Industrials

• China Communications Construction (1800 HK) has bucked the trend of weaker earnings growth in the last two quarters by posting a healthy 17.7% YoY net profit growth for 1Q22.
• While gross margin contracted slightly, the good control on selling and administrative expenses have partly absorbed margin contraction. Its new contract value for 1Q22 has also reached record high.
• With government’s aggressive special purpose bond issue and infrastructure investment, we expect new contract momentum to pick up. Trading at 3.2x PER and 0.22x P/B, CCCC is massively undervalued.

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• Guodian Technology & Environment Group (1296 HK)‘s composite document is out with the H Shareholders’ class meeting on 20 May. The IFA considers the offer to be fair and reasonable. 
• The key condition for the privatisation is approval by at least 75% of independent H-shareholders (<10% of all independent H-shareholders rejection). There is no minimum acceptance condition. 
• The H Shareholder with a blocking stake has provided an irrevocable. For a 9 June payment, the gross and annualised spread to the offer is 1.9% and 19.5%, respectively. 

• 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 IPOs front, Campus Activewear got great coverage, while Rainbow and Shieldus appear to be struggling.
• There were no large placements, apart from a selldown in Areit (AyalaLand REIT) (AREIT PM) and a friends and family round in Zhongyuan Bank (1216 HK).

• Keppel (KEP SP) and Sembcorp (SMM SP) have announced the O&M business combination and it is a little more interesting than expected. It is a Very Big Desirable Order Book.
• Razer Inc (1337 HK)was trading at a 8% gross spread to terms a day before the vote, on headcount test concerns. But it was even close. 
• KKR and Hitachi Ltd (6501 JP) have a deal to get KKR to buy Hitachi Transport System (9086 JP) in a VLBO (Very Leveraged BuyOut).

• There are 36 – mostly firm – transactions currently being discussed and analysed on Smartkarma. Inside is a timetable of upcoming key events for each deal.
• Five new deals this week involving Hitachi Transport (9086 JP), Lanzhou Zhuangyuan Pasture (1533 HK), Beijing Enterprises Urban (3718 HK), SPH REIT (SPHREIT SP), and Shin Keisei Electric Railway (9014 JP).
• Key updates took place for: Western Areas (WSA AU), Guodian Technology & Environment Group (1296 HK), Toyo Construction (1890 JP), True Corp (TRUE TB) / Total Access Communication (DTAC TB).

• Japan-Based Railway Company Keisei Electric Railway Co (9009 JP) (“Keisei”) and its 44.64%-owned equity method affiliate Shin Keisei Electric Railway (9014 JP) (“Shin Keisei”) have signed a Share Exchange Agreement.
• Shin Keisei Shareholders will receive 0.82 Keisei Shares per Shin Keisei Share. Following the completion of this Deal, Shin Keisei will become a wholly-owned subsidiary of Keisei.
• Below is a closer look at the details of this Transaction and the likelihood of Deal Completion.

• The recent surge in IC test equipment orders is unsustainable. Only service orders maintain a positive trend.
• After peaking this fiscal year, sales and profits are likely to show double-digit declines. When earnings might hit bottom is not clear, but cyclical gearing is high. 
• Earnings could rebound in 2 or 3 years, but visibility is poor. Don’t forget that Advantest has dropped into the red three times in the past 20 years. 

• Beijing Enterprises Water Group (371 HK)/(BEWG) will launch a conditional mandatory general offer (MGO) for Beijing Enterprises Urban Resources (3718 HK) at HK$0.78 as it crossed the 30%+ voting threshold. 
• The MGO is conditional on the offeror and concert parties holding more than 50% of the voting rights (currently own 38.64%). The MGO price is unattractive, in our view.
• BEWG’s justification for the offer and lack of a “no increase in offer price” wording suggests the possibility of a bump. The shares closed 2.6% above the MGO price.    

• Guodian Technology & Environment (1296 HK)‘s Composite Document is now out. The Scheme Meeting will be held on the 20th May with expected payment on or before the 9 June. 
• The Independent Financial Advisor (Gram Capital) has concluded China Energy and Guodian Power’s Offer is fair and reasonable. 
• This is a done deal – play the spread. This is trading at a gross/annualised spread of 1.9%/18.6%. 

