In our Discover HK Connect series, we aim to help our investors understand the flow of southbound trades via the Hong Kong Connect, as analyzed by our proprietary data engine. We will discuss the stocks that experienced the most inflow and outflow by mainland investors in the past seven days.
We split the stocks eligible for the Hong Kong Connect trade into three groups: component stocks in the HSCEI index, stocks with a market capitalization between USD 1 billion and USD 5 billion, and stocks with a market capitalization between USD 500 million and USD 1 billion.
In this week’s HK Connect Discovery, we highlight the strong inflow to automobile stocks and Sands China.
Investors who have bought CSE Global on dips since my last note would have profited ~18%.
The upbeat guidance by management and supply-demand environment should give some legs to the recent rebound.
While risks of slower global growth may weigh on the stock, the stock is trading below its five-year average PE despite significantly improved cash flow from operations and a healthy order intake (three-year high).
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Have you ever wondered how a company secures the Chinese lucky number “8” as their ticker in Hong Kong? I’ll explain later on, but let’s just say that being the son of Li Ka Shing helps.
Li Ka Shing is a name that hardly needs introduction in Hong Kong and Richard Li, Li Ka Shing’s youngest son and Chairman of PCCW Ltd (8 HK), follows suit. After being born into Hong Kong’s richest family, Richard Li was educated in the US where he worked various odd jobs at McDonald’s and as a caddy at a local golf course before enrolling at Menlo College and eventually withdrawing without a degree. As fate would have it, Mr. Li went on to set up STAR TV, Asia’s satellite-delivered cable TV service, at the tender age of 24. Three years after starting STAR TV, Richard Li sold the venture, which had amassed a viewer base of 45 million people, to Rupert Murdoch’s News Corp (NWS AU) for USD 1 billion in 1993. During the same year, Mr. Li founded the Pacific Century Group and began a streak of noteworthy acquisitions.
You may be starting to wonder what all of this has to do with a trade on PCCW Ltd (8 HK) and I don’t blame you. In the rest of this insight I will:
finish the historical overview of the Li family and PCCW
present my trade idea and rationale
give a detailed overview of the business units of PCCW and the associated performance of each
recap ALL of my stub trades on Smartkarma and the performance of each
Keyence Corp (6861 JP) has long been a standout within the Japanese machinery sector for its exceptional margins, with only Fanuc Corp (6954 JP) and perhaps Smc Corp (6273 JP) really operating in the same the stratosphere. But while Fanuc has faded, with its OPM now struggling to stay over 30% and SMC has only recently peaked its head over the 30% level, Keyence has been powering ahead and is on the cusp of recording five straight years over 50% OPM.
With relatively limited disclosures to go along with such stellar performance it is understandable then that some investors are concerned that the story is too good to be true, and even the FT has written a series of articles with a slightly critical bent: 1234
Having recently visited the company, we analyse below, the nature of its competitive advantages by comparing it with its most similar peer Cognex Corp (CGNX US).
There is no apparent value enhancement to Naspers Ltd (NPN SJ)‘s spinning-off and separately listing Tencent Holdings (700 HK), while there is no change in governance and no monetisation at the parent level.
Preceding my comments on Naspers are the weekly setup/unwind tables for Asia-Pacific Holdcos.
These relationships trade with a minimum liquidity threshold of US$1mn on a 90-day moving average, and a % market capitalisation threshold – the $ value of the holding/opco held, over the parent’s market capitalisation, expressed in percent – of at least 20%.
SamE voluntarily red flagged its 1Q19 earnings even before 1Q ends. SamE mentioned two things: 1. Falling memory chip prices and 2. slowing demand for display panels. Given the ‘usual’ profit size of DP business, this should be all about memory chips, specifically server DRAM.
Memory chip price falling should not be enough to explain this much 1Q profit loss. It must be that SamE has decided to reflect huge inventory losses and pay bills from Amazon and Google on the book in this first quarter. Of course, SamE wouldn’t want to talk about this explicitly.
