Equity Bottom-Up

In this briefing:

1. Maxis Revenues Stabilizing. Ambitious Long Term Goals in Enterprise and Connectivity
2. BBTN: Indonesia Has Special Mention Problems Too
3. Westpac Banking: Looking Fragile
4. Celltrion Healthcare: Well, We Were Warned

1. Maxis Revenues Stabilizing. Ambitious Long Term Goals in Enterprise and Connectivity

In late January, we upgraded our view on the Malaysian telecom sector after 6 years of being negative. We also and noted that Maxis was best placed to benefit from increased bundling and Enterprise opportunities (due to low cost access to Telekom Malaysia’s (T MK) (TM) fibre infrastructure).  We see signs the current round of results (4Q18) as being supportive of this view. While Maxis 4Q numbers were affected by one offs, the key is a return to service revenue growth while we think the market will view Maxis’ long term revenue guidance positively. Longer term, Maxis announced aggressive longer term revenue targets based on a move into Enterprise and fixed connectivity which should deliver significant revenue growth.

2. BBTN: Indonesia Has Special Mention Problems Too

Bank Tabungan Negara Persero (BBTN IJ) appears to have a nasty combination of high Special Mention Loans (SMLs) and elevated “past due but unimpaired Loans”.

The implication is that provisioning levels are insufficient in an environment of eroding asset quality.

But the bank continues to grow credit by around 20% YoY.

The bank is hugely exposed to the retail real estate market (91% of Loans).

In fact, the Indonesian Banking Sector is rife with high SMLs and in some cases elevated “past due but unimpaired Loans”.

SMLs are traditionally associated with Chinese under-reporting of underlying bad loans, and hence the production of a somewhat flattering Asset Quality picture.

Maybe, the health and valuation of the Indonesian Banking Sector needs to be reassessed with implications for IDR.

3. Westpac Banking: Looking Fragile

Westpac Banking (WBC AU) is facing a class action suit regarding alleged irresponsible lending in home loans since 2011. This is the first class action against a major Australian bank since the publication of the royal commission’s final report.

The ramifications of the royal commission report remain a source of debate with elections coming up. But, in general, banks will not be allowed to conduct operations in a “business-as-usual way”. There will be consequences for credit provision.

Westpac’s Balance Sheet looks decidedly fragile as it stands. The bank is entering a slowdown from a position of weakness.

Exposures to Australia’s slowing economy (not unrelated of course to China), the dovish turn at the Central Bank, and in particular its bubbly housing market make us hyper cautious. The highly volatile Aussie dollar tumbled from levels above $0.7200 to below $0.7100 following reports that China banned coal imports from the country at a major port.

Despite the sinking share prices of Australia’s main banks, valuations may still be too high given the varied headwinds.

4. Celltrion Healthcare: Well, We Were Warned

Celltrion Healthcare (091990 KS) reported preliminary 2018 results that were dramatically short of expectations as the company cut shipments to reduce distributors’ inventories. Management had announced plans to shift to a direct sales model to get better control over pricing decisions, but the magnitude of Q4’s shortfall (94% decline in revenue) raises questions about the role of “channel stuffing” in boosting prior periods’ results. In addition, we expect some spillover effect on Celltrion Inc (068270 KS)‘s Q4’s results. This Insight discusses the results in brief and contrasts Celltrion Healthcare’s results with those of Samsung Bioepis. 

We continue to avoid these stocks.

In this briefing:

1. TWPC: Sign of Recovery from 4Q18 Earnings
2. PLAT: Already Priced in the Delay in Opening a New Project
3. A Comparison of Recent Visitors Trend to Korea and Japan

1. TWPC: Sign of Recovery from 4Q18 Earnings

TWPC 4Q18 recurring profit was Bt86m (+135%YoY, +975%QoQ). The easing in cassava supply help supporting TWPC both selling volume and profitability.

• The strong revenue at Bt2.1bn (+12%YoY, +25%QoQ) and GPM at 17.2% (+0.7ppts YoY, +3.2ppts QoQ) should reflect the easing cassava supply and mark its earnings bottom out.
• TWPC FY2018 recurring profit was Bt197m (-48% YoY), largely eroded by starch industry downturn.
• TWPC announced a dividend payment of Bt0.32 (XD on 07-May-19), which is equivalent to 4.0% dividend yield.

We maintain our BUY rating with 2019E target price of Bt10.0, derived from 16.5x PE. We believe 2019 will be turnaround year for TWPC as the starch business down-cycle should have already ended. We like TWPC for its scalability with its strong brands in large markets both starch and food (Vermicelli and noodles).

