Credit demand is deteriorating; credit risks are rising; Eurodollar costs are edging higher
A de-escalation in trade tensions and a Fed pause could ease the pain
Will Fed recently turning more dovish (possible shift to slower QT & Fed rate cut in 2019?) + concomitant USD drift provide sufficient respite to put a floor under risk assets?
Mitsubishi Corp (8058 JP) is looking to sell 9m shares of Ayala Corporation (AC PM) for approximately US$155m. Post-placement, Mitsubishi Corp will still hold 7.2% of Ayala Corp if the upsize option is not exercised.
The deal scores poorly on our framework owing to its the large deal size relative to its three-month ADV. The company is also slightly more leveraged than its peers. However, it was offset by cheaper valuation and a strong track record.
But, our deal breaker here is the fact that the selldown one year after 2018’s selldown may signal that Mitsubishi Corp. may return to sell more on the market again in the near-term. While Mitsubishi, in the past, has reaffirmed that their partnership with AC will likely continue, it should not serve as a reassurance that it will continue to hold shares in AC.
In absolute terms we see Toyota Motor moving into a top while Tsuruha shows risk of a final low to work into this pair position but has a very compelling bullish chart set up as Toyota fade from resistance.
After a holiday hiatus where markets were slow and somewhat quiet and the number of insights published and read dipped, we resume your regularly scheduled service.
Smartkarma saw just over 110 insights published last week, with an additional 35 published between Friday afternoon and Sunday evening. The pace is picking up.
Across the platform, almost four dozen thematic, macro, and economics pieces were published by 30 insight providers, and two dozen-plus insights were published on Japan and Korea (note that the prior week, Japan was effectively on holiday the whole week).
Take out an ad in a magazine or pay a one of the Wondergirls to post an Instagram photo of herself using our makeup? How do we get Americans and Europeans to want our bubble tea sleeping packs and panda-shaped palettes? All valid questions for K-beauty companies in the midst of a global expansion.
Source: Internet – Chosungah Beauty
Korean beauty products powerhouse, Amorepacific is going through some growing pains at the moment. In the 3Q18 the group reported a YoY sales increase of 6% but OP tumbled 24% due to increased personnel and marketing costs. In a management policy statement last week, Chairman Suh outlined the problems the group is encountering as it copes with reaching customers in a world where online and offline customer interaction is changing.
The stub is now trading at its widest discount to NAV in at least 3 years and has reached 22% discount to its Sum of the Parts NAV by my calculations. This level represents a level 1.5 standard deviations below its long-term average and also offers compelling value.
In this insight I will detail:
an actionable market-neutral trade idea
an analysis of the various business units of Amorepacific
reasons for the under-performance of Amorepacific parent and a sign of a rebound
a recap of ALL my stub trade ideas on Smartkarma, including track record of performance
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Prored Partners is a business consulting company founded in 2009 by the CEO, Mr Satani (who retains 60% of the equity). Prior to setting up Prored, he worked as a business consultant at a consultancy firm subsequently acquired by PwC Consulting. The shares were registered on the Mother’s exchange at the end of July 2018. Unfortunately, it is a micro-cap (market cap Y24bn) but should be of interest to those looking for a very fast growing small cap name. It trades on 17x our forecasts for this year to 10/19. The company has been growing at a fast pace over the last few years. We expect this strong rate of growth to continue, see below.
We noted in Ten Years On – Asia Outperforms Advanced Economies Asia’s economies and companies have outperformed advanced country peers in the ten years to 2017. Growing by 6.8%, real, through the crisis the region is 188% larger in US dollar terms while US dollar per capita incomes 170% higher compared with 2007. In this note we argue even though Asian stock markets have underperformed since 2010 and the bulk of global capital flows have gone to advanced countries, Asia’s time is coming. Valuations are cheap. Growth fundamentals strong. There are few external or internal imbalances. Macroeconomic management has been better than in advanced economies and the scope to ease policy to ward off headwinds in 2019 is greater. China has already started.
On November 6th, NTT (Nippon Telegraph & Telephone) (9432 JP)announced a ¥150 billion buyback program, and NTT Docomo Inc (9437 JP)announced that its very large ¥600 billion buyback program presented days before would be done through a single below-market-price Tender Offer where NTT was expected to be the only seller. That left NTT buying shares on market and NTT Docomo buying shares off-market in the immediate future.
The Tender Offer went through as planned (though NTT sold a tiny trifle less than expected).
On January 7th, NTT announced it had repurchased 8.4mm shares for ¥38.8 billion, leaving only ¥15.35 billion to repurchase in this program. That is worth about 7-8 trading days of buying. The buyback is therefore almost done.
A hint as to the future came in a Nikkei article in December. It may be many months before we see more NTT on-market buybacks.
In this report, we will explain our strategy for trading NCsoft Corp (036570 KS) shares in 2019. NCsoft is expected to launch five new mobile games in 2019 including “Lineage 2M”, “AION 2”, “Blade & Soul 2”, “Blade & Soul M”, and “Blade & Soul S”. These five new games are based on its existing MMORPG franchise games. The company is hoping to release all five of these new mobile games in 1H 2019.
Lineage 2M, which is perhaps the most anticipated mobile game among these five games, is expected to be launched in 2Q19. Traders are starting to gear up for the launch of this important game in the coming months. Many investors are likely to take the “buy on rumor and sell on news” strategy, which in this case the news would refer to the launch of the Lineage 2M game.
Nonetheless, in this case, we believe that because many investors may be getting ready to sell NCsoft near the launch date of Lineage 2M, many savvy investors are likely to sell their shares a few days/weeks earlier than the actual launch date. At this point, the most likely period as to when Lineage 2M may be launched is in May 2019. As a result, a good time to consider selling NCsoft may be sometime in March/April 2019.
Japan Hotel Reit Investment (8985 JP) (JHR) plans to raise around US$300m/JPY33bn to part fund the acquisition of Hilton properties located in Tokyo and Osaka.
We have previously covered four other capital raising by JHR:
The prior-deals have given mixed bag results over the short-term. In this insight, we will run the deal through our framework and analyse past performance.
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In this week’s GER M&A wrap, we highlight the dwindling likelihood of a follow-on deal for Don Quijote Holdings (7532 JP) , which is now trading below terms. Secondly, we take a contrarian view on the M1 Ltd (M1 SP) deal and contend there is less likely to be a bidding war. Finally, we update on rejected by Healius (HLS AU) and provide a comprehensive list of upcoming catalysts for near-term M&A deals.
The rest of our event-driven research can be found below.
Best of luck for the new week – Rickin, Venkat and Arun
Value made a comeback, but growth remains core: In May 2018, we examined the divide between value and growth stocks, ( Notes from the Silk Road: Small-Mid Cap Screening for Zulu Warriors). As Q3 unfolded, this eventuated with a +7.5% reversal in favour of value stocks, only to see growth resume dominance in October and November.
The optimal value/growth style dynamic: We feel exposure to growth at a reasonable price (GARP) coupled with a healthy FCF yield (via our amended Zulu Screen) should provide some healthy medium to long term returns for investors.
The Screen’s Risk: The Zulu Screen relies on analyst estimates. When market sentiment is weak and forecasts are not amended in a timely manner, the screen is susceptible to mis-selection.
Q2 2018 screening list succumbed to volatile markets: This was seen in our May screen with our list posting on average a 30% decline in share price, relative to the broader Asia-Pacific Ex-Japan declining 13.6% and the Asia Pacific index by 11.8%.
Are there reasons for the underperformance? 10 of the 19 stocks in the May screen were from Hong Kong, which saw the Hang Seng Index (HIS) decline 16% over the same period. The decrease seems due to concern over trade wars and doubts about the China economy. Our key approach to stock selection is to take a medium-to-long-term view as well as focus on quality ranked stocks relative to their peers. This is highlighted via the average stock rank of the group declining only 15.8% from 89.6 to 75.5 points.
Our Q1 2019 screen selected only 9 stocks. Of the 9 stocks identified, the average PEG Ratio was 0.4x, the price to FCF yield was 11% and ROCE was 25%. Stocks were selected from Australia, New Zealand, India, Korea, Japan, Hong Kong, Taiwan and Singapore. Cowell Fashion Company from Korea was the only remaining stock from our May screening.
NEW YEAR RALLY – From the December 25th’s lows of 8% by number and 11% by value, the percentages of Japanese stocks above the weighted sum of moving averages have recovered to 14% by number and 20% by value – just on the ‘buying zone’ line. As we expected, the Total Market Value has rallied 8.7% and looks to have some further to run, especially if the Yen reverses some of its recent strength. The Bank of Japan provided a ‘helping hand’ on both 4th and 10th January, the only days this year so far on which the market declined.
SECTORS
LEGEND: The ‘sparklines’ show the three-year trend in the weighted percentage above moving average relative to the Market Composite and the ‘STDev’ column is a measure of the variability of that relative measure. The table also provides averages for the breaks above and breaks below and the positive and negative crossovers.
SECTOR BREAKDOWN – The top six sectors measured by the percentage above the weighted average of 5-240 Days remain, predictably, domestic and defensive – REITs, Information Technology, Media and Utilities continue from our previous review with Healthcare and Transportation replacing Food, Beverages and Tobacco and Internet Content & Services. Equally predictable is the bottom half-dozen. Banks, Autos, Metals, Electrical Equipment, and Chemicals remain from 23rd December Moving Average Outliers Insight, with Building Materials replacing Non-Bank Finance. Over the last trading five days, however, there has been a noticeable reversal with Autos, Electrical Equipment, and Machinery all over ’55’ while Other Consumer Products, Restaurants, Telecommunications and Food, Beverages & Tobacco are all below ’40’.
