Industrials

• Investors are pressing Siemens Energy (67% owner of Siemens Gamesa Renewable Energy, S.A. (SGRE SM))  to act in the wake of a downwards sliding share price.
• DFC valuation (WACC 7.5%, 5y EV/EBITDA exit multiple of 5.5x, which conservatively implies no growth rate, which I consider adequate in a low visibility environment) gives a fair value of €16.4/share. 
• An exclusion bid could be on the cards, and the premium need not be high, 20% could be enough, but that would still amount to c. €3.7 billion.

• AKR Corporindo (AKRA IJ) paints an optimistic finish to 2021, with indications of +20-30% QoQ growth for both chemical and fuel distribution in 4Q2021.
• The outlook for FY2022 looks equally promising for the distribution business, with a ramp-up of retail fuel distribution plus a strong pipeline of demand for its JIIPE industrial estate.
• AKR Corporindo (AKRA IJ) remains an interesting industrial proxy for the recovery of the overall Indonesian economy trading at a significant discount to its historical average.

• This article will update on Tsubaki Nakashima, which I focused on in my previous article, as I attended the analyst meeting for its financial results for FY12/2021.
• A temporary issue with quality and inventory management in 4Q resulted in missed profits in FY12/2021, but the company resolved the issue early and it will not affect FY12/2022.
• As the demand for high-margin ceramic balls accelerates in line with the shift to high-power EVs, it is only a matter of time before it regains the confidence from investors,.

• PNC Infratech Ltd (PNCIL) reported a decent set of Q3FY22 numbers driven by its superior execution and a robust order book
• The company reported revenue of Rs 1,522 Cr (up 15% YoY), EBIDTA of Rs 166 Cr (down 7% YoY), and APAT of Rs 81 Cr (down 22% YoY)
• We retain our BUY rating on the stock with a target price of Rs 385/share, implying an upside of 39% from the CMP.

• PNC Infratech has established itself as a strong executor in roads, water infra and airport runway segments
• Reported EBITDA at Rs 165.5 crore was down 7.3% YoY with margin at 10.9%, down 263 bps YoY.
• The company has booked Rs 39 crore towards impairment of Ghaziabad Aligarh Expressway Pvt Ltd. (associate company)

• Mahindra Logistics is an end-to-end 3PL logistics solution provider, from performing milk run to in-factory logistics, warehousing to first mile and last mile logistics
• Serves over 400 customers via its two business segment: supply chain management [(SCM), 96% of revenues] and enterprise mobility
• Revenues from Mahindra comprise 52% of SCM revenues (FY21) while the rest is contributed by non-Mahindra

• US crude export growth is the positive driver while China import contraction is the negative for tanker ton-mile demand in last year which contraction 5.3% YoY.  
• Significant room exists for a rebound in US oil export as oil majors announced plans to increase output. China’s import growth will recover in the next 12-18 months as well. 
• US oil export to China needs 2x more VLCC than from Arabian Gulf. This bodes well for tanker rate, benefiting Cosco Shipping Energy (1138 HK) in the medium term.

• There are 29 inclusions and 12 deletions for the HSCI at the March rebalance. 26 of the inclusions will be added to Connect while all deletes will leave Stock Connect.
• Some of the Stock Connect deletions have a lot of mainland holdings and there could unwinding of some of the positions ahead of becoming sell-only on the link.
• Orient Overseas International, United Energy, Cloud Village and Gcl Poly Energy Holdings Limited could also move higher over the next couple of weeks before the stocks enter Stock Connect.

• The stocks worth our attention are mostly IPO institutional lockup releases. In particular, LG Energy, Iljin HySolus, and Hyundai Heavy Industries will be of the most interest.
• Most of these have undergone significant price corrections. Nevertheless, current prices significantly outperform the offering prices. So, the incentives for IPO institutional investors to realize profits should be pretty intense.
• Kakao Pay’s volume isn’t that much. Even with a heavier release last time, it didn’t meet our expectations. Probably it is because it is bottoming out at the current level.

• PNC Infratech: PNC Infratech (PNC) reported a muted quarter (owing to delay in execution of Jal Jeevan Mission (JJM) projects) with revenue/EBITDA/APAT of INR 15.2/2/1.1bn missing our estimates by 8/10/20%.
• Whilst FYTD22 order inflow was tepid at INR 27bn, PNC maintained its INR 80bn order inflow target for FY22. In the water segment (INR 41bn OB), PNC has INR 32bn OB under JJM (ex of INR 23.4bn of new JJM projects won Jan-22).
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• Hock Seng Lee (HSL MK) has announced an unconditional voluntary take-over offer of RM1.35/share.  
• The joint ultimate offerors, led by director Yu Chee Hoe, currently hold 84.2%. 
• HSL is already in non-compliance with  Bursa’s 25% free float. The Offeror does not intend to main HSL’s listing

Robust earnings growth, but still traded at cheap valuation

• The market cap review period for the June rebalance of the Stock Exchange of Thailand SET 50 Index (SET50 INDEX) starts in a couple of weeks.
• Using the last close, we see JMT Network Services (JMT) and Bangkok Life Assurance (BLA) as potential inclusions, replacing Ratch Group PCL (RATCH TB) and KCE Electronics PCL (KCE TB).
• Ratch Group PCL is the lowest ranked index constituent and needs to move 15% higher to avoid deletion. Passive trackers will need to sell nearly 4 days of ADV.

