Equity Bottom-Up

In this briefing:

1. Rakuten IPO Redux: Pinterest Surfaces More Liquidity but Not Paper Profits
2. Hoya: Future Prospects Remain Positive with More Room for Share Price Growth
3. JD.com (JD): Cancels Delivery Man’s Basic Salary, Adapts to Growth of Commission Business
4. Taiwan Business Bank: Catching the Sun’s Rays
5. HK Connect Discovery Weekly: Air China and Great Wall Motor (2019-04-04)

1. Rakuten IPO Redux: Pinterest Surfaces More Liquidity but Not Paper Profits

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

2. Hoya: Future Prospects Remain Positive with More Room for Share Price Growth

This insight mainly focuses on the key takeaways from our recent visit to Hoya Corporation (7741 JP):

• Hoya will continue to refresh its lineup of endoscopes this year as the company introduces new models once in every five to six years and we believe the company’s existing endoscope systems are nearing the end of their life cycles. We believe, this should result in growth in revenues for the company.
• Hoya was the first company to introduce its Disposable Injector Development system which is one of the fastest growing businesses for Hoya. The global intraocular market is forecasted to grow at a CAGR of 5.4% until 2024 resulting in growth in top-line for Hoya which has been gradually taking share in this market.
• The Luxottica/Essilor merger could pose a significant long-term threat to Hoya and will have a knock-on effect on the rest of the spectacle and eyewear manufacturers due to their market domination. That being said, we forecast the eyeglass and contact lenses to continue to witness growth due to Hoya’s strong presence in the markets in which it operates and a tailwind in the short-term as customers switch to Hoya for diversification reasons. The company’s acquisition of the eyewear business of 3M will also add to the revenue growth.
• Hoya holds a monopoly in the glass HDD substrates market and the market is currently underpenetrated. The superior features of glass substrates compared to aluminum should shift the demand towards glass, which is sold at twice the price of aluminum.
• Hoya Corporation is currently trading at a 1-year forward EV/EBIT multiple of 16.75x, which is close to its 52-week high of 16.79x. When compared with 5 year forward EBIT multiples there is still room for some multiple expansion in the short-term leading to price appreciation.

3. JD.com (JD): Cancels Delivery Man’s Basic Salary, Adapts to Growth of Commission Business

* JD cut delivery men’s salary by 25% last week.

* 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.

4. Taiwan Business Bank: Catching the Sun’s Rays

Taiwan Business Bank (2834 TT) ticks most of the boxes with a PH Score of 10. This is a top decile performance globally in terms of fundamental trends from our quantamental value-quality gauge.

We would caution that the asset quality is not as crystalline as the reduced NPL ratio indicates given that rising impaired loans represent 5x NPLs. We await greater granularity from further analysis of the NPL breakdown by category. Having said that, the impaired loan ratio is still pretty low and manageable at 1.48% while Provisioning -on an upward trend- should reflect increasing non-NPL but impaired assets.

Results were markedly impacted by a palpable reduction in Loan Loss Provisions which will be a response, we assume, to lower problem loans or NPLs as well as very strong recoveries (net negative charge-offs), rather than higher impaired Loans.

In addition, the trend in Efficiency may not be as good as it appears to be given that OPEX expansion outpaced “Underlying Income” expansion. The latter was impacted by a sharp increase in Interest Expenses from Deposits especially, as well as a tepid Fee Income performance. While Interest Income from non-credit assets rose robustly, the core Interest Income on Loans firmed by 11.4% YoY, for a YoY gain of NT2.3bn, despite a modest decrease in the Loan portfolio in such a low margin environment. Interestingly, Loan recoveries also saw a NT2.3bn gain.

Valuation is quite appealing given the tailwinds of a high PH Score. FV, P/Book, and Earnings Yield stand at 6%, 0.9x, and 10%, respectively.

5. HK Connect Discovery Weekly: Air China and Great Wall Motor (2019-04-04)

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 briefing:

1. HK Connect Discovery Weekly: PICC, Xinyi Solar (2019-03-08)
2. Japan Tobacco: No Dire Consequences Despite Late Entry to Heated Tobacco
3. Hitachi High Tech’s Ace in the Hole
4. Bank Alfalah: Metrics Point to Falāh

1. HK Connect Discovery Weekly: PICC, Xinyi Solar (2019-03-08)

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.