COMPANIES
COMPANY MOVING AVERAGE OUTLIERS – As with the market and sectors, our moving average outlier indicator uses a weighted sum of the share price relative to its 5-day, 20-day, 60-day, 120 day and 240-day moving averages. Extreme values are weighted sums greater than 100% and less than -100%. We would caution that this indicator is best used for timing shorter-term reversals and, in many cases, higher highs and lower lows will be seen.
Source: Japan Analytics
THE +/-100% CLUB – The number of extreme negative outliers reached a peak for 1,352 on December 25th and has since returned to ‘normal’ levels. We suggested in the previous Insight in this series that such an extreme number of extremes was a signal of a short-term bottom, which, so far, has proved to be correct.
In the DETAIL section below, we highlight the current top and bottom twenty-five larger capitalisation outliers as well as those companies that have seen the most significant positive and negative changes in their outlier percentage in the last two weeks and provide short comments on companies of particular note.
CURRENCY DRIVER – The ¥/US$ cross rate has strengthened by 5.3% since the recent US$ peak of ¥114.20 on November 12th 2018, which has led some FX and technical specialists (including Thomas Schroeder here on Smartkarma) to call for a more sustained bout of US$ weakness. A period of Yen strength is far from a consensus forecast for most Japanese equity investors, and historically a stronger Yen has resulted in a weaker Japanese equity market. The three Yen ‘peaks’ highlighted by the vertical lines in the chart above all coincided with medium-term lows in TOPIX.
Source: Japan Analytics
¥ < 100 – If we isolate only the 1,484 days in the last forty years when the USDJPY cross has traded above ¥100, the average TOPIX index is 975, which would imply 36% downside for Japanese equities were the Yen to rise above ¥90. Nevertheless, the three Yen peaks we have isolated have proved to be excellent entry points with the subsequent trough-to-peak performance being 28% in 1995~1996, 108% in 2011~2015 and 48% in 2016~2018. Long-term Japan ‘bulls’ should welcome the coming US dollar bear market.
Source: Japan Analytics
EARNINGS DRIVER – The USDJPY cross remains an important driver of earnings and earnings momentum in Japan. As measured by our Results and Revision Scores, there is a good correlation between the trends in both scores and the year-on-year change in USDJPY lagged by six months, especially around significant turning points for the cross rate (marked by the vertical lines). The Results and Revision Scores have declined since January 2018 in line with the stronger Yen. A move up to above the ¥90 level would, without doubt, take both scores into negative territory again- the only question being, are we replaying 2009/10 or 2016/17?
Source: Japan Analytics
CURRENCY CORRELATIONS – In the DETAIL below, we list the larger capitalisation companies whose share price performance most closely correlated with the dollar-yen cross rate. As a preview, the most correlated larger capitalisation company that has been listed since 2006 is, unsurprisingly, Toyota Motor (7203 JP).
Source: Japan Analytics
THE FOREIGN CURRENCY TRANSLATION ADJUSTMENT – We also go one step further and use the ‘Foreign Currency Translation Adjustment’ that forms part of Other Comprehensive Income (which has been disclosed in corporate balance sheets and income statements since 2001 and 2011, respectively) to measure the extent of each company’s global business and the embedded currency risk. The correlation of the aggregate FCTA for all non-financial companies is, as would be expected, reasonably tight after adding two-month lag for the reporting cycle. As these amounts are directly deducted from Net Assets for companies adopting JGAAP and from Shareholders’ Equity for those companies reporting under SEC or IFRS standards, the impact on valuations cannot be ignored.
Ideally, own Bandhan Bank (BANDHAN IN) on a deal break, or wait for this deal and its spread to season a bit.
It’s still not clear that a bump or counterbid will be forthcoming in the M1 Ltd (M1 SP) deal, but at S$2.07, the risks are better than they were higher.
Healius (HLS AU) (unsurprisingly) rejects the indicative offer but Jangho is not out of the picture; nor is the possibility of a third party.
Douglas Kim revisited the news that Kim Jung-Joo wants to sell his stake in the Nexon Group. Travis Lundy also chimed in with his read of the situation. The key questions are whether Kim Jung-Ju would sell NXC (and NXMH) – which holds a 48% stake in Nexon Co – as reported by the local press, or whether NXC and NXMH would sell their stakes in Japan-listed Nexon. The implication being that if they sold the stake in Nexon, it would mean buyers would get a large stake in a single company, whereas there is a bunch of other stuff floating around in NXC and its subsidiaries.
The other question is whether Tencent Holdings (700 HK) or another buyer buying NXC would trigger a mandatory Tender Offer for the shares in Nexon in Japan. The letter of the law in the TOB Rules would indicate not, but Travis reckons Yes. If the Kim family sold their stake in NXC Corporation to a buyer, he thinks it is HIGHLY likely that the buyer would be obliged (by Japanese authorities) to conduct a tender offer for the shares of Nexon that they wanted to buy.
As a trade, this does not look like a great risk arb bet (where you make a bet that a company will get taken over) at first glance if the total trade for NXC is going to be ₩10tn. It would be a good trade if the ₩10tn number were made up of say ₩3tn of assets (in NXC), then the assumption that the current market price adding ₩7tn of assets to arrive at that total of ₩10tn would be an “estimate” of current value rather than an estimate of what it would take to get the deal done, and current market value is a significant premium to book (where NXC has heretofore reported its financials and Nexon). In that case, one might imagine that a bidding war could result in a higher price for Nexon, and an easy exit at ¥2000+/share.
Either way it would be a chunk of change which would make many buyers – even buyers from China thought to be quite wealthy – balk. A priori, Travis would want to own Nexon vs Tencent, Electronic Arts (EA US), Netease Inc (Adr) (NTES US), and others, but it is not necessarily a comfortable trade.
Konnectivity Pte. Ltd officially announced the launch of its Offer to by M1 Ltd (M1 SP). The Close is 4 February, but the Offer is not Final.
If you think there will not be a bump and the deal may or may not go through at S$2.06, unless you are so big that your selling would dramatically impact the price, the right trade here is to sell in the market.
If you think there is a possibility of a bump as the Offeror seeks to a) get Axiata to tender and b) to get everyone else to tender so they can delist and squeeze out minorities, but if no bump there is a quasi-certainty that Konnectivity Pte will gain 50%+1 share at S$2.06, then buying at S$2.07 is not a bad trade depending on your likelihood of bump and bump price.
If Konnectivity bump, they have two choices: Bump a little bit and declare final so that everyone who played for a bump decides to sell (that might mean a bump to S$2.15 or so); or bump a lot and get Axiata out.
Travis believes a bump is certainly possible but also thinks this deal gets done if there is no bump. If Axiata countered at, say S$2.15, he would be inclined to buy at S$2.15 to expect a further counter by Konnectivity.
Bandhan Bank (BANDHAN IN)(“BBL”) and GRUH announced together on January 7th that their respective boards have considered and approved a Scheme of Amalgamation where Bandhan Bank will be the acquiring entity and GRUH Finance will become the acquired entity. At the exchange ratio of 568 Bandhan Bank shares per 1000 GRUH Finance shares, GRUH Finance’s price currently translates to a PER and PBV of 51.8x and 12.5x respectively which is significantly higher than the average for its comparable peers (PER=14.9x; PBV=2.0x).
This is a great deal forHousing Development Finance Corporation (HDFC IN)which currently owns 57.8% of GRUH Finance. It will own 15% of the merged entity. Considering HDFC Ltd already owns 19.72% as the promoter of HDFC bank and that RBI does not allow the promoter of one bank to hold more than 10% in another bank as a promoter, HDFC Ltd will have to divest a stake that is at least equivalent to 5% of the merged entity.
This deal is perhaps less good for Bandhan shareholders. GRUH is being purchased expensively, and minorities are getting hit. This is possibly so that the promoter can get closer to the obligation to the RBI to drop his stake to 40%. That ‘excuse’ is widespread in the media but may not bear up under scrutiny.
Travis thinks both names could have further to fall and sees no compelling reason to expect growth to surprise on the previously expected upside as branch openings are frozen. A deal break would not solve that, but a shareholder disentanglement on the Bandhan side would.
As widely expected, Healius’s board rejected the unsolicited and conditional proposal from Jangho Group Co Ltd A (601886 CH) at A$3.25/share.Pricing under the proposal is okay, at best, valuing Healius roughly in sync with Sonic Healthcare (SHL AU), its nearest peer. Optically, the indicative offer is underwhelming, 20% below the recent high in March last year, and below where Jangho was accumulating its stake in early 2016.
Operationally, Healius is not without issue, including increasing salaries, failure to secure key contracts, an inability to retain doctors at its medical centres, and the forced resignation of its CEO two years ago after he was charged by ASIC.
An offer from Jangho would also fall under FIRB’s remit, specifically sensitive patient data in the hands of a foreign owner, and it is up for debate whether maintaining such information in a secure site in Australia (as applied in Jangho’s acquisition of Vision Eye in 2015) will alleviate these concerns.
This deal is unlikely to get up under the current terms following the board rejection, but I do expect Jangho to bump its offer; or a third party to enter the fray. On a risk/reward basis I still tilt positive at a 18% gross spread (and up 7% from the post-rejection closing price) to the indicative offer.
For those who like plain vanilla, PCI announced Pagani Holding (an SPV indirectly owned by Platinum Equity Advisors) had made a S$1.33/share cash offer for the company by way of a scheme. Chuan Hup Holdings (CH SP), which holds 76.7% in PCI, has given an irrevocable undertaking to vote its stake in favour of the scheme resolution. So this is a done deal. The more interesting facet here is that Chuan Hup is currently trading at discount to its net cash after factoring in the proceeds from the sale of PCI shares.
