Industrials

• The review period for the Nikkei 225 (NKY INDEX) September rebalance ended yesterday. There could be three changes at the rebalance with sector balance in focus for the additions.
• Fast Retailing (9983 JP)‘s capping in the index has been confirmed and its index weight will drop by around 0.9% resulting in big selling at the close on 30 September. 
• Passive trackers will need to buy between 3.5-35x ADV (2.4%-24% of real float) on the inclusions and sell between 3.7-42.5x ADV on the deletions.

• Welcome back to the portfolio updates series!
• This month, I am a few days early with the update. The reason is that my wife and I are celebrating our wedding next weekend, followed by an extended vacation, during which I will be disconnected for a couple of weeks.
• As a result, the next stock deep dive will not be released until the last week of August.

• China Communications Construction (1800 HK)‘s overseas contracts surged sharply in 2Q24 as market share gained. Slow domestic contracts are transient as bond issues will accelerate.
• Its backlog continued to grow to 4.7x 12-month forward revenue, which is higher than the 5-year average of 4.1x. Improving margin trend in 1Q24 will sustain into 2H24.
• With a projected ROE of 8.4% for the next two years, its 0.2x P/B is inexpensive. It is also attractive based on dividend yields of 7.7% and 8.4%, respectively.

• CMS Info Systems Ltd (CMSINFO IN) is the market leader in the Indian cash management and managed services industry. 
• The company has shown good growth in recent years, and this has mostly come from the managed services and card market.
• Among major forensic takeaways, the company has been taking continuous hit on its debtors which undermines the growth quality. Cautious must also be given to payables, depreciation rate and ESOPs.

• Sales increased 26.3% YoY to JPY7.6bn, with operating profit up 36.9% YoY to JPY1.3bn.
• Idle Asset Utilization segment Q3 sales were JPY7.4bn (+27.4% YoY), with an operating profit of JPY1.3bn (+39.1% YoY).
• Visualization segment Q3 sales were JPY149mn (-6.0% YoY), with an operating loss of JPY9mn (profit of JPY5mn in Q3 FY09/23).

• TRS experienced a continuation of sales growing within its packaging and aerospace segments. TRS’s specialty products segment remains a laggard to the rest of the business with demand eroding. 
• The recovery within the packaging business should have been the main highlight of TRS’s Q2. However, the weakness within specialty products resulted in TRS missing our estimates for the quarter.
• We are updating our full year estimates after TRS lowered its adjusted EPS and sales guidance. 

• Revenue increased by 6.2% YoY to JPY39.7bn, with significant contributions from Automotive & Battery Materials, Second, and Third Business segments.
• Operating profit rose 15.4% YoY to JPY780mn, while recurring profit surged 95.1% YoY to JPY1.1bn, driven by improved earnings at equity-method affiliates.
• Net income attributable to owners of the parent grew 181.0% YoY to JPY756mn, with a notable increase in equity in earnings of affiliates.

• For Q1 FY03/25, the company reported revenue of JPY11.9bn (+29.2% YoY), operating profit of JPY1.1bn (+228.1% YoY).
• The company maintained its 1H and full-year forecasts and resolved to dispose of 7,000 treasury shares.
• The medium-term management plan targets FY03/25 revenue of JPY55.0bn, OPM of 5.0% or more, and ROE of 7.0% or more.

• Q1 FY03/25 results: Sales JPY2.3bn (+3.3% YoY), Operating profit JPY338mn (+3.5% YoY), Operating profit margin 14.9% (+0.1pp).
• Automotive sector: No significant improvement in tool demand despite anticipated recovery from domestic car production resurgence.
• Overseas sales increased YoY, particularly in Greater China and parts of Asia, offsetting low sales in primary markets.

