Industrials

In this briefing:

1. Keyence (6861 JP): Deceleration Continues in 3Q
2. ECM Weekly (2 February 2019) – Maoyan, China Tower, Dexin, Chalet Hotels, Bharat Hotels, Wingarc1st
3. HK Connect Discovery – January Snapshot
4. MacroAsia (MAC PM) – Company Visit Highlights Short-Term Headwinds but Core Business on Solid Ground
5. Hyundai Heavy/DSME Event – Comprehensive Summary

1. Keyence (6861 JP): Deceleration Continues in 3Q

Keyence reported higher sales and profits but lower rates of growth in the three month to December. Consolidated sales were up 11.8% year-on-year compared with 15.2% growth in 2Q and 19.7% growth in 1Q. Operating profit was up 9.1% compared with 12.7% growth in 2Q and 21.2% growth in 1Q. The operating margin declined to 53.8% compared with 55.2% in 2Q, 54.6% in 1Q and 56.6% in 4Q of FY Mar-18.

Once again, the results at Keyence were much better than those at other factory automation related companies – notably Fanuc (6954 JP) and Omron (6645 JP), where operating profits dropped at double-digit rates. But Keyence is geared to incremental improvements rather than large capital outlays, and to customers’ R&D spending, and it has a diversified base of user industries. On the other hand, it is not immune to weakening demand in China, Europe and elsewhere.

Since hitting a 52-week low of ¥50, 780 on October 26, Keyence has rebounded by 13%. At ¥57,270, the shares are now selling at 30x our EPS estimate for this fiscal year and 27x our estimate for FY Mar-20. Their 5-year historical P/E range is 18x – 42x. Other valuations are also well up in their historical ranges.

The sales and profit data suggest difficult year-on-year comparisons for the next few quarters.

2. ECM Weekly (2 February 2019) – Maoyan, China Tower, Dexin, Chalet Hotels, Bharat Hotels, Wingarc1st

Aequitas Research puts out a weekly update on the deals that have been covered by Smartkarma Insight Providers recently, along with updates for upcoming IPOs.

Accuracy Rate:

Our overall accuracy rate is 72% for IPOs and 63.8% for Placements 

(Performance measurement criteria is explained at the end of the note)

New IPO filings

• Edvantage Group (Hong Kong, ~US$100m)
• Koolearn (Hong Kong, re-filed)
• Shangde Qizhi Education Group (Hong Kong, re-filed)

Below is a snippet of our IPO tool showing upcoming events for the next week. The IPO tool is designed to provide readers with timely information on all IPO related events (Book open/closing, listing, initiation, lock-up expiry, etc) for all the deals that we have worked on. You can access the tool here or through the tools menu.

News on Upcoming IPOs

• China’s Sinochem Energy lets Hong Kong IPO application lapse
• India’s Cleartrip eyes IPO as it plans Gulf expansion
• Blackstone set to IPO inaugural $1 billion Reit before March
• Bursa Malaysia’s outgoing CEO says IPO pipeline for 2019 looks strong
• China to Scrap Price, Debut Gain Limits to Entice Tech IPOs

Smartkarma Community’s this week Analysis on Upcoming IPO

• Ebang IPO Preview: Balance Sheet Indicators Point to a Significant Slowdown
• Chalet Hotels IPO Review – Backed up into a Corner
• CStone Pharma IPO Preview: Mixed Prospects of Late-Stage Clinical Drug Candidates
• IPO Radar: KTB Securities, the Only Korean Broker in Thailand
• Shanghai Henlius (复宏汉霖) IPO: Not an Impressive Biosimilar Portfolio
• Dreamtech: Trying for an IPO Again at a Lower Price
• Bharat Hotels Pre-IPO – Catching up with Peers
• China Tower Corp: Trading Idea Before Lock-Up Expiry
• Dexin China (德信中国) Pre-IPO – Related Party Transactions and Partial Asset Listing

List of pre-IPO Coverage on Smartkarma

3. HK Connect Discovery – January Snapshot

This is a monthly version of our HK Connect Weekly note, in which I highlight Hong Kong-listed companies leading the southbound flow weekly. Over the past month, we have seen the flow turning from outflow to inflow. Our previous insights published in Jan can be found in the links below. In this insight, we will focus on the month flow to get a bigger picture vs the weekly flow.

Our January Coverage of Hong Kong Connect southbound flow

• HK Connect Discovery Weekly: CR Beer, Great Wall Motors, and Kingsoft (2019-01-07)
• HK Connect Discovery Weekly: China Tower, Tencent, New China Life (2019-01-11)
• HK Connect Discovery Weekly: Tencent, Kingsoft, and Yichang HEC (2019-01-18)
• HK Connect Discovery Weekly: CRRC, Car Inc/ UCar (2019-01-25)

4. MacroAsia (MAC PM) – Company Visit Highlights Short-Term Headwinds but Core Business on Solid Ground

We met with MacroAsia management in Manila to discuss their most recent 3Q18 results and outlook for the coming year. The key takeaways were that: growth from LTP would be underpinned by business from PAL Express’s new A321 Neo and turboprop fleet; the ground handling and catering businesses will see growth from mid-March as PAL contracts with Sky Kitchen and Sky Logistics are terminated and awarded to MacroAsia; and lastly, that margin pressure due to cost inflation in the catering business should normalize during the second half as agreements are renegotiated.

