Equity Bottom-Up

In this briefing:

1. Robotics Earnings: Nabtesco and HDS Results Strong; Still No Reason to Own Fanuc
2. A War Between Netflix & Disney = $$$ for Studio Dragon
3. Muthoot Finance – Top ROA Lender, with 116 Tons of Gold!
4. Catch-Up Session with Intuch Group
5. Monex Group (8698 JP): Upside Is Unlikely Due to Weak Cryptocurrency Markets

1. 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.

2. A War Between Netflix & Disney = $$$ for Studio Dragon

• In this report, we provide an update on Studio Dragon (253450 KS), which has been one of the best IPOs in Korea in the past two years. We believe that the stock is well poised to resume its higher share price in the upcoming months driven by a strong line up of new original dramas & movies in 2019. Studio Dragon (253450 KS) is a key beneficiary of the ultra-aggressive push by major global powerhouses such as Netflix and Disney to expand their OTT streaming services and provide “original” Korean drama contents that have the potential to become globally popular. 
• One of the strong competitive weapons of Studio Dragon is that its main script writers including Park Ji-Eun, Kim Eun-Sook, and Kim Young-Hyun are considered some of the best ones in Korea. The top screenwriters at Studio Dragon are women. It is fair to say that an overwhelming percentage of the Korean TV dramas have women as their key target audience. As such, most of the Korean TV dramas tend not to include too much violence. Most of them have intricate relationship based story lines geared towards the female audience.
• Valuation of the company has become more attractive since the highs in the summer of 2018. Studio Dragon (253450 KS) is currently trading at P/E multiples of 35x in 2019E and 26x in 2020E. If we apply the same 35x P/E to next year’s consensus net profit estimate of 99.6 billion won, this would imply a market cap of 3.5 trillion won, which would be 35% higher than current market cap of 2.6 trillion won. Thus, we remain positive on this stock. 

3. Muthoot Finance – Top ROA Lender, with 116 Tons of Gold!

India’s non-banking finance company (NBFC), Muthoot Finance (MUTH IN; “MTF”), lends against gold, arguably the best collateral of all. Its gold jewelry kept as security is up from 147 tons to 166 tons, from December 2016 to December 2018. This may be one reason that the company’s bad loans are low, not only in an India context, but in Asia. Its stage three loans surged after demonetization peaking in December 2017 at INR21.5bn. Since then, figures have fallen sharply, to INR6.4bn as at December 2018. As a percentage of loans, stage three loans declined from 7.6% to 2.0% over this period. With credit costs and write-offs down 96% during 9M19 YoY, credit metrics appear healthy.

4. Catch-Up Session with Intuch Group

We caught up with Intuch Group this week to check how things were going on with them and their subsidiaries, AIS and Thaicom. It’s good to touch base, since it’s been a while, and many things have changed in the interim:

• Intuch self-congratulated themselves for a narrowing of their discount to NAV from 28% to 20% in 2018 while introducing three new investments and announced the breakeven of their shopping network, a joint venture with Hyundai.
• Wongnai, an online foodie guide and one of Intuch’s largest investments, underperformed our revenue forecast significantly, but managed to post impressive revenue growth nevertheless. While profitable, their rapid expansion also means they are unlikely to meet their own internal profitability expectations.
• Thaicom posted a loss in Q4 and almost non-existent earnings in 2018 largely due to asset impairments, but there is some hope in the future with the government’s various PPP (public-private partnership) schemes mentioned in the meeting.
• AIS, the Group’s flagship company, posted flat earnings of Bt30bn and is in the process of reversing a decline in revenue market share through aggressive push in enterprise and consumer services.

5. Monex Group (8698 JP): Upside Is Unlikely Due to Weak Cryptocurrency Markets

In our previous note, Monex Group (8698 JP): Weak Fundamentals Deter the Possibility of a Further Upside, we suggested that despite the partial resumption of Coincheck’s services, further upside for Monex Group Inc (8698 JP) is unlikely due to weak cryptocurrency markets.