2. Japan Tobacco: No Dire Consequences Despite Late Entry to Heated Tobacco

• Late entry to Japanese heated tobacco market resulted in Japan Tobacco (2914 JP) losing market share to peers
• New product launches to give Japan Tobacco a fighting chance against IQOS
• Early maturity of heated tobacco in Japan: a blessing in disguise for Japan Tobacco
• Pricing power is expected to be back on track in future
• PloomTECH will soon be ready to compete with IQOS at a global level
• More product offerings targeting different customer needs in reduced risk products category
• International segment volume growth driven by global flagship brands and acquisitions
• Market unjustly penalising Japan Tobacco for the early maturity of heated tobacco segment
• Transformation of dividend yield from industry worst to industry best
• Undervalued at 10.09x EV/Forward EBIT: DCF target price yields 21.8% upside

3. Hitachi High Tech’s Ace in the Hole

Last Friday, Hitachi (6501) was reported to be considering selling Hitachi Chemical (4217), according to media sources over the weekend. This has sent Hitachi Chemical and its parent into a frenzy with Hitachi Chemical ADR up 13% last Friday. We believe this news is relevant for Hitachi High Tech because both subsidiaries are 51-52% consolidated by the parent Hitachi, and both have arguably businesses with little synergy with the parent. We believe that Hitachi High Tech is also rumored to be on the block for sale or spin-off.  Media sources say that Hitachi is considering a sale of Hitachi Chemical and would reap Y300bn.  The current value of their 51% ownership in Hitachi Chemical is Y211bn, and thus there is 42% implied upside if the Y300bn figure is achieved.

To recap Q3 results for Hitachi High Tech from January 31, 2019, the numbers were decent with earnings above consensus forecasts by 33% for Q3 (Y15.8bn OP versus Y13.8bn forecast). The profit rise was due to improved margins in medical and continued strength in process semiconductor equipment. The shares are up 20% year-to-date, outperforming the Nikkei by 15%. Some of the fears of a sharp slowdown in semiconductor have been nullified by the continued strength in logic chip investments as well as the improved profitability in medical clinical analyzers. Medical profits soared 46% YoY in Q3 to Y7.6bn on a 13% YoY increase in revenues. OP margin improved from 12.3% to 15.8% YoY.

4. Bank Alfalah: Metrics Point to Falāh

Bank Alfalah (BAFL PA) is heading in the right direction as testified by its metric progression, embodied in its quintile 1 PH Score™.

Valuations are not stretched – especially the Total return Ratio of 1.8x and an Earnings Yield of 14.5%.

Combining the fundamental momentum signals (PH Score™) with franchise valuation, and a low RSI, places BAFL PA in the top decile of bank opportunities globally.

In this briefing:

1. Hoya: Future Prospects Remain Positive with More Room for Share Price Growth
2. JD.com (JD): Cancels Delivery Man’s Basic Salary, Adapts to Growth of Commission Business
3. Taiwan Business Bank: Catching the Sun’s Rays
4. HK Connect Discovery Weekly: Air China and Great Wall Motor (2019-04-04)
5. Indonesia Property-In Search of the End of the Rainbow- Part 7 – Kawasan Industri Jababeka (KIJA IJ)

1. Hoya: Future Prospects Remain Positive with More Room for Share Price Growth

This insight mainly focuses on the key takeaways from our recent visit to Hoya Corporation (7741 JP):

• Hoya will continue to refresh its lineup of endoscopes this year as the company introduces new models once in every five to six years and we believe the company’s existing endoscope systems are nearing the end of their life cycles. We believe, this should result in growth in revenues for the company.
• Hoya was the first company to introduce its Disposable Injector Development system which is one of the fastest growing businesses for Hoya. The global intraocular market is forecasted to grow at a CAGR of 5.4% until 2024 resulting in growth in top-line for Hoya which has been gradually taking share in this market.
• The Luxottica/Essilor merger could pose a significant long-term threat to Hoya and will have a knock-on effect on the rest of the spectacle and eyewear manufacturers due to their market domination. That being said, we forecast the eyeglass and contact lenses to continue to witness growth due to Hoya’s strong presence in the markets in which it operates and a tailwind in the short-term as customers switch to Hoya for diversification reasons. The company’s acquisition of the eyewear business of 3M will also add to the revenue growth.
• Hoya holds a monopoly in the glass HDD substrates market and the market is currently underpenetrated. The superior features of glass substrates compared to aluminum should shift the demand towards glass, which is sold at twice the price of aluminum.
• Hoya Corporation is currently trading at a 1-year forward EV/EBIT multiple of 16.75x, which is close to its 52-week high of 16.79x. When compared with 5 year forward EBIT multiples there is still room for some multiple expansion in the short-term leading to price appreciation.

