Equity Bottom-Up

In this briefing:

1. Korean Stubs Spotlight: A Pair Trade Between BGF Co. & BGF Retail
2. China Tobacco International (IPO): The Monopolist Will Not Recover
3. A Round up of Some Japanese Equities Buys as We Begin the New Year.
4. Amarin–2019’s Biggest Buyout Target for Big Pharma
5. IPS Securex (IPSS SP): Micro-Cap Could Benefit from SG Gov’t HDB Upgrade Program

1. 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

2. 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.

3. 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. 

4. Amarin–2019’s Biggest Buyout Target for Big Pharma

Amarin (AMRN US), a US-listed biotech firm, presented the full results of its “Reduce-It” (RI) clinical trial at a conference for the American Heart Association (AHA) last November. The new data announced showed that, Vascepa–Amarin’s cardiovascular drug–when used with statins, reduces the risk of heart attacks by 31%, strokes by 28%, and cardiovascular death by 20%–all with minimal safety issues. The stock has plunged by -37% since the AHA event, largely due to concerns–which are misplaced in our view–regarding the placebo used in the RI trial. 

We attended the AHA event and its ancillary meetings in Chicago and, in this Insight, detail the main points covered there, the powerful efficacy of Vascepa, the addressable market, the placebo issue, and why we think Amarin could be 2019’s biggest buyout candidate among Big Pharma. We also analyze Amarin’s 2018 preliminary results and 2019 guidance from last Friday in detail.      

Enthusiastic Response from Doctors over the “Reduce-It” Trial Data: The data released at the AHA event for Vascepa from its Reduce-It (RI) trial was so robust that it drew applause from the 2,500 doctors in attendance, 87% of whom were polled, responding that they would prescribe Vascepa. Given how safe the drug is and its high relative risk reduction (RRR) of cardiovascular events, Vascepa should be a blockbuster drug. 

Q4 2018 Revenues & Prescriptions Surge Post Trial Results: Amarin just announced Q4 revenues and 2019 guidance last Friday. While its conservative 2019 guidance of $350m in revenues (+55% YoY) may disappoint, as it’s 16% below consensus estimates, the key focus should be on Q4 revenue growth of 38% YoY, with 35% growth in new prescriptions. This came on the back of the RI trial results and without any label expansion, which Amarin plans to file with the FDA during Q1. If label expansion is approved, Vascepa sales should soar further. 

Peak Sales Could Easily Surpass $10bn if Vascepa is Approved in Europe & China: Counting only the patients with coronary heart disease and diabetes–the core target for Vascepa–there are 48m patients in North America, 98m in Europe and 230m in China. If only 30% of these patients use Vascepa by 2030–when its patent expires–peak sales could reach at least $12bn (see Table-3 below). The need for Vascepa is dire, as cardiovascular disease (CVD) is the leading cause of death worldwide (see chart-1). In the US, one in four adults have elevated triglycerides, yet only 4% have been treated. The upside for Vascepa is huge. 

Stock Plunges Due to Concern Over Placebo Used in Reduce-It Trial: Just 16 minutes into the Reduce-It trial results being revealed at the AHA conference last November, Forbes published a “kill” story on the trial outcomes. The Forbes article (here) claimed that results were not trustworthy (quoting doctors in charge of clinical trials for a rival drug), as the mineral oil used in the placebo arm of the trial impacted statin absorption. This sent the stock plunging by -26% in the following two days after the conference. Below we discuss why these concerns are misplaced, especially since the FDA approved of mineral oil for use as a placebo.   

Amarin is Now an Attractive Take-Over Candidate for Big Pharma: Based on our estimates, Amarin should reach $7.6bn in 2022 revenues and $8.40 in EPS (consensus is at $1.5bn and $2.23) on just 40% penetration of the CVD patients in the US and the Middle East (where Vascepa is already approved) and 30% penetration in Canada and Europe.  On average, it takes drug makers at least $4bn over 10 years for new drug development and the success rate for FDA approval is only one in ten. In light of this, Amarin has become an attractive take-over candidate, with potential peak sales of $16bn (if China is successfully penetrated) and current market cap of only $4.2bn. 

5. IPS Securex (IPSS SP): Micro-Cap Could Benefit from SG Gov’t HDB Upgrade Program

Since its founding in 1960 the Housing Development Board (HDB) has constructed over 1.1 million dwelling units across Singapore. Currently, over 80% of the Singapore population lives in HDB built housing. With the bulk of these buildings having been constructed between 1960-1988 many of them are up for extensive renewal and renovation works. Construction companies should benefit from this trend, as should the micro-cap Ips Securex Holdings (IPSS SP), a reseller of equipment that modifies HDBs with emergency monitoring systems for senior citizens.

Outgoing PM Lee Hsien Loong (LHL) was very outspoken about the need to upgrade HDBs and make them safer for many of SG’s “pioneers” and senior citizens during his speech at the 2018 National Day Parade (NDP). With a general election coming later this year (date TBC) investors in IPS can be hopeful that the company should be awarded some new contracts and finally end the three-year de-rating which has taken the stock from 0.32 SGD in December 2015 to 0.055 SGD recently.

