Equity Bottom-Up

In this briefing:

1. SoftBank Group (9984 JP): SoftBank Corp IPO Has Failed to Meaningfully Narrow the Holdco Discount
2. AALI (AALI IJ): Indonesian Biodiesel Mandate to Support CPO Price
3. India: New Tariff Regulation Is Temporary Relief For NTPC Ltd (NTPC IN) ​and Power Grid (PWGR IN) ​
4. Tencent Music (TME): Both Live Video and Music Fairly Valued, No Action
5. Small Cap Diary: MEGA, Eastwater

1. SoftBank Group (9984 JP): SoftBank Corp IPO Has Failed to Meaningfully Narrow the Holdco Discount

Softbank Group (9984 JP)’s market cap has consistently traded below its NAV. A popular expectation was that the Softbank Corp (9434 JP) IPO should be a catalyst to narrow the conglomerate discount (holdco discount). On its trading debut today, SoftBank Corp’s shares fell 14.5% from its IPO price of JPY1,500 to JPY1,282 per share – the worst first-day decline ever for a major IPO in Japan since the Japan Display (6740 JP) IPO in 2014. 

2. AALI (AALI IJ): Indonesian Biodiesel Mandate to Support CPO Price

• Current price offers a good entry point, relatively strong analyst recommendation, and low earnings expectation relative to its sector
• Successful execution of Indonesia’s biodiesel mandate should drive CPO demand for biodiesel blending, hence driving CPO prices
• Through strong partnerships with smaller estates AALI can increase external FFB (fresh fruit bunch) purchases, reducing fixed costs incurred by plantation
• Attractive at 19CE* 10% ROE/PB compared to ASEAN Consumer staples at 4.6% and AALI offers 4% dividend yield
• Risks: Low palm-based commodities and crude palm oil prices

* Consensus Estimates

3. India: New Tariff Regulation Is Temporary Relief For NTPC Ltd (NTPC IN) ​and Power Grid (PWGR IN) ​

This is something you really don’t see often, a sharp and positive stock price movement in Govt owned Indian power utilities. But after the latest draft regulation on the tariff norms for 2019-24 from CERC (the Central Electricity Regulatory Commission, which is the highest regulatory body for power sector in India) was released on 14th of December, both NTPC Ltd (NTPC IN) and Power Grid Corporation Of India (PWGR IN) have done well in absolute terms and also outperformed the broader markets. After CERC suggested continuation of the 15.5% regulated return on equity (RoE) for the power generation and transmission companies, this was seen as a positive regulatory development and helped these stocks.

However, investors should also look at the risks before getting too optimistic on Govt owned Regulated Power Utilities, a) these are not final norms and CERC has invited comments from the stakeholders and Regulator may still tweak the tariff norms for period starting 1st April 2019 depending on feedback and inputs from DISCOMs and consumer groups, b) Usually, the political rivalry between Centre and States doesn’t affect the PSUs but as some of recent developments such as Odisha where the state blamed Centre for increased tariff burden suggest, this is changing and could be damaging for future long term contracts of NTPC Ltd (NTPC IN) and Power Grid Corporation Of India Limited (PWGR IN).

There are question marks on future growth for both these companies. While NTPC Ltd (NTPC IN) will have to compete with renewable sources, there is a risk that capex growth will slow down for Power Grid Corporation Of India Limited (PWGR IN) as well. While latest draft regulation has come as positive, we don’t expect sustained stock price outperformance from NTPC Ltd (NTPC IN) and Power Grid Corporation Of India Limited (PWGR IN) as there are structural challenges for them and a Govt ownership and its impact on strategic decision making continues to remain an overhang.

4. Tencent Music (TME): Both Live Video and Music Fairly Valued, No Action

• We believe that TME is fairly valued based on peer companies’ price / sales ratios.
• The Chinese internet peer companies as comparison bases in valuation have declined significantly more than indices, we believe it is not a concern that indices declined further.
• We believe that the main business of music will grow strongly in 2019 and 2020 due to the rapid growth of both the paying user base and ARPU (Average Revenues per User per month).

5. Small Cap Diary: MEGA, Eastwater

Small caps have an easier time scaling up in good times, but can get hit much harder by liquidity in the bear markets. Anyway, it’s still good to check how some of the better-know small cap names like MEGA and Eastwater even if they are not doing particularly well.

Here’s some highlights:

• MEGA hasn’t done quite as well. Their earnings growth has slowed to under 10% this year despite an average of 19% between 2014 and 2017. It doesn’t seem like there’s anything wrong with the business model or even execution, just Law of Large Numbers and running out of near-term opportunities.
• Interestingly, the company’s biggest market outside ASEAN is Africa (eg. Nigeria, Ethiopia), which accounts for 12% of their branded product revenues, and that’s declined 4.2%, hence dragging down the company’s performance.
• East Water realized healthy and stable gross margin of 50% and ROE of 10.9% while maintaining a strong credit rating of A+, allowing them to finance aggressive capex cheaply.
• The company generates over half of its revenues from raw water, which is more profitable than tap and industrial, and has had a recent change in strategic shareholder from EGCO to Manila Water.

In this briefing:

1. SPH REIT Nibbles at Blackstone’s Portfolio
2. Taisho Frontrunner to Acquire BMS’s French OTC Business
3. UTP (UTP TB): Continued Gain from Tight Global Paper Supply
4. Exuberance of Korean Retail Investors About Jim Rogers Becoming an Outside Director of Ananti
5. Nio Surged 31% in November; Will Momentum Continue Through 2019?

1. SPH REIT Nibbles at Blackstone’s Portfolio

SPH REIT is acquiring an 85% stake in Figtree Grove Shopping Centre in the inner western suburb of Wollongong, New South Wales, Australia for S$188.2 mn. Australia’s media has reported Blackstone as the property’s vendor. SPH REIT is jointly acquiring Figtree Grove with a publicly listed financial services group, Moelis Australia Limited, which will own the remaining 15% interest.

This acquisition is SPH REIT’s first overseas foray and is only the second acquisition deal since listing. Compared to its first acquisition of The Rail Mall, the acquisition of Figtree Grove is truly meaningful as it opens up the possibility of portfolio acquisitions from its newly established network of contacts.   