As anticipated in my insight (DNO Closes In On Faroe) last week, DNO ASA (DNO NO)bumped its Offer for Faroe, which has now been declared unconditional. Tendered shares get paid in 14 days. The final closing date of the offer is the 6 February.
The 5.3% bump to GBP 1.60/share shortly followed a prior announcement from DNO which referenced a statement made the previous day by the Norwegian Petroleum Directorate of a 30% reserves downgrade at Faroe’s Oda field from 47.2mn MMboe to 32.7 MMboe.
The Final Offer price represents a premium of 52.4% to Faroe‘s share price of GBP 1.05 at the close of business on 3 April 2018, and values Faroe at ~£641.7mn. Despite open hostilities to the initial offer, Faroe’s board has now accepted the increased Offer and recommends shareholders tender.
DNO now owns or has 76.49% acceptances so can now make preparations to move to delist Faroe. If total acceptances exceed 90% of the voting rights, DNO will exercise its rights to compulsorily acquire the remaining Faroe shares not tendered, also at GBP 1.60/share.
The company bought back 16% of volume in the month (in December), and 15% of rolling 4-week ADV if only the first 20 days were days on which the company bought – which based on execution prices seems likely.
Travis expects a similar rate to continue and expects the lower trading volumes seen in December to continue. The period of excitement is over until Toshiba gives people a reason to get excited.
Travis is not particularly bullish Q3 results or Q4 forecasts for the company and the stock has rebounded perhaps more than the market has off lows. With Apple Inc (AAPL US) guiding suppliers to lower iPhone production yet again, TMC could run into a soft spot.
The key stub assets include South Springs, one of the largest golf resorts in Korea, and brand royalty, each accounting for around 7-8% of NAV. The remaining, immaterial ops include an ad agency, an “Amazon Fresh”-like fresh food delivery start-up, management consulting, dividends, and rent.
This looks like a decent stub-setup, with a likelihood of the discount narrowing from here – typically, the Korean Holdcos trade within a 20-40% discount band – rather than clearing 60%. And there is no tender offer overhang in 2019. But apart from the optics, there are no obvious catalysts at the stub level for the nine-month discount-widening trend to reverse.
Kingboard, which hasn’t been in the news since it sold its 9.6% stake in Cathay Pacific Airways (293 HK) to Qatar Airways back in November 2017, is coming up “expensive” on my monitor, after KBC’s mid-week price outperformance over KBL.
The new news this week is that KBC announced it is acquiring a handful of floors of the Overseas Trust Bank Building here in Hong Kong. Pricing looks okay with reference to property sold nearby, but probably towards the high-end for mid-floor office space in Wan Chai.
This is a connected transaction as the seller of the properties is Hallgain Investments – a vehicle largely owned by senior management of KBC – which owns 39.02% of KBC. The net rental on the properties is $1.35mn or a yield of 0.15%, which hardly augurs a case to go long the stub.
I compiled a summary of the 93 M&A transactions, with a collective deal size of ~US$215bn, published on Smartkarma in 2018, and analysed which sectors attracted the most interest: (Mostly Asia) M&A in 2018: What Was Hot, And What Was Not
The premium for Swire’s As over the Bs – [19 HK/(5* 87 HK)] – continues to increase and is now at its highest since October 2003.
Source: CapIQ; RHS represents HK$mn
I tackled this share class last August (Swire’s Interims and Bifurcating Dual Class) when the premium was 18%. Since September 2015, the two classes of shares can be unified leaving John Swire & Sons with 55% of the equity (& 63.7% of the vote). The pushback then, and now, is why bother? And the HKEx giving permission to Xiaomi Corp (1810 HK) to list with dual-class shares lessens the chance of such a unification.
Logically though, this premium should narrow (eventually one would expect) and investors are betting on this. The $ value traded for the Bs on Wednesday was the highest since mid-December 2017, and the third highest $ value traded in 21 years. And volume for the Bs has been increasing recently, having doubled in size in the past year compared to the 5-year average.
As an aside, Swire’s discount to NAV (adjusting for the privatisation of HAECO) is trading at it narrowest inside a year:
My ongoing series flags large moves (~10%) in CCASS holdings over the past week or so, moves which are often outside normal market transactions. These may be indicative of share pledges. Or potential takeovers. Or simply help understand volume swings.
Often these moves can easily be explained – the placement of new shares, rights issue, movements subsequent to a takeover, amongst others. For those mentioned below, I could not find an obvious reason for the CCASS move.
Offer close date, (failing which) 31-Jan-2019 – Termination Date
C
Source: Company announcements. E = Smartkarma estimates; C =confirmed
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Mitsubishi Corp (8058 JP) is looking to sell 9m shares of Ayala Corporation (AC PM) for approximately US$155m. Post-placement, Mitsubishi Corp will still hold 7.2% of Ayala Corp if the upsize option is not exercised.
The deal scores poorly on our framework owing to its the large deal size relative to its three-month ADV. The company is also slightly more leveraged than its peers. However, it was offset by cheaper valuation and a strong track record.
But, our deal breaker here is the fact that the selldown one year after 2018’s selldown may signal that Mitsubishi Corp. may return to sell more on the market again in the near-term. While Mitsubishi, in the past, has reaffirmed that their partnership with AC will likely continue, it should not serve as a reassurance that it will continue to hold shares in AC.
In absolute terms we see Toyota Motor moving into a top while Tsuruha shows risk of a final low to work into this pair position but has a very compelling bullish chart set up as Toyota fade from resistance.
After a holiday hiatus where markets were slow and somewhat quiet and the number of insights published and read dipped, we resume your regularly scheduled service.
Smartkarma saw just over 110 insights published last week, with an additional 35 published between Friday afternoon and Sunday evening. The pace is picking up.
Across the platform, almost four dozen thematic, macro, and economics pieces were published by 30 insight providers, and two dozen-plus insights were published on Japan and Korea (note that the prior week, Japan was effectively on holiday the whole week).
Take out an ad in a magazine or pay a one of the Wondergirls to post an Instagram photo of herself using our makeup? How do we get Americans and Europeans to want our bubble tea sleeping packs and panda-shaped palettes? All valid questions for K-beauty companies in the midst of a global expansion.
Source: Internet – Chosungah Beauty
Korean beauty products powerhouse, Amorepacific is going through some growing pains at the moment. In the 3Q18 the group reported a YoY sales increase of 6% but OP tumbled 24% due to increased personnel and marketing costs. In a management policy statement last week, Chairman Suh outlined the problems the group is encountering as it copes with reaching customers in a world where online and offline customer interaction is changing.
The stub is now trading at its widest discount to NAV in at least 3 years and has reached 22% discount to its Sum of the Parts NAV by my calculations. This level represents a level 1.5 standard deviations below its long-term average and also offers compelling value.
In this insight I will detail:
an actionable market-neutral trade idea
an analysis of the various business units of Amorepacific
reasons for the under-performance of Amorepacific parent and a sign of a rebound
a recap of ALL my stub trade ideas on Smartkarma, including track record of performance
Prored Partners is a business consulting company founded in 2009 by the CEO, Mr Satani (who retains 60% of the equity). Prior to setting up Prored, he worked as a business consultant at a consultancy firm subsequently acquired by PwC Consulting. The shares were registered on the Mother’s exchange at the end of July 2018. Unfortunately, it is a micro-cap (market cap Y24bn) but should be of interest to those looking for a very fast growing small cap name. It trades on 17x our forecasts for this year to 10/19. The company has been growing at a fast pace over the last few years. We expect this strong rate of growth to continue, see below.
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INTERIM UPDATE – Pasona Group (2168 JP) released their second-quarter results on January 11th. This Insight updates our recent Insight Pasona Non-Grata and re-iterates our buy recommendation. Pasona shares have risen by 15% this year to the intra-say high last Friday. Our target price remains ¥1,500 – a further 18% upside from today’s level.
The shares have underperformed TOPIX by 25% over the last 12 months and in terms of book, see chart below, are trading at near 5 year lows. Earnings for 3/19 were revised down after 1Q (operating profit from Y75bn to Y66bn due to write-off in the rolling stock division). The current forecast in our view is achievable and next year, in the absence of further write-off and growth in other parts of the business, we would expect operating profits to recover to the Y80bn level. This is a big conglomerate with many moving parts, some good and some not so good, but there is a price for everything and given where the shares are now, and where we think earnings are going, we are happy to buy here with the company trading at 0.9x book and the shares yielding just under 3%.
While the amount of real estate needed by data centres is small in comparison with the volumes required for e-commerce, we are seeing that data centres are also impacting the market for industrial real estate in locations around the world.
Cloud and mobile computing, plus the Internet of Things are driving demand in the data center industry. According to Cushman & Wakefield, revenue growth at multi-tenant data centres will be 12% to 14% each year for the next two to five years.
The data centres industry is having, and is positioned to continue to have, a material positive impact on pricing for industrial real estate in many markets around the world.
Real estate firm Cushman & Wakefield evaluated ten Asia Pacific markets for a range of factors. Singapore emerged as one of the two most attractive Asia Pacific locations for data centres. Over the past five months, Singapore has seen more than its share of significant data centre announcements. Most recently, Mapletree Industrial Trust disclosed that it would lease one of its buildings to global data centre company Equinix for 25 years.
Following Yaskawa’s second downward revision at 3Q earnings, we are shifting towards a more positive stance on the stock, even from a long-term perspective. We had been negative on the stock from late 2017 and as the stock tumbled we maintained that it was still too early buy for the long-term, though by mid-late 2018 we did (incorrectly) feel that there was the potential for a short term rally due to the severity of underperformance.
