Equity Bottom-Up

In this briefing:

1. Speedcast: Back on Track
2. King’s Town: “The Night Seems to Fade, but the Moonlight Lingers On”

1. Speedcast: Back on Track

Speedcast International (SDA AU) recently reported FY18 (Dec YE) results which showed a solid recovery in 2H. That has allowed the stock to start to recover from a torrid 1H18 performance which saw targets missed. The strong recovery in operating performance in 2H18 has allowed Ian Martin to reset forecasts and he now looks for the EBITDA margin to increase steadily as acquisitions are bedded down. By FY20, we expect Speedcast to be in a much stronger position as rising cash flow leads to lower debts. We have a new 12m target price of A$4.40 based on 11.7x FY20F EPS. We expect SpeedCast to be in a materially better operating position as it moves into FY20, and good cash flow will be used to reduce debt through the year. Operating execution in 1H19 is crucial.

2. King’s Town: “The Night Seems to Fade, but the Moonlight Lingers On”

King’S Town Bank (2809 TT) flags up some amber signals with the growth of funding and credit costs, huge asset writedowns on financial assets, and a shrinking bottom line that barely resembles Comprehensive Income.

This all may signal a management team getting to grips with some asset problems and navigating the ship into calmer waters. Or is the bank being cleaned up for sale? The bank was rumoured to be interested in Entie Commercial Bank (2849 TT).

Our PH Score™ (our fundamental trend and value-quality indicator) though is subpar at 2.5 (bottom quintile globally) and the RSI (14 day) is high at 77. We would prefer to see an elevated PH Score™ and a low RSI. “If a business does well, the stock will follow”. We are intrigued.

If the bank was trading on a Franchise Valuation of 8% (Asia Pacific median including Japan), shares might be more compelling. But Market Cap./Deposits stands at 20%. The median P/Book in the region (including Japan) stands at 0.8x versus 1.1x at King’s Town.

In this briefing:

1. SIS: 4Q18 Result Broke the Record

1. SIS: 4Q18 Result Broke the Record

SIS’s 4Q18 net profit was Bt149m (+77%YoY, +16%QoQ), a record high level. The impressive 2018 result was much better than our forecast and accounts for 131% of our full-year forecast.

• A YoY and QoQ earnings growth were backed by an all-time high level of gross margin at 6.7% mainly driven by higher sales contribution from data center related products and others (security and surveillance) segments. 2018 net profit was at Bt468 (+58%YoY), buoyed by a record high sales and margin
• We maintain a positive outlook toward its 2019-20E earnings driven by 1) solid growth for high margin segments: enterprise, security and surveillance on the back of strong outlook for IT investment by private sector along the mega-trend of digitalization.
• Announced Bt0.55 of dividend payment or equivalent to 4.7% yield (XD on 3th May 2019

We maintain a BUY rating for SIS with our new target price of Bt15.0 derived from 10xPE’19E, its average trading range in the past five years or a 30% discount to the Thai Info Tech sector.

In this briefing:

1. SIS: 4Q18 Result Broke the Record
2. OCBC – Difficult to Square
3. Renesas: Factory Stoppage Announcement Should Correct Premature Rebound Expectations

1. SIS: 4Q18 Result Broke the Record

SIS’s 4Q18 net profit was Bt149m (+77%YoY, +16%QoQ), a record high level. The impressive 2018 result was much better than our forecast and accounts for 131% of our full-year forecast.

• A YoY and QoQ earnings growth were backed by an all-time high level of gross margin at 6.7% mainly driven by higher sales contribution from data center related products and others (security and surveillance) segments. 2018 net profit was at Bt468 (+58%YoY), buoyed by a record high sales and margin
• We maintain a positive outlook toward its 2019-20E earnings driven by 1) solid growth for high margin segments: enterprise, security and surveillance on the back of strong outlook for IT investment by private sector along the mega-trend of digitalization.
• Announced Bt0.55 of dividend payment or equivalent to 4.7% yield (XD on 3th May 2019

We maintain a BUY rating for SIS with our new target price of Bt15.0 derived from 10xPE’19E, its average trading range in the past five years or a 30% discount to the Thai Info Tech sector.