While the addition of an Australian retail asset into SPH REIT’s portfolio enhances geographical diversification (5.2% of portfolio by asset value), investors should know that the e-commerce threat to retailers in Australia appears to be greater than in Singapore.  

Estimates show that the acquisition of Figtree Grove is marginally DPU-accretive. I am maintaining my view on SPH REIT as a defensive investment to continue holding, noting the stable yield of 5.6% for FY19F-20F.  Fair value is largely unchanged at S$1.09/unit (previous S$1.08/unit).

2. Taisho Frontrunner to Acquire BMS’s French OTC Business

Event – Bristol Myers Squibb Co (BMY US)‘s  French OTC business UPSA has been on the block since June 2018. According to a December 17, 2018 Bloomberg report (link), Taisho has emerged as the frontrunner to acquire UPSA for ~$1.6b

Our Take

• If Taisho Pharmaceutical Holdin (4581 JP)  indeed goes ahead, it would get access to UPSA’s established (matured) OTC business, which generated ~$480m in sales in FY17
• UPSC’s key OTC brands include Aspirine, Dafalgan and Efferalgan pain relievers; Donormyl sleep aid; and Fervex cold and flu remedies
• Taisho also gains a foothold in France, contributing ~60% of UPSA sales (the rest is from other EU countries and China), by leveraging UPSA’s production facilities and distribution channels to perhaps market some of its own OTC products

Valuation

Preliminary analysis suggests that the potential acquisition would have only a marginal impact on Taisho’s financials in the short to medium term due to:

• Acquisition of a matured OTC portfolio that is projected to decline by 3-5% per year
• Absence of cost synergies; Taisho’s SG&A expense to increase by ~¥12-15b from FY19e
• Post deal Cash and Eq. of ~ $1b (assuming UPSA is an all cash deal)

3. UTP (UTP TB): Continued Gain from Tight Global Paper Supply

• Strong long-term sales growth, share price is less volatile, and solid short-term earnings momentum relative to its sector
• Sales growth for UTP’s cardboard paper and packaging used for corrugated boxes should be supported by an ongoing 20% ramp-up in production to 20,000 tons/month on tight global supply conditions
• Strong demand and efficiency improvements on older cardboard paper-making equipment has expanded margins, operating margin expanded by 12 ppts in 9M18 YoY
• UTP has shown solid improvements in asset turnover while also improving its net margin
• Risk: Chinese moves to ramp up paper supply again

* Consensus Estimates

4. Exuberance of Korean Retail Investors About Jim Rogers Becoming an Outside Director of Ananti

• After it was announced on 10 December that Jim Rogers was being considered an outside director of Ananti Inc (025980 KS), its share price has soared more than 100% in six business days. At current price of 21,000 won, market cap of Ananti is 1.7 trillion won ($1.5 billion). In six days, Jim Rogers has added more than $800 million in market cap to Ananti, which is now trading at more than 5.0x P/B, compared to 2.5x P/B only a week ago. We think the risk/reward of Ananti is no longer favorable given the steep share price increase.
• This is a classic “buy on rumor, sell on news” trading that could impact the share price. The fact is, Jim Rogers has not yet accepted to be an outside director of the company. Rather, he has been recommended to become an outside director to be decided on December 27th and there are only six more business days until this date. It is almost a given that Jim Rogers will be voted in as an outside director of Ananti. We think that there could be many investors that may be unloading their shares as we get closer to December 27th.
• In addition, there are many other companies that should benefit from a greater opening up of the North Korean economy to South Korea and rest of the world. We have listed the 30 key North Korean related stocks below. Hence, for those investors that want to get a greater exposure to the North Korea related stocks in South Korea, some of these other stocks may provide greater value than Ananti which has soared in price in such a short period of time.

5. Nio Surged 31% in November; Will Momentum Continue Through 2019?

• NIO Inc (NIO US) surged 30.7% in November after reporting steady growth in production and following certain notable investors such as Baillie Gifford & Co (largest investor in Tesla Motors (TSLA US) after Elon Musk) acquiring a stake in the company creating a bullish view on the company.
• The EV start-up delivered 3,089 vehicles in November, registering a more than 96% increase from October, indicating a smooth flow in its production line of ES8. The latter was something its rival, Tesla, took long to establish. The company has reached a total production of more than 10,000 units thus far.
• On the 15^th of December which is the company’s ‘Nio Day’, Nio hopes to launch its ES6, a 5-seater, two-row, high-performance premium electric SUV that will have a longer range and at a lower price than its three-row seven-passenger ES8. Production and delivery of ES6 are expected to begin in 2019.
• Q3 FY2018 results although slightly below the company’s expectations was an improvement compared to the previous quarter and acted as a tailwind in increasing investor confidence in the company. Sales increased to USD214m in Q3 from USD 46 in Q2. Though the company has not yet generated any profits, operating losses as a % of revenues have declined to -191.2% in Q3 cf.-4,077% in Q2.
• For Q4 FY2019E the company expects to deliver 6,700 to 7,000 vehicles more than double the total deliveries during Q3, forecasting revenue between USD 418.5-436 m, at 95-100% increase from Q3. The company has not guided on OP.
• Although the company is still fighting for profits, which seems to be normal for a start-up, it should be noted that the company has a quite steady cash reserve to fund its operation and ramp up production of its to-be-released ES6 model. In our opinion, if the launch of ES6 is as successful as ES8 and the company avoids production delays like Tesla, then it may break even or even make profits within a shorter time period than which Tesla took (almost 8 years). That said, Nio’s stock is likely to witness further surges through 2019 following its recovery since November.

In this briefing:

1. China Tower: Changing Our View to Positive. Low Cost Expansion Should Generate Better Returns

1. China Tower: Changing Our View to Positive. Low Cost Expansion Should Generate Better Returns

At the time of the IPO we were quite negative on China Tower (788 HK) prospects. However, in recent calls and meetings our view has changed and become more constructive. Chris Hoare now believes that China Tower is managing to generate co-location growth outside the Master Services Agreement (MSA) and at a much lower level of capital intensity (perhaps up to 50%) than indicated in the IPO. Management has also proven to be more open to shareholders than expected and with lower capex, higher FCF generation we upgrade to a BUY with a HK$1.60 target price.  The stock has started to move as the market has begun to understand the more positive outlook. It will be interesting to see if China Tower is allowed to retain these benefits long term.

