Equity Bottom-Up

In this briefing:

1. Yahoo Japan Company Visit: Profit Erosion Has Bottomed and Mobile Payments (PayPay) Starts Strong
2. SAPPE: New Strategic Partner Drive 2019 Earning Growth
3. Donki (7532 JP) Becomes Japan’s 4th Biggest Retailer
4. Eurobank: Battle-Hardened and Transformation Bound
5. Vodafone Idea Needs a 55% Price Increase to Return to Viability

1. Yahoo Japan Company Visit: Profit Erosion Has Bottomed and Mobile Payments (PayPay) Starts Strong

We recently met with Yahoo Japan (4689 JP)  for an update on the company after Q3 results. We thought the financial announcement was positive with encouraging forecasts for profitability, both this year and going forward, and revenue growth potential. In addition, Yahoo Japan reported solid customer growth for mobile payments joint venture PayPay, driven by strong marketing support and an attractive proposition for offline merchants.  We think the latter is very important for the development of mobile payments in Japan and PayPay has had a robust start.

2. SAPPE: New Strategic Partner Drive 2019 Earning Growth

We cut our target price by 22% to Bt24.7 to factor in  disappointing 2018 result. However, we maintain our BUY rating on the back of positive outlook toward its new products and market expansion plan.

The story:

• Posted net profit of Bt50m in 4Q18, down 36%YoY and 25%QoQ
• Trimmed 2019-21E forecast by 23.8%-24.3% respectively
• Expanding strategic partnership
• Our new target price of Bt24.7 is based on a target PE’19E of 18.8x which is equivalent to the World’s consumer staples sector.

Risks:  (1) Fluctuations in raw material prices

             (2) Exchange rate fluctuations

             (3) Highly competitive industry

3. Donki (7532 JP) Becomes Japan’s 4th Biggest Retailer

Pan Pacific International (7532 JP) (Don Quijote) is on a roll at the moment.

The discount and variety retailer just opened its fourth store in South-East Asia, mixing Japanese restaurants and cafes with a Donki store and a range of Japanese speciality tenants. The store has all the high-level retail entertainment that its Japanese stores offer but with the added cachet of being from Japan and mixing in a lot more in-mall tenants and food outlets. PPI now plans 200 overseas stores in the medium-term.

Back home, PPI is creating new small store formats which have the potential to reach into parts of Japan its big box stores cannot.

At the same time, PPI is beginning the conversion of 100 Uny stores to mixed food and variety stores. With the first six conversions showing sales growth of 83% over 10 months and gross margins up 59%, PPI’s expectation of an extra ¥20 billion in operating profit once conversions are complete looks very achievable.

The takeover means PPI is now Japan’s fourth-biggest retailer, up from 15th just three years ago.

These multiple ventures reflect the company’s flexibility, adapting to each local market’s needs with formats to match.

Its recent decision to close down its e-commerce business is not a weakness but a positive move, demonstrating that PPI understands where its strengths lie: in live store entertainment.

4. Eurobank: Battle-Hardened and Transformation Bound

Eurobank Ergasias Sa (EUROB GA) FY18 results were satisfactory. The bank is now weaned off ELA, pays a tax rate of 33% for the first time in many years, generates robust deposit inflows, enhancing the liquidity position, and is actively reducing NPEs. Management foresees the current problem loan ratio at 37.1% easing to 16% in 2019 and 9% by 2021. Problem exposures will be slashed by €10bn in 2019 through securitizations, collateral liquidations, sales, recoveries and charge-offs. Recent data show a much more benign situation regarding negative NPE formation. The worst seems to be behind the Greek Banking System, barring some external global or regional event or domestic policy misstep.

The legal framework for banks has improved with the Katseli Law providing lenders with greater protection for recovering mortgage NPE foreclosures in the event of default on restructured loans. The real estate auction system has also been gaining much greater traction.

Eurobank is engaged in a corporate transformation plan in order to unlock value, improve capitalisation, and manage NPEs. The plan revolves around a merger with Grivalia, “Pillar” (€2bn mortgage NPE securitization), “Cairo” (€7.5bn multi-asset securitization), the creation of a loan servicer, and a hive down. The bank will focus on core banking rather than functioning as a distressed real estate asset manager.

The outlook for the Greek economy has improved somewhat. The 2019 Budget is based on a primary surplus target of 3.5% of GDP. Exports and private consumption are drivers for solid growth of around 2%. The cash buffer of at least EUR26.5 bn is equivalent to 2 years of gross financing needs. Moody’s raised Greece’s issuer rating to B1 from B3 and its outlook to stable from positive (Feb19). The sovereign gained market access with recent 5year €2.5bn and 10year €2.5bn issues. A tailwind will be the resurgence of “animal spirits” under a New Democracy administration after elections later this year.

5. Vodafone Idea Needs a 55% Price Increase to Return to Viability

Underlying profitability continues to deteriorate at Vodafone Idea (IDEA IN) (IDEA). Chris Hoare has updated his liquidity analysis, and estimates that IDEA needs prices to rise by over 50% to hit cash flow break-even in the medium term. That needs market behavior to change from Jio in particular. Bulls will point to IDEA’s current capital raising and the large capital raising planned at Bharti Airtel (BHARTI IN) as signalling a possible end to hostilities. However, the math at IDEA is such that even a $3.5bn injection gives only temporary relief. What they really need are price increases. Without them (and even with the capital increase), Chris thinks IDEA runs out of cash in about 2 years. We retain our Reduce recommendation and cut our price target to INR16.

In this briefing:

1. Postcard from Surat (India)
2. Advantest (6857 JP): Memory Downturn Yet to Impact Advantest
3. Yokogawa Electric (6841 JP): A Less Risky Investment in LNG Engineering
4. Company Visits: Berli Jucker, M Visions
5. Best World (BEST SP): BT Article, Franchise and KOL

1. Postcard from Surat (India)

With our Post Card Series, our aim is to bring on-ground realities & perspectives from cities across India.  In this insight, we share our takeaways from our visit to Surat, the diamond hub of India. Our focus is Titan Co Ltd (TTAN IN) and the impact on margins. 

Studded jewellery has more margins than plain gold jewellery. Part of Titan’s plan is to improve the mix in favour of studded jewellery which could help it command even higher margins. Titan anticipates this mix to improve to 50% by FY2023. Our interactions indicate a limited possibility of this change in mix. Operating leverage may be the only driver that can help in margin expansion.

We revise our FY20 EBIT margin & EPS estimates. Our FY20 EBIT margin is revised from 12.63% to 11.6% for FY20, continues to be higher than consensus which is at 10.82%. While we see limited margin expansion possibility, revenue growth likely to surprise. We introduce our FY21 EPS estimate at INR 28.75 compared to consensus EPS which is at INR 25.50.

