Equity Bottom-Up

In this briefing:

1. SYNEX: New Smartphone Launches Help Drive Earnings Momentum in 2019
2. MODEC: Add
3. LG Electronics – Boost from Higher Dividends, Air Motion Technology, & The War Against Huawei
4. Tesla. SEC Contempt Filing & Ludicrous Autopilot Claims Engulf Delusional Musk
5. Indonesia Property – In Search of the End of the Rainbow – Part 2 –  Bumi Serpong Damai (BSDE IJ)

1. SYNEX: New Smartphone Launches Help Drive Earnings Momentum in 2019

SYNEX’s 4Q18 net profit was at Bt190m (+16%YoY, +18QoQ), in-line with our expectation

• Record-high level of sales at Bt10.38bn is the major contributor to impressive 4Q18 performance. Meanwhile , gross margin drops below 4% in the first time due to changing product mix towards more on device segment
• SYNEX post 2018 net profit of Bt721m (+15%YoY) driven by 18% increase in revenue
• We maintain our positive view toward FY19-20E earnings outlook driven by (1) number of flagship smartphone model launches and new brands for low budget users, Neffos, and, (2) higher sales contribution from high-margins product such as gaming desktops and post-sales services.

We maintain our BUY rating with a new target price of Bt16.80 (previous target price at Bt15.0) derived from 17xPE’2019E, which is the average of the World information and technology sector

2. MODEC: Add

Towards the end of 2018 Modec Inc (6269 JP)‘s share price dropped 46.5% as the price of crude oil also cratered, falling 44.4% . Since that plunge, the stock price has rebounded 53.9% as the company posted excellent results at 4Q and guidance, while conservative, was for continued healthy earnings.

Having visited the company today, we believe earnings should continue to be strong and actually strengthen over the next few years with MODEC likely to start running into capacity constraints over the course of this year.

3. LG Electronics – Boost from Higher Dividends, Air Motion Technology, & The War Against Huawei

• In this report, we provide an update on Lg Electronics (066570 KS), including the potential impact of the war on Huawei on the company, dividend policy, debt issue, sales of non-core assets, and the launch of new smartphones. 
• Although LG’s V50 ThinQ product is a bit disappointing, another new LG smartphone called G8ThinQ appears to be promising. This is one of the first smartphones to use “air motion” technology to activate some of the features including playing a song or video or adjusting volume (remember Tom Cruise in the movie Minority Report)? The airmotion technology could bring back the “thrill” of using a smartphone. 
• Many investors around the world are asking, “What companies will benefit from the continued war on Huawei by the US government?” LG Electronics, the 7th largest smartphone maker globally, could be one of the key beneficiaries of the war on Huawei. 
• LG Electronics recently announced that it will pay DPS of 750 won for its common shareholders in 2018, which is nearly twice as high the DPS of 400 won in 2017. 

4. Tesla. SEC Contempt Filing & Ludicrous Autopilot Claims Engulf Delusional Musk

The US Securities and Exchange Commission (SEC) requested a federal judge to hold Tesla CEO Elon Musk in contempt of court yesterday regarding recent misleading tweets about the company’s unit production volumes for 2019. This latest move comes not long after Musk bragged that he does not respect the SEC and that his tweets were not being censored by the Board according to the terms of the agreement reached with the SEC following his controversial “Am considering taking Tesla private at $420. Funding secured” tweet on August 8’th last.  

Separately, Musk has been talking up the capabilities of the company’s Autopilot technology, claiming that it will deliver “Full Self Driving” by the end of the year, that its in-house developed hardware is 2000% better than NVIDIA’s and that by the end of next year, it would be safe for somebody to fall asleep with Autopilot in control. We find these claims to be ludicrous and Elon Musk delusional in thinking that the SEC would stand idly by while he publicly admits to ignoring the terms of his settlement with them barely four months ago. 

5. Indonesia Property – In Search of the End of the Rainbow – Part 2 –  Bumi Serpong Damai (BSDE IJ)

In this series under Smartkarma Originals, CrossASEAN Research insight providers Angus Mackintosh and Jessica Irene seek to determine whether or not we are close to the end of the rainbow and to a period of outperformance for the property sector. Our end conclusions will be based on a series of company visits to the major listed property companies in Indonesia, conversations with local banks, property agents, and other relevant channel checks. 

The second company we explore is leading township developer Bumi Serpong Damai (BSDE IJ), with exposure ranging from landed housing, shophouses, condominiums, as well as the defensive and growing buffer of nearly 20% of revenues coming from recurrent rental income.

Bumi Serpong Damai (BSDE IJ) has one of the largest land banks of any developer, with a land bank of over 4,000 ha, more than half of which is in its flagship township of BSD City in Serpong.

Given its breadth of exposure to the property segment, the company has the flexibility to switch its exposure between different segments depending on the health of the overall market. 

Its projects are well connected by toll-roads and railway but it is well positioned to benefit from new infrastructure such as the new MRT, LRT, as well as new toll road extensions, which will enhance the attractiveness of its developments.  

Management suggests that they will take a cautious start to the year ahead of the election but see a window for a pick-up in marketing sales in May, with the potential for a much better 2H19. 

Despite a run-up in the share price since the start of the year, valuations do not look challenging from a historical basis especially looking at its PBV. It also trades at a significant discount to NAV of 67%, as well as being below its 5 yr historical mean on a forward PER basis.

Catalysts ahead include a post-election pick-up in activity leading to more project launches, completion of infrastructure projects, aggressive mortgage lending by the banks, and a more dovish interest rate outlook. Valuations are already attractive but a rise in property market activity should also lead to earnings upgrades, which if sustained, may lead to property prices moving upwards.

In this briefing:

1. MODEC: Add
2. LG Electronics – Boost from Higher Dividends, Air Motion Technology, & The War Against Huawei
3. Tesla. SEC Contempt Filing & Ludicrous Autopilot Claims Engulf Delusional Musk
4. Indonesia Property – In Search of the End of the Rainbow – Part 2 –  Bumi Serpong Damai (BSDE IJ)
5. Baidu (BIDU): Stagnant in 4Q18, Wrong Change Feeds a 24% User Increase to Google

1. MODEC: Add

Towards the end of 2018 Modec Inc (6269 JP)‘s share price dropped 46.5% as the price of crude oil also cratered, falling 44.4% . Since that plunge, the stock price has rebounded 53.9% as the company posted excellent results at 4Q and guidance, while conservative, was for continued healthy earnings.

Having visited the company today, we believe earnings should continue to be strong and actually strengthen over the next few years with MODEC likely to start running into capacity constraints over the course of this year.

