Equity Bottom-Up

In this briefing:

1. Credit Bank of Moscow: A Highly Ranked EM Opportunity
2. Rides War Has Shifted To Share of Wallet
3. Indonesian Telcos: Mobile Pricing Should Continue to Recover. Telkom Remains Our Top Pick
4. Z IN
5. TSMC. Reiterating Our Bullish Stance After Earnings

1. Credit Bank of Moscow: A Highly Ranked EM Opportunity

Founded in 1992 and acquired by Mr. Roman Avdeev in 1994,Credit Bank Of Moscow Pjsc (CBOM RM) benefits from an entrenched market position and strong brand recognition in its strategic market of Moscow which represents 25% of Russian GDP. CBM is an established operation in Moscow and the Moscow region with over 7,000 devices in high traffic locations.

CBM has expanded fast, from commanding a mere 0.7% share of system Assets in 2013 to 2.9% today.

The bank has a defined strategy underpinned by blue-chip, large, and medium-sized corporate services (fees, settlements, cash handling); high-margin consumer lending; and investment banking (SOVA Capital synergies, interbank, ECM, DCM, M&A). CBM commands a client-base of 15k corporates: companies represent 87% of loans. The bank has 1.5MM retail customers: accounting for a third of deposits.

In 2015 CBM acquired Inkakhran, swelling its nationwide cash handling market share to 17%. In this segment, CBM commands a client-base of 3k, of which 164 are banks, with 876 armoured vehicles covering 33k collection points.

Management is focused on above-system growth, based on a relatively robust liquid Balance Sheet, reducing funding costs, and enhancing operating efficiency and productivity. 2018 was marked by building up liquidity and strengthening capital adequacy as well as managing Balance Sheet risk -after 5 years of forceful growth- while maintaining profitability and cost efficiencies.

Technology highlights include the Your Bank Online system, MKB Business, and Foreign Exchange Control Dashboard.

Avdeev’s Rossium, a domestic group with interests in agriculture, timber, oil and a pharmacy chain, is the majority shareholder (56%) while the EBRD holds a position which reduces the float (18%). The supervisory board contains 5 out of 10 independent non executives while 2 more are nominees of minority shareholders. Related party lending is 3.5% of the loan book. Rosneft exposure though represents a caveat to CBM and to the system in general though some view this more of a strength.

2. 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

3. 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.

4. 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.

5. 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.

In this briefing:

1. Snippets #18: Naughty CEOs, Southern Crusades
2. Lloyds Banking Group (LLOY LN): Growth Who Needs It?
3. Centrica PLC (CNA LN): Lots of Gas but No Fizz
4. TAL Education (TAL): Online Courses Improved Margin in 3Q19, Parents Returning, 44% Upside
5. US Speciality Lenders – Worse Credit Metrics, Especially Personal Loans

1. Snippets #18: Naughty CEOs, Southern Crusades

In this review, we highlight five new unrelated developments that might impact the Thai stock market if you happen to hold the affected stocks.

• Skeletons in the closet. CIMB’s Thai CEO went on voluntary leave to clear his name regarding a legacy case back in his KTB days, while one of Thailand’s highest profile tycoon Dr. Prasert has been implicated in a stock manipulation case of Bangkok Airways from way back in 2015.
• Religious wars? As the southern insurgency spreads to economically vibrant province of Songkhla, insurgents attack a Buddhist temple and kill two monks, possibly in an effort to turn the crisis into a religious war. Doesn’t sound great for overall stability.
• A rare bump in the Baht. Despite QE unwinding, the Baht has risen almost 3% against the greenback. Bad news for exporters (eg. TUF, DELTA) good news for serial acquirers (think Thai Beverage, Banpu).
• Government-inspired deals. Is the government driving M&A in Thailand these days? They certainly had a hand in the TMB-Thanachart deal and now are rumored to be buying Thaicom, the country’s only satellite operator.
• Air quality takes a dive thanks to diesel and aggressive skytrain construction programs. Stores selling face mask and companies that substitute ethanol to diesel are set to benefit, while BTS might hit headwinds as government forces them to slow down construction.

2. Lloyds Banking Group (LLOY LN): Growth Who Needs It?

The political decision to exit the European Union has unpredictable negative consequences for both the UK economy and stockmarket. My purpose is to identify a portfolio of UK shorts and occasional longs.   

Lloyds Banking: What does it do ?

Lloyds Banking Group is the UK’s largest retail bank with a 20% share of both consumer credit and mortgage lending. It has no investment banking activities or overseas activities.

Why is it in the long portfolio ?

After a 10 year period of rehabilitation post the Financial Crisis the group is now profitable at the statutory level and generating a healthy double return on tangible equity (ROE). This year the consensus expectation is for a dividend of 3.3p per share (+7%) leaving the shares on a yield of 5.7%. In addition management completed a GBP1bn share buyback, the combination of buy-back and divided represents 4.7p per share or an effective yield of 8.1%. If future projections prove correct then the ROE should morph into the mid-teens by 2020. A return at this level should be sufficient to lift the shares well above book value. 