With the stock selling off harshly in the recent market fall but rebounding following its weak earnings we feel that much of the bad news is now priced in and expectations have corrected to the point where this is once again interesting on the long side.
Credit demand is deteriorating; credit risks are rising; Eurodollar costs are edging higher
A de-escalation in trade tensions and a Fed pause could ease the pain
Will Fed recently turning more dovish (possible shift to slower QT & Fed rate cut in 2019?) + concomitant USD drift provide sufficient respite to put a floor under risk assets?
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2018 – TOP 30 PERFORMING LARGE CAPS – The best performing stock in Japan over the last twelve-months rose by an average of 49%, with three companies more than doubling. Only one traditional manufacturing company – Toyo Seikan (5901 JP) – features on a list otherwise led by Healthcare (5), Retail (3), Real Estate (3), Restaurants (3), Transportation (3), and Other Consumer Products (3). Two companies – Daikyo (8840 JP) and NTT Urban Development (8933 JP) are in the process of being acquired. Four companies are currently ‘Overbought (Relative Price Score >4), ‘Fully Priced’ and have a declining Results/Revision Score – Workman (7564 JP), Fancl (4921 JP), Systena (2317 JP), and Kikkoman (2801 JP), and are candidates for profit-taking/short selling, as are Goldwin (8111 JP) and Familymart Uny (8028 JP) based on their Relative Price Scores alone.
2018 – BOTTOM 30 PERFORMING LARGE CAPS – The worst-performing list is led by Machinery (8), Technology Hardware (6), and Electrical Equipment (3) sector companies. ‘Malfeasance’ is the thread connecting Suruga Bank (8358 JP), Tateru (1435 JP), Rizap (2928 JP), KYB (7242 JP), and Fujikura (5803 JP). Only seven companies on the list have positive Results/Revision Scores; the average one-year change in that score was -15. Seven of the top-ten declining stocks were loss-making as of the most recent trailing-twelve-months. Only one stock – Harmonic Drive Systems (6324 JP) remains ‘Fully Priced’ and only one – Hosiden Corp (6804 JP) – is now in our ‘Deep Value’ category.
In the DETAIL below, we review the outlier stock in terms of our Relative Price Score/Results & Revision Score matrix which highlights outliers in four categories – Peak Growth, Contrarian Sell, Contrarian Buy, and Ex-Growth/Turnaround – looking at the performance of 2018’s outliers as well as identifying each category’s current outliers. We conclude with tables of the best and worst performers in each of our thirty market sectors. We wish all investors in Japan ‘tight lines’ in 2019.
NOTES ON SCORING METHODOLOGY
The Results/Revision Score (RRS) is the average of the Japan Analytics’ Results Score and Forecasts/Revision Score for each company: –
The Results Score is calculated quarterly since 2008, using the most recent eight quarters of company data for revenues, operating income and operating margin and measure the rate, degree and consistency of change for each metric. The Results Score has a maximum of +30 and a minimum of -30 for each period.
The Forecast/Revision Score is based on Annual and Interim period company forecasts and compares changes from previous forecasts as well as against the trailing twelve-month (TTM) or previous first-half results, with annual forecasts being double-weighted. This score also has a maximum of +30 and a minimum of -30 for each period.
The Relative Price Score (RPS) measures the difference between the current relative share price and the mean absolute deviation of relative prices since listing which allows for a comparison of all companies on the same scale. Deviations in the top or bottom percentiles of historical observations of Relative Price Score are deemed to be ‘Overbought’ (OB) and ‘Oversold’ (OS), respectively. The company ‘thresholds’ are ‘+4’ for Overbought and ‘-2’ of Oversold.
Lastly, valuation ‘QUADrants’ group companies into the top and bottom 20% of TTM PER and PBR ranges and categorise outliers in both into four quadrants: “FP” = Fully Priced, “SP” = Speculative, “MT” = Mature and “DV” = Deep Value. “NE’ is assigned to companies which are loss-making in the most the recent trailing-twelve-month period.
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Value made a comeback, but growth remains core: In May 2018, we examined the divide between value and growth stocks, ( Notes from the Silk Road: Small-Mid Cap Screening for Zulu Warriors). As Q3 unfolded, this eventuated with a +7.5% reversal in favour of value stocks, only to see growth resume dominance in October and November.
The optimal value/growth style dynamic: We feel exposure to growth at a reasonable price (GARP) coupled with a healthy FCF yield (via our amended Zulu Screen) should provide some healthy medium to long term returns for investors.
The Screen’s Risk: The Zulu Screen relies on analyst estimates. When market sentiment is weak and forecasts are not amended in a timely manner, the screen is susceptible to mis-selection.
Q2 2018 screening list succumbed to volatile markets: This was seen in our May screen with our list posting on average a 30% decline in share price, relative to the broader Asia-Pacific Ex-Japan declining 13.6% and the Asia Pacific index by 11.8%.
Are there reasons for the underperformance? 10 of the 19 stocks in the May screen were from Hong Kong, which saw the Hang Seng Index (HIS) decline 16% over the same period. The decrease seems due to concern over trade wars and doubts about the China economy. Our key approach to stock selection is to take a medium-to-long-term view as well as focus on quality ranked stocks relative to their peers. This is highlighted via the average stock rank of the group declining only 15.8% from 89.6 to 75.5 points.
Our Q1 2019 screen selected only 9 stocks. Of the 9 stocks identified, the average PEG Ratio was 0.4x, the price to FCF yield was 11% and ROCE was 25%. Stocks were selected from Australia, New Zealand, India, Korea, Japan, Hong Kong, Taiwan and Singapore. Cowell Fashion Company from Korea was the only remaining stock from our May screening.
NEW YEAR RALLY – From the December 25th’s lows of 8% by number and 11% by value, the percentages of Japanese stocks above the weighted sum of moving averages have recovered to 14% by number and 20% by value – just on the ‘buying zone’ line. As we expected, the Total Market Value has rallied 8.7% and looks to have some further to run, especially if the Yen reverses some of its recent strength. The Bank of Japan provided a ‘helping hand’ on both 4th and 10th January, the only days this year so far on which the market declined.
SECTORS
LEGEND: The ‘sparklines’ show the three-year trend in the weighted percentage above moving average relative to the Market Composite and the ‘STDev’ column is a measure of the variability of that relative measure. The table also provides averages for the breaks above and breaks below and the positive and negative crossovers.
SECTOR BREAKDOWN – The top six sectors measured by the percentage above the weighted average of 5-240 Days remain, predictably, domestic and defensive – REITs, Information Technology, Media and Utilities continue from our previous review with Healthcare and Transportation replacing Food, Beverages and Tobacco and Internet Content & Services. Equally predictable is the bottom half-dozen. Banks, Autos, Metals, Electrical Equipment, and Chemicals remain from 23rd December Moving Average Outliers Insight, with Building Materials replacing Non-Bank Finance. Over the last trading five days, however, there has been a noticeable reversal with Autos, Electrical Equipment, and Machinery all over ’55’ while Other Consumer Products, Restaurants, Telecommunications and Food, Beverages & Tobacco are all below ’40’.
COMPANIES
COMPANY MOVING AVERAGE OUTLIERS – As with the market and sectors, our moving average outlier indicator uses a weighted sum of the share price relative to its 5-day, 20-day, 60-day, 120 day and 240-day moving averages. Extreme values are weighted sums greater than 100% and less than -100%. We would caution that this indicator is best used for timing shorter-term reversals and, in many cases, higher highs and lower lows will be seen.
Source: Japan Analytics
THE +/-100% CLUB – The number of extreme negative outliers reached a peak for 1,352 on December 25th and has since returned to ‘normal’ levels. We suggested in the previous Insight in this series that such an extreme number of extremes was a signal of a short-term bottom, which, so far, has proved to be correct.
In the DETAIL section below, we highlight the current top and bottom twenty-five larger capitalisation outliers as well as those companies that have seen the most significant positive and negative changes in their outlier percentage in the last two weeks and provide short comments on companies of particular note.
CURRENCY DRIVER – The ¥/US$ cross rate has strengthened by 5.3% since the recent US$ peak of ¥114.20 on November 12th 2018, which has led some FX and technical specialists (including Thomas Schroeder here on Smartkarma) to call for a more sustained bout of US$ weakness. A period of Yen strength is far from a consensus forecast for most Japanese equity investors, and historically a stronger Yen has resulted in a weaker Japanese equity market. The three Yen ‘peaks’ highlighted by the vertical lines in the chart above all coincided with medium-term lows in TOPIX.
Source: Japan Analytics
¥ < 100 – If we isolate only the 1,484 days in the last forty years when the USDJPY cross has traded above ¥100, the average TOPIX index is 975, which would imply 36% downside for Japanese equities were the Yen to rise above ¥90. Nevertheless, the three Yen peaks we have isolated have proved to be excellent entry points with the subsequent trough-to-peak performance being 28% in 1995~1996, 108% in 2011~2015 and 48% in 2016~2018. Long-term Japan ‘bulls’ should welcome the coming US dollar bear market.
Source: Japan Analytics
EARNINGS DRIVER – The USDJPY cross remains an important driver of earnings and earnings momentum in Japan. As measured by our Results and Revision Scores, there is a good correlation between the trends in both scores and the year-on-year change in USDJPY lagged by six months, especially around significant turning points for the cross rate (marked by the vertical lines). The Results and Revision Scores have declined since January 2018 in line with the stronger Yen. A move up to above the ¥90 level would, without doubt, take both scores into negative territory again- the only question being, are we replaying 2009/10 or 2016/17?
