Equity Bottom-Up

In this briefing:

1. Manulife US REIT (MUST SP): Strong FY18 NPI Growth Led by Acquisitions
2. Shimadzu (7701 JP): 3Q Results Suggest a Trading Range
3. Olympus: 3QFY03/19 Profits Decline on the Back of Litigation Related Costs

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%.

2. 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. 

3. Olympus: 3QFY03/19 Profits Decline on the Back of Litigation Related Costs

Olympus Corporation (7733 JP) reported its 3QFY03/19 results on Friday (08^th February) after markets closed. The third quarter revenue dropped 1.7% YoY while operating profit declined by a significant 21.5% YoY, which was 12% below consensus estimates. The operating profit margin for the quarter was 8.8% compared to 11.1% for the same period last year.

The cumulative nine-month results were not impressive either. Although revenue saw a marginal improvement of 1.6% YoY, operating profit declined by 66%, resulting in a 700 basis point decline in operating margin, which fell to just 3.5%. Revenue and operating profit missed consensus estimates by 0.4% and 10.4%, respectively.

The company shares are currently trading at JPY4,645 per share which we believe is overvalued based on our EV/EBIT valuation. The premium is not justified given the governance related issues and the scandals currently faced by the company. Further, Olympus’ financial performance has been disappointing recently, and the company’s largest segment is growing only at single-digits and the Imaging business continues to drag on company revenue and margins. The share price gained nearly 38% since the beginning of the year following the company’s announcement to transform its business and improve governance. In our view the potential for a transformation in governance and business practices is already fully-discounted in the share price.

In this briefing:

1. Muthoot Finance – Top ROA Lender, with 116 Tons of Gold!
2. Catch-Up Session with Intuch Group
3. Monex Group (8698 JP): Upside Is Unlikely Due to Weak Cryptocurrency Markets
4. GOLD:  Expect FY1Q19 Earnings to Be Bottom Out
5. NYT: Property Tax Expense Pressured 4Q18 Earnings to Its Trough in 2018

1. 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.

2. 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.

3. 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.

4. 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.

5. 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. Manulife US REIT (MUST SP): Strong FY18 NPI Growth Led by Acquisitions
2. Shimadzu (7701 JP): 3Q Results Suggest a Trading Range
3. Olympus: 3QFY03/19 Profits Decline on the Back of Litigation Related Costs
4. Cypress Semiconductor. The Perfect Acquisition Target.

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%.

2. 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. 

3. Olympus: 3QFY03/19 Profits Decline on the Back of Litigation Related Costs

Olympus Corporation (7733 JP) reported its 3QFY03/19 results on Friday (08^th February) after markets closed. The third quarter revenue dropped 1.7% YoY while operating profit declined by a significant 21.5% YoY, which was 12% below consensus estimates. The operating profit margin for the quarter was 8.8% compared to 11.1% for the same period last year.

The cumulative nine-month results were not impressive either. Although revenue saw a marginal improvement of 1.6% YoY, operating profit declined by 66%, resulting in a 700 basis point decline in operating margin, which fell to just 3.5%. Revenue and operating profit missed consensus estimates by 0.4% and 10.4%, respectively.

The company shares are currently trading at JPY4,645 per share which we believe is overvalued based on our EV/EBIT valuation. The premium is not justified given the governance related issues and the scandals currently faced by the company. Further, Olympus’ financial performance has been disappointing recently, and the company’s largest segment is growing only at single-digits and the Imaging business continues to drag on company revenue and margins. The share price gained nearly 38% since the beginning of the year following the company’s announcement to transform its business and improve governance. In our view the potential for a transformation in governance and business practices is already fully-discounted in the share price.

4. Cypress Semiconductor. The Perfect Acquisition Target.

There’s a lot to like about Cypress Semiconductor. Since taking the helm back in August 2016, CEO Hassane El-Khoury has led the company through a series of strategic realignments as part of his Cypress 3.0 initiative. While some of those moves were initially counterintuitive, they are now proving prescient as the company demonstrates far more resilience in the face of the current downturn compared to any period in its history.

Cypress offers exposure to the high growth automotive and IoT markets, industrial and consumer to a slightly lesser degree. Their product portfolio is the #1 market leader in new fewer than seven key segments, up from #3 just two years ago. On the latest earnings call, the company reported annual revenues of $2.48 billion for 2018, a 7% YoY increase. The company’s financial model targets a growth CAGR of 7-9% through 2021 and is well on track to achieve that goal. 

Like many of its peers, last year’s downturn saw Cypress share price fall more than 30% from its 52-week high at the trough. Currently, after a 6.63% rise on the back of solid earnings and reasonable outlook, its stock currently trades at $14.79, a 21.6% discount to the 52-week high. It also comes with an impressive dividend yield of 3.5% annualized as of December 31’st 2018.

We believe that the company would be an excellent acquisition target for the likes of Qualcomm whose failed bid for NXP last year thwarted its attempt to expand into the market for automotive semiconductors. We expect any such takeover offer would instantly add ~30% to the company’s share price. 

In this briefing:

1. Chiba Bank (8331 JP):  Top Dog
2. CyberAgent: Tumbling Dice

1. Chiba Bank (8331 JP):  Top Dog

Chiba Bank (8331 JP) , Japan’s 4^th-largest regional bank in terms of deposits, loans or total assets, reported consolidated recurring profits for the nine months to end-December 2018 (3Q FY3/2019) of ¥59.66 billion (down 10.6% YoY) and net profits of ¥41.44 billion (down 10.8% YoY) on marginally higher revenues of ¥180.20 billion (+1.3% YoY).  Results were influenced by higher funding costs and a sharp rise in credit costs that offset the benefits of strong growth in loan demand.  There was also some improvement in net interest income and securities trading profits, and a reduction in administrative expenses.  The Japanese banking sector is currently unloved by foreign investors. However, trading on a forward-looking PE ratio of 9.1x (using the bank’s own FY3/2019 guidance), a PBR of 0.52x and boasting the highest current market capitalisation of any Japanese regional bank of ¥553.9 billion (US$5.04 billion), Chiba Bank continues to offer good prospects of long-term growth and a strong profits ‘track record’ supported by the underlying strength of the Chiba prefectural economy.

2. CyberAgent: Tumbling Dice

Source: Japan Analytics

TUMBLING DICE – After ZOZO (3092 JP) (-52%) and Mercari (4385 JP) (-50%), CyberAgent (4751 JP) is the worst-performing large-cap Internet stock in Japan over the last seven months.  The company is the sector’s leading foreigner-held stock with over 48% (60%+ of the float) held by institutional investors such as Baillie Gifford (11.9%), JP Morgan AM (6.9%), Tybourne Capital (5.1%) and Blackrock Japan (5.0%). Having outperformed the sector and the market annually over the last nine years by 38% and 25%, respectively, over the seven months since the stock peaked in terms of our Relative Price Score on 13th July, CyberAgent shares have declined by 56%, underperforming the market by 48% and the sector by 37%.

