Consumer

• Rakuten (4755 JP) aims to raise up to US$2.4bn (JPY323bn) via a global offering.
• We have covered various aspects of the deal in our earlier notes, see here and here.
• In this note, we will talk about the updates since our last note, as well as the performance of some of the past large primary raises in Japan.

• In this insight, we take a look at Quiddity’s flow expectations for the June 2023 index rebalance.
• I currently see 5 ADDs/DELs. Some of these names are different from the ones I specified in my previous insight.
• I have also discussed some long-short trading ideas involving names with significant flow implications.

• Starbucks Corp. is a roaster, marketer, and retailer of specialty coffee with operations in approximately 83 markets.
• It has over 35,000 Company-operated and licensed stores.
• It operates through three segments: North America, which includes the United States and Canada; International, which includes China, Japan, Asia Pacific, Europe, Middle East, Africa, Latin America, and the Caribbean; and Channel Development.

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.

• Golden Eagle Retail
• Vedanta Resources

• Aequitas Research puts out a weekly update on the deals that were covered by the team recently along with updates for upcoming IPOs.
• On the IPO front, JD.com Inc (ADR) (JD US) and Alibaba (ADR) (BABA US)‘s spin-off’s continue to draw interest.
• The REIT were out in full force this week for placements as interest rates globally appear to be approaching their peak.

• Five sell side analysts have recently upped their PT’s on Wynn Resorts Ltf.
• Our own tracking of this company goes as far back as the ’80s to the 2000s, when we competed head to head for market share of the upscale segment.
• At US$110 it sustains its long history of trading at a premium to peers.

• The weak share price performance of Haier Smart Home Co Ltd (6690 HK) is unwarranted given the healthy earnings trend, solid net cash position and undemanding valuations.
• The 15.9% 1Q23 recurring earnings growth showed its low correlation with the property market while demonstrated the achievement in cost control and rising premium product contribution.
• It is set to benefit from government’s push for higher penetration of household appliances in rural areas. Meanwhile, recent Rmb depreciation may bring exchange gain for 1H23.

• It’s hoped Buffett’s visit to Japan will encourage managers to review their business strategies to develop products with competitive advantage and value, so that more companies can expect sustainable growth.
• Companies with low OP Margin will need to rethink their fundamental strategy to raise OP Margin for mid-to-long term, as ROE may only temporarily rise even if cash is reduced.
• There are many stocks in Japan with low valuations, but while there are many cash cow companies, there aren’t many undervalued stocks that can generate cash flow for sustainable growth.

• The fact that KS200 IT has a significantly higher AUM provides a flow trading opportunity. This is due to the change in GICS for Kakao Pay from IT to Financials.
• It has been observed that Kakao Pay’s DTV has recently decreased significantly. This may result in the flow size reaching up to 1.4 times DTV.
• It is advisable to design an outright short position for day trading purposes. Additionally, a more aggressive approach can be considered by combining a long position on Samsung SDS.

• Expect some upset on SBI Shinsei Bank (8303 JP)‘s Offer, the possibility of some activism, but it all plays out in the back end. Not the front end.
• Rakuten (4755 JP) is doing a large equity offering to get the monkey off its back with regard to over-leverage, near-term debt refinancing, and WC for Rakuten Mobile.
• Fund manager China Everbright (165 HK)‘s implied stub and simple ratio (CEL / Everbright Securities Co (A) (601788 CH)) are at multi-year lows.

• We continue to recommend a tactical overweight to defensives (Staples, Health Care, and Utilities) as the MSCI ACWI (ACWI-US) tests the top-end of our anticipated 2023 trading range at $93.
• We also remain overweight Europe, Japan, and India, where a lot more than just defensives continue to outperform.
• Actionable Themes: Consumer Discretionary and Defensives, Mainly in Japan and Europe

• Examining ROE contribution requires first reducing cash and raising Asset Turnover and Financial Leverage. Also, regarding stock price appreciation, increasing ROE+DOE, which has higher correlation with TOPIX, will be effective.
• Stock performance is correlated with higher foreign ownership and Tobin’s q, indicating that overseas investors are also more interested in cash-rich, growth policy, dividend policy, policy-shareholdings, treasury-share retirements, AGM/IR disclosures.
• TSE’s adoption of P/B, made it easier to compare management capabilities with that of other companies. Managers who can’t achieve sufficient stock performance will have to seek help from shareholder-returns.

