Industrials

In this briefing:

1. THK (6481 JP): New Orders Down by Two-Thirds in 4Q, Near the Bottom of the Cycle
2. Horiba (6856 JP): Long-Term Buy on Pullbacks

1. THK (6481 JP): New Orders Down by Two-Thirds in 4Q, Near the Bottom of the Cycle

Sales and profits were above management’s guidance in FY Dec-18, with operating profit rising 36.9% on a 10.9% increase in sales. But new orders continuously declined and were down about two-thirds year-on-year in 4Q.

In view of the order flow, management is guiding for a 12% decline in sales and a 44% decline in operating profit in FY Dec-19, a forecast that is roughly in line with our own.

On the positive side, historical data indicates that new orders are at or near the bottom of the cycle. Anticipating a better investment climate after some resolution of the U.S.-China trade problem, we are forecasting an increase in sales and profits going into FY Dec-20.

The shares have rebounded by 41% since the beginning of January. At ¥2,720 (Friday, February 15, close), they are selling at 15.6x our estimate for FY Dec-19 and 13.8x our estimate for FY Dec-20E. These multiples look reasonably attractive in comparison with the company’s recent P/E range.

2. Horiba (6856 JP): Long-Term Buy on Pullbacks

Horiba’s share price has rebounded on FY Dec-18 results that were above management’s most recent guidance and better than we had expected. Consolidated operating profit was up 7.5% on a 7.8% increase in sales, and net profit up 37.0% following extraordinary gains (vs. losses the previous year) and a lower effective tax rate.  

4Q results were weak, primarily due to the downturn in semiconductor capital spending, but this was no surprise. Total consolidated operating profit was down 10.3% year-on-year on a 2.3% increase in sales in the three months to December, while operating profit on Semiconductor Instruments & Systems (primarily mass flow controllers) was down 32.8% on a 15.8% decrease in sales.

Looking ahead, management is guiding for year-on-year declines in both sales and profits in the six months to June, again due to weak demand for semiconductor equipment, followed by a sharp rebound in 2H and low single-digit growth FY Dec-19 as a whole. Judging from the semiconductor equipment order flow, it appears that a weak 1H will be hard to avoid, while there is as yet no sign pointing to recovery. Nevertheless, we have raised our own sales and profit estimates for this fiscal year and next based on the absolute levels of orders and sales.

Automotive Test Systems and the company’s other businesses should continue to grow, supported by the acquisition of FuelCon AG of Germany (an industry leader in battery and fuel cell validation) and Manta Instruments of the U.S. (which makes nanoparticle tracking analysis systems). The issue, then, is how soon and how rapidly semiconductor related investments will recover. We suspect later and more slowly than management hopes, but in any case the downturn appears to have been discounted.

At ¥5,980 (Friday, February 15, closing price), Horiba has rebounded by 44% from its January 4 low of ¥4,155, but is still 38% below its ¥9,590 all-time high reached last May. It is now selling at 13.6x our EPS estimate for this fiscal year and 12.3x our estimate for FY Dec-20. These and other projected valuations are on the low side of their 5-year historical ranges. Once the recent bounce has been consolidated, there should be another buying opportunity for longer term investors.

In this briefing:

1. THK (6481 JP): New Orders Down by Two-Thirds in 4Q, Near the Bottom of the Cycle
2. Horiba (6856 JP): Long-Term Buy on Pullbacks
3. Doosan Heavy & Doosan E&C Rights Offers: Situational Assessment & Offering Size Estimation

1. THK (6481 JP): New Orders Down by Two-Thirds in 4Q, Near the Bottom of the Cycle

Sales and profits were above management’s guidance in FY Dec-18, with operating profit rising 36.9% on a 10.9% increase in sales. But new orders continuously declined and were down about two-thirds year-on-year in 4Q.

In view of the order flow, management is guiding for a 12% decline in sales and a 44% decline in operating profit in FY Dec-19, a forecast that is roughly in line with our own.

On the positive side, historical data indicates that new orders are at or near the bottom of the cycle. Anticipating a better investment climate after some resolution of the U.S.-China trade problem, we are forecasting an increase in sales and profits going into FY Dec-20.

The shares have rebounded by 41% since the beginning of January. At ¥2,720 (Friday, February 15, close), they are selling at 15.6x our estimate for FY Dec-19 and 13.8x our estimate for FY Dec-20E. These multiples look reasonably attractive in comparison with the company’s recent P/E range.

2. Horiba (6856 JP): Long-Term Buy on Pullbacks

Horiba’s share price has rebounded on FY Dec-18 results that were above management’s most recent guidance and better than we had expected. Consolidated operating profit was up 7.5% on a 7.8% increase in sales, and net profit up 37.0% following extraordinary gains (vs. losses the previous year) and a lower effective tax rate.  

4Q results were weak, primarily due to the downturn in semiconductor capital spending, but this was no surprise. Total consolidated operating profit was down 10.3% year-on-year on a 2.3% increase in sales in the three months to December, while operating profit on Semiconductor Instruments & Systems (primarily mass flow controllers) was down 32.8% on a 15.8% decrease in sales.

Looking ahead, management is guiding for year-on-year declines in both sales and profits in the six months to June, again due to weak demand for semiconductor equipment, followed by a sharp rebound in 2H and low single-digit growth FY Dec-19 as a whole. Judging from the semiconductor equipment order flow, it appears that a weak 1H will be hard to avoid, while there is as yet no sign pointing to recovery. Nevertheless, we have raised our own sales and profit estimates for this fiscal year and next based on the absolute levels of orders and sales.

Automotive Test Systems and the company’s other businesses should continue to grow, supported by the acquisition of FuelCon AG of Germany (an industry leader in battery and fuel cell validation) and Manta Instruments of the U.S. (which makes nanoparticle tracking analysis systems). The issue, then, is how soon and how rapidly semiconductor related investments will recover. We suspect later and more slowly than management hopes, but in any case the downturn appears to have been discounted.

At ¥5,980 (Friday, February 15, closing price), Horiba has rebounded by 44% from its January 4 low of ¥4,155, but is still 38% below its ¥9,590 all-time high reached last May. It is now selling at 13.6x our EPS estimate for this fiscal year and 12.3x our estimate for FY Dec-20. These and other projected valuations are on the low side of their 5-year historical ranges. Once the recent bounce has been consolidated, there should be another buying opportunity for longer term investors.