PASSIVE PERILS – We will discuss the ‘perils ‘ of Passive TV in the DETAIL below. However, CyberAgent is yet another good example of the ‘perils’ of passive investing. On September 5th Nikkei Inc. announced that CyberAgent would replace Furukawa (5715 JP) in the Nikkei 225 index, with the inclusion occurring on October 1st. Since the ¥6050 intraday peak of the week before inclusion in the index, the shares have declined by 49% in 90 trading days.   

SUMMARY – CyberAgent’s business has three ‘pillars’, internet advertising, mobile gaming software, and media. The latter now includes the linear free-to-view AbemaTV business, which helped drive the share price to a post-listing high of ¥6930 in July 2018. Since then, business conditions for two of these ‘pillars’ have degraded significantly,  while the fledgeling TV business remains in ‘up-front’ investment mode. To cap what will be a turbulent year for CyberAgent, the company is moving into a new head office building in Shibuya called ‘Abema Towers‘ in March. We shall refrain from making any analogies to the Skyscraper Index. 

VISION SHIFT? – In previous years, CyberAgent had a clear vision statement – ‘To create the 21st century’s leading company’. The company’s recent performance has led to a change of tone, and CyberAgent is now rather more modestly just ‘Aiming to be a company with medium to long-term supporters’.  In the vein of the lyrics from the best song on the best Rolling Stones album, Exile on Main Street, the business has recently been at ‘all sixes and sevens and nines’. In the search for new ‘supporters’, we encourage CyberAgent to just ‘keep on rolling’, letting the dice fall where they may. 

In this briefing:

1. Shimadzu (7701 JP): 3Q Results Suggest a Trading Range
2. Olympus: 3QFY03/19 Profits Decline on the Back of Litigation Related Costs
3. Cypress Semiconductor. The Perfect Acquisition Target.
4. Concordia Financial Group (7186 JP): Out of Focus
5. Shiseido Company Limited: 4QFY2018 Results – Setting Expectations Too High

1. 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. 

2. Olympus: 3QFY03/19 Profits Decline on the Back of Litigation Related Costs

Olympus Corporation (7733 JP) reported its 3QFY03/19 results on Friday (08^th February) after markets closed. The third quarter revenue dropped 1.7% YoY while operating profit declined by a significant 21.5% YoY, which was 12% below consensus estimates. The operating profit margin for the quarter was 8.8% compared to 11.1% for the same period last year.

The cumulative nine-month results were not impressive either. Although revenue saw a marginal improvement of 1.6% YoY, operating profit declined by 66%, resulting in a 700 basis point decline in operating margin, which fell to just 3.5%. Revenue and operating profit missed consensus estimates by 0.4% and 10.4%, respectively.

The company shares are currently trading at JPY4,645 per share which we believe is overvalued based on our EV/EBIT valuation. The premium is not justified given the governance related issues and the scandals currently faced by the company. Further, Olympus’ financial performance has been disappointing recently, and the company’s largest segment is growing only at single-digits and the Imaging business continues to drag on company revenue and margins. The share price gained nearly 38% since the beginning of the year following the company’s announcement to transform its business and improve governance. In our view the potential for a transformation in governance and business practices is already fully-discounted in the share price.

3. Cypress Semiconductor. The Perfect Acquisition Target.

There’s a lot to like about Cypress Semiconductor. Since taking the helm back in August 2016, CEO Hassane El-Khoury has led the company through a series of strategic realignments as part of his Cypress 3.0 initiative. While some of those moves were initially counterintuitive, they are now proving prescient as the company demonstrates far more resilience in the face of the current downturn compared to any period in its history.

Cypress offers exposure to the high growth automotive and IoT markets, industrial and consumer to a slightly lesser degree. Their product portfolio is the #1 market leader in new fewer than seven key segments, up from #3 just two years ago. On the latest earnings call, the company reported annual revenues of $2.48 billion for 2018, a 7% YoY increase. The company’s financial model targets a growth CAGR of 7-9% through 2021 and is well on track to achieve that goal. 

Like many of its peers, last year’s downturn saw Cypress share price fall more than 30% from its 52-week high at the trough. Currently, after a 6.63% rise on the back of solid earnings and reasonable outlook, its stock currently trades at $14.79, a 21.6% discount to the 52-week high. It also comes with an impressive dividend yield of 3.5% annualized as of December 31’st 2018.

We believe that the company would be an excellent acquisition target for the likes of Qualcomm whose failed bid for NXP last year thwarted its attempt to expand into the market for automotive semiconductors. We expect any such takeover offer would instantly add ~30% to the company’s share price. 

4. Concordia Financial Group (7186 JP): Out of Focus

CY2018 was not a good year for Concordia Financial Group, Ltd (7186 JP)  (CFG), the holding company for one of Japan’s largest regional banks, the Bank of Yokohama (BoY), and a small secondary regional bank, Higashi-Nippon Bank (HNPB).  Beset by a lending scandal at HNPB, which forced the bank’s president to step down, CFG’s share price remains some 30% below February 2018 levels, and has essentially traded sideways so far this year. 

CFG management’s attempts to placate disgruntled shareholders with stock buybacks and dividend payout increases have largely failed to impress.  3Q FY3/2019 profits declined by 8% year-on-year but relied heavily on non-core profit items: true core earnings collapsed 35.9%.  The Japanese banking sector remains unloved at present.  That said, currently trading on similar valuations to our much-preferred Chiba Bank (8331 JP) , CFG remains a liquid alternative to the ‘crowded trade’ of simply buying megabanks for exposure to the Japanese financial sector.  Patience, however, is the key word for investors here.  No harm in waiting to buy at a better entry price.

5. Shiseido Company Limited: 4QFY2018 Results – Setting Expectations Too High

Shiseido Co Ltd (4911 JP) reported its FY2018 results on 8^th Feb 2019. Shiseido’s revenue grew 8.9% YoY in FY 2018, marginally above our estimated growth rate of 8.7%. Shiseido’s EBIT increased by 34.7% in FY2018 primarily due to the gains made in the first 9 months of the year. However, in 4Q2018 the EBIT margin dropped to 2.4% from 3.6% in the same period last year. On a QoQ basis, margin drop was far more substantial as it declined more than 8.5% in 4QFY2018. Even though we were forecasting a decline in margins, we expected it to be a bit more gradual. Thus, Shiseido’s FY2018 EBIT fell short of our expectation. On the positive side, Shiseido also guided that they are increasing their semi-annual dividend by another JPY5.0 to JPY30.0 from 1HFY2019.

