Equity Bottom-Up

In this briefing:

1. Fortis Healthcare: OK Results and a Cost-Cutter CEO
2. New J. Hutton Exploration Report (Week Ending 15/02/19)
3. Sell Bombardier: Core EBIT Fell, Core Cashflow Is Negative, Covenants Maybe Under Stress
4. Singtel’s Weak 3Q18 Results but Dividend Looks Sustainable and Long Term Upside from Associates

1. Fortis Healthcare: OK Results and a Cost-Cutter CEO

Fortis Healthcare (FORH IN) ‘s hospital business continued to improve in FQ3 while the lab business remained stable. This Insight briefly focuses on the highlights of the results and their implications. The hiring of a CEO out of Narayana Hrudayalaya (NARH IN) signals continued (and likely intensified) focus on efficiency to improve profitability. 

We continue to think that Fortis is a promising turnaround story. Refer to the Insight Stream for the history of this situation.

2. New J. Hutton Exploration Report (Week Ending 15/02/19)

• Gold Road Resources (GOR AU) continued strong BUY
• Mineral Resource increased 2% to 6.61Moz
• 2019 attributable production guided at 50–60koz Au
• AISC est. between A$1,050 to $1,150/oz, is realistic
•  Using $1,300/oz attributable 2019 EBIT will be between US$7.5-15m
• 2020 attributable EBIT of 150k/oz conservative $A54m
• Price/EBIT ratio now 10.9 to 16.8 (previous est. 8 to 9.1)
• Expand AIM & ASX coverage to 397 companies from next week
• Gold Road Resources (GOR AU), Azumah Resources (AZM AU), Millennium Minerals (MOY AU), Metals X Ltd (MLX AU), De Grey Mining (DEG AU) , Resolute Mining (RSG AU), Andromeda Metals (ADN AU)  

3. Sell Bombardier: Core EBIT Fell, Core Cashflow Is Negative, Covenants Maybe Under Stress

Core EBIT fell: FY2018 EBIT and cashflow were inflated by one-off gains.

Core cashflow remains negative: Bombardier Inc (BBD/B CN) is still unable to fund its annual US$1bn+ capex budget from core operating cashflow.

Covenants maybe under stress: We are very concerned that the consolidated capital structure presented to investors is very different to the structures used in their debt covenants.

4. Singtel’s Weak 3Q18 Results but Dividend Looks Sustainable and Long Term Upside from Associates

Singtel (ST SP) recent 3Q18 results were relatively lackluster. Singapore revenue trends were encouraging, but EBITDA remains under pressure esp in the Enterprise segment. Optus saw good net subscriber additions, but this came at a cost – lower ARPU and mobile service revenue (MSR). We have lowered our forecast to reflect pressure on EBITDA and continued losses in Group Digital Life (GDL) but maintain a BUY on the stock with a target price of S$4.00. The near 6% dividend yield is the key support and we believe it can continue to be paid without resorting to increased leverage. Longer term, the fate of key associates (India and Indonesia in particular) are key to the stock’s performance

In this briefing:

1. Sell Prada (1913 HK): Accounting Inflates Margins and Facilitates Excessive Dividends
2. Quick Update on ZTO Express: Results OK, but Guidance Unimpressive
3. NIO: A Survivor Among All the Chinese Start-Ups
4. Security Bank: Something Makes Me Feel Insecure
5. Thai Telecoms: Slowdown in Mobile Business Continues.

1. Sell Prada (1913 HK): Accounting Inflates Margins and Facilitates Excessive Dividends

In our first report on Prada S.P.A. (1913 HK): An expensive luxury, we explained how creative accounting was disguising their business reality.  Since then, the stock has fallen 44% and the dividend has been cut. However, we think the key issues have yet to be addressed. They report growth, good operating cashflow and a solid financial position, but in-store sales are stagnant, margins falling, inventory rising and credit quality declining. It seems that profits are being inflated in order to pay dividends, largely to the controlling family.