IPS is cheap with a market cap of only 27M SGD (20M USD) but can only start to re-rate on new major contract announcements.

In this briefing:

1. Pasona Non-Grata
2. Selamat Sempurna (SMSM IJ) – Truly Industrious – On the Ground in J-Town
3. Tencent: A Brief Statistical Review of Game Approvals
4. Intel Touts 3D Logic Scaling, Chiplets & Hybrid Design To Extend Moore’s Law
5. Sea Ltd: A Surprise Winner in Cut-Throat E-Commerce Battle?

1. Pasona Non-Grata

PASONA NON-GRATA

Source: Japan Analytics

ROUND TRIP – Temporary staffing company Pasona (2168 JP)‘s shares have completed a year-long ’round trip’ after reaching Overbought territory one year ago following the launch of an ‘engagement campaign’ by the activist investor, Oasis. In May 2018, the company took advantage of its elevated share price to sell 2.3m shares (of which 2m were Treasury Shares), prompting a sharp correction in the share price. In recent months, the shares have languished as the company’s business performance has begun to deteriorate, reaching an 18-month low of 1,008 on 25th December, before rebounding 12% to close the year at ¥1,126.

HOLDCO DISCOUNT – According to the Smartkarma HoldCo Monitor, Pasona has the largest ‘ListCo as a % of Market Cap’ percentage at 365%, and the second-largest ‘Discount to Net Asset Value’ (78%) of the 77 companies that are tracked. With Pasona’s interim results due to be released on Friday 11th, January, the Insight will look at the company’s recent business performance, offer some guidelines for valuing the company and make two stock-specific recommendations. The format follows that of our recent Insight on GMO Internet. 

2. Selamat Sempurna (SMSM IJ) – Truly Industrious – On the Ground in J-Town

A company visit in Jakarta revealed that it continues to focus on growing its higher margin heavy-duty filter revenues, with an ongoing emphasis on growing its export business. 

Selamat Sempurna (SMSM IJ) should be a beneficiary of the US-China Trade War given much lower tariffs for Indonesian produced filters versus those from China. It has already seen a marked pick-up in enquiries from potential US customers. 

Its domestic filter business continues to see strong growth, especially heavy-duty filter sales, which are benefitting from demand from commercial vehicles and heavy equipment demand, with higher unit costs and replacement rates in this space.

The company’s body-maker division is seeing even higher rates of growth than filters and decent visibility, with demand coming from heavy equipment customers such as United Tractors (UNTR IJ).

The company should be a beneficiary of the imposition of B20 standards for Indonesia, which will require companies to change filters more regularly.

It was also recently granted ISO14001:2015 Environmental Management System, which should be positive from an environmental and ESG perspective. This is important for its US and European sales in the long-term. 

Selamat Sempurna (SMSM IJ) continues to be one of the few attractive industrial companies in Indonesia, with a very strong long-term record on sales growth and profitability. Its domestic filter business continues to see strong growth, with a significant tailwind from its body-maker division. It is also focused on growing both its export sales and at the same time its higher-margin heavy-duty filter business. According to Bloomberg Consensus Estimates, the company trades on 12.4x FY19E PER and 10.9x FY20E PER, with forecast EPS CAGR of 15% for FY19E and FY20E respectively. 

3. 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.

4. 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. 

5. Sea Ltd: A Surprise Winner in Cut-Throat E-Commerce Battle?

• A big takeaway from our conversations with Indo e-commerce industry sources is that they vouch for Shopee’s (Sea Ltd’s (SE US) e-commerce arm) MS gains story in the country.
• Indo e-commerce market has been enjoying super growth period (94% CAGR in 2015-18E) despite three major challenges (logistics, payment and highly subsidized market).
• With SE’s fund raising a matter of when, not if (2H20 as most likely timetable), Shopee’s tremendous progress in key metrics (MS, take rate) provides comfort.
• Assuming fair valuation of US$3 bn (vs. US$1.4 bn implied in SE’s ADR price) for Shopee, 12-mo PT for SE works out to be US$15.73/ADR, representing 43% upside potential.  

In this briefing:

1. TRACKING TRAFFIC/Chinese Tourism: Visits to Macau & HK Surge
2. Siauliu Bankas: A Baltic Belter
3. Banco Guayaquil: Off Radar but Surging Higher
4. EGM Diaries
5. HCG Q2FY19 Results Update

1. TRACKING TRAFFIC/Chinese Tourism: Visits to Macau & HK Surge

A year ago we began publishing Tracking Traffic/Chinese Tourism as the hub for all of our research on China’s tourism sector. This monthly report features analysis of Chinese tourism data, notes from our conversations with industry participants, and links to recent company news and thematic pieces. Our aim is to highlight important trends in China’s tourism sector (and changes to those trends).