2. LG Electronics – Boost from Higher Dividends, Air Motion Technology, & The War Against Huawei

• In this report, we provide an update on Lg Electronics (066570 KS), including the potential impact of the war on Huawei on the company, dividend policy, debt issue, sales of non-core assets, and the launch of new smartphones. 
• Although LG’s V50 ThinQ product is a bit disappointing, another new LG smartphone called G8ThinQ appears to be promising. This is one of the first smartphones to use “air motion” technology to activate some of the features including playing a song or video or adjusting volume (remember Tom Cruise in the movie Minority Report)? The airmotion technology could bring back the “thrill” of using a smartphone. 
• Many investors around the world are asking, “What companies will benefit from the continued war on Huawei by the US government?” LG Electronics, the 7th largest smartphone maker globally, could be one of the key beneficiaries of the war on Huawei. 
• LG Electronics recently announced that it will pay DPS of 750 won for its common shareholders in 2018, which is nearly twice as high the DPS of 400 won in 2017. 

3. Tesla. SEC Contempt Filing & Ludicrous Autopilot Claims Engulf Delusional Musk

The US Securities and Exchange Commission (SEC) requested a federal judge to hold Tesla CEO Elon Musk in contempt of court yesterday regarding recent misleading tweets about the company’s unit production volumes for 2019. This latest move comes not long after Musk bragged that he does not respect the SEC and that his tweets were not being censored by the Board according to the terms of the agreement reached with the SEC following his controversial “Am considering taking Tesla private at $420. Funding secured” tweet on August 8’th last.  

Separately, Musk has been talking up the capabilities of the company’s Autopilot technology, claiming that it will deliver “Full Self Driving” by the end of the year, that its in-house developed hardware is 2000% better than NVIDIA’s and that by the end of next year, it would be safe for somebody to fall asleep with Autopilot in control. We find these claims to be ludicrous and Elon Musk delusional in thinking that the SEC would stand idly by while he publicly admits to ignoring the terms of his settlement with them barely four months ago. 

4. Indonesia Property – In Search of the End of the Rainbow – Part 2 –  Bumi Serpong Damai (BSDE IJ)

In this series under Smartkarma Originals, CrossASEAN Research insight providers Angus Mackintosh and Jessica Irene seek to determine whether or not we are close to the end of the rainbow and to a period of outperformance for the property sector. Our end conclusions will be based on a series of company visits to the major listed property companies in Indonesia, conversations with local banks, property agents, and other relevant channel checks. 

The second company we explore is leading township developer Bumi Serpong Damai (BSDE IJ), with exposure ranging from landed housing, shophouses, condominiums, as well as the defensive and growing buffer of nearly 20% of revenues coming from recurrent rental income.

Bumi Serpong Damai (BSDE IJ) has one of the largest land banks of any developer, with a land bank of over 4,000 ha, more than half of which is in its flagship township of BSD City in Serpong.

Given its breadth of exposure to the property segment, the company has the flexibility to switch its exposure between different segments depending on the health of the overall market. 

Its projects are well connected by toll-roads and railway but it is well positioned to benefit from new infrastructure such as the new MRT, LRT, as well as new toll road extensions, which will enhance the attractiveness of its developments.  

Management suggests that they will take a cautious start to the year ahead of the election but see a window for a pick-up in marketing sales in May, with the potential for a much better 2H19. 

Despite a run-up in the share price since the start of the year, valuations do not look challenging from a historical basis especially looking at its PBV. It also trades at a significant discount to NAV of 67%, as well as being below its 5 yr historical mean on a forward PER basis.

Catalysts ahead include a post-election pick-up in activity leading to more project launches, completion of infrastructure projects, aggressive mortgage lending by the banks, and a more dovish interest rate outlook. Valuations are already attractive but a rise in property market activity should also lead to earnings upgrades, which if sustained, may lead to property prices moving upwards.

5. Baidu (BIDU): Stagnant in 4Q18, Wrong Change Feeds a 24% User Increase to Google

• Baidu posted a weak result for 4Q2018.
• We believe it is a wrong decision to change Baidu into an in-house search engine.
• Alphabet Inc Cl C (GOOG US) ’s monthly active users in mainland China increased 24% QoQ in January 2019.
• We believe Baidu’s stock price has been fairly impacted.

In this briefing:

1. LG Electronics – Boost from Higher Dividends, Air Motion Technology, & The War Against Huawei
2. Tesla. SEC Contempt Filing & Ludicrous Autopilot Claims Engulf Delusional Musk
3. Indonesia Property – In Search of the End of the Rainbow – Part 2 –  Bumi Serpong Damai (BSDE IJ)
4. Baidu (BIDU): Stagnant in 4Q18, Wrong Change Feeds a 24% User Increase to Google
5. Ho Bee Land – 4Q Earnings Hit by Unexpected Tax Provision

1. LG Electronics – Boost from Higher Dividends, Air Motion Technology, & The War Against Huawei

• In this report, we provide an update on Lg Electronics (066570 KS), including the potential impact of the war on Huawei on the company, dividend policy, debt issue, sales of non-core assets, and the launch of new smartphones. 
• Although LG’s V50 ThinQ product is a bit disappointing, another new LG smartphone called G8ThinQ appears to be promising. This is one of the first smartphones to use “air motion” technology to activate some of the features including playing a song or video or adjusting volume (remember Tom Cruise in the movie Minority Report)? The airmotion technology could bring back the “thrill” of using a smartphone. 
• Many investors around the world are asking, “What companies will benefit from the continued war on Huawei by the US government?” LG Electronics, the 7th largest smartphone maker globally, could be one of the key beneficiaries of the war on Huawei. 
• LG Electronics recently announced that it will pay DPS of 750 won for its common shareholders in 2018, which is nearly twice as high the DPS of 400 won in 2017. 

2. Tesla. SEC Contempt Filing & Ludicrous Autopilot Claims Engulf Delusional Musk

The US Securities and Exchange Commission (SEC) requested a federal judge to hold Tesla CEO Elon Musk in contempt of court yesterday regarding recent misleading tweets about the company’s unit production volumes for 2019. This latest move comes not long after Musk bragged that he does not respect the SEC and that his tweets were not being censored by the Board according to the terms of the agreement reached with the SEC following his controversial “Am considering taking Tesla private at $420. Funding secured” tweet on August 8’th last.  

Separately, Musk has been talking up the capabilities of the company’s Autopilot technology, claiming that it will deliver “Full Self Driving” by the end of the year, that its in-house developed hardware is 2000% better than NVIDIA’s and that by the end of next year, it would be safe for somebody to fall asleep with Autopilot in control. We find these claims to be ludicrous and Elon Musk delusional in thinking that the SEC would stand idly by while he publicly admits to ignoring the terms of his settlement with them barely four months ago. 

