Equity Bottom-Up

In this briefing:

1. Keyence (6861 JP): Deceleration Continues in 3Q
2. Hoya Reports Solid 3QFY03/19 Performance; Our Outlook on the Company Remains Unchanged
3. KDDI: 3Q18/19 Results Miss Slightly but Stock Is Poised to Benefit From Lower Handset Subsidies
4. DTAC: Survived 2019 but Pressured on All Sides. Maintain Reduce.
5. Intel’s New CEO. The Best An IDM Can Get?

1. Keyence (6861 JP): Deceleration Continues in 3Q

Keyence reported higher sales and profits but lower rates of growth in the three month to December. Consolidated sales were up 11.8% year-on-year compared with 15.2% growth in 2Q and 19.7% growth in 1Q. Operating profit was up 9.1% compared with 12.7% growth in 2Q and 21.2% growth in 1Q. The operating margin declined to 53.8% compared with 55.2% in 2Q, 54.6% in 1Q and 56.6% in 4Q of FY Mar-18.

Once again, the results at Keyence were much better than those at other factory automation related companies – notably Fanuc (6954 JP) and Omron (6645 JP), where operating profits dropped at double-digit rates. But Keyence is geared to incremental improvements rather than large capital outlays, and to customers’ R&D spending, and it has a diversified base of user industries. On the other hand, it is not immune to weakening demand in China, Europe and elsewhere.

Since hitting a 52-week low of ¥50, 780 on October 26, Keyence has rebounded by 13%. At ¥57,270, the shares are now selling at 30x our EPS estimate for this fiscal year and 27x our estimate for FY Mar-20. Their 5-year historical P/E range is 18x – 42x. Other valuations are also well up in their historical ranges.

The sales and profit data suggest difficult year-on-year comparisons for the next few quarters.

2. Hoya Reports Solid 3QFY03/19 Performance; Our Outlook on the Company Remains Unchanged

Hoya Corporation (7741 JP) reported its 3QFY03/19 earnings yesterday (01^st Feb). The revenues grew at 4.9% YoY while operating profit increased by a hefty 20.2% YoY during the quarter. On a constant currency basis, revenues grew 6.6% YoY while pre-tax profit increased 15.0% YoY during the period. In addition, Hoya’s margin too witnessed an expansion with operating profit margin reaching 27.8% from 24.3%, while it reported a pre-tax margin of 27.7% compared to 25.4% a year ago. Moreover, the company beat consensus estimates on revenue, operating profit and pre-tax profit.

Revenues grew thanks to strong performances by the Life Care and Electronics businesses although the Imaging business saw a decline.

3. KDDI: 3Q18/19 Results Miss Slightly but Stock Is Poised to Benefit From Lower Handset Subsidies

KDDI’s (9433 JP) 3Q results were a small miss (2% vs our forecasts), at both the revenue and profit lines, but not enough to change our positive stance. A key part of our view is derived from our negative view on Apple (AAPL US) from August 2018 where we see an “air-pocket” of demand loss coming through. This is particularly important to Japan where the iPhone accounts for around 75% of smartphones. Apple has downgraded guidance and we believe is in a secular downtrend as refresh cycles elongate and that has been accentuated by the pull forward of demadn for the iPhone X. 

This is playing out in Japan, with KDDI reporting handset revenues down 13% YoY, and the key cause of the revenue miss. KDDI increased discounting to offset falling sales in 3Q adding a ¥9.9bn increase in handset costs in the quarter. Without that, EBIT would have beaten expectations. KPIs were generally strong, and service revenue trends improved to -0.1% YoY from -0.8%. Given the nature of the miss, and the fact the company is reiterating guidance we do not expect material changes to forecasts. Our price target is ¥4,100, and our recommendation remains Buy.

4. DTAC: Survived 2019 but Pressured on All Sides. Maintain Reduce.

Total Access Communication (DTAC TB) has emerged from a torrid 2018 and has survived. That was not always a certainty as the year progressed and their access to much of their spectrum expired. In the end DTAC managed to buy some 2x5MHZ of 900MHZ and 2x5MHZ of 1800MHZ spectrum and retain access temporarily to expired spectrum (the remedy). See DTAC 3Q Result: No Recovery Yet. Spectrum Issue Now Solved, but Leverage Is Rising.

However, survival has come at a cost. DTAC is paying a high price to TOT to rent its 2300MHZ spectrum (and is paying to build out the network), it has paid large sums to secure small amounts of 1800MHZ and 900MHZ spectrum to partially replaced expired concession spectrum and has agreed to pay to use equipment sitting on CAT’s infrastructure.  Finally it has moved to settle a number of disputes with CAT (discussed in Thai Telcos: Outstanding Liabilities to CAT/TOT Loom Post DTAC’s Partial Settlement) and pay them a net THB9bn. That clears the decks partially but there are some very large outstanding cases not covered (these relate to all three operators).

Latest results do little to suggest that good times are just around the corner. They were disappointing and suggest the Thai market will continue to struggle in 2019 as discussed in Emerging Asean Telcos 2019: Indonesia Looks Best Placed. Malaysia Improving. DTAC’s survival has led to increased competition in the market as it moves to win back customers and that suggests more earnings disappointment to come. We remain cautious and somewhat surprised by the strong move in recent days. We have a Reduce recommendation and THB32 target price.

5. Intel’s New CEO. The Best An IDM Can Get?

After seven months of searching, Intel has just announced that interim CEO Bob Swan’s position will be made permanent, making him the seventh CEO in the company’s 50 year history and the first to attain that position not having risen through the ranks of what was once a world-class succession planning process. Mr. Swan, who joined the company to replace Stacy Smith as CFO back in 2016, had originally declared himself out of the running for the role. Is Mr. Swan the best a global IDM giant can get as its CEO?

