We continue to believe that equities in Europe and the UK are bottoming with the STOXX Europe 600 index breaking topside its 14-month downtrend. Helping lead the turnaround is the Personal & Household Goods supersector. We believe outperformance is set to continue and several stocks are actionable at current levels within our int’l Group CD-28 Apparel, Accessory & Luxury Goods, Europe: LVMH Moet Hennessy Louis Vuitton SE (MC-FR), Christian Dior SE (CDI-FR), Kering SA (KER-FR), Hermes International SCA (RMS-FR), adidas AG (ADS-DE), Moncler SpA (MONC-IT), PUMA SE (PUM-DE), and Bjorn Borg AB (BORG-SE). Add exposure.
In its final report into a fatal accident involving a Tesla Model S being driven in Autopilot Mode by one Joshua Brown, the NHTSA included the controversial finding that having Autopilot engaged reduced accident rates by 40%. Now, after battling both the NHTSA and Tesla for almost two years to get access to the underlying dataset, independent US-based consulting firm QCS has published a detailed report casting serious doubt on the methodology, statistics and science behind this 40% safer claim.
Meanwhile on March 2’nd 2019, in a carbon copy of the circumstances which claimed the life of Joshua Brown almost three years ago, another Tesla driver lost his life when his Model 3 crashed into a semi-trailer as it legitimately crossed his line of travel to make a right-hand turn at an uncontrolled intersection. At the time of the accident, it was unknown whether Autopilot was engaged or not. If it transpires that it was engaged, it will represent a serious blow to Tesla’s credibility not least in part due to the company’s claims that its self-driving technology is continuously learning and improving based on the experiences and data collected on a daily basis from its ever-growing fleet of vehicles on the road.
Until now, on the one-month anniversary on this latest fatality, Tesla’s silence on the matter remains deafening.
In the middle of last week, Russia’s largest chain of hypermarkets Lenta Ltd (LNTA LI)announced that it was aware that there were ongoing discussions between Luna (TPG’s holding entity, which owns 34.13% of Lenta’s capital) and Alexey Mordashov’s Severgroup, for Luna to sell its stake in Lenta to the Russian conglomerate. A day later, Lenta announced the company was aware of discussions between Severgroup and the EBRD (7.40% holder).
Reuters reported last night that Severgroup had reached an agreement to buy a 41.9% stake, excluding treasury shares, in Lenta from those two sellers, for a total of US$721mm, or US$18 per share or US$3.60 per GDR. That implies a price of US$1.75bn for the whole company.
Later last night, Lenta announced on its website (full press release here) a cash offer for all the shares had been proposed. The Offer has a pre-condition dealing with the above-mentioned transactions being approved by those who need to approve.
The Offer Price is an 8.11% premium to the last trade on 26 March – the undisturbed price, and a premium of 9.76% to the 6mo average price of US$3.28 for the GDRs.
CVC is looking to raise about US$353m through the sale of about 648m Map Aktif Adiperkasa PT (MAPA IJ) shares in the follow-on offering.
Map Aktif (MAPA) is a sports, leisure, and kids retailer in Indonesia. It is a subsidiary of Mitra Adiperkasa (MAPI IJ). The selldown might not be totally unexpected as CVC planned to exit its investment by 2020. However, post this selldown it will still have 192m share left.
Japanese Retail is in a secular decline: There are areas in retail that are worse affected than the rest
Falling foot traffic: The biggest problem for Japanese retail
Don Quijote’s recent history and growth potential
Attracting shoppers from multiple store formats helps Don Quijote to expand its target market
Don Quijote is least affected from slowdown in Chinese tourist spending
FamilyMart UNY store conversions to contribute to revenue and EBIT growth over the next five years
New store openings to cap at 25 per year because of UNY store conversions
Valuation: Market unjustly penalized Don Quijote for the UNY acquisition
Change in retail landscape to help make Don Quijote the “DON” in Japanese retail
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Xtep International (1368 HK) has announced a placing and top-up subscription of new shares event, creating a capital base which is 9% larger.
XTEP states that they have considered various ways of raising funds and consider that it would be in their best interests to raise equity funding through the placing and the subscription.
With the share price down 16% since the placement, we examine what this means for the company’s fundamentals and shareholders. We believe the results will prove to be mixed for management and shareholders alike. We highlight how we expect the stock ranking to react, given we the placement was only a few days back and this is yet to reflect. This special situation analysis may surprise you with the conclusions.
After a lacklustre week of range-bound trading, crude ended higher on Friday, though well off its session highs.
Crude was buoyed by strong investor cheer, which prompted an across-the-globe rally in the stock markets. The burst of euphoria was prompted by promising signs from the just-concluded high-level trade negotiations between the US and China in Beijing, though arguably throwing caution to the winds.
The American president fired his second tweet of the year at OPEC on Thursday. It was “very important that OPEC increase the flow of oil,” he said, because the price of oil was “getting too high.” The producers as well as market participants decided not to heed this time.
However, the pressure from Donald Trump is bound to intensify if Brent sustains a rally above $70, and OPEC and its Saudi leadership will not be able to continue ignoring it.
Aramco agreeing with the Public Investment Fund to buy 70% of petrochemicals giant Saudi Basic Industries Corp (SABIC AB) for $69.1 billion marks a new era for the companies. However, it does not mean that the Aramco IPO would be shelved, and directly or indirectly, we don’t expect it to derail Saudi Arabia’s strategy of actively managing oil supply through OPEC.
Our chart of the week shows that speculative bets on a price rally continue to return to Brent and WTI futures, but cautiously.
Sony Corp (6758 JP) is forming a bullish descending wedge/channel that once mature will chisel out an intermediate low with scope to clear medium term breakout resistance. The tactical low near 4,400 lies just above more strategic support.