3. Indonesia Property – In Search of the End of the Rainbow – Part 2 –  Bumi Serpong Damai (BSDE IJ)

In this series under Smartkarma Originals, CrossASEAN Research insight providers Angus Mackintosh and Jessica Irene seek to determine whether or not we are close to the end of the rainbow and to a period of outperformance for the property sector. Our end conclusions will be based on a series of company visits to the major listed property companies in Indonesia, conversations with local banks, property agents, and other relevant channel checks. 

The second company we explore is leading township developer Bumi Serpong Damai (BSDE IJ), with exposure ranging from landed housing, shophouses, condominiums, as well as the defensive and growing buffer of nearly 20% of revenues coming from recurrent rental income.

Bumi Serpong Damai (BSDE IJ) has one of the largest land banks of any developer, with a land bank of over 4,000 ha, more than half of which is in its flagship township of BSD City in Serpong.

Given its breadth of exposure to the property segment, the company has the flexibility to switch its exposure between different segments depending on the health of the overall market. 

Its projects are well connected by toll-roads and railway but it is well positioned to benefit from new infrastructure such as the new MRT, LRT, as well as new toll road extensions, which will enhance the attractiveness of its developments.  

Management suggests that they will take a cautious start to the year ahead of the election but see a window for a pick-up in marketing sales in May, with the potential for a much better 2H19. 

Despite a run-up in the share price since the start of the year, valuations do not look challenging from a historical basis especially looking at its PBV. It also trades at a significant discount to NAV of 67%, as well as being below its 5 yr historical mean on a forward PER basis.

Catalysts ahead include a post-election pick-up in activity leading to more project launches, completion of infrastructure projects, aggressive mortgage lending by the banks, and a more dovish interest rate outlook. Valuations are already attractive but a rise in property market activity should also lead to earnings upgrades, which if sustained, may lead to property prices moving upwards.

4. Baidu (BIDU): Stagnant in 4Q18, Wrong Change Feeds a 24% User Increase to Google

• Baidu posted a weak result for 4Q2018.
• We believe it is a wrong decision to change Baidu into an in-house search engine.
• Alphabet Inc Cl C (GOOG US) ’s monthly active users in mainland China increased 24% QoQ in January 2019.
• We believe Baidu’s stock price has been fairly impacted.

5. Ho Bee Land – 4Q Earnings Hit by Unexpected Tax Provision

Ho Bee Land Ltd (HOBEE SP) (“HBL”) reported it 4Q 2018 financial results this evening.

PATMI for 4Q18 dropped 20.5% YoY to S$81.4 mil. Excluding the impact of the tax provision for Hotel Windsor, underlying PATMI would have remained stable at approximately S$101.7 mil.

HBL’s real estate business had performed within expectations. There were also improvements in the financial position of HBL, such as the increase in cash balance, lower net gearing ratio, refinancing of bridging loan and extension of debt maturity.

Fair value of HBL is pegged at S$3.32 per share, translating to an upside of 32%. REIT listing remains a potential catalyst. I maintain my BUY rating on HBL.

In this briefing:

1. Tesla. SEC Contempt Filing & Ludicrous Autopilot Claims Engulf Delusional Musk
2. Indonesia Property – In Search of the End of the Rainbow – Part 2 –  Bumi Serpong Damai (BSDE IJ)
3. Baidu (BIDU): Stagnant in 4Q18, Wrong Change Feeds a 24% User Increase to Google
4. Ho Bee Land – 4Q Earnings Hit by Unexpected Tax Provision
5. Notes from the Silk Road: Nine Dragons Paper Holdings (2689.HK) – Potential Volatility Risk

1. Tesla. SEC Contempt Filing & Ludicrous Autopilot Claims Engulf Delusional Musk

The US Securities and Exchange Commission (SEC) requested a federal judge to hold Tesla CEO Elon Musk in contempt of court yesterday regarding recent misleading tweets about the company’s unit production volumes for 2019. This latest move comes not long after Musk bragged that he does not respect the SEC and that his tweets were not being censored by the Board according to the terms of the agreement reached with the SEC following his controversial “Am considering taking Tesla private at $420. Funding secured” tweet on August 8’th last.  

Separately, Musk has been talking up the capabilities of the company’s Autopilot technology, claiming that it will deliver “Full Self Driving” by the end of the year, that its in-house developed hardware is 2000% better than NVIDIA’s and that by the end of next year, it would be safe for somebody to fall asleep with Autopilot in control. We find these claims to be ludicrous and Elon Musk delusional in thinking that the SEC would stand idly by while he publicly admits to ignoring the terms of his settlement with them barely four months ago. 

2. Indonesia Property – In Search of the End of the Rainbow – Part 2 –  Bumi Serpong Damai (BSDE IJ)

In this series under Smartkarma Originals, CrossASEAN Research insight providers Angus Mackintosh and Jessica Irene seek to determine whether or not we are close to the end of the rainbow and to a period of outperformance for the property sector. Our end conclusions will be based on a series of company visits to the major listed property companies in Indonesia, conversations with local banks, property agents, and other relevant channel checks. 

The second company we explore is leading township developer Bumi Serpong Damai (BSDE IJ), with exposure ranging from landed housing, shophouses, condominiums, as well as the defensive and growing buffer of nearly 20% of revenues coming from recurrent rental income.

Bumi Serpong Damai (BSDE IJ) has one of the largest land banks of any developer, with a land bank of over 4,000 ha, more than half of which is in its flagship township of BSD City in Serpong.

Given its breadth of exposure to the property segment, the company has the flexibility to switch its exposure between different segments depending on the health of the overall market. 

Its projects are well connected by toll-roads and railway but it is well positioned to benefit from new infrastructure such as the new MRT, LRT, as well as new toll road extensions, which will enhance the attractiveness of its developments.  

Management suggests that they will take a cautious start to the year ahead of the election but see a window for a pick-up in marketing sales in May, with the potential for a much better 2H19. 

Despite a run-up in the share price since the start of the year, valuations do not look challenging from a historical basis especially looking at its PBV. It also trades at a significant discount to NAV of 67%, as well as being below its 5 yr historical mean on a forward PER basis.

Catalysts ahead include a post-election pick-up in activity leading to more project launches, completion of infrastructure projects, aggressive mortgage lending by the banks, and a more dovish interest rate outlook. Valuations are already attractive but a rise in property market activity should also lead to earnings upgrades, which if sustained, may lead to property prices moving upwards.