2. PLAT: Already Priced in the Delay in Opening a New Project

PLAT reported 4Q18 net profit of Bt198m (-3%YoY, +6%QoQ) and in-line with our expectation.

• Slow sales growth (+3%YoY) due to the delay in opening The Market Bangkok project from Dec 18 to 14 Feb 2019 caused a YoY drop in 4Q18 performance. In summary, 2018 earnings grew 2%YoY driven by 5%YoY in sales growth. We also believe current share price already priced in this delay.
• Despite a drop in 4Q18 earnings YoY, we expect strong recovery in 1H19 earnings driven by opening The Market Bangkok (70% booked).
• We maintain our positive view toward its outlook back by the rise in average rental rate trend after long term contracts expiration in 2020-2021E.
• Announced an annual dividend payment of Bt0.2 (XD on 4 Mar), which is equivalent to 2.6% upcoming dividend yield.

We maintain BUY rating with a target price of Bt9.4 based on DCF (10.8%WACC, 0% TG)*.

3. A Comparison of Recent Visitors Trend to Korea and Japan

• In this report, we compare the recent dynamic foreign tourists trend to Korea and Japan. In January 2019, the number of foreign visitors to Japan rose 7.5% YoY to 2.69 million. A total of 0.78 million from South Korea visited Japan in January (DOWN 3% YoY) followed by 0.75 million people from China (up 19.3% YoY).
• According to Korea Ministry of Economy & Finance (MoEF), the number of people from China to Korea increased 35.1% YoY in January 2019.
• As evidenced by the better than expected Chinese visitors to Korea and worse than expected South Korean visitors to Japan in January, there is an increasing indication that this trend could continue in 2019. Many of the Korean related cosmetics stocks have positively reacted to the recent data. One of the interesting trades to be long on a basket of Korean cosmetics related stocks and be short on a basket of Japanese cosmetics related names. 

In this briefing:

1. Lasertec (6920 JP): Pricing in Long-Term Growth
2. Micron: Things Are Bad, and Getting Worse!
3. Brazilian Political Turmoil Adds to Market Volatility, and Concerns on Pension Reform
4. Hankyu Invests ¥1.75 Billion in Hankyu Men’s Tokyo
5. After Zozo: Onward Sets Sights on Digital Renaissance

1. Lasertec (6920 JP): Pricing in Long-Term Growth

Lasertec hit a new high in the semiconductor stock rally that followed Micron Technology’s March 20 earnings call. On Friday, March 22 (March 21 was a holiday in Japan), Lasertec was up 8.4% to ¥4,900. At this price, the shares are selling at 42x our EPS estimate for FY Jun-19, 36x our estimate for FY Jun-20 and 31x our estimate for FY Jun-21. On a 5-year view, earnings growth could bring the projected P/E multiple down to 21x, in our estimation.

Following strong 1H results, management left FY Jun-19 sales and profit guidance unchanged, but raised semiconductor-related orders guidance by 13% while cutting  orders guidance for FPD-related and other products by nearly 40%. Total new orders guidance was raised from ¥37 billion to ¥39 billion, compared with sales guidance of ¥28 billion, implying an increase in the order backlog from ¥39.9 billion to ¥50.9 billion.

With this in mind, we have raised our sales and profit estimates for FY Jun-20 and added new, higher estimates for FY Jun-21 and beyond. Rising demand for EUV mask blank and mask defect inspection equipment should drive an increase in total sales from ¥29 billion this fiscal year to ¥38 billion in FY Jun-21, and approximately ¥50 billion in FY Jun-23. Over the same period, operating profit should rise from ¥7.0 billion to ¥9.5 billion, and then to approximately ¥14 billion.

Risks for investors include the potential delay or reduction of orders and shipments (as just happened with FPD inspection equipment), high volatility in quarterly orders, sales and profits, and extended valuations.

2. Micron: Things Are Bad, and Getting Worse!

Today’s Micron earnings call underscored how difficult the memory business is getting, and the company’s guidance indicated that this is only the start of it.  Revenues for 2FQ19 were down 26% Q/Q at $5.8 billion, and the company projects 3QF19 revenues to fall to $4.8 billion.

