Consumer

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

In this briefing:

1. Up Fintech (Tiger Brokers) IPO Quick Take – It’s Not like Futu, Won’t Perform like It Either
2. Korean Stubs Spotlight: A Pair Trade Between Hyosung Corp and Hyosung TNC
3. Lippo Malls REIT – Acquisition of Lippo Mall Puri Announced. Dilutive Rights Issue Coming.
4. NIO (NIO): NIO Is Essentially a Distributor, Not an OEM…3 Things to Keep in Mind at Lock-Up Expiry
5. Nongshim Stub Trade: Sub Moving Up on New Hit Product, Now at Near -2σ

1. 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.

2. 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

3. 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. 

4. 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

5. Nongshim Stub Trade: Sub Moving Up on New Hit Product, Now at Near -2σ

• Shin Ramyun non-frying noodle dramatically reversed Sub’s fortune. Local street starts believing Sub will hit a ₩100bil OP milestone this year. Local institutions began to scoop up Sub shares since a week ago. Yesterday, local pension/foreign money came in. This led to the largest Sub pushing in many weeks. Holdco/Sub are not at near -2σ.
• Street consensus on Sub’s FY19e OP is already upwardly adjusted to ₩106bil. On this, Sub is already at a 17x earnings. ₩106bil OP is immaturely aggressive. 17x isn’t particularly cheap given Sub’s FY18 year-end PER (18.4x).
• Valuation wise, Sub price should be pressed down at this level until more dramatic and tangible sales data come out. Holdco discount is still hovering at 50% to NAV. I’d make a stub trade here. Holdco liquidity can be an issue.

In this briefing:

1. Korean Stubs Spotlight: A Pair Trade Between Hyosung Corp and Hyosung TNC
2. Lippo Malls REIT – Acquisition of Lippo Mall Puri Announced. Dilutive Rights Issue Coming.
3. NIO (NIO): NIO Is Essentially a Distributor, Not an OEM…3 Things to Keep in Mind at Lock-Up Expiry
4. Nongshim Stub Trade: Sub Moving Up on New Hit Product, Now at Near -2σ
5. HK Connect Discovery Weekly: PICC, Xinyi Solar (2019-03-08)

1. 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

2. 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. 

3. 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

4. Nongshim Stub Trade: Sub Moving Up on New Hit Product, Now at Near -2σ

• Shin Ramyun non-frying noodle dramatically reversed Sub’s fortune. Local street starts believing Sub will hit a ₩100bil OP milestone this year. Local institutions began to scoop up Sub shares since a week ago. Yesterday, local pension/foreign money came in. This led to the largest Sub pushing in many weeks. Holdco/Sub are not at near -2σ.
• Street consensus on Sub’s FY19e OP is already upwardly adjusted to ₩106bil. On this, Sub is already at a 17x earnings. ₩106bil OP is immaturely aggressive. 17x isn’t particularly cheap given Sub’s FY18 year-end PER (18.4x).
• Valuation wise, Sub price should be pressed down at this level until more dramatic and tangible sales data come out. Holdco discount is still hovering at 50% to NAV. I’d make a stub trade here. Holdco liquidity can be an issue.

5. HK Connect Discovery Weekly: PICC, Xinyi Solar (2019-03-08)

In our Discover HK Connect series, we aim to help our investors understand the flow of southbound trades via the Hong Kong Connect, as analyzed by our proprietary data engine. We will discuss the stocks that experienced the most inflow and outflow by mainland investors in the past seven days.

We split the stocks eligible for the Hong Kong Connect trade into three groups: component stocks in the HSCEI index, stocks with a market capitalization between USD 1 billion and USD 5 billion, and stocks with a market capitalization between USD 500 million and USD 1 billion.

In this insight, we will highlight PICC and Xinyi Solar.

In this briefing:

1. Japan Tobacco: No Dire Consequences Despite Late Entry to Heated Tobacco
2. Tesla’s Plan B 2.0; Y Not
3. Last Week in GER Event-Driven Research: Myob, Rakuten, Delta, Graincorp and Hopewell Holding
4. Meituan Dianping (3690 HK): Lock-Up Expiry – Good 4Q18 Required
5. Omron into the Nikkei 225, Pioneer Out

1. Japan Tobacco: No Dire Consequences Despite Late Entry to Heated Tobacco

• Late entry to Japanese heated tobacco market resulted in Japan Tobacco (2914 JP) losing market share to peers
• New product launches to give Japan Tobacco a fighting chance against IQOS
• Early maturity of heated tobacco in Japan: a blessing in disguise for Japan Tobacco
• Pricing power is expected to be back on track in future
• PloomTECH will soon be ready to compete with IQOS at a global level
• More product offerings targeting different customer needs in reduced risk products category
• International segment volume growth driven by global flagship brands and acquisitions
• Market unjustly penalising Japan Tobacco for the early maturity of heated tobacco segment
• Transformation of dividend yield from industry worst to industry best
• Undervalued at 10.09x EV/Forward EBIT: DCF target price yields 21.8% upside

2. Tesla’s Plan B 2.0; Y Not

Employees, customers, suppliers, and investors still are reeling over Tesla’s startling decision, announced February 28th, to move immediately to online-only sales, a dramatic reversal of strategy still in place as of the 2018 10-K filing on February 19th in which the company had touted growth via recent store expansions and substantial additions planned globally going forward. 