Since then, Monex’s share price (which was around JPY500 in mid-November 2018) has fallen to JPY367 as of 8th February 2019. This is only marginally above the pre-acquisition (of Coincheck) price of JPY344 (on 2nd April 2018). In the meantime, Bitcoin (XBTUSD CURNCY)  has also fallen from around USD6,000 in mid-November to around USD3,500 at present.

In this briefing:

1. Chunghwa Telecom’s 2019 Guidance Looks Optimistic After Missing 2018 Guidance.
2. Sony: Mispriced, Misunderstood, or Both?
3. Carnarvon Petroleum (CVN AU) Equity Raise: Opportunity to Get Exposure to Cheap Pre-FID Oil Assets
4. Tokyo Kiraboshi Financial Group (7173 JP): Red Dwarf
5. EPG: Revenue from Auto Parts and EPP Buoyed Earnings to Grow YoY

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.

3. 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.

4. 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) !

5. 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.

In this briefing:

1. NYT: Property Tax Expense Pressured 4Q18 Earnings to Its Trough in 2018

1. NYT: Property Tax Expense Pressured 4Q18 Earnings to Its Trough in 2018

NYT reported 4Q18 net profit of Bt90m (-11%YoY, -24%QoQ), the lowest level in the past eight quarters. The 2018 result was in-line with our forecast.

• A drop in 4Q18 earnings was caused by one-time expense on property tax, which we expected at around Bt10-13m.
• 4Q18 revenue also remained flat at Bt368m (-1%YoY, +3.5%YoY) as number of vehicles that passed through the A5 terminal slightly dropped along the country’s car export unit to 281,853 units (-3%YoY, -5%QoQ).
• The company announced Bt0.30 of annual dividend or equivalent to 5.7% (XD on 3th of May 2019)

We maintain our 2019-20E earnings forecast and still rank NYT as a BUY with a target price of *Bt7.60 based on DCF (8.8%WACC, 1%TG) which implies 20xPE’2019E

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

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
4. EPG: Revenue from Auto Parts and EPP Buoyed Earnings to Grow YoY
5. Robotics Earnings: Nabtesco and HDS Results Strong; Still No Reason to Own Fanuc

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) !

4. 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.

5. 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. 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
5. A War Between Netflix & Disney = $$$ for Studio Dragon

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.

5. A War Between Netflix & Disney = $$$ for Studio Dragon

• In this report, we provide an update on Studio Dragon (253450 KS), which has been one of the best IPOs in Korea in the past two years. We believe that the stock is well poised to resume its higher share price in the upcoming months driven by a strong line up of new original dramas & movies in 2019. Studio Dragon (253450 KS) is a key beneficiary of the ultra-aggressive push by major global powerhouses such as Netflix and Disney to expand their OTT streaming services and provide “original” Korean drama contents that have the potential to become globally popular. 
• One of the strong competitive weapons of Studio Dragon is that its main script writers including Park Ji-Eun, Kim Eun-Sook, and Kim Young-Hyun are considered some of the best ones in Korea. The top screenwriters at Studio Dragon are women. It is fair to say that an overwhelming percentage of the Korean TV dramas have women as their key target audience. As such, most of the Korean TV dramas tend not to include too much violence. Most of them have intricate relationship based story lines geared towards the female audience.
• Valuation of the company has become more attractive since the highs in the summer of 2018. Studio Dragon (253450 KS) is currently trading at P/E multiples of 35x in 2019E and 26x in 2020E. If we apply the same 35x P/E to next year’s consensus net profit estimate of 99.6 billion won, this would imply a market cap of 3.5 trillion won, which would be 35% higher than current market cap of 2.6 trillion won. Thus, we remain positive on this stock. 