Clear pivot points will help manage positioning within the bull wedge that is in the final innings.
The tactical buy level is not that far from strategic support with a more bullish macro lean.
MACD bull divergence is not only supportive into near term weakness but also points to a breakout above medium resistance. Risk lies with Sony not looking back after hitting our tactical low target.
So for the disastrous January and February combined, Tesla delivered about 24,900 cars, only a third of the cars it projected for the entire first quarter.
This explains the chaos and drama which dominated March as Tesla hurried through additional price cuts and layoffs, bungled the launch of a harried new online-sales strategy, and threw together a reveal of the disappointing and far-from-ready Model Y (see my reports Tesla’s Plan B 2.0; Y Not and Tesla: Now We Know the Y, But Not the How and Tesla Bonds Go Boom).
Less convincing were Tesla’s conveniently “leaked” teases over the past couple of weeks about a “massive increase in delivery volume” and “Vehicle Delivery Help Needed!” to get a remarkable 30,000 cars to customers the last 15 days of March. Especially since several price cuts already this year have yet to reignite fading demand even for Model 3, much less the aging Models S and X amid accelerating competition from stronger rivals and Tesla’s alarming quality and service troubles which are driving away customers.
We’ve seen this quarter-end movie too many times, and investors responded last week by selling off Tesla stock and bonds to six-month lows.
Thankfully, we are just days away from finding out Tesla’s deliveries for the quarter, which the company will likely report on or before Tuesday. I’m guessing it won’t be pretty.
Market concensus estimates have been falling like meteors the past couple of weeks, and still seem far too ambitious versus my estimates.
Bond Angle analysis continues below.
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At noon Sydney time Lynas Corp Ltd (LYC AU) held an investor briefing by webcast regarding comments made by the Malaysian Prime Minister in his first cabinet press conference on Friday 5 April 2019. Those comments were noted in the ASX regulatory update.
The enlarged entity will have a combined portfolio value of S$6.7 bil, propelling the enlarged entity to become one of the biggest REITs in Singapore in terms of portfolio size.
Based on last traded prices, the combined entity will have an enlarged market capitalization of S$2.83 bil, making it the 11th biggest S-REIT in terms of market capitalization.
For OUE C-REIT, it enjoys fewer benefits from enlarged portfolio but a merger will alleviate concern on the CPPU timebomb.
For OUE H-TRUST, unitholders benefit more from an improve asset/sector diversification and also a potential cash payout.
For sponsor OUE LTD, it will find it easier to recycle assets in an enlarged REIT.
OUE C-REIT and OUE H-TRUST have announced trading halts this morning pending release of announcements. A clarification announcement on the merger is likely to be issued.
Below is a recap of the key IPO/placement research produced by the Global Equity Research team. This week, we update on the bevvy of placements offered by various companies. After placements by Pinduoduo (PDD US) and Sea Ltd (SE US) , we saw more offerings from HUYA Inc (HUYA US) , Bilibili Inc (BILI US) and Qutoutiao Inc (QTT US). We update on these three offerings and perhaps big picture, this could reflect a signalling inflection point in these shares. More details below
In addition, we have provided an updated calendar of upcoming catalysts for EVENT driven names below.
Best of luck for the new week – Arun, Venkat and Rickin
Graincorp Ltd A (GNC AU) said on Thursday it plans to spin off its malting and craft brewing distribution business (MaltCo). The proposed demerger, which will complete at the end of the year, would result in two independent ASX-listed companies – MaltCo and GrainCorp’s Grains and Oils businesses (New GrainCorp).
In the absence of an LTAP binding proposal, the GrainCorp Board to their credit has proposed an alternative way to create shareholder value or at least minimise a share price fall. Unfortunately, the proposed demerger is unlikely to be superior to the LTAP proposal, in our view.
On 5 April, Ap Eagers Ltd (APE AU) announced that it had lobbed an unsolicited all-scrip takeover for Automotive Holdings (AHG AU)/AHG. Under the proposal, AHG’s shareholders would receive 1 AP Eagers share for every 3.8 AHG share. In a 100% acquisition scenario, AP Eagers shareholders would own 75.5% of the merged AP Eagers-AHG.
Presumably, AP Eagers believes its proposal delivers fair value to both AP Eagers and AHG shareholders. While AP Eagers’ bid provides some relief for AHG shareholders, our analysis suggests that AP Eagers’ bid requires a bump to cross the finish line.
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Here it is. The end – the culmination of years of effort and high balance sheet usage by hedge funds. Altaba Inc (AABA US) is going out with a whimper plus a little upside.
Reportedly plans for the sale of NHC have been abandoned with a focus on selling its Nexon Co Ltd (3659 JP)gaming unit.
We now have an agreed deal for Panalpina Welttransport Holding (PWTN SW) supported by the Ernst Göhner Foundation, the major activist shareholders, and Panalpina management.
Altaba will sell or distribute, in stages, its remaining net assets to shareholders, with a “pre-dissolution liquidating distribution to stockholders (in cash, Alibaba ADSs or a combination thereof), which Altaba currently expects will be made in the fourth quarter of 2019 and estimates will be in an amount between $52.12 and $59.63/share in cash and/or Alibaba ADSs (which estimates assume, among other things, an Alibaba Share price realized on sale and, if applicable, an Alibaba share value at the time of distribution, of $177.00/Alibaba share).”
As p55 of the preliminary proxy makes clear, based on the same US$177/share assumption of value realized or distributed per Alibaba share held, the total distributed would be in a range of $76.72 and $79.72 based on some other assumptions.
A larger portion of the remaining amount could take 12 months to arrive, and there could be other residual portions which will take longer (years), as discussed in the proxy and call transcript.
