Equity Bottom-Up

In this briefing:

1. Start Your Engines: SoftBank Corp (9434 JP) Is Off to the Races
2. Lawson’s New Online Service Is Working, Doubles Coverage
3. MCX: The Pieces of the Puzzle Have Fallen in Place, BUY for 32% Upside
4. Snippets #17: PTTEP’s Winner Curse, Huawei’s Crisis
5. SMC (6273 JP): Profits Start to Decline

1. Start Your Engines: SoftBank Corp (9434 JP) Is Off to the Races

The price has been set. The book building is done. Like watching a sleek race car aligned on the starting grid, the world eagerly awaits the start of trading for Softbank Corp (9434 JP) on Wednesday, 19 December. 

We are also eager to see the stock go live. It’s not only nostalgia for the stock code “9434” to be brought back into the race, but it will be helpful to be able to compare the stock and to gain better insights into the domestic Japanese telecom industry.

That said, the past few weeks have been full of drama, and some of the drama has longer-term implications. In this insight, we take a more detailed look at some of the challenges facing SoftBank Corp. and some of the concerns that may give investors pause, or at least some things to keep in mind, over the months ahead.

Specifically, we look at issues related to:

• Network outages
• Huawei network equipment
• Corporate governance
• Regulatory headwinds
• Competitive threats

2. Lawson’s New Online Service Is Working, Doubles Coverage

Lawson (2651 JP) Fresh Pick is the convenience store operator’s new e-commerce solution for food launched earlier this year, and replacing various other less successful experiments.

Unlike competing services, Lawson’s service is limited to just 600 SKUs (stock keeping units), all fresh foods, and Lawson offers no home delivery, only click-and-collect.

In the nine months since launch, the service has expanded from 200 to 1,200 stores, currently concentrated in west Tokyo and Kanagawa.

It is a model that will expand rapidly across the rest of the country because Lawson has to invest so little to make this happen.

3. MCX: The Pieces of the Puzzle Have Fallen in Place, BUY for 32% Upside

• Multi Commodity Exch India (MCX IN) is the leading commodity futures exchange in India with ~90% market share. It enjoys ~100% market share in each of the top 7 products traded on its exchange.
• Average Daily Turnover (ADT) is up 24% YoY over YTD-Nov-18 after 4 years of stagnation on the back of increase in volatility of key commodity prices.
• We see 50-60% increase in ADT over FY18-21 on the back of Mutual Funds entering commodity futures trading creating enough liquidity for large industries like refineries shifting to MCX for hedging, bank distribution of commodity trading products and monetization of commodity options trading.
• MCX’s volumes are unlikely to be impacted by new entrants like NSE and BSE since none of the new entrants can offer any meaningful improvement over MCX’s offering in terms of lower cost, higher speed or tax friendliness. This makes MCX a ripe acquisition candidate going by global experience.
• We expect 16% Revenue Cagr, 20% EPS Cagr over FY18-21. Our target price for MCX at 28x Dec-20 EPS is Rs 950- implying 32% upside.

4. Snippets #17: PTTEP’s Winner Curse, Huawei’s Crisis

December turned out to be more eventful than expected. Guess not everyone is waiting peacefully at home for Santa to hop by. Here’s a quick run-down on stories that have impact (at least indirectly) on Thai equities.

• Winning bids, losing confidence. PTTEP crushes Chevron in a mighty bid to secure the Bongkot and Erawan fields, but investors responded by driving their shares down 6%. Energy guru Manoon Siriwan pushes back on the bears saying that while costs are high, getting Erawan field on a greenfield basis should more than outweigh the negatives.
• Huawei and trade wars. Trump’s trade wars take a strange turn following the arrests of Huawei CFO and Canadian citizens in China. As commerce and politics gets mixed up, talks abound about Apple moving production to Vietnam or…Thailand?
• ERC puts the final nail to Glow’s coffin. This is lamest ruling ever! ERC rejects GPSC’s appeal saying that other industrial estates are already monopolies, and they don’t wanna turn MapTaPhut into another one. Their reasoning defies logic and forced us to capitulate on our Glow position.
• End of the LTF era. As the tax exemptions from LTFs are phased out, critics point that equities-based programs favor the rich over the poor, while the Puay Ungpakorn Institute points out that insurance companies could benefit from this unfortunate event.
• CP Group Routs the Mighty BTS in its bid for the high speed railway project, though their victory still predicates on the terms of government subsidy. Though this CP Group entity isn’t listed and many consortium members are foreign, two listed Thai consortium members include BEM and ITD, the country’s biggest construction company.