In this briefing:

1. Manulife US REIT (MUST SP): Strong FY18 NPI Growth Led by Acquisitions

1. Manulife US REIT (MUST SP): Strong FY18 NPI Growth Led by Acquisitions

Manulife Us Reit (MUST SP) announced a 3.6% year-on-year (y-o-y) growth in adjusted DPU to 6.05 US cents for financial year ended 31 December 2018 (FY18).  Net property income (NPI) for FY18 grew 55.4% y-o-y to US$90.7mn, beating our forecast by 15%. Distributable income grew 51.9% y-o-y to US$71.0mn, mainly due to contributions from the four office properties acquired in 2017 (Plaza and Exchange in New Jersey) and 2018 (Penn in Washington D.C. and Phipps in Atlanta).  The 2H18 distribution of 3.04 US cents per unit will be paid on 29 March 2019. The book closure date is 19 February 2019.

Strong occupancy rate and rental escalation continue to support organic growth

MUST continued to maintain high portfolio occupancy rate of 96.7% and long weighted average lease expiry (WALE) by net lettable area (NLA) of 5.8 years. Leases signed in FY18 resulted in positive rental reversions of 8.9%. Moving forward, the leases expiring in 2019 are minimal while 60.7% of the portfolio’s leases by NLA will only expire in 2023 and beyond. As the majority of MUST’s leases by gross rental income have rental escalations averaging 2.5% p.a., MUST’s gross revenue will continue to enjoy stable organic growth. In addition, MUST’s properties are Class A and Trophy assets in cities where future supply are limited. Majority of its properties have passing rents below market rents, which further supports organic rental growth.

Potential acquisitions remain as key catalysts

MUST’s balance sheet remains strong (aggregate leverage at 37.2%) and it has additional debt headroom of about US$209mn before hitting the maximum regulatory gearing limit of 45%. As its unit price had rebounded from a low in 4Q18, the discount to net asset value (NAV) was removed. Currently trading at about 1.07x P/NAV, MUST may see greater opportunities for potential yield-accretive acquisitions.    

Proposed US Tax Act, 267A Regulations no material impact

The 267A Regulations are still in proposed form but the manager expects that the proposed regulations and the proposed Bardados tax changes will not have any material impact on the net tangible asset (NTA) and DPU of MUST.

Maintain “Buy” with fair value of US$1.04/unit

Valuations remain attractive with FY19F and FY20F yield of 7.1% and 7.2%. From its lowest point of 69.5 US cents in 4Q18, MUST’s unit price had rebounded about 23%, outperforming the FTSE ST Real Estate Investment Trusts Index. We maintain our BUY recommendation with a higher fair value of US$1.04, implying a 21% upside from the current price (coverage initiated on 16 Nov 2018). Reversing from a position of discount to net asset value to the current 1.07x P/NAV, , MUST may see greater opportunities in making yield-accretive acquisitions. Fair value is derived based on the dividend discount model with a required rate of return of 9% (using U.S. 10-year risk free rate of 2.64%) and a terminal growth rate of 1.5%.

In this briefing:

1. Monex Group (8698 JP): Upside Is Unlikely Due to Weak Cryptocurrency Markets
2. GOLD:  Expect FY1Q19 Earnings to Be Bottom Out
3. NYT: Property Tax Expense Pressured 4Q18 Earnings to Its Trough in 2018
4. Manulife US REIT (MUST SP): Strong FY18 NPI Growth Led by Acquisitions

1. Monex Group (8698 JP): Upside Is Unlikely Due to Weak Cryptocurrency Markets

In our previous note, Monex Group (8698 JP): Weak Fundamentals Deter the Possibility of a Further Upside, we suggested that despite the partial resumption of Coincheck’s services, further upside for Monex Group Inc (8698 JP) is unlikely due to weak cryptocurrency markets.

Since then, Monex’s share price (which was around JPY500 in mid-November 2018) has fallen to JPY367 as of 8th February 2019. This is only marginally above the pre-acquisition (of Coincheck) price of JPY344 (on 2nd April 2018). In the meantime, Bitcoin (XBTUSD CURNCY)  has also fallen from around USD6,000 in mid-November to around USD3,500 at present.