• Sony Corp (6758 JP) reported earnings on 28 April, which saw profit-taking the next day after a brief two-day run-up, as revenues, OP, and NP were guided down.
• There previous ¥200bn buyback ended about two weeks later. Yesterday they launched a new ¥200bn buyback, and the stock reacted well this AM. And then BIG new news this morning.
• Sony announced an assessment of a partial spin-off of Sony Financial. Assessment this FY, spinoff “within next 2-3yrs” (if possible). This garnered more excitement. Brief analysis of both follows.

• On 28th Mar 2023, Alibaba Group (9988 HK)  announced that it would adopt a new organizational and governance structure, splitting into six major business groups and other investments.
• Alibaba also stated that each of the business groups would be set up as an independent entity with its own board and the groups will eventually seek to list.
• In our previous note, we highlighted which division could list. In this note, we will look at the Cloud segement.

• Alibaba’s revenue from physical stores decreased year over year for the first time.
• The operating margin declined despite that Alibaba cut losses in minor businesses.
• We conclude an upside of 15% and a price target at HK$101. Downgrade to Hold.

• Sing Tao News Corp (1105 HK), which owns Hong Kong’s oldest and third-largest Chinese language newspaper, is suspended pursuant to the Hong Kong Code on Takeovers and Mergers.
• A takeover of Sing Tao was mooted in 2019-2021 when Charles Ho, the former chairman, sought to exit his 48.98% stake; but that transaction fizzled out.
• At a market cap of just US$50mn, this (likely) Offer hardly rates a mention. Yet a takeover of a Hong Kong newspaper is still newsworthy.

• Vedant Fashions (MANYAVAR IN)‘ Promoter is looking to raise US$239m via trimming a 7% stake in the firm. 
• The selldown here is to meet the minimum public shareholding requirement of 25% set by SEBI.
• The deal would be a large one to process with the base deal alone representing 187 days of the firm’s three month ADV.

• Alibaba (ADR) (BABA US)‘s 4QFY23 OP beat consensus by around RMB 2.5bn (20% beat) through cost cutting, but YoY revenue growth remained sluggish at 2.0%.
• Consensus expectations of Alibaba achieving an OP of RMB 150bn by FY25 may be overly optimistic due to declining dominance of Taobao and Tmall, and lack of profitable alternative businesses.
• Alibaba Group (9988 HK) would need to excel to reach RMB100bn OP, resulting in a high FY+2 EV/OP of 14.0x. This seems steep for a company with minimal earnings growth.

• DXN Holdings (2080694D MK) raised around US$147m in its Malaysian IPO.
• DXN Holdings (DXN) is a global health-oriented and wellness direct selling company.
• In this note, we will talk about the trading dynamics.

• The Keepers Holdings (KEEPR PM) reported solid revenue growth of 33% YoY for Q1 2023, but profitability disappointed our expectations coming in a 26.5% YoY(vs. >50% our expectation).
• The primary reason for the disappointment was Bodegas W&H coming in with a 6mn peso profit in Q1 due to seasonality, one-offs, and cost increases (Vs. 100mn peso Q42022 profit).
• While trends remain strong on the core business, with the stock trading at 8.3x/7.1x FY23e/24e, with a 4.7/5.5% dividend yield, Bodega’s performance is an eyesore that we will monitor. 