• The review period for the Nikkei 225 (NKY INDEX) September rebalance ended yesterday. There could be three changes at the rebalance with sector balance in focus for the additions.
• Fast Retailing (9983 JP)‘s capping in the index has been confirmed and its index weight will drop by around 0.9% resulting in big selling at the close on 30 September. 
• Passive trackers will need to buy between 3.5-35x ADV (2.4%-24% of real float) on the inclusions and sell between 3.7-42.5x ADV on the deletions.

• Welcome back to the portfolio updates series!
• This month, I am a few days early with the update. The reason is that my wife and I are celebrating our wedding next weekend, followed by an extended vacation, during which I will be disconnected for a couple of weeks.
• As a result, the next stock deep dive will not be released until the last week of August.

• China Communications Construction (1800 HK)‘s overseas contracts surged sharply in 2Q24 as market share gained. Slow domestic contracts are transient as bond issues will accelerate.
• Its backlog continued to grow to 4.7x 12-month forward revenue, which is higher than the 5-year average of 4.1x. Improving margin trend in 1Q24 will sustain into 2H24.
• With a projected ROE of 8.4% for the next two years, its 0.2x P/B is inexpensive. It is also attractive based on dividend yields of 7.7% and 8.4%, respectively.

• CMS Info Systems Ltd (CMSINFO IN) is the market leader in the Indian cash management and managed services industry. 
• The company has shown good growth in recent years, and this has mostly come from the managed services and card market.
• Among major forensic takeaways, the company has been taking continuous hit on its debtors which undermines the growth quality. Cautious must also be given to payables, depreciation rate and ESOPs.

• Sales increased 26.3% YoY to JPY7.6bn, with operating profit up 36.9% YoY to JPY1.3bn.
• Idle Asset Utilization segment Q3 sales were JPY7.4bn (+27.4% YoY), with an operating profit of JPY1.3bn (+39.1% YoY).
• Visualization segment Q3 sales were JPY149mn (-6.0% YoY), with an operating loss of JPY9mn (profit of JPY5mn in Q3 FY09/23).

• TRS experienced a continuation of sales growing within its packaging and aerospace segments. TRS’s specialty products segment remains a laggard to the rest of the business with demand eroding. 
• The recovery within the packaging business should have been the main highlight of TRS’s Q2. However, the weakness within specialty products resulted in TRS missing our estimates for the quarter.
• We are updating our full year estimates after TRS lowered its adjusted EPS and sales guidance. 

• Revenue increased by 6.2% YoY to JPY39.7bn, with significant contributions from Automotive & Battery Materials, Second, and Third Business segments.
• Operating profit rose 15.4% YoY to JPY780mn, while recurring profit surged 95.1% YoY to JPY1.1bn, driven by improved earnings at equity-method affiliates.
• Net income attributable to owners of the parent grew 181.0% YoY to JPY756mn, with a notable increase in equity in earnings of affiliates.

• For Q1 FY03/25, the company reported revenue of JPY11.9bn (+29.2% YoY), operating profit of JPY1.1bn (+228.1% YoY).
• The company maintained its 1H and full-year forecasts and resolved to dispose of 7,000 treasury shares.
• The medium-term management plan targets FY03/25 revenue of JPY55.0bn, OPM of 5.0% or more, and ROE of 7.0% or more.

• Q1 FY03/25 results: Sales JPY2.3bn (+3.3% YoY), Operating profit JPY338mn (+3.5% YoY), Operating profit margin 14.9% (+0.1pp).
• Automotive sector: No significant improvement in tool demand despite anticipated recovery from domestic car production resurgence.
• Overseas sales increased YoY, particularly in Greater China and parts of Asia, offsetting low sales in primary markets.

• SYM had an increase in system costs. SYM’s management highlighted delays in construction of systems in the quarter resulting in the Company to taking back EPC work.   
• SYM suggests bringing the EPC work in-house would be more efficient. We do not agree. This creates additional headwinds as to timing and could create a new risk for SYM.  
• During the earnings call, SYM’s management referred to delays in permits and product delivery resulting in people not having anything to do. This is a characterization of a construction/contracting company.