Our estimated FY18 NPAT of P948mn is broadly in-line with management guidance and implies a valuation of 23.5x trailing P/E. We still that despite the recent fall in share price, this valuation will come under pressure until the company can demonstrate a return to earnings growth after a challenging year.

5. Hyundai Heavy/DSME Event – Comprehensive Summary

• Below is a comprehensive summary of the Hyundai Heavy/DSME event that engulfed the Korean market yesterday. This is a multi step process. Details of most events will be determined after one month of holdback period.
• I will provide a trade approach on each name in a follow-up post.

In this briefing:

1. SCSK (9719 JP) Launches Buyout of Subsidiary JIEC
2. Toppan Printing: Money for Nothing (& Your Clicks for Free)
3. New US Sanctions Against Venezuela: Impact on the Oil Sector and Prices

1. SCSK (9719 JP) Launches Buyout of Subsidiary JIEC

Today after the close, Sumitomo Corp (8053 JP) consolidated subsidiary SCSK Corp (9719 JP) announced a Tender Offer to buy out minorities in JIEC Co Ltd (4291 JP).

SCSK currently holds 4,768,000 shares or 69.52% of voting rights. 

The Tender Offer is at ¥2,750/share which is a 39.3% premium to the last traded price of the day before the announcement (¥1,974), a 38% premium to the one-month average, and a 41% premium to the 3-month and 6-month averages.

It is being done at about 7.5x TTM EV/EBITDA.

This is one of those situations with which the currently underway METI M&A Fairness enquiry might have a problem.

2. Toppan Printing: Money for Nothing (& Your Clicks for Free)

TOPPAN PRINTING (7911 JP) is Japan’s current Negative Enterprise Value ‘champion’. Although only growing in the low single digits and with margins to match, comprehensive income margins and returns are significantly higher, as they take Toppan’s significant investment portfolio gains into account. The investment portfolio has grown at a 39.1% compound annual growth rate (CAGR) over the last five years, outperforming Toppan’s core operations (6.4% CAGR) and the overall stock market (7.5% CAGR).

MARKET MYOPIA – Despite the investment portfolio’s ¥411b contribution to Shareholder’s Equity, which has otherwise only increased by ¥98b, the stock market preferred to focus on the stagnating top-line, and the shares have been serial underperformers. Toppan’s market capitalisation has grown by only 2% per annum or just ¥34b since December 2013. From the recent peak in June 2017, Toppan shares have underperformed the market by 27% and, for the last year, have been at their most extreme value relative to TOPIX over the previous thirty years.  During this period, Toppan’s equity holdings rose from 43% of the company’s market capitalisation to close to parity at the recent market peak in September 2018. 

BOTTOMING OUT – With the upcoming boost to sales in the printing business from the change in Japan’s gengō (元号) or era name on the accession of the new Emperor in April, the shares have finally broken out of a one-year period in the Oversold ‘doldrums’.

SELLING STRATEGIC INVESTMENTS – More importantly, the company has become more proactive in managing equity risk. On 23rd January, Toppan sold 10.5m shares in Recruit Holdings (6098 JP) for approximately ¥31.5b, reducing Toppan’s holding in Japan’s leading listing employment services business from 6.57% to 6.05%. Despite the boilerplate language used to describe the company’s strategy towards strategic shareholdings, Toppan has begun to address the portfolio more proactively and in accordance with the spirit of the new guidelines on Corporate Governance in Japan.

BUYBACK POTENTIAL – With this sale, Toppan’s liquid assets will now exceed US$3b or 58% of the current market capitalisation, while the company has committed to capital expenditures totalling only ¥125b over the next five years. Toppan last conducted a modest 0.2% share buyback in 2015-Q2, which was ‘unwound’ by a 0.5% reduction in Treasury Stock in 2017-Q3, which was not accompanied by a share cancellation. With just 8% of shares outstanding held in treasury, there is ample room for further buybacks. 

3. New US Sanctions Against Venezuela: Impact on the Oil Sector and Prices

US sanctions against Venezuela’s central bank and PDVSA, announced on Monday (January 28), have sent refiners on the US Gulf Coast scrambling for replacement supplies of heavy crude. Though they do not cover the business of non-US entities with PDVSA, the move has put Venezuelan crude importers in China and India on notice.

For US refiners, the three main alternative suppliers of heavy, sour crude — Canada, Mexico and Saudi Arabia — are either constrained in their ability to step up supply or are deliberately reducing shipments.

Venezuela’s upstream oil sector has been limping for a long time now. But the sanctions against PDVSA may deal it a death blow. The crude market is keeping a wary eye on the situation but appears unwilling to price in the worst-case scenario for the time being, as it remains fixated on the global economic prospects and concerns over oil demand growth.

We look at the fallout of the latest move by Washington on the primary entities doing oil business with Venezuela: refiners in the US, China and India (the main markets for Venezuelan crude) and Russian giants Rosneft and Lukoil.

We also discuss the likelihood and impact of Venezuelan crude production grinding down from the current 1 million b/d to zero. 

In this briefing:

1. HK Connect Discovery – January Snapshot
2. MacroAsia (MAC PM) – Company Visit Highlights Short-Term Headwinds but Core Business on Solid Ground
3. Hyundai Heavy/DSME Event – Comprehensive Summary
4. SCSK (9719 JP) Launches Buyout of Subsidiary VeriServe (3724 JP)
5. Misumi Group (9962 JP): Another Downward Revision

1. HK Connect Discovery – January Snapshot

This is a monthly version of our HK Connect Weekly note, in which I highlight Hong Kong-listed companies leading the southbound flow weekly. Over the past month, we have seen the flow turning from outflow to inflow. Our previous insights published in Jan can be found in the links below. In this insight, we will focus on the month flow to get a bigger picture vs the weekly flow.