3. Baidu (BIDU): Stagnant in 4Q18, Wrong Change Feeds a 24% User Increase to Google

• Baidu posted a weak result for 4Q2018.
• We believe it is a wrong decision to change Baidu into an in-house search engine.
• Alphabet Inc Cl C (GOOG US) ’s monthly active users in mainland China increased 24% QoQ in January 2019.
• We believe Baidu’s stock price has been fairly impacted.

4. Ho Bee Land – 4Q Earnings Hit by Unexpected Tax Provision

Ho Bee Land Ltd (HOBEE SP) (“HBL”) reported it 4Q 2018 financial results this evening.

PATMI for 4Q18 dropped 20.5% YoY to S$81.4 mil. Excluding the impact of the tax provision for Hotel Windsor, underlying PATMI would have remained stable at approximately S$101.7 mil.

HBL’s real estate business had performed within expectations. There were also improvements in the financial position of HBL, such as the increase in cash balance, lower net gearing ratio, refinancing of bridging loan and extension of debt maturity.

Fair value of HBL is pegged at S$3.32 per share, translating to an upside of 32%. REIT listing remains a potential catalyst. I maintain my BUY rating on HBL.

5. Notes from the Silk Road: Nine Dragons Paper Holdings (2689.HK) – Potential Volatility Risk

On the eve of the Chinese New Year holiday Nine Dragon Paper (NDP) released a profit warning regarding their H1 FY19 fiscal earnings. This warning came ahead of the 26th February 2019 Board Meeting.

Management guidance calls for a decrease for H1-2019 of approximately 45% YoY and revenue line of not less than RMB2.4bn. NDP cites an increase in raw materials and a decrease in the selling price of the products. 

Despite the negative news, the share price has rallied 15% since the announcement. We examine the implications.

In this briefing:

1. Indonesia Property – In Search of the End of the Rainbow – Part 2 –  Bumi Serpong Damai (BSDE IJ)
2. Baidu (BIDU): Stagnant in 4Q18, Wrong Change Feeds a 24% User Increase to Google
3. Ho Bee Land – 4Q Earnings Hit by Unexpected Tax Provision
4. Notes from the Silk Road: Nine Dragons Paper Holdings (2689.HK) – Potential Volatility Risk
5. Jcontentree (2nd Largest Korean Drama Production Firm): Three Key Catalysts

1. Indonesia Property – In Search of the End of the Rainbow – Part 2 –  Bumi Serpong Damai (BSDE IJ)

In this series under Smartkarma Originals, CrossASEAN Research insight providers Angus Mackintosh and Jessica Irene seek to determine whether or not we are close to the end of the rainbow and to a period of outperformance for the property sector. Our end conclusions will be based on a series of company visits to the major listed property companies in Indonesia, conversations with local banks, property agents, and other relevant channel checks. 

The second company we explore is leading township developer Bumi Serpong Damai (BSDE IJ), with exposure ranging from landed housing, shophouses, condominiums, as well as the defensive and growing buffer of nearly 20% of revenues coming from recurrent rental income.

Bumi Serpong Damai (BSDE IJ) has one of the largest land banks of any developer, with a land bank of over 4,000 ha, more than half of which is in its flagship township of BSD City in Serpong.

Given its breadth of exposure to the property segment, the company has the flexibility to switch its exposure between different segments depending on the health of the overall market. 

Its projects are well connected by toll-roads and railway but it is well positioned to benefit from new infrastructure such as the new MRT, LRT, as well as new toll road extensions, which will enhance the attractiveness of its developments.  

Management suggests that they will take a cautious start to the year ahead of the election but see a window for a pick-up in marketing sales in May, with the potential for a much better 2H19. 

Despite a run-up in the share price since the start of the year, valuations do not look challenging from a historical basis especially looking at its PBV. It also trades at a significant discount to NAV of 67%, as well as being below its 5 yr historical mean on a forward PER basis.

Catalysts ahead include a post-election pick-up in activity leading to more project launches, completion of infrastructure projects, aggressive mortgage lending by the banks, and a more dovish interest rate outlook. Valuations are already attractive but a rise in property market activity should also lead to earnings upgrades, which if sustained, may lead to property prices moving upwards.

2. Baidu (BIDU): Stagnant in 4Q18, Wrong Change Feeds a 24% User Increase to Google

• Baidu posted a weak result for 4Q2018.
• We believe it is a wrong decision to change Baidu into an in-house search engine.
• Alphabet Inc Cl C (GOOG US) ’s monthly active users in mainland China increased 24% QoQ in January 2019.
• We believe Baidu’s stock price has been fairly impacted.

3. Ho Bee Land – 4Q Earnings Hit by Unexpected Tax Provision

Ho Bee Land Ltd (HOBEE SP) (“HBL”) reported it 4Q 2018 financial results this evening.

PATMI for 4Q18 dropped 20.5% YoY to S$81.4 mil. Excluding the impact of the tax provision for Hotel Windsor, underlying PATMI would have remained stable at approximately S$101.7 mil.

HBL’s real estate business had performed within expectations. There were also improvements in the financial position of HBL, such as the increase in cash balance, lower net gearing ratio, refinancing of bridging loan and extension of debt maturity.

Fair value of HBL is pegged at S$3.32 per share, translating to an upside of 32%. REIT listing remains a potential catalyst. I maintain my BUY rating on HBL.

4. Notes from the Silk Road: Nine Dragons Paper Holdings (2689.HK) – Potential Volatility Risk

On the eve of the Chinese New Year holiday Nine Dragon Paper (NDP) released a profit warning regarding their H1 FY19 fiscal earnings. This warning came ahead of the 26th February 2019 Board Meeting.

Management guidance calls for a decrease for H1-2019 of approximately 45% YoY and revenue line of not less than RMB2.4bn. NDP cites an increase in raw materials and a decrease in the selling price of the products. 

Despite the negative news, the share price has rallied 15% since the announcement. We examine the implications.

5. Jcontentree (2nd Largest Korean Drama Production Firm): Three Key Catalysts

Jcontentree Corp (036420 KS) is the second largest drama production firm in Korea after Studio Dragon (253450 KS). The company has three key catalysts that could positively impact its share price in the next 6-12 months:

• Expansion of OTT Service by the Global Giants – One of the most favorable investment themes in the next several years is the tremendous growth of the global OTT services by global giants such as Netflix, Disney, and Amazon. These giants want to provide the very best contents that could be popular on a global basis and the Korean dramas have been becoming increasingly popular all over the world and Jcontentree should also be one of the key beneficiaries of this trend. 
• IPO of Megabox – The company also has a controlling stake in Megabox Joongang, which is the third largest movie theater chain in Korea. On February 19th, 2019, Jcontentree sent a RFP to eight securities firms for the IPO of Megabox. The company will soon finalize the securities firms for the IPO and plans to complete the IPO in 1H 2021. Various media have estimated the value of Megabox to be around 700 billion won or more. 
• Korean dramas may be re-aired in China in 2019 – The Korean dramas were blocked in China in the past two years but there are some cautious optimism that the Chinese regulators will allow some of the Korean dramas to air in 2019.