Tesla explained that even with now three substantial price cuts on all its cars and now three significant layoffs since last summer, it must slash costs even more to support the launch of its long overdue $35,000 base version of the flagship Model 3 (see my report Tesla’s New Plan: Buy Before You Try).

I warned clients that Tesla’s stunning strategy reversal seemed driven more by alarming cash consumption plus much weaker than expected sales and profit margins already apparent in what is shaping up to be a disastrous first quarter–troubling trends that may continue. However, as I noted, it also costs money to close stores, get out of leases (good luck with that), fire employees and redistribute remaining staff, and sell off fairly new equipment at steep losses.

Not to mention that shiny new Tesla stores suddenly going dark may appear ominously similar to retail stores going out of business seen increasingly all over the country–a bad look for Tesla, especially given customers already are spooked by its escalating quality, reliability, and service problems (see “Musk and Weird Q3 Developments Are Driving Investors to Telsa’s Rivals” and “Tesla – Dave’s Not Here, and Musk Won’t Leave” and “Tesla: Down to the Wire” and Tesla – Truth and Consequences).

Tesla probably hasn’t seen the light–it’s just received as of March 1st a desperately needed cash infusion by finally securing overdue funding for Tesla Shanghai Gigafactory 3 which has been under construction since January (see Tesla – Shanghai Surprise). Unfortunately, the four banks in Tesla’s new “China Loan Agreement,” which the company announced on Thursday with a rare 8-K filing, committed only to fund a one-year limited purpose loan for up to 3.5 billion yuan ($521 million). This is barely enough time or cash to get the Shanghai assembly plant up and running–much less also stave off the current cash crunch.

But Tesla must keep up appearances as well as bolster its liquidity through at least the end of the quarter as it gets ready to reveal Thursday evening the long-awaited Model Y–though I suspect this won’t result in a massive burst of cash from new reservations as Tesla hopes.

Years of robbing Peter to pay Paul hasn’t produced a sustainable growth model for Tesla, mostly because its business strategy still is better described as, “Wow, we didn’t see that coming.”

Continue reading for Bond Angle analysis.

3. Last Week in GER Event-Driven Research: Myob, Rakuten, Delta, Graincorp and Hopewell Holding

In this version of the GER weekly EVENTS research wrap, we contend that investors should cash out on the MYOB Group Ltd (MYO AU) deal and assess the NAV discount potential for Rakuten Inc (4755 JP) post the IPO launch of Lyft Inc (0812823D US) – of which Rakuten has a 13% stake. Moreover, we dig into the deals for Delta Electronics Thai (DELTA TB) , Graincorp Ltd A (GNC AU) and Hopewell Holdings (54 HK)

More details can be found below. 

Best of luck for the new week – Rickin, Venkat and Arun

4. Meituan Dianping (3690 HK): Lock-Up Expiry – Good 4Q18 Required

Meituan Dianping (3690 HK)‘s shares currently trade 18% below its IPO price of HK$69.00 per share. Meituan will announce its 4Q18 results on Monday, 11 March 2019, after market close. Notably, Meituan’s six-month lock-up period expires on 19 March 2019.

5. Omron into the Nikkei 225, Pioneer Out

Friday 8 March after the close, the Nikkei announced that because the third party share sale of Pioneer Corp (6773 JP)  had been completed, it would be deleted from the Nikkei 225 Average (and the Nikkei 500 Index). Omron Corp (6645 JP) will replace Pioneer in the Nikkei 225 Average, with a deemed par value of 50 yen per share.

The date for this index deletion and inclusion event is the 15th of March, as per the schedule of the February 19th announcement as to how the Pioneer event would be treated. 

This affords special sits/events followers a couple of different events to look at. 

In this briefing:

1. Lippo Malls REIT – Acquisition of Lippo Mall Puri Announced. Dilutive Rights Issue Coming.
2. NIO (NIO): NIO Is Essentially a Distributor, Not an OEM…3 Things to Keep in Mind at Lock-Up Expiry
3. Nongshim Stub Trade: Sub Moving Up on New Hit Product, Now at Near -2σ
4. HK Connect Discovery Weekly: PICC, Xinyi Solar (2019-03-08)
5. Short Haidilao (海底捞) Before Earning & Lock-Up Expiry

1. 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. 

2. 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

3. Nongshim Stub Trade: Sub Moving Up on New Hit Product, Now at Near -2σ

• Shin Ramyun non-frying noodle dramatically reversed Sub’s fortune. Local street starts believing Sub will hit a ₩100bil OP milestone this year. Local institutions began to scoop up Sub shares since a week ago. Yesterday, local pension/foreign money came in. This led to the largest Sub pushing in many weeks. Holdco/Sub are not at near -2σ.
• Street consensus on Sub’s FY19e OP is already upwardly adjusted to ₩106bil. On this, Sub is already at a 17x earnings. ₩106bil OP is immaturely aggressive. 17x isn’t particularly cheap given Sub’s FY18 year-end PER (18.4x).
• Valuation wise, Sub price should be pressed down at this level until more dramatic and tangible sales data come out. Holdco discount is still hovering at 50% to NAV. I’d make a stub trade here. Holdco liquidity can be an issue.

