Consumer

In this briefing:

1. ECM Weekly (2 February 2019) – Maoyan, China Tower, Dexin, Chalet Hotels, Bharat Hotels, Wingarc1st
2. Netmarble Games + Tencent = The Most Likely Consortium to Acquire NXC Corp/Nexon?
3. Shanghai/Shenzhen Connect – $8.5 Bn of Inflow in January (Kweichow Moutai, Gree, Midea)
4. ZOZO: Earthbound

1. ECM Weekly (2 February 2019) – Maoyan, China Tower, Dexin, Chalet Hotels, Bharat Hotels, Wingarc1st

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% for IPOs and 63.8% for Placements 

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

New IPO filings

• Edvantage Group (Hong Kong, ~US$100m)
• Koolearn (Hong Kong, re-filed)
• Shangde Qizhi Education Group (Hong Kong, re-filed)

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

• China’s Sinochem Energy lets Hong Kong IPO application lapse
• India’s Cleartrip eyes IPO as it plans Gulf expansion
• Blackstone set to IPO inaugural $1 billion Reit before March
• Bursa Malaysia’s outgoing CEO says IPO pipeline for 2019 looks strong
• China to Scrap Price, Debut Gain Limits to Entice Tech IPOs

Smartkarma Community’s this week Analysis on Upcoming IPO

• Ebang IPO Preview: Balance Sheet Indicators Point to a Significant Slowdown
• Chalet Hotels IPO Review – Backed up into a Corner
• CStone Pharma IPO Preview: Mixed Prospects of Late-Stage Clinical Drug Candidates
• IPO Radar: KTB Securities, the Only Korean Broker in Thailand
• Shanghai Henlius (复宏汉霖) IPO: Not an Impressive Biosimilar Portfolio
• Dreamtech: Trying for an IPO Again at a Lower Price
• Bharat Hotels Pre-IPO – Catching up with Peers
• China Tower Corp: Trading Idea Before Lock-Up Expiry
• Dexin China (德信中国) Pre-IPO – Related Party Transactions and Partial Asset Listing

List of pre-IPO Coverage on Smartkarma

2. Netmarble Games + Tencent = The Most Likely Consortium to Acquire NXC Corp/Nexon?

Netmarble Games (251270 KS) officially announced on January 31st that it is interested in buying Nexon/NXC Corp. We believe that there is a growing likelihood of a potential consortium which includes Tencent and Netmarble Games to acquire NXC Corp/Nexon. Three major reasons why Tencent may want to partner with Netmarble Games to acquire NXC Corp/Nexon include the following:

• Avoid the cultural backlash from Korean gamers
• Among all the companies that Tencent has invested in Korea, Netmarble Games has become the biggest in amount. 
• Netmarble Games is more focused on games and has a stronger balance sheet than Kakao Corp, which has also shown interest in acquiring NXC Corp/Nexon. 

3. Shanghai/Shenzhen Connect – $8.5 Bn of Inflow in January (Kweichow Moutai, Gree, Midea)

In our Discover SZ/SH Connect series, we aim to help our investors understand the flow of northbound trades via the Shanghai Connect and Shenzhen Connect, as analyzed by our proprietary data engine. We will discuss the stocks that experienced the most inflow and outflow by offshore investors in the past seven days.

We split the stocks eligible for the northbound trade into three groups: those with a market capitalization of above USD 5 billion, and those with a market capitalization between USD 1 billion and USD 5 billion.

We note that offshore investors were buying all GICS sectors, and had a strong preference for Consumer Staples, Financials and Consumer Discretionary names. We estimate that total inflow into A-share market via northbound trade amounted to USD 8.5 bn in January.

Stocks with strong inflows (by quantum) were Kweichow Moutai Co Ltd A (600519 CH), Gree Electric Appliances Inc Of Zhuhai (000651 CH), and Midea Group Co Ltd A (000333 CH). Please read this note together with our coverage for December flow and our coverage for January northbound flow. 

4. ZOZO: Earthbound

DOWN AND OUT – ZOZO (3092 JP)‘s third-quarter results which were announced yesterday, saw a 28% quarter-on-quarter increase in sales and trailing-twelve-month (TTM) revenues increased by 25%. Elsewhere the wheels are gradually coming off. In ZOZO most important quarter of the year, Operating Income rose by just 8.2% year-on-year and Net Income by 9.5%. As we mentioned in our previous Insight, Buying a Stairway to Heaven, ZOZO required at least ¥46b in revenues and ¥15b in operating income to meet their full-year forecasts. ¥36b and ¥10b failed to reach this high hurdle and, for the first time since listing, ZOZO has been required to revise down the company’s earnings forecasts. Revenues have been revised down by 20%, OPerating Income by 34% and Net Income by 36% compared to the company’s previous forecasts. Compared to the trailing-twelve-month number the revisions are +1% and -11%, respectively.  

DOWNSIDE RISK – If ZOZO has entered an era of low or no-growth, a revaluation fo the business to reflect such a reality could see the company’s shares fall by up to 50%

In this briefing:

1. CyberAgent Cuts Its OP Guidance by JPY10bn; We Are Still Bullish
2. Alibaba (BABA): For Dec. Quarter, Focus on Profit Improvement, But Not Revenue Growth, 40% Upside

1. CyberAgent Cuts Its OP Guidance by JPY10bn; We Are Still Bullish

Cyberagent Inc (4751 JP) reported 1Q FY09/19 financial results on Wednesday (30^th January) after the market close. CyberAgent reported revenue of JPY110.8bn (+13.2%YoY) and OP of JPY5.3bn (-35.2%YoY) for 1Q FY09/19.

Revenue and OP both missed consensus (JPY111.7bn and JPY8.2bn respectively). This was mostly due to low OP from the Game business due to increased advertising expenditure for new titles. OP margin of the Internet Advertisement business also fell due to upfront investments for expansion. Media business, driven by AbemaTV, demonstrated strong topline growth driven by robust increase in the number of AbemaTV premium users but continued to make losses due to heavy investment in content development.

CyberAgent revised down its full-year FY03/19E OP guidance to JPY20bn from JPY30bn previously, but we continue to remain positive about the company’s long term performance, driven by the prospects of its passive TV business (see Mio Kato‘s previous note on this Cyberagent: Aggressive Plans for Passive TV).