2. GOLD:  Expect FY1Q19 Earnings to Be Bottom Out

GOLD reported FY1Q19 net profit of Bt459m (-26%YoY, -13%QoQ), the lowest in past six quarters. The FY1Q19 result was 21% of our full-year forecast and 10% lower than our forecast.

•  The disappointed FY1Q19 result (ending Dec 18) was mainly due to flat sales from real estate at Bt3.76bn which contribute 89% of total sales. Meanwhile, gross margin also fell to 30.4% compared to 32.3% in FY1Q18 due to higher marketing cost. We expect FY1Q19 earnings to be the bottom out as the company adjusted down unit selling price in order to boost sales during the last quarter last year.
• We maintain our positive outlook toward its FY2019-20 performance and beyond driven by new projects and upside from sale of FYI CENTER to GVREIT and operate the Sam Yan Mitrtown large mixed-use complex.

We maintain our forecast and BUY rating with a target price of Bt15 based on 13xPE’19E.

3. NYT: Property Tax Expense Pressured 4Q18 Earnings to Its Trough in 2018

NYT reported 4Q18 net profit of Bt90m (-11%YoY, -24%QoQ), the lowest level in the past eight quarters. The 2018 result was in-line with our forecast.

• A drop in 4Q18 earnings was caused by one-time expense on property tax, which we expected at around Bt10-13m.
• 4Q18 revenue also remained flat at Bt368m (-1%YoY, +3.5%YoY) as number of vehicles that passed through the A5 terminal slightly dropped along the country’s car export unit to 281,853 units (-3%YoY, -5%QoQ).
• The company announced Bt0.30 of annual dividend or equivalent to 5.7% (XD on 3th of May 2019)

We maintain our 2019-20E earnings forecast and still rank NYT as a BUY with a target price of *Bt7.60 based on DCF (8.8%WACC, 1%TG) which implies 20xPE’2019E

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

4. Manulife US REIT (MUST SP): Strong FY18 NPI Growth Led by Acquisitions

Manulife Us Reit (MUST SP) announced a 3.6% year-on-year (y-o-y) growth in adjusted DPU to 6.05 US cents for financial year ended 31 December 2018 (FY18).  Net property income (NPI) for FY18 grew 55.4% y-o-y to US$90.7mn, beating our forecast by 15%. Distributable income grew 51.9% y-o-y to US$71.0mn, mainly due to contributions from the four office properties acquired in 2017 (Plaza and Exchange in New Jersey) and 2018 (Penn in Washington D.C. and Phipps in Atlanta).  The 2H18 distribution of 3.04 US cents per unit will be paid on 29 March 2019. The book closure date is 19 February 2019.

Strong occupancy rate and rental escalation continue to support organic growth

MUST continued to maintain high portfolio occupancy rate of 96.7% and long weighted average lease expiry (WALE) by net lettable area (NLA) of 5.8 years. Leases signed in FY18 resulted in positive rental reversions of 8.9%. Moving forward, the leases expiring in 2019 are minimal while 60.7% of the portfolio’s leases by NLA will only expire in 2023 and beyond. As the majority of MUST’s leases by gross rental income have rental escalations averaging 2.5% p.a., MUST’s gross revenue will continue to enjoy stable organic growth. In addition, MUST’s properties are Class A and Trophy assets in cities where future supply are limited. Majority of its properties have passing rents below market rents, which further supports organic rental growth.

Potential acquisitions remain as key catalysts

MUST’s balance sheet remains strong (aggregate leverage at 37.2%) and it has additional debt headroom of about US$209mn before hitting the maximum regulatory gearing limit of 45%. As its unit price had rebounded from a low in 4Q18, the discount to net asset value (NAV) was removed. Currently trading at about 1.07x P/NAV, MUST may see greater opportunities for potential yield-accretive acquisitions.    