Summary China Tower forecasts: 

In this briefing:

1. India: New Tariff Regulation Is Temporary Relief For NTPC Ltd (NTPC IN) ​and Power Grid (PWGR IN) ​
2. Tencent Music (TME): Both Live Video and Music Fairly Valued, No Action
3. Small Cap Diary: MEGA, Eastwater
4. SPH REIT Nibbles at Blackstone’s Portfolio
5. Taisho Frontrunner to Acquire BMS’s French OTC Business

1. India: New Tariff Regulation Is Temporary Relief For NTPC Ltd (NTPC IN) ​and Power Grid (PWGR IN) ​

This is something you really don’t see often, a sharp and positive stock price movement in Govt owned Indian power utilities. But after the latest draft regulation on the tariff norms for 2019-24 from CERC (the Central Electricity Regulatory Commission, which is the highest regulatory body for power sector in India) was released on 14th of December, both NTPC Ltd (NTPC IN) and Power Grid Corporation Of India (PWGR IN) have done well in absolute terms and also outperformed the broader markets. After CERC suggested continuation of the 15.5% regulated return on equity (RoE) for the power generation and transmission companies, this was seen as a positive regulatory development and helped these stocks.

However, investors should also look at the risks before getting too optimistic on Govt owned Regulated Power Utilities, a) these are not final norms and CERC has invited comments from the stakeholders and Regulator may still tweak the tariff norms for period starting 1st April 2019 depending on feedback and inputs from DISCOMs and consumer groups, b) Usually, the political rivalry between Centre and States doesn’t affect the PSUs but as some of recent developments such as Odisha where the state blamed Centre for increased tariff burden suggest, this is changing and could be damaging for future long term contracts of NTPC Ltd (NTPC IN) and Power Grid Corporation Of India Limited (PWGR IN).

There are question marks on future growth for both these companies. While NTPC Ltd (NTPC IN) will have to compete with renewable sources, there is a risk that capex growth will slow down for Power Grid Corporation Of India Limited (PWGR IN) as well. While latest draft regulation has come as positive, we don’t expect sustained stock price outperformance from NTPC Ltd (NTPC IN) and Power Grid Corporation Of India Limited (PWGR IN) as there are structural challenges for them and a Govt ownership and its impact on strategic decision making continues to remain an overhang.

2. Tencent Music (TME): Both Live Video and Music Fairly Valued, No Action

• We believe that TME is fairly valued based on peer companies’ price / sales ratios.
• The Chinese internet peer companies as comparison bases in valuation have declined significantly more than indices, we believe it is not a concern that indices declined further.
• We believe that the main business of music will grow strongly in 2019 and 2020 due to the rapid growth of both the paying user base and ARPU (Average Revenues per User per month).

3. Small Cap Diary: MEGA, Eastwater

Small caps have an easier time scaling up in good times, but can get hit much harder by liquidity in the bear markets. Anyway, it’s still good to check how some of the better-know small cap names like MEGA and Eastwater even if they are not doing particularly well.

Here’s some highlights:

• MEGA hasn’t done quite as well. Their earnings growth has slowed to under 10% this year despite an average of 19% between 2014 and 2017. It doesn’t seem like there’s anything wrong with the business model or even execution, just Law of Large Numbers and running out of near-term opportunities.
• Interestingly, the company’s biggest market outside ASEAN is Africa (eg. Nigeria, Ethiopia), which accounts for 12% of their branded product revenues, and that’s declined 4.2%, hence dragging down the company’s performance.
• East Water realized healthy and stable gross margin of 50% and ROE of 10.9% while maintaining a strong credit rating of A+, allowing them to finance aggressive capex cheaply.
• The company generates over half of its revenues from raw water, which is more profitable than tap and industrial, and has had a recent change in strategic shareholder from EGCO to Manila Water.

4. SPH REIT Nibbles at Blackstone’s Portfolio

SPH REIT is acquiring an 85% stake in Figtree Grove Shopping Centre in the inner western suburb of Wollongong, New South Wales, Australia for S$188.2 mn. Australia’s media has reported Blackstone as the property’s vendor. SPH REIT is jointly acquiring Figtree Grove with a publicly listed financial services group, Moelis Australia Limited, which will own the remaining 15% interest.

This acquisition is SPH REIT’s first overseas foray and is only the second acquisition deal since listing. Compared to its first acquisition of The Rail Mall, the acquisition of Figtree Grove is truly meaningful as it opens up the possibility of portfolio acquisitions from its newly established network of contacts.   

While the addition of an Australian retail asset into SPH REIT’s portfolio enhances geographical diversification (5.2% of portfolio by asset value), investors should know that the e-commerce threat to retailers in Australia appears to be greater than in Singapore.  

Estimates show that the acquisition of Figtree Grove is marginally DPU-accretive. I am maintaining my view on SPH REIT as a defensive investment to continue holding, noting the stable yield of 5.6% for FY19F-20F.  Fair value is largely unchanged at S$1.09/unit (previous S$1.08/unit).

5. Taisho Frontrunner to Acquire BMS’s French OTC Business

Event – Bristol Myers Squibb Co (BMY US)‘s  French OTC business UPSA has been on the block since June 2018. According to a December 17, 2018 Bloomberg report (link), Taisho has emerged as the frontrunner to acquire UPSA for ~$1.6b

Our Take

• If Taisho Pharmaceutical Holdin (4581 JP)  indeed goes ahead, it would get access to UPSA’s established (matured) OTC business, which generated ~$480m in sales in FY17
• UPSC’s key OTC brands include Aspirine, Dafalgan and Efferalgan pain relievers; Donormyl sleep aid; and Fervex cold and flu remedies
• Taisho also gains a foothold in France, contributing ~60% of UPSA sales (the rest is from other EU countries and China), by leveraging UPSA’s production facilities and distribution channels to perhaps market some of its own OTC products

Valuation

Preliminary analysis suggests that the potential acquisition would have only a marginal impact on Taisho’s financials in the short to medium term due to:

• Acquisition of a matured OTC portfolio that is projected to decline by 3-5% per year
• Absence of cost synergies; Taisho’s SG&A expense to increase by ~¥12-15b from FY19e
• Post deal Cash and Eq. of ~ $1b (assuming UPSA is an all cash deal)

In this briefing:

1. CKP (CKP TB): Powerful Expansion to Drive Earnings Growth
2. Company Visits: The Best of November/December 2018
3. Islami Bank Bangladesh: Cheap in a Risky Sector
4. Bank St Petersburg: A Christmas Cracker of Value
5. BAUTO (BAUTO MK): New Models to Keep Strong Sales Momentum

1. CKP (CKP TB): Powerful Expansion to Drive Earnings Growth

• Strong net profit momentum and more attractive to analysts relative to its sector
• Higher power demand trend from new industrial consumers should continue supporting electricity sales, revenue rose 31% YoY in 3Q18
• Large capacity expansion from Xayaburi hydroelectric power plant in Laos with expected commercial operation date (COD) in 4Q19 to more than double CKP’s current effective capacity
• Trades above ASEAN Utilities at 19CE* 45.1x PE but offers great EPS growth in a sector that is expected to remain flattish
• Risk: Delays for new plants, change in government regulation

* Consensus Estimates

2. Company Visits: The Best of November/December 2018

During this quarter, we visited 13 companies and have to admit the average quality has improved. Amongst these, there were four stocks that impressed us the most, and the Oscars go to…

• SSP acheiving profit growth in excess of 20% in the backdrop of Thai economic headwinds and Trumpian trade wars by expanding into countries unaffected by both issues.
• Amata VN capitalizing on the shift from locations with rising labor costs (eg Thailand, China) to Vietnam, which has more than a few geographic and demographic advantages.
• Gunkul, arguably Thailand’s hottest renewable play at the moment delivering outsized long-term growth in solar/wind space as well as a promising solar roof game plan.
• TIGER, an aggressive and small construction company that has only IPO’d for less than a quarter and is already highlighting aggressive growth plans.

3. Islami Bank Bangladesh: Cheap in a Risky Sector

The Islami Bank Bangladesh (ISLAMI BD) narrative is underpinned by a quintile 1 global PH Score™ and a lowly franchise valuation by global standards.

ISLAMIBANK is a Shariah-centric entity, basing its operations on partnership, profit-sharing, a principal-agent/ lessee-lessor relationship, and trading via traditional concepts of Murabaha, Mudaraba, Musharakah, Muajjal, Ijarah, Ujarah, and Wadiah. The bank’s asset-base is dominated by “investments” relating to Bai-Murabaha (asset financing with a mark-up) and hire purchase under Shirkatul Melk with modest exposure to Bai-Muajjal, Quard, Bai-Salam, Mudaraba and Musharaka.  More than 50% of “Investments” relate to the industrial space, in particular to textiles (spinning/weaving/dyeing), to agriculture, to garments and accessories, and to steel (re-rolling and engineering). About 90% of “investments” stem from urban areas. There is a focus on Dhaka and Ctittagong opportunity. Source of Funding is based on Mudarabah.

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. 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 too.

4. Bank St Petersburg: A Christmas Cracker of Value

Bank St Petersburg PJSC (BSPB RM) benefits from an entrenched market position and strong brand recognition in its home market of City of St. Petersburg –represented by sectors such as pharmaceuticals, medical materials, motor vehicles, trailers/semi-trailers, food products, textiles, and rubber /plastic goods- as well as Kaliningrad and Leningrad.  

BSPB’s asset base is a quite diversified. While management focuses on relatively low-risk and hence low-yielding loans to core large corporates and mortgages, the consumer credit segment and autos are a fast-growing area.

Top Russian banks tend to have a technological edge vis-a-vis other EMs. BSPB‘s Internet Bank ( i.bspb.ru) remains one of the best in Russia exhibiting a 25% growth in retail customers to 960k last year. A recent innovation was the launch of a mobile website which was created as part of the integrated environment based on BSPB Mobile banking apps for iOS, Android, and WindowsMobile . The e-banking system is currently used by more than 95% of the corporate customers of BSPB with 99% of payments and FX transactions being made online. BSPB cards support all the cutting-edge mobile payment technologies offered by Apple Pay, Samsung Pay and Android Pay.

A key of BSPB’s strategic plan is to achieve a sustained ROAE of 15%+. The bank also vows to remain among the top 20 Russian banks by assets and to increase transaction revenues by 50% over 2018-20. In order to achieve these goals, management is committed to expand  the low-risk transaction business and  bolster corporate lending by introducing industry expertise and specialisation and a segmental approach  matching customer demand with high quality services and products.

Independent directors make up at least 1/3 of the Supervisory Board.

5. BAUTO (BAUTO MK): New Models to Keep Strong Sales Momentum

• Improving asset turnover, relatively strong analyst recommendations, and slow asset growth relative to its sector
• New launches in FY2019-20 e.g. CX-3 facelift and 7-seat SUV CX-8 should stimulate sales going forward. Sales were up by 24% in 1QFY19 YoY
• Equity income from JV with Mazda Motor (7261 JP) should increase as production volume ramps up to meet strong ASEAN demand. Production up by 40% YoY in FY2018
• Attractive at a 19CE* 0.4 PEG ratio versus ASEAN Consumer Discretionary at a PEG of 0.9 and BAUTO is net cash
• Risks: Regulations and sluggish consumer demand, FX risk JPY and PHP

* Consensus Estimates

In this briefing:

1. Global Banks – DBS Frail Against Global Peers
2. Korean Government and Hyundai Motor Group’s Grand Ambitions to Expand Hydrogen Fuel Cell Vehicles
3. Belluna: Growing by Selling Gentility to the Expanding Older Market in Japan
4. SoftBank Group (9984 JP): SoftBank Corp IPO Has Failed to Meaningfully Narrow the Holdco Discount
5. AALI (AALI IJ): Indonesian Biodiesel Mandate to Support CPO Price

1. Global Banks – DBS Frail Against Global Peers

Oil prices are now similar to where they were during 2017 when Singapore’s banks faced significant credit quality stresses. This was due to oil service sector lending, where bad loans here have generally not even declined. With a key driver of this sector distress in the past showing radical weakness yet again, the risk is resurgence in credit costs at Singapore banks during 4Q18. At the same time, global banks are telling a story. It is one not of a robust global economy, but one that is weakening. We have written at length about our concerns of rising rates due to policy rather than real demand, and it remains core to our global bank view. Perhaps Canada’s weak inflation rate – coming below target – is just another global example in addition to countries in Europe and UK, that underlying demand is simply not that robust?