CyberAgent’s share price closed at JPY3,500 on Thursday (31st January) down 16% from its previous close. CyberAgent’s share price has been on a bearish trend for the last two quarters, down 49% from an all-time high of JPY6,800 in July. We believe this presents an ideal buying opportunity for the stock. Our SOTP valuation for CyberAgent gives a FY1 target price of JPY4,480 which implies a 28% upside to the current market price.

For details on Cyberagent’s business model please see our previous notes CyberAgent: Hot Internet Media Stock Up ~50% YTD (Part 1) and CyberAgent (Part II): Medium-Term Prospects Are Priced In; Positive Long-Term Outlook .

2. Alibaba (BABA): For Dec. Quarter, Focus on Profit Improvement, But Not Revenue Growth, 40% Upside

• For the December quarter results, the market is focusing on the slowdown of the revenue growth, but we notice that the growth rate of operating profits recovered.
• In two of our previous reports, we mentioned BABA’s efforts on cost control in the second half of 2018. Now we can see the results.
• We believe the most important risk is the significant operating losses in the minor business “digital media”.
• The P/E band suggests that the stock price has an upside of 40%.

In this briefing:

1. Shanghai/Shenzhen Connect – $8.5 Bn of Inflow in January (Kweichow Moutai, Gree, Midea)
2. ZOZO: Earthbound
3. Koito Outperforms in 3Q While Stanley Disappoints; Latter Still on Track to Achieve FY03/19E Target
4. Toppan Printing: Money for Nothing (& Your Clicks for Free)
5. Share Classifications: Jan 2019 Month-End Snapshot

1. Shanghai/Shenzhen Connect – $8.5 Bn of Inflow in January (Kweichow Moutai, Gree, Midea)

In our Discover SZ/SH Connect series, we aim to help our investors understand the flow of northbound trades via the Shanghai Connect and Shenzhen Connect, as analyzed by our proprietary data engine. We will discuss the stocks that experienced the most inflow and outflow by offshore investors in the past seven days.

We split the stocks eligible for the northbound trade into three groups: those with a market capitalization of above USD 5 billion, and those with a market capitalization between USD 1 billion and USD 5 billion.

We note that offshore investors were buying all GICS sectors, and had a strong preference for Consumer Staples, Financials and Consumer Discretionary names. We estimate that total inflow into A-share market via northbound trade amounted to USD 8.5 bn in January.

Stocks with strong inflows (by quantum) were Kweichow Moutai Co Ltd A (600519 CH), Gree Electric Appliances Inc Of Zhuhai (000651 CH), and Midea Group Co Ltd A (000333 CH). Please read this note together with our coverage for December flow and our coverage for January northbound flow. 

2. ZOZO: Earthbound

DOWN AND OUT – ZOZO (3092 JP)‘s third-quarter results which were announced yesterday, saw a 28% quarter-on-quarter increase in sales and trailing-twelve-month (TTM) revenues increased by 25%. Elsewhere the wheels are gradually coming off. In ZOZO most important quarter of the year, Operating Income rose by just 8.2% year-on-year and Net Income by 9.5%. As we mentioned in our previous Insight, Buying a Stairway to Heaven, ZOZO required at least ¥46b in revenues and ¥15b in operating income to meet their full-year forecasts. ¥36b and ¥10b failed to reach this high hurdle and, for the first time since listing, ZOZO has been required to revise down the company’s earnings forecasts. Revenues have been revised down by 20%, OPerating Income by 34% and Net Income by 36% compared to the company’s previous forecasts. Compared to the trailing-twelve-month number the revisions are +1% and -11%, respectively.  

DOWNSIDE RISK – If ZOZO has entered an era of low or no-growth, a revaluation fo the business to reflect such a reality could see the company’s shares fall by up to 50%

3. Koito Outperforms in 3Q While Stanley Disappoints; Latter Still on Track to Achieve FY03/19E Target

Koito Manufacturing (7276 JP) released its 3QFY03/19 earnings that saw revenue outpace consensus estimates by +2%, while Stanley Electric (6923 JP) ’s revenue fell below consensus estimates by -1%. While Koito witnessed revenue growth of 10% YoY, Stanley posted a decline in revenue for the quarter by -4% YoY. On profitability as well, Koito witnessed growth of +6% YoY, achieving an OPM of 12%. Stanley, on the other hand, experienced a decline in OP for the quarter by -7% YoY, although still managing to achieve a relatively higher OPM of 13%. Here again, Koito managed to beat consensus estimates by +1% while Stanley fell below consensus estimates by -3%. Our conservative estimates for 3Q looked a bit light for Koito while they were slightly high for Stanley.  Koito has been the company which usually disappoints the market with its earnings results, although it has proved otherwise this quarter.

That being said, it should be noted that, although Stanley’s three months ended results did not look particularly robust, its nine months ended results were quite favourable. The company witnessed the revenue grow 0.5% YoY (for the nine months ended 30^th Dec 2018) while OP grew by 5.9% YoY, supported by the steady growth in the high-margin LED headlamps. For Koito, on the other hand, the three months ended results seemed quite favourable, although the nine months ended results displayed a revenue decline of -5.1% YoY and OP decline of -2.4% YoY, citing the deconsolidation of its Chinese subsidiary and the decrease in the volume of automobile production in some of its business regions as the key reasons. Thus, the overall YTD financial performance of Stanley looks still attractive compared to that of Koito. Following the earnings release, Stanley opened -3.7% down on Thursday from Tuesday’s close, while Koito closed +4.8% up on Wednesday since Friday’s close.

4. Toppan Printing: Money for Nothing (& Your Clicks for Free)

TOPPAN PRINTING (7911 JP) is Japan’s current Negative Enterprise Value ‘champion’. Although only growing in the low single digits and with margins to match, comprehensive income margins and returns are significantly higher, as they take Toppan’s significant investment portfolio gains into account. The investment portfolio has grown at a 39.1% compound annual growth rate (CAGR) over the last five years, outperforming Toppan’s core operations (6.4% CAGR) and the overall stock market (7.5% CAGR).