In this issue readers can find:

Although we remain positive on the long-term growth of Chinese tourism, it’s clear that near-term demand has weakened substantially. We continue to take a negative view of travel intermediaries like Ctrip, which face intensifying competition from many sources. We are more positive on the prospects of actual owners of Chinese travel and tourism assets, like hotel chain Huazhu Group (HTHT US) and Air China Ltd (H) (753 HK). 

2. Siauliu Bankas: A Baltic Belter

Formed in 1992, Siauliu Bankas AB (SAB1L LH) has evolved into the sixth largest Lithuanian bank in terms of Assets and an important provider of banking services to Lithuanian SMEs. SAB1L is based in Siauliai in the north of the country, and in recent years has developed a nationwide franchise. It now has an upgraded network of 43 branches in all regions of Lithuania, and is investing in its digital footprint. SAB1L holds a 9.3% share of the corporate credit market, a 8.7% share of system deposits, and 8.7% of fast-evolving consumer loans. Main peers are SEB, Luminar, and Swedbank.

The bank is generating vibrant non-interest income from settlements and cash office transactions as well as its niche home and multi-apartment improvement revenue stream. The banks commands a 60% share of this energy-efficient focused market.

Constant uncertainty regarding an EBRD loan and conversion terms/dilution  has weighed on shares for some time. This has since cleared. EBRD is now the main shareholder with a 26% stake after a 2013 subordinated loan was recently converted into equity. The decision to strengthen the bank’s capital not only shows that the largest shareholder has a positive view of the bank’s strategy and outlook, but creates conditions for the bank to continue expanding its activities.

The Lithuanian economy represents a relatively solid narrative. Fiscal discipline combines with growth spurred by consumption, credit, firm investment, exports, while inflation and unemployment remain under control. Industrial output soared in October, propped up by a rebound in manufacturing production. In addition, exports climbed in October while upbeat retail sales pointed to strong household consumption. GDP can grow by 2.5-3.0% over the next year barring any unforeseen global ruptures.

3. Banco Guayaquil: Off Radar but Surging Higher

Banco Guayaquil SA (GYL ED) commands Ecuador’s most extensive network of 5,732 points of sale, incorporating branches, ATMs, neighbourhood units, as well as a virtual mobile bank, plus telephone and mobile banking. The bank commands 10.5% and 10.3% of the system credit and deposit markets.

Contrary to perception, Ecuador’s financial system appears relatively sound. It is well-capitalised, with solid credit quality, and high levels of liquidity. Private credit is still growing quite robustly. The supervision of the cooperatives should be strengthened though this is not a systemic risk. Removing barriers to financial intermediation, enhancing risk management, and improving oversight and contingency planning could help fortify the system further.

Ecuador’s economy though remains fragile and speculative. The administration of Lenin Moreno cannot be faulted for not grappling with some of the main issues confronting the country after years of chronic mismanagement by Correa. While growth still remains moderate, limited by structural bottlenecks, inflation and unemployment are under control though the fiscal deficit, debt burden, and paltry reserves represent huge challenges, not aided by recent oil sell-off. For this reason, CDS is sky-high – at similar levels to Argentina at 750bps.

But unlike Argentina, deep value can be found in Ecuador’s Banking Sector. At least investors are compensated, in great part, for country risk unlike elsewhere.

And, arguably, the time to buy oil-related proxies is when the commodity price is low, not high.

4. EGM Diaries

We recently attended the extraordinary general meeting (EGM) of Zydus Wellness (ZYWL IN). The primary agenda for the EGM was to approve the issue of fresh equity and raise debt to finance the acquisition of Kraft Heinz Co (KHC US) ‘s Indian subsidiary Heinz India Private Limited jointly with Cadila Healthcare (CDH IN). This will include the brands Complan (Health Food Drink), Glucon D (Glucose Powder), Nycil (Talcum Power) and Sampriti Ghee. We believe the deal is in sync with management’s vision of developing Pharma oriented consumer brands. However with recent acquisition of Glaxosmithkline Consumer Healthcare (SKB IN) by  Hindustan Unilever (HUVR IN) the competition in the health food drink market may get intense. Having said that, the largest brand Glucon D will likely continue market leadership along with Everyuth and Nycil which will be a good addition to the Zydus Portfolio. Any attempt for market share gains with Complan and Sampriti ghee will be futile and may come at a cost of margins. Based on preliminary, we expect full effect of the deal to appear on FY 2020 financials. Our preliminary estimates indicate a FY 2021 EPS of 51.68, which with a average PE multiple of 34.56 leads to a price target of INR 1809 per share implying an upside of 35% from latest close price of INR 1342. We will revisit our estimates post Q4 FY19 numbers when a much clearer picture is likely to emerge. 

5. HCG Q2FY19 Results Update

Healthcare Global Enterprises (HCG IN) , a leading cancer care hospital network’s (please click here for detailed report) Q2 FY19 results were inline with our expectations. Revenues grew by 16% YoY in Q2 FY19 due to strong growth from the HCG centres , EBITDA grew by only 8% in the same period due to operating losses reported by the new centers that dragged the overall profits.  We analyze the results.