2. Korean Government and Hyundai Motor Group’s Grand Ambitions to Expand Hydrogen Fuel Cell Vehicles

• On December 18th, the Korean government announced numerous measures to reduce fine dust levels, including a significant increase in the number of hydrogen powered vehicles, including expanding hydrogen vehicles to 65,000 units by 2022 (cumulative). 
• The Korean government wants to encourage the growth of hydrogen powered economy and position the country as one of the global leaders in this segment. The Korean government plans to spend about 3.5 trillion won to support the Korean auto industry. The Korean government’s new plan is to expand the hydrogen vehicles to 65,000 units by 2022, which is a big increase from the previous plan of expanding the hydrogen vehicles to 15,000 units by 2022.
• The Hyundai Motor Group also recently announced a grand plan to expand its fuel cell vehicles with the announcement of its ‘FCEV Vision 2030.’ The Hyundai Motor Group plans to increase its annual production capacity for fuel cell systems to 0.7 million units by 2030, with plans to invest about $7 billion in the next 10 years to develop hydrogen fuel cell systems. 

3. Belluna: Growing by Selling Gentility to the Expanding Older Market in Japan

While Nissen and Senshukai (8165 JP) have hit new lows in the past five years, Belluna (9997 JP) has gone from strength to strength by sticking with printed catalogues and tying these to e-commerce and retail store expansion.

The company’s strategy is also helped by the core customer demographic being women over the age of 50, one of the few population segments that is still growing.

As a result, group sales have risen by 28.8% in five years and operating profit has almost doubled from ¥7.8 billion to ¥13 billion.

The acquisition of Sagami, a kimono retailer that suffered from lack of attention under Uny’s management, could also result in a boost to profits in the next year.

4. SoftBank Group (9984 JP): SoftBank Corp IPO Has Failed to Meaningfully Narrow the Holdco Discount

Softbank Group (9984 JP)’s market cap has consistently traded below its NAV. A popular expectation was that the Softbank Corp (9434 JP) IPO should be a catalyst to narrow the conglomerate discount (holdco discount). On its trading debut today, SoftBank Corp’s shares fell 14.5% from its IPO price of JPY1,500 to JPY1,282 per share – the worst first-day decline ever for a major IPO in Japan since the Japan Display (6740 JP) IPO in 2014. 

5. AALI (AALI IJ): Indonesian Biodiesel Mandate to Support CPO Price

• Current price offers a good entry point, relatively strong analyst recommendation, and low earnings expectation relative to its sector
• Successful execution of Indonesia’s biodiesel mandate should drive CPO demand for biodiesel blending, hence driving CPO prices
• Through strong partnerships with smaller estates AALI can increase external FFB (fresh fruit bunch) purchases, reducing fixed costs incurred by plantation
• Attractive at 19CE* 10% ROE/PB compared to ASEAN Consumer staples at 4.6% and AALI offers 4% dividend yield
• Risks: Low palm-based commodities and crude palm oil prices

* Consensus Estimates

In this briefing:

1. BAUTO (BAUTO MK): New Models to Keep Strong Sales Momentum
2. Global Banks – DBS Frail Against Global Peers
3. Korean Government and Hyundai Motor Group’s Grand Ambitions to Expand Hydrogen Fuel Cell Vehicles
4. Belluna: Growing by Selling Gentility to the Expanding Older Market in Japan
5. SoftBank Group (9984 JP): SoftBank Corp IPO Has Failed to Meaningfully Narrow the Holdco Discount

1. BAUTO (BAUTO MK): New Models to Keep Strong Sales Momentum

• Improving asset turnover, relatively strong analyst recommendations, and slow asset growth relative to its sector
• New launches in FY2019-20 e.g. CX-3 facelift and 7-seat SUV CX-8 should stimulate sales going forward. Sales were up by 24% in 1QFY19 YoY
• Equity income from JV with Mazda Motor (7261 JP) should increase as production volume ramps up to meet strong ASEAN demand. Production up by 40% YoY in FY2018
• Attractive at a 19CE* 0.4 PEG ratio versus ASEAN Consumer Discretionary at a PEG of 0.9 and BAUTO is net cash
• Risks: Regulations and sluggish consumer demand, FX risk JPY and PHP

* Consensus Estimates

2. Global Banks – DBS Frail Against Global Peers

Oil prices are now similar to where they were during 2017 when Singapore’s banks faced significant credit quality stresses. This was due to oil service sector lending, where bad loans here have generally not even declined. With a key driver of this sector distress in the past showing radical weakness yet again, the risk is resurgence in credit costs at Singapore banks during 4Q18. At the same time, global banks are telling a story. It is one not of a robust global economy, but one that is weakening. We have written at length about our concerns of rising rates due to policy rather than real demand, and it remains core to our global bank view. Perhaps Canada’s weak inflation rate – coming below target – is just another global example in addition to countries in Europe and UK, that underlying demand is simply not that robust?

3. Korean Government and Hyundai Motor Group’s Grand Ambitions to Expand Hydrogen Fuel Cell Vehicles

• On December 18th, the Korean government announced numerous measures to reduce fine dust levels, including a significant increase in the number of hydrogen powered vehicles, including expanding hydrogen vehicles to 65,000 units by 2022 (cumulative). 
• The Korean government wants to encourage the growth of hydrogen powered economy and position the country as one of the global leaders in this segment. The Korean government plans to spend about 3.5 trillion won to support the Korean auto industry. The Korean government’s new plan is to expand the hydrogen vehicles to 65,000 units by 2022, which is a big increase from the previous plan of expanding the hydrogen vehicles to 15,000 units by 2022.
• The Hyundai Motor Group also recently announced a grand plan to expand its fuel cell vehicles with the announcement of its ‘FCEV Vision 2030.’ The Hyundai Motor Group plans to increase its annual production capacity for fuel cell systems to 0.7 million units by 2030, with plans to invest about $7 billion in the next 10 years to develop hydrogen fuel cell systems. 

4. Belluna: Growing by Selling Gentility to the Expanding Older Market in Japan

While Nissen and Senshukai (8165 JP) have hit new lows in the past five years, Belluna (9997 JP) has gone from strength to strength by sticking with printed catalogues and tying these to e-commerce and retail store expansion.

