Consumer

• The changes for the KOSPI2 INDEX, KOSDAQ150 Index, CSI300 Index, STAR50 INDEX and a bunch of other onshore China indices were implemented last week.
• The coming week has a lot of rebalance implementations on Friday with the S&P/ASX family and the MVIS family, among others.
• AUM for the Yuanta/P-shares Taiwan Top 50 ETF (0050 TT) has continued to increase with big inflows in the last week.

• Conventional corporate wisdom says market leaders have less room to grow and must concentrate on holding share. Not true.
• As Macau recovery gains steam, Galaxy is meeting challenges with its expansion likely to move its dominant market share higher as the total pie grows.
• The company’s focus is on capacity as well as diversity of offerings bolstered by a balance sheet among the healthiest in the sector.

• Home Depot delivered a disappointing set of results as the company was unable to meet the revenue expectations as well as earnings expectations of Wall Street.
• However, despite these challenges, Home Depot observed strength in key spring-related categories, such as live goods and other garden-related products, where the weather was more favorable.
• Despite the challenges, Home Depot’s dedicated team prioritizes associates and customers, delivering value and service throughout the quarter.

• The June rebalance of the KraneShares CSI China Internet ETF (KWEB US) will take place at the close of trading today.
• There are a couple of deletions and one inclusion. Plus there will be capping changes on the other stocks, but the impact of those changes is not large.
• The stocks have already been moving in the right direction during the day and the pre-positions could be flipped to the ETF at the close.

• In May, JD Health made a voluntary announcement that the company has made operating income of RMB795.4m (5.7% of revenues) in 1Q2023 vs RMB61.6m (0.7% of revenues) reported in 1Q2022.
• JD Health’s share price been down more than 25% despite the company announcing strong 1Q2023 results, as the market has become concerned over the company’s ability to sustain its profits.
• Our quantamental analysis proves that JD Health may not be able to generate OPM in excess of 2-3% as there is very little room for GPM to improve.

• CP ALL is increasingly one of the best proxies for consumption in Thailand, with its broad exposure to convenience stores, hypermarkets, supermarkets, wholesale through Makro’s cash & carry stores.
• The company continues to expand its store footprint and improve margins through a better product mix towards fresh and private labels, as well as group synergies around growing omnichannel sales. 
• CP ALL is the largest weighting in MSCI Thailand and has seen pressure from foreign outflows due to political uncertainty but this may be about to work in its favour. 

• Balkrishna Industries (BIL IN) is one of the big names in Off-Highway Tyre (OHT) segment across the globe.
• The company is currently in a capex mode and looks to augment its tyre capacity and expand the carbon black manufacturing.
• However, there are some corporate level discomforts regarding the payouts to the stakeholders on the back of capex, and disclosure errs in few lone items on the balance sheet.

• The test will be how many companies will disclose details that include the measures investors expect and whether the stock price will react positively when the panel concludes this fall.
• The most effective measure to ensure that “TSE’s request” doesn’t end up as a formal disclosure is for shareholders to press management at the AGMs to raise the share price.
• It’s important that the company’s resources are used effectively to maximize corporate value, and such measures should be put in place to increase the share price above the current level.

• Toyota managed to exceed analyst expectations in terms of revenue as well as earnings.
• The company faced production constraints due to factors like semiconductor shortages, natural disasters, and the ongoing impact of COVID-19.
• Their expert team members also remain committed to managing risks, investing in growth, and shaping the future of the automotive industry.

• Fox Corporation delivered an all-around beat in the previous quarter.
• The significant Super Bowl LVII bolstered the quarter’s success on the Fox Broadcast Network, which generated significant advertising revenue across their businesses and contributed to a remarkable 61% growth in advertising revenue in the Television segment.
• Despite the industry challenges, We give Fox Corporation a ‘Hold’ rating with a revised target price.