Our January Coverage of Hong Kong Connect southbound flow

• HK Connect Discovery Weekly: CR Beer, Great Wall Motors, and Kingsoft (2019-01-07)
• HK Connect Discovery Weekly: China Tower, Tencent, New China Life (2019-01-11)
• HK Connect Discovery Weekly: Tencent, Kingsoft, and Yichang HEC (2019-01-18)
• HK Connect Discovery Weekly: CRRC, Car Inc/ UCar (2019-01-25)

2. MacroAsia (MAC PM) – Company Visit Highlights Short-Term Headwinds but Core Business on Solid Ground

We met with MacroAsia management in Manila to discuss their most recent 3Q18 results and outlook for the coming year. The key takeaways were that: growth from LTP would be underpinned by business from PAL Express’s new A321 Neo and turboprop fleet; the ground handling and catering businesses will see growth from mid-March as PAL contracts with Sky Kitchen and Sky Logistics are terminated and awarded to MacroAsia; and lastly, that margin pressure due to cost inflation in the catering business should normalize during the second half as agreements are renegotiated.

Our estimated FY18 NPAT of P948mn is broadly in-line with management guidance and implies a valuation of 23.5x trailing P/E. We still that despite the recent fall in share price, this valuation will come under pressure until the company can demonstrate a return to earnings growth after a challenging year.

3. Hyundai Heavy/DSME Event – Comprehensive Summary

• Below is a comprehensive summary of the Hyundai Heavy/DSME event that engulfed the Korean market yesterday. This is a multi step process. Details of most events will be determined after one month of holdback period.
• I will provide a trade approach on each name in a follow-up post.

4. SCSK (9719 JP) Launches Buyout of Subsidiary VeriServe (3724 JP)

Today after the close, Sumitomo Corp (8053 JP) consolidated subsidiary SCSK Corp (9719 JP) announced a Tender Offer to buy out minorities in Veriserve Corp (3724 JP).

SCSK currently holds 2,900,000 shares or 55.59% of voting rights. 

The Tender Offer is at ¥6,700/share which is a 43.6% premium to the last traded price of the day before the announcement (¥4,665), a 44.6% premium to the one-month average, a 28.3% premium to the 3-month average, and a 36.6% premium to the 6-month average.

The price does not seem egregiously unfair, but for investors who own it who think it has another double in it this year they might get upset.

This is one of those situations with which the currently underway METI M&A Fairness enquiry might have a problem.

And if you care about the fairness of the M&A bidding and response process, and ensuring that minority investors get their interests defended by process, have a look at the METI Fair M&A panel and its consultation paper and by all means offer your comments. 

5. Misumi Group (9962 JP): Another Downward Revision

Misumi Group sold off after announcing poor 3Q results and another downward revision to FY Mar-19 sales and profit guidance, but bounced right back to finish at ¥2,480 yesterday (January 31), which is 30x management’s new EPS estimate for this fiscal year. Price/book value (as of the end of December) is 3.6x. The indicated dividend was cut in line with guidance, maintaining management’s 25% payout ratio target but resulting in a dividend yield of 0.8%.

Operating and net profits are now expected to decline. Management is guiding for a 7.1% increase in sales in FY Mar-19 as a whole, but monthly data shows year-on-year growth dropping to 5.2%  in November and 3.1% in December. Factory Automation sales were unchanged in November and down 1.3% in December, 

In the three months to December, operating profit dropped 17.8% year-on-year on a 5.7% increase in sales, with Factory Automation profit down 16.9% and VONA profit down 35.4%. Inventory was up while receivables were down. Sales growth in China turned negative. 

The company continues to invest in production capacity, logistics and IT, aiming to expand its Factory Automation and VONA e-commerce businesses in Japan, Asia, America and Europe. The goal is to create a unified, cloud-based, rapid-response distribution system with the world’s largest components and production materials database. The anticipated success of this plan appears to explain both the rebound in the share price and relatively high current valuation, but with the China growth trajectory broken and the economic outlook uncertain, it may take longer and come with lower margins than originally expected.

In this briefing:

1. China Tower Corp: Trading Idea Before Lock-Up Expiry
2. Korea M&A Spotlight: KDB Is Ready to Sell Its Stake in DSME to Hyundai Heavy Industries Holdings
3. Teasing Updates on CaiNiao Network & Ele.me Out of Alibaba’s Q3 Results
4. CEVA’s Fair & Reasonable Offer; But Please Don’t Tender

1. China Tower Corp: Trading Idea Before Lock-Up Expiry

China Tower Corp, the owner and operator and telecommunication tower network in China, listed on August 8th last year. Over the past six months, the stock has returned 35% with the addition of a number of global investors to its share registry.

• As it heads into lock-up expiry in Feb, in this insight we would like to examine China Tower’s performance since listing.
• We note that China Tower has delivered a decent set of results for 3Q2018 and it will be a key beneficiary of China’s push into 5G built-up with little uncertainty.
• The current valuation of the company was still lower than international tower providers.
• With the improving operating metrics and stable income, we believe there are still upsides for China Tower Corp post-lock-up expiry. 