The company’s strategy is also helped by the core customer demographic being women over the age of 50, one of the few population segments that is still growing.

As a result, group sales have risen by 28.8% in five years and operating profit has almost doubled from ¥7.8 billion to ¥13 billion.

The acquisition of Sagami, a kimono retailer that suffered from lack of attention under Uny’s management, could also result in a boost to profits in the next year.

5. SoftBank Group (9984 JP): SoftBank Corp IPO Has Failed to Meaningfully Narrow the Holdco Discount

Softbank Group (9984 JP)’s market cap has consistently traded below its NAV. A popular expectation was that the Softbank Corp (9434 JP) IPO should be a catalyst to narrow the conglomerate discount (holdco discount). On its trading debut today, SoftBank Corp’s shares fell 14.5% from its IPO price of JPY1,500 to JPY1,282 per share – the worst first-day decline ever for a major IPO in Japan since the Japan Display (6740 JP) IPO in 2014. 

In this briefing:

1. AALI (AALI IJ): Indonesian Biodiesel Mandate to Support CPO Price
2. India: New Tariff Regulation Is Temporary Relief For NTPC Ltd (NTPC IN) ​and Power Grid (PWGR IN) ​
3. Tencent Music (TME): Both Live Video and Music Fairly Valued, No Action
4. Small Cap Diary: MEGA, Eastwater
5. SPH REIT Nibbles at Blackstone’s Portfolio

1. AALI (AALI IJ): Indonesian Biodiesel Mandate to Support CPO Price

• Current price offers a good entry point, relatively strong analyst recommendation, and low earnings expectation relative to its sector
• Successful execution of Indonesia’s biodiesel mandate should drive CPO demand for biodiesel blending, hence driving CPO prices
• Through strong partnerships with smaller estates AALI can increase external FFB (fresh fruit bunch) purchases, reducing fixed costs incurred by plantation
• Attractive at 19CE* 10% ROE/PB compared to ASEAN Consumer staples at 4.6% and AALI offers 4% dividend yield
• Risks: Low palm-based commodities and crude palm oil prices

* Consensus Estimates

2. India: New Tariff Regulation Is Temporary Relief For NTPC Ltd (NTPC IN) ​and Power Grid (PWGR IN) ​

This is something you really don’t see often, a sharp and positive stock price movement in Govt owned Indian power utilities. But after the latest draft regulation on the tariff norms for 2019-24 from CERC (the Central Electricity Regulatory Commission, which is the highest regulatory body for power sector in India) was released on 14th of December, both NTPC Ltd (NTPC IN) and Power Grid Corporation Of India (PWGR IN) have done well in absolute terms and also outperformed the broader markets. After CERC suggested continuation of the 15.5% regulated return on equity (RoE) for the power generation and transmission companies, this was seen as a positive regulatory development and helped these stocks.

However, investors should also look at the risks before getting too optimistic on Govt owned Regulated Power Utilities, a) these are not final norms and CERC has invited comments from the stakeholders and Regulator may still tweak the tariff norms for period starting 1st April 2019 depending on feedback and inputs from DISCOMs and consumer groups, b) Usually, the political rivalry between Centre and States doesn’t affect the PSUs but as some of recent developments such as Odisha where the state blamed Centre for increased tariff burden suggest, this is changing and could be damaging for future long term contracts of NTPC Ltd (NTPC IN) and Power Grid Corporation Of India Limited (PWGR IN).

There are question marks on future growth for both these companies. While NTPC Ltd (NTPC IN) will have to compete with renewable sources, there is a risk that capex growth will slow down for Power Grid Corporation Of India Limited (PWGR IN) as well. While latest draft regulation has come as positive, we don’t expect sustained stock price outperformance from NTPC Ltd (NTPC IN) and Power Grid Corporation Of India Limited (PWGR IN) as there are structural challenges for them and a Govt ownership and its impact on strategic decision making continues to remain an overhang.

3. Tencent Music (TME): Both Live Video and Music Fairly Valued, No Action

• We believe that TME is fairly valued based on peer companies’ price / sales ratios.
• The Chinese internet peer companies as comparison bases in valuation have declined significantly more than indices, we believe it is not a concern that indices declined further.
• We believe that the main business of music will grow strongly in 2019 and 2020 due to the rapid growth of both the paying user base and ARPU (Average Revenues per User per month).

4. Small Cap Diary: MEGA, Eastwater

Small caps have an easier time scaling up in good times, but can get hit much harder by liquidity in the bear markets. Anyway, it’s still good to check how some of the better-know small cap names like MEGA and Eastwater even if they are not doing particularly well.

Here’s some highlights:

• MEGA hasn’t done quite as well. Their earnings growth has slowed to under 10% this year despite an average of 19% between 2014 and 2017. It doesn’t seem like there’s anything wrong with the business model or even execution, just Law of Large Numbers and running out of near-term opportunities.
• Interestingly, the company’s biggest market outside ASEAN is Africa (eg. Nigeria, Ethiopia), which accounts for 12% of their branded product revenues, and that’s declined 4.2%, hence dragging down the company’s performance.
• East Water realized healthy and stable gross margin of 50% and ROE of 10.9% while maintaining a strong credit rating of A+, allowing them to finance aggressive capex cheaply.
• The company generates over half of its revenues from raw water, which is more profitable than tap and industrial, and has had a recent change in strategic shareholder from EGCO to Manila Water.

5. SPH REIT Nibbles at Blackstone’s Portfolio

SPH REIT is acquiring an 85% stake in Figtree Grove Shopping Centre in the inner western suburb of Wollongong, New South Wales, Australia for S$188.2 mn. Australia’s media has reported Blackstone as the property’s vendor. SPH REIT is jointly acquiring Figtree Grove with a publicly listed financial services group, Moelis Australia Limited, which will own the remaining 15% interest.

This acquisition is SPH REIT’s first overseas foray and is only the second acquisition deal since listing. Compared to its first acquisition of The Rail Mall, the acquisition of Figtree Grove is truly meaningful as it opens up the possibility of portfolio acquisitions from its newly established network of contacts.   

While the addition of an Australian retail asset into SPH REIT’s portfolio enhances geographical diversification (5.2% of portfolio by asset value), investors should know that the e-commerce threat to retailers in Australia appears to be greater than in Singapore.  