• KKR and Hitachi Ltd (6501 JP) have a deal to get KKR to buy Hitachi Transport System (9086 JP) in a VLBO (Very Leveraged BuyOut). 
• As somewhat expected, it is a “split price deal” where Hitachi will accept a lower price for its 40% stake than minorities will receive in a Tender Offer. 
• This is a big win for Hitachi Transport shareholders, but the Tender Offer likely won’t start until late September.

• Toyo Construction (1890 JP) today released a change to its Target Opinion Statement for Infroneer’s takeover bid at ¥770/share. It supports the tender itself, but withdraws its recommendation investors tender.
• Infroneer refused to raise their price, so this effectively kills their bid (though they will extend). TC will engage with Yamauchi Family Office which has separately offered to bid ¥1,000/share.
• The dynamics have now changed. This is a range trade, and will likely take time unless Infroneer says “I’ll sell at ¥1,000/share.”

• Beijing Enterprises Urban Resources (3718 HK) (BEUR) has announced a mandatory general cash offer from Beijing Enterprises Water Group (371 HK) (BEW). 
• This Offer was triggered by BEW increasing its stake to 31.23% from 29.97%. The Offer price is HK$0.78/share, a zero premium to last close and 20% above the 30-day average. 
• This is an underwhelming privatisation Offer. BEUR traded through terms as recent as last November. The Offer price has not been declared final.

• Arwana Citramulia (ARNA IJ) released a strong set of 1Q2022 surpassing expectations and paving the way for strong growth in 2022 driven by an improving product mix.
• ASPs for Arwana are increasing through changing product mix, which is improving margins but not suppressing demand with a move to higher-end Digi Uno and ARNA products. 
• A webinar with management confirmed the positive outlook for 2022, with an estimate of +30% bottom-line growth forecast from increased volumes, greater efficiencies, and higher ASPs through improved product mix.

• AKR Corporindo (AKRA IJ) results continued to reflect its key exposure to both economic recovery in Indonesia and its exposure to rising commodity prices through its chemical distribution.
• Volume growth in petroleum distribution may surprise on the upside, whilst chemical prices remain elevated boosting that business.
• The pipeline for its JIIPE industrial estate looks promising and management remains confident in targeting 40 ha land sales with potential upside from Freeport Smelter related demand. 

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• ACCO experienced a recovery in all its segments in the first quarter 2022, especially from COVID-19 related closures in Mexico and Brazil
• ACCO reported comparable sales rose 11 percent compared to the prior year, but foreign exchange limited the quarter’s performance
• ACCO is continuing to project a higher free cash flow than in 2021, which would be used to reduce its debt level.

• Consolidated OP was 6.664bn yen (+10.9% YoY), and OPM was 12.2% (-0.9ppt YoY).
• Progress toward the company’s 1H OP guidance of 11.702bn yen (-1.6% YoY) was 57%.
• OP exceeded its 1Q target of 6.268bn yen by 396m yen

• Keppel Corp and Sembcorp Marine have announced the O&M business combination and it is a little more interesting than expected. It is a Very Big Desirable Order Book.
• Separately, there is the potential for more index inclusion flow based on the conclusion of the combination in Q4.
• The light at the end of the tunnel used to be far away, and one was never sure if it wasn’t an oncoming train. It’s closer and clearer now.

• The Keppel O&M / SMM Combination and Keppel Rig Asset Restructure were announced today and the arithmetic is both tough and interesting. There’s a little magic here.
• KEP shareholders receive SMM shares worth ~1/3 of today’s share price, and the rest is currently valued at well under Net Tangible Assets post-Restructuring/Transaction.
• That suggests Keppel has upside, but one must think carefully about the exposures.

• The terms for the proposed combination of Keppel O&M and Sembcorp Marine (SMM SP) were announced. The agreed equity value exchange ratio between Keppel O&M and Sembcorp Marine is 56%:44%. 
• The proposed combination will require Keppel Corp (KEP SP) and Sembcorp Marine shareholder approvals at separate EGMs and is expected to close in 4Q2022.
• The transaction is a big win for Keppel shareholders as the proposed combination creates S$9.4 billion of value, which is around 80% of Keppel’s market cap at the last close.

