Consumer

In this briefing:

1. Last Week in Event SPACE: Kosaido, Descente, Panalpina, Ophir, RPC, Baidu, CJ Corp
2. Descente’s Doleful Defense (Dicaeologia)
3. Nissan Governance Outlook – Foggy Now, Sunny Later
4. CyberAgent: Tumbling Dice
5. Itochu and Descente: Gloves Off

1. Last Week in Event SPACE: Kosaido, Descente, Panalpina, Ophir, RPC, Baidu, CJ Corp

Last Week in Event SPACE …

• Something is up as Kosaido Co Ltd (7868 JP)‘s shares trade almost 40% through terms and back down – still 18% through terms.
• Descente Ltd (8114 JP)‘s management’s explanation why Itochu owning 40% would be bad is almost a paean to good governance, but the gloves are off.
• Panalpina Welttransport Holding (PWTN SW) is burdened with “social costs” in the near-term.
• Opportunistic yes, but Medco Energi Internasional T (MEDC IJ)‘s proposal for Ophir Energy (OPHR LN) is okay in a less-than-ideal situation.
• A possible last minute counter to Apollo’s disappointing offer for RPC Group PLC (RPC LN).
• The market is valuing Baidu Inc (ADR) (BIDU US) core ops as an “Old Economy” company with little to no growth prospect.
• Plus CCASS movements and expected upcoming events for key M&A transactions.

(This insight covers specific insights & comments involving Stubs, Pairs, Arbitrage, share Classification and Events – or SPACE – in the past week)

Kosaido Co Ltd (7868 JP) (Mkt Cap: $176mn; Liquidity: $1.2mn)

When Bain announced its MBO for Kosaido at ¥610/share, Travis Lundy concluded (in his insight Smallcap Kosaido (7868 JP) Tender Offer: Wrong Price But Whaddya Gonna Do?) that it was a lowball bid and a virtual asset strip in progress. The kind of thing which gives activist hedge funds a bad name, but when cloaked in the finery of “Private Equity”, it looks like the renewal of a business. The share price jumped from the 400s to just under the Tender Offer Price, traded there for several days, then a week after it started trading at or near arb terms, the share price suddenly jumped through terms and headed higher.

• Travis’ inclination at Thursday’s price (¥775/share) is that at a 30% discount to book, there could be enough here to entice someone to split the company up at a slightly better level, but he doubts that it is worth 1x book. Given the headaches involved in making this company worth more than book, it would be worth less than book now. If the Info business can be rescued, then it is cheap. If it cannot, it is not.
• Because “management-friendly” shareholders currently hold at least 40% and probably more like 50+%, Travis thinks Murakami-san will find it really tough to mount, or get someone else to mount, a truly hostile action. 
• Perhaps Murakami-san’s goal here is to block the deal then get management to use debt to buy out other people and expand the funeral parlour business, then get a strategic to buy the whole thing out. It could be, but Travis doesn’t think chasing the market at 25-30% above where Murakami-san got in is a good risk.

Since Travis wrote, Murakami-san’s vehicles have added another 1.24% to reach 9.55% of shares out. The last set of shares was purchased at an average of ¥652/share.

(link to Travis’ insight: Kosaido: Activism Drives Price 30+% Through Terms)

Descente Ltd (8114 JP) (Mkt Cap: $1.8bn; Liquidity: $4.3mn)

This past Thursday 7 February, Descente announced a weak Position Statement (Against) (in Japanese) the Itochu Corp (8001 JP) Tender Offer with a 28-page supporting powerpoint deck (also in Japanese). Descente appears to have no ability to defend itself, and its claim that a large shareholder like Itochu could damage corporate value by weakening governance is effectively a statement that others (like perhaps Wacoal) would too, so only a full takeover makes sense under that defense.

• Descente management’s explanation for why Itochu owning 40% would be bad is almost a paean to good governance. If the influence of suppliers and customers in the shareholder register is bad, it is bad – whether friendly to management or not. Conflict of interest can happen via entrenchment.
• The lack of a white knight proposed and effective “I got nothing, but please don’t tender” response is bearish for the shares. if management is right and Itochu’s presence at 40% will lower corporate value, the back end might be worth less than ¥1,871/share where it was trading pre-tender. That would mean the fair value of shares now would still be below here.
• If Itochu gets its 40% and ANTA votes with Itochu, it is highly possible that the two could effect dramatic change at the management and board level. That would be very hostile and corporate Japan would have something to say about that. Travis says “I am not sure Itochu would go that hostile immediately.”
• Michael Causton just wrote about Descente’s rejection of the Itochu tender saying “The Gloves Are Off”. He notes there is a perception of a cultural difference between Descente’s brand cultivation and Itochu Textile’s hands-off approach to brand management, but notes that the differences between Descente and Itochu need to be resolved quickly in order to optimally ramp up brand awareness and sales points ahead of the Rugby World Cup in Japan this year, the Olympics, next year, and the World Masters Games the year after. 

links to:
Travis’ insight: Descente’s Doleful Defense (Dicaeologia)
Michael’s insight: Itochu and Descente: Gloves Off

ND Software (3794 JP) (Mkt Cap: $212mn; Liquidity: $0.04mn)

ND Software (NDS) announced a MBO sponsored by both the existing president, who owns 20%, and J-Will Partners to take the company private at ¥1700/share, which is a 28.7% premium to last trade and comes out to be ~7.2x trailing 12-month EV/EBITDA. The deal comes with a 66.7% minimum threshold for completion, after which there will be a two-step squeeze-out, as is the norm in deals like this. Looks straightforward, but …

• Sometime activist Symphony Financial Partners (SFP) holds around 20% in NDS. If on board, this this deal is almost done because 31.26% is already pledged to tender, Symphony’s stake would make it 51.5%. Other presumably management-friendly shareholders own another 10%, and employees own about 7%. If Symphony is on board, that easily clears the 67% hurdle. If SFP are not on board, they own about 60% of what is necessary to block this deal.  And they could buy on market to raise their stake further. 
• Travis would not want to sell out his shares tomorrow at ¥1699/share. Or even ¥1701. He thinks there is a chance that the loose float is scooped up by shareholders or players who might want to increase their stake and see if this deal can be bumped. 

(link to Travis’ insight: ND Software (3794 JP) TOB for an MBO – Fireworks a Possibility)

Panalpina Welttransport Holding (PWTN SW) (Mkt Cap: $4.1bn; Liquidity: $20mn)

Palpina confirmed that the Ernst Göhner Foundation, Panalpina’s largest shareholder (46% of shares out) does not support the current non-binding proposal from DSV and that it supports Panalpina’s Board of Directors in pursuing an independent growth strategy that includes M&A. Panalpina’a stock tanked, but is trading only 3% below DSV’s indicative offer, and 20.5% above where the stock was trading in mid-January before DSV’s indicative non-binding proposal. 

• If management had said that they have a plan which is to grow themselves out of their current doldrums, and their largest shareholder supports that plan to stick with management and go slow, nothing will get done until the new chairman is installed in May at the AGM, and even then, given the Foundation’s position that they support management’s “independent growth strategy”, there is not much minority shareholders can do.
• This is an ongoing issue of governance. If the directors are effectively chosen by the Ernst Göhner Foundation, which supports the company’s independence, so they do too, minority shareholders serve no purpose other than to provide capital for the foundation to keep Panalpina listed.
• This doesn’t mean that there will be no deal, but it does mean there will be a lull unless someone else comes up with a more aggressive offer. Travis expects this is eventually worth another go but he would want to reload lower and/or later, or when Panalpina is in a better position after the full IT package is deployed.

Since Travis wrote, DSV has released earnings and said it is still significantly engaged in the bid, and comments from the chairman of the Ernst Göhner Foundation has made comments suggesting it is not wedded to the idea, so it comes down to price – someone has to pay now to get the benefits expected from the full IT package.

Travis pointed out in the discussions that interestingly, when DSV released earnings it did not announce a buyback, which would have been normal, leading some to speculate the company is saving its cash for another go at it.

(link to Travis’ insight: Largest Panalpina Shareholder to Other Shareholders: Get Stuffed) 

Ophir Energy (OPHR LN) (Mkt Cap: $204mn; Liquidity: $3mn)

On its fourth attempt Medco Energi Internasional T (MEDC IJ) receives board approval for its £0.55/share (66% premium to the closing price) offer for Ophir. The deal is conditional on receiving 75% shareholder approval, approval from the relevant authorities in Tanzania and Ophir not losing all or substantially all of its Bualuang interests in Thailand. It is expected that the Scheme will become effective in the first half of 2019.

• There is an opportunistic element to Medco’s tilt after Ophir recently announced the denial of the license extension for the Fortuna project by the Equatorial Guinea Ministry of Mines and Hydrocarbons. This resulted in a $300mn non-cash impairment. Ophir had previously written down $310mn on the same project back in September.
• Shareholders such as Petrus (~2.8% stake) won’t support the offer having announced in mid-Jan that Medco’s earlier £0.485/share proposal “massively under-values” Ophir.
• Reg approvals are not expected to be an issue  – the stake in Tanzania is for a 20% non-controlling interest, a similar % approved in a prior sale to Pavilion in 2015. There is no approval/consent required from the Thai authorities – it is in there really to cover the unlikely situation that for some reason the Thai authorities raise an objection.

• Ophir’s shares are trading at or close to terms. Given Medco’s numerous proposals in short succession – four in three months – a bump cannot be dismissed. And the recent disclosure of a new shareholder (Sand Grove) may warrant such an outcome. A firm offer is on the table backed by the Ophir’s board. I’d look to get involved a spread or two below terms. 

(link to my insight: Medco’s “Okay” Offer For Ophir After Fortuna Setback)

RPC Group PLC (RPC LN) (Mkt Cap: $4.2bn; Liquidity: $43mn)

On January 23, after months of media speculation, RPC announced a final cash offer by a unit of Apollo Global Management for £7.82/share by way of a scheme. Two institutional shareholders, Aviva, with 1.93% and Royal London Asset Management, with 1.44%, immediately expressed disappointment with the offer valuation.