2. OCBC – Difficult to Square

The data and text from Oversea Chinese Banking Corp. (OCBC SP) is difficult to square. It talks about improved credit quality, but its NPLs are up both YoY and QoQ.  In the bank’s Pillar 3 disclosure it notes that ‘risk-weighted assets (RWA) were largely stable in the quarter primarily due to improving asset quality.’ In its financial supplement it reports NPLs of S$3,938m compared with S$3,594m, in 4Q18 and 3Q18. This is nearly 10% higher QoQ.  The reality is that OCBC ramped up credit costs in 4Q18 to nearly 3x its full 9M18 charge and despite this, its NPL cover is now down to 57% from 78% a year ago. To us this appears like marked deterioration.  And even QoQ, where NPL cover was 65% in 3Q18. The risk now is that credit costs during the current year are more like 4Q18 or higher, rather than the paltry figures seen during full year 2018. We do not believe the market is expecting this. 

3. Renesas: Factory Stoppage Announcement Should Correct Premature Rebound Expectations

We commented previously on 13 Dec 2018 that:

We visited Renesas Electronics (6723 JP) this week to discuss progress on inventory reduction and its likely ramp of utilisation rates/wafer throughput, as well as to gather further details on the IDT acquisition and its long -term strategy. On the whole, we continue to like the long-term picture, consider the stock to be undervalued and believe investors with long time horizons should be looking at the stock on the long side. However, our discussions suggested to us that while production cuts to reduce inventory should be completed this month or at worst in 1Q2019, a ramp in utilisation rates could take longer than is implied by consensus.

Following this comment Renesas Electronics (6723 JP) traded directionally with the market though in very volatile fashion, first dropping 17% before rebounding 69%. Now, with Nikkei reporting that the company would halt production at most facilities during the year and for as much as two months in some cases, the stock is once again giving up its gains and is limit down -14%.  This leaves it just 10% above where we previously commented on the stock and as it approaches the ¥500 level again we feel it is becoming interesting again. We examine the potential financial impact from the production halts below.

In this briefing:

1. SIS: 4Q18 Result Broke the Record
2. OCBC – Difficult to Square
3. Renesas: Factory Stoppage Announcement Should Correct Premature Rebound Expectations
4. Matahari Department Store (LPPF IJ) – A Retail Conundrum

1. SIS: 4Q18 Result Broke the Record

SIS’s 4Q18 net profit was Bt149m (+77%YoY, +16%QoQ), a record high level. The impressive 2018 result was much better than our forecast and accounts for 131% of our full-year forecast.

• A YoY and QoQ earnings growth were backed by an all-time high level of gross margin at 6.7% mainly driven by higher sales contribution from data center related products and others (security and surveillance) segments. 2018 net profit was at Bt468 (+58%YoY), buoyed by a record high sales and margin
• We maintain a positive outlook toward its 2019-20E earnings driven by 1) solid growth for high margin segments: enterprise, security and surveillance on the back of strong outlook for IT investment by private sector along the mega-trend of digitalization.
• Announced Bt0.55 of dividend payment or equivalent to 4.7% yield (XD on 3th May 2019

We maintain a BUY rating for SIS with our new target price of Bt15.0 derived from 10xPE’19E, its average trading range in the past five years or a 30% discount to the Thai Info Tech sector.

2. OCBC – Difficult to Square

The data and text from Oversea Chinese Banking Corp. (OCBC SP) is difficult to square. It talks about improved credit quality, but its NPLs are up both YoY and QoQ.  In the bank’s Pillar 3 disclosure it notes that ‘risk-weighted assets (RWA) were largely stable in the quarter primarily due to improving asset quality.’ In its financial supplement it reports NPLs of S$3,938m compared with S$3,594m, in 4Q18 and 3Q18. This is nearly 10% higher QoQ.  The reality is that OCBC ramped up credit costs in 4Q18 to nearly 3x its full 9M18 charge and despite this, its NPL cover is now down to 57% from 78% a year ago. To us this appears like marked deterioration.  And even QoQ, where NPL cover was 65% in 3Q18. The risk now is that credit costs during the current year are more like 4Q18 or higher, rather than the paltry figures seen during full year 2018. We do not believe the market is expecting this. 