2. JD.com (JD): Cancels Delivery Man’s Basic Salary, Adapts to Growth of Commission Business

* JD cut delivery men’s salary by 25% last week.

* 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.

3. Taiwan Business Bank: Catching the Sun’s Rays

Taiwan Business Bank (2834 TT) ticks most of the boxes with a PH Score of 10. This is a top decile performance globally in terms of fundamental trends from our quantamental value-quality gauge.

We would caution that the asset quality is not as crystalline as the reduced NPL ratio indicates given that rising impaired loans represent 5x NPLs. We await greater granularity from further analysis of the NPL breakdown by category. Having said that, the impaired loan ratio is still pretty low and manageable at 1.48% while Provisioning -on an upward trend- should reflect increasing non-NPL but impaired assets.

Results were markedly impacted by a palpable reduction in Loan Loss Provisions which will be a response, we assume, to lower problem loans or NPLs as well as very strong recoveries (net negative charge-offs), rather than higher impaired Loans.

In addition, the trend in Efficiency may not be as good as it appears to be given that OPEX expansion outpaced “Underlying Income” expansion. The latter was impacted by a sharp increase in Interest Expenses from Deposits especially, as well as a tepid Fee Income performance. While Interest Income from non-credit assets rose robustly, the core Interest Income on Loans firmed by 11.4% YoY, for a YoY gain of NT2.3bn, despite a modest decrease in the Loan portfolio in such a low margin environment. Interestingly, Loan recoveries also saw a NT2.3bn gain.

Valuation is quite appealing given the tailwinds of a high PH Score. FV, P/Book, and Earnings Yield stand at 6%, 0.9x, and 10%, respectively.

4. HK Connect Discovery Weekly: Air China and Great Wall Motor (2019-04-04)

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. 

5. Indonesia Property-In Search of the End of the Rainbow- Part 7 – Kawasan Industri Jababeka (KIJA IJ)

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. 

It has a blue chip customer base both local and foreign at Cikarang including Unilever Indonesia (UNVR IJ), Samsung Electronics (005930 KS), as well as a number of Japanese automakers and their related suppliers.

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. 

In this briefing:

1. Taiwan Business Bank: Catching the Sun’s Rays
2. HK Connect Discovery Weekly: Air China and Great Wall Motor (2019-04-04)
3. Indonesia Property-In Search of the End of the Rainbow- Part 7 – Kawasan Industri Jababeka (KIJA IJ)
4. OUE C-REIT, OUE H-TRUST – First Thoughts on Merger Scenario
5. Telecom Review (April 2019): DTAC Calls for Truce With CAT

1. Taiwan Business Bank: Catching the Sun’s Rays

Taiwan Business Bank (2834 TT) ticks most of the boxes with a PH Score of 10. This is a top decile performance globally in terms of fundamental trends from our quantamental value-quality gauge.

We would caution that the asset quality is not as crystalline as the reduced NPL ratio indicates given that rising impaired loans represent 5x NPLs. We await greater granularity from further analysis of the NPL breakdown by category. Having said that, the impaired loan ratio is still pretty low and manageable at 1.48% while Provisioning -on an upward trend- should reflect increasing non-NPL but impaired assets.

Results were markedly impacted by a palpable reduction in Loan Loss Provisions which will be a response, we assume, to lower problem loans or NPLs as well as very strong recoveries (net negative charge-offs), rather than higher impaired Loans.