In this briefing:

1. CyberAgent: Tumbling Dice
2. Angang Steel: Headwinds Intensify
3. Huayi Brothers: Their Move to Theme Part Echoes A Disney Business Model Worth a Hard Look

1. CyberAgent: Tumbling Dice

Source: Japan Analytics

TUMBLING DICE – After ZOZO (3092 JP) (-52%) and Mercari (4385 JP) (-50%), CyberAgent (4751 JP) is the worst-performing large-cap Internet stock in Japan over the last seven months.  The company is the sector’s leading foreigner-held stock with over 48% (60%+ of the float) held by institutional investors such as Baillie Gifford (11.9%), JP Morgan AM (6.9%), Tybourne Capital (5.1%) and Blackrock Japan (5.0%). Having outperformed the sector and the market annually over the last nine years by 38% and 25%, respectively, over the seven months since the stock peaked in terms of our Relative Price Score on 13th July, CyberAgent shares have declined by 56%, underperforming the market by 48% and the sector by 37%.

PASSIVE PERILS – We will discuss the ‘perils ‘ of Passive TV in the DETAIL below. However, CyberAgent is yet another good example of the ‘perils’ of passive investing. On September 5th Nikkei Inc. announced that CyberAgent would replace Furukawa (5715 JP) in the Nikkei 225 index, with the inclusion occurring on October 1st. Since the ¥6050 intraday peak of the week before inclusion in the index, the shares have declined by 49% in 90 trading days.   

SUMMARY – CyberAgent’s business has three ‘pillars’, internet advertising, mobile gaming software, and media. The latter now includes the linear free-to-view AbemaTV business, which helped drive the share price to a post-listing high of ¥6930 in July 2018. Since then, business conditions for two of these ‘pillars’ have degraded significantly,  while the fledgeling TV business remains in ‘up-front’ investment mode. To cap what will be a turbulent year for CyberAgent, the company is moving into a new head office building in Shibuya called ‘Abema Towers‘ in March. We shall refrain from making any analogies to the Skyscraper Index. 

VISION SHIFT? – In previous years, CyberAgent had a clear vision statement – ‘To create the 21st century’s leading company’. The company’s recent performance has led to a change of tone, and CyberAgent is now rather more modestly just ‘Aiming to be a company with medium to long-term supporters’.  In the vein of the lyrics from the best song on the best Rolling Stones album, Exile on Main Street, the business has recently been at ‘all sixes and sevens and nines’. In the search for new ‘supporters’, we encourage CyberAgent to just ‘keep on rolling’, letting the dice fall where they may. 

2. Angang Steel: Headwinds Intensify

INVESTMENT VIEW:  The outlook for Angang’s profitability in 2019 is deteriorating quicker than consensus forecasts, we believe.  Chinese steel demand and pricing are forecast to be weak in 2019, yet raw material costs remain high.  We recommend staying short Angang Steel Co Ltd (H) (347 HK) shares with a PT of HK$5.

3. Huayi Brothers: Their Move to Theme Part Echoes A Disney Business Model Worth a Hard Look

• Movie World park is first stage in long term plan for 20 “movie theme” cities in China.
• Jack Ma’s investment in company has grown since 2015: Its film finance.
• Company sees licensing of intellectual property rather than brick and mortar as key to best asset deployment as they diversify.

The Walt Disney Company’s just released 1Q19 earnings report held an upside surprise of $1.84 a share beating consensus of $1.57. Revenues of US$15.5bn also beat analysts expectations of US$15.180bn. Filmed entertainment was down due to tough comps from last year’s blockbuster releases. Network TV was up. But what commands our attention in this insight is results from Disney theme parks: All units showed flat to modest growth in attendance, with revenue up primarily due to raised prices. Disney Shanghai was softer than last year attributed to the economic slowdown. Yet theme parks continue to lead the Disney business units year in and year out.

 Reviewing that result in the light of ongoing research I have been working at on Asia theme park prospects, I focused in on Huayi Brothers. Their movie themed park at Suzhou opened last July. While it is too early to make a long term call on the film company’s diversification into theme parks, their move to monetize their intellectual property in that space foretells more diversification ahead.

 The Disney business model appears to be proceeding.

 Huayi Brothers Media Corporation (SHE: 300027)

(All amounts shown in CNY except where otherwise noted).

 Since an ebullient IPO debut in 2009, when on October 23^rd, HB stock skyrocketed to 63.66yuan trading was halted, the stock price has since been both spiked and rocked by events. Most recently, it fell 21% last June when news of the details of a sketchy performance contract for one of HB’s top female stars made headlines. She appeared to have made an effort to disguise her salary. The scandal broke on television. It has triggered an investigation by Beijing officials. Promptly HB founder and Chairman Dennis Wang pledged US$16m to bolster confidence the shares amid continuing disputations between the parties to the scandal.

 On a positive note, during the last five year period, Alibaba’s (NYSE:BABA) Jack Ma announced he was investing US$103M over 5 years to finance the production of 10 HB films. On that news the shares had spiked 6.6%. There are also standing deals with real estate operator Evergrande Group (HK3333) and Tencent Holding(OTC) to deploy HB intellectual property names and brands into theme parks and online social gaming.

 Out of this mix of headwinds and tailwinds in the already volatile China entertainment/film sector, we arrive at a point where HB shares have taken a long, sustained beating. We are moved to believe that now rubbing up against a 5 year low, is the stock its worthy of attention for investors who have a risk profile. One needs to be comfortable with HB’s gyrating past trading patterns to see opportunity in its future as a “Disney in the making” in the words of a film executive friend from Hong Kong.

 Price at writing: 4.51 (52wk low 4.06)

5 year high: June 5 2015: 23.26

1 year high: (2018): 10.14

3 year high: May 23 2016: 14.30

3 year low: 4.70

 Market cap at writing: 12.61bn

P/E 15.11

EPS: 0.30

Revenue: 3.93bn

Revenue growth: 12.7%

EBITDA: 625m

LTD AT WRITING: 5.92bn

Equity: 10.5bn

Book value: 3.58bn

 To get a sense of how major institutional investors were responding to the roller coaster rides of the HB trade we note here that Vanguard International Stock Index Emerging Market Fund, one of HB’s biggest investors, is still holding its position at writing 2,727,202 shares of valued at 23,567,346bn cny.

 The Disney strategy

 The company began as a film production studio in 1994 and has since expanded its TV, internet, movie theaters, talent agencies and more recently, theme parks.

 It is its foray into the theme park space that is the clearest expression of its “Disneyesque” business model. Last July HB opened a 400,000 square meter theme park at Suzhou called “Movie World”. They announced it was the first in a series of 20 “film cities parks” they would create by providing intellectual property from their film hits partnered with realty developers.

