Yesterday, NIO Inc (NIO US)’s share tumbled 20% on the back of poor 1Q19 guidance. NIO warned that deliveries of ES8, its electric SUV, have been sluggish so far in 2019 and scrapped plans to build its Shanghai Manufacturing Plant. NIO blamed the slump on uncertainty over government subsidies for electric vehicles, China’s slowing economy and disruption caused by the Chinese New Year holidays.
The weak guidance could not come at a worse time as its six-month lock-up period expires on 11 March 2019. We continue to remain bears on NIO and believe that the lock-up expiry will lead to further share price weakness.
Pt Matahari Department Store (LPPF IJ)‘s FY18 results call was an interesting combination of kitchen sinking, a cautious outlook, combined with some more optimistic strategies on specialty stores with new brands and smaller format stores for regional expansion. The big question is whether these strategies will win out or will the company continue to underwhelm on its growth prospects?
Pt Matahari Department Store (LPPF IJ) remains a market leader in its space with 159 departments stores across Indonesia selling affordable fashion to the middle classes but it has underwhelmed on a few occasions on its growth and guidance. It is reducing its dividend payout to facilitate the build-out of specialty stores with new brands on board.
Valuations do now look interesting with the company trading on 6.0x FY19E PER and 5.4x FY20E PER. It generates a forecast ROE of 70% and ROE of 30%, which is extremely high for a retailer. The question is how much analysts will downgrade and whether investors will look through its Lippo connection. After another 9% fall in the share price today after 22% yesterday, a lot does seem to have been factored in already.
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Pt Matahari Department Store (LPPF IJ)‘s FY18 results call was an interesting combination of kitchen sinking, a cautious outlook, combined with some more optimistic strategies on specialty stores with new brands and smaller format stores for regional expansion. The big question is whether these strategies will win out or will the company continue to underwhelm on its growth prospects?
Pt Matahari Department Store (LPPF IJ) remains a market leader in its space with 159 departments stores across Indonesia selling affordable fashion to the middle classes but it has underwhelmed on a few occasions on its growth and guidance. It is reducing its dividend payout to facilitate the build-out of specialty stores with new brands on board.
Valuations do now look interesting with the company trading on 6.0x FY19E PER and 5.4x FY20E PER. It generates a forecast ROE of 70% and ROE of 30%, which is extremely high for a retailer. The question is how much analysts will downgrade and whether investors will look through its Lippo connection. After another 9% fall in the share price today after 22% yesterday, a lot does seem to have been factored in already.
Get Straight to the Source on Smartkarma
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
Pt Matahari Department Store (LPPF IJ)‘s FY18 results call was an interesting combination of kitchen sinking, a cautious outlook, combined with some more optimistic strategies on specialty stores with new brands and smaller format stores for regional expansion. The big question is whether these strategies will win out or will the company continue to underwhelm on its growth prospects?
Pt Matahari Department Store (LPPF IJ) remains a market leader in its space with 159 departments stores across Indonesia selling affordable fashion to the middle classes but it has underwhelmed on a few occasions on its growth and guidance. It is reducing its dividend payout to facilitate the build-out of specialty stores with new brands on board.
Valuations do now look interesting with the company trading on 6.0x FY19E PER and 5.4x FY20E PER. It generates a forecast ROE of 70% and ROE of 30%, which is extremely high for a retailer. The question is how much analysts will downgrade and whether investors will look through its Lippo connection. After another 9% fall in the share price today after 22% yesterday, a lot does seem to have been factored in already.
The Semiconductor Industry Association in the US released the latest WSTS figures for January chip revenues. Monthly revenues are down 15.6% from January of 2018. While this is not a surprise to our clients it is frightening to those who anticipated that 2019 would be a continuation of the bonanza enjoyed in 2018.
Liquidity is driving the futures market to push up iron ore. We know futures trading is very active. This tells us we are not the only ones who noticed the divergence and are looking to capitalize.The fundamental issue is that we expect the futures and spot are back together after being seeing a gap.
Get Straight to the Source on Smartkarma
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
Pt Matahari Department Store (LPPF IJ)‘s FY18 results call was an interesting combination of kitchen sinking, a cautious outlook, combined with some more optimistic strategies on specialty stores with new brands and smaller format stores for regional expansion. The big question is whether these strategies will win out or will the company continue to underwhelm on its growth prospects?