Our previous coverage on China Tower Corp

• China Tower Corp IPO: An Elephant Still Growing
• China Tower Corp (中国铁塔) IPO: Fairly Valued For One Doing National Service
• China Tower Corp (中国铁塔) Post-IPO: Lacklustre Trading Interest but Looking Forward to 1H Results

2. Korea M&A Spotlight: KDB Is Ready to Sell Its Stake in DSME to Hyundai Heavy Industries Holdings

It was reported yesterday after market close that Hyundai Heavy Industries (009540 KS) (HHI) may be interesting in buying Daewoo Shipbuilding & Marine Engineering (042660 KS) (DSME). Hyundai Heavy Industries has mentioned that it is reviewing this potential merger but that nothing has been determined so far. Korea Development Bank (KDB) currently owns a 55.7% stake in DSME, which is currently worth 2.3 trillion won as of January 31st. The local media have mentioned there there could be some formal announcement of the deal on March 31st at the HHI’s board meeting. 

We have provided the five major scenarios of the potential deal structure between DSME & HHIH. While we do not rule out a potential rights offering of the common shares, we think that a greater probability is that HHIH may use a combination its treasury shares, cash, and new issue of dividend preferred stock (Scenario V) to complete this purchase of the 55.7% stake of DSME. 

What trade has the best risk/reward? At this point, it would appear that the best trade would be to go long on Samsung Heavy Industries (010140 KS). 

3. Teasing Updates on CaiNiao Network & Ele.me Out of Alibaba’s Q3 Results

A set of generally solid Q3FY19 earnings results from Chinese e-commerce giant Alibaba Group Holding (BABA US) also yielded some interesting insights into the company’s two main logistics-related ventures (CaiNiao Network and on-demand food delivery specialist ele.me).

Unfortunately, the information we can glean from BABA’s Q3FY19 results suggests CaiNiao and ele.me are either growing slower or generating significant losses — or both.

In our view, the main logistics takeaways from BABA’s results are:

1. Alibaba’s ‘Core Commerce’ revenues continue to grow faster than express delivery. For the seventh consecutive quarter, Alibaba’s ‘core commerce’ grew much faster than China’s parcel delivery market, outgrowing parcel volume by 8% and parcel delivery revenue by almost 18%. At the margins, China’s express delivery firms are being bypassed by new modes of fulfillment, in our view. 
2. CaiNiao Network’s 15% growth in Q3FY19 is disappointing. Revenue at Alibaba’s CaiNiao Network grew by just 15% Y/Y in the December quarter, to 4.5 bn RMB. In other words, CaiNiao grew even slower than overall Chinese express delivery revenue in the December quarter (+17% Y/Y). That’s disappointing for a company that enjoyed an equity valuation of US$20 bn when Alibaba upped its stake to 51% in late 2017.
3. The reporting segment that includes ele.me barely grew from Q2FY19 to Q3FY19. Alibaba’s ‘Local Consumer Services’ segment had revenue of 5.2 bn RMB in Q3FY19, representing Q/Q growth of just 2.7%. It’s unclear how much local services venture Koubei contributed to this, as Alibaba only began consolidating its revenues some time in December.
4. It looks like losses from CaiNiao & ele.me continued to pile up in Q3FY19. Although it’s not an ‘apples-to-apples’ comparison, EBITA losses from the group of companies that includes CaiNiao and ele.me expanded from 5.8 bn RMB in Q2FY19 to over 8.2 bn RMB in Q3FY19.  This suggests the deep losses from this group (which were equivalent to about 15% of BABA’s core ‘marketplace’ EBITA in Q2FY19) aren’t going away soon.

4. CEVA’s Fair & Reasonable Offer; But Please Don’t Tender

CMA CGM SA (144898Z FP) has published its prospectus for what is evidently a heavily orchestrated Public Tender Offer for Ceva Logistics AG (CEVA SW).

Ceva’s Board has concluded that “the offer price of CHF 30 per CEVA share is reasonable from a financial perspective and that the Offer provides a fair exit opportunity for shareholders who wish to receive cash for their CEVA shares”.

However, CEVA Board does not recommend that shareholders tender shares in the belief that shareholders could realise a higher value with their continuing investment, due to:

• the growth potential inherent in the CEVA business.
• the effects of the acquisition of the freight management business of CMA CGM.
• the strategic partnership between CEVA and CMA CGM.

According to Ceva, “the valuation of the revised business plan indicates a midpoint value of 40 francs per share, well above the share price of 30 francs offered“.

CMA CGM added that “the recommendation to shareholders from the CEVA board not to tender shares in exchange for cash is done in perfect agreement with CMA CGM“.

CMA CGM currently holds 50.6% of CEVA, via a 33% direct stake with the remainder in derivatives. It is the intention of CMA CGM to maintain CEVA’s listing. 

After a 10-trading day cooling off period, the offer will be open for acceptances between February 12 to March 12, unless extended.

Shares are currently trading (marginally) through terms.

In this briefing:

1. StubWorld: Aramco’s Stake Reaffirms Hyundai Heavy’s NAV; Rusal Gains After Sanctions Lifted

1. StubWorld: Aramco’s Stake Reaffirms Hyundai Heavy’s NAV; Rusal Gains After Sanctions Lifted

This week in StubWorld …

• Saudi Arabian Oil Co’s 19.9% stake in Hyundai Oilfield spotlights Hyundai Heavy Industries Holdings (267250 KS)‘s deep discount to NAV.
• United Co Rusal (486 HK)‘s discount to NAV narrows after sanctions are lifted, but remains well off its pre-sanctions level.