In this briefing:

1. Major Highlights of SK Telecom’s 4Q18 Earnings Conference Call
2. CyberAgent Cuts Its OP Guidance by JPY10bn; We Are Still Bullish
3. TDK Revises FY03/19 Guidance on the Back of US-China Trade Tensions
4. Alibaba (BABA): For Dec. Quarter, Focus on Profit Improvement, But Not Revenue Growth, 40% Upside

1. Major Highlights of SK Telecom’s 4Q18 Earnings Conference Call

• SK Telecom (017670 KS) reported disappointing 4Q18 earnings results. SK Telecom’s revenue of 4,351.7 billion won was 0.2% lower than consensus and its operating profit of 225 billion won was 23% lower than the consensus in 4Q18. Despite the disappointing 4Q18 results (especially due to lower operating income and lack of flow through of SK Hynix dividends to SKT), we remain positive on SK Telecom.
• We believe that SK Telecom’s 10,000 won DPS in 2018 is a disappointment. However, we believe the stage has been set for higher DPS policy, linking SK Hynix’s dividends to SK Telecom and as mentioned in the conference call numerous times, this is likely to be announced in the AGM in March. In terms of amount, we believe 13,000 won to 15,000 won appears to be reasonable in 2019. 
• The company’s comment about its sales and profits improving starting in 2H 2019 is consistent with its previous statement in the third quarter conference call. However, the company’s statement about its revenue target of more than 1 trillion won growth YoY in 2019 is new and positive. In 2018, SK Telecom generated consolidated sales of 16.9 trillion won, down 3.7% YoY. If the company is able to generate revenue of 17.9 trillion won in 2019, this would represent a growth of 5.9% YoY. The current consensus estimate of the company’s sales is 17.47 trillion won in 2019. Thus, the company has basically guided the 2019 sales target by 2.5% higher than the current consensus estimate.

2. CyberAgent Cuts Its OP Guidance by JPY10bn; We Are Still Bullish

Cyberagent Inc (4751 JP) reported 1Q FY09/19 financial results on Wednesday (30^th January) after the market close. CyberAgent reported revenue of JPY110.8bn (+13.2%YoY) and OP of JPY5.3bn (-35.2%YoY) for 1Q FY09/19.

Revenue and OP both missed consensus (JPY111.7bn and JPY8.2bn respectively). This was mostly due to low OP from the Game business due to increased advertising expenditure for new titles. OP margin of the Internet Advertisement business also fell due to upfront investments for expansion. Media business, driven by AbemaTV, demonstrated strong topline growth driven by robust increase in the number of AbemaTV premium users but continued to make losses due to heavy investment in content development.

CyberAgent revised down its full-year FY03/19E OP guidance to JPY20bn from JPY30bn previously, but we continue to remain positive about the company’s long term performance, driven by the prospects of its passive TV business (see Mio Kato‘s previous note on this Cyberagent: Aggressive Plans for Passive TV).

CyberAgent’s share price closed at JPY3,500 on Thursday (31st January) down 16% from its previous close. CyberAgent’s share price has been on a bearish trend for the last two quarters, down 49% from an all-time high of JPY6,800 in July. We believe this presents an ideal buying opportunity for the stock. Our SOTP valuation for CyberAgent gives a FY1 target price of JPY4,480 which implies a 28% upside to the current market price.

For details on Cyberagent’s business model please see our previous notes CyberAgent: Hot Internet Media Stock Up ~50% YTD (Part 1) and CyberAgent (Part II): Medium-Term Prospects Are Priced In; Positive Long-Term Outlook .

3. TDK Revises FY03/19 Guidance on the Back of US-China Trade Tensions

• TDK revised its FY03/19E guidance following the 3QFY03/19 earnings release, which underperformed both consensus and LSR expectations. 
• The company has been affected by the US-China trade war and the deceleration of the Chinese economy in the third quarter. 
• Revenue guidance for FY03/19E has been decreased to JPY1,370bn from JPY1,420bn (-3.5%) projected in October 2018. OP guidance for the year has been reduced to JPY110bn compared to the previous expectation of JPY120bn (-8.3%).
• On our estimates, TDK is currently trading at a FY1 PE of 12x, lower than its historical median of 16.4x.

4. Alibaba (BABA): For Dec. Quarter, Focus on Profit Improvement, But Not Revenue Growth, 40% Upside

• For the December quarter results, the market is focusing on the slowdown of the revenue growth, but we notice that the growth rate of operating profits recovered.
• In two of our previous reports, we mentioned BABA’s efforts on cost control in the second half of 2018. Now we can see the results.
• We believe the most important risk is the significant operating losses in the minor business “digital media”.
• The P/E band suggests that the stock price has an upside of 40%.

In this briefing:

1. Misumi Group (9962 JP): Another Downward Revision
2. JDI: Share Price Continues to Slide Following Weak Earnings Outlook Due to US-China Trade War
3. ACB: Quality at a Reasonable Price
4. Koito Outperforms in 3Q While Stanley Disappoints; Latter Still on Track to Achieve FY03/19E Target
5. Mexican Banks AMLO Effect; Less Bad than Feared?

1. Misumi Group (9962 JP): Another Downward Revision

Misumi Group sold off after announcing poor 3Q results and another downward revision to FY Mar-19 sales and profit guidance, but bounced right back to finish at ¥2,480 yesterday (January 31), which is 30x management’s new EPS estimate for this fiscal year. Price/book value (as of the end of December) is 3.6x. The indicated dividend was cut in line with guidance, maintaining management’s 25% payout ratio target but resulting in a dividend yield of 0.8%.

Operating and net profits are now expected to decline. Management is guiding for a 7.1% increase in sales in FY Mar-19 as a whole, but monthly data shows year-on-year growth dropping to 5.2%  in November and 3.1% in December. Factory Automation sales were unchanged in November and down 1.3% in December, 

In the three months to December, operating profit dropped 17.8% year-on-year on a 5.7% increase in sales, with Factory Automation profit down 16.9% and VONA profit down 35.4%. Inventory was up while receivables were down. Sales growth in China turned negative. 

The company continues to invest in production capacity, logistics and IT, aiming to expand its Factory Automation and VONA e-commerce businesses in Japan, Asia, America and Europe. The goal is to create a unified, cloud-based, rapid-response distribution system with the world’s largest components and production materials database. The anticipated success of this plan appears to explain both the rebound in the share price and relatively high current valuation, but with the China growth trajectory broken and the economic outlook uncertain, it may take longer and come with lower margins than originally expected.

2. JDI: Share Price Continues to Slide Following Weak Earnings Outlook Due to US-China Trade War

A Japanese newspaper recently reported that JDI is expected to post a consolidated loss for the current fiscal year. However, the company claims that the newspaper report was not based on any forecast made by JDI. The company has stated that it is currently calculating topline and bottomline for the third quarter and it expects the economic slowdown in China, prolonged user lifecycles for smartphones and the US China trade war to in fact have a greater than expected impact on the company’s financial performance. While its third quarter results are to be released in mid-February 2019, consensus expects the company to turnaround its losses to make an overall net profit for the year.