• While China Southern Airlines (1055 HK) saw passenger traffic up 17.3% in Jan, this is at the expense of higher capacity, leading to a 1.8pp YoY passenger load contraction. 
• Its cargo traffic underperformed both CEA and Air China with a YoY decline; and this is disappointing in a period of time where airfreight rate is at record-breaking level.  
• We see reduced local travel demand, higher operating costs, weaker cargo business, pressure on yield and higher base of comparison key challenges in 2022, and prefer Air China Ltd (753 HK). 

• New target price 2,150 yen; Reiterate our Hold rating

• On February 3, the company announced FY12/21 consolidated OP of 24.1bn yen (+23.1% YoY, OPM 12.7%), slightly below the company’s guidance of 24.7bn yen

• Mita Securities’ earnings forecast: Lowering our OPM assumptions

• The deal is expected to be referred for thorough analysis given political sensitivities as Ultra Electronics Holdings (ULE LN) is a key supplier to the UK’s army. Shorts are increasing.
• The review should fall under the old rules though. My standalone fair value estimate (DCF based) is 3,184p. (vs. 2,950p comps-based implied valuation and 3,325p median Capital IQ consensus TP).
• Long ULE LN, TP 3,500p, plus 16p interim. Upside is 17.2%. I just don’t see the UK Government blocking a friendly defence deal from an investor coming from a key ally.

• We anticipate KEX earnings performance to experience net loss for at least in the next two quarters while expecting to see market consolidation within the express delivery industry in Thailand
• First net loss since listed at Bt604m in 4Q21 pressured by aggressive price cutting strategy and cost arise from spare resources on labour and transportation. This resulted 
• Report Bt47m net profit in 2021 (-98%YoY) due to a price war which resulted in a drastic fall in average selling price. (contracted 20-25%YoY in 2021)

• KNR Constructions is one of the leading companies in the roads and highways sector having executed 6,000+ lane km of projects across 12 states in India
• The company also has an established presence in irrigation and urban water infrastructure management.
• Target Price and Valuation: We value KNR at Rs 360/share

• Unconditional voluntary cash offer of MYR1.35/sh
• No intention to maintain listing status
• Offer price is fair
• Challenging near-term outlook

The unconditional voluntary take-over offer for the remaining 87m shares (15.81%) in HSL for MYR1.35/shr by Hock Seng Lee Enterprise Sdn Bhd (HSLE) is 39% above our previous TP of MYR0.97, but in-line with its current share price. We believe the offer price is fair, which implies 15x FY22E PER and 0.8x P/BV (5-year mean). HSL’s net cash was MYR213m end-Sep 2021. We lift our TP to reflect the offer price; maintain HOLD.

• JD Logistics is a logistics distribution service platform that provides logistics solutions in China through its nationwide warehouse and distribution logistics network
• Unlike its peers, it does not directly invest in warehouse assets but instead leases them from its parent company JD.com, which theoretically confers advantages of an “asset light” strategy
• JD Logistics has yet to yield such benefits to date, but its upcoming full year 2021 results could help investors determine potential ROA and margin improvement trends

• Tile manufacturer Arwana Citramulia (ARNA IJ)‘s 4Q2021 results confirmed a strong finish to the year and management expects an equally vibrant performance in 2022, as a top quality Indonesian industrial
• Increased capacity, better product mix, greater efficiencies on gas usage, and the new line of porcelain tiles will help to drive better margins this year. 
• Arwana Citramulia throws off high returns with ROEs of more than 30%. Valuations do not look challenging with a strong EPS 30% growth and a forward PER of 11x.

• Voltas (VOLT) reported a mixed set of numbers in Q3FY22. Revenue/PAT de-grew by 10%/25% YoY (below our estimates by 4.6%/22%)
• On the other hand, EBITDA grew by 6.7% YoY (above our estimates by 6%)
• The company witnessed lower growth in UCP (up 9% YoY); EMPS (down 34.6% YoY) was below expectations.