3. Doosan Heavy & Doosan E&C Rights Offers: Situational Assessment & Offering Size Estimation

• Doosan Engineering & Construction (011160 KS) is considering a ₩400bil rights offer. At a usual 30% discount to the last closing price, this ₩400bil rights offer will issue a total 372M new shares. This is a 370% capital increase with a 79% share dilution. Per share allocation is 3.82.
• Doosan Heavy Industries (034020 KS) is left with no other option but to pursue its own rights offer as well. Considering Doosan Corp (000150 KS)‘s financial situation, Doosan Corp may be able to inject only about ₩100bil into Heavy.
• Factoring in this ₩100bil for a a 34.04% stake, we can estimate the size of Heavy’s rights offer at about ₩300bil.  At a 30% discount to the last closing price, this ₩300bil rights offer will issue a total 45.5M new shares. This is a 35% capital increase with a 26% shareholding dilution. Per share allocation is 0.35.

In this briefing:

1. HK Connect Discovery Weekly: China Tower, Geely, COFCO Meat (2019-02-15)
2. The Panalpina Conundrum
3. HDC Holdings Goes Activist on Samyang Foods
4. Last Week in GER Research: API/Sigma, M1, Eclipx/Mcmillan and Hansoh IPO
5. M1 Ltd (M1 SP): Axiata Throws in the Towel, Delisting Looms

1. HK Connect Discovery Weekly: China Tower, Geely, COFCO Meat (2019-02-15)

In our Discover HK Connect series, we aim to help our investors understand the flow of southbound trades via the Hong Kong Connect, as analyzed by our proprietary data engine. We will discuss the stocks that experienced the most inflow and outflow by mainland investors in the past seven days.

We split the stocks eligible for the Hong Kong Connect trade into three groups: component stocks in the HSCEI index, stocks with a market capitalization between USD 1 billion and USD 5 billion, and stocks with a market capitalization between USD 500 million and USD 1 billion.

In this week’s HK Connect Discovery, we highlight the continuous inflow to China Tower prior to lock-up expiry,  positive news development for automobile stocks, and the pork cycle beneficiary. 

2. The Panalpina Conundrum

For years, Panalpina Welttransport Holding (PWTN SW) has underperformed expectations, and investors such as Artisan and Franklin Templeton have held stakes of a few percent to more (Artisan now owns 12%) and have complained more or less publicly. Swedish activist investor Cevian has also owned shares for years (now at 12.3% approximately) and complained quite publicly last October about the governance structure and management and suggested that management be open to a takeover. The company pooh-poohed that, but a week later announced that Chairman Peter Ulber – one of Cevian’s governance targets – would not stand for re-election in May 2019 at the AGM. 

A week after that,  Kuehne + Nagel International A (KNIN VX) CEO Detlef Trefzger said in Swiss finance magazine Finanz und Wirtschaft (German) it would be happy to open talks with Panalpina but would not pursue a hostile merger. Fast forward less than 8 weeks and DSV A/S (DSV DC) made a public proposal of a takeover for cash and scrip valued at CHF 170/share, which came at a 24% premium to last and +31% vs 1-month VWAP but was even better by day end and by Friday’s close was 8.5% higher.

A couple of weeks after Panalpina shares spiked, the Chairman of K&N Klaus-Michael Kühne was quoted in the press saying Panalpina was “hopelessly overvalued” and the company did not want to either overpay, or undertake a “megafusion” (large M&A) because of the difficulty in integrating companies. He IS chairman, AND his name is on the door, AND he indirectly controls 53% of the stock so his word carries weight.

A body of Panalpina workers came out against the idea of a DSV acquisition, and the board of major shareholder The Ernst Göhner Foundation apparently told Panalpina it supported Panalpina management’s model of growing by its own consolidator strategy, which Panalpina CEO Stefan Karlen said on the 13th in a phone interview with Bloomberg could involve taking on debt.

A day later, interviews with the Thomas Gutzwiller, chairman of the Göhner Foundation’s Panalpina committee, said the Foundation doesn’t fundamentally oppose a takeover of Panalpina and would be prepared to reduce its stake in “any transactions within the scope of implementing the strategy,” (Luzerner Zeitung). He also said that the foundation had supported the company’s major investments (in IT) in recent years and wanted to reap the benefits.

It wasn’t clear whether which approach takes priority. Does the foundation want to wait? Is it just looking for a higher price? I think the two are not incompatible.

Frustrated by the lack of transparency on whether Panalpina was considering DSV’s approach or not, major shareholder Artisan Partners earlier this week wrote an open letter to Panalpina’s board explicitly asking Panalpina to entertain the bid and open negotiations, and to ensure that conflicted members of the board recuse themselves. 

This puts the #2, #3, and long-time #4 shareholders (Franklin Templeton was a long-time #4) firmly and publicly in the camp of trying to get something done. In fact, a fund manager at Franklin Templeton was quoted in a Bloomberg article recently saying the Foundation was perhaps the only shareholder against the deal. There is an enormous amount of frustration at these holders who have held for years (9, 10+, and several) have not seen margins improve. Since the deal was announced, two major risk arb funds have purchased a combined 5+%, and others appear to be in as well.

The New News

On Friday, Panalpina confirmed media scuttlebutt that it was in preliminary talks with Kuwait-listed logistics company Agility Public Warehouse which has a market cap of about US$3.7bn. A Bloomberg report suggested a deal could be reached as early as this week for its logistics business (presumably leaving the infrastructure business in Agility’s hands. The same article suggested the Göhner Foundation is supportive of the new talks. 

Also on Friday, DSV announced a new all cash CHF 180/share offer for Panalpina, and Panalpina shares rebounded from CHF 149.00 to CHF 156.10/share that day. That leaves 15.3% to the cash offer, though the original cash and scrip offer is now worth CHF 184.5/share, which is an even better premium to pre-offer terms.

It’s all still in play, but for the moment, EVERYTHING comes down to the Foundation – for one simple reason embedded in the Panalpina Articles of Association.

3. HDC Holdings Goes Activist on Samyang Foods

• We have a really interesting and unusual situation in Korea right now with HDC Holdings (012630 KS) going activist on Samyang Foods (003230 KS). HDC Holdings is the second largest owner of Samyang Foods.
• HDC Holdings is recommending that the company should exclude executive directors that have been sentenced to imprisonment on cases such as embezzlement and extreme negligence resulting in significant losses for Samyang Foods. This is an agenda which will be discussed in the Samyang Foods’ AGM next month on March 22nd.
• HDC Holdings is taking a very unusual move right now in going against the traditional “save face” mentality in the Korea Inc. and trying to publicly urge Samyang Foods to make changes to its BOD. 