Proposed US Tax Act, 267A Regulations no material impact

The 267A Regulations are still in proposed form but the manager expects that the proposed regulations and the proposed Bardados tax changes will not have any material impact on the net tangible asset (NTA) and DPU of MUST.

Maintain “Buy” with fair value of US$1.04/unit

Valuations remain attractive with FY19F and FY20F yield of 7.1% and 7.2%. From its lowest point of 69.5 US cents in 4Q18, MUST’s unit price had rebounded about 23%, outperforming the FTSE ST Real Estate Investment Trusts Index. We maintain our BUY recommendation with a higher fair value of US$1.04, implying a 21% upside from the current price (coverage initiated on 16 Nov 2018). Reversing from a position of discount to net asset value to the current 1.07x P/NAV, , MUST may see greater opportunities in making yield-accretive acquisitions. Fair value is derived based on the dividend discount model with a required rate of return of 9% (using U.S. 10-year risk free rate of 2.64%) and a terminal growth rate of 1.5%.

In this briefing:

1. EPG: Revenue from Auto Parts and EPP Buoyed Earnings to Grow YoY
2. Robotics Earnings: Nabtesco and HDS Results Strong; Still No Reason to Own Fanuc
3. A War Between Netflix & Disney = $$$ for Studio Dragon
4. Muthoot Finance – Top ROA Lender, with 116 Tons of Gold!
5. Catch-Up Session with Intuch Group

1. 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.

2. 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.

3. A War Between Netflix & Disney = $$$ for Studio Dragon

• In this report, we provide an update on Studio Dragon (253450 KS), which has been one of the best IPOs in Korea in the past two years. We believe that the stock is well poised to resume its higher share price in the upcoming months driven by a strong line up of new original dramas & movies in 2019. Studio Dragon (253450 KS) is a key beneficiary of the ultra-aggressive push by major global powerhouses such as Netflix and Disney to expand their OTT streaming services and provide “original” Korean drama contents that have the potential to become globally popular. 
• One of the strong competitive weapons of Studio Dragon is that its main script writers including Park Ji-Eun, Kim Eun-Sook, and Kim Young-Hyun are considered some of the best ones in Korea. The top screenwriters at Studio Dragon are women. It is fair to say that an overwhelming percentage of the Korean TV dramas have women as their key target audience. As such, most of the Korean TV dramas tend not to include too much violence. Most of them have intricate relationship based story lines geared towards the female audience.
• Valuation of the company has become more attractive since the highs in the summer of 2018. Studio Dragon (253450 KS) is currently trading at P/E multiples of 35x in 2019E and 26x in 2020E. If we apply the same 35x P/E to next year’s consensus net profit estimate of 99.6 billion won, this would imply a market cap of 3.5 trillion won, which would be 35% higher than current market cap of 2.6 trillion won. Thus, we remain positive on this stock. 

4. Muthoot Finance – Top ROA Lender, with 116 Tons of Gold!

India’s non-banking finance company (NBFC), Muthoot Finance (MUTH IN; “MTF”), lends against gold, arguably the best collateral of all. Its gold jewelry kept as security is up from 147 tons to 166 tons, from December 2016 to December 2018. This may be one reason that the company’s bad loans are low, not only in an India context, but in Asia. Its stage three loans surged after demonetization peaking in December 2017 at INR21.5bn. Since then, figures have fallen sharply, to INR6.4bn as at December 2018. As a percentage of loans, stage three loans declined from 7.6% to 2.0% over this period. With credit costs and write-offs down 96% during 9M19 YoY, credit metrics appear healthy.