4. HK Connect Discovery Weekly: PICC, Xinyi Solar (2019-03-08)

In our Discover HK Connect series, we aim to help our investors understand the flow of southbound trades via the Hong Kong Connect, as analyzed by our proprietary data engine. We will discuss the stocks that experienced the most inflow and outflow by mainland investors in the past seven days.

We split the stocks eligible for the Hong Kong Connect trade into three groups: component stocks in the HSCEI index, stocks with a market capitalization between USD 1 billion and USD 5 billion, and stocks with a market capitalization between USD 500 million and USD 1 billion.

In this insight, we will highlight PICC and Xinyi Solar.

5. Short Haidilao (海底捞) Before Earning & Lock-Up Expiry

Haidilao International, the largest Chinese cuisine player by valuation, was listed on September 26th last year and lock-up expiry will be on March 26th. The stock has returned 24% since listing. 

• As it heads into lock-up expiry, we will examine Haidilao’s shareholder structure and potential shares up for sale.
• Haidilao was included in the Hong Kong Connect Scheme on December 10th, 2018 and shares held by mainland investors have been consistently increasing.
• But we think Haidilao’s valuation has built in a perfect growth scenario.
• Risk of de-rating for Haidilao warrants a short position.

Our previous coverage on Meituan Dianping

• Haidilao IPO First Glance: Legendary Hot Pot Restaurant that Will Be Hot (Part 1)
• Haidilao (海底捞) IPO: Superior Metrics in a Scalable Segment (Part 2)
• Haidilao (海底捞) IPO: Near Term Rapid Growth but Deceleration Ahead (Part 3)
• Haidilao (海底捞) IPO: Appealing Valuation at the Low End for a Branded National Champion (Part 4) 
• Haidilao (海底捞) Post-IPO Trading Update: Not Much Upside from High End, Lessons from Meituan

In this briefing:

1. NIO (NIO): NIO Is Essentially a Distributor, Not an OEM…3 Things to Keep in Mind at Lock-Up Expiry
2. Nongshim Stub Trade: Sub Moving Up on New Hit Product, Now at Near -2σ
3. HK Connect Discovery Weekly: PICC, Xinyi Solar (2019-03-08)
4. Short Haidilao (海底捞) Before Earning & Lock-Up Expiry
5. Japan Tobacco: No Dire Consequences Despite Late Entry to Heated Tobacco

1. 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

2. Nongshim Stub Trade: Sub Moving Up on New Hit Product, Now at Near -2σ

• Shin Ramyun non-frying noodle dramatically reversed Sub’s fortune. Local street starts believing Sub will hit a ₩100bil OP milestone this year. Local institutions began to scoop up Sub shares since a week ago. Yesterday, local pension/foreign money came in. This led to the largest Sub pushing in many weeks. Holdco/Sub are not at near -2σ.
• Street consensus on Sub’s FY19e OP is already upwardly adjusted to ₩106bil. On this, Sub is already at a 17x earnings. ₩106bil OP is immaturely aggressive. 17x isn’t particularly cheap given Sub’s FY18 year-end PER (18.4x).
• Valuation wise, Sub price should be pressed down at this level until more dramatic and tangible sales data come out. Holdco discount is still hovering at 50% to NAV. I’d make a stub trade here. Holdco liquidity can be an issue.

3. HK Connect Discovery Weekly: PICC, Xinyi Solar (2019-03-08)

In our Discover HK Connect series, we aim to help our investors understand the flow of southbound trades via the Hong Kong Connect, as analyzed by our proprietary data engine. We will discuss the stocks that experienced the most inflow and outflow by mainland investors in the past seven days.

We split the stocks eligible for the Hong Kong Connect trade into three groups: component stocks in the HSCEI index, stocks with a market capitalization between USD 1 billion and USD 5 billion, and stocks with a market capitalization between USD 500 million and USD 1 billion.

In this insight, we will highlight PICC and Xinyi Solar.

4. Short Haidilao (海底捞) Before Earning & Lock-Up Expiry

Haidilao International, the largest Chinese cuisine player by valuation, was listed on September 26th last year and lock-up expiry will be on March 26th. The stock has returned 24% since listing. 

• As it heads into lock-up expiry, we will examine Haidilao’s shareholder structure and potential shares up for sale.
• Haidilao was included in the Hong Kong Connect Scheme on December 10th, 2018 and shares held by mainland investors have been consistently increasing.
• But we think Haidilao’s valuation has built in a perfect growth scenario.
• Risk of de-rating for Haidilao warrants a short position.