4. Last Week in GER Research: API/Sigma, M1, Eclipx/Mcmillan and Hansoh IPO

In this version of the GER weekly research wrap, we assess the bump prospects in the Australian Pharma Industries (API AU) / Sigma Healthcare (SIG AU) potential merger. Arun updates on M1 Ltd (M1 SP) which could be delisted following an unconditional offer. In addition, we dig into the trading update for Eclipx (ECX AU) and assess the risks that Mcmillan Shakespeare (MMS AU) could walk away from the deal. Finally, we initiate on the IPO of Hansoh Pharmaceutical (HANSOH HK). A calendar of upcoming catalysts is also attached. 

More details can be found below. 

Best of luck for the new week – Rickin, Venkat and Arun

5. M1 Ltd (M1 SP): Axiata Throws in the Towel, Delisting Looms

After the market close last Friday, M1 Ltd (M1 SP) announced that the voluntary conditional offer (VGO) became unconditional as Keppel Corp Ltd (KEP SP) and Singapore Press Holdings (SPH SP) (KCL-SPH) has an interest in M1 of 76.4%. The offer became unconditional due to Axiata Group (AXIATA MK), the single largest shareholder with a 28.7% shareholding, accepting the offer.

In this briefing:

1. Horiba (6856 JP): Long-Term Buy on Pullbacks
2. Doosan Heavy & Doosan E&C Rights Offers: Situational Assessment & Offering Size Estimation

1. Horiba (6856 JP): Long-Term Buy on Pullbacks

Horiba’s share price has rebounded on FY Dec-18 results that were above management’s most recent guidance and better than we had expected. Consolidated operating profit was up 7.5% on a 7.8% increase in sales, and net profit up 37.0% following extraordinary gains (vs. losses the previous year) and a lower effective tax rate.  

4Q results were weak, primarily due to the downturn in semiconductor capital spending, but this was no surprise. Total consolidated operating profit was down 10.3% year-on-year on a 2.3% increase in sales in the three months to December, while operating profit on Semiconductor Instruments & Systems (primarily mass flow controllers) was down 32.8% on a 15.8% decrease in sales.

Looking ahead, management is guiding for year-on-year declines in both sales and profits in the six months to June, again due to weak demand for semiconductor equipment, followed by a sharp rebound in 2H and low single-digit growth FY Dec-19 as a whole. Judging from the semiconductor equipment order flow, it appears that a weak 1H will be hard to avoid, while there is as yet no sign pointing to recovery. Nevertheless, we have raised our own sales and profit estimates for this fiscal year and next based on the absolute levels of orders and sales.

Automotive Test Systems and the company’s other businesses should continue to grow, supported by the acquisition of FuelCon AG of Germany (an industry leader in battery and fuel cell validation) and Manta Instruments of the U.S. (which makes nanoparticle tracking analysis systems). The issue, then, is how soon and how rapidly semiconductor related investments will recover. We suspect later and more slowly than management hopes, but in any case the downturn appears to have been discounted.

At ¥5,980 (Friday, February 15, closing price), Horiba has rebounded by 44% from its January 4 low of ¥4,155, but is still 38% below its ¥9,590 all-time high reached last May. It is now selling at 13.6x our EPS estimate for this fiscal year and 12.3x our estimate for FY Dec-20. These and other projected valuations are on the low side of their 5-year historical ranges. Once the recent bounce has been consolidated, there should be another buying opportunity for longer term investors.

2. Doosan Heavy & Doosan E&C Rights Offers: Situational Assessment & Offering Size Estimation

• Doosan Engineering & Construction (011160 KS) is considering a ₩400bil rights offer. At a usual 30% discount to the last closing price, this ₩400bil rights offer will issue a total 372M new shares. This is a 370% capital increase with a 79% share dilution. Per share allocation is 3.82.
• Doosan Heavy Industries (034020 KS) is left with no other option but to pursue its own rights offer as well. Considering Doosan Corp (000150 KS)‘s financial situation, Doosan Corp may be able to inject only about ₩100bil into Heavy.
• Factoring in this ₩100bil for a a 34.04% stake, we can estimate the size of Heavy’s rights offer at about ₩300bil.  At a 30% discount to the last closing price, this ₩300bil rights offer will issue a total 45.5M new shares. This is a 35% capital increase with a 26% shareholding dilution. Per share allocation is 0.35.

In this briefing:

1. The Panalpina Conundrum
2. HDC Holdings Goes Activist on Samyang Foods
3. Last Week in GER Research: API/Sigma, M1, Eclipx/Mcmillan and Hansoh IPO
4. M1 Ltd (M1 SP): Axiata Throws in the Towel, Delisting Looms
5. THK (6481 JP): New Orders Down by Two-Thirds in 4Q, Near the Bottom of the Cycle

1. The Panalpina Conundrum

For years, Panalpina Welttransport Holding (PWTN SW) has underperformed expectations, and investors such as Artisan and Franklin Templeton have held stakes of a few percent to more (Artisan now owns 12%) and have complained more or less publicly. Swedish activist investor Cevian has also owned shares for years (now at 12.3% approximately) and complained quite publicly last October about the governance structure and management and suggested that management be open to a takeover. The company pooh-poohed that, but a week later announced that Chairman Peter Ulber – one of Cevian’s governance targets – would not stand for re-election in May 2019 at the AGM. 

A week after that,  Kuehne + Nagel International A (KNIN VX) CEO Detlef Trefzger said in Swiss finance magazine Finanz und Wirtschaft (German) it would be happy to open talks with Panalpina but would not pursue a hostile merger. Fast forward less than 8 weeks and DSV A/S (DSV DC) made a public proposal of a takeover for cash and scrip valued at CHF 170/share, which came at a 24% premium to last and +31% vs 1-month VWAP but was even better by day end and by Friday’s close was 8.5% higher.

A couple of weeks after Panalpina shares spiked, the Chairman of K&N Klaus-Michael Kühne was quoted in the press saying Panalpina was “hopelessly overvalued” and the company did not want to either overpay, or undertake a “megafusion” (large M&A) because of the difficulty in integrating companies. He IS chairman, AND his name is on the door, AND he indirectly controls 53% of the stock so his word carries weight.

A body of Panalpina workers came out against the idea of a DSV acquisition, and the board of major shareholder The Ernst Göhner Foundation apparently told Panalpina it supported Panalpina management’s model of growing by its own consolidator strategy, which Panalpina CEO Stefan Karlen said on the 13th in a phone interview with Bloomberg could involve taking on debt.

