Equity Bottom-Up

In this briefing:

1. Shaily Engineering-Q2FY18 Results Update
2. MonotaRO (3064 JP): Strong Finish to FY Dec-18
3. CCL Products Q2 FY19 Results Update- Moving up the Value Chain as Expected
4. Chinese Telcos: 5G Launches in 2019. Buy the 5G Beneficiary (China Tower).
5. Accordia Golf Trust (AGT SP): MBK + ORIX + AGT = Time for Outperformance? 9.5% Dividend Yield

1. Shaily Engineering-Q2FY18 Results Update

Shaily Engineering Plastics (SHEP IN) Q2 FY19 results were below our expectations. While revenue increased by 10% YoY, PAT declined by 9% YoY in Q2 FY19. This muted performance was primarily due higher raw material prices and a shortage of labour as well as power outage that resulted in low machine utilization. We analyze the results.

2. MonotaRO (3064 JP): Strong Finish to FY Dec-18

In the three months to December, MonotaRO’s domestic (parent company) sales continued to grow at an annual rate close to 25%, indicating that full-year consolidated results should be close to management’s guidance and our own estimates. This also suggests that our 18% sales growth forecast for 2019 could be conservative.  

Parent company data for December show sales up 18.4% year-on-year  in nominal terms, but up 24.6% when adjusted for the number of working days in the month. The figures for November were 27.3% growth in nominal terms, but 21.3% adjusted.

In the three months to December, adjusted sales were up 24.2%, a slight improvement from 23.9% growth in 3Q. In FY Dec-18 as a whole, reported parent company sales were up 24.4% to ¥105.3 billion, slightly exceeding management’s ¥104.1 billion guidance. 

At ¥2,523 (Friday, January 11, close), the shares have dropped 25% since October. They  are now selling at 61x our EPS estimate for FY Dec-18, 54x our estimate for FY Dec-19 and 47x our estimate for FY Dec-20. Price/sales multiples for the same three years are 5.7x, 4.8x and 4.2x.

Consolidated results for FY Dec-18 are due to be announced by the end of January. 

3. CCL Products Q2 FY19 Results Update- Moving up the Value Chain as Expected

Ccl Products India (CCLP IN) Q2 FY19 results were beyond our expectations. Although the revenues declined by 2% YoY in Q2 FY19 due to lower realization as the green coffee prices have declined by near 20% YoY in Q2 FY19, PAT increased by 41% YoY (against our expectation of 20% YoY growth) due to higher capacity utilization and improving share of value added products in the revenue mix.

We analyze the results.

4. Chinese Telcos: 5G Launches in 2019. Buy the 5G Beneficiary (China Tower).

We highlighted in a recent note Chris Hoare‘s positive outlook for China Tower (788 HK). Our view takes into account the 5G build-out commencing this year, improved capex efficiency from using “social resources”, the rapid growth in non-tower businesses that lie outside the Master Services Agreement (MSA), and the valuation benefit from what looks like surprisingly investor friendly management. 

This note focuses on four key issues facing the Chinese telcos in 2019:

• 5G capex (March) (this is by far the most important),
• Regulatory newsflow (February/ March),
• Operating trend improvements (August), and
• Emerging business opportunities driving future growth (August).

We remain positive on the telcos which trade at low multiples. China Unicom (762 HK) continues to trade at a discount, yet is most exposed to the positive story emerging at China Tower. We switch our top pick among the telcos from China Mobile (941 HK) back to China Unicom as a result. Alastair Jones thinks China Telecom’s (728 HK) premium multiple is at risk if management execution on the cost base doesn’t improve. It is our least preferred telco at this stage. Overall, we expect China Tower to outperform all telcos and it is our top pick.  The upgrade to China Tower flows through the telcos (valuation and costs) and our new target prices are as follows: China Unicom to HK$14.4, China Telecom to HK$5.4 and China Mobile to HK$96. 

5. Accordia Golf Trust (AGT SP): MBK + ORIX + AGT = Time for Outperformance? 9.5% Dividend Yield

Accordia Golf Trust (AGT SP) has not been a great success story since its IPO in August 2014. The stock went to market at a unit price of 0.97 SGD and was recently traded at 0.53 SGD. If we include the dividends received since the IPO (0.2387 SGD) the ‘real‘ adjusted price is still only 0.76 SGD.

In the past we have attended several management meetings and the 2017 company AGM but were disappointed on multiple occasions by management that either 1) did not care, 2) did not know how or 3) was held back by other corporate Japanese factors from creating shareholder value.

Over the last six months several new developments are potentially creating a cocktail that could finally create sustained value for AGT unitholders:

• Appointment of new CFO who assures investors no repeat of “membership deposit debacle”
• New five-year funding secured from two lenders
• MBK Partners buys ORIX Golf Management
• Value investor Hibiki Path Advisors buys 6.2% of the company
• Clear focus on acquisitions and using its balance sheet strength

With its 2019 financial year ending in March, investors can be hopeful that its dividend in FY20 can grow to a minimum of 5 SGD cents suggesting a yield of 9.5%. If management injects assets a higher DPU is possible.

In this briefing:

1. Tencent: A Brief Statistical Review of Game Approvals
2. Intel Touts 3D Logic Scaling, Chiplets & Hybrid Design To Extend Moore’s Law

1. Tencent: A Brief Statistical Review of Game Approvals

Paused for eight months, China’s authority resumed the domestic game approval in December. The first batch of 80 games was approved recently.

Since the last round of game application approval, the stock price of Tencent Holdings (700 HK) has fallen by 26%. Stock price reacted positively to the recent progress of game approval. 

In this insight, we try to assess the significance of recent progress with a statistical approach.

2. Intel Touts 3D Logic Scaling, Chiplets & Hybrid Design To Extend Moore’s Law

During an invitation-only Architecture Day held on December 11’th 2018,  Intel revealed three key strategies aimed at extending Moore’s Law. The first, 3D Logic packaging, aims to increase effective transistor density by scaling up rather than down, similar to the CoWoS technology introduced by Taiwan Semiconductor in 2012. The second, switching to multiple, smaller “chiplet” processor cores, is required to address the thermal and yield challenges precipitated by the progression of ever larger multi-core monolithic processor die and is the key foundation underpinning Advanced Micro Devices‘s Zen-based architecture. The third is a hybrid architecture aimed at reducing power consumption and clearly reminiscent of ARM’s big.LITTLE approach which was first introduced some six years ago and now widely used today in smartphone and tablet SOCs. 