It looks like there is upside as the stock closed at US$72.76 (at the time of the insight). But there is less than you think simply because it will take time to get out of it. And discount rates of the first portion may be low, but discount rates applied to the later payments post-delisting and post court workout for the Holdback Amount could be higher.
Travis Lundy has opinions on what to do once you start getting into the arb risks. Do read his insight.
Sanghyun Park discussed Nexon sale after the FT reported bankers has stopped plans to sell the holding company NXC. The sale of NXC is probably the simplest exit path for Kim Jung-ju as it would be a more attractive tax outcome than selling Nexon Japan outright.
But there’s a lot of other stuff in NXC that suitors don’t want to, which ideally should be sold before selling NXC. There’s also the issue of whether a tender offer would be required whether the sale of NXC or Nexon – Travis concludes an offer would be required while Sanghyun does not.
Korean local news outlet reported thatTencent Holdings (700 HK)‘s US$6bn bond issuance may be a fund raising for a Nexon takeover. Still, South Korea would prefer keep Nexon’s ownership domestic, which may favour Kakao Games (1404796D KS) or PE outfit MBK.
Summit Ascent announced that First Steamship (the major shareholder) and Kuo Jen Hao (chairman) are in talks to sell their entire shareholdings. No numbers were disclosed. This stake sale would not trigger an MGO and there was no reference to the release of an announcement pursuant to the Codes on Takeovers and Mergers and Share Buy-Backs in Hong Kong. Shares are up 35%.
Summit is trading at a trailing PER of 267x. CapIQ forecasts point to a threefold increase in earnings in FY19, although I would advise caution on those numbers given the tight cluster of target prices; historically, target prices for Summit have been wide of the mark.
First Steamship bought in at $1.06 in December 2017, around the same price when this announcement was made. Should this sale complete, this would result in the third time the shares of the major shareholder have changed hands. This looks like a great opportunity to exit.
On the 20th March, MYO announcing receipt of a letter from KKR saying that the A$3.40 price was their “best and final offer”, making it clear under Truth in Takeovers language that Manikay was not going to get a higher price out of them. Manikay continued to buy shares on the 20th and the 21st, getting to 16.16% of the company as filed on the 22nd.
On Monday 1 April, MYOB announced a supplemental disclosure to the Scheme documents noting KKR’s final intention, and that the directors continued to unanimously recommend the Scheme.
Mid-week, Manikay caved and said intends to vote all its shares for the upcoming Scheme, subject to there being no proposal that we consider to be superior prior to the vote. This is now MUCH closer to being a done deal. It will trade tight.
Travis is a trifle surprised Manikay did not wait a little longer. They were able to increase their stake in the low A$3.30s because of the uncertainty of their intentions, and they could probably have gone close to 20% in the low 3.30s before saying “Yes.” That would have been a welcome extra profit.
Lifeboat market play Ezion has received a bail-out from Malaysia’sYinson Holdings (YNS MK) via a capitalisation of debt and option agreement. Ezion remains suspended.
On the surface, this looks like a bargain for Yinson which is ostensibly taking over Ezion for US$200mn. However, Yinson said that it is still negotiating with the designated lenders of the US$916mn debt on the terms and conditions..
Yinson’s business risks include contact risk, oil price fluctuations and the level of activities in the O&G industry. These risks do not change should the Ezion proposal complete.
The last time came on the heels of a long independent review by EY which found KCF had given up profit to the parent through a series of relatively unfair interested party transaction agreements.
At the end, the Bermudan Court of Appeals went against a Supreme Court decision which had decided that a replacement counterparty decision was prejudiced against minorities, and despite the April 2017 deal being not fair and not reasonable according to the IFA, the parent acquired ~10% (of the 28% it did not own) bringing their stake to 82.3%. A year later the parent acquired another 5.5% bringing them to almost 88%.
Now an offer at SGD 0.60/share (compared to the Revalued NTA of SGD 0.7086/share from the IFA report (p36) of two years ago gets closer to the mark, but crucially, it is designed to squeeze out minorities with the threat of delisting. Kingboard Laminates only needs 2.05% to oblige a delisting from the SGX. As far as Travis can tell, it would require more – at least 95% of shares – to oblige a mandatory squeezeout of minorities according to Section 102-103 of Bermuda Companies Act.
The deal is at a negligible premium and is far, far below Tangible Book Value Per Share (which is almost three times the offer price). Given that the acquirer bought a large stake in the company and offered perpetual capital of almost the current market cap at a significant premium to the MGO price, Travis thinks it an unattractive offer.
It is puzzling as to why the CEO would sell his shares at such a discount, especially when the company and Everbright co-own some of the assets.
While the stated intention of the Offeror is to keep the stock listed, and the MGO is presented almost as “technical”, it would be enormously to Everbright’s benefit to buy as many shares as they could down at this price level. It will go from being underwater on an equity affiliate stake purchase to having a huge writeup in value if Everbright consolidates the asset post MGO.
For that, Travis thinks there is a possibility of a bump just to make it more attractive, though the IFA report could come out with a not fair and reasonable result which shows NTA or NAV far, far higher than the Offer Price, which is not yet declared final.
In a mainly technical piece, I explained why China Three Gorges, China Power New Energy Development Co (735 HK)‘s largest shareholder with 27.1% is currently required to abstain from voting at the forthcoming court meeting, despite the misleading statement in the announcement that China Three Gorges has given an irrevocable undertaking to vote for the Scheme. (link to my insight: China Three Gorges’ Rebuttable Presumption)
What was once a tough deal is now an agreed deal. The deal is 2.375 shares of DSV for every share of Panalpina, which as of the previous Friday’s close had a value of CHF 195.80/share which is a 43% premium to the CHF 137/share, where Panalpina was trading the day before DSV’s first bid.