 In a study of the China film industry from Deloite Global published in 2017, the researchers noted, “With Disney as its model, HB has launched a “de-cinematic” strategy that integrates the traditional film business, internet entertainment, location-based entertainment, expanding to upstream and downstream industry chains to alleviate dependence on the film industry.”

 Current estimates are that HB revenues continue heavily in film with over 85.% of its total sales from that sector, another 7.8% from internet entertainment, and 6.6.% from brand licensing. All others contribute 0.8%.

 However its going forward strategy is not to deploy hard capex on actually building theme parks but to partner with such realty operators like Evergrande as an intellectual property provider. This veers from a Disney formula since that company has financed and developed its theme parks internally from land acquisition to design, construction and operations. But it does comport with the core Disney strategy of monetizing intellectual property sprung from its films.

 The China film industry is notably dominated by the top 15 companies, among which is HB. The sector is at the same time without a dominant cluster of “major” studios as is the case in the US and other markets. The division of market share among the top players run from the biggest, China Film, at about 4.3% to HB which at 1.3% clusters in the same area between 1% and 2% with at least 8 other producers. This is rooted in the global nature of the film business today where a given year or given share is not necessarily a function of financial or asset deployment power. It reflects in China as everywhere else, the success or failure of individual films from the number of blockbusters to the number of flops it may release in a given year.

 As Disney’s 1Q19 results show, its filmed entertainment unit was down y/y 2% in operating income largely due to 2018 comps that included several blockbuster films. At the same time, its theme parks were up 13%—almost entirely due to a 7% increase in average visitor spend. And that increase we learn, came almost entirely from raised prices. So the key here is the price elasticity in the theme park business that filmed entertainment does not necessarily provide.

 In China there is also a wrinkle to the film business that links box office grosses to the trade in studio stocks. Over the years there has been considerable concern as to the accuracy of box office grosses reported by some studios. Our Hong Kong associate in that field outlined the problem. This quote is a translation.

 “You have instances where studios or theater operators buy up seats in off peak times and theaters that are fundamentally empty. You have ghost grosses. They then report a film has done much bigger business than it actually has because they know that reports of big grosses have a direct effect on the trade of movie stocks. And you get this bizarre situation where the move guys produce phantom grosses to pump up their stock”.

 “Much of this practice has been cleaned up, particularly among the top companies like HB. But in an economic environment where there are still observers in the financial sector that are not entirely comfortable that Beijing’s own economic GDP, trade and monetary numbers are all that accurate, anything is possible”. One of the priorities long expressed by Xi Jinping has been to end the lack of confidence in government numbers. Clearly such practices as ghost numbers can migrate to the private sector.

 In any event, estimated ticket sales in 2018 are believed to be relatively accurate rising to nearly US$9bn.

 Theme Parks forward look: Aging out and creating new

 Theme parks in China are currently showing a 13% rate of growth through 2017 totaling 190m admissions. According to a theme park engineers AECOM study, China will surpass the US as the globe’s biggest theme park market by 2020. Pipeline projects, of which HB projects it will participate with movie themes, continue to dominate in south and east China locations with 42% of all projects scheduled to open there covering a population base of 528m.

Over 27% of all current pipeline projects are themed to fantasy/cartoon/movie media intellectual property bases. Projected Capex total for the theme part pipeline from 2018 through 2025 is 280bn.

 Investors in the theme park space also need to understand the ongoing need to keep pop culture icons sprung out of film blockbusters as fresh as possible. The reason is the inevitable “aging out” of the biggest, most formidable themes. Disney characters such as Mickey Mouse made their first appearances in films in the 1920’s US and did not go global until the 1960s-70s. The company has reworked the theming several times.

 Yet its newest attractions are those like Star Wars Galaxy Edge due to go live at Disney Parks by Q3 this year. The first Star Wars movie debuted in 1977. In brief, children in the 8 to 16 year old demographic cohort back then are now in their fifties. A long list of sequels through last year have kept the imagery and characters refreshed through successive generations.

 What Disney has done well is to package and repackage its core intellectual property stars like Mickey Mouse, Donald Duck and Toy Story characters like the cowboy to keep younger generations eager to experience the live attractions. This is the core dilemma of investing in any sector heavily dependent on creativity.

 The takeaway: An investment theory even based on shifting sands can sometime produce powerful results. Facing a fading film business, Walt Disney literally went into deep debt to develop the first Disneyland in 1955. Linked to a television series, the park had a built in marketing engine. Yet by the early 1980s, the aging out of the company’s core characters and poor results from its efforts in non-cartoon films, the stock had taken a hit. The board brought in a new executive team that repurposed its intellectual property, reimagined its animation business and went on to acquire valuable properties from third parties.

 So our conclusion is that the heart of an entertainment company lies in the capacity to reinvent its character stable and repurpose its original form to a diverse downstream set of revenue producing units. That is what we see in HB.

 Even though they began business in 1994, as far as their diversification strategy goes, its early stages. If they succeed in their theme park initiatives and other related businesses beyond filmed entertainment, their valuation could surge given the starting point of an effective 5 year low.

 Part of the forward valuation consideration needs to be the partnerships thus far achieved with Jack Ma ,Tencent, and Evergrande. Do these sophisticated investors see a potential Disney model flourishing downstream?

So the question is this: Beyond standard investing metrics applied to HB, do investors need to consider a broader conception of how to value a company’s future. You can’t really measure a forward EBITDA number, or pluck a one year estimated PT out of what may spring from the imagination of the creative community where blockbuster ideas are generated.

 In the end, at its current low, HB may be a very cheap entry point if it can execute a “Disney-like strategy” over the next five to seven years as its theme park plans spread across the proposed 20 China cities.

 And the model is Disney. Every time the company appeared to run out of creative gas, it managed to find new inspired

properties within the minds of its key creative people.

So at its five year low we raise the question: Does the investment community see big rewards for HB exchanged for the risks implicit in the shifting sands of artists as opposed to projectable earnings metrics?

In this briefing:

1. Olympus: 3QFY03/19 Profits Decline on the Back of Litigation Related Costs
2. Cypress Semiconductor. The Perfect Acquisition Target.
3. Concordia Financial Group (7186 JP): Out of Focus
4. Shiseido Company Limited: 4QFY2018 Results – Setting Expectations Too High
5. Chiba Bank (8331 JP):  Top Dog

1. Olympus: 3QFY03/19 Profits Decline on the Back of Litigation Related Costs

Olympus Corporation (7733 JP) reported its 3QFY03/19 results on Friday (08^th February) after markets closed. The third quarter revenue dropped 1.7% YoY while operating profit declined by a significant 21.5% YoY, which was 12% below consensus estimates. The operating profit margin for the quarter was 8.8% compared to 11.1% for the same period last year.

