Consumer

In this briefing:

1. Yahoo Japan Company Visit: Profit Erosion Has Bottomed and Mobile Payments (PayPay) Starts Strong
2. SAPPE: New Strategic Partner Drive 2019 Earning Growth
3. Donki (7532 JP) Becomes Japan’s 4th Biggest Retailer
4. Postcard from Surat (India)
5. TRADE IDEA – Hang Lung (10 HK) Stub: A Timeless Arb

1. Yahoo Japan Company Visit: Profit Erosion Has Bottomed and Mobile Payments (PayPay) Starts Strong

We recently met with Yahoo Japan (4689 JP)  for an update on the company after Q3 results. We thought the financial announcement was positive with encouraging forecasts for profitability, both this year and going forward, and revenue growth potential. In addition, Yahoo Japan reported solid customer growth for mobile payments joint venture PayPay, driven by strong marketing support and an attractive proposition for offline merchants.  We think the latter is very important for the development of mobile payments in Japan and PayPay has had a robust start.

2. SAPPE: New Strategic Partner Drive 2019 Earning Growth

We cut our target price by 22% to Bt24.7 to factor in  disappointing 2018 result. However, we maintain our BUY rating on the back of positive outlook toward its new products and market expansion plan.

The story:

• Posted net profit of Bt50m in 4Q18, down 36%YoY and 25%QoQ
• Trimmed 2019-21E forecast by 23.8%-24.3% respectively
• Expanding strategic partnership
• Our new target price of Bt24.7 is based on a target PE’19E of 18.8x which is equivalent to the World’s consumer staples sector.

Risks:  (1) Fluctuations in raw material prices

             (2) Exchange rate fluctuations

             (3) Highly competitive industry

3. Donki (7532 JP) Becomes Japan’s 4th Biggest Retailer

Pan Pacific International (7532 JP) (Don Quijote) is on a roll at the moment.

The discount and variety retailer just opened its fourth store in South-East Asia, mixing Japanese restaurants and cafes with a Donki store and a range of Japanese speciality tenants. The store has all the high-level retail entertainment that its Japanese stores offer but with the added cachet of being from Japan and mixing in a lot more in-mall tenants and food outlets. PPI now plans 200 overseas stores in the medium-term.

Back home, PPI is creating new small store formats which have the potential to reach into parts of Japan its big box stores cannot.

At the same time, PPI is beginning the conversion of 100 Uny stores to mixed food and variety stores. With the first six conversions showing sales growth of 83% over 10 months and gross margins up 59%, PPI’s expectation of an extra ¥20 billion in operating profit once conversions are complete looks very achievable.

The takeover means PPI is now Japan’s fourth-biggest retailer, up from 15th just three years ago.

These multiple ventures reflect the company’s flexibility, adapting to each local market’s needs with formats to match.

Its recent decision to close down its e-commerce business is not a weakness but a positive move, demonstrating that PPI understands where its strengths lie: in live store entertainment.

4. Postcard from Surat (India)

With our Post Card Series, our aim is to bring on-ground realities & perspectives from cities across India.  In this insight, we share our takeaways from our visit to Surat, the diamond hub of India. Our focus is Titan Co Ltd (TTAN IN) and the impact on margins. 

Studded jewellery has more margins than plain gold jewellery. Part of Titan’s plan is to improve the mix in favour of studded jewellery which could help it command even higher margins. Titan anticipates this mix to improve to 50% by FY2023. Our interactions indicate a limited possibility of this change in mix. Operating leverage may be the only driver that can help in margin expansion.

We revise our FY20 EBIT margin & EPS estimates. Our FY20 EBIT margin is revised from 12.63% to 11.6% for FY20, continues to be higher than consensus which is at 10.82%. While we see limited margin expansion possibility, revenue growth likely to surprise. We introduce our FY21 EPS estimate at INR 28.75 compared to consensus EPS which is at INR 25.50.

Trust is a factor which cannot be easily replicated or acquired. The trust that Titan enjoys argues for a higher PE multiple. Based on a two-year average forward multiple 51x, our target price for Titan is INR 1466 which represents an upside of 37% from the last close price of INR 1070

5. TRADE IDEA – Hang Lung (10 HK) Stub: A Timeless Arb

An old favorite in the Asian arbitrageur’s investment universe is the Hang Lung stub. The Hang Lung Group acquired Hang Lung Properties (formerly named Amoy Properties) and designated the subsidiary as its property investment arm.  After both companies were listed in 1992, the same year that the company entered the mainland with its purchase of the Grand Gateway 66 and Plaza 66 in Shanghai, the pair was open to arbs. The Hang Lung Group now controls over RMB 130 (USD 19.4b) billion of property in Hong Kong and China. 

In the wonderful world of Asian holding companies, Hang Lung needs little introduction. However, in this insight I would like to highlight a trade idea. I will detail why I think now is the right time to setup a stub trade and some background information on the company and what assets constitute the stub. 

In this insight I will cover:

I. The Trade

II. The Stub Assets

III. My Track Record with Stub Trades

In this briefing:

1. Donki (7532 JP) Becomes Japan’s 4th Biggest Retailer
2. Postcard from Surat (India)
3. TRADE IDEA – Hang Lung (10 HK) Stub: A Timeless Arb
4. Company Visits: Berli Jucker, M Visions
5. Best World (BEST SP): BT Article, Franchise and KOL

1. Donki (7532 JP) Becomes Japan’s 4th Biggest Retailer

Pan Pacific International (7532 JP) (Don Quijote) is on a roll at the moment.

The discount and variety retailer just opened its fourth store in South-East Asia, mixing Japanese restaurants and cafes with a Donki store and a range of Japanese speciality tenants. The store has all the high-level retail entertainment that its Japanese stores offer but with the added cachet of being from Japan and mixing in a lot more in-mall tenants and food outlets. PPI now plans 200 overseas stores in the medium-term.

Back home, PPI is creating new small store formats which have the potential to reach into parts of Japan its big box stores cannot.

At the same time, PPI is beginning the conversion of 100 Uny stores to mixed food and variety stores. With the first six conversions showing sales growth of 83% over 10 months and gross margins up 59%, PPI’s expectation of an extra ¥20 billion in operating profit once conversions are complete looks very achievable.

The takeover means PPI is now Japan’s fourth-biggest retailer, up from 15th just three years ago.

These multiple ventures reflect the company’s flexibility, adapting to each local market’s needs with formats to match.

Its recent decision to close down its e-commerce business is not a weakness but a positive move, demonstrating that PPI understands where its strengths lie: in live store entertainment.

2. Postcard from Surat (India)

With our Post Card Series, our aim is to bring on-ground realities & perspectives from cities across India.  In this insight, we share our takeaways from our visit to Surat, the diamond hub of India. Our focus is Titan Co Ltd (TTAN IN) and the impact on margins. 

Studded jewellery has more margins than plain gold jewellery. Part of Titan’s plan is to improve the mix in favour of studded jewellery which could help it command even higher margins. Titan anticipates this mix to improve to 50% by FY2023. Our interactions indicate a limited possibility of this change in mix. Operating leverage may be the only driver that can help in margin expansion.