In this briefing:

1. Baidu (BIDU): Stagnant in 4Q18, Wrong Change Feeds a 24% User Increase to Google
2. Ho Bee Land – 4Q Earnings Hit by Unexpected Tax Provision
3. Notes from the Silk Road: Nine Dragons Paper Holdings (2689.HK) – Potential Volatility Risk
4. Jcontentree (2nd Largest Korean Drama Production Firm): Three Key Catalysts
5. IQiyi (IQ): In 4Q18, Baidu’s Growth Engine Lost Control Over Content Cost

1. Baidu (BIDU): Stagnant in 4Q18, Wrong Change Feeds a 24% User Increase to Google

• Baidu posted a weak result for 4Q2018.
• We believe it is a wrong decision to change Baidu into an in-house search engine.
• Alphabet Inc Cl C (GOOG US) ’s monthly active users in mainland China increased 24% QoQ in January 2019.
• We believe Baidu’s stock price has been fairly impacted.

2. Ho Bee Land – 4Q Earnings Hit by Unexpected Tax Provision

Ho Bee Land Ltd (HOBEE SP) (“HBL”) reported it 4Q 2018 financial results this evening.

PATMI for 4Q18 dropped 20.5% YoY to S$81.4 mil. Excluding the impact of the tax provision for Hotel Windsor, underlying PATMI would have remained stable at approximately S$101.7 mil.

HBL’s real estate business had performed within expectations. There were also improvements in the financial position of HBL, such as the increase in cash balance, lower net gearing ratio, refinancing of bridging loan and extension of debt maturity.

Fair value of HBL is pegged at S$3.32 per share, translating to an upside of 32%. REIT listing remains a potential catalyst. I maintain my BUY rating on HBL.

3. Notes from the Silk Road: Nine Dragons Paper Holdings (2689.HK) – Potential Volatility Risk

On the eve of the Chinese New Year holiday Nine Dragon Paper (NDP) released a profit warning regarding their H1 FY19 fiscal earnings. This warning came ahead of the 26th February 2019 Board Meeting.

Management guidance calls for a decrease for H1-2019 of approximately 45% YoY and revenue line of not less than RMB2.4bn. NDP cites an increase in raw materials and a decrease in the selling price of the products. 

Despite the negative news, the share price has rallied 15% since the announcement. We examine the implications.

4. Jcontentree (2nd Largest Korean Drama Production Firm): Three Key Catalysts

Jcontentree Corp (036420 KS) is the second largest drama production firm in Korea after Studio Dragon (253450 KS). The company has three key catalysts that could positively impact its share price in the next 6-12 months:

• Expansion of OTT Service by the Global Giants – One of the most favorable investment themes in the next several years is the tremendous growth of the global OTT services by global giants such as Netflix, Disney, and Amazon. These giants want to provide the very best contents that could be popular on a global basis and the Korean dramas have been becoming increasingly popular all over the world and Jcontentree should also be one of the key beneficiaries of this trend. 
• IPO of Megabox – The company also has a controlling stake in Megabox Joongang, which is the third largest movie theater chain in Korea. On February 19th, 2019, Jcontentree sent a RFP to eight securities firms for the IPO of Megabox. The company will soon finalize the securities firms for the IPO and plans to complete the IPO in 1H 2021. Various media have estimated the value of Megabox to be around 700 billion won or more. 
• Korean dramas may be re-aired in China in 2019 – The Korean dramas were blocked in China in the past two years but there are some cautious optimism that the Chinese regulators will allow some of the Korean dramas to air in 2019.

5. IQiyi (IQ): In 4Q18, Baidu’s Growth Engine Lost Control Over Content Cost

• We notice that the growth rate of cost of revenues exceeded the growth rate of membership revenues.
• We believe that the margins will continue to decline even if the advertising business recovers.
• IQ has the largest monthly active users in the video market, but it does not have an obvious advantage over Tencent Holdings (700 HK) .

In this briefing:

1. CSE Global: Gaining Momentum
2. Indonesia Property – In Search of the End of the Rainbow – Part 1 – Ciputra Development (CTRA IJ)
3. Maxis Revenues Stabilizing. Ambitious Long Term Goals in Enterprise and Connectivity
4. BBTN: Indonesia Has Special Mention Problems Too
5. Westpac Banking: Looking Fragile

1. CSE Global: Gaining Momentum

• Investors who have bought CSE Global on dips since my last note would have profited ~18%.
• The upbeat guidance by management and supply-demand environment should give some legs to the recent rebound.
• While risks of slower global growth may weigh on the stock, the stock is trading below its five-year average PE despite significantly improved cash flow from operations and a healthy order intake (three-year high). 

2. Indonesia Property – In Search of the End of the Rainbow – Part 1 – Ciputra Development (CTRA IJ)

In this series under Smartkarma Originals, CrossASEAN insight providers AngusMackintosh and Jessica Irene seek to determine whether or not we are close to the end of the rainbow and to a period of outperformance for the property sector. Our end conclusions will be based on a series of company visits to the major listed property companies in Indonesia, conversations with local banks, property agents, and other relevant channel checks. 

The first company that we explore is Ciputra Development (CTRA IJ), a township developer with 38 years of track record. With 75 ongoing township projects in 33 cities, CTRA has the widest coverage of any developer in Indonesia. However, tightening policies by the Bank Indonesia (BI), in particular the presales mortgage disbursement regulation caused a significant drop in operating cashflow and increased gearing level.

Earnings have been on a downtrend, as slower revenue recognition coupled with higher interest costs have weighed on the bottom line. As BI has recently started to relax property regulations, we may begin to see some positive impact on cash flows over the next few quarters, although earnings are likely to remain weak from declining presales over the past three years.

As we enter the election year, presales announcements may not be positive in the short term, but activities may improve after the electoral contest, helped by a pick up in sentiment and boosted by a better interest rate environment and positive regulatory tailwinds. Potential portfolio inflow to high beta stocks and rising risk appetite for smaller cap underperforming stocks should also drive CTRA’s share price outperformance in 2019. We see a 50% upside to our target price of IDR1,352 per share.