Trust is a factor which cannot be easily replicated or acquired. The trust that Titan enjoys argues for a higher PE multiple. Based on a two-year average forward multiple 51x, our target price for Titan is INR 1466 which represents an upside of 37% from the last close price of INR 1070

2. Advantest (6857 JP): Memory Downturn Yet to Impact Advantest

• Advantest Corporation (6857 JP), based in Japan, manufactures and sells semiconductor testing equipment and electronic measuring systems. The company generates a majority of its revenue outside of Japan, where its products are mostly sold in countries where semiconductor volume production processes are concentrated, including South Korea, Taiwan and China.
• The company’s revenues are highly correlated with memory demand and capital expenditure. The current oversupply in the DRAM and NAND memory markets has caused DRAM and NAND prices to decline. This has impacted the capital spending by large memory makers such as Samsung, Micron and SK Hynix.
• Advantest has witnessed its revenue and operating profits growing at double digits since the beginning of the current semiconductor cycle. However, with the oversupply, memory price declines and capex halts, we expect the company revenue and profits to deteriorate starting in FY03/2020.
• Based on our valuation, we believe Advantest is still overvalued at its current price of JPY2,510 per share. As the memory market has just started decelerating and the current cycle nears its worst, we feel the company share price will decline further with the gloomy outlook for company earnings.

3. Yokogawa Electric (6841 JP): A Less Risky Investment in LNG Engineering

Yokogawa Electric is one of the world’s leading suppliers of distributed control systems (DCS) used in the LNG, oil & gas, petrochemical and other industries. It is particularly strong in LNG, having provided control systems for dozens of liquefaction trains, LNG carriers and re-gasification plants.

Unlike Chiyoda Corporation (6366 JP) and JGC (1963 JP), which depend on a small number of large engineering, procurement and construction (EPC) orders, which can be as large as ¥500 billion, Yokogawa only rarely receives an order as large as ¥10 billion and most of its orders are less than ¥1 billion. It is geared primarily to ongoing investments and operating expenditures in its user industries, less exposed to highly variable orders for large LNG and other engineering projects, and relatively immune to cost overruns and other problems at projects gone wrong.

Margins have expanded over the past several years due to a combination of restructuring and technological advance. Unprofitable non-core businesses have been abandoned or sold, high-wage domestic employees retired, and administration, manufacturing and logistics rationalized. Enterprise and robotic process automation (RPA) software have been introduced and an Industrial Internet of Things (IIoT) cloud computing platform is under development.  Top-line growth has been slow, but the operating margin has risen from from 5.0% in FY Mar-12 to 8.0% in FY Mar-18, and should reach 10% in FY Mar-21, in our estimation.

At ¥2,215 (Wednesday, March 13 closing price), the shares are selling at 23x our EPS estimate for FY Mar-19 and 20x our estimate for FY Mar-21. Projected EV/EBITDA multiples for the same two years are 9.8x and 8.2x. These and other projected valuation multiples are above their recent historical averages, but indicate upside potential of 20% or more if the anticipated upturn in new LNG investments materializes. Investors willing to take on more speculative risk should look at Chiyoda and JGC.

4. Company Visits: Berli Jucker, M Visions

We visited one big-cap stock, Berli Jucker, and one pip-squeak recent IPO M Vision today. A couple of highlights:

• Slow revenue growth at BJC at under 5% largely driven by Big C (hypermarket), but earnings growth was strong at 28% mainly due to lower cost of palm oil in the snack business.
• Good progress in Vietnam with expansion of the bottle capacity this year and SABECO increasing purchases of bottles.
• Overall unimpressed. The company isn’t expecting to grow revenues more than 9% this year, and many of the cost cuts we saw in 2018 are clearly one-offs. Higher oil prices are likely to lead to rising palm oil prices this year too, since the two commodities are linked through substitution effect.
• MVP underwent a bad year on the profit level, but their various businesses, at least on the top line level, looks like it could recover quickly this year.

5. Best World (BEST SP): BT Article, Franchise and KOL

Best World International (BEST SP) share price has been hammered due to the recent article in Business Times, although the company has addressed them one by one. The annual meeting that recently took place in their office in Singapore shed some light on the seemingly “new but not so new” franchise business model in China. The company also has started to engage Key Opinion Leaders (KOL) aka social media influencers as part of their social selling campaign. 

In this briefing:

1. Donki (7532 JP) Becomes Japan’s 4th Biggest Retailer
2. Eurobank: Battle-Hardened and Transformation Bound
3. Vodafone Idea Needs a 55% Price Increase to Return to Viability
4. Reason Why Amazon Canceled DRAM Order from Samsung: Short-Term Impact on Samsung
5. UOB – Driving Bad Loans

1. Donki (7532 JP) Becomes Japan’s 4th Biggest Retailer

Pan Pacific International (7532 JP) (Don Quijote) is on a roll at the moment.

The discount and variety retailer just opened its fourth store in South-East Asia, mixing Japanese restaurants and cafes with a Donki store and a range of Japanese speciality tenants. The store has all the high-level retail entertainment that its Japanese stores offer but with the added cachet of being from Japan and mixing in a lot more in-mall tenants and food outlets. PPI now plans 200 overseas stores in the medium-term.

Back home, PPI is creating new small store formats which have the potential to reach into parts of Japan its big box stores cannot.

At the same time, PPI is beginning the conversion of 100 Uny stores to mixed food and variety stores. With the first six conversions showing sales growth of 83% over 10 months and gross margins up 59%, PPI’s expectation of an extra ¥20 billion in operating profit once conversions are complete looks very achievable.

The takeover means PPI is now Japan’s fourth-biggest retailer, up from 15th just three years ago.

These multiple ventures reflect the company’s flexibility, adapting to each local market’s needs with formats to match.

Its recent decision to close down its e-commerce business is not a weakness but a positive move, demonstrating that PPI understands where its strengths lie: in live store entertainment.

2. Eurobank: Battle-Hardened and Transformation Bound

Eurobank Ergasias Sa (EUROB GA) FY18 results were satisfactory. The bank is now weaned off ELA, pays a tax rate of 33% for the first time in many years, generates robust deposit inflows, enhancing the liquidity position, and is actively reducing NPEs. Management foresees the current problem loan ratio at 37.1% easing to 16% in 2019 and 9% by 2021. Problem exposures will be slashed by €10bn in 2019 through securitizations, collateral liquidations, sales, recoveries and charge-offs. Recent data show a much more benign situation regarding negative NPE formation. The worst seems to be behind the Greek Banking System, barring some external global or regional event or domestic policy misstep.

The legal framework for banks has improved with the Katseli Law providing lenders with greater protection for recovering mortgage NPE foreclosures in the event of default on restructured loans. The real estate auction system has also been gaining much greater traction.

Eurobank is engaged in a corporate transformation plan in order to unlock value, improve capitalisation, and manage NPEs. The plan revolves around a merger with Grivalia, “Pillar” (€2bn mortgage NPE securitization), “Cairo” (€7.5bn multi-asset securitization), the creation of a loan servicer, and a hive down. The bank will focus on core banking rather than functioning as a distressed real estate asset manager.

The outlook for the Greek economy has improved somewhat. The 2019 Budget is based on a primary surplus target of 3.5% of GDP. Exports and private consumption are drivers for solid growth of around 2%. The cash buffer of at least EUR26.5 bn is equivalent to 2 years of gross financing needs. Moody’s raised Greece’s issuer rating to B1 from B3 and its outlook to stable from positive (Feb19). The sovereign gained market access with recent 5year €2.5bn and 10year €2.5bn issues. A tailwind will be the resurgence of “animal spirits” under a New Democracy administration after elections later this year.