5. SMC (6273 JP): Profits Start to Decline

SMC’s year-on-year profit comparisons have turned negative. In the three months to September (Q2 of FY Mar-19), gross profit was down 3.7% year-on-year, operating profit was down 8.8% and net profit was down 9.6%. Operating profit was down 15.1% from Q1. Sales were up only 0.4% year-on-year in Q2, compared with 29.0% growth a year earlier, and down 7.5% from Q1. Management responded by cutting full-year guidance, implicitly changing anticipated 2H operating profit growth from +3.0% to -9.3% year-on-year.

This has all been discounted. The share price dropped 43% from its 52-week and all-time high of ¥55,830 on January 18 to a 52-week low of ¥31,580 on October 28, then rebounded to ¥40,000 in early December. Last Friday, December 14, it closed at ¥34,840. 

What happens next? The share price trend suggests that because year-on-year profit comparisons have finally turned negative, it’s time to start anticipating recovery. But the  fundamentals indicate that profit comparisons are likely to remain very difficult and most probably negative for at least three more quarters. Management reports that semiconductor-related demand is down in all markets and that auto-related demand is down in the U.S. Auto sales are also declining in China. The length and depth of the downturn and the timing and strength of recovery are both unclear. Any positive news on the trade front should support the share price, but while trade friction aggravates the cyclical downturns in the semiconductor and auto industries, it is not their cause.

At ¥34,840, the shares are selling at 17.0x our EPS estimate for FY Mar-19 and 17.7x our estimate for FY Mar-20. These multiples compare with a 5-year historical range of 13.8x – 28.5x. Our projected EV/EBITDA multiples for the same two years are 8.7x and 8.1x, which compare with a 5-year historical range of 7.0x – 15.1x. This should help put a floor under the share price. Interestingly, Japan Analytics’ chart analysis indicates that SMC has never been seriously overbought (see chart below).

In this briefing:

1. CKD (6407) Hit Buy China Slowdown. Now Excessively Cheap and Cutting Costs.
2. Starbucks (SBUX): China Strategy Reaped by Luckin’s Parasitical Tactic, a Visit and Case Study
3. Goldwin Tops Sports Market Growth Through Store Investment
4. Hengan Intl. (1044 HK): Our Analysis Suggests that Bonitas’ Allegations Have Some Substance
5. SEAFCO (SEAFCO TB): Solid Backlog, Solid Profitability

1. CKD (6407) Hit Buy China Slowdown. Now Excessively Cheap and Cutting Costs.

To us the shares are have now fully discounted the current spate of bad news. The company has a very strong balance sheet and owns 10% in itself. The shares are on 0.9x book, they yield 3.7% and trade on a 3/20 EV/ebitda multiple of 3.8x, assuming ebitda next year of Y16.5bn. Unless one is exceedingly bearish on the outlook for the global economy, then these shares are starting to look attractive here. They have fallen 65% year to date, yet longer term management has a clear strategy with regards to improving profitability.

2. Starbucks (SBUX): China Strategy Reaped by Luckin’s Parasitical Tactic, a Visit and Case Study

• We believe Luckin copies SBUX’s site selection, but chooses low rental places close to Starbucks shops.
• Starbucks plans to add delivery business to raise margins and comparable store sales, but Luckin has focused on delivery since inception.
• Starbucks needs the China market as its growth momentum, but we believe Luckin’s parasitical tactic will be a major resistance.

3. Goldwin Tops Sports Market Growth Through Store Investment

Marketing of sports brands has become increasingly retail-led in the last decade and a focus on retailing has enabled Goldwin (8111 JP) to make serious gains while the two biggest domestic brands, Asics Corp (7936 JP) and Mizuno Corp (8022 JP), have been distracted by overseas expansion.

Goldwin took a close look at its beleaguered business 15 years ago and decided retail could be its salvation.

At current rates it will catch up with Mizuno’s domestic sales in a few years.

Overall, we are bullish about Goldwin but also the wider sports category because sports and sports fashion is in many ways one of the few consumer categories to be largely immune to a demographically challenged market like Japan – all age segments are buying into sports apparel, including the over 60s.

4. Hengan Intl. (1044 HK): Our Analysis Suggests that Bonitas’ Allegations Have Some Substance

Hengan Intl Group (1044 HK), China’s leading sanitary towel and nappy producer, has been targeted by a short seller, Bonitas Research. Hengan has denied Bonitas’ allegations to which Bonitas has responded that Hengan’s response was weak and evasive. The shares have continued to slide suggesting that investors are less than convinced with Hengan’s rebuttal.

