Equity Bottom-Up: Tesla Motors, Mitsubishi Motors, AIA Group Ltd, Rex International Holding, Koei Tecmo Holdings, Link REIT, HM Sampoerna, Xtep International, Bank Central Asia and more

In today’s briefing:

  • Tesla – Short Side Risk-Reward Looking Juicy Again
  • Mitsubishi Motors – Small and Ugly
  • AIA – Expecting An Even Weaker 2Q20 Result
  • Rex Int: From Virtual Drilling Tech Play to Pumping Oil in Oman; Overlooked Bargain + M&A Candidate
  • Koei Tecmo – Two New Sangokushi Games on Deck
  • Link REIT – Moving Further Away From Its Core
  • Sampoerna (HMSP): Losing From Higher Excise Tax
  • Notes from the Silk Road: Xtep Int’l Holdings (1368 HK): Profit Warning Comes as No Surprise
  • Bank Central Asia – Hunkering Down Is Not Helping

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.

Mitsubishi Motors – Small and Ugly

By Mio Kato, CFA

Today Mitsubishi Motors released a set of rather shocking results, harsh-looking but still perhaps optimistic guidance and its new Mid-Term Business Plan – Small but Beautiful. We find the company’s current situation to be anything but beautiful given the deterioration of results in its key ASEAN market.

AIA – Expecting An Even Weaker 2Q20 Result

By Thomas J. Monaco

* Weak 1H20 Operational Results Expected: AIA (1299.HK) is set to report 1H20 interim results on August 20, 2020. As a follow-on to AIA’s very abbreviated and abysmal 1Q20 operating result that was impacted by regional COVID-19 restrictions and social distancing measures in Greater China and ASEAN new business sales, and expense overruns – accelerating the decline in the value of new business (VONB), should continue to be problematic for AIA;

* Watch The Investment Portfolio: Yields drive the bottom-line at life insurers. Rates have been reduced to all-time lows in most markets globally, and investment returns at AIA’s bottom-line will continue to be challenged. In addition, ratings agency downgrades are expected to negatively impact AIA solvency margins.  With over USD 220 bn in corporate debt issues likely on the verge of downgrade by the venerable ratings agencies (which is greater than the actual USD 147 bn downgraded during the GFC) the market must be prepared for substantive hits to AIA’s investment portfolio; and 

* Weak Disclosure:We continue to encourage AIA to dislcose its assumptions for how it calculates in VONB margins. 

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.

Koei Tecmo – Two New Sangokushi Games on Deck

By Mio Kato, CFA

KT delivered strong results yesterday with OP of ¥4.4bn exceeding consensus’ ¥3.6bn estimate by 22%. When we last wrote on KT back in April we suggested that consensus OP estimates for the FY (¥19.3bn) could be exceeded by 50%+. Since then consensus has risen to ¥22.4bn but we feel there is still more upside.

Link REIT – Moving Further Away From Its Core

By Thomas J. Monaco

 * New Transaction In London: On July 26, 2020, Link REIT (823.HK) announced its proposed acquisition of a Grade A office building, The Cabot at 25 Cabot Square at Canary Wharf in London for  GBP 371mn or HKD 3.68 bn –  5% lower than market expectations. The Cabot is Grade A freehold multi-let Canary Wharf office with over 44,000 sq. meters and is widely recognized landmark;

 * Deal Makes Close To No Sense: While the acquisition of The Cabot is mildly dividend accretive on its face at approximately 1.4%, this transaction makes little sense for Link REIT on a number of levels; and

 *Hong Kong Pressures Are Very Apparent: This transaction so far away from Link REIT’s core competencies speaks volumes as to where it believes its core Hong Kong retail business is heading. This doesn’t seem like smart diversification and smells more of panic leverage when one considers the thre price and location of this deal. 

Sampoerna (HMSP): Losing From Higher Excise Tax

By Henry Soediarko

The unsatisfactory 1H 2020 operating numbers that stemmed from lower revenue growth and higher excise taxes reduce operating cash flow, prompting the company to increase the amount of debt in the balance sheet that will further reduce the net income margin by 1.7 to 4% if the next six months’ operating numbers will not improve. With the shift in the consumers’ taste that reduces Dji-Sam-Soe’s (HMSP’s flagship product) sales, HMSP is not in the best position to outperform the potential weak consumption trend in the second half of 2020. If HMSP were to cut or forego dividends next year, it will accelerate the switch from HMSP to GGRM. 

HMSP’s operating numbers are also very volatile compared to the steady GGRM’s, yet the former seems to trade at a higher valuation in the Indonesian equity market compared to the latter albeit losing market share. Maintain underweight HMSP and overweight GGRM. 

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?

Bank Central Asia – Hunkering Down Is Not Helping

By Thomas J. Monaco

*Lower Costs and Under-Provisioning Support Result: Bank Central Asia’ (BBCA.IJ) [BCA] reported 2Q20 earnings results of IDR of 5.7 bn, declining IDR 924 mn (14.0%) linked quarter – and missing consensus forecasts. However, if we exclude securities gains we find that core operating results actually improved linked quarter by IDR 1.3 bn (30.2%) to IDR 5.8 bn. While BCA was – like most banks around the word – was ravaged by credit weakness, the story for the quarter is management’s ability to quickly rein-in costs; and

*Accelerating Credit Risk Supported By Lower Reserves: BCA’s NPLs increased IDR 2.5 bn (26.5%) linked quarter, and amount to 2.09% of total loans – up 18 bp over the period. 2020 guidance, however, remains unchanged at between 2.5-2.7%.NPL recognition of loans within the restructuring process/moratorium are throwing a wrench into BCA’s forecasts, however. As it stands, reserves were bled against both total loans and NPLs linked quarter (seemingly not taking potential losses of its forecast moratorium book into account) declined 25 bp and 45.3%, respectively, to 2.05% and 99.1%.

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