3. ACB: Quality at a Reasonable Price

Fundamental trends at Asia Commercial Bank/Vietnam (ACB VN) are benign and stand out within Vietnam’s improving banking universe. The bank has delivered on its objectives over the last year and key metrics/signals at 12M18 underline positive fundamental momentum and quality-value attributes, embodied in a high PH Score™.

ACB’s improvements reflect a sound macro backdrop (upgraded sovereign strength) as well as a strategy that is based on higher-margin consumer lending, and to a lesser extent SMEs, balanced by a rising CASA deposit base. More than 50% of the loan book stems from retail accounts, of which a third this relates to mortgages.

The bank targets greater efficiency, a digitalization drive (some 25% of transactions are on-line), and an expanding customer base, including SME payroll accounts.

Vietnam exhibits broad-based, mild-inflationary, growth. Reforms continue in the banking sector, privatisations and reducing red tape. However, economic distortions and capacity constraints remain, as do external and domestic risks and longer-term challenges. The robust economy though provides an opportunity for additional reforms to boost investment, ensure durable growth and resilient balance sheets, and reduce the external surplus.

Regarding banks, SOCBs need to be capitalized with government funds, and private sector and foreign ownership limits raised (lifting a 30% foreign investor limit to banking and aviation is underway). Vietnam needs to develop a macroprudential framework and to enhance data quality on balance sheet exposures to better monitor and manage risks, and to ensure that robust liquidity and crisis management frameworks are in place from a legal and operational perspective in order to mitigate financial sector risks. The broad picture though reflects an improved macro profile combined with progress at banks in writing off legacy problem assets and boosting capitalisation – especially in the case of ACB as well as ABB, ACB, Military Bank, OCB, TPbank, VIB, and Techcombank. However, (outperforming) Sacombank faces a risk from its problem assets while VP is constrained by risk from its consumer finance portfolio. 

4. Koito Outperforms in 3Q While Stanley Disappoints; Latter Still on Track to Achieve FY03/19E Target

Koito Manufacturing (7276 JP) released its 3QFY03/19 earnings that saw revenue outpace consensus estimates by +2%, while Stanley Electric (6923 JP) ’s revenue fell below consensus estimates by -1%. While Koito witnessed revenue growth of 10% YoY, Stanley posted a decline in revenue for the quarter by -4% YoY. On profitability as well, Koito witnessed growth of +6% YoY, achieving an OPM of 12%. Stanley, on the other hand, experienced a decline in OP for the quarter by -7% YoY, although still managing to achieve a relatively higher OPM of 13%. Here again, Koito managed to beat consensus estimates by +1% while Stanley fell below consensus estimates by -3%. Our conservative estimates for 3Q looked a bit light for Koito while they were slightly high for Stanley.  Koito has been the company which usually disappoints the market with its earnings results, although it has proved otherwise this quarter.

That being said, it should be noted that, although Stanley’s three months ended results did not look particularly robust, its nine months ended results were quite favourable. The company witnessed the revenue grow 0.5% YoY (for the nine months ended 30^th Dec 2018) while OP grew by 5.9% YoY, supported by the steady growth in the high-margin LED headlamps. For Koito, on the other hand, the three months ended results seemed quite favourable, although the nine months ended results displayed a revenue decline of -5.1% YoY and OP decline of -2.4% YoY, citing the deconsolidation of its Chinese subsidiary and the decrease in the volume of automobile production in some of its business regions as the key reasons. Thus, the overall YTD financial performance of Stanley looks still attractive compared to that of Koito. Following the earnings release, Stanley opened -3.7% down on Thursday from Tuesday’s close, while Koito closed +4.8% up on Wednesday since Friday’s close.

5. Mexican Banks AMLO Effect; Less Bad than Feared?

• We take a contrarian bullish view on microfinance bank Gentera SAB De CV (GENTERA* MM EQUITY) , despite the AMLO headwinds, and a cautious stance on Grupo Financiero Banorte-O (GFNORTEO MM)
• AMLO push to increase financial inclusion in Mexico, focused on the low income and rural population, may add to bank sector costs at the margin without materially impacting revenues
• Early fears of increased intervention in the bank sector – such as capping fees and commissions – appear to have abated. Interest-free loans for micro-entrepreneurs have hit sentiment on microfinance and consumer finance stocks, especially Gentera SAB De CV (GENTERA* MM EQUITY); we believe, on a medium-term view, these concerns may be overdone
• We would be cautious on the Mexican big cap banks, and especially Grupo Financiero Banorte-O (GFNORTEO MM) ; we see downside risk to consensus estimates from overly-positive GFI acquisition synergies, and potential pressure on local government loan rates over the medium term
• We are neutral on Grupo Financiero Inbursa-O (GFINBURO MM)  and Banco Santander Mexico-B (BSMXB MM) , we like BBVA Bancomer long-dated unsecured bonds as an alternative to Mexican bank equity exposure

In this briefing:

1. Shanghai/Shenzhen Connect – $8.5 Bn of Inflow in January (Kweichow Moutai, Gree, Midea)
2. HK Connect Discovery – January Snapshot
3. India Banks – Consumer and Mortgage Also a Risk
4. MacroAsia (MAC PM) – Company Visit Highlights Short-Term Headwinds but Core Business on Solid Ground
5. ZOZO: Earthbound

1. Shanghai/Shenzhen Connect – $8.5 Bn of Inflow in January (Kweichow Moutai, Gree, Midea)

In our Discover SZ/SH Connect series, we aim to help our investors understand the flow of northbound trades via the Shanghai Connect and Shenzhen Connect, as analyzed by our proprietary data engine. We will discuss the stocks that experienced the most inflow and outflow by offshore investors in the past seven days.

We split the stocks eligible for the northbound trade into three groups: those with a market capitalization of above USD 5 billion, and those with a market capitalization between USD 1 billion and USD 5 billion.

We note that offshore investors were buying all GICS sectors, and had a strong preference for Consumer Staples, Financials and Consumer Discretionary names. We estimate that total inflow into A-share market via northbound trade amounted to USD 8.5 bn in January.