The cumulative nine-month results were not impressive either. Although revenue saw a marginal improvement of 1.6% YoY, operating profit declined by 66%, resulting in a 700 basis point decline in operating margin, which fell to just 3.5%. Revenue and operating profit missed consensus estimates by 0.4% and 10.4%, respectively.

The company shares are currently trading at JPY4,645 per share which we believe is overvalued based on our EV/EBIT valuation. The premium is not justified given the governance related issues and the scandals currently faced by the company. Further, Olympus’ financial performance has been disappointing recently, and the company’s largest segment is growing only at single-digits and the Imaging business continues to drag on company revenue and margins. The share price gained nearly 38% since the beginning of the year following the company’s announcement to transform its business and improve governance. In our view the potential for a transformation in governance and business practices is already fully-discounted in the share price.

2. Cypress Semiconductor. The Perfect Acquisition Target.

There’s a lot to like about Cypress Semiconductor. Since taking the helm back in August 2016, CEO Hassane El-Khoury has led the company through a series of strategic realignments as part of his Cypress 3.0 initiative. While some of those moves were initially counterintuitive, they are now proving prescient as the company demonstrates far more resilience in the face of the current downturn compared to any period in its history.

Cypress offers exposure to the high growth automotive and IoT markets, industrial and consumer to a slightly lesser degree. Their product portfolio is the #1 market leader in new fewer than seven key segments, up from #3 just two years ago. On the latest earnings call, the company reported annual revenues of $2.48 billion for 2018, a 7% YoY increase. The company’s financial model targets a growth CAGR of 7-9% through 2021 and is well on track to achieve that goal. 

Like many of its peers, last year’s downturn saw Cypress share price fall more than 30% from its 52-week high at the trough. Currently, after a 6.63% rise on the back of solid earnings and reasonable outlook, its stock currently trades at $14.79, a 21.6% discount to the 52-week high. It also comes with an impressive dividend yield of 3.5% annualized as of December 31’st 2018.

We believe that the company would be an excellent acquisition target for the likes of Qualcomm whose failed bid for NXP last year thwarted its attempt to expand into the market for automotive semiconductors. We expect any such takeover offer would instantly add ~30% to the company’s share price. 

3. Concordia Financial Group (7186 JP): Out of Focus

CY2018 was not a good year for Concordia Financial Group, Ltd (7186 JP)  (CFG), the holding company for one of Japan’s largest regional banks, the Bank of Yokohama (BoY), and a small secondary regional bank, Higashi-Nippon Bank (HNPB).  Beset by a lending scandal at HNPB, which forced the bank’s president to step down, CFG’s share price remains some 30% below February 2018 levels, and has essentially traded sideways so far this year. 

CFG management’s attempts to placate disgruntled shareholders with stock buybacks and dividend payout increases have largely failed to impress.  3Q FY3/2019 profits declined by 8% year-on-year but relied heavily on non-core profit items: true core earnings collapsed 35.9%.  The Japanese banking sector remains unloved at present.  That said, currently trading on similar valuations to our much-preferred Chiba Bank (8331 JP) , CFG remains a liquid alternative to the ‘crowded trade’ of simply buying megabanks for exposure to the Japanese financial sector.  Patience, however, is the key word for investors here.  No harm in waiting to buy at a better entry price.

4. Shiseido Company Limited: 4QFY2018 Results – Setting Expectations Too High

Shiseido Co Ltd (4911 JP) reported its FY2018 results on 8^th Feb 2019. Shiseido’s revenue grew 8.9% YoY in FY 2018, marginally above our estimated growth rate of 8.7%. Shiseido’s EBIT increased by 34.7% in FY2018 primarily due to the gains made in the first 9 months of the year. However, in 4Q2018 the EBIT margin dropped to 2.4% from 3.6% in the same period last year. On a QoQ basis, margin drop was far more substantial as it declined more than 8.5% in 4QFY2018. Even though we were forecasting a decline in margins, we expected it to be a bit more gradual. Thus, Shiseido’s FY2018 EBIT fell short of our expectation. On the positive side, Shiseido also guided that they are increasing their semi-annual dividend by another JPY5.0 to JPY30.0 from 1HFY2019.

5. Chiba Bank (8331 JP):  Top Dog

Chiba Bank (8331 JP) , Japan’s 4^th-largest regional bank in terms of deposits, loans or total assets, reported consolidated recurring profits for the nine months to end-December 2018 (3Q FY3/2019) of ¥59.66 billion (down 10.6% YoY) and net profits of ¥41.44 billion (down 10.8% YoY) on marginally higher revenues of ¥180.20 billion (+1.3% YoY).  Results were influenced by higher funding costs and a sharp rise in credit costs that offset the benefits of strong growth in loan demand.  There was also some improvement in net interest income and securities trading profits, and a reduction in administrative expenses.  The Japanese banking sector is currently unloved by foreign investors. However, trading on a forward-looking PE ratio of 9.1x (using the bank’s own FY3/2019 guidance), a PBR of 0.52x and boasting the highest current market capitalisation of any Japanese regional bank of ¥553.9 billion (US$5.04 billion), Chiba Bank continues to offer good prospects of long-term growth and a strong profits ‘track record’ supported by the underlying strength of the Chiba prefectural economy.

In this briefing:

1. CyberAgent: Tumbling Dice
2. Angang Steel: Headwinds Intensify
3. Huayi Brothers: Their Move to Theme Part Echoes A Disney Business Model Worth a Hard Look
4. The Downward Revision in FY03/19 Guidance Places Panasonic in Our Worst-Case Scenario
5. Murata Up 12.8% Following 3QFY03/19 Earnings Release

1. CyberAgent: Tumbling Dice

Source: Japan Analytics

TUMBLING DICE – After ZOZO (3092 JP) (-52%) and Mercari (4385 JP) (-50%), CyberAgent (4751 JP) is the worst-performing large-cap Internet stock in Japan over the last seven months.  The company is the sector’s leading foreigner-held stock with over 48% (60%+ of the float) held by institutional investors such as Baillie Gifford (11.9%), JP Morgan AM (6.9%), Tybourne Capital (5.1%) and Blackrock Japan (5.0%). Having outperformed the sector and the market annually over the last nine years by 38% and 25%, respectively, over the seven months since the stock peaked in terms of our Relative Price Score on 13th July, CyberAgent shares have declined by 56%, underperforming the market by 48% and the sector by 37%.

PASSIVE PERILS – We will discuss the ‘perils ‘ of Passive TV in the DETAIL below. However, CyberAgent is yet another good example of the ‘perils’ of passive investing. On September 5th Nikkei Inc. announced that CyberAgent would replace Furukawa (5715 JP) in the Nikkei 225 index, with the inclusion occurring on October 1st. Since the ¥6050 intraday peak of the week before inclusion in the index, the shares have declined by 49% in 90 trading days.   

