Equity Bottom-Up: Tencent Holdings, Beyond Meat Inc, Alibaba Group, Tesla Motors, Xtep International, Aomori Bank, Rex International Holding and more

In today’s briefing:

  • Tencent – Well Timed Transaction
  • Smartkarma Webinar | Beyond Food: No Longer Impossible
  • China Internet Weekly (27Jul2020): Online Retail Continued to Accelerate in June
  • Tesla – Short Side Risk-Reward Looking Juicy Again
  • Notes from the Silk Road: Xtep Int’l Holdings (1368 HK): Profit Warning Comes as No Surprise
  • Aomori Bank  (8342 JP):  A Withered Oak in the Green Forest
  • Rex Int: From Virtual Drilling Tech Play to Pumping Oil in Oman; Overlooked Bargain + M&A Candidate

Tencent – Well Timed Transaction

By Thomas J. Monaco

*Another Material Developments At Afterpay: Afterpay Touch (APT.AU) confirmed another material development. The launch of its global rewards system called “Pulse” commenced in the US, and is set to be launched in the United Kingdom, Australia, and New Zealand in the coming months. In short, Afterpay is looking to reward regular users who pay on time (five purchases every six months) which turns the credit card model on its head, as it relies solely on increasing customer spend for points; 

*Other Recently Announced Positives: In addition to the update provided on Pulse, Afterpay has provided a solid update on its growth and traction post-deal; expressed its interest in a capital raise; and onboarded Apple Pay (AAPL.US) and Alphabet (GOOG.US) Google Pay; and

*Magic Fairy Dust: While no transaction particulars were disclosed, we calculate an average share purchase price of AUD 22.47 per share for the 5% stake or a hefty 6.8x P/BV for a company which is loss-making and where Tencent hasn’t control. Tencent has already earned 146% on this stake. 


Smartkarma Webinar | Beyond Food: No Longer Impossible

By Smartkarma Research

In this Smartkarma Webinar, we speak to David Huggins, CFA, Nutrition Portfolio Manager at Blackrock’s BGF Nutrition Fund. David will discuss current trends in food and nutrition, including plant-based protein, changing consumer behaviour, and the future of food technology.

The webinar will be hosted on Wednesday, 29/July/2020, 5.00pm SGT/HKT.

David is co-portfolio manager of the BGF Nutrition fund, a Blackrock sustainable thematic fund. Areas of expertise include nutrition, food & beverage, agriculture, and cannabis/CBD. He has a solid track record in public equity investing and is skilled in bottom-up investment analysis, modelling, and big-picture thinking. He graduated from the University of Bristol and is a CFA Charterholder.


China Internet Weekly (27Jul2020): Online Retail Continued to Accelerate in June

By Ming Lu

  • The growth rate of China online retail reached 19% YoY in June, higher than 15.6% YoY in May.
  • Chinese retailing e-commerce companies raised funds of RMB28.6 billion in 1H20, decreasing by 74.5% YoY.
  • Ministry of Human Resource and Social Security warned about “employee sharing”, which was started by Alibaba (BABA).

Tesla – Short Side Risk-Reward Looking Juicy Again

By Mio Kato, CFA

Tesla is up almost eight times from its July 2019 and at its intraday high was actually a ten-bagger in just over 12 months. Some of this rally was driven by the company reporting a string of profitable quarters and the more recent surge appears to have been heavily driven by retail trading with Tesla consistently remaining among the most popular Robinhood stocks. With the most recent earnings beat actually driving a share price fall of about 11%, however, the stock is starting to look vulnerable. We examine valuations and the earnings quality below.


Notes from the Silk Road: Xtep Int’l Holdings (1368 HK): Profit Warning Comes as No Surprise

By David Lepper

In April 2020, we highlighted that the head winds for XTEP in H1 2020 were likely to be strong; our reasoning was that Chinese sportswear is not a priority item on the consumer’s discretionary spend list of the average consumer given the current climate. However, once conditions improve and confidence returns so should the attractiveness of the product. With the company having released its expected profit warning, as it heads into its black-out period, we ask is it time to revisit the stock?