Stocks with strong inflows (by quantum) were Kweichow Moutai Co Ltd A (600519 CH), Gree Electric Appliances Inc Of Zhuhai (000651 CH), and Midea Group Co Ltd A (000333 CH). Please read this note together with our coverage for December flow and our coverage for January northbound flow. 

2. HK Connect Discovery – January Snapshot

This is a monthly version of our HK Connect Weekly note, in which I highlight Hong Kong-listed companies leading the southbound flow weekly. Over the past month, we have seen the flow turning from outflow to inflow. Our previous insights published in Jan can be found in the links below. In this insight, we will focus on the month flow to get a bigger picture vs the weekly flow.

Our January Coverage of Hong Kong Connect southbound flow

• HK Connect Discovery Weekly: CR Beer, Great Wall Motors, and Kingsoft (2019-01-07)
• HK Connect Discovery Weekly: China Tower, Tencent, New China Life (2019-01-11)
• HK Connect Discovery Weekly: Tencent, Kingsoft, and Yichang HEC (2019-01-18)
• HK Connect Discovery Weekly: CRRC, Car Inc/ UCar (2019-01-25)

3. India Banks – Consumer and Mortgage Also a Risk

As new numbers are released, we have a better glimpse of where we are in the bad loan cycle, and the data is not reassuring. And we see that it is not only about risk with infrastructure or corporate loans in India, even if these are the most well-known credit risks. Housing loans are not immune from the economic malaise that remains in place. Non-bank financial company (NBFC) Can Fin Homes (CANF IN) shows exceptionally high quarterly bad loan growth in the latest period. Recalling our note on HDFC Bank, consumer loans more generally, may not be as robust as most believe.  And there are others.

4. MacroAsia (MAC PM) – Company Visit Highlights Short-Term Headwinds but Core Business on Solid Ground

We met with MacroAsia management in Manila to discuss their most recent 3Q18 results and outlook for the coming year. The key takeaways were that: growth from LTP would be underpinned by business from PAL Express’s new A321 Neo and turboprop fleet; the ground handling and catering businesses will see growth from mid-March as PAL contracts with Sky Kitchen and Sky Logistics are terminated and awarded to MacroAsia; and lastly, that margin pressure due to cost inflation in the catering business should normalize during the second half as agreements are renegotiated.

Our estimated FY18 NPAT of P948mn is broadly in-line with management guidance and implies a valuation of 23.5x trailing P/E. We still that despite the recent fall in share price, this valuation will come under pressure until the company can demonstrate a return to earnings growth after a challenging year.

5. ZOZO: Earthbound

DOWN AND OUT – ZOZO (3092 JP)‘s third-quarter results which were announced yesterday, saw a 28% quarter-on-quarter increase in sales and trailing-twelve-month (TTM) revenues increased by 25%. Elsewhere the wheels are gradually coming off. In ZOZO most important quarter of the year, Operating Income rose by just 8.2% year-on-year and Net Income by 9.5%. As we mentioned in our previous Insight, Buying a Stairway to Heaven, ZOZO required at least ¥46b in revenues and ¥15b in operating income to meet their full-year forecasts. ¥36b and ¥10b failed to reach this high hurdle and, for the first time since listing, ZOZO has been required to revise down the company’s earnings forecasts. Revenues have been revised down by 20%, OPerating Income by 34% and Net Income by 36% compared to the company’s previous forecasts. Compared to the trailing-twelve-month number the revisions are +1% and -11%, respectively.  

DOWNSIDE RISK – If ZOZO has entered an era of low or no-growth, a revaluation fo the business to reflect such a reality could see the company’s shares fall by up to 50%

In this briefing:

1. AMD. Our Opteron Thesis Is Intact & Reinforced After Q2 2018 Earnings
2. Tesla Motors – Gaining Industrial Strength
3. Tesla (TSLA): 4Q Earnings and First Impressions on the Company’s Strategy
4. Shin-Etsu Reports Double-Digit Growth in Revenue and Operating Profit; Stock Is Clearly Undervalued
5. Facebook 4Q Results: An Easy Beat – Has Zuck Turned the Tanker?

1. AMD. Our Opteron Thesis Is Intact & Reinforced After Q2 2018 Earnings

Advanced Micro Devices reported earnings of $1.42 billion for fourth quarter 2018, up 6% YoY, narrowly missing consensus estimates by $20 million. For 2018 as a whole, AMD grew revenues by 23% to $6.48 billion. On the conference call, CEO Lisa Su claimed that the company exited the year having met its long-stated interim goal of 5% server market share. Furthermore, she reiterated her company’s intention to double that market share within four to six quarters.

On the earnings call, the company revealed that combined data center CPU and GPU sales for the quarter amounted to mid-teens percentage of overall revenue, roughly equally split between the two. This implies that data center GPU revenues were in the order of $105 million, amounting to ~20% of Nvidia‘s recently announced guidance miss for the quarter. 

Paradoxically, AMD’s ambitions in the data center will remain largely unthwarted by the current semiconductor downturn, their market share gains will come at the expense of Intel and NVIDIA. Our original Opteron thesis remains intact and reinforced by the unexpectedly strong data center GPU market share gains against NVIDIA. 

2. Tesla Motors – Gaining Industrial Strength

Tesla Motors (TSLA US) continues to power ahead of the competition in electric vehicles with an 80% market share of all electric vehicles sold in the United States in 2018.  With approximately 140,000 Model 3 cars sold in the U.S., Tesla outsold every marquee sedan brand. Model 3 outsold mid-size SUVs including BMW X3, Acura MDX, Audi Qs, Lexus RX and even the Mercedes C -Class. 