Pt Matahari Department Store (LPPF IJ) remains a market leader in its space with 159 departments stores across Indonesia selling affordable fashion to the middle classes but it has underwhelmed on a few occasions on its growth and guidance. It is reducing its dividend payout to facilitate the build-out of specialty stores with new brands on board.
Valuations do now look interesting with the company trading on 6.0x FY19E PER and 5.4x FY20E PER. It generates a forecast ROE of 70% and ROE of 30%, which is extremely high for a retailer. The question is how much analysts will downgrade and whether investors will look through its Lippo connection. After another 9% fall in the share price today after 22% yesterday, a lot does seem to have been factored in already.
The Semiconductor Industry Association in the US released the latest WSTS figures for January chip revenues. Monthly revenues are down 15.6% from January of 2018. While this is not a surprise to our clients it is frightening to those who anticipated that 2019 would be a continuation of the bonanza enjoyed in 2018.
Liquidity is driving the futures market to push up iron ore. We know futures trading is very active. This tells us we are not the only ones who noticed the divergence and are looking to capitalize.The fundamental issue is that we expect the futures and spot are back together after being seeing a gap.
Bottoming out (albeit marginal) of investor confidence drove the market rally YTD. News on 28th Feb that MSCI decides to quadruple China A-Shares inclusion in emerging market index is further boosting the market. Positive signals from Government Work Report might keep the market rally going for a while.
However, stake sale plans of listed companies’ major shareholders, who own 53% of A-share free-floating market cap, are on the way. This might be the catalyst for the rally to end as attracting new investors into the market is going to be tough. Institutional investors’ share positions are close to their historical high after keeping buying in the past few weeks and have limit cash for buying more. There are also no signal signs individual investors are increasing their capital allocation for stock investment. In addition the aggressive stake reduction plans of major shareholders might be taken by other market participants to indicate negative expectations on their companies’ earnings this year.
We think it’s time to turn cautious on A-shares: take profit and wait for the next buying opportunity for value investors.
Get Straight to the Source on Smartkarma
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
ICBC (H) (1398 HK) delivered a robust PH Score of 8.5 – our quantamental value-quality gauge.
A highlight was the trend in cost-control. The bank delivered underlying “jaws” of 420bps. Besides OPEX restraint, including payroll, Efficiency gains were supported by robust underlying top-line expansion as growth in interest income on earning assets, underpinned by moderate credit growth, broadly matched expansion of interest expenses on interest-bearing Liabilities. This combination is not so prevalent in China these days, especially in smaller or medium-sized lenders.
It is well-flagged that the system is grappling with Asset Quality issues and there is a debate about the interrelated property market. ICBC is not immune, similar to other SOEs, from migration of souring loans. However, by China standards, rising asset writedowns which exerted a negative pull on Pre-Tax Profit as a % of pre-impairment Operating Profit, high charge-offs, and swelling (though not exploding) substandard and loss loans look arguably manageable given ICBC‘s sheer scale. The Asset Quality issue here is also not as bad as it was in bygone years (2004 springs to mind) when capital injections, asset transfers, and government-subsidised bad loan disposals were the order of the day. This is a “Big Four” player.
Shares are not expensive. ICBC trades at a P/Book of 0.8x, a Franchise Valuation of 10%, an Earnings Yield of 16.7%, a Dividend Yield of 4.9%, and a Total Return Ratio of 1.6x.
In our Discover SZ/SH Connect series, we aim to help our investors understand the flow of northbound trades via the Shanghai Connect and Shenzhen Connect, as analyzed by our proprietary data engine. We will discuss the stocks that experienced the most inflow and outflow by offshore investors in the past seven days.
We split the stocks eligible for the northbound trade into three groups: those with a market capitalization of above USD 5 billion, and those with a market capitalization between USD 1 billion and USD 5 billion.
We note that in March, northbound inflows turned more cautious vs strong inflows in February (link to our Feb note) and January (link to our Jan note). Nevertheless we see strong inflows into Healthcare sector, led by Jiangsu Hengrui Medicine Co., (600276 CH). We also highlight Universal Scientific Industrial Shanghai (601231 CH 环旭电子) in the mid cap space that attracted strong northbound inflows.
The JKM has halved its value since December, continuing its steady decline and dropping below the TTF, the benchmark for European LNG prices. Asian LNG spot prices are now at their lowest level since May 2015. While a prolonged LNG price downturn could force many projects to be cancelled, the winners among the developers are starting to emerge, aggressively pushing ahead their projects closer to the final investment decision.