At the event, Intel showcased their first product based on these three key concepts and it features a large Core processor combined with four smaller Atom processors, all manufactured on the same piece of silicon, an approach the company refers to as Hybrid x86. Intel confirmed that it will be the basis for a new line of products set to launch in the second half of 2019.

They say that imitation is the sincerest form of flattery and, based on what Intel had to say at its Architecture Day, TSMC, AMD and ARM will likely be flattered in equal measure. 

In this briefing:

1. Emart: Attractive Entry Point, Undervalued Real Estate Assets, & Homeplus REIT IPO
2. Bleak Future for Indusind Bank
3. Jamuna Bank: Clearing Electoral Uncertainties
4. China Tower: More Details on Non Telco Growth Suggest Further Upside to Share Price
5. Bank Mandiri (BMRI IJ) – Shape Shifting and Millenial Mortgages – On the Ground in J-Town

1. Emart: Attractive Entry Point, Undervalued Real Estate Assets, & Homeplus REIT IPO

Shares of E Mart Inc (139480 KS) are down 40% from their highs in March 2018 and we think this decline has been excessive. We believe the stock has bottomed and we expect a 20-30% upside on this stock over the next six months to one year (current share price is 193,500 won). At end of 3Q18, the company had 157 Emart hypermarkets and Traders warehouse supermarkets, of which 90% of their assets were owned by the company and 10% were leased. The company has the highest number of hypermarkets and warehouse supermarkets in Korea. The following are the major catalysts that could boost Emart shares by 20-30%+ in the next 6-12 months. 

• Renewed focus on the company’s real estate value
• Upcoming IPO of Homeplus REIT in 2019
• Push back against a steep increase in minimum wages
• Success of Pierrot Shopping and a gradual reduction of unprofitable hypermarkets

2. Bleak Future for Indusind Bank

Indusind Bank’s reckless decision to provide a Rs 20 bn (8% of the bank’s capital) unsecured bridge loan to IL&FS, an insolvent infrastructure company has led to a significant de-rating of its valuation multiple. In the 3QFY2019 results call, Ramesh Sobti, the bank’s CEO believes that the bank will eventually need to provide only 40-50% of this exposure and the bank has currently provided only 26.5%. The bank’s guidance on this appears to be as optimistic as its initial appraisal when it disbursed the loan, without any apparent scrutiny of the company’s financials. Shareholders in the bank need to be more realistic and factor a 100% write-off on the unsecured IL&FS exposure and need to examine all the bank’s loans more carefully for similar high-risk lending. The glory days of this once fancied stock are over and a bleak future beckons.

3. Jamuna Bank: Clearing Electoral Uncertainties

The Jamuna Bank Ltd (JAMUNABA BD) narrative is underpinned by a quintile 1 global PH Score™ and a low franchise valuation as well as a high Earnings Yield by global standards.

Established by a group of local entrepreneurs in 2001, experienced in  trade, commerce, and industry, Jamuna Bank Ltd is the only Bengali named 3rd generation private commercial bank. JBL. has exhibited vibrant growth over 18 years. The Credit Rating Agency of Bangladesh  classifies JBL as AA2 [very strong capacity and very high quality] for Long Term and ST-2 for Short Term.

JBL offers both conventional and Islamic banking. The Bank provides diverse services, encompassing trade, commerce, and manufacturing. The traditional focus has been on the corporate sector (especially textiles and manufacturing services) though SME lending and retail are fast-expanding. JBL is engaged with entrepreneurs in setting up enterprise ventures and BMRE of existing industrial units. Operations are centred on Dhaka and Chittagong though Rajshahi is an important market too.

All 122 branches are running with real-time online capacity while  the bank has 243 ATMs, sharing with other partner banks and consortium throughout Bangladesh. In addition, JBL is a Primary Dealer of government. securities.

While the economy is in a relatively stable state, the Banking Sector presents a highly mixed picture. Funding and liquidity are adequate in the Banking System in general. At the main listed entities, ROA and ROE stand at around 1% and 12%. Capitalisation targets are moving in the right direction though there is a shortfall at a number of lenders. The sector is weighed down by SOCB asset quality and poor governance which needs to be addressed as it exerts a distortionary impact across the system. SOCB NPL Ratio stands at around 30% and is probably worse than this versus around 10% for the system in general. The system stressed Loan/Investment Ratio is probably double this level. Worryingly, private sector bank defaults are rising at a fast clip as LDRs climb at the same time.

4. China Tower: More Details on Non Telco Growth Suggest Further Upside to Share Price

After initially being very skeptical of the China Tower (788 HK) IPO given it is essentially a price take to its three largest shareholders, we changed our view in early December to a more positive outlook. What changed our view has been series of calls and meetings with the company that suggested a more shareholder friendly approach than expected and a real opportunity to reduce capex substantially through the use of “social resources” (e.g. electricity grid, local government sites). These can be used to deliver co-locations without building towers and poles and imply much lower capital intensity at a time when revenue growth will be accelerating as 5G is rolled out.  Management has also given more detail on non-Tower business prospects which can generate higher returns (not under the Master Services Agreement). While small now (2% of revenue) they are growing rapidly. With lower capex than initially guided and a more shareholder friendly management (i.e. higher dividends are possible) we reduce the SOE discount and raise our forecasts (again). We remain at BUY with a new target price of HK$2.20

5. Bank Mandiri (BMRI IJ) – Shape Shifting and Millenial Mortgages – On the Ground in J-Town

A recent meeting with Bank Mandiri Persero (BMRI IJ) in Jakarta confirmed a positive outlook for loan growth and net interest margins for 2019, with continuing incremental improvements to credit quality, especially in the MidCap and SME space.

The bank is optimistic about loan growth in 2019 but with a shift in the shape of growth, with Midcap and SME loans moving into positive territory, a slight tempering of growth from large corporates. 

Microlending continues to be a significant growth driver, especially salary-based loans, which have huge potential and are relatively low risk.   