3. Tesla (TSLA): 4Q Earnings and First Impressions on the Company’s Strategy

Tesla’s 4Q results came in lower than consensus expectations.  While the 4Q results did not surprise us, it came as a negative surprise to street consensus that has taken the stock down by 4.7% in after hours trading at the time of this writing.  Here are some initial impressions:

• Deepak Ahuja steps down (again) as CFO but will remain as senior advisor going forward, and Senior Finance VP Zach Kirkhorn will step up to CFO. This may actually be a positive development from the perspective of management at this time.  Ahuja has always played a critical role in pulling Tesla through one existential crisis after another based on our historical observations, and the context under which he originally retired in 2015 coincided with management believing that it was safe at that time.  With the Model 3 production normalization and the company’s subsequent restructuring initiatives, management may be feeling safer about 2019 than 2018.
• We are less concerned with why the quarterly earnings miss took place.  Gross margins for automotive sales took a dive in 4Q but in our view that resulted primarily from a significant mix shift with the Model 3 taking 70% of the delivery mix, from 67% in 3Q18.  This mix shift is likely to continue to pressure Tesla’s overall margins in 2019.  However, given Automotive gross margins came to 24.3% in 4Q we think it is relatively easy for Tesla management to guide a target 25% range especially if that target is set for 4-6 quarters from now.
• Gigafactory 3 in Shanghai is projected to be completed by the end of 2019, with short range Model 3 and the Model Y (based on the Model 3 platform with 78% shared content) beginning production at that time, financed largely with local bank debt.  Battery cell supply will initially come from Nevada, Japan and some local suppliers but modules and packs will be made in-house.  Given the logistic layout of the Gigafactory 3 and labor cost gap, we think it is plausible for management to currently project that China margins by 2020 could be roughly on par with its U.S. manufacturing operations.  It remains to be seen whether this has been thought through well but the trust factor here will have to go to Deepak Ahuja’s deep industry knowledge given his prior auto industry experience before joining Tesla.
• Tesla’s cash on hand at the end of 4Q18 stood at $3.7bn.  While some investors may remain concerned about the $920m 0.25% Convertible Prefs that are due to mature on February 27, 2019 with a conversion price of $359.87 per share, there should be sufficient liquidity on the balance sheet to cover it in our view even if share price is below that price level on maturity.

We have historically said on this forum, despite a healthy dose of skepticism on the operational aspects of the company given a highly charismatic CEO with untested automotive industry credentials, that calling Tesla’s shares is tantamount to a market call (see, e.g., Tesla: Model 3 Production Rate Reaches 5,000/Week, but Shares Fall ).  The fact that share price performance in the past few months have focused more heavily on earnings, we highly suspect that as with many NASDAQ listed stocks, market confidence with Mr. Musk’s capital raising capabilities may not be a key driver for Tesla’s valuations over the next 12 months.

Tesla (TSLA): Consensus Estimates vs. Actual

4. Shin-Etsu Reports Double-Digit Growth in Revenue and Operating Profit; Stock Is Clearly Undervalued

Shin-Etsu reported its 3QFY03/19 results yesterday (29^th January 2019) which saw the company revenue growing at 13.4% YoY in 3QFY03/19 while its operating profit increased at a stellar 32.5% YoY during the quarter. Shin-Etsu has witnessed positive performance across all its segments while the Semiconductor Silicon segment reported the highest growth in revenue and operating profit. Further, the company beat consensus revenue and operating profit estimates by 1.5% and 6.4% respectively.

5. Facebook 4Q Results: An Easy Beat – Has Zuck Turned the Tanker?

When we wrote in 3Q18 that there were scope for *upgrades* to Facebook’s earnings, the sell-side remained cautious.  With the stock up 12% after-hours, we assess whether Facebook has further legs to the investment case. More details below.

In this briefing:

1. Baidu (BIDU): The Change Amounts to Business Suicide, Disappointing Existing Users and Clients

1. Baidu (BIDU): The Change Amounts to Business Suicide, Disappointing Existing Users and Clients

• Baidu’s new methodology directs the large majority of search results to its in-house functions, especially to its blog function BJH (百家号).
• Baidu began to hide websites of search results after the change above was widely criticized. However, as a result, users can hardly find authoritative websites.
• Because of these changes, it is hard for users to find useful content.
• We believe Baidu is giving up its existing advantages for users and clients.
• We also believe that users will choose to leave if the platform tries to choose content for them. If users leave Baidu, advertisers will follow them.

In this briefing:

1. Teasing Updates on CaiNiao Network & Ele.me Out of Alibaba’s Q3 Results
2. Kumho Tire (073240): Tough Times Ahead Still…
3. Market Largely Untroubled by Kao’s Troubles
4. Zee Entertainment- Present Mess Seems to Be of Short Term in Nature
5. UMC – Major Highlights of 4Q18 Earnings

1. Teasing Updates on CaiNiao Network & Ele.me Out of Alibaba’s Q3 Results

A set of generally solid Q3FY19 earnings results from Chinese e-commerce giant Alibaba Group Holding (BABA US) also yielded some interesting insights into the company’s two main logistics-related ventures (CaiNiao Network and on-demand food delivery specialist ele.me).

Unfortunately, the information we can glean from BABA’s Q3FY19 results suggests CaiNiao and ele.me are either growing slower or generating significant losses — or both.

In our view, the main logistics takeaways from BABA’s results are:

1. Alibaba’s ‘Core Commerce’ revenues continue to grow faster than express delivery. For the seventh consecutive quarter, Alibaba’s ‘core commerce’ grew much faster than China’s parcel delivery market, outgrowing parcel volume by 8% and parcel delivery revenue by almost 18%. At the margins, China’s express delivery firms are being bypassed by new modes of fulfillment, in our view. 
2. CaiNiao Network’s 15% growth in Q3FY19 is disappointing. Revenue at Alibaba’s CaiNiao Network grew by just 15% Y/Y in the December quarter, to 4.5 bn RMB. In other words, CaiNiao grew even slower than overall Chinese express delivery revenue in the December quarter (+17% Y/Y). That’s disappointing for a company that enjoyed an equity valuation of US$20 bn when Alibaba upped its stake to 51% in late 2017.
3. The reporting segment that includes ele.me barely grew from Q2FY19 to Q3FY19. Alibaba’s ‘Local Consumer Services’ segment had revenue of 5.2 bn RMB in Q3FY19, representing Q/Q growth of just 2.7%. It’s unclear how much local services venture Koubei contributed to this, as Alibaba only began consolidating its revenues some time in December.
4. It looks like losses from CaiNiao & ele.me continued to pile up in Q3FY19. Although it’s not an ‘apples-to-apples’ comparison, EBITA losses from the group of companies that includes CaiNiao and ele.me expanded from 5.8 bn RMB in Q2FY19 to over 8.2 bn RMB in Q3FY19.  This suggests the deep losses from this group (which were equivalent to about 15% of BABA’s core ‘marketplace’ EBITA in Q2FY19) aren’t going away soon.