3. Vodafone Idea Needs a 55% Price Increase to Return to Viability

Underlying profitability continues to deteriorate at Vodafone Idea (IDEA IN) (IDEA). Chris Hoare has updated his liquidity analysis, and estimates that IDEA needs prices to rise by over 50% to hit cash flow break-even in the medium term. That needs market behavior to change from Jio in particular. Bulls will point to IDEA’s current capital raising and the large capital raising planned at Bharti Airtel (BHARTI IN) as signalling a possible end to hostilities. However, the math at IDEA is such that even a $3.5bn injection gives only temporary relief. What they really need are price increases. Without them (and even with the capital increase), Chris thinks IDEA runs out of cash in about 2 years. We retain our Reduce recommendation and cut our price target to INR16.

4. Reason Why Amazon Canceled DRAM Order from Samsung: Short-Term Impact on Samsung

• SamE shocked the market with 4Q results. OP was down nearly 30% YoY and even 20% from the already heavily adjusted street consensus of ₩13.4tril. The main reason was Amazon’s canceled order. Amazon canceled a significant portion of memory chips, mostly DRAM to be used in its IDCs.
• The market guessed that Amazon might have delayed purchase to further capitalize on falling prices. But Amazon had canceled DRAM order because there were fundamental flaws in SamE’s custom DRAM chips at chip design level.
• The street was expecting a bounce back for memory chip ASP in 2H this year. SamE’s technical issue may push it back further. Meanwhile, SamE’s next quarterly profit level can be even worse. Some in the local street already adjusted SamE’s 1Q OP down to slightly above ₩7tril. At this level, SamE’s FY19e PER would be at 11~12x. This is a very aggressive territory for SamE.

5. UOB – Driving Bad Loans

It’s easy to miss. Headline bad loans are down. But United Overseas Bank (UOB SP) saw a surge in newly defaulted loans during 2H18 compared with 1H18.  The bank’s Pillar 3 disclosure reveals this all too clearly, and it goes to true underlying credit metrics. Write-offs flatter figures or loan reschedulings, and high figures here can lead one to believe that companies and consumers are finding it easier to service their loans. This though may not be true. And it may be one of the most important considerations when analyzing any bank.

In this briefing:

1. Eurobank: Battle-Hardened and Transformation Bound
2. Vodafone Idea Needs a 55% Price Increase to Return to Viability
3. Reason Why Amazon Canceled DRAM Order from Samsung: Short-Term Impact on Samsung
4. UOB – Driving Bad Loans
5. Postcard from Surat (India)

1. Eurobank: Battle-Hardened and Transformation Bound

Eurobank Ergasias Sa (EUROB GA) FY18 results were satisfactory. The bank is now weaned off ELA, pays a tax rate of 33% for the first time in many years, generates robust deposit inflows, enhancing the liquidity position, and is actively reducing NPEs. Management foresees the current problem loan ratio at 37.1% easing to 16% in 2019 and 9% by 2021. Problem exposures will be slashed by €10bn in 2019 through securitizations, collateral liquidations, sales, recoveries and charge-offs. Recent data show a much more benign situation regarding negative NPE formation. The worst seems to be behind the Greek Banking System, barring some external global or regional event or domestic policy misstep.

The legal framework for banks has improved with the Katseli Law providing lenders with greater protection for recovering mortgage NPE foreclosures in the event of default on restructured loans. The real estate auction system has also been gaining much greater traction.

Eurobank is engaged in a corporate transformation plan in order to unlock value, improve capitalisation, and manage NPEs. The plan revolves around a merger with Grivalia, “Pillar” (€2bn mortgage NPE securitization), “Cairo” (€7.5bn multi-asset securitization), the creation of a loan servicer, and a hive down. The bank will focus on core banking rather than functioning as a distressed real estate asset manager.

The outlook for the Greek economy has improved somewhat. The 2019 Budget is based on a primary surplus target of 3.5% of GDP. Exports and private consumption are drivers for solid growth of around 2%. The cash buffer of at least EUR26.5 bn is equivalent to 2 years of gross financing needs. Moody’s raised Greece’s issuer rating to B1 from B3 and its outlook to stable from positive (Feb19). The sovereign gained market access with recent 5year €2.5bn and 10year €2.5bn issues. A tailwind will be the resurgence of “animal spirits” under a New Democracy administration after elections later this year.

2. Vodafone Idea Needs a 55% Price Increase to Return to Viability

Underlying profitability continues to deteriorate at Vodafone Idea (IDEA IN) (IDEA). Chris Hoare has updated his liquidity analysis, and estimates that IDEA needs prices to rise by over 50% to hit cash flow break-even in the medium term. That needs market behavior to change from Jio in particular. Bulls will point to IDEA’s current capital raising and the large capital raising planned at Bharti Airtel (BHARTI IN) as signalling a possible end to hostilities. However, the math at IDEA is such that even a $3.5bn injection gives only temporary relief. What they really need are price increases. Without them (and even with the capital increase), Chris thinks IDEA runs out of cash in about 2 years. We retain our Reduce recommendation and cut our price target to INR16.

3. Reason Why Amazon Canceled DRAM Order from Samsung: Short-Term Impact on Samsung

• SamE shocked the market with 4Q results. OP was down nearly 30% YoY and even 20% from the already heavily adjusted street consensus of ₩13.4tril. The main reason was Amazon’s canceled order. Amazon canceled a significant portion of memory chips, mostly DRAM to be used in its IDCs.
• The market guessed that Amazon might have delayed purchase to further capitalize on falling prices. But Amazon had canceled DRAM order because there were fundamental flaws in SamE’s custom DRAM chips at chip design level.
• The street was expecting a bounce back for memory chip ASP in 2H this year. SamE’s technical issue may push it back further. Meanwhile, SamE’s next quarterly profit level can be even worse. Some in the local street already adjusted SamE’s 1Q OP down to slightly above ₩7tril. At this level, SamE’s FY19e PER would be at 11~12x. This is a very aggressive territory for SamE.

4. UOB – Driving Bad Loans

It’s easy to miss. Headline bad loans are down. But United Overseas Bank (UOB SP) saw a surge in newly defaulted loans during 2H18 compared with 1H18.  The bank’s Pillar 3 disclosure reveals this all too clearly, and it goes to true underlying credit metrics. Write-offs flatter figures or loan reschedulings, and high figures here can lead one to believe that companies and consumers are finding it easier to service their loans. This though may not be true. And it may be one of the most important considerations when analyzing any bank.

5. Postcard from Surat (India)

With our Post Card Series, our aim is to bring on-ground realities & perspectives from cities across India.  In this insight, we share our takeaways from our visit to Surat, the diamond hub of India. Our focus is Titan Co Ltd (TTAN IN) and the impact on margins. 

Studded jewellery has more margins than plain gold jewellery. Part of Titan’s plan is to improve the mix in favour of studded jewellery which could help it command even higher margins. Titan anticipates this mix to improve to 50% by FY2023. Our interactions indicate a limited possibility of this change in mix. Operating leverage may be the only driver that can help in margin expansion.