• Elgi Equipments (Elgi) manufactures wide range of air compressors (~90% of revenue) and automotive equipment (~10%).
• Elgi is the second largest player in the Indian air compressor market (~22% market share) and among the top eight players globally
• Target Price and Valuation: We value Elgi at Rs 410 i.e. 50x P/E on FY24E EPS

• Ashok Leyland Ltd (AL) reported a subdued performance that stood below our estimates
• We tweak our estimates downwards to factor in near-term headwinds and lower volumes.
• We maintain our BUY rating on the stock and value it at 18x FY24E EPS to arrive at a TP to Rs 160 (Rs 175 earlier), implying an upside of 29% from CMP.

• ENGR’s 3QFY22 revenue was 25% below our estimate, with the miss led by a 25%/26% miss in the Consultancy/Turnkey segment.
• Operating profit stood at INR625m, 48% below our estimate.
• This was on account of an unfavorable revenue mix, with 47% revenue from Turnkey projects.

• SMC Corp (6273 JP) announced better Q3 and an upward revision to still-below consensus for this year. Consensus is for up-and-to-the-right the next few years (but implied Q4 looks light).
• The company raised its dividend so now it is 1% yield.
• And the company announced a small but intriguing buyback. If you own the stock or trade in the space, it is worth understanding

• Kelly Services Inc A (KELYA US) aims to raise around US$200m via selling its 3.8% stake in Persol Holdings (2181 JP).
• Kelly Services mentioned that it was looking to end its cross-shareholding with Persol Holdings in its earnings announcement. The two share a JV in PersolKelly.
• In this note, we will run the deal through our ECM framework and comment on other deal dynamics.

• Nihon M&A Center (2127 JP) reported 3QFY03/2021 results yesterday alongside publication of investigation report over false recording of sales contracts on the internal system between FY03/2019 to 2QFY03/2021.
• The company announced on 20th December 2021 that it has commenced an investigation over the above issue and postponed the announcement of its 3Q results.
• Revenue for 3QFY03/2021 increased 14.6% YoY to JPY10.85bn (vs consensus JPY12bn) while OP dropped 5.1% YoY to JPY4.0bn (vs consensus JPY6.0bn).

• Spreads have generally tightened across our liquid universe, 410 bps in the case of Volkswagen. Spreads in Sixt (45.7%) and Schroders (37%) are worth mentioning.
• Recommendations Long ords / short prefs: Fuchs Petrolub, Henkel, Handelsbanken.
• Recommendations Long prefs / short ords: BMW, Grifols, Roche, Telecom Italia (takeover interest), Volkswagen.

• The new product in IGBT for NEV will be the main driver going ahead riding on the growing EV ecosystem in China.
• The recent sell-off provides a good entry point for new investors. For those who are already invested, it provides an opportunity to add at a better price. 
• It is a lesser-known NEV name in China that is still trading at a lower valuation compared to the mega-cap names such as CATL and BYD. 

• H.G. Infra Engineering Limited (HGIEL) – incorporated in 2003, is a Jaipur (Rajasthan) based infrastructure company 
• Over the last 18 years, the company has successfully transformed itself into a primary road developer from a sub-contractor
• We recommend a Buy the stock for a target price of Rs 680 implying an upside of 11% from CMP.

• Toshiba’s second IR day produced little of extra value as details on its new MTP did not add anything particularly new. 
• The company did a reasonable job of breaking down sources of growth and technological strengths but there were few immediate growth drivers. 
• As prospects for strong growth look to be shifting further out an SOTP analysis does not favour Toshiba.

• Toa Corp (1885) is a niche infrastructure construction play with a decent growing business and a recent change in shareholder return policy. 
• They bought back back 6% of shares in 2019. Then launched another 6% buyback in 2021. And now have announced another 6% buyback for 2022.
• The shareholder structure and the return profile bear closer investigation.

• FY Mar-22 guidance was raised, but new orders were down in 3Q and both sales & operating are headed down in 4Q. 
• 4Q is seasonally weak and long-term demand drivers such as 5G, IoT and auto electrification remain in place, but the timing of recovery is uncertain.
• The shares have dropped 21% since last September, to the low side but not the bottom of their 5-year P/E range. Look for an opportunity to buy for the long-term.

• Harmonic Drive posted relatively good numbers in 3Q on account of strong SG&A controls but neglected to raise guidance. 
• That looks conservative and backlog hit a new high, but valuations remain stretched. 
• Ultimately we still see significant risk for next FY and expect guidance to be significantly weaker than consensus expects.

• We expect the company to report 4Q21 net profit at Bt159m.(+110%YoY +14%QoQ), an all-time high level. YoY and QoQ expansion will be driven by a spike in equity income Bt102m 
• Anticipate revenue to hit all-time high at Bt1.4bn in 4Q21, mainly driven by high season for logistics segment and consolidation of overseas business.
• Solid outlook for warehouse & yard management in 2022, Potential upside from business expansion via multi-model strategy with JVs

• Another quarter, another Toshiba Medium Term Plan as activist investors keep sending management back to the drawing board until they come back with a privatisation. 
• Except there is still no sign of any significant appetite among buyers and no sign that they would be allowed to go through with it even if there was. 
• So Toshiba management shuffled a few deck chairs and the market yawned.