• We have one sure addition, Hyundai Heavy Industries. So, we have one guaranteed deletion, and we may have another delete depending on the outcome for the Segment Number of Companies.
• It is safe to say that Seegene‘s exclusion is almost confirmed. The one with the next smallest market cap is Green Cross.
• But if SK Telecom is excluded due to a low foreign room, Green Cross will survive, and even Seegene may remain in the Standard Index.

• HCM reported FY revenue of ¥1,025bn, just above our ¥1,010bn estimate and blowing away clueless consensus’ ¥963bn. 
• OP was ¥93.5bn despite the trouble in Ukraine/Russia, just below our ¥95bn estimate and significantly above consensus at ¥86.8bn and guidance of ¥84bn. 
• Guidance for a YoY OP decline is silly in our view and we suspect there will be a double digit increase.

• Keppel Corp and Sembcorp Marine have announced a proposed combination of Keppel O&M and Sembcorp Marine to create a global player in offshore renewables, new energy and cleaner O&M solutions.
• Keppel Corp (KEP SP) and its shareholders will own 56% of the combined entity, while Sembcorp Marine (SMM SP) shareholders will own the other 44%.
• Depending on the combined entity market cap, there could be selling from MSCI Standard and FTSE Straits Times Index (STI) (STI INDEX) trackers at the time of implementation.

• Xinjiang Goldwind Science & Technology (2208 HK) sees recent recovery in WTG price to be positive; and the increase in average unit size should be good to unit costs.
• Gross margin contracted 3.1pp YoY in 1Q22 and it has put in place many cost reduction initiatives to contain cost inflation. It expects more impacts can be realised in 2H22.
• External order backlog up 6.3% YoY to 16.97GW, with an encouraging 37.7% growth for overseas contracts. We think its 9.9x FY22F PER is inexpensive relative to the clean energy plays.

• Barings Private Equity Asia is in the “preliminary stages of considering a possible offer” for AIM-listed translations leader RWS Holdings. PUSU deadline is 19 May.
• The offer seems opportunistic at the time of share price weakness. H1 results were in line and the company is confident about its prospects. Barings may boost results adding leverage.
• Andrew Brode will not sell cheap (shares traded at 653p four months ago). My (conservative) DCF valuation is 544p. Current market turmoil may represent a chance to go long RWS LN.

• Sinotrans (598 HK) posted a 17.7% YoY net profit growth for 1Q22, providing evidences that it can weather the slowing trade momentum. More encouragingly, net profit surged 54.9% QoQ.
• Gross margin expanded 1.3pp YoY, signaling better cost performance. DHL-Sinotrans continued to provide very promising contribution, reflecting in a 14.3% growth in investment income. 
• Operation parameters are solid and gearing stays healthy (7.6%), providing room for higher dividend payout. Even at last year’s payout, it trade on 10.9% yield; and it’s on 3.3x PER.

• Finally, Blue Bird (BIRD IJ) is back on profit in two consecutive quarters, highlighting the comeback mode in Indonesia. 
• It went on to sign a partnership to develop and integrate big data analytics with PT LRT Jakarta and BCA app users can call Bluebird from the app. 
• It is still trading at 0.6x PBR while pre COVID level was 1.3-1.5x PBR. 

• The NZ Air Rights Trade is nearly done. Last day of trading is today. 
• The Rights were super cheap. They ran as NZ AIR ran a bit. 
• Now it is the time to trade NZ AIR Shares vs Peers.

• Hitachi has been in the process of selling Hitachi Transport System (9086 JP). An article in the Nikkei Thursday last suggested a deal was imminent (both companies report 28 April). 
• Bloomberg carried an article this morning with more numbers and implied arithmetic. Then they revised the language in the article. 
• There is STILL room for different interpretations of likely deal price if one tries to parse all the info provided and match it with history. But we may be there.

• Suppose we grouped S1 and Taiwan Secom with the Physical/Integrated Security weighting and then applied the Cybersecurity weighing to Ahnlab and CyberOne. We would have 11.40x, substantially lower than 14.85x.
• SK Shieldus’ sales were ₩1.55T, an increase of ₩0.22T (16.8%) from the previous year. But 65% of last year’s sales increase was derived from the internal deals with SK Group.
• How the company and the bankers will respond to those mentioned above two controversial aspects will be the most crucial point in determining the success or failure of this IPO.