In addition, the trend in Efficiency may not be as good as it appears to be given that OPEX expansion outpaced “Underlying Income” expansion. The latter was impacted by a sharp increase in Interest Expenses from Deposits especially, as well as a tepid Fee Income performance. While Interest Income from non-credit assets rose robustly, the core Interest Income on Loans firmed by 11.4% YoY, for a YoY gain of NT2.3bn, despite a modest decrease in the Loan portfolio in such a low margin environment. Interestingly, Loan recoveries also saw a NT2.3bn gain.

Valuation is quite appealing given the tailwinds of a high PH Score. FV, P/Book, and Earnings Yield stand at 6%, 0.9x, and 10%, respectively.

2. HK Connect Discovery Weekly: Air China and Great Wall Motor (2019-04-04)

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. 

3. Indonesia Property-In Search of the End of the Rainbow- Part 7 – Kawasan Industri Jababeka (KIJA IJ)

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. 

It has a blue chip customer base both local and foreign at Cikarang including Unilever Indonesia (UNVR IJ), Samsung Electronics (005930 KS), as well as a number of Japanese automakers and their related suppliers.

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. 

4. OUE C-REIT, OUE H-TRUST – First Thoughts on Merger Scenario

Last evening, Wall Street Journal reported that Oue Commercial Real Estate Investment Tr (OUECT SP) and Oue Hospitality Trust (OUEHT SP) are in discussions to merge in a cash and stock deal. OUE Commercial will offer to buy OUE Hospitality to create a single entity that will remain listed on the SGX.

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 11^th 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.

5. Telecom Review (April 2019): DTAC Calls for Truce With CAT

On April 4, we attended the DTAC shareholders’ meeting and listened to how management defended their strategic decisions in various areas such as legal settlements, marketing, and spectrum bidding. This is our take on their responses to various issue:

• Settlement with CAT. DTAC plans to do a further settlement worth Bt9.05bn nett with CAT to resolve all past bilateral issues, but will resume paying dividends in H2’19.
• Spectrum. Since they still have less spectrum than both AIS and True Move, we can’t really fault them for bidding for the 900MHz spectrum, especially since competition has come down considerably.
• Marketing. Like AIS, they are looking beyond just voice airtime. Mobile gaming is one area they will look at. DTAC’s subsidy on game-centric iPhones and the data airtime that comes with it is significantly more than both True Move and AIS.
• Others. They also managed to get a raise for the Chairman and do finishing touches on the PaySabai  (a payment platform) consolidation. In our view, these are really formalities at this phase, since PaySabai is pretty much wholly owned.

In this briefing:

1. Hitachi High Tech’s Ace in the Hole
2. Bank Alfalah: Metrics Point to Falāh

1. Hitachi High Tech’s Ace in the Hole

Last Friday, Hitachi (6501) was reported to be considering selling Hitachi Chemical (4217), according to media sources over the weekend. This has sent Hitachi Chemical and its parent into a frenzy with Hitachi Chemical ADR up 13% last Friday. We believe this news is relevant for Hitachi High Tech because both subsidiaries are 51-52% consolidated by the parent Hitachi, and both have arguably businesses with little synergy with the parent. We believe that Hitachi High Tech is also rumored to be on the block for sale or spin-off.  Media sources say that Hitachi is considering a sale of Hitachi Chemical and would reap Y300bn.  The current value of their 51% ownership in Hitachi Chemical is Y211bn, and thus there is 42% implied upside if the Y300bn figure is achieved.

To recap Q3 results for Hitachi High Tech from January 31, 2019, the numbers were decent with earnings above consensus forecasts by 33% for Q3 (Y15.8bn OP versus Y13.8bn forecast). The profit rise was due to improved margins in medical and continued strength in process semiconductor equipment. The shares are up 20% year-to-date, outperforming the Nikkei by 15%. Some of the fears of a sharp slowdown in semiconductor have been nullified by the continued strength in logic chip investments as well as the improved profitability in medical clinical analyzers. Medical profits soared 46% YoY in Q3 to Y7.6bn on a 13% YoY increase in revenues. OP margin improved from 12.3% to 15.8% YoY.

2. Bank Alfalah: Metrics Point to Falāh

Bank Alfalah (BAFL PA) is heading in the right direction as testified by its metric progression, embodied in its quintile 1 PH Score™.

Valuations are not stretched – especially the Total return Ratio of 1.8x and an Earnings Yield of 14.5%.