We revise our FY20 EBIT margin & EPS estimates. Our FY20 EBIT margin is revised from 12.63% to 11.6% for FY20, continues to be higher than consensus which is at 10.82%. While we see limited margin expansion possibility, revenue growth likely to surprise. We introduce our FY21 EPS estimate at INR 28.75 compared to consensus EPS which is at INR 25.50.

Trust is a factor which cannot be easily replicated or acquired. The trust that Titan enjoys argues for a higher PE multiple. Based on a two-year average forward multiple 51x, our target price for Titan is INR 1466 which represents an upside of 37% from the last close price of INR 1070

3. TRADE IDEA – Hang Lung (10 HK) Stub: A Timeless Arb

An old favorite in the Asian arbitrageur’s investment universe is the Hang Lung stub. The Hang Lung Group acquired Hang Lung Properties (formerly named Amoy Properties) and designated the subsidiary as its property investment arm.  After both companies were listed in 1992, the same year that the company entered the mainland with its purchase of the Grand Gateway 66 and Plaza 66 in Shanghai, the pair was open to arbs. The Hang Lung Group now controls over RMB 130 (USD 19.4b) billion of property in Hong Kong and China. 

In the wonderful world of Asian holding companies, Hang Lung needs little introduction. However, in this insight I would like to highlight a trade idea. I will detail why I think now is the right time to setup a stub trade and some background information on the company and what assets constitute the stub. 

In this insight I will cover:

I. The Trade

II. The Stub Assets

III. My Track Record with Stub Trades

4. Company Visits: Berli Jucker, M Visions

We visited one big-cap stock, Berli Jucker, and one pip-squeak recent IPO M Vision today. A couple of highlights:

• Slow revenue growth at BJC at under 5% largely driven by Big C (hypermarket), but earnings growth was strong at 28% mainly due to lower cost of palm oil in the snack business.
• Good progress in Vietnam with expansion of the bottle capacity this year and SABECO increasing purchases of bottles.
• Overall unimpressed. The company isn’t expecting to grow revenues more than 9% this year, and many of the cost cuts we saw in 2018 are clearly one-offs. Higher oil prices are likely to lead to rising palm oil prices this year too, since the two commodities are linked through substitution effect.
• MVP underwent a bad year on the profit level, but their various businesses, at least on the top line level, looks like it could recover quickly this year.

5. Best World (BEST SP): BT Article, Franchise and KOL

Best World International (BEST SP) share price has been hammered due to the recent article in Business Times, although the company has addressed them one by one. The annual meeting that recently took place in their office in Singapore shed some light on the seemingly “new but not so new” franchise business model in China. The company also has started to engage Key Opinion Leaders (KOL) aka social media influencers as part of their social selling campaign. 

In this briefing:

1. Postcard from Surat (India)
2. TRADE IDEA – Hang Lung (10 HK) Stub: A Timeless Arb
3. Company Visits: Berli Jucker, M Visions
4. Best World (BEST SP): BT Article, Franchise and KOL
5. DoubleDragon Properties (DD PM): From Overhyped to Undervalued; Multi-Bagger in the Making?

1. Postcard from Surat (India)

With our Post Card Series, our aim is to bring on-ground realities & perspectives from cities across India.  In this insight, we share our takeaways from our visit to Surat, the diamond hub of India. Our focus is Titan Co Ltd (TTAN IN) and the impact on margins. 

Studded jewellery has more margins than plain gold jewellery. Part of Titan’s plan is to improve the mix in favour of studded jewellery which could help it command even higher margins. Titan anticipates this mix to improve to 50% by FY2023. Our interactions indicate a limited possibility of this change in mix. Operating leverage may be the only driver that can help in margin expansion.

We revise our FY20 EBIT margin & EPS estimates. Our FY20 EBIT margin is revised from 12.63% to 11.6% for FY20, continues to be higher than consensus which is at 10.82%. While we see limited margin expansion possibility, revenue growth likely to surprise. We introduce our FY21 EPS estimate at INR 28.75 compared to consensus EPS which is at INR 25.50.

Trust is a factor which cannot be easily replicated or acquired. The trust that Titan enjoys argues for a higher PE multiple. Based on a two-year average forward multiple 51x, our target price for Titan is INR 1466 which represents an upside of 37% from the last close price of INR 1070

2. TRADE IDEA – Hang Lung (10 HK) Stub: A Timeless Arb

An old favorite in the Asian arbitrageur’s investment universe is the Hang Lung stub. The Hang Lung Group acquired Hang Lung Properties (formerly named Amoy Properties) and designated the subsidiary as its property investment arm.  After both companies were listed in 1992, the same year that the company entered the mainland with its purchase of the Grand Gateway 66 and Plaza 66 in Shanghai, the pair was open to arbs. The Hang Lung Group now controls over RMB 130 (USD 19.4b) billion of property in Hong Kong and China. 

In the wonderful world of Asian holding companies, Hang Lung needs little introduction. However, in this insight I would like to highlight a trade idea. I will detail why I think now is the right time to setup a stub trade and some background information on the company and what assets constitute the stub. 

In this insight I will cover:

I. The Trade

II. The Stub Assets

III. My Track Record with Stub Trades

3. Company Visits: Berli Jucker, M Visions

We visited one big-cap stock, Berli Jucker, and one pip-squeak recent IPO M Vision today. A couple of highlights:

• Slow revenue growth at BJC at under 5% largely driven by Big C (hypermarket), but earnings growth was strong at 28% mainly due to lower cost of palm oil in the snack business.
• Good progress in Vietnam with expansion of the bottle capacity this year and SABECO increasing purchases of bottles.
• Overall unimpressed. The company isn’t expecting to grow revenues more than 9% this year, and many of the cost cuts we saw in 2018 are clearly one-offs. Higher oil prices are likely to lead to rising palm oil prices this year too, since the two commodities are linked through substitution effect.
• MVP underwent a bad year on the profit level, but their various businesses, at least on the top line level, looks like it could recover quickly this year.

4. Best World (BEST SP): BT Article, Franchise and KOL

Best World International (BEST SP) share price has been hammered due to the recent article in Business Times, although the company has addressed them one by one. The annual meeting that recently took place in their office in Singapore shed some light on the seemingly “new but not so new” franchise business model in China. The company also has started to engage Key Opinion Leaders (KOL) aka social media influencers as part of their social selling campaign. 

5. DoubleDragon Properties (DD PM): From Overhyped to Undervalued; Multi-Bagger in the Making?

This Insight was written by Nicolas Van Broekhoven and Lloyd Moffatt.

What is an Orphan Stock?

An attractively valued company with a minimum market cap of USD $1 billion but no sell-side coverage.Doubledragon Properties (DD PM) meets those criteria.

Why Read This Report?

Learn about the Philippines youngest self-made billionaire*, Edgar ‘Injap’ Sia,  how he created one of the largest fast-food chains (Mang Inasal) in the country and successfully sold it to Jollibee Foods (JFC PM) for over USD$100 M.