• Beijing Enterprises Water Group (371 HK) (BEW) and Beijing Enterprises Urban Resources (3718 HK) (BEUR) were both suspended this morning, the latter pursuant to the Takeovers Code. 
• BEW holds ~29% in BEUR, a stake largely unchanged since BEUR’s listing in January 2020.
• A possible privatisation of BEUR follows on the heels of the ongoing take-private transaction for Guodian Technology & Environment Group (1296 HK), another waste treatment and environmental play.

• Machine tool orders are losing momentum given the geopolitical risks and shortage of materials
• Margins are also order pressure given soaring materials and transportation costs
• FY3/23 OP guidance misses consensus, but it is not conservative. We expect the share price to head lower

• FY Mar-22 sales and profits exceeded guidance, as expected. New orders declined slightly in 4Q but remained above sales.
• Unfortunately, Disco has decided to stop disclosing orders and the order backlog. A cynic would say this signals the peak of the cycle. 
• 1Q guidance looks conservative. That should be no surprise and no catalyst for the stock price. Shipments of blade dicers are forecast to decline by 10%. Beware. 

• Despite a dead cat bounce in Robomachine coming through as we suggested Fanuc’s 4Q OP missed consensus estimates by 14%. 
• Guidance was strong however with revenue guidance of ¥825.5bn materially above consensus’ ¥797.7bn. 
• This continues a pattern of weak results and strong guidance in the FA sector going into a tightening cycle which is concerning.

• With the Carlyle Group taking a 10% stake in Hyundai Glovis, we believe there could be increasing pressures including through higher dividends and buybacks to return capital to shareholders.
• Hyundai Glovis is likely to get re-rated going forward, driven by profitable expansion into LNG and hydrogen transport, online used car sales platform, and more favorable shareholder return policies.
• Hyundai Glovis’ recent contract with Tesla to ship cars out of China is another positive sign on the growing importance of Hyundai Glovis in the Asian vehicles shipping market.

• Beijing Enterprises Urban Resources (3718 HK)/BEUR and Beijing Enterprises Water Group (371 HK)/BEWG entered trading halts relating to the Code on Takeovers and Mergers and “a proposed notifiable transaction”, respectively. 
• BEWG, the largest BEUR shareholder, has steadily increased its stake from 26.25% at BEUR’s IPO on 15 January 2020 to 29.45% as of 31 March 2022.
• Our best guess is that the trading halts relate to a potential mandatory general offer associated with BEWG acquiring 30%+ of the voting rights. 

• On 26 April, it was reported that Life Asset Management sent a shareholder letter to SK Inc to cancel 1.8 million shares worth about 470 billion won. 
• Our SoTP valuation of SK Inc suggests an implied valuation of 307,321 won per share, suggesting 17.3% upside from current levels.
• There has been an increased interest in SK Inc as its affiliates are getting ready for IPOs in 2022/2023 including Londian Wason Holdings, SK E&S, SK Pharmteco, and SK Siltron.

• Guodian Technology & Environment Group (1296 HK)‘s (GTE) pre-cons are now fulfilled – bang in line with my timetable estimate.
• The Composite Document should be despatched to the shareholders on or before 29 April 2022. 
• Assuming all goes to plan – and there is every indication it will – payment under the Offer is expected around mid-June.

• Winia Aid is getting ready to complete its IPO in June. According to the bankers’ valuation, market cap after the IPO is from 219 billion won to 249 billion won.
• It has three main businesses including distribution, logistics, and services. Distribution and logistics are for Winia and other global products. Service is mainly for Apple’s authorized service provider in Korea. 
• The company has a solid growth in sales and profits. From 2018 to 2021, the company’s revenue and operating profit increased by 39.2% and 86.2% CAGR, respectively.

• Valmont Industries operates in four primary business segments: Engineered Infrastructure Products, Utility Support Structures, Irrigation and Coatings; as well as in the tubing, grinding media and electrolytic manganese dioxide businesses.
• Valmont focuses on two global markets: infrastructure and agriculture.
• The Irrigation segment manufactures and distributes mechanical irrigation equipment, and related parts and services under the Valley brand name for the agricultural industry; and tubular products for industrial customers

• KNRC sits on a strong order book of ~INR100b (excluding recently won projects), which provides clear revenue visibility for the next three years.
• It has received appointed dates (AD) for two HAM projects in Jan’22 and financial closure (FC) in one HAM project in Apr’22, which will support execution in FY23E and FY24E.
• We expect margin to stay elevated, despite inflationary pressures from higher commodity prices, as a sizable portion (~26%) of its order book consists of irrigation projects.