Source: Japan Analytics
CURRENCY CORRELATIONS – In the DETAIL below, we list the larger capitalisation companies whose share price performance most closely correlated with the dollar-yen cross rate. As a preview, the most correlated larger capitalisation company that has been listed since 2006 is, unsurprisingly, Toyota Motor (7203 JP).
Source: Japan Analytics
THE FOREIGN CURRENCY TRANSLATION ADJUSTMENT – We also go one step further and use the ‘Foreign Currency Translation Adjustment’ that forms part of Other Comprehensive Income (which has been disclosed in corporate balance sheets and income statements since 2001 and 2011, respectively) to measure the extent of each company’s global business and the embedded currency risk. The correlation of the aggregate FCTA for all non-financial companies is, as would be expected, reasonably tight after adding two-month lag for the reporting cycle. As these amounts are directly deducted from Net Assets for companies adopting JGAAP and from Shareholders’ Equity for those companies reporting under SEC or IFRS standards, the impact on valuations cannot be ignored.
Ideally, own Bandhan Bank (BANDHAN IN) on a deal break, or wait for this deal and its spread to season a bit.
It’s still not clear that a bump or counterbid will be forthcoming in the M1 Ltd (M1 SP) deal, but at S$2.07, the risks are better than they were higher.
Healius (HLS AU) (unsurprisingly) rejects the indicative offer but Jangho is not out of the picture; nor is the possibility of a third party.
Douglas Kim revisited the news that Kim Jung-Joo wants to sell his stake in the Nexon Group. Travis Lundy also chimed in with his read of the situation. The key questions are whether Kim Jung-Ju would sell NXC (and NXMH) – which holds a 48% stake in Nexon Co – as reported by the local press, or whether NXC and NXMH would sell their stakes in Japan-listed Nexon. The implication being that if they sold the stake in Nexon, it would mean buyers would get a large stake in a single company, whereas there is a bunch of other stuff floating around in NXC and its subsidiaries.
The other question is whether Tencent Holdings (700 HK) or another buyer buying NXC would trigger a mandatory Tender Offer for the shares in Nexon in Japan. The letter of the law in the TOB Rules would indicate not, but Travis reckons Yes. If the Kim family sold their stake in NXC Corporation to a buyer, he thinks it is HIGHLY likely that the buyer would be obliged (by Japanese authorities) to conduct a tender offer for the shares of Nexon that they wanted to buy.
As a trade, this does not look like a great risk arb bet (where you make a bet that a company will get taken over) at first glance if the total trade for NXC is going to be ₩10tn. It would be a good trade if the ₩10tn number were made up of say ₩3tn of assets (in NXC), then the assumption that the current market price adding ₩7tn of assets to arrive at that total of ₩10tn would be an “estimate” of current value rather than an estimate of what it would take to get the deal done, and current market value is a significant premium to book (where NXC has heretofore reported its financials and Nexon). In that case, one might imagine that a bidding war could result in a higher price for Nexon, and an easy exit at ¥2000+/share.
Either way it would be a chunk of change which would make many buyers – even buyers from China thought to be quite wealthy – balk. A priori, Travis would want to own Nexon vs Tencent, Electronic Arts (EA US), Netease Inc (Adr) (NTES US), and others, but it is not necessarily a comfortable trade.
Konnectivity Pte. Ltd officially announced the launch of its Offer to by M1 Ltd (M1 SP). The Close is 4 February, but the Offer is not Final.
If you think there will not be a bump and the deal may or may not go through at S$2.06, unless you are so big that your selling would dramatically impact the price, the right trade here is to sell in the market.
If you think there is a possibility of a bump as the Offeror seeks to a) get Axiata to tender and b) to get everyone else to tender so they can delist and squeeze out minorities, but if no bump there is a quasi-certainty that Konnectivity Pte will gain 50%+1 share at S$2.06, then buying at S$2.07 is not a bad trade depending on your likelihood of bump and bump price.
If Konnectivity bump, they have two choices: Bump a little bit and declare final so that everyone who played for a bump decides to sell (that might mean a bump to S$2.15 or so); or bump a lot and get Axiata out.
Travis believes a bump is certainly possible but also thinks this deal gets done if there is no bump. If Axiata countered at, say S$2.15, he would be inclined to buy at S$2.15 to expect a further counter by Konnectivity.
Bandhan Bank (BANDHAN IN)(“BBL”) and GRUH announced together on January 7th that their respective boards have considered and approved a Scheme of Amalgamation where Bandhan Bank will be the acquiring entity and GRUH Finance will become the acquired entity. At the exchange ratio of 568 Bandhan Bank shares per 1000 GRUH Finance shares, GRUH Finance’s price currently translates to a PER and PBV of 51.8x and 12.5x respectively which is significantly higher than the average for its comparable peers (PER=14.9x; PBV=2.0x).
This is a great deal forHousing Development Finance Corporation (HDFC IN)which currently owns 57.8% of GRUH Finance. It will own 15% of the merged entity. Considering HDFC Ltd already owns 19.72% as the promoter of HDFC bank and that RBI does not allow the promoter of one bank to hold more than 10% in another bank as a promoter, HDFC Ltd will have to divest a stake that is at least equivalent to 5% of the merged entity.
This deal is perhaps less good for Bandhan shareholders. GRUH is being purchased expensively, and minorities are getting hit. This is possibly so that the promoter can get closer to the obligation to the RBI to drop his stake to 40%. That ‘excuse’ is widespread in the media but may not bear up under scrutiny.
Travis thinks both names could have further to fall and sees no compelling reason to expect growth to surprise on the previously expected upside as branch openings are frozen. A deal break would not solve that, but a shareholder disentanglement on the Bandhan side would.
As widely expected, Healius’s board rejected the unsolicited and conditional proposal from Jangho Group Co Ltd A (601886 CH) at A$3.25/share.Pricing under the proposal is okay, at best, valuing Healius roughly in sync with Sonic Healthcare (SHL AU), its nearest peer. Optically, the indicative offer is underwhelming, 20% below the recent high in March last year, and below where Jangho was accumulating its stake in early 2016.
Operationally, Healius is not without issue, including increasing salaries, failure to secure key contracts, an inability to retain doctors at its medical centres, and the forced resignation of its CEO two years ago after he was charged by ASIC.
An offer from Jangho would also fall under FIRB’s remit, specifically sensitive patient data in the hands of a foreign owner, and it is up for debate whether maintaining such information in a secure site in Australia (as applied in Jangho’s acquisition of Vision Eye in 2015) will alleviate these concerns.
This deal is unlikely to get up under the current terms following the board rejection, but I do expect Jangho to bump its offer; or a third party to enter the fray. On a risk/reward basis I still tilt positive at a 18% gross spread (and up 7% from the post-rejection closing price) to the indicative offer.
For those who like plain vanilla, PCI announced Pagani Holding (an SPV indirectly owned by Platinum Equity Advisors) had made a S$1.33/share cash offer for the company by way of a scheme. Chuan Hup Holdings (CH SP), which holds 76.7% in PCI, has given an irrevocable undertaking to vote its stake in favour of the scheme resolution. So this is a done deal. The more interesting facet here is that Chuan Hup is currently trading at discount to its net cash after factoring in the proceeds from the sale of PCI shares.
As anticipated in my insight (DNO Closes In On Faroe) last week, DNO ASA (DNO NO)bumped its Offer for Faroe, which has now been declared unconditional. Tendered shares get paid in 14 days. The final closing date of the offer is the 6 February.
The 5.3% bump to GBP 1.60/share shortly followed a prior announcement from DNO which referenced a statement made the previous day by the Norwegian Petroleum Directorate of a 30% reserves downgrade at Faroe’s Oda field from 47.2mn MMboe to 32.7 MMboe.
The Final Offer price represents a premium of 52.4% to Faroe‘s share price of GBP 1.05 at the close of business on 3 April 2018, and values Faroe at ~£641.7mn. Despite open hostilities to the initial offer, Faroe’s board has now accepted the increased Offer and recommends shareholders tender.
DNO now owns or has 76.49% acceptances so can now make preparations to move to delist Faroe. If total acceptances exceed 90% of the voting rights, DNO will exercise its rights to compulsorily acquire the remaining Faroe shares not tendered, also at GBP 1.60/share.
The company bought back 16% of volume in the month (in December), and 15% of rolling 4-week ADV if only the first 20 days were days on which the company bought – which based on execution prices seems likely.
Travis expects a similar rate to continue and expects the lower trading volumes seen in December to continue. The period of excitement is over until Toshiba gives people a reason to get excited.
Travis is not particularly bullish Q3 results or Q4 forecasts for the company and the stock has rebounded perhaps more than the market has off lows. With Apple Inc (AAPL US) guiding suppliers to lower iPhone production yet again, TMC could run into a soft spot.
The key stub assets include South Springs, one of the largest golf resorts in Korea, and brand royalty, each accounting for around 7-8% of NAV. The remaining, immaterial ops include an ad agency, an “Amazon Fresh”-like fresh food delivery start-up, management consulting, dividends, and rent.
This looks like a decent stub-setup, with a likelihood of the discount narrowing from here – typically, the Korean Holdcos trade within a 20-40% discount band – rather than clearing 60%. And there is no tender offer overhang in 2019. But apart from the optics, there are no obvious catalysts at the stub level for the nine-month discount-widening trend to reverse.
Kingboard, which hasn’t been in the news since it sold its 9.6% stake in Cathay Pacific Airways (293 HK) to Qatar Airways back in November 2017, is coming up “expensive” on my monitor, after KBC’s mid-week price outperformance over KBL.