Summary of this insight:

• The property development product portfolio includes landed housing, high-rise condominiums, and offices. Landed housing projects are still CTRA’s bread and butter, comprising more than half of the company’s revenue and more than two-thirds of presales. As the property demand is currently dominated by the end-users, CTRA’s product offering is shifting towards smaller more affordable units. We have put together an example mortgage calculation and determine a key affordability level based on the average income per capita in the Greater Jakarta to illustrate how much should a housing unit be worth for the end users market.
• The investment properties portfolio consists of 4 malls, 9 hotels, and 4 hospitals across the major cities in Indonesia, making up 13%, 8%, and 6% of 9M18 total consolidated revenues respectively. This is a 68% increase in revenue contribution versus five years ago. The company has been actively building its investment property portfolio to weather out the volatility in the non-recurring or development revenue.
• Accessibility is a key factor to land appreciation and hence, company’s total NAV. With the traffic worsening around the Greater Jakarta area, time to commute is an increasingly important factor in determining where to stay and access to public transportation such as MRT and LRT will be a powerful driver going forward. CTRA has a very diverse property development portfolio, hence the benefit of the infrastructure rollout is more widespread across the different projects.
• 65% of CTRA’s presales are generated from units priced IDR2bn and below, which indicate that the majority of CTRA’s buyers are in the middle to middle-low segments. These buyers are price sensitive and are highly dependent on financing. CTRA’s mortgage and in-house installment proportion is one of the highest in our property universe, making the company more susceptible to the changes in the property mortgage regulation by the Central Bank (BI).

• The property mortgage regulation in Indonesia has had few rounds of changes in the past decade, with a series of tightening measures taking place between 2013-2014, and the start of loosening measures in 2016-2018. We will discuss in depth the various property regulations issued and its impact on CTRA’s cashflow. We also constructed a cashflow simulation time series for a sample housing sale to determine the time needed for the project to turn net cashflow positive and when can the developer reinvest for future landbank of equivalent value.
• Pros: as we expect a better rate of cash inflow from future mortgages, our model shows that the advances-to-inventory ratio, which is an indicative figure for the property developers’ working capital, will begin to rise in 2019, leading to an inflection point for CTRA’s FCF. One-off adjustment in the earlier booking of 2019’s first mortgage disbursement is the key driver. 

• Cons: CTRA booked three consecutive years of negative presales growth with a decline rate of -11% Cagr. This indicates that the accounting revenue growth will more likely be weaker over the next 12-18 months. We also estimate that margin should continue to trend down until 2020. As we continue to see a larger proportion of units priced below IDR1bn in the past 2 years, it is unlikely to see a pick up in margin in 2019-2020.

• Cons: Election year to election year, we may see some similarity between the 2014 and 2019’s quarterly presales split. 1Q14 and 2Q14 contributed 41% to total FY14 presales, while 4Q14 contributed a chunky 33%. If we assume the same quarterly split for 2019 presales target, we may potentially see 13%-27% YoY declines in the next three quarters of presales reporting. Note however that the BI issued its first round of tightening regulations at the end of 2013 and this may have an impact to the 1H14 presales. Also there is a difference in the election schedules as the 2014 election was dragged on until late August, while the 2019 contest will be done by end of April.
• Recommendation & catalyst: CTRA share price has underperformed the JCI by 24% in the past 12 months. Though the share price has a nice 28% rebound from its 5-year low point, CTRA’s discount to net asset value (NAV) and price-to-book (PB) ratio is still at more than -1 standard deviation below its historical mean. Its price-to-earnings (PE) ratio however is only slightly below the historical mean. Improving risk appetite for high beta stocks, better interest rate environment, accomodative policies from the government, and potential pick up of activity after the election are a few of the key catalysts for the stock and sector. This underlines our BUY recommendation on CTRA with 50% upside. Our bull case scenario of rerating to +1 standard deviation above mean valuation offers 26% additional upside to our TP. 

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

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

4. BBTN: Indonesia Has Special Mention Problems Too

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

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

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

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

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

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

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

5. Westpac Banking: Looking Fragile

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

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

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

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

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

In this briefing:

1. Ho Bee Land – 4Q Earnings Hit by Unexpected Tax Provision
2. Notes from the Silk Road: Nine Dragons Paper Holdings (2689.HK) – Potential Volatility Risk
3. Jcontentree (2nd Largest Korean Drama Production Firm): Three Key Catalysts
4. IQiyi (IQ): In 4Q18, Baidu’s Growth Engine Lost Control Over Content Cost
5. HK Connect Discovery Weekly: Geely, Great Wall Motor and Sands China (2019-02-22)

1. Ho Bee Land – 4Q Earnings Hit by Unexpected Tax Provision

Ho Bee Land Ltd (HOBEE SP) (“HBL”) reported it 4Q 2018 financial results this evening.

PATMI for 4Q18 dropped 20.5% YoY to S$81.4 mil. Excluding the impact of the tax provision for Hotel Windsor, underlying PATMI would have remained stable at approximately S$101.7 mil.

HBL’s real estate business had performed within expectations. There were also improvements in the financial position of HBL, such as the increase in cash balance, lower net gearing ratio, refinancing of bridging loan and extension of debt maturity.

Fair value of HBL is pegged at S$3.32 per share, translating to an upside of 32%. REIT listing remains a potential catalyst. I maintain my BUY rating on HBL.

2. Notes from the Silk Road: Nine Dragons Paper Holdings (2689.HK) – Potential Volatility Risk

On the eve of the Chinese New Year holiday Nine Dragon Paper (NDP) released a profit warning regarding their H1 FY19 fiscal earnings. This warning came ahead of the 26th February 2019 Board Meeting.

Management guidance calls for a decrease for H1-2019 of approximately 45% YoY and revenue line of not less than RMB2.4bn. NDP cites an increase in raw materials and a decrease in the selling price of the products. 

Despite the negative news, the share price has rallied 15% since the announcement. We examine the implications.

3. Jcontentree (2nd Largest Korean Drama Production Firm): Three Key Catalysts

Jcontentree Corp (036420 KS) is the second largest drama production firm in Korea after Studio Dragon (253450 KS). The company has three key catalysts that could positively impact its share price in the next 6-12 months:

• Expansion of OTT Service by the Global Giants – One of the most favorable investment themes in the next several years is the tremendous growth of the global OTT services by global giants such as Netflix, Disney, and Amazon. These giants want to provide the very best contents that could be popular on a global basis and the Korean dramas have been becoming increasingly popular all over the world and Jcontentree should also be one of the key beneficiaries of this trend. 
• IPO of Megabox – The company also has a controlling stake in Megabox Joongang, which is the third largest movie theater chain in Korea. On February 19th, 2019, Jcontentree sent a RFP to eight securities firms for the IPO of Megabox. The company will soon finalize the securities firms for the IPO and plans to complete the IPO in 1H 2021. Various media have estimated the value of Megabox to be around 700 billion won or more. 
• Korean dramas may be re-aired in China in 2019 – The Korean dramas were blocked in China in the past two years but there are some cautious optimism that the Chinese regulators will allow some of the Korean dramas to air in 2019.