SamE shares aren’t reacting to this a lot right now. It is mainly because local street already heavily adjusted 1Q OP to as low as ₩6.5~7tril. This 1Q earnings shock factor must have been already reflected into the price. Even below ₩6tril level wouldn’t be taken as a huge surprise.
SamE said last month that memory sales would be revived starting 2H this year. I think this is still a valid and crucial point. This suggests that server DRAM demand from Amazon and Google will likely be back starting 3Q19. This means SamE is confident that it can handle the server DRAM optimization issue by then.
I’m still sticking to my previous OP forecast for FY19. It should be ₩8tril more than the current street consensus. At this, SamE Common is trading at a 8.73x PER. SamE is scheduled to deliver 1Q19 interim numbers next week on Apr 5.
Get Straight to the Source on Smartkarma
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
In our Discover HK Connect series, we aim to help our investors understand the flow of southbound trades via the Hong Kong Connect, as analyzed by our proprietary data engine. We will discuss the stocks that experienced the most inflow and outflow by mainland investors in the past seven days.
We split the stocks eligible for the Hong Kong Connect trade into three groups: component stocks in the HSCEI index, stocks with a market capitalization between USD 1 billion and USD 5 billion, and stocks with a market capitalization between USD 500 million and USD 1 billion.
In this week’s HK Connect Discovery, we highlight the strong inflow to automobile stocks and Sands China.
Investors who have bought CSE Global on dips since my last note would have profited ~18%.
The upbeat guidance by management and supply-demand environment should give some legs to the recent rebound.
While risks of slower global growth may weigh on the stock, the stock is trading below its five-year average PE despite significantly improved cash flow from operations and a healthy order intake (three-year high).
In late January, we upgraded our view on the Malaysian telecom sector after 6 years of being negative. We also and noted that Maxis was best placed to benefit from increased bundling and Enterprise opportunities (due to low cost access to Telekom Malaysia’s (T MK) (TM) fibre infrastructure). We see signs the current round of results (4Q18) as being supportive of this view. While Maxis 4Q numbers were affected by one offs, the key is a return to service revenue growth while we think the market will view Maxis’ long term revenue guidance positively. Longer term, Maxis announced aggressive longer term revenue targets based on a move into Enterprise and fixed connectivity which should deliver significant revenue growth.
Get Straight to the Source on Smartkarma
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
Keyence Corp (6861 JP) has long been a standout within the Japanese machinery sector for its exceptional margins, with only Fanuc Corp (6954 JP) and perhaps Smc Corp (6273 JP) really operating in the same the stratosphere. But while Fanuc has faded, with its OPM now struggling to stay over 30% and SMC has only recently peaked its head over the 30% level, Keyence has been powering ahead and is on the cusp of recording five straight years over 50% OPM.
With relatively limited disclosures to go along with such stellar performance it is understandable then that some investors are concerned that the story is too good to be true, and even the FT has written a series of articles with a slightly critical bent: 1234
Having recently visited the company, we analyse below, the nature of its competitive advantages by comparing it with its most similar peer Cognex Corp (CGNX US).
There is no apparent value enhancement to Naspers Ltd (NPN SJ)‘s spinning-off and separately listing Tencent Holdings (700 HK), while there is no change in governance and no monetisation at the parent level.
Preceding my comments on Naspers are the weekly setup/unwind tables for Asia-Pacific Holdcos.
These relationships trade with a minimum liquidity threshold of US$1mn on a 90-day moving average, and a % market capitalisation threshold – the $ value of the holding/opco held, over the parent’s market capitalisation, expressed in percent – of at least 20%.
SamE voluntarily red flagged its 1Q19 earnings even before 1Q ends. SamE mentioned two things: 1. Falling memory chip prices and 2. slowing demand for display panels. Given the ‘usual’ profit size of DP business, this should be all about memory chips, specifically server DRAM.