We revise our FY20 EBIT margin & EPS estimates. Our FY20 EBIT margin is revised from 12.63% to 11.6% for FY20, continues to be higher than consensus which is at 10.82%. While we see limited margin expansion possibility, revenue growth likely to surprise. We introduce our FY21 EPS estimate at INR 28.75 compared to consensus EPS which is at INR 25.50.

Trust is a factor which cannot be easily replicated or acquired. The trust that Titan enjoys argues for a higher PE multiple. Based on a two-year average forward multiple 51x, our target price for Titan is INR 1466 which represents an upside of 37% from the last close price of INR 1070

In this briefing:

1. Vodafone Idea Needs a 55% Price Increase to Return to Viability
2. Reason Why Amazon Canceled DRAM Order from Samsung: Short-Term Impact on Samsung
3. UOB – Driving Bad Loans
4. Postcard from Surat (India)
5. Advantest (6857 JP): Memory Downturn Yet to Impact Advantest

1. Vodafone Idea Needs a 55% Price Increase to Return to Viability

Underlying profitability continues to deteriorate at Vodafone Idea (IDEA IN) (IDEA). Chris Hoare has updated his liquidity analysis, and estimates that IDEA needs prices to rise by over 50% to hit cash flow break-even in the medium term. That needs market behavior to change from Jio in particular. Bulls will point to IDEA’s current capital raising and the large capital raising planned at Bharti Airtel (BHARTI IN) as signalling a possible end to hostilities. However, the math at IDEA is such that even a $3.5bn injection gives only temporary relief. What they really need are price increases. Without them (and even with the capital increase), Chris thinks IDEA runs out of cash in about 2 years. We retain our Reduce recommendation and cut our price target to INR16.

2. Reason Why Amazon Canceled DRAM Order from Samsung: Short-Term Impact on Samsung

• SamE shocked the market with 4Q results. OP was down nearly 30% YoY and even 20% from the already heavily adjusted street consensus of ₩13.4tril. The main reason was Amazon’s canceled order. Amazon canceled a significant portion of memory chips, mostly DRAM to be used in its IDCs.
• The market guessed that Amazon might have delayed purchase to further capitalize on falling prices. But Amazon had canceled DRAM order because there were fundamental flaws in SamE’s custom DRAM chips at chip design level.
• The street was expecting a bounce back for memory chip ASP in 2H this year. SamE’s technical issue may push it back further. Meanwhile, SamE’s next quarterly profit level can be even worse. Some in the local street already adjusted SamE’s 1Q OP down to slightly above ₩7tril. At this level, SamE’s FY19e PER would be at 11~12x. This is a very aggressive territory for SamE.

3. UOB – Driving Bad Loans

It’s easy to miss. Headline bad loans are down. But United Overseas Bank (UOB SP) saw a surge in newly defaulted loans during 2H18 compared with 1H18.  The bank’s Pillar 3 disclosure reveals this all too clearly, and it goes to true underlying credit metrics. Write-offs flatter figures or loan reschedulings, and high figures here can lead one to believe that companies and consumers are finding it easier to service their loans. This though may not be true. And it may be one of the most important considerations when analyzing any bank.

4. Postcard from Surat (India)

With our Post Card Series, our aim is to bring on-ground realities & perspectives from cities across India.  In this insight, we share our takeaways from our visit to Surat, the diamond hub of India. Our focus is Titan Co Ltd (TTAN IN) and the impact on margins. 

Studded jewellery has more margins than plain gold jewellery. Part of Titan’s plan is to improve the mix in favour of studded jewellery which could help it command even higher margins. Titan anticipates this mix to improve to 50% by FY2023. Our interactions indicate a limited possibility of this change in mix. Operating leverage may be the only driver that can help in margin expansion.

We revise our FY20 EBIT margin & EPS estimates. Our FY20 EBIT margin is revised from 12.63% to 11.6% for FY20, continues to be higher than consensus which is at 10.82%. While we see limited margin expansion possibility, revenue growth likely to surprise. We introduce our FY21 EPS estimate at INR 28.75 compared to consensus EPS which is at INR 25.50.

Trust is a factor which cannot be easily replicated or acquired. The trust that Titan enjoys argues for a higher PE multiple. Based on a two-year average forward multiple 51x, our target price for Titan is INR 1466 which represents an upside of 37% from the last close price of INR 1070

5. Advantest (6857 JP): Memory Downturn Yet to Impact Advantest

• Advantest Corporation (6857 JP), based in Japan, manufactures and sells semiconductor testing equipment and electronic measuring systems. The company generates a majority of its revenue outside of Japan, where its products are mostly sold in countries where semiconductor volume production processes are concentrated, including South Korea, Taiwan and China.
• The company’s revenues are highly correlated with memory demand and capital expenditure. The current oversupply in the DRAM and NAND memory markets has caused DRAM and NAND prices to decline. This has impacted the capital spending by large memory makers such as Samsung, Micron and SK Hynix.
• Advantest has witnessed its revenue and operating profits growing at double digits since the beginning of the current semiconductor cycle. However, with the oversupply, memory price declines and capex halts, we expect the company revenue and profits to deteriorate starting in FY03/2020.
• Based on our valuation, we believe Advantest is still overvalued at its current price of JPY2,510 per share. As the memory market has just started decelerating and the current cycle nears its worst, we feel the company share price will decline further with the gloomy outlook for company earnings.

In this briefing:

1. Reason Why Amazon Canceled DRAM Order from Samsung: Short-Term Impact on Samsung
2. UOB – Driving Bad Loans
3. Postcard from Surat (India)
4. Advantest (6857 JP): Memory Downturn Yet to Impact Advantest
5. Yokogawa Electric (6841 JP): A Less Risky Investment in LNG Engineering

1. Reason Why Amazon Canceled DRAM Order from Samsung: Short-Term Impact on Samsung

• SamE shocked the market with 4Q results. OP was down nearly 30% YoY and even 20% from the already heavily adjusted street consensus of ₩13.4tril. The main reason was Amazon’s canceled order. Amazon canceled a significant portion of memory chips, mostly DRAM to be used in its IDCs.
• The market guessed that Amazon might have delayed purchase to further capitalize on falling prices. But Amazon had canceled DRAM order because there were fundamental flaws in SamE’s custom DRAM chips at chip design level.
• The street was expecting a bounce back for memory chip ASP in 2H this year. SamE’s technical issue may push it back further. Meanwhile, SamE’s next quarterly profit level can be even worse. Some in the local street already adjusted SamE’s 1Q OP down to slightly above ₩7tril. At this level, SamE’s FY19e PER would be at 11~12x. This is a very aggressive territory for SamE.

2. UOB – Driving Bad Loans

It’s easy to miss. Headline bad loans are down. But United Overseas Bank (UOB SP) saw a surge in newly defaulted loans during 2H18 compared with 1H18.  The bank’s Pillar 3 disclosure reveals this all too clearly, and it goes to true underlying credit metrics. Write-offs flatter figures or loan reschedulings, and high figures here can lead one to believe that companies and consumers are finding it easier to service their loans. This though may not be true. And it may be one of the most important considerations when analyzing any bank.