This post discusses the key questions on Nexon sale at this point. It then provides the most realistic answers to these questions from various circumstantial aspects. This post is based on the recent news reports and also various local sources.
Bank Of Zhengzhou (6196 HK) reveals a picture of cascading asset toxicity and subpar earnings quality. As elsewhere in China, it is difficult to decipher whether better NPL recognition is behind this profound asset quality deterioration or poor underwriting practice and discipline combined with troubled debtors: the answer may lie somewhere in between.
While the low PH Score (a value-quality gauge) of 4.7 is supported by a lowly valuation metric (earnings quality is not reassuring), it is more a testament to -and reflection of- core eroding fundamental trends across the board. Regarding trends, Capital Adequacy and Provisioning were the variables to post a positive change. But even then, not all Capitalisation and Provisioning metrics moved in the right direction.
Franchise Valuation at 12% does not indicate that the bank is especially cheap though P/Book of 0.64x is below the regional median of 0.78x.
Get Straight to the Source on Smartkarma
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
The Semiconductor Industry Association in the US released the latest WSTS figures for January chip revenues. Monthly revenues are down 15.6% from January of 2018. While this is not a surprise to our clients it is frightening to those who anticipated that 2019 would be a continuation of the bonanza enjoyed in 2018.
Liquidity is driving the futures market to push up iron ore. We know futures trading is very active. This tells us we are not the only ones who noticed the divergence and are looking to capitalize.The fundamental issue is that we expect the futures and spot are back together after being seeing a gap.
Bottoming out (albeit marginal) of investor confidence drove the market rally YTD. News on 28th Feb that MSCI decides to quadruple China A-Shares inclusion in emerging market index is further boosting the market. Positive signals from Government Work Report might keep the market rally going for a while.
However, stake sale plans of listed companies’ major shareholders, who own 53% of A-share free-floating market cap, are on the way. This might be the catalyst for the rally to end as attracting new investors into the market is going to be tough. Institutional investors’ share positions are close to their historical high after keeping buying in the past few weeks and have limit cash for buying more. There are also no signal signs individual investors are increasing their capital allocation for stock investment. In addition the aggressive stake reduction plans of major shareholders might be taken by other market participants to indicate negative expectations on their companies’ earnings this year.
We think it’s time to turn cautious on A-shares: take profit and wait for the next buying opportunity for value investors.
Despite burning through $700mn in cash in 2018, investors decided to give another $1.3bn to Sea Ltd (SE US) . We believe investors should treat Sea Ltd with caution for the following reasons:
A significant slowdown in e-commerce
Is the gaming division a one-hit wonder?
Expecting another 800mn cash burn into 2019
Consensus has priced in further upgrades while cash flow metrics worst in the sector
NB. Our team has taken both sides of the Sea Ltd investment case as we think this makes for better decision making and encourages unique thinking within our team. We strongly recommend that investors read my colleague Arun’s positive notes on the company listed below, if you have not already done so.
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
The advertising revenues slowed down significantly in 4Q2018.
We believe the content transition from politics to entertainment was not as good as the management expected.
We believe WB will not defeat Tencent’s WeChat.
We believe the stock price has downside of 9%.
Get Straight to the Source on Smartkarma
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
In our Discover SZ/SH Connect series, we aim to help our investors understand the flow of northbound trades via the Shanghai Connect and Shenzhen Connect, as analyzed by our proprietary data engine. We will discuss the stocks that experienced the most inflow and outflow by offshore investors in the past seven days.
We split the stocks eligible for the northbound trade into three groups: those with a market capitalization of above USD 5 billion, and those with a market capitalization between USD 1 billion and USD 5 billion.
We note that in March, northbound inflows turned more cautious vs strong inflows in February (link to our Feb note) and January (link to our Jan note). Nevertheless we see strong inflows into Healthcare sector, led by Jiangsu Hengrui Medicine Co., (600276 CH). We also highlight Universal Scientific Industrial Shanghai (601231 CH 环旭电子) in the mid cap space that attracted strong northbound inflows.
The JKM has halved its value since December, continuing its steady decline and dropping below the TTF, the benchmark for European LNG prices. Asian LNG spot prices are now at their lowest level since May 2015. While a prolonged LNG price downturn could force many projects to be cancelled, the winners among the developers are starting to emerge, aggressively pushing ahead their projects closer to the final investment decision.
This post discusses the key questions on Nexon sale at this point. It then provides the most realistic answers to these questions from various circumstantial aspects. This post is based on the recent news reports and also various local sources.