5. SEAFCO (SEAFCO TB): Solid Backlog, Solid Profitability

• Sales on an upward trend, good core profit return, and earnings on an upward trend relative to its sector
• Well-positioned to win some upcoming bids for public and private projects such as the MRT Purple Line, expressway, and high-speed train to boost earnings moving forward, net profit up by 134% in 3Q18 YoY
• Strong backlog of public and private projects amounting to around Bt3bn to help sustain revenue growth, 104% in 3Q18 YoY
• Trades below Thai Industrials at 19CE* 4.1x PB, offers much higher ROE, and a solid balance sheet
• Risks: Delay in construction, volatility in raw materials prices

* Consensus Estimates

In this briefing:

1. SCMA (SCMA IJ) – Biting the Digital Bullet – On the Ground in J-Town
2. China Tower: Changing Our View to Positive. Low Cost Expansion Should Generate Better Returns
3. Naspers: Profitability Improvements Continue
4. GMO Internet Inc. – Limited Downside as Crypto Business Weighs Little on Consolidated Performance
5. SCC (SCC TB): Potential Beneficiary from US-China Trade War

1. SCMA (SCMA IJ) – Biting the Digital Bullet – On the Ground in J-Town

Media Partners Asia suggests that the advertising revenues for the Free-to-Air TV industry in Indonesia can grow +5.6% CAGR  between 2017-2023.

Internet companies are driving growth at the margin but also make-up 2/3rds of the 15% of total spend on digital advertising, which suggests only 5% lost from TV. 

Surya Citra Media Pt Tbk (SCMA IJ) is on the cusp of a significant move into the digital advertising and content space through Vidio.com, Kapanlagi.com, as well as its payments gateway Dana. 

The company will also enter a new advertising medium of outdoor billboards, where it will seek to consolidate the industry through acquisitions, with the aim of controlling 50% of this market. 

Surya Citra Media Pt Tbk (SCMA IJ) remains the best media proxy for advertising in Indonesia. It has seen its two main Free-to-Air stations SCTV and Indosiar command number 1 & 2 audience share positions over the last two months, giving an overall prime-time audience share YTD of 35%.  The company estimates that the core business can probably achieve growth of +10% over the next two years. The real kicker to growth for the company will come from its significant move into the digital and content space through a series of acquisitions, mainly from its parent Elang Mahkota Teknologi Tbk (EMTK IJ). These transactions are will be done at arm’s length so as to avoid any corporate governance concerns. According to CapIQ consensus, the company is trading on 16.7x FY19E PER and 15.1x FY20E PER, with forecast EPS growth of 8.6% and 10.6% for FY19E and FY20E respectively. The company also has a dividend yield of 3.9% for FY19E and generates an ROE of 32%.

2. 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: 

3. Naspers: Profitability Improvements Continue

Following David Blennerhassett‘s recent StubWorld note, we wanted add a bit more detail on the non Tencent Holdings (700 HK) part of Naspers (NPN SJ). In any discussion of Naspers, this tends to get overlooked but in fact, Naspers has generally done quite well in these businesses, by building them, monetizing them, and in some cases selling them. Alastair Jones believes that, given moves to unbundle the pay-TV assets in 2019, there is scope for the NAV discount to narrow. The current low/negative valuation for the unlisted assets ignores their significant value.

Naspers valuation:

4. GMO Internet Inc. – Limited Downside as Crypto Business Weighs Little on Consolidated Performance

GMO Internet is currently trading at JPY1,485 per share which is just 7.6% above its 12-month low of JPY1,380 per share. The Group’s share price reached an all-time high of JPY3,020 in June 2018, however, it has declined by more than 50% since then following the company’s poor performance in its cryptocurrency and mining related segment led by stagnant crypto prices coupled with negative news on issues concerning advertising fraud in its Online Advertising & Media segment. This was further exacerbated by news that there will be delays in shipments of two bitcoin mining rig lines with refunds already issued in November. However, we believe, the downside is limited as the weaknesses of its crypto related business will weigh little on the consolidated earnings of the business. GMO’s business is structured in a way that its two main segments, namely, the Internet Infrastructure and Online Advertising and Media businesses are not prone to much volatility with recurring revenues. Therefore, we believe the negativity surrounding the company is exhausted and we expect the company to continue its strong growth trajectory.

