Daily BriefsIndustrials

Industrials: Nikola Corp, ZTO Express, SCG Packaging, Recruit Holdings, Garuda Indonesia (Persero) and more

In today’s briefing:

  • Nikola’s Founder Resigns – The Next Enron?
  • TRACKING TRAFFIC/Chinese Express: ZTO HK Listing | August Pricing Still Weak | KEX IPO in Bangkok
  • SCG Packaging and SET50 Fast Entry Inclusion: In The Box
  • 🇯🇵 JAPAN • Recruit (6098 JP) & The ‘New Workforce Paradigm’
  • SCG Packaging IPO: Valuation Insights
  • Pressure Building: How Consolidation in China’s Express Sector Might Look Over the Next Two Years
  • Morning Views Asia: E House China Holdings, Garuda Indonesia (Persero)

Nikola’s Founder Resigns – The Next Enron?

By Douglas Kim

In this insight, we provide our thoughts on the resignation of Nikola Corp (NKLA US) founder Trevor Milton, who will be replaced by Stephen Girsky, a former GM executive who already sits on Nikola Corp’s board. On 10 September, a firm called  Hindenburg Research published a report that harshly criticized the company. We are interested in Nikola mainly because a Korean company called Hanwha Solutions (009830 KS)’s stock price has been highly impacted by Nikola’s share price recently.

In our view, Hindenburg Research makes legitimate criticism of Nikola Corp and its founder Trevor Milton. Nikola Corp has come out with a rebuttal but we do not believe this is enough to calm investors and customers. Regarding Nikola Corp, it all comes down to whether or not the company has its own unique hydrogen-based technology which it claims it does. Nikola Corp needs to hire a well-respected third party agent and give sufficient proof that its technology really works. 

Investors are waiting for the confirmation of an independent third party test of its technology. If the company is unwilling to provide such tests and continues to delay such tests, we believe this could have a further negative impact on Nikola Corp and its major investors including Hanwha Solutions. 


TRACKING TRAFFIC/Chinese Express: ZTO HK Listing | August Pricing Still Weak | KEX IPO in Bangkok

By Daniel Hellberg

The express sector’s big news is that ZTO Express (ZTO US) is seeking an IPO in Hong Kong, as many large Chinese tech companies have done in recent months. We understand the rationale for this move, but still dislike the company’s deteriorating fundamentals and rich valuation. 

In August, express sector volume growth remained firm (+36.5% YoY), but revenue growth slowed (+17.9%, slowest since March) as average unit pricing tumbled. We believe the current price war will continue in the medium-term, eating into express companies’ margins and cash flow.

Outside of China, Kerry Express Thailand (KEX TB) has filed IPO documents. We believe this offering is worth watching, as KEX may be the only public ‘pure play’ on eCommerce logistics in SE Asia. A successful IPO should also boost sentiment toward Kerry Logistics Network (636 HK).

Conclusion: Owning independent market leader S.F. Holding (002352 CH) against short positions in any of the listed express companies aligned with Alibaba Group (BABA US) has been a winning strategy in 2020, and we see no reason to change course in the near-term. 


SCG Packaging and SET50 Fast Entry Inclusion: In The Box

By Brian Freitas

SCG Packaging (SCGP TB), Thailand’s largest packaging company, is looking to raise between THB 37.77-39.46bn (US$1.21-1.26bn) via a listing on the Stock Exchange of Thailand (SET) by selling 1.127bn shares (plus a greenshoe of 169m shares) at a price range of THB 33.5-35/share.

Shares will be offered to investors between 28 September and 14 October with final pricing to be announced on 8 October and shares should begin trading in the second half of October.

Using current market prices, the stock should be included in the SET50 index at the close on its third day of trading, but the final decision is dependent on SCG Packaging (SCGP TB)‘s closing price on its first trading day and also on the performance of the current constituents of the SET50 index and the Thailand SET Index (SET INDEX).

In this Insight, we take a look at the some of the IPO details and the possibility of the stock being included in the SET50 index.


🇯🇵 JAPAN • Recruit (6098 JP) & The ‘New Workforce Paradigm’

By Campbell Gunn

“I don’t believe BlackRock will be ever 100% back in [the] office – maybe 60% or 70%, and maybe that’s a rotation of people. I don’t believe we’ll ever have a full cadre of people in [the] office [again]. It’s going to be a new workforce. It’s going to be a new paradigm, but I do believe it will be a better paradigm for the firm.”

Larry Fink, CEO, Blackrock Inc.

Thursday 17rh September 2020

Source for all charts: Japan Analytics

Recruit (6098 JP)– Since listing in October 2014 has been a key ‘Abe-era stock’ – rising by 284% from its February 2016 low. As a prime beneficiary of more flexible working practices and the rise of the temporary workforce in Japan.