A day later, interviews with the Thomas Gutzwiller, chairman of the Göhner Foundation’s Panalpina committee, said the Foundation doesn’t fundamentally oppose a takeover of Panalpina and would be prepared to reduce its stake in “any transactions within the scope of implementing the strategy,” (Luzerner Zeitung). He also said that the foundation had supported the company’s major investments (in IT) in recent years and wanted to reap the benefits.

It wasn’t clear whether which approach takes priority. Does the foundation want to wait? Is it just looking for a higher price? I think the two are not incompatible.

Frustrated by the lack of transparency on whether Panalpina was considering DSV’s approach or not, major shareholder Artisan Partners earlier this week wrote an open letter to Panalpina’s board explicitly asking Panalpina to entertain the bid and open negotiations, and to ensure that conflicted members of the board recuse themselves. 

This puts the #2, #3, and long-time #4 shareholders (Franklin Templeton was a long-time #4) firmly and publicly in the camp of trying to get something done. In fact, a fund manager at Franklin Templeton was quoted in a Bloomberg article recently saying the Foundation was perhaps the only shareholder against the deal. There is an enormous amount of frustration at these holders who have held for years (9, 10+, and several) have not seen margins improve. Since the deal was announced, two major risk arb funds have purchased a combined 5+%, and others appear to be in as well.

The New News

On Friday, Panalpina confirmed media scuttlebutt that it was in preliminary talks with Kuwait-listed logistics company Agility Public Warehouse which has a market cap of about US$3.7bn. A Bloomberg report suggested a deal could be reached as early as this week for its logistics business (presumably leaving the infrastructure business in Agility’s hands. The same article suggested the Göhner Foundation is supportive of the new talks. 

Also on Friday, DSV announced a new all cash CHF 180/share offer for Panalpina, and Panalpina shares rebounded from CHF 149.00 to CHF 156.10/share that day. That leaves 15.3% to the cash offer, though the original cash and scrip offer is now worth CHF 184.5/share, which is an even better premium to pre-offer terms.

It’s all still in play, but for the moment, EVERYTHING comes down to the Foundation – for one simple reason embedded in the Panalpina Articles of Association.

2. HDC Holdings Goes Activist on Samyang Foods

• We have a really interesting and unusual situation in Korea right now with HDC Holdings (012630 KS) going activist on Samyang Foods (003230 KS). HDC Holdings is the second largest owner of Samyang Foods.
• HDC Holdings is recommending that the company should exclude executive directors that have been sentenced to imprisonment on cases such as embezzlement and extreme negligence resulting in significant losses for Samyang Foods. This is an agenda which will be discussed in the Samyang Foods’ AGM next month on March 22nd.
• HDC Holdings is taking a very unusual move right now in going against the traditional “save face” mentality in the Korea Inc. and trying to publicly urge Samyang Foods to make changes to its BOD. 

3. Last Week in GER Research: API/Sigma, M1, Eclipx/Mcmillan and Hansoh IPO

In this version of the GER weekly research wrap, we assess the bump prospects in the Australian Pharma Industries (API AU) / Sigma Healthcare (SIG AU) potential merger. Arun updates on M1 Ltd (M1 SP) which could be delisted following an unconditional offer. In addition, we dig into the trading update for Eclipx (ECX AU) and assess the risks that Mcmillan Shakespeare (MMS AU) could walk away from the deal. Finally, we initiate on the IPO of Hansoh Pharmaceutical (HANSOH HK). A calendar of upcoming catalysts is also attached. 

More details can be found below. 

Best of luck for the new week – Rickin, Venkat and Arun

4. M1 Ltd (M1 SP): Axiata Throws in the Towel, Delisting Looms

After the market close last Friday, M1 Ltd (M1 SP) announced that the voluntary conditional offer (VGO) became unconditional as Keppel Corp Ltd (KEP SP) and Singapore Press Holdings (SPH SP) (KCL-SPH) has an interest in M1 of 76.4%. The offer became unconditional due to Axiata Group (AXIATA MK), the single largest shareholder with a 28.7% shareholding, accepting the offer.

5. THK (6481 JP): New Orders Down by Two-Thirds in 4Q, Near the Bottom of the Cycle

Sales and profits were above management’s guidance in FY Dec-18, with operating profit rising 36.9% on a 10.9% increase in sales. But new orders continuously declined and were down about two-thirds year-on-year in 4Q.

In view of the order flow, management is guiding for a 12% decline in sales and a 44% decline in operating profit in FY Dec-19, a forecast that is roughly in line with our own.

On the positive side, historical data indicates that new orders are at or near the bottom of the cycle. Anticipating a better investment climate after some resolution of the U.S.-China trade problem, we are forecasting an increase in sales and profits going into FY Dec-20.

The shares have rebounded by 41% since the beginning of January. At ¥2,720 (Friday, February 15, close), they are selling at 15.6x our estimate for FY Dec-19 and 13.8x our estimate for FY Dec-20E. These multiples look reasonably attractive in comparison with the company’s recent P/E range.

In this briefing:

1. Last Week in GER Research: API/Sigma, M1, Eclipx/Mcmillan and Hansoh IPO
2. M1 Ltd (M1 SP): Axiata Throws in the Towel, Delisting Looms
3. THK (6481 JP): New Orders Down by Two-Thirds in 4Q, Near the Bottom of the Cycle
4. Horiba (6856 JP): Long-Term Buy on Pullbacks
5. Doosan Heavy & Doosan E&C Rights Offers: Situational Assessment & Offering Size Estimation

1. Last Week in GER Research: API/Sigma, M1, Eclipx/Mcmillan and Hansoh IPO

In this version of the GER weekly research wrap, we assess the bump prospects in the Australian Pharma Industries (API AU) / Sigma Healthcare (SIG AU) potential merger. Arun updates on M1 Ltd (M1 SP) which could be delisted following an unconditional offer. In addition, we dig into the trading update for Eclipx (ECX AU) and assess the risks that Mcmillan Shakespeare (MMS AU) could walk away from the deal. Finally, we initiate on the IPO of Hansoh Pharmaceutical (HANSOH HK). A calendar of upcoming catalysts is also attached. 

More details can be found below. 

Best of luck for the new week – Rickin, Venkat and Arun

2. M1 Ltd (M1 SP): Axiata Throws in the Towel, Delisting Looms

After the market close last Friday, M1 Ltd (M1 SP) announced that the voluntary conditional offer (VGO) became unconditional as Keppel Corp Ltd (KEP SP) and Singapore Press Holdings (SPH SP) (KCL-SPH) has an interest in M1 of 76.4%. The offer became unconditional due to Axiata Group (AXIATA MK), the single largest shareholder with a 28.7% shareholding, accepting the offer.