In this briefing:

1. Avanti Feeds- Q2 FY18 Results Update
2. Aarti Industries-Q2FY19 Results Update
3. Wonderla- Q2FY19 Results Update
4. Shemaroo Q2 FY 18 Results Update
5. Indonesia Banks – Exceptional ROA Still Unrecognized at PT BFI Finance

1. Avanti Feeds- Q2 FY18 Results Update

Avanti Feeds (AVNT IN)  Q2 FY19 results were significantly below our expectations. While revenues declined by 14% YoY due to low shrimp cultivation as well as low demand particularly in US , the net profit declined by 68% YoY due to increase in raw material prices in the same period. We analyze the results.

2. Aarti Industries-Q2FY19 Results Update

Aarti Industries (ARTO IN) Q2 FY19 results were beyond our expectations, as the revenues grew by 46% YoY and net profit increased by 57% YoY against our expectation of 15% and 20% YoY growth in sales and PAT. This robust result was due to improving capacity utilization, rupee depreciation and expanding contribution of higher value products.

Based on the recent developments we have revised our estimates wherein we expect sales and PAT CAGR of 18% and 22% from FY18-20e.

We analyze the results.

3. Wonderla- Q2FY19 Results Update

Wonderla Holidays (WONH IN) Q2 FY19 results were below our expectations. While revenues declined by 16% YoY, EBITDA decreased by 18% YoY in Q2 FY19. The impact was primarily from its Kerala based amusement park that got affected by the devastating flood that the state has witnessed after a gap of near 100 years. We analyze the result.

4. Shemaroo Q2 FY 18 Results Update

Shemaroo Entertainment (SHEM IN) Q2 FY19 results were in line with our expectations. While the revenues grew by 21% YoY due to a strong growth from the digital business along with a strong recovery in the traditional business post demonetization and GST impact, PAT also grew by 22% YoY in Q2 FY19. We analyze the result.

5. Indonesia Banks – Exceptional ROA Still Unrecognized at PT BFI Finance

PT BFI Finance Indonesia (BFIN IJ) has the second highest ROA of all 107 banks and finance companies in our Indonesia database, at 8.2% as at 2017. It is a specialty lender, focussing on leasing and consumer financing. It provides financing for new cars, used cars, motorcycles through dealers and sales representatives, consumer loans and investment leasing for new and used heavy equipment, trucks, medical devices and machinery. The range of sectors in which its clients operate includes mining, trading, construction, services, agriculture, manufacturing, transportation and infrastructure. As at 3Q18 approximately 60% of lending is consumer finance or collateralized lending, with the remainder including vehicle financing and lease financing. BFIN is the old PT Bunas Finance, before changing its name in 2001. The company stands out in Indonesia and in Asia on a multitude of variables. Its ROA last year was 8.6x higher than the full industry average in Indonesia, and even outside this profitable banking market, there are few that compare. The company appears unrecognized despite consistently superior operating metrics, perhaps due to limited analyst coverage (two analysts) and low market capitalization (US$682m). This can create an opportunity. 

In this briefing:

1. Duzonbizon: Capitalizing on the Growth of Cloud Based CRM Software in Korea
2. THK (6481 JP): Downturn Discounted, Recovery Depends on New Orders

1. Duzonbizon: Capitalizing on the Growth of Cloud Based CRM Software in Korea

Duzonbizon (012510 KS) (also spelled “Douzonbizon”), is a leading beneficiary of the expanding cloud based CRM software market in Korea. The Korean public cloud market is expected to grow from 2.0 trillion won in 2018 to 2.4 trillion won in 2019. In the case of the domestic public cloud market, SaaS will continue to be strong. One of the catalysts that could positively impact the cloud industry in Korea is that there could be a change in the regulations which may allow many of the government related offices to start using private cloud services starting in 2019. 

The company has very little competition in the Lite ERP segment, where it has a near monopoly position. The customers that use this product are typically small companies with annual sales of less than 10 billion won to 20 billion won. Other major competitors have not chosen to aggressively fight against Duzonbizon in this segment.  The company’s cloud business is based on providing cloud-based ERP products. The company has been able to significantly increase its total sales by providing the ERP products as a cloud based service. The customers can reduce costs on servers and personnel by relying on the company’s cloud based ERP software and services. 

Duzonbizon is currently trading at 29x P/E (2019E) and 24x P/E (2020E), using consensus earnings estimates. The company’s P/E valuation multiples have been rising in the past several years and the valuation multiples have ranged in the 20-40x. While the company’s valuation multiples are relatively higher than the KOSPI market average, they are lower than the global CRM software leaders such as Salesforce.Com Inc (CRM US), which is currently trading at 49x P/E. Despite the recent volatility in Duzonbizon’s share price in the past few months, we are positive on the stock over the next one year and we think the stock could climb by an additional 20-30% over the next year. We believe that the company has a very strong business moat with a very loyal customer base. We want to start 2019 recommending a solid, emerging growth company in the Korean tech space and so we believe that Duzonbizon is a good company to start off with. 