3. Postcard from Surat (India)

With our Post Card Series, our aim is to bring on-ground realities & perspectives from cities across India.  In this insight, we share our takeaways from our visit to Surat, the diamond hub of India. Our focus is Titan Co Ltd (TTAN IN) and the impact on margins. 

Studded jewellery has more margins than plain gold jewellery. Part of Titan’s plan is to improve the mix in favour of studded jewellery which could help it command even higher margins. Titan anticipates this mix to improve to 50% by FY2023. Our interactions indicate a limited possibility of this change in mix. Operating leverage may be the only driver that can help in margin expansion.

We revise our FY20 EBIT margin & EPS estimates. Our FY20 EBIT margin is revised from 12.63% to 11.6% for FY20, continues to be higher than consensus which is at 10.82%. While we see limited margin expansion possibility, revenue growth likely to surprise. We introduce our FY21 EPS estimate at INR 28.75 compared to consensus EPS which is at INR 25.50.

Trust is a factor which cannot be easily replicated or acquired. The trust that Titan enjoys argues for a higher PE multiple. Based on a two-year average forward multiple 51x, our target price for Titan is INR 1466 which represents an upside of 37% from the last close price of INR 1070

4. Advantest (6857 JP): Memory Downturn Yet to Impact Advantest

• Advantest Corporation (6857 JP), based in Japan, manufactures and sells semiconductor testing equipment and electronic measuring systems. The company generates a majority of its revenue outside of Japan, where its products are mostly sold in countries where semiconductor volume production processes are concentrated, including South Korea, Taiwan and China.
• The company’s revenues are highly correlated with memory demand and capital expenditure. The current oversupply in the DRAM and NAND memory markets has caused DRAM and NAND prices to decline. This has impacted the capital spending by large memory makers such as Samsung, Micron and SK Hynix.
• Advantest has witnessed its revenue and operating profits growing at double digits since the beginning of the current semiconductor cycle. However, with the oversupply, memory price declines and capex halts, we expect the company revenue and profits to deteriorate starting in FY03/2020.
• Based on our valuation, we believe Advantest is still overvalued at its current price of JPY2,510 per share. As the memory market has just started decelerating and the current cycle nears its worst, we feel the company share price will decline further with the gloomy outlook for company earnings.

5. Yokogawa Electric (6841 JP): A Less Risky Investment in LNG Engineering

Yokogawa Electric is one of the world’s leading suppliers of distributed control systems (DCS) used in the LNG, oil & gas, petrochemical and other industries. It is particularly strong in LNG, having provided control systems for dozens of liquefaction trains, LNG carriers and re-gasification plants.

Unlike Chiyoda Corporation (6366 JP) and JGC (1963 JP), which depend on a small number of large engineering, procurement and construction (EPC) orders, which can be as large as ¥500 billion, Yokogawa only rarely receives an order as large as ¥10 billion and most of its orders are less than ¥1 billion. It is geared primarily to ongoing investments and operating expenditures in its user industries, less exposed to highly variable orders for large LNG and other engineering projects, and relatively immune to cost overruns and other problems at projects gone wrong.

Margins have expanded over the past several years due to a combination of restructuring and technological advance. Unprofitable non-core businesses have been abandoned or sold, high-wage domestic employees retired, and administration, manufacturing and logistics rationalized. Enterprise and robotic process automation (RPA) software have been introduced and an Industrial Internet of Things (IIoT) cloud computing platform is under development.  Top-line growth has been slow, but the operating margin has risen from from 5.0% in FY Mar-12 to 8.0% in FY Mar-18, and should reach 10% in FY Mar-21, in our estimation.

At ¥2,215 (Wednesday, March 13 closing price), the shares are selling at 23x our EPS estimate for FY Mar-19 and 20x our estimate for FY Mar-21. Projected EV/EBITDA multiples for the same two years are 9.8x and 8.2x. These and other projected valuation multiples are above their recent historical averages, but indicate upside potential of 20% or more if the anticipated upturn in new LNG investments materializes. Investors willing to take on more speculative risk should look at Chiyoda and JGC.

In this briefing:

1. UOB – Driving Bad Loans
2. Postcard from Surat (India)
3. Advantest (6857 JP): Memory Downturn Yet to Impact Advantest
4. Yokogawa Electric (6841 JP): A Less Risky Investment in LNG Engineering
5. Company Visits: Berli Jucker, M Visions

1. UOB – Driving Bad Loans

It’s easy to miss. Headline bad loans are down. But United Overseas Bank (UOB SP) saw a surge in newly defaulted loans during 2H18 compared with 1H18.  The bank’s Pillar 3 disclosure reveals this all too clearly, and it goes to true underlying credit metrics. Write-offs flatter figures or loan reschedulings, and high figures here can lead one to believe that companies and consumers are finding it easier to service their loans. This though may not be true. And it may be one of the most important considerations when analyzing any bank.

2. Postcard from Surat (India)

With our Post Card Series, our aim is to bring on-ground realities & perspectives from cities across India.  In this insight, we share our takeaways from our visit to Surat, the diamond hub of India. Our focus is Titan Co Ltd (TTAN IN) and the impact on margins. 

Studded jewellery has more margins than plain gold jewellery. Part of Titan’s plan is to improve the mix in favour of studded jewellery which could help it command even higher margins. Titan anticipates this mix to improve to 50% by FY2023. Our interactions indicate a limited possibility of this change in mix. Operating leverage may be the only driver that can help in margin expansion.

We revise our FY20 EBIT margin & EPS estimates. Our FY20 EBIT margin is revised from 12.63% to 11.6% for FY20, continues to be higher than consensus which is at 10.82%. While we see limited margin expansion possibility, revenue growth likely to surprise. We introduce our FY21 EPS estimate at INR 28.75 compared to consensus EPS which is at INR 25.50.

Trust is a factor which cannot be easily replicated or acquired. The trust that Titan enjoys argues for a higher PE multiple. Based on a two-year average forward multiple 51x, our target price for Titan is INR 1466 which represents an upside of 37% from the last close price of INR 1070

3. Advantest (6857 JP): Memory Downturn Yet to Impact Advantest

• Advantest Corporation (6857 JP), based in Japan, manufactures and sells semiconductor testing equipment and electronic measuring systems. The company generates a majority of its revenue outside of Japan, where its products are mostly sold in countries where semiconductor volume production processes are concentrated, including South Korea, Taiwan and China.
• The company’s revenues are highly correlated with memory demand and capital expenditure. The current oversupply in the DRAM and NAND memory markets has caused DRAM and NAND prices to decline. This has impacted the capital spending by large memory makers such as Samsung, Micron and SK Hynix.
• Advantest has witnessed its revenue and operating profits growing at double digits since the beginning of the current semiconductor cycle. However, with the oversupply, memory price declines and capex halts, we expect the company revenue and profits to deteriorate starting in FY03/2020.
• Based on our valuation, we believe Advantest is still overvalued at its current price of JPY2,510 per share. As the memory market has just started decelerating and the current cycle nears its worst, we feel the company share price will decline further with the gloomy outlook for company earnings.

