Equity Bottom-Up

In this briefing:

1. GMO Internet Reports Solid FY12/18 Despite Heavy Losses Incurred in Crypto Mining Business
2. Parco: 4 New Shopping Centres This Year, 28% Rise in Revenue in 5 Years to 2021
3. Hana Financial: Hand It to Hana
4. Fujimi (5384 JP): Silicon Slow, HDD & Industrial Down in 3Q
5. NTT Corp: The Rising Dividend Story Is Playing Out.

1. GMO Internet Reports Solid FY12/18 Despite Heavy Losses Incurred in Crypto Mining Business

GMO Internet, Inc. (9449 JP) announced its consolidated financial results for its full-year FY12/18 yesterday (12^th February). Despite heavy losses incurred in the cryptocurrency mining business in FY12/18, GMO managed to achieve a solid year with 20% YoY growth in top-line alongside a 23.5% YoY growth in operating profits. Excluding the crypto losses, the operating profit increased 35.7% YoY, with an OPM of 13.2% compared to 11.4% reported a year ago. For the full-year, the company has reported a net loss of JPY20.7bn as opposed to a net profit of JPY8bn in FY12/17, blaming the crypto losses for the decline. For FY12/18, the management has proposed a dividend of JPY29.5 per share (compared to JPY23 paid in FY12/17) in spite of reporting net losses for the fiscal year. Further, the company has also allocated JPY1.36bn (equivalent to 0.7% of outstanding shares at the current price) for share repurchases in FY2019.

GMO is currently trading at JPY1,741 per share which we believe is undervalued compared to its combined equity stake in 8 listed subsidiaries. The company share price has lost more than 40% since it peaked in June last year due to the negativity surrounding its cryptocurrency and mining segment. However, we believe further downside is limited as the company has closed down a majority of its mining related business which weighs very little on the consolidated performance of the company. Further, the company’s key businesses, Internet Infrastructure, Online Advertising & Media and Internet Finance generate solid recurring revenues, which should help the company achieve strong growth. Following its earnings announcement, the share price gained 5.6% from the previous days close.

2. Parco: 4 New Shopping Centres This Year, 28% Rise in Revenue in 5 Years to 2021

Parco (8251 JP) is enjoying a new lease of life under J Front Retailing (3086 JP) ownership, investing assiduously in updating existing buildings and showing a decisiveness to rebuild entirely where location merits it and even closing down stores that don’t work.

It will celebrate its 50th anniversary this year by opening four new buildings, including the flagship Parco Shibuya and is forecasting a 28% rise in revenue for 2016-2021.

3. Hana Financial: Hand It to Hana

Fundamental trends at Hana Financial (086790 KS) are benign and stand out within South Korea’s improving and deep value banking universe. Key metrics/signal at 12M18 positive fundamental momentum and value-quality trends embodied in a high PH Score™.

Hana is an important constituent of South Korea’s Banking Sector, holding approximately 13% of the system total loans, 15% of deposits and about 40% of the nation’s trade finance due to the bank’s entrenched foreign-currency clearing system. This valuable franchise is backed by strengthening capitalisation, improving asset quality after a difficult period for banks grappling with corporate exposures, and discrete gains on Efficiency and Profitability post sizeable merger and integration costs.

Corporate governance remains an issue to monitor after the nepotism scandal of recent years and was covered by Douglas Kim last year.

Having said that, Hana is a slightly higher risk than peers with a HY profile given its default rating.

4. Fujimi (5384 JP): Silicon Slow, HDD & Industrial Down in 3Q

Fujimi’s sales and operating profit increased by only 1.2% and 2.3% year-on-year, respectively, in the three months to December. Sales of hard disc and industrial polishing materials declined. Sales of silicon wafer lapping and polishing materials, and CMP slurry, continued to rise, but at slower rates than in 2Q.

Full-year FY Mar-19 guidance was left unchanged, implying year-on-year declines in both sales and profits in 4Q. We believe that guidance is conservative, but we also expect the slowdown to continue.

At ¥2,368 (Wednesday, February 13, closing price), the shares are selling at 13.3x our EPS estimate for FY Mar-19 and 12.7x our estimate for FY Mar-20. These and other projected valuations are not at the bottom of their historical ranges, but should be low enough to support the share price as long as a U.S.-China trade deal – and, therefore, the implementation of deferred investment plans – seems likely.

5. NTT Corp: The Rising Dividend Story Is Playing Out.

As we wrote about in Preference for NTT Retained on Its Commitment to a Substantial Long Term Profit Increase, we like the long term story at NTT (Nippon Telegraph & Telephone) (9432 JP) given its relatively low payout ration, long term opportunities for cost reductions as their workforce shrinks through retirements. While government action and the announced price cuts announced by NTT Docomo Inc (9437 JP) hurt sentiment to the sector in 2H18, Chris Hoare remains positive. The recent 3Q results were decent with the key positives being a rising dividend and strong cash flow growth which is in line with our long term positive thesis on the stock. We remain Buyers with a target price of ¥7,150.