3. Brazilian Political Turmoil Adds to Market Volatility, and Concerns on Pension Reform

• Brazil’s Ex-President Michel Temer has been arrested as part of the on-going CarWash (Lava Jato) criminal investigation, on bribery and corruption charges
• We believe that this increases the near-term downside risk to the BOVESPA index and blue chips, including the large cap banks
• This will also, we believe, heighten the negative “noise” around pension reform, potentially increasing the complexity of the reform process; even if this development alone should not serve to derail it, in our view
• Large cap Brazilian banks’ share prices have come under pressure recently, and we would expect the market correction to continue in the short term
• Nonetheless, we still see potential for Banco Do Brasil Sa (BBAS3 BZ) to re-rate over the medium term, and narrow the PBV gap with its core peers, Itau Unibanco Holding Sa (ITUB4 BZ) and Banco Bradesco Sa (BBDC4 BZ), as Banco do Brasil’s own internal restructuring takes effect

4. Hankyu Invests ¥1.75 Billion in Hankyu Men’s Tokyo

Hankyu Hanshin has outperformed the department store sector in the last few years and continues to invest to lock in its dominance of the Osaka market.

It is now about to unveil a major new update to its Tokyo store, creating a more luxurious Men’s Emporium.

The investment is an example of how the better department stores are repositioning individual buildings to better meet target market needs and find relevance in an e-commerce age.

5. After Zozo: Onward Sets Sights on Digital Renaissance

Onward Holdings (8016 JP) made a bold stand against price discounts in January when it announced plans to stop selling on ZOZO (3092 JP) but the timing was not ideal as Onward lowered its FY2018 sales guidance shortly thereafter..

With Zozo no longer a partner, Onward is investing in the growth of its own e-commerce business and has installed a new 50-person digital strategy group to make this happen.

If the plan works, Onward could finally break away from its dependence on the contracting department store apparel market but the journey to reach this goal will be a long one.

In this briefing:

1. This Week in Blockchain & Cryptos: Revisiting LINE’s Crypto Plans

1. This Week in Blockchain & Cryptos: Revisiting LINE’s Crypto Plans

LINE Corp (3938 JP) is one of the top Japanese names in our “Watchlist” of listed companies in Japan and South Korea that are adopting blockchain technologies or have exposure to cryptocurrencies. 

Since being added to the “Watchlist” in May last year (2018), LINE has launched a cryptocurrency, a cryptocurrency exchange, and a blockchain venture fund. In this note, we revisit LINE’s blockchain and cryptocurrency plans.

In this briefing:

1. LG Uplus: Risks Now Largely Priced In. Raise to Neutral on CJ Hello Deal Synergies
2. Indian Housing Finance Companies-Series 2- LIC Housing Finance
3. ASML. Safe Harbor In A Semi Storm.

1. LG Uplus: Risks Now Largely Priced In. Raise to Neutral on CJ Hello Deal Synergies

LG Uplus (032640 KS) shares have fallen around 20% from the highs of January when the market was excited by 5G. That always seemed overly optimistic given the lack of viable business cases and unknown investment requirements and we were comfortable with our Sell rating from mid October and KRW15,000 target price.  Following weak results, an easing of 5G  enthusiasm and the recently announced CJ Hello (037560 KS) deal the share price has fallen to around the KRW15,000. Alastair Jones now thinks a lot of bad news is in the price and the available synergies from CJ Hello offset a weaker earnings outlook. 

2. Indian Housing Finance Companies-Series 2- LIC Housing Finance

We have recently written a report on Housing Finance Industry (please click here) where we delved on the outlook of the industry that has witnessed significant support from the government as it opened up the funding stream for the NBFC sector including HFCs who in the past relied heavily on banks. In addition, the government has also focussed on improving the housing demand through reforms like RERA, Housing For All etc. that has helped revive sales in the recent quarters.

We concluded the report by saying that the forthcoming articles in the form of a series will elaborate on some HFCs that are likely to be the key beneficiaries of an expected revival of the residential real estate. These HFCs have shown high corporate governance standard and their asset quality has not been compromised for growth. And this could be ascertained by the highest credit rating of AAA awarded to these HFCs by the noted credit rating agencies in India.

In continuation of the series, this article provides detail on Lic Housing Finance (LICHF IN) , the second largest HFC in the country. The company has witnessed robust growth in the past with an asset quality that is among the best in class. We initiate coverage on the company through this report that would delve on the outlook of the company along with some glaring risks that have lately emerged and may likely have an impact on the asset quality going forward.

