Brief Industrials: Smartkarma’s Week that Was in 🇯🇵/🇰🇷 : Korea’s NPS, Samsung, Toshiba, Hitachi Hi-Tech, Payments and more

In this briefing:

  1. Smartkarma’s Week that Was in 🇯🇵/🇰🇷 : Korea’s NPS, Samsung, Toshiba, Hitachi Hi-Tech, Payments
  2. A Pair Trade Between Doosan Heavy Industries & Doosan Corp: (미세먼지, Nuclear Power, & 0.42 Million)
  3. Koolearn (新东方在线) IPO Review – Yet to See Results from Increased Spending
  4. Keppel Infrastructure Trust Placement – Scaled Down but Large Deal; Very Well Flagged Deal
  5. Yokogawa Electric (6841 JP): A Less Risky Investment in LNG Engineering

1. Smartkarma’s Week that Was in 🇯🇵/🇰🇷 : Korea’s NPS, Samsung, Toshiba, Hitachi Hi-Tech, Payments

Something of a slower week on Smartkarma this week (I contributed to that slowness by being away and under the weather when back) with about 120 insights published. A list of the insights to do with Japan and Korea this week are listed below.

There will be a couple more shortly. 

JAPAN

DateIPTitle
3/10Travis LundyOmron into the Nikkei 225, Pioneer Out
3/11David RubensteinHitachi High Tech’s Ace in the Hole
3/11Oshadhi KumarasiriJapan Tobacco: No Dire Consequences Despite Late Entry to Heated Tobacco
3/12Nicholas TannerNsk (6471) Conditions Have Deteriorated Significantly but Given Valuations, This Is Now in the Price
3/12Mio Kato, CFAToshiba: King Street Round Two
3/12Mio Kato, CFAChiyoda: Minor Updates About the Major Capital Infusion, Cost Overruns and Upcoming Orders
3/13Travis LundyShinetsu Buyback – Maybe More Than It Appears
3/13Supun WalpolaCyberAgent (4751 JP): Key Takeaways from Our Discussion with the IR Team
3/13Mio Kato, CFAZozo: Looks Like There’s a Dead Cat in This Bouncy Zozosuit
3/13Pelham SmithersESport Prize Money in 2019 Running at 2x 2018 Levels
3/13Michael CaustonLoyalty Points In Japan: More Loyalty, More Points and the Conduit to Cashless Payments
3/13Michael CaustonWho Will Win the Cashless Wars in Japan?
3/14Scott FosterYokogawa Electric (6841 JP): A Less Risky Investment in LNG Engineering
3/14Shifara Samsudeen, ACMA, CGMAAdvantest (6857 JP): Memory Downturn Yet to Impact Advantest
3/14Michael CaustonDonki (7532 JP) Becomes Japan’s 4th Biggest Retailer
3/15Kirk BoodryYahoo Japan Company Visit: Profit Erosion Has Bottomed and Mobile Payments (PayPay) Starts Strong
3/15Kirk BoodryDoCoMo Company Visit: Brief Comments on Mobile Competition and Payment Efforts
3/15Michael CaustonIsetan-Mitsukoshi Unveils Digital Strategy
3/16Jim HandyMoore’s Law May Not Be Dead, After All

Korea

DateIPTitle
3/10Sanghyun ParkHHI – DSME Acquisition: Current Situation & Trade Approach
3/11Thomas SchroederLG Corp Daily Cycle Pivot and Re Test of Base Line Support
3/11Douglas KimHomeplus REIT IPO: A Key Landmark Deal in the History of the Korean REIT Market
3/12Sanghyun ParkNongshim Stub Trade: Sub Moving Up on New Hit Product, Now at Near -2σ
3/12Douglas KimKorean Stubs Spotlight: A Pair Trade Between Hyosung Corp and Hyosung TNC
3/13Douglas KimKorea National Pension Fund Announces a List of 11 Companies They Oppose in Upcoming AGMs
3/14Sanghyun ParkReason Why Amazon Canceled DRAM Order from Samsung: Short-Term Impact on Samsung

For more detail, read on below the fold…

For me, the MUST READS of this weak are the cashless payment-related pieces by Kirk Boodry and Michael Causton shown at the bottom. 