In this briefing:

1. Chunghwa Telecom’s 2019 Guidance Looks Optimistic After Missing 2018 Guidance.

1. Chunghwa Telecom’s 2019 Guidance Looks Optimistic After Missing 2018 Guidance.

Chunghwa Telecom (2412 TT) recently announced very ambitious FY19 guidance targets. While the market may view management’s optimism poistively, we expect this to be very short-lived for two reasons (i) Chunghwa’s 2018 guidance proved to be hopelessly optimistic, eventually missing revenue and EBITDA by a wide margin, and (ii) Chunghwa starts 2019 with a -6% revenue growth. It will be tough to get to the guided 2.4-3.5% growth in 2019.  Management seem to be assuming the competitive environment will ease, but the comparables will be very tough in 1H19, and we will not see a repeat of the one-off cancellation fees received in May 2018. The dividend looks to be at risk, and if that is a key concern, we would prefer to own Far Eastone (4904 TT) or Taiwan Mobile (3045 TT) which should keep  dividends stable. We to reiterate our Reduce recommendation and slightly lower the target price to NT$86.

In this briefing:

1. Chunghwa Telecom’s 2019 Guidance Looks Optimistic After Missing 2018 Guidance.
2. Sony: Mispriced, Misunderstood, or Both?

1. Chunghwa Telecom’s 2019 Guidance Looks Optimistic After Missing 2018 Guidance.

Chunghwa Telecom (2412 TT) recently announced very ambitious FY19 guidance targets. While the market may view management’s optimism poistively, we expect this to be very short-lived for two reasons (i) Chunghwa’s 2018 guidance proved to be hopelessly optimistic, eventually missing revenue and EBITDA by a wide margin, and (ii) Chunghwa starts 2019 with a -6% revenue growth. It will be tough to get to the guided 2.4-3.5% growth in 2019.  Management seem to be assuming the competitive environment will ease, but the comparables will be very tough in 1H19, and we will not see a repeat of the one-off cancellation fees received in May 2018. The dividend looks to be at risk, and if that is a key concern, we would prefer to own Far Eastone (4904 TT) or Taiwan Mobile (3045 TT) which should keep  dividends stable. We to reiterate our Reduce recommendation and slightly lower the target price to NT$86.

2. Sony: Mispriced, Misunderstood, or Both?

• Forward earnings will focus heavily on the debut of PS5, the performance of the new Spider-Man movie and other core content revenue streams for the company this year.
• Some see Sony as coasting on historically successes of the past, others see recent Disney and ATT deals acquiring content competitors, as a prelude to a play on Sony this year.
• Investor pressure to sell or spin off non-content businesses growing due to continued poor performance in mobile and possible profitable departure from semiconductor sector.

In this briefing:

1. Parco: 4 New Shopping Centres This Year, 28% Rise in Revenue in 5 Years to 2021
2. Hana Financial: Hand It to Hana
3. Fujimi (5384 JP): Silicon Slow, HDD & Industrial Down in 3Q
4. NTT Corp: The Rising Dividend Story Is Playing Out.
5. Valuetronics (VALUE SP): Trade War Uncertainty Continues, Downside Supported by Large Cash Position

1. Parco: 4 New Shopping Centres This Year, 28% Rise in Revenue in 5 Years to 2021

Parco (8251 JP) is enjoying a new lease of life under J Front Retailing (3086 JP) ownership, investing assiduously in updating existing buildings and showing a decisiveness to rebuild entirely where location merits it and even closing down stores that don’t work.

It will celebrate its 50th anniversary this year by opening four new buildings, including the flagship Parco Shibuya and is forecasting a 28% rise in revenue for 2016-2021.

2. Hana Financial: Hand It to Hana

Fundamental trends at Hana Financial (086790 KS) are benign and stand out within South Korea’s improving and deep value banking universe. Key metrics/signal at 12M18 positive fundamental momentum and value-quality trends embodied in a high PH Score™.

Hana is an important constituent of South Korea’s Banking Sector, holding approximately 13% of the system total loans, 15% of deposits and about 40% of the nation’s trade finance due to the bank’s entrenched foreign-currency clearing system. This valuable franchise is backed by strengthening capitalisation, improving asset quality after a difficult period for banks grappling with corporate exposures, and discrete gains on Efficiency and Profitability post sizeable merger and integration costs.

Corporate governance remains an issue to monitor after the nepotism scandal of recent years and was covered by Douglas Kim last year.

Having said that, Hana is a slightly higher risk than peers with a HY profile given its default rating.

3. Fujimi (5384 JP): Silicon Slow, HDD & Industrial Down in 3Q

Fujimi’s sales and operating profit increased by only 1.2% and 2.3% year-on-year, respectively, in the three months to December. Sales of hard disc and industrial polishing materials declined. Sales of silicon wafer lapping and polishing materials, and CMP slurry, continued to rise, but at slower rates than in 2Q.