Preceding my comments on HHI and Rusal are the weekly setup/unwind tables for Asia-Pacific Holdcos.

These relationships trade with a minimum liquidity threshold of US$1mn on a 90-day moving average, and a % market capitalisation threshold – the $ value of the holding/opco held, over the parent’s market capitalisation, expressed as a % – of at least 20%.

In this briefing:

1. Itochu Confirms Intent to Deepen Hold over Descente
2. TRACKING TRAFFIC/Chinese Express & Logistics: Inter-City Pricing -9.1%
3. Hyosung Holdings: Current Status & Trade Approach

1. Itochu Confirms Intent to Deepen Hold over Descente

Itochu (8001 JP) continues a battle of words and equity as it attempts to gain more control over sports firm Descente (8114 JP).

Meanwhile, Descente has brought in Wacoal (3591 JP) as a white knight and made a splash in the business media about its recent success.

Itochu insists that Descente needs Itochu’s management skills, particularly to build a stronger business in China and other overseas markets, and says the only way to make Descente listen is to buy more stock – more than its current nearly 30%.

2. TRACKING TRAFFIC/Chinese Express & Logistics: Inter-City Pricing -9.1%

Tracking Traffic/Chinese Express & Logistics is the hub for our research on China’s express parcels and logistics sectors. Tracking Traffic/Chinese Express & Logistics features analysis of monthly Chinese express and logistics data, notes from our conversations with industry players, and links to company and thematic notes. 

This month’s issue covers the following topics:

We retain a negative view of China’s express industry’s fundamentals: demand growth is slowing and pricing for inter-city shipments appears to be falling faster than costs can be cut, leading to margin compression. 

3. Hyosung Holdings: Current Status & Trade Approach

• Local institutions are busy scooping up Hyosung Corporation (004800 KS) shares lately. The owner risk is now gone. There are increasing signs of improving fundamentals on all of the four major subs. Some are already expecting ₩5,000 per share. This is a 9.2% annual div yield at the last closing price.
• Discount is also attractive. It is now at 46% to NAV. With this much div yield, discount should be much below the local peer average of 40%.
• I’d continue to long Holdco. Hedge would be tricky. Heavy is up 15% YTD. I admit that there is no clear cointegrated relationship between them. But Heavy’s recent rally is more of a speculative money pushing up on the hydrogen vehicle theme. I’d pick Heavy for a hedge.

In this briefing:

1. Itochu Confirms Intent to Deepen Hold over Descente
2. TRACKING TRAFFIC/Chinese Express & Logistics: Inter-City Pricing -9.1%
3. Hyosung Holdings: Current Status & Trade Approach
4. Ecopro BM IPO Preview: The World’s #2 Player in the NCA High Nickel-Based Cathode Materials

1. Itochu Confirms Intent to Deepen Hold over Descente

Itochu (8001 JP) continues a battle of words and equity as it attempts to gain more control over sports firm Descente (8114 JP).

Meanwhile, Descente has brought in Wacoal (3591 JP) as a white knight and made a splash in the business media about its recent success.

Itochu insists that Descente needs Itochu’s management skills, particularly to build a stronger business in China and other overseas markets, and says the only way to make Descente listen is to buy more stock – more than its current nearly 30%.

2. TRACKING TRAFFIC/Chinese Express & Logistics: Inter-City Pricing -9.1%

Tracking Traffic/Chinese Express & Logistics is the hub for our research on China’s express parcels and logistics sectors. Tracking Traffic/Chinese Express & Logistics features analysis of monthly Chinese express and logistics data, notes from our conversations with industry players, and links to company and thematic notes. 

This month’s issue covers the following topics:

We retain a negative view of China’s express industry’s fundamentals: demand growth is slowing and pricing for inter-city shipments appears to be falling faster than costs can be cut, leading to margin compression. 

3. Hyosung Holdings: Current Status & Trade Approach

• Local institutions are busy scooping up Hyosung Corporation (004800 KS) shares lately. The owner risk is now gone. There are increasing signs of improving fundamentals on all of the four major subs. Some are already expecting ₩5,000 per share. This is a 9.2% annual div yield at the last closing price.
• Discount is also attractive. It is now at 46% to NAV. With this much div yield, discount should be much below the local peer average of 40%.
• I’d continue to long Holdco. Hedge would be tricky. Heavy is up 15% YTD. I admit that there is no clear cointegrated relationship between them. But Heavy’s recent rally is more of a speculative money pushing up on the hydrogen vehicle theme. I’d pick Heavy for a hedge.

4. Ecopro BM IPO Preview: The World’s #2 Player in the NCA High Nickel-Based Cathode Materials

• Ecopro BM Co Ltd (247540 KS) specializes in making cathode active materials for rechargeable batteries that are used in EVs and electrical energy storage systems (ESS). Ecopro BM Co Ltd (247540 KS) is expected to complete its IPO in late February 2019. The institutional book building starts on February 14th, 2019. The IPO deal base size ranges from $96 million to $115 million. According to the bankers’ valuation, the expected market cap after the IPO would range from 796 billion won to 957 billion won. 
• The bankers selected two stocks including  L&F Co Ltd (066970 KS) and Cosmoam&T (005070 KS) as comparable companies to Ecopro BM. An IPO discount of 27.2% to 36.4%, the bankers derived an IPO price range of 37,500 – 42,900 won. The company’s sales and profits have been surging in the past three years. In 1Q-3Q18, it generated sales of 406 billion won (up 107.6% YoY) and operating profit of 36.1 billion won (up 108.5% YoY).
• Ecopro BM Co Ltd (247540 KS) was spun off from its parent company Ecopro Co Ltd (086520 KS) in May 2016. Currently Ecopro Co Ltd (086520 KS) owns a 68.6% of Ecopro BM Co Ltd (247540 KS).
• Ecopro BM has the second largest market share in the world after Sumitomo in the NCA high nickel-based cathode materials. Ecopro BM’s major customers include Samsung SDI and Murata Manufacturing Plant (TMM) (Japan). 