• Ador Welding (AWL IN) is a renowned player in the business of manufacturing and trading of welding and related products.  
• The company sells welding consumables, equipments and also does preoject-engineering. While the company has seen recent growth in topline, there are few forensic checks that one must be cautious about.
• This relates to accounting policy relating to Flares segment, lack of conservatism relating to ECL provisioning and depreciation, troubles in generating cash, etc.

• Parcel volume growth remained strong in June, but ASPs weakened (again)
• YTO Express seems to be managing price / volume tradeoff competently
• Year-To-Date, only YTO shares up > 10%; three companies down -10% or more 

• Sales rose to JPY17.2bn (+6.1% YoY), driven by strong overseas subsidiaries and a weaker yen.
• Operating profit decreased to JPY1.9bn (-15.3% YoY) due to increased SG&A expenses and reduced high GPM LCL export cargo.
• Overseas segment sales grew to JPY6.0bn (+30.2% YoY), with solid warehouse operations in India and South Korea.

• SYM had an increase in system costs. SYM’s management highlighted delays in construction of systems in the quarter resulting in the Company to taking back EPC work.   
• SYM suggests bringing the EPC work in-house would be more efficient. We do not agree. This creates additional headwinds as to timing and could create a new risk for SYM.  
• During the earnings call, SYM’s management referred to delays in permits and product delivery resulting in people not having anything to do. This is a characterization of a construction/contracting company.

• Ador Welding (AWL IN) is a renowned player in the business of manufacturing and trading of welding and related products.  
• The company sells welding consumables, equipments and also does preoject-engineering. While the company has seen recent growth in topline, there are few forensic checks that one must be cautious about.
• This relates to accounting policy relating to Flares segment, lack of conservatism relating to ECL provisioning and depreciation, troubles in generating cash, etc.

• Parcel volume growth remained strong in June, but ASPs weakened (again)
• YTO Express seems to be managing price / volume tradeoff competently
• Year-To-Date, only YTO shares up > 10%; three companies down -10% or more 

• Sales rose to JPY17.2bn (+6.1% YoY), driven by strong overseas subsidiaries and a weaker yen.
• Operating profit decreased to JPY1.9bn (-15.3% YoY) due to increased SG&A expenses and reduced high GPM LCL export cargo.
• Overseas segment sales grew to JPY6.0bn (+30.2% YoY), with solid warehouse operations in India and South Korea.

• The review period for the September rebalance ends 31 July. We expect the changes to be announced 30 August with the implementation taking place after the close on 13 September.
• We forecast 6 changes for the index, including migrations between the STAR100 Index and the STAR50 INDEX. There is uncertainty for a few adds given profitability (or lack of it). 
• The outright potential adds have outperformed the outright potential deletes since the start of the calendar year with 12% outperformance in just the last 3 weeks.

• Fanuc reported slightly better-than-expected Q1 sales and OP forecasts, mainly due to a recovery in sales of FA equipment
• Fanuc’s results are consistent with a bottoming out of Japan’s machine tool orders in the first half of the year
• We turn bullish on the stock given the cyclical bottoming out of orders and margins. However, the stock is still not “cheap” and the company faces a number of challenges

• According to daily Expansion, Ganz MaVag plans to reserve part of Talgo SA (TLGO SM)‘s share capital for one or more Spanish partners chosen by the Spanish Government. 
• Uncertainty over the approval process has lowered the price to €4.31, given the low likelihood of counteroffers and the uncertainty of a potentially prolonged process.
• Gross spread is 13.8%, indicating uncertainty regarding timeline and development. The market is pricing a 39% probability of deal completion. Recommendation is sell on strength.

• Enphase Energy reported solid financial outcomes for the second quarter of 2024, driven by robust demand for its products and effective inventory management.
• The company achieved a revenue of $303.5 million, reflecting shipments of approximately 1.4 million microinverters and 120 megawatt-hours of batteries.
• This performance was supported by an overall end market demand valued at around $396 million for the quarter.