3. THK (6481 JP): New Orders Down by Two-Thirds in 4Q, Near the Bottom of the Cycle

Sales and profits were above management’s guidance in FY Dec-18, with operating profit rising 36.9% on a 10.9% increase in sales. But new orders continuously declined and were down about two-thirds year-on-year in 4Q.

In view of the order flow, management is guiding for a 12% decline in sales and a 44% decline in operating profit in FY Dec-19, a forecast that is roughly in line with our own.

On the positive side, historical data indicates that new orders are at or near the bottom of the cycle. Anticipating a better investment climate after some resolution of the U.S.-China trade problem, we are forecasting an increase in sales and profits going into FY Dec-20.

The shares have rebounded by 41% since the beginning of January. At ¥2,720 (Friday, February 15, close), they are selling at 15.6x our estimate for FY Dec-19 and 13.8x our estimate for FY Dec-20E. These multiples look reasonably attractive in comparison with the company’s recent P/E range.

4. Horiba (6856 JP): Long-Term Buy on Pullbacks

Horiba’s share price has rebounded on FY Dec-18 results that were above management’s most recent guidance and better than we had expected. Consolidated operating profit was up 7.5% on a 7.8% increase in sales, and net profit up 37.0% following extraordinary gains (vs. losses the previous year) and a lower effective tax rate.  

4Q results were weak, primarily due to the downturn in semiconductor capital spending, but this was no surprise. Total consolidated operating profit was down 10.3% year-on-year on a 2.3% increase in sales in the three months to December, while operating profit on Semiconductor Instruments & Systems (primarily mass flow controllers) was down 32.8% on a 15.8% decrease in sales.

Looking ahead, management is guiding for year-on-year declines in both sales and profits in the six months to June, again due to weak demand for semiconductor equipment, followed by a sharp rebound in 2H and low single-digit growth FY Dec-19 as a whole. Judging from the semiconductor equipment order flow, it appears that a weak 1H will be hard to avoid, while there is as yet no sign pointing to recovery. Nevertheless, we have raised our own sales and profit estimates for this fiscal year and next based on the absolute levels of orders and sales.

Automotive Test Systems and the company’s other businesses should continue to grow, supported by the acquisition of FuelCon AG of Germany (an industry leader in battery and fuel cell validation) and Manta Instruments of the U.S. (which makes nanoparticle tracking analysis systems). The issue, then, is how soon and how rapidly semiconductor related investments will recover. We suspect later and more slowly than management hopes, but in any case the downturn appears to have been discounted.

At ¥5,980 (Friday, February 15, closing price), Horiba has rebounded by 44% from its January 4 low of ¥4,155, but is still 38% below its ¥9,590 all-time high reached last May. It is now selling at 13.6x our EPS estimate for this fiscal year and 12.3x our estimate for FY Dec-20. These and other projected valuations are on the low side of their 5-year historical ranges. Once the recent bounce has been consolidated, there should be another buying opportunity for longer term investors.

5. Doosan Heavy & Doosan E&C Rights Offers: Situational Assessment & Offering Size Estimation

• Doosan Engineering & Construction (011160 KS) is considering a ₩400bil rights offer. At a usual 30% discount to the last closing price, this ₩400bil rights offer will issue a total 372M new shares. This is a 370% capital increase with a 79% share dilution. Per share allocation is 3.82.
• Doosan Heavy Industries (034020 KS) is left with no other option but to pursue its own rights offer as well. Considering Doosan Corp (000150 KS)‘s financial situation, Doosan Corp may be able to inject only about ₩100bil into Heavy.
• Factoring in this ₩100bil for a a 34.04% stake, we can estimate the size of Heavy’s rights offer at about ₩300bil.  At a 30% discount to the last closing price, this ₩300bil rights offer will issue a total 45.5M new shares. This is a 35% capital increase with a 26% shareholding dilution. Per share allocation is 0.35.

In this briefing:

1. Minebea-Mitsumi Underpriced Tender for U SHIN (6985 JP) Launched

1. Minebea-Mitsumi Underpriced Tender for U SHIN (6985 JP) Launched

Three months ago, Minebea Mitsumi (6479 JP) announced that it would launch a Tender Offer for U Shin Ltd (6985 JP) and it would take just under three months until the approvals were received and it could officially start the Tender Offer process. It took a couple of weeks longer, as proposed by U Shin’s update on 30 January, which indicated anti-trust approvals had been received.

The background to the Tender Offer was discussed in Minebea Mitsumi Launches Offer for U-SHIN in early November.

My first conclusion in November was that this was the “riskiest” straight-out non-hostile TOB I had seen in a while. 

This is a wide-open deal. The buyer owns 1 round lot. The largest holder is an activist. The deal is being proposed at not such a super-high multiple (8x forecast FY earnings for the year ending 31 December 2018) and 4.9x EV/EBITDA. It is 3.7-4.0x when taking into account the 67 different equity positions they held at the end of last year, some of which they have recently liquidated. 

from (8 Nov 2018) Minebea Mitsumi Launches Offer for U-SHIN

In the interim, the activist dropped their position in half (necessitating a filing of a Large Shareholder Report for going below 5% – and they may have completely liquidated by now), and an investment bank has gone above 5% since then.

The financial advisory “valuations” at the time were more than questionable. A discussion of the valuation levels can be found in the previous insight (I don’t need to repeat them here, just go there).

Today, the company raised its OP and Ordinary Income forecasts for the year ended 31 December 2018, but lowered its Net Income forecast by 98.8% due to writeoffs at many overseas facilities. Then the promptly reported earnings (also only in Japanese) a few seconds later (only available in Japanese). 

Op is now forecast to drop 2% in 2019 vs 2018, but the 2019 forecast is 11+% higher than the 2018 forecast was just yesterday. The forecast for Net Income is ¥99.35/share, putting the deal at <10x forecast PER. And even less if one considers that the cross-shareholdings could be reduced. 

The New News

Today Minebea Mitsumi announced the launch of its Tender Offer, to commence tomorrow, at the same price as originally planned (¥985/share), and to run for 38 days. 

This deal is still perplexing to me. It’s easy enough from an industrial standpoint. I mean, why not buy relatively cheap assets then see if you can cross-sell or assume some attrition. But for investors… I wonder why they put up with this.