2. Kumho Tire (073240): Tough Times Ahead Still…

Weak car sales in China, Nissan’s removal of Carlos Ghosn, Akebono Brake Industry share price plunge – facts that make everyone cringe at the sound of it. High indebtedness, low margin and weak sales growth were the chief reasons why Akebono’s share price plunge. Kumho Tire’s high debt to equity ratio has been reduced by an equity investment from a Chinese group but will that help to turn the company around? 

3. Market Largely Untroubled by Kao’s Troubles

After an article appeared on Nikkei Asian Review on 29^th January 2019 stating that Kao Corp (4452 JP) is going to miss its revenue and profit projections for FY2018E, we witnessed no panic in the market. Kao Corporation shares opened trading at JPY 7,621.00 per share up by 0.1% from the previous close price of JPY 7,610.00. The price increased further to JPY 7,657.00 before decreasing towards the day’s low of JPY 7,521.00 and it closed at JPY 7,583.00 which was about 0.4% down from the previous day’s closing price. However, the volume traded had an impact because of this news. For the past 3 months, the average daily volume traded has been around 1.73m shares a day, but declined 27.2% on 29^th Jan 2019.

This news came to light from a third-party source, but Kao responded to it on its investor relations website saying:

“The article in the Nikkei on Jan. 29 regarding the earning forecast consolidated results, is not based on any announcement made by Kao Corporation.”

In their latest release to their investor relations website, Kao Corporation keeps quiet on its ability to meet its 2018E guidance.

This has been happening at Kao for the past few years. Each time a news article has been released regarding Kao’s annual results, by a third party a few days prior to the official announcement.

4. Zee Entertainment- Present Mess Seems to Be of Short Term in Nature

Zee Entertainment Enterprises (ZIN) in the last two trading sessions has corrected by almost 13% over an allegation by a media house that has suggested a link of the Essel Group, the parent company with a firm that is being probed by Serious Fraud Investigation Office over deposits worth Rs. 32 bn during demonetization.

However, the company has denied any link with the firm and has blamed some “negative forces” that are behind the fall to hinder the strategic sale of Zee Entertainment, the crown jewel of the group, so that the parent, Essel group can reduce the debt burden that has accumulated over the years due to some bad calls.

We provide the details in this report.

5. UMC – Major Highlights of 4Q18 Earnings

United Microelectronics Corp (2303 TT) (UMC), the fourth largest foundry company globally, reported its 4Q18 earnings after market close yesterday. UMC reported disappointing results with sales of 35.5 NT$ billion, which was down 3% YoY and 3.7% lower than the consensus. It also reported EPS of NT$ (0.14). The Street had been expecting a positive EPS of $0.11. United Microelectronics Corp (2303 TT) shares are down 5% following its poor 4Q18 earnings. 

In 4Q18, wafer shipments declined 5.2% QoQ and utilization rate was also lower at 88%, compared to 94% in 3Q18 and 90% in 4Q17. The company blamed the poor results mainly due to the weak demand for smartphones and crashing demand for cryptocurrency mining machines.

According to UMC, it expects the entire global foundry market growth to be flat this year. The company has already started to observe inventory correction within the entire semiconductor supply chain starting 4Q18. It expects the inventory correction is likely to last more than 1Q19.

In this briefing:

1. BYD: Endless Darkness
2. Notes from the Silk Road: Xtep Int’l Holdings (1368 HK) – Confirming a Step Up
3. RHT Health Trust – Cash on Sale
4. Shiseido Co Ltd: Could Become a Victim of Its Own Success

1. BYD: Endless Darkness

Although its monthly sales is trending up, BYD’s worst time isn’t behind us yet. Completely switching to NMC battery for its EV passenger vehicles causes BYD losing its advantage on EV battery technology for passenger vehicles and medium term pain on lower products margins. The expected significant cut on governments’ subsidy on NEVs would further erode its margins seriously in the next two years. The biggest competitor, Tesla’s new plant in Shanghai is on its way. NEV models from local OEMs, such as Baic Motor Corp Ltd H (1958 HK) , Geely Automobile Holdings (175 HK) and Saic Motor Corp Ltd A (600104 CH) , are getting more and more attractive to customers. 

We estimate BYD’s net profit to decrease by 18% yoy and 40% yoy respectively assuming an 40% cut on NEV subsidies in 2019-2020E, after an estimated 35% yoy decline on net profit in 2018E. Its share price, which indicates 50x P/E on our estimated 2019E earnings, still has downward pressure. 

2. Notes from the Silk Road: Xtep Int’l Holdings (1368 HK) – Confirming a Step Up

■ Two positive announcements in quick succession: Xtep International (Xtep) have confirmed our outlook that their turnaround strategy is on track, namely: Same-Store Sales growth in the mid-teens and a positive profit warning. 

■ What this means: The reality is simple for Xtep, its turnaround plan is on track and the group appears to have better control of its distribution network. The 2018 full year numbers should serve to help the company in building investor confidence. Expect 2019 to be another year of consolidation within its retail network, XTEP’s focus is expected to be on driving brand equity, improving working capital terms whilst looking at the next stage of its turnaround story.

■ Our upgrades: Normally, so close to results we would acknowledge them and maintain our forecast. However, they are a confirmation for XTEP and its strategy. With Sales ahead of our previous 18% YoY growth expectation, we have moved them towards the guided 25%. At the same time, we have tweaked our bottom line growth from 55% to 54% to better reflect this guidance. Whilst 2019 will be a year of consolidation, the outlook calls for growth to be in line with our expectations, hence forecasts are largely unchanged. 

■ The next stage of the turnaround program is approaching: Expect the March announcement to allow XTEP to pitch an investment case which delivers investor confidence. With some HK$1.45 per share of net-cash (or circa 32% of market cap) on its balance sheet and a need for better utilisation one strategy may be to look for acquisitions, but it may also prove wise for shareholders to be rewarded for their patience, via some form of capital return. We also anticipate March to see an expansion on its strategic goals for organic growth, which we believe should be centre around how XTEP can continue to improve its retail footprint and build its brand equity.

3. RHT Health Trust – Cash on Sale

On 15^th January 2019, RHT Health Trust (RHT SP) announced the completion of the disposal of RHT’s entire asset portfolio of clinical establishments and hospitals in India to Fortis.