Full-year FY Mar-19 guidance was left unchanged, implying year-on-year declines in both sales and profits in 4Q. We believe that guidance is conservative, but we also expect the slowdown to continue.

At ¥2,368 (Wednesday, February 13, closing price), the shares are selling at 13.3x our EPS estimate for FY Mar-19 and 12.7x our estimate for FY Mar-20. These and other projected valuations are not at the bottom of their historical ranges, but should be low enough to support the share price as long as a U.S.-China trade deal – and, therefore, the implementation of deferred investment plans – seems likely.

4. NTT Corp: The Rising Dividend Story Is Playing Out.

As we wrote about in Preference for NTT Retained on Its Commitment to a Substantial Long Term Profit Increase, we like the long term story at NTT (Nippon Telegraph & Telephone) (9432 JP) given its relatively low payout ration, long term opportunities for cost reductions as their workforce shrinks through retirements. While government action and the announced price cuts announced by NTT Docomo Inc (9437 JP) hurt sentiment to the sector in 2H18, Chris Hoare remains positive. The recent 3Q results were decent with the key positives being a rising dividend and strong cash flow growth which is in line with our long term positive thesis on the stock. We remain Buyers with a target price of ¥7,150.

5. Valuetronics (VALUE SP): Trade War Uncertainty Continues, Downside Supported by Large Cash Position

Valuetronics reported its 3Q19 figures this week which showed a 7.5% decline in revenues but a small (+2.6%) increase in bottom line profits. Stronger margins in its ICE segment offset weakness in its CE segment.

Valuetronics Holdings (VALUE SP) remains a solid company run by a good management team with interesting clients in consumer electronics and automotive. The valuation of the company is cheap (5x ex-cash 2019 P/E) and the balance sheet is rock solid.

All these positives are currently being overshadowed by the US-China trade war as the company has 100% of its production in China and does 45.7% of its sales in North-America. While many companies try to downplay the impact of the trade-war Valuetronics cannot hide and the alternatives it is working on to offset the tariff impact will surely cause short-term disruption and increased costs.

YTD the share price is +12% as the market is hoping for a positive resolution to the US-China trade war. Management is cautious on macro political improvements as trade war friction is unlikely to dissipate soon. Given the weak outlook for its CE segment and no significant new customer wins in its ICE segment risk/reward does not seem very attractive despite good dividend yield and cheap valuation.

In this briefing:

1. Sony: Mispriced, Misunderstood, or Both?
2. Carnarvon Petroleum (CVN AU) Equity Raise: Opportunity to Get Exposure to Cheap Pre-FID Oil Assets
3. Tokyo Kiraboshi Financial Group (7173 JP): Red Dwarf

1. Sony: Mispriced, Misunderstood, or Both?

• Forward earnings will focus heavily on the debut of PS5, the performance of the new Spider-Man movie and other core content revenue streams for the company this year.
• Some see Sony as coasting on historically successes of the past, others see recent Disney and ATT deals acquiring content competitors, as a prelude to a play on Sony this year.
• Investor pressure to sell or spin off non-content businesses growing due to continued poor performance in mobile and possible profitable departure from semiconductor sector.

2. Carnarvon Petroleum (CVN AU) Equity Raise: Opportunity to Get Exposure to Cheap Pre-FID Oil Assets

Carnarvon Petroleum (CVN AU) has announced a A$50mm equity raise to fund the appraisal of its key Dorado discovery this year and a further exploration well in the area. We discuss why we see Carnarvon’s assets as attractive.

3. Tokyo Kiraboshi Financial Group (7173 JP): Red Dwarf

Tokyo Kiraboshi Financial Group (7173 JP) (TKFG) progresses from bad to worse, and its stock price is behaving accordingly.  Amidst volatile trading, the share price is gradually sinking back towards the 52-week intra-day low of ¥1,454 that was reached on Christmas Day 2018 before closing that day at ¥1,504.  3Q FY3/2019 (9 months to 31 December 2018) consolidated results represented a decline of over 56% YoY at the recurring profit level, with net profits down 34% YoY after tax adjustments.  On a quarterly basis, Q3 (October-December 2018) net operating profits collapsed 96% to just ¥66 million, while recurring profits fell 68% YoY to just ¥565 million with a small net loss of ¥9 million as a result of lower fee income and sharply higher credit costs.  Hardly a ‘glittering’ performance.

Trading on a forward-looking price/earnings multiple of 11.7x (using the bank’s current FY3/2019 guidance) and a price/book ratio of 0.19x, TKFG is expensive compared to peer regional banks.  Indeed, adjusting the group’s earnings per share (EPS) for the ¥55 billion (US$507 million) in two still-outstanding preference share issues raises the annualised PER to over 19x: roughly twice that of peer banks.  TKFG’s RoA and RoE ratios are woefully low at 0.09% and 1.71% respectively, loan growth has shrunk to just +0.5% YoY, deposits have fallen alarmingly (down 4.5% YoY), and the overhead ratio has shot up to 95% in Q3.  Yet, despite all these ‘red flags’, TKFG still managed to attract an aggregate foreign ownership of 17.4% as of 31 March 2018 (the most recent data publicly available): a strange choice.  Caveat emptor (may the buyer beware) !