3. Renesas: Factory Stoppage Announcement Should Correct Premature Rebound Expectations

We commented previously on 13 Dec 2018 that:

We visited Renesas Electronics (6723 JP) this week to discuss progress on inventory reduction and its likely ramp of utilisation rates/wafer throughput, as well as to gather further details on the IDT acquisition and its long -term strategy. On the whole, we continue to like the long-term picture, consider the stock to be undervalued and believe investors with long time horizons should be looking at the stock on the long side. However, our discussions suggested to us that while production cuts to reduce inventory should be completed this month or at worst in 1Q2019, a ramp in utilisation rates could take longer than is implied by consensus.

Following this comment Renesas Electronics (6723 JP) traded directionally with the market though in very volatile fashion, first dropping 17% before rebounding 69%. Now, with Nikkei reporting that the company would halt production at most facilities during the year and for as much as two months in some cases, the stock is once again giving up its gains and is limit down -14%.  This leaves it just 10% above where we previously commented on the stock and as it approaches the ¥500 level again we feel it is becoming interesting again. We examine the potential financial impact from the production halts below.

4. Matahari Department Store (LPPF IJ) – A Retail Conundrum

Pt Matahari Department Store (LPPF IJ)‘s FY18 results call was an interesting combination of kitchen sinking, a cautious outlook, combined with some more optimistic strategies on specialty stores with new brands and smaller format stores for regional expansion. The big question is whether these strategies will win out or will the company continue to underwhelm on its growth prospects? 

Pt Matahari Department Store (LPPF IJ) remains a market leader in its space with 159 departments stores across Indonesia selling affordable fashion to the middle classes but it has underwhelmed on a few occasions on its growth and guidance. It is reducing its dividend payout to facilitate the build-out of specialty stores with new brands on board. 

Valuations do now look interesting with the company trading on 6.0x FY19E PER and 5.4x FY20E PER. It generates a forecast ROE of 70% and ROE of 30%, which is extremely high for a retailer. The question is how much analysts will downgrade and whether investors will look through its Lippo connection. After another 9% fall in the share price today after 22% yesterday, a lot does seem to have been factored in already.

In this briefing:

1. Guangzhou Rural: All the Shakespearoes?
2. ICBC: Opportunity in Disguise
3. Shanghai/Shenzhen Connect – Inflow Turned Cautious in March but MSCI Adjustment Ahead
4. Bank of Zhengzhou: “Bend One Cubit, Make Eight Cubits Straight”
5. Tesla (TSLA): 1Q Deliveries – Aging Products or the Impact of Tax Credit Phase Out?

1. Guangzhou Rural: All the Shakespearoes?

I am partial to a bit of Confucius. Or to such thinking. Now and again. The chairman of Guangzhou Rural Commercial Bank (1551 HK) has a Confucian message (scholars will no doubt berate me) at the beginning of the report and accounts: “A single spark can start a prairie fire while a crack can lead to ice breaking”. From what I can glean, the chairman is alluding to the forty year process of China’s emergence. No satanic conflagration intended or any portends of global warming. For some reason, a tune by the 1970s new-wave group, The Stranglers, passed through my mind: “He got an ice pick that made his ears burn” and “They watched their Rome burn”. Cultural differences perhaps.

Guangzhou Rural Commercial Bank (1551 HK) shares many of the issues that affect Chinese lenders today.  (The “Big four” are much less susceptible to deep stresses in this environment). Unsurprisingly, Asset Quality issues weigh on these results and earnings quality is subpar with trading gains and other assorted non-operating or “other items” playing a big part in the composition of Pre-Tax Profit. The latter flatters the “improving” headline Cost-Income ratio which is not really an indicator of greater efficiency here. In fact underlying “jaws” are highly negative. It is thus surprising that the wage bill should shoot up 30% YoY in such austere times. Given the aforementioned Asset Quality issues, such as booming substandard loans, ballooning credit costs, and high charge-offs, the “improving” NPL ratio is flattered by an exuberant denominator. Asset Quality does look volatile. The Liquidity Coverage Ratio and LDR duly eroded.