Our previous coverage on Meituan Dianping

• Haidilao IPO First Glance: Legendary Hot Pot Restaurant that Will Be Hot (Part 1)
• Haidilao (海底捞) IPO: Superior Metrics in a Scalable Segment (Part 2)
• Haidilao (海底捞) IPO: Near Term Rapid Growth but Deceleration Ahead (Part 3)
• Haidilao (海底捞) IPO: Appealing Valuation at the Low End for a Branded National Champion (Part 4) 
• Haidilao (海底捞) Post-IPO Trading Update: Not Much Upside from High End, Lessons from Meituan

5. Japan Tobacco: No Dire Consequences Despite Late Entry to Heated Tobacco

• Late entry to Japanese heated tobacco market resulted in Japan Tobacco (2914 JP) losing market share to peers
• New product launches to give Japan Tobacco a fighting chance against IQOS
• Early maturity of heated tobacco in Japan: a blessing in disguise for Japan Tobacco
• Pricing power is expected to be back on track in future
• PloomTECH will soon be ready to compete with IQOS at a global level
• More product offerings targeting different customer needs in reduced risk products category
• International segment volume growth driven by global flagship brands and acquisitions
• Market unjustly penalising Japan Tobacco for the early maturity of heated tobacco segment
• Transformation of dividend yield from industry worst to industry best
• Undervalued at 10.09x EV/Forward EBIT: DCF target price yields 21.8% upside

In this briefing:

1. Nongshim Stub Trade: Sub Moving Up on New Hit Product, Now at Near -2σ
2. HK Connect Discovery Weekly: PICC, Xinyi Solar (2019-03-08)
3. Short Haidilao (海底捞) Before Earning & Lock-Up Expiry
4. Japan Tobacco: No Dire Consequences Despite Late Entry to Heated Tobacco
5. Tesla’s Plan B 2.0; Y Not

1. Nongshim Stub Trade: Sub Moving Up on New Hit Product, Now at Near -2σ

• Shin Ramyun non-frying noodle dramatically reversed Sub’s fortune. Local street starts believing Sub will hit a ₩100bil OP milestone this year. Local institutions began to scoop up Sub shares since a week ago. Yesterday, local pension/foreign money came in. This led to the largest Sub pushing in many weeks. Holdco/Sub are not at near -2σ.
• Street consensus on Sub’s FY19e OP is already upwardly adjusted to ₩106bil. On this, Sub is already at a 17x earnings. ₩106bil OP is immaturely aggressive. 17x isn’t particularly cheap given Sub’s FY18 year-end PER (18.4x).
• Valuation wise, Sub price should be pressed down at this level until more dramatic and tangible sales data come out. Holdco discount is still hovering at 50% to NAV. I’d make a stub trade here. Holdco liquidity can be an issue.

2. HK Connect Discovery Weekly: PICC, Xinyi Solar (2019-03-08)

In our Discover HK Connect series, we aim to help our investors understand the flow of southbound trades via the Hong Kong Connect, as analyzed by our proprietary data engine. We will discuss the stocks that experienced the most inflow and outflow by mainland investors in the past seven days.

We split the stocks eligible for the Hong Kong Connect trade into three groups: component stocks in the HSCEI index, stocks with a market capitalization between USD 1 billion and USD 5 billion, and stocks with a market capitalization between USD 500 million and USD 1 billion.

In this insight, we will highlight PICC and Xinyi Solar.

3. Short Haidilao (海底捞) Before Earning & Lock-Up Expiry

Haidilao International, the largest Chinese cuisine player by valuation, was listed on September 26th last year and lock-up expiry will be on March 26th. The stock has returned 24% since listing. 

• As it heads into lock-up expiry, we will examine Haidilao’s shareholder structure and potential shares up for sale.
• Haidilao was included in the Hong Kong Connect Scheme on December 10th, 2018 and shares held by mainland investors have been consistently increasing.
• But we think Haidilao’s valuation has built in a perfect growth scenario.
• Risk of de-rating for Haidilao warrants a short position.

Our previous coverage on Meituan Dianping

• Haidilao IPO First Glance: Legendary Hot Pot Restaurant that Will Be Hot (Part 1)
• Haidilao (海底捞) IPO: Superior Metrics in a Scalable Segment (Part 2)
• Haidilao (海底捞) IPO: Near Term Rapid Growth but Deceleration Ahead (Part 3)
• Haidilao (海底捞) IPO: Appealing Valuation at the Low End for a Branded National Champion (Part 4) 
• Haidilao (海底捞) Post-IPO Trading Update: Not Much Upside from High End, Lessons from Meituan

4. Japan Tobacco: No Dire Consequences Despite Late Entry to Heated Tobacco

• Late entry to Japanese heated tobacco market resulted in Japan Tobacco (2914 JP) losing market share to peers
• New product launches to give Japan Tobacco a fighting chance against IQOS
• Early maturity of heated tobacco in Japan: a blessing in disguise for Japan Tobacco
• Pricing power is expected to be back on track in future
• PloomTECH will soon be ready to compete with IQOS at a global level
• More product offerings targeting different customer needs in reduced risk products category
• International segment volume growth driven by global flagship brands and acquisitions
• Market unjustly penalising Japan Tobacco for the early maturity of heated tobacco segment
• Transformation of dividend yield from industry worst to industry best
• Undervalued at 10.09x EV/Forward EBIT: DCF target price yields 21.8% upside

5. Tesla’s Plan B 2.0; Y Not

Employees, customers, suppliers, and investors still are reeling over Tesla’s startling decision, announced February 28th, to move immediately to online-only sales, a dramatic reversal of strategy still in place as of the 2018 10-K filing on February 19th in which the company had touted growth via recent store expansions and substantial additions planned globally going forward. 