What are the risks ?

A key risk is economic dislocation from Brexit. Management believe that EU exit along the lines of the current withdrawal agreement will be compatible with only a marginal increase in credit losses.

3. Centrica PLC (CNA LN): Lots of Gas but No Fizz

The political decision to exit the European Union has unpredictable negative consequences for both the UK economy and stockmarket. My purpose is to identify a portfolio of UK shorts and occasional longs.  

Centrica PLC: What does it do ?

Centrica, through its operating subsidiary British gas is the largest of the six major energy supply companies operating in the UK. The core activity, and providing around 70% of revenues, is energy supply to households and businesses in the UK, US and Canada. The group has a 28% share of the home energy market in the UK and 13% of the market in US. In energy supply to businesses, Centrica is the second largest supplier in the US where it claims a 15% market share. Beyond energy supply Centrica has three established business, Services, Trading, and E&P, and two nascent high growth businesses Distributed Energy & Power and Connected Home

Why is it in the short portfolio?

Energy Supply is dominated by regulation and price conscious consumers which has lead management to predict a flat revenue outcome over the long term. Customer numbers are declining, the recently introduced default tariff price cap will eat into revenues, and higher gas prices are unhelpful.

Recognizing the problem management intend to treat Energy Supply as a cash-cow re-investing its cash-flow into the growth businesses. However the available upside from these new ventures may not provide sufficient compensation. More immediately consideration of cash-flow suggests the dividend, currently supporting the shares with a near 9% yield, may not prove sustainable.

4. TAL Education (TAL): Online Courses Improved Margin in 3Q19, Parents Returning, 44% Upside

• We believe that parents of primary school children will bring their children back to tutoring schools when they become aware of the competition in junior high schools.
• The expansion of online business and the change towards small classes are improving both the revenue growth and the margins.
• We believe that the requirement of educator license is not a concern.
• The 5-year P/E band suggests an upside of 44% for the share of TAL Education.

5. US Speciality Lenders – Worse Credit Metrics, Especially Personal Loans

We look at credit metrics of three specialty lenders in the US, for newly announced results. Discover Financial Services (DFS US) mostly provides credit card loans, but additionally it provides student loans and personal loans. The last category is where there is the most deterioration in the just-reported 4Q18 results, and it goes to our concerns about the reported ‘robustness’ of the US economy.  The company’s charge off rate in personal loans rose to 4.49% in 4Q18. The figure was 3.62% in 4Q17 and 2.70% in 4Q16. This is considerable deterioration. Even where some of the credit metrics in credit card loans is not as dire, the direction is of concern. All said, perhaps this is one reason that DFS falls into our growing bucket of financial companies with declining QoQ profit in 4Q18? Credit metrics at Sallie Mae and Synchrony Financial, do not leave us sanguine about the US consumer either. 

In this briefing:

1. JKN: Prime Content Distributor Eyes Big Opportunities in ASEAN Market
2. Meituan Dianping: Core Business Progress Toward Profitability an Overlooked Story?
3. Onward Quits Zozo: Another Dent in Zozo’s Reputation
4. Workman Vs. Decathlon: The Upcoming Battle for Japan’s Sports Market
5. Dr Lal Pathlabs: Pricing Pressure, Lower Earnings Growth Leave Room for Downside

1. JKN: Prime Content Distributor Eyes Big Opportunities in ASEAN Market

We initiate coverage of JKN with a BUY rating, based on a target price of Bt8.80, pegged to the the 14.8xPE’19E mean of the Asia ex-Japan Consumer Discretionary Sector.

The story:

• Plenty of opportunities in the ASEAN market
• Harvest season is imminent
• New contracts with three new channels confirm 2019 domestic growth
• Mild recovery for domestic digital TV industry in 2019E

Risks: Heavy reliance on a few major customers, probability it will have to set provisions for doubtful debts and potential inability to renew contracts with customers.

2. Meituan Dianping: Core Business Progress Toward Profitability an Overlooked Story?

• Our deep-dive segment profitability analysis reveals that Meituan Dianping’s (3690 HK) core business (combined food delivery and in-store, hotel & travel) has made good progress toward profitability.
• The ballooning consolidated operating losses mainly stem from new initiatives (particularly car hailing and Mobike).
• Furthermore, lower S&M expenses to sales ratio plus food delivery’s higher take rate suggests that competition with Ele.me is more manageable than anticipated.
• Our SOTP yields intrinsic value of HK$61.07/share, that represents 37% upside potential. 

3. Onward Quits Zozo: Another Dent in Zozo’s Reputation

ZOZO (3092 JP) has been hit from all sides recently, with a major sell-off by investors disturbed by Zozo’s execution of its private brand launch and the resulting impact on the company’s reputation among merchants and consumers alike.

Last month it launched a new campaign which, on the surface, was all about helping customers give back to society, but which drew an immediate negative response from some merchants.