• On January 31, Berry Global Group, a former Apollo  portfolio company, announced it was considering a possible cash offer for RPC and has requested due diligence. RPC responded with a release confirming it will engage with Berry in order to advance discussions in the interests of delivering best value to shareholders.
• The price being paid by Apollo is not very generous, though RPC’s sale process has been widely reported since September, 2018. Apollo’s ‘no increase’ declaration has made it easy for BERY to win this, provided no one else comes to the party. (I reached out to RPC who confirmed Apollo is restricted from countering a higher bid as it is bound by the language in the Offer announcement that the offer of £7.82 per share is final and will not be increased.) So there is limited upside from here unless you think someone else could join BERY as a late gatecrasher.
• Apollo’s offer provides an effective floor so there is limited downside from here, especially under strict UK rules which make it difficult for an acquirer to walk. John DeMasi recommend buying RPC on the possibility BERY comes out with a generous offer or another buyer shows up due to the undemanding valuation of Apollo’s offer.

(link to John’s insight: RPC Group PLC – It Ain’t Over ’til It’s Over)

Baidu Inc (ADR) (BIDU US) (Mkt Cap: $60.6bn; Liquidity: $490mn)

Johannes Salim, CFA tackled Baidu which he estimates is trading at a discount to NAV of 29% or ~2 SD below its 3-yr average NAV discount.

• It’s a weak-ish stub with 57%-owned video streaming subsidiary iQIYI Inc (IQ US) (which went public in 1Q18) and 19%-owned online travel agency, Ctrip.Com International (Adr) (CTRP US), together accounting  for 14% of NAV.
• BIDU’s core business (primarily online/mobile search services plus new initiatives such as Baidu Cloud and autonomous driving), accounts for 78% of NAV, with net cash a further 8% of NAV.
• Fundamentally, BIDU’s core business has grown healthily, with strong cash flows generation. Johannes estimates the market is unjustifiably valuing this business at US$49.3bn, or 8.7x 2019E EV/EBITDA or 11.2x 2019P, suggesting little to no growth prospect.

(link to Johannes’ insight: Baidu: Time to Swoop In, with NAV Discount Widening Substantially)

CJ Corp (001040 KS) (Mkt Cap: $3bn; Liquidity: $7.5mn)

Sanghyun Park recommends long Holdco and short the synthetic sub ((Cj Cheiljedang (097950 KS), CJ ENM (035760 KS), CJ CGV Co Ltd (079160 KS) and Cj Freshway (051500 KS) on a ratio of 50:40:7:3 ) at this point.

• By my calcs, CJ Corp is trading at a 52% discount to NAV compared to a 52-week average of 41%. CJ C and CJ ENM comprise 63% of NAV.
• Of note, the stub ops still account for 29% of NAV and primarily comprises the 55.13% stake in CJ Olive Networks and brand royalty, each accounting for ~13% of NAV.

(link to Sanghyun’s insight: CJ Corp Holdco/Synthetic Sub Trade: Current Status & Trade Approach)

Toyota Industries (6201 JP)(Mkt Cap: $15.8bn; Liquidity: $24mn)

Curtis Lehnert recommends closing the Toyota set-up trade, which hasn’t exactly been a storming one (4% or 1.96% on the gross notional).

• Toyota announced earning recently which (slightly) beat expectations slightly and the stock rallied in response. This move brought the discount to NAV in line with its 6-month average and has eroded the statistical edge of staying in the trade.
• The fundamentals for Toyota are still attractive, therefore it could be argued to hold the stub beyond these levels. However, Curtis has opted for the tactical route in the current environment and take profits when a statistical edge disappears.

(link to Curtis’ insight: TRADE IDEA – Toyota Industries (6201 JP): Close the Stub Trade)

Briefly …

• Sanghyun recommended a long 2PB and short 1P, after Hyundai Motor Co (005380 KS)‘s 1P/2PB price ratio touched 152% of σ on a 20D MA. This is the highest since late Nov last year. Hyundai Motor Share Class: Long 2PB / Short 1P Amid Restructuring Speculation
• Sanghyun also recommended go long Samsung Electronics (005930 KS)‘s1P and short Common, for a short term reversion as we enter the March shareholder meeting phase. Samsung Electronics Share Class: Long 1P / Short Common on BlackRock Showing

• Greencross Ltd (GXL AU) shareholders have approved the scheme of arrangement.

• MYOB Group Ltd (MYO AU) trades through terms after announcing Vinva is a new substantial holder.

My ongoing series flags large moves (~10%) in CCASS holdings over the past week or so, moves which are often outside normal market transactions.  These may be indicative of share pledges.  Or potential takeovers. Or simply help understand volume swings. 

Often these moves can easily be explained – the placement of new shares, rights issue, movements subsequent to a takeover, amongst others. For those mentioned below, I could not find an obvious reason for the CCASS move.   

2. Descente’s Doleful Defense (Dicaeologia)

The new Takeover Rules enacted in December 2006 (with one amendment to the SEL made in 2005 in direct reaction to the loophole used by Livedoor to acquire large stakes of Nippon Broadcasting System off-market to reach a level above one-third) are enshrined in the Financial Instruments and Exchange Act/Law (normally called “FIE”, “FIEA”, or “FIEL”), with the most relevant portions commencing with Article 27-2. These “TOB Rules” outlawed stealth acquisition off-market to “suddenly acquire” a large stake without passing through the market mechanism or conducting a Tender Offer. The principle of this was a sense of “fairness” such that minority investors had an equal opportunity to sell to someone who sought to have control or influence, and that it could not simply be arranged through collusive behavior. 

The first rule which mattered to Descente Ltd (8114 JP) was that the Board of the “Subject Company”, according to Article 27-10…

shall, pursuant to the provisions of a Cabinet Office Ordinance, submit a document which states its opinion on the Tender Offer and other matters specified by a Cabinet Office Ordinance (hereinafter referred to as the “Subject Company’s Position Statement”) to the Prime Minister within a period specified by a Cabinet Order from the date when the Public Notice for Commencing Tender Offer is made.

That period specified is 10 business days.

So by Thursday 14 February, Descente’s board was obliged to release a “Subject Company Position Statement” (意見表明報告書) saying whether it was for or against (or neutral or withholding an opinion about) the bid. It also had to state the reasons for its opinion, the process it took to come to those opinions, and whether it would take defensive measures against the bid (and other measures specified in the relevant Cabinet Order. This reporting obligation would allow Descente’s board to ask questions of the acquiror (to which the acquiror would be required to respond within five business days) and to ask for an extension of the Offer (which has a legal enforcement under certain conditions, which are not that difficult to meet).

Several days before that deadline, on Thursday 7 February, Descente Ltd (8114 JP announced its Position Statement (Against) (in Japanese) the Itochu Corp (8001 JP)‘s Tender Offer with a 28-page supporting powerpoint deck (also in Japanese).

The shares were down Thursday and Friday for a reason. 

If Descente Management and the Board hope that nobody will tender, because Itochu’s presence will cause harm to the medium-long-term corporate value of the company, Management and the Board are putting investors on the spot.

Shares were trading in the ¥1870s and Itochu is offering 50% more than that. Descente saying that corporate value in the medium-long term will be damaged means that should show up in the share price, and investors at the close Friday – after a day to digest the Descente response – believed ¥2520 was the right price if one included the economic effects of the Itochu tender offer. Obviously, that means they think it was worth less if they were not going to tender. 

Investors who want to sell all of their shares now could possibly do so at a 33% premium to where their shares were trading. 

Management and the Board proposing investors not avail themselves of an opportunity to sell shares to someone willing to pay 50% more than pre-tender price for a portion of their shares (or perhaps 33% more than pre-tender as of Friday’s close for more or all of it) needed to explain their own value proposition. Descente had an opportunity to present a “fair value” number from a valuation expert and hints at why they think the shares are worth as much or more over the medium-long term, giving economically-minded investors a reason not to tender. 

The “Subject Company Position Statement” did not do that. 

3. Nissan Governance Outlook – Foggy Now, Sunny Later

This past week saw developments which put the Nissan Motor (7201 JP) – Renault SA (RNO FP) relationship on a better path.

There are interesting noises around the likely arrival of Jean-Dominique Senard on the board of Nissan which the French state won’t like (because they won’t be getting the pony they want) but which would ultimately serve Renault’s interests better. 

Renault and Nissan are conducting a joint investigation into the Renault-Nissan Alliance BV entity which Carlos Ghosn also chaired, and Renault has passed a dossier of Ghosn’s personal expenses borne by Renault and the Alliance to French investigators.

A trial balloon was floated in the Nikkei suggesting the French government had said to the Japanese government it was open to Renault selling some Nissan shares and perhaps the state could lower its stake in Renault. This was “categorically denied” by the French with some haste but the idea of forming a holding company was categorically denied as acceptable by the French just under a year ago. Things have changed.

Governance changes are afoot, with a steady flow of developments likely coming in March, April, May, and June.

Below, a discussion of what the board looks like, will look like, and could look like in/after June and a discussion of the structure of possible capital changes.

4. CyberAgent: Tumbling Dice

Source: Japan Analytics

TUMBLING DICE – After ZOZO (3092 JP) (-52%) and Mercari (4385 JP) (-50%), CyberAgent (4751 JP) is the worst-performing large-cap Internet stock in Japan over the last seven months.  The company is the sector’s leading foreigner-held stock with over 48% (60%+ of the float) held by institutional investors such as Baillie Gifford (11.9%), JP Morgan AM (6.9%), Tybourne Capital (5.1%) and Blackrock Japan (5.0%). Having outperformed the sector and the market annually over the last nine years by 38% and 25%, respectively, over the seven months since the stock peaked in terms of our Relative Price Score on 13th July, CyberAgent shares have declined by 56%, underperforming the market by 48% and the sector by 37%.

PASSIVE PERILS – We will discuss the ‘perils ‘ of Passive TV in the DETAIL below. However, CyberAgent is yet another good example of the ‘perils’ of passive investing. On September 5th Nikkei Inc. announced that CyberAgent would replace Furukawa (5715 JP) in the Nikkei 225 index, with the inclusion occurring on October 1st. Since the ¥6050 intraday peak of the week before inclusion in the index, the shares have declined by 49% in 90 trading days.   