3. ASML. Safe Harbor In A Semi Storm.

Dutch lithography bellwether ASML is unique among its WFE peers in forecasting 2019 as yet another growth year for the company, making it eight such years in a row. While the likes of Applied Materials and Lam Research anticipate YoY revenue declines in the mid-to-high teens, ASML is sheltered from the worst excesses of the downturn by virtue of its technological moat, namely its EUV lithography tools. Customers like Taiwan Semiconductor Manufacturing Company, Samsung Electronics and Intel  are critically depending on ASML to deliver thirty of those tools in 2019 in order to ramp their latest process nodes. 

On the latest earnings call, ASML underscored its confidence in the company’s prospects by proposing a 50% increase in dividends to €2.10 per share. Currently trading at a 17% discount to its 52-week high, ASML is a safe harbor in the current semiconductor storm. 

In this briefing:

1. Micron: Things Are Bad, and Getting Worse!
2. Brazilian Political Turmoil Adds to Market Volatility, and Concerns on Pension Reform
3. Hankyu Invests ¥1.75 Billion in Hankyu Men’s Tokyo
4. After Zozo: Onward Sets Sights on Digital Renaissance
5. Snippets #21: Bremain, TMB Rights Issue

1. Micron: Things Are Bad, and Getting Worse!

Today’s Micron earnings call underscored how difficult the memory business is getting, and the company’s guidance indicated that this is only the start of it.  Revenues for 2FQ19 were down 26% Q/Q at $5.8 billion, and the company projects 3QF19 revenues to fall to $4.8 billion.

2. Brazilian Political Turmoil Adds to Market Volatility, and Concerns on Pension Reform

• Brazil’s Ex-President Michel Temer has been arrested as part of the on-going CarWash (Lava Jato) criminal investigation, on bribery and corruption charges
• We believe that this increases the near-term downside risk to the BOVESPA index and blue chips, including the large cap banks
• This will also, we believe, heighten the negative “noise” around pension reform, potentially increasing the complexity of the reform process; even if this development alone should not serve to derail it, in our view
• Large cap Brazilian banks’ share prices have come under pressure recently, and we would expect the market correction to continue in the short term
• Nonetheless, we still see potential for Banco Do Brasil Sa (BBAS3 BZ) to re-rate over the medium term, and narrow the PBV gap with its core peers, Itau Unibanco Holding Sa (ITUB4 BZ) and Banco Bradesco Sa (BBDC4 BZ), as Banco do Brasil’s own internal restructuring takes effect

3. Hankyu Invests ¥1.75 Billion in Hankyu Men’s Tokyo

Hankyu Hanshin has outperformed the department store sector in the last few years and continues to invest to lock in its dominance of the Osaka market.

It is now about to unveil a major new update to its Tokyo store, creating a more luxurious Men’s Emporium.

The investment is an example of how the better department stores are repositioning individual buildings to better meet target market needs and find relevance in an e-commerce age.

4. After Zozo: Onward Sets Sights on Digital Renaissance

Onward Holdings (8016 JP) made a bold stand against price discounts in January when it announced plans to stop selling on ZOZO (3092 JP) but the timing was not ideal as Onward lowered its FY2018 sales guidance shortly thereafter..

With Zozo no longer a partner, Onward is investing in the growth of its own e-commerce business and has installed a new 50-person digital strategy group to make this happen.

If the plan works, Onward could finally break away from its dependence on the contracting department store apparel market but the journey to reach this goal will be a long one.

5. Snippets #21: Bremain, TMB Rights Issue

These are the five developments/news flows/trends and their potential impact on Thai equities you should be aware of in recent weeks: 

• Reversing Brexit. A special report highlighting the possible reversal of Brexit should have limited impact on Thai equities, though a few names like SSI, Thai Union, and Minor do float up on the screen.
• TMB announces a 5 for 1 rights issue at Bt2.07/sh, which could raise US$570m of new capital for their acquisition of Thanchart and imply a 65-35 split of ownership between the two banks.
• Politically motivated wage hike. Some of the political campaigns by smaller parties are even more populist than the major parties, implying wage increases between 10-30% from current levels. This could really destabilize Thailand’s long-term prospects as an investment base. 
• Italian-Thai Chairman thrown into prison. Premchai Karnasutra, who killed one of Thailand’s last 9 black leopards, is sentenced to 16 months in jail. Share prices actually rose!
• Bangkok’s third airport! The Navy is putting up the UTaPao airport construction up for bid. Front runners include the CP-led consortium, which includes ITD, but contenders include the BTS-STEC consortium and another smaller one.