In this briefing:

1. M1 Ltd (M1 SP): Axiata Throws in the Towel, Delisting Looms
2. THK (6481 JP): New Orders Down by Two-Thirds in 4Q, Near the Bottom of the Cycle
3. Horiba (6856 JP): Long-Term Buy on Pullbacks
4. Doosan Heavy & Doosan E&C Rights Offers: Situational Assessment & Offering Size Estimation
5. Global Solar Energy Stocks Are Bottoming

1. M1 Ltd (M1 SP): Axiata Throws in the Towel, Delisting Looms

After the market close last Friday, M1 Ltd (M1 SP) announced that the voluntary conditional offer (VGO) became unconditional as Keppel Corp Ltd (KEP SP) and Singapore Press Holdings (SPH SP) (KCL-SPH) has an interest in M1 of 76.4%. The offer became unconditional due to Axiata Group (AXIATA MK), the single largest shareholder with a 28.7% shareholding, accepting the offer.

2. THK (6481 JP): New Orders Down by Two-Thirds in 4Q, Near the Bottom of the Cycle

Sales and profits were above management’s guidance in FY Dec-18, with operating profit rising 36.9% on a 10.9% increase in sales. But new orders continuously declined and were down about two-thirds year-on-year in 4Q.

In view of the order flow, management is guiding for a 12% decline in sales and a 44% decline in operating profit in FY Dec-19, a forecast that is roughly in line with our own.

On the positive side, historical data indicates that new orders are at or near the bottom of the cycle. Anticipating a better investment climate after some resolution of the U.S.-China trade problem, we are forecasting an increase in sales and profits going into FY Dec-20.

The shares have rebounded by 41% since the beginning of January. At ¥2,720 (Friday, February 15, close), they are selling at 15.6x our estimate for FY Dec-19 and 13.8x our estimate for FY Dec-20E. These multiples look reasonably attractive in comparison with the company’s recent P/E range.

3. Horiba (6856 JP): Long-Term Buy on Pullbacks

Horiba’s share price has rebounded on FY Dec-18 results that were above management’s most recent guidance and better than we had expected. Consolidated operating profit was up 7.5% on a 7.8% increase in sales, and net profit up 37.0% following extraordinary gains (vs. losses the previous year) and a lower effective tax rate.  

4Q results were weak, primarily due to the downturn in semiconductor capital spending, but this was no surprise. Total consolidated operating profit was down 10.3% year-on-year on a 2.3% increase in sales in the three months to December, while operating profit on Semiconductor Instruments & Systems (primarily mass flow controllers) was down 32.8% on a 15.8% decrease in sales.

Looking ahead, management is guiding for year-on-year declines in both sales and profits in the six months to June, again due to weak demand for semiconductor equipment, followed by a sharp rebound in 2H and low single-digit growth FY Dec-19 as a whole. Judging from the semiconductor equipment order flow, it appears that a weak 1H will be hard to avoid, while there is as yet no sign pointing to recovery. Nevertheless, we have raised our own sales and profit estimates for this fiscal year and next based on the absolute levels of orders and sales.

Automotive Test Systems and the company’s other businesses should continue to grow, supported by the acquisition of FuelCon AG of Germany (an industry leader in battery and fuel cell validation) and Manta Instruments of the U.S. (which makes nanoparticle tracking analysis systems). The issue, then, is how soon and how rapidly semiconductor related investments will recover. We suspect later and more slowly than management hopes, but in any case the downturn appears to have been discounted.

At ¥5,980 (Friday, February 15, closing price), Horiba has rebounded by 44% from its January 4 low of ¥4,155, but is still 38% below its ¥9,590 all-time high reached last May. It is now selling at 13.6x our EPS estimate for this fiscal year and 12.3x our estimate for FY Dec-20. These and other projected valuations are on the low side of their 5-year historical ranges. Once the recent bounce has been consolidated, there should be another buying opportunity for longer term investors.

4. Doosan Heavy & Doosan E&C Rights Offers: Situational Assessment & Offering Size Estimation

• Doosan Engineering & Construction (011160 KS) is considering a ₩400bil rights offer. At a usual 30% discount to the last closing price, this ₩400bil rights offer will issue a total 372M new shares. This is a 370% capital increase with a 79% share dilution. Per share allocation is 3.82.
• Doosan Heavy Industries (034020 KS) is left with no other option but to pursue its own rights offer as well. Considering Doosan Corp (000150 KS)‘s financial situation, Doosan Corp may be able to inject only about ₩100bil into Heavy.
• Factoring in this ₩100bil for a a 34.04% stake, we can estimate the size of Heavy’s rights offer at about ₩300bil.  At a 30% discount to the last closing price, this ₩300bil rights offer will issue a total 45.5M new shares. This is a 35% capital increase with a 26% shareholding dilution. Per share allocation is 0.35.

5. Global Solar Energy Stocks Are Bottoming

In today’s report we highlight the following actionable solar energy names: First Solar (FSLR), SolarEdge Technologies (SEDG), GCL-Poly Energy (3800-HK), Meyer Burger Technology AG (MBTN-CH), Enphase Energy (ENPH), JinkoSolar Sponsored ADR (JKS), TerraForm Power (TERP), Beijing Enterprises Clean Energy Group (1250-HK), GCL New Energy (451-HK), and Viatron Technologies (141000-KR).

In this briefing:

1. THK (6481 JP): New Orders Down by Two-Thirds in 4Q, Near the Bottom of the Cycle
2. Horiba (6856 JP): Long-Term Buy on Pullbacks
3. Doosan Heavy & Doosan E&C Rights Offers: Situational Assessment & Offering Size Estimation
4. Global Solar Energy Stocks Are Bottoming
5. Minebea-Mitsumi Underpriced Tender for U SHIN (6985 JP) Launched

1. THK (6481 JP): New Orders Down by Two-Thirds in 4Q, Near the Bottom of the Cycle

Sales and profits were above management’s guidance in FY Dec-18, with operating profit rising 36.9% on a 10.9% increase in sales. But new orders continuously declined and were down about two-thirds year-on-year in 4Q.

In view of the order flow, management is guiding for a 12% decline in sales and a 44% decline in operating profit in FY Dec-19, a forecast that is roughly in line with our own.

On the positive side, historical data indicates that new orders are at or near the bottom of the cycle. Anticipating a better investment climate after some resolution of the U.S.-China trade problem, we are forecasting an increase in sales and profits going into FY Dec-20.