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• LTTS reported a 3.6% QoQ CC growth in 4QFY22, 90bp below our estimate due to softer growth in Industrial Products (-0.5% QoQ), Medical Devices (flat QoQ), and Telecom and Hi-Tech (+1.1% QoQ), while Transportation grew a robust 7.8% QoQ.
• Despite the large 400bp shift in its on-site revenue mix and lower utilization (-80bp QoQ), operating margin was flat QoQ.
• Attrition spiked to 20.4% (+290bp QoQ) in 4QFY22, indicating continued supply pressures.

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• Yamauchi No10 Family Office (YFO) Friday declared a fourth buyer in its group and reached 26.28% as of the 19th. 
• Toyo Construction revealed a back-and-forth between itself and YFO in which it was revealed It YFO had also proposed a Tender Offer at ¥1,000/Share subject to discussions and Board Agreement. 
• This, and YFO’s position make Infroneer’s ¥770/share Tender Offer somewhat untenable. Shares could become more volatile. 

• SK Shieldus (ABFHIZ KS) is a leading South Korean security provider. It is seeking a KRX IPO to raise up to US$0.9 billion. 
• The primary change in the updated prospectus is the syndicate’s valuation methodology which results in a 10% lower value per share. The IPO price range of KRW31,000-38,800 is unchanged.
• Sentiment on IPOs remains poor. For investors willing to look at IPOs, our valuation analysis suggests that the IPO price range remains reasonable.  

• Cimc Enric Holdings (3899 HK) has an encouraging 1Q22 with 24.9% revenue growth. If not the impact of the pandemic and lockdowns in Mar, growth would even reach 35.2%.
• Total new orders increased 23.2% in the quarter even in a period disrupted by lockdowns. Backlog stands at Rmb15.5bn, enough to fully cover FY22 revenue with 7% growth.
• Hydrogen energy business, though still small, witnessed 80.5% revenue growth. Good demand drives new orders to Rmb105.4m; and its backlog of Rmb180m equals to 5x of 1Q22 revenue. 

• Founder and Chairman Nagamori has reappointed himself CEO, obscuring the reasons why Nidec’s share price has declined.
• Quarterly earnings should recover, but strategic investments look three years into the future while materials costs rise and the economic situation deteriorates.
• Rising interest rates and compression of valuation multiples are likely to dampen the share price. Look to the long term without expecting a return to the glory days. 

• Guodian Technology & Environment Group (1296 HK)’s privatisation offer from China Energy is HK$1.08 per H share. The pre-condition was fulfilled on 22 April.  
• The key conditions for the delisting will be approval by at least 75% of independent H-shareholders (<10% of all independent H-shareholders rejection). There is no minimum acceptance condition.  
• At last close and for a mid-June effective date (composite document despatched by 29 April), the gross and annualised spread to the offer is 2.9% and 19.9%, respectively.

• DiDi Global (DIDI US) had serious data problems. It still listed itself, against the wishes of the regulators. Then it got in serious hot water. And it’s been getting hotter. 
• Ramsay Health Care (RHC AU) announced an unsolicited, non-binding Offer from KKR (and HISTA), at A$88.00/share, a 36.7% premium to last close, however, earnings have been left bedridden by the pandemic.
• Post-Deal, Keppel Corp (KEP SP) will look more like Sembcorp Industries (SCI SP). More engineering, less power generation infra assets, more other infra assets and more data centres. 

• SK Shieldus (SKS) aims to raise around US$800m via issuing a mix of primary and secondary shares in its Korea IPO.
• SKS is the security subsidiary of SK Square. It provides security services across four main categories: information security/Cybersecurity, convergence security, physical security, and Safety & Care.
• In this note, we will look at the refiling updates.

• A sharp spike in bond yields pressured growth stocks and weighed on Strategy performance against its core benchmark, where leadership was decidedly one-sided in favor of value.
• Nevertheless, we remain positive on areas like the IT sector and have largely maintained holdings in our highest-conviction ideas.