5. SCC (SCC TB): Potential Beneficiary from US-China Trade War

• Share price is less volatile, cheap on a PE basis, and good chance of target-price upgrade relative to its sector
• Plans for cement export to US buyers as they face higher prices from China as a result of trade war
• Gross margin support from comparatively lower cost as SCC has secured 80% of its coal requirement for 2019 in face of rising coal prices
• SCC trades in line with Thai Materials at 19CE* 9.6% ROE/PB
• Risk: Lower than expected cement price, uncertainty regarding US-China trade war

* Consensus Estimates

In this briefing:

1. BreadTalk (BREAD SP): As Din Tai Fung Opens in London, CEO Puts Out Target to Double Mkt Cap
2. Renesas: Visit Suggests Utilisation Rate Rebound Could Take Longer Than Sell-Side Expects
3. PLANB: Solid Outlook for Music Marketing Business Under BNK48 Office
4. Titan Co Ltd (TTAN IN)
5. Telstra Dividend: Does the 22cps Dividend (7% Yield) Hold? We Think It Does.

1. BreadTalk (BREAD SP): As Din Tai Fung Opens in London, CEO Puts Out Target to Double Mkt Cap

Breadtalk (BREAD SP) has been a great Singapore Inc story since its founding in 2000. The company, under the leadership of George Quek, has grown from a few bakery outlets to hundreds of outlets across Asia. Profitability at Breadtalk has been lackluster but shares remain cheap on an EV/EBITDA basis.

Meanwhile, the group has an aggressive target to achieve 8% NPM by 2020 which not a single sell-side analyst believes they can achieve. Over the past week, the CEO was quoted in a Business Times article saying that he wants to achieve a “1 billion SGD market cap” vs the 480 million SGD market cap currently. While this could be easily dismissed as marketing talk, this target is not unrealistic at all.

With the launch of its first Din Tai Fung outlet in London investors better take notice. One of the drivers of upside surprises might be the rapid roll-out of Din Tai Fung in the UK and the rest of Europe. The CEO is even keen to explore expansion in the US market and has done research trips to Texas, LA and New York.

With the shares having derated from 1.16 SGD in early August to 0.86 SGD recently the valuation (6.8x 2019 EV/EBITDA) is now attractive once again. My Fair Value estimate remains at 1.25 SGD (47% upside).

2. Renesas: Visit Suggests Utilisation Rate Rebound Could Take Longer Than Sell-Side Expects

We visited Renesas Electronics (6723 JP) this week to discuss progress on inventory reduction and its likely ramp of utilisation rates/wafer throughput, as well as to gather further details on the IDT acquisition and its long -term strategy. On the whole, we continue to like the long-term picture, consider the stock to be undervalued and believe investors with long time horizons should be looking at the stock on the long side. However, our discussions suggested to us that while production cuts to reduce inventory should be completed this month or at worst in 1Q2019, a ramp in utilisation rates could take longer than is implied by consensus.

3. PLANB: Solid Outlook for Music Marketing Business Under BNK48 Office

We maintain Plan B Media (PLANB TB) with a BUY rating, and the new target price of Bt8.30 derived from 1.5xPEG’2019E, which is the average of Thailand’s consumer discretionary sector or equivalent to 32xPE’19E

The story:

• Revising up net profit in 2018-20E by 2-11% mainly from BNK office
• Music and sports marketing drive earnings momentum north
• Plenty of opportunities to monetize underutilized capacity

Risks: Obstacles for renewing concession contracts with state-owned enterprises along with falling consumer spending and a share-price dilution effect on the back of then generally mandated raise in capital.

4. Titan Co Ltd (TTAN IN)

Titan Company Limited manufactures and sells watches, jewellery, eyewear, and other accessories and products in India and internationally. The company operates through four segments: Watches, Jewellery, Eyewear, and others. It is one of the few companies operating in organised jewellery retail industry of India. We visit stores & markets in Kochi (Kerela) and Chennai (Tamil Nadu), the biggest consumption markets to understand structural changes that have taken place in the industry, with an objective to tweak our revenue and margin estimates. We believe consensus might be underestimating growth from the jewellery segment which is the largest contributor with 81.60% of Sales as of FY2018. Our revenue estimates for FY19 and FY20 are 5.8% & 2.98% higher than consensus, primarily based on higher than expected market share gains from unorganised players. Our EBITDA margins for FY 19 & FY20 are 1% & 1.30% higher than consensus estimates primarily based on product mix which is in favour of studded jewellery and operating leverage as sales across stores pick up.  Our EPS for FY19 & FY20 is estimated at INR 18.60 and INR 24.26 per share which is higher than consensus by INR 2.47 and 4.05 per share for FY 19 and FY 20.  Based on an average forward multiple of 49x we arrive at a target price of INR 1187, representing a 30% potential return from current market price. 