SUMMARY – CyberAgent’s business has three ‘pillars’, internet advertising, mobile gaming software, and media. The latter now includes the linear free-to-view AbemaTV business, which helped drive the share price to a post-listing high of ¥6930 in July 2018. Since then, business conditions for two of these ‘pillars’ have degraded significantly,  while the fledgeling TV business remains in ‘up-front’ investment mode. To cap what will be a turbulent year for CyberAgent, the company is moving into a new head office building in Shibuya called ‘Abema Towers‘ in March. We shall refrain from making any analogies to the Skyscraper Index. 

VISION SHIFT? – In previous years, CyberAgent had a clear vision statement – ‘To create the 21st century’s leading company’. The company’s recent performance has led to a change of tone, and CyberAgent is now rather more modestly just ‘Aiming to be a company with medium to long-term supporters’.  In the vein of the lyrics from the best song on the best Rolling Stones album, Exile on Main Street, the business has recently been at ‘all sixes and sevens and nines’. In the search for new ‘supporters’, we encourage CyberAgent to just ‘keep on rolling’, letting the dice fall where they may. 

5. Itochu and Descente: Gloves Off

Descente Ltd (8114 JP) issued a 13-page statement yesterday in response to Itochu Corp’s (8001 JP) tender offer to raise its stake in the sports firm from 30.44% to 40%.

In brief: its gloves off and Descente is limbering up for a fight for its independence – an independence it has not had since the 1990s.

Itochu insists it is the answer to Descente’s weaknesses but Descente is having none of it, arguing that it is already implementing the strategies proposed by Itochu.

Descente’s statement of intent was followed by Descente’s labour union, All Descente, supporting Descente, saying Itochu’s bid was contrary to Descente’s long-term interests.

Descente may well hope for an MBO as a way out, and Itochu may want a third party to acquire Descente as Travis Lundy suggests. Either way, a quick resolution is needed if Descente is to take advantage of the upcoming sports boom in Japan.

The question remains as to whether Descente would benefit from independence or control by Itochu. To date, it is arguable that the very tension between Itochu’s demand for faster growth and higher profits and, on the other hand, Descente’s reining in of this demand in favour of long-term brand cultivation that has led to Descente’s recent growth path. Without this delicate balance of tensions, the whole edifice may sag.

In this briefing:

1. Itochu and Descente: Gloves Off
2. Homeplus REIT IPO – The Largest Ever REIT IPO in Korea
3. ECM Weekly (9 February 2019) – Pinduoduo, Homeplus, PNB Metlife, Cal-Comp Tech
4. Huayi Brothers: Their Move to Theme Part Echoes A Disney Business Model Worth a Hard Look
5. The Downward Revision in FY03/19 Guidance Places Panasonic in Our Worst-Case Scenario

1. Itochu and Descente: Gloves Off

Descente Ltd (8114 JP) issued a 13-page statement yesterday in response to Itochu Corp’s (8001 JP) tender offer to raise its stake in the sports firm from 30.44% to 40%.

In brief: its gloves off and Descente is limbering up for a fight for its independence – an independence it has not had since the 1990s.

Itochu insists it is the answer to Descente’s weaknesses but Descente is having none of it, arguing that it is already implementing the strategies proposed by Itochu.

Descente’s statement of intent was followed by Descente’s labour union, All Descente, supporting Descente, saying Itochu’s bid was contrary to Descente’s long-term interests.

Descente may well hope for an MBO as a way out, and Itochu may want a third party to acquire Descente as Travis Lundy suggests. Either way, a quick resolution is needed if Descente is to take advantage of the upcoming sports boom in Japan.

The question remains as to whether Descente would benefit from independence or control by Itochu. To date, it is arguable that the very tension between Itochu’s demand for faster growth and higher profits and, on the other hand, Descente’s reining in of this demand in favour of long-term brand cultivation that has led to Descente’s recent growth path. Without this delicate balance of tensions, the whole edifice may sag.

2. Homeplus REIT IPO – The Largest Ever REIT IPO in Korea

The Homeplus REIT (“Korea Retail Homeplus #1 REIT”), which is expected to be completed by end of March, will be the biggest ever REIT IPO in Korea. The key investment merit of this Homeplus REIT is that it offers a stable dividend yield of about 6-7%. We expect a very strong demand for this Homeplus REIT IPO. 

Homeplus is the second largest retailer in Korea, after E Mart Inc (139480 KS). Homeplus REIT will use 51 Homeplus stores (out of total of 141 stores) located throughout Korea as its base assets. Homeplus REIT is expected to raise between 1.5 trillion won and 1.7 trillion won in this IPO, of which the allocation between institutional and retail is set at 80:20. The IPO price range is between 4,530 won to 5,000 won. 

Rising interest rates also pose a concern for the company. Of the company’s total long term debt, about 61% are floating rate based so higher interest rates could result in higher interest payments for the company. 

Overall, this Homeplus REIT IPO is likely to attract high interests among overseas institutional investors. However, there are some concerns that this deal could have relatively lower local institutions interest. One of the main reasons for this is because many large local institutions including the NPS have already invested in Homeplus as a consortium of MBK Partners. Although there is no public market value of Homeplus right now, many investors believe that the consortium led by MBK Partners overpaid for Homeplus back in 2015. As a result, these local institutions that have already invested stakes in Homeplus are less likely to further invest in the Homeplus REIT IPO. 

3. ECM Weekly (9 February 2019) – Pinduoduo, Homeplus, PNB Metlife, Cal-Comp Tech

Aequitas Research puts out a weekly update on the deals that have been covered by Smartkarma Insight Providers recently, along with updates for upcoming IPOs.

Accuracy Rate:

Our overall accuracy rate is 72.1% for IPOs and 63.8% for Placements 

(Performance measurement criteria is explained at the end of the note)

No new IPO filings

Below is a snippet of our IPO tool showing upcoming events for the next week. The IPO tool is designed to provide readers with timely information on all IPO related events (Book open/closing, listing, initiation, lock-up expiry, etc) for all the deals that we have worked on. You can access the tool here or through the tools menu.

News on Upcoming IPOs

• PineBridge-backed Uniparts gets SEBI nod to float IPO
• Cal-Comp Philippines eyes IPO by third quarter
• JERA new president says IPO is an option
• Singapore’s Zalora explores listing to fuel expansion
• S. Korea’s Homeplus files for up to $1.5 bln REIT IPO
• Korean bio unicorn in the making, Voronoi, to join the Kosdaq this year

Smartkarma Community’s this week Analysis on Upcoming IPO

• Koolearn: Losses in Full View
• Koolearn: Marketing Expenses Have Taken Operating Profits Down the Drain

List of pre-IPO Coverage on Smartkarma

4. Huayi Brothers: Their Move to Theme Part Echoes A Disney Business Model Worth a Hard Look

• Movie World park is first stage in long term plan for 20 “movie theme” cities in China.
• Jack Ma’s investment in company has grown since 2015: Its film finance.
• Company sees licensing of intellectual property rather than brick and mortar as key to best asset deployment as they diversify.

The Walt Disney Company’s just released 1Q19 earnings report held an upside surprise of $1.84 a share beating consensus of $1.57. Revenues of US$15.5bn also beat analysts expectations of US$15.180bn. Filmed entertainment was down due to tough comps from last year’s blockbuster releases. Network TV was up. But what commands our attention in this insight is results from Disney theme parks: All units showed flat to modest growth in attendance, with revenue up primarily due to raised prices. Disney Shanghai was softer than last year attributed to the economic slowdown. Yet theme parks continue to lead the Disney business units year in and year out.

 Reviewing that result in the light of ongoing research I have been working at on Asia theme park prospects, I focused in on Huayi Brothers. Their movie themed park at Suzhou opened last July. While it is too early to make a long term call on the film company’s diversification into theme parks, their move to monetize their intellectual property in that space foretells more diversification ahead.

 The Disney business model appears to be proceeding.

 Huayi Brothers Media Corporation (SHE: 300027)

(All amounts shown in CNY except where otherwise noted).

 Since an ebullient IPO debut in 2009, when on October 23^rd, HB stock skyrocketed to 63.66yuan trading was halted, the stock price has since been both spiked and rocked by events. Most recently, it fell 21% last June when news of the details of a sketchy performance contract for one of HB’s top female stars made headlines. She appeared to have made an effort to disguise her salary. The scandal broke on television. It has triggered an investigation by Beijing officials. Promptly HB founder and Chairman Dennis Wang pledged US$16m to bolster confidence the shares amid continuing disputations between the parties to the scandal.

 On a positive note, during the last five year period, Alibaba’s (NYSE:BABA) Jack Ma announced he was investing US$103M over 5 years to finance the production of 10 HB films. On that news the shares had spiked 6.6%. There are also standing deals with real estate operator Evergrande Group (HK3333) and Tencent Holding(OTC) to deploy HB intellectual property names and brands into theme parks and online social gaming.

 Out of this mix of headwinds and tailwinds in the already volatile China entertainment/film sector, we arrive at a point where HB shares have taken a long, sustained beating. We are moved to believe that now rubbing up against a 5 year low, is the stock its worthy of attention for investors who have a risk profile. One needs to be comfortable with HB’s gyrating past trading patterns to see opportunity in its future as a “Disney in the making” in the words of a film executive friend from Hong Kong.

 Price at writing: 4.51 (52wk low 4.06)

5 year high: June 5 2015: 23.26

1 year high: (2018): 10.14

3 year high: May 23 2016: 14.30

3 year low: 4.70

 Market cap at writing: 12.61bn

P/E 15.11

EPS: 0.30

Revenue: 3.93bn

Revenue growth: 12.7%

EBITDA: 625m

LTD AT WRITING: 5.92bn

Equity: 10.5bn

Book value: 3.58bn

 To get a sense of how major institutional investors were responding to the roller coaster rides of the HB trade we note here that Vanguard International Stock Index Emerging Market Fund, one of HB’s biggest investors, is still holding its position at writing 2,727,202 shares of valued at 23,567,346bn cny.

