Industrials

In this briefing:

1. Snippets #18: Naughty CEOs, Southern Crusades
2. Rides War Has Shifted To Share of Wallet
3. China Kepei Edu (科培教育) Post-IPO – Tepid Demand Means Little Support if IPO Price Breaks
4. RRG Proprietary Corporate Governance Scoring System Identifies Poor Governance in Korea
5. Japan Post Holdings Basing Cycle with Clear Sell and Buy Levels

1. Snippets #18: Naughty CEOs, Southern Crusades

In this review, we highlight five new unrelated developments that might impact the Thai stock market if you happen to hold the affected stocks.

• Skeletons in the closet. CIMB’s Thai CEO went on voluntary leave to clear his name regarding a legacy case back in his KTB days, while one of Thailand’s highest profile tycoon Dr. Prasert has been implicated in a stock manipulation case of Bangkok Airways from way back in 2015.
• Religious wars? As the southern insurgency spreads to economically vibrant province of Songkhla, insurgents attack a Buddhist temple and kill two monks, possibly in an effort to turn the crisis into a religious war. Doesn’t sound great for overall stability.
• A rare bump in the Baht. Despite QE unwinding, the Baht has risen almost 3% against the greenback. Bad news for exporters (eg. TUF, DELTA) good news for serial acquirers (think Thai Beverage, Banpu).
• Government-inspired deals. Is the government driving M&A in Thailand these days? They certainly had a hand in the TMB-Thanachart deal and now are rumored to be buying Thaicom, the country’s only satellite operator.
• Air quality takes a dive thanks to diesel and aggressive skytrain construction programs. Stores selling face mask and companies that substitute ethanol to diesel are set to benefit, while BTS might hit headwinds as government forces them to slow down construction.

2. Rides War Has Shifted To Share of Wallet

Grab is not just challenging the usual passengers-ride and taxi market; it has upped its game by selling monthly subscription plans, which can build recurring users. It is also looking to take bigger slices of business trips, traditionally the more lucrative pie for local taxi companies and niche car rental companies.

This report explains why Grab has gone into this promotional strategy, and is divided into five parts:

1. Monthly Subscription Plans 

2. Better Allocation of Resources 

3. The Juicy Corporate Pie

4. Fare comparison between Grab, Go-Jek, CD

5. Conclusions

3. China Kepei Edu (科培教育) Post-IPO – Tepid Demand Means Little Support if IPO Price Breaks

Kepei Education (1890 HK) has raised US$112m at HK$2.48 per share, just slightly above the mid-end of the IPO price range. We have previously covered the insight in: 

• China Kepei Edu (科培教育) Pre-IPO Review – A Well Run Private Higher Education Company
• China Kepei Edu (科培教育) IPO – Regulation Poses Significant Near-Term Risks

In this insight, we will update on the deal dynamics, implied valuation, and include a valuation sensitivity table.

4. RRG Proprietary Corporate Governance Scoring System Identifies Poor Governance in Korea

• Our proprietary corporate governance scoring system now covers over 1,985 stocks including over 200 in Korea.
• We recently added a coverage of 28 new names in Korea.
• The two lowest scores in this group are Samsung Electro-Mechanics and Advanced Process Systems both with scores of 40/100.
• The involvement of a former executive at Samsung Electro-Mechanics in the Park scandal and ouster highlights the governance risk.
• Companies with good governance include LS Corp, and Lotte Shopping. Past issues with the founding family of Lotte should be noted and taken into consideration.
  We welcome requests from clients of names they want to see added to the universe.

5. Japan Post Holdings Basing Cycle with Clear Sell and Buy Levels

Japan Post Holdings (6178 JP) rise is moving into an exhaustive resistance zone and due for a hard give back cycle.

Tactical buy supports are compelling for a bigger upside drive given the successful macro backswing support test and ascent that very often opens the way for the macro cycle to make headway, once a corrective cycle terminates. It is this corrective cycle that shows promise for an entry point.

Japan Post Holdings (JPH) does have a short history of volatile swings and will be the challenge within an ongoing basing cycle. We have well defined levels to trade this range tactically while aligning some strong risk pivot supports to reign in risk.

Macro pivot support will define the long term trend for JPH.