In this briefing:

1. Hana Financial: Hand It to Hana
2. Fujimi (5384 JP): Silicon Slow, HDD & Industrial Down in 3Q
3. NTT Corp: The Rising Dividend Story Is Playing Out.
4. Valuetronics (VALUE SP): Trade War Uncertainty Continues, Downside Supported by Large Cash Position
5. Apple Shipments to China Fall as Local Phone Makers Eat Up Market Share

1. Hana Financial: Hand It to Hana

Fundamental trends at Hana Financial (086790 KS) are benign and stand out within South Korea’s improving and deep value banking universe. Key metrics/signal at 12M18 positive fundamental momentum and value-quality trends embodied in a high PH Score™.

Hana is an important constituent of South Korea’s Banking Sector, holding approximately 13% of the system total loans, 15% of deposits and about 40% of the nation’s trade finance due to the bank’s entrenched foreign-currency clearing system. This valuable franchise is backed by strengthening capitalisation, improving asset quality after a difficult period for banks grappling with corporate exposures, and discrete gains on Efficiency and Profitability post sizeable merger and integration costs.

Corporate governance remains an issue to monitor after the nepotism scandal of recent years and was covered by Douglas Kim last year.

Having said that, Hana is a slightly higher risk than peers with a HY profile given its default rating.

2. Fujimi (5384 JP): Silicon Slow, HDD & Industrial Down in 3Q

Fujimi’s sales and operating profit increased by only 1.2% and 2.3% year-on-year, respectively, in the three months to December. Sales of hard disc and industrial polishing materials declined. Sales of silicon wafer lapping and polishing materials, and CMP slurry, continued to rise, but at slower rates than in 2Q.

Full-year FY Mar-19 guidance was left unchanged, implying year-on-year declines in both sales and profits in 4Q. We believe that guidance is conservative, but we also expect the slowdown to continue.

At ¥2,368 (Wednesday, February 13, closing price), the shares are selling at 13.3x our EPS estimate for FY Mar-19 and 12.7x our estimate for FY Mar-20. These and other projected valuations are not at the bottom of their historical ranges, but should be low enough to support the share price as long as a U.S.-China trade deal – and, therefore, the implementation of deferred investment plans – seems likely.

3. NTT Corp: The Rising Dividend Story Is Playing Out.

As we wrote about in Preference for NTT Retained on Its Commitment to a Substantial Long Term Profit Increase, we like the long term story at NTT (Nippon Telegraph & Telephone) (9432 JP) given its relatively low payout ration, long term opportunities for cost reductions as their workforce shrinks through retirements. While government action and the announced price cuts announced by NTT Docomo Inc (9437 JP) hurt sentiment to the sector in 2H18, Chris Hoare remains positive. The recent 3Q results were decent with the key positives being a rising dividend and strong cash flow growth which is in line with our long term positive thesis on the stock. We remain Buyers with a target price of ¥7,150.

4. Valuetronics (VALUE SP): Trade War Uncertainty Continues, Downside Supported by Large Cash Position

Valuetronics reported its 3Q19 figures this week which showed a 7.5% decline in revenues but a small (+2.6%) increase in bottom line profits. Stronger margins in its ICE segment offset weakness in its CE segment.

Valuetronics Holdings (VALUE SP) remains a solid company run by a good management team with interesting clients in consumer electronics and automotive. The valuation of the company is cheap (5x ex-cash 2019 P/E) and the balance sheet is rock solid.

All these positives are currently being overshadowed by the US-China trade war as the company has 100% of its production in China and does 45.7% of its sales in North-America. While many companies try to downplay the impact of the trade-war Valuetronics cannot hide and the alternatives it is working on to offset the tariff impact will surely cause short-term disruption and increased costs.

YTD the share price is +12% as the market is hoping for a positive resolution to the US-China trade war. Management is cautious on macro political improvements as trade war friction is unlikely to dissipate soon. Given the weak outlook for its CE segment and no significant new customer wins in its ICE segment risk/reward does not seem very attractive despite good dividend yield and cheap valuation.

5. Apple Shipments to China Fall as Local Phone Makers Eat Up Market Share

• The Chinese smartphone market, which commands approximately 30.0% of the global smartphone market, experienced declining sales in 4Q2018. The Chinese smartphone market fell by 9.7% YoY in 4QFY2018 .
• Meanwhile, the global smartphone market fell by 4.9% YoY in the same quarter as a result of conditions in China, longer replacement cycles and a lack of technological innovations in the industry.
• Apple continued to suffer with iPhone shipments to China falling by 20.3% YoY during the last quarter.
• 5G compatible phones are likely to turn around industry performance, however, the introduction of such devices will most likely occur in the latter half of 2019. Apple, in question is rumoured to release their 5G compatible iPhone in 2020, later than close competitor Samsung.
• Slow market conditions are likely to prevail until the next generation of communication technology becomes commercialised. Until such a time, companies such as Apple, and parts suppliers to smartphone vendors may continue to struggle with slowing performance similar to that of present. However, over the long term, companies stand to benefit once 5G is released in spite of the short term outlook not being too favourable.