Memory chip price falling should not be enough to explain this much 1Q profit loss. It must be that SamE has decided to reflect huge inventory losses and pay bills from Amazon and Google on the book in this first quarter. Of course, SamE wouldn’t want to talk about this explicitly.
SamE shares aren’t reacting to this a lot right now. It is mainly because local street already heavily adjusted 1Q OP to as low as ₩6.5~7tril. This 1Q earnings shock factor must have been already reflected into the price. Even below ₩6tril level wouldn’t be taken as a huge surprise.
SamE said last month that memory sales would be revived starting 2H this year. I think this is still a valid and crucial point. This suggests that server DRAM demand from Amazon and Google will likely be back starting 3Q19. This means SamE is confident that it can handle the server DRAM optimization issue by then.
I’m still sticking to my previous OP forecast for FY19. It should be ₩8tril more than the current street consensus. At this, SamE Common is trading at a 8.73x PER. SamE is scheduled to deliver 1Q19 interim numbers next week on Apr 5.
Chris Hoare downgraded China Mobile (941 HK) some time ago on rising concerns that 5G capex would be higher than expected. While China Unicom (762 HK) and China Telecom (728 HK) both laid out very modest 2019 5G capex plans, China Mobile did not. And despite what we saw as reasonable results, earnings guidance was weak and the lack of a rising dividend payout suggests internal concerns over 5G spending. We had seen China Mobile as a defensive stock, but recent strong performance and rising 5G worries led us to downgrade our recommendation. It remains at Reduce with a HK$75 target.
Get Straight to the Source on Smartkarma
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
In this version of the GER weekly research wrap, we assess the controversy surrounding potentially inflated revenue concerns for Best World International (BEST SP) . Secondly, we dig into the latest M&A situation for Graincorp Ltd A (GNC AU) amidst a testy AGM and a slow resolution to a binding bid which may limit a bump. In addition, we update on the KKR bid for MYOB Group Ltd (MYO AU) which Arun contends is unlikely to receive a counter bid due to KKR’s blocking stake. Finally, we initiate on the IPO of hotelier Zhejiang New Century Hotel Management Group (ZHEKAIH HK). A calendar of upcoming catalysts is also attached.
More details can be found below.
Best of luck for the new week – Rickin, Venkat and Arun
Get Straight to the Source on Smartkarma
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
China Telecom (728 HK), having delivered strong revenue growth but weak margins in 3Q18, delivered better 4Q numbers. Like its peers however, the business is under some pressure with ARPUs weak despite strong data growth. We see the Chinese Telcos as vulnerable to policy demands for accelerated 5G spending. While the market may like the look of a joint roll-out of 5G with China Unicom (762 HK), that may be simplistic. Chris Hoare thinks the cost of a combined roll-out is likely to be even higher than China Mobile (941 HK). Recent price strength makes our Reduce recommendation clearer.
China Unicom’s (762 HK) recent 4Q18 results were not great. The overall figures look ok due to strength in the fixed line business which offset weakness in mobile. However, they were the weakest of the three operators and the stock, which has had a strong run, now looks due for a pause. We have turned more cautious on the Chinese telcos on concerns that 5G spending could be higher than expected. Chris Hoare believes a major reason for the Chinese telcos outperforming in the past year has come from declining capex spending expectations. That trend may now start to reverse. While China Unicom has guided for only modest 5G capex in 2019 the focus will turn to 2020 where it is a much bigger issue and while we expect China Unicom to do a joint roll-out with China Telecom (728 HK) we expect the scale of the spending to be larger than an individual build.
Samsung Electronics (005930 KS) met our rally target outlined in 28 January insight SEC and SK Hynix Breakouts at 70.3k. In that insight we outlined the tactical rise would give way to a pullback toward ideal pocket support that would offer a better risk to reward intermediate entry point for SEC.
Multiple rejection at that 47.2-5k barrier call for fresh lows toward preferred pocket and buy support. Only external pressures would adjust our downside bias to lower pattern support that comes in at 35k.