After selling Mang Inasal in 2010, Sia started building DoubleDragon (DD) as he joined hands with Tony Tan (founder of Jollibee Foods (JFC PM) ). DD was listed in 2014 at a market value of USD$85 M (PHP2/share) and reached a market cap of over USD$3 B USD two years after listing (PHP70/share).

DD’s valuation mid-2016 was overhyped and overvalued.

From mid-2016 to late 2018 the share price fell by approximately 75%. Last year the stock bottomed at PHP17.2 despite fundamentals improving drastically between 2016 and 2018.

We value DD on a blended a) P/E multiple and b) Cap Rate basis.

DD recently traded around PHP 22/share and is currently valued at 9.5x FY20 P/E, a steep discount to its industry peers. Assuming the company achieves PHP10.8 B in recurring revenues by FY20 the market is currently valuing the company at a 21% Cap Rate vs 7% for its primary peer Sm Prime Holdings (SMPH PM). DD should trade at a discount to SM (long track record, higher liquidity, included in PSE index) but the gap is too wide.

We argue DD should trade at a) 15x P/E and b) 10% cap rate. Combining the two valuation methods we arrive at a blended Fair Value of PHP 40.31/share, or 83% upside from current levels.

The founders control 70% of the company and expect to grow the current USD$1.2B market cap exponentially the coming 3-5 years. DoubleDragon is a potential multi-bagger in the making.

1. FY18 results publication by early April 2019
2. Delivery of 100 operating CityMalls by FY20
3. The passing of workable REIT law
4. Delivery of PHP5.5B FY20 profit target
5. FCF inflection point coming closer in FY20
6. Re-discovery by sell-side firms as index inclusion looms
7. Visibility into FY21-FY25 dividend potential

Footnote: *Injap was reported as having USD$1 B in assets by Forbes in 2017, as the share price of DD has fallen we estimate this has dropped to approximately USD$ 400-500 M, which would still rank him among the top-25 wealthiest individuals in the Philippines.

In this briefing:

1. Zozo: Looks Like There’s a Dead Cat in This Bouncy Zozosuit
2. CyberAgent (4751 JP): Key Takeaways from Our Discussion with the IR Team
3. Dongzheng Auto Finance (东正汽车金融) Pre-IPO Review – Dependent on Dealership Network for Growth
4. Up Fintech (Tiger Brokers) IPO Quick Take – It’s Not like Futu, Won’t Perform like It Either
5. Korean Stubs Spotlight: A Pair Trade Between Hyosung Corp and Hyosung TNC

1. Zozo: Looks Like There’s a Dead Cat in This Bouncy Zozosuit

ZOZO Inc (3092 JP) is up almost 30% since its mid February low and roughly flat compared to the date of Michael Causton and our recent collaborative in-depth look (Zozo: A Shooting Star Shooting Itself in the Foot) at the company’s structural problems.

We believe this presents an excellent opportunity to look at the stock on the short side again.

We would also refer readers to an article from Livedoor news which delves into the company’s issues from a local industry insider’s perspective. The article is in Japanese and the google translated version is almost unintelligible but we summarise the salient points and our perspective below.

2. CyberAgent (4751 JP): Key Takeaways from Our Discussion with the IR Team

Our recent conversation with CyberAgent’s IR team suggests that a significant improvement in the OP margin is unlikely in the next few quarters. The OP margins of both Game business and the Internet Advertisement, while likely to improve gradually, are likely to remain low compared to recent history due to higher advertising and personnel costs.

Upfront investments in AbemaTV are likely to continue until the target of 10m Weekly Average Users (WAU) is met, which could take a year or more. The company expects around 50% of AbemaTV revenue to eventually come from premium users, which seems to be a shift in strategy, from a “free” service towards a more hybrid model.

CyberAgent’s share price closed at ¥4,050 on Tuesday, up 7.1% from its previous close, following the news that the stock was added to the Goldman Sachs’ conviction list with a reiterated buy rating. However, even before this, CyberAgent’s share price had been on a steady increase over the past two weeks (+29.0%), recovering from a one-year low in early February. This increase, despite rather mediocre 1Q results, a downward revision of OP guidance, and lack of any major short term catalysts is an indication that the market deems CyberAgent to be undervalued – mainly on the AbemaTV front.

3. Dongzheng Auto Finance (东正汽车金融) Pre-IPO Review – Dependent on Dealership Network for Growth

Dongzheng Automotive Finance (2718 HK) is looking to raise approximately US$300 – 500m in its upcoming IPO. 

DAF is a fast growing auto finance company which acquires customers through a network of dealership around China. Its net interest income grew by 66% CAGR from FY2016 to FY2018 while net fees/comms income and profit grew by 39.6% and 61% CAGR over the same period.

However, most of its growth originated from ZhengTong dealers and joint promotion arrangement. Excluding loans from joint promotion arrangement, gross outstanding loan had only grown by 12% CAGR.

In this insight, we will look at the company’s business, analyze the competitive landscape, provide thoughts on valuation, and some questions for management.

4. Up Fintech (Tiger Brokers) IPO Quick Take – It’s Not like Futu, Won’t Perform like It Either

Up Fintech (TIGR US) plans to raise up to US$91m in its US listing. The company counts Xiaomi Corp (1810 HK) and Interactive Brokers Group, Inc (IBKR US) as its main investors.

In my earlier insights, I commented about Tiger’s reliance on IBKR and compared its operations with Futu Holdings Ltd (FHL US):

• Up Fintech (Tiger Brokers) Pre-IPO Quick Note – Much Too Reliant on IBKR
• Futu Holdings IPO Quick Note – Comparison with Tiger Brokers – Same Market, Different Economics

In this insight, I’ll run the deal through our framework and comment on valuations.

5. Korean Stubs Spotlight: A Pair Trade Between Hyosung Corp and Hyosung TNC

In this report, we provide an analysis of our pair trade idea between Hyosung Corporation (004800 KS) (market cap of 1,612 billion won) and Hyosung TNC Co Ltd (298020 KS) (market cap of 712 billion won). Our strategy will be to be long Hyosung TNC and be short Hyosung Corp. 

In the past six months, Hyosung Corp is up 62% while Hyosung TNC is down 12%. We believe this price divergence has been excessive. The four major reasons why Hyosung Corp’s share price has surged in the past six months are mentioned below. There is a case to be made that the market has already factored into Hyosung Corp’s share price many of the positive factors mentioned below. 

• Excellent dividends 
• Corporate activism related stock 
• Strong financial results 
• Timing of the increased insider ownerships/Completion of tender offers

Hyosung TNC has underperformed the market as well as Hyosung Corp in the past six months. However, Hyosung TNC appears to be a turnaround story driven by the following factors: 

• Decline in raw material prices 
• Aggressive spandex investment in India 
• Stabilization of spandex prices in 2H19 
• Consolidation of the global spandex industry

In this briefing:

1. TRADE IDEA – Hang Lung (10 HK) Stub: A Timeless Arb
2. Company Visits: Berli Jucker, M Visions
3. Best World (BEST SP): BT Article, Franchise and KOL
4. DoubleDragon Properties (DD PM): From Overhyped to Undervalued; Multi-Bagger in the Making?
5. Zozo: Looks Like There’s a Dead Cat in This Bouncy Zozosuit

1. TRADE IDEA – Hang Lung (10 HK) Stub: A Timeless Arb

An old favorite in the Asian arbitrageur’s investment universe is the Hang Lung stub. The Hang Lung Group acquired Hang Lung Properties (formerly named Amoy Properties) and designated the subsidiary as its property investment arm.  After both companies were listed in 1992, the same year that the company entered the mainland with its purchase of the Grand Gateway 66 and Plaza 66 in Shanghai, the pair was open to arbs. The Hang Lung Group now controls over RMB 130 (USD 19.4b) billion of property in Hong Kong and China. 