5. Catch-Up Session with Intuch Group

We caught up with Intuch Group this week to check how things were going on with them and their subsidiaries, AIS and Thaicom. It’s good to touch base, since it’s been a while, and many things have changed in the interim:

• Intuch self-congratulated themselves for a narrowing of their discount to NAV from 28% to 20% in 2018 while introducing three new investments and announced the breakeven of their shopping network, a joint venture with Hyundai.
• Wongnai, an online foodie guide and one of Intuch’s largest investments, underperformed our revenue forecast significantly, but managed to post impressive revenue growth nevertheless. While profitable, their rapid expansion also means they are unlikely to meet their own internal profitability expectations.
• Thaicom posted a loss in Q4 and almost non-existent earnings in 2018 largely due to asset impairments, but there is some hope in the future with the government’s various PPP (public-private partnership) schemes mentioned in the meeting.
• AIS, the Group’s flagship company, posted flat earnings of Bt30bn and is in the process of reversing a decline in revenue market share through aggressive push in enterprise and consumer services.

In this briefing:

1. NYT: Property Tax Expense Pressured 4Q18 Earnings to Its Trough in 2018
2. Manulife US REIT (MUST SP): Strong FY18 NPI Growth Led by Acquisitions
3. Shimadzu (7701 JP): 3Q Results Suggest a Trading Range

1. NYT: Property Tax Expense Pressured 4Q18 Earnings to Its Trough in 2018

NYT reported 4Q18 net profit of Bt90m (-11%YoY, -24%QoQ), the lowest level in the past eight quarters. The 2018 result was in-line with our forecast.

• A drop in 4Q18 earnings was caused by one-time expense on property tax, which we expected at around Bt10-13m.
• 4Q18 revenue also remained flat at Bt368m (-1%YoY, +3.5%YoY) as number of vehicles that passed through the A5 terminal slightly dropped along the country’s car export unit to 281,853 units (-3%YoY, -5%QoQ).
• The company announced Bt0.30 of annual dividend or equivalent to 5.7% (XD on 3th of May 2019)

We maintain our 2019-20E earnings forecast and still rank NYT as a BUY with a target price of *Bt7.60 based on DCF (8.8%WACC, 1%TG) which implies 20xPE’2019E

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

2. Manulife US REIT (MUST SP): Strong FY18 NPI Growth Led by Acquisitions

Manulife Us Reit (MUST SP) announced a 3.6% year-on-year (y-o-y) growth in adjusted DPU to 6.05 US cents for financial year ended 31 December 2018 (FY18).  Net property income (NPI) for FY18 grew 55.4% y-o-y to US$90.7mn, beating our forecast by 15%. Distributable income grew 51.9% y-o-y to US$71.0mn, mainly due to contributions from the four office properties acquired in 2017 (Plaza and Exchange in New Jersey) and 2018 (Penn in Washington D.C. and Phipps in Atlanta).  The 2H18 distribution of 3.04 US cents per unit will be paid on 29 March 2019. The book closure date is 19 February 2019.

Strong occupancy rate and rental escalation continue to support organic growth

MUST continued to maintain high portfolio occupancy rate of 96.7% and long weighted average lease expiry (WALE) by net lettable area (NLA) of 5.8 years. Leases signed in FY18 resulted in positive rental reversions of 8.9%. Moving forward, the leases expiring in 2019 are minimal while 60.7% of the portfolio’s leases by NLA will only expire in 2023 and beyond. As the majority of MUST’s leases by gross rental income have rental escalations averaging 2.5% p.a., MUST’s gross revenue will continue to enjoy stable organic growth. In addition, MUST’s properties are Class A and Trophy assets in cities where future supply are limited. Majority of its properties have passing rents below market rents, which further supports organic rental growth.

Potential acquisitions remain as key catalysts

MUST’s balance sheet remains strong (aggregate leverage at 37.2%) and it has additional debt headroom of about US$209mn before hitting the maximum regulatory gearing limit of 45%. As its unit price had rebounded from a low in 4Q18, the discount to net asset value (NAV) was removed. Currently trading at about 1.07x P/NAV, MUST may see greater opportunities for potential yield-accretive acquisitions.    