MACD basing support is expected to create a solid support for price on weakness. Risk lies with the MACD slipping back within the pattern range.
Yunji Inc. (YJ US) is a leading membership-based social e-commerce platform in China which primarily sells merchandise through its Yunji app. Yunji is also referred to as a multi-level revenue sharing platform as the business model is based on providing incentives to members to promote products and invite new members through their social networks. Yunji is seeking to raise $200 million through a Nasdaq IPO.
Our analysis of the balance sheet points to waning member engagement which does not bode well for Yunji’s long-term sustainable growth in a highly competitive market.
On Thursday March 21’st 2019, Micron announced latest quarter (Q2FY19) revenues of $5.8 billion, at the bottom end of their forecast range and down 26% sequentially. The midrange of their forecast for the current quarter (Q3FY19) will see revenues drop another 17% sequentially to $4.8 billion, roughly equivalent to the same quarter two years ago. On the earnings call, CEO Sanjay Mehrotra stated that the company would be cutting back both DRAM and NAND production by ~5% in response to a further deterioration in the CY2019 demand outlook. Furthermore, he refused to be drawn as to whether or not the current quarter would be the downturn trough despite reiterating his belief in the widely anticipated 2H CY2019 recovery thesis.
The challenging environment notwithstanding, there were some key positives also from the earnings call. The company is taking decisive and unprecedented actions to reduce their bit supply, actions we believe will be matched by Samsung Electronics and SK Hynix. Gross margin coming into this downturn was a historic high at 61% and NAND gross margins have remained in the high 30% range despite ASP’s falling for five of the past six quarters. Furthermore, as forecasted three months ago, Micron still expects DRAM bit shipments to increase in the current quarter.
Integrating the latest updates from company, we now model Micron revenues declining for two further quarters to reach a trough at $4.5 billion in the company’s Q4FY19. We further model net income in the trough quarter at $1 billion. Thereafter we model a return to modest, sustained growth in the following quarters. Yes, things may be getting worse for Micron but they are still remarkably good.
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Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
China Unicom’s (762 HK) recent 4Q18 results were not great. The overall figures look ok due to strength in the fixed line business which offset weakness in mobile. However, they were the weakest of the three operators and the stock, which has had a strong run, now looks due for a pause. We have turned more cautious on the Chinese telcos on concerns that 5G spending could be higher than expected. Chris Hoare believes a major reason for the Chinese telcos outperforming in the past year has come from declining capex spending expectations. That trend may now start to reverse. While China Unicom has guided for only modest 5G capex in 2019 the focus will turn to 2020 where it is a much bigger issue and while we expect China Unicom to do a joint roll-out with China Telecom (728 HK) we expect the scale of the spending to be larger than an individual build.
Samsung Electronics (005930 KS) met our rally target outlined in 28 January insight SEC and SK Hynix Breakouts at 70.3k. In that insight we outlined the tactical rise would give way to a pullback toward ideal pocket support that would offer a better risk to reward intermediate entry point for SEC.
Multiple rejection at that 47.2-5k barrier call for fresh lows toward preferred pocket and buy support. Only external pressures would adjust our downside bias to lower pattern support that comes in at 35k.
MACD basing support is expected to create a solid support for price on weakness. Risk lies with the MACD slipping back within the pattern range.
Yunji Inc. (YJ US) is a leading membership-based social e-commerce platform in China which primarily sells merchandise through its Yunji app. Yunji is also referred to as a multi-level revenue sharing platform as the business model is based on providing incentives to members to promote products and invite new members through their social networks. Yunji is seeking to raise $200 million through a Nasdaq IPO.
Our analysis of the balance sheet points to waning member engagement which does not bode well for Yunji’s long-term sustainable growth in a highly competitive market.