In this briefing:

1. Shinmaywa Own Share Tender Offer at Premium
2. RIO & BHP:  Valuation Gap Gone; Closing Long-Rio/Short-BHP
3. M1 Ltd (M1 SG): A Clever Ploy to Put the Ball Firmly in Axiata’s Court
4. Polycab India Limited Pre-IPO – Market Leader with Steady Growth but with a Few Unanswered Question
5. Smallcap Kosaido (7868 JP) Tender Offer: Wrong Price But Whaddya Gonna Do?

1. Shinmaywa Own Share Tender Offer at Premium

On 21 January 2019, my favorite manufacturer of garbage trucks, vertical carousel parking infrastructure, sea planes, and jetways – Shinmaywa Industries (7224 JP) – announced a share buyback. This was not unusual. The company bought back shares last year and indicated earlier this year it would seek a relatively high return of capital to shareholders.  In the last five months of 2018, the company bought back 3.6% of shares outstanding, and cancelled those shares at the end of December 2018). 

Indeed, the company on January 9th this year announced a revised dividend forecast for the year ending March 2019. The dividend was lifted by 1 yen. 

The company also announced a new policy of shareholder returns for the year starting April 1. 

While taking into consideration strategic business investment for the future and the internal reserves required for maintaining and expanding the Company’s management foundation, we are aware that appropriate return of profit to shareholders is an important management issue. In that regard, in our Medium-term Management Plan for the three years to the end of the fiscal year ending March 31, 2021, “Change for Growing, 2020,” (the “Medium-term Management Plan”), which was announced in May 2018, we set up a basic payout ratio on a consolidated basis of 40-50% and carrying out flexible acquisition of treasury shares with a focus on improvement of capital efficiency as basic shareholder return policies.

The company acknowledged the above and announced it would seek to add a commemorative (70th anniversary of incorporation and 100th anniversary of being in business) special dividend of ¥45/share, on top of the normal interim dividend (which is likely to be ¥18-19/share) paid to shareholders as of the end of September 2019.

That was nice, but that was little preparation for the news of 21 January.

• On that day, the company announced yet another increase in dividend forecast for the current fiscal year, raising the H2 dividend – which had just been raised from ¥18/share to ¥19/share less than two weeks ago – to ¥27/share.
• The company also announced a Tender Offer to buy back 26.666mm its own shares at a roughly 10.5% premium to last trade.  

That’s a big tender offer. It is ¥40bn and 29.0% of shares outstanding. 

Regular readers of Smartkarma will know that I will have comments on situations like these. 

2. RIO & BHP:  Valuation Gap Gone; Closing Long-Rio/Short-BHP

Investment Conclusion:
We recommend closing our long-Rio Tinto Ltd (RIO AU)/short-Bhp Billiton (BHP AU) following recent trading updates from both companies which helped to narrow the previous valuation gap we identified in our Aug-18 note: US$20bn in Lost Market Cap Looks Hard to Justify: Recommend Long Rio; Short BHP

3. M1 Ltd (M1 SG): A Clever Ploy to Put the Ball Firmly in Axiata’s Court

M1 Ltd (M1 SP), the third largest telecom operator in Singapore, is subject to a voluntary conditional offer (VGO) at S$2.06 cash per share from Keppel Corp Ltd (KEP SP) and Singapore Press Holdings (SPH SP) (KCL-SPH). KCL-SPH said on Tuesday that they wouldn’t increase their S$2.06 offer price “under any circumstances whatsoever.”

4. Polycab India Limited Pre-IPO – Market Leader with Steady Growth but with a Few Unanswered Question

Polycab India (POLY IN) plans to raise around US$280m in its IPO through a mix of selling primary and secondary shares. It is the largest manufacturer of wires and cables in India with a 12% market share, as per CRISIL research. The company has also recently entered the consumer electrical segments. 

Sales growth has been decent while margin expansion has helped the company to report much higher PATMI growth. Although, cash flow from operations has lagged earnings growth as working capital requirements have been volatile. In addition, receivables quality seems to be deteriorating. To add to that the rationale for the dealers and employees rationalization hasn’t been clearly explained.

In this insight, I’ve covered the above points, compared the company to its listed peers and commented on valuations. Should the deal be offered at multiples close to its wires and cables peers, it might still be interesting.

5. Smallcap Kosaido (7868 JP) Tender Offer: Wrong Price But Whaddya Gonna Do?

Last week on 17 January, printing and HR services company and funeral parlor operator Kosaido Co Ltd (7868 JP) announced that Bain Capital Private Equity would conduct an MBO on its shares via Tender Offer, with a minimum threshold for success of acquiring 66.67% of the shares outstanding. The Tender Offer commenced on 18 January and goes through 1 Mach 2019. The Tender Offer Price is ¥610/share, which is a 43.8% premium to the close of the day before the announcement and a 59.7% premium to the one-month VWAP up through the day before the announcement. 