Aomori Bank  (8342 JP):  A Withered Oak in the Green Forest

By J. Brian Waterhouse

1Q FY3/2021 results for Aomori Bank (8342 JP), the leading regional bank based in Aomori Prefecture at the very top of Japan’s main island of Honshu, showed a 10% YoY improvement in consolidated net profits despite a fall in overall revenues.  Dig a little deeper and it becomes evident that that result was achieved through heavy reliance on stock profits, bond trading and asset sales.

Aomori Bank (“Aomori” 青森 means “green forest” in Japanese) is a good example of the plight befalling many regional banks around Japan where the population is shrinking rapidly, young workers are leaving to find jobs elsewhere and the local economy is in long-term decline.  Net profit generation is poor, core earnings have been declining rapidly since FY3/2013, net interest margin has fallen to less than half what it was a decade ago, the overhead ratio is a worrying 84%, credit costs are rising exponentially and the bank has been forced to cut its FY3/2021 dividend from ¥60ps to ¥50ps to preserve capital.

The stock price is down 21% in the last six months and yet, on a forward-looking PER of 27.9x (using the bank’s own FY3/2021 guidance), this remains the 2nd-most demanding regional bank stock in the Tohoku Region (being beaten only by Michinoku Bank (8350 JP), also from Aomori Prefecture, on a staggering 62.7x).

Remarkably, aggregate ownership by foreign institutional investors is at an all-time high, and has been rising steadily for the last eight years.  We fail to understand the attraction.  Caveat Emptor!  (May the Buyer Beware) is our advice to any would-be investor in this bank stock.


Rex Int: From Virtual Drilling Tech Play to Pumping Oil in Oman; Overlooked Bargain + M&A Candidate

By Nicolas Van Broekhoven

Rex International Holding (REXI SP) will celebrate its 7th year of being listed on the SGX this Friday. Rex IPO’d late July 2013 at 0.50 SGD and within three months of its listing peaked at 0.88 SGD. The downfall was epic as oil prices tumbled from 110 USD/bbl in 2013 to just 25 USD/bbl in 2016. Rex would finally bottom at 0.008 SGD per share in 3Q2018.

The stock has recovered some of its losses but REX is still trading 60% lower than its IPO. Now, times may be changing and Mr. Market is sleeping.

What has changed? Why Own Rex?

Rex has brought its Yumna field offshore Oman in development and is producing oil. Ten days ago Rex has achieved a declaration of commerciality from the Oman government and even at 40 USD oil price cash flows could be 40M USD/year. Contrast this with an Enterprise Value of just 143M USD. This leaves the stock trading at just over 3x 2021 Cash Flow. Obviously, this remains a commodity play and price taker so if oil prices drop/rise this number would change.

Short term catalysts: move to SGX mainboard once cash flows are evident, qualified person report to quantify volume of oil in Yumna field. Longer-term, given the average age of the principal shareholders involved, Rex is likely to end up in the hands of Eni SpA (ENI IM) or Total Sa Spon Adr (TOT US). Both companies are already active in Oman. Its remaining Norway assets and Virtual Drilling technology are just gravy.

Fair Value: Asset development in Oman and asset monetization in Norway gives Fair Value of at least 0.36 SGD/share, or 100% upside. This is based on 6x 2021 cash flow est. M&A could significantly increase that value to acquirer given size of Block 50 in Oman. ADTV is well over 3M USD.

Key risks are: drop in oil price below 25 USD which makes Oman project uneconomical. The downside is mitigated by a clean balance sheet (zero debt and +/-60M USD net cash) + M&A potential.

Key upside: cut in O&G CapEx budgets creates a super spike in oil prices between 2022-2025. Recall, JP Morgan recently told its clients oil could spike to 190 USD by 2025. The principal owners are well into their 70’s and will want to monetize their combined 45% ownership in Rex at some point.


Before it’s here, it’s on Smartkarma