In the wonderful world of Asian holding companies, Hang Lung needs little introduction. However, in this insight I would like to highlight a trade idea. I will detail why I think now is the right time to setup a stub trade and some background information on the company and what assets constitute the stub. 

In this insight I will cover:

I. The Trade

II. The Stub Assets

III. My Track Record with Stub Trades

2. Company Visits: Berli Jucker, M Visions

We visited one big-cap stock, Berli Jucker, and one pip-squeak recent IPO M Vision today. A couple of highlights:

• Slow revenue growth at BJC at under 5% largely driven by Big C (hypermarket), but earnings growth was strong at 28% mainly due to lower cost of palm oil in the snack business.
• Good progress in Vietnam with expansion of the bottle capacity this year and SABECO increasing purchases of bottles.
• Overall unimpressed. The company isn’t expecting to grow revenues more than 9% this year, and many of the cost cuts we saw in 2018 are clearly one-offs. Higher oil prices are likely to lead to rising palm oil prices this year too, since the two commodities are linked through substitution effect.
• MVP underwent a bad year on the profit level, but their various businesses, at least on the top line level, looks like it could recover quickly this year.

3. Best World (BEST SP): BT Article, Franchise and KOL

Best World International (BEST SP) share price has been hammered due to the recent article in Business Times, although the company has addressed them one by one. The annual meeting that recently took place in their office in Singapore shed some light on the seemingly “new but not so new” franchise business model in China. The company also has started to engage Key Opinion Leaders (KOL) aka social media influencers as part of their social selling campaign. 

4. DoubleDragon Properties (DD PM): From Overhyped to Undervalued; Multi-Bagger in the Making?

This Insight was written by Nicolas Van Broekhoven and Lloyd Moffatt.

What is an Orphan Stock?

An attractively valued company with a minimum market cap of USD $1 billion but no sell-side coverage.Doubledragon Properties (DD PM) meets those criteria.

Why Read This Report?

Learn about the Philippines youngest self-made billionaire*, Edgar ‘Injap’ Sia,  how he created one of the largest fast-food chains (Mang Inasal) in the country and successfully sold it to Jollibee Foods (JFC PM) for over USD$100 M.

After selling Mang Inasal in 2010, Sia started building DoubleDragon (DD) as he joined hands with Tony Tan (founder of Jollibee Foods (JFC PM) ). DD was listed in 2014 at a market value of USD$85 M (PHP2/share) and reached a market cap of over USD$3 B USD two years after listing (PHP70/share).

DD’s valuation mid-2016 was overhyped and overvalued.

From mid-2016 to late 2018 the share price fell by approximately 75%. Last year the stock bottomed at PHP17.2 despite fundamentals improving drastically between 2016 and 2018.

We value DD on a blended a) P/E multiple and b) Cap Rate basis.

DD recently traded around PHP 22/share and is currently valued at 9.5x FY20 P/E, a steep discount to its industry peers. Assuming the company achieves PHP10.8 B in recurring revenues by FY20 the market is currently valuing the company at a 21% Cap Rate vs 7% for its primary peer Sm Prime Holdings (SMPH PM). DD should trade at a discount to SM (long track record, higher liquidity, included in PSE index) but the gap is too wide.

We argue DD should trade at a) 15x P/E and b) 10% cap rate. Combining the two valuation methods we arrive at a blended Fair Value of PHP 40.31/share, or 83% upside from current levels.

The founders control 70% of the company and expect to grow the current USD$1.2B market cap exponentially the coming 3-5 years. DoubleDragon is a potential multi-bagger in the making.

1. FY18 results publication by early April 2019
2. Delivery of 100 operating CityMalls by FY20
3. The passing of workable REIT law
4. Delivery of PHP5.5B FY20 profit target
5. FCF inflection point coming closer in FY20
6. Re-discovery by sell-side firms as index inclusion looms
7. Visibility into FY21-FY25 dividend potential

Footnote: *Injap was reported as having USD$1 B in assets by Forbes in 2017, as the share price of DD has fallen we estimate this has dropped to approximately USD$ 400-500 M, which would still rank him among the top-25 wealthiest individuals in the Philippines.

5. Zozo: Looks Like There’s a Dead Cat in This Bouncy Zozosuit

ZOZO Inc (3092 JP) is up almost 30% since its mid February low and roughly flat compared to the date of Michael Causton and our recent collaborative in-depth look (Zozo: A Shooting Star Shooting Itself in the Foot) at the company’s structural problems.

We believe this presents an excellent opportunity to look at the stock on the short side again.

We would also refer readers to an article from Livedoor news which delves into the company’s issues from a local industry insider’s perspective. The article is in Japanese and the google translated version is almost unintelligible but we summarise the salient points and our perspective below.

In this briefing:

1. Company Visits: Berli Jucker, M Visions
2. Best World (BEST SP): BT Article, Franchise and KOL
3. DoubleDragon Properties (DD PM): From Overhyped to Undervalued; Multi-Bagger in the Making?
4. Zozo: Looks Like There’s a Dead Cat in This Bouncy Zozosuit
5. CyberAgent (4751 JP): Key Takeaways from Our Discussion with the IR Team

1. Company Visits: Berli Jucker, M Visions

We visited one big-cap stock, Berli Jucker, and one pip-squeak recent IPO M Vision today. A couple of highlights:

• Slow revenue growth at BJC at under 5% largely driven by Big C (hypermarket), but earnings growth was strong at 28% mainly due to lower cost of palm oil in the snack business.
• Good progress in Vietnam with expansion of the bottle capacity this year and SABECO increasing purchases of bottles.
• Overall unimpressed. The company isn’t expecting to grow revenues more than 9% this year, and many of the cost cuts we saw in 2018 are clearly one-offs. Higher oil prices are likely to lead to rising palm oil prices this year too, since the two commodities are linked through substitution effect.
• MVP underwent a bad year on the profit level, but their various businesses, at least on the top line level, looks like it could recover quickly this year.

2. Best World (BEST SP): BT Article, Franchise and KOL

Best World International (BEST SP) share price has been hammered due to the recent article in Business Times, although the company has addressed them one by one. The annual meeting that recently took place in their office in Singapore shed some light on the seemingly “new but not so new” franchise business model in China. The company also has started to engage Key Opinion Leaders (KOL) aka social media influencers as part of their social selling campaign. 

3. DoubleDragon Properties (DD PM): From Overhyped to Undervalued; Multi-Bagger in the Making?

This Insight was written by Nicolas Van Broekhoven and Lloyd Moffatt.

What is an Orphan Stock?