Bank Of Zhengzhou (6196 HK) reveals a picture of cascading asset toxicity and subpar earnings quality. As elsewhere in China, it is difficult to decipher whether better NPL recognition is behind this profound asset quality deterioration or poor underwriting practice and discipline combined with troubled debtors: the answer may lie somewhere in between.
While the low PH Score (a value-quality gauge) of 4.7 is supported by a lowly valuation metric (earnings quality is not reassuring), it is more a testament to -and reflection of- core eroding fundamental trends across the board. Regarding trends, Capital Adequacy and Provisioning were the variables to post a positive change. But even then, not all Capitalisation and Provisioning metrics moved in the right direction.
Franchise Valuation at 12% does not indicate that the bank is especially cheap though P/Book of 0.64x is below the regional median of 0.78x.
Follow-on offerings by Chinese ADRs are the flavour of the day. Hot on the heels of Qutoutiao Inc (QTT US) and Bilibili Inc (BILI US), HUYA Inc (HUYA US) filed for a potential $550 million public offering without presenting any details on the new ADS being offered. Also, certain selling shareholders will offer shares in the offering.
Huya is one of the few recent Chinese “new-economy” IPOs which has lived up to the hype by delivering a creditable post-IPO financial performance. While Huya has proven to be a good IPO, we believe this follow-on offering is highly opportunistic and would be tempted to participate only at a large discount.
Get Straight to the Source on Smartkarma
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
The JKM has halved its value since December, continuing its steady decline and dropping below the TTF, the benchmark for European LNG prices. Asian LNG spot prices are now at their lowest level since May 2015. While a prolonged LNG price downturn could force many projects to be cancelled, the winners among the developers are starting to emerge, aggressively pushing ahead their projects closer to the final investment decision.
This post discusses the key questions on Nexon sale at this point. It then provides the most realistic answers to these questions from various circumstantial aspects. This post is based on the recent news reports and also various local sources.
Bank Of Zhengzhou (6196 HK) reveals a picture of cascading asset toxicity and subpar earnings quality. As elsewhere in China, it is difficult to decipher whether better NPL recognition is behind this profound asset quality deterioration or poor underwriting practice and discipline combined with troubled debtors: the answer may lie somewhere in between.
While the low PH Score (a value-quality gauge) of 4.7 is supported by a lowly valuation metric (earnings quality is not reassuring), it is more a testament to -and reflection of- core eroding fundamental trends across the board. Regarding trends, Capital Adequacy and Provisioning were the variables to post a positive change. But even then, not all Capitalisation and Provisioning metrics moved in the right direction.
Franchise Valuation at 12% does not indicate that the bank is especially cheap though P/Book of 0.64x is below the regional median of 0.78x.
Follow-on offerings by Chinese ADRs are the flavour of the day. Hot on the heels of Qutoutiao Inc (QTT US) and Bilibili Inc (BILI US), HUYA Inc (HUYA US) filed for a potential $550 million public offering without presenting any details on the new ADS being offered. Also, certain selling shareholders will offer shares in the offering.
Huya is one of the few recent Chinese “new-economy” IPOs which has lived up to the hype by delivering a creditable post-IPO financial performance. While Huya has proven to be a good IPO, we believe this follow-on offering is highly opportunistic and would be tempted to participate only at a large discount.
On February 27th of this year, Altaba Inc (AABA US) held a “Strategic and Financial Update Conference Call.” In that call the company led by CEO Thomas McInerney said that effectively it was going to deal with its two major remaining assets (2.03bn shares of Yahoo Japan Corp (4689 JP) and 383.56mm shares of Alibaba Group Holding Ltd (BABA US)) in two stages, saying at the time they were “moving to an active monetization mode on [our] Yahoo Japan stake.”
That Yahoo Japan stake took longer, but the company worked to sell $20+bn of Alibaba last summer through a tender offer and selldown to generate cash for corporate liabilities and taxes, and then the company sold its Yahoo Japan stake in early September.
Since then, there has been a period of watchful waiting. Some have been expecting a period with an acceptable amount of carry and then possible significant upside. I haven’t seen the upside but agree there has been some baseline carry. And if you can get lots of leverage on this and ride the volatility, it could produce an OK return from A to Z if you ignore the indignities and volatility of passing through stops B to Y.
The New News
Yesterday, Altaba and CEO McInerney held a conference call after filing a PRE 14A preliminary proxy statement related to the selldown/unwinding of its entire Alibaba stake and the proposed windup/dissolution of Altaba as an entity.