The company’s board of directors announced it supported the deal. 

Terms & Schedule

In this briefing:

1. StubWorld: Intouch Gains On Possible Sale of Thaicom
2. Sell General Electric (GE US): Lots of Liabilities, Limited Cashflow – Target $1
3. Dubious Delisting Deals: New Sports, LEAP, China Singyes Solar
4. Recruit Holdings Placement – A Tiny, Long Overdue Sell Down
5. ATP30: 100% Secured Client Base Prompt 2019 Growth

1. StubWorld: Intouch Gains On Possible Sale of Thaicom

This week in StubWorld …

• Both Intouch Holdings (INTUCH TB) and Thaicom Pcl (THCOM TB) gain ~10% in response to rumours of a government takeout of Thaicom.

Preceding my comments on Intouch and Yoosung T&S (024800 KS) are the weekly setup/unwind tables for Asia-Pacific Holdcos.

These relationships trade with a minimum liquidity threshold of US$1mn on a 90-day moving average, and a % market capitalisation threshold – the $ value of the holding/opco held, over the parent’s market capitalisation, expressed as a % – of at least 20%.

2. Sell General Electric (GE US): Lots of Liabilities, Limited Cashflow – Target $1

GE’s business reality is far removed from management’s up-beat message. Creative accounting enabled management to line their pockets, while the underlying business deteriorated. A bloated board sanctioned poor disclosure, leasing, restructuring provisions and asset trading that obscured the decline. In FY 2018, we expect underlying Industrial profits of US$3.4bn and unlevered sustainable cashflow of US$5.1bn, down 50%. Change is coming, but it is too little, too late…

3. Dubious Delisting Deals: New Sports, LEAP, China Singyes Solar

My colleagues strive to cover M&A transactions in Asia-Pac – and further afield – with a market cap >US$100mn and/or when liquidity or the backdrop story warrant comment. This insight is no exception.

In the past two weeks, two companies who form part of the Huarong-CMB network (HCN), as discussed by David Webb, and one company enmeshed in the Enigma network, have received official offers or are have made announcements pursuant to the Hong Kong Code on Takeovers and Mergers.

• [HCN]  New Sports Group (299 HK) was halted from trading on the 18 January and announced a cash or scrip offer, with the cash alternative of $0.435/share priced at a premium of 3.57% to last close.
• [Enigma]  LEAP Holdings Group Ltd (1499 HK) is currently suspended pending an announcement.
• [HCN]  China Singyes Solar Tech (750 HK) announced it may be subject to a mandatory takeover pending the outcome of an MOU.

Below are brief comments on all three situations. In the case of New Sports, it is a very real deal, with financing in place for the cash option.

It is arguable whether the tanking in CSST shares yesterday after the resumption of trading, increases or lessens the chances of an official Offer unfolding.

4. Recruit Holdings Placement – A Tiny, Long Overdue Sell Down

Toppan Printing (7911 JP) is looking to sell 10.5m shares in Recruit Holdings (6098 JP) for about US$263m. Post-placement, Toppan Printing will still have about 6% stake (103m shares) in Recruit Holdings.

The deal scores well on our framework owing to its strong price and earnings momentum and stellar track record. However, it was offset by its relatively expensive valuation compared to peers. The selldown by Toppan Printing is tiny relative to the three-month ADV which the market would likely be able to absorb. The sell down is also long overdue considering that Toppan Printing skipped the 2016 secondary offering in which many shareholders have participated.

5. ATP30: 100% Secured Client Base Prompt 2019 Growth

We maintain a BUY rating for ATP30, based on a target price of Bt2.46 (previous TP: 2.48) and derived from a 30xPE’18E, which is its average trading range in the past one year and 10% discount to Thailand’s transportation sector

The story:

• Active fleet expansion still go on in 2019-20E
• Lower interest expense burden support margin expansion

Risks: Higher than expected in volatility in fuel price and probability that clients will terminate service contracts

In this briefing:

1. Notes from the Silk Road: Smartgroup Corporation Ltd (SIQ.AX)
2. SK Hynix: Attractive at Current Level
3. Nidec (6594 JP): Recovery to Take Time, Valuations Still High
4. ECM Weekly (26 January 2019) – Maoyan, CStone Pharma, Polycab India, Hujiang Edu
5. Delhi International Airport: INR90 Billion Investment Planned

1. Notes from the Silk Road: Smartgroup Corporation Ltd (SIQ.AX)

• 2018 full results due on the 18^th February 2019: Since our initial report on 3rd September 2018, SIQ’s share price has declined some 21% versus the ASX All Ordinaries fall of circa 8%. With results due, we expect the market to refocus on Smartgroup and its good growth story. This is important as much of the focus for the group in the last two years has been on the acquisitions being made. To see management return focus to organic growth, post these acquisitions should help investor confidence in SIQ. Specifically concentrating on the cross-selling of its services whilst benefiting from Australia’s tight labour market and corporates chasing incremental cost savings can only be positives.
• Review and upgrade to forecasts: With the benefit of further time to review SIQ’s business progress and the composition of our forecasts, we have increased fiscal 2018 and 2019 EPS forecasts 10% and 12% respectively. Much of our thought process is at the SG&A line, whilst the view that the overall trajectory of earnings remains on track. 
• 2019 we expect to be a year of consolidation, with consistent growth: In the two years to the end of fiscal 2017, SIQ had made six acquisitions. These acquisitions were aimed at both industry consolidation, as well as complementary product build out. We expect 2019 to be a year where the benefits from these acquisitions are exhibited in both the bottom and top-line growth. We expect this even though 2019 may present macro challenges. 
• We reiterate our view that SIQ offers Growth at a Reasonable price: SIQ’s forward multiples are positive for a company which has posted a long term book value growth rate of circa 7%  (net of dividend) and is forecast to post a similar rate 2019 and in 2020. Based on our 2019 EPS forecasts SIQ should be able to deliver circa A$0.62/share, which implies 18% YoY growth and a 13 times P/E. 