2. Quick Update on ZTO Express: Results OK, but Guidance Unimpressive

After reviewing 4Q18 results and guidance for 2019, we retain our negative view of ZTO. For 2019 and 2020, we continue to expect slower top-line growth, margin compression, and a sharp increase in CapEx requirements. Our 2019-20 EPS forecasts and target price of $13.31 remain unchanged.

With help from a sharp increase in non-operating income, ZTO’s 4Q18 Adjusted EPS met consensus expectations of $0.24per ADS. But FY19Adjusted Net Profit guidance fell short of expectations, and management’s decision to withdraw quarterly guidance altogether is also disappointing.

ZTO’s gross margin fell ~370 bps in 4Q18 due to cost pressures and the rapid growth of certain low-margin businesses. We believe the same factors will continue to put downward pressure on margins in 2019 and 2020.

ZTO stated during the earnings call that Capex this year would increase by 50-100% compared to the 4bn RMB the company spent in 2018. According to management, much of the increase will go into building out ‘last-mile’ and rural infrastructure and we suspect the initial returns on these investments will be poor

3. NIO: A Survivor Among All the Chinese Start-Ups

Since its announcement on 4Q2018 results and termination of Jiading plant construction, NIO’s share price has been halved. We believe the market has over-reacted on NIO’s cashflow risk. With the expected 30-50% reduction on NEV (New Energy Vehicle) subsidies, all the Start-ups would have worse-than-ever cashflow pressure in 2019. But NIO might survive.

In China’s NEV market, NIO’s market position remains unique among all the Chinese Start-ups. Tesla is still NIO’s main competitor. NIO’s ES6 has capability to compete with Tesla’s Model Y, based on our comparison. Tesla and NIO both have to rely on external funding. The other Chinese Start-ups have to compete with traditional OEMs who have much less cash flow pressures.

NIO’s 4Q2018 financial data were in good trend. We estimate its net loss in 2019 to be further narrowed to Rmb6.1bn. With estimated Rmb13.2bn cash balance at end-Feb 2019, NIO have enough money to cover its estimated cash outflow in the next two year. And it would be able to get another round of external funding in 2020/2021, as long as its business operation ramps up as expected.

4. Security Bank: Something Makes Me Feel Insecure

Security Bank (SECB PM) trades at a premium to Asian banks on a P/Book, franchise valuation, earnings yield, and total return ratio basis.

The PH Score™ of 5.3 is neither good nor bad. (Asia median is 5.7).

In terms of fundamental traction, efficiency has eroded and interconnected profitability has narrowed. “Jaws” are negative. Funding cost growth is sharply in excess of interest income growth. On the other hand, liquidity and capital adequacy are moving in the right direction or are stable.

Asset quality seems to have dramatically improved. Headline non-performing loans are now very low due to adoption of PFRS9. These are calculated now as loans aligned to a default criteria. The bank seems to have reclassified part of “stage 3” impaired loans back into “stage 2”. “Stage 2” is comprised of assets which have experienced a SICR (significant increase in credit risk) since initial recognition, such as substandard, past-dues, and SMLs, and are not classified as NPLs. “Stage 2” represents almost 4% of the loan book versus a headline impaired or problem loan ratio of just 0.64%. In addition, unimpaired past-due loans (73% of headline NPLs) climbed 57% YoY. Charge-offs soared 47% YoY. Perhaps the asset quality is not as pristine as the NPL ratio intimates.

When we look back from 2004, we see an explosive increase in loans (+10x since 2004) coinciding with lower profitability over this period. This is not a good sign. As the bank shifts to consumer lending for growth, up 10x since 2012, we wonder whether a similar pattern will emerge.

In short, the bank resides in the bottom decile of our global VFM (Valuation, Fundamentals, Momentum) rankings.