MARKET MYOPIA – Despite the investment portfolio’s ¥411b contribution to Shareholder’s Equity, which has otherwise only increased by ¥98b, the stock market preferred to focus on the stagnating top-line, and the shares have been serial underperformers. Toppan’s market capitalisation has grown by only 2% per annum or just ¥34b since December 2013. From the recent peak in June 2017, Toppan shares have underperformed the market by 27% and, for the last year, have been at their most extreme value relative to TOPIX over the previous thirty years.  During this period, Toppan’s equity holdings rose from 43% of the company’s market capitalisation to close to parity at the recent market peak in September 2018. 

BOTTOMING OUT – With the upcoming boost to sales in the printing business from the change in Japan’s gengō (元号) or era name on the accession of the new Emperor in April, the shares have finally broken out of a one-year period in the Oversold ‘doldrums’.

SELLING STRATEGIC INVESTMENTS – More importantly, the company has become more proactive in managing equity risk. On 23rd January, Toppan sold 10.5m shares in Recruit Holdings (6098 JP) for approximately ¥31.5b, reducing Toppan’s holding in Japan’s leading listing employment services business from 6.57% to 6.05%. Despite the boilerplate language used to describe the company’s strategy towards strategic shareholdings, Toppan has begun to address the portfolio more proactively and in accordance with the spirit of the new guidelines on Corporate Governance in Japan.

BUYBACK POTENTIAL – With this sale, Toppan’s liquid assets will now exceed US$3b or 58% of the current market capitalisation, while the company has committed to capital expenditures totalling only ¥125b over the next five years. Toppan last conducted a modest 0.2% share buyback in 2015-Q2, which was ‘unwound’ by a 0.5% reduction in Treasury Stock in 2017-Q3, which was not accompanied by a share cancellation. With just 8% of shares outstanding held in treasury, there is ample room for further buybacks. 

5. Share Classifications: Jan 2019 Month-End Snapshot

This month-end share class summary is a companion insight to Travis Lundy‘s H/A Spread & Southbound Monitors and Ke Yan‘s HK Connect Discovery Weeklies.

This share class monitor provides a snapshot of the premium/discounts for various share classifications around the region, and comprises four sets of data:

1.  82 ADRs 
2.  104 Korean Prefs 
3.  22 Regional Dual Classes
4.  7 Foreign/Local Thai shares 

The average premium/discount for each set over a one-year period is graphed below.

Source: CapIQ

For a granular breakdown of each data set, PDFs are attached at the bottom of this insight.

In this briefing:

1. LG H&H Share Class: Long 1P / Short Common with a Short-Term Horizon
2. Market Largely Untroubled by Kao’s Troubles
3. U.S. Equity Strategy: Market in Wait-And-See Mode; Upgrading Tech
4. Tesla – Shanghai Surprise
5. Zee Entertainment- Present Mess Seems to Be of Short Term in Nature

1. LG H&H Share Class: Long 1P / Short Common with a Short-Term Horizon

• Common was up 4.81% yesterday. 1P went up 2.45%. The duo is now at 232% of σ. Pref discount stands at 40.32%. This is above 120D mean. This much premium on Common is the highest since October. On 120D, price ratio is above 120D mean.
• Current PER on FY19 earnings is 27x. Valuation wise, there doesn’t seem to be much room for further upside. Local sentiments on the fundamentals outlook are relatively divided. This suggests that it’d be hard to build sustainable price momentums.
• I’d trade this duo on the current divergence. Just, we are moving towards March shareholder meeting cycle. Div yield difference on Common/1P is also pretty minimal. I’d have this trade with a very short-term horizon.

2. Market Largely Untroubled by Kao’s Troubles

After an article appeared on Nikkei Asian Review on 29^th January 2019 stating that Kao Corp (4452 JP) is going to miss its revenue and profit projections for FY2018E, we witnessed no panic in the market. Kao Corporation shares opened trading at JPY 7,621.00 per share up by 0.1% from the previous close price of JPY 7,610.00. The price increased further to JPY 7,657.00 before decreasing towards the day’s low of JPY 7,521.00 and it closed at JPY 7,583.00 which was about 0.4% down from the previous day’s closing price. However, the volume traded had an impact because of this news. For the past 3 months, the average daily volume traded has been around 1.73m shares a day, but declined 27.2% on 29^th Jan 2019.

This news came to light from a third-party source, but Kao responded to it on its investor relations website saying:

“The article in the Nikkei on Jan. 29 regarding the earning forecast consolidated results, is not based on any announcement made by Kao Corporation.”

In their latest release to their investor relations website, Kao Corporation keeps quiet on its ability to meet its 2018E guidance.

This has been happening at Kao for the past few years. Each time a news article has been released regarding Kao’s annual results, by a third party a few days prior to the official announcement.

3. U.S. Equity Strategy: Market in Wait-And-See Mode; Upgrading Tech

The S&P 500 has paused just below logical resistance at the downtrend, and we believe the equity market is in wait-and-see mode for incremental information on a variety of issues including trade talks, Fed action and earnings.  Meanwhile, We are upgrading equal-weighted Technology to overweight. Our equal-weighted Tech Sector has surged to the top of our RSR ranks due to broad-based strength in semiconductors last week. Solar stocks are another Group that is emerging as leadership. In today’s report we highlight attractive small-cap Technology stocks, as well as selection of key stocks (MSFT, AMZN, GOOGL, V, NFLX, and ADBE) and subsectors (semis, biotech, and homebuilders) which are all up against logical price resistance.

4. Tesla – Shanghai Surprise

Tesla Motors (TSLA US) stock is in a tailspin, again. Closing at $297 today, the stock is down 11% ytd, well off its high last August at $379 and trailing even 2018’s comparatively tepid average of $316. Tesla bondholders have remained wary, with the benchmark 5.3% senior notes still hovering near 86 where they’ve traded since last September after plunging more than 10 points versus the beginning of 2018.

Investors are spooked as more Wall Street analysts have slashed their formerly ambitious estimates for Tesla’s fourth-quarter and 2019 revenue, profit, and cash flow primarily due to what they now identify as lower than expected demand and profitability for Model 3. The thing is, Tesla has been signaling escalating troubles for months as I have warned in “Great Magic Trick Tesla; Now Do It Again” which digested Tesla’s “miracle” third quarter and “Tesla: Down to the Wire” which reviewed the frantic close of the fourth quarter). 