Dentsu Group had demanding Q123 on Q122 comparisons and, with the acquisition contributions, we are not too concerned about the read-across for the rest of FY23, with performance skewed to H2. Progress in Customer Transformation and Technology (CT&T), up 6.7% in Q123 and now 35% of group net revenue, should buoy medium-term growth. Tag, the acquisition announced in March and expected to complete in early Q323 (subject to regulatory clearances), is another step towards the 50% CT&T target. We anticipate a return to margin expansion in FY24 as one-off factors retreat, the transition progresses and cost benefits from the ‘One dentsu’ initiative start to flow. The valuation remains at a marked discount to global peers.

• Dmall Inc (1751691D CH) is looking to raise around US$200m in its upcoming Hong Kong IPO.
• Dmall provides cloud-based, end-to-end SaaS platform purpose-built for the Chinese retail industry.
• In this note, we will talk about the not so positive aspects of the deal.

• Dmall Inc (1751691D CH) is looking to raise around US$200m in its upcoming Hong Kong IPO.
• Dmall provides cloud-based, end-to-end SaaS platform purpose-built for the Chinese retail industry.
• In this note, we will talk about the positive aspects of the deal.

• In this insight, we discuss recent insiders buying in five Korean companies including Dongsuh, Green Cross Holdings, Megastudy, Yuanta Securities, and YG Entertainment. 
• With the exception of YG Entertainment, the share prices of the four other companies are trading at nearly 50% since their peak levels in the past several years. 
• Of these five companies, three of them (YG Entertainment, Yuanta Securities, and Dongsuh Co) generated positive operating profit on a YoY basis.

• Zozo managed a 7% gain in GTVs last year which meant it grew its share of the fashion market. 
• It now has more than 10 million active users and has laid down plans to reach ¥800 billion in GTVs in the medium term.
• Zozo’s momentum is clear and its targets look realistic. Shame about the performance of Z Holdings.

• Tencent Music reported 1Q2023 results. Revenue increased 5.4% YoY to RMB7.0bn (vs consensus RMB6.9bn) while adj. OP more than doubled to RMB1.09bn (vs consensus RMB1.13bn) vs RMB518m in 1Q2022.
• Online music services revenue grew 33.8% driven by strong growth in both paying users and monthly ARPU. Social Entertainment further declined during the quarter.
• 1Q2023 earnings were primarily driven by Online music services and we do not expect a recovery in social entertainment segment’s earnings in the short-term.

• China Travel International Investment Hong Kong (308 HK) should have more upside from here given the sharp earnings recovery over FY23-25. But the market seems to have overlooked this.
• Its FY18 net profit reached HK$687m; but dipped to HK$356m loss in FY22. With its businesses now behind issues like HK social unrest and border closure, there is immense upside. 
• All of CTII’s business segments have experienced recovery in FY23, especially following the resumption of HK-mainland China traffic. Its 0.54x P/B is still 52% down from the peak. 

• MNSO reported its C1Q23 revenue (3.7%)/1.1% vs. our estimate/consensus, while non-GAAP net income beat our estimate/consensus by 17.7%/26.1% respectively, driven by gross margin ramp-up strategy and G&A reduction; 
• We think MNSO’s brand upgrade strategy is success so far, as it offered more high gross margin products without significantly diluting sales. 
• We maintain Buy rating and raise TP by US$0.5 to US$25.5 to factor in the better gross margin and store expansion outlook.

• Inter Parfums (IPAR) continuing to experience demand for its fragrances has not been enough to overcome investor concerns related to the slow demand environment in China and the duty-free segment
• IPAR’s top three brands each grew by more than 20 percent compared to last year with Jimmy Choo sales up 63 percent
• IPAR managing through its inventory balance could result in cash conversion that should improve investor sentiment

Britvic’s H1 results have demonstrated the business’s resilience, with growth in underlying revenue and EBIT margin, and only a modest volume decline during H1. Britvic has continued to execute pricing actions successfully throughout the period, with management also helping to mitigate inflationary pressures through cost efficiencies. Britvic’s brand performance remains strong, and the business continues to invest in growth capacity. The company has announced a further share buyback program of up to £75m over the next 12 months.

