Bottom-Up EquitiesDaily Briefs

Equity Bottom-Up: Tencent, Evergrande, DBS, Melco Resorts & Entertainment, TSMC, Meituan, Sansan Inc, Link REIT, Hisamitsu Pharmaceutical Co, Microport Scientific and more

In today’s briefing:

  • Tencent Holdings – Under Severe Pressure
  • China Evergrande Group – Shoes Dropping At Shenjing
  • DBS – Oil Prices Can Support Reversals
  • Melco Resorts: At US$10.44 a Share the Stock Is Immensely Cheap Here, Pandemic or Notwithstanding
  • TSMC (2330 TT): Future Growth Through Advanced Technology and Overseas Expansion
  • Meituan: Major Overhang Cleared After $534m Fine
  • San San (4443) – Networking, Not Net Working
  • Link REIT – Looking For Handouts
  • Hisamitsu Pharmaceutical (4530 JP): Avoid as More Pain Ahead
  • Microport Scientific (853.HK) – The Favorable and the Unfavorable Aspects

Tencent Holdings – Under Severe Pressure

By Thomas J. Monaco

*Fintech Hits Are Coming: Regulators have forced the capitulation of internet anti-competitive behavior. Most recently, both Alibaba (BABA.US) [Alibaba} and Tencent (700.HK) [Tencent] have stopped blocking rivals’ links which prevented users to purchase goods using competitor payment apps. This is a big deal, given that FinTech represented a growing 30.3% of revenue for Tencent at 2Q21. The more Tencent relies on Fintech to support growth, the more alarming the moves by Alibaba and other competitors are; and

*Prior To The War On Gaming, Tencent’s Results Have Already Deteriorated: Tencent’s 2Q21 GAAP net income declined CNY 5.2 bn (10.8%) linked quarter – and were of poor quality. Results were challenged by: cost of revenue increase; operating expense increase; losses in associates; higher impairment charges; and weaker online games. Were it not for the artificially lower tax rate, results would have been even more challenged. We can’t wait to see what the impact of mainland China’s latest regulatory maneuvers will have on Tencent’s 3Q21 results out on November 10th.  

China Evergrande Group – Shoes Dropping At Shenjing

By Thomas J. Monaco

*Shenjing Fell Apart Before Evergrande Heated Up: Even prior to the China Evergrande Group (3333.HK) debacle, Shenjing Bank was (2066.HK) [Shenjing] struggling: 1) core operating earnings (excluding gains) were a negative CNY 1.1 tn at 1H21, by our calculation; and 2) short-term liquidity deteriorated at an unprecedented pace. With Evergrande’s risk, we calculate Shenjing’s NPLs are now closer to a whopping 24.4% – and solvency is called into question; and  

*Evergrande’s Smartest Move Ever: The rest of the financial system figured out that Shenjing was an accident waiting to happen, with the interbank market cutting their risk. Despite this, Shengjing Finance Holdings (SFH) purchased Evergrande’s 19.93% stake – becoming the bank’s largest shareholder. For USD 1.55 bn, SFH has now absolved Evergrande of being a liquidity and capital backstop. Well done! 

DBS – Oil Prices Can Support Reversals

By Daniel Tabbush

Rising oil prices can benefit DBS far more than peers, given its loan exposure to oil & gas service sector. The bank can see improvements in both in on-balance sheet exposures as well as its off-balance sheet commitments. A look at loan loss reserves compared with gross loans, shows how one can model write-backs, and a precedence for seeing reserves come down after a sharp rise.  

Melco Resorts: At US$10.44 a Share the Stock Is Immensely Cheap Here, Pandemic or Notwithstanding

By Howard J Klein

  • Sporadic, isolated Covid Delta outbreaks in Asia have stalled recovery cycle. But we see a strong recovery in progress by 2Q22.
  • MLCO has borne a disproportionate downside because of swift pandemic triggered revenue declines both in Macau and Manila.
  • The company’s liquidity assure it a forward positive outlook post pandemic with a daily run rate that runs ~US$2.

TSMC (2330 TT): Future Growth Through Advanced Technology and Overseas Expansion

By Scott Foster

TSMC is dealing with increasing geopolitical and geophysical risks through a combination of advanced technology and overseas expansion.