Panalpina is getting taken out at 28.1x reported 2018 EV/EBITDA multiple (pre-IFRS 16) calculated at a CHF 195.8 price. Panalpina shareholders will own ~23% of DSV shares out if all shares are exchanged and the Ernst Göhner Foundation will be the largest shareholder at ~11%.
69.9% of shares have irrevocably agreed to support the Exchange Offer. The customary condition is 80% to make it go through, meaning DSV needs another 10.1% out of the 30% extant (or just over one-third).
Travis expects there is another 10-15% held by arbitrageurs and 5-7% held by indexers already so this deal looks to me like it is done. He expects the Exchange Offer may settle as early as early-August. If it trades tight, he would get out because DSV is probably priced to a very good level.
Reuters reported that Alexey Mordashov’s Severgroup had reached an agreement to buy a 41.9% stake, excluding treasury shares, in Lenta from those TPG and European Bank for Reconstruction and Development, for a total of US$721mm, or US$18 per share or US$3.60 per GDR. That implies a price of US$1.75bn for the whole company. This was followed by Lenta announced confirming the cash offer. The Offer Price is an 8.11% premium to the last trade on 26 March – the undisturbed price, and a premium of 9.76% to the 6mo average price of US$3.28 for the GDRs.
The first 41.9% are sold conditional on FAS Clearance (presumably Mordashov has cleared this transaction with “the right people”) expected in May 2019, a few easily achieved conditions, and the condition of no sanctions being in play for any of the selling or buying parties.
Once cleared – expected in May 2019 – this becomes a straightforward offer with no minimum acceptances meaning that investors can sell shares into the deal or decide not to do so.
It’s not an attractive offer price, with the possibility of a bump if enough people complain. If you want to buy and hold, this deal is a put option.
Since announcing the intended listing of its international internet assets on Euronext Amsterdam “no earlier than H2 2019” – together with a secondary, inward listing on the Johannesburg Stock Exchange – I calculate Naspers discount to NAV has narrowed to 34.4% from 37.1%, the day before the announcement, placing the current discount a shade below the 12-month average.
The likelihood of NewCo trading at a tighter discount to where Naspers’ previously (& currently trades) is universally accepted. Naspers will benefit from that reduced discount via its 75% stake; but it is not known where Naspers’ own discount will trade after the spin-off.
There are indications the management want to see the group discount narrow to 30%, possibly down to the 20% level, which implies a significantly lower discount for Naspers, potentially around 10%. That would seem optimistic as investors focus more on the directly-held Tencent vehicle, and the fact Naspers is a holding company, holding a stake in another holding company.
Naspers’ discount may drift narrower on the expectation Naspers’ spin-off works its magic. Greater clarity on the option into Naspers or NewCo may provide an additional boost; but conversely, if such an option is limited, there is likely to be disappointment.
With Melco trading at a (then) 32% discount to NAV, Curtis Lehnert recommends a set-up trade on a dollar for dollar basis. The current level, as I write, is statistically the most attractive according to the Smartkarma Holdco Tool, sitting at -1.8 standard deviations from the 180 DMA.
Stub assets are minimal – around 8% of GAV – if excluding gaming licenses, goodwill and trademarks. Net cash is $6.4bn or $4.27/share.
Those stub assets are still loss-making, after deconsolidating out MLCO, to the tune of $386mn in EBITDA, but that was an improvement on (HK$682mn) figure in FY17.
Still, Curtis thinks now is the time to enter the trade to take advantage of both the statistical and fundamental supports to the trade.
For the month of March, ten new deals were discussed on Smartkarma with a cumulative deal size of US$22.3bn. This overall number includes Blackstone and Hellman & Friedman’s proposal for Scout24 AG (G24 GR) after the Tender Offer was officially launched in March. This deal was first proposed in mid-January – which was rejected by the board – and subsequently an improved offer was tabled, which was then supported.
The average premium to last close for the new deals announced in March was 18%, while the average for the first quarter of 2019 is 33%.
Delta Electronics Thai (DELTA TB)‘s results of the CVTO have been announced. 42.85% of shares tendered, therefore the offeror held 63.78% of shares at the close of the offer. The MSCI downweight occurred at the close Thursday, however shares popped 17.5%.
My ongoing series flags large moves (~10%) in CCASS holdings over the past week or so, moves which are often outside normal market transactions. These may be indicative of share pledges. Or potential takeovers. Or simply help understand volume swings.
Often these moves can easily be explained – the placement of new shares, rights issue, movements subsequent to a takeover, amongst others. For those mentioned below, I could not find an obvious reason for the CCASS move.
In our Discover SZ/SH Connect series, we aim to help our investors understand the flow of northbound trades via the Shanghai Connect and Shenzhen Connect, as analyzed by our proprietary data engine. We will discuss the stocks that experienced the most inflow and outflow by offshore investors in the past seven days.
We split the stocks eligible for the northbound trade into three groups: those with a market capitalization of above USD 5 billion, and those with a market capitalization between USD 1 billion and USD 5 billion.
We note that in March, northbound inflows turned more cautious vs strong inflows in February (link to our Feb note) and January (link to our Jan note). Nevertheless we see strong inflows into Healthcare sector, led by Jiangsu Hengrui Medicine Co., (600276 CH). We also highlight Universal Scientific Industrial Shanghai (601231 CH 环旭电子) in the mid cap space that attracted strong northbound inflows.
Tesla’s 1Q delivery details released yesterday suggests one of three possible reasons for the dramatic drop across the company’s product lineup – either the impact of the federal tax credit phaseout is beginning to hit Tesla’s sales, the sales reflect an aging product portfolio or a combination of both. We suspect that it might be a combination of the two.