Mandiri is switching its focus on smaller sized mortgages and is even offering products specifically targeting millennials. It is also training staff in its branches to promote both mortgages and auto loans, which should help to boost growth in consumer loans.

The bank is investing heavily in growing both Mandiri Online mobile banking, as well as working closely with the major e-commerce players in Indonesia. 

Management is optimistic about the outlook for net interest margins and comfortable with its funding requirements, with good visibility on credit quality. 

Bank Mandiri Persero (BMRI IJ) remains a key proxy for the Indonesian banking sector, with an increasingly well-diversified portfolio and growing exposure to the potentially higher growth areas of microlending and consumer loans. The bank has fully embraced modern day banking with strong growth in Mandiri Online, which should help the bank grow its transactional business and its current and savings accounts (CASA). Its push to grow salary-based loans is another business with huge potential, given the low penetration of its corporate pay-roll accounts. According to Cap IQ consensus estimates, the bank trades on 12.5x FY19E PER and 11.0x FY20E PER, with forecast EPS growth of +16.5% and +11.8% for FY19E and FY20E.  The bank trades on 1.9x FY18E PBV with an FY18E ROE of 13.9%, which is forecast to rise to 15.5% by FY20E. Given its higher growth profile and rising ROE, the bank looks relatively attractive compared to peers. 

In this briefing:

1. MonotaRO (3064 JP): Strong Finish to FY Dec-18
2. CCL Products Q2 FY19 Results Update- Moving up the Value Chain as Expected
3. Chinese Telcos: 5G Launches in 2019. Buy the 5G Beneficiary (China Tower).
4. Accordia Golf Trust (AGT SP): MBK + ORIX + AGT = Time for Outperformance? 9.5% Dividend Yield
5. ZOZO – Buying a Stairway to Heaven

1. MonotaRO (3064 JP): Strong Finish to FY Dec-18

In the three months to December, MonotaRO’s domestic (parent company) sales continued to grow at an annual rate close to 25%, indicating that full-year consolidated results should be close to management’s guidance and our own estimates. This also suggests that our 18% sales growth forecast for 2019 could be conservative.  

Parent company data for December show sales up 18.4% year-on-year  in nominal terms, but up 24.6% when adjusted for the number of working days in the month. The figures for November were 27.3% growth in nominal terms, but 21.3% adjusted.

In the three months to December, adjusted sales were up 24.2%, a slight improvement from 23.9% growth in 3Q. In FY Dec-18 as a whole, reported parent company sales were up 24.4% to ¥105.3 billion, slightly exceeding management’s ¥104.1 billion guidance. 

At ¥2,523 (Friday, January 11, close), the shares have dropped 25% since October. They  are now selling at 61x our EPS estimate for FY Dec-18, 54x our estimate for FY Dec-19 and 47x our estimate for FY Dec-20. Price/sales multiples for the same three years are 5.7x, 4.8x and 4.2x.

Consolidated results for FY Dec-18 are due to be announced by the end of January. 

2. CCL Products Q2 FY19 Results Update- Moving up the Value Chain as Expected

Ccl Products India (CCLP IN) Q2 FY19 results were beyond our expectations. Although the revenues declined by 2% YoY in Q2 FY19 due to lower realization as the green coffee prices have declined by near 20% YoY in Q2 FY19, PAT increased by 41% YoY (against our expectation of 20% YoY growth) due to higher capacity utilization and improving share of value added products in the revenue mix.

We analyze the results.

3. Chinese Telcos: 5G Launches in 2019. Buy the 5G Beneficiary (China Tower).

We highlighted in a recent note Chris Hoare‘s positive outlook for China Tower (788 HK). Our view takes into account the 5G build-out commencing this year, improved capex efficiency from using “social resources”, the rapid growth in non-tower businesses that lie outside the Master Services Agreement (MSA), and the valuation benefit from what looks like surprisingly investor friendly management. 

This note focuses on four key issues facing the Chinese telcos in 2019:

• 5G capex (March) (this is by far the most important),
• Regulatory newsflow (February/ March),
• Operating trend improvements (August), and
• Emerging business opportunities driving future growth (August).

We remain positive on the telcos which trade at low multiples. China Unicom (762 HK) continues to trade at a discount, yet is most exposed to the positive story emerging at China Tower. We switch our top pick among the telcos from China Mobile (941 HK) back to China Unicom as a result. Alastair Jones thinks China Telecom’s (728 HK) premium multiple is at risk if management execution on the cost base doesn’t improve. It is our least preferred telco at this stage. Overall, we expect China Tower to outperform all telcos and it is our top pick.  The upgrade to China Tower flows through the telcos (valuation and costs) and our new target prices are as follows: China Unicom to HK$14.4, China Telecom to HK$5.4 and China Mobile to HK$96. 

4. Accordia Golf Trust (AGT SP): MBK + ORIX + AGT = Time for Outperformance? 9.5% Dividend Yield

Accordia Golf Trust (AGT SP) has not been a great success story since its IPO in August 2014. The stock went to market at a unit price of 0.97 SGD and was recently traded at 0.53 SGD. If we include the dividends received since the IPO (0.2387 SGD) the ‘real‘ adjusted price is still only 0.76 SGD.

In the past we have attended several management meetings and the 2017 company AGM but were disappointed on multiple occasions by management that either 1) did not care, 2) did not know how or 3) was held back by other corporate Japanese factors from creating shareholder value.

Over the last six months several new developments are potentially creating a cocktail that could finally create sustained value for AGT unitholders:

• Appointment of new CFO who assures investors no repeat of “membership deposit debacle”
• New five-year funding secured from two lenders
• MBK Partners buys ORIX Golf Management
• Value investor Hibiki Path Advisors buys 6.2% of the company
• Clear focus on acquisitions and using its balance sheet strength

With its 2019 financial year ending in March, investors can be hopeful that its dividend in FY20 can grow to a minimum of 5 SGD cents suggesting a yield of 9.5%. If management injects assets a higher DPU is possible.