In this briefing:

1. Carnarvon Petroleum (CVN AU) Equity Raise: Opportunity to Get Exposure to Cheap Pre-FID Oil Assets
2. Tokyo Kiraboshi Financial Group (7173 JP): Red Dwarf
3. EPG: Revenue from Auto Parts and EPP Buoyed Earnings to Grow YoY
4. Robotics Earnings: Nabtesco and HDS Results Strong; Still No Reason to Own Fanuc

1. Carnarvon Petroleum (CVN AU) Equity Raise: Opportunity to Get Exposure to Cheap Pre-FID Oil Assets

Carnarvon Petroleum (CVN AU) has announced a A$50mm equity raise to fund the appraisal of its key Dorado discovery this year and a further exploration well in the area. We discuss why we see Carnarvon’s assets as attractive.

2. Tokyo Kiraboshi Financial Group (7173 JP): Red Dwarf

Tokyo Kiraboshi Financial Group (7173 JP) (TKFG) progresses from bad to worse, and its stock price is behaving accordingly.  Amidst volatile trading, the share price is gradually sinking back towards the 52-week intra-day low of ¥1,454 that was reached on Christmas Day 2018 before closing that day at ¥1,504.  3Q FY3/2019 (9 months to 31 December 2018) consolidated results represented a decline of over 56% YoY at the recurring profit level, with net profits down 34% YoY after tax adjustments.  On a quarterly basis, Q3 (October-December 2018) net operating profits collapsed 96% to just ¥66 million, while recurring profits fell 68% YoY to just ¥565 million with a small net loss of ¥9 million as a result of lower fee income and sharply higher credit costs.  Hardly a ‘glittering’ performance.

Trading on a forward-looking price/earnings multiple of 11.7x (using the bank’s current FY3/2019 guidance) and a price/book ratio of 0.19x, TKFG is expensive compared to peer regional banks.  Indeed, adjusting the group’s earnings per share (EPS) for the ¥55 billion (US$507 million) in two still-outstanding preference share issues raises the annualised PER to over 19x: roughly twice that of peer banks.  TKFG’s RoA and RoE ratios are woefully low at 0.09% and 1.71% respectively, loan growth has shrunk to just +0.5% YoY, deposits have fallen alarmingly (down 4.5% YoY), and the overhead ratio has shot up to 95% in Q3.  Yet, despite all these ‘red flags’, TKFG still managed to attract an aggregate foreign ownership of 17.4% as of 31 March 2018 (the most recent data publicly available): a strange choice.  Caveat emptor (may the buyer beware) !

3. EPG: Revenue from Auto Parts and EPP Buoyed Earnings to Grow YoY

EPG reports FY3Q19 net profit of Bt225m (+24%YoY,-14%QoQ). The FY9M19 result was in line with and accounts for 69% of our full-year forecast.

• A YoY increase in earnings was mainly caused by sales contribution from automotive segment (+28%YoY). While a QoQ fall in earnings was due to a seasonal drop in sales of thermal insulators segment and narrow gross profit margins due to rising raw material costs.
• We maintain our positive outlook toward its FY19-20E earnings driven by growth in every business units: 1) sales recovery from EPP segment (22% of total sales in FY9M19) from changing its product mix toward more on food packaging; 2) revenue contribution from Flexiglass after acquired it during FY1Q19, and, 3) consistent sales growth for Aeroflex (28% of total sales)

We maintain our BUY rating  with the target price of *Bt10.40 derived from its 2-years average trading range of 25xPE’19E.

*We make no changes to forecast, recommendation, and target price at the time of result announcement.

4. Robotics Earnings: Nabtesco and HDS Results Strong; Still No Reason to Own Fanuc

Following a long period of weakness, robotics related stocks are displaying stronger performance recently as 3Q results have come in weak, but generally done so with management reassurances that this is the bottom.

We had been negative on the sector for some time before turning more constructive in mid January following Yaskawa’s earnings. We concur with the general messaging that this is the bottom based on our analysis of order levels for the companies and regional trend breakdowns. We do not expect a particularly sharp rebound in orders and sales in the near future and believe there is still some risk of these stocks returning toward the lows over the course of the year. However, we believe that the next significant move should be upwards and longer term investors should be looking for entry timings.

In this briefing:

1. Fujimi (5384 JP): Silicon Slow, HDD & Industrial Down in 3Q
2. NTT Corp: The Rising Dividend Story Is Playing Out.
3. Valuetronics (VALUE SP): Trade War Uncertainty Continues, Downside Supported by Large Cash Position
4. Apple Shipments to China Fall as Local Phone Makers Eat Up Market Share
5. FRETAIL IN

1. Fujimi (5384 JP): Silicon Slow, HDD & Industrial Down in 3Q

Fujimi’s sales and operating profit increased by only 1.2% and 2.3% year-on-year, respectively, in the three months to December. Sales of hard disc and industrial polishing materials declined. Sales of silicon wafer lapping and polishing materials, and CMP slurry, continued to rise, but at slower rates than in 2Q.