Excitement over a new product typically lasts for 6-12 months, then should show a stabilizing pattern. To be honest, the Model 3 should now be a mid-cycle product in the minds of consumers since the car has been around since mid 2017, although analysts’ clock began ticking on the product in 2Q18 given their P&L focus. We are now in the 10th month following normalization of the Model 3 production which would suggest that we should be anticipating a Model 3 delivery range of 50-65,000 units based on delivery patterns for the past 3 quarters, but we also believe investors should keep in mind that for Tesla the federal tax credit phaseout kicked in on January 1, 2019. The combination of these two factors could have very well led to a drop in deliveries in 1Q, with a 4Q18 front-load effect. This seems to be especially noticeable on the drop in the deliveries of Models S&X that few analysts on the street seem to have focused on following Tesla’s press release. We believe what is sorely needed for Tesla as a brand is a product portfolio refresh, not Model Y launch at this point.
Given the above, we would be inclined to model in a 200-250k units of the Model 3 deliveries in 2019 at this point, which would be conservative compared to the 360-400k units that Tesla is currently guiding. The wild card would be if China demand for the Model 3 exceeds the initial indications of about 10k units per quarter (see JL Warren Capital’s Tesla China Q1 Delivery Revision ), which should be included in the 1Q shipment figures that were released by the company.
Tesla: Global Deliveries 1Q19
(Units)
1Q18
4Q18
1Q19
QoQ
YoY
Model 3
8,180
63,359
50,900
-19.7%
522.2%
Models S&X
21,800
27,550
12,100
-56.1%
-44.5%
Total
29,980
90,909
63,000
-30.7%
110.1%
Source: Company Data
U.S. federal tax credit for EVs begin to phase out for EV manufacturers once the OEM hits cumulative sales of 200k units, and Tesla achieved this landmark back in July 2018. The actual phaseout for the company began on January 1, 2019. Granted we have been concerned about Tesla’s aging product portfolio for the past year (see Tesla: A Few Thoughts on Ageing Products Before 1Q Earnings Announcement, April 10, 2018), we also believe that the drop in the Models S&X deliveries in 1Q19 is highly likely to have been exacerbated by the tax credit phaseout and/or other factors.
Tesla also admitted it delivered half of its total deliveries for the entire quarter in the last nine days of March, blaming “challenges encountered” for delays in getting cars to buyers in Europe and China. But even adding cars “in transit” doesn’t cover the shortfall versus guidance and market expectations.
It also doesn’t ease investors’ concerns about cooling demand for Model 3 in the US, or the alarming drop-off in sales for Models S and X, well, everywhere.
Read on for continued Bond Angle analysis.
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Changliao Inc (CL HK) is looking to raise about US$100m in its upcoming IPO. The company just filed its draft prospectus with the HKEX last week.
Changliao is a fast-growing social networking entertainment platform. The business model of engaging and monetizing users through interactive games is interesting.
However, the need for an IPO is questionable since the company has a healthy net cash balance sheet and it had paid out dividends in the past two years. It can easily finance its growth through debt or operating cash flow.
Tencent is an investor in the firm, however, it had only invested RMB9m in the company in FY2016. There are no other notable investors despite several rounds of financing.
In this insight, we will look at the company’s business model, analyze its financial performance and operating metrics.
Rakuten Inc (4755 JP) investee Pinterest Inc (PINS US) has filed its IPO prospectus implying a lower valuation than its last venture round but a robust increase in value since Rakuten led the Series C round in May 2012. We think an initial ¥4bn investment could be worth ¥25-30bn at the midpoint of the suggested IPO range.
As with Lyft, the absolute value again and shift to greater liquidity are positive as it gives Rakuten more financial flexibility as it ramps up investments in the mobile business.
Unlike Lyft, the Pinterest IPO value is down from the latest funding round which impacts paper profits that provide cover for spending on mobile albeit at a fraction of the upside from Lyft.
Pinterest doesn’t generate the same headlines as Lyft but a second IPO of a Rakuten investment as its cash needs expand can only be good news
* JD ever generated cash flows by accounts payable in direct sales, but cost control is necessary when the commission business grew faster than the direct sales business.
* We believe that the overwhelming majority of delivery men will stay with JD after the salary cut, as many small delivery companies went bankrupt in 2018.
* we believe JD will be able to control costs well and keep close-to-zero net margin in 2019.
In our Discover HK Connect series, we aim to help our investors understand the flow of southbound trades via the Hong Kong Connect, as analyzed by our proprietary data engine. We will discuss the stocks that experienced the most inflow and outflow by mainland investors in the past seven days.
We split the stocks eligible for the Hong Kong Connect trade into three groups: component stocks in the HSCEI index, stocks with a market capitalization between USD 1 billion and USD 5 billion, and stocks with a market capitalization between USD 500 million and USD 1 billion.
In this insight, we will highlight Air China and Great Wall Motor.
In this series under Smartkarma Originals, CrossASEAN insight providers AngusMackintosh and Jessica Irene seek to determine whether or not we are close to the end of the rainbow and to a period of outperformance for the property sector. Our end conclusions will be based on a series of company visits to the major listed property companies in Indonesia, conversations with local banks, property agents, and other relevant channel checks.
In the seventh company in ongoing Smartkarma Originals series on the property space in Indonesia, we now look at Indonesia’s oldest Industrial Estate developer and operator Kawasan Industri Jababeka (KIJA IJ). The company’s largest and the original estate is in Cikarang to the East of Jakarta and comprises 1,239 hectares of industrial land bank and a masterplan of 5,600 ha.
The company has also expanded its presence to Kendal, close to Semarang in Central Java, where it has a joint venture with Singapore listed company Sembcorp Industries (SCI SP). This estate covers a total area of 2,700 ha to be developed in three phases over a period of 25 years and is focused on manufacturing in industries.