5. ZOZO – Buying a Stairway to Heaven

ZOZO (3092 JP)

ONWARD AND OUT – ZOZO (3092 JP), formerly Start Today, has been the sixth-most-traded large capitalisation stock over the last ten trading days after Benefit One (2412 JP), Rizap (2928 JP), Takeda Pharmaceutical (4502 JP), Hoshizaki (6465 JP), and Workman Co Ltd (7564 JP). According to Nikkei XTECH, on 25th December apparel maker Onward (8016 JP) suspended selling of its products on ZOZOTOWN and will leave the platform altogether. Although Onward products are estimated to account for less than 3% of total transactions on the site, there are concerns that other apparel makers will follow suit as a result of the emerging direct competition on the site from ZOZO’s private label. Since reaching our 4.0 ‘Overbought’ threshold on 9th July 2018, ZOZO shares have corrected by 57% – the worst performance of any large cap from that date – as concerns mounted over the private brand strategy and the behaviour of CEO Yusaku Maezawa.  Since bottoming on 4th January, the shares have risen by 18% following positive comments from the CEO about sales over the New Year holiday period.    

PRIVATE-LABEL STRETCH GOALS– The ‘teething problems’ of ZOZO entering the private-label apparel business have been well-documented by Michael Causton in a recent Insight on Smartkarma. Michael rightly questions the feasibility of the company scaling a ¥200b apparel business within the next three years while targeting an additional incremental ¥400b in e-commerce revenue, particularly as it has taken ZOZO twenty years to reach the first ¥100b in annual revenues. In the DETAIL section below, we shall examine ZOZO’s current and possible future financial condition as it strives to become one of the top-ten global fashion retailers. 

‘ZOSO’ & THE STAIRWAY TO HEAVEN – In addition to some notable purchases of modern art at record-breaking prices, CEO Maezawa also last year booked himself on Space X’s first flight to the moon. With apologies, the lyrics of the peerless song from Led Zeppelin’s untitled fourth album – known by fans as ‘Zoso’ after the symbol designed by Jimmy Page for the inner sleeve – come to mind:- 

There’s a lad(y) who’s sure
All that glitters is gold
And (s)he’s buying a stairway to heaven
When(s)he gets there (s)he knows
If the stores are all closed
With a word (s)he can get what (s)he came for.

In this briefing:

1. JD.com (JD): Lawsuit Over, Price Falling Back to First Trading Day, Defensive in Bear Market

1. JD.com (JD): Lawsuit Over, Price Falling Back to First Trading Day, Defensive in Bear Market

• Minnesotan Authorities declined to charge the founder of JD.
• JD’s stock price has already plunged 52% in 2018. We believe JD is a defensive equity for portfolios, as the NASDAQ Composite just plunged 50% at most in the financial crisis of 2008.
• Compared to 2014, today’s JD has a higher market share in the larger e-commerce market. However, JD’s stock price is at the same level as the first trading day in 2014.
• JD continued to generate operating cash inflows in 2018 as previous years despite of its zero net margins.
• We are not concerned about the programmer layoff in December, as we believe JD overly invested in “hi-tech” that will not bring revenues in the near future.
• Based on historical Price / GMV, we believe there is an upside of 270% for JD’s stock price.

In this briefing:

1. New Oriental (EDU): Educator License Not A Concern
2. HOYA Corporation: Fairly Priced but Value Accretive M&A Deals Could Support a Higher Price Target
3. Nissan: Overlooked Personnel Moves Suggest the Alliance Will Not Survive Long Term
4. Japanese Telcos: What to Look for in 2019. Earnings May Surprise on the Upside.
5. HK Connect Discovery Weekly: CR Beer, Great Wall Motors, and Kingsoft (2019-01-07)

1. New Oriental (EDU): Educator License Not A Concern

• The Education Ministry of China promulgated Burden Relief Measures for Students in Primary and Secondary Schools (中小学生减负措施).
• The market is concerned about “Article 15” on the educator license.
• We note that a large number of teachers in part-time schools took the educator exam in November 2018.
• We expect that the incremental passers of the educator exam will be many more than the number of EDU’s vacancies, and that most of the passers will prefer to work for giants such as EDU or TAL (TAL) as opposed to other part-time schools.

2. HOYA Corporation: Fairly Priced but Value Accretive M&A Deals Could Support a Higher Price Target

HOYA Corporation is currently trading at JPY6,867 per share which we believe is fairly valued based on our SOTP valuation. The company operates with a few stable businesses and holds solid shares in the markets in which it operates. The company generates nearly 50.0% of its revenue from its core business of selling eyeglass lenses and contact lenses. The advancement in eyeglass and contact lenses technology, the growth in global population with vision-related issues due to increased use of PCs, smartphones and tablets and an ageing population will drive demand for eyeglasses and contact lenses. Although the company’s IT Segment which generates around 33.0% of company revenue is growing slowly, the management has aggressively managed the costs to improve the segment’s pre-tax profit margin to over 40.0%. While the Lifecare segment remains the engine of revenue growth for HOYA, it focuses on the IT segment for profitability. HOYA has grown its businesses, mainly the Lifecare segment through value adding M&A deals. The company has announced that it has entered into definitive agreements to acquire US-based Mid Labs and Germany-based Fritz by the end of FY19 (March 2019). The proposed acquisitions could help HOYA to expand its footprint in the global retinal market and further its Lifecare growth. The company has a strong balance sheet with a debt-to-equity ratio of 0.3% as of 2QFY19 with cash and cash equivalents worth JPY252.3bn (35.2% of total assets).

According to our analysis, HOYA operates solid businesses with impressive ROE and positive FCF, however, we believe, the market has already factored most of this into the share price. Therefore, we believe HOYA is worth looking at on the long side if its management continues to find value adding M&A deals which complement its existing lines of business or new business opportunities which would be transformative for HOYA. Our valuation is neutral, but we favour HOYA within the sector as it has held up relatively well despite the tech sell off due to its attractive health care business and shareholder friendliness which was perhaps underappreciated while the market was in its bull phase.

3. Nissan: Overlooked Personnel Moves Suggest the Alliance Will Not Survive Long Term

While most news coverage is intensely focused on former Chairman Carlos Ghosn’s first public statements, defence strategy and Japan’s rather arcane justice system, we believe that news regarding the sudden “leave” of two Nissan executives is worth paying attention to as it may have ramifications for the fate of the alliance overall. We discuss the details below.

