Brief Growth Ideas: Donaco International Ltd: A Tiny Cap, Low Price Entry Bet on the Bourgeoning Cambodia Gaming Market and more

In this briefing:

1. Donaco International Ltd: A Tiny Cap, Low Price Entry Bet on the Bourgeoning Cambodia Gaming Market
2. Yes Bank: In the Cross Hairs of the Regulator
3. THK (6481 JP): New Orders Down by Two-Thirds in 4Q, Near the Bottom of the Cycle
4. Horiba (6856 JP): Long-Term Buy on Pullbacks
5. ECM Weekly (16 February 2019) – ByteDance, Embassy Office REIT, AB InBev Asia, CStone, Dexin

1. Donaco International Ltd: A Tiny Cap, Low Price Entry Bet on the Bourgeoning Cambodia Gaming Market

• The company’s flagship Star Vegas casino resort was victimized by an alleged diversion of VIP players by its contract management. Now under corporate control it is beginning to recover.
• Its US$124m breech of contract claim against the vendor was filed in there Singapore court system and sits at final appeal stage.
• Cambodia’s new gaming regulation law will stabilize and eliminate wild west dimension of Poipet casinos. This could lead to major earnings gains and increased investment going forward.

2. Yes Bank: In the Cross Hairs of the Regulator

Yes Bank is in the cross hairs of the Reserve Bank of India (RBI), the banking regulator. On February 13, 2019, the bank issued a press release stating that the regulator’s risk assessment report (RAR) for the year ended March 31, 2018 revealed nil divergence, i.e. the bank’s net profits and asset quality were in conformity with the regulatory norms, unlike in FY2016 and FY2017. However, on February 15, 2019, the bank released a note stating that the RBI had pulled up the bank, as publicly disclosing a part of the RAR breaches regulatory confidentiality and is in violation of regulatory guidelines. While the RAR is indeed confidential, the RBI did not publicly admonish other banks like HDFC Bank, Axis Bank and Kotak Mahindra Bank (KMB) when they had publicly revealed nil divergence from their RARs. It is apparent that Yes Bank is the bad boy in the eyes of the regulator, and the bank will have to renew its efforts to change that perception. Shareholders have to therefore exercise caution and take the surge in the share price with a pinch of salt.

3. THK (6481 JP): New Orders Down by Two-Thirds in 4Q, Near the Bottom of the Cycle

Sales and profits were above management’s guidance in FY Dec-18, with operating profit rising 36.9% on a 10.9% increase in sales. But new orders continuously declined and were down about two-thirds year-on-year in 4Q.

In view of the order flow, management is guiding for a 12% decline in sales and a 44% decline in operating profit in FY Dec-19, a forecast that is roughly in line with our own.

On the positive side, historical data indicates that new orders are at or near the bottom of the cycle. Anticipating a better investment climate after some resolution of the U.S.-China trade problem, we are forecasting an increase in sales and profits going into FY Dec-20.

The shares have rebounded by 41% since the beginning of January. At ¥2,720 (Friday, February 15, close), they are selling at 15.6x our estimate for FY Dec-19 and 13.8x our estimate for FY Dec-20E. These multiples look reasonably attractive in comparison with the company’s recent P/E range.

4. Horiba (6856 JP): Long-Term Buy on Pullbacks

Horiba’s share price has rebounded on FY Dec-18 results that were above management’s most recent guidance and better than we had expected. Consolidated operating profit was up 7.5% on a 7.8% increase in sales, and net profit up 37.0% following extraordinary gains (vs. losses the previous year) and a lower effective tax rate.  

4Q results were weak, primarily due to the downturn in semiconductor capital spending, but this was no surprise. Total consolidated operating profit was down 10.3% year-on-year on a 2.3% increase in sales in the three months to December, while operating profit on Semiconductor Instruments & Systems (primarily mass flow controllers) was down 32.8% on a 15.8% decrease in sales.

Looking ahead, management is guiding for year-on-year declines in both sales and profits in the six months to June, again due to weak demand for semiconductor equipment, followed by a sharp rebound in 2H and low single-digit growth FY Dec-19 as a whole. Judging from the semiconductor equipment order flow, it appears that a weak 1H will be hard to avoid, while there is as yet no sign pointing to recovery. Nevertheless, we have raised our own sales and profit estimates for this fiscal year and next based on the absolute levels of orders and sales.

Automotive Test Systems and the company’s other businesses should continue to grow, supported by the acquisition of FuelCon AG of Germany (an industry leader in battery and fuel cell validation) and Manta Instruments of the U.S. (which makes nanoparticle tracking analysis systems). The issue, then, is how soon and how rapidly semiconductor related investments will recover. We suspect later and more slowly than management hopes, but in any case the downturn appears to have been discounted.

At ¥5,980 (Friday, February 15, closing price), Horiba has rebounded by 44% from its January 4 low of ¥4,155, but is still 38% below its ¥9,590 all-time high reached last May. It is now selling at 13.6x our EPS estimate for this fiscal year and 12.3x our estimate for FY Dec-20. These and other projected valuations are on the low side of their 5-year historical ranges. Once the recent bounce has been consolidated, there should be another buying opportunity for longer term investors.

5. ECM Weekly (16 February 2019) – ByteDance, Embassy Office REIT, AB InBev Asia, CStone, Dexin

Aequitas Research puts out a weekly update on the deals that have been covered by Smartkarma Insight Providers recently, along with updates for upcoming IPOs.

Accuracy Rate:

Our overall accuracy rate is 72.1% for IPOs and 63.8% for Placements 

(Performance measurement criteria is explained at the end of the note)

New IPO filings

• Reliance General Insurance (re-filed, India)

Below is a snippet of our IPO tool showing upcoming events for the next week. The IPO tool is designed to provide readers with timely information on all IPO related events (Book open/closing, listing, initiation, lock-up expiry, etc) for all the deals that we have worked on. You can access the tool here or through the tools menu.

News on Upcoming IPOs

• PineBridge-backed Uniparts gets SEBI nod to float IPO
• Cal-Comp Philippines eyes IPO by third quarter
• JERA new president says IPO is an option
• Singapore’s Zalora explores listing to fuel expansion
• S. Korea’s Homeplus files for up to $1.5 bln REIT IPO
• Korean bio unicorn in the making, Voronoi, to join the Kosdaq this year

Smartkarma Community’s this week Analysis on Upcoming IPO

• Homeplus REIT IPO – The Largest Ever REIT IPO in Korea
• Ecopro BM IPO: Valuation Analysis
• Embassy Office Parks REIT – Good Assets but Projections Might Be a Tad Too Bullish
• CStone Pharma (基石药业) IPO: Thoughts on Valuation (Part 2)
• Hansoh Pharma IPO Preview: A Decent Story Tarnished by a Huge Pre-IPO Dividend
• Ab InBev Asia Pre-IPO – A Brief History of the Asia Pacific Operations – Eeking Out Growth in China 
• ByteDance (字节跳动) IPO: How Jinri Toutiao Paves The Way for a Bigger Empire (Part 1)
• ByteDance (字节跳动) IPO: Tiktok the No.1 Short Video App for a Good Reason (Part 2)
• Dreamtech IPO: Valuation Analysis
• Dexin China (德信中国) IPO Review – Key Issues Remain but 9M Results Showed Strong Growth

List of pre-IPO Coverage on Smartkarma