5. Telstra Dividend: Does the 22cps Dividend (7% Yield) Hold? We Think It Does.

Telstra’s (TLS AU) share price continues to drift downwards as more questions are asked about the dividend outlook. Optus has backed up its new mobile marketing campaign with big increases in data allowances across MBB (mobile broadband) price points. Reports suggest TPG (TPM AU) is still talking up ‘disruptive’ mobile data pricing despite its lack of network coverage and capacity. The ACCC (competition commission) is due to make a draft decision on the merger with VHA tomorrow (13 December) and it is known to favor a disruptive 4th MNO. We expect the merger to proceed.

In this briefing:

1. Doosan Bobcat – Negative on the North American Housing Market Turning Downwards
2. Hikari Tsushin (9435) Continues to Generate Profits Growth as New Business Streams Contribute. BUY
3. DeNA (2432): Undervalued Internet Stock
4. Revisiting the Renewable Energy Space

1. Doosan Bobcat – Negative on the North American Housing Market Turning Downwards

We believe that the consensus earnings estimates of Doosan Bobcat Inc (241560 KS) are likely to revised down by 10-15% in the next 6-12 months, negatively impacted by the faster than expected downturn in the North American housing construction market. Currently, Doosan Bobcat stock price is at 32,900 won. We expect 15% or more downside risk on this stock over the next 6-12 months. 

The US is the biggest market for the company. The US housing starts is an important indicator for the company since the US housing starts has a big impact on the demand for compact construction equipment. You could see from the charts below that US housing starts has been on a strong rebound since 2009. However, since early part of this year, there are signs that the US housing starts is beginning to soften and turn down.  

Home prices are starting to decline in the US – Most recently in 3Q18, the median sales price of houses sold in the US was $325,700, down 3.6% from the peak of $337,900 in 4Q17. The list of cities/regions with recent declining home prices in North America are as follows: Vancouver (Canada), Manhattan, NYC, Seattle, WA, San Francisco, CA, San Diego, CA, Toronto (Canada), and Los Angeles, CA.

2. Hikari Tsushin (9435) Continues to Generate Profits Growth as New Business Streams Contribute. BUY

The company forecasts an operating profit of Y55bn this year, the consensus is for Y57bn which is not unreasonable as management want to hold profits back. Next year assuming they make about Y64bn, the shares are on about 19x. With long term profits growth expected, and a good shareholder return policy this is a great domestic long term BUY. BUY into recent weakness. Foreigners own 24% of this name.

3. DeNA (2432): Undervalued Internet Stock

Dena Co Ltd (2432 JP) used to be the GO-GO internet stock for both retail and institutional investors in Japan during the previous bull run before 2008 and trading at 40-50x PER. The multiples have since then collapsed to 10-20x PER although the business prospect remains solid if not better. Benefiting from the increasing regulation in China, DeNA signed an agreement with Tencent Holdings (700 HK) to distribute Arena of Valor in Japan which will boost revenue and improve margin. At 14x PER and 1.2x PBR, DeNA looks attractive. 

4. Revisiting the Renewable Energy Space

We checked on two stocks today that are well-known in the renewable energy space, namely solar and wind power, to see how things were going. We may not be tree huggers ourselves, but it’s fair to say that sustainable investing is pretty big these days. Here’s some run-down.

• GUNKUL posting impressive earnings growth of 57% (normalized) on the back of a 30% revenue growth, and they’re still hoping to see another 25% revenue growth in 2019 as new projects in Japan and Thailand (floating panel) start operations soon.
• DEMCO also growing earnings 23% on the back of more modest revenue growth of just 6%, but management is far less confident on this front having faced issues with land reclamation rights and design changes.
• An interesting point in the visit was the fact that GUNKUL wants to establish a very large base of solar roofs by the time prices become competitive. Solar panel prices have fallen tenfold since they were first introduced in Thailand.

In this briefing:

1. UTP (UTP TB): Continued Gain from Tight Global Paper Supply
2. Exuberance of Korean Retail Investors About Jim Rogers Becoming an Outside Director of Ananti
3. Nio Surged 31% in November; Will Momentum Continue Through 2019?
4. TPCH (TPCH TB): Biomass Power Value Play
5. Start Your Engines: SoftBank Corp (9434 JP) Is Off to the Races

1. 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

2. 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.

3. 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.