5. Thai Telecoms: Slowdown in Mobile Business Continues.

The Thai mobile market reported another weak quarter in 4Q18, with trends deteriorating at all three operators. The weakness was partly due to the cheap unlimited fixed speed offers which were popular in 2018 but which have now been removed from the market. Growth should recover by 2H19.  With Total Access Communication (DTAC TB) having acquired spectrum in 2018, it will no longer cede market share without a struggle. That suggests competitive risks are high in Thailand, with all three operators aiming to boost market share. We remain cautious on the sector and are also worried that the government seems keen to push on with 5G spectrum auctions despite a lack of use cases.

In this briefing:

1. Quick Update on ZTO Express: Results OK, but Guidance Unimpressive
2. NIO: A Survivor Among All the Chinese Start-Ups
3. Security Bank: Something Makes Me Feel Insecure
4. Thai Telecoms: Slowdown in Mobile Business Continues.
5. China Tower. How Far Will It Rally?

1. Quick Update on ZTO Express: Results OK, but Guidance Unimpressive

After reviewing 4Q18 results and guidance for 2019, we retain our negative view of ZTO. For 2019 and 2020, we continue to expect slower top-line growth, margin compression, and a sharp increase in CapEx requirements. Our 2019-20 EPS forecasts and target price of $13.31 remain unchanged.

With help from a sharp increase in non-operating income, ZTO’s 4Q18 Adjusted EPS met consensus expectations of $0.24per ADS. But FY19Adjusted Net Profit guidance fell short of expectations, and management’s decision to withdraw quarterly guidance altogether is also disappointing.

ZTO’s gross margin fell ~370 bps in 4Q18 due to cost pressures and the rapid growth of certain low-margin businesses. We believe the same factors will continue to put downward pressure on margins in 2019 and 2020.

ZTO stated during the earnings call that Capex this year would increase by 50-100% compared to the 4bn RMB the company spent in 2018. According to management, much of the increase will go into building out ‘last-mile’ and rural infrastructure and we suspect the initial returns on these investments will be poor

2. NIO: A Survivor Among All the Chinese Start-Ups

Since its announcement on 4Q2018 results and termination of Jiading plant construction, NIO’s share price has been halved. We believe the market has over-reacted on NIO’s cashflow risk. With the expected 30-50% reduction on NEV (New Energy Vehicle) subsidies, all the Start-ups would have worse-than-ever cashflow pressure in 2019. But NIO might survive.

In China’s NEV market, NIO’s market position remains unique among all the Chinese Start-ups. Tesla is still NIO’s main competitor. NIO’s ES6 has capability to compete with Tesla’s Model Y, based on our comparison. Tesla and NIO both have to rely on external funding. The other Chinese Start-ups have to compete with traditional OEMs who have much less cash flow pressures.

NIO’s 4Q2018 financial data were in good trend. We estimate its net loss in 2019 to be further narrowed to Rmb6.1bn. With estimated Rmb13.2bn cash balance at end-Feb 2019, NIO have enough money to cover its estimated cash outflow in the next two year. And it would be able to get another round of external funding in 2020/2021, as long as its business operation ramps up as expected.

3. Security Bank: Something Makes Me Feel Insecure

Security Bank (SECB PM) trades at a premium to Asian banks on a P/Book, franchise valuation, earnings yield, and total return ratio basis.

The PH Score™ of 5.3 is neither good nor bad. (Asia median is 5.7).

In terms of fundamental traction, efficiency has eroded and interconnected profitability has narrowed. “Jaws” are negative. Funding cost growth is sharply in excess of interest income growth. On the other hand, liquidity and capital adequacy are moving in the right direction or are stable.

Asset quality seems to have dramatically improved. Headline non-performing loans are now very low due to adoption of PFRS9. These are calculated now as loans aligned to a default criteria. The bank seems to have reclassified part of “stage 3” impaired loans back into “stage 2”. “Stage 2” is comprised of assets which have experienced a SICR (significant increase in credit risk) since initial recognition, such as substandard, past-dues, and SMLs, and are not classified as NPLs. “Stage 2” represents almost 4% of the loan book versus a headline impaired or problem loan ratio of just 0.64%. In addition, unimpaired past-due loans (73% of headline NPLs) climbed 57% YoY. Charge-offs soared 47% YoY. Perhaps the asset quality is not as pristine as the NPL ratio intimates.