Tesla explained that even with now three substantial price cuts on all its cars and now three significant layoffs since last summer, it must slash costs even more to support the launch of its long overdue $35,000 base version of the flagship Model 3 (see my report Tesla’s New Plan: Buy Before You Try).

I warned clients that Tesla’s stunning strategy reversal seemed driven more by alarming cash consumption plus much weaker than expected sales and profit margins already apparent in what is shaping up to be a disastrous first quarter–troubling trends that may continue. However, as I noted, it also costs money to close stores, get out of leases (good luck with that), fire employees and redistribute remaining staff, and sell off fairly new equipment at steep losses.

Not to mention that shiny new Tesla stores suddenly going dark may appear ominously similar to retail stores going out of business seen increasingly all over the country–a bad look for Tesla, especially given customers already are spooked by its escalating quality, reliability, and service problems (see “Musk and Weird Q3 Developments Are Driving Investors to Telsa’s Rivals” and “Tesla – Dave’s Not Here, and Musk Won’t Leave” and “Tesla: Down to the Wire” and Tesla – Truth and Consequences).

Tesla probably hasn’t seen the light–it’s just received as of March 1st a desperately needed cash infusion by finally securing overdue funding for Tesla Shanghai Gigafactory 3 which has been under construction since January (see Tesla – Shanghai Surprise). Unfortunately, the four banks in Tesla’s new “China Loan Agreement,” which the company announced on Thursday with a rare 8-K filing, committed only to fund a one-year limited purpose loan for up to 3.5 billion yuan ($521 million). This is barely enough time or cash to get the Shanghai assembly plant up and running–much less also stave off the current cash crunch.

But Tesla must keep up appearances as well as bolster its liquidity through at least the end of the quarter as it gets ready to reveal Thursday evening the long-awaited Model Y–though I suspect this won’t result in a massive burst of cash from new reservations as Tesla hopes.

Years of robbing Peter to pay Paul hasn’t produced a sustainable growth model for Tesla, mostly because its business strategy still is better described as, “Wow, we didn’t see that coming.”

Continue reading for Bond Angle analysis.

In this briefing:

1. HK Connect Discovery Weekly: PICC, Xinyi Solar (2019-03-08)
2. Short Haidilao (海底捞) Before Earning & Lock-Up Expiry
3. Japan Tobacco: No Dire Consequences Despite Late Entry to Heated Tobacco
4. Tesla’s Plan B 2.0; Y Not
5. Last Week in GER Event-Driven Research: Myob, Rakuten, Delta, Graincorp and Hopewell Holding

1. HK Connect Discovery Weekly: PICC, Xinyi Solar (2019-03-08)

In our Discover HK Connect series, we aim to help our investors understand the flow of southbound trades via the Hong Kong Connect, as analyzed by our proprietary data engine. We will discuss the stocks that experienced the most inflow and outflow by mainland investors in the past seven days.

We split the stocks eligible for the Hong Kong Connect trade into three groups: component stocks in the HSCEI index, stocks with a market capitalization between USD 1 billion and USD 5 billion, and stocks with a market capitalization between USD 500 million and USD 1 billion.

In this insight, we will highlight PICC and Xinyi Solar.

2. Short Haidilao (海底捞) Before Earning & Lock-Up Expiry

Haidilao International, the largest Chinese cuisine player by valuation, was listed on September 26th last year and lock-up expiry will be on March 26th. The stock has returned 24% since listing. 

• As it heads into lock-up expiry, we will examine Haidilao’s shareholder structure and potential shares up for sale.
• Haidilao was included in the Hong Kong Connect Scheme on December 10th, 2018 and shares held by mainland investors have been consistently increasing.
• But we think Haidilao’s valuation has built in a perfect growth scenario.
• Risk of de-rating for Haidilao warrants a short position.