• Starbucks Corporation delivered a strong performance in the quarter and managed an all-around beat.
• The company achieved double-digit comp in all company-operated markets, driven by a stronger-than-expected recovery and observed ongoing momentum in its licensed markets.
• The primary drivers of revenue growth were comparable store sales, the year-over-year increase in net new company-operated stores, and the sustained momentum in the company’s worldwide license to market.

• The increase in the number of companies adopting restricted stock is a positive development, but the bias toward fixed remuneration and the non-disclosure of individual director compensation are unsolved issues.
• It’s ironic that 90% investors see ROE as equal to or lower than the cost of capital, while 93% companies know their cost of capital but only 2.3% disclose it.
• If affiliated companies with 20% shareholdings are included, there are still large number of companies covered (36.7% in the prime market), and “parent-subsidiary listings” continue to be a hot topic.

• Yesterday (15 May 2023) just before EOD, an article ran suggesting a ¥300bn capital raise by Rakuten (4755 JP). The stock fell 10% in 10mins. Rakuten hemmed/hawed but didn’t deny.
• One day later, we have a deal. It is up to 546mm shares including greenshoe, which at the close was ¥333bn. 468mm shares to the public, 79mm to 3rd parties.
• This increases Real World Float by 95%. In that respect this is vaguely IPO-ish. Investors have to re-underwrite. Then Passive re-shrinks the float. Details matter.

• Rakuten (4755 JP) aims to raise up to US$2.4bn (JPY323bn) via a global offering.
• The deal was undoubtedly accelerated by Reuters breaking the news of a possible equity raising on 15th May 2023.
• We have covered most aspects of the deal in our previous note, in this note we talk about the deal dynamics and run the deal through our ECM framework.

• Rakuten (4755 JP) is looking to raise around US$2.4bn by selling shares via a Japanese Public Offering and an International Offering as well as through a third-party allotment.
• The stock has already dropped 13.7% in the last couple of days on large volumes as the rumours of the offering started to swirl.
• The offering prices late next week and passive trackers will be buying stock once the stock settles and this will provide support in the near-term.

• Rakuten (4755 JP) announced a public offering of 468.1m new shares and third-party allotment of 78.8m shares to secure ¥333bn.
• Enhanced network coverage via KDDI network sharing to attract new users and overcome previous barriers for Rakuten Mobile.
• Mobile breakeven could drive Rakuten’s operating profit to ¥150-200bn, potentially boosting the share price to around ¥2,000.

• In this insight, we discuss 10 small cap cosmetic stocks in Korea, which are up on average 26.6% YTD, outperforming KOSPI which is up 10.9% YTD. 
• The drivers of their strong share price performances include reopening after the COVID-19 pandemic and ending of nearly all pandemic related restrictions (including wearing of face masks).
• Among the 10 companies, we would focus on the top five small cap cosmetics stocks with the highest growth in operating profit in 1Q 2023 including Cosmecca Korea and Clio.

• It has taken three years to build and set up but Aeon will finally open its first automated warehouse for online food sales in Chiba this summer. 
• The warehouse will run on technology from Ocado and act as the backend for a completely new online supermarket called Green Beans.
• A second warehouse is due to come online in 2026, expanding sales to all of Tokyo and into Kanagawa. This is the most advanced food e-commerce operation in Japan.

• XWELL reported 1Q23 revenue of $7.1 million, compared with $7.6 million in 4Q22, which is a reasonable performance given that the first quarter tends to be seasonally slow.
• The spa business contributed $4.7 million, helped by growth in international spas.
• The XpresTest segment, which included the CDC program and the one remaining XpresCheck location, contributed $1.8 million, while HyperPointe contributed $0.6 million.

• Rakuten (4755 JP) is considering raising around US$2.2bn (JPY300bn), as per Reuters reports. The company hasn’t confirmed or denied the same in its press release.
• The company has been listing some of its subsidiaries and monetising investments to raise cash and has recently hinted at a possible equity issuance.
• While there is no guarantee that the deal will ever materialize, in this note, we take an early look at the possible deal dynamics.