4. Japanese Telcos: What to Look for in 2019. Earnings May Surprise on the Upside.

The Japanese telecom market was more volatile in 2018 than anticipated. However, Chris Hoare remains broadly positive on the sector for 2019. While pressure on the revenue line is intensifying, we do do not expect a price war to break out. In fact, we look for volatility to ease as the year progresses. Operators point to opex reductions and handset subsidy reductions to offset revenue weakness. We think that earnings are likely to surprise on to the upside. Over time we also look for dividend payout ratios to gradually rise, with the Softbank Corp (9434 JP) (KK) listing the long term catalyst.  For Softbank Group (9984 JP) (SB) we look for market confidence to improve on the Vision Fund strategy, as profitable exits/up-valuations of assets such as Uber are announced.

The sector is recovering from NTT Docomo’s (9437 JP) price cut announcements but we don’t think they will slash prices (cuts will be selective). Our top pick is now KDDI (9433 JP) which could actually benefit from Rakuten’s (4755 JP) entry (as the roaming partner). DoCoMo is most affected but there are plenty of cost cutting opportunities. NTT (Nippon Telegraph & Telephone) (9432 JP) has optimistic guidance with substantial opex and capex cost cuts planned. Our order of preference for the stocks is now: KDDI (Buy), followed in order by NTT (Buy), SB Group (Buy), DoCoMo (Buy) and SB Corp (Neutral). We do not currently cover Rakuten. 

5. HK Connect Discovery Weekly: CR Beer, Great Wall Motors, and Kingsoft (2019-01-07)

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 mainlanders in the past seven days.

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

In the past week, there were only three and a half days trading on the Hong Kong Stock Exchange last week. Hence the flow numbers were not as significant as a typical 5 trading day week. Having said that, we find it interesting that the Chinese were buying China Resources Beer Holdin (291 HK), Great Wall Motor Company (H) (2333 HK). In addition, Yichang Hec Changjiang Pharm (1558 HK) is a rare health care stock that experienced inflow last week despite overall poor sector performance last week. 

In this briefing:

1. Tencent Music: Short Idea on Consumption Slowdown Angle
2. Geely: Worst Case Priced In, Waiting for Sector Headwinds to Abate
3. Korean Stubs Spotlight: A Pair Trade Between BGF Co. & BGF Retail
4. China Tobacco International (IPO): The Monopolist Will Not Recover
5. A Round up of Some Japanese Equities Buys as We Begin the New Year.

1. Tencent Music: Short Idea on Consumption Slowdown Angle

• Tencent Music Entertainment (TME US)‘s social entertainment services (discretionary consumption in nature) face more headwinds due to ongoing China (macro) consumption slowdown.
• Moreover, high consensus earnings expectation would make material earnings downgrade a major narrative for TME throughout 2019, in our opinion.
• We initiative coverage on TME with Short/Sell recommendation, with 12-mo PT of US$9.80/ADR (representing a 25% downside potential).

2. Geely: Worst Case Priced In, Waiting for Sector Headwinds to Abate

Geely announced its Dec 2018 car sales volume at 93,333 units (down 39% yoy) and its FY2018 sales volume at 1.5mn units, 6% lower than our estimate of 1.59mn units.

Meanwhile management sets its FY2019 sales target at 1.51mn units, which surprised the market as the market consensus stood at around 1.8mn units. The stock price corrected by 11.3% on Jan 8th, right after the announcement.

In our view, it is reasonable for the management to give a cautious guidance for 2019E. After all, 2019E China’s auto sales volume might drop by 8% yoy.( China Auto Outlook 2019 – Keep Warm, Winter Is Here! )

However, would Geely’s aggressive new model launches sales offset the weak demand on existing models in 2019E? If not how bad it could be? In this report, we have done a scenario analysis. Our analysis shows that the possibility that Geely missing its 2019E guidance is low. Even assuming our worst case scenario, the stock would be at 7.1x P/E and no medium term downside from current levels. 

3. Korean Stubs Spotlight: A Pair Trade Between BGF Co. & BGF Retail

In this report, we provide an analysis of our pair trade idea between BGF Co Ltd (027410 KS) and Bgf Retail (282330 KS). Our strategy will be to be long BGF Co & Short BGF Retail. BGF Co Ltd (027410 KS)‘s share price plummeted by 48% in the past year while Bgf Retail (282330 KS) had a tiny gain of 0.7% in the same period. In the past year, BGF Co was down versus BGF Retail for pretty much the entire year. The BGF/BGF Retail share price ratio has been trending downwards since March 23rd, 2018. The current ratio is 0.037 and it is now close to approaching two σ. 

The following are the major catalysts that could boost BGF Co shares higher than BGF Retail shares within the next six months. 

• Temporary relief from big market fears, seasonality, & trading volume 

• Market’s concerns about the size of tender offer rather than the value of BGF Co post tender offer in 2018 
• NAV discount to its intrinsic value at an all-time high – Our NAV analysis of BGF Co suggests that it is trading at a 51% discount to its NAV, which is close to its all time highest discount. Typically, the Korean holdcos trade at a 20-40% discount to their intrinsic value so it is unusual for the holdco to trade with so much discount. 
• Government is likely to slow down the minimum wage hikes 

• Potential increases in brand usage fees

4. China Tobacco International (IPO): The Monopolist Will Not Recover

• China Tobacco International (HK) Co. Ltd. plans to go public on the Hong Kong Stock Exchange.
• The state-owned company holds monopolistic positions in tobacco leaf export, tobacco leaf import, and cigarette export.
• Both revenue growth and margins declined year-over-year in the first three quarters of 2018.
• We believe the China cigarette market will not recover, as all signals suggest weak demand.

5. A Round up of Some Japanese Equities Buys as We Begin the New Year.

Please see some recent buy ideas, all very cheap, that we believe offer decent longer term growth and have had a dreadful December. We have written on all recently and below is a summary of the main points as well as an some valuation metrics. All are sensibly priced in our view now. 