• Tyson Foods delivered a disappointing set of results as the company was unable to meet the revenue expectations as well as earnings expectations of Wall Street.
• While the overall performance was disappointing compared to the previous year, Tyson Foods claims to have performed reasonably in volume and dollar sales, gaining market share in the retail core business lines.
• Despite these challenges, Tyson Foods remains focused on strengthening its branded foods business.

• Wynn Resorts managed to surpass the revenue expectations as well as the earnings expectations of Wall Street.
• In Las Vegas, Wynn Resorts achieved significant results in Q1, supported by a thriving consumer base.
• In Macau, Wynn Resorts generated significant earnings despite some challenges, including a lower VIP hold.

• Positive surprises in profitability during Q1 2023 failed to reverse the long-term decline of Chinese e-commerce, possibly due to market recognition of the temporary impact of cost-cutting and monetization efforts.
• In our opinion, robust growth in GMV is fundamentally essential to reverse the long-term downward trend of the Chinese e-commerce sector.
• Chinese e-commerce sector no longer discloses GMV, but Express delivery volume indicates a 20% decline in parcel volumes compared to 2021, potentially reflecting a decrease in GMV.

• The waiting is over – Q4 FY3/2023 results highlighted 1) continued recovery in the hotel industry spurred by domestic and overseas traveler demand, 2) improvement in profit structure through business model transformation and increased accommodation demand has led to an increase in revenue, and 3) the completion of the acquisition of Red Planet’s business in the Philippines highlights the company’s expansion into overseas operations.
• However, as the tourism industry in Japan is in a full-fledged recovery phase, the company believes it can achieve sustained growth.
• Sound financial foundations – the company’s recapitalization strategy has been a success, and we maintain our view that there will be positive free cash flow generation in FY3/2024.

• In the past several days, one of the biggest news in the global sports industry has been the merger of PGA Tour, DP World Tour, and LIV Golf. 
• We believe that this merger is likely to have a positive impact on the global golf industry, including on Fila Holdings (081660 KS) and Acushnet Holdings (GOLF US).
• If this merger successfully completed this year, there is a good possibility of a pick-up in golf related equipment sales and profits for Acushnet and Fila Holdings starting 2024. 

• We recently interviewed some Temu merchants, and the main conclusion is that Temu continues to experience rapid growth despite the chaos. 
• Temu’s GMV reached a new high in May; Temu faces upcoming challenges from Shein and TikTok, as they are also about to launch their fully managed models.
• Moreover, Temu’s unit economics (UE) has not seen further improvement for several months, and the supply of goods has been a problem;

• Estée Lauder continues to make new lows as risks related to its premium valuation and business concentration materialize.
• Estée Lauder’s return on capital is also facing long-lasting headwinds.
• The company will remain too richly priced for the time being, according to the company’s CEO.

• Telenet has announced the publication of the prospectus. The Board of Directors of Telenet has prepared a response memorandum in which it sets out its recommendation of the Offer.
• The offer is opportunistic and optically generous, with neither interloper risk nor sweetening to be expected. I believe most investors will cash out. Liberty could eventually drop the acceptance threshold.
• Given the ambiguity surrounding both the company and the sector in Belgium, I still think Liberty might acquire Telenet for almost a bargain. Spread is 2.38%/19.8% (gross/annualised).

In this next installment of our #webinar Wednesdays, we welcome Smartkarma Insight Provider, Nicolas Van Broekhoven, as he shares his thoughts and insights on three different small cap stock ideas. From Hong Kong to Canada, tune in as Nicolas delves deeper into stock ideas from across the globe.

The webinar will be hosted on Wednesday, 14 June 2023, 17:00 SGT/HKT.

Nicolas Van Broekhoven was on the buyside for 15 years, and most recently at a medium-sized boutique asset management firm. Having grown up in Europe, attending university in the US and living in Singapore for the last 7 years, this has given him a broad scope on the world and investing in general. He considers himself as a generalist investor with a preference for small and mid-cap companies and special situations. However, a large cap that has gone temporarily out of favor might also pique his interest. His style of investing could be categorized as more of value investor, rather than growth at any cost. Learning from Charlie Munger on the importance of quality of a company has been of tremendous value over the years. Nicolas likes businesses with real earnings, cash flows, dividends, book value and insider ownership.