In this briefing:

1. McMillan’s Offer For Eclipx Wobbles
2. Ebang IPO Preview: Balance Sheet Indicators Point to a Significant Slowdown
3. Chalet Hotels IPO Review – Backed up into a Corner
4. Hyundai Heavy Holdco Trade: Long Holdco / Short HHI (30%) & SKI (70%) On Aramco Deal
5. TRACKING TRAFFIC/Containers & Air Cargo: December Box Rates & Volume Firm

1. McMillan’s Offer For Eclipx Wobbles

Thirty minutes after Eclipx (ECX AU) guided down its FY19 NPATA figure, Mcmillan Shakespeare (MMS AU) announced that the first court meeting to be held on the 1st February – which would consider the Scheme documents that are sent to ECX shareholders – will be rescheduled. No new date was announced.

As to ECX’s FY19 guidance:

• FY19 NPATA (net profit after tax and before amortisation) is expected to be broadly flat vs. FY18.
• 1H19 is expected to ~40% of FY19 NPATA.
• Certain equipment finance exposure has emerged in 1Q19, which will result in expected provisions of A$2.3mn and an allowance for further provisioning of A$0.8mn.
• FY19 net profit is expected to grow versus FY19 but this is “due to the average corporate tax rate for FY18 being 25% compared to the estimated FY19 corporate tax rate of 29%.”

The key MACs (Material Adverse Effect) under the SIA, means a specified event, which is reasonably likely to have:

a material adverse effect on the business, assets, liabilities, financial or trading positions, profitability or prospects of ECX taken as a whole; OR

the effect that the value of the net tangible assets of ECX is reduced by at least A$13mn, measured against the net tangible assets stated in the ECX audited FY18 financial statements;

the effect that the value of the annual NPATA of ECX is reduced by at least 10% measured against the NPATA stated in EXC’s audited FY18 financial statements. (my emphasis)

That word may prove to be significant.

But at a 20% gross spread to terms (ECX is down ~19% as I type) and trading bang in line with its undisturbed price, prior to Sg Fleet (SGF AU)‘s August proposal, the negative news surrounding the NPATA guidance and the MACs appears fully priced in.

2. Ebang IPO Preview: Balance Sheet Indicators Point to a Significant Slowdown

Ebang (EBANG HK) is a Chinese designer of bitcoin mining machines which are sold under the Ebit brand. Ebang refiled its draft prospectus with HKEX on 20 December 2018, but the IPO plans of cryptocurrency related companies are in a state of flux. Last week, the CEO of the Hong Kong Exchanges and Clearing, said that companies seeking to go public in Hong Kong should show consistency in their business models, in response to questions about the IPO applications of Bitmain Technologies Ltd (1374554D CH), Canaan Inc. (CANAAN HK) and Ebang.

3. Chalet Hotels IPO Review – Backed up into a Corner

Chalet Hotels Limited (CHALET IN) is looking to raise up to US$234m in its upcoming IPO.

Chalet Hotels (Chalet) is an owner, developer, and asset manager of luxury hotels. The company has grown its revenue and EBITDA at 15.8% and 22.8% CAGR from FY2016 to FY2018. The growth has been driven by the consistent improvement of its average occupancy rate which in turn drove RevPAR higher.

However, the company is embroiled in litigation with Hindustan Aeronautics (HNAL IN) which could result in the company incurring significant costs. Along with the impending renewal of the licensing agreement in 2020 and 2021, there is much to be worried about the company’s near-term outlook and its highly leveraged balance sheet may leave the company backed up into a corner.

In this insight, we will look at the company financial and operating performance, compare hotels’ operating metrics to the industry average, and compare its valuation to other Indian hotel peers. We will also run the deal through our IPO framework.

4. Hyundai Heavy Holdco Trade: Long Holdco / Short HHI (30%) & SKI (70%) On Aramco Deal

• Korea’s local news outlet reported that Saudi Aramco agrees to buy a 15~20% stake in Hyundai Oilbank Co Ltd (1082Z KS) in a pre-IPO deal. Aramco has reported priced Oilbank at ₩10tril. Hyundai Heavy Industries Holdings (267250 KS) is currently at a 50% discount to NAV. Assuming no change in Oilbank’s ₩10tril value reaffirmed by Aramco, this is like a 6%p drop in two months.
• At this much holdco discount, I’d go long HHIH on the Aramco deal. This will make enough cash injection to Holdco. Oilbank’s ₩10tril valuation stays intact despite the recent de-valuation of the local peers on falling oil prices.
• Holdco is basically 70% Oilbank and 30% HHI. I’d first pick Hyundai Heavy Industries (009540 KS) for 30%. The HHIH/HHI duo is at 20D MA. But on 120D horizon, they are pretty closer to the lowest. For the other 70%, I’d short SK Innovation (096770 KS). SK Innovation has been less price corrected lately compared with S Oil. On a 20D MA, the HHIH/SK Innovation duo is close to -1σ.