Our previous coverage on Meituan Dianping

• Haidilao IPO First Glance: Legendary Hot Pot Restaurant that Will Be Hot (Part 1)
• Haidilao (海底捞) IPO: Superior Metrics in a Scalable Segment (Part 2)
• Haidilao (海底捞) IPO: Near Term Rapid Growth but Deceleration Ahead (Part 3)
• Haidilao (海底捞) IPO: Appealing Valuation at the Low End for a Branded National Champion (Part 4) 
• Haidilao (海底捞) Post-IPO Trading Update: Not Much Upside from High End, Lessons from Meituan

3. Japan Tobacco: No Dire Consequences Despite Late Entry to Heated Tobacco

• Late entry to Japanese heated tobacco market resulted in Japan Tobacco (2914 JP) losing market share to peers
• New product launches to give Japan Tobacco a fighting chance against IQOS
• Early maturity of heated tobacco in Japan: a blessing in disguise for Japan Tobacco
• Pricing power is expected to be back on track in future
• PloomTECH will soon be ready to compete with IQOS at a global level
• More product offerings targeting different customer needs in reduced risk products category
• International segment volume growth driven by global flagship brands and acquisitions
• Market unjustly penalising Japan Tobacco for the early maturity of heated tobacco segment
• Transformation of dividend yield from industry worst to industry best
• Undervalued at 10.09x EV/Forward EBIT: DCF target price yields 21.8% upside

4. Tesla’s Plan B 2.0; Y Not

Employees, customers, suppliers, and investors still are reeling over Tesla’s startling decision, announced February 28th, to move immediately to online-only sales, a dramatic reversal of strategy still in place as of the 2018 10-K filing on February 19th in which the company had touted growth via recent store expansions and substantial additions planned globally going forward. 

Tesla explained that even with now three substantial price cuts on all its cars and now three significant layoffs since last summer, it must slash costs even more to support the launch of its long overdue $35,000 base version of the flagship Model 3 (see my report Tesla’s New Plan: Buy Before You Try).

I warned clients that Tesla’s stunning strategy reversal seemed driven more by alarming cash consumption plus much weaker than expected sales and profit margins already apparent in what is shaping up to be a disastrous first quarter–troubling trends that may continue. However, as I noted, it also costs money to close stores, get out of leases (good luck with that), fire employees and redistribute remaining staff, and sell off fairly new equipment at steep losses.

Not to mention that shiny new Tesla stores suddenly going dark may appear ominously similar to retail stores going out of business seen increasingly all over the country–a bad look for Tesla, especially given customers already are spooked by its escalating quality, reliability, and service problems (see “Musk and Weird Q3 Developments Are Driving Investors to Telsa’s Rivals” and “Tesla – Dave’s Not Here, and Musk Won’t Leave” and “Tesla: Down to the Wire” and Tesla – Truth and Consequences).

Tesla probably hasn’t seen the light–it’s just received as of March 1st a desperately needed cash infusion by finally securing overdue funding for Tesla Shanghai Gigafactory 3 which has been under construction since January (see Tesla – Shanghai Surprise). Unfortunately, the four banks in Tesla’s new “China Loan Agreement,” which the company announced on Thursday with a rare 8-K filing, committed only to fund a one-year limited purpose loan for up to 3.5 billion yuan ($521 million). This is barely enough time or cash to get the Shanghai assembly plant up and running–much less also stave off the current cash crunch.

But Tesla must keep up appearances as well as bolster its liquidity through at least the end of the quarter as it gets ready to reveal Thursday evening the long-awaited Model Y–though I suspect this won’t result in a massive burst of cash from new reservations as Tesla hopes.

Years of robbing Peter to pay Paul hasn’t produced a sustainable growth model for Tesla, mostly because its business strategy still is better described as, “Wow, we didn’t see that coming.”

Continue reading for Bond Angle analysis.

5. Last Week in GER Event-Driven Research: Myob, Rakuten, Delta, Graincorp and Hopewell Holding

In this version of the GER weekly EVENTS research wrap, we contend that investors should cash out on the MYOB Group Ltd (MYO AU) deal and assess the NAV discount potential for Rakuten Inc (4755 JP) post the IPO launch of Lyft Inc (0812823D US) – of which Rakuten has a 13% stake. Moreover, we dig into the deals for Delta Electronics Thai (DELTA TB) , Graincorp Ltd A (GNC AU) and Hopewell Holdings (54 HK)

More details can be found below. 

Best of luck for the new week – Rickin, Venkat and Arun

In this briefing:

1. Short Haidilao (海底捞) Before Earning & Lock-Up Expiry
2. Japan Tobacco: No Dire Consequences Despite Late Entry to Heated Tobacco
3. Tesla’s Plan B 2.0; Y Not
4. Last Week in GER Event-Driven Research: Myob, Rakuten, Delta, Graincorp and Hopewell Holding
5. Meituan Dianping (3690 HK): Lock-Up Expiry – Good 4Q18 Required

1. Short Haidilao (海底捞) Before Earning & Lock-Up Expiry

Haidilao International, the largest Chinese cuisine player by valuation, was listed on September 26th last year and lock-up expiry will be on March 26th. The stock has returned 24% since listing. 

• As it heads into lock-up expiry, we will examine Haidilao’s shareholder structure and potential shares up for sale.
• Haidilao was included in the Hong Kong Connect Scheme on December 10th, 2018 and shares held by mainland investors have been consistently increasing.
• But we think Haidilao’s valuation has built in a perfect growth scenario.
• Risk of de-rating for Haidilao warrants a short position.

