Brief Growth Ideas: CIMC Vehicle (中集车辆): Market Leader of Semi-Trailers but Little Growth Ahead and more

In this briefing:

1. CIMC Vehicle (中集车辆): Market Leader of Semi-Trailers but Little Growth Ahead
2. Japanese Cosmetics Sector: Weak Inbound Sales in January Was Merely a One-Off Glitch
3. Sumco: Well Positioned to Expand Capacity Faster than Its Competitors if Demand Picks Up
4. Nexon to Increase Focus on Mobile Gaming Amidst Talks of Possible Sale of the Company
5. Modi’s Vulnerable Domestic Flank

1. CIMC Vehicle (中集车辆): Market Leader of Semi-Trailers but Little Growth Ahead

CIMC Vehicle, the largest manufacturer of semi-trailers in the world and a subsidiary of CIMC, will start to pre-market its USD300-500 million IPO in Hong Kong, as per media reports. In this insight, we will cover the following topics:

• Company background
• Semi-trailer and truck body industry
• Shareholders and pre-IPO investors
• Our thoughts on valuation

2. Japanese Cosmetics Sector: Weak Inbound Sales in January Was Merely a One-Off Glitch

• Japanese cosmetic companies showed a bit of concern in January when the inbound sales, which had been growing steadily over the past few years turned red all of a sudden.
• Tourist arrivals kept their growth momentum going into January, However per capita spend by tourists has been on the decline for a couple of years
• Chinese e-commerce legislation did have an impact on Japanese cosmetic companies, however, the impact wasn’t as significant for cosmetic companies as it was for some of the other retailers
• Inbound and travel retail sales: back on track from February onwards

3. Sumco: Well Positioned to Expand Capacity Faster than Its Competitors if Demand Picks Up

• The semiconductor silicon wafer market saw continued growth in demand for all wafer diameters supported by applications for servers, data centers, automobiles and IoT applications.
• While the demand for semiconductors, data centers and other IoT applications are declining, Sumco expects firm demand from power semiconductors, sensors and automotive uses. The management expects the demand from the 5G market also to aid in top-line growth.
• Sumco has posted an extraordinary loss following the early termination of a long-term polysilicon purchasing agreement. The long-term contract with Osaka Titanium is expected to end in March 2019. We expect this move to help Sumco switch to cheaper polysilicon which in turn should help reduce costs. That being said, some of the long-term contracts for polysilicon are still continuing, and there is still significant inventory built-up so this impact could take four to five years to be fully realised.
• Having visited the company recently, Sumco still has more potential brownfield capacity available, which we believe can be used in the event the demand picks up enabling the company to add new capacity faster than its competitors and enjoy the benefits from growing demand and increasing prices.

4. Nexon to Increase Focus on Mobile Gaming Amidst Talks of Possible Sale of the Company

• The global gaming market is transitioning towards mobile gaming, which currently captures around 50% of market share. This has resulted in Korean gaming company Nexon slowly shifting its focus towards mobile games.
• Over the year’s Nexon’s mobile gaming segment has grown faster than the PC online segment. When looking at the five-year revenue CAGR between the two business segments, the PC online segment has grown at a CAGR of 9.4% over FY2013-18 while the mobile games segment has grown at a double digit CAGR of 14.1% over the same period.
• For the mobile gaming segment, in the future, Nexon’s primary focus includes developing mobile games based on IPs of older PC games.
• The company has a steady line up of mobile games planned for FY2019, with ten titles set to release in the first half.
• On our estimates, Nexon seems over-valued, currently trading at a FY1 EV/OP of 9.6x compared to its five-year historical median of 7.7x.

5. Modi’s Vulnerable Domestic Flank

The Indian prime minister’s announcement that India had destroyed a ‘low-earth orbit’ satellite with a missile, and thus joined an elite club, suggests that the ruling party is desperate to deflect the voters’ attention from the dire economic situation in India. This desperation points to a reality quite different from the view in the capital market, which appears to have discounted another term for Modi. In the wake of the Balakot ‘surgical strike’, this government wants to foreground its muscular national security policy to compensate for its inability to address the economic situation on employment and rural wages.