One of these, Onward Holdings, withdrew all its brands from sale on Zozo. This is another damaging dent in Zozo’s reputation. 

4. Workman Vs. Decathlon: The Upcoming Battle for Japan’s Sports Market

Decathlon is a category killer sans pareil and will finally open its first store in Japan in March. If Decathlon implements its store roll out well, the French sports retailer will cause a major disruption in Japan’s sports market.

Large domestic sports retailers like Xebio Holdings (8281 JP) and Alpen Co Ltd (3028 JP) will be gearing up to compete in some categories but are far behind in private label development and cost performance, and the major sports brands will have to accelerate their plans for retail stores while reviewing pricing (downwards). Sports firms like Mizuno (8022 JP), with relatively low perceived brand value, could face challenges in the newly polarised market that will emerge from Decathlon’s entry.

A major source of competition for Decathlon will come from a more unlikely retailer: the uniforms to outdoor apparel/gear firm, Workman (7564 JP). While still small, Workman is already manoeuvring to hinder Decathlon’s growth in Japan, and looks like having establishment backing to do so – and echoes the growth of Uniqlo after Gap entered the Japanese market in the 1990s and the rise and rise of Nitori (9843 JP) after IKEA’s launch in 2006.

Both Gap and IKEA have relatively small operations in Japan today compared to their early potential. Decathlon will need to expand rapidly if it is to gain sufficient share to stop Workman emerging with a clear lead in its market. 

5. Dr Lal Pathlabs: Pricing Pressure, Lower Earnings Growth Leave Room for Downside

• Dr Lal Pathlabs (DLPL IN) is the largest pathology chain in India and caters to the Rs 600 bn market growing at 15% Cagr. It is strongest in the lucrative NCR and Kolkata markets.
• Management has the best capital allocation track record in the pathology chain space. Network expansion mirrored patient volume growth.
• Patient volume growth has been the strongest among peers.
• However, revenue/patient has been declining as competitive pressure forced them to do away with price hikes for 2 consecutive years (2017-18). Increasing bundling of tests without adequate price hikes leading to sharp decline in revenue/sample.
• Expansion into eastern India with second central reference lab will drive down realizations
• Revenue growth deceleration and Ebitda margin contraction over FY17-18 looks to have stabilized now but are unlikely to revive.
• We expect Revenue and PAT Cagr of 15% and 16% respectively over FY18-21 against 21% and 34% respectively delivered over FY13-16.
• At CMP of Rs 996, Dr Lal trades at 36.1x FY20 EPS. Dr Lal’s steep multiples could see some compression with the lower growth trajectory and once the faster-growing Metropolis lists in the market. Our target price (30x FY20F) is Rs 827 implying 17% downside.

In this briefing:

1. Autohome (ATHM): Commission Conflict with Dealers, as Auto Industry Suffers First Decline Since 1990
2. Pasona : Interim Update – Still More Upside
3. Khi (7012) Given Expected Recovery in Profits, Shares Are Now Too Cheap.
4. Brazil Banks: Banco Do Brasil Focus – Prospects for Improved Returns, Narrowing PBV Discount

1. Autohome (ATHM): Commission Conflict with Dealers, as Auto Industry Suffers First Decline Since 1990

• China vehicle sales volume declined in 2018, which was the first time since 1990.
• Car dealers are negotiating commission rate with Autohome.
• We believe Autohome has more bargaining power than dealers, but will compromise to some extent.
• Our previous financial assumptions had already integrate the potential weakness in automobile industry.
• The stock price has been fully reflected the impact of the negotiation.

2. Pasona : Interim Update – Still More Upside

INTERIM UPDATE – Pasona Group (2168 JP) released their second-quarter results on January 11th. This Insight updates our recent Insight Pasona Non-Grata and re-iterates our buy recommendation. Pasona shares have risen by 15% this year to the intra-say high last Friday. Our target price remains ¥1,500 – a further 18% upside from today’s level. 

3. Khi (7012) Given Expected Recovery in Profits, Shares Are Now Too Cheap.

The shares have underperformed TOPIX by 25% over the last 12 months and in terms of book, see chart below, are trading at near 5 year lows. Earnings for 3/19 were revised down after 1Q (operating profit from Y75bn to Y66bn due to write-off in the rolling stock division). The current forecast in our view is achievable and next year, in the absence of further write-off and growth in other parts of the business, we would expect operating profits to recover to the Y80bn level. This is a big conglomerate with many moving parts, some good and some not so good, but there is a price for everything and given where the shares are now, and where we think earnings are going, we are happy to buy here with the company trading at 0.9x book and the shares yielding just under 3%.

4. Brazil Banks: Banco Do Brasil Focus – Prospects for Improved Returns, Narrowing PBV Discount

• A rising pro-market tide has lifted the big-cap banks, but now it is time to be more selective. We see further potential for stock re-rating among the Brazilian banks, as the new Bolosonaro administration executes its pro-market policies.
• Our top pick is Banco Do Brasil Sa (BdoBAS3 BZ) , with a target price of BRL57, which implies 19% re-rating potential. We believe that Banco do Brasil (BdoB) shareholders are set to benefit from less of a “social programme” agenda which in turn should help improve ROE going forward.
• Yet the PBV discount between BdoB and its private sector peers – especially against Itaú Unibanco at 52% – has barely narrowed, and we believe that the discount has potential to narrow further as BdoB’s ROE expands and narrows the gap with its private sector peers.