• Overall, June container throughput growth and average container rates strong
• But spot rates have begun to wobble recently, and 2025 uncertainty grows
• We have decided to close our suggested container shipping pair trade 

• WM presented its financial outcomes for the second quarter of 2024, underscoring a period of significant operational strength and strategic alignment towards its long-term growth objectives.
• WM reported a historical high with a 30% operating EBITDA margin, driven by efficiencies from technological investments and a robust pricing strategy.
• The company’s commitment to leveraging its expertise across various platforms was evident, particularly with its planned acquisition of Stericycle, which is expected to complement and expand its service offerings in the medical waste industry.

Metlen Energy & Metals achieved a record H1 EBITDA of €474m in 2024 (vs €437m in H123), while also increasing its operating margin by 169bp to 19.1% (17.4% at H123). Revenue declined marginally (-1% to €2,482m) but Metlen’s diversified and synergistic business model across the energy and metals sectors is helping to grow its margins and diversity of earnings (towards RES/Utility/Metals and away from volatile natural gas supply). Both net profit after minorities and earnings per share increased by c 5% y-o-y to €282m and €2.04, respectively. Net debt/EBITDA is a comfortable 1.76x and Metlen looks well placed for a potential upgrade to investment grade status by the rating agencies later this year, achieving its goal.

• Revenue increased by JPY5.1bn (+2.9% YoY), driven by growth in the Furniture and Stationery Businesses.
• Operating profit declined by JPY97mn (-0.6% YoY) due to lower profit in the Interior Retail business and increased adjustments.
• Gross profit margin rose to 39.9%, while the SG&A expense ratio increased to 31.1% due to strategic spending.

• General Dynamics recently presented their second quarter 2024 financial results, reflecting notable growth across their business segments with some operational challenges specifically in their Aerospace division.
• This analysis delves into both the positive outcomes and areas of concern from their performance to provide a balanced investment perspective.
• Starting with their strengths, General Dynamics displayed robust revenue increases across all their four business segments, highlighting an 18% overall growth.

• The review period for the September rebalance ends 31 July. We expect the changes to be announced 30 August with the implementation taking place after the close on 13 September.
• We forecast 6 changes for the index, including migrations between the STAR100 Index and the STAR50 INDEX. There is uncertainty for a few adds given profitability (or lack of it). 
• The outright potential adds have outperformed the outright potential deletes since the start of the calendar year with 12% outperformance in just the last 3 weeks.

• Fanuc reported slightly better-than-expected Q1 sales and OP forecasts, mainly due to a recovery in sales of FA equipment
• Fanuc’s results are consistent with a bottoming out of Japan’s machine tool orders in the first half of the year
• We turn bullish on the stock given the cyclical bottoming out of orders and margins. However, the stock is still not “cheap” and the company faces a number of challenges

• According to daily Expansion, Ganz MaVag plans to reserve part of Talgo SA (TLGO SM)‘s share capital for one or more Spanish partners chosen by the Spanish Government. 
• Uncertainty over the approval process has lowered the price to €4.31, given the low likelihood of counteroffers and the uncertainty of a potentially prolonged process.
• Gross spread is 13.8%, indicating uncertainty regarding timeline and development. The market is pricing a 39% probability of deal completion. Recommendation is sell on strength.

• Enphase Energy reported solid financial outcomes for the second quarter of 2024, driven by robust demand for its products and effective inventory management.
• The company achieved a revenue of $303.5 million, reflecting shipments of approximately 1.4 million microinverters and 120 megawatt-hours of batteries.
• This performance was supported by an overall end market demand valued at around $396 million for the quarter.