• We see 8 stocks moving from MidCap to LargeCap, 9 stocks moving from LargeCap to MidCap, 9 stocks from SmallCap to MidCap, and 10 stocks from MidCap to SmallCap.
• Following a strong listing, Mankind Pharma (6596876Z IN) should be added to the Large Cap segment of the market in July.
• The expected migrations from SmallCap to MidCap have outperformed the other migrations by a huge margin over the last couple of months and there could be profit taking ahead.

• One of the few long-term success stories in supermarkets is Yaoko, which recently celebrated 34 consecutive years of record operating profits. 
• Thanks to a combination of innovation and attention to detail, Yaoko’s financial performance continues to trounce larger rivals in the highly competitive food market in Kanto.
• With Japan’s supermarket sector about to enter a period of consolidation, Yaoko will be one of the leaders.

Lucror Analytics’ ESG Scores are based on a 3-tiered scale and are adjusted for Controversies (if applicable).
We assess Altice France’s ESG as “Adequate”, in line with its “Adequate” Environmental, Social and Governance scores. Controversies are “Immaterial” and Disclosure is “Adequate”.

• Population decline is not far in the future, and a situation is looming where rural municipalities will no longer be able to function to support social infrastructure.
• The government is sticking to maintain the foreign technical internship in industries where labor is in short supply, and managing the number of foreign workers accepted for 5-10 year time-limit.
• Accepting foreigners means that people must live in a society that recognizes diversity and each other’s human rights. Unfortunately, we are not ready to create such a society.

• Q123 Net Revenue was strong, exceeding Q119 (pre-Covid) levels by over 12%
• Almost six months into recovery, Trip.com (TCOM US) has also managed SG&A expenses well
• A good result for the company, but we see no reason to alter our long-term view

• On 1 June, Lifedrink (2585 JP), which listed in early 2022, announced it would move to TSE Prime in late June, leading to a TOPIX inclusion in late July. 
• The offset to that was an announcement of an offering, whereby the PE Fund which brought the company to market would sell up to 3.87mm shares, effectively doubling float. 
• The offering is larger than the TOPIX inclusion. The stock fell the next day, rebounded, then rebounded 11% Monday. Now it’s up more and hit a lifetime closing high.

• Challenger Technologies (CHLG SP) has disclosed a final voluntary unconditional offer from Dymon Asia and the Loo Family at S$0.60 per share, a 7.1% premium to the previous S$0.56 offer. 
• As predicted, the offer followed the recent SGX unconditional offer playbook – a lowball offer followed by declaring the offer final after a cursory bump.
• The modest offer premium will still leave minorities aggrieved. Hitting the 90% compulsory threshold implies a minority acceptance rate of 31.3%. At the last close, the gross spread is 3.4%.

• Rakuten sold its 20% stake in Seiyu to KKR at the end of May, divesting from direct ownership in physical supermarkets. 
• This provides a much needed injection of cash for Rakuten’s digital projects and should also help the online platform build trust with other supermarket chains interested in joining its platform.
• Both companies reaffirmed their commitment to build the largest online food retail platform within the next two years.

• After consumer electronics retailer Challenger Technologies (CHLG SP) announced a voluntary unconditional cash offer of S$0.56/share on the 30 May, it has closed through terms every day. 
• At a 3.1% and 4.3% to undisturbed and one-month VWAP, the Offer was low-balled. The Offeror (Dymon Asia and Challenger’s CEO Loo Leong Thye) have now bumped to S$0.60/share. 
• The price has been declared final. It is still only a 9.1% premium to undisturbed. But it is a lifetime high. 