Proposed US Tax Act, 267A Regulations no material impact

The 267A Regulations are still in proposed form but the manager expects that the proposed regulations and the proposed Bardados tax changes will not have any material impact on the net tangible asset (NTA) and DPU of MUST.

Maintain “Buy” with fair value of US$1.04/unit

Valuations remain attractive with FY19F and FY20F yield of 7.1% and 7.2%. From its lowest point of 69.5 US cents in 4Q18, MUST’s unit price had rebounded about 23%, outperforming the FTSE ST Real Estate Investment Trusts Index. We maintain our BUY recommendation with a higher fair value of US$1.04, implying a 21% upside from the current price (coverage initiated on 16 Nov 2018). Reversing from a position of discount to net asset value to the current 1.07x P/NAV, , MUST may see greater opportunities in making yield-accretive acquisitions. Fair value is derived based on the dividend discount model with a required rate of return of 9% (using U.S. 10-year risk free rate of 2.64%) and a terminal growth rate of 1.5%.

3. Shimadzu (7701 JP): 3Q Results Suggest a Trading Range

Shimadzu’s 3Q results were good enough to reassure long-term investors, but not good enough to be called a buy signal. Sales and operating profit were up 4.5% and 4.6% year-on-year, respectively, in the three months to December, an improvement over 2Q but well below the double-digit increases recorded in 1Q and last fiscal year.  Forex losses and other factors led to a 2.2% decline in net profit. 

Sales were up in Japan, Europe and Asia ex-Japan and ex-China, but down in America,  China and Other Regions. Sales of core Analytical & Measuring Instruments were up 2.4%, operating profit on those sales was up 4.1% and the operating margin rose to +15.4% from +15.1% the previous year.

Sales of Industrial Machinery were down 5.7%, but operating profit on those sales was up 2.7% and the division generated a +9.7% operating margin vs. +9.0% the previous year. Sales of turbo-molecular pumps, primarily to semiconductor equipment makers, were down 14.3%.

Medical System sales were up 10.6% and the division generated a +1.5% operating margin vs. + 0.1% the previous year. Aircraft Equipment sales were up 12.1% but the division made a -0.5% operating loss vs. +1.2% profit the previous year. 

At ¥2,659 (Friday, February 8 closing price), the shares are selling at 24x our EPS estimate for FY Mar-19 and 12x EV/EBITDA. The five-year historical P/E range is 13x – 30x, the EV/EBITDA range is 6x – 16x. Over the next several quarters, we expect continued weakness in Industrial Machinery to offset single-digit growth in Instruments, keeping overall growth low. 

In this briefing:

1. A War Between Netflix & Disney = $$$ for Studio Dragon
2. Muthoot Finance – Top ROA Lender, with 116 Tons of Gold!
3. Catch-Up Session with Intuch Group
4. Monex Group (8698 JP): Upside Is Unlikely Due to Weak Cryptocurrency Markets
5. GOLD:  Expect FY1Q19 Earnings to Be Bottom Out

1. A War Between Netflix & Disney = $$$ for Studio Dragon

• In this report, we provide an update on Studio Dragon (253450 KS), which has been one of the best IPOs in Korea in the past two years. We believe that the stock is well poised to resume its higher share price in the upcoming months driven by a strong line up of new original dramas & movies in 2019. Studio Dragon (253450 KS) is a key beneficiary of the ultra-aggressive push by major global powerhouses such as Netflix and Disney to expand their OTT streaming services and provide “original” Korean drama contents that have the potential to become globally popular. 
• One of the strong competitive weapons of Studio Dragon is that its main script writers including Park Ji-Eun, Kim Eun-Sook, and Kim Young-Hyun are considered some of the best ones in Korea. The top screenwriters at Studio Dragon are women. It is fair to say that an overwhelming percentage of the Korean TV dramas have women as their key target audience. As such, most of the Korean TV dramas tend not to include too much violence. Most of them have intricate relationship based story lines geared towards the female audience.
• Valuation of the company has become more attractive since the highs in the summer of 2018. Studio Dragon (253450 KS) is currently trading at P/E multiples of 35x in 2019E and 26x in 2020E. If we apply the same 35x P/E to next year’s consensus net profit estimate of 99.6 billion won, this would imply a market cap of 3.5 trillion won, which would be 35% higher than current market cap of 2.6 trillion won. Thus, we remain positive on this stock. 