• It is highly likely that Dongwon Industries will be removed from the KOSPI 200 index in this June review.
• Additionally, based on the confirmed cancellation timeline, the possibility of reinstatement during the December review seems unlikely.
• As a result, it would be wise to maintain shorting position strategies that factor in this information.

For our next Corporate Webinar, we are glad to welcome China Shenshan’s Executive Director, David Zhao.

In the upcoming webinar, David will share a short company presentation after which, he will engage in a fireside chat with Smartkarma Insight Provider, Angus Mackintosh. The Corporate Webinar will include a live Q&A session

The webinar will be hosted on Tuesday, 23 May 2023, 17:00 SGT/HKT.

About China Shenshan Orchard

China Shenshan Orchard Holdings Co. Ltd. is a horticultural marketing company in the business of planting, cultivating and sale of kiwifruits in the People’s Republic of China (“PRC”). The Group holds forest use rights for 8 strategically located orchards, spanning a total land area of 9,805 mu (approximately 6.5 million sqm), which is believed to be one of the largest domestic kiwifruit orchards concentrated in the Chibi City, Hubei, the PRC.

• On the 7 March, PE outfit TPG took a 17.8% stake in InvoCare (IVC AU), Australia’s leading funeral services provider, and also pitched a A$12.65/share non-binding Offer via a Scheme.
• The Indicative proposal was subject to the completion of due diligence. InvoCare rejected the proposal on the 27 March. On the 24 April, TPG withdrew its NBIO.
• TPG has returned with a revised A$13/share, inclusive of a A$0.60/share fully franked dividend. If the proposal becomes a binding transaction, InvoCare’s Board intends to unanimously recommend it.

• Q1 CY23 watch and jewelry sales for HK were up 88% YoY. HK sales for Oriental Watch (30% of revenues but less volatile) will benefit from the recovery in HK.
• We estimate China sales will continue to remain resilient as cross-border travel is yet to pick up in a big way. 
• Trading at 7.5x FY23e and a 14.2% dividend yield, with more than 50% of the market capitalization in cash, the company can pay solid future dividends despite weaker earnings.

• On 28th Mar 2023, Alibaba Group (9988 HK) announced that it would adopt a new organizational and governance structure, splitting into six major business groups and other investments.
• Alibaba also stated that each of the business groups would be set up as an independent entity with its own board and the groups will eventually seek to list.
• Having looked at the past performance of its division, some appear more worthy than others of undertaking a listing in the next year or two.

• The previously stockpiled drugs/medical devices require a long cycle of digestion. As the industry beta brought by COVID-19 dividend would fade away, JD Health’s performance growth could slow down accordingly.
• Although JD Health divides its buiness into product revenue and service revenue, drug/product sales are still the underlying logic and business model, which is difficult to maintain high growth expectations.
• Current valuation is in reasonable range. Since JD Health will be added to HSI INDEX, it could help boost share price. However, if business transformation fails, high valuation is unsustainable. 

• Invocare Ltd (IVC AU) disclosed a revised non-binding indicative proposal from TPG at A$13.00 per share, a mere 2.8% above the previously rejected proposal of A$12.65 per share.
• TPG Inc (TPG US) has secured a five-week exclusive due diligence. The Board intend to unanimously recommend a binding proposal at no less than A$13.00 per share. 
• The Board’s capitulation for a marginal bump reflects the lack of a Plan B. While, not a knockout bid, the offer is reasonable. The gross spread stands at 4.6%. 

In our view, Tata Motors’ Q4 and FY 2022-23 results were stronger than expected, with all business segments performing well. Most importantly, JLR improved strongly on the back of the easing semiconductor shortage situation. It is encouraging to see a solid and consistent improvement from the company throughout the year, from a very weak Q1 to a robust Q4. Earnings and cash flows were better than expected. We view positively the company’s efforts to rebrand itself into the sub-brands of Range Rover, Defender and Discovery. We note that Range Rover is viewed positively in the luxury space in emerging markets.