2. THK (6481 JP): Downturn Discounted, Recovery Depends on New Orders

After dropping 60% from a high of ¥4,830 last February 27 to a 52-week low of ¥1,945 on December 26, THK closed at ¥2,062 on December 28, the last trading day of 2018.  

New orders peaked in the three months to Dec-17. The order backlog peaked in the three months to Mar-18, and so did the share price. Sales and operating profit peaked in the three months to Jun-18. Demand from the company’s top three user categories – electronics (semiconductor production equpment in particular), machine tools, and general industry – has been moving in parallel. By region, new orders from China have dropped most rapidly, followed by orders from Taiwan and Japan. 

After double-digit positive comparisons in the nine months to Sep-18, management is guiding for a 30% year-on-year decline in operating profit in 4Q of FY Dec-18. Judging from the orders trend and economic situation, substantial declines in sales and profits are likely in FY Dec-19. If demand from China picks up following a trade agreement with the U.S. sometime next year, there should be a moderate recovery going into FY Dec-20.

The shares are now selling at 7.7x management’s EPS guidance for FY Dec-18 and 0.9x book value at the end of Sep-18. Our forecast puts the shares on 11.9x earnings for FY Dec-19 and 10.4x earnings for FY Dec-20E. Valuations are at the bottom of their recent historical ranges. When orders recover, the stock price should, too.

In this briefing:

1. Discover SZ/​SH Connect: Foreigners Were Buying Industries and Financials in December
2. LG Uplus: Two Key Catalysts in 2019 (5G Roll-Out & Potential Acquisition of CJ Hellovision)
3. Jeans Mate Posts a Profit at Last
4. JD.com (JD): Lawsuit Over, Price Falling Back to First Trading Day, Defensive in Bear Market
5. India Generic Drugs: Antitrust Suit Could Cost Billions

1. Discover SZ/​SH Connect: Foreigners Were Buying Industries and Financials in December

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

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

We note that offshore investors were buying industries and financials in December. Interesting stocks in the north bound trades are Han’S Laser Technology In A (002008 CH), Muyuan Foodstuff Co Ltd A (002714 CH) and  Hangzhou Tigermed Consulting (300347 CH) . 

2. LG Uplus: Two Key Catalysts in 2019 (5G Roll-Out & Potential Acquisition of CJ Hellovision)

• LG Uplus Corp (032640 KS) was a clear market winner in 2018 as the stock was up 26% last year versus KOSPI which was down 17%. We think that LG Uplus is likely to continue to outperform the market over the next 12 months. There are many catalysts with this stock but the two most important catalysts on this stock over the next 12 months include the 5G roll-out and the potential acquisition of Cj Hellovision (037560 KS). 
• LG Uplus experienced a breakout year in 2013 with a steep increase in its share price. LG Uplus’ wireless ARPU increased 13.6% YoY in 2013, driven by higher ARPU 4G/LTE subscribers, which jumped from 4.4 million at end of 2012 to 7.1 million at end of 2013. Similar to the positive impact that the roll-out of 4G services had on LG Uplus’ wireless service ARPU and its share price, we believe that the roll-out of 5G services will have a positive impact on the company’s ARPU and its share price in 2019 and 2020. 
• At current price of 9,060 won for CJ Hellovision (market cap of 702 billion won), the EV is 1.3 trillion won, which would suggest an EV/EBITDA of 3.9x, using an estimated EBITDA of 272 billion won. If we double the value, the EV/EBITDA multiple would spike to 7.4x. LG Uplus is currently trading at 4.0x EV/EBITDA using 2018 consensus EBITDA estimates. Although it is a normal practice to pay a significant premium in Korea for an acquisition of a large controlling stake in a company, LG Uplus is probably analyzing on every angle to see if it is worth it paying a hefty 7.4x EV/EBITDA multiple for CJ Hellovision. 

3. Jeans Mate Posts a Profit at Last

While Rizap Group (2928 JP) has seen its share price crash and its CEO bow in apology after profit warnings and a plan to radically cut back on M&A, Jeans Mate Corp (7448 JP), which Rizap acquired last year, has quickly moved to modernise stores. It has just replaced its Shibuya store with a new concept called JEM that could mean the end of the Jeans Mate name altogether and posted its first operating profit in years. While many of Rizap’s acquisitions were dubious, Jeans Mate is one business that could be turned around into a modestly successful casual apparel retailer.

4. 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.

5. India Generic Drugs: Antitrust Suit Could Cost Billions

This Insight builds on our previous Insight, India Generic Drugs: US Antitrust Inquiry Widens by discussing estimated potential liabilities and details contained in court filings. Public comments by one of the plaintiffs (47 states) suggest the defendants’ aggregate liability could exceed US$6 billion, the largest previous settlement on record. There is not enough information to apportion potential liability by company, but some companies are better-positioned to bear the cost of a settlement than others. The process could drag on for an undetermined period of time (which helps the defendants). At the same time, the overhang will keep a lid on generic drug prices in the US market. 