SUMMARY – CyberAgent’s business has three ‘pillars’, internet advertising, mobile gaming software, and media. The latter now includes the linear free-to-view AbemaTV business, which helped drive the share price to a post-listing high of ¥6930 in July 2018. Since then, business conditions for two of these ‘pillars’ have degraded significantly,  while the fledgeling TV business remains in ‘up-front’ investment mode. To cap what will be a turbulent year for CyberAgent, the company is moving into a new head office building in Shibuya called ‘Abema Towers‘ in March. We shall refrain from making any analogies to the Skyscraper Index. 

VISION SHIFT? – In previous years, CyberAgent had a clear vision statement – ‘To create the 21st century’s leading company’. The company’s recent performance has led to a change of tone, and CyberAgent is now rather more modestly just ‘Aiming to be a company with medium to long-term supporters’.  In the vein of the lyrics from the best song on the best Rolling Stones album, Exile on Main Street, the business has recently been at ‘all sixes and sevens and nines’. In the search for new ‘supporters’, we encourage CyberAgent to just ‘keep on rolling’, letting the dice fall where they may. 

2. Angang Steel: Headwinds Intensify

INVESTMENT VIEW:  The outlook for Angang’s profitability in 2019 is deteriorating quicker than consensus forecasts, we believe.  Chinese steel demand and pricing are forecast to be weak in 2019, yet raw material costs remain high.  We recommend staying short Angang Steel Co Ltd (H) (347 HK) shares with a PT of HK$5.

3. Huayi Brothers: Their Move to Theme Part Echoes A Disney Business Model Worth a Hard Look

• Movie World park is first stage in long term plan for 20 “movie theme” cities in China.
• Jack Ma’s investment in company has grown since 2015: Its film finance.
• Company sees licensing of intellectual property rather than brick and mortar as key to best asset deployment as they diversify.

The Walt Disney Company’s just released 1Q19 earnings report held an upside surprise of $1.84 a share beating consensus of $1.57. Revenues of US$15.5bn also beat analysts expectations of US$15.180bn. Filmed entertainment was down due to tough comps from last year’s blockbuster releases. Network TV was up. But what commands our attention in this insight is results from Disney theme parks: All units showed flat to modest growth in attendance, with revenue up primarily due to raised prices. Disney Shanghai was softer than last year attributed to the economic slowdown. Yet theme parks continue to lead the Disney business units year in and year out.

 Reviewing that result in the light of ongoing research I have been working at on Asia theme park prospects, I focused in on Huayi Brothers. Their movie themed park at Suzhou opened last July. While it is too early to make a long term call on the film company’s diversification into theme parks, their move to monetize their intellectual property in that space foretells more diversification ahead.

 The Disney business model appears to be proceeding.

 Huayi Brothers Media Corporation (SHE: 300027)

(All amounts shown in CNY except where otherwise noted).

 Since an ebullient IPO debut in 2009, when on October 23^rd, HB stock skyrocketed to 63.66yuan trading was halted, the stock price has since been both spiked and rocked by events. Most recently, it fell 21% last June when news of the details of a sketchy performance contract for one of HB’s top female stars made headlines. She appeared to have made an effort to disguise her salary. The scandal broke on television. It has triggered an investigation by Beijing officials. Promptly HB founder and Chairman Dennis Wang pledged US$16m to bolster confidence the shares amid continuing disputations between the parties to the scandal.

 On a positive note, during the last five year period, Alibaba’s (NYSE:BABA) Jack Ma announced he was investing US$103M over 5 years to finance the production of 10 HB films. On that news the shares had spiked 6.6%. There are also standing deals with real estate operator Evergrande Group (HK3333) and Tencent Holding(OTC) to deploy HB intellectual property names and brands into theme parks and online social gaming.

 Out of this mix of headwinds and tailwinds in the already volatile China entertainment/film sector, we arrive at a point where HB shares have taken a long, sustained beating. We are moved to believe that now rubbing up against a 5 year low, is the stock its worthy of attention for investors who have a risk profile. One needs to be comfortable with HB’s gyrating past trading patterns to see opportunity in its future as a “Disney in the making” in the words of a film executive friend from Hong Kong.

 Price at writing: 4.51 (52wk low 4.06)

5 year high: June 5 2015: 23.26

1 year high: (2018): 10.14

3 year high: May 23 2016: 14.30

3 year low: 4.70

 Market cap at writing: 12.61bn

P/E 15.11

EPS: 0.30

Revenue: 3.93bn

Revenue growth: 12.7%

EBITDA: 625m

LTD AT WRITING: 5.92bn

Equity: 10.5bn

Book value: 3.58bn

 To get a sense of how major institutional investors were responding to the roller coaster rides of the HB trade we note here that Vanguard International Stock Index Emerging Market Fund, one of HB’s biggest investors, is still holding its position at writing 2,727,202 shares of valued at 23,567,346bn cny.

 The Disney strategy

 The company began as a film production studio in 1994 and has since expanded its TV, internet, movie theaters, talent agencies and more recently, theme parks.

 It is its foray into the theme park space that is the clearest expression of its “Disneyesque” business model. Last July HB opened a 400,000 square meter theme park at Suzhou called “Movie World”. They announced it was the first in a series of 20 “film cities parks” they would create by providing intellectual property from their film hits partnered with realty developers.

 In a study of the China film industry from Deloite Global published in 2017, the researchers noted, “With Disney as its model, HB has launched a “de-cinematic” strategy that integrates the traditional film business, internet entertainment, location-based entertainment, expanding to upstream and downstream industry chains to alleviate dependence on the film industry.”

 Current estimates are that HB revenues continue heavily in film with over 85.% of its total sales from that sector, another 7.8% from internet entertainment, and 6.6.% from brand licensing. All others contribute 0.8%.

 However its going forward strategy is not to deploy hard capex on actually building theme parks but to partner with such realty operators like Evergrande as an intellectual property provider. This veers from a Disney formula since that company has financed and developed its theme parks internally from land acquisition to design, construction and operations. But it does comport with the core Disney strategy of monetizing intellectual property sprung from its films.

 The China film industry is notably dominated by the top 15 companies, among which is HB. The sector is at the same time without a dominant cluster of “major” studios as is the case in the US and other markets. The division of market share among the top players run from the biggest, China Film, at about 4.3% to HB which at 1.3% clusters in the same area between 1% and 2% with at least 8 other producers. This is rooted in the global nature of the film business today where a given year or given share is not necessarily a function of financial or asset deployment power. It reflects in China as everywhere else, the success or failure of individual films from the number of blockbusters to the number of flops it may release in a given year.