The new news this week is that KBC announced it is acquiring a handful of floors of the Overseas Trust Bank Building here in Hong Kong. Pricing looks okay with reference to property sold nearby, but probably towards the high-end for mid-floor office space in Wan Chai.
This is a connected transaction as the seller of the properties is Hallgain Investments – a vehicle largely owned by senior management of KBC – which owns 39.02% of KBC. The net rental on the properties is $1.35mn or a yield of 0.15%, which hardly augurs a case to go long the stub.
I compiled a summary of the 93 M&A transactions, with a collective deal size of ~US$215bn, published on Smartkarma in 2018, and analysed which sectors attracted the most interest: (Mostly Asia) M&A in 2018: What Was Hot, And What Was Not
The premium for Swire’s As over the Bs – [19 HK/(5* 87 HK)] – continues to increase and is now at its highest since October 2003.
Source: CapIQ; RHS represents HK$mn
I tackled this share class last August (Swire’s Interims and Bifurcating Dual Class) when the premium was 18%. Since September 2015, the two classes of shares can be unified leaving John Swire & Sons with 55% of the equity (& 63.7% of the vote). The pushback then, and now, is why bother? And the HKEx giving permission to Xiaomi Corp (1810 HK) to list with dual-class shares lessens the chance of such a unification.
Logically though, this premium should narrow (eventually one would expect) and investors are betting on this. The $ value traded for the Bs on Wednesday was the highest since mid-December 2017, and the third highest $ value traded in 21 years. And volume for the Bs has been increasing recently, having doubled in size in the past year compared to the 5-year average.
As an aside, Swire’s discount to NAV (adjusting for the privatisation of HAECO) is trading at it narrowest inside a year:
My ongoing series flags large moves (~10%) in CCASS holdings over the past week or so, moves which are often outside normal market transactions. These may be indicative of share pledges. Or potential takeovers. Or simply help understand volume swings.
Often these moves can easily be explained – the placement of new shares, rights issue, movements subsequent to a takeover, amongst others. For those mentioned below, I could not find an obvious reason for the CCASS move.
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.
Despite a shaky 2018 Q4 market and the disappointing Softbank Corp (9434 JP)‘s IPO, we have been getting a steady stream of newsflow on upcoming IPOs.
Starting with upcoming IPOs, Chengdu Expressway Company Limited (1785 HK) and Weimob.com (2013 HK) will be listing next week on Tuesday, 15th January. Weimob was priced at the low end of its price range while Chengdu Expressway’s IPO was at a fixed price of HK$2.20. We are bearish on both IPOs. Weimob is overly reliant on Tencent for its SaaS and Ads business and, at the same time, Tencent will only own less than 3% stake after listing. Whereas Chengdu Expressway has been a well-managed company but valuation implies limited upside. Trading liquidity will likely remain tepid as like Qilu Expressway Co Ltd (1576 HK) which listed mid last year.
In the pipeline, we are hearing that Kepei Education (KEPEI HK) will likely open its book next Monday. We will be following up with a note on valuation. In other IPOs that are coming in this quarter, Helenbergh China and Zhongliang, both property developers, are looking to IPO in this quarter. Viva Biotech Shanghai Ltd (1577881D HK) is also looking to list in Hong Kong Q2 while Urban Commons, a US property developer, is planning a US$500m REIT IPO in Singapore.
Activity seems healthy for the ECM space, but sentiment has not been the best as seen from Xiaomi’s high profile IPO that took a hit just as its lockup expired. Its share price has corrected from a high of HK$22.20 to just above HK$10.34 this Friday. This should not have been a big surprise since many have already pointed out that its valuation should really have been closer to that of a hardware business and we pointed out that the IPO’s trajectory would likely be similar to Razer.
This reminds us of a particular listing last year, Razer Inc (1337 HK) , and, in fact, both bear quite a handful of similarities. Strong portfolio of investors, hardware business with software capabilities, expensive valuations, and etc. The stock did well at first but has come back down to earth since then.
Accuracy Rate:
Our overall accuracy rate is 72% for IPOs and 64% for Placements
(Performance measurement criteria is explained at the end of the note)
New IPO filings
China Tobacco International (Hong Kong, US$100m)
China East Education (Hong Kong, US$400m)
Ebang International (Hong Kong, re-filed)
MicuRx Pharma (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.
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We noted in Ten Years On – Asia Outperforms Advanced Economies Asia’s economies and companies have outperformed advanced country peers in the ten years to 2017. Growing by 6.8%, real, through the crisis the region is 188% larger in US dollar terms while US dollar per capita incomes 170% higher compared with 2007. In this note we argue even though Asian stock markets have underperformed since 2010 and the bulk of global capital flows have gone to advanced countries, Asia’s time is coming. Valuations are cheap. Growth fundamentals strong. There are few external or internal imbalances. Macroeconomic management has been better than in advanced economies and the scope to ease policy to ward off headwinds in 2019 is greater. China has already started.
On November 6th, NTT (Nippon Telegraph & Telephone) (9432 JP)announced a ¥150 billion buyback program, and NTT Docomo Inc (9437 JP)announced that its very large ¥600 billion buyback program presented days before would be done through a single below-market-price Tender Offer where NTT was expected to be the only seller. That left NTT buying shares on market and NTT Docomo buying shares off-market in the immediate future.
The Tender Offer went through as planned (though NTT sold a tiny trifle less than expected).
On January 7th, NTT announced it had repurchased 8.4mm shares for ¥38.8 billion, leaving only ¥15.35 billion to repurchase in this program. That is worth about 7-8 trading days of buying. The buyback is therefore almost done.
A hint as to the future came in a Nikkei article in December. It may be many months before we see more NTT on-market buybacks.
In this report, we will explain our strategy for trading NCsoft Corp (036570 KS) shares in 2019. NCsoft is expected to launch five new mobile games in 2019 including “Lineage 2M”, “AION 2”, “Blade & Soul 2”, “Blade & Soul M”, and “Blade & Soul S”. These five new games are based on its existing MMORPG franchise games. The company is hoping to release all five of these new mobile games in 1H 2019.
Lineage 2M, which is perhaps the most anticipated mobile game among these five games, is expected to be launched in 2Q19. Traders are starting to gear up for the launch of this important game in the coming months. Many investors are likely to take the “buy on rumor and sell on news” strategy, which in this case the news would refer to the launch of the Lineage 2M game.
Nonetheless, in this case, we believe that because many investors may be getting ready to sell NCsoft near the launch date of Lineage 2M, many savvy investors are likely to sell their shares a few days/weeks earlier than the actual launch date. At this point, the most likely period as to when Lineage 2M may be launched is in May 2019. As a result, a good time to consider selling NCsoft may be sometime in March/April 2019.
Japan Hotel Reit Investment (8985 JP) (JHR) plans to raise around US$300m/JPY33bn to part fund the acquisition of Hilton properties located in Tokyo and Osaka.
We have previously covered four other capital raising by JHR:
The prior-deals have given mixed bag results over the short-term. In this insight, we will run the deal through our framework and analyse past performance.
In this week’s GER M&A wrap, we highlight the dwindling likelihood of a follow-on deal for Don Quijote Holdings (7532 JP) , which is now trading below terms. Secondly, we take a contrarian view on the M1 Ltd (M1 SP) deal and contend there is less likely to be a bidding war. Finally, we update on rejected by Healius (HLS AU) and provide a comprehensive list of upcoming catalysts for near-term M&A deals.
The rest of our event-driven research can be found below.
Best of luck for the new week – Rickin, Venkat and Arun
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After a holiday hiatus where markets were slow and somewhat quiet and the number of insights published and read dipped, we resume your regularly scheduled service.
Smartkarma saw just over 110 insights published last week, with an additional 35 published between Friday afternoon and Sunday evening. The pace is picking up.
Across the platform, almost four dozen thematic, macro, and economics pieces were published by 30 insight providers, and two dozen-plus insights were published on Japan and Korea (note that the prior week, Japan was effectively on holiday the whole week).
Take out an ad in a magazine or pay a one of the Wondergirls to post an Instagram photo of herself using our makeup? How do we get Americans and Europeans to want our bubble tea sleeping packs and panda-shaped palettes? All valid questions for K-beauty companies in the midst of a global expansion.
Source: Internet – Chosungah Beauty
Korean beauty products powerhouse, Amorepacific is going through some growing pains at the moment. In the 3Q18 the group reported a YoY sales increase of 6% but OP tumbled 24% due to increased personnel and marketing costs. In a management policy statement last week, Chairman Suh outlined the problems the group is encountering as it copes with reaching customers in a world where online and offline customer interaction is changing.
The stub is now trading at its widest discount to NAV in at least 3 years and has reached 22% discount to its Sum of the Parts NAV by my calculations. This level represents a level 1.5 standard deviations below its long-term average and also offers compelling value.
In this insight I will detail:
an actionable market-neutral trade idea
an analysis of the various business units of Amorepacific
reasons for the under-performance of Amorepacific parent and a sign of a rebound
a recap of ALL my stub trade ideas on Smartkarma, including track record of performance
Prored Partners is a business consulting company founded in 2009 by the CEO, Mr Satani (who retains 60% of the equity). Prior to setting up Prored, he worked as a business consultant at a consultancy firm subsequently acquired by PwC Consulting. The shares were registered on the Mother’s exchange at the end of July 2018. Unfortunately, it is a micro-cap (market cap Y24bn) but should be of interest to those looking for a very fast growing small cap name. It trades on 17x our forecasts for this year to 10/19. The company has been growing at a fast pace over the last few years. We expect this strong rate of growth to continue, see below.