In this briefing:

1. Indian Housing Finance Companies-Series 2- LIC Housing Finance
2. ASML. Safe Harbor In A Semi Storm.
3. Spotify: Playbook for Online Platforms to Turn Profitable – Implications for Meituan Dianping
4. MAJOR: Impressive 4Q18 Earnings

1. Indian Housing Finance Companies-Series 2- LIC Housing Finance

We have recently written a report on Housing Finance Industry (please click here) where we delved on the outlook of the industry that has witnessed significant support from the government as it opened up the funding stream for the NBFC sector including HFCs who in the past relied heavily on banks. In addition, the government has also focussed on improving the housing demand through reforms like RERA, Housing For All etc. that has helped revive sales in the recent quarters.

We concluded the report by saying that the forthcoming articles in the form of a series will elaborate on some HFCs that are likely to be the key beneficiaries of an expected revival of the residential real estate. These HFCs have shown high corporate governance standard and their asset quality has not been compromised for growth. And this could be ascertained by the highest credit rating of AAA awarded to these HFCs by the noted credit rating agencies in India.

In continuation of the series, this article provides detail on Lic Housing Finance (LICHF IN) , the second largest HFC in the country. The company has witnessed robust growth in the past with an asset quality that is among the best in class. We initiate coverage on the company through this report that would delve on the outlook of the company along with some glaring risks that have lately emerged and may likely have an impact on the asset quality going forward.

2. ASML. Safe Harbor In A Semi Storm.

Dutch lithography bellwether ASML is unique among its WFE peers in forecasting 2019 as yet another growth year for the company, making it eight such years in a row. While the likes of Applied Materials and Lam Research anticipate YoY revenue declines in the mid-to-high teens, ASML is sheltered from the worst excesses of the downturn by virtue of its technological moat, namely its EUV lithography tools. Customers like Taiwan Semiconductor Manufacturing Company, Samsung Electronics and Intel  are critically depending on ASML to deliver thirty of those tools in 2019 in order to ramp their latest process nodes. 

On the latest earnings call, ASML underscored its confidence in the company’s prospects by proposing a 50% increase in dividends to €2.10 per share. Currently trading at a 17% discount to its 52-week high, ASML is a safe harbor in the current semiconductor storm. 

3. Spotify: Playbook for Online Platforms to Turn Profitable – Implications for Meituan Dianping

• Our analysis of how Spotify Technology Sa (SPOT US) turned profitable in 4Q18 reveals three key ingredients: critical mass in sales, GM progression, and core business diversification.
• With sales reaching critical mass, this would allow fixed costs to be spread out in such a way that opex/unit is lower than GP/unit.
• Progression in GM and core business diversification strategy are worth monitoring.
• Implication: Meituan Dianping’s (3690 HK) core business is ahead of iQIYI Inc (IQ US) in terms of profitability inflection point timeline.

4. MAJOR: Impressive 4Q18 Earnings

MAJOR 4Q18 net profit was Bt259m (+247%YoY, +26%QoQ). The impressive earnings was driven by solid guests admission (+97%YoY).

• 4Q18 revenue was Bt3.0bn (+59%YoY, +44% QoQ). Interesting movies lineup was the factor, pushing admission revenue (+88%YoY) and concession revenue (+70%YoY).
• Gross profit margin was strong at 37.6% from 28.7% in 4Q17 and 30.8% in 3Q18, thank to the higher contribution of concession revenue, which has decent margin.
• SG&A to sales was under control at 27.0%, compared to 34.3% in 4Q17 and 26.7% in 3Q18.

We maintain a BUY rating on MAJOR with 2019E target price of Bt31.00, derived from a PER of 24.2x, which is +1 SD of its 3-year trading average. We expect MAJOR to continuously deliver robust earnings in 2019E, given the fascinating movies lineup and advertising sales model changing from direct selling to selling through agencies.

In this briefing:

1. Brazilian Political Turmoil Adds to Market Volatility, and Concerns on Pension Reform
2. Hankyu Invests ¥1.75 Billion in Hankyu Men’s Tokyo
3. After Zozo: Onward Sets Sights on Digital Renaissance
4. Snippets #21: Bremain, TMB Rights Issue
5. Tisco – A Bright Bank in a Dim Rate World

1. Brazilian Political Turmoil Adds to Market Volatility, and Concerns on Pension Reform

• Brazil’s Ex-President Michel Temer has been arrested as part of the on-going CarWash (Lava Jato) criminal investigation, on bribery and corruption charges
• We believe that this increases the near-term downside risk to the BOVESPA index and blue chips, including the large cap banks
• This will also, we believe, heighten the negative “noise” around pension reform, potentially increasing the complexity of the reform process; even if this development alone should not serve to derail it, in our view
• Large cap Brazilian banks’ share prices have come under pressure recently, and we would expect the market correction to continue in the short term
• Nonetheless, we still see potential for Banco Do Brasil Sa (BBAS3 BZ) to re-rate over the medium term, and narrow the PBV gap with its core peers, Itau Unibanco Holding Sa (ITUB4 BZ) and Banco Bradesco Sa (BBDC4 BZ), as Banco do Brasil’s own internal restructuring takes effect