The company also has successfully installed a 140 MW gas-fired power station at its Cikarang, providing a recurrent stream utility-type earnings, which cushion against the volatility in its industrial estate and property earnings. After some issues with one of its boilers (non-recurrent) and issues early last year with PLN, this asset now looks set to provide a stable earnings stream for the company.
KIJA has also built a dry-port at Cikarang estate which has been increasing throughput by around +25% every year, providing its customers with the facility for customs clearance at a faster pace of that at the Tanjong Priok port, as well as logistics support.
After two difficult years where the company has been hit by a combination of problems at its power plant, foreign exchange write-downs, and slower demand for industrial plots, the company now looks set to see a strong recovery in earnings in 2019 and beyond.
The company has seen coverage from equity analysts dwindle, which means there are no consensus estimates but it looks attractive from both a PBV and an NAV basis trading on 0.85x FY19E PBV and at a 73% discount to NAV. If the company were to trade back to its historical mean from a PBV and PER point of view, this would imply an upside of 33% to IDR325, using a blend of the two measures. An absence of one-off charges in 2019 and a pick up in industrial sales should mean a significant recovery in earnings, putting the company on an FY19E PER multiple of 9.7x, which is by no means expensive given its strategic positioning and given that this is a recovery story.
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Shin Ramyun non-frying noodle dramatically reversed Sub’s fortune. Local street starts believing Sub will hit a ₩100bil OP milestone this year. Local institutions began to scoop up Sub shares since a week ago. Yesterday, local pension/foreign money came in. This led to the largest Sub pushing in many weeks. Holdco/Sub are not at near -2σ.
Street consensus on Sub’s FY19e OP is already upwardly adjusted to ₩106bil. On this, Sub is already at a 17x earnings. ₩106bil OP is immaturely aggressive. 17x isn’t particularly cheap given Sub’s FY18 year-end PER (18.4x).
Valuation wise, Sub price should be pressed down at this level until more dramatic and tangible sales data come out. Holdco discount is still hovering at 50% to NAV. I’d make a stub trade here. Holdco liquidity can be an issue.
In our Discover HK Connect series, we aim to help our investors understand the flow of southbound trades via the Hong Kong Connect, as analyzed by our proprietary data engine. We will discuss the stocks that experienced the most inflow and outflow by mainland investors in the past seven days.
We split the stocks eligible for the Hong Kong Connect trade into three groups: component stocks in the HSCEI index, stocks with a market capitalization between USD 1 billion and USD 5 billion, and stocks with a market capitalization between USD 500 million and USD 1 billion.
In this insight, we will highlight PICC and Xinyi Solar.
Haidilao International, the largest Chinese cuisine player by valuation, was listed on September 26th last year and lock-up expiry will be on March 26th. The stock has returned 24% since listing.
As it heads into lock-up expiry, we will examine Haidilao’s shareholder structure and potential shares up for sale.
Haidilao was included in the Hong Kong Connect Scheme on December 10th, 2018 and shares held by mainland investors have been consistently increasing.
But we think Haidilao’s valuation has built in a perfect growth scenario.
Risk of de-rating for Haidilao warrants a short position.
Tesla Motors (TSLA US) has changed its mind, again, and now reportedly is putting on hold plans to close hundreds of its mostly newly opened stores and lay off thousands more employees–at least until the end of the month.
Employees, customers, suppliers, and investors still are reeling over Tesla’s startling decision, announced February 28th, to move immediately to online-only sales, a dramatic reversal of strategy still in place as of the 2018 10-K filing on February 19th in which the company had touted growth via recent store expansions and substantial additions planned globally going forward.
Tesla explained that even with now three substantial price cuts on all its cars and now three significant layoffs since last summer, it must slash costs even more to support the launch of its long overdue $35,000 base version of the flagship Model 3 (see my report Tesla’s New Plan: Buy Before You Try).
I warned clients that Tesla’s stunning strategy reversal seemed driven more by alarming cash consumption plus much weaker than expected sales and profit margins already apparent in what is shaping up to be a disastrous first quarter–troubling trends that may continue. However, as I noted, it also costs money to close stores, get out of leases (good luck with that), fire employees and redistribute remaining staff, and sell off fairly new equipment at steep losses.
Tesla probably hasn’t seen the light–it’s just received as of March 1st a desperately needed cash infusion by finally securing overdue funding for Tesla Shanghai Gigafactory 3 which has been under construction since January (see Tesla – Shanghai Surprise). Unfortunately, the four banks in Tesla’s new “China Loan Agreement,” which the company announced on Thursday with a rare 8-K filing, committed only to fund a one-year limited purpose loan for up to 3.5 billion yuan ($521 million). This is barely enough time or cash to get the Shanghai assembly plant up and running–much less also stave off the current cash crunch.
But Tesla must keep up appearances as well as bolster its liquidity through at least the end of the quarter as it gets ready to reveal Thursday evening the long-awaited Model Y–though I suspect this won’t result in a massive burst of cash from new reservations as Tesla hopes.
Years of robbing Peter to pay Paul hasn’t produced a sustainable growth model for Tesla, mostly because its business strategy still is better described as, “Wow, we didn’t see that coming.”
Continue reading for Bond Angle analysis.
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Meituan Dianping (3690 HK)‘s shares currently trade 18% below its IPO price of HK$69.00 per share. Meituan will announce its 4Q18 results on Monday, 11 March 2019, after market close. Notably, Meituan’s six-month lock-up period expires on 19 March 2019.
We believe that should Meituan deliver a strong 4Q18; it will likely not experience Xiaomi Corp (1810 HK)’s share price collapse after the end of its six-month lock-up period.