 The Disney strategy

 The company began as a film production studio in 1994 and has since expanded its TV, internet, movie theaters, talent agencies and more recently, theme parks.

 It is its foray into the theme park space that is the clearest expression of its “Disneyesque” business model. Last July HB opened a 400,000 square meter theme park at Suzhou called “Movie World”. They announced it was the first in a series of 20 “film cities parks” they would create by providing intellectual property from their film hits partnered with realty developers.

 In a study of the China film industry from Deloite Global published in 2017, the researchers noted, “With Disney as its model, HB has launched a “de-cinematic” strategy that integrates the traditional film business, internet entertainment, location-based entertainment, expanding to upstream and downstream industry chains to alleviate dependence on the film industry.”

 Current estimates are that HB revenues continue heavily in film with over 85.% of its total sales from that sector, another 7.8% from internet entertainment, and 6.6.% from brand licensing. All others contribute 0.8%.

 However its going forward strategy is not to deploy hard capex on actually building theme parks but to partner with such realty operators like Evergrande as an intellectual property provider. This veers from a Disney formula since that company has financed and developed its theme parks internally from land acquisition to design, construction and operations. But it does comport with the core Disney strategy of monetizing intellectual property sprung from its films.

 The China film industry is notably dominated by the top 15 companies, among which is HB. The sector is at the same time without a dominant cluster of “major” studios as is the case in the US and other markets. The division of market share among the top players run from the biggest, China Film, at about 4.3% to HB which at 1.3% clusters in the same area between 1% and 2% with at least 8 other producers. This is rooted in the global nature of the film business today where a given year or given share is not necessarily a function of financial or asset deployment power. It reflects in China as everywhere else, the success or failure of individual films from the number of blockbusters to the number of flops it may release in a given year.

 As Disney’s 1Q19 results show, its filmed entertainment unit was down y/y 2% in operating income largely due to 2018 comps that included several blockbuster films. At the same time, its theme parks were up 13%—almost entirely due to a 7% increase in average visitor spend. And that increase we learn, came almost entirely from raised prices. So the key here is the price elasticity in the theme park business that filmed entertainment does not necessarily provide.

 In China there is also a wrinkle to the film business that links box office grosses to the trade in studio stocks. Over the years there has been considerable concern as to the accuracy of box office grosses reported by some studios. Our Hong Kong associate in that field outlined the problem. This quote is a translation.

 “You have instances where studios or theater operators buy up seats in off peak times and theaters that are fundamentally empty. You have ghost grosses. They then report a film has done much bigger business than it actually has because they know that reports of big grosses have a direct effect on the trade of movie stocks. And you get this bizarre situation where the move guys produce phantom grosses to pump up their stock”.

 “Much of this practice has been cleaned up, particularly among the top companies like HB. But in an economic environment where there are still observers in the financial sector that are not entirely comfortable that Beijing’s own economic GDP, trade and monetary numbers are all that accurate, anything is possible”. One of the priorities long expressed by Xi Jinping has been to end the lack of confidence in government numbers. Clearly such practices as ghost numbers can migrate to the private sector.

 In any event, estimated ticket sales in 2018 are believed to be relatively accurate rising to nearly US$9bn.

 Theme Parks forward look: Aging out and creating new

 Theme parks in China are currently showing a 13% rate of growth through 2017 totaling 190m admissions. According to a theme park engineers AECOM study, China will surpass the US as the globe’s biggest theme park market by 2020. Pipeline projects, of which HB projects it will participate with movie themes, continue to dominate in south and east China locations with 42% of all projects scheduled to open there covering a population base of 528m.

Over 27% of all current pipeline projects are themed to fantasy/cartoon/movie media intellectual property bases. Projected Capex total for the theme part pipeline from 2018 through 2025 is 280bn.

 Investors in the theme park space also need to understand the ongoing need to keep pop culture icons sprung out of film blockbusters as fresh as possible. The reason is the inevitable “aging out” of the biggest, most formidable themes. Disney characters such as Mickey Mouse made their first appearances in films in the 1920’s US and did not go global until the 1960s-70s. The company has reworked the theming several times.

 Yet its newest attractions are those like Star Wars Galaxy Edge due to go live at Disney Parks by Q3 this year. The first Star Wars movie debuted in 1977. In brief, children in the 8 to 16 year old demographic cohort back then are now in their fifties. A long list of sequels through last year have kept the imagery and characters refreshed through successive generations.

 What Disney has done well is to package and repackage its core intellectual property stars like Mickey Mouse, Donald Duck and Toy Story characters like the cowboy to keep younger generations eager to experience the live attractions. This is the core dilemma of investing in any sector heavily dependent on creativity.

 The takeaway: An investment theory even based on shifting sands can sometime produce powerful results. Facing a fading film business, Walt Disney literally went into deep debt to develop the first Disneyland in 1955. Linked to a television series, the park had a built in marketing engine. Yet by the early 1980s, the aging out of the company’s core characters and poor results from its efforts in non-cartoon films, the stock had taken a hit. The board brought in a new executive team that repurposed its intellectual property, reimagined its animation business and went on to acquire valuable properties from third parties.

 So our conclusion is that the heart of an entertainment company lies in the capacity to reinvent its character stable and repurpose its original form to a diverse downstream set of revenue producing units. That is what we see in HB.

 Even though they began business in 1994, as far as their diversification strategy goes, its early stages. If they succeed in their theme park initiatives and other related businesses beyond filmed entertainment, their valuation could surge given the starting point of an effective 5 year low.

 Part of the forward valuation consideration needs to be the partnerships thus far achieved with Jack Ma ,Tencent, and Evergrande. Do these sophisticated investors see a potential Disney model flourishing downstream?

So the question is this: Beyond standard investing metrics applied to HB, do investors need to consider a broader conception of how to value a company’s future. You can’t really measure a forward EBITDA number, or pluck a one year estimated PT out of what may spring from the imagination of the creative community where blockbuster ideas are generated.

 In the end, at its current low, HB may be a very cheap entry point if it can execute a “Disney-like strategy” over the next five to seven years as its theme park plans spread across the proposed 20 China cities.

 And the model is Disney. Every time the company appeared to run out of creative gas, it managed to find new inspired

properties within the minds of its key creative people.

So at its five year low we raise the question: Does the investment community see big rewards for HB exchanged for the risks implicit in the shifting sands of artists as opposed to projectable earnings metrics?

5. The Downward Revision in FY03/19 Guidance Places Panasonic in Our Worst-Case Scenario

• Panasonic Corp (6752 JP)’s 3Q earnings were quite weak, failing to meet both consensus and our estimates. Panasonic reported revenue of JPY2,074.8bn and OP of JPY97.5bn resulting in an OPM of 4.7% compared to 5.8% in the third quarter of last year
• The majority of revenue growth came from the Automotive & Industrial Solution (A&IS) segment which saw the strongest growth in revenue at nearly 8% YoY followed by the Eco Solutions Segment. Despite the steady growth in the A&IS revenue, the segment continued to display a decline in profits by almost 13% YoY.
• A downward revision in targets was made following the weak earnings this quarter. Nine-months cumulative figures weren’t particularly attractive in the OP front as well (Revenue up 3% YoY and OP down -8% YoY as of 3QFY03/19). Panasonic is nearing our modest case scenario, although its downward revised earnings target places it in our worst-case scenario, where we expect Panasonic to be exposed to a high degree of risk, increasing its lookout for other customers. Panasonic has only tied up with Toyota Motor (7203 JP) thus far and may have to diversify its customer base further to bring earnings to a sustainable level.
• After the earnings release and news about Chinese competitor, CATL (A) (300750 CH), collaborating with Honda Motor (7267 JP) ( Honda Chooses CATL as Battery Partner for Their EVs; Panasonic Has Lost the Chance), Tesla Motors (TSLA US) announced that it was acquiring battery company Maxwell Technologies for production of its EV batteries. Panasonic fell almost -5% on Monday’s open.

In this briefing:

1. Yahoo Japan 3Q Update: Consumer Business Drives Mid-Term Growth; Plans to Diversify in the Long Run
2. Ghabbour Auto: Hyundai Motor’s Gateway to Egypt & A Major Turnaround Story

1. Yahoo Japan 3Q Update: Consumer Business Drives Mid-Term Growth; Plans to Diversify in the Long Run

Yahoo Japan (4689 JP)  reported 3Q FY03/19 financial results last Monday (04th February). Revenue and OP were on par with consensus. YJ revised the lower range of its FY03/19E OP guidance upwards by JPY7bn to JPY140bn mainly due to lower than expected growth related expenses (expenses for new challenges as per the management). Meanwhile, the upper limit of the FY03/19E OP guidance of JPY143bn remains unchanged. The revised OP guidance for FY03/19E is JPY140-143bn.

2. Ghabbour Auto: Hyundai Motor’s Gateway to Egypt & A Major Turnaround Story

• This is a follow-up report to Dylan Waller‘s note Egypt Travel Report: Stock Market Discount Widens Despite Numerous Recovery Signals. This report is the first of several company-specific series of reports on the Egyptian companies. Although I have taken a first crack at analyzing Ghabbour Auto (AUTO EY) (also called GB Auto), most of the other Egyptian company specific reports will be done by Dylan Waller. 
• In this report, I provide an analysis about Ghabbour Auto, which is the largest auto manufacturing company Egypt, and it is also a distributor of Hyundai Motor vehicles. This report is aimed at investors with very long-term investment perspectives (3 to 5+ years), rather than those with shorter investment horizons. 
• Established in 1960, the Ghabbour Group is an Egyptian manufacturer of automobiles, buses, and motorcycles, with headquarters in Cairo. Ghabbour Auto has partnerships with numerous global auto makers including Hyundai Motor, Mazda, Geely, and Volvo. The company has the exclusive license to assemble and distribute Hyundai and Geely passenger cars. GB Auto is the largest company in the Egyptian passenger car market in terms of market share, sales, and production capacity.  