Where the bank does better, in contrast to many other Chinese lenders, is on Net Interest Income.  Guangzhou seems to have reduced its funding costs markedly. The bank managed to lower its corporate time deposit rates especially. The result is that Interest Expenses on Deposits rose by just 6.4% YoY. Liability management seems to be behind a reduction in Debt/Equity from 2.79x to 1.62x, thus decreasing Debt funding costs by 24% YoY. Spurred by corporate credit growth of 38% YoY, Interest Income on Loans climbed by 31% YoY. However, the bank does share an issue with some other lenders – a collapse in Interest Income on non-credit earning assets. This is, in part, due to a shrinkage of its FI holdings by some CN89.5bn. This means that despite the credit spurt, Interest Income in its totality edged up by barely 1% YoY. A disappointing performance on fee income (custody, wealth management, advisory) reduced Total underlying Income growth to 6% YoY. That 6% is all about rampant corporate credit supply and lower corporate deposit and debt interest costs.

Trends are thus decidedly mixed given the underlying picture behind the positive headline fundamental change in Efficiency, Asset Quality and ROAA. Liquidity deteriorated. It must be said that Provisioning was enhanced, Capitalisation moved in the right direction, while NIM and Interest Spread both improved.

2. ICBC: Opportunity in Disguise

ICBC (H) (1398 HK) delivered a robust PH Score of 8.5 – our quantamental value-quality gauge.

A highlight was the trend in cost-control. The bank delivered underlying “jaws” of 420bps. Besides OPEX restraint, including payroll, Efficiency gains were supported by robust underlying top-line expansion as  growth in interest income on earning assets, underpinned by moderate credit growth, broadly matched expansion of interest expenses on interest-bearing Liabilities. This combination is not so prevalent in China these days, especially in smaller or medium-sized lenders.

It is well-flagged that the system is grappling with Asset Quality issues and there is a debate about the interrelated property market. ICBC is not immune, similar to other SOEs, from migration of souring loans. However, by China standards, rising asset writedowns which exerted a negative pull on Pre-Tax Profit as a % of pre-impairment Operating Profit, high charge-offs, and swelling (though not exploding) substandard and loss loans look arguably manageable given ICBC‘s sheer scale. The Asset Quality issue here is also not as bad as it was in bygone years (2004 springs to mind) when capital injections, asset transfers, and government-subsidised bad loan disposals were the order of the day. This is a “Big Four” player.

Shares are not expensive. ICBC trades at a P/Book of 0.8x, a Franchise Valuation of 10%, an Earnings Yield of 16.7%, a Dividend Yield of 4.9%, and a Total Return Ratio of 1.6x.

3. Shanghai/Shenzhen Connect – Inflow Turned Cautious in March but MSCI Adjustment Ahead

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.

4. Bank of Zhengzhou: “Bend One Cubit, Make Eight Cubits Straight”

Bank Of Zhengzhou (6196 HK) reveals a picture of cascading asset toxicity and subpar earnings quality. As elsewhere in China, it is difficult to decipher whether better NPL recognition is behind this profound asset quality deterioration or poor underwriting practice and discipline combined with troubled debtors: the answer may lie somewhere in between.

While the low PH Score (a value-quality gauge) of 4.7 is supported by a lowly valuation metric (earnings quality is not reassuring), it is more a testament to -and reflection of- core eroding fundamental trends across the board. Regarding trends, Capital Adequacy and Provisioning were the variables to post a positive change. But even then, not all Capitalisation and Provisioning metrics moved in the right direction.

Franchise Valuation at 12% does not indicate that the bank is especially cheap though P/Book of 0.64x is below the regional median of 0.78x.

5. Tesla (TSLA): 1Q Deliveries – Aging Products or the Impact of Tax Credit Phase Out?

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.

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.

In this briefing:

1. PT Bank Rakyat Indonesia (Persero): Rather Rich for a Bargain Hunter

1. PT Bank Rakyat Indonesia (Persero): Rather Rich for a Bargain Hunter

Bank Rakyat Indonesia Perser (BBRI IJ) seems to be doing a great deal right to perhaps satisfy a punchy valuation.

Profitability is elevated with chunky NIMs and spreads, fee income and insurance are performing well, and OPEX is under control. Capital Adequacy and CIR look healthy.

However, we are concerned about rising interest costs, at a pace in excess of interest income generation.