In this briefing:

1. Itausa: Discounted Access to Premium Quality Itau
2. Spark NZ on Track to Meet Long Term Goals but near Top of Trading Range. Now at Neutral.
3. Xiaomi (1810 HK): Dead Money
4. Arcs, Valor and Retail Partners Form First Nationwide Supermarket Alliance
5. Nidec (6594 JP): Big Downward Revision

1. Itausa: Discounted Access to Premium Quality Itau

• Itausa-Investimentos Itau-Pr (ITSA4 BZ) is the main indirect vehicle through which to gain discounted equity exposure to premium ROE-generating Brazilian bank, Itau Unibanco Holding Sa (ITUB4 BZ).
• Itausa trades at a 24% discount to its NAV, with Itau Unibanco accounting for 91% of the asset value of the holding.
• The current NAV discount is close to the 10-year high of 28%, and wider than the 10-year average discount of 21% and the 10-year low of 16%.

2. Spark NZ on Track to Meet Long Term Goals but near Top of Trading Range. Now at Neutral.

We have revised our forecasts for Spark New Zealand (SPK NZ) following recent accounting changes. Ian Martin believes Spark is on track to achieve its revised long term operating EBITDA margin target of 31% by FY21, and possibly by FY20.  Spark’s performance is driven largely by on-net mobile, fixed wireless access (FWA) and cloud/data services. Spark has also shown solid cost control gains and is ahead of its target for implementing its Agile program. It plans to launch 5G by July 2020 suggesting steady capex spending, and confidence in its earnings outlook. Spark is also planning to move more deeply into sports content including a partnership with NEC in sports production. 

While we remain positive on the long term outlook for Spark, and have raised our target price from NZ$4.05 to NZ$4.40, the stock is not cheap. It trades at 18.2x FY19F EPS and 8.0x FY19 EBITDA. The company needs to show strong cost control to meet targets and for this reason we reduce our recommendation to Neutral.

Three year operating outlook for Spark NZ (NS$ m)

3. Xiaomi (1810 HK): Dead Money

Xiaomi Corp (1810 HK)’s shares are around 43% below the IPO price partly due to the recent well-documented selling of shares following the end of a lock-up period. Ultimately, every share has a “right” value and the investors buying into the recent share placement presumably have the view that the shares are attractive at current levels.

4. Arcs, Valor and Retail Partners Form First Nationwide Supermarket Alliance

The supermarket sector is the most fragmented and uncompetitive of all retail sectors, a situation encouraged by major suppliers and not ideal for consumers.

Despite some effort from the likes of Aeon, consolidation has failed to materialise beyond a few in-group mergers.

Yet pressure on supermarkets to consolidate has been building due to depopulation in the regions, competitive pressures from other food retailers such as convenience stores and drugstore chains, as well as the emerging online food services.

Change is now coming. The biggest industry consolidation yet was announced last month, a precedent-setting alliance between three major supermarkets, Arcs Co Ltd (9948 JP), Valor Holdings (9956 JP) and Retail Partners (8167 JP), carving up a large chunk of the country into three regional fiefdoms.

5. Nidec (6594 JP): Big Downward Revision

Nidec has cut FY Mar-19 sales guidance by 9.4%, operating profit guidance by 25.6% and net profit guidance by 23.8% to reflect what management calls unexpectedly weak demand, the need for large inventory adjustments, and anticipated restructuring charges. 

Management attributes this to U.S. – China trade friction, but weak demand for hard disc drives (HDDs) caused by excessive date center investment and falling NAND flash memory prices, and declining auto sales in both China and the U.S., appear to have compounded the problem. 

Nidec’s share price was up ¥60 (+0.49%) today to ¥12,395, but the announcement was made after the market closed. Management plans to discuss the situation at a press conference starting at 18:30 Tokyo time today.

In this briefing:

1. Tokyo Kiraboshi Financial Group (7173 JP): All That Glitters Is Neither Gold Nor Star Quality
2. Sumber Alfaria Trijaya (AMRT IJ) – Flying off the Shelves – On the Ground in J-Town
3. Mitsubishi Selling off Stake in Aeon, Ministop in Limbo
4. Saigon Hanoi Commercial: A Forsaken Franchise
5. Shin Kong Financial: Bargain or Value Trap?