5. TRACKING TRAFFIC/Containers & Air Cargo: December Box Rates & Volume Firm

Tracking Traffic/Containers & Air Cargo is the hub for all of our research on container shipping and air cargo, featuring analysis of monthly industry data, notes from our conversations with industry participants, and links to recent company and thematic pieces. 

Tracking Traffic/Containers & Air Cargo aims to highlight changes to existing trends, relationships, and views affecting the leading Asian companies in these two sectors. This month’s note includes data from about twenty different sources.

In this issue readers will find:

Although slowing demand growth is unlikely to generate impressive top-line improvements, firmer pricing combined with lower fuel costs should support an ongoing improvement in profitability for container carriers in the near-term. Meanwhile, the slump in air cargo demand has not yet hit air cargo yields, but it’s becoming clearer that an economic slowdown is hurting demand for this relatively expensive mode of transport.

In this briefing:

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

1. 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. 

2. 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.

3. 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. Ebang IPO Preview: Balance Sheet Indicators Point to a Significant Slowdown
2. Chalet Hotels IPO Review – Backed up into a Corner
3. Hyundai Heavy Holdco Trade: Long Holdco / Short HHI (30%) & SKI (70%) On Aramco Deal
4. TRACKING TRAFFIC/Containers & Air Cargo: December Box Rates & Volume Firm
5. Notes from the Silk Road: Smartgroup Corporation Ltd (SIQ.AX)

1. Ebang IPO Preview: Balance Sheet Indicators Point to a Significant Slowdown

Ebang (EBANG HK) is a Chinese designer of bitcoin mining machines which are sold under the Ebit brand. Ebang refiled its draft prospectus with HKEX on 20 December 2018, but the IPO plans of cryptocurrency related companies are in a state of flux. Last week, the CEO of the Hong Kong Exchanges and Clearing, said that companies seeking to go public in Hong Kong should show consistency in their business models, in response to questions about the IPO applications of Bitmain Technologies Ltd (1374554D CH), Canaan Inc. (CANAAN HK) and Ebang.

2. Chalet Hotels IPO Review – Backed up into a Corner

Chalet Hotels Limited (CHALET IN) is looking to raise up to US$234m in its upcoming IPO.

Chalet Hotels (Chalet) is an owner, developer, and asset manager of luxury hotels. The company has grown its revenue and EBITDA at 15.8% and 22.8% CAGR from FY2016 to FY2018. The growth has been driven by the consistent improvement of its average occupancy rate which in turn drove RevPAR higher.

However, the company is embroiled in litigation with Hindustan Aeronautics (HNAL IN) which could result in the company incurring significant costs. Along with the impending renewal of the licensing agreement in 2020 and 2021, there is much to be worried about the company’s near-term outlook and its highly leveraged balance sheet may leave the company backed up into a corner.

In this insight, we will look at the company financial and operating performance, compare hotels’ operating metrics to the industry average, and compare its valuation to other Indian hotel peers. We will also run the deal through our IPO framework.

3. Hyundai Heavy Holdco Trade: Long Holdco / Short HHI (30%) & SKI (70%) On Aramco Deal

• Korea’s local news outlet reported that Saudi Aramco agrees to buy a 15~20% stake in Hyundai Oilbank Co Ltd (1082Z KS) in a pre-IPO deal. Aramco has reported priced Oilbank at ₩10tril. Hyundai Heavy Industries Holdings (267250 KS) is currently at a 50% discount to NAV. Assuming no change in Oilbank’s ₩10tril value reaffirmed by Aramco, this is like a 6%p drop in two months.
• At this much holdco discount, I’d go long HHIH on the Aramco deal. This will make enough cash injection to Holdco. Oilbank’s ₩10tril valuation stays intact despite the recent de-valuation of the local peers on falling oil prices.
• Holdco is basically 70% Oilbank and 30% HHI. I’d first pick Hyundai Heavy Industries (009540 KS) for 30%. The HHIH/HHI duo is at 20D MA. But on 120D horizon, they are pretty closer to the lowest. For the other 70%, I’d short SK Innovation (096770 KS). SK Innovation has been less price corrected lately compared with S Oil. On a 20D MA, the HHIH/SK Innovation duo is close to -1σ.