The bank also seems to be stretching a little in terms of quality income to reach the Net Profit line with “other non-interest interest income” and gains on securities. The bottom line falls a little short of a comprehensive income assessment.

In addition, asset quality remains a thorny issue. The Balance Sheet continues to be much more toxic than the sedate NPL ratio. This relates to the micro focus.

Debt to Equity is on the rise.

Overall, trends are no better than average – as testified by a PH Score of 5.

Trading on a P/Book of 2.6x and an earnings yield of 7.3%, we believe that valuation is somewhat rich irrespective of the bank’s strengths. A franchise valuation of 52% versus a median of 8% in Asia Pacific seals the deal.

In this briefing:

1. ICBC: Opportunity in Disguise
2. Shanghai/Shenzhen Connect – Inflow Turned Cautious in March but MSCI Adjustment Ahead
3. Bank of Zhengzhou: “Bend One Cubit, Make Eight Cubits Straight”
4. Tesla (TSLA): 1Q Deliveries – Aging Products or the Impact of Tax Credit Phase Out?
5. Jiangxi Bank: “No Sooner Has One Pushed a Gourd Under Water than Another Pops Up”

1. ICBC: Opportunity in Disguise

ICBC (H) (1398 HK) delivered a robust PH Score of 8.5 – our quantamental value-quality gauge.

A highlight was the trend in cost-control. The bank delivered underlying “jaws” of 420bps. Besides OPEX restraint, including payroll, Efficiency gains were supported by robust underlying top-line expansion as  growth in interest income on earning assets, underpinned by moderate credit growth, broadly matched expansion of interest expenses on interest-bearing Liabilities. This combination is not so prevalent in China these days, especially in smaller or medium-sized lenders.

It is well-flagged that the system is grappling with Asset Quality issues and there is a debate about the interrelated property market. ICBC is not immune, similar to other SOEs, from migration of souring loans. However, by China standards, rising asset writedowns which exerted a negative pull on Pre-Tax Profit as a % of pre-impairment Operating Profit, high charge-offs, and swelling (though not exploding) substandard and loss loans look arguably manageable given ICBC‘s sheer scale. The Asset Quality issue here is also not as bad as it was in bygone years (2004 springs to mind) when capital injections, asset transfers, and government-subsidised bad loan disposals were the order of the day. This is a “Big Four” player.

Shares are not expensive. ICBC trades at a P/Book of 0.8x, a Franchise Valuation of 10%, an Earnings Yield of 16.7%, a Dividend Yield of 4.9%, and a Total Return Ratio of 1.6x.

2. Shanghai/Shenzhen Connect – Inflow Turned Cautious in March but MSCI Adjustment Ahead

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.

3. Bank of Zhengzhou: “Bend One Cubit, Make Eight Cubits Straight”

Bank Of Zhengzhou (6196 HK) reveals a picture of cascading asset toxicity and subpar earnings quality. As elsewhere in China, it is difficult to decipher whether better NPL recognition is behind this profound asset quality deterioration or poor underwriting practice and discipline combined with troubled debtors: the answer may lie somewhere in between.

While the low PH Score (a value-quality gauge) of 4.7 is supported by a lowly valuation metric (earnings quality is not reassuring), it is more a testament to -and reflection of- core eroding fundamental trends across the board. Regarding trends, Capital Adequacy and Provisioning were the variables to post a positive change. But even then, not all Capitalisation and Provisioning metrics moved in the right direction.

Franchise Valuation at 12% does not indicate that the bank is especially cheap though P/Book of 0.64x is below the regional median of 0.78x.

4. Tesla (TSLA): 1Q Deliveries – Aging Products or the Impact of Tax Credit Phase Out?

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.

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.

5. Jiangxi Bank: “No Sooner Has One Pushed a Gourd Under Water than Another Pops Up”

Jiangxi Bank Co Ltd (1916 HK) initially attracted our attention with a subpar PH Score (a quantamental value-quality gauge). The bank only scored positively on Capital Adequacy and Efficiency trends. The latter is almost certainly not a true picture.

Further analysis reveals a bank ratcheting up the credit spigot exuberantly on the back of poor asset quality fundamentals (booming substandard loans and SML expansion) with ensuing elevated asset writedowns weighing on a reducing bottom-line despite gains from securities and a lower tax provision.