  1. Recycling is the solution to water shortages in Taiwan and Arizona.
  2. New production and R&D facilities in the U.S. and Japan mark the beginning of large-scale operations in those countries. Investment in Europe seems likely to follow.
  3. A 3D packaging venture with Japanese equipment and materials suppliers is taking the lead in back-end technology development.
  4. Approval of a new fab at the 2-nm node in Taiwan should keep the world’s most advanced front-end process technology at home.
  5. TSMC and other companies are working with the Taiwanese government and local universities to increase the number of engineering graduates trained to work in the semiconductor industry.

These initiatives address the main challenges facing TSMC as it navigates between China and the U.S. and creates new growth opportunities worldwide. We expect them to succeed. 

For a review of TSMC’s latest overseas investment, see TSMC – First Details of Japanese Investment Emerge by Mio Kato.

Meituan: Major Overhang Cleared After $534m Fine

By Ke Yan, CFA, FRM

On Friday October 8th post-market close, the State Administration for Market Regulation issued a notice to fine Meituan $534m for its monopolistic behavior of “two-choose-one”. In this note, we will analyze the impact of this notice. We think the quantum of the fine is within the market expectation and most importantly, the major overhang of the stock is removed. Recent data also shows that Meituan continues to be a beneficiary of the movement restriction due to COVID-19 and the growing penetration rate of the O2O services in China. 

San San (4443) – Networking, Not Net Working

By Mark Chadwick

  • San San should benefit from an end to Covid restrictions as employees start to network again, with revenue driven to some extent by the volume of business cards that are digitised
  • San San remains in the early stages of its growth cycle as corporate Japan embraces digital transformation
  • Q1 Sales growth +25% YoY, accelerated from 19% YoY the previous quarter
  • Bill One, a new invoicing platform, is starting to contribute
  • The stock has run up 52% YTD, one of the top performers among large cap SaaS companies in Japan 
  • Trading at 18x TTM Revenue the stock is cheaper than peers

Link REIT – Looking For Handouts

By Thomas J. Monaco

*Worries In Both Hong Kong and Mainland China: The Hong Kong retail portfolio’s rental reversion rate continued to be challenged YOY in FY 1H22, albeit slightly improving from a negative 1.8% in FY 2H21 to a barely positive low single digits. Not surprisingly, this weakness would appear to be with us for an extended period – especially given the continued border closures amid the COVID-19 disruption.  The mainland Chinese expansion remains worrisome, given the likely carry-on impact of stress seen in the broader mainland Chinese property market and its lenders; and

*Poor Capital Management Becoming A Big Problem: Link REIT (823.HK) [Link] management also appears hell-bent on destroying shareholder value with deals which make little financial sense. Link recently announced the acquisition of Happy Valley Shopping Mall in Guangzhou where the current annualized NPI yield barely covering the project’s cost of funding. In order to improve occupancy, it would appear that Link would likely need to offer significant tenant enticements, and investment massively in asset enhancement. Bizarrely instead of weighing buybacks return versus new investment ROI, management views share buybacks as a mechanism to defend shares against short-selling. 

Hisamitsu Pharmaceutical (4530 JP): Avoid as More Pain Ahead

By Tina Banerjee

Hisamitsu Pharmaceutical is promoting a patch treatment culture globally. The company is the global leader in OTC topical analgesics patch market. The shares plunged 22% in last one-year, underperforming Nikkei 225, which gained 19%. Hisamitsu shares are trading near 52-week low. However, it will be wise not to indulge in bottom fishing, as the company is facing near-term headwinds for its mainstay products. This insight has analyzed the risks being faced by its key products as well as upside risks arising from new products. Investors should wait for Q2 earnings announcement before taking any positions on the stock.

Microport Scientific (853.HK) – The Favorable and the Unfavorable Aspects

By Xinyao (Criss) Wang

After hitting a record high of HK$72.85/share in June, the share price of Microport Scientific (853 HK) has fallen continuously in the following months, down over 45% by the end of October 8, 2021. This insight mainly analyzed the 2021/1H performance, the business, the concerns and the outlook of MicroPort, including both the favorable and the unfavorable aspects.

Related tickers: Tencent (0700.HK), Evergrande (3333.HK), DBS (DBSM.SI), Melco Resorts & Entertainment (MLCO.O), TSMC (2330.TW), Meituan (3690.HK), Link REIT (0823.HK), Hisamitsu Pharmaceutical Co (4530.T), Microport Scientific (0853.HK)

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