4. IQiyi (IQ): In 4Q18, Baidu’s Growth Engine Lost Control Over Content Cost

• We notice that the growth rate of cost of revenues exceeded the growth rate of membership revenues.
• We believe that the margins will continue to decline even if the advertising business recovers.
• IQ has the largest monthly active users in the video market, but it does not have an obvious advantage over Tencent Holdings (700 HK) .

5. HK Connect Discovery Weekly: Geely, Great Wall Motor and Sands China (2019-02-22)

In our Discover HK Connect series, we aim to help our investors understand the flow of southbound trades via the Hong Kong Connect, as analyzed by our proprietary data engine. We will discuss the stocks that experienced the most inflow and outflow by mainland investors in the past seven days.

We split the stocks eligible for the Hong Kong Connect trade into three groups: component stocks in the HSCEI index, stocks with a market capitalization between USD 1 billion and USD 5 billion, and stocks with a market capitalization between USD 500 million and USD 1 billion.

In this week’s HK Connect Discovery, we highlight the strong inflow to automobile stocks and Sands China. 

In this briefing:

1. Notes from the Silk Road: Nine Dragons Paper Holdings (2689.HK) – Potential Volatility Risk
2. Jcontentree (2nd Largest Korean Drama Production Firm): Three Key Catalysts
3. IQiyi (IQ): In 4Q18, Baidu’s Growth Engine Lost Control Over Content Cost
4. HK Connect Discovery Weekly: Geely, Great Wall Motor and Sands China (2019-02-22)
5. CSE Global: Gaining Momentum

1. Notes from the Silk Road: Nine Dragons Paper Holdings (2689.HK) – Potential Volatility Risk

On the eve of the Chinese New Year holiday Nine Dragon Paper (NDP) released a profit warning regarding their H1 FY19 fiscal earnings. This warning came ahead of the 26th February 2019 Board Meeting.

Management guidance calls for a decrease for H1-2019 of approximately 45% YoY and revenue line of not less than RMB2.4bn. NDP cites an increase in raw materials and a decrease in the selling price of the products. 

Despite the negative news, the share price has rallied 15% since the announcement. We examine the implications.

2. Jcontentree (2nd Largest Korean Drama Production Firm): Three Key Catalysts

Jcontentree Corp (036420 KS) is the second largest drama production firm in Korea after Studio Dragon (253450 KS). The company has three key catalysts that could positively impact its share price in the next 6-12 months:

• Expansion of OTT Service by the Global Giants – One of the most favorable investment themes in the next several years is the tremendous growth of the global OTT services by global giants such as Netflix, Disney, and Amazon. These giants want to provide the very best contents that could be popular on a global basis and the Korean dramas have been becoming increasingly popular all over the world and Jcontentree should also be one of the key beneficiaries of this trend. 
• IPO of Megabox – The company also has a controlling stake in Megabox Joongang, which is the third largest movie theater chain in Korea. On February 19th, 2019, Jcontentree sent a RFP to eight securities firms for the IPO of Megabox. The company will soon finalize the securities firms for the IPO and plans to complete the IPO in 1H 2021. Various media have estimated the value of Megabox to be around 700 billion won or more. 
• Korean dramas may be re-aired in China in 2019 – The Korean dramas were blocked in China in the past two years but there are some cautious optimism that the Chinese regulators will allow some of the Korean dramas to air in 2019.

3. IQiyi (IQ): In 4Q18, Baidu’s Growth Engine Lost Control Over Content Cost

• We notice that the growth rate of cost of revenues exceeded the growth rate of membership revenues.
• We believe that the margins will continue to decline even if the advertising business recovers.
• IQ has the largest monthly active users in the video market, but it does not have an obvious advantage over Tencent Holdings (700 HK) .

4. HK Connect Discovery Weekly: Geely, Great Wall Motor and Sands China (2019-02-22)

In our Discover HK Connect series, we aim to help our investors understand the flow of southbound trades via the Hong Kong Connect, as analyzed by our proprietary data engine. We will discuss the stocks that experienced the most inflow and outflow by mainland investors in the past seven days.

We split the stocks eligible for the Hong Kong Connect trade into three groups: component stocks in the HSCEI index, stocks with a market capitalization between USD 1 billion and USD 5 billion, and stocks with a market capitalization between USD 500 million and USD 1 billion.

In this week’s HK Connect Discovery, we highlight the strong inflow to automobile stocks and Sands China. 

5. CSE Global: Gaining Momentum

• Investors who have bought CSE Global on dips since my last note would have profited ~18%.
• The upbeat guidance by management and supply-demand environment should give some legs to the recent rebound.
• While risks of slower global growth may weigh on the stock, the stock is trading below its five-year average PE despite significantly improved cash flow from operations and a healthy order intake (three-year high). 

In this briefing:

1. Jcontentree (2nd Largest Korean Drama Production Firm): Three Key Catalysts
2. IQiyi (IQ): In 4Q18, Baidu’s Growth Engine Lost Control Over Content Cost
3. HK Connect Discovery Weekly: Geely, Great Wall Motor and Sands China (2019-02-22)
4. CSE Global: Gaining Momentum
5. Indonesia Property – In Search of the End of the Rainbow – Part 1 – Ciputra Development (CTRA IJ)

1. Jcontentree (2nd Largest Korean Drama Production Firm): Three Key Catalysts

Jcontentree Corp (036420 KS) is the second largest drama production firm in Korea after Studio Dragon (253450 KS). The company has three key catalysts that could positively impact its share price in the next 6-12 months:

• Expansion of OTT Service by the Global Giants – One of the most favorable investment themes in the next several years is the tremendous growth of the global OTT services by global giants such as Netflix, Disney, and Amazon. These giants want to provide the very best contents that could be popular on a global basis and the Korean dramas have been becoming increasingly popular all over the world and Jcontentree should also be one of the key beneficiaries of this trend. 
• IPO of Megabox – The company also has a controlling stake in Megabox Joongang, which is the third largest movie theater chain in Korea. On February 19th, 2019, Jcontentree sent a RFP to eight securities firms for the IPO of Megabox. The company will soon finalize the securities firms for the IPO and plans to complete the IPO in 1H 2021. Various media have estimated the value of Megabox to be around 700 billion won or more. 
• Korean dramas may be re-aired in China in 2019 – The Korean dramas were blocked in China in the past two years but there are some cautious optimism that the Chinese regulators will allow some of the Korean dramas to air in 2019.