1. Tokyo Kiraboshi Financial Group (7173 JP): All That Glitters Is Neither Gold Nor Star Quality

Since our bearish Insight on Tokyo Kiraboshi Financial Group (7173 JP) issued in November 2018, Tokyo Kiraboshi FG (7173 JP): Shooting Star, the stock’s subsequent performance has fully justified our pessimism, with the share price finishing CY2018 down 47.7% year-on-year (YoY).  Having touched a low of ¥1,504 on Christmas Day, the shares have recovered 10.1% to ¥1,656 as of Friday’s close: slightly better than the Topix Bank Index, which closed on Friday at 154.44, up 9.0% over the same period.  Trading on a forward-looking price/earnings multiple of 12.5x (using the bank’s current FY3/2019 guidance) and a price/book ratio of 0.21x, TKFG looks cheap. This is deceptive. Adjusting the group’s earnings per share (EPS) for the ¥55 billion (US$507 million) in two still-outstanding preference share issues pushes the PER to over 18x: hardly a bargain.  Meanwhile, the group’s RoA and RoE ratios are woefully low, loan growth has collapsed since end-March 2018, deposits have fallen alarmingly, and main bank subsidiary Kiraboshi Bank is struggling to keep its net return on funds deployed (NRFD) in positive territory.  A stock best avoided.

2. Sumber Alfaria Trijaya (AMRT IJ) – Flying off the Shelves – On the Ground in J-Town

Leading Indonesian mini-mart operator Sumber Alfaria Trijaya Tbk P (AMRT IJ) (Alfamart) has undergone quite a dramatic transformation over the past 12 months, with a dramatic slowdown in its new store buildout paving the way for a significant pick up in SSSG and a reduction in debt. 

The company plans to start to step up its store openings selectively over the next year, with 500 new stores planned and fewer closures. Last year it only opened net 200 new stores having opened 1200 stores the previous year.

The market segment continues to see consolidation, with supermarkets and hypermarts suffering and mini-markets continuing to gain ground as the “pantry of the middle-class”.

The company continues to grow its fee-income business, which is highly profitable, with increasing collaboration with utilities, finance companies, and e-commerce players to name but a few. 

After a difficult 2017, Sumber Alfaria Trijaya Tbk P (AMRT IJ) looks to be well and truly back on a growth trajectory, with a rationalisation of its stores, a slow down in its expansion, reduced gearing, and a focus on operational efficiencies. The Mini-market continues to win out in the retail space and is increasingly being used as a distribution network for e-commerce companies. The growth in fee-service from bill payment and other services will be positive for the bottom line. The stock is by no means cheap on a PE basis but provides quite unique exposure to what is still a high-growth area of the economy. According to Capital IQ consensus estimates, the company trades on 51x FY19E PER and 44x FY20E PER, with forecast EPS growth of +30% and +16% for FY19E and FY20E respectively. 

3. Mitsubishi Selling off Stake in Aeon, Ministop in Limbo

Mitsubishi has finally given up its hope of convincing Aeon to merge Ministop (9946 JP) with Lawson and is selling its stake in the largest retail group.

There will be no change to the extensive supply relationship between the two companies and Mitsubishi’s food wholesale arm, Mitsubishi Shokuhin (7451 JP).

While Aeon seems to have spurned Mitsubishi for now, it is hard to see how Aeon will progress in the convenience store sector without Mitsubishi’s help. In the short-term Ministop looks like a poor investment but Aeon may have to sell to Mitsubishi eventually and will want a good price for it.

4. Saigon Hanoi Commercial: A Forsaken Franchise

Value-quality trends at Saigon Hanoi Commericial (SHB VN) stand out within Vietnam’s improving banking universe. Key metrics/signals at 9M18 underline positive fundamental momentum embodied in a high PH Score™.  SHB’s improvements reflect macro backdrop (upgraded sovereign strength).

Formerly known as Nhon Ai Rural Commercial, SHB incorporated Hanoi Building Commercial Bank and Vinaconex – Viettel Finance in 2012 and 2017, respectively, in line with system restructuring. SHB borrows short in order to lend short and long as well as purchase high-yielding government bonds. More than 79% of loans stem from credit provision up to 1 month and from 1-3 months, broadly matching short-duration market funding. (The liquidity gap is sound). Credit is diverse with an emphasis on agriculture, manufacturing and wholesale and retail trade. SHB is increasing higher-margin consumer lending which represents just 22% of the loan portfolio. Some 8% of the portfolio relates to state-owned enterprises.

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 ABB, ACB, Military Bank, OCB, TPbank, VIB, and Techcombank. However, Sacombank faces a significant risk from its problem assets while VP is constrained by risk from its consumer finance portfolio. 

5. Shin Kong Financial: Bargain or Value Trap?

Analysing Shin Kong Financial Holding (2888 TT)is like evaluating an investment trust with operating cash flow and a robust demand deposit funding base derived from 106 bank branches. The consolidated asset-base (68% of which consists of securities) is a float (long for claim reserves and short for premium reserves) composed of low beta high dividend yielding stocks but mainly overseas FI, some NT$1.7trillion worth yielding 4.7%, as well as loans (20% of Assets).

SKFH is the holding for life insurance (SKL), the bank (SKB), property insurance, mainly auto and fire insurance (SKPIA), the investment trust (SKIT), Masterlink securities, and VC operations (SKVC). SKFH is mainly life insurance (73% of Assets) and the bank (24%).