Estimates show that the acquisition of Figtree Grove is marginally DPU-accretive. I am maintaining my view on SPH REIT as a defensive investment to continue holding, noting the stable yield of 5.6% for FY19F-20F.  Fair value is largely unchanged at S$1.09/unit (previous S$1.08/unit).

In this briefing:

1. Taisho Frontrunner to Acquire BMS’s French OTC Business
2. UTP (UTP TB): Continued Gain from Tight Global Paper Supply
3. Exuberance of Korean Retail Investors About Jim Rogers Becoming an Outside Director of Ananti
4. Nio Surged 31% in November; Will Momentum Continue Through 2019?
5. TPCH (TPCH TB): Biomass Power Value Play

1. Taisho Frontrunner to Acquire BMS’s French OTC Business

Event – Bristol Myers Squibb Co (BMY US)‘s  French OTC business UPSA has been on the block since June 2018. According to a December 17, 2018 Bloomberg report (link), Taisho has emerged as the frontrunner to acquire UPSA for ~$1.6b

Our Take

• If Taisho Pharmaceutical Holdin (4581 JP)  indeed goes ahead, it would get access to UPSA’s established (matured) OTC business, which generated ~$480m in sales in FY17
• UPSC’s key OTC brands include Aspirine, Dafalgan and Efferalgan pain relievers; Donormyl sleep aid; and Fervex cold and flu remedies
• Taisho also gains a foothold in France, contributing ~60% of UPSA sales (the rest is from other EU countries and China), by leveraging UPSA’s production facilities and distribution channels to perhaps market some of its own OTC products

Valuation

Preliminary analysis suggests that the potential acquisition would have only a marginal impact on Taisho’s financials in the short to medium term due to:

• Acquisition of a matured OTC portfolio that is projected to decline by 3-5% per year
• Absence of cost synergies; Taisho’s SG&A expense to increase by ~¥12-15b from FY19e
• Post deal Cash and Eq. of ~ $1b (assuming UPSA is an all cash deal)

2. UTP (UTP TB): Continued Gain from Tight Global Paper Supply

• Strong long-term sales growth, share price is less volatile, and solid short-term earnings momentum relative to its sector
• Sales growth for UTP’s cardboard paper and packaging used for corrugated boxes should be supported by an ongoing 20% ramp-up in production to 20,000 tons/month on tight global supply conditions
• Strong demand and efficiency improvements on older cardboard paper-making equipment has expanded margins, operating margin expanded by 12 ppts in 9M18 YoY
• UTP has shown solid improvements in asset turnover while also improving its net margin
• Risk: Chinese moves to ramp up paper supply again

* Consensus Estimates

3. Exuberance of Korean Retail Investors About Jim Rogers Becoming an Outside Director of Ananti

• After it was announced on 10 December that Jim Rogers was being considered an outside director of Ananti Inc (025980 KS), its share price has soared more than 100% in six business days. At current price of 21,000 won, market cap of Ananti is 1.7 trillion won ($1.5 billion). In six days, Jim Rogers has added more than $800 million in market cap to Ananti, which is now trading at more than 5.0x P/B, compared to 2.5x P/B only a week ago. We think the risk/reward of Ananti is no longer favorable given the steep share price increase.
• This is a classic “buy on rumor, sell on news” trading that could impact the share price. The fact is, Jim Rogers has not yet accepted to be an outside director of the company. Rather, he has been recommended to become an outside director to be decided on December 27th and there are only six more business days until this date. It is almost a given that Jim Rogers will be voted in as an outside director of Ananti. We think that there could be many investors that may be unloading their shares as we get closer to December 27th.
• In addition, there are many other companies that should benefit from a greater opening up of the North Korean economy to South Korea and rest of the world. We have listed the 30 key North Korean related stocks below. Hence, for those investors that want to get a greater exposure to the North Korea related stocks in South Korea, some of these other stocks may provide greater value than Ananti which has soared in price in such a short period of time.

4. Nio Surged 31% in November; Will Momentum Continue Through 2019?

• NIO Inc (NIO US) surged 30.7% in November after reporting steady growth in production and following certain notable investors such as Baillie Gifford & Co (largest investor in Tesla Motors (TSLA US) after Elon Musk) acquiring a stake in the company creating a bullish view on the company.
• The EV start-up delivered 3,089 vehicles in November, registering a more than 96% increase from October, indicating a smooth flow in its production line of ES8. The latter was something its rival, Tesla, took long to establish. The company has reached a total production of more than 10,000 units thus far.
• On the 15^th of December which is the company’s ‘Nio Day’, Nio hopes to launch its ES6, a 5-seater, two-row, high-performance premium electric SUV that will have a longer range and at a lower price than its three-row seven-passenger ES8. Production and delivery of ES6 are expected to begin in 2019.
• Q3 FY2018 results although slightly below the company’s expectations was an improvement compared to the previous quarter and acted as a tailwind in increasing investor confidence in the company. Sales increased to USD214m in Q3 from USD 46 in Q2. Though the company has not yet generated any profits, operating losses as a % of revenues have declined to -191.2% in Q3 cf.-4,077% in Q2.
• For Q4 FY2019E the company expects to deliver 6,700 to 7,000 vehicles more than double the total deliveries during Q3, forecasting revenue between USD 418.5-436 m, at 95-100% increase from Q3. The company has not guided on OP.
• Although the company is still fighting for profits, which seems to be normal for a start-up, it should be noted that the company has a quite steady cash reserve to fund its operation and ramp up production of its to-be-released ES6 model. In our opinion, if the launch of ES6 is as successful as ES8 and the company avoids production delays like Tesla, then it may break even or even make profits within a shorter time period than which Tesla took (almost 8 years). That said, Nio’s stock is likely to witness further surges through 2019 following its recovery since November.