Our previous coverage on Meituan Dianping

• Haidilao IPO First Glance: Legendary Hot Pot Restaurant that Will Be Hot (Part 1)
• Haidilao (海底捞) IPO: Superior Metrics in a Scalable Segment (Part 2)
• Haidilao (海底捞) IPO: Near Term Rapid Growth but Deceleration Ahead (Part 3)
• Haidilao (海底捞) IPO: Appealing Valuation at the Low End for a Branded National Champion (Part 4) 
• Haidilao (海底捞) Post-IPO Trading Update: Not Much Upside from High End, Lessons from Meituan

2. Japan Tobacco: No Dire Consequences Despite Late Entry to Heated Tobacco

• Late entry to Japanese heated tobacco market resulted in Japan Tobacco (2914 JP) losing market share to peers
• New product launches to give Japan Tobacco a fighting chance against IQOS
• Early maturity of heated tobacco in Japan: a blessing in disguise for Japan Tobacco
• Pricing power is expected to be back on track in future
• PloomTECH will soon be ready to compete with IQOS at a global level
• More product offerings targeting different customer needs in reduced risk products category
• International segment volume growth driven by global flagship brands and acquisitions
• Market unjustly penalising Japan Tobacco for the early maturity of heated tobacco segment
• Transformation of dividend yield from industry worst to industry best
• Undervalued at 10.09x EV/Forward EBIT: DCF target price yields 21.8% upside

3. Tesla’s Plan B 2.0; Y Not

Employees, customers, suppliers, and investors still are reeling over Tesla’s startling decision, announced February 28th, to move immediately to online-only sales, a dramatic reversal of strategy still in place as of the 2018 10-K filing on February 19th in which the company had touted growth via recent store expansions and substantial additions planned globally going forward. 

Tesla explained that even with now three substantial price cuts on all its cars and now three significant layoffs since last summer, it must slash costs even more to support the launch of its long overdue $35,000 base version of the flagship Model 3 (see my report Tesla’s New Plan: Buy Before You Try).

I warned clients that Tesla’s stunning strategy reversal seemed driven more by alarming cash consumption plus much weaker than expected sales and profit margins already apparent in what is shaping up to be a disastrous first quarter–troubling trends that may continue. However, as I noted, it also costs money to close stores, get out of leases (good luck with that), fire employees and redistribute remaining staff, and sell off fairly new equipment at steep losses.

Not to mention that shiny new Tesla stores suddenly going dark may appear ominously similar to retail stores going out of business seen increasingly all over the country–a bad look for Tesla, especially given customers already are spooked by its escalating quality, reliability, and service problems (see “Musk and Weird Q3 Developments Are Driving Investors to Telsa’s Rivals” and “Tesla – Dave’s Not Here, and Musk Won’t Leave” and “Tesla: Down to the Wire” and Tesla – Truth and Consequences).

Tesla probably hasn’t seen the light–it’s just received as of March 1st a desperately needed cash infusion by finally securing overdue funding for Tesla Shanghai Gigafactory 3 which has been under construction since January (see Tesla – Shanghai Surprise). Unfortunately, the four banks in Tesla’s new “China Loan Agreement,” which the company announced on Thursday with a rare 8-K filing, committed only to fund a one-year limited purpose loan for up to 3.5 billion yuan ($521 million). This is barely enough time or cash to get the Shanghai assembly plant up and running–much less also stave off the current cash crunch.

But Tesla must keep up appearances as well as bolster its liquidity through at least the end of the quarter as it gets ready to reveal Thursday evening the long-awaited Model Y–though I suspect this won’t result in a massive burst of cash from new reservations as Tesla hopes.

Years of robbing Peter to pay Paul hasn’t produced a sustainable growth model for Tesla, mostly because its business strategy still is better described as, “Wow, we didn’t see that coming.”

Continue reading for Bond Angle analysis.

4. Last Week in GER Event-Driven Research: Myob, Rakuten, Delta, Graincorp and Hopewell Holding

In this version of the GER weekly EVENTS research wrap, we contend that investors should cash out on the MYOB Group Ltd (MYO AU) deal and assess the NAV discount potential for Rakuten Inc (4755 JP) post the IPO launch of Lyft Inc (0812823D US) – of which Rakuten has a 13% stake. Moreover, we dig into the deals for Delta Electronics Thai (DELTA TB) , Graincorp Ltd A (GNC AU) and Hopewell Holdings (54 HK)

More details can be found below. 

Best of luck for the new week – Rickin, Venkat and Arun

5. Meituan Dianping (3690 HK): Lock-Up Expiry – Good 4Q18 Required

Meituan Dianping (3690 HK)‘s shares currently trade 18% below its IPO price of HK$69.00 per share. Meituan will announce its 4Q18 results on Monday, 11 March 2019, after market close. Notably, Meituan’s six-month lock-up period expires on 19 March 2019.

In this briefing:

1. Tesla’s Plan B 2.0; Y Not
2. Last Week in GER Event-Driven Research: Myob, Rakuten, Delta, Graincorp and Hopewell Holding
3. Meituan Dianping (3690 HK): Lock-Up Expiry – Good 4Q18 Required
4. Omron into the Nikkei 225, Pioneer Out
5. M: Trimmed 2019-20E Earnings Forecast by 12% and 19%

1. Tesla’s Plan B 2.0; Y Not

Employees, customers, suppliers, and investors still are reeling over Tesla’s startling decision, announced February 28th, to move immediately to online-only sales, a dramatic reversal of strategy still in place as of the 2018 10-K filing on February 19th in which the company had touted growth via recent store expansions and substantial additions planned globally going forward. 