Management is focused on enhancing integration initiatives, efficiencies, initiatives and synergies within the Group. “Shin Kong: Pioneering a digital mobile future” is a programme to drive digital evolution through AI, big data, and smart robots.

With 317 branches, the secure and mature insurance franchise (mainly life but also health) is concentrated on selling foreign FX protection and policies in order to support interest spreads and contain hedging costs. While Net Profit at the life insurance subsidiary jumped exuberantly at 9M18, there were signs of deterioration in the underlying underwriting business with the claims: premium plus expenses: premium ratios eroding somewhat which shows up in the Consolidated statement in a decrease in “Net Income on Life Insurance”.

The bank is scaling up its presence in wealth management (bancassurance, mutual funds), trade finance, syndicated loans, and retail plus SME credit. Fee income is now 20% of total Revenues. A negative take, as elsewhere, was the rise in interest expenses after Fed tightening though this helps improve returns from life insurers’ assets, which have a shorter duration than their insurance liabilities. However, value-quality trends at SKB (the bank) are positive. Key metrics/signals at 9M18 in consolidated accounts and separate bank statements underline positive fundamental momentum embodied in a high PH Score™.

Consolidated results perhaps better reflect earnings pressures in insurance than the life insurance Balance Sheet as well as showing gains from FX and the sale of investments across divisions and a solid banking performance despite aforementioned interest expenses growth.

In this briefing:

1. HK Connect Discovery Weekly: Tencent, Kingsoft, and Yichang HEC (2019-01-18)
2. HDFC Bank – Quarterly Credit Deterioration
3. TRACKING TRAFFIC/Chinese Express & Logistics: Inter-City Pricing -9.1%
4. Aristocrat Leisure Ltd near 52 Week Low Has Runway Based on Positive Earnings Outlook Through 2021
5. Hanon Systems (018880): Overvalued Stocks in The Low Margin Sector

1. HK Connect Discovery Weekly: Tencent, Kingsoft, and Yichang HEC (2019-01-18)

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

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

In this week’s HK Connect Discovery, we highlight that Tencent topped the weekly inflow by quantum and its shares held by mainland investors via Stock Connect is at one year low. Stocks exposed to mobile game sector experienced inflow too. In addition, we continue to observe that the mainland investors holding on Yichang HEC continue to rise. 

2. HDFC Bank – Quarterly Credit Deterioration

The beloved bank reported exceptionally high growth in non-performing assets (NPAs) rising from INR111bn to INR119, from 2Q19 to 3Q19. And this is flattered, as it is after write-offs.  Its doubtful 3 loans, rose by 33% in the quarter. The bank’s additions to NPAs during the period, also increased – a more objective figure, before write-offs. The figure was INR40bn in 1Q19: INR39bn in 2Q19; and rose to INR46bn in 3Q19. This is not data that we expect most analysts to focus on, as much lays hidden in the bank’s Pillar 3 disclosure. The result of deteriorating credit metrics: 21% higher growth in credit costs QoQ and 64% YoY in 3Q19.

3. TRACKING TRAFFIC/Chinese Express & Logistics: Inter-City Pricing -9.1%

Tracking Traffic/Chinese Express & Logistics is the hub for our research on China’s express parcels and logistics sectors. Tracking Traffic/Chinese Express & Logistics features analysis of monthly Chinese express and logistics data, notes from our conversations with industry players, and links to company and thematic notes. 

This month’s issue covers the following topics:

We retain a negative view of China’s express industry’s fundamentals: demand growth is slowing and pricing for inter-city shipments appears to be falling faster than costs can be cut, leading to margin compression. 

4. Aristocrat Leisure Ltd near 52 Week Low Has Runway Based on Positive Earnings Outlook Through 2021

• Australia’s big gaming tech maker spurs organic growth with its entry into the digital gaming space.
• A balance of a strong international footprint and big US presence in the casino sector show up in dramatic forward earnings estimates by analysts.
• Sharp decline in entire gaming sector since last summer has kept the ARISTOCRAT story below the radar.

5. Hanon Systems (018880): Overvalued Stocks in The Low Margin Sector

The recent negative sales in the Chinese auto industry and Nissan’s case of Carlos Ghosn removal could put additional pressure on the already thin margin of auto supplier industry. One of the Carlos Ghosn early contribution to Nissan was to cut cost and outsource the auto parts maker to a wide variety of suppliers including to Hanon Systems (018880 KS) . Nissan’s new management may want to undo some of Carlos Ghosn’ legacy including changing the selection criteria of parts supplier.

Hanon’s global peers also experienced a decrease in the inventory turnover and most of them have been priced at PER <10 but Hanon is still trading at 24x PER while its sales growth and profitability is still in low single digit? Facing the onset of the slowdown in the Chinese auto industry, won’t it be another headwind for Hanon Systems?