Among Indian generic companies, Dr. Reddy’S Laboratories (DRRD IN), Aurobindo Pharma (ARBP IN),Cadila Healthcare (CDH IN), and Glenmark Pharmaceuticals (GNP IN) have the highest risk based on their market caps and exposure to the US market.       

In this briefing:

1. Bank Mandiri (BMRI IJ) – Shape Shifting and Millenial Mortgages – On the Ground in J-Town
2. New Oriental (EDU): Educator License Not A Concern
3. HOYA Corporation: Fairly Priced but Value Accretive M&A Deals Could Support a Higher Price Target
4. Nissan: Overlooked Personnel Moves Suggest the Alliance Will Not Survive Long Term
5. Japanese Telcos: What to Look for in 2019. Earnings May Surprise on the Upside.

1. 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. 

2. 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.

3. 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.

4. 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.

5. 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. 

In this briefing:

1. Tesla Motors Inc: Come Hell or High Water
2. FutureBright (703 HK): Typhoon Dampens 3Q Results
3. Nintendo: Is the Hype Surrounding the Switch Slowly Dying Down?

1. Tesla Motors Inc: Come Hell or High Water

It is our view, that come hell or high-water, in 2019, Tesla Motors (TSLA US) will establish itself as the pre-eminent large-cap growth stock. Those that are short would cover the position at a loss and those that are long are looking at another Apple Inc (AAPL US) or Amazon.com Inc (AMZN US) in the making. The ride may be volatile, but will be worth it. 

2. FutureBright (703 HK): Typhoon Dampens 3Q Results

We recently met with management to discuss the company’s 3Q results and outlook for the coming year.

There was clear disappointment that goals for 2018 had not been achieved: rising opex dampened the recovery in EBITDA, despite solid SSSg, the Hengqin Land sale is racked with yet further delays, and the key rental property is still untenanted. That said, we feel much of the frustration is due to positive outcomes on all front being just around the corner.

This note aims to give a brief update on the key pillars forming our thesis.

3. Nintendo: Is the Hype Surrounding the Switch Slowly Dying Down?

Nintendo reported their 2QFY03/19 in October with results showing growth at both the top line and bottom line albeit not living up to consensus expectations. Top line grew by 4.0% YoY to JPY388.9bn in 1H03/19 while OP grew by 53.9% YoY to JPY61.4bn. OP in the last quarter (2QFY03/19) was the second highest the company has experienced over the last five years. This growth has been mainly driven by the sales of Nintendo Switch hardware which sold just over 5m units in 1HFY03/19. However, YoY growth remained at 3.4% compared to 4.9m units sold in 1HFY03/18. This has left investors worried about Nintendo’s aggressive target of selling 20m units of the Switch for FY03/19. Of this target, the company has managed to achieve only around 25.0% in 1H. Nintendo’s financial performance follows a seasonal trend with the December quarter showing stronger performance due to increased sales during Christmas. While the company’s current quarter is likely to show strong results, we remain skeptical about the company reaching the aforementioned target for FY03/19.

Switch Sales Have Caused an Improvement in Nintendo’s OP….

….Despite a Slowdown in the Growth of Units Sales

Nintendo’s Last Quarter Has Also Failed to Live Up To Consensus Expectations

In this briefing:

1. China Tobacco International (IPO): The Monopolist Will Not Recover
2. A Round up of Some Japanese Equities Buys as We Begin the New Year.
3. Amarin–2019’s Biggest Buyout Target for Big Pharma
4. IPS Securex (IPSS SP): Micro-Cap Could Benefit from SG Gov’t HDB Upgrade Program
5. TRACKING TRAFFIC/Chinese Tourism: Visits to Macau & HK Surge

1. 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.

2. 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. 

3. Amarin–2019’s Biggest Buyout Target for Big Pharma

Amarin (AMRN US), a US-listed biotech firm, presented the full results of its “Reduce-It” (RI) clinical trial at a conference for the American Heart Association (AHA) last November. The new data announced showed that, Vascepa–Amarin’s cardiovascular drug–when used with statins, reduces the risk of heart attacks by 31%, strokes by 28%, and cardiovascular death by 20%–all with minimal safety issues. The stock has plunged by -37% since the AHA event, largely due to concerns–which are misplaced in our view–regarding the placebo used in the RI trial. 

We attended the AHA event and its ancillary meetings in Chicago and, in this Insight, detail the main points covered there, the powerful efficacy of Vascepa, the addressable market, the placebo issue, and why we think Amarin could be 2019’s biggest buyout candidate among Big Pharma. We also analyze Amarin’s 2018 preliminary results and 2019 guidance from last Friday in detail.      