2. A Pair Trade Between Doosan Heavy Industries & Doosan Corp: (미세먼지, Nuclear Power, & 0.42 Million)

Doosan pair

In this report, we provide an analysis of our pair trade idea between Doosan Heavy Industries (034020 KS) and Doosan Corp (000150 KS)Our strategy will be to be long Doosan Heavy Industries and be short Doosan Corp. Our base case strategy is to achieve gains of 7-9% on this pair trade over the next six months. 

In the past two years, Moon Jae-In administration’s energy policy has been to further reduce the reliance on nuclear power and increase reliance in renewable and coal power. The use of nuclear power in Korea is highly impacted by politics. There are a few stocks in Korea such as Doosan Heavy Industries (034020 KS) where politics is very important. The conservative parties in Korea tend to favor the use of nuclear power. However, the ruling liberal party does not favor the use of nuclear power. 

Among the domestic issues, the decline in the nuclear power generation and greater use of coal based power generation have been cited as key reasons why the fine dust problems has increased in Korea in the past two years. In fact, more than 0.42 million Korean citizens have signed petitions in the past few weeks that would oppose the continued decline in the use of nuclear power generation. 

3. Koolearn (新东方在线) IPO Review – Yet to See Results from Increased Spending

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Koolearn (1797 HK) is looking to raise up to US$S234m in its upcoming IPO.  We have previously covered the company in:

In this insight, we will look at the updates on financials and operating metrics, compare it to other listed online education companies, and run the deal through our framework.

The increase in spending on marketing has not yielded the intended results as the growth rates of student enrollment and gross billings slowing down. Furthermore, aggressive spending behavior is similar to that of STG and LAIX and both companies did not perform well post listing.

4. Keppel Infrastructure Trust Placement – Scaled Down but Large Deal; Very Well Flagged Deal

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Keppel Infrastructure Trust (KIT SP) plans to raise US$450m via an equity placement and non-renounacable preferential offering. Its sponsor, Keppel Corp Ltd (KEP SP) will subscribe in the placement and the preferential offering to maintain its 18.2% stake.

KIT announced the acquisition of IXOM in Nov 2018 and has been talking about the need to issue equity ever since. Its earlier presentations seem to indicate a preference for raising a large sum via an equity issuance. Furthermore, despite the smaller raise the accretion to DPU is probably only marginal. 

5. Yokogawa Electric (6841 JP): A Less Risky Investment in LNG Engineering

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Yokogawa Electric is one of the world’s leading suppliers of distributed control systems (DCS) used in the LNG, oil & gas, petrochemical and other industries. It is particularly strong in LNG, having provided control systems for dozens of liquefaction trains, LNG carriers and re-gasification plants.

Unlike Chiyoda Corporation (6366 JP) and JGC (1963 JP), which depend on a small number of large engineering, procurement and construction (EPC) orders, which can be as large as ¥500 billion, Yokogawa only rarely receives an order as large as ¥10 billion and most of its orders are less than ¥1 billion. It is geared primarily to ongoing investments and operating expenditures in its user industries, less exposed to highly variable orders for large LNG and other engineering projects, and relatively immune to cost overruns and other problems at projects gone wrong.

Margins have expanded over the past several years due to a combination of restructuring and technological advance. Unprofitable non-core businesses have been abandoned or sold, high-wage domestic employees retired, and administration, manufacturing and logistics rationalized. Enterprise and robotic process automation (RPA) software have been introduced and an Industrial Internet of Things (IIoT) cloud computing platform is under development.  Top-line growth has been slow, but the operating margin has risen from from 5.0% in FY Mar-12 to 8.0% in FY Mar-18, and should reach 10% in FY Mar-21, in our estimation.

At ¥2,215 (Wednesday, March 13 closing price), the shares are selling at 23x our EPS estimate for FY Mar-19 and 20x our estimate for FY Mar-21. Projected EV/EBITDA multiples for the same two years are 9.8x and 8.2x. These and other projected valuation multiples are above their recent historical averages, but indicate upside potential of 20% or more if the anticipated upturn in new LNG investments materializes. Investors willing to take on more speculative risk should look at Chiyoda and JGC.

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