2. Hankyu Invests ¥1.75 Billion in Hankyu Men’s Tokyo

Hankyu Hanshin has outperformed the department store sector in the last few years and continues to invest to lock in its dominance of the Osaka market.

It is now about to unveil a major new update to its Tokyo store, creating a more luxurious Men’s Emporium.

The investment is an example of how the better department stores are repositioning individual buildings to better meet target market needs and find relevance in an e-commerce age.

3. After Zozo: Onward Sets Sights on Digital Renaissance

Onward Holdings (8016 JP) made a bold stand against price discounts in January when it announced plans to stop selling on ZOZO (3092 JP) but the timing was not ideal as Onward lowered its FY2018 sales guidance shortly thereafter..

With Zozo no longer a partner, Onward is investing in the growth of its own e-commerce business and has installed a new 50-person digital strategy group to make this happen.

If the plan works, Onward could finally break away from its dependence on the contracting department store apparel market but the journey to reach this goal will be a long one.

4. Snippets #21: Bremain, TMB Rights Issue

These are the five developments/news flows/trends and their potential impact on Thai equities you should be aware of in recent weeks: 

• Reversing Brexit. A special report highlighting the possible reversal of Brexit should have limited impact on Thai equities, though a few names like SSI, Thai Union, and Minor do float up on the screen.
• TMB announces a 5 for 1 rights issue at Bt2.07/sh, which could raise US$570m of new capital for their acquisition of Thanchart and imply a 65-35 split of ownership between the two banks.
• Politically motivated wage hike. Some of the political campaigns by smaller parties are even more populist than the major parties, implying wage increases between 10-30% from current levels. This could really destabilize Thailand’s long-term prospects as an investment base. 
• Italian-Thai Chairman thrown into prison. Premchai Karnasutra, who killed one of Thailand’s last 9 black leopards, is sentenced to 16 months in jail. Share prices actually rose!
• Bangkok’s third airport! The Navy is putting up the UTaPao airport construction up for bid. Front runners include the CP-led consortium, which includes ITD, but contenders include the BTS-STEC consortium and another smaller one.

5. Tisco – A Bright Bank in a Dim Rate World

The Fed’s comments may be a surprise to many, but we hope not to our readers. Granular US bank data has indicated for some time, that rising rates were more driven by policy than by demand.  As the world now braces for rate cuts and slower growth, there remain a handful of small banks in Asia Pacific that offer respite. Thailand’s Tisco Financial Group (TISCO TB) ranks as having one of the highest dividend yields in Asia Pacific at 7.8%. Where Tisco remains small, growth prospects are far better than for mainstream banks Bangkok Bank Public (BBL TB), Siam Commercial Bank Pub Co (SCB TB) and Kasikornbank PCL (KBANK TB). Additionally, Tisco has seen a steady rise in profitability with ROA now at 2.31% from 1.84% two years ago and from 1.30% in 2014. This profile of rising and high returns, while still small in a local context, and with one of the best dividend yields anywhere, make it a bright spot in a low rate world.

In this briefing:

1. ASML. Safe Harbor In A Semi Storm.
2. Spotify: Playbook for Online Platforms to Turn Profitable – Implications for Meituan Dianping
3. MAJOR: Impressive 4Q18 Earnings
4. REIT Discover: The Three R’s Driving Starhill Global REIT (SGREIT SP)

1. ASML. Safe Harbor In A Semi Storm.

Dutch lithography bellwether ASML is unique among its WFE peers in forecasting 2019 as yet another growth year for the company, making it eight such years in a row. While the likes of Applied Materials and Lam Research anticipate YoY revenue declines in the mid-to-high teens, ASML is sheltered from the worst excesses of the downturn by virtue of its technological moat, namely its EUV lithography tools. Customers like Taiwan Semiconductor Manufacturing Company, Samsung Electronics and Intel  are critically depending on ASML to deliver thirty of those tools in 2019 in order to ramp their latest process nodes. 