2. IQiyi (IQ): In 4Q18, Baidu’s Growth Engine Lost Control Over Content Cost

• We notice that the growth rate of cost of revenues exceeded the growth rate of membership revenues.
• We believe that the margins will continue to decline even if the advertising business recovers.
• IQ has the largest monthly active users in the video market, but it does not have an obvious advantage over Tencent Holdings (700 HK) .

3. HK Connect Discovery Weekly: Geely, Great Wall Motor and Sands China (2019-02-22)

In our Discover HK Connect series, we aim to help our investors understand the flow of southbound trades via the Hong Kong Connect, as analyzed by our proprietary data engine. We will discuss the stocks that experienced the most inflow and outflow by mainland investors in the past seven days.

We split the stocks eligible for the Hong Kong Connect trade into three groups: component stocks in the HSCEI index, stocks with a market capitalization between USD 1 billion and USD 5 billion, and stocks with a market capitalization between USD 500 million and USD 1 billion.

In this week’s HK Connect Discovery, we highlight the strong inflow to automobile stocks and Sands China. 

4. CSE Global: Gaining Momentum

• Investors who have bought CSE Global on dips since my last note would have profited ~18%.
• The upbeat guidance by management and supply-demand environment should give some legs to the recent rebound.
• While risks of slower global growth may weigh on the stock, the stock is trading below its five-year average PE despite significantly improved cash flow from operations and a healthy order intake (three-year high). 

5. Indonesia Property – In Search of the End of the Rainbow – Part 1 – Ciputra Development (CTRA IJ)

In this series under Smartkarma Originals, CrossASEAN insight providers AngusMackintosh and Jessica Irene seek to determine whether or not we are close to the end of the rainbow and to a period of outperformance for the property sector. Our end conclusions will be based on a series of company visits to the major listed property companies in Indonesia, conversations with local banks, property agents, and other relevant channel checks. 

The first company that we explore is Ciputra Development (CTRA IJ), a township developer with 38 years of track record. With 75 ongoing township projects in 33 cities, CTRA has the widest coverage of any developer in Indonesia. However, tightening policies by the Bank Indonesia (BI), in particular the presales mortgage disbursement regulation caused a significant drop in operating cashflow and increased gearing level.

Earnings have been on a downtrend, as slower revenue recognition coupled with higher interest costs have weighed on the bottom line. As BI has recently started to relax property regulations, we may begin to see some positive impact on cash flows over the next few quarters, although earnings are likely to remain weak from declining presales over the past three years.

As we enter the election year, presales announcements may not be positive in the short term, but activities may improve after the electoral contest, helped by a pick up in sentiment and boosted by a better interest rate environment and positive regulatory tailwinds. Potential portfolio inflow to high beta stocks and rising risk appetite for smaller cap underperforming stocks should also drive CTRA’s share price outperformance in 2019. We see a 50% upside to our target price of IDR1,352 per share.

Summary of this insight:

• The property development product portfolio includes landed housing, high-rise condominiums, and offices. Landed housing projects are still CTRA’s bread and butter, comprising more than half of the company’s revenue and more than two-thirds of presales. As the property demand is currently dominated by the end-users, CTRA’s product offering is shifting towards smaller more affordable units. We have put together an example mortgage calculation and determine a key affordability level based on the average income per capita in the Greater Jakarta to illustrate how much should a housing unit be worth for the end users market.
• The investment properties portfolio consists of 4 malls, 9 hotels, and 4 hospitals across the major cities in Indonesia, making up 13%, 8%, and 6% of 9M18 total consolidated revenues respectively. This is a 68% increase in revenue contribution versus five years ago. The company has been actively building its investment property portfolio to weather out the volatility in the non-recurring or development revenue.
• Accessibility is a key factor to land appreciation and hence, company’s total NAV. With the traffic worsening around the Greater Jakarta area, time to commute is an increasingly important factor in determining where to stay and access to public transportation such as MRT and LRT will be a powerful driver going forward. CTRA has a very diverse property development portfolio, hence the benefit of the infrastructure rollout is more widespread across the different projects.
• 65% of CTRA’s presales are generated from units priced IDR2bn and below, which indicate that the majority of CTRA’s buyers are in the middle to middle-low segments. These buyers are price sensitive and are highly dependent on financing. CTRA’s mortgage and in-house installment proportion is one of the highest in our property universe, making the company more susceptible to the changes in the property mortgage regulation by the Central Bank (BI).

• The property mortgage regulation in Indonesia has had few rounds of changes in the past decade, with a series of tightening measures taking place between 2013-2014, and the start of loosening measures in 2016-2018. We will discuss in depth the various property regulations issued and its impact on CTRA’s cashflow. We also constructed a cashflow simulation time series for a sample housing sale to determine the time needed for the project to turn net cashflow positive and when can the developer reinvest for future landbank of equivalent value.
• Pros: as we expect a better rate of cash inflow from future mortgages, our model shows that the advances-to-inventory ratio, which is an indicative figure for the property developers’ working capital, will begin to rise in 2019, leading to an inflection point for CTRA’s FCF. One-off adjustment in the earlier booking of 2019’s first mortgage disbursement is the key driver. 

• Cons: CTRA booked three consecutive years of negative presales growth with a decline rate of -11% Cagr. This indicates that the accounting revenue growth will more likely be weaker over the next 12-18 months. We also estimate that margin should continue to trend down until 2020. As we continue to see a larger proportion of units priced below IDR1bn in the past 2 years, it is unlikely to see a pick up in margin in 2019-2020.

• Cons: Election year to election year, we may see some similarity between the 2014 and 2019’s quarterly presales split. 1Q14 and 2Q14 contributed 41% to total FY14 presales, while 4Q14 contributed a chunky 33%. If we assume the same quarterly split for 2019 presales target, we may potentially see 13%-27% YoY declines in the next three quarters of presales reporting. Note however that the BI issued its first round of tightening regulations at the end of 2013 and this may have an impact to the 1H14 presales. Also there is a difference in the election schedules as the 2014 election was dragged on until late August, while the 2019 contest will be done by end of April.
• Recommendation & catalyst: CTRA share price has underperformed the JCI by 24% in the past 12 months. Though the share price has a nice 28% rebound from its 5-year low point, CTRA’s discount to net asset value (NAV) and price-to-book (PB) ratio is still at more than -1 standard deviation below its historical mean. Its price-to-earnings (PE) ratio however is only slightly below the historical mean. Improving risk appetite for high beta stocks, better interest rate environment, accomodative policies from the government, and potential pick up of activity after the election are a few of the key catalysts for the stock and sector. This underlines our BUY recommendation on CTRA with 50% upside. Our bull case scenario of rerating to +1 standard deviation above mean valuation offers 26% additional upside to our TP.