• This should come as no surprise. Nagoya Railroad (9048 JP) is buying out minorities in logistics unit Meitetsu Transport (9077 JP).  
• Given the shareholder structure, this can be done and squeezed out with not a single share tendered, but it’s ugly. 
• Logistics REITs trade at 1.3-1.5x book. This is being done at 0.55x book where just 1.0x book for the warehouse assets would be more than the EV at Takeover Price.

• Daikin 3Q results were mixed with revenue of ¥743bn (-2.2% QoQ, 21.3% YoY) looking strong but OP of ¥66.8bn, implying an OPM decline to 9.0% from 10.3% last quarter. 
• Reported revenue was 6.0% higher than consensus while OP was 4.2% lower. 
• The company revised its FY22 revenue guidance to ¥3,050bn (+4.1%) but OP was raised just ¥10bn to ¥310bn (+3.3%) which may disappoint.

• DAX is a German blue-chip index that currently tracks the 40 largest companies listed on the Regulated Market of the Frankfurt Stock Exchange. 
• The DAX Index is reviewed on a quarterly basis in March, June, September, and December. 
• In this insight, we take a look at the potential constituency changes that can happen in the March 2022 review.

• The FY21 result of China Everbright Environment (257 HK) (CEE) should look impressive and we see improvement in cash flow to relieve market concerns on leverage and financial position.  
• New project addition is solid over the last three months, adding about 5% to operational project portfolio. Strong special purpose bonds issuance in 4Q21 and 2022 will fuel pipeline momentum.
• Valuations look undemanding at 4.1x PER and 0.65x P/B for FY22F; and by maintaining payout ratio at c.30%, dividend yields are at attractive 6.4% and 7.4% for next 2 years.

• HG Infra Engineering is a Jaipur (Rajasthan) based infrastructure company having primary focus on roads and allied sectors
• Additionally, the company is actively looking to diversify itself by targeting railways, airport, and water infra segments
• Target Price and Valuation: We value HG Infra at a target price of Rs 885

• Grindwell Norton (GNL) is the market leader in the India abrasive market with ~26% market share.
• The segments include abrasives (contributing ~57%), ceramics & plastics (33%) and IT services & others (10%).
• Target Price and Valuation: We value GNL at Rs 2035 i.e. 55x P/E on FY24E EPS

• Timken India is into manufacturing, distribution and sale of antifriction bearings, primarily tapered roller bearings, cylindrical roller bearing and other bearing components and accessories
• They are also in power transmission product brands & partner with renewable energy companies to power some of world’s largest wind mills
• Target Price and Valuation: We value Timken at Rs 2405 i.e. 48x P/E on FY24E EPS

• Astral Ltd (ASTRAL) reported a healthy set of numbers for Q3FY22 in both pipes and adhesives, despite the inflation in raw material prices
• Consol. revenue/EBITDA/PAT grew 22.4%/2.9%/3.2% YoY, respectively, in-line with our estimates of 20%/0.6%/1.6% YoY
• Revenue for Q3FY22 came in at INR1099cr, led by the healthy performance of the pipes business(up ~24% YoY).

• Seibu Holdings created a new Medium Term Management Plan in May 2021 including what it called Big, Hairy, Audacious Goals, or BHAGs.
• That goal was to move a longtime asset-heavy business to an asset-light model by selling hotel and leisure assets, securitising others, and undergoing a Whole Business Restructuring.
• Seibu Construction was sold in January and now it looks like 30 out of 40-odd Japan hotel and leisure facilities are nearly a done deal with a sale to GIC.

• GrafTech International Ltd (EAF US) Q4 2021 results demonstrated the company is well on track to an FY22 profit of over 520 mn USD, implying a 5x PE. 
• Debt deleveraging remains a powerful theme in the story. With an average debt reduction of 400 mn USD a year, the company will be close to zero debt by 2023. 
• We believe the company will also use its cash to buy back stock ( 159 mn USD authorized buyback or 6% of market capitalization ) and pay dividends. 

However, EBITDA fell 2% YoY, owing to the elevated gas price impact. The company continues to keep a tight leash on its debtors. Timely capacity expansion in Q4FY22 should bolster its volume and market share growth. We maintain BUY on Somany Ceramics with an unchanged target price of INR 1,130/share (13x Dec-23E consolidated EBITDA). We continue to like SOMC for its strong retail distribution, improving product mix, and tightened working capital (WC).