Enthusiastic Response from Doctors over the “Reduce-It” Trial Data: The data released at the AHA event for Vascepa from its Reduce-It (RI) trial was so robust that it drew applause from the 2,500 doctors in attendance, 87% of whom were polled, responding that they would prescribe Vascepa. Given how safe the drug is and its high relative risk reduction (RRR) of cardiovascular events, Vascepa should be a blockbuster drug. 

Q4 2018 Revenues & Prescriptions Surge Post Trial Results: Amarin just announced Q4 revenues and 2019 guidance last Friday. While its conservative 2019 guidance of $350m in revenues (+55% YoY) may disappoint, as it’s 16% below consensus estimates, the key focus should be on Q4 revenue growth of 38% YoY, with 35% growth in new prescriptions. This came on the back of the RI trial results and without any label expansion, which Amarin plans to file with the FDA during Q1. If label expansion is approved, Vascepa sales should soar further. 

Peak Sales Could Easily Surpass $10bn if Vascepa is Approved in Europe & China: Counting only the patients with coronary heart disease and diabetes–the core target for Vascepa–there are 48m patients in North America, 98m in Europe and 230m in China. If only 30% of these patients use Vascepa by 2030–when its patent expires–peak sales could reach at least $12bn (see Table-3 below). The need for Vascepa is dire, as cardiovascular disease (CVD) is the leading cause of death worldwide (see chart-1). In the US, one in four adults have elevated triglycerides, yet only 4% have been treated. The upside for Vascepa is huge. 

Stock Plunges Due to Concern Over Placebo Used in Reduce-It Trial: Just 16 minutes into the Reduce-It trial results being revealed at the AHA conference last November, Forbes published a “kill” story on the trial outcomes. The Forbes article (here) claimed that results were not trustworthy (quoting doctors in charge of clinical trials for a rival drug), as the mineral oil used in the placebo arm of the trial impacted statin absorption. This sent the stock plunging by -26% in the following two days after the conference. Below we discuss why these concerns are misplaced, especially since the FDA approved of mineral oil for use as a placebo.   

Amarin is Now an Attractive Take-Over Candidate for Big Pharma: Based on our estimates, Amarin should reach $7.6bn in 2022 revenues and $8.40 in EPS (consensus is at $1.5bn and $2.23) on just 40% penetration of the CVD patients in the US and the Middle East (where Vascepa is already approved) and 30% penetration in Canada and Europe.  On average, it takes drug makers at least $4bn over 10 years for new drug development and the success rate for FDA approval is only one in ten. In light of this, Amarin has become an attractive take-over candidate, with potential peak sales of $16bn (if China is successfully penetrated) and current market cap of only $4.2bn. 

4. IPS Securex (IPSS SP): Micro-Cap Could Benefit from SG Gov’t HDB Upgrade Program

Since its founding in 1960 the Housing Development Board (HDB) has constructed over 1.1 million dwelling units across Singapore. Currently, over 80% of the Singapore population lives in HDB built housing. With the bulk of these buildings having been constructed between 1960-1988 many of them are up for extensive renewal and renovation works. Construction companies should benefit from this trend, as should the micro-cap Ips Securex Holdings (IPSS SP), a reseller of equipment that modifies HDBs with emergency monitoring systems for senior citizens.

Outgoing PM Lee Hsien Loong (LHL) was very outspoken about the need to upgrade HDBs and make them safer for many of SG’s “pioneers” and senior citizens during his speech at the 2018 National Day Parade (NDP). With a general election coming later this year (date TBC) investors in IPS can be hopeful that the company should be awarded some new contracts and finally end the three-year de-rating which has taken the stock from 0.32 SGD in December 2015 to 0.055 SGD recently.

IPS is cheap with a market cap of only 27M SGD (20M USD) but can only start to re-rate on new major contract announcements.

5. TRACKING TRAFFIC/Chinese Tourism: Visits to Macau & HK Surge

A year ago we began publishing Tracking Traffic/Chinese Tourism as the hub for all of our research on China’s tourism sector. This monthly report features analysis of Chinese tourism data, notes from our conversations with industry participants, and links to recent company news and thematic pieces. Our aim is to highlight important trends in China’s tourism sector (and changes to those trends).

In this issue readers can find:

Although we remain positive on the long-term growth of Chinese tourism, it’s clear that near-term demand has weakened substantially. We continue to take a negative view of travel intermediaries like Ctrip, which face intensifying competition from many sources. We are more positive on the prospects of actual owners of Chinese travel and tourism assets, like hotel chain Huazhu Group (HTHT US) and Air China Ltd (H) (753 HK). 