So while it’s interesting that market estimates are collapsing toward my previously below-consensus estimates–and even I lowered my already cautious 2019 numbers–I’m concerned about other potentially quake-worthy news affecting performance for 2019 and beyond which we are not getting from Tesla.

With little more notice than a tweet,CEO Elon Musk popped into Shanghai, China, in early January for a showy groundbreaking ceremony to launch Tesla’s new multi-billion dollar Gigafactory 3 which reportedly will be capable of doubling Tesla’s current production capacity. Even more surprising, Musk projected Model 3 production will begin there before the end of this year–less than eleven months from now.

Yet three weeks later we still have no idea how much this mega-plant will cost, or whether Tesla has “funding secured” to pay for it–and these may not even be most troubling facts investors don’t have.

Whatare Musk, and Tesla, and Tesla’s banks, and Musk’s China-based financiers not telling us about Shanghai Giga 3? I suspect the answers may come with potentially nasty surprises.

Read more for Bond Angle analysis.

5. Zee Entertainment- Present Mess Seems to Be of Short Term in Nature

Zee Entertainment Enterprises (ZIN) in the last two trading sessions has corrected by almost 13% over an allegation by a media house that has suggested a link of the Essel Group, the parent company with a firm that is being probed by Serious Fraud Investigation Office over deposits worth Rs. 32 bn during demonetization.

However, the company has denied any link with the firm and has blamed some “negative forces” that are behind the fall to hinder the strategic sale of Zee Entertainment, the crown jewel of the group, so that the parent, Essel group can reduce the debt burden that has accumulated over the years due to some bad calls.

We provide the details in this report.

In this briefing:

1. Tesla Motors – Gaining Industrial Strength
2. Tesla (TSLA): 4Q Earnings and First Impressions on the Company’s Strategy
3. Bharat Hotels Pre-IPO – Catching up with Peers
4. Teasing Updates on CaiNiao Network & Ele.me Out of Alibaba’s Q3 Results
5. Kumho Tire (073240): Tough Times Ahead Still…

1. Tesla Motors – Gaining Industrial Strength

Tesla Motors (TSLA US) continues to power ahead of the competition in electric vehicles with an 80% market share of all electric vehicles sold in the United States in 2018.  With approximately 140,000 Model 3 cars sold in the U.S., Tesla outsold every marquee sedan brand. Model 3 outsold mid-size SUVs including BMW X3, Acura MDX, Audi Qs, Lexus RX and even the Mercedes C -Class. 

2. Tesla (TSLA): 4Q Earnings and First Impressions on the Company’s Strategy

Tesla’s 4Q results came in lower than consensus expectations.  While the 4Q results did not surprise us, it came as a negative surprise to street consensus that has taken the stock down by 4.7% in after hours trading at the time of this writing.  Here are some initial impressions:

• Deepak Ahuja steps down (again) as CFO but will remain as senior advisor going forward, and Senior Finance VP Zach Kirkhorn will step up to CFO. This may actually be a positive development from the perspective of management at this time.  Ahuja has always played a critical role in pulling Tesla through one existential crisis after another based on our historical observations, and the context under which he originally retired in 2015 coincided with management believing that it was safe at that time.  With the Model 3 production normalization and the company’s subsequent restructuring initiatives, management may be feeling safer about 2019 than 2018.
• We are less concerned with why the quarterly earnings miss took place.  Gross margins for automotive sales took a dive in 4Q but in our view that resulted primarily from a significant mix shift with the Model 3 taking 70% of the delivery mix, from 67% in 3Q18.  This mix shift is likely to continue to pressure Tesla’s overall margins in 2019.  However, given Automotive gross margins came to 24.3% in 4Q we think it is relatively easy for Tesla management to guide a target 25% range especially if that target is set for 4-6 quarters from now.
• Gigafactory 3 in Shanghai is projected to be completed by the end of 2019, with short range Model 3 and the Model Y (based on the Model 3 platform with 78% shared content) beginning production at that time, financed largely with local bank debt.  Battery cell supply will initially come from Nevada, Japan and some local suppliers but modules and packs will be made in-house.  Given the logistic layout of the Gigafactory 3 and labor cost gap, we think it is plausible for management to currently project that China margins by 2020 could be roughly on par with its U.S. manufacturing operations.  It remains to be seen whether this has been thought through well but the trust factor here will have to go to Deepak Ahuja’s deep industry knowledge given his prior auto industry experience before joining Tesla.
• Tesla’s cash on hand at the end of 4Q18 stood at $3.7bn.  While some investors may remain concerned about the $920m 0.25% Convertible Prefs that are due to mature on February 27, 2019 with a conversion price of $359.87 per share, there should be sufficient liquidity on the balance sheet to cover it in our view even if share price is below that price level on maturity.

We have historically said on this forum, despite a healthy dose of skepticism on the operational aspects of the company given a highly charismatic CEO with untested automotive industry credentials, that calling Tesla’s shares is tantamount to a market call (see, e.g., Tesla: Model 3 Production Rate Reaches 5,000/Week, but Shares Fall ).  The fact that share price performance in the past few months have focused more heavily on earnings, we highly suspect that as with many NASDAQ listed stocks, market confidence with Mr. Musk’s capital raising capabilities may not be a key driver for Tesla’s valuations over the next 12 months.

Tesla (TSLA): Consensus Estimates vs. Actual

3. Bharat Hotels Pre-IPO – Catching up with Peers

Bharat Hotels (BHOT IN) plans to raise around US$150m in its Indian IPO in order to pay down debt. The company owns and operates 12 luxury hotels under “The LaLiT” brand and two mid-market hotels under “The LaLiT Traveller” brand. 

BH has been reporting a steady improvement in operations led by a pick-up in occupancy levels. This has resulted in 30% EBITDA CAGR over FY14-18. 

However, only three out of its 12 hotels seem to be performing consistently and have been increasing their contribution to EBITDA, which was at 76% by FY18. In addition, a comparison with its peer group seems to imply that the company still has some more catching up to do.