On the latest earnings call, ASML underscored its confidence in the company’s prospects by proposing a 50% increase in dividends to €2.10 per share. Currently trading at a 17% discount to its 52-week high, ASML is a safe harbor in the current semiconductor storm. 

2. Spotify: Playbook for Online Platforms to Turn Profitable – Implications for Meituan Dianping

• Our analysis of how Spotify Technology Sa (SPOT US) turned profitable in 4Q18 reveals three key ingredients: critical mass in sales, GM progression, and core business diversification.
• With sales reaching critical mass, this would allow fixed costs to be spread out in such a way that opex/unit is lower than GP/unit.
• Progression in GM and core business diversification strategy are worth monitoring.
• Implication: Meituan Dianping’s (3690 HK) core business is ahead of iQIYI Inc (IQ US) in terms of profitability inflection point timeline.

3. MAJOR: Impressive 4Q18 Earnings

MAJOR 4Q18 net profit was Bt259m (+247%YoY, +26%QoQ). The impressive earnings was driven by solid guests admission (+97%YoY).

• 4Q18 revenue was Bt3.0bn (+59%YoY, +44% QoQ). Interesting movies lineup was the factor, pushing admission revenue (+88%YoY) and concession revenue (+70%YoY).
• Gross profit margin was strong at 37.6% from 28.7% in 4Q17 and 30.8% in 3Q18, thank to the higher contribution of concession revenue, which has decent margin.
• SG&A to sales was under control at 27.0%, compared to 34.3% in 4Q17 and 26.7% in 3Q18.

We maintain a BUY rating on MAJOR with 2019E target price of Bt31.00, derived from a PER of 24.2x, which is +1 SD of its 3-year trading average. We expect MAJOR to continuously deliver robust earnings in 2019E, given the fascinating movies lineup and advertising sales model changing from direct selling to selling through agencies.

4. REIT Discover: The Three R’s Driving Starhill Global REIT (SGREIT SP)

REIT Discover is an insight series featuring under-researched and off-the-radar REITs in an attempt to identify hidden gems and gems in-the-making. The spotlight is on Starhill Global REIT (SGREIT)’s unit price under-performance and deep discount to net asset value (NAV) after two years of declining revenues, net property income (NPI) and distribution per unit (DPU). Looking ahead, SGREIT looks poised for a re-rating based on the three R’s – review, recovery, revitalization.  

Review – Master leases to Toshin and Katagreen (YTL Group), collectively representing 36% of gross portfolio rent as at 31 December 2018, are due for rent review and lease renewal in June 2019. The 12-year master lease to Toshin covers the retail strata area of Ngee Ann City owned by SGREIT. It provides SGREIT with potential rental upside every three years starting from June 2013. The master lease to Katagreen for its Malaysia properties Starhill Gallery and Lot 10 is due to expire in June 2019. The renewal proposal, which includes an asset enhancement initiative for Starhill Gallery, is being evaluated.

Recovery – 2Q18/19 revenue and NPI jumped 10.6% and 20.2% y-o-y respectively on office portfolio recovery. The committed occupancy for the REIT’s Singapore office portfolio rose to 93.6% as at 31 December 2018 from 89.4% as at 31 December 2017. The committed occupancy for Myer Centre Adelaide has also seen a big improvement. SGREIT’s office portfolio accounts for 13% of gross revenue in 2Q18/19.

Revitalization – Amidst a soft retail climate, SGREIT’s retail portfolio maintained a high average occupancy rate albeit at a softer rent, particularly at Wisma Atria. On 30 January 2019, the Singapore Tourism Board (STB), Urban Redevelopment Authority (URA) and National Parks Board (NParks) unveiled plans to strengthen Orchard Road’s position as a must-visit lifestyle destination. In addition, the impending completion of Thomson-East Coast Line’s (TEL) Orchard MRT Station in 2021 is expected to further transform Orchard Road and thus benefit SGREIT’s Singapore retail portfolio. Future mixed-use development will be built at the new Orchard MRT interchange station, which may provide investment opportunities for the REIT.

As an overview, SGREIT’s S$3.1bn property portfolio comprises 10 mid- to high- end retail properties in Singapore, Malaysia, Australia, China and Japan. The Singapore properties accounted for 69.5% of total asset value and 62% of gross revenue in 2QFY18/19 (financial year-end 30 June) and are made up of interests in two landmark properties in the heart of the Orchard Road shopping belt, Wisma Atria and Ngee Ann City. The REIT strikes a good balance between long and short term leases. Master leases and long-term leases, incorporating periodic rent reviews, represent about 49.4% of gross rent as at 31 December 2018, providing income stability. 