In this briefing:

1. Homeplus REIT IPO – The Largest Ever REIT IPO in Korea
2. ECM Weekly (9 February 2019) – Pinduoduo, Homeplus, PNB Metlife, Cal-Comp Tech
3. Huayi Brothers: Their Move to Theme Part Echoes A Disney Business Model Worth a Hard Look
4. The Downward Revision in FY03/19 Guidance Places Panasonic in Our Worst-Case Scenario
5. Chalet Hotels Post-IPO – First-Day Traded Volume Pales in Comparison to past Indian IPOs

1. Homeplus REIT IPO – The Largest Ever REIT IPO in Korea

The Homeplus REIT (“Korea Retail Homeplus #1 REIT”), which is expected to be completed by end of March, will be the biggest ever REIT IPO in Korea. The key investment merit of this Homeplus REIT is that it offers a stable dividend yield of about 6-7%. We expect a very strong demand for this Homeplus REIT IPO. 

Homeplus is the second largest retailer in Korea, after E Mart Inc (139480 KS). Homeplus REIT will use 51 Homeplus stores (out of total of 141 stores) located throughout Korea as its base assets. Homeplus REIT is expected to raise between 1.5 trillion won and 1.7 trillion won in this IPO, of which the allocation between institutional and retail is set at 80:20. The IPO price range is between 4,530 won to 5,000 won. 

Rising interest rates also pose a concern for the company. Of the company’s total long term debt, about 61% are floating rate based so higher interest rates could result in higher interest payments for the company. 

Overall, this Homeplus REIT IPO is likely to attract high interests among overseas institutional investors. However, there are some concerns that this deal could have relatively lower local institutions interest. One of the main reasons for this is because many large local institutions including the NPS have already invested in Homeplus as a consortium of MBK Partners. Although there is no public market value of Homeplus right now, many investors believe that the consortium led by MBK Partners overpaid for Homeplus back in 2015. As a result, these local institutions that have already invested stakes in Homeplus are less likely to further invest in the Homeplus REIT IPO. 

2. ECM Weekly (9 February 2019) – Pinduoduo, Homeplus, PNB Metlife, Cal-Comp Tech

Aequitas Research puts out a weekly update on the deals that have been covered by Smartkarma Insight Providers recently, along with updates for upcoming IPOs.

Accuracy Rate:

Our overall accuracy rate is 72.1% for IPOs and 63.8% for Placements 

(Performance measurement criteria is explained at the end of the note)

No new IPO filings

Below is a snippet of our IPO tool showing upcoming events for the next week. The IPO tool is designed to provide readers with timely information on all IPO related events (Book open/closing, listing, initiation, lock-up expiry, etc) for all the deals that we have worked on. You can access the tool here or through the tools menu.

News on Upcoming IPOs

• PineBridge-backed Uniparts gets SEBI nod to float IPO
• Cal-Comp Philippines eyes IPO by third quarter
• JERA new president says IPO is an option
• Singapore’s Zalora explores listing to fuel expansion
• S. Korea’s Homeplus files for up to $1.5 bln REIT IPO
• Korean bio unicorn in the making, Voronoi, to join the Kosdaq this year

Smartkarma Community’s this week Analysis on Upcoming IPO

• Koolearn: Losses in Full View
• Koolearn: Marketing Expenses Have Taken Operating Profits Down the Drain

List of pre-IPO Coverage on Smartkarma

3. Huayi Brothers: Their Move to Theme Part Echoes A Disney Business Model Worth a Hard Look

• Movie World park is first stage in long term plan for 20 “movie theme” cities in China.
• Jack Ma’s investment in company has grown since 2015: Its film finance.
• Company sees licensing of intellectual property rather than brick and mortar as key to best asset deployment as they diversify.

The Walt Disney Company’s just released 1Q19 earnings report held an upside surprise of $1.84 a share beating consensus of $1.57. Revenues of US$15.5bn also beat analysts expectations of US$15.180bn. Filmed entertainment was down due to tough comps from last year’s blockbuster releases. Network TV was up. But what commands our attention in this insight is results from Disney theme parks: All units showed flat to modest growth in attendance, with revenue up primarily due to raised prices. Disney Shanghai was softer than last year attributed to the economic slowdown. Yet theme parks continue to lead the Disney business units year in and year out.

 Reviewing that result in the light of ongoing research I have been working at on Asia theme park prospects, I focused in on Huayi Brothers. Their movie themed park at Suzhou opened last July. While it is too early to make a long term call on the film company’s diversification into theme parks, their move to monetize their intellectual property in that space foretells more diversification ahead.

 The Disney business model appears to be proceeding.

 Huayi Brothers Media Corporation (SHE: 300027)

(All amounts shown in CNY except where otherwise noted).

 Since an ebullient IPO debut in 2009, when on October 23^rd, HB stock skyrocketed to 63.66yuan trading was halted, the stock price has since been both spiked and rocked by events. Most recently, it fell 21% last June when news of the details of a sketchy performance contract for one of HB’s top female stars made headlines. She appeared to have made an effort to disguise her salary. The scandal broke on television. It has triggered an investigation by Beijing officials. Promptly HB founder and Chairman Dennis Wang pledged US$16m to bolster confidence the shares amid continuing disputations between the parties to the scandal.

 On a positive note, during the last five year period, Alibaba’s (NYSE:BABA) Jack Ma announced he was investing US$103M over 5 years to finance the production of 10 HB films. On that news the shares had spiked 6.6%. There are also standing deals with real estate operator Evergrande Group (HK3333) and Tencent Holding(OTC) to deploy HB intellectual property names and brands into theme parks and online social gaming.

 Out of this mix of headwinds and tailwinds in the already volatile China entertainment/film sector, we arrive at a point where HB shares have taken a long, sustained beating. We are moved to believe that now rubbing up against a 5 year low, is the stock its worthy of attention for investors who have a risk profile. One needs to be comfortable with HB’s gyrating past trading patterns to see opportunity in its future as a “Disney in the making” in the words of a film executive friend from Hong Kong.

 Price at writing: 4.51 (52wk low 4.06)

5 year high: June 5 2015: 23.26

1 year high: (2018): 10.14

3 year high: May 23 2016: 14.30

3 year low: 4.70

 Market cap at writing: 12.61bn

P/E 15.11

EPS: 0.30

Revenue: 3.93bn

Revenue growth: 12.7%

EBITDA: 625m

LTD AT WRITING: 5.92bn

Equity: 10.5bn

Book value: 3.58bn

 To get a sense of how major institutional investors were responding to the roller coaster rides of the HB trade we note here that Vanguard International Stock Index Emerging Market Fund, one of HB’s biggest investors, is still holding its position at writing 2,727,202 shares of valued at 23,567,346bn cny.

 The Disney strategy

 The company began as a film production studio in 1994 and has since expanded its TV, internet, movie theaters, talent agencies and more recently, theme parks.

 It is its foray into the theme park space that is the clearest expression of its “Disneyesque” business model. Last July HB opened a 400,000 square meter theme park at Suzhou called “Movie World”. They announced it was the first in a series of 20 “film cities parks” they would create by providing intellectual property from their film hits partnered with realty developers.

 In a study of the China film industry from Deloite Global published in 2017, the researchers noted, “With Disney as its model, HB has launched a “de-cinematic” strategy that integrates the traditional film business, internet entertainment, location-based entertainment, expanding to upstream and downstream industry chains to alleviate dependence on the film industry.”

 Current estimates are that HB revenues continue heavily in film with over 85.% of its total sales from that sector, another 7.8% from internet entertainment, and 6.6.% from brand licensing. All others contribute 0.8%.

 However its going forward strategy is not to deploy hard capex on actually building theme parks but to partner with such realty operators like Evergrande as an intellectual property provider. This veers from a Disney formula since that company has financed and developed its theme parks internally from land acquisition to design, construction and operations. But it does comport with the core Disney strategy of monetizing intellectual property sprung from its films.

 The China film industry is notably dominated by the top 15 companies, among which is HB. The sector is at the same time without a dominant cluster of “major” studios as is the case in the US and other markets. The division of market share among the top players run from the biggest, China Film, at about 4.3% to HB which at 1.3% clusters in the same area between 1% and 2% with at least 8 other producers. This is rooted in the global nature of the film business today where a given year or given share is not necessarily a function of financial or asset deployment power. It reflects in China as everywhere else, the success or failure of individual films from the number of blockbusters to the number of flops it may release in a given year.

 As Disney’s 1Q19 results show, its filmed entertainment unit was down y/y 2% in operating income largely due to 2018 comps that included several blockbuster films. At the same time, its theme parks were up 13%—almost entirely due to a 7% increase in average visitor spend. And that increase we learn, came almost entirely from raised prices. So the key here is the price elasticity in the theme park business that filmed entertainment does not necessarily provide.

 In China there is also a wrinkle to the film business that links box office grosses to the trade in studio stocks. Over the years there has been considerable concern as to the accuracy of box office grosses reported by some studios. Our Hong Kong associate in that field outlined the problem. This quote is a translation.

 “You have instances where studios or theater operators buy up seats in off peak times and theaters that are fundamentally empty. You have ghost grosses. They then report a film has done much bigger business than it actually has because they know that reports of big grosses have a direct effect on the trade of movie stocks. And you get this bizarre situation where the move guys produce phantom grosses to pump up their stock”.

 “Much of this practice has been cleaned up, particularly among the top companies like HB. But in an economic environment where there are still observers in the financial sector that are not entirely comfortable that Beijing’s own economic GDP, trade and monetary numbers are all that accurate, anything is possible”. One of the priorities long expressed by Xi Jinping has been to end the lack of confidence in government numbers. Clearly such practices as ghost numbers can migrate to the private sector.

 In any event, estimated ticket sales in 2018 are believed to be relatively accurate rising to nearly US$9bn.

 Theme Parks forward look: Aging out and creating new

 Theme parks in China are currently showing a 13% rate of growth through 2017 totaling 190m admissions. According to a theme park engineers AECOM study, China will surpass the US as the globe’s biggest theme park market by 2020. Pipeline projects, of which HB projects it will participate with movie themes, continue to dominate in south and east China locations with 42% of all projects scheduled to open there covering a population base of 528m.