 As Disney’s 1Q19 results show, its filmed entertainment unit was down y/y 2% in operating income largely due to 2018 comps that included several blockbuster films. At the same time, its theme parks were up 13%—almost entirely due to a 7% increase in average visitor spend. And that increase we learn, came almost entirely from raised prices. So the key here is the price elasticity in the theme park business that filmed entertainment does not necessarily provide.

 In China there is also a wrinkle to the film business that links box office grosses to the trade in studio stocks. Over the years there has been considerable concern as to the accuracy of box office grosses reported by some studios. Our Hong Kong associate in that field outlined the problem. This quote is a translation.

 “You have instances where studios or theater operators buy up seats in off peak times and theaters that are fundamentally empty. You have ghost grosses. They then report a film has done much bigger business than it actually has because they know that reports of big grosses have a direct effect on the trade of movie stocks. And you get this bizarre situation where the move guys produce phantom grosses to pump up their stock”.

 “Much of this practice has been cleaned up, particularly among the top companies like HB. But in an economic environment where there are still observers in the financial sector that are not entirely comfortable that Beijing’s own economic GDP, trade and monetary numbers are all that accurate, anything is possible”. One of the priorities long expressed by Xi Jinping has been to end the lack of confidence in government numbers. Clearly such practices as ghost numbers can migrate to the private sector.

 In any event, estimated ticket sales in 2018 are believed to be relatively accurate rising to nearly US$9bn.

 Theme Parks forward look: Aging out and creating new

 Theme parks in China are currently showing a 13% rate of growth through 2017 totaling 190m admissions. According to a theme park engineers AECOM study, China will surpass the US as the globe’s biggest theme park market by 2020. Pipeline projects, of which HB projects it will participate with movie themes, continue to dominate in south and east China locations with 42% of all projects scheduled to open there covering a population base of 528m.

Over 27% of all current pipeline projects are themed to fantasy/cartoon/movie media intellectual property bases. Projected Capex total for the theme part pipeline from 2018 through 2025 is 280bn.

 Investors in the theme park space also need to understand the ongoing need to keep pop culture icons sprung out of film blockbusters as fresh as possible. The reason is the inevitable “aging out” of the biggest, most formidable themes. Disney characters such as Mickey Mouse made their first appearances in films in the 1920’s US and did not go global until the 1960s-70s. The company has reworked the theming several times.

 Yet its newest attractions are those like Star Wars Galaxy Edge due to go live at Disney Parks by Q3 this year. The first Star Wars movie debuted in 1977. In brief, children in the 8 to 16 year old demographic cohort back then are now in their fifties. A long list of sequels through last year have kept the imagery and characters refreshed through successive generations.

 What Disney has done well is to package and repackage its core intellectual property stars like Mickey Mouse, Donald Duck and Toy Story characters like the cowboy to keep younger generations eager to experience the live attractions. This is the core dilemma of investing in any sector heavily dependent on creativity.

 The takeaway: An investment theory even based on shifting sands can sometime produce powerful results. Facing a fading film business, Walt Disney literally went into deep debt to develop the first Disneyland in 1955. Linked to a television series, the park had a built in marketing engine. Yet by the early 1980s, the aging out of the company’s core characters and poor results from its efforts in non-cartoon films, the stock had taken a hit. The board brought in a new executive team that repurposed its intellectual property, reimagined its animation business and went on to acquire valuable properties from third parties.

 So our conclusion is that the heart of an entertainment company lies in the capacity to reinvent its character stable and repurpose its original form to a diverse downstream set of revenue producing units. That is what we see in HB.

 Even though they began business in 1994, as far as their diversification strategy goes, its early stages. If they succeed in their theme park initiatives and other related businesses beyond filmed entertainment, their valuation could surge given the starting point of an effective 5 year low.

 Part of the forward valuation consideration needs to be the partnerships thus far achieved with Jack Ma ,Tencent, and Evergrande. Do these sophisticated investors see a potential Disney model flourishing downstream?

So the question is this: Beyond standard investing metrics applied to HB, do investors need to consider a broader conception of how to value a company’s future. You can’t really measure a forward EBITDA number, or pluck a one year estimated PT out of what may spring from the imagination of the creative community where blockbuster ideas are generated.

 In the end, at its current low, HB may be a very cheap entry point if it can execute a “Disney-like strategy” over the next five to seven years as its theme park plans spread across the proposed 20 China cities.

 And the model is Disney. Every time the company appeared to run out of creative gas, it managed to find new inspired

properties within the minds of its key creative people.

So at its five year low we raise the question: Does the investment community see big rewards for HB exchanged for the risks implicit in the shifting sands of artists as opposed to projectable earnings metrics?

4. The Downward Revision in FY03/19 Guidance Places Panasonic in Our Worst-Case Scenario

• Panasonic Corp (6752 JP)’s 3Q earnings were quite weak, failing to meet both consensus and our estimates. Panasonic reported revenue of JPY2,074.8bn and OP of JPY97.5bn resulting in an OPM of 4.7% compared to 5.8% in the third quarter of last year
• The majority of revenue growth came from the Automotive & Industrial Solution (A&IS) segment which saw the strongest growth in revenue at nearly 8% YoY followed by the Eco Solutions Segment. Despite the steady growth in the A&IS revenue, the segment continued to display a decline in profits by almost 13% YoY.
• A downward revision in targets was made following the weak earnings this quarter. Nine-months cumulative figures weren’t particularly attractive in the OP front as well (Revenue up 3% YoY and OP down -8% YoY as of 3QFY03/19). Panasonic is nearing our modest case scenario, although its downward revised earnings target places it in our worst-case scenario, where we expect Panasonic to be exposed to a high degree of risk, increasing its lookout for other customers. Panasonic has only tied up with Toyota Motor (7203 JP) thus far and may have to diversify its customer base further to bring earnings to a sustainable level.
• After the earnings release and news about Chinese competitor, CATL (A) (300750 CH), collaborating with Honda Motor (7267 JP) ( Honda Chooses CATL as Battery Partner for Their EVs; Panasonic Has Lost the Chance), Tesla Motors (TSLA US) announced that it was acquiring battery company Maxwell Technologies for production of its EV batteries. Panasonic fell almost -5% on Monday’s open.

5. Murata Up 12.8% Following 3QFY03/19 Earnings Release

• Murata reported 3.4% YoY revenue growth to JPY427.6bn and 89.9% YoY OP growth to JPY85.6bn in its third quarter earnings.
• Despite the strong third quarter performance, we, along with consensus, expect the company to underperform its revenue guidance. This is mainly due to the slowdown in the smartphone market, which is expected to persist in the current quarter as well.
• Based on our estimates, Murata is currently trading at a FY1 PE multiple of 17.5x, lower than its historical median of 20.5x.