4. 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

5. Start Your Engines: SoftBank Corp (9434 JP) Is Off to the Races

The price has been set. The book building is done. Like watching a sleek race car aligned on the starting grid, the world eagerly awaits the start of trading for Softbank Corp (9434 JP) on Wednesday, 19 December. 

We are also eager to see the stock go live. It’s not only nostalgia for the stock code “9434” to be brought back into the race, but it will be helpful to be able to compare the stock and to gain better insights into the domestic Japanese telecom industry.

That said, the past few weeks have been full of drama, and some of the drama has longer-term implications. In this insight, we take a more detailed look at some of the challenges facing SoftBank Corp. and some of the concerns that may give investors pause, or at least some things to keep in mind, over the months ahead.

Specifically, we look at issues related to:

• Network outages
• Huawei network equipment
• Corporate governance
• Regulatory headwinds
• Competitive threats

In this briefing:

1. Exuberance of Korean Retail Investors About Jim Rogers Becoming an Outside Director of Ananti
2. Nio Surged 31% in November; Will Momentum Continue Through 2019?
3. TPCH (TPCH TB): Biomass Power Value Play
4. Start Your Engines: SoftBank Corp (9434 JP) Is Off to the Races
5. Lawson’s New Online Service Is Working, Doubles Coverage

1. 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.

2. 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.

3. 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

4. Start Your Engines: SoftBank Corp (9434 JP) Is Off to the Races

The price has been set. The book building is done. Like watching a sleek race car aligned on the starting grid, the world eagerly awaits the start of trading for Softbank Corp (9434 JP) on Wednesday, 19 December. 

We are also eager to see the stock go live. It’s not only nostalgia for the stock code “9434” to be brought back into the race, but it will be helpful to be able to compare the stock and to gain better insights into the domestic Japanese telecom industry.

That said, the past few weeks have been full of drama, and some of the drama has longer-term implications. In this insight, we take a more detailed look at some of the challenges facing SoftBank Corp. and some of the concerns that may give investors pause, or at least some things to keep in mind, over the months ahead.

Specifically, we look at issues related to:

• Network outages
• Huawei network equipment
• Corporate governance
• Regulatory headwinds
• Competitive threats

5. Lawson’s New Online Service Is Working, Doubles Coverage

Lawson (2651 JP) Fresh Pick is the convenience store operator’s new e-commerce solution for food launched earlier this year, and replacing various other less successful experiments.

Unlike competing services, Lawson’s service is limited to just 600 SKUs (stock keeping units), all fresh foods, and Lawson offers no home delivery, only click-and-collect.

In the nine months since launch, the service has expanded from 200 to 1,200 stores, currently concentrated in west Tokyo and Kanagawa.

It is a model that will expand rapidly across the rest of the country because Lawson has to invest so little to make this happen.

In this briefing:

1. MCX: The Pieces of the Puzzle Have Fallen in Place, BUY for 32% Upside
2. Snippets #17: PTTEP’s Winner Curse, Huawei’s Crisis
3. SMC (6273 JP): Profits Start to Decline
4. Weichai Power(2338.HK)： Fuel Cell Not the Answer (Yet), More Boldness Needed on All-Electric
5. REPCO Home – 2QFY19 – Focus on LAP to Maintain the NIMs and Spread

1. MCX: The Pieces of the Puzzle Have Fallen in Place, BUY for 32% Upside

• Multi Commodity Exch India (MCX IN) is the leading commodity futures exchange in India with ~90% market share. It enjoys ~100% market share in each of the top 7 products traded on its exchange.
• Average Daily Turnover (ADT) is up 24% YoY over YTD-Nov-18 after 4 years of stagnation on the back of increase in volatility of key commodity prices.
• We see 50-60% increase in ADT over FY18-21 on the back of Mutual Funds entering commodity futures trading creating enough liquidity for large industries like refineries shifting to MCX for hedging, bank distribution of commodity trading products and monetization of commodity options trading.
• MCX’s volumes are unlikely to be impacted by new entrants like NSE and BSE since none of the new entrants can offer any meaningful improvement over MCX’s offering in terms of lower cost, higher speed or tax friendliness. This makes MCX a ripe acquisition candidate going by global experience.
• We expect 16% Revenue Cagr, 20% EPS Cagr over FY18-21. Our target price for MCX at 28x Dec-20 EPS is Rs 950- implying 32% upside.

2. Snippets #17: PTTEP’s Winner Curse, Huawei’s Crisis

December turned out to be more eventful than expected. Guess not everyone is waiting peacefully at home for Santa to hop by. Here’s a quick run-down on stories that have impact (at least indirectly) on Thai equities.