The balance net cash proceeds of S$32.52 mil will be retained as undistributed proceeds to cover on-going expenses of RHT following Completion. This translates to a cash NAV of S$0.04 per unit.

RHT’s closing unit price today was S$0.029 per unit, translating to a 28% discount to its cash NAV of S$0.04 per unit.

Taking Saizen REIT’s premium as a reference, RHT could potentially trade up to a 20% premium to its cash NAV, implying a unit price of S$0.048 per unit, or an upside potential of 65.5% when it announces progress in acquiring new assets/business.

Key risk is the suspension in trading of RHT units if it is unable to acquire new business.

Recommended investment strategy is to acquire RHT at current price (steep discount to cash NAV), hold out till a re-rating upon the announcement of a potential acquisition, and divest at a premium to cash NAV.

4. Shiseido Co Ltd: Could Become a Victim of Its Own Success

Shiseido Co Ltd (4911 JP)  will Struggle to Replicate its Past Success Over FY2018-23E

In the past few years, Shiseido was able to outpace the rest of the Japanese cosmetics market by a significant margin. Shiseido’s Japanese operations benefited from the tailwinds of an increasing Chinese tourist influx while its international operations steadily expanded its footprint in China and other geographies. The company also managed to improve its EBIT margin in FY2017 to 8.0% cf. 4.3% in FY2016. Margin improvement kept going into 3Q of FY2018 and we expect FY2018E margin to be 10.8%.

In our opinion, Shiseido will struggle to maintain its revenue CAGR of 7.5% over FY2013-18E over the next five years. We expect a more modest revenue CAGR of 4.9% over FY2018-23E.

Also, as a result of revenue growth and other cost efficiencies, Shiseido’s EBIT is expected to grow at a CAGR of 43.9% over FY2014-18E. But we expect Shiseido to find it difficult to improve its EBIT margin from the FY2018E level.

In this briefing:

1. Meet, Beat or Miss Q4 Estimates, Both Las Vegas Sands and Sands China Are Solid Bets
2. AFFIN Bank: To Affinity and Beyond
3. Thyrocare Technologies: All’s Not Well with This Wellness Pathology Leader
4. ATP30: 100% Secured Client Base Prompt 2019 Growth
5. Korean Stubs Spotlight: A Pair Trade Between Amorepacific Group & Shiseido

1. Meet, Beat or Miss Q4 Estimates, Both Las Vegas Sands and Sands China Are Solid Bets

• LVS shot at Japan license enhanced by his role in lobbying US Justice Department’s reverse opinion on online gambling published last week. Read why in this insight.
• Owning Sands China makes a strong case based on an ROCE analysis vs. the hospitality sector.
• Owning both at current trade is one of the screaming bargains in the entire sector

2. AFFIN Bank: To Affinity and Beyond

Based in Malaysia, AFFIN Bank Bhd (ABANK MK) is the product of two mergers over the last decade. Today AFFIN is a small-medium-sized financial services group, with 107 branches, combining corporate and SME banking; consumer banking (remittance services, vehicle loans, mortgages, personal loans, credit cards, unit trusts, and bancassurance products); Investment/Merchant Banking via AFFIN Hwang (AHAM), including corporate finance, capital market services and investment management; plus underwriting of general and life insurance (an underpenetrated market) through AAGI and AALI. AFFIN Islamic is a wholly owned subsidiary.

The core shareholders are LTAT (the superannuation fund for the Armed Forces), the Bank of East Asia, and Boustead Holdings which limits the float.

Malaysia has a tailwind of a new administration, vowing to overturn many aspects of its predecessor – including cancelling mega infra projects and reducing the “real” National debt.

The economy is pretty buoyant and is slated to generate an average of 4.75% GDP growth over 2018-2022. Inflation has mellowed, supported by the cut in GST, but will still, once these effects diminish, be modest, at around 2%, this year. The current and trade accounts are in surplus.

Malaysia, however, has a high level (by Asian standards) of household (excluding mortgages) indebtedness, dominated by credit cards, auto/vehicle finance, and personal loans. This had led to a moderately high risk in terms of the credit-to-GDP gap. The corporate sector is not excessively leveraged.

3. Thyrocare Technologies: All’s Not Well with This Wellness Pathology Leader

• Thyrocare Technologies (THYROCAR IN) is the fourth largest pathology chain in India and derives 54% of revenues from the wellness/preventive segment (Rs60bn market growing at 20% Cagr). Margins in wellness are ~2x that of illness segment.
• It is positioned as the lowest price provider in the market with some of its tests priced at 50-70% discount to peers.
• It enjoys the highest operating margin in the industry with excellent control of reagent and manpower costs.
• However, hyper competition in the wellness segment is pushing down pricing. Pullback in adspends is leading to loss of market share over FY18-1HFY19.
• Two-thirds of its capital is invested in the radiology business that does not have economies of scale. Business is loss-making and a drag on return ratios.
• We expect Revenue and PAT Cagr of 15% and 12% respectively over FY18-21 in the face of intensified competition against 24% and 19% respectively delivered over FY14-18.
• Softer growth coupled with utilization of free-cash from the clinical pathology business into the capital intensive and loss-making radiology business will weigh on stock performance. We value the stock at 22.5x FY20 EPS- at 25% discount to the industry leader Dr Lal Pathlabs (DLPL IN) . Our target price is Rs 494 implying 10% downside.

4. ATP30: 100% Secured Client Base Prompt 2019 Growth

We maintain a BUY rating for ATP30, based on a target price of Bt2.46 (previous TP: 2.48) and derived from a 30xPE’18E, which is its average trading range in the past one year and 10% discount to Thailand’s transportation sector

The story:

• Active fleet expansion still go on in 2019-20E
• Lower interest expense burden support margin expansion

Risks: Higher than expected in volatility in fuel price and probability that clients will terminate service contracts

5. Korean Stubs Spotlight: A Pair Trade Between Amorepacific Group & Shiseido

In this report, we provide an analysis of our pair trade idea between Amorepacific Group (002790 KS) and Shiseido Co Ltd (4911 JP). Our strategy will be to long Amorepacific Group (APG) and short Shiseido. As mentioned in our report, Korean Stubs Biweekly Sigma σ (#1): The Inaugural Edition, our base case strategy is to achieve gains of 8-10% on this pair trade. Our risk control is to close the trade if it generates 4-5% in combined losses. Cost of commissions are not included in the calculations and closing prices as of January 23rd are used in our pair trade. [Long APG – $0.5 million; Short Shiseido – $0.5 million for total of $1.0 million].