Over 27% of all current pipeline projects are themed to fantasy/cartoon/movie media intellectual property bases. Projected Capex total for the theme part pipeline from 2018 through 2025 is 280bn.

 Investors in the theme park space also need to understand the ongoing need to keep pop culture icons sprung out of film blockbusters as fresh as possible. The reason is the inevitable “aging out” of the biggest, most formidable themes. Disney characters such as Mickey Mouse made their first appearances in films in the 1920’s US and did not go global until the 1960s-70s. The company has reworked the theming several times.

 Yet its newest attractions are those like Star Wars Galaxy Edge due to go live at Disney Parks by Q3 this year. The first Star Wars movie debuted in 1977. In brief, children in the 8 to 16 year old demographic cohort back then are now in their fifties. A long list of sequels through last year have kept the imagery and characters refreshed through successive generations.

 What Disney has done well is to package and repackage its core intellectual property stars like Mickey Mouse, Donald Duck and Toy Story characters like the cowboy to keep younger generations eager to experience the live attractions. This is the core dilemma of investing in any sector heavily dependent on creativity.

 The takeaway: An investment theory even based on shifting sands can sometime produce powerful results. Facing a fading film business, Walt Disney literally went into deep debt to develop the first Disneyland in 1955. Linked to a television series, the park had a built in marketing engine. Yet by the early 1980s, the aging out of the company’s core characters and poor results from its efforts in non-cartoon films, the stock had taken a hit. The board brought in a new executive team that repurposed its intellectual property, reimagined its animation business and went on to acquire valuable properties from third parties.

 So our conclusion is that the heart of an entertainment company lies in the capacity to reinvent its character stable and repurpose its original form to a diverse downstream set of revenue producing units. That is what we see in HB.

 Even though they began business in 1994, as far as their diversification strategy goes, its early stages. If they succeed in their theme park initiatives and other related businesses beyond filmed entertainment, their valuation could surge given the starting point of an effective 5 year low.

 Part of the forward valuation consideration needs to be the partnerships thus far achieved with Jack Ma ,Tencent, and Evergrande. Do these sophisticated investors see a potential Disney model flourishing downstream?

So the question is this: Beyond standard investing metrics applied to HB, do investors need to consider a broader conception of how to value a company’s future. You can’t really measure a forward EBITDA number, or pluck a one year estimated PT out of what may spring from the imagination of the creative community where blockbuster ideas are generated.

 In the end, at its current low, HB may be a very cheap entry point if it can execute a “Disney-like strategy” over the next five to seven years as its theme park plans spread across the proposed 20 China cities.

 And the model is Disney. Every time the company appeared to run out of creative gas, it managed to find new inspired

properties within the minds of its key creative people.

So at its five year low we raise the question: Does the investment community see big rewards for HB exchanged for the risks implicit in the shifting sands of artists as opposed to projectable earnings metrics?

4. The Downward Revision in FY03/19 Guidance Places Panasonic in Our Worst-Case Scenario

• Panasonic Corp (6752 JP)’s 3Q earnings were quite weak, failing to meet both consensus and our estimates. Panasonic reported revenue of JPY2,074.8bn and OP of JPY97.5bn resulting in an OPM of 4.7% compared to 5.8% in the third quarter of last year
• The majority of revenue growth came from the Automotive & Industrial Solution (A&IS) segment which saw the strongest growth in revenue at nearly 8% YoY followed by the Eco Solutions Segment. Despite the steady growth in the A&IS revenue, the segment continued to display a decline in profits by almost 13% YoY.
• A downward revision in targets was made following the weak earnings this quarter. Nine-months cumulative figures weren’t particularly attractive in the OP front as well (Revenue up 3% YoY and OP down -8% YoY as of 3QFY03/19). Panasonic is nearing our modest case scenario, although its downward revised earnings target places it in our worst-case scenario, where we expect Panasonic to be exposed to a high degree of risk, increasing its lookout for other customers. Panasonic has only tied up with Toyota Motor (7203 JP) thus far and may have to diversify its customer base further to bring earnings to a sustainable level.
• After the earnings release and news about Chinese competitor, CATL (A) (300750 CH), collaborating with Honda Motor (7267 JP) ( Honda Chooses CATL as Battery Partner for Their EVs; Panasonic Has Lost the Chance), Tesla Motors (TSLA US) announced that it was acquiring battery company Maxwell Technologies for production of its EV batteries. Panasonic fell almost -5% on Monday’s open.

5. Chalet Hotels Post-IPO – First-Day Traded Volume Pales in Comparison to past Indian IPOs

Chalet Hotels Limited (CHALET IN) raised US$239m at INR280 per share, the top-end of its IPO price range. We have previously covered the IPO in Chalet Hotels IPO Review – Backed up into a Corner.

In this insight, we will update on the deal dynamics, implied valuation, and include a valuation sensitivity table.

In this briefing:

1. Ghabbour Auto: Hyundai Motor’s Gateway to Egypt & A Major Turnaround Story
2. CJ Corp Holdco/Synthetic Sub Trade: Current Status & Trade Approach
3. Pinduoduo (拼多多) Placement – Not a Good Sign

1. Ghabbour Auto: Hyundai Motor’s Gateway to Egypt & A Major Turnaround Story

• This is a follow-up report to Dylan Waller‘s note Egypt Travel Report: Stock Market Discount Widens Despite Numerous Recovery Signals. This report is the first of several company-specific series of reports on the Egyptian companies. Although I have taken a first crack at analyzing Ghabbour Auto (AUTO EY) (also called GB Auto), most of the other Egyptian company specific reports will be done by Dylan Waller. 
• In this report, I provide an analysis about Ghabbour Auto, which is the largest auto manufacturing company Egypt, and it is also a distributor of Hyundai Motor vehicles. This report is aimed at investors with very long-term investment perspectives (3 to 5+ years), rather than those with shorter investment horizons. 
• Established in 1960, the Ghabbour Group is an Egyptian manufacturer of automobiles, buses, and motorcycles, with headquarters in Cairo. Ghabbour Auto has partnerships with numerous global auto makers including Hyundai Motor, Mazda, Geely, and Volvo. The company has the exclusive license to assemble and distribute Hyundai and Geely passenger cars. GB Auto is the largest company in the Egyptian passenger car market in terms of market share, sales, and production capacity.  

2. CJ Corp Holdco/Synthetic Sub Trade: Current Status & Trade Approach

• CJ Corp is a three-sub holdco. CJ Cheiljedang and CJ ENM, account for three fourth of the holdings. CJ Olive Networks accounts for 10%. Olive Young’s growth has slowed down substantially. There is nearly nothing in Holdco’s stub. Holdco price should now be virtually pegged to the two listed subs.
• It’d be safe to do a stub trade with a synthetic sub. I synthesize the four listed subs on a ratio of 50:40:7:3 (CJ Cheiljedang, CJ ENM, CJ CGV and CJ FW). It’d be also fine to do a simpler one with 55:45 on CJ Cheiljedang and CJ ENM only.
• Holdco/Synthetic Sub are now at -0.25σ on a 20D MA. Normally, I wouldn’t make any move at this point. But things still look a bit tempting in favor of Holdco. We are now seeing a much higher price volatility on Korea’s media content stocks including CJ ENM.
• Generally, a higher sub price volatility leads to a higher holdco valuation relative to sub. In addition, this Olive Networks IPO story is being re-ignited by local investors lately. I expect Holdco to hit a +2σ level which we saw late December. I’d go long Holdco and short the synthetic sub even at this point.

3. Pinduoduo (拼多多) Placement – Not a Good Sign

Pinduoduo (PDD US) is looking to raise about US$1.5bn in its follow-up offering. The placement is a mix of primary and secondary selldown.

The deal scores poorly on our framework due to its large deal size and expensive valuation relative to peers. We find that the timing of the placement to be peculiar and the large overhang post-offering is a worry. Banyan’s selldown in this placement suggested that principal shareholders may progressively look to exit their stakes contrary to our previous assumption and their shares will add pressure to the share price in the near-term.

In this briefing:

1. Sony Revises FY03/19 Guidance Downwards; Management Announces a Surprise Buyback
2. Mitra Adiperkasa (MAPI IJ) – Retail Therapy Is Alive and Well – On the Ground in J-Town
3. Meiji Holdings 3QFY2019 Results On Track to Meet Guidance, Dark Clouds Loom Over Its Mid Term Target
4. Zozo: At First the Fit Was Bad but Now the Threads Are Unravelling
5. Yahoo Japan 3Q Update: Consumer Business Drives Mid-Term Growth; Plans to Diversify in the Long Run

1. Sony Revises FY03/19 Guidance Downwards; Management Announces a Surprise Buyback

• Sony’s revenue for the quarter fell by 10.1% YoY to JPY2,401.8bn while company’s OP saw a 7.5% YoY growth in 3QFY03/19. 
• Sony downgraded its FY03/19 revenue guidance following the third quarter’s earnings results. The company expects to make revenue worth JPY8,500bn for FY03/19, a 2.3% decrease from the October forecast. Sony’s OP forecast for the year still remains at JPY870.0bn.
• Following the 3QFY03/19 earnings release, the company announced that it would buyback JPY100bn worth of its own stock starting Tuesday and lasting until the 22nd of March. 
• As per consensus expectations, Sony is currently trading at a FY1 PE multiple of 7.6x, significantly lower than its historical median of 19.7x.

2. Mitra Adiperkasa (MAPI IJ) – Retail Therapy Is Alive and Well – On the Ground in J-Town

With the huge investment that has been going into e-commerce in Indonesia, especially in the consumer space, there are doomsayers out there crying out that the end is nigh for traditional offline retail as we know it.

Anyone who has actually visited popular destination Jakarta malls such as Grand Indonesia or Kota Kassablanca with their eyes open would almost certainly take a different view. 

A visit to Mitra Adiperkasa (MAPI IJ) management in Jakarta last week confirmed that middle-class retail therapy in Indonesia is alive and well and the company is well positioned to take advantage.  