Combining the fundamental momentum signals (PH Score™) with franchise valuation, and a low RSI, places BAFL PA in the top decile of bank opportunities globally.

In this briefing:

1. Bank Alfalah: Metrics Point to Falāh

1. Bank Alfalah: Metrics Point to Falāh

Bank Alfalah (BAFL PA) is heading in the right direction as testified by its metric progression, embodied in its quintile 1 PH Score™.

Valuations are not stretched – especially the Total return Ratio of 1.8x and an Earnings Yield of 14.5%.

Combining the fundamental momentum signals (PH Score™) with franchise valuation, and a low RSI, places BAFL PA in the top decile of bank opportunities globally.

In this briefing:

1. Bank Alfalah: Metrics Point to Falāh
2. SMC (6273 JP): Profit Decline Accelerates

1. Bank Alfalah: Metrics Point to Falāh

Bank Alfalah (BAFL PA) is heading in the right direction as testified by its metric progression, embodied in its quintile 1 PH Score™.

Valuations are not stretched – especially the Total return Ratio of 1.8x and an Earnings Yield of 14.5%.

Combining the fundamental momentum signals (PH Score™) with franchise valuation, and a low RSI, places BAFL PA in the top decile of bank opportunities globally.

2. SMC (6273 JP): Profit Decline Accelerates

Downturns in the semiconductor, auto and other user industries have caught up with SMC. Sales were down 4.0% year-on-year in the three months to December (the first decline in more than two years) and the decline in profits accelerated, with gross profit down 5.4%, operating profit down 10.6% and net profit down 18.8%. Year-on-year comparisons are likely to remain difficult for at least another two quarters.

In December, we wrote: “Management reports that semiconductor-related demand is down in all markets and that auto-related demand is down in the U.S. Auto sales are also declining in China.” (SMC (6273 JP): Profits Start to Decline ) Last week, WSTS reported the first decline in semiconductor sales in 30 months and the Nikkei newspaper reported that “Japanese chipmaker Renesas Electronics will temporarily halt work at 13 of the company’s 14 production facilities, including all nine domestic plants, due to high inventory levels and possible impact as Chinese demand for automotive and machinery tools plummets.” On Friday, March 8, SMC’s share price dropped by 3%. 

SMC has left FY Mar-19 guidance unchanged, implying a 4.1% decline in sales and a 2.9% decline in operating profit in 4Q. In view of current trends, this looks over-optimistic. The shares are now selling at 17.8x our EPS estimate for FY Mar-19 and 18.6x our estimate for FY Mar-20. These multiples compare with a 5-year historical P/E range of 13.8x – 28.5x. 

In this briefing:

1. HK Connect Discovery Weekly: Air China and Great Wall Motor (2019-04-04)
2. Indonesia Property-In Search of the End of the Rainbow- Part 7 – Kawasan Industri Jababeka (KIJA IJ)
3. OUE C-REIT, OUE H-TRUST – First Thoughts on Merger Scenario
4. Telecom Review (April 2019): DTAC Calls for Truce With CAT
5. Organo (6368 JP): Company Visit Notes and Conclusions

1. HK Connect Discovery Weekly: Air China and Great Wall Motor (2019-04-04)

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. 

2. Indonesia Property-In Search of the End of the Rainbow- Part 7 – Kawasan Industri Jababeka (KIJA IJ)

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. 

It has a blue chip customer base both local and foreign at Cikarang including Unilever Indonesia (UNVR IJ), Samsung Electronics (005930 KS), as well as a number of Japanese automakers and their related suppliers.

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. 

3. OUE C-REIT, OUE H-TRUST – First Thoughts on Merger Scenario

Last evening, Wall Street Journal reported that Oue Commercial Real Estate Investment Tr (OUECT SP) and Oue Hospitality Trust (OUEHT SP) are in discussions to merge in a cash and stock deal. OUE Commercial will offer to buy OUE Hospitality to create a single entity that will remain listed on the SGX.

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 11^th 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.