In this briefing:

1. Accordia Golf Trust (AGT): Buy but Please Consider This…

1. Accordia Golf Trust (AGT): Buy but Please Consider This…

Accordia Golf Trust (AGT SP) is the second largest golf course operator in Japan that offers stable DPU with assets that are less correlated to the global economic cycle but they have their own challenges; aging demographics that makes the number of games played lower over time, volatile weather in Japan (unlike in Singapore where it’s sunny summer all year long), limited upside impact from automation initiative and golf tax. 

In this briefing:

1. Weibo (WB): Revenues Slowed Down Significantly in 4Q2018, Failed in Transition

1. Weibo (WB): Revenues Slowed Down Significantly in 4Q2018, Failed in Transition

• The advertising revenues slowed down significantly in 4Q2018.
• We believe the content transition from politics to entertainment was not as good as the management expected.
• We believe WB will not defeat Tencent’s WeChat.
• We believe the stock price has downside of 9%.

In this briefing:

1. Shanghai/Shenzhen Connect – Inflow Turned Cautious in March but MSCI Adjustment Ahead
2. Bank of Zhengzhou: “Bend One Cubit, Make Eight Cubits Straight”
3. Tesla (TSLA): 1Q Deliveries – Aging Products or the Impact of Tax Credit Phase Out?
4. Jiangxi Bank: “No Sooner Has One Pushed a Gourd Under Water than Another Pops Up”
5. British Land (BLND:LN): Retail in Reverse

1. Shanghai/Shenzhen Connect – Inflow Turned Cautious in March but MSCI Adjustment Ahead

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.

2. Bank of Zhengzhou: “Bend One Cubit, Make Eight Cubits Straight”

Bank Of Zhengzhou (6196 HK) reveals a picture of cascading asset toxicity and subpar earnings quality. As elsewhere in China, it is difficult to decipher whether better NPL recognition is behind this profound asset quality deterioration or poor underwriting practice and discipline combined with troubled debtors: the answer may lie somewhere in between.

While the low PH Score (a value-quality gauge) of 4.7 is supported by a lowly valuation metric (earnings quality is not reassuring), it is more a testament to -and reflection of- core eroding fundamental trends across the board. Regarding trends, Capital Adequacy and Provisioning were the variables to post a positive change. But even then, not all Capitalisation and Provisioning metrics moved in the right direction.

Franchise Valuation at 12% does not indicate that the bank is especially cheap though P/Book of 0.64x is below the regional median of 0.78x.

3. Tesla (TSLA): 1Q Deliveries – Aging Products or the Impact of Tax Credit Phase Out?

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.

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.

4. Jiangxi Bank: “No Sooner Has One Pushed a Gourd Under Water than Another Pops Up”

Jiangxi Bank Co Ltd (1916 HK) initially attracted our attention with a subpar PH Score (a quantamental value-quality gauge). The bank only scored positively on Capital Adequacy and Efficiency trends. The latter is almost certainly not a true picture.

Further analysis reveals a bank ratcheting up the credit spigot exuberantly on the back of poor asset quality fundamentals (booming substandard loans and SML expansion) with ensuing elevated asset writedowns weighing on a reducing bottom-line despite gains from securities and a lower tax provision.

5. British Land (BLND:LN): Retail in Reverse

A ‘perfect storm’ is enveloping UK retailers. Brexit uncertainty is reducing footfall and sales and the structural shift to e-commerce continues unabated. But if things are tough for retailers they are equally bad for UK property companies with a significant proportion of retail in their portfolios. Declining rents and rising yields are not positive for valuations. Landlords also have to deal with an increasing incidence of tenant insolvencies. 

British Land: what does it do ?

British Land is the third largest property company in the FTSE100 with a market capitalisation of £5.6bn and property portfolio of £12.8bn split almost equally between Retail and Central London offices. 

Why is it in the Short portfolio ?

Trading pressure in the retail sector is translating into rent reductions for landlords, or worse, vacant space. Yields are rising due to decreased investment demand. Property consultancies anticipate a double digit decline in retail capital values over the next two years. The consensus expectation is for British Land’s EPRA NAV to decline 8% over the next two years.