Tesla explained that even with now three substantial price cuts on all its cars and now three significant layoffs since last summer, it must slash costs even more to support the launch of its long overdue $35,000 base version of the flagship Model 3 (see my report Tesla’s New Plan: Buy Before You Try).

I warned clients that Tesla’s stunning strategy reversal seemed driven more by alarming cash consumption plus much weaker than expected sales and profit margins already apparent in what is shaping up to be a disastrous first quarter–troubling trends that may continue. However, as I noted, it also costs money to close stores, get out of leases (good luck with that), fire employees and redistribute remaining staff, and sell off fairly new equipment at steep losses.

Not to mention that shiny new Tesla stores suddenly going dark may appear ominously similar to retail stores going out of business seen increasingly all over the country–a bad look for Tesla, especially given customers already are spooked by its escalating quality, reliability, and service problems (see “Musk and Weird Q3 Developments Are Driving Investors to Telsa’s Rivals” and “Tesla – Dave’s Not Here, and Musk Won’t Leave” and “Tesla: Down to the Wire” and Tesla – Truth and Consequences).

Tesla probably hasn’t seen the light–it’s just received as of March 1st a desperately needed cash infusion by finally securing overdue funding for Tesla Shanghai Gigafactory 3 which has been under construction since January (see Tesla – Shanghai Surprise). Unfortunately, the four banks in Tesla’s new “China Loan Agreement,” which the company announced on Thursday with a rare 8-K filing, committed only to fund a one-year limited purpose loan for up to 3.5 billion yuan ($521 million). This is barely enough time or cash to get the Shanghai assembly plant up and running–much less also stave off the current cash crunch.

But Tesla must keep up appearances as well as bolster its liquidity through at least the end of the quarter as it gets ready to reveal Thursday evening the long-awaited Model Y–though I suspect this won’t result in a massive burst of cash from new reservations as Tesla hopes.

Years of robbing Peter to pay Paul hasn’t produced a sustainable growth model for Tesla, mostly because its business strategy still is better described as, “Wow, we didn’t see that coming.”

Continue reading for Bond Angle analysis.

2. Last Week in GER Event-Driven Research: Myob, Rakuten, Delta, Graincorp and Hopewell Holding

In this version of the GER weekly EVENTS research wrap, we contend that investors should cash out on the MYOB Group Ltd (MYO AU) deal and assess the NAV discount potential for Rakuten Inc (4755 JP) post the IPO launch of Lyft Inc (0812823D US) – of which Rakuten has a 13% stake. Moreover, we dig into the deals for Delta Electronics Thai (DELTA TB) , Graincorp Ltd A (GNC AU) and Hopewell Holdings (54 HK)

More details can be found below. 

Best of luck for the new week – Rickin, Venkat and Arun

3. Meituan Dianping (3690 HK): Lock-Up Expiry – Good 4Q18 Required

Meituan Dianping (3690 HK)‘s shares currently trade 18% below its IPO price of HK$69.00 per share. Meituan will announce its 4Q18 results on Monday, 11 March 2019, after market close. Notably, Meituan’s six-month lock-up period expires on 19 March 2019.

4. Omron into the Nikkei 225, Pioneer Out

Friday 8 March after the close, the Nikkei announced that because the third party share sale of Pioneer Corp (6773 JP)  had been completed, it would be deleted from the Nikkei 225 Average (and the Nikkei 500 Index). Omron Corp (6645 JP) will replace Pioneer in the Nikkei 225 Average, with a deemed par value of 50 yen per share.

The date for this index deletion and inclusion event is the 15th of March, as per the schedule of the February 19th announcement as to how the Pioneer event would be treated. 

This affords special sits/events followers a couple of different events to look at. 

5. M: Trimmed 2019-20E Earnings Forecast by 12% and 19%

M had 4Q18 net profit of Bt606m (+11%YoY, -10%QoQ). The 2018 earnings was 10% lower than our forecast but in line with our expectation.

• Excluding impairment cost from employee benefit, 4Q18 core earnings grew 26.4%YoY to Bt690m. Meanwhile, gross margin remains flat at 68.3%, close to past four quarters level.
• The 2018 earnings increases 6% driven by gross profit margin expansion to 68.4% from 67.8% in 2017 and 4.3% growth in sales to Bt16bn due mainly to branches expansion and lower raw material costs respectively.
• We maintain our positive view toward its 2019-2020 outlook backed by SSSG recovery and branch expansion plan. However, we cut our 2019-20E earnings forecast by 12% and 19% respectively to factor in weak sales and margin than our previous expectation.

We maintain our BUY rating based on a new target price of Bt88 (27.4xPE’19) or down 8% from our previous target to follow earnings cut.