4. Yokogawa Electric (6841 JP): A Less Risky Investment in LNG Engineering

Yokogawa Electric is one of the world’s leading suppliers of distributed control systems (DCS) used in the LNG, oil & gas, petrochemical and other industries. It is particularly strong in LNG, having provided control systems for dozens of liquefaction trains, LNG carriers and re-gasification plants.

Unlike Chiyoda Corporation (6366 JP) and JGC (1963 JP), which depend on a small number of large engineering, procurement and construction (EPC) orders, which can be as large as ¥500 billion, Yokogawa only rarely receives an order as large as ¥10 billion and most of its orders are less than ¥1 billion. It is geared primarily to ongoing investments and operating expenditures in its user industries, less exposed to highly variable orders for large LNG and other engineering projects, and relatively immune to cost overruns and other problems at projects gone wrong.

Margins have expanded over the past several years due to a combination of restructuring and technological advance. Unprofitable non-core businesses have been abandoned or sold, high-wage domestic employees retired, and administration, manufacturing and logistics rationalized. Enterprise and robotic process automation (RPA) software have been introduced and an Industrial Internet of Things (IIoT) cloud computing platform is under development.  Top-line growth has been slow, but the operating margin has risen from from 5.0% in FY Mar-12 to 8.0% in FY Mar-18, and should reach 10% in FY Mar-21, in our estimation.

At ¥2,215 (Wednesday, March 13 closing price), the shares are selling at 23x our EPS estimate for FY Mar-19 and 20x our estimate for FY Mar-21. Projected EV/EBITDA multiples for the same two years are 9.8x and 8.2x. These and other projected valuation multiples are above their recent historical averages, but indicate upside potential of 20% or more if the anticipated upturn in new LNG investments materializes. Investors willing to take on more speculative risk should look at Chiyoda and JGC.

5. Company Visits: Berli Jucker, M Visions

We visited one big-cap stock, Berli Jucker, and one pip-squeak recent IPO M Vision today. A couple of highlights:

• Slow revenue growth at BJC at under 5% largely driven by Big C (hypermarket), but earnings growth was strong at 28% mainly due to lower cost of palm oil in the snack business.
• Good progress in Vietnam with expansion of the bottle capacity this year and SABECO increasing purchases of bottles.
• Overall unimpressed. The company isn’t expecting to grow revenues more than 9% this year, and many of the cost cuts we saw in 2018 are clearly one-offs. Higher oil prices are likely to lead to rising palm oil prices this year too, since the two commodities are linked through substitution effect.
• MVP underwent a bad year on the profit level, but their various businesses, at least on the top line level, looks like it could recover quickly this year.

In this briefing:

1. Advantest (6857 JP): Memory Downturn Yet to Impact Advantest
2. Yokogawa Electric (6841 JP): A Less Risky Investment in LNG Engineering
3. Company Visits: Berli Jucker, M Visions
4. Best World (BEST SP): BT Article, Franchise and KOL
5. Krung Thai Bank: Not as Cheap as It Looks

1. Advantest (6857 JP): Memory Downturn Yet to Impact Advantest

• Advantest Corporation (6857 JP), based in Japan, manufactures and sells semiconductor testing equipment and electronic measuring systems. The company generates a majority of its revenue outside of Japan, where its products are mostly sold in countries where semiconductor volume production processes are concentrated, including South Korea, Taiwan and China.
• The company’s revenues are highly correlated with memory demand and capital expenditure. The current oversupply in the DRAM and NAND memory markets has caused DRAM and NAND prices to decline. This has impacted the capital spending by large memory makers such as Samsung, Micron and SK Hynix.
• Advantest has witnessed its revenue and operating profits growing at double digits since the beginning of the current semiconductor cycle. However, with the oversupply, memory price declines and capex halts, we expect the company revenue and profits to deteriorate starting in FY03/2020.
• Based on our valuation, we believe Advantest is still overvalued at its current price of JPY2,510 per share. As the memory market has just started decelerating and the current cycle nears its worst, we feel the company share price will decline further with the gloomy outlook for company earnings.

2. Yokogawa Electric (6841 JP): A Less Risky Investment in LNG Engineering

Yokogawa Electric is one of the world’s leading suppliers of distributed control systems (DCS) used in the LNG, oil & gas, petrochemical and other industries. It is particularly strong in LNG, having provided control systems for dozens of liquefaction trains, LNG carriers and re-gasification plants.

Unlike Chiyoda Corporation (6366 JP) and JGC (1963 JP), which depend on a small number of large engineering, procurement and construction (EPC) orders, which can be as large as ¥500 billion, Yokogawa only rarely receives an order as large as ¥10 billion and most of its orders are less than ¥1 billion. It is geared primarily to ongoing investments and operating expenditures in its user industries, less exposed to highly variable orders for large LNG and other engineering projects, and relatively immune to cost overruns and other problems at projects gone wrong.

Margins have expanded over the past several years due to a combination of restructuring and technological advance. Unprofitable non-core businesses have been abandoned or sold, high-wage domestic employees retired, and administration, manufacturing and logistics rationalized. Enterprise and robotic process automation (RPA) software have been introduced and an Industrial Internet of Things (IIoT) cloud computing platform is under development.  Top-line growth has been slow, but the operating margin has risen from from 5.0% in FY Mar-12 to 8.0% in FY Mar-18, and should reach 10% in FY Mar-21, in our estimation.

At ¥2,215 (Wednesday, March 13 closing price), the shares are selling at 23x our EPS estimate for FY Mar-19 and 20x our estimate for FY Mar-21. Projected EV/EBITDA multiples for the same two years are 9.8x and 8.2x. These and other projected valuation multiples are above their recent historical averages, but indicate upside potential of 20% or more if the anticipated upturn in new LNG investments materializes. Investors willing to take on more speculative risk should look at Chiyoda and JGC.

3. Company Visits: Berli Jucker, M Visions

We visited one big-cap stock, Berli Jucker, and one pip-squeak recent IPO M Vision today. A couple of highlights:

• Slow revenue growth at BJC at under 5% largely driven by Big C (hypermarket), but earnings growth was strong at 28% mainly due to lower cost of palm oil in the snack business.
• Good progress in Vietnam with expansion of the bottle capacity this year and SABECO increasing purchases of bottles.
• Overall unimpressed. The company isn’t expecting to grow revenues more than 9% this year, and many of the cost cuts we saw in 2018 are clearly one-offs. Higher oil prices are likely to lead to rising palm oil prices this year too, since the two commodities are linked through substitution effect.
• MVP underwent a bad year on the profit level, but their various businesses, at least on the top line level, looks like it could recover quickly this year.

4. Best World (BEST SP): BT Article, Franchise and KOL

Best World International (BEST SP) share price has been hammered due to the recent article in Business Times, although the company has addressed them one by one. The annual meeting that recently took place in their office in Singapore shed some light on the seemingly “new but not so new” franchise business model in China. The company also has started to engage Key Opinion Leaders (KOL) aka social media influencers as part of their social selling campaign. 