2. SK Hynix: Attractive at Current Level

Multiple news article mentioned SK Hynix’ weak Q4 2018 numbers due to the slowdown in the smartphone markets but the fact remains that:

1. smartphone is the dominant communication tools
2. smartphone penetration still has room to grow
3. current model of smartphone is likely to remain the same for the next foreseeable future
4. lower end smartphones will likely be the next growth driver

In this report we will discuss the following:

1. Q4 2018 result

2. Price action in 2018

3. Margin comparison with the peers

4. Exposure to the growing affordable smartphone segment

3. Nidec (6594 JP): Recovery to Take Time, Valuations Still High

After dropping to a 52-week low of ¥11,405 on January 17 – the day after management announced a large downward revision to sales and profit guidance – Nidec rebounded to close at ¥13,055 on Friday, January 25. The latter price is 30% below the ¥18,525 peak reached a year earlier. Both the shock of the downward revision and the reflexive optimism of believers in the company now seem to have been discounted.

Consolidated sales and profits dropped abruptly in the three months to December and are expected to drop further in 4Q of FY Mar-19 due to weak demand in most regional markets, inventory write-downs and restructuring costs. Nidec is already reconfiguring its global supply chains, shipping products to the U.S. from Mexico and Europe instead of from China and planning to build factories to make motors for electric vehicles in Mexico and Poland in addition to China.

With most of the one-off expenses out of the way, profits should start to recover in FY Mar-20. Sales, on the other hand, seem likely to decline further due to weak unit demand and pricing for HDD spindle motors, falling auto production in China and elsewhere, and weakness in other industrial and commercial markets. Recovery will depend on U.S.-China trade relations and the state of the world economy, and new acquisitions that cannot be predicted. As things stand now, we expect sales to pick up going into FY Mar-21. In the long run, the company should continue to benefit from the electrification of the auto market and factory automation.

At ¥13,055, the shares are selling at 34x management’s EPS guidance for FY Mar-19, 32x our estimate for FY Mar-20 and 30x our EPS estimate for FY Mar-21. Projected EV/EBITDA multiples for the same three years are 18x, 17x and 15x. Price/book value as of the end of December is 3.9x. The dividend yield is less than 1%. Over the past few years, the P/E has found support at 20x, EV/EBITDA at 10x and the PBR at 2.5x. The January 17 low put the shares on 30x management’s new EPS guidance for this fiscal year.

4. ECM Weekly (26 January 2019) – Maoyan, CStone Pharma, Polycab India, Hujiang Edu

Aequitas Research puts out a weekly update on the deals that have been covered by Smartkarma Insight Providers recently, along with updates for upcoming IPOs.

Accuracy Rate:

Our overall accuracy rate is 71.9% for IPOs and 63.8% for Placements 

(Performance measurement criteria is explained at the end of the note)

No new IPO filings

Below is a snippet of our IPO tool showing upcoming events for the next week. The IPO tool is designed to provide readers with timely information on all IPO related events (Book open/closing, listing, initiation, lock-up expiry, etc) for all the deals that we have worked on. You can access the tool here or through the tools menu.

News on Upcoming IPOs

• Asia’s thirst for beer adds fizz to mega-brewer’s plans for IPO
• Chinese cryptocurrency exchanges seek reverse mergers in Hong Kong
• Market, bankers pin hope on Chalet Hotels for breaking lull in IPO launches
• Hong Kong exchange head clarifies listing rules as IPO hopes dim for cryptocurrency giant Bitmain

Smartkarma Community’s this week Analysis on Upcoming IPO

• CStone Pharma (基石药业) IPO: Strong Assembly and Backing (Part 1)
• Maoyan Entertainment IPO Valuation: Press the Skip Button
• Hujiang Education (沪江教育) Pre-IPO – Spending More than It Earns
• Polycab India Limited Pre-IPO – Market Leader with Steady Growth but with a Few Unanswered Question
• Maoyan Entertainment (猫眼娱乐) IPO: Turning Profitable, Thoughts on Valuation
• Ecopro BM IPO Preview: The World’s #2 Player in the NCA High Nickel-Based Cathode Materials

List of pre-IPO Coverage on Smartkarma

5. Delhi International Airport: INR90 Billion Investment Planned

Delhi International Airport Limited (0180331D IN) has announced that it will be investing INR90 bn in the busiest aerodrome in India over the next three and a half years. This investment is aimed at boosting the passenger handling capacity up to 100 million passengers per year and is expected to be funded using bank loans and new debt instruments. The investment will affect the bond spreads for the company. Nevertheless, a change in regulations means that new baggage charges can be levied on every flight, putting the company in a better position to generate more cash in the future. We maintain our NEUTRAL recommendation.