An attractively valued company with a minimum market cap of USD $1 billion but no sell-side coverage.Doubledragon Properties (DD PM) meets those criteria.

Why Read This Report?

Learn about the Philippines youngest self-made billionaire*, Edgar ‘Injap’ Sia,  how he created one of the largest fast-food chains (Mang Inasal) in the country and successfully sold it to Jollibee Foods (JFC PM) for over USD$100 M.

After selling Mang Inasal in 2010, Sia started building DoubleDragon (DD) as he joined hands with Tony Tan (founder of Jollibee Foods (JFC PM) ). DD was listed in 2014 at a market value of USD$85 M (PHP2/share) and reached a market cap of over USD$3 B USD two years after listing (PHP70/share).

DD’s valuation mid-2016 was overhyped and overvalued.

From mid-2016 to late 2018 the share price fell by approximately 75%. Last year the stock bottomed at PHP17.2 despite fundamentals improving drastically between 2016 and 2018.

We value DD on a blended a) P/E multiple and b) Cap Rate basis.

DD recently traded around PHP 22/share and is currently valued at 9.5x FY20 P/E, a steep discount to its industry peers. Assuming the company achieves PHP10.8 B in recurring revenues by FY20 the market is currently valuing the company at a 21% Cap Rate vs 7% for its primary peer Sm Prime Holdings (SMPH PM). DD should trade at a discount to SM (long track record, higher liquidity, included in PSE index) but the gap is too wide.

We argue DD should trade at a) 15x P/E and b) 10% cap rate. Combining the two valuation methods we arrive at a blended Fair Value of PHP 40.31/share, or 83% upside from current levels.

The founders control 70% of the company and expect to grow the current USD$1.2B market cap exponentially the coming 3-5 years. DoubleDragon is a potential multi-bagger in the making.

1. FY18 results publication by early April 2019
2. Delivery of 100 operating CityMalls by FY20
3. The passing of workable REIT law
4. Delivery of PHP5.5B FY20 profit target
5. FCF inflection point coming closer in FY20
6. Re-discovery by sell-side firms as index inclusion looms
7. Visibility into FY21-FY25 dividend potential

Footnote: *Injap was reported as having USD$1 B in assets by Forbes in 2017, as the share price of DD has fallen we estimate this has dropped to approximately USD$ 400-500 M, which would still rank him among the top-25 wealthiest individuals in the Philippines.

4. Zozo: Looks Like There’s a Dead Cat in This Bouncy Zozosuit

ZOZO Inc (3092 JP) is up almost 30% since its mid February low and roughly flat compared to the date of Michael Causton and our recent collaborative in-depth look (Zozo: A Shooting Star Shooting Itself in the Foot) at the company’s structural problems.

We believe this presents an excellent opportunity to look at the stock on the short side again.

We would also refer readers to an article from Livedoor news which delves into the company’s issues from a local industry insider’s perspective. The article is in Japanese and the google translated version is almost unintelligible but we summarise the salient points and our perspective below.

5. CyberAgent (4751 JP): Key Takeaways from Our Discussion with the IR Team

Our recent conversation with CyberAgent’s IR team suggests that a significant improvement in the OP margin is unlikely in the next few quarters. The OP margins of both Game business and the Internet Advertisement, while likely to improve gradually, are likely to remain low compared to recent history due to higher advertising and personnel costs.

Upfront investments in AbemaTV are likely to continue until the target of 10m Weekly Average Users (WAU) is met, which could take a year or more. The company expects around 50% of AbemaTV revenue to eventually come from premium users, which seems to be a shift in strategy, from a “free” service towards a more hybrid model.

CyberAgent’s share price closed at ¥4,050 on Tuesday, up 7.1% from its previous close, following the news that the stock was added to the Goldman Sachs’ conviction list with a reiterated buy rating. However, even before this, CyberAgent’s share price had been on a steady increase over the past two weeks (+29.0%), recovering from a one-year low in early February. This increase, despite rather mediocre 1Q results, a downward revision of OP guidance, and lack of any major short term catalysts is an indication that the market deems CyberAgent to be undervalued – mainly on the AbemaTV front.

In this briefing:

1. Best World (BEST SP): BT Article, Franchise and KOL
2. DoubleDragon Properties (DD PM): From Overhyped to Undervalued; Multi-Bagger in the Making?
3. Zozo: Looks Like There’s a Dead Cat in This Bouncy Zozosuit
4. CyberAgent (4751 JP): Key Takeaways from Our Discussion with the IR Team
5. Dongzheng Auto Finance (东正汽车金融) Pre-IPO Review – Dependent on Dealership Network for Growth

1. Best World (BEST SP): BT Article, Franchise and KOL

Best World International (BEST SP) share price has been hammered due to the recent article in Business Times, although the company has addressed them one by one. The annual meeting that recently took place in their office in Singapore shed some light on the seemingly “new but not so new” franchise business model in China. The company also has started to engage Key Opinion Leaders (KOL) aka social media influencers as part of their social selling campaign. 

2. DoubleDragon Properties (DD PM): From Overhyped to Undervalued; Multi-Bagger in the Making?

This Insight was written by Nicolas Van Broekhoven and Lloyd Moffatt.

What is an Orphan Stock?

An attractively valued company with a minimum market cap of USD $1 billion but no sell-side coverage.Doubledragon Properties (DD PM) meets those criteria.

Why Read This Report?

Learn about the Philippines youngest self-made billionaire*, Edgar ‘Injap’ Sia,  how he created one of the largest fast-food chains (Mang Inasal) in the country and successfully sold it to Jollibee Foods (JFC PM) for over USD$100 M.

After selling Mang Inasal in 2010, Sia started building DoubleDragon (DD) as he joined hands with Tony Tan (founder of Jollibee Foods (JFC PM) ). DD was listed in 2014 at a market value of USD$85 M (PHP2/share) and reached a market cap of over USD$3 B USD two years after listing (PHP70/share).

DD’s valuation mid-2016 was overhyped and overvalued.

From mid-2016 to late 2018 the share price fell by approximately 75%. Last year the stock bottomed at PHP17.2 despite fundamentals improving drastically between 2016 and 2018.

We value DD on a blended a) P/E multiple and b) Cap Rate basis.

DD recently traded around PHP 22/share and is currently valued at 9.5x FY20 P/E, a steep discount to its industry peers. Assuming the company achieves PHP10.8 B in recurring revenues by FY20 the market is currently valuing the company at a 21% Cap Rate vs 7% for its primary peer Sm Prime Holdings (SMPH PM). DD should trade at a discount to SM (long track record, higher liquidity, included in PSE index) but the gap is too wide.

We argue DD should trade at a) 15x P/E and b) 10% cap rate. Combining the two valuation methods we arrive at a blended Fair Value of PHP 40.31/share, or 83% upside from current levels.

The founders control 70% of the company and expect to grow the current USD$1.2B market cap exponentially the coming 3-5 years. DoubleDragon is a potential multi-bagger in the making.