• Overall, June container throughput growth and average container rates strong
• But spot rates have begun to wobble recently, and 2025 uncertainty grows
• We have decided to close our suggested container shipping pair trade 

• WM presented its financial outcomes for the second quarter of 2024, underscoring a period of significant operational strength and strategic alignment towards its long-term growth objectives.
• WM reported a historical high with a 30% operating EBITDA margin, driven by efficiencies from technological investments and a robust pricing strategy.
• The company’s commitment to leveraging its expertise across various platforms was evident, particularly with its planned acquisition of Stericycle, which is expected to complement and expand its service offerings in the medical waste industry.

Metlen Energy & Metals achieved a record H1 EBITDA of €474m in 2024 (vs €437m in H123), while also increasing its operating margin by 169bp to 19.1% (17.4% at H123). Revenue declined marginally (-1% to €2,482m) but Metlen’s diversified and synergistic business model across the energy and metals sectors is helping to grow its margins and diversity of earnings (towards RES/Utility/Metals and away from volatile natural gas supply). Both net profit after minorities and earnings per share increased by c 5% y-o-y to €282m and €2.04, respectively. Net debt/EBITDA is a comfortable 1.76x and Metlen looks well placed for a potential upgrade to investment grade status by the rating agencies later this year, achieving its goal.

• Revenue increased by JPY5.1bn (+2.9% YoY), driven by growth in the Furniture and Stationery Businesses.
• Operating profit declined by JPY97mn (-0.6% YoY) due to lower profit in the Interior Retail business and increased adjustments.
• Gross profit margin rose to 39.9%, while the SG&A expense ratio increased to 31.1% due to strategic spending.

• General Dynamics recently presented their second quarter 2024 financial results, reflecting notable growth across their business segments with some operational challenges specifically in their Aerospace division.
• This analysis delves into both the positive outcomes and areas of concern from their performance to provide a balanced investment perspective.
• Starting with their strengths, General Dynamics displayed robust revenue increases across all their four business segments, highlighting an 18% overall growth.

• Several weeks ago, ENEOS Holdings (5020 JP) launched its long-delayed Tender Offer for Tatsuta Electric Wire & Cable (5809 JP) with no bump despite the time value of money. 
• It said the price reflected Tatsuta’s value sufficiently. A week ago on the 19th, ENEOS extended the Tender Offer, likely because they didn’t have the shares. Price was still “sufficient.”
• I suggested it might not be; I didn’t expect a big bump, but caveated earnings. Friday produced great Q1 earnings, and a bump from ¥720/share to ¥780/share. 

• Lonking Holdings (3339 HK)‘s positive profit alert for 33-50% YoY increase in 1H24 earnings suggests that market consensus of just 10% full-year growth is way too conservative.  
• Industry sales momentum for excavators and wheel loaders has accelerated in the last three months. A low base in 2H24 will mean an even stronger recovery.
• Government supportive measures for equipment renewal and faster special purpose bond issuance will fuel demand too. We estimate net cash equals 90% of the share price. 

• Sanil Electric (062040 KS) raised around US$193m in its Korea IPO, after pricing the deal above the top end of the range at KRW35,000/share.
• Sanil Electric is a specialized company that manufactures and sells reactors, transformers, railway vehicle parts, and switchboards. As an industrial transformer manufacturer, the company mainly manufactures power and distribution transformers.
• In this note, we will talk about the demand for the deal and other trading dynamics.

• United Parcel Service, Inc. (UPS) returned to volume growth in the U.S. market in the second quarter of 2024, marking a significant shift following nine quarters of decline.
• This achievement was largely a result of the company’s strategic efforts, including its emphasis on small and medium sized business (SMB) sectors and strategic acquisitions like Estafeta, which bolstered its position in Mexico.
• This move is expected to enhance UPS’s logistics orchestration capabilities, particularly as regional manufacturing shifts closer to the United States.