Full-year FY Mar-19 guidance was left unchanged, implying year-on-year declines in both sales and profits in 4Q. We believe that guidance is conservative, but we also expect the slowdown to continue.

At ¥2,368 (Wednesday, February 13, closing price), the shares are selling at 13.3x our EPS estimate for FY Mar-19 and 12.7x our estimate for FY Mar-20. These and other projected valuations are not at the bottom of their historical ranges, but should be low enough to support the share price as long as a U.S.-China trade deal – and, therefore, the implementation of deferred investment plans – seems likely.

2. NTT Corp: The Rising Dividend Story Is Playing Out.

As we wrote about in Preference for NTT Retained on Its Commitment to a Substantial Long Term Profit Increase, we like the long term story at NTT (Nippon Telegraph & Telephone) (9432 JP) given its relatively low payout ration, long term opportunities for cost reductions as their workforce shrinks through retirements. While government action and the announced price cuts announced by NTT Docomo Inc (9437 JP) hurt sentiment to the sector in 2H18, Chris Hoare remains positive. The recent 3Q results were decent with the key positives being a rising dividend and strong cash flow growth which is in line with our long term positive thesis on the stock. We remain Buyers with a target price of ¥7,150.

3. Valuetronics (VALUE SP): Trade War Uncertainty Continues, Downside Supported by Large Cash Position

Valuetronics reported its 3Q19 figures this week which showed a 7.5% decline in revenues but a small (+2.6%) increase in bottom line profits. Stronger margins in its ICE segment offset weakness in its CE segment.

Valuetronics Holdings (VALUE SP) remains a solid company run by a good management team with interesting clients in consumer electronics and automotive. The valuation of the company is cheap (5x ex-cash 2019 P/E) and the balance sheet is rock solid.

All these positives are currently being overshadowed by the US-China trade war as the company has 100% of its production in China and does 45.7% of its sales in North-America. While many companies try to downplay the impact of the trade-war Valuetronics cannot hide and the alternatives it is working on to offset the tariff impact will surely cause short-term disruption and increased costs.

YTD the share price is +12% as the market is hoping for a positive resolution to the US-China trade war. Management is cautious on macro political improvements as trade war friction is unlikely to dissipate soon. Given the weak outlook for its CE segment and no significant new customer wins in its ICE segment risk/reward does not seem very attractive despite good dividend yield and cheap valuation.

4. Apple Shipments to China Fall as Local Phone Makers Eat Up Market Share

• The Chinese smartphone market, which commands approximately 30.0% of the global smartphone market, experienced declining sales in 4Q2018. The Chinese smartphone market fell by 9.7% YoY in 4QFY2018 .
• Meanwhile, the global smartphone market fell by 4.9% YoY in the same quarter as a result of conditions in China, longer replacement cycles and a lack of technological innovations in the industry.
• Apple continued to suffer with iPhone shipments to China falling by 20.3% YoY during the last quarter.
• 5G compatible phones are likely to turn around industry performance, however, the introduction of such devices will most likely occur in the latter half of 2019. Apple, in question is rumoured to release their 5G compatible iPhone in 2020, later than close competitor Samsung.
• Slow market conditions are likely to prevail until the next generation of communication technology becomes commercialised. Until such a time, companies such as Apple, and parts suppliers to smartphone vendors may continue to struggle with slowing performance similar to that of present. However, over the long term, companies stand to benefit once 5G is released in spite of the short term outlook not being too favourable.

5. FRETAIL IN

We visit the large format stores of Future Retail (FRETAIL IN) fbb, Big Bazaar and Big Bazaar Gen Next, along with visiting stores run by Future Lifestyle Fashions (FLFL IN) Brand Factory and Central in Ahmedabad, Gujarat to understand some of the drivers behind SSSG of over 10% over the last 15 consecutive quarters. Our regional checks indicate the large format growth might be maintained in the future driven by loyalty programs like Future Pay. Interestingly the group has resorted to using its stores to mobilise funds for its fixed deposits, which could be a final indication that the planned of deal with Amazon.com Inc (AMZN US) is finally being called off.

In this briefing:

1. Double-Digit Growth Continues; OP Growth of More than 4.9% Likely for FY03/19
2. NCsoft: Major Highlights of 4Q18 Earnings Conference Call
3. Puregold Price Club: Steady Grower with Provincial Expansion Story
4. Chunghwa Telecom’s 2019 Guidance Looks Optimistic After Missing 2018 Guidance.
5. Sony: Mispriced, Misunderstood, or Both?