Current annualized DPU yield of 6.5% appears attractive for a REIT with a resilient retail and office portfolio in stable and mature markets. We believe the revenue decline in recent years have been priced-in. Potential risks, other than foreign currency exchange-related risks and slower-than-expected recovery in its retail and office portfolio, include challenges in finding yield-accretive acquisitions due to its steep discount to net asset value (0.78x Price/NAV). The lack of scale in certain markets e.g. China and Japan, and strata-ownership of properties could explain SGREIT’s prolonged discount to NAV. Perhaps a portfolio reconstitution may hold the key to narrowing the discount.

In this briefing:

1. Hankyu Invests ¥1.75 Billion in Hankyu Men’s Tokyo
2. After Zozo: Onward Sets Sights on Digital Renaissance
3. Snippets #21: Bremain, TMB Rights Issue
4. Tisco – A Bright Bank in a Dim Rate World
5. Tencent (700 HK): The Worst Part Online Game Recovered in Q4 Before Restarting License Approval

1. Hankyu Invests ¥1.75 Billion in Hankyu Men’s Tokyo

Hankyu Hanshin has outperformed the department store sector in the last few years and continues to invest to lock in its dominance of the Osaka market.

It is now about to unveil a major new update to its Tokyo store, creating a more luxurious Men’s Emporium.

The investment is an example of how the better department stores are repositioning individual buildings to better meet target market needs and find relevance in an e-commerce age.

2. After Zozo: Onward Sets Sights on Digital Renaissance

Onward Holdings (8016 JP) made a bold stand against price discounts in January when it announced plans to stop selling on ZOZO (3092 JP) but the timing was not ideal as Onward lowered its FY2018 sales guidance shortly thereafter..

With Zozo no longer a partner, Onward is investing in the growth of its own e-commerce business and has installed a new 50-person digital strategy group to make this happen.

If the plan works, Onward could finally break away from its dependence on the contracting department store apparel market but the journey to reach this goal will be a long one.

3. Snippets #21: Bremain, TMB Rights Issue

These are the five developments/news flows/trends and their potential impact on Thai equities you should be aware of in recent weeks: 

• Reversing Brexit. A special report highlighting the possible reversal of Brexit should have limited impact on Thai equities, though a few names like SSI, Thai Union, and Minor do float up on the screen.
• TMB announces a 5 for 1 rights issue at Bt2.07/sh, which could raise US$570m of new capital for their acquisition of Thanchart and imply a 65-35 split of ownership between the two banks.
• Politically motivated wage hike. Some of the political campaigns by smaller parties are even more populist than the major parties, implying wage increases between 10-30% from current levels. This could really destabilize Thailand’s long-term prospects as an investment base. 
• Italian-Thai Chairman thrown into prison. Premchai Karnasutra, who killed one of Thailand’s last 9 black leopards, is sentenced to 16 months in jail. Share prices actually rose!
• Bangkok’s third airport! The Navy is putting up the UTaPao airport construction up for bid. Front runners include the CP-led consortium, which includes ITD, but contenders include the BTS-STEC consortium and another smaller one.

4. Tisco – A Bright Bank in a Dim Rate World

The Fed’s comments may be a surprise to many, but we hope not to our readers. Granular US bank data has indicated for some time, that rising rates were more driven by policy than by demand.  As the world now braces for rate cuts and slower growth, there remain a handful of small banks in Asia Pacific that offer respite. Thailand’s Tisco Financial Group (TISCO TB) ranks as having one of the highest dividend yields in Asia Pacific at 7.8%. Where Tisco remains small, growth prospects are far better than for mainstream banks Bangkok Bank Public (BBL TB), Siam Commercial Bank Pub Co (SCB TB) and Kasikornbank PCL (KBANK TB). Additionally, Tisco has seen a steady rise in profitability with ROA now at 2.31% from 1.84% two years ago and from 1.30% in 2014. This profile of rising and high returns, while still small in a local context, and with one of the best dividend yields anywhere, make it a bright spot in a low rate world.

5. Tencent (700 HK): The Worst Part Online Game Recovered in Q4 Before Restarting License Approval

• The worst business, online game, recovered in 4Q2018, because small competitors died.
• The growth rate of game broadcast also bounced up in 4Q2018, as an important competitor Panda TV went bankrupt.
• In fact, games are only a small part of Tencent and other businesses have been growing strongly.
• The re-organization in October 2018 controlled expenses well.
• The 5-year P/E band suggests that Tencent’s stock price has upside of 26%.