When we look back from 2004, we see an explosive increase in loans (+10x since 2004) coinciding with lower profitability over this period. This is not a good sign. As the bank shifts to consumer lending for growth, up 10x since 2012, we wonder whether a similar pattern will emerge.

In short, the bank resides in the bottom decile of our global VFM (Valuation, Fundamentals, Momentum) rankings.

4. Thai Telecoms: Slowdown in Mobile Business Continues.

The Thai mobile market reported another weak quarter in 4Q18, with trends deteriorating at all three operators. The weakness was partly due to the cheap unlimited fixed speed offers which were popular in 2018 but which have now been removed from the market. Growth should recover by 2H19.  With Total Access Communication (DTAC TB) having acquired spectrum in 2018, it will no longer cede market share without a struggle. That suggests competitive risks are high in Thailand, with all three operators aiming to boost market share. We remain cautious on the sector and are also worried that the government seems keen to push on with 5G spectrum auctions despite a lack of use cases.

5. China Tower. How Far Will It Rally?

China Tower (788 HK) has rallied strongly in recent months and the question raised repeatedly in recent client meetings was “how much further is China Tower likely to rally?”. Chris Hoare sees China Tower’s position as unusual as the price moves are not driven by earnings upgrades or changed 5G expectations. Rather is is a sustained move post the IPO when the information in the market was incomplete and expectations were much lower. We were negative at the time of the IPO but changed our views as more information became available.  We remain positive on the scope for revaluation in China Tower given its rapid revenue growth and low valuations vs EM peers. While the recent results were somewhat disappointing, we see good upside as the market factors is lower capex and higher returns.

In this briefing:

1. Silverlake Axis (SILV SP): 2Q19 Results Again Confirm New 3-Year Growth Cycle; HNA Overhang Removed

1. Silverlake Axis (SILV SP): 2Q19 Results Again Confirm New 3-Year Growth Cycle; HNA Overhang Removed

Silverlake Axis (SILV SP) published 2Q19 results which again confirmed that the long-anticipated rise in revenues (+20% YoY) and profits (+99% YoY) has finally arrived. After three years of stagnation, this is the second quarter in a row that real earnings growth is visible.

YTD the share price of SILV has run by approximately 31% as we saw some larger volume spikes earlier this year which indicate that HNA is now finally off the register as a significant shareholder. Since HNA’s stake had dropped below 5% the new buyer has not had to step forward and disclose its identity.

Importantly, management believes the first half of FY19 was just the beginning of a new 3-year growth cycle and prospects are looking good for both FY2019 (ends June 2019) and FY2020 (ends June 2020). Dividends will continue but might be tempered depending on the number of acquisitions that are made. 

Risk-Reward is not as attractive as early November but continues to look solid at these levels with a total return of 20% still achievable (assuming mid-point of historical P/E range) or a total return of 60% (assuming high-end of historical P/E range).

In this briefing:

1. Silverlake Axis (SILV SP): 2Q19 Results Again Confirm New 3-Year Growth Cycle; HNA Overhang Removed
2. Donaco International Ltd: A Tiny Cap, Low Price Entry Bet on the Bourgeoning Cambodia Gaming Market

1. Silverlake Axis (SILV SP): 2Q19 Results Again Confirm New 3-Year Growth Cycle; HNA Overhang Removed

Silverlake Axis (SILV SP) published 2Q19 results which again confirmed that the long-anticipated rise in revenues (+20% YoY) and profits (+99% YoY) has finally arrived. After three years of stagnation, this is the second quarter in a row that real earnings growth is visible.

YTD the share price of SILV has run by approximately 31% as we saw some larger volume spikes earlier this year which indicate that HNA is now finally off the register as a significant shareholder. Since HNA’s stake had dropped below 5% the new buyer has not had to step forward and disclose its identity.