1. Double-Digit Growth Continues; OP Growth of More than 4.9% Likely for FY03/19

• Tsubakimoto Chain Co’s (6371 JP) 3QFY03/19 results were strong, with revenue continuing to witness double-digit growth at +13.1% YoY, although fell slightly below consensus estimates. On OP, Tsubakimoto witnessed only +5.2% YoY growth for 3Q. This was, however, above consensus and our estimates.
• Nine-months cumulative figures look attractive as well, with both revenue and OP witnessing double-digit growth rates at 13.2% YoY and 16.0% YoY respectively as of The company’s revenue continues to trend upwards in a healthy fashion, while margins managed to reach 10.1% this quarter slightly below the 10.8% OPM achieved in 3Q last year.
• A majority of revenue growth came from the company’s Materials Handling Equipment segment, which has witnessed strong recovery thanks to the recently acquired Central Conveyor Company in this segment. The growth was followed by the company’s steadily growing business segments, Chain segment and Power Transmission segment. This was true for the company’s OP as well. The Materials Handling Equipment segment continued to make operating profits this quarter, followed by the Chain segment and the Power Transmission segment. The Auto Parts segment, however, continued to witness slow growth in revenue and pressure in its margins this quarter as well.
• Despite strong results, post-release, Tsubakimoto opened -9.9% down on Friday from Thursday’s close. The stock, however, rallied 8% by Tuesday’s close.

2. NCsoft: Major Highlights of 4Q18 Earnings Conference Call

• NCsoft Corp (036570 KS)‘s 4Q18 earnings fell short of the consensus earnings estimates. In 4Q18, NCsoft reported sales of 399.7 billion won (down 25.1% YoY and 1.1% lower than consensus), operating profit of 112.6 billion won (down 40.5% YoY and 13.3% lower than the consensus), and net profit of 67.6 billion won (down 44% YoY and 32.9% lower than the consensus). 
• Three different analysts raised questions about why the company changed the timing of the launch of the Lineage2M game. In the 3Q18 earnings conference call, the company previously mentioned that it will most likely launch the Lineage2M mobile MMORPG game in 2Q19. In the most recent 4Q18 earnings conference call, the company mentioned that it will launch Lineage2M by the end of 2019. 
• We expect little change to the consensus earnings estimates of NCsoft in 2019 and 2020. Although Tencent consortium acquiring Nexon could pose greater competitive threats to NCsoft in Korea, it could also lead to a consolidation of the gaming sector in Asia, which would be a positive for the company. NCsoft is currently trading at P/E multiples of 15x in 2019 and 12x in 2020, based on the consensus earnings estimates, which are attractive. We maintain our positive view of the company following its 4Q18 earnings. 

3. Puregold Price Club: Steady Grower with Provincial Expansion Story

• Conference call with the IR of Puregold Price Club (PGOLD PM) reveals that SSSG grew healthily at 6.5% YoY in 9M18, thanks to personal income tax cut.
• The bigger growth driver is provincial expansion (outside Metro Manila), which would allow PGOLD to achieve mid-teen sales growth.
• There has been little to no sales impact from e-commerce as e-commerce penetration in Philippines is lagging even in the ASEAN context. 
• PGOLD trades at 18.3x 2019E PE, a 15% discount to peers average of 21.6x

4. Chunghwa Telecom’s 2019 Guidance Looks Optimistic After Missing 2018 Guidance.

Chunghwa Telecom (2412 TT) recently announced very ambitious FY19 guidance targets. While the market may view management’s optimism poistively, we expect this to be very short-lived for two reasons (i) Chunghwa’s 2018 guidance proved to be hopelessly optimistic, eventually missing revenue and EBITDA by a wide margin, and (ii) Chunghwa starts 2019 with a -6% revenue growth. It will be tough to get to the guided 2.4-3.5% growth in 2019.  Management seem to be assuming the competitive environment will ease, but the comparables will be very tough in 1H19, and we will not see a repeat of the one-off cancellation fees received in May 2018. The dividend looks to be at risk, and if that is a key concern, we would prefer to own Far Eastone (4904 TT) or Taiwan Mobile (3045 TT) which should keep  dividends stable. We to reiterate our Reduce recommendation and slightly lower the target price to NT$86.

5. Sony: Mispriced, Misunderstood, or Both?

• Forward earnings will focus heavily on the debut of PS5, the performance of the new Spider-Man movie and other core content revenue streams for the company this year.
• Some see Sony as coasting on historically successes of the past, others see recent Disney and ATT deals acquiring content competitors, as a prelude to a play on Sony this year.
• Investor pressure to sell or spin off non-content businesses growing due to continued poor performance in mobile and possible profitable departure from semiconductor sector.