• Revisions to the Corporate Governance Code have increased the ratio of independent directors, and more companies have established voluntary nominating and compensation committees.
• On the other hand, the transition to a Company with US type 3 committees and an independent director chairing the board of directors has been slow in coming.
• Substantive improvements regarding the transition to a company with an audit committee and the establishment of a voluntary nominating and compensation committee should be carefully examined.

• Melco shares have been hammered worse than peers during covid having fallen as low as a range ~US$4. Other factors contributed to downside, since eliminated.
• 1Q23 earnings release shows strong recovery arc in progress both in Macau and Manila.
• With two markets firing and a third ready to open we see an attractive entry point here.

• Cisarua Mountain Dairy booked a solid +25% YoY growth in sales in 1Q2023, with a flat performance from dairy from a high base but very strong consumer foods growth. 
• Powdered milk prices and packaging costs have started to decline which will help to boost margins as the year progresses since Cisarua Mountain Dairy bought forward last year.
• Cisarua Mountain Dairy is an increasingly interesting consumer proxy catering to Indonesia’s middle classes but increasingly focusing on the less affluent mass market as it grows distribution in general trade.

• On the 7 March, PE outfit TPG took a 17.8% stake in InvoCare (IVC AU), Australia’s leading funeral services provider, and also pitched a A$12.65/share non-binding Offer via a Scheme.
• The Indicative proposal was subject to the completion of due diligence. InvoCare rejected the proposal on the 27 March. On the 24 April, TPG withdrew its NBIO.
• TPG has returned with a revised A$13/share, inclusive of a A$0.60/share fully franked dividend. If the proposal becomes a binding transaction, InvoCare’s Board intends to unanimously recommend it.

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.

• Melco Resorts & Entertainment
• Sands China

• The 100 Yen shop model looked in danger when inflation began to bite and labour costs surged but the sector continues to expand
• Their fixed price model meant there was little leeway to offset higher costs through higher prices but a survey shows 90% of respondents visited a Daiso store recently.
• While Daiso has adapted quickly and looks to have a bright future, Seria Co Ltd (2782 JP) refuses to adapt and has seen profits plummet.

• The Hang Seng index committee has added four stocks to take the number of Hong Kong Hang Seng Index (HSI INDEX) constituents to 80. A year late, but we’re there!
• The next leg of the increase in the number of index constituents will take us up to 100. There is no timeline, so this should take a couple of years.
• Estimated one-way turnover is 2.93% leading to a one-way trade of HK$5.7bn (US$730m). All adds will have over 2x ADV to buy from passive trackers.

• The Nikkei Index team has been quite conscious of market impact since the April 2000 debacle. For a few years after, things were quieter. In 2005, Fast Retailing spurred introspection.
• Float was low and became lower. Selection behaviour changed. Now there is a new consultation where “technical listings” would stay in, and phased “stepwise” inclusion would reduce inclusion impact.
• The proposal increases subjectivity, reduces the attractiveness of bets, but otherwise increases the likelihood they will follow the other selection rules. It STILL does not solve the high weight problem.

• Aequitas Research puts out a weekly update on the deals that were covered by the team recently along with updates for upcoming IPOs.
• Mankind Pharma delivered some joy to the Indian equity markets over the past week.
• There were no major placements over the past week but there were some lockup expiries.

• Many companies have low valuations due to the fact that not few managers are concerned about maintaining public listing with the idea of prioritizing it over growth in shareholder interests.
• Many companies only minimally respond to formally aligning board practices with the criteria of the Corporate Governance Code, and very few are creating value through advancing their corporate governance initiatives.
• TSE data shows that OP Margin is neutral and Asset Turnover and Financial Leverage are both negative for ROE, so immediate share repurchases are the effective way in raising ROE.