4. Teasing Updates on CaiNiao Network & Ele.me Out of Alibaba’s Q3 Results

A set of generally solid Q3FY19 earnings results from Chinese e-commerce giant Alibaba Group Holding (BABA US) also yielded some interesting insights into the company’s two main logistics-related ventures (CaiNiao Network and on-demand food delivery specialist ele.me).

Unfortunately, the information we can glean from BABA’s Q3FY19 results suggests CaiNiao and ele.me are either growing slower or generating significant losses — or both.

In our view, the main logistics takeaways from BABA’s results are:

1. Alibaba’s ‘Core Commerce’ revenues continue to grow faster than express delivery. For the seventh consecutive quarter, Alibaba’s ‘core commerce’ grew much faster than China’s parcel delivery market, outgrowing parcel volume by 8% and parcel delivery revenue by almost 18%. At the margins, China’s express delivery firms are being bypassed by new modes of fulfillment, in our view. 
2. CaiNiao Network’s 15% growth in Q3FY19 is disappointing. Revenue at Alibaba’s CaiNiao Network grew by just 15% Y/Y in the December quarter, to 4.5 bn RMB. In other words, CaiNiao grew even slower than overall Chinese express delivery revenue in the December quarter (+17% Y/Y). That’s disappointing for a company that enjoyed an equity valuation of US$20 bn when Alibaba upped its stake to 51% in late 2017.
3. The reporting segment that includes ele.me barely grew from Q2FY19 to Q3FY19. Alibaba’s ‘Local Consumer Services’ segment had revenue of 5.2 bn RMB in Q3FY19, representing Q/Q growth of just 2.7%. It’s unclear how much local services venture Koubei contributed to this, as Alibaba only began consolidating its revenues some time in December.
4. It looks like losses from CaiNiao & ele.me continued to pile up in Q3FY19. Although it’s not an ‘apples-to-apples’ comparison, EBITA losses from the group of companies that includes CaiNiao and ele.me expanded from 5.8 bn RMB in Q2FY19 to over 8.2 bn RMB in Q3FY19.  This suggests the deep losses from this group (which were equivalent to about 15% of BABA’s core ‘marketplace’ EBITA in Q2FY19) aren’t going away soon.

5. Kumho Tire (073240): Tough Times Ahead Still…

Weak car sales in China, Nissan’s removal of Carlos Ghosn, Akebono Brake Industry share price plunge – facts that make everyone cringe at the sound of it. High indebtedness, low margin and weak sales growth were the chief reasons why Akebono’s share price plunge. Kumho Tire’s high debt to equity ratio has been reduced by an equity investment from a Chinese group but will that help to turn the company around? 

In this briefing:

1. Shiseido Co Ltd: Could Become a Victim of Its Own Success

1. Shiseido Co Ltd: Could Become a Victim of Its Own Success

Shiseido Co Ltd (4911 JP)  will Struggle to Replicate its Past Success Over FY2018-23E

In the past few years, Shiseido was able to outpace the rest of the Japanese cosmetics market by a significant margin. Shiseido’s Japanese operations benefited from the tailwinds of an increasing Chinese tourist influx while its international operations steadily expanded its footprint in China and other geographies. The company also managed to improve its EBIT margin in FY2017 to 8.0% cf. 4.3% in FY2016. Margin improvement kept going into 3Q of FY2018 and we expect FY2018E margin to be 10.8%.

In our opinion, Shiseido will struggle to maintain its revenue CAGR of 7.5% over FY2013-18E over the next five years. We expect a more modest revenue CAGR of 4.9% over FY2018-23E.

Also, as a result of revenue growth and other cost efficiencies, Shiseido’s EBIT is expected to grow at a CAGR of 43.9% over FY2014-18E. But we expect Shiseido to find it difficult to improve its EBIT margin from the FY2018E level.

In this briefing:

1. Aristocrat Leisure Ltd near 52 Week Low Has Runway Based on Positive Earnings Outlook Through 2021
2. Hanon Systems (018880): Overvalued Stocks in The Low Margin Sector
3. Hyosung Holdings: Current Status & Trade Approach

1. Aristocrat Leisure Ltd near 52 Week Low Has Runway Based on Positive Earnings Outlook Through 2021

• Australia’s big gaming tech maker spurs organic growth with its entry into the digital gaming space.
• A balance of a strong international footprint and big US presence in the casino sector show up in dramatic forward earnings estimates by analysts.
• Sharp decline in entire gaming sector since last summer has kept the ARISTOCRAT story below the radar.

2. Hanon Systems (018880): Overvalued Stocks in The Low Margin Sector

The recent negative sales in the Chinese auto industry and Nissan’s case of Carlos Ghosn removal could put additional pressure on the already thin margin of auto supplier industry. One of the Carlos Ghosn early contribution to Nissan was to cut cost and outsource the auto parts maker to a wide variety of suppliers including to Hanon Systems (018880 KS) . Nissan’s new management may want to undo some of Carlos Ghosn’ legacy including changing the selection criteria of parts supplier.

Hanon’s global peers also experienced a decrease in the inventory turnover and most of them have been priced at PER <10 but Hanon is still trading at 24x PER while its sales growth and profitability is still in low single digit? Facing the onset of the slowdown in the Chinese auto industry, won’t it be another headwind for Hanon Systems?

3. Hyosung Holdings: Current Status & Trade Approach

• Local institutions are busy scooping up Hyosung Corporation (004800 KS) shares lately. The owner risk is now gone. There are increasing signs of improving fundamentals on all of the four major subs. Some are already expecting ₩5,000 per share. This is a 9.2% annual div yield at the last closing price.
• Discount is also attractive. It is now at 46% to NAV. With this much div yield, discount should be much below the local peer average of 40%.
• I’d continue to long Holdco. Hedge would be tricky. Heavy is up 15% YTD. I admit that there is no clear cointegrated relationship between them. But Heavy’s recent rally is more of a speculative money pushing up on the hydrogen vehicle theme. I’d pick Heavy for a hedge.