The shares have rebounded by 41% since the beginning of January. At ¥2,720 (Friday, February 15, close), they are selling at 15.6x our estimate for FY Dec-19 and 13.8x our estimate for FY Dec-20E. These multiples look reasonably attractive in comparison with the company’s recent P/E range.

2. Horiba (6856 JP): Long-Term Buy on Pullbacks

Horiba’s share price has rebounded on FY Dec-18 results that were above management’s most recent guidance and better than we had expected. Consolidated operating profit was up 7.5% on a 7.8% increase in sales, and net profit up 37.0% following extraordinary gains (vs. losses the previous year) and a lower effective tax rate.  

4Q results were weak, primarily due to the downturn in semiconductor capital spending, but this was no surprise. Total consolidated operating profit was down 10.3% year-on-year on a 2.3% increase in sales in the three months to December, while operating profit on Semiconductor Instruments & Systems (primarily mass flow controllers) was down 32.8% on a 15.8% decrease in sales.

Looking ahead, management is guiding for year-on-year declines in both sales and profits in the six months to June, again due to weak demand for semiconductor equipment, followed by a sharp rebound in 2H and low single-digit growth FY Dec-19 as a whole. Judging from the semiconductor equipment order flow, it appears that a weak 1H will be hard to avoid, while there is as yet no sign pointing to recovery. Nevertheless, we have raised our own sales and profit estimates for this fiscal year and next based on the absolute levels of orders and sales.

Automotive Test Systems and the company’s other businesses should continue to grow, supported by the acquisition of FuelCon AG of Germany (an industry leader in battery and fuel cell validation) and Manta Instruments of the U.S. (which makes nanoparticle tracking analysis systems). The issue, then, is how soon and how rapidly semiconductor related investments will recover. We suspect later and more slowly than management hopes, but in any case the downturn appears to have been discounted.

At ¥5,980 (Friday, February 15, closing price), Horiba has rebounded by 44% from its January 4 low of ¥4,155, but is still 38% below its ¥9,590 all-time high reached last May. It is now selling at 13.6x our EPS estimate for this fiscal year and 12.3x our estimate for FY Dec-20. These and other projected valuations are on the low side of their 5-year historical ranges. Once the recent bounce has been consolidated, there should be another buying opportunity for longer term investors.

3. Doosan Heavy & Doosan E&C Rights Offers: Situational Assessment & Offering Size Estimation

• Doosan Engineering & Construction (011160 KS) is considering a ₩400bil rights offer. At a usual 30% discount to the last closing price, this ₩400bil rights offer will issue a total 372M new shares. This is a 370% capital increase with a 79% share dilution. Per share allocation is 3.82.
• Doosan Heavy Industries (034020 KS) is left with no other option but to pursue its own rights offer as well. Considering Doosan Corp (000150 KS)‘s financial situation, Doosan Corp may be able to inject only about ₩100bil into Heavy.
• Factoring in this ₩100bil for a a 34.04% stake, we can estimate the size of Heavy’s rights offer at about ₩300bil.  At a 30% discount to the last closing price, this ₩300bil rights offer will issue a total 45.5M new shares. This is a 35% capital increase with a 26% shareholding dilution. Per share allocation is 0.35.

4. Global Solar Energy Stocks Are Bottoming

In today’s report we highlight the following actionable solar energy names: First Solar (FSLR), SolarEdge Technologies (SEDG), GCL-Poly Energy (3800-HK), Meyer Burger Technology AG (MBTN-CH), Enphase Energy (ENPH), JinkoSolar Sponsored ADR (JKS), TerraForm Power (TERP), Beijing Enterprises Clean Energy Group (1250-HK), GCL New Energy (451-HK), and Viatron Technologies (141000-KR).

5. Minebea-Mitsumi Underpriced Tender for U SHIN (6985 JP) Launched

Three months ago, Minebea Mitsumi (6479 JP) announced that it would launch a Tender Offer for U Shin Ltd (6985 JP) and it would take just under three months until the approvals were received and it could officially start the Tender Offer process. It took a couple of weeks longer, as proposed by U Shin’s update on 30 January, which indicated anti-trust approvals had been received.

The background to the Tender Offer was discussed in Minebea Mitsumi Launches Offer for U-SHIN in early November.

My first conclusion in November was that this was the “riskiest” straight-out non-hostile TOB I had seen in a while. 

This is a wide-open deal. The buyer owns 1 round lot. The largest holder is an activist. The deal is being proposed at not such a super-high multiple (8x forecast FY earnings for the year ending 31 December 2018) and 4.9x EV/EBITDA. It is 3.7-4.0x when taking into account the 67 different equity positions they held at the end of last year, some of which they have recently liquidated. 

from (8 Nov 2018) Minebea Mitsumi Launches Offer for U-SHIN

In the interim, the activist dropped their position in half (necessitating a filing of a Large Shareholder Report for going below 5% – and they may have completely liquidated by now), and an investment bank has gone above 5% since then.

The financial advisory “valuations” at the time were more than questionable. A discussion of the valuation levels can be found in the previous insight (I don’t need to repeat them here, just go there).

Today, the company raised its OP and Ordinary Income forecasts for the year ended 31 December 2018, but lowered its Net Income forecast by 98.8% due to writeoffs at many overseas facilities. Then the promptly reported earnings (also only in Japanese) a few seconds later (only available in Japanese). 

Op is now forecast to drop 2% in 2019 vs 2018, but the 2019 forecast is 11+% higher than the 2018 forecast was just yesterday. The forecast for Net Income is ¥99.35/share, putting the deal at <10x forecast PER. And even less if one considers that the cross-shareholdings could be reduced. 

The New News

Today Minebea Mitsumi announced the launch of its Tender Offer, to commence tomorrow, at the same price as originally planned (¥985/share), and to run for 38 days. 

This deal is still perplexing to me. It’s easy enough from an industrial standpoint. I mean, why not buy relatively cheap assets then see if you can cross-sell or assume some attrition. But for investors… I wonder why they put up with this.

In this briefing:

1. Horiba (6856 JP): Long-Term Buy on Pullbacks
2. Doosan Heavy & Doosan E&C Rights Offers: Situational Assessment & Offering Size Estimation
3. Global Solar Energy Stocks Are Bottoming
4. Minebea-Mitsumi Underpriced Tender for U SHIN (6985 JP) Launched
5. UG Healthcare: Weak 2Q19 Driven by One-Off Issue, If 10% NPM Achieved in FY20 Trades at 4x FY20 P/E

1. Horiba (6856 JP): Long-Term Buy on Pullbacks

Horiba’s share price has rebounded on FY Dec-18 results that were above management’s most recent guidance and better than we had expected. Consolidated operating profit was up 7.5% on a 7.8% increase in sales, and net profit up 37.0% following extraordinary gains (vs. losses the previous year) and a lower effective tax rate.  