In this briefing:

1. Chinese Telcos: 5G Launches in 2019. Buy the 5G Beneficiary (China Tower).
2. Accordia Golf Trust (AGT SP): MBK + ORIX + AGT = Time for Outperformance? 9.5% Dividend Yield
3. ZOZO – Buying a Stairway to Heaven
4. Emart: Attractive Entry Point, Undervalued Real Estate Assets, & Homeplus REIT IPO
5. Bleak Future for Indusind Bank

1. Chinese Telcos: 5G Launches in 2019. Buy the 5G Beneficiary (China Tower).

We highlighted in a recent note Chris Hoare‘s positive outlook for China Tower (788 HK). Our view takes into account the 5G build-out commencing this year, improved capex efficiency from using “social resources”, the rapid growth in non-tower businesses that lie outside the Master Services Agreement (MSA), and the valuation benefit from what looks like surprisingly investor friendly management. 

This note focuses on four key issues facing the Chinese telcos in 2019:

• 5G capex (March) (this is by far the most important),
• Regulatory newsflow (February/ March),
• Operating trend improvements (August), and
• Emerging business opportunities driving future growth (August).

We remain positive on the telcos which trade at low multiples. China Unicom (762 HK) continues to trade at a discount, yet is most exposed to the positive story emerging at China Tower. We switch our top pick among the telcos from China Mobile (941 HK) back to China Unicom as a result. Alastair Jones thinks China Telecom’s (728 HK) premium multiple is at risk if management execution on the cost base doesn’t improve. It is our least preferred telco at this stage. Overall, we expect China Tower to outperform all telcos and it is our top pick.  The upgrade to China Tower flows through the telcos (valuation and costs) and our new target prices are as follows: China Unicom to HK$14.4, China Telecom to HK$5.4 and China Mobile to HK$96. 

2. Accordia Golf Trust (AGT SP): MBK + ORIX + AGT = Time for Outperformance? 9.5% Dividend Yield

Accordia Golf Trust (AGT SP) has not been a great success story since its IPO in August 2014. The stock went to market at a unit price of 0.97 SGD and was recently traded at 0.53 SGD. If we include the dividends received since the IPO (0.2387 SGD) the ‘real‘ adjusted price is still only 0.76 SGD.

In the past we have attended several management meetings and the 2017 company AGM but were disappointed on multiple occasions by management that either 1) did not care, 2) did not know how or 3) was held back by other corporate Japanese factors from creating shareholder value.

Over the last six months several new developments are potentially creating a cocktail that could finally create sustained value for AGT unitholders:

• Appointment of new CFO who assures investors no repeat of “membership deposit debacle”
• New five-year funding secured from two lenders
• MBK Partners buys ORIX Golf Management
• Value investor Hibiki Path Advisors buys 6.2% of the company
• Clear focus on acquisitions and using its balance sheet strength

With its 2019 financial year ending in March, investors can be hopeful that its dividend in FY20 can grow to a minimum of 5 SGD cents suggesting a yield of 9.5%. If management injects assets a higher DPU is possible.

3. ZOZO – Buying a Stairway to Heaven

ZOZO (3092 JP)

ONWARD AND OUT – ZOZO (3092 JP), formerly Start Today, has been the sixth-most-traded large capitalisation stock over the last ten trading days after Benefit One (2412 JP), Rizap (2928 JP), Takeda Pharmaceutical (4502 JP), Hoshizaki (6465 JP), and Workman Co Ltd (7564 JP). According to Nikkei XTECH, on 25th December apparel maker Onward (8016 JP) suspended selling of its products on ZOZOTOWN and will leave the platform altogether. Although Onward products are estimated to account for less than 3% of total transactions on the site, there are concerns that other apparel makers will follow suit as a result of the emerging direct competition on the site from ZOZO’s private label. Since reaching our 4.0 ‘Overbought’ threshold on 9th July 2018, ZOZO shares have corrected by 57% – the worst performance of any large cap from that date – as concerns mounted over the private brand strategy and the behaviour of CEO Yusaku Maezawa.  Since bottoming on 4th January, the shares have risen by 18% following positive comments from the CEO about sales over the New Year holiday period.    

PRIVATE-LABEL STRETCH GOALS– The ‘teething problems’ of ZOZO entering the private-label apparel business have been well-documented by Michael Causton in a recent Insight on Smartkarma. Michael rightly questions the feasibility of the company scaling a ¥200b apparel business within the next three years while targeting an additional incremental ¥400b in e-commerce revenue, particularly as it has taken ZOZO twenty years to reach the first ¥100b in annual revenues. In the DETAIL section below, we shall examine ZOZO’s current and possible future financial condition as it strives to become one of the top-ten global fashion retailers. 

‘ZOSO’ & THE STAIRWAY TO HEAVEN – In addition to some notable purchases of modern art at record-breaking prices, CEO Maezawa also last year booked himself on Space X’s first flight to the moon. With apologies, the lyrics of the peerless song from Led Zeppelin’s untitled fourth album – known by fans as ‘Zoso’ after the symbol designed by Jimmy Page for the inner sleeve – come to mind:- 

There’s a lad(y) who’s sure
All that glitters is gold
And (s)he’s buying a stairway to heaven
When(s)he gets there (s)he knows
If the stores are all closed
With a word (s)he can get what (s)he came for.

4. Emart: Attractive Entry Point, Undervalued Real Estate Assets, & Homeplus REIT IPO

Shares of E Mart Inc (139480 KS) are down 40% from their highs in March 2018 and we think this decline has been excessive. We believe the stock has bottomed and we expect a 20-30% upside on this stock over the next six months to one year (current share price is 193,500 won). At end of 3Q18, the company had 157 Emart hypermarkets and Traders warehouse supermarkets, of which 90% of their assets were owned by the company and 10% were leased. The company has the highest number of hypermarkets and warehouse supermarkets in Korea. The following are the major catalysts that could boost Emart shares by 20-30%+ in the next 6-12 months. 