In this briefing:

1. Pinduoduo (拼多多) Lock-Up Expiry – A Bug with Overhang
2. Nissan/Renault: French State Intervention Continues
3. TRACKING TRAFFIC/Chinese Express & Logistics: Inter-City Pricing -9.1%
4. Galaxy Entertainment Bullish Set up for a Breakout
5. Pinduoduo (PDD US): Lock-Up Expiry – Keep Calm, Keep Going

1. Pinduoduo (拼多多) Lock-Up Expiry – A Bug with Overhang

Just as Pinduoduo (PDD US) lock-up expiry date (22nd January) is approaching, there was news of a massive bug that could result in an RMB20bn loss for PDD. According to the company’s official Weibo account, the bug has already been rectified and a police report has been filed. 

In this insight, we will analyze the potential impact of the bug and the number of shares that could potentially be sold upon lock-up expiry.

2. Nissan/Renault: French State Intervention Continues

This past week saw some interesting news out of the ongoing saga of governance and control that is the Renault SA (RNO FP)Nissan Motor (7201 JP) Alliance. 

• A week ago, former Nissan Chief Performance Officer and onetime potential successor to Ghosn and/or Saikawa-san – Jose Munoz – who was put on leave to help Nissan deal with its internal investigation – resigned effective immediately. Some suggest this is the start of a bloodbath of Ghosn loyalists.
• Former Nissan CEO and still-CEO at Renault Carlos Ghosn was in court to appeal the decision to not allow him bail. I expect that will end up at the Supreme Court in not too long, but for the moment he might stay in detention for another 7-8 weeks.
• Nissan sources said (according to a Reuters report) earlier in the week they would be looking to file suit for damages against Ghosn.
• Nissan and Mitsubishi officially announced Friday that as a result of a joint investigation by Nissan and Mitsubishi Motors (7211 JP) into the Nissan-Mitsubishi Alliance entity (Nissan Mitsubishi BV), it was discovered that “Ghosn entered into a personal employment contract with NMBV and that under that contract he received a total of 7,822,206.12 euros (including tax) in compensation and other payments of NMBV funds. Despite the clear requirement that any decisions regarding director compensation and employment contracts specifying compensation must be approved by NMBV’s board of directors, Ghosn entered into the contract without any discussion with the other board members, Nissan CEO Hiroto Saikawa and Mitsubishi Motors CEO Osamu Masuko, to improperly receive the payments.” Saikawa and Masuko were not informed and did not also get paid by the company. The NMBV entity will attempt to recoup the funds from Ghosn. Nissan and Mitsubishi are thinking of dissolving their Dutch alliance entity.
• The Nissan panel reviewing Nissan’s governance structure, made up of three independent directors and four external members, met for the first time Sunday. The proposals are due end-March, upon which the board will propose a new management system/structure for approval at the shareholder meeting at end-June 2019. The co-chair said in a comment after today’s meeting that Ghosn perhaps had questionable ethics.
• French business newspaper Les Echos carried an “exclusive” interview with Nissan CEO Hiroto Saikawa which was reasonably enlightening, or should have been from a French point of view. In the interview, Saikawa is adamant that he fully supports the Renault-Nissan Alliance saying that it was not just important but “crucial” and he “would do nothing to render it harm”, and that the French state’s stake in Renault “posed no problem at all” because the “French state does not impose in any way on Nissan.” Saikawa-san also noted that he had no intention of ridding Nissan of French/foreign employees.
• Renault Director Martin Vial visited Japan with French officials including Emmanuel Moulin – chief of staff to Bruno Le Maire, who is French Minister of the Economy – to meet with Hiroto Saikawa and Japanese officials Wednesday and Thursday. This trip was first reported by Le Figaro in the early hours of Wednesday morning (15 Jan) Asia time, and the point of the trip was reportedly to discuss the changes in governance at the top of Renault which might be coming – i.e. a new chairman as the French state and Renault’s independent directors appear to have decided that another two months of detention for Carlos Ghosn is enough to warrant a change even if they still presume his innocence in the charges brought in Japan. They were also to inquire after Ghosn’s case, though that seemed to have been secondary.
• As a sidebar to this trip, Bruno Le Maire came out Wednesday saying that the State had asked the Renault board to hold a board meeting to replace Ghosn, and said that the French state would leave it to Renault’s directors to choose, but also came out and said that  Cie Generale Des Etablissement MIchelin (ML FP) CEO Jean-Dominique Senard would be a great choice (though other suggestions are that he might take the role of Chairman as others note that Renault Interim CEO Thierry Bolloré’s role could be made permanent). His comments about Mr. Senard included those suggesting that Mr. Senard adheres to certain ideas of the “social responsibilities” of the company – ideas which Mr. Le Maire shares.

Mr Le Maire also said this week…

“Nous souhaitons la pérennité de l’alliance. La question des participations au sein de l’alliance n’est pas sur la table.”

Another quote from an article which came out Saturday night at midnight Paris time was similar. 

“Un rééquilibrage actionnarial, une modification des participations croisées entre Renault et Nissan n’est pas sur la table”, déclare Bruno Le Maire. “Nous sommes attachés au bon fonctionnement de cette alliance qui fait sa force.”   

Both quotes say “we” (the French state) seek for the Alliance to continue functioning in a stable manner and changes of the crossholding relationship or ownership rates between the companies were not on the table. 

The second appears to be a quote from the Journal du Dimanche (article linked above) which was probably conducted a day or two earlier – and it makes a reference to it having been conducted just after his return from Tokyo (it was not revealed earlier this week that he had made the trip with Mssrs. Vial and Moulin so this is something of a question mark). 

All of this was out by Friday. It was all very measured and reassuring. 

Then Sunday saw a bombshell dropped… again…

In the Nikkei and Bloomberg, it was revealed that the French visitors to Tokyo had informed Japanese officials of their intention to have Renault appoint the next chairman of Nissan (as apparently the Alliance agreement allows) and of the French State’s intention to seek to integrate Nissan and Renault under the umbrella of a single holding company. 

This is interesting for three reasons…

1. A holding company where the two companies stay listed does nothing that the Alliance does not do now except put a single board in place on top of both companies. That would be a Dutch Foundation structure. A holding company where one of the two companies loses its listing (because it is taken over) would require one of those companies lose a set of shareholders. 
2. A Dutch Foundation (which is effectively the same thing if the two companies stay listed) was an idea which a year ago in the previous kerfuffle last spring about merging was “not an option acceptable to the government” (Les Echos, 7-Mar-18)
3. This is, once again, the French state seeking to intervene in the governance of Nissan. That’s a no-no according to the Alliance Agreement as modified in December 2015. 