4. Telecom Review (April 2019): DTAC Calls for Truce With CAT

On April 4, we attended the DTAC shareholders’ meeting and listened to how management defended their strategic decisions in various areas such as legal settlements, marketing, and spectrum bidding. This is our take on their responses to various issue:

• Settlement with CAT. DTAC plans to do a further settlement worth Bt9.05bn nett with CAT to resolve all past bilateral issues, but will resume paying dividends in H2’19.
• Spectrum. Since they still have less spectrum than both AIS and True Move, we can’t really fault them for bidding for the 900MHz spectrum, especially since competition has come down considerably.
• Marketing. Like AIS, they are looking beyond just voice airtime. Mobile gaming is one area they will look at. DTAC’s subsidy on game-centric iPhones and the data airtime that comes with it is significantly more than both True Move and AIS.
• Others. They also managed to get a raise for the Chairman and do finishing touches on the PaySabai  (a payment platform) consolidation. In our view, these are really formalities at this phase, since PaySabai is pretty much wholly owned.

5. Organo (6368 JP): Company Visit Notes and Conclusions

• Organo has rebounded from December’s sharp sell-off, but remains attractively valued on a long-term view, in our estimation. 
• New orders for water treatment systems from the semiconductor and other industries were up 22% year-on-year and exceeded sales by 33% in the nine months to December.
• According to management, orders continued to exceed sales in the three months to March, but are likely to drop below sales in 1H of FY Mar-20 due to the downturn in memory ICs.
• But the situation is not dire, as overall silicon wafer shipments and demand for image sensors both continue to rise, while foundry is doing better than memory.
• Longer term, management expects growth driven by IIoT, power devices,  electric vehicles, and a cyclical recovery in memory. The biggest uncertainty is Chinese domestic demand.
• Some orders have been deferred by one or two quarters, but the company has so far not suffered any cancellations. With a one-year lag from order to revenue recognition for larger projects, management believes it has sufficient visibility to predict improvement in 2H.
• Management has no plans to revise FY Mar-19 guidance, which is for a 14.9% increase in sales, a 43.9% increase in operating profit and a 33.1% increase in net profit to ¥322.5 per share. At ¥3,200 (Friday, April 5 closing price), this translates into a P/E ratio of 9.9x.
• In our estimation, this is cheap enough to be of interest to long-term investors. In the meantime, the calculations of Japan Analytics show upside to a no-growth valuation. Little or no growth appears to be the most likely scenario for FY Mar-20.

• Organo is Japan’s second-ranking industrial water treatment company after Kurita Water Industries (6370). Both provide ultra-pure water processing equipment and related products and services to the semiconductor industry. Kurita ranks first in Japan and Korea, Organo ranks first in Taiwan, and both companies compete in China.

In this briefing:

1. SMC (6273 JP): Profit Decline Accelerates

1. SMC (6273 JP): Profit Decline Accelerates

Downturns in the semiconductor, auto and other user industries have caught up with SMC. Sales were down 4.0% year-on-year in the three months to December (the first decline in more than two years) and the decline in profits accelerated, with gross profit down 5.4%, operating profit down 10.6% and net profit down 18.8%. Year-on-year comparisons are likely to remain difficult for at least another two quarters.

In December, we wrote: “Management reports that semiconductor-related demand is down in all markets and that auto-related demand is down in the U.S. Auto sales are also declining in China.” (SMC (6273 JP): Profits Start to Decline ) Last week, WSTS reported the first decline in semiconductor sales in 30 months and the Nikkei newspaper reported that “Japanese chipmaker Renesas Electronics will temporarily halt work at 13 of the company’s 14 production facilities, including all nine domestic plants, due to high inventory levels and possible impact as Chinese demand for automotive and machinery tools plummets.” On Friday, March 8, SMC’s share price dropped by 3%. 

SMC has left FY Mar-19 guidance unchanged, implying a 4.1% decline in sales and a 2.9% decline in operating profit in 4Q. In view of current trends, this looks over-optimistic. The shares are now selling at 17.8x our EPS estimate for FY Mar-19 and 18.6x our estimate for FY Mar-20. These multiples compare with a 5-year historical P/E range of 13.8x – 28.5x. 