In this briefing:

1. China Meidong (1268 HK): Standout Story in Gloomy Auto Dealership Sector; Luxury Brands Outperform
2. Tosei (8923) An Undervalued and Depressed Japanese Property Developer.
3. Golden Agri:  Reduced Risk of El Niño Pushes Out CPO Price Recovery into 2020
4. A Bear Investment Case for TSMC (In-Depth Version)
5. A Bull Investment Case for TSMC (In-Depth Version)

1. China Meidong (1268 HK): Standout Story in Gloomy Auto Dealership Sector; Luxury Brands Outperform

China Meidong Auto (1268 HK) has been on a rollercoaster ride in 2018. The stock price of Meidong started 2018 around 2.7 HKD and recently has been trading around 2.9 HKD.

Nice and steady ride? Not exactly, as it has swung from 4.3 HKD in June to 2.6 HKD in August. After analyzing how NPAT estimates evolved over the past year there should be no justifications for these wild swings. 

Meidong is likely to report solid FY18 results by late March vs industry peers which are expected to report a weak 2H18. While BMW dealers have been reportedly suffering in China during 2018, Meidong was fortunate to have other luxury brands pick up the slack.

FY19 should be another growth year for Meidong as 1) recently acquired BMW showrooms contribute their maiden results and 2) other luxury brands continue to perform despite overall doom and gloom in the Chinese auto market. Should the Chinese government launch car replacement stimulus measures this would be icing on the cake.

Fair Value lowered slightly from 4.7 HKD to 4.4 HKD (10x 2019E) on lower 2019 profit estimates, which leaves 52% upside excluding dividends.

2. Tosei (8923) An Undervalued and Depressed Japanese Property Developer.

The shares are very cheap. They trade at 0.9x book but there is some Y22bn in unrealised profit on land/buildings (vs. the market cap of Y46bn). If adjusted for this, the shares are less that half book. Meanwhile the dividend has been steadily increasing (both payout ratio and in absolute terms). To 11/19 the payout ratio will be 23% and the dividend will rise to Y37 from Y30 last year. At today’s price of Y950, the yield is thus 3.9%. And the shares trade on multiple of 6x. They rose significantly last year on the back of Morgan Stanley BUY note (from Y800 to Y1,500) but with the market’s correction and the tightening of bank lending to individuals (which has no impact on them), the shares have fallen back to Y950. For those looking for a cheap domestic small cap name, this is worth looking at.  

3. Golden Agri:  Reduced Risk of El Niño Pushes Out CPO Price Recovery into 2020

INVESTMENT VIEW:
The Australian Bureau of Meteorology has just downgraded its risk of El Niño from ‘Alert’ to ‘Watch’, and as a result, we temper our optimism for a near-term rally in CPO prices.  Longer-term, we remain bullish on Golden Agri Resources (GGR SP), but higher CPO prices remain a key catalyst for our bullish call on the shares. 

4. A Bear Investment Case for TSMC (In-Depth Version)

5. A Bull Investment Case for TSMC (In-Depth Version)

Taiwan Semiconductor Mfg Co has dominated the foundry segment over the past two decades. With revenues of $33 billion in 2017, the company had a 56% share of the foundry market and was over five times the size of its nearest competitor, Globalfoundries. Under the visionary leadership of Morris Chang, TSMC effectively invented the fabless model. Originally mocked by former AMD CEO Gerry Sanders who once famously quipped that “real men own fabs”, the fabless model has evolved into a thriving ecosystem, one which has facilitated the meteoric rise of some of the biggest names in the semiconductor segment including Apple, Qualcomm and Nvidia.  

TSMC’s success has been predicated upon the company’s so-called Trinity of Strengths, namely process leadership, manufacturing excellence and customer trust. In today’s highly competitive foundry landscape, those strengths have never been more significant.

While the smartphone processor business has been central to TSMC’s growth in recent years with Apple accounting for some 22% of revenues, the company is well positioned to diversify and benefit from high, secular growth trends in IoT, Automotive and AI acceleration. Even more significantly, TSMC is set to compete for the first time with Intel in the lucrative data center market by virtue of its role in manufacturing server chips for Advanced Micro Devices and a growing swathe of ARM-based server initiatives lead by none other than Amazon. 

Between 2006 and 2017, TSMC grew at a CAGR of 9.8% in NT$ terms, easily outpacing growth of both the broader semiconductor segment and its foundry peers. For the period 2019-2022, we model TSMC growing at a slightly lower CAGR of 8.36%, but nonetheless more than double the anticipated CAGR for the semiconductor segment as a whole. 