In this briefing:

1. NTT Corp: The Rising Dividend Story Is Playing Out.
2. Valuetronics (VALUE SP): Trade War Uncertainty Continues, Downside Supported by Large Cash Position
3. Apple Shipments to China Fall as Local Phone Makers Eat Up Market Share
4. FRETAIL IN
5. Double-Digit Growth Continues; OP Growth of More than 4.9% Likely for FY03/19

1. NTT Corp: The Rising Dividend Story Is Playing Out.

As we wrote about in Preference for NTT Retained on Its Commitment to a Substantial Long Term Profit Increase, we like the long term story at NTT (Nippon Telegraph & Telephone) (9432 JP) given its relatively low payout ration, long term opportunities for cost reductions as their workforce shrinks through retirements. While government action and the announced price cuts announced by NTT Docomo Inc (9437 JP) hurt sentiment to the sector in 2H18, Chris Hoare remains positive. The recent 3Q results were decent with the key positives being a rising dividend and strong cash flow growth which is in line with our long term positive thesis on the stock. We remain Buyers with a target price of ¥7,150.

2. Valuetronics (VALUE SP): Trade War Uncertainty Continues, Downside Supported by Large Cash Position

Valuetronics reported its 3Q19 figures this week which showed a 7.5% decline in revenues but a small (+2.6%) increase in bottom line profits. Stronger margins in its ICE segment offset weakness in its CE segment.

Valuetronics Holdings (VALUE SP) remains a solid company run by a good management team with interesting clients in consumer electronics and automotive. The valuation of the company is cheap (5x ex-cash 2019 P/E) and the balance sheet is rock solid.

All these positives are currently being overshadowed by the US-China trade war as the company has 100% of its production in China and does 45.7% of its sales in North-America. While many companies try to downplay the impact of the trade-war Valuetronics cannot hide and the alternatives it is working on to offset the tariff impact will surely cause short-term disruption and increased costs.

YTD the share price is +12% as the market is hoping for a positive resolution to the US-China trade war. Management is cautious on macro political improvements as trade war friction is unlikely to dissipate soon. Given the weak outlook for its CE segment and no significant new customer wins in its ICE segment risk/reward does not seem very attractive despite good dividend yield and cheap valuation.

3. Apple Shipments to China Fall as Local Phone Makers Eat Up Market Share

• The Chinese smartphone market, which commands approximately 30.0% of the global smartphone market, experienced declining sales in 4Q2018. The Chinese smartphone market fell by 9.7% YoY in 4QFY2018 .
• Meanwhile, the global smartphone market fell by 4.9% YoY in the same quarter as a result of conditions in China, longer replacement cycles and a lack of technological innovations in the industry.
• Apple continued to suffer with iPhone shipments to China falling by 20.3% YoY during the last quarter.
• 5G compatible phones are likely to turn around industry performance, however, the introduction of such devices will most likely occur in the latter half of 2019. Apple, in question is rumoured to release their 5G compatible iPhone in 2020, later than close competitor Samsung.
• Slow market conditions are likely to prevail until the next generation of communication technology becomes commercialised. Until such a time, companies such as Apple, and parts suppliers to smartphone vendors may continue to struggle with slowing performance similar to that of present. However, over the long term, companies stand to benefit once 5G is released in spite of the short term outlook not being too favourable.

4. FRETAIL IN

We visit the large format stores of Future Retail (FRETAIL IN) fbb, Big Bazaar and Big Bazaar Gen Next, along with visiting stores run by Future Lifestyle Fashions (FLFL IN) Brand Factory and Central in Ahmedabad, Gujarat to understand some of the drivers behind SSSG of over 10% over the last 15 consecutive quarters. Our regional checks indicate the large format growth might be maintained in the future driven by loyalty programs like Future Pay. Interestingly the group has resorted to using its stores to mobilise funds for its fixed deposits, which could be a final indication that the planned of deal with Amazon.com Inc (AMZN US) is finally being called off.

5. Double-Digit Growth Continues; OP Growth of More than 4.9% Likely for FY03/19

• Tsubakimoto Chain Co’s (6371 JP) 3QFY03/19 results were strong, with revenue continuing to witness double-digit growth at +13.1% YoY, although fell slightly below consensus estimates. On OP, Tsubakimoto witnessed only +5.2% YoY growth for 3Q. This was, however, above consensus and our estimates.
• Nine-months cumulative figures look attractive as well, with both revenue and OP witnessing double-digit growth rates at 13.2% YoY and 16.0% YoY respectively as of The company’s revenue continues to trend upwards in a healthy fashion, while margins managed to reach 10.1% this quarter slightly below the 10.8% OPM achieved in 3Q last year.
• A majority of revenue growth came from the company’s Materials Handling Equipment segment, which has witnessed strong recovery thanks to the recently acquired Central Conveyor Company in this segment. The growth was followed by the company’s steadily growing business segments, Chain segment and Power Transmission segment. This was true for the company’s OP as well. The Materials Handling Equipment segment continued to make operating profits this quarter, followed by the Chain segment and the Power Transmission segment. The Auto Parts segment, however, continued to witness slow growth in revenue and pressure in its margins this quarter as well.
• Despite strong results, post-release, Tsubakimoto opened -9.9% down on Friday from Thursday’s close. The stock, however, rallied 8% by Tuesday’s close.