1. FY18 results publication by early April 2019
2. Delivery of 100 operating CityMalls by FY20
3. The passing of workable REIT law
4. Delivery of PHP5.5B FY20 profit target
5. FCF inflection point coming closer in FY20
6. Re-discovery by sell-side firms as index inclusion looms
7. Visibility into FY21-FY25 dividend potential

Footnote: *Injap was reported as having USD$1 B in assets by Forbes in 2017, as the share price of DD has fallen we estimate this has dropped to approximately USD$ 400-500 M, which would still rank him among the top-25 wealthiest individuals in the Philippines.

3. Zozo: Looks Like There’s a Dead Cat in This Bouncy Zozosuit

ZOZO Inc (3092 JP) is up almost 30% since its mid February low and roughly flat compared to the date of Michael Causton and our recent collaborative in-depth look (Zozo: A Shooting Star Shooting Itself in the Foot) at the company’s structural problems.

We believe this presents an excellent opportunity to look at the stock on the short side again.

We would also refer readers to an article from Livedoor news which delves into the company’s issues from a local industry insider’s perspective. The article is in Japanese and the google translated version is almost unintelligible but we summarise the salient points and our perspective below.

4. CyberAgent (4751 JP): Key Takeaways from Our Discussion with the IR Team

Our recent conversation with CyberAgent’s IR team suggests that a significant improvement in the OP margin is unlikely in the next few quarters. The OP margins of both Game business and the Internet Advertisement, while likely to improve gradually, are likely to remain low compared to recent history due to higher advertising and personnel costs.

Upfront investments in AbemaTV are likely to continue until the target of 10m Weekly Average Users (WAU) is met, which could take a year or more. The company expects around 50% of AbemaTV revenue to eventually come from premium users, which seems to be a shift in strategy, from a “free” service towards a more hybrid model.

CyberAgent’s share price closed at ¥4,050 on Tuesday, up 7.1% from its previous close, following the news that the stock was added to the Goldman Sachs’ conviction list with a reiterated buy rating. However, even before this, CyberAgent’s share price had been on a steady increase over the past two weeks (+29.0%), recovering from a one-year low in early February. This increase, despite rather mediocre 1Q results, a downward revision of OP guidance, and lack of any major short term catalysts is an indication that the market deems CyberAgent to be undervalued – mainly on the AbemaTV front.

5. Dongzheng Auto Finance (东正汽车金融) Pre-IPO Review – Dependent on Dealership Network for Growth

Dongzheng Automotive Finance (2718 HK) is looking to raise approximately US$300 – 500m in its upcoming IPO. 

DAF is a fast growing auto finance company which acquires customers through a network of dealership around China. Its net interest income grew by 66% CAGR from FY2016 to FY2018 while net fees/comms income and profit grew by 39.6% and 61% CAGR over the same period.

However, most of its growth originated from ZhengTong dealers and joint promotion arrangement. Excluding loans from joint promotion arrangement, gross outstanding loan had only grown by 12% CAGR.

In this insight, we will look at the company’s business, analyze the competitive landscape, provide thoughts on valuation, and some questions for management.

In this briefing:

1. DoubleDragon Properties (DD PM): From Overhyped to Undervalued; Multi-Bagger in the Making?
2. Zozo: Looks Like There’s a Dead Cat in This Bouncy Zozosuit
3. CyberAgent (4751 JP): Key Takeaways from Our Discussion with the IR Team
4. Dongzheng Auto Finance (东正汽车金融) Pre-IPO Review – Dependent on Dealership Network for Growth
5. Up Fintech (Tiger Brokers) IPO Quick Take – It’s Not like Futu, Won’t Perform like It Either

1. DoubleDragon Properties (DD PM): From Overhyped to Undervalued; Multi-Bagger in the Making?

This Insight was written by Nicolas Van Broekhoven and Lloyd Moffatt.

What is an Orphan Stock?

An attractively valued company with a minimum market cap of USD $1 billion but no sell-side coverage.Doubledragon Properties (DD PM) meets those criteria.

Why Read This Report?

Learn about the Philippines youngest self-made billionaire*, Edgar ‘Injap’ Sia,  how he created one of the largest fast-food chains (Mang Inasal) in the country and successfully sold it to Jollibee Foods (JFC PM) for over USD$100 M.

After selling Mang Inasal in 2010, Sia started building DoubleDragon (DD) as he joined hands with Tony Tan (founder of Jollibee Foods (JFC PM) ). DD was listed in 2014 at a market value of USD$85 M (PHP2/share) and reached a market cap of over USD$3 B USD two years after listing (PHP70/share).

DD’s valuation mid-2016 was overhyped and overvalued.

From mid-2016 to late 2018 the share price fell by approximately 75%. Last year the stock bottomed at PHP17.2 despite fundamentals improving drastically between 2016 and 2018.

We value DD on a blended a) P/E multiple and b) Cap Rate basis.

DD recently traded around PHP 22/share and is currently valued at 9.5x FY20 P/E, a steep discount to its industry peers. Assuming the company achieves PHP10.8 B in recurring revenues by FY20 the market is currently valuing the company at a 21% Cap Rate vs 7% for its primary peer Sm Prime Holdings (SMPH PM). DD should trade at a discount to SM (long track record, higher liquidity, included in PSE index) but the gap is too wide.

We argue DD should trade at a) 15x P/E and b) 10% cap rate. Combining the two valuation methods we arrive at a blended Fair Value of PHP 40.31/share, or 83% upside from current levels.

The founders control 70% of the company and expect to grow the current USD$1.2B market cap exponentially the coming 3-5 years. DoubleDragon is a potential multi-bagger in the making.

1. FY18 results publication by early April 2019
2. Delivery of 100 operating CityMalls by FY20
3. The passing of workable REIT law
4. Delivery of PHP5.5B FY20 profit target
5. FCF inflection point coming closer in FY20
6. Re-discovery by sell-side firms as index inclusion looms
7. Visibility into FY21-FY25 dividend potential

Footnote: *Injap was reported as having USD$1 B in assets by Forbes in 2017, as the share price of DD has fallen we estimate this has dropped to approximately USD$ 400-500 M, which would still rank him among the top-25 wealthiest individuals in the Philippines.

2. Zozo: Looks Like There’s a Dead Cat in This Bouncy Zozosuit

ZOZO Inc (3092 JP) is up almost 30% since its mid February low and roughly flat compared to the date of Michael Causton and our recent collaborative in-depth look (Zozo: A Shooting Star Shooting Itself in the Foot) at the company’s structural problems.

We believe this presents an excellent opportunity to look at the stock on the short side again.

We would also refer readers to an article from Livedoor news which delves into the company’s issues from a local industry insider’s perspective. The article is in Japanese and the google translated version is almost unintelligible but we summarise the salient points and our perspective below.

3. CyberAgent (4751 JP): Key Takeaways from Our Discussion with the IR Team

Our recent conversation with CyberAgent’s IR team suggests that a significant improvement in the OP margin is unlikely in the next few quarters. The OP margins of both Game business and the Internet Advertisement, while likely to improve gradually, are likely to remain low compared to recent history due to higher advertising and personnel costs.

Upfront investments in AbemaTV are likely to continue until the target of 10m Weekly Average Users (WAU) is met, which could take a year or more. The company expects around 50% of AbemaTV revenue to eventually come from premium users, which seems to be a shift in strategy, from a “free” service towards a more hybrid model.