Importantly, management believes the first half of FY19 was just the beginning of a new 3-year growth cycle and prospects are looking good for both FY2019 (ends June 2019) and FY2020 (ends June 2020). Dividends will continue but might be tempered depending on the number of acquisitions that are made. 

Risk-Reward is not as attractive as early November but continues to look solid at these levels with a total return of 20% still achievable (assuming mid-point of historical P/E range) or a total return of 60% (assuming high-end of historical P/E range).

2. Donaco International Ltd: A Tiny Cap, Low Price Entry Bet on the Bourgeoning Cambodia Gaming Market

• The company’s flagship Star Vegas casino resort was victimized by an alleged diversion of VIP players by its contract management. Now under corporate control it is beginning to recover.
• Its US$124m breech of contract claim against the vendor was filed in there Singapore court system and sits at final appeal stage.
• Cambodia’s new gaming regulation law will stabilize and eliminate wild west dimension of Poipet casinos. This could lead to major earnings gains and increased investment going forward.

In this briefing:

1. NIO: A Survivor Among All the Chinese Start-Ups
2. Security Bank: Something Makes Me Feel Insecure
3. Thai Telecoms: Slowdown in Mobile Business Continues.
4. China Tower. How Far Will It Rally?
5. Philippine National Bank – The Beginning of Recognition

1. NIO: A Survivor Among All the Chinese Start-Ups

Since its announcement on 4Q2018 results and termination of Jiading plant construction, NIO’s share price has been halved. We believe the market has over-reacted on NIO’s cashflow risk. With the expected 30-50% reduction on NEV (New Energy Vehicle) subsidies, all the Start-ups would have worse-than-ever cashflow pressure in 2019. But NIO might survive.

In China’s NEV market, NIO’s market position remains unique among all the Chinese Start-ups. Tesla is still NIO’s main competitor. NIO’s ES6 has capability to compete with Tesla’s Model Y, based on our comparison. Tesla and NIO both have to rely on external funding. The other Chinese Start-ups have to compete with traditional OEMs who have much less cash flow pressures.

NIO’s 4Q2018 financial data were in good trend. We estimate its net loss in 2019 to be further narrowed to Rmb6.1bn. With estimated Rmb13.2bn cash balance at end-Feb 2019, NIO have enough money to cover its estimated cash outflow in the next two year. And it would be able to get another round of external funding in 2020/2021, as long as its business operation ramps up as expected.

2. Security Bank: Something Makes Me Feel Insecure

Security Bank (SECB PM) trades at a premium to Asian banks on a P/Book, franchise valuation, earnings yield, and total return ratio basis.

The PH Score™ of 5.3 is neither good nor bad. (Asia median is 5.7).

In terms of fundamental traction, efficiency has eroded and interconnected profitability has narrowed. “Jaws” are negative. Funding cost growth is sharply in excess of interest income growth. On the other hand, liquidity and capital adequacy are moving in the right direction or are stable.

Asset quality seems to have dramatically improved. Headline non-performing loans are now very low due to adoption of PFRS9. These are calculated now as loans aligned to a default criteria. The bank seems to have reclassified part of “stage 3” impaired loans back into “stage 2”. “Stage 2” is comprised of assets which have experienced a SICR (significant increase in credit risk) since initial recognition, such as substandard, past-dues, and SMLs, and are not classified as NPLs. “Stage 2” represents almost 4% of the loan book versus a headline impaired or problem loan ratio of just 0.64%. In addition, unimpaired past-due loans (73% of headline NPLs) climbed 57% YoY. Charge-offs soared 47% YoY. Perhaps the asset quality is not as pristine as the NPL ratio intimates.

When we look back from 2004, we see an explosive increase in loans (+10x since 2004) coinciding with lower profitability over this period. This is not a good sign. As the bank shifts to consumer lending for growth, up 10x since 2012, we wonder whether a similar pattern will emerge.

