over the last four months on the back of strong growth in the digital broking industry in India. However, we think the stupendous growth of >17x in Angel’s active client base over the past couple of years may not sustain. While the shift to digital and discount broking is inevitable, the recent growth seems to be temporary and will likely reverse led by high customer churn. Cyclicality and heightened competition in the sector will further adversely impact the fundamentals and lead to de-rating of the stock once the euphoria in the sector subsides. The market is also pricing in high optimism around Angel’s potential to be a fintech platform. We again differ here based on our insights into Angel’s customer base, competitive scenario and nascent track record of Angel in the quasi-passive quant-based asset management and wealth management space.  


HCM – Miss on Margins

By Mio Kato

HCM announced slightly concerning 1Q results yesterday as despite a strong revenue beat (12% above consensus), OP missed by 10%. This is a result of gross margin continuing to undershoot and it is unclear when this issue might be resolved.


Related tickers: Tencent (0700.HK), Tencent (0700.HK), Kunlun Energy (0135.HK), Nissan Motor (7201.T), Tesla Motors (TSLA.OQ), Rakuten Inc (4755.T), BFI Finance Indonesia (BFIN.JK), Hitachi Construction Machinery (6305.T)

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