• The S&P 500 broke above 4200 and the 2-month megaphone pattern on Friday, and is already approaching the 4300-4325 area which we have anticipated would cap upside for 2023.
• While we would be cautious at these levels given our expectation for inflation to remain elevated, we cannot get too bearish if the S&P 500 is above 4165-4200.
• Breadth remains weak within the S&P 500, but we are starting to see breadth improvement within small-cap Russell 2000 (IWM). More on that below, IWM targets include $190 and $200-202.

• Discounts to NAV of covered holdcos have generally tightened during May. Discounts to NAV: C.F.Alba, 50.1%; GBL, 40.5% (!); Heineken Holding, 16.0%; Industrivärden C, 5.2%; Investor B, 11.6%; Porsche Automobile Holding, 45.1%. 
• The spread of Rio Tinto DLC widened to 17.2%. Rio Tinto is a candidate for an Australian top hat structure.
• Recommended trades: Heineken Holding/Heineken, Porsche SE/vs. listed assets and Rio DLC.

• Fashion wear retailer ENM Holdings (128 HK) has received a delisting Offer from major shareholder, Chinachem.
• The Scheme consideration of HK$0.58 is a 24.7% premium to last close, although shares popped 24% prior to suspension. 
• The Offer price is final. There is probably enough here for the Offer to get up. But there is potentially significant value to be unlocked from recent land rezoning. 

• The Nikkei 225 Sep 2023 review has 2 months left of data collection. That means the rankings are quasi-fixed. So then the question is what to do with them.
• There is a consultation in progress. You still have one week to respond, but that doesn’t change the names. 
• The top inclusion is the big one in dollar terms but low in liquidity. The next two are likely to be consumer names, and much more impactful. 

• ADEA could be the most under the radar artificial intelligence (“AI”) beneficiary through its patent portfolio related to hybrid bonding
• Hybrid bonding is expected to help usher the next generation of semiconductors to handle the growing need for speed and bandwidth with lower power consumption
• ADEA’s stock has been mainly valued on the free cash flow it is able to generate from its media patent portfolio with little value given to ADEA’s semiconductor patent portfolio

• With increasing pressure to buy back treasury stock to raise ROE, more companies with few tradable shares are expected to promptly retire treasury stock in the future.
• Companies that have retired treasury stock three or more times show not only higher stock price valuations, but also superior growth policy scores, cash holding scores, and dividend policy scores.
• Rather than simply focusing on the share repurchase, the focus should be on the overall cash allocation that led to it, including investment in growth and shareholder returns.

• Hyatt Hotels delivered a mixed set of results in its most recent quarter with revenues above Wall Street expectations but below-par earnings.
• Hyatt achieved significant net room expansions, with more than 5000 rooms added on a gross in the quarter.
• In the quarter, Hyatt completes its Dream Hotel Group acquisition.

• Royal Caribbean delivered a solid result managed an all-around beat in the last quarter.
• For both ticket and onboard, solid demand for Caribbean itineraries is translated into advanced load factors at quite a better-than-expected pricing.
• Moreover, secular tailwinds continued benefitting Royal Caribbean, with consumers shifting spending and preferences from goods to experiences, resulting in strong travel and entertainment spend.

• Fenbi Ltd (2469 HK) was added to the Hang Seng Composite Index (HSCI) at the close Friday and will be added to Southbound Stock Connect from open of trading today.
• We see 22 potential adds, 19 potential deletes, couple of close deletes, 5 deletes on prolonged suspension and 4 close liquidity deletes for the HSCI in September.
• There are 11 potential deletions where holdings via Stock Connect are more than 20% of shares outstanding. There could be some unwinding of positions over the next couple of months.

• Enm Holdings (128 HK) announced a privatisation offer from Chime Corporation at HK$0.58 per scheme share, a 54.7% premium to the undisturbed price of HK$0.375 per share (24 May). 
• The key condition is the scheme be approved by at least 75% disinterested shareholders (<10% disinterested shareholders rejection). No shareholder holds a blocking stake. The offer price is final.
• Detractors will argue the offer is low due to ENM’s net cash (75% of the market cap). However, the offer is reasonable compared to historical multiples and share prices. 