In this briefing:

1. SNC: Downgrade to “HOLD” to Factor in Gloomy Outlook
2. Sony Revises FY03/19 Guidance Downwards; Management Announces a Surprise Buyback
3. Mitra Adiperkasa (MAPI IJ) – Retail Therapy Is Alive and Well – On the Ground in J-Town
4. Meiji Holdings 3QFY2019 Results On Track to Meet Guidance, Dark Clouds Loom Over Its Mid Term Target
5. Zozo: At First the Fit Was Bad but Now the Threads Are Unravelling

1. SNC: Downgrade to “HOLD” to Factor in Gloomy Outlook

SNC’s 4Q18 net profit dropped 39%YoY to Bt72m, lowest in past five quarters.  

• The drop in sales to Bt1.288m (-19%YoY) and the rise in SG&A to sales from 6.6% in 4Q17 to 9.6% are major contributors to the drop in earnings.
• Overall, FY18 net profit was Bt431m (+6%YoY) despite 14% decrease in sales. The strong improvement in its 2018 earnings was due mainly to high restructuring costs in 2017.
• We maintain neutral view toward its 2019-20 outlook due to slow recovery in overall industry.

We cut our target price by 17% to Bt14 (9.6xPE’19E) and downgrade from “BUY” to “HOLD” for gloomy outlook. Despite limit upside, current share price is still cheap compared to historical trading and offer an attractive dividend yield (6.5% in 2019-20E).

2. Sony Revises FY03/19 Guidance Downwards; Management Announces a Surprise Buyback

• Sony’s revenue for the quarter fell by 10.1% YoY to JPY2,401.8bn while company’s OP saw a 7.5% YoY growth in 3QFY03/19. 
• Sony downgraded its FY03/19 revenue guidance following the third quarter’s earnings results. The company expects to make revenue worth JPY8,500bn for FY03/19, a 2.3% decrease from the October forecast. Sony’s OP forecast for the year still remains at JPY870.0bn.
• Following the 3QFY03/19 earnings release, the company announced that it would buyback JPY100bn worth of its own stock starting Tuesday and lasting until the 22nd of March. 
• As per consensus expectations, Sony is currently trading at a FY1 PE multiple of 7.6x, significantly lower than its historical median of 19.7x.

3. Mitra Adiperkasa (MAPI IJ) – Retail Therapy Is Alive and Well – On the Ground in J-Town

With the huge investment that has been going into e-commerce in Indonesia, especially in the consumer space, there are doomsayers out there crying out that the end is nigh for traditional offline retail as we know it.

Anyone who has actually visited popular destination Jakarta malls such as Grand Indonesia or Kota Kassablanca with their eyes open would almost certainly take a different view. 

A visit to Mitra Adiperkasa (MAPI IJ) management in Jakarta last week confirmed that middle-class retail therapy in Indonesia is alive and well and the company is well positioned to take advantage.  

Mitra Adiperkasa (MAPI IJ) finished 2019 with +8% Same Store Sales Growth (SSSG), with a particularly strong performance from its Sports Station Stores within Ramayana Lestari Sentosa (RALS IJ) stores. 

The company continues to expand its footprint in Indonesia, with plans to increase its floor area by 60,000 sqm in 2019 and a focus on MAP Active, Fashion, and Starbucks. 

MAP continues to take an omnichannel approach to sales, working with all the major online marketplaces and selling through its own Mapemall.com. Online sales only account for around 1% of total sales currently. 

Mitra Adiperkasa (MAPI IJ) remains a key proxy for middle-class consumption in Indonesia, with an increasingly broad spectrum of exposure through alliances with other retailers such as Ramayana Lestari Sentosa (RALS IJ) and Pt Matahari Department Store (LPPF IJ), as well as through its Starbucks expansion. After a few years of restructuring, the company is now harvesting on its transformation, with its specialty business now growing at a faster pace, its department stores in much better shape, and Starbucks enjoying better scale benefits. The company’s margins have improved, it has a stronger balance sheet and more efficient working capital management. According to Capital IQ, the company is trading on 19.6x FY19E PER and 16.5x FY20E PER, with forecast EPS growth of +14.0% and +18.2% for FY19E and FY20E respectively, which continues to look attractive in valuation terms. 

4. Meiji Holdings 3QFY2019 Results On Track to Meet Guidance, Dark Clouds Loom Over Its Mid Term Target

Meiji Holdings (2269 JP) recorded revenue growth of 4.1% in 3QFY2019. The food segment which produces yoghurt, drinking milk, cheese, ice cream, chocolate, nutritional products and sports nutrients came short of the expectations as it recorded a 1.1% drop in revenue. The pharmaceutical segment grew by 35.9% during the quarter allowing Meiji to maintain overall revenue growth in line with FY2019E guidance.

In contrast, EBIT turned out better than expected as it grew 32.6% in 3QFY2019. Both the food and pharmaceutical segments reported significant margin gains, thus the overall EBIT margin of Meiji improved by 227bps cf. 3Q2018.

5. Zozo: At First the Fit Was Bad but Now the Threads Are Unravelling

Just a day after a pledge from CEO Maekawa to stop tweeting sent ZOZO Inc (3092 JP)‘s stock up 8% intraday, the Nikkei reported that United Arrows (7606 JP) would be parting ways with Zozotown and bringing their e-commerce business in-house from October. This comes just days after United Arrows affirmed their desire to continue working with Zozo casting doubt on the positive noises coming from Zozo itself.

As we have pointed out previously, this is the big risk for Zozo and with arguably the company that granted Zozo credibility when it was a startup leaving, a dark cloud has settled over the company’s mid-term future.

In this briefing:

1. Ghabbour Auto: Hyundai Motor’s Gateway to Egypt & A Major Turnaround Story

1. Ghabbour Auto: Hyundai Motor’s Gateway to Egypt & A Major Turnaround Story

• This is a follow-up report to Dylan Waller‘s note Egypt Travel Report: Stock Market Discount Widens Despite Numerous Recovery Signals. This report is the first of several company-specific series of reports on the Egyptian companies. Although I have taken a first crack at analyzing Ghabbour Auto (AUTO EY) (also called GB Auto), most of the other Egyptian company specific reports will be done by Dylan Waller. 
• In this report, I provide an analysis about Ghabbour Auto, which is the largest auto manufacturing company Egypt, and it is also a distributor of Hyundai Motor vehicles. This report is aimed at investors with very long-term investment perspectives (3 to 5+ years), rather than those with shorter investment horizons. 
• Established in 1960, the Ghabbour Group is an Egyptian manufacturer of automobiles, buses, and motorcycles, with headquarters in Cairo. Ghabbour Auto has partnerships with numerous global auto makers including Hyundai Motor, Mazda, Geely, and Volvo. The company has the exclusive license to assemble and distribute Hyundai and Geely passenger cars. GB Auto is the largest company in the Egyptian passenger car market in terms of market share, sales, and production capacity.