4. TRACKING TRAFFIC/Containers & Air Cargo: December Box Rates & Volume Firm

Tracking Traffic/Containers & Air Cargo is the hub for all of our research on container shipping and air cargo, featuring analysis of monthly industry data, notes from our conversations with industry participants, and links to recent company and thematic pieces. 

Tracking Traffic/Containers & Air Cargo aims to highlight changes to existing trends, relationships, and views affecting the leading Asian companies in these two sectors. This month’s note includes data from about twenty different sources.

In this issue readers will find:

Although slowing demand growth is unlikely to generate impressive top-line improvements, firmer pricing combined with lower fuel costs should support an ongoing improvement in profitability for container carriers in the near-term. Meanwhile, the slump in air cargo demand has not yet hit air cargo yields, but it’s becoming clearer that an economic slowdown is hurting demand for this relatively expensive mode of transport.

5. 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. 

In this briefing:

1. Sell General Electric (GE US): Lots of Liabilities, Limited Cashflow – Target $1
2. Dubious Delisting Deals: New Sports, LEAP, China Singyes Solar
3. Recruit Holdings Placement – A Tiny, Long Overdue Sell Down
4. ATP30: 100% Secured Client Base Prompt 2019 Growth
5. Shinmaywa Own Share Tender Offer at Premium

1. 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…

2. 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.

3. 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.

4. 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

5. 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. 

In this briefing:

1. Rides War Has Shifted To Share of Wallet
2. China Kepei Edu (科培教育) Post-IPO – Tepid Demand Means Little Support if IPO Price Breaks
3. RRG Proprietary Corporate Governance Scoring System Identifies Poor Governance in Korea
4. Japan Post Holdings Basing Cycle with Clear Sell and Buy Levels
5. StubWorld: Intouch Gains On Possible Sale of Thaicom

1. Rides War Has Shifted To Share of Wallet

Grab is not just challenging the usual passengers-ride and taxi market; it has upped its game by selling monthly subscription plans, which can build recurring users. It is also looking to take bigger slices of business trips, traditionally the more lucrative pie for local taxi companies and niche car rental companies.

This report explains why Grab has gone into this promotional strategy, and is divided into five parts:

1. Monthly Subscription Plans 

2. Better Allocation of Resources 

3. The Juicy Corporate Pie

4. Fare comparison between Grab, Go-Jek, CD

5. Conclusions

2. China Kepei Edu (科培教育) Post-IPO – Tepid Demand Means Little Support if IPO Price Breaks

Kepei Education (1890 HK) has raised US$112m at HK$2.48 per share, just slightly above the mid-end of the IPO price range. We have previously covered the insight in: 

• China Kepei Edu (科培教育) Pre-IPO Review – A Well Run Private Higher Education Company
• China Kepei Edu (科培教育) IPO – Regulation Poses Significant Near-Term Risks

In this insight, we will update on the deal dynamics, implied valuation, and include a valuation sensitivity table.

3. RRG Proprietary Corporate Governance Scoring System Identifies Poor Governance in Korea

• Our proprietary corporate governance scoring system now covers over 1,985 stocks including over 200 in Korea.
• We recently added a coverage of 28 new names in Korea.
• The two lowest scores in this group are Samsung Electro-Mechanics and Advanced Process Systems both with scores of 40/100.
• The involvement of a former executive at Samsung Electro-Mechanics in the Park scandal and ouster highlights the governance risk.
• Companies with good governance include LS Corp, and Lotte Shopping. Past issues with the founding family of Lotte should be noted and taken into consideration.
  We welcome requests from clients of names they want to see added to the universe.

4. Japan Post Holdings Basing Cycle with Clear Sell and Buy Levels

Japan Post Holdings (6178 JP) rise is moving into an exhaustive resistance zone and due for a hard give back cycle.

Tactical buy supports are compelling for a bigger upside drive given the successful macro backswing support test and ascent that very often opens the way for the macro cycle to make headway, once a corrective cycle terminates. It is this corrective cycle that shows promise for an entry point.