• Renewed focus on the company’s real estate value
• Upcoming IPO of Homeplus REIT in 2019
• Push back against a steep increase in minimum wages
• Success of Pierrot Shopping and a gradual reduction of unprofitable hypermarkets

5. Bleak Future for Indusind Bank

Indusind Bank’s reckless decision to provide a Rs 20 bn (8% of the bank’s capital) unsecured bridge loan to IL&FS, an insolvent infrastructure company has led to a significant de-rating of its valuation multiple. In the 3QFY2019 results call, Ramesh Sobti, the bank’s CEO believes that the bank will eventually need to provide only 40-50% of this exposure and the bank has currently provided only 26.5%. The bank’s guidance on this appears to be as optimistic as its initial appraisal when it disbursed the loan, without any apparent scrutiny of the company’s financials. Shareholders in the bank need to be more realistic and factor a 100% write-off on the unsecured IL&FS exposure and need to examine all the bank’s loans more carefully for similar high-risk lending. The glory days of this once fancied stock are over and a bleak future beckons.

In this briefing:

1. Jamuna Bank: Clearing Electoral Uncertainties
2. China Tower: More Details on Non Telco Growth Suggest Further Upside to Share Price
3. Bank Mandiri (BMRI IJ) – Shape Shifting and Millenial Mortgages – On the Ground in J-Town
4. New Oriental (EDU): Educator License Not A Concern
5. HOYA Corporation: Fairly Priced but Value Accretive M&A Deals Could Support a Higher Price Target

1. Jamuna Bank: Clearing Electoral Uncertainties

The Jamuna Bank Ltd (JAMUNABA BD) narrative is underpinned by a quintile 1 global PH Score™ and a low franchise valuation as well as a high Earnings Yield by global standards.

Established by a group of local entrepreneurs in 2001, experienced in  trade, commerce, and industry, Jamuna Bank Ltd is the only Bengali named 3rd generation private commercial bank. JBL. has exhibited vibrant growth over 18 years. The Credit Rating Agency of Bangladesh  classifies JBL as AA2 [very strong capacity and very high quality] for Long Term and ST-2 for Short Term.

JBL offers both conventional and Islamic banking. The Bank provides diverse services, encompassing trade, commerce, and manufacturing. The traditional focus has been on the corporate sector (especially textiles and manufacturing services) though SME lending and retail are fast-expanding. JBL is engaged with entrepreneurs in setting up enterprise ventures and BMRE of existing industrial units. Operations are centred on Dhaka and Chittagong though Rajshahi is an important market too.

All 122 branches are running with real-time online capacity while  the bank has 243 ATMs, sharing with other partner banks and consortium throughout Bangladesh. In addition, JBL is a Primary Dealer of government. securities.

While the economy is in a relatively stable state, the Banking Sector presents a highly mixed picture. Funding and liquidity are adequate in the Banking System in general. At the main listed entities, ROA and ROE stand at around 1% and 12%. Capitalisation targets are moving in the right direction though there is a shortfall at a number of lenders. The sector is weighed down by SOCB asset quality and poor governance which needs to be addressed as it exerts a distortionary impact across the system. SOCB NPL Ratio stands at around 30% and is probably worse than this versus around 10% for the system in general. The system stressed Loan/Investment Ratio is probably double this level. Worryingly, private sector bank defaults are rising at a fast clip as LDRs climb at the same time.

2. China Tower: More Details on Non Telco Growth Suggest Further Upside to Share Price

After initially being very skeptical of the China Tower (788 HK) IPO given it is essentially a price take to its three largest shareholders, we changed our view in early December to a more positive outlook. What changed our view has been series of calls and meetings with the company that suggested a more shareholder friendly approach than expected and a real opportunity to reduce capex substantially through the use of “social resources” (e.g. electricity grid, local government sites). These can be used to deliver co-locations without building towers and poles and imply much lower capital intensity at a time when revenue growth will be accelerating as 5G is rolled out.  Management has also given more detail on non-Tower business prospects which can generate higher returns (not under the Master Services Agreement). While small now (2% of revenue) they are growing rapidly. With lower capex than initially guided and a more shareholder friendly management (i.e. higher dividends are possible) we reduce the SOE discount and raise our forecasts (again). We remain at BUY with a new target price of HK$2.20

3. Bank Mandiri (BMRI IJ) – Shape Shifting and Millenial Mortgages – On the Ground in J-Town

A recent meeting with Bank Mandiri Persero (BMRI IJ) in Jakarta confirmed a positive outlook for loan growth and net interest margins for 2019, with continuing incremental improvements to credit quality, especially in the MidCap and SME space.

The bank is optimistic about loan growth in 2019 but with a shift in the shape of growth, with Midcap and SME loans moving into positive territory, a slight tempering of growth from large corporates. 

Microlending continues to be a significant growth driver, especially salary-based loans, which have huge potential and are relatively low risk.   

Mandiri is switching its focus on smaller sized mortgages and is even offering products specifically targeting millennials. It is also training staff in its branches to promote both mortgages and auto loans, which should help to boost growth in consumer loans.

The bank is investing heavily in growing both Mandiri Online mobile banking, as well as working closely with the major e-commerce players in Indonesia. 

Management is optimistic about the outlook for net interest margins and comfortable with its funding requirements, with good visibility on credit quality. 

Bank Mandiri Persero (BMRI IJ) remains a key proxy for the Indonesian banking sector, with an increasingly well-diversified portfolio and growing exposure to the potentially higher growth areas of microlending and consumer loans. The bank has fully embraced modern day banking with strong growth in Mandiri Online, which should help the bank grow its transactional business and its current and savings accounts (CASA). Its push to grow salary-based loans is another business with huge potential, given the low penetration of its corporate pay-roll accounts. According to Cap IQ consensus estimates, the bank trades on 12.5x FY19E PER and 11.0x FY20E PER, with forecast EPS growth of +16.5% and +11.8% for FY19E and FY20E.  The bank trades on 1.9x FY18E PBV with an FY18E ROE of 13.9%, which is forecast to rise to 15.5% by FY20E. Given its higher growth profile and rising ROE, the bank looks relatively attractive compared to peers. 

4. New Oriental (EDU): Educator License Not A Concern

• The Education Ministry of China promulgated Burden Relief Measures for Students in Primary and Secondary Schools (中小学生减负措施).
• The market is concerned about “Article 15” on the educator license.
• We note that a large number of teachers in part-time schools took the educator exam in November 2018.
• We expect that the incremental passers of the educator exam will be many more than the number of EDU’s vacancies, and that most of the passers will prefer to work for giants such as EDU or TAL (TAL) as opposed to other part-time schools.