Mitra Adiperkasa (MAPI IJ) finished 2019 with +8% Same Store Sales Growth (SSSG), with a particularly strong performance from its Sports Station Stores within Ramayana Lestari Sentosa (RALS IJ) stores. 

The company continues to expand its footprint in Indonesia, with plans to increase its floor area by 60,000 sqm in 2019 and a focus on MAP Active, Fashion, and Starbucks. 

MAP continues to take an omnichannel approach to sales, working with all the major online marketplaces and selling through its own Mapemall.com. Online sales only account for around 1% of total sales currently. 

Mitra Adiperkasa (MAPI IJ) remains a key proxy for middle-class consumption in Indonesia, with an increasingly broad spectrum of exposure through alliances with other retailers such as Ramayana Lestari Sentosa (RALS IJ) and Pt Matahari Department Store (LPPF IJ), as well as through its Starbucks expansion. After a few years of restructuring, the company is now harvesting on its transformation, with its specialty business now growing at a faster pace, its department stores in much better shape, and Starbucks enjoying better scale benefits. The company’s margins have improved, it has a stronger balance sheet and more efficient working capital management. According to Capital IQ, the company is trading on 19.6x FY19E PER and 16.5x FY20E PER, with forecast EPS growth of +14.0% and +18.2% for FY19E and FY20E respectively, which continues to look attractive in valuation terms. 

3. Meiji Holdings 3QFY2019 Results On Track to Meet Guidance, Dark Clouds Loom Over Its Mid Term Target

Meiji Holdings (2269 JP) recorded revenue growth of 4.1% in 3QFY2019. The food segment which produces yoghurt, drinking milk, cheese, ice cream, chocolate, nutritional products and sports nutrients came short of the expectations as it recorded a 1.1% drop in revenue. The pharmaceutical segment grew by 35.9% during the quarter allowing Meiji to maintain overall revenue growth in line with FY2019E guidance.

In contrast, EBIT turned out better than expected as it grew 32.6% in 3QFY2019. Both the food and pharmaceutical segments reported significant margin gains, thus the overall EBIT margin of Meiji improved by 227bps cf. 3Q2018.

4. Zozo: At First the Fit Was Bad but Now the Threads Are Unravelling

Just a day after a pledge from CEO Maekawa to stop tweeting sent ZOZO Inc (3092 JP)‘s stock up 8% intraday, the Nikkei reported that United Arrows (7606 JP) would be parting ways with Zozotown and bringing their e-commerce business in-house from October. This comes just days after United Arrows affirmed their desire to continue working with Zozo casting doubt on the positive noises coming from Zozo itself.

As we have pointed out previously, this is the big risk for Zozo and with arguably the company that granted Zozo credibility when it was a startup leaving, a dark cloud has settled over the company’s mid-term future.

5. Yahoo Japan 3Q Update: Consumer Business Drives Mid-Term Growth; Plans to Diversify in the Long Run

Yahoo Japan (4689 JP)  reported 3Q FY03/19 financial results last Monday (04th February). Revenue and OP were on par with consensus. YJ revised the lower range of its FY03/19E OP guidance upwards by JPY7bn to JPY140bn mainly due to lower than expected growth related expenses (expenses for new challenges as per the management). Meanwhile, the upper limit of the FY03/19E OP guidance of JPY143bn remains unchanged. The revised OP guidance for FY03/19E is JPY140-143bn.

In this briefing:

1. Tesla (TSLA): SWOT Analysis Leads To…Rivian
2. Dali Foods (3799:HK): Short to HK$4.18 on Expected Cost Increases (Full Note)
3. TRACKING TRAFFIC/Chinese Tourism: HK & Macau Gained ‘Share’ in December, Continuing H218 Trend

1. Tesla (TSLA): SWOT Analysis Leads To…Rivian

What happens when innovation becomes commoditized?  We believe this is a core concern to every Tesla watcher, bulls and bears so we began our Lunar New Year week (or Pro Am 2019 week in Pebble Beach) with a quick and dirty SWOT analysis of Tesla to see where the next potential existential threat can come from…and we ended up looking at Rivian.  

Rivian is a private company that has not issued public debt so financial information on the company is unavailable in the U.S. public domain, so we poured through strategic investor Sumitomo Corp’s Yuho reports to see if we can find any tidbits in Japan but found nothing there either.  Hence, while we cannot make much financial observations about the company at this point, we do see a number of strategic signs from Rivian’s actions that may indicating that it is most likely improving upon the Tesla experience to avoid the hiccups and the bumps on the road to premium EV segment dominance.

From an APAC stock market perspective, we see LG Chem and Sumitomo Corp as two entities that could potentially see financial impact from Rivian in the next several years. Teslerati has made an educated guess on LG Chem as Rivian’s cell supplier which we believe to be reasonable, although Rivian and LG Chem have neither confirmed nor denied the relationship (https://insideevs.com/new-details-rivian-battery-pack-design/, https://www.teslarati.com/rivian-battery-lab-irvine-california-megapack-production/).  Current investment in Rivian by Sumitomo Corp is most likely an insignificant amount from the latter’s perspective but could perhaps grow into something bigger at some point in the future.  

The Rivian R1S

2. Dali Foods (3799:HK): Short to HK$4.18 on Expected Cost Increases (Full Note)

Chinese snack food and beverage maker Dali Foods Group (3799 HK) is well-loved by sell-side analysts, with 18 of 20 analysts rating the stock ‘Buy’ or ‘Overweight’.

In contrast to the consensus ‘bull’ view of the company, we believe revenue growth is slowing and that core margins will soon come under intense pressure due to rising raw materials costs. As a result, our earnings estimates for Dali Foods are substantially lower than consensus.

Based on 13.5 times our 2019 EPS estimate, our target price for Dali Foods’ shares is HK$4.18, about 23% below the closing price of HK$5.41 on February 1st. 

3. TRACKING TRAFFIC/Chinese Tourism: HK & Macau Gained ‘Share’ in December, Continuing H218 Trend

Tracking Traffic/Chinese Tourism is the hub for all of our research on China’s tourism sector. This monthly report features analysis of Chinese tourism data, notes from our conversations with industry participants, and links to recent company news and thematic pieces. Our aim is to highlight important trends in China’s tourism sector (and changes to those trends).

In this issue readers can find:

Although we remain positive on the long-term growth of Chinese tourism, it’s clear that near-term demand growth has slowed, and that Chinese tourists are generally staying closer to home and probably spending less than they were a year ago. 

Happy New Year (of the Pig)!

In this briefing:

1. Yahoo Japan 3Q Update: Consumer Business Drives Mid-Term Growth; Plans to Diversify in the Long Run
2. Ghabbour Auto: Hyundai Motor’s Gateway to Egypt & A Major Turnaround Story
3. CJ Corp Holdco/Synthetic Sub Trade: Current Status & Trade Approach
4. Pinduoduo (拼多多) Placement – Not a Good Sign
5. Auto Earnings: Positive Toyota/Mazda, Negative Subaru/Suzuki

1. Yahoo Japan 3Q Update: Consumer Business Drives Mid-Term Growth; Plans to Diversify in the Long Run

Yahoo Japan (4689 JP)  reported 3Q FY03/19 financial results last Monday (04th February). Revenue and OP were on par with consensus. YJ revised the lower range of its FY03/19E OP guidance upwards by JPY7bn to JPY140bn mainly due to lower than expected growth related expenses (expenses for new challenges as per the management). Meanwhile, the upper limit of the FY03/19E OP guidance of JPY143bn remains unchanged. The revised OP guidance for FY03/19E is JPY140-143bn.

2. Ghabbour Auto: Hyundai Motor’s Gateway to Egypt & A Major Turnaround Story

• This is a follow-up report to Dylan Waller‘s note Egypt Travel Report: Stock Market Discount Widens Despite Numerous Recovery Signals. This report is the first of several company-specific series of reports on the Egyptian companies. Although I have taken a first crack at analyzing Ghabbour Auto (AUTO EY) (also called GB Auto), most of the other Egyptian company specific reports will be done by Dylan Waller. 
• In this report, I provide an analysis about Ghabbour Auto, which is the largest auto manufacturing company Egypt, and it is also a distributor of Hyundai Motor vehicles. This report is aimed at investors with very long-term investment perspectives (3 to 5+ years), rather than those with shorter investment horizons. 
• Established in 1960, the Ghabbour Group is an Egyptian manufacturer of automobiles, buses, and motorcycles, with headquarters in Cairo. Ghabbour Auto has partnerships with numerous global auto makers including Hyundai Motor, Mazda, Geely, and Volvo. The company has the exclusive license to assemble and distribute Hyundai and Geely passenger cars. GB Auto is the largest company in the Egyptian passenger car market in terms of market share, sales, and production capacity.  

3. CJ Corp Holdco/Synthetic Sub Trade: Current Status & Trade Approach

• CJ Corp is a three-sub holdco. CJ Cheiljedang and CJ ENM, account for three fourth of the holdings. CJ Olive Networks accounts for 10%. Olive Young’s growth has slowed down substantially. There is nearly nothing in Holdco’s stub. Holdco price should now be virtually pegged to the two listed subs.
• It’d be safe to do a stub trade with a synthetic sub. I synthesize the four listed subs on a ratio of 50:40:7:3 (CJ Cheiljedang, CJ ENM, CJ CGV and CJ FW). It’d be also fine to do a simpler one with 55:45 on CJ Cheiljedang and CJ ENM only.
• Holdco/Synthetic Sub are now at -0.25σ on a 20D MA. Normally, I wouldn’t make any move at this point. But things still look a bit tempting in favor of Holdco. We are now seeing a much higher price volatility on Korea’s media content stocks including CJ ENM.
• Generally, a higher sub price volatility leads to a higher holdco valuation relative to sub. In addition, this Olive Networks IPO story is being re-ignited by local investors lately. I expect Holdco to hit a +2σ level which we saw late December. I’d go long Holdco and short the synthetic sub even at this point.

4. Pinduoduo (拼多多) Placement – Not a Good Sign

Pinduoduo (PDD US) is looking to raise about US$1.5bn in its follow-up offering. The placement is a mix of primary and secondary selldown.