5. Krung Thai Bank: Not as Cheap as It Looks

Originally, Krung Thai Bank Pub (KTB TB) struck us as interesting. A solid PH Score™, reasonable franchise valuation and P/Book, and a low RSI.

However, further due-diligence shows a somewhat stagnant and eroding operation.

• Headline profitability improvement is unrelated to efficiency or to operational advances.
• Cost growth is fast outpacing a declining top-line.
• Interest income has actually fallen for each of the last 3 years.
• The bank is being squeezed on margin despite keeping interest expenses unchanged.
• Non-interest expenses soared by 26% YoY.
• The bottom line (and profitability) was flattered by varied low quality items as well as much lower loan loss provisions, but still remained well above comprehensive income.
• Asset Quality is also concerning (despite lower loan loss provisions) given the sharp rise in loss (especially) and substandard loans as well as the amount of Special Mention Loans on the Balance Sheet. This means provisioning of problem loans may not be sufficient.
• Liquidity: Deposits are also declining, pushing up the LDR.

In this briefing:

1. Bharti Infratel: Bad News Largely in the Price Now. Upgrade to Neutral
2. Geo Energy (GERL SP): Recovery in Coal Price from 4Q18 Bottom; Continue to Wait for M&A Action
3. Meituan Dianping 4Q2018 Quick Read: Monetization Rate and Margins Disappointed
4. Nsk (6471) Conditions Have Deteriorated Significantly but Given Valuations, This Is Now in the Price
5. New J. Hutton Exploration Report (Weeks Ending 08/03/19)

1. Bharti Infratel: Bad News Largely in the Price Now. Upgrade to Neutral

Following three years of share price declines, Chris Hoare has started to moderate his negative view on Bharti Infratel (BHIN IN). Our thesis, that Infratel would struggle as the market consolidated to three players, has largely played out. We remain wary of the viability of Vodafone Idea (IDEA IN) at current tariff levels but the ongoing capital raising at IDEA puts off the day of reckoning, while IDEA’s exit penalties (as they consolidate with Vodafone) are being paid quarterly which will flatter revenues/cash flow. We think earnings forecasts have probably bottomed for the time being and raise our recommendation to Neutral and upgrade our price target to INR270 (from INR220).

2. Geo Energy (GERL SP): Recovery in Coal Price from 4Q18 Bottom; Continue to Wait for M&A Action

Geo Energy Resources (GERL SP) reported weak 4Q18 results late last month. The reason for the 5M USD net loss in 4Q18 was mainly due to Chinese import restrictions for Indonesian coal in November and December last year. With the import quota removed as of January ICI4 coal prices have rebounded from +/-30 USD/ton late 2018 to 40 USD/ton this week. 

Geo remains in deep value territory (3x EV/EBITDA) as the company still has over 200M USD+ in cash it raised from a 300M USD bond placing almost 18 months ago. While the CEO announced plans to organize a HK dual listing in 1H19 this cannot materialize unless management can execute on a significant acquisition opportunity it has been considering for the last twelve months. With Indonesian elections coming up next month the hope is that clarity on this potential transaction can be sorted by late 1H19.

While Europe is obsessed with Climate Change doomsday scenarios being shouted around by school-skipping teenagers, the reality is that three out of four of the most populated countries in the world (China, India and Indonesia) will remain heavy users of coal for decades to come. With cleaner coal technology being the key differentiator how much pollution is emitted.

My Fair Value estimate (Base case) remains 0.35 SGD or 89% upside.  Please recall, Macquarie paid 0.29 SGD for a 5% stake in November 2018 and had warrants issued to it at 0.33 SGD.

3. Meituan Dianping 4Q2018 Quick Read: Monetization Rate and Margins Disappointed

Meituan Dianping reported 4Q2018 numbers last night. As we covered the company’s IPO and lock-up expiry, we took a close look the company 4Q2018 results and listened in the conference call. While we are encouraged by the company’s strong transaction volume and revenue growth in 4Q2018, we are less bullish given the deceleration of monetization growth. We also note that the company trimmed down the details of reporting, in particular, the operation of its New Initiative segment and hence results were less transparent. 

4. Nsk (6471) Conditions Have Deteriorated Significantly but Given Valuations, This Is Now in the Price

Over the last 12 months, these shares have been a dreadful performer (as have the other ball bearing makers), both in absolute terms (-36%) and on a relative basis (underperformed TOPIX by 30%). Operating profits for the full year have recently been revised down (for the second time). The operating environment has deteriorated markedly into 4Q. It would appear to us that the market, and analysts, are aware of the current poor trading conditions. The question is when will conditions start to improve. The first half of next year will be very poor indeed with profits down perhaps 35% year-on-year. And it now appears that some analyst’s numbers do not assume recovery for any of next fiscal year, which we believe as too harsh.

Clearly the first half of next year (3/20) is going to show very poor year on year comparisons. This will be unavoidable given a good first half this year and business conditions now. The company itself is now forecasting a 4Q operating profit of Y16.7bn (-40%) having made Y24.8bn in 1Q, Y20.2bn in 2Q and Y21.3bn in 3Q. Assuming this level carries on into the first half of next year before starting a gradual recovery in the second half, then first half operating profit may well come in at about Y32-33bn, a 35% year-on-year fall. The consensus for the full year is currently about Y70bn with the lowest number being Y64bn. Sell recommendations have also begun to appear. To us this appear to be a bit after the event given where earnings are now and where the shares are trading.

The shares currently yield 4.2% and the pay-out ratio this year is 36%. Management’s target is for 30% but at the same time they are reluctant to cut the dividend going forward. This may well prove some support. Meanwhile the company owns 7% of itself and on our calculation is trading on an EV/ebitda of just under 4x. Finally, its book value (0.9x) relative to the market’s book value is now at a very depressed level (see chart below) which suggests to us that although there may be some short term down side risk, we would look to buy on a longer term.

5. New J. Hutton Exploration Report (Weeks Ending 08/03/19)

• Coverage now expanded to 730 mining companies
• Retain Peel Mining Ltd (PEX AU) as a Speculative Buy
• Current drilling infill only
• Est. A$4-4.5m cash with capital raising soon
• Very solid geological genetic model honing future extensional exploration efforts 
• Expect maiden Resource computation to commence after next three hole assays released
• Aeon Metals Ltd (AML AU), Blackearth Minerals NL (BEM AU), Boss Resources (BOE AU), Centaurus Metals (CTM AU), Catalyst Metals (CYL AU), Amur Minerals (AMC LN), Patagonia Gold (PGD LN), Tyranna Resources (TYX AU), Gladiator Resources (GLA AU), King River Resources (KRR AU), Vango Mining (VAN AU), Hummingbird Resources (HUM LN), Caravel Minerals (CVV AU), Lefroy Exploration Ltd (LEX AU), Millennium Minerals (MOY AU), Northern Minerals (NTU AU), Blackham Resources (BLK AU), Avz Minerals (AVZ AU), Orocobre Ltd (ORE AU), Serabi Gold plc (SRB LN), Paringa Resources (PNL AU), Artemis Resources (ARV AU), Centrex Metals (CXM AU), Great Boulder Resources Ltd (GBR AU), Superior Lake Resources (SUP AU), Cora Gold Ltd (CORA LN), European Metals Holdings Ltd (EMH LN), Savannah Resources PLC (SAV LN) , IronRidge Resources Ltd (IRR LN)

In this briefing:

1. Yokogawa Electric (6841 JP): A Less Risky Investment in LNG Engineering
2. Company Visits: Berli Jucker, M Visions
3. Best World (BEST SP): BT Article, Franchise and KOL
4. Krung Thai Bank: Not as Cheap as It Looks
5. DoubleDragon Properties (DD PM): From Overhyped to Undervalued; Multi-Bagger in the Making?