We noted in Ten Years On – Asia Outperforms Advanced Economies Asia’s economies and companies have outperformed advanced country peers in the ten years to 2017. Growing by 6.8%, real, through the crisis the region is 188% larger in US dollar terms while US dollar per capita incomes 170% higher compared with 2007. In this note we argue even though Asian stock markets have underperformed since 2010 and the bulk of global capital flows have gone to advanced countries, Asia’s time is coming. Valuations are cheap. Growth fundamentals strong. There are few external or internal imbalances. Macroeconomic management has been better than in advanced economies and the scope to ease policy to ward off headwinds in 2019 is greater. China has already started.
On November 6th, NTT (Nippon Telegraph & Telephone) (9432 JP)announced a ¥150 billion buyback program, and NTT Docomo Inc (9437 JP)announced that its very large ¥600 billion buyback program presented days before would be done through a single below-market-price Tender Offer where NTT was expected to be the only seller. That left NTT buying shares on market and NTT Docomo buying shares off-market in the immediate future.
The Tender Offer went through as planned (though NTT sold a tiny trifle less than expected).
On January 7th, NTT announced it had repurchased 8.4mm shares for ¥38.8 billion, leaving only ¥15.35 billion to repurchase in this program. That is worth about 7-8 trading days of buying. The buyback is therefore almost done.
A hint as to the future came in a Nikkei article in December. It may be many months before we see more NTT on-market buybacks.
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CURRENCY DRIVER – The ¥/US$ cross rate has strengthened by 5.3% since the recent US$ peak of ¥114.20 on November 12th 2018, which has led some FX and technical specialists (including Thomas Schroeder here on Smartkarma) to call for a more sustained bout of US$ weakness. A period of Yen strength is far from a consensus forecast for most Japanese equity investors, and historically a stronger Yen has resulted in a weaker Japanese equity market. The three Yen ‘peaks’ highlighted by the vertical lines in the chart above all coincided with medium-term lows in TOPIX.
Source: Japan Analytics
¥ < 100 – If we isolate only the 1,484 days in the last forty years when the USDJPY cross has traded above ¥100, the average TOPIX index is 975, which would imply 36% downside for Japanese equities were the Yen to rise above ¥90. Nevertheless, the three Yen peaks we have isolated have proved to be excellent entry points with the subsequent trough-to-peak performance being 28% in 1995~1996, 108% in 2011~2015 and 48% in 2016~2018. Long-term Japan ‘bulls’ should welcome the coming US dollar bear market.
Source: Japan Analytics
EARNINGS DRIVER – The USDJPY cross remains an important driver of earnings and earnings momentum in Japan. As measured by our Results and Revision Scores, there is a good correlation between the trends in both scores and the year-on-year change in USDJPY lagged by six months, especially around significant turning points for the cross rate (marked by the vertical lines). The Results and Revision Scores have declined since January 2018 in line with the stronger Yen. A move up to above the ¥90 level would, without doubt, take both scores into negative territory again- the only question being, are we replaying 2009/10 or 2016/17?
Source: Japan Analytics
CURRENCY CORRELATIONS – In the DETAIL below, we list the larger capitalisation companies whose share price performance most closely correlated with the dollar-yen cross rate. As a preview, the most correlated larger capitalisation company that has been listed since 2006 is, unsurprisingly, Toyota Motor (7203 JP).
Source: Japan Analytics
THE FOREIGN CURRENCY TRANSLATION ADJUSTMENT – We also go one step further and use the ‘Foreign Currency Translation Adjustment’ that forms part of Other Comprehensive Income (which has been disclosed in corporate balance sheets and income statements since 2001 and 2011, respectively) to measure the extent of each company’s global business and the embedded currency risk. The correlation of the aggregate FCTA for all non-financial companies is, as would be expected, reasonably tight after adding two-month lag for the reporting cycle. As these amounts are directly deducted from Net Assets for companies adopting JGAAP and from Shareholders’ Equity for those companies reporting under SEC or IFRS standards, the impact on valuations cannot be ignored.
Ideally, own Bandhan Bank (BANDHAN IN) on a deal break, or wait for this deal and its spread to season a bit.
It’s still not clear that a bump or counterbid will be forthcoming in the M1 Ltd (M1 SP) deal, but at S$2.07, the risks are better than they were higher.
Healius (HLS AU) (unsurprisingly) rejects the indicative offer but Jangho is not out of the picture; nor is the possibility of a third party.
Douglas Kim revisited the news that Kim Jung-Joo wants to sell his stake in the Nexon Group. Travis Lundy also chimed in with his read of the situation. The key questions are whether Kim Jung-Ju would sell NXC (and NXMH) – which holds a 48% stake in Nexon Co – as reported by the local press, or whether NXC and NXMH would sell their stakes in Japan-listed Nexon. The implication being that if they sold the stake in Nexon, it would mean buyers would get a large stake in a single company, whereas there is a bunch of other stuff floating around in NXC and its subsidiaries.
The other question is whether Tencent Holdings (700 HK) or another buyer buying NXC would trigger a mandatory Tender Offer for the shares in Nexon in Japan. The letter of the law in the TOB Rules would indicate not, but Travis reckons Yes. If the Kim family sold their stake in NXC Corporation to a buyer, he thinks it is HIGHLY likely that the buyer would be obliged (by Japanese authorities) to conduct a tender offer for the shares of Nexon that they wanted to buy.
As a trade, this does not look like a great risk arb bet (where you make a bet that a company will get taken over) at first glance if the total trade for NXC is going to be ₩10tn. It would be a good trade if the ₩10tn number were made up of say ₩3tn of assets (in NXC), then the assumption that the current market price adding ₩7tn of assets to arrive at that total of ₩10tn would be an “estimate” of current value rather than an estimate of what it would take to get the deal done, and current market value is a significant premium to book (where NXC has heretofore reported its financials and Nexon). In that case, one might imagine that a bidding war could result in a higher price for Nexon, and an easy exit at ¥2000+/share.
Either way it would be a chunk of change which would make many buyers – even buyers from China thought to be quite wealthy – balk. A priori, Travis would want to own Nexon vs Tencent, Electronic Arts (EA US), Netease Inc (Adr) (NTES US), and others, but it is not necessarily a comfortable trade.
Konnectivity Pte. Ltd officially announced the launch of its Offer to by M1 Ltd (M1 SP). The Close is 4 February, but the Offer is not Final.
If you think there will not be a bump and the deal may or may not go through at S$2.06, unless you are so big that your selling would dramatically impact the price, the right trade here is to sell in the market.
If you think there is a possibility of a bump as the Offeror seeks to a) get Axiata to tender and b) to get everyone else to tender so they can delist and squeeze out minorities, but if no bump there is a quasi-certainty that Konnectivity Pte will gain 50%+1 share at S$2.06, then buying at S$2.07 is not a bad trade depending on your likelihood of bump and bump price.
If Konnectivity bump, they have two choices: Bump a little bit and declare final so that everyone who played for a bump decides to sell (that might mean a bump to S$2.15 or so); or bump a lot and get Axiata out.
Travis believes a bump is certainly possible but also thinks this deal gets done if there is no bump. If Axiata countered at, say S$2.15, he would be inclined to buy at S$2.15 to expect a further counter by Konnectivity.
Bandhan Bank (BANDHAN IN)(“BBL”) and GRUH announced together on January 7th that their respective boards have considered and approved a Scheme of Amalgamation where Bandhan Bank will be the acquiring entity and GRUH Finance will become the acquired entity. At the exchange ratio of 568 Bandhan Bank shares per 1000 GRUH Finance shares, GRUH Finance’s price currently translates to a PER and PBV of 51.8x and 12.5x respectively which is significantly higher than the average for its comparable peers (PER=14.9x; PBV=2.0x).
This is a great deal forHousing Development Finance Corporation (HDFC IN)which currently owns 57.8% of GRUH Finance. It will own 15% of the merged entity. Considering HDFC Ltd already owns 19.72% as the promoter of HDFC bank and that RBI does not allow the promoter of one bank to hold more than 10% in another bank as a promoter, HDFC Ltd will have to divest a stake that is at least equivalent to 5% of the merged entity.
This deal is perhaps less good for Bandhan shareholders. GRUH is being purchased expensively, and minorities are getting hit. This is possibly so that the promoter can get closer to the obligation to the RBI to drop his stake to 40%. That ‘excuse’ is widespread in the media but may not bear up under scrutiny.
Travis thinks both names could have further to fall and sees no compelling reason to expect growth to surprise on the previously expected upside as branch openings are frozen. A deal break would not solve that, but a shareholder disentanglement on the Bandhan side would.
As widely expected, Healius’s board rejected the unsolicited and conditional proposal from Jangho Group Co Ltd A (601886 CH) at A$3.25/share.Pricing under the proposal is okay, at best, valuing Healius roughly in sync with Sonic Healthcare (SHL AU), its nearest peer. Optically, the indicative offer is underwhelming, 20% below the recent high in March last year, and below where Jangho was accumulating its stake in early 2016.
Operationally, Healius is not without issue, including increasing salaries, failure to secure key contracts, an inability to retain doctors at its medical centres, and the forced resignation of its CEO two years ago after he was charged by ASIC.
An offer from Jangho would also fall under FIRB’s remit, specifically sensitive patient data in the hands of a foreign owner, and it is up for debate whether maintaining such information in a secure site in Australia (as applied in Jangho’s acquisition of Vision Eye in 2015) will alleviate these concerns.
This deal is unlikely to get up under the current terms following the board rejection, but I do expect Jangho to bump its offer; or a third party to enter the fray. On a risk/reward basis I still tilt positive at a 18% gross spread (and up 7% from the post-rejection closing price) to the indicative offer.