This is widely reported in English, Japanese, and French on Sunday. 

There is a conciliatory article in Bloomberg with a headline suggesting a French official (Le Maire) downplayed the French comments about a holding company, but that refers to the JDD article, which is probably days old and repeated the same comment he made publicly earlier this week, reported by Les Echos and Le Figaro about a lack of change in cross-holding, but a careful read of the timeline suggests his comments were made in France before someone leaked this to the Nikkei.

Saikawa-san was reported to have said this morning (Monday 21 Jan 2019) that he had not heard about this, but that now was not the time to consider revising capital ties.

One should note, once again, that this is not the CEO or independent Chairman of Renault saying this. It is not the board or Nissan saying this. It is the French state. 

What does this all mean?  What are the possibilities and ramifications? Read on…

3. TRACKING TRAFFIC/Chinese Express & Logistics: Inter-City Pricing -9.1%

Tracking Traffic/Chinese Express & Logistics is the hub for our research on China’s express parcels and logistics sectors. Tracking Traffic/Chinese Express & Logistics features analysis of monthly Chinese express and logistics data, notes from our conversations with industry players, and links to company and thematic notes. 

This month’s issue covers the following topics:

We retain a negative view of China’s express industry’s fundamentals: demand growth is slowing and pricing for inter-city shipments appears to be falling faster than costs can be cut, leading to margin compression. 

4. Galaxy Entertainment Bullish Set up for a Breakout

Galaxy Entertainment Group (27 HK) exhibits some valid chart support in the form of a key low at 61.8% retracement and physical price support at the 40 level. This low should stay in place for 2019.

Price and RSI wedge formations are building steam for an upside breakout. MACD bull divergence and the triangle breakout back in November will provide forward upside energy. MACD triangles are some of the most powerful chart set ups.

Currently at an attractive risk to reward support zone for an entry with a reasonably tight stop.

5. Pinduoduo (PDD US): Lock-Up Expiry – Keep Calm, Keep Going

The recent collapse of Xiaomi Corp (1810 HK)’s shares after the end of its six-month lock-up period has focused minds on upcoming lockup expirations. Pinduoduo (PDD US) is the next major Chinese tech company with an upcoming lock-up expiration – its six-month lock-up period expires on 22 January.

In this briefing:

1. Propertylink – CNI Shareholders To Vote On ESR’s Final Offer
2. M1 Ltd (M1 SG): A Clever Ploy to Put the Ball Firmly in Axiata’s Court
3. Maoyan Entertainment (猫眼娱乐) IPO: Turning Profitable, Thoughts on Valuation
4. Itochu Confirms Intent to Deepen Hold over Descente
5. Healthscope (HSO AU): Brookfield Makes Investors Wait, BGH Unlikely to Provide Material Upside

1. Propertylink – CNI Shareholders To Vote On ESR’s Final Offer

ESR has now declared its Offer for Propertylink Group (PLG AU) “to be best and final“, and the Offer has been extended until the 28 February (unless further extended). 

After adjusting for the interim distribution of A$0.036/share (ex-date 28 December; payment 31 January), the amount payable by ESR under the Offer is A$1.164/share, cash.

The Target Statement issued back on the 20 November included a “fair and reasonable” opinion from KPMG,  together with unanimous PLG board support.

To recap: after PLG rebuffed an offer from Centuria Capital (CNI AU) in September, followed by PLG making an offer for Centuria Industrial Reit (CIP AU) – in which both CNI (23.5%) and PLG (17.3%) have sizeable stakes – ESR launched its offer for PLG. Adding to the cross-holdings, ESR also acquired major positions in both PLG (18.06% initially, now up to 19.9%) and CNI (14.9%).

ESR’s Offer is conditional on a minimum acceptance condition of 50.1%. CNI has a 19.5% stake and Vinva Investment Management 5%.

The next key event is CNI’s shareholder vote on the 31 January. This is not a vote to decide on tendering the shares held by CNI in PLG into ESR’s offer; but to give CNI’s board the authorisation to tender (or not to tender) those PLG shares. 

Although no definitive decision has been made public by CNI, calling the EGM to get shareholder approval and attaching a “fair & reasonable” opinion from an independent expert (Deloitte) to CNI’s EGM notice, can be construed as sending a strong signal CNI’s board will ultimately tender in its shares. According to the AFR (paywalled), CNI’s John Mcbain said: “We want to make sure when we do decide to vote, if we get shareholder approval, the timing is with us“. 

Assuming the resolution passes, CNI’s board decision on PLG shares will take place shortly afterwards. My bet is this turns unconditional the first week of Feb. The consideration under the Offer would then be paid 20 business days after the Offer becomes unconditional. Now trading with completion in mind at a gross/annualised spread of 0.8%/6.7%, assuming payment the first week of March.

2. M1 Ltd (M1 SG): A Clever Ploy to Put the Ball Firmly in Axiata’s Court

M1 Ltd (M1 SP), the third largest telecom operator in Singapore, is subject to a voluntary conditional offer (VGO) at S$2.06 cash per share from Keppel Corp Ltd (KEP SP) and Singapore Press Holdings (SPH SP) (KCL-SPH). KCL-SPH said on Tuesday that they wouldn’t increase their S$2.06 offer price “under any circumstances whatsoever.”

3. Maoyan Entertainment (猫眼娱乐) IPO: Turning Profitable, Thoughts on Valuation

Maoyan Entertainment (formerly Entertainment Plus) launched its institutional book building last Friday. We covered the company’s background, industry backdrop, financials, shareholders and the regulatory overhang in our previous two notes.

In this note, we will look at the recent development of the company, based on the data from the prospectus and our channel checks. We will also discuss the valuation of the company. 

Our Previous Insight on Maoyan Entertainment:

• Entertainment Plus (猫眼娱乐) IPO: The Engineered Movie Ticketing Leader that Runs Out of Steam (Part 1)
• Entertainment Plus (猫眼娱乐) IPO: The Coming Regulatory Bang Isn’t That Bad (Part 2)

4. Itochu Confirms Intent to Deepen Hold over Descente

Itochu (8001 JP) continues a battle of words and equity as it attempts to gain more control over sports firm Descente (8114 JP).

