In this briefing:
- Dollar Yen BIG Short Phase II
- A Pricey Deal in Hindsight, Walmart? India Reviews Policy – Amazon, Walmart May Need to Rejig Model
- Futu Holdings Pre-IPO – Great Metrics but in a Commoditised Industry
- U.S. Equity Strategy: Oversold Rally Continues
- Korean Stubs Spotlight: A Pair Trade Between BGF Co. & BGF Retail
1. Dollar Yen BIG Short Phase II
Major top and short call at USD/JPY 114 and flash decline did have a direct impact on a risk assets and the Nikkei in line with our S&P and Nikkei short calls. The second phase of USD/JPY weakness will usher in the next downturn in risk assets in late Q1 after some tactical posturing. We do view SPX 2,600 as a good level to re cycle shorts with some range work in store for February.
High degree divergence is still not fully unwound and implies the USD/JPY is set for a new low and part of phase II of the pain trade. Japan’s Crowded Long Faces Exodus Pressure . Japan Bank Index Bearish Head and Shoulders .
JPY crosses versus the AUD, GBP and Euro are currently nudging up against key resistance points that represent an interesting pivot point to stage a fresh decline (good risk aversion barometers).
We are seeing the knock on effect in Asian FX.
USD/JPY will surpass our original downside target of 108-109.
2. A Pricey Deal in Hindsight, Walmart? India Reviews Policy – Amazon, Walmart May Need to Rejig Model
Would Wal Mart Stores (WMT US) have paid USD16 bn last year for Flipkart, a leading online Indian retailer, if the recent clarification on India’s policy on FDI in e-commerce were in place back then? Foreign owned online retailers in India ( Amazon.com Inc (AMZN US) , Wal Mart Stores (WMT US) and Alibaba Group Holding (BABA US) ) will need to rejig their operating models and may face prospects of slower growth and even more distant breakeven targets, if the Indian Government is indeed determined to enforce its policy that e-commerce ‘Marketplaces’ operate only as platforms for third party vendors. Unsurprisingly, Amazon.com Inc (AMZN US) and Wal Mart Stores (WMT US) have reportedly teamed up to lobby the government on these regulations.
The Indian Government had posted a one-page circular on Dec 26th giving further clarifications to its existing policy on foreign owned e-commerce entities. The detailing of policy specifics seems to be an attempt to enforce the existing policy restrictions on foreign owned online retailers; compliance has so far been sketchy. India do not allow majority foreign ownership in multi brand retail stores and online retailers are allowed to operate only as ‘Marketplaces’ and not as B2C entities. With national elections due in next few months, the Government cannot ignore demands from domestic lobby groups to reign in free play by deep pocketed foreign operators that have been hurting local retailers.
In the detailed note below, we present (1) an overview of the regulatory framework and restrictions under which online retailers operate in India (2) the updated policy and its impact on operating models of Amazon and Walmart in India (3) expectations for India’s e-commerce players. Also, there is a likely gainer from all these – a listed Indian player aspiring to trump global majors in India’s online retail turf.
3. Futu Holdings Pre-IPO – Great Metrics but in a Commoditised Industry
Futu Holdings Ltd (FHL US) plans to raise around US$300m in its US IPO. The company is backed by Tencent Holdings (700 HK) , Matrix Partners and Sequoia, who together own over 45% of the company.
The founding team comes mostly from Tencent, which might explain Tencent’s large stake in the company. Growth for the company has been stupendous despite the jittery markets, with margin financing adding to the top-line growth.
While its low costs will help it to steal clients from the more traditional brokers, other new low-cost brokers seem to be offering similar services at comparable rates. In addition, the company is not licensed or regulated by any entities in China, despite the majority of its client base being Chinese nationals. Furthermore, the company plans to expand into newer overseas market where it doesn’t seem to have much of a cost advantage.
4. U.S. Equity Strategy: Oversold Rally Continues
A combination of, optimism surrounding U.S.-China trade talks, and Fed Chairman Powell’s comments have led to a continuation of the oversold bounce which began on 12/26, and the S&P 500 is now trading just below the 12/19 pre-Fed rate hike area. ~2,350 on the S&P 500 remains the support level to monitor. A retest of this low remains the most likely scenario, though it is far from a guarantee due to the potential for a “V” reversal. We examine an array of factors leading to our intact cautious outlook, and highlight attractive set-ups within Consumer Discretionary and Health Care Sectors.
5. Korean Stubs Spotlight: A Pair Trade Between BGF Co. & BGF Retail
In this report, we provide an analysis of our pair trade idea between BGF Co Ltd (027410 KS) and Bgf Retail (282330 KS). Our strategy will be to be long BGF Co & Short BGF Retail. BGF Co Ltd (027410 KS)‘s share price plummeted by 48% in the past year while Bgf Retail (282330 KS) had a tiny gain of 0.7% in the same period. In the past year, BGF Co was down versus BGF Retail for pretty much the entire year. The BGF/BGF Retail share price ratio has been trending downwards since March 23rd, 2018. The current ratio is 0.037 and it is now close to approaching two σ.
The following are the major catalysts that could boost BGF Co shares higher than BGF Retail shares within the next six months.
- Temporary relief from big market fears, seasonality, & trading volume
- Market’s concerns about the size of tender offer rather than the value of BGF Co post tender offer in 2018
- NAV discount to its intrinsic value at an all-time high – Our NAV analysis of BGF Co suggests that it is trading at a 51% discount to its NAV, which is close to its all time highest discount. Typically, the Korean holdcos trade at a 20-40% discount to their intrinsic value so it is unusual for the holdco to trade with so much discount.
- Government is likely to slow down the minimum wage hikes
- Potential increases in brand usage fees
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