Japan Post Holdings (JPH) does have a short history of volatile swings and will be the challenge within an ongoing basing cycle. We have well defined levels to trade this range tactically while aligning some strong risk pivot supports to reign in risk.

Macro pivot support will define the long term trend for JPH.

5. 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%.

In this briefing:

1. SK Hynix: Attractive at Current Level
2. Nidec (6594 JP): Recovery to Take Time, Valuations Still High
3. ECM Weekly (26 January 2019) – Maoyan, CStone Pharma, Polycab India, Hujiang Edu
4. Delhi International Airport: INR90 Billion Investment Planned
5. Snippets #18: Naughty CEOs, Southern Crusades

1. 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

2. 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.

3. 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

4. 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.

5. Snippets #18: Naughty CEOs, Southern Crusades

In this review, we highlight five new unrelated developments that might impact the Thai stock market if you happen to hold the affected stocks.

• Skeletons in the closet. CIMB’s Thai CEO went on voluntary leave to clear his name regarding a legacy case back in his KTB days, while one of Thailand’s highest profile tycoon Dr. Prasert has been implicated in a stock manipulation case of Bangkok Airways from way back in 2015.
• Religious wars? As the southern insurgency spreads to economically vibrant province of Songkhla, insurgents attack a Buddhist temple and kill two monks, possibly in an effort to turn the crisis into a religious war. Doesn’t sound great for overall stability.
• A rare bump in the Baht. Despite QE unwinding, the Baht has risen almost 3% against the greenback. Bad news for exporters (eg. TUF, DELTA) good news for serial acquirers (think Thai Beverage, Banpu).
• Government-inspired deals. Is the government driving M&A in Thailand these days? They certainly had a hand in the TMB-Thanachart deal and now are rumored to be buying Thaicom, the country’s only satellite operator.
• Air quality takes a dive thanks to diesel and aggressive skytrain construction programs. Stores selling face mask and companies that substitute ethanol to diesel are set to benefit, while BTS might hit headwinds as government forces them to slow down construction.

In this briefing:

1. Hyosung Holdings: Current Status & Trade Approach
2. Ecopro BM IPO Preview: The World’s #2 Player in the NCA High Nickel-Based Cathode Materials
3. Mitsubishi Selling off Stake in Aeon, Ministop in Limbo

1. 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.

2. 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). 

3. Mitsubishi Selling off Stake in Aeon, Ministop in Limbo

Mitsubishi has finally given up its hope of convincing Aeon to merge Ministop (9946 JP) with Lawson and is selling its stake in the largest retail group.

There will be no change to the extensive supply relationship between the two companies and Mitsubishi’s food wholesale arm, Mitsubishi Shokuhin (7451 JP).

While Aeon seems to have spurned Mitsubishi for now, it is hard to see how Aeon will progress in the convenience store sector without Mitsubishi’s help. In the short-term Ministop looks like a poor investment but Aeon may have to sell to Mitsubishi eventually and will want a good price for it.

In this briefing:

1. Nidec (6594 JP): Recovery to Take Time, Valuations Still High
2. ECM Weekly (26 January 2019) – Maoyan, CStone Pharma, Polycab India, Hujiang Edu
3. Delhi International Airport: INR90 Billion Investment Planned
4. Snippets #18: Naughty CEOs, Southern Crusades
5. Rides War Has Shifted To Share of Wallet

1. 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.

2. 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

3. 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.

4. Snippets #18: Naughty CEOs, Southern Crusades

In this review, we highlight five new unrelated developments that might impact the Thai stock market if you happen to hold the affected stocks.

• Skeletons in the closet. CIMB’s Thai CEO went on voluntary leave to clear his name regarding a legacy case back in his KTB days, while one of Thailand’s highest profile tycoon Dr. Prasert has been implicated in a stock manipulation case of Bangkok Airways from way back in 2015.
• Religious wars? As the southern insurgency spreads to economically vibrant province of Songkhla, insurgents attack a Buddhist temple and kill two monks, possibly in an effort to turn the crisis into a religious war. Doesn’t sound great for overall stability.
• A rare bump in the Baht. Despite QE unwinding, the Baht has risen almost 3% against the greenback. Bad news for exporters (eg. TUF, DELTA) good news for serial acquirers (think Thai Beverage, Banpu).
• Government-inspired deals. Is the government driving M&A in Thailand these days? They certainly had a hand in the TMB-Thanachart deal and now are rumored to be buying Thaicom, the country’s only satellite operator.
• Air quality takes a dive thanks to diesel and aggressive skytrain construction programs. Stores selling face mask and companies that substitute ethanol to diesel are set to benefit, while BTS might hit headwinds as government forces them to slow down construction.