5. TPCH (TPCH TB): Biomass Power Value Play

• Strong long-term earnings growth, good growth in core profit, and relatively strong analyst recommendation relative to its sector
• As Thailand’s largest independent biomass power producer, TPCH is well-positioned to take advantage of government moves to diversify the country’s energy mix
• Longer-term earnings to be supported by ongoing capacity expansions, including the waste-to-energy project in Nonthaburi planned for 2019
• Trades below Thai Utilities at 19CE* 9.7x PE and offers double-digit EPS growth while the sector is expected to contract
• Risks: Higher feedstock costs as well as project delays and/or issues

* Consensus Estimates

In this briefing:

1. Weichai Power(2338.HK)： Fuel Cell Not the Answer (Yet), More Boldness Needed on All-Electric
2. REPCO Home – 2QFY19 – Focus on LAP to Maintain the NIMs and Spread
3. Mahindra & Mahindra Ltd- 2QFY19 – New Launches Cause Margin Pain, Benefits to Follow
4. Bharat Heavy Electricals (BHEL IN): Don’t Expect the Share Buy-Back to Help Much
5. SVI (SVI TB): Production Capacity Expansion Should Continue to Pay Off

1. Weichai Power(2338.HK)： Fuel Cell Not the Answer (Yet), More Boldness Needed on All-Electric

Weichai Power, China’s largest independent Diesel engine producer, has been looking for a new core business to survive in long term downward trend of its current core business (Diesel engine for commercial vehicle and construction machines) since 2012 when it acquired 25% stake of KION Group AG (KGX GR). By now Weichai owns KION (materials handling equipment), Dematics (integrated automated supply chain technology, directly own ed by KION),  Power Solutions International (PSIX US) (cleantech engine). It also has stakes in Ballard Power Systems (BLDP CN) (PEM fuel cell products), Ceres Power Holdings (CWR LN) (fuel cell technology and engineering). Lately, Weichai entered into an agreement with Westport Fuel System (WPRT.US) to develop and commercialise HPDI 2.0.

It seems Weichai decides to put its chip on fuel cell and low-emission engines. However, our analysis shows all the above investment would not be enough to secure Weichai’s market outlook in the next 5-10 years. 

This note focus on an evaluation of Weichai’s technology choices on a 5-10 year time horizon. We will discuss the company’s 12-months view in another note.   

2. REPCO Home – 2QFY19 – Focus on LAP to Maintain the NIMs and Spread

Repco Home Finance (REPCO IN) 2QFY19 results were in line with our estimates. The outstanding loan book portfolio reflected 11% YoY growth (v/s our expectation of 12%) at Rs 103,820 mn. The Net Interest Income (NII) was Rs 1,154 mn (v/s our estimates of Rs 1,230 mn), reflecting a YoY decline of 5%. The PAT was Rs 670 (v/s our estimates of Rs 618 mn), reflecting a YoY decline of 4%.

The management stated that the sand mining issue in Tamil Nadu (TN) (58.4% of outstanding loan book as of 1HFY19) lasted longer than expected. This has led to lower construction activity and demand for housing loans in Tamil Nadu. The company has guided for an improvement in 2HFY19 with the target of 15-16% loan growth.  They are focusing more on the other markets like Maharashtra, Gujarat, Karnataka to grow the loan book.

We have revised our NII estimates by -5.3%/-5.2%/ -1.5%, PPOP by -7.3%/-7.2%/-5.1% and PAT by -3.5%/ -3.5%/-1.9% for FY19E/FY20E/FY21E respectively.  We have revised our P/ABV multiple from 2.3x to 1.9x. Applying it to the adjusted book value for September-20E of Rs 306 per share, we arrive at the fair value of Rs 570 (earlier Rs 630)  for the next 12 months.

3. Mahindra & Mahindra Ltd- 2QFY19 – New Launches Cause Margin Pain, Benefits to Follow

• Mahindra & Mahindra (MM IN) reported 2QFY19 PAT of Rs 17,788 mn vs our estimate of Rs 15,240 mn. The revenues were 2.5% lower than estimated. EBITDA was Rs 18,493 mn as against our estimate of Rs 20,721 mn. EBITDA margins were  14.5% against our estimate of 15.8%.  Overall the performance was lower than our expectation.
• EBITDA margins were impacted due to higher raw material cost and higher launch cost related to Marazzo (7/8 seater utility vehicle). We expect the margins to remain under pressure for the 2HFY19E as the Company has lined up more new model launches.
• The shift in the festive season from 2Q to 3Q impacted the tractor sales volume in this quarter. M&M management expects the tractor industry to growth in the range of 12-14% YoY in FY19E where M&M is expected to grow at 12.5% YoY in FY19E.
• We have lowered EPS estimates for FY20E by 8%. Over FY18-21E, we expect revenue and PAT to grow at CAGR 14% and 13% respectively. We expect EBITDA margin to expand from 14.8% in FY18 to 15.5% in FY21E.
• Our EPS estimates for FY20E & 21E stand at Rs 47.3/- & Rs 53.7/- respectively. We have maintained the PE multiple of 17x with an EPS of Rs 47.2/- for the year ending September- 20E and valued its share in the subsidiaries at Rs 315/- to arrive at the fair value estimate of Rs 1,115/- for the next 12 months.

4. Bharat Heavy Electricals (BHEL IN): Don’t Expect the Share Buy-Back to Help Much

Bharat Heavy Electricals (BHEL IN) had announced a sizeable share buyback a couple of weeks ago. This buyback amounting to total Rs16.3 bn has opened yesterday, but we think that it is unlikely to help much. In the coming years, the Indian power distribution companies (DISCOMs) are likely to buy more power from renewable sources and the proposed changes in regulation will expedite the shift. In addition, resolution of power assets in distress continues to remain slow and new orders for Bharat Heavy Electricals (BHEL IN) which is already struggling with slow moving orders, remain sluggish. Another interesting development is shift in interest from company’s key customers. For example, NTPC Ltd (NTPC IN) is exploring acquisition opportunities much more than greenfield expansion. All of this is certainly bad news for the Bharat Heavy Electricals (BHEL IN) stock. While the PAT nos. are small in absolute terms and even a slight positive change will make valuations look attractive for the stock, this will not have a meaningful impact unless things improve structurally for the company.

5. SVI (SVI TB): Production Capacity Expansion Should Continue to Pay Off

• More attractive to analysts, solid short-term earnings momentum, and strong stock price momentum relative to its sector
• Production capacity expansion at Cambodia and Slovakia plants should continue to stimulate sales which was up by 32% in 3Q18 YoY
• SVI’s focus on industrial customers means less volatile sales, and the long selling cycle works against new competitors
• Trades slightly lower at 19CE* PEG ratio of 0.7 compared to Thai Info Tech at 0.8 PEG and SVI is net cash
• Risks: Swift changes in technology

* Consensus Estimates