The following are the major catalysts that could boost APG shares higher than Shiseido shares within the next six to twelve months: 

• Amorepacific Group shares are extremely oversold and forming a base
• THAAD is no longer an issue
• Amorepacific Group’s NAV discount 
• Attractive relative valuations
• Amorepacific’s new headquarters building distraction out of the way
• Chinese tourists are coming back to Korea & slower growth rate of visitors to Japan

In this briefing:

1. Rides War Has Shifted To Share of Wallet
2. Indonesian Telcos: Mobile Pricing Should Continue to Recover. Telkom Remains Our Top Pick
3. Z IN
4. TSMC. Reiterating Our Bullish Stance After Earnings
5. Keppel-KBS US REIT – Positioned for Defensive Growth. Still Attractively Priced.

1. Rides War Has Shifted To Share of Wallet

Grab is not just challenging the usual passengers-ride and taxi market; it has upped its game by selling monthly subscription plans, which can build recurring users. It is also looking to take bigger slices of business trips, traditionally the more lucrative pie for local taxi companies and niche car rental companies.

This report explains why Grab has gone into this promotional strategy, and is divided into five parts:

1. Monthly Subscription Plans 

2. Better Allocation of Resources 

3. The Juicy Corporate Pie

4. Fare comparison between Grab, Go-Jek, CD

5. Conclusions

2. Indonesian Telcos: Mobile Pricing Should Continue to Recover. Telkom Remains Our Top Pick

Over the past three years, an aggressive price war has pushed Indonesian data prices down 80% to unsustainable levels. With the exception of India, and Jio’s moves there, Indonesia now has the cheapest data in markets we track globally. However, there have been signs recently of tariff stability, with Telkomsel’s tariff rising 7%. Investors’ main concern, and the key risk to being bullish on the sector in Indonesia, is the risk a price war breaks out again. We think that is unlikely. The smaller telcos are not making sufficient returns to cover capex and finance costs and market share gains alone will not save them. Something needs to give: either prices rise and/or smaller players consolidate. Rumors swirling around Indosat (ISAT IJ) in recent days suggest consolidation may be under consideration again. 

Our view is that the price cycle has turned in Indonesia and consolidation is likely. That underpins our positive view on Indonesian telcos. We look for Telkom Indonesia (TLKM IJ) to deliver strong growth from its two major engines: mobile through Telkomsel and fixed line (broadband). The stock has done reasonably well since mid-2018, but we see upside and rate the shares a Buy with a raised target price of IDR5,250. We continue to like the re-rating story at XL Axiata (EXCL IJ), and remain Buyers with a price target of IDR5,200. Indosat’s share price has soared in recent days and we have now cut the stock to a Sell with the target price retained at IDR2,040.

3. Z IN

In spite of a stellar quarter (Q3 FY19), we remain cautious on Zee Entertainment Enterprises (Z IN) and the prospects of broadcasters in India. Hindi GEC is consolidating, and most of the growth is likely to happen in regional channels which remain competitive. Global data suggests ad spends as a % of revenue for many broadcasters and cable operators has been disrupted and couple of year’s down the line, India should be no exception. Contrary to consensus, driven by millennials and non-affordability of second television, cord cutting in India could accelerate sooner than excepted. With an hyper competitive OTT landscape, uncertainty post TRAI Tariff implementations, in an industry suspect to easy value migration, the long term outlook for Zee Entertainment Enterprises (Z IN) and the broadcast Industry warrants attention. The only near term positive for the stock is the potential stake sale to a strategic partner, which is likely to keep the stock price buoyant but only in the near term.

4. TSMC. Reiterating Our Bullish Stance After Earnings

While Taiwan Semiconductor Manufacturing Company‘s Q4 2018 earnings were in line with expectations at ~$9.4 billion, the company’s revenue forecast for Q1 2019 was down 22% sequentially to $7.3 billion. TSMC predicts a tepid 2019 with semiconductor growth of 1%, down from ~6% last year. Like many of its peers, TSMC sees challenges relating to inventory overhang, waning smartphone unit sales and global macro uncertainty weighing on the company in the first half and expects business to recover to modest growth in the second half. The bottom line is that the company anticipates a no-to-low growth year of the Pig. 

In spite of the downbeat outlook for the year, the company reiterated its belief that it will hit its 5-10% growth CAGR through 2021. To meet that goal, it is clear that TSMC now expects both 2020 and 2021 to be double digit growth years and, as we outlined in our SmartKarma Originals report A Bull Investment Case for TSMC (In-Depth Version), much of that growth will come from TSMC’s new-found markets for processors and AI acceleration in the data center.

From a process technology leadership perspective, a fundamental tenet of our bull case for the company, TSMC noted that its 7nm process accounted for a staggering 23% of revenues in the fourth quarter, 7nm+ (with EUV) is on track for volume ramp in the second quarter and 5nm remains on track to follow just one year later. 

Investors shrugged of the negative outlook for the year with the company’s share price barely registering the news. We reiterate our bullish stance on the stock and our growth CAGR of 8.36% through 2022.

5. Keppel-KBS US REIT – Positioned for Defensive Growth. Still Attractively Priced.

Keppel-Kbs Us Reit (KORE SP) (“KORE”) announced its full-year results this evening. 

Income available for distribution to Unitholders was 8.6% higher than the IPO forecast. The outperformance was due to contribution from the Westpark Portfolio which was acquired on 30^th Nov 2018. Excluding the impact of Westpark Portfolio, income from the underlying IPO portfolio was generally in line with the forecast.

For the full year, total income available for distribution to Unitholders was US$43.8 mil.

KORE reiterated that the US tax regulation changes and convergence of Barbados tax rates for domestic and international companies are not expected to have any material impact on NTA and DPU. There will be no further changes expected to the trust structure.

The outlook for KORE remains positive. KORE has positioned itself well for defensive growth in the coming year.

Positive set of results and outlook is expected to continue driving the re-rating of KORE. The immediate price target for KORE is US$0.78 per unit (parity to NAV) that will translate to a forward yield of 7.3%.