The deal scores poorly on our framework due to its large deal size and expensive valuation relative to peers. We find that the timing of the placement to be peculiar and the large overhang post-offering is a worry. Banyan’s selldown in this placement suggested that principal shareholders may progressively look to exit their stakes contrary to our previous assumption and their shares will add pressure to the share price in the near-term.

5. Auto Earnings: Positive Toyota/Mazda, Negative Subaru/Suzuki

On a relative basis we have been positive on Toyota Motor (7203 JP)  and negative on Subaru Corp (7270 JP)  since early 2017 as we consider Toyota’s underlying earnings strength to be superior to the majority of its peers and consider hybrids to be moving towards the mass adoption stage while we also feel that Subaru, after a purple patch when it led the automotive industry in terms of margins, is now falling back to Earth and the sell side remains behind the curve on the depth of issues and underspend that needs to be addressed at the company. The ratio between the two returned about 40% in 2018 but is down about 12% so far this year.

In the case of Mazda Motor (7261 JP) and Suzuki Motor (7269 JP), in Mar 2018 we took the contrarian view of preferring Mazda over Suzuki despite earnings momentum being significantly stronger for Suzuki than for Mazda. This proved to be “early” as the ratio declined 16% during the year and at one point fell as much as 30%, but we continue to feel that our thesis has merit and would note that the ratio is now up 2% relative to its value at our initial recommendation. Our thesis is simply that Mazda’s earnings are under pressure due to forward investments in technology (extremely high efficiency gasoline and diesel engines) and distribution and after sales which have traditionally been a Mazda weakness and are in our opinion the main difference between Mazda and a much stronger company like Honda. In the case of Suzuki, while the long-term growth outlook due to the India exposure remains bright, we felt that momentum was likely to decelerate and that Suzuki could face headwinds in the short-term as consumer upgraded from mini-vehicles in which it is dominant, to compact and mid-size cars where Suzuki is strong in India, but not the force of nature that it is in the mini-vehicle segment. While it has taken time, recent results suggest this thesis is starting to play out.

In this briefing:

1. Chalet Hotels Post-IPO – First-Day Traded Volume Pales in Comparison to past Indian IPOs
2. Sony Revises FY03/19 Guidance Downwards; Management Announces a Surprise Buyback
3. Mitra Adiperkasa (MAPI IJ) – Retail Therapy Is Alive and Well – On the Ground in J-Town
4. Meiji Holdings 3QFY2019 Results On Track to Meet Guidance, Dark Clouds Loom Over Its Mid Term Target
5. Zozo: At First the Fit Was Bad but Now the Threads Are Unravelling

1. Chalet Hotels Post-IPO – First-Day Traded Volume Pales in Comparison to past Indian IPOs

Chalet Hotels Limited (CHALET IN) raised US$239m at INR280 per share, the top-end of its IPO price range. We have previously covered the IPO in Chalet Hotels IPO Review – Backed up into a Corner.

In this insight, we will update on the deal dynamics, implied valuation, and include a valuation sensitivity table.

2. Sony Revises FY03/19 Guidance Downwards; Management Announces a Surprise Buyback

• Sony’s revenue for the quarter fell by 10.1% YoY to JPY2,401.8bn while company’s OP saw a 7.5% YoY growth in 3QFY03/19. 
• Sony downgraded its FY03/19 revenue guidance following the third quarter’s earnings results. The company expects to make revenue worth JPY8,500bn for FY03/19, a 2.3% decrease from the October forecast. Sony’s OP forecast for the year still remains at JPY870.0bn.
• Following the 3QFY03/19 earnings release, the company announced that it would buyback JPY100bn worth of its own stock starting Tuesday and lasting until the 22nd of March. 
• As per consensus expectations, Sony is currently trading at a FY1 PE multiple of 7.6x, significantly lower than its historical median of 19.7x.

3. Mitra Adiperkasa (MAPI IJ) – Retail Therapy Is Alive and Well – On the Ground in J-Town

With the huge investment that has been going into e-commerce in Indonesia, especially in the consumer space, there are doomsayers out there crying out that the end is nigh for traditional offline retail as we know it.

Anyone who has actually visited popular destination Jakarta malls such as Grand Indonesia or Kota Kassablanca with their eyes open would almost certainly take a different view. 

A visit to Mitra Adiperkasa (MAPI IJ) management in Jakarta last week confirmed that middle-class retail therapy in Indonesia is alive and well and the company is well positioned to take advantage.  

Mitra Adiperkasa (MAPI IJ) finished 2019 with +8% Same Store Sales Growth (SSSG), with a particularly strong performance from its Sports Station Stores within Ramayana Lestari Sentosa (RALS IJ) stores. 

The company continues to expand its footprint in Indonesia, with plans to increase its floor area by 60,000 sqm in 2019 and a focus on MAP Active, Fashion, and Starbucks. 

MAP continues to take an omnichannel approach to sales, working with all the major online marketplaces and selling through its own Mapemall.com. Online sales only account for around 1% of total sales currently. 

Mitra Adiperkasa (MAPI IJ) remains a key proxy for middle-class consumption in Indonesia, with an increasingly broad spectrum of exposure through alliances with other retailers such as Ramayana Lestari Sentosa (RALS IJ) and Pt Matahari Department Store (LPPF IJ), as well as through its Starbucks expansion. After a few years of restructuring, the company is now harvesting on its transformation, with its specialty business now growing at a faster pace, its department stores in much better shape, and Starbucks enjoying better scale benefits. The company’s margins have improved, it has a stronger balance sheet and more efficient working capital management. According to Capital IQ, the company is trading on 19.6x FY19E PER and 16.5x FY20E PER, with forecast EPS growth of +14.0% and +18.2% for FY19E and FY20E respectively, which continues to look attractive in valuation terms. 

4. Meiji Holdings 3QFY2019 Results On Track to Meet Guidance, Dark Clouds Loom Over Its Mid Term Target

Meiji Holdings (2269 JP) recorded revenue growth of 4.1% in 3QFY2019. The food segment which produces yoghurt, drinking milk, cheese, ice cream, chocolate, nutritional products and sports nutrients came short of the expectations as it recorded a 1.1% drop in revenue. The pharmaceutical segment grew by 35.9% during the quarter allowing Meiji to maintain overall revenue growth in line with FY2019E guidance.

In contrast, EBIT turned out better than expected as it grew 32.6% in 3QFY2019. Both the food and pharmaceutical segments reported significant margin gains, thus the overall EBIT margin of Meiji improved by 227bps cf. 3Q2018.

5. Zozo: At First the Fit Was Bad but Now the Threads Are Unravelling

Just a day after a pledge from CEO Maekawa to stop tweeting sent ZOZO Inc (3092 JP)‘s stock up 8% intraday, the Nikkei reported that United Arrows (7606 JP) would be parting ways with Zozotown and bringing their e-commerce business in-house from October. This comes just days after United Arrows affirmed their desire to continue working with Zozo casting doubt on the positive noises coming from Zozo itself.

As we have pointed out previously, this is the big risk for Zozo and with arguably the company that granted Zozo credibility when it was a startup leaving, a dark cloud has settled over the company’s mid-term future.

In this briefing:

1. Honda Chooses CATL as Battery Partner for Their EVs; Panasonic Has Lost the Chance
2. Dali Foods (3799:HK): Short on Expected Cost Increases (Summary Note)

1. Honda Chooses CATL as Battery Partner for Their EVs; Panasonic Has Lost the Chance

CATL (A) (300750 CH) announced on Monday that it has signed a deal with Honda Motor (7267 JP) for jointly developing Li-ion batteries. This news comes to us as no surprise, given CATL’s effort in expanding market share globally by tying with leading automakers such as Nissan Motor (7201 JP), Daimler AG (DAI GR), and Bayerische Motoren Werke Ag (BMW GR). It seems that the Chinese battery leader is now targeting leading Japanese automakers alongside their focus on luxury automakers in Europe ( BMW to Invest in CATL: Chinese Battery Maker to Gain Exposure in Europe?).  Following Panasonic Corp (6752 JP)’s news about forming a Joint Venture with Toyota, we were under the impression that Panasonic would hit a deal with Honda as well. However, it seems that CATL has emerged as a first mover and secured a steady business by partnering with Honda, one of the leading automakers in Japan. Although Panasonic and Honda joined hands for developing a swappable battery system in Indonesia, the team hasn’t really gone ahead in developing Li-ion batteries. Honda’s battery sales are now for CATL, while Panasonic has lost a steady business deal unless the latter makes plans with Honda to develop new battery technologies such as solid-state batteries. In our opinion, Honda and CATL, being leaders in their respective industries, when joined together via this agreement should capture a strong position in the auto sector which is striding towards electrification. The effect of this news on CATL share price cannot be really seen as the markets are closed for ongoing holidays in China. Panasonic, however, opened -5.1% low on February 5th, mainly due to its disappointing 3QFY03/19 earnings and could be partly due to this news.

2. Dali Foods (3799:HK): Short on Expected Cost Increases (Summary Note)

Chinese snack food and non-alcoholic beverage maker Dali Foods Group (3799 HK) is well-loved by sell-side analysts. Fully 18 of twenty analysts (including all four of the ‘bulge bracket’ investment banks who cover it) rate the stock ‘Buy’ or ‘Overweight’, and only one analyst gives the shares an ‘Underweight’ rating.

The ‘bull’ case for Dali Foods includes continued strong revenue growth and further margin expansion over the next few years. In contrast, we believe revenue growth is already moderating and that core margins will soon come under pressure due to rising raw materials costs. As a result, our forward earnings estimates are substantially below consensus expectations.

Based on 13.5 times our 2019 EPS estimate, our target price for Dali Foods is HK$4.18, about 23% below its HK$5.41 closing price on February 1st. We suggest investors Short Dali Foods; current holders should consider exiting their positions, in our view.

A longer note that includes company and industry background, plus financial statements and forecasts for Dali Foods, can be found elsewhere here on Smartkarma using the company’s ticker.