4Q results were weak, primarily due to the downturn in semiconductor capital spending, but this was no surprise. Total consolidated operating profit was down 10.3% year-on-year on a 2.3% increase in sales in the three months to December, while operating profit on Semiconductor Instruments & Systems (primarily mass flow controllers) was down 32.8% on a 15.8% decrease in sales.

Looking ahead, management is guiding for year-on-year declines in both sales and profits in the six months to June, again due to weak demand for semiconductor equipment, followed by a sharp rebound in 2H and low single-digit growth FY Dec-19 as a whole. Judging from the semiconductor equipment order flow, it appears that a weak 1H will be hard to avoid, while there is as yet no sign pointing to recovery. Nevertheless, we have raised our own sales and profit estimates for this fiscal year and next based on the absolute levels of orders and sales.

Automotive Test Systems and the company’s other businesses should continue to grow, supported by the acquisition of FuelCon AG of Germany (an industry leader in battery and fuel cell validation) and Manta Instruments of the U.S. (which makes nanoparticle tracking analysis systems). The issue, then, is how soon and how rapidly semiconductor related investments will recover. We suspect later and more slowly than management hopes, but in any case the downturn appears to have been discounted.

At ¥5,980 (Friday, February 15, closing price), Horiba has rebounded by 44% from its January 4 low of ¥4,155, but is still 38% below its ¥9,590 all-time high reached last May. It is now selling at 13.6x our EPS estimate for this fiscal year and 12.3x our estimate for FY Dec-20. These and other projected valuations are on the low side of their 5-year historical ranges. Once the recent bounce has been consolidated, there should be another buying opportunity for longer term investors.

2. Doosan Heavy & Doosan E&C Rights Offers: Situational Assessment & Offering Size Estimation

• Doosan Engineering & Construction (011160 KS) is considering a ₩400bil rights offer. At a usual 30% discount to the last closing price, this ₩400bil rights offer will issue a total 372M new shares. This is a 370% capital increase with a 79% share dilution. Per share allocation is 3.82.
• Doosan Heavy Industries (034020 KS) is left with no other option but to pursue its own rights offer as well. Considering Doosan Corp (000150 KS)‘s financial situation, Doosan Corp may be able to inject only about ₩100bil into Heavy.
• Factoring in this ₩100bil for a a 34.04% stake, we can estimate the size of Heavy’s rights offer at about ₩300bil.  At a 30% discount to the last closing price, this ₩300bil rights offer will issue a total 45.5M new shares. This is a 35% capital increase with a 26% shareholding dilution. Per share allocation is 0.35.

3. Global Solar Energy Stocks Are Bottoming

In today’s report we highlight the following actionable solar energy names: First Solar (FSLR), SolarEdge Technologies (SEDG), GCL-Poly Energy (3800-HK), Meyer Burger Technology AG (MBTN-CH), Enphase Energy (ENPH), JinkoSolar Sponsored ADR (JKS), TerraForm Power (TERP), Beijing Enterprises Clean Energy Group (1250-HK), GCL New Energy (451-HK), and Viatron Technologies (141000-KR).

4. Minebea-Mitsumi Underpriced Tender for U SHIN (6985 JP) Launched

Three months ago, Minebea Mitsumi (6479 JP) announced that it would launch a Tender Offer for U Shin Ltd (6985 JP) and it would take just under three months until the approvals were received and it could officially start the Tender Offer process. It took a couple of weeks longer, as proposed by U Shin’s update on 30 January, which indicated anti-trust approvals had been received.

The background to the Tender Offer was discussed in Minebea Mitsumi Launches Offer for U-SHIN in early November.

My first conclusion in November was that this was the “riskiest” straight-out non-hostile TOB I had seen in a while. 

This is a wide-open deal. The buyer owns 1 round lot. The largest holder is an activist. The deal is being proposed at not such a super-high multiple (8x forecast FY earnings for the year ending 31 December 2018) and 4.9x EV/EBITDA. It is 3.7-4.0x when taking into account the 67 different equity positions they held at the end of last year, some of which they have recently liquidated. 

from (8 Nov 2018) Minebea Mitsumi Launches Offer for U-SHIN

In the interim, the activist dropped their position in half (necessitating a filing of a Large Shareholder Report for going below 5% – and they may have completely liquidated by now), and an investment bank has gone above 5% since then.

The financial advisory “valuations” at the time were more than questionable. A discussion of the valuation levels can be found in the previous insight (I don’t need to repeat them here, just go there).

Today, the company raised its OP and Ordinary Income forecasts for the year ended 31 December 2018, but lowered its Net Income forecast by 98.8% due to writeoffs at many overseas facilities. Then the promptly reported earnings (also only in Japanese) a few seconds later (only available in Japanese). 

Op is now forecast to drop 2% in 2019 vs 2018, but the 2019 forecast is 11+% higher than the 2018 forecast was just yesterday. The forecast for Net Income is ¥99.35/share, putting the deal at <10x forecast PER. And even less if one considers that the cross-shareholdings could be reduced. 

The New News

Today Minebea Mitsumi announced the launch of its Tender Offer, to commence tomorrow, at the same price as originally planned (¥985/share), and to run for 38 days. 

This deal is still perplexing to me. It’s easy enough from an industrial standpoint. I mean, why not buy relatively cheap assets then see if you can cross-sell or assume some attrition. But for investors… I wonder why they put up with this.

5. UG Healthcare: Weak 2Q19 Driven by One-Off Issue, If 10% NPM Achieved in FY20 Trades at 4x FY20 P/E

UG Healthcare (UGHC SP) showed good topline growth (+15%) but very weak bottom-line performance (-73%) in the second quarter of FY19 (financial year ending June). Weak bottom-line results were caused by delays and cost overruns in opening its latest factory expansion.

While the latest results are a setback I remain a believer in the UG Healthcare story. The eventual goal of reaching 100M SGD in revenues and getting a 10% NPM remains unchanged by the end of FY2020. Should the target be achieved the company trades at 4x 2020 P/E. Competitors in Malaysia trade at mid-teens multiples (or higher) so UG should deserve a significant re-rating the coming two years. Fundamentally, nothing has changed to alter my bear case  (0.24 SGD), base case (0.39 SGD) or blue-sky scenario (0.62 SGD) analysis. Liquidity remains an issue at less than 25K SGD/day.