In this briefing:

1. Indonesia Property-In Search of the End of the Rainbow- Part 7 – Kawasan Industri Jababeka (KIJA IJ)
2. OUE C-REIT, OUE H-TRUST – First Thoughts on Merger Scenario
3. Telecom Review (April 2019): DTAC Calls for Truce With CAT
4. Organo (6368 JP): Company Visit Notes and Conclusions
5. Las Vegas Sands: Singapore Expansion Impacts Our Valuation Now, Long Before Projected 2025 Debut

1. Indonesia Property-In Search of the End of the Rainbow- Part 7 – Kawasan Industri Jababeka (KIJA IJ)

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. 

It has a blue chip customer base both local and foreign at Cikarang including Unilever Indonesia (UNVR IJ), Samsung Electronics (005930 KS), as well as a number of Japanese automakers and their related suppliers.

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. 

2. OUE C-REIT, OUE H-TRUST – First Thoughts on Merger Scenario

Last evening, Wall Street Journal reported that Oue Commercial Real Estate Investment Tr (OUECT SP) and Oue Hospitality Trust (OUEHT SP) are in discussions to merge in a cash and stock deal. OUE Commercial will offer to buy OUE Hospitality to create a single entity that will remain listed on the SGX.

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 11^th 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.

3. Telecom Review (April 2019): DTAC Calls for Truce With CAT

On April 4, we attended the DTAC shareholders’ meeting and listened to how management defended their strategic decisions in various areas such as legal settlements, marketing, and spectrum bidding. This is our take on their responses to various issue:

• Settlement with CAT. DTAC plans to do a further settlement worth Bt9.05bn nett with CAT to resolve all past bilateral issues, but will resume paying dividends in H2’19.
• Spectrum. Since they still have less spectrum than both AIS and True Move, we can’t really fault them for bidding for the 900MHz spectrum, especially since competition has come down considerably.
• Marketing. Like AIS, they are looking beyond just voice airtime. Mobile gaming is one area they will look at. DTAC’s subsidy on game-centric iPhones and the data airtime that comes with it is significantly more than both True Move and AIS.
• Others. They also managed to get a raise for the Chairman and do finishing touches on the PaySabai  (a payment platform) consolidation. In our view, these are really formalities at this phase, since PaySabai is pretty much wholly owned.

4. Organo (6368 JP): Company Visit Notes and Conclusions

• Organo has rebounded from December’s sharp sell-off, but remains attractively valued on a long-term view, in our estimation. 
• New orders for water treatment systems from the semiconductor and other industries were up 22% year-on-year and exceeded sales by 33% in the nine months to December.
• According to management, orders continued to exceed sales in the three months to March, but are likely to drop below sales in 1H of FY Mar-20 due to the downturn in memory ICs.
• But the situation is not dire, as overall silicon wafer shipments and demand for image sensors both continue to rise, while foundry is doing better than memory.
• Longer term, management expects growth driven by IIoT, power devices,  electric vehicles, and a cyclical recovery in memory. The biggest uncertainty is Chinese domestic demand.
• Some orders have been deferred by one or two quarters, but the company has so far not suffered any cancellations. With a one-year lag from order to revenue recognition for larger projects, management believes it has sufficient visibility to predict improvement in 2H.
• Management has no plans to revise FY Mar-19 guidance, which is for a 14.9% increase in sales, a 43.9% increase in operating profit and a 33.1% increase in net profit to ¥322.5 per share. At ¥3,200 (Friday, April 5 closing price), this translates into a P/E ratio of 9.9x.
• In our estimation, this is cheap enough to be of interest to long-term investors. In the meantime, the calculations of Japan Analytics show upside to a no-growth valuation. Little or no growth appears to be the most likely scenario for FY Mar-20.

• Organo is Japan’s second-ranking industrial water treatment company after Kurita Water Industries (6370). Both provide ultra-pure water processing equipment and related products and services to the semiconductor industry. Kurita ranks first in Japan and Korea, Organo ranks first in Taiwan, and both companies compete in China.

5. Las Vegas Sands: Singapore Expansion Impacts Our Valuation Now, Long Before Projected 2025 Debut

• LVS at $64 has runway to $80 by Q4 this year with more core catalysts than many peers.
• Just announced Singapore expansion solidifies LVS first mover MICE advantage as developer of choice in other jurisdictions.
• Singapore outlook adds credibility to LVS pole position in race for Japan IR license before year’s end, adding ballast to our PT.