In this briefing:
- SAPPE: New Strategic Partner Drive 2019 Earning Growth
- Donki (7532 JP) Becomes Japan’s 4th Biggest Retailer
- NASDAQ:GDS Placement – Visible Growth, Additional Ping An Investment
- UOB – Driving Bad Loans
- Postcard from Surat (India)
1. SAPPE: New Strategic Partner Drive 2019 Earning Growth
We cut our target price by 22% to Bt24.7 to factor in disappointing 2018 result. However, we maintain our BUY rating on the back of positive outlook toward its new products and market expansion plan.
The story:
- Posted net profit of Bt50m in 4Q18, down 36%YoY and 25%QoQ
- Trimmed 2019-21E forecast by 23.8%-24.3% respectively
- Expanding strategic partnership
- Our new target price of Bt24.7 is based on a target PE’19E of 18.8x which is equivalent to the World’s consumer staples sector.
Risks: (1) Fluctuations in raw material prices
(2) Exchange rate fluctuations
(3) Highly competitive industry
2. Donki (7532 JP) Becomes Japan’s 4th Biggest Retailer
Pan Pacific International (7532 JP) (Don Quijote) is on a roll at the moment.
The discount and variety retailer just opened its fourth store in South-East Asia, mixing Japanese restaurants and cafes with a Donki store and a range of Japanese speciality tenants. The store has all the high-level retail entertainment that its Japanese stores offer but with the added cachet of being from Japan and mixing in a lot more in-mall tenants and food outlets. PPI now plans 200 overseas stores in the medium-term.
Back home, PPI is creating new small store formats which have the potential to reach into parts of Japan its big box stores cannot.
At the same time, PPI is beginning the conversion of 100 Uny stores to mixed food and variety stores. With the first six conversions showing sales growth of 83% over 10 months and gross margins up 59%, PPI’s expectation of an extra ¥20 billion in operating profit once conversions are complete looks very achievable.
The takeover means PPI is now Japan’s fourth-biggest retailer, up from 15th just three years ago.
These multiple ventures reflect the company’s flexibility, adapting to each local market’s needs with formats to match.
Its recent decision to close down its e-commerce business is not a weakness but a positive move, demonstrating that PPI understands where its strengths lie: in live store entertainment.
3. NASDAQ:GDS Placement – Visible Growth, Additional Ping An Investment
GDS Holding, the largest carrier-neutral, cloud-neutral data centre operator in China, is raising USD 400 million from a private placement. The deal was launched last night (US time) post the company’s results announcement. In this insight, we will cover:
- Details of the deal
- Key takeaways from its 4Q2018 results
- USD 150 million investment by Ping An
- Its shareholders
- The score in our Placement Framework
4. UOB – Driving Bad Loans
It’s easy to miss. Headline bad loans are down. But United Overseas Bank (UOB SP) saw a surge in newly defaulted loans during 2H18 compared with 1H18. The bank’s Pillar 3 disclosure reveals this all too clearly, and it goes to true underlying credit metrics. Write-offs flatter figures or loan reschedulings, and high figures here can lead one to believe that companies and consumers are finding it easier to service their loans. This though may not be true. And it may be one of the most important considerations when analyzing any bank.
5. Postcard from Surat (India)
With our Post Card Series, our aim is to bring on-ground realities & perspectives from cities across India. In this insight, we share our takeaways from our visit to Surat, the diamond hub of India. Our focus is Titan Co Ltd (TTAN IN) and the impact on margins.
Studded jewellery has more margins than plain gold jewellery. Part of Titan’s plan is to improve the mix in favour of studded jewellery which could help it command even higher margins. Titan anticipates this mix to improve to 50% by FY2023. Our interactions indicate a limited possibility of this change in mix. Operating leverage may be the only driver that can help in margin expansion.
We revise our FY20 EBIT margin & EPS estimates. Our FY20 EBIT margin is revised from 12.63% to 11.6% for FY20, continues to be higher than consensus which is at 10.82%. While we see limited margin expansion possibility, revenue growth likely to surprise. We introduce our FY21 EPS estimate at INR 28.75 compared to consensus EPS which is at INR 25.50.
Trust is a factor which cannot be easily replicated or acquired. The trust that Titan enjoys argues for a higher PE multiple. Based on a two-year average forward multiple 51x, our target price for Titan is INR 1466 which represents an upside of 37% from the last close price of INR 1070
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