CyberAgent’s share price closed at ¥4,050 on Tuesday, up 7.1% from its previous close, following the news that the stock was added to the Goldman Sachs’ conviction list with a reiterated buy rating. However, even before this, CyberAgent’s share price had been on a steady increase over the past two weeks (+29.0%), recovering from a one-year low in early February. This increase, despite rather mediocre 1Q results, a downward revision of OP guidance, and lack of any major short term catalysts is an indication that the market deems CyberAgent to be undervalued – mainly on the AbemaTV front.

4. Dongzheng Auto Finance (东正汽车金融) Pre-IPO Review – Dependent on Dealership Network for Growth

Dongzheng Automotive Finance (2718 HK) is looking to raise approximately US$300 – 500m in its upcoming IPO. 

DAF is a fast growing auto finance company which acquires customers through a network of dealership around China. Its net interest income grew by 66% CAGR from FY2016 to FY2018 while net fees/comms income and profit grew by 39.6% and 61% CAGR over the same period.

However, most of its growth originated from ZhengTong dealers and joint promotion arrangement. Excluding loans from joint promotion arrangement, gross outstanding loan had only grown by 12% CAGR.

In this insight, we will look at the company’s business, analyze the competitive landscape, provide thoughts on valuation, and some questions for management.

5. Up Fintech (Tiger Brokers) IPO Quick Take – It’s Not like Futu, Won’t Perform like It Either

Up Fintech (TIGR US) plans to raise up to US$91m in its US listing. The company counts Xiaomi Corp (1810 HK) and Interactive Brokers Group, Inc (IBKR US) as its main investors.

In my earlier insights, I commented about Tiger’s reliance on IBKR and compared its operations with Futu Holdings Ltd (FHL US):

• Up Fintech (Tiger Brokers) Pre-IPO Quick Note – Much Too Reliant on IBKR
• Futu Holdings IPO Quick Note – Comparison with Tiger Brokers – Same Market, Different Economics

In this insight, I’ll run the deal through our framework and comment on valuations.

In this briefing:

1. CyberAgent (4751 JP): Key Takeaways from Our Discussion with the IR Team
2. Dongzheng Auto Finance (东正汽车金融) Pre-IPO Review – Dependent on Dealership Network for Growth
3. Up Fintech (Tiger Brokers) IPO Quick Take – It’s Not like Futu, Won’t Perform like It Either
4. Korean Stubs Spotlight: A Pair Trade Between Hyosung Corp and Hyosung TNC
5. Lippo Malls REIT – Acquisition of Lippo Mall Puri Announced. Dilutive Rights Issue Coming.

1. CyberAgent (4751 JP): Key Takeaways from Our Discussion with the IR Team

Our recent conversation with CyberAgent’s IR team suggests that a significant improvement in the OP margin is unlikely in the next few quarters. The OP margins of both Game business and the Internet Advertisement, while likely to improve gradually, are likely to remain low compared to recent history due to higher advertising and personnel costs.

Upfront investments in AbemaTV are likely to continue until the target of 10m Weekly Average Users (WAU) is met, which could take a year or more. The company expects around 50% of AbemaTV revenue to eventually come from premium users, which seems to be a shift in strategy, from a “free” service towards a more hybrid model.

CyberAgent’s share price closed at ¥4,050 on Tuesday, up 7.1% from its previous close, following the news that the stock was added to the Goldman Sachs’ conviction list with a reiterated buy rating. However, even before this, CyberAgent’s share price had been on a steady increase over the past two weeks (+29.0%), recovering from a one-year low in early February. This increase, despite rather mediocre 1Q results, a downward revision of OP guidance, and lack of any major short term catalysts is an indication that the market deems CyberAgent to be undervalued – mainly on the AbemaTV front.

2. Dongzheng Auto Finance (东正汽车金融) Pre-IPO Review – Dependent on Dealership Network for Growth

Dongzheng Automotive Finance (2718 HK) is looking to raise approximately US$300 – 500m in its upcoming IPO. 

DAF is a fast growing auto finance company which acquires customers through a network of dealership around China. Its net interest income grew by 66% CAGR from FY2016 to FY2018 while net fees/comms income and profit grew by 39.6% and 61% CAGR over the same period.

However, most of its growth originated from ZhengTong dealers and joint promotion arrangement. Excluding loans from joint promotion arrangement, gross outstanding loan had only grown by 12% CAGR.

In this insight, we will look at the company’s business, analyze the competitive landscape, provide thoughts on valuation, and some questions for management.

3. Up Fintech (Tiger Brokers) IPO Quick Take – It’s Not like Futu, Won’t Perform like It Either

Up Fintech (TIGR US) plans to raise up to US$91m in its US listing. The company counts Xiaomi Corp (1810 HK) and Interactive Brokers Group, Inc (IBKR US) as its main investors.

In my earlier insights, I commented about Tiger’s reliance on IBKR and compared its operations with Futu Holdings Ltd (FHL US):

• Up Fintech (Tiger Brokers) Pre-IPO Quick Note – Much Too Reliant on IBKR
• Futu Holdings IPO Quick Note – Comparison with Tiger Brokers – Same Market, Different Economics

In this insight, I’ll run the deal through our framework and comment on valuations.

4. Korean Stubs Spotlight: A Pair Trade Between Hyosung Corp and Hyosung TNC

In this report, we provide an analysis of our pair trade idea between Hyosung Corporation (004800 KS) (market cap of 1,612 billion won) and Hyosung TNC Co Ltd (298020 KS) (market cap of 712 billion won). Our strategy will be to be long Hyosung TNC and be short Hyosung Corp. 

In the past six months, Hyosung Corp is up 62% while Hyosung TNC is down 12%. We believe this price divergence has been excessive. The four major reasons why Hyosung Corp’s share price has surged in the past six months are mentioned below. There is a case to be made that the market has already factored into Hyosung Corp’s share price many of the positive factors mentioned below. 

• Excellent dividends 
• Corporate activism related stock 
• Strong financial results 
• Timing of the increased insider ownerships/Completion of tender offers

Hyosung TNC has underperformed the market as well as Hyosung Corp in the past six months. However, Hyosung TNC appears to be a turnaround story driven by the following factors: 

• Decline in raw material prices 
• Aggressive spandex investment in India 
• Stabilization of spandex prices in 2H19 
• Consolidation of the global spandex industry

5. Lippo Malls REIT – Acquisition of Lippo Mall Puri Announced. Dilutive Rights Issue Coming.

Lippo Malls Indonesia Retail Trust (LMRT SP) (“LMIRT”) today announced the acquisition of Lippo Mall Puri from its sponsor PT Lippo Karawaci Tbk for a consideration of Rp.3,700.0 bil (S$354.7 mil).

There is a significant amount of vendor support provided by Lippo Group to improve the net property income and NPI yield of Lippo Mall Puri. If we exclude the vendor support from the target NPI, the NPI yield excluding vendor support will just be 6.52% per annum.