In this briefing:

1. A Bear Investment Case for TSMC (Summary Version)
2. A Bull Investment Case for TSMC (Summary Version)
3. RIO & BHP:  Valuation Gap Gone; Closing Long-Rio/Short-BHP
4. New J. Hutton Exploration Report (Week Ending 18/1/19)
5. Itochu Confirms Intent to Deepen Hold over Descente

1. A Bear Investment Case for TSMC (Summary Version)

2. A Bull Investment Case for TSMC (Summary Version)

Summary

Taiwan Semiconductor Mfg Co has dominated the foundry segment over the past two decades. With revenues of $33 billion in 2017, the company had a 56% share of the foundry market and was over five times the size of its nearest competitor, Globalfoundries. Under the visionary leadership of Morris Chang, TSMC effectively invented the fabless model. Originally mocked by former AMD CEO Gerry Sanders who once famously quipped that “real men own fabs”, the fabless model has evolved into a thriving ecosystem, one which has facilitated the meteoric rise of some of the biggest names in the semiconductor segment including Apple, Qualcomm and Nvidia.  

TSMC’s success has been predicated upon the company’s so-called Trinity of Strengths, namely process leadership, manufacturing excellence and customer trust. In today’s highly competitive foundry landscape, those strengths have never been more significant.

While the smartphone processor business has been central to TSMC’s growth in recent years with Apple accounting for some 22% of revenues, the company is well positioned to diversify and benefit from high, secular growth trends in IoT, Automotive and AI acceleration. Even more significantly, TSMC is set to compete for the first time with Intel in the lucrative data center market by virtue of its role in manufacturing server chips for Advanced Micro Devices and a growing swathe of ARM-based server initiatives lead by none other than Amazon. 

Between 2006 and 2017, TSMC grew at a CAGR of 9.8% in NT$ terms, easily outpacing growth of both the broader semiconductor segment and its foundry peers. For the period 2019-2022, we model TSMC growing at a slightly lower CAGR of 8.36%, but nonetheless more than double the anticipated CAGR for the semiconductor segment as a whole. 

3. RIO & BHP:  Valuation Gap Gone; Closing Long-Rio/Short-BHP

Investment Conclusion:
We recommend closing our long-Rio Tinto Ltd (RIO AU)/short-Bhp Billiton (BHP AU) following recent trading updates from both companies which helped to narrow the previous valuation gap we identified in our Aug-18 note: US$20bn in Lost Market Cap Looks Hard to Justify: Recommend Long Rio; Short BHP

4. New J. Hutton Exploration Report (Week Ending 18/1/19)

• Launching weekly exploration report
• Initial coverage of 318 companies
• Eventual ASX, TSX & AIM coverage
• Scientific approach to determine prospectivity
• Selective judgement on announcement materiality
• Preference for gold
• Targeting company maker projects
• Best exploration tenements, Magnesium, graphite, metallurgical coal
• Paladin Energy (PDN AU), Admiralty Resources Nl (ADY AU) , Jameson Resources (JAL AU), Golden Rim Resources (GMR AU), Orion Gold Nl (ORN AU) , Talga Resources (TLG AU), Barra Resources (BAR AU), King River Resources (KRR AU), Korab Resources (KOR AU), Lefroy Exploration Ltd (LEX AU)

5. Itochu Confirms Intent to Deepen Hold over Descente

Itochu (8001 JP) continues a battle of words and equity as it attempts to gain more control over sports firm Descente (8114 JP).

Meanwhile, Descente has brought in Wacoal (3591 JP) as a white knight and made a splash in the business media about its recent success.

Itochu insists that Descente needs Itochu’s management skills, particularly to build a stronger business in China and other overseas markets, and says the only way to make Descente listen is to buy more stock – more than its current nearly 30%.

In this briefing:

1. AFFIN Bank: To Affinity and Beyond
2. Thyrocare Technologies: All’s Not Well with This Wellness Pathology Leader
3. ATP30: 100% Secured Client Base Prompt 2019 Growth
4. Korean Stubs Spotlight: A Pair Trade Between Amorepacific Group & Shiseido
5. Panasonic Is Bonding with Toyota- A JV Plan for 2020

1. 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.

2. 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.

3. 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

4. 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

5. Panasonic Is Bonding with Toyota- A JV Plan for 2020

It seems that Panasonic Corp (6752 JP) is planning for long term growth by concentrating on building its relationship with Toyota Motor (7203 JP) while witnessing its key customer, Tesla Motors (TSLA US), drifts away. Toyota and Panasonic are in discussion to form a JV by 2020E with the aim of mass manufacturing EV batteries with possible benefits from cost-cutting efforts. We mentioned in Tesla Drifting Away Could Leave Panasonic Struggling to Gain Traction in China, that Tesla is looking for Chinese local players to source its factory in China upon the refusal from Panasonic to join hands with them in investing in their Chinese factory. Panasonic, which seemed to have felt the pressure mounting from Tesla potentially distancing itself from them, given that the majority of their battery sales are currently dependent on Tesla, is now preparing itself for the future by building long terms plans with its not-so-new customer, Toyota. Panasonic entered a partnership agreement with Toyota back in 2017 to develop EV batteries including their traditional prismatic batteries while also aiming to develop new battery solutions for the growing and evolving EV market. Thus, its plan to form a JV with Toyota by 2020E displays the confidence Panasonic has in Toyota while also indicating that the former is paving a path for some steady growth in its battery business being supported by one of the leading automakers.