For those who like plain vanilla, PCI announced Pagani Holding (an SPV indirectly owned by Platinum Equity Advisors) had made a S$1.33/share cash offer for the company by way of a scheme. Chuan Hup Holdings (CH SP), which holds 76.7% in PCI, has given an irrevocable undertaking to vote its stake in favour of the scheme resolution. So this is a done deal. The more interesting facet here is that Chuan Hup is currently trading at discount to its net cash after factoring in the proceeds from the sale of PCI shares.
As anticipated in my insight (DNO Closes In On Faroe) last week, DNO ASA (DNO NO)bumped its Offer for Faroe, which has now been declared unconditional. Tendered shares get paid in 14 days. The final closing date of the offer is the 6 February.
The 5.3% bump to GBP 1.60/share shortly followed a prior announcement from DNO which referenced a statement made the previous day by the Norwegian Petroleum Directorate of a 30% reserves downgrade at Faroe’s Oda field from 47.2mn MMboe to 32.7 MMboe.
The Final Offer price represents a premium of 52.4% to Faroe‘s share price of GBP 1.05 at the close of business on 3 April 2018, and values Faroe at ~£641.7mn. Despite open hostilities to the initial offer, Faroe’s board has now accepted the increased Offer and recommends shareholders tender.
DNO now owns or has 76.49% acceptances so can now make preparations to move to delist Faroe. If total acceptances exceed 90% of the voting rights, DNO will exercise its rights to compulsorily acquire the remaining Faroe shares not tendered, also at GBP 1.60/share.
The company bought back 16% of volume in the month (in December), and 15% of rolling 4-week ADV if only the first 20 days were days on which the company bought – which based on execution prices seems likely.
Travis expects a similar rate to continue and expects the lower trading volumes seen in December to continue. The period of excitement is over until Toshiba gives people a reason to get excited.
Travis is not particularly bullish Q3 results or Q4 forecasts for the company and the stock has rebounded perhaps more than the market has off lows. With Apple Inc (AAPL US) guiding suppliers to lower iPhone production yet again, TMC could run into a soft spot.
The key stub assets include South Springs, one of the largest golf resorts in Korea, and brand royalty, each accounting for around 7-8% of NAV. The remaining, immaterial ops include an ad agency, an “Amazon Fresh”-like fresh food delivery start-up, management consulting, dividends, and rent.
This looks like a decent stub-setup, with a likelihood of the discount narrowing from here – typically, the Korean Holdcos trade within a 20-40% discount band – rather than clearing 60%. And there is no tender offer overhang in 2019. But apart from the optics, there are no obvious catalysts at the stub level for the nine-month discount-widening trend to reverse.
Kingboard, which hasn’t been in the news since it sold its 9.6% stake in Cathay Pacific Airways (293 HK) to Qatar Airways back in November 2017, is coming up “expensive” on my monitor, after KBC’s mid-week price outperformance over KBL.
The new news this week is that KBC announced it is acquiring a handful of floors of the Overseas Trust Bank Building here in Hong Kong. Pricing looks okay with reference to property sold nearby, but probably towards the high-end for mid-floor office space in Wan Chai.
This is a connected transaction as the seller of the properties is Hallgain Investments – a vehicle largely owned by senior management of KBC – which owns 39.02% of KBC. The net rental on the properties is $1.35mn or a yield of 0.15%, which hardly augurs a case to go long the stub.
I compiled a summary of the 93 M&A transactions, with a collective deal size of ~US$215bn, published on Smartkarma in 2018, and analysed which sectors attracted the most interest: (Mostly Asia) M&A in 2018: What Was Hot, And What Was Not
The premium for Swire’s As over the Bs – [19 HK/(5* 87 HK)] – continues to increase and is now at its highest since October 2003.
Source: CapIQ; RHS represents HK$mn
I tackled this share class last August (Swire’s Interims and Bifurcating Dual Class) when the premium was 18%. Since September 2015, the two classes of shares can be unified leaving John Swire & Sons with 55% of the equity (& 63.7% of the vote). The pushback then, and now, is why bother? And the HKEx giving permission to Xiaomi Corp (1810 HK) to list with dual-class shares lessens the chance of such a unification.
Logically though, this premium should narrow (eventually one would expect) and investors are betting on this. The $ value traded for the Bs on Wednesday was the highest since mid-December 2017, and the third highest $ value traded in 21 years. And volume for the Bs has been increasing recently, having doubled in size in the past year compared to the 5-year average.
As an aside, Swire’s discount to NAV (adjusting for the privatisation of HAECO) is trading at it narrowest inside a year:
My ongoing series flags large moves (~10%) in CCASS holdings over the past week or so, moves which are often outside normal market transactions. These may be indicative of share pledges. Or potential takeovers. Or simply help understand volume swings.
Often these moves can easily be explained – the placement of new shares, rights issue, movements subsequent to a takeover, amongst others. For those mentioned below, I could not find an obvious reason for the CCASS move.
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.
Despite a shaky 2018 Q4 market and the disappointing Softbank Corp (9434 JP)‘s IPO, we have been getting a steady stream of newsflow on upcoming IPOs.
Starting with upcoming IPOs, Chengdu Expressway Company Limited (1785 HK) and Weimob.com (2013 HK) will be listing next week on Tuesday, 15th January. Weimob was priced at the low end of its price range while Chengdu Expressway’s IPO was at a fixed price of HK$2.20. We are bearish on both IPOs. Weimob is overly reliant on Tencent for its SaaS and Ads business and, at the same time, Tencent will only own less than 3% stake after listing. Whereas Chengdu Expressway has been a well-managed company but valuation implies limited upside. Trading liquidity will likely remain tepid as like Qilu Expressway Co Ltd (1576 HK) which listed mid last year.
In the pipeline, we are hearing that Kepei Education (KEPEI HK) will likely open its book next Monday. We will be following up with a note on valuation. In other IPOs that are coming in this quarter, Helenbergh China and Zhongliang, both property developers, are looking to IPO in this quarter. Viva Biotech Shanghai Ltd (1577881D HK) is also looking to list in Hong Kong Q2 while Urban Commons, a US property developer, is planning a US$500m REIT IPO in Singapore.
Activity seems healthy for the ECM space, but sentiment has not been the best as seen from Xiaomi’s high profile IPO that took a hit just as its lockup expired. Its share price has corrected from a high of HK$22.20 to just above HK$10.34 this Friday. This should not have been a big surprise since many have already pointed out that its valuation should really have been closer to that of a hardware business and we pointed out that the IPO’s trajectory would likely be similar to Razer.
This reminds us of a particular listing last year, Razer Inc (1337 HK) , and, in fact, both bear quite a handful of similarities. Strong portfolio of investors, hardware business with software capabilities, expensive valuations, and etc. The stock did well at first but has come back down to earth since then.
Accuracy Rate:
Our overall accuracy rate is 72% for IPOs and 64% for Placements
(Performance measurement criteria is explained at the end of the note)
New IPO filings
China Tobacco International (Hong Kong, US$100m)
China East Education (Hong Kong, US$400m)
Ebang International (Hong Kong, re-filed)
MicuRx Pharma (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.
In the three months to December, MonotaRO’s domestic (parent company) sales continued to grow at an annual rate close to 25%, indicating that full-year consolidated results should be close to management’s guidance and our own estimates. This also suggests that our 18% sales growth forecast for 2019 could be conservative.
Parent company data for December show sales up 18.4% year-on-year in nominal terms, but up 24.6% when adjusted for the number of working days in the month. The figures for November were 27.3% growth in nominal terms, but 21.3% adjusted.
In the three months to December, adjusted sales were up 24.2%, a slight improvement from 23.9% growth in 3Q. In FY Dec-18 as a whole, reported parent company sales were up 24.4% to ¥105.3 billion, slightly exceeding management’s ¥104.1 billion guidance.
At ¥2,523 (Friday, January 11, close), the shares have dropped 25% since October. They are now selling at 61x our EPS estimate for FY Dec-18, 54x our estimate for FY Dec-19 and 47x our estimate for FY Dec-20. Price/sales multiples for the same three years are 5.7x, 4.8x and 4.2x.
Consolidated results for FY Dec-18 are due to be announced by the end of January.
MonotaRO is the only pure-play e-commerce MRO (Maintenance, Repair and Operation) investment in the Japanese stock market. With over 10,000 SKUs (stock keeping units – i.e., individual items, including gloves, hand and power tools, hardware, painting supplies, etc.) for sale to construction companies, manufacturers, auto repair shops and other customers, the company is both driving and benefitting from the growth of Japan’s B2B MRO market. Overseas subsidiaries in South Korea, Indonesia and China, which account for about 4% of consolidated sales, are not yet profitable.
Accordia Golf Trust (AGT SP) has not been a great success story since its IPO in August 2014. The stock went to market at a unit price of 0.97 SGD and was recently traded at 0.53 SGD. If we include the dividends received since the IPO (0.2387 SGD) the ‘real‘ adjusted price is still only 0.76 SGD.
In the past we have attended several management meetings and the 2017 company AGM but were disappointed on multiple occasions by management that either 1) did not care, 2) did not know how or 3) was held back by other corporate Japanese factors from creating shareholder value.
Over the last six months several new developments are potentially creating a cocktail that could finally create sustained value for AGT unitholders:
Appointment of new CFO who assures investors no repeat of “membership deposit debacle”
New five-year funding secured from two lenders
MBK Partners buys ORIX Golf Management
Value investor Hibiki Path Advisors buys 6.2% of the company
Clear focus on acquisitions and using its balance sheet strength
With its 2019 financial year ending in March, investors can be hopeful that its dividend in FY20 can grow to a minimum of 5 SGD cents suggesting a yield of 9.5%. If management injects assets a higher DPU is possible.
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