Meanwhile, Descente has brought in Wacoal (3591 JP) as a white knight and made a splash in the business media about its recent success.

Itochu insists that Descente needs Itochu’s management skills, particularly to build a stronger business in China and other overseas markets, and says the only way to make Descente listen is to buy more stock – more than its current nearly 30%.

5. Healthscope (HSO AU): Brookfield Makes Investors Wait, BGH Unlikely to Provide Material Upside

Healthscope Ltd (HSO AU), Australia’s second-largest private hospital operator, noted today that Brookfield Asset Management (BAM US) is seeking the necessary internal approvals to submit a binding proposal by 31 January. We believe that Brookfield will come through with its binding proposal as the delays are not due to issues cropping up from the due diligence but due to ongoing financing negotiations with multiple banks.

In this briefing:

1. Korean Stubs Spotlight: A Pair Trade Between Amorepacific Group & Shiseido
2. Hujiang Education (沪江教育) Pre-IPO – Spending More than It Earns
3. Panasonic Is Bonding with Toyota- A JV Plan for 2020
4. China Meidong (1268 HK): Standout Story in Gloomy Auto Dealership Sector; Luxury Brands Outperform
5. Golden Agri:  Reduced Risk of El Niño Pushes Out CPO Price Recovery into 2020

1. Korean Stubs Spotlight: A Pair Trade Between Amorepacific Group & Shiseido

In this report, we provide an analysis of our pair trade idea between Amorepacific Group (002790 KS) and Shiseido Co Ltd (4911 JP). Our strategy will be to long Amorepacific Group (APG) and short Shiseido. As mentioned in our report, Korean Stubs Biweekly Sigma σ (#1): The Inaugural Edition, our base case strategy is to achieve gains of 8-10% on this pair trade. Our risk control is to close the trade if it generates 4-5% in combined losses. Cost of commissions are not included in the calculations and closing prices as of January 23rd are used in our pair trade. [Long APG – $0.5 million; Short Shiseido – $0.5 million for total of $1.0 million].

The following are the major catalysts that could boost APG shares higher than Shiseido shares within the next six to twelve months: 

• Amorepacific Group shares are extremely oversold and forming a base
• THAAD is no longer an issue
• Amorepacific Group’s NAV discount 
• Attractive relative valuations
• Amorepacific’s new headquarters building distraction out of the way
• Chinese tourists are coming back to Korea & slower growth rate of visitors to Japan

2. Hujiang Education (沪江教育) Pre-IPO – Spending More than It Earns

Hujiang Education (1414698D CH) (HET) is planning to raise US$200m in its upcoming IPO.

HET has grown its revenue at an impressive 73% CAGR from 2015 to 2017 and has been accompanied by gross margin expansion. The strong growth was supported by improving operating metrics such as an increase in student enrollment and average spending. 

However, HET has been making losses and continues to spend more than its net billing. It is unclear whether HET had already achieved break even for its proprietary courses before expanding into its CCtalk platform. But from its high level of expenses, it seems unsustainable for HET to be relying heavily on the sales and marketing spending to get users to purchase online courses.

In this insight, we will look into the company’s financial and operating performance, regulatory risks regarding K12 courses, aggressive spending on sales and marketing, and the performance of other online education companies.

3. Panasonic Is Bonding with Toyota- A JV Plan for 2020

It seems that Panasonic Corp (6752 JP) is planning for long term growth by concentrating on building its relationship with Toyota Motor (7203 JP) while witnessing its key customer, Tesla Motors (TSLA US), drifts away. Toyota and Panasonic are in discussion to form a JV by 2020E with the aim of mass manufacturing EV batteries with possible benefits from cost-cutting efforts. We mentioned in Tesla Drifting Away Could Leave Panasonic Struggling to Gain Traction in China, that Tesla is looking for Chinese local players to source its factory in China upon the refusal from Panasonic to join hands with them in investing in their Chinese factory. Panasonic, which seemed to have felt the pressure mounting from Tesla potentially distancing itself from them, given that the majority of their battery sales are currently dependent on Tesla, is now preparing itself for the future by building long terms plans with its not-so-new customer, Toyota. Panasonic entered a partnership agreement with Toyota back in 2017 to develop EV batteries including their traditional prismatic batteries while also aiming to develop new battery solutions for the growing and evolving EV market. Thus, its plan to form a JV with Toyota by 2020E displays the confidence Panasonic has in Toyota while also indicating that the former is paving a path for some steady growth in its battery business being supported by one of the leading automakers.

4. China Meidong (1268 HK): Standout Story in Gloomy Auto Dealership Sector; Luxury Brands Outperform

China Meidong Auto (1268 HK) has been on a rollercoaster ride in 2018. The stock price of Meidong started 2018 around 2.7 HKD and recently has been trading around 2.9 HKD.

Nice and steady ride? Not exactly, as it has swung from 4.3 HKD in June to 2.6 HKD in August. After analyzing how NPAT estimates evolved over the past year there should be no justifications for these wild swings. 

Meidong is likely to report solid FY18 results by late March vs industry peers which are expected to report a weak 2H18. While BMW dealers have been reportedly suffering in China during 2018, Meidong was fortunate to have other luxury brands pick up the slack.

FY19 should be another growth year for Meidong as 1) recently acquired BMW showrooms contribute their maiden results and 2) other luxury brands continue to perform despite overall doom and gloom in the Chinese auto market. Should the Chinese government launch car replacement stimulus measures this would be icing on the cake.

Fair Value lowered slightly from 4.7 HKD to 4.4 HKD (10x 2019E) on lower 2019 profit estimates, which leaves 52% upside excluding dividends.

5. Golden Agri:  Reduced Risk of El Niño Pushes Out CPO Price Recovery into 2020

INVESTMENT VIEW:
The Australian Bureau of Meteorology has just downgraded its risk of El Niño from ‘Alert’ to ‘Watch’, and as a result, we temper our optimism for a near-term rally in CPO prices.  Longer-term, we remain bullish on Golden Agri Resources (GGR SP), but higher CPO prices remain a key catalyst for our bullish call on the shares.