The transaction is DPU and yield dilutive. The resultant DPU post-transaction will decline from 2.05 S-cents to 1.61 S-cents / 1.42 S-cents. Distribution yield will also fall from 10.25% to 9.28% / 8.85% based on TERP.

The transaction could also potentially result in LMIRT’s gearing increasing from 34.6% to 39.0% which will worsen its balance sheet strength and credit standings. 

In view of the unattractive acquisition and potential EFR dilution, investors should avoid LMIRT for now and wait for opportunity to enter with a greater margin of safety. 

In this briefing:

1. Dongzheng Auto Finance (东正汽车金融) Pre-IPO Review – Dependent on Dealership Network for Growth
2. Up Fintech (Tiger Brokers) IPO Quick Take – It’s Not like Futu, Won’t Perform like It Either
3. Korean Stubs Spotlight: A Pair Trade Between Hyosung Corp and Hyosung TNC
4. Lippo Malls REIT – Acquisition of Lippo Mall Puri Announced. Dilutive Rights Issue Coming.
5. NIO (NIO): NIO Is Essentially a Distributor, Not an OEM…3 Things to Keep in Mind at Lock-Up Expiry

1. Dongzheng Auto Finance (东正汽车金融) Pre-IPO Review – Dependent on Dealership Network for Growth

Dongzheng Automotive Finance (2718 HK) is looking to raise approximately US$300 – 500m in its upcoming IPO. 

DAF is a fast growing auto finance company which acquires customers through a network of dealership around China. Its net interest income grew by 66% CAGR from FY2016 to FY2018 while net fees/comms income and profit grew by 39.6% and 61% CAGR over the same period.

However, most of its growth originated from ZhengTong dealers and joint promotion arrangement. Excluding loans from joint promotion arrangement, gross outstanding loan had only grown by 12% CAGR.

In this insight, we will look at the company’s business, analyze the competitive landscape, provide thoughts on valuation, and some questions for management.

2. Up Fintech (Tiger Brokers) IPO Quick Take – It’s Not like Futu, Won’t Perform like It Either

Up Fintech (TIGR US) plans to raise up to US$91m in its US listing. The company counts Xiaomi Corp (1810 HK) and Interactive Brokers Group, Inc (IBKR US) as its main investors.

In my earlier insights, I commented about Tiger’s reliance on IBKR and compared its operations with Futu Holdings Ltd (FHL US):

• Up Fintech (Tiger Brokers) Pre-IPO Quick Note – Much Too Reliant on IBKR
• Futu Holdings IPO Quick Note – Comparison with Tiger Brokers – Same Market, Different Economics

In this insight, I’ll run the deal through our framework and comment on valuations.

3. Korean Stubs Spotlight: A Pair Trade Between Hyosung Corp and Hyosung TNC

In this report, we provide an analysis of our pair trade idea between Hyosung Corporation (004800 KS) (market cap of 1,612 billion won) and Hyosung TNC Co Ltd (298020 KS) (market cap of 712 billion won). Our strategy will be to be long Hyosung TNC and be short Hyosung Corp. 

In the past six months, Hyosung Corp is up 62% while Hyosung TNC is down 12%. We believe this price divergence has been excessive. The four major reasons why Hyosung Corp’s share price has surged in the past six months are mentioned below. There is a case to be made that the market has already factored into Hyosung Corp’s share price many of the positive factors mentioned below. 

• Excellent dividends 
• Corporate activism related stock 
• Strong financial results 
• Timing of the increased insider ownerships/Completion of tender offers

Hyosung TNC has underperformed the market as well as Hyosung Corp in the past six months. However, Hyosung TNC appears to be a turnaround story driven by the following factors: 

• Decline in raw material prices 
• Aggressive spandex investment in India 
• Stabilization of spandex prices in 2H19 
• Consolidation of the global spandex industry

4. Lippo Malls REIT – Acquisition of Lippo Mall Puri Announced. Dilutive Rights Issue Coming.

Lippo Malls Indonesia Retail Trust (LMRT SP) (“LMIRT”) today announced the acquisition of Lippo Mall Puri from its sponsor PT Lippo Karawaci Tbk for a consideration of Rp.3,700.0 bil (S$354.7 mil).

There is a significant amount of vendor support provided by Lippo Group to improve the net property income and NPI yield of Lippo Mall Puri. If we exclude the vendor support from the target NPI, the NPI yield excluding vendor support will just be 6.52% per annum.

The transaction is DPU and yield dilutive. The resultant DPU post-transaction will decline from 2.05 S-cents to 1.61 S-cents / 1.42 S-cents. Distribution yield will also fall from 10.25% to 9.28% / 8.85% based on TERP.

The transaction could also potentially result in LMIRT’s gearing increasing from 34.6% to 39.0% which will worsen its balance sheet strength and credit standings. 

In view of the unattractive acquisition and potential EFR dilution, investors should avoid LMIRT for now and wait for opportunity to enter with a greater margin of safety. 

5. NIO (NIO): NIO Is Essentially a Distributor, Not an OEM…3 Things to Keep in Mind at Lock-Up Expiry

NIO’s 6-month Lock-up expires today and as of the time of this writing the stock is down by 6.6% from the closing price on Friday, March 8.  The stock’s share overhang issue have been well covered on the Smartkarma platform by other analysts (see NIO Post-CBS Rally Making TSLA Valuation a Grand Bargain (Price Target =$3) , NIO (NIO US): Lock-Up Expiry – This Could Get Messy) so while we do not see a need to rehash those details in this insight, here are 3 things that we believe every NIO investor and would-be investor should keep in mind about the company especially if one wants to play the Tesla vs. NIO scenario:

1. Licensing/Regulatory Risk – NIO has an autonomous driving testing license but no EV manufacturing license.  An EV manufacturing license issued by the NDRC is required for EV manufacturers to market and sell their products but a 100k unit scale is a main prerequisite.  This is a key reason why NIO entered into a 5-year outsourcing relationship with JAC.  While this relationship was assumed to be temporary, there could be many hurdles for NIO to actually obtain a license in the coming years should it decide to invest in production facilities again.
2. Core IP Held by Suppliers – Powertrain technology is held by CATL and the State-owned JAC is listed as the ES8’s manufacturer on the Ministry of Information and Technology website.  Continental AG designs NIO’s vehicle suspension and chassis.  It is also unclear how much actual development work other than exterior/cockpit design is done in-house at NIO based on publicly available information.  Without scale and IP we believe NIO’s bargaining position with its suppliers is weak and displays stronger characteristics of a distributor than a final assembler. 
3. Low ASP, low margins – NIO’s ASP on the ES8 from what we have seen was $64k per unit in 2018 and $63k per unit in 1Q19 while Tesla’s Model X ASP is about $100k per unit.  There is a reason why gross margin at NIO is razor thin and it has more to do with low price point than low volumes in our view.   

Given differences between the U.S. and China operating environment for EV makers, we believe Tesla is not a good equity valuation comp for NIO, which is basically a distributor in our view.  As such, long term value drivers would most likely come from aftermarket and service revenues, while short-mid term value drivers seem elusive especially in the aftermath of the company’s decision to scrap its production plant investment plans in Shanghai.

The NIO ES8