In short, the bank resides in the bottom decile of our global VFM (Valuation, Fundamentals, Momentum) rankings.

3. Thai Telecoms: Slowdown in Mobile Business Continues.

The Thai mobile market reported another weak quarter in 4Q18, with trends deteriorating at all three operators. The weakness was partly due to the cheap unlimited fixed speed offers which were popular in 2018 but which have now been removed from the market. Growth should recover by 2H19.  With Total Access Communication (DTAC TB) having acquired spectrum in 2018, it will no longer cede market share without a struggle. That suggests competitive risks are high in Thailand, with all three operators aiming to boost market share. We remain cautious on the sector and are also worried that the government seems keen to push on with 5G spectrum auctions despite a lack of use cases.

4. China Tower. How Far Will It Rally?

China Tower (788 HK) has rallied strongly in recent months and the question raised repeatedly in recent client meetings was “how much further is China Tower likely to rally?”. Chris Hoare sees China Tower’s position as unusual as the price moves are not driven by earnings upgrades or changed 5G expectations. Rather is is a sustained move post the IPO when the information in the market was incomplete and expectations were much lower. We were negative at the time of the IPO but changed our views as more information became available.  We remain positive on the scope for revaluation in China Tower given its rapid revenue growth and low valuations vs EM peers. While the recent results were somewhat disappointing, we see good upside as the market factors is lower capex and higher returns.

5. Philippine National Bank – The Beginning of Recognition

It has taken some time, but finally Philippine National Bank (PNB PM) is being recognized by the market.  To us though, this is only the beginning. The story with PNB has for a long time been about a turnaround, moving from a sleepy state-owned bank focused on large corporate loans and with a high level of bad loans, to a more invigorated bank with far better credit quality and a new focus on the consumer.  The recent milestone of paying a special dividend was a clear sign of how the bank improved since the Asian Financial Crisis (AFC).  The market is now awakening to what a new CEO can do with PNB and one who comes from HSBC Philippines. Still PNB’s market capitalization is only 9% of assets compared with 14-20% for the largest three peer banks. There appears a lot more to come. 

In this briefing:

1. Musashino Bank  (8336 JP): Braking Bad

1. Musashino Bank  (8336 JP): Braking Bad

Musashino Bank (8336 JP) was one of the last regional banks to announce 3Q FY3/2019 results, and they were a nasty surprise: a consolidated net loss for the nine months to 31 December 2018, caused by heavy reserving in Q3 (October-December 2018) against the bank’s exposure to the troubled Akebono Brake Industry Co (7238 JP) .  While the bank has slashed its full-year net profit guidance from ¥11.1 billion to ¥4.5 billion, this would still require an heroic level of profits in Q4 which the bank has never before achieved.  The share price has fallen over 31% in the last twelve months.  Valuations at current levels are still high (FY3/2019 PER is 17.6x) and we consider the share price to be vulnerable to further weakness.  Caveat emptor (May the buyer beware) !

In this briefing:

1. Thai Telecoms: Slowdown in Mobile Business Continues.
2. China Tower. How Far Will It Rally?
3. Philippine National Bank – The Beginning of Recognition
4. After You Looks Beyond Thailand For Opportunities
5. China Blood Products: Deals Highlight Values

1. Thai Telecoms: Slowdown in Mobile Business Continues.

The Thai mobile market reported another weak quarter in 4Q18, with trends deteriorating at all three operators. The weakness was partly due to the cheap unlimited fixed speed offers which were popular in 2018 but which have now been removed from the market. Growth should recover by 2H19.  With Total Access Communication (DTAC TB) having acquired spectrum in 2018, it will no longer cede market share without a struggle. That suggests competitive risks are high in Thailand, with all three operators aiming to boost market share. We remain cautious on the sector and are also worried that the government seems keen to push on with 5G spectrum auctions despite a lack of use cases.