• Winning bids, losing confidence. PTTEP crushes Chevron in a mighty bid to secure the Bongkot and Erawan fields, but investors responded by driving their shares down 6%. Energy guru Manoon Siriwan pushes back on the bears saying that while costs are high, getting Erawan field on a greenfield basis should more than outweigh the negatives.
• Huawei and trade wars. Trump’s trade wars take a strange turn following the arrests of Huawei CFO and Canadian citizens in China. As commerce and politics gets mixed up, talks abound about Apple moving production to Vietnam or…Thailand?
• ERC puts the final nail to Glow’s coffin. This is lamest ruling ever! ERC rejects GPSC’s appeal saying that other industrial estates are already monopolies, and they don’t wanna turn MapTaPhut into another one. Their reasoning defies logic and forced us to capitulate on our Glow position.
• End of the LTF era. As the tax exemptions from LTFs are phased out, critics point that equities-based programs favor the rich over the poor, while the Puay Ungpakorn Institute points out that insurance companies could benefit from this unfortunate event.
• CP Group Routs the Mighty BTS in its bid for the high speed railway project, though their victory still predicates on the terms of government subsidy. Though this CP Group entity isn’t listed and many consortium members are foreign, two listed Thai consortium members include BEM and ITD, the country’s biggest construction company.

3. SMC (6273 JP): Profits Start to Decline

SMC’s year-on-year profit comparisons have turned negative. In the three months to September (Q2 of FY Mar-19), gross profit was down 3.7% year-on-year, operating profit was down 8.8% and net profit was down 9.6%. Operating profit was down 15.1% from Q1. Sales were up only 0.4% year-on-year in Q2, compared with 29.0% growth a year earlier, and down 7.5% from Q1. Management responded by cutting full-year guidance, implicitly changing anticipated 2H operating profit growth from +3.0% to -9.3% year-on-year.

This has all been discounted. The share price dropped 43% from its 52-week and all-time high of ¥55,830 on January 18 to a 52-week low of ¥31,580 on October 28, then rebounded to ¥40,000 in early December. Last Friday, December 14, it closed at ¥34,840. 

What happens next? The share price trend suggests that because year-on-year profit comparisons have finally turned negative, it’s time to start anticipating recovery. But the  fundamentals indicate that profit comparisons are likely to remain very difficult and most probably negative for at least three more quarters. Management reports that semiconductor-related demand is down in all markets and that auto-related demand is down in the U.S. Auto sales are also declining in China. The length and depth of the downturn and the timing and strength of recovery are both unclear. Any positive news on the trade front should support the share price, but while trade friction aggravates the cyclical downturns in the semiconductor and auto industries, it is not their cause.

At ¥34,840, the shares are selling at 17.0x our EPS estimate for FY Mar-19 and 17.7x our estimate for FY Mar-20. These multiples compare with a 5-year historical range of 13.8x – 28.5x. Our projected EV/EBITDA multiples for the same two years are 8.7x and 8.1x, which compare with a 5-year historical range of 7.0x – 15.1x. This should help put a floor under the share price. Interestingly, Japan Analytics’ chart analysis indicates that SMC has never been seriously overbought (see chart below).

4. 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.   

5. 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.

In this briefing:

1. Goldwin Tops Sports Market Growth Through Store Investment
2. Hengan Intl. (1044 HK): Our Analysis Suggests that Bonitas’ Allegations Have Some Substance
3. SEAFCO (SEAFCO TB): Solid Backlog, Solid Profitability
4. BreadTalk (BREAD SP): As Din Tai Fung Opens in London, CEO Puts Out Target to Double Mkt Cap
5. Renesas: Visit Suggests Utilisation Rate Rebound Could Take Longer Than Sell-Side Expects

1. Goldwin Tops Sports Market Growth Through Store Investment

Marketing of sports brands has become increasingly retail-led in the last decade and a focus on retailing has enabled Goldwin (8111 JP) to make serious gains while the two biggest domestic brands, Asics Corp (7936 JP) and Mizuno Corp (8022 JP), have been distracted by overseas expansion.

Goldwin took a close look at its beleaguered business 15 years ago and decided retail could be its salvation.

At current rates it will catch up with Mizuno’s domestic sales in a few years.

Overall, we are bullish about Goldwin but also the wider sports category because sports and sports fashion is in many ways one of the few consumer categories to be largely immune to a demographically challenged market like Japan – all age segments are buying into sports apparel, including the over 60s.