In this briefing:

1. Siauliu Bankas: A Baltic Belter
2. Banco Guayaquil: Off Radar but Surging Higher
3. EGM Diaries
4. HCG Q2FY19 Results Update
5. Avanti Feeds- Q2 FY18 Results Update

1. Siauliu Bankas: A Baltic Belter

Formed in 1992, Siauliu Bankas AB (SAB1L LH) has evolved into the sixth largest Lithuanian bank in terms of Assets and an important provider of banking services to Lithuanian SMEs. SAB1L is based in Siauliai in the north of the country, and in recent years has developed a nationwide franchise. It now has an upgraded network of 43 branches in all regions of Lithuania, and is investing in its digital footprint. SAB1L holds a 9.3% share of the corporate credit market, a 8.7% share of system deposits, and 8.7% of fast-evolving consumer loans. Main peers are SEB, Luminar, and Swedbank.

The bank is generating vibrant non-interest income from settlements and cash office transactions as well as its niche home and multi-apartment improvement revenue stream. The banks commands a 60% share of this energy-efficient focused market.

Constant uncertainty regarding an EBRD loan and conversion terms/dilution  has weighed on shares for some time. This has since cleared. EBRD is now the main shareholder with a 26% stake after a 2013 subordinated loan was recently converted into equity. The decision to strengthen the bank’s capital not only shows that the largest shareholder has a positive view of the bank’s strategy and outlook, but creates conditions for the bank to continue expanding its activities.

The Lithuanian economy represents a relatively solid narrative. Fiscal discipline combines with growth spurred by consumption, credit, firm investment, exports, while inflation and unemployment remain under control. Industrial output soared in October, propped up by a rebound in manufacturing production. In addition, exports climbed in October while upbeat retail sales pointed to strong household consumption. GDP can grow by 2.5-3.0% over the next year barring any unforeseen global ruptures.

2. Banco Guayaquil: Off Radar but Surging Higher

Banco Guayaquil SA (GYL ED) commands Ecuador’s most extensive network of 5,732 points of sale, incorporating branches, ATMs, neighbourhood units, as well as a virtual mobile bank, plus telephone and mobile banking. The bank commands 10.5% and 10.3% of the system credit and deposit markets.

Contrary to perception, Ecuador’s financial system appears relatively sound. It is well-capitalised, with solid credit quality, and high levels of liquidity. Private credit is still growing quite robustly. The supervision of the cooperatives should be strengthened though this is not a systemic risk. Removing barriers to financial intermediation, enhancing risk management, and improving oversight and contingency planning could help fortify the system further.

Ecuador’s economy though remains fragile and speculative. The administration of Lenin Moreno cannot be faulted for not grappling with some of the main issues confronting the country after years of chronic mismanagement by Correa. While growth still remains moderate, limited by structural bottlenecks, inflation and unemployment are under control though the fiscal deficit, debt burden, and paltry reserves represent huge challenges, not aided by recent oil sell-off. For this reason, CDS is sky-high – at similar levels to Argentina at 750bps.

But unlike Argentina, deep value can be found in Ecuador’s Banking Sector. At least investors are compensated, in great part, for country risk unlike elsewhere.

And, arguably, the time to buy oil-related proxies is when the commodity price is low, not high.

3. EGM Diaries

We recently attended the extraordinary general meeting (EGM) of Zydus Wellness (ZYWL IN). The primary agenda for the EGM was to approve the issue of fresh equity and raise debt to finance the acquisition of Kraft Heinz Co (KHC US) ‘s Indian subsidiary Heinz India Private Limited jointly with Cadila Healthcare (CDH IN). This will include the brands Complan (Health Food Drink), Glucon D (Glucose Powder), Nycil (Talcum Power) and Sampriti Ghee. We believe the deal is in sync with management’s vision of developing Pharma oriented consumer brands. However with recent acquisition of Glaxosmithkline Consumer Healthcare (SKB IN) by  Hindustan Unilever (HUVR IN) the competition in the health food drink market may get intense. Having said that, the largest brand Glucon D will likely continue market leadership along with Everyuth and Nycil which will be a good addition to the Zydus Portfolio. Any attempt for market share gains with Complan and Sampriti ghee will be futile and may come at a cost of margins. Based on preliminary, we expect full effect of the deal to appear on FY 2020 financials. Our preliminary estimates indicate a FY 2021 EPS of 51.68, which with a average PE multiple of 34.56 leads to a price target of INR 1809 per share implying an upside of 35% from latest close price of INR 1342. We will revisit our estimates post Q4 FY19 numbers when a much clearer picture is likely to emerge. 

4. HCG Q2FY19 Results Update

Healthcare Global Enterprises (HCG IN) , a leading cancer care hospital network’s (please click here for detailed report) Q2 FY19 results were inline with our expectations. Revenues grew by 16% YoY in Q2 FY19 due to strong growth from the HCG centres , EBITDA grew by only 8% in the same period due to operating losses reported by the new centers that dragged the overall profits.  We analyze the results.

5. Avanti Feeds- Q2 FY18 Results Update

Avanti Feeds (AVNT IN)  Q2 FY19 results were significantly below our expectations. While revenues declined by 14% YoY due to low shrimp cultivation as well as low demand particularly in US , the net profit declined by 68% YoY due to increase in raw material prices in the same period. We analyze the results.