2. China Tower. How Far Will It Rally?

China Tower (788 HK) has rallied strongly in recent months and the question raised repeatedly in recent client meetings was “how much further is China Tower likely to rally?”. Chris Hoare sees China Tower’s position as unusual as the price moves are not driven by earnings upgrades or changed 5G expectations. Rather is is a sustained move post the IPO when the information in the market was incomplete and expectations were much lower. We were negative at the time of the IPO but changed our views as more information became available.  We remain positive on the scope for revaluation in China Tower given its rapid revenue growth and low valuations vs EM peers. While the recent results were somewhat disappointing, we see good upside as the market factors is lower capex and higher returns.

3. Philippine National Bank – The Beginning of Recognition

It has taken some time, but finally Philippine National Bank (PNB PM) is being recognized by the market.  To us though, this is only the beginning. The story with PNB has for a long time been about a turnaround, moving from a sleepy state-owned bank focused on large corporate loans and with a high level of bad loans, to a more invigorated bank with far better credit quality and a new focus on the consumer.  The recent milestone of paying a special dividend was a clear sign of how the bank improved since the Asian Financial Crisis (AFC).  The market is now awakening to what a new CEO can do with PNB and one who comes from HSBC Philippines. Still PNB’s market capitalization is only 9% of assets compared with 14-20% for the largest three peer banks. There appears a lot more to come. 

4. After You Looks Beyond Thailand For Opportunities

We met up with management of two companies whose industries couldn’t have been more different. This is the quick run-down on what they are up to recently:

• After You posted 14% earnings growth on the back of 20% revenue growth. While this remains healthy, it realizes that domestic market opportunities will become more limited and has started to look abroad with HK as its first market.
• Locally, the desserts leader is still planning a slew of new products and some in exclusive partnerships with various airlines such as Air Asia and Thai Smile.
• In an effort to reduce storefront expenses, they will start selling certain products outside stores and even online, now 3% of total sales.
• Amata’s earnings crashed 28% in 2018 on the back of 2% revenue decline, as Vietnam retroactively forbid certain land sales and even fines the company for past transactions that abided with the law back then!

5. China Blood Products: Deals Highlight Values

Grifols SA (GRF SM) and Shanghai RAAS Blood Products Co Ltd (002252.SZ) recently announced an asset exchange that effectively combines the companies’ blood products operations in China. This transaction marks the third investment (two are cross-border) into the industry in the last two years. Despite some challenges arising from recent healthcare reforms, the industry has favorable supply/demand dynamics and high barriers to entry. US-listed China Biologic Products (CBPO US) trades at a significant discount to the implied private market values, but requires patience as management adjusts to the new operating environment.

In this briefing:

1. China Tower. How Far Will It Rally?
2. Philippine National Bank – The Beginning of Recognition
3. After You Looks Beyond Thailand For Opportunities
4. China Blood Products: Deals Highlight Values
5. Woori Bank: Overhang Versus Valuation

1. China Tower. How Far Will It Rally?

China Tower (788 HK) has rallied strongly in recent months and the question raised repeatedly in recent client meetings was “how much further is China Tower likely to rally?”. Chris Hoare sees China Tower’s position as unusual as the price moves are not driven by earnings upgrades or changed 5G expectations. Rather is is a sustained move post the IPO when the information in the market was incomplete and expectations were much lower. We were negative at the time of the IPO but changed our views as more information became available.  We remain positive on the scope for revaluation in China Tower given its rapid revenue growth and low valuations vs EM peers. While the recent results were somewhat disappointing, we see good upside as the market factors is lower capex and higher returns.

2. Philippine National Bank – The Beginning of Recognition

It has taken some time, but finally Philippine National Bank (PNB PM) is being recognized by the market.  To us though, this is only the beginning. The story with PNB has for a long time been about a turnaround, moving from a sleepy state-owned bank focused on large corporate loans and with a high level of bad loans, to a more invigorated bank with far better credit quality and a new focus on the consumer.  The recent milestone of paying a special dividend was a clear sign of how the bank improved since the Asian Financial Crisis (AFC).  The market is now awakening to what a new CEO can do with PNB and one who comes from HSBC Philippines. Still PNB’s market capitalization is only 9% of assets compared with 14-20% for the largest three peer banks. There appears a lot more to come. 