2. Muthoot Finance – Top ROA Lender, with 116 Tons of Gold!

India’s non-banking finance company (NBFC), Muthoot Finance (MUTH IN; “MTF”), lends against gold, arguably the best collateral of all. Its gold jewelry kept as security is up from 147 tons to 166 tons, from December 2016 to December 2018. This may be one reason that the company’s bad loans are low, not only in an India context, but in Asia. Its stage three loans surged after demonetization peaking in December 2017 at INR21.5bn. Since then, figures have fallen sharply, to INR6.4bn as at December 2018. As a percentage of loans, stage three loans declined from 7.6% to 2.0% over this period. With credit costs and write-offs down 96% during 9M19 YoY, credit metrics appear healthy.

3. Catch-Up Session with Intuch Group

We caught up with Intuch Group this week to check how things were going on with them and their subsidiaries, AIS and Thaicom. It’s good to touch base, since it’s been a while, and many things have changed in the interim:

• Intuch self-congratulated themselves for a narrowing of their discount to NAV from 28% to 20% in 2018 while introducing three new investments and announced the breakeven of their shopping network, a joint venture with Hyundai.
• Wongnai, an online foodie guide and one of Intuch’s largest investments, underperformed our revenue forecast significantly, but managed to post impressive revenue growth nevertheless. While profitable, their rapid expansion also means they are unlikely to meet their own internal profitability expectations.
• Thaicom posted a loss in Q4 and almost non-existent earnings in 2018 largely due to asset impairments, but there is some hope in the future with the government’s various PPP (public-private partnership) schemes mentioned in the meeting.
• AIS, the Group’s flagship company, posted flat earnings of Bt30bn and is in the process of reversing a decline in revenue market share through aggressive push in enterprise and consumer services.

4. Monex Group (8698 JP): Upside Is Unlikely Due to Weak Cryptocurrency Markets

In our previous note, Monex Group (8698 JP): Weak Fundamentals Deter the Possibility of a Further Upside, we suggested that despite the partial resumption of Coincheck’s services, further upside for Monex Group Inc (8698 JP) is unlikely due to weak cryptocurrency markets.

Since then, Monex’s share price (which was around JPY500 in mid-November 2018) has fallen to JPY367 as of 8th February 2019. This is only marginally above the pre-acquisition (of Coincheck) price of JPY344 (on 2nd April 2018). In the meantime, Bitcoin (XBTUSD CURNCY)  has also fallen from around USD6,000 in mid-November to around USD3,500 at present.

5. GOLD:  Expect FY1Q19 Earnings to Be Bottom Out

GOLD reported FY1Q19 net profit of Bt459m (-26%YoY, -13%QoQ), the lowest in past six quarters. The FY1Q19 result was 21% of our full-year forecast and 10% lower than our forecast.

•  The disappointed FY1Q19 result (ending Dec 18) was mainly due to flat sales from real estate at Bt3.76bn which contribute 89% of total sales. Meanwhile, gross margin also fell to 30.4% compared to 32.3% in FY1Q18 due to higher marketing cost. We expect FY1Q19 earnings to be the bottom out as the company adjusted down unit selling price in order to boost sales during the last quarter last year.
• We maintain our positive outlook toward its FY2019-20 performance and beyond driven by new projects and upside from sale of FYI CENTER to GVREIT and operate the Sam Yan Mitrtown large mixed-use complex.

We maintain our forecast and BUY rating with a target price of Bt15 based on 13xPE’19E.