Friday 8 March after the close, the Nikkei announced that because the third party share sale of Pioneer Corp (6773 JP) had been completed, it would be deleted from the Nikkei 225 Average (and the Nikkei 500 Index). Omron Corp (6645 JP) will replace Pioneer in the Nikkei 225 Average, with a deemed par value of 50 yen per share.
The date for this index deletion and inclusion event is the 15th of March, as per the schedule of the February 19th announcement as to how the Pioneer event would be treated.
This affords special sits/events followers a couple of different events to look at.
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DAF is a fast growing auto finance company which acquires customers through a network of dealership around China. Its net interest income grew by 66% CAGR from FY2016 to FY2018 while net fees/comms income and profit grew by 39.6% and 61% CAGR over the same period.
However, most of its growth originated from ZhengTong dealers and joint promotion arrangement. Excluding loans from joint promotion arrangement, gross outstanding loan had only grown by 12% CAGR.
In this insight, we will look at the company’s business, analyze the competitive landscape, provide thoughts on valuation, and some questions for management.
In this report, we provide an analysis of our pair trade idea between Hyosung Corporation (004800 KS) (market cap of 1,612 billion won) and Hyosung TNC Co Ltd (298020 KS) (market cap of 712 billion won). Our strategy will be to be long Hyosung TNC and be short Hyosung Corp.
In the past six months, Hyosung Corp is up 62% while Hyosung TNC is down 12%. We believe this price divergence has been excessive. The four major reasons why Hyosung Corp’s share price has surged in the past six months are mentioned below. There is a case to be made that the market has already factored into Hyosung Corp’s share price many of the positive factors mentioned below.
Excellent dividends
Corporate activism related stock
Strong financial results
Timing of the increased insider ownerships/Completion of tender offers
Hyosung TNC has underperformed the market as well as Hyosung Corp in the past six months. However, Hyosung TNC appears to be a turnaround story driven by the following factors:
Lippo Malls Indonesia Retail Trust (LMRT SP) (“LMIRT”) today announced the acquisition of Lippo Mall Puri from its sponsor PT Lippo Karawaci Tbk for a consideration of Rp.3,700.0 bil (S$354.7 mil).
There is a significant amount of vendor support provided by Lippo Group to improve the net property income and NPI yield of Lippo Mall Puri. If we exclude the vendor support from the target NPI, the NPI yield excluding vendor support will just be 6.52% per annum.
The transaction is DPU and yield dilutive. The resultant DPU post-transaction will decline from 2.05 S-cents to 1.61 S-cents / 1.42 S-cents. Distribution yield will also fall from 10.25% to 9.28% / 8.85% based on TERP.
The transaction could also potentially result in LMIRT’s gearing increasing from 34.6% to 39.0% which will worsen its balance sheet strength and credit standings.
In view of the unattractive acquisition and potential EFR dilution, investors should avoid LMIRT for now and wait for opportunity to enter with a greater margin of safety.
NIO’s 6-month Lock-up expires today and as of the time of this writing the stock is down by 6.6% from the closing price on Friday, March 8. The stock’s share overhang issue have been well covered on the Smartkarma platform by other analysts (see NIO Post-CBS Rally Making TSLA Valuation a Grand Bargain (Price Target =$3) , NIO (NIO US): Lock-Up Expiry – This Could Get Messy) so while we do not see a need to rehash those details in this insight, here are 3 things that we believe every NIO investor and would-be investor should keep in mind about the company especially if one wants to play the Tesla vs. NIO scenario:
Licensing/Regulatory Risk – NIO has an autonomous driving testing license but no EV manufacturing license. An EV manufacturing license issued by the NDRC is required for EV manufacturers to market and sell their products but a 100k unit scale is a main prerequisite. This is a key reason why NIO entered into a 5-year outsourcing relationship with JAC. While this relationship was assumed to be temporary, there could be many hurdles for NIO to actually obtain a license in the coming years should it decide to invest in production facilities again.
Core IP Held by Suppliers – Powertrain technology is held by CATL and the State-owned JAC is listed as the ES8’s manufacturer on the Ministry of Information and Technology website. Continental AG designs NIO’s vehicle suspension and chassis. It is also unclear how much actual development work other than exterior/cockpit design is done in-house at NIO based on publicly available information. Without scale and IP we believe NIO’s bargaining position with its suppliers is weak and displays stronger characteristics of a distributor than a final assembler.
Low ASP, low margins – NIO’s ASP on the ES8 from what we have seen was $64k per unit in 2018 and $63k per unit in 1Q19 while Tesla’s Model X ASP is about $100k per unit. There is a reason why gross margin at NIO is razor thin and it has more to do with low price point than low volumes in our view.
Given differences between the U.S. and China operating environment for EV makers, we believe Tesla is not a good equity valuation comp for NIO, which is basically a distributor in our view. As such, long term value drivers would most likely come from aftermarket and service revenues, while short-mid term value drivers seem elusive especially in the aftermath of the company’s decision to scrap its production plant investment plans in Shanghai.
The NIO ES8
Source: Company Website
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We visited one big-cap stock, Berli Jucker, and one pip-squeak recent IPO M Vision today. A couple of highlights:
Slow revenue growth at BJC at under 5% largely driven by Big C (hypermarket), but earnings growth was strong at 28% mainly due to lower cost of palm oil in the snack business.
Good progress in Vietnam with expansion of the bottle capacity this year and SABECO increasing purchases of bottles.
Overall unimpressed. The company isn’t expecting to grow revenues more than 9% this year, and many of the cost cuts we saw in 2018 are clearly one-offs. Higher oil prices are likely to lead to rising palm oil prices this year too, since the two commodities are linked through substitution effect.