1. Yokogawa Electric (6841 JP): A Less Risky Investment in LNG Engineering

Yokogawa Electric is one of the world’s leading suppliers of distributed control systems (DCS) used in the LNG, oil & gas, petrochemical and other industries. It is particularly strong in LNG, having provided control systems for dozens of liquefaction trains, LNG carriers and re-gasification plants.

Unlike Chiyoda Corporation (6366 JP) and JGC (1963 JP), which depend on a small number of large engineering, procurement and construction (EPC) orders, which can be as large as ¥500 billion, Yokogawa only rarely receives an order as large as ¥10 billion and most of its orders are less than ¥1 billion. It is geared primarily to ongoing investments and operating expenditures in its user industries, less exposed to highly variable orders for large LNG and other engineering projects, and relatively immune to cost overruns and other problems at projects gone wrong.

Margins have expanded over the past several years due to a combination of restructuring and technological advance. Unprofitable non-core businesses have been abandoned or sold, high-wage domestic employees retired, and administration, manufacturing and logistics rationalized. Enterprise and robotic process automation (RPA) software have been introduced and an Industrial Internet of Things (IIoT) cloud computing platform is under development.  Top-line growth has been slow, but the operating margin has risen from from 5.0% in FY Mar-12 to 8.0% in FY Mar-18, and should reach 10% in FY Mar-21, in our estimation.

At ¥2,215 (Wednesday, March 13 closing price), the shares are selling at 23x our EPS estimate for FY Mar-19 and 20x our estimate for FY Mar-21. Projected EV/EBITDA multiples for the same two years are 9.8x and 8.2x. These and other projected valuation multiples are above their recent historical averages, but indicate upside potential of 20% or more if the anticipated upturn in new LNG investments materializes. Investors willing to take on more speculative risk should look at Chiyoda and JGC.

2. Company Visits: Berli Jucker, M Visions

We visited one big-cap stock, Berli Jucker, and one pip-squeak recent IPO M Vision today. A couple of highlights:

• Slow revenue growth at BJC at under 5% largely driven by Big C (hypermarket), but earnings growth was strong at 28% mainly due to lower cost of palm oil in the snack business.
• Good progress in Vietnam with expansion of the bottle capacity this year and SABECO increasing purchases of bottles.
• Overall unimpressed. The company isn’t expecting to grow revenues more than 9% this year, and many of the cost cuts we saw in 2018 are clearly one-offs. Higher oil prices are likely to lead to rising palm oil prices this year too, since the two commodities are linked through substitution effect.
• MVP underwent a bad year on the profit level, but their various businesses, at least on the top line level, looks like it could recover quickly this year.

3. Best World (BEST SP): BT Article, Franchise and KOL

Best World International (BEST SP) share price has been hammered due to the recent article in Business Times, although the company has addressed them one by one. The annual meeting that recently took place in their office in Singapore shed some light on the seemingly “new but not so new” franchise business model in China. The company also has started to engage Key Opinion Leaders (KOL) aka social media influencers as part of their social selling campaign. 

4. Krung Thai Bank: Not as Cheap as It Looks

Originally, Krung Thai Bank Pub (KTB TB) struck us as interesting. A solid PH Score™, reasonable franchise valuation and P/Book, and a low RSI.

However, further due-diligence shows a somewhat stagnant and eroding operation.

• Headline profitability improvement is unrelated to efficiency or to operational advances.
• Cost growth is fast outpacing a declining top-line.
• Interest income has actually fallen for each of the last 3 years.
• The bank is being squeezed on margin despite keeping interest expenses unchanged.
• Non-interest expenses soared by 26% YoY.
• The bottom line (and profitability) was flattered by varied low quality items as well as much lower loan loss provisions, but still remained well above comprehensive income.
• Asset Quality is also concerning (despite lower loan loss provisions) given the sharp rise in loss (especially) and substandard loans as well as the amount of Special Mention Loans on the Balance Sheet. This means provisioning of problem loans may not be sufficient.
• Liquidity: Deposits are also declining, pushing up the LDR.

5. DoubleDragon Properties (DD PM): From Overhyped to Undervalued; Multi-Bagger in the Making?

This Insight was written by Nicolas Van Broekhoven and Lloyd Moffatt.

What is an Orphan Stock?

An attractively valued company with a minimum market cap of USD $1 billion but no sell-side coverage.Doubledragon Properties (DD PM) meets those criteria.

Why Read This Report?

Learn about the Philippines youngest self-made billionaire*, Edgar ‘Injap’ Sia,  how he created one of the largest fast-food chains (Mang Inasal) in the country and successfully sold it to Jollibee Foods (JFC PM) for over USD$100 M.

After selling Mang Inasal in 2010, Sia started building DoubleDragon (DD) as he joined hands with Tony Tan (founder of Jollibee Foods (JFC PM) ). DD was listed in 2014 at a market value of USD$85 M (PHP2/share) and reached a market cap of over USD$3 B USD two years after listing (PHP70/share).

DD’s valuation mid-2016 was overhyped and overvalued.

From mid-2016 to late 2018 the share price fell by approximately 75%. Last year the stock bottomed at PHP17.2 despite fundamentals improving drastically between 2016 and 2018.

We value DD on a blended a) P/E multiple and b) Cap Rate basis.

DD recently traded around PHP 22/share and is currently valued at 9.5x FY20 P/E, a steep discount to its industry peers. Assuming the company achieves PHP10.8 B in recurring revenues by FY20 the market is currently valuing the company at a 21% Cap Rate vs 7% for its primary peer Sm Prime Holdings (SMPH PM). DD should trade at a discount to SM (long track record, higher liquidity, included in PSE index) but the gap is too wide.

We argue DD should trade at a) 15x P/E and b) 10% cap rate. Combining the two valuation methods we arrive at a blended Fair Value of PHP 40.31/share, or 83% upside from current levels.

The founders control 70% of the company and expect to grow the current USD$1.2B market cap exponentially the coming 3-5 years. DoubleDragon is a potential multi-bagger in the making.

1. FY18 results publication by early April 2019
2. Delivery of 100 operating CityMalls by FY20
3. The passing of workable REIT law
4. Delivery of PHP5.5B FY20 profit target
5. FCF inflection point coming closer in FY20
6. Re-discovery by sell-side firms as index inclusion looms
7. Visibility into FY21-FY25 dividend potential

Footnote: *Injap was reported as having USD$1 B in assets by Forbes in 2017, as the share price of DD has fallen we estimate this has dropped to approximately USD$ 400-500 M, which would still rank him among the top-25 wealthiest individuals in the Philippines.