2. Hengan Intl. (1044 HK): Our Analysis Suggests that Bonitas’ Allegations Have Some Substance

Hengan Intl Group (1044 HK), China’s leading sanitary towel and nappy producer, has been targeted by a short seller, Bonitas Research. Hengan has denied Bonitas’ allegations to which Bonitas has responded that Hengan’s response was weak and evasive. The shares have continued to slide suggesting that investors are less than convinced with Hengan’s rebuttal.

3. SEAFCO (SEAFCO TB): Solid Backlog, Solid Profitability

• Sales on an upward trend, good core profit return, and earnings on an upward trend relative to its sector
• Well-positioned to win some upcoming bids for public and private projects such as the MRT Purple Line, expressway, and high-speed train to boost earnings moving forward, net profit up by 134% in 3Q18 YoY
• Strong backlog of public and private projects amounting to around Bt3bn to help sustain revenue growth, 104% in 3Q18 YoY
• Trades below Thai Industrials at 19CE* 4.1x PB, offers much higher ROE, and a solid balance sheet
• Risks: Delay in construction, volatility in raw materials prices

* Consensus Estimates

4. BreadTalk (BREAD SP): As Din Tai Fung Opens in London, CEO Puts Out Target to Double Mkt Cap

Breadtalk (BREAD SP) has been a great Singapore Inc story since its founding in 2000. The company, under the leadership of George Quek, has grown from a few bakery outlets to hundreds of outlets across Asia. Profitability at Breadtalk has been lackluster but shares remain cheap on an EV/EBITDA basis.

Meanwhile, the group has an aggressive target to achieve 8% NPM by 2020 which not a single sell-side analyst believes they can achieve. Over the past week, the CEO was quoted in a Business Times article saying that he wants to achieve a “1 billion SGD market cap” vs the 480 million SGD market cap currently. While this could be easily dismissed as marketing talk, this target is not unrealistic at all.

With the launch of its first Din Tai Fung outlet in London investors better take notice. One of the drivers of upside surprises might be the rapid roll-out of Din Tai Fung in the UK and the rest of Europe. The CEO is even keen to explore expansion in the US market and has done research trips to Texas, LA and New York.

With the shares having derated from 1.16 SGD in early August to 0.86 SGD recently the valuation (6.8x 2019 EV/EBITDA) is now attractive once again. My Fair Value estimate remains at 1.25 SGD (47% upside).

5. Renesas: Visit Suggests Utilisation Rate Rebound Could Take Longer Than Sell-Side Expects

We visited Renesas Electronics (6723 JP) this week to discuss progress on inventory reduction and its likely ramp of utilisation rates/wafer throughput, as well as to gather further details on the IDT acquisition and its long -term strategy. On the whole, we continue to like the long-term picture, consider the stock to be undervalued and believe investors with long time horizons should be looking at the stock on the long side. However, our discussions suggested to us that while production cuts to reduce inventory should be completed this month or at worst in 1Q2019, a ramp in utilisation rates could take longer than is implied by consensus.

In this briefing:

1. Mahindra & Mahindra Ltd- 2QFY19 – New Launches Cause Margin Pain, Benefits to Follow
2. Bharat Heavy Electricals (BHEL IN): Don’t Expect the Share Buy-Back to Help Much
3. SVI (SVI TB): Production Capacity Expansion Should Continue to Pay Off
4. CKD (6407) Hit Buy China Slowdown. Now Excessively Cheap and Cutting Costs.
5. Starbucks (SBUX): China Strategy Reaped by Luckin’s Parasitical Tactic, a Visit and Case Study

1. 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.

2. 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.

3. 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

4. CKD (6407) Hit Buy China Slowdown. Now Excessively Cheap and Cutting Costs.

To us the shares are have now fully discounted the current spate of bad news. The company has a very strong balance sheet and owns 10% in itself. The shares are on 0.9x book, they yield 3.7% and trade on a 3/20 EV/ebitda multiple of 3.8x, assuming ebitda next year of Y16.5bn. Unless one is exceedingly bearish on the outlook for the global economy, then these shares are starting to look attractive here. They have fallen 65% year to date, yet longer term management has a clear strategy with regards to improving profitability.

5. Starbucks (SBUX): China Strategy Reaped by Luckin’s Parasitical Tactic, a Visit and Case Study

• We believe Luckin copies SBUX’s site selection, but chooses low rental places close to Starbucks shops.
• Starbucks plans to add delivery business to raise margins and comparable store sales, but Luckin has focused on delivery since inception.
• Starbucks needs the China market as its growth momentum, but we believe Luckin’s parasitical tactic will be a major resistance.