MVP underwent a bad year on the profit level, but their various businesses, at least on the top line level, looks like it could recover quickly this year.
Best World International (BEST SP) share price has been hammered due to the recent article in Business Times, although the company has addressed them one by one. The annual meeting that recently took place in their office in Singapore shed some light on the seemingly “new but not so new” franchise business model in China. The company also has started to engage Key Opinion Leaders (KOL) aka social media influencers as part of their social selling campaign.
An attractively valued company with a minimum market cap of USD $1 billion but no sell-side coverage.Doubledragon Properties (DD PM) meets those criteria.
Why Read This Report?
Learn about the Philippines youngest self-made billionaire*, Edgar ‘Injap’ Sia, how he created one of the largest fast-food chains (Mang Inasal) in the country and successfully sold it to Jollibee Foods (JFC PM) for over USD$100 M.
After selling Mang Inasal in 2010, Sia started building DoubleDragon (DD) as he joined hands with Tony Tan (founder of Jollibee Foods (JFC PM) ). DD was listed in 2014 at a market value of USD$85 M (PHP2/share) and reached a market cap of over USD$3 B USD two years after listing (PHP70/share).
DD’s valuation mid-2016 was overhyped and overvalued.
From mid-2016 to late 2018 the share price fell by approximately 75%. Last year the stock bottomed at PHP17.2 despite fundamentals improving drastically between 2016 and 2018.
This has created a unique opportunity to invest in a diversified property company whose main earnings contributor will come from building neighborhood malls in suburban communities outside Metro Manila. It is forecast that 90% of its revenues would be recurring in nature by FY20.
We value DD on a blended a) P/E multiple and b) Cap Rate basis.
DD recently traded around PHP 22/share and is currently valued at 9.5x FY20 P/E, a steep discount to its industry peers. Assuming the company achieves PHP10.8 B in recurring revenues by FY20 the market is currently valuing the company at a 21% Cap Rate vs 7% for its primary peer Sm Prime Holdings (SMPH PM). DD should trade at a discount to SM (long track record, higher liquidity, included in PSE index) but the gap is too wide.
We argue DD should trade at a) 15x P/E and b) 10% cap rate. Combining the two valuation methods we arrive at a blended Fair Value of PHP 40.31/share, or 83% upside from current levels.
Assumptions
Fair Value
15x 2020 P/E
PHP 35
10% Cap Rate
PHP 45.63
BLENDED FAIR VALUE
40.31 PHP
The founders control 70% of the company and expect to grow the current USD$1.2B market cap exponentially the coming 3-5 years. DoubleDragon is a potential multi-bagger in the making.
Catalysts to unlock value at DoubleDragon would be:
FY18 results publication by early April 2019
Delivery of 100 operating CityMalls by FY20
The passing of workable REIT law
Delivery of PHP5.5B FY20 profit target
FCF inflection point coming closer in FY20
Re-discovery by sell-side firms as index inclusion looms
Visibility into FY21-FY25 dividend potential
Footnote: *Injap was reported as having USD$1 B in assets by Forbes in 2017, as the share price of DD has fallen we estimate this has dropped to approximately USD$ 400-500 M, which would still rank him among the top-25 wealthiest individuals in the Philippines.
We believe this presents an excellent opportunity to look at the stock on the short side again.
We would also refer readers to an article from Livedoor news which delves into the company’s issues from a local industry insider’s perspective. The article is in Japanese and the google translated version is almost unintelligible but we summarise the salient points and our perspective below.
Our recent conversation with CyberAgent’s IR team suggests that a significant improvement in the OP margin is unlikely in the next few quarters. The OP margins of both Game business and the Internet Advertisement, while likely to improve gradually, are likely to remain low compared to recent history due to higher advertising and personnel costs.
Upfront investments in AbemaTV are likely to continue until the target of 10m Weekly Average Users (WAU) is met, which could take a year or more. The company expects around 50% of AbemaTV revenue to eventually come from premium users, which seems to be a shift in strategy, from a “free” service towards a more hybrid model.
CyberAgent’s share price closed at ¥4,050 on Tuesday, up 7.1% from its previous close, following the news that the stock was added to the Goldman Sachs’ conviction list with a reiterated buy rating. However, even before this, CyberAgent’s share price had been on a steady increase over the past two weeks (+29.0%), recovering from a one-year low in early February. This increase, despite rather mediocre 1Q results, a downward revision of OP guidance, and lack of any major short term catalysts is an indication that the market deems CyberAgent to be undervalued – mainly on the AbemaTV front.
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We recently met with Yahoo Japan (4689 JP) for an update on the company after Q3 results. We thought the financial announcement was positive with encouraging forecasts for profitability, both this year and going forward, and revenue growth potential. In addition, Yahoo Japan reported solid customer growth for mobile payments joint venture PayPay, driven by strong marketing support and an attractive proposition for offline merchants. We think the latter is very important for the development of mobile payments in Japan and PayPay has had a robust start.
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.
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.
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
An old favorite in the Asian arbitrageur’s investment universe is the Hang Lung stub. The Hang Lung Group acquired Hang Lung Properties (formerly named Amoy Properties) and designated the subsidiary as its property investment arm. After both companies were listed in 1992, the same year that the company entered the mainland with its purchase of the Grand Gateway 66 and Plaza 66 in Shanghai, the pair was open to arbs. The Hang Lung Group now controls over RMB 130 (USD 19.4b) billion of property in Hong Kong and China.
In the wonderful world of Asian holding companies, Hang Lung needs little introduction. However, in this insight I would like to highlight a trade idea. I will detail why I think now is the right time to setup a stub trade and some background information on the company and what assets constitute the stub.
In this insight I will cover:
I. The Trade
II. The Stub Assets
III. My Track Record with Stub Trades
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