The company will sell or distribute, in stages, its remaining net assets to shareholders, with a “pre-dissolution liquidating distribution to stockholders (in cash, Alibaba ADSs or a combination thereof), which the Fund currently expects will be made in the fourth quarter of 2019 and estimates will be in an amount between $52.12 and $59.63 per Share in cash and/or Alibaba ADSs (which estimates assume, among other things, an Alibaba Share price realized on sale and, if applicable, an Alibaba Share value at the time of distribution, of $177.00 per Alibaba Share).”
As p55 of the preliminary proxy makes clear (and as discussed in the transcript linked above, which is short and worth reading), based on the same US$177/share assumption of value realized or distributed per Alibaba share held, the total distributed would be in a range of $76.72 and $79.72 based on some other assumptions. A larger portion of the remaining amount could take 12 months to arrive, and there could be other residual portions which will take longer (years), as discussed in the proxy and call transcript.
The figure of $76.72 – $79.72 represents a 5.44-9.56% premium to yesterday’s close of $72.76/share and represents the total of the Pre-Dissolution Liquidating Distribution in Q4 2019, a second distribution in Q4 2020, then residuals thereafter after the court-mandated holdback in the dissolution process pays its claims.
Fair value calculations, parameters, and risk discussion below.
Elaborate fair value calculations using different assumptions of appropriate discount rates for each payment, and exactly how much is in the last bit (and how long it takes to pay out) suggest a group of ranges of fair value, from about 3-4% below the last-traded price, to about 4-5% above. However, for a hedge fund to earn a 10% net return for investors from owning the trade at the close of yesterday, getting there requires a fair bit of leverage and the resulting information ratio may be lower than desirable.
Assuming the approximate time to payment as described in the proxy statement, and amount of payment in the first distribution as described, and a multi-year residual of US$5/share, current borrow rates and an assumption of slightly higher discount rate required for the portion of time the stock is unlisted and even higher when one is receiving residual claims, the current fair value of the stock ranges from about 2% below current price and 4% higher. If you assume a higher Holdback Amount, the range of outcomes shifts lower.
Get Straight to the Source on Smartkarma
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
Bottoming out (albeit marginal) of investor confidence drove the market rally YTD. News on 28th Feb that MSCI decides to quadruple China A-Shares inclusion in emerging market index is further boosting the market. Positive signals from Government Work Report might keep the market rally going for a while.
However, stake sale plans of listed companies’ major shareholders, who own 53% of A-share free-floating market cap, are on the way. This might be the catalyst for the rally to end as attracting new investors into the market is going to be tough. Institutional investors’ share positions are close to their historical high after keeping buying in the past few weeks and have limit cash for buying more. There are also no signal signs individual investors are increasing their capital allocation for stock investment. In addition the aggressive stake reduction plans of major shareholders might be taken by other market participants to indicate negative expectations on their companies’ earnings this year.
We think it’s time to turn cautious on A-shares: take profit and wait for the next buying opportunity for value investors.
Despite burning through $700mn in cash in 2018, investors decided to give another $1.3bn to Sea Ltd (SE US) . We believe investors should treat Sea Ltd with caution for the following reasons:
A significant slowdown in e-commerce
Is the gaming division a one-hit wonder?
Expecting another 800mn cash burn into 2019
Consensus has priced in further upgrades while cash flow metrics worst in the sector
NB. Our team has taken both sides of the Sea Ltd investment case as we think this makes for better decision making and encourages unique thinking within our team. We strongly recommend that investors read my colleague Arun’s positive notes on the company listed below, if you have not already done so.
Meituan Dianping, the largest O2O platform in China, was listed on September 20th last year and lock-up expiry will be on March 20th. The stock has returned -13% since listing.
As it heads into lock-up expiry on March 20th, we will examine Meituan Dianping shareholder structure and potential shares up for sale.
Meituan was included by MSCI recently and will be eligible for the Hong Kong Connect soon thanks to rule amendment.
The company delivered a decent topline growth in 3Q2018 but its profit fell short of expectation. We highlight potentials from the food supply chain solution. We also discuss implication from MoBike acquisition.
We review our SOTP valuation of Meituan and believe there is an upside.
The advertising revenues slowed down significantly in 4Q2018.
We believe the content transition from politics to entertainment was not as good as the management expected.
We believe WB will not defeat Tencent’s WeChat.
We believe the stock price has downside of 9%.
Get Straight to the Source on Smartkarma
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