5. Rides War Has Shifted To Share of Wallet

Grab is not just challenging the usual passengers-ride and taxi market; it has upped its game by selling monthly subscription plans, which can build recurring users. It is also looking to take bigger slices of business trips, traditionally the more lucrative pie for local taxi companies and niche car rental companies.

This report explains why Grab has gone into this promotional strategy, and is divided into five parts:

1. Monthly Subscription Plans 

2. Better Allocation of Resources 

3. The Juicy Corporate Pie

4. Fare comparison between Grab, Go-Jek, CD

5. Conclusions

In this briefing:

1. Chalet Hotels IPO Review – Backed up into a Corner
2. Hyundai Heavy Holdco Trade: Long Holdco / Short HHI (30%) & SKI (70%) On Aramco Deal
3. TRACKING TRAFFIC/Containers & Air Cargo: December Box Rates & Volume Firm
4. Notes from the Silk Road: Smartgroup Corporation Ltd (SIQ.AX)
5. SK Hynix: Attractive at Current Level

1. Chalet Hotels IPO Review – Backed up into a Corner

Chalet Hotels Limited (CHALET IN) is looking to raise up to US$234m in its upcoming IPO.

Chalet Hotels (Chalet) is an owner, developer, and asset manager of luxury hotels. The company has grown its revenue and EBITDA at 15.8% and 22.8% CAGR from FY2016 to FY2018. The growth has been driven by the consistent improvement of its average occupancy rate which in turn drove RevPAR higher.

However, the company is embroiled in litigation with Hindustan Aeronautics (HNAL IN) which could result in the company incurring significant costs. Along with the impending renewal of the licensing agreement in 2020 and 2021, there is much to be worried about the company’s near-term outlook and its highly leveraged balance sheet may leave the company backed up into a corner.

In this insight, we will look at the company financial and operating performance, compare hotels’ operating metrics to the industry average, and compare its valuation to other Indian hotel peers. We will also run the deal through our IPO framework.

2. Hyundai Heavy Holdco Trade: Long Holdco / Short HHI (30%) & SKI (70%) On Aramco Deal

• Korea’s local news outlet reported that Saudi Aramco agrees to buy a 15~20% stake in Hyundai Oilbank Co Ltd (1082Z KS) in a pre-IPO deal. Aramco has reported priced Oilbank at ₩10tril. Hyundai Heavy Industries Holdings (267250 KS) is currently at a 50% discount to NAV. Assuming no change in Oilbank’s ₩10tril value reaffirmed by Aramco, this is like a 6%p drop in two months.
• At this much holdco discount, I’d go long HHIH on the Aramco deal. This will make enough cash injection to Holdco. Oilbank’s ₩10tril valuation stays intact despite the recent de-valuation of the local peers on falling oil prices.
• Holdco is basically 70% Oilbank and 30% HHI. I’d first pick Hyundai Heavy Industries (009540 KS) for 30%. The HHIH/HHI duo is at 20D MA. But on 120D horizon, they are pretty closer to the lowest. For the other 70%, I’d short SK Innovation (096770 KS). SK Innovation has been less price corrected lately compared with S Oil. On a 20D MA, the HHIH/SK Innovation duo is close to -1σ.

3. TRACKING TRAFFIC/Containers & Air Cargo: December Box Rates & Volume Firm

Tracking Traffic/Containers & Air Cargo is the hub for all of our research on container shipping and air cargo, featuring analysis of monthly industry data, notes from our conversations with industry participants, and links to recent company and thematic pieces. 

Tracking Traffic/Containers & Air Cargo aims to highlight changes to existing trends, relationships, and views affecting the leading Asian companies in these two sectors. This month’s note includes data from about twenty different sources.

In this issue readers will find:

Although slowing demand growth is unlikely to generate impressive top-line improvements, firmer pricing combined with lower fuel costs should support an ongoing improvement in profitability for container carriers in the near-term. Meanwhile, the slump in air cargo demand has not yet hit air cargo yields, but it’s becoming clearer that an economic slowdown is hurting demand for this relatively expensive mode of transport.

4. 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. 

5. 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