3. After You Looks Beyond Thailand For Opportunities

We met up with management of two companies whose industries couldn’t have been more different. This is the quick run-down on what they are up to recently:

• After You posted 14% earnings growth on the back of 20% revenue growth. While this remains healthy, it realizes that domestic market opportunities will become more limited and has started to look abroad with HK as its first market.
• Locally, the desserts leader is still planning a slew of new products and some in exclusive partnerships with various airlines such as Air Asia and Thai Smile.
• In an effort to reduce storefront expenses, they will start selling certain products outside stores and even online, now 3% of total sales.
• Amata’s earnings crashed 28% in 2018 on the back of 2% revenue decline, as Vietnam retroactively forbid certain land sales and even fines the company for past transactions that abided with the law back then!

4. China Blood Products: Deals Highlight Values

Grifols SA (GRF SM) and Shanghai RAAS Blood Products Co Ltd (002252.SZ) recently announced an asset exchange that effectively combines the companies’ blood products operations in China. This transaction marks the third investment (two are cross-border) into the industry in the last two years. Despite some challenges arising from recent healthcare reforms, the industry has favorable supply/demand dynamics and high barriers to entry. US-listed China Biologic Products (CBPO US) trades at a significant discount to the implied private market values, but requires patience as management adjusts to the new operating environment.

5. Woori Bank: Overhang Versus Valuation

Given overhang risk, investors have been bailing out of Woori or taking short positions. Woori Bank Employees Stock Ownership Association seems to have absorbed part of the selling from the likes of Blackrock, Samsung Asset, SEB Investment, Northern Trust, State Street, Russell Investment, and JP Morgan Asset. We do note though that Vanguard and TIAA have increased their position during the HoldCo transition.

There is still to come the 12% stake in Woori Holdings that Woori Bank receives relating to the transfer of the credit card entity that needs to be sold. KDIC’s 18% stake adds to the overhang risk. With https://www.smartkarma.com/insights/woori-bank-holdco-conversion-current-status-trade-approach Sanghyun Park has detailed the risk.

We delve into the latest financials of Woori Financial Group. The picture is mixed. While efficiency advances were the main positive standout, we highlight sharply higher funding costs and a build-up of precautionary loans as main areas of concern. The bottom line was also boosted by much lower loan loss provisions as headline NPLs fell.

A constructive view of the Group is thus based on the credibility of what appears to be underlying asset improvement and the benefits of returning to HoldCo status.

We conclude that despite the overhang risk, shares are not expensive. Shares inhabit the highest decile of our global VFM (Valuation, Fundamentals, Momentum) rankings. There may though be a better entry point for bargain hunters.

In this briefing:

1. THK (6481 JP): New Orders Down by Two-Thirds in 4Q, Near the Bottom of the Cycle

1. THK (6481 JP): New Orders Down by Two-Thirds in 4Q, Near the Bottom of the Cycle

Sales and profits were above management’s guidance in FY Dec-18, with operating profit rising 36.9% on a 10.9% increase in sales. But new orders continuously declined and were down about two-thirds year-on-year in 4Q.

In view of the order flow, management is guiding for a 12% decline in sales and a 44% decline in operating profit in FY Dec-19, a forecast that is roughly in line with our own.

On the positive side, historical data indicates that new orders are at or near the bottom of the cycle. Anticipating a better investment climate after some resolution of the U.S.-China trade problem, we are forecasting an increase in sales and profits going into FY Dec-20.

The shares have rebounded by 41% since the beginning of January. At ¥2,720 (Friday, February 15, close), they are selling at 15.6x our estimate for FY Dec-19 and 13.8x our estimate for FY Dec-20E. These multiples look reasonably attractive in comparison with the company’s recent P/E range.