• We summarise the latest spreads and newsflow of merger arb situations covered by us across Hong Kong, Australia, New Zealand, Singapore, Japan, Indonesia, Malaysia, Philippines, Thailand and Chinese ADRs.
• Highest spreads – 111 Inc (YI US), Enm Holdings (128 HK), United Malt Group Ltd (UMG AU), Estia Health (EHE AU), HKBN Ltd (1310 HK), Hailan Holdings (2278 HK).
• Lowest spreads – Healius (HLS AU), Liontown Resources (LTR AU), Challenger Technologies (CHLG SP), Lian Beng (LBG SP), SBI Shinsei Bank (8303 JP), Newcrest Mining (NCM AU). 

Lucror Analytics Morning Views comprise our fundamental credit analysis, opinions and trade recommendations on high yield issuers in the region, based on key company-specific developments in the past 24 hours. Our Morning Views include a section with a brief market commentary, key market indicators and a macroeconomic and corporate event calendar.

• NagaCorp Ltd

• Australian tax-loss selling is a thing. Retail investors will take gains on things that run up in price, or get taken over, then look for losses.
• The China Conch Venture Holdings (586 HK) / Anhui Conch Cement (600585 CH) ratio is at an all-time low. The implied stub is re-testing its all-time low.
• Historically, Canon (7751 JP)‘s buybacks are aggressive. It may pay to observe market data to see when they are done. It may also pay to look at peer outperformance cycles. 

• It was a busy week with index rebalance implementations and announcements of index changes.
• The coming week has the KOSPI200 and KOSDAQ150 rebalancing on Thursday and a bunch of onshore China indices rebalancing on Friday.
• There were big inflows to China ETFs during the week while the largest inflows went to the Tracker Fund of Hong Kong Ltd (2800 HK) ETF.

• There are 38 – mostly firm, mostly Asia-Pac – transactions currently being discussed and analysed on Smartkarma. Inside is a timetable of upcoming key events for each deal.
• Two new deals were discussed on Smartkarma this week: Golden Eagle Retail (3308 HK)‘s Scheme; and Challenger Technologies (CHLG SP)‘s voluntary unconditional cash offer
• Key updates took place for Yashili International Holdings (1230 HK), Inner Mongolia Yitai Coal B (900948 CH), and Metro Pacific Investments Co (MPI PM).

• Last week, shareholders of Seven & I Holdings (3382 JP) rejected all four of the board nominees proposed by ValueAct.
• ValueAct, seeing their higher vote count as a modest success, sent a letter to Seven & I, requesting a resumption of discussions despite the failed attempt to remove senior leadership.
• We think the company is unlikely to seriously consider Value Act’s proposals any longer, indicating the end of the investor activism campaign.

• FEMSA has placed c.€3.3 billion of Heineken NV (HEIA NA) and Heineken Holding NV (HEIO NA) shares and tap €250 million of existing 2026 Exchangeable bonds. The placement removes a major overhang.
• The holding structure (equivalence 1 HEIO NA ~ 1 HEIA NO) allows the Heineken family to control the second largest brewer worldwide, with just a 27.3% economic interest (post-FEMSA’s placement).
• The discount has tightened to 15.8%, still above the 10.4% average of the last ten years, and rather large considering such a simple structure.

Lucror Analytics Weekly Wraps provide an overview of all Morning Views comments and reports published by our analyst team in the past week, and also showcase a list of the most-read reports.

In this Insight:

1. Vedanta Resources
2. China Jinmao Holdings
3. Lifestyle International Holdings
4. Geely Auto
5. First Pacific Co

and more…

• The most important factor in increasing stock valuations is overseas investors, and a clue can be found in exploring what kind of companies they tend to invest in.
• It is a company with high cash holdings and a high growth policy score, i.e., a company that generates ample cash flow. This should be considered a necessary condition.
• As foreign ownership increases, shareholder returns such as share buybacks will also be implemented to review cash allocations and improve board practices, so these can be considered byproducts.