• Lockheed Martin’s performance in the second quarter of 2024 showcases a confident trajectory marked by significant operational and financial strides.
• The company reported a robust backlog valued at approximately $160 billion, more than twice its annual revenue, indicating sustained demand and potential future earnings stability.
• Revenue growth saw a 9% year-over-year increase across all four business segments, driven by enhanced operational performances and an improving supply chain.

• PACCAR Inc. reported robust financial results for the second quarter of 2024, demonstrating strong performance across its various segments, despite mixed market conditions.
• The company recorded revenues of $8.8 billion and net income of $1.12 billion, driven by commendable performance in both truck and parts operations worldwide.
• PACCAR Parts notable revenue increase to $1.7 billion and pretax profits of $414 million highlight its resilience and operational efficiency, achieving a 30.3% gross margin.

• Several weeks ago, ENEOS Holdings (5020 JP) launched its long-delayed Tender Offer for Tatsuta Electric Wire & Cable (5809 JP) with no bump despite the time value of money. 
• It said the price reflected Tatsuta’s value sufficiently. A week ago on the 19th, ENEOS extended the Tender Offer, likely because they didn’t have the shares. Price was still “sufficient.”
• I suggested it might not be; I didn’t expect a big bump, but caveated earnings. Friday produced great Q1 earnings, and a bump from ¥720/share to ¥780/share. 

• Lonking Holdings (3339 HK)‘s positive profit alert for 33-50% YoY increase in 1H24 earnings suggests that market consensus of just 10% full-year growth is way too conservative.  
• Industry sales momentum for excavators and wheel loaders has accelerated in the last three months. A low base in 2H24 will mean an even stronger recovery.
• Government supportive measures for equipment renewal and faster special purpose bond issuance will fuel demand too. We estimate net cash equals 90% of the share price. 

• Sanil Electric (062040 KS) raised around US$193m in its Korea IPO, after pricing the deal above the top end of the range at KRW35,000/share.
• Sanil Electric is a specialized company that manufactures and sells reactors, transformers, railway vehicle parts, and switchboards. As an industrial transformer manufacturer, the company mainly manufactures power and distribution transformers.
• In this note, we will talk about the demand for the deal and other trading dynamics.

• United Parcel Service, Inc. (UPS) returned to volume growth in the U.S. market in the second quarter of 2024, marking a significant shift following nine quarters of decline.
• This achievement was largely a result of the company’s strategic efforts, including its emphasis on small and medium sized business (SMB) sectors and strategic acquisitions like Estafeta, which bolstered its position in Mexico.
• This move is expected to enhance UPS’s logistics orchestration capabilities, particularly as regional manufacturing shifts closer to the United States.

• Lockheed Martin’s performance in the second quarter of 2024 showcases a confident trajectory marked by significant operational and financial strides.
• The company reported a robust backlog valued at approximately $160 billion, more than twice its annual revenue, indicating sustained demand and potential future earnings stability.
• Revenue growth saw a 9% year-over-year increase across all four business segments, driven by enhanced operational performances and an improving supply chain.

• PACCAR Inc. reported robust financial results for the second quarter of 2024, demonstrating strong performance across its various segments, despite mixed market conditions.
• The company recorded revenues of $8.8 billion and net income of $1.12 billion, driven by commendable performance in both truck and parts operations worldwide.
• PACCAR Parts notable revenue increase to $1.7 billion and pretax profits of $414 million highlight its resilience and operational efficiency, achieving a 30.3% gross margin.

• If further restructuring can be avoided, profitability should return to an acceptable level while sales growth continues. 
• The decline of EV prices has probably run its course and global demand for factory automation continues to rise despite weakness in China.
• Projected valuations are at a 10-year low. Investor attention can now shift to economic and operating risks.

• If further restructuring can be avoided, profitability should return to an acceptable level while sales growth continues. 
• The decline of EV prices has probably run its course and global demand for factory automation continues to rise despite weakness in China.
• Projected valuations are at a 10-year low. Investor attention can now shift to economic and operating risks.