5. HOYA Corporation: Fairly Priced but Value Accretive M&A Deals Could Support a Higher Price Target

HOYA Corporation is currently trading at JPY6,867 per share which we believe is fairly valued based on our SOTP valuation. The company operates with a few stable businesses and holds solid shares in the markets in which it operates. The company generates nearly 50.0% of its revenue from its core business of selling eyeglass lenses and contact lenses. The advancement in eyeglass and contact lenses technology, the growth in global population with vision-related issues due to increased use of PCs, smartphones and tablets and an ageing population will drive demand for eyeglasses and contact lenses. Although the company’s IT Segment which generates around 33.0% of company revenue is growing slowly, the management has aggressively managed the costs to improve the segment’s pre-tax profit margin to over 40.0%. While the Lifecare segment remains the engine of revenue growth for HOYA, it focuses on the IT segment for profitability. HOYA has grown its businesses, mainly the Lifecare segment through value adding M&A deals. The company has announced that it has entered into definitive agreements to acquire US-based Mid Labs and Germany-based Fritz by the end of FY19 (March 2019). The proposed acquisitions could help HOYA to expand its footprint in the global retinal market and further its Lifecare growth. The company has a strong balance sheet with a debt-to-equity ratio of 0.3% as of 2QFY19 with cash and cash equivalents worth JPY252.3bn (35.2% of total assets).

According to our analysis, HOYA operates solid businesses with impressive ROE and positive FCF, however, we believe, the market has already factored most of this into the share price. Therefore, we believe HOYA is worth looking at on the long side if its management continues to find value adding M&A deals which complement its existing lines of business or new business opportunities which would be transformative for HOYA. Our valuation is neutral, but we favour HOYA within the sector as it has held up relatively well despite the tech sell off due to its attractive health care business and shareholder friendliness which was perhaps underappreciated while the market was in its bull phase.

In this briefing:

1. Nissan: Overlooked Personnel Moves Suggest the Alliance Will Not Survive Long Term
2. Japanese Telcos: What to Look for in 2019. Earnings May Surprise on the Upside.
3. HK Connect Discovery Weekly: CR Beer, Great Wall Motors, and Kingsoft (2019-01-07)
4. Tencent Music: Short Idea on Consumption Slowdown Angle
5. Geely: Worst Case Priced In, Waiting for Sector Headwinds to Abate

1. Nissan: Overlooked Personnel Moves Suggest the Alliance Will Not Survive Long Term

While most news coverage is intensely focused on former Chairman Carlos Ghosn’s first public statements, defence strategy and Japan’s rather arcane justice system, we believe that news regarding the sudden “leave” of two Nissan executives is worth paying attention to as it may have ramifications for the fate of the alliance overall. We discuss the details below.

2. Japanese Telcos: What to Look for in 2019. Earnings May Surprise on the Upside.

The Japanese telecom market was more volatile in 2018 than anticipated. However, Chris Hoare remains broadly positive on the sector for 2019. While pressure on the revenue line is intensifying, we do do not expect a price war to break out. In fact, we look for volatility to ease as the year progresses. Operators point to opex reductions and handset subsidy reductions to offset revenue weakness. We think that earnings are likely to surprise on to the upside. Over time we also look for dividend payout ratios to gradually rise, with the Softbank Corp (9434 JP) (KK) listing the long term catalyst.  For Softbank Group (9984 JP) (SB) we look for market confidence to improve on the Vision Fund strategy, as profitable exits/up-valuations of assets such as Uber are announced.

The sector is recovering from NTT Docomo’s (9437 JP) price cut announcements but we don’t think they will slash prices (cuts will be selective). Our top pick is now KDDI (9433 JP) which could actually benefit from Rakuten’s (4755 JP) entry (as the roaming partner). DoCoMo is most affected but there are plenty of cost cutting opportunities. NTT (Nippon Telegraph & Telephone) (9432 JP) has optimistic guidance with substantial opex and capex cost cuts planned. Our order of preference for the stocks is now: KDDI (Buy), followed in order by NTT (Buy), SB Group (Buy), DoCoMo (Buy) and SB Corp (Neutral). We do not currently cover Rakuten. 

3. HK Connect Discovery Weekly: CR Beer, Great Wall Motors, and Kingsoft (2019-01-07)

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 mainlanders in the past seven days.

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

In the past week, there were only three and a half days trading on the Hong Kong Stock Exchange last week. Hence the flow numbers were not as significant as a typical 5 trading day week. Having said that, we find it interesting that the Chinese were buying China Resources Beer Holdin (291 HK), Great Wall Motor Company (H) (2333 HK). In addition, Yichang Hec Changjiang Pharm (1558 HK) is a rare health care stock that experienced inflow last week despite overall poor sector performance last week. 

4. Tencent Music: Short Idea on Consumption Slowdown Angle

• Tencent Music Entertainment (TME US)‘s social entertainment services (discretionary consumption in nature) face more headwinds due to ongoing China (macro) consumption slowdown.
• Moreover, high consensus earnings expectation would make material earnings downgrade a major narrative for TME throughout 2019, in our opinion.
• We initiative coverage on TME with Short/Sell recommendation, with 12-mo PT of US$9.80/ADR (representing a 25% downside potential).

5. Geely: Worst Case Priced In, Waiting for Sector Headwinds to Abate

Geely announced its Dec 2018 car sales volume at 93,333 units (down 39% yoy) and its FY2018 sales volume at 1.5mn units, 6% lower than our estimate of 1.59mn units.

Meanwhile management sets its FY2019 sales target at 1.51mn units, which surprised the market as the market consensus stood at around 1.8mn units. The stock price corrected by 11.3% on Jan 8th, right after the announcement.

In our view, it is reasonable for the management to give a cautious guidance for 2019E. After all, 2019E China’s auto sales volume might drop by 8% yoy.( China Auto Outlook 2019 – Keep Warm, Winter Is Here! )

However, would Geely’s aggressive new model launches sales offset the weak demand on existing models in 2019E? If not how bad it could be? In this report, we have done a scenario analysis. Our analysis shows that the possibility that Geely missing its 2019E guidance is low. Even assuming our worst case scenario, the stock would be at 7.1x P/E and no medium term downside from current levels.