• Anycolor (5032 JP) IPOed a year ago, rose several-fold, saw the underwriting broker offer a huge target price, then it fell. There was an offering. And then the murders began.*
• The offering in January, discussed here, created overhang, and the stock fell sharply in the next 6 weeks. Blowout earnings came in mid-March. Along with a TSE Prime transfer application.
• Now we have the Prime promotion on 8 June, which leads to a TOPIX inclusion on 28 July. 

• Despite a recovery in Chinese retail sales, JD.com’s revenue growth slow-down has accelerated, losing market share to disruptive online competitors amidst ramped-up pricing pressure.
• Margin progression remains on track as JD.com refocuses on its core operations, optimizing its product mix and sales channels to improve operating efficiency.
• JD.com trades on only a 4.1x Dec-23f PE multiple when excluding its net cash balance sheet and associates at book value.

• Despite the enormous demand for Black Pink concerts and the expected launch of the new girl-group band BabyMonster, we believe shares of Yg Entertainment (122870 KS) have overextended this year.
• Black Pink remains a fan-favorite group and their contribution to sales and profits are likely to peak this year. Valuations for YG Entertainment is also unattractive.
• Although BabyMonster is likely to become popular, the higher probability scenario is for them to fall below expectations. We do not believe BabyMonster could become the next Black Pink. 

• Although listed companies are required to consider the interests of minority shareholders, parent-subsidiary listings should inherently be avoided because it’s difficult to reconcile conflicting interests between parent and its subsidiary.
• This case questioned whether the FamilyMart directors considered the interests of minority shareholders. The fact that fiduciary duty is scarce in Japan could have been a factor behind this case.
• This lack of understanding may also be a factor preventing independent directors from fulfilling their functions, as some CEOs are seen to consider independent directors as advisors rather than managers.

• Indonesia-based social commerce platform Evermos today announced that it had raised US$39 million in its Series C funding round.
• It was led by the International Finance Corporation (IFC) — a member of the World Bank group — and IFC Emerging Asia Fund, LP, managed by IFC Asset Management Company, with the participation of returning partners such as Jungle Ventures, Shunwei Capital, UOB Venture Management, and Telkomsel Mitra Inovasi.
• This funding round also saw investment from new partners SWC Global, Endeavor Catalyst, and Uni-President Asset Holdings.

• Kellogg managed an all-around beat in the latest quarterly result, with a 14% organic net sales growth and better-than-expected profit margins.
• The company’s operating profit showed solid year-on-year growth for the fourth consecutive quarter, and its cash flow and balance sheet remained strong.
• Kellogg raised its guidance for organic net sales growth, adjusted operating profit growth, and adjusted earnings per share, reflecting the strong performance in Q1.

Lucror Analytics Morning Views comprise our fundamental credit analysis, opinions and trade recommendations on high yield issuers in the region, based on key company-specific developments in the past 24 hours. Our Morning Views include a section with a brief market commentary, key market indicators and a macroeconomic and corporate event calendar.

• Tata Motors ADR

• It was a challenging Q1 for Paramount Global, with total revenue of $7.3 billion and the company failed to meet the revenue expectations as well as the earnings expectations of Wall Street.
• Free cash flow in Q1 was a use of $554 million, aligned with expectations for negative free cash flow in 2023, but positive free cash flow is anticipated in the back half of the year.
• The company aims to improve earnings and free cash flow through franchise content, commercial execution, and operating efficiencies, targeting positive growth in 2024.

• It was a mixed first quarter for BorgWarner as the company reported double-digit organic growth and surpassed the revenue expectations of Wall Street but missed out meeting earnings expectations.
• The company’s free cash flow was impacted by planned capital spending to support the growth of its eProducts division, as well as working capital usage and annual incentive compensation payout.
• However, BorgWarner made significant progress during the quarter, securing multiple new eProducts awards and announcing capacity investments in this segment.