PEAK TEMP – Using a sample of all currently-listed companies, the number of temporary workers has increased tenfold to 4.7 million since 2000 and ratio of ‘temps’ to full-time employees has more than quadrupled, reaching a peak of 23.2% in 2018. Much of the rise has come at consolidated subsidiaries – the number of temps at head offices has not changed materially since reaching one million in 2006. As in other countries, many Japanese manufacturing companies face a material reduction in demand which will eventually result in ‘reductions-in-force’  with temps bearing the initial brunt.  Also, tighter regulation on abuse of the working terms conditions offered to temporary workers has forced many companies to offer full-time employment to temp staff.

THE REVELATION OF WFH – The COVID-induced experience of working-from-home (WFH) has been a revelation for many office staff in central Tokyo who had previously endured tortuous two-hour-long-daily commutes on crowded trains. Many do not wish to return to the past ways of working and commuting, echoing Larry Fink thoughts above. For Japanese HR departments, WFH will require a substantial commitment in terms of IT infrastructure. In many companies, employees have to log out while in the office every time they leave their desk. It is unlikely that companies will make such an investment and extend such trust to temporary workers. With 20% of revenues generated in the US and a further 25% from ‘Other Regions’, Recruit is heavily exposed to global COVID and WFH trends. 

LESS OFFICE SPACE, LESS PAPERWORK, FEWER TEMPS – Overall, WFH will result in a decline in demand for CBD office space, but also will lead to less paperwork, more efficient working methods, and a reduction in the requirement for ‘temps’. This trend has now been given government-backing with the creation of a new Digital Agency by 2021.   

REVENUES ▲ – Recruit has grown revenues faster than any other larger Commercial Services company in Japan since 2013, outshining peers Persol (2181 JP) and Outsourcing (2427 JP).  

PROFITS ► – Recruit’s ‘bottom-lin’  has been much less impressive and since recovering from a period of losses in FY17, Comprehensive Income to Common (CITC) has failed to grow over the last three years.

MIDDLING MARGINS – Indeed, within the Employment and Staffing Services Peer Group, Recruit ranks eighteenth out sixty in terms of trailing CITC margin at 6.3%.

RELATIVE PRICE SCORE ▲ -Recruit accounts for 75% of its Peer Group’s market capitalisation and has been the prime driver taking both to new Relative Price Score highs in recent weeks.

RESULTS & REVISION SCORE ▼ – The trend in Rescuit and the Peer Group’s earning momentum since 2018 has been down, which COVID-19 has accelerated. 

In the DETAIL below,  we shall review Recruit’s financial performance and valuation and assess if Recruit is a ‘structural short’.


SCG Packaging IPO: Valuation Insights

By Arun George

SCG Packaging (SCGP TB) is the largest packaging paper producer and largest corrugated container producer in Southeast Asia, according to Frost & Sullivan. SCGP’s parent company is Siam Cement (SCC TB), which is a 99.04% shareholder.

SCGP has launched its IPO at a price range of THB33.50-35.00 per share to raise as much as THB39.5 billion ($1.27 billion). Cornerstone investors which comprise of 18 domestic and foreign funds will subscribe for 677 million offer shares (60% of the offering). The largest domestic cornerstone investors are Kasikorn Asset Management and BBL Asset Management. The largest foreign cornerstone investors are Avanda Investment Management and NTAsian Discovery Master Fund. The final pricing will be announced on 8 October.

In our initiation note, we stated that SCGP’s fundamentals offer more positives (margin expansion, strong cash generation, reasonable dividend policy) than negatives (negative organic revenue growth) . Overall, we think that a reasonable P/E valuation, a market-leading business and solid cornerstone support makes SCGP tempting at the proposed pricing range. 


Pressure Building: How Consolidation in China’s Express Sector Might Look Over the Next Two Years

By Daniel Hellberg

The objectives of this report are to examine what express sector consolidation may look like over the next few years, and to offer investors guidance about how to play this trend when the dominoes begin to fall, most likely in 2021-22. We organize the report into six parts as follows:

  1. How things used to work in China’s express sector
  2. How the sector has begun changing in ways that may force consolidation
  3. The ‘Why?’ & ‘How?’ of Chinese express sector consolidation
  4. Alibaba’s critical role in potential M&A activity
  5. Some thoughts about the timing of expected changes
  6. Conclusions

Morning Views Asia: E House China Holdings, Garuda Indonesia (Persero)

By Charles Macgregor

Lucror Analytics Morning Views comprise our fundamental credit analysis, opinions and trade recommendations on high yield issuers in the region, based on key company-specific developments in the past 24 hours. Our Morning Views include a section with a brief market commentary, key market indicators and a macroeconomic and corporate event calendar.


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