On Thursday March 21’st 2019, Micron announced latest quarter (Q2FY19) revenues of $5.8 billion, at the bottom end of their forecast range and down 26% sequentially. The midrange of their forecast for the current quarter (Q3FY19) will see revenues drop another 17% sequentially to $4.8 billion, roughly equivalent to the same quarter two years ago. On the earnings call, CEO Sanjay Mehrotra stated that the company would be cutting back both DRAM and NAND production by ~5% in response to a further deterioration in the CY2019 demand outlook. Furthermore, he refused to be drawn as to whether or not the current quarter would be the downturn trough despite reiterating his belief in the widely anticipated 2H CY2019 recovery thesis.
The challenging environment notwithstanding, there were some key positives also from the earnings call. The company is taking decisive and unprecedented actions to reduce their bit supply, actions we believe will be matched by Samsung Electronics and SK Hynix. Gross margin coming into this downturn was a historic high at 61% and NAND gross margins have remained in the high 30% range despite ASP’s falling for five of the past six quarters. Furthermore, as forecasted three months ago, Micron still expects DRAM bit shipments to increase in the current quarter.
Integrating the latest updates from company, we now model Micron revenues declining for two further quarters to reach a trough at $4.5 billion in the company’s Q4FY19. We further model net income in the trough quarter at $1 billion. Thereafter we model a return to modest, sustained growth in the following quarters. Yes, things may be getting worse for Micron but they are still remarkably good.
Pinterest Inc (PINS US), a leading digital media platform in the US, is getting ready for an IPO in the next several weeks. In our view, this is one of the most exciting global tech IPOs since the Elastic NV (ESTC US) IPO in October 2018. Pinterest has one of those rare combinations of strong sales growth, leading website brand awareness, loyal users network effect, and a clear path to profitability. Pinterest was most recently valued at $12.3 billion in private market valuation when it raised $150 million in 2017.
One of the attractive features about Pinterest is the fact that it has a very loyal user base among moms in the US. According to the company, about two thirds of its total user base are female, mostly in the US. Nearly 8 out of 10 moms (who are often the decision makers for purchasing household goods) and about half of the millennials in the US regularly use Pinterest.
The company has a very attractive income statement. Its revenue increased 59% CAGR from 2016 to 2018 and its operating losses have been declining nicely. Operating loss as a percentage of sales declined from 62.9% in 2016 to 9.9% in 2018.
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Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
There is no apparent value enhancement to Naspers Ltd (NPN SJ)‘s spinning-off and separately listing Tencent Holdings (700 HK), while there is no change in governance and no monetisation at the parent level.
Preceding my comments on Naspers are the weekly setup/unwind tables for Asia-Pacific Holdcos.
These relationships trade with a minimum liquidity threshold of US$1mn on a 90-day moving average, and a % market capitalisation threshold – the $ value of the holding/opco held, over the parent’s market capitalisation, expressed in percent – of at least 20%.
SamE voluntarily red flagged its 1Q19 earnings even before 1Q ends. SamE mentioned two things: 1. Falling memory chip prices and 2. slowing demand for display panels. Given the ‘usual’ profit size of DP business, this should be all about memory chips, specifically server DRAM.
Memory chip price falling should not be enough to explain this much 1Q profit loss. It must be that SamE has decided to reflect huge inventory losses and pay bills from Amazon and Google on the book in this first quarter. Of course, SamE wouldn’t want to talk about this explicitly.
SamE shares aren’t reacting to this a lot right now. It is mainly because local street already heavily adjusted 1Q OP to as low as ₩6.5~7tril. This 1Q earnings shock factor must have been already reflected into the price. Even below ₩6tril level wouldn’t be taken as a huge surprise.
SamE said last month that memory sales would be revived starting 2H this year. I think this is still a valid and crucial point. This suggests that server DRAM demand from Amazon and Google will likely be back starting 3Q19. This means SamE is confident that it can handle the server DRAM optimization issue by then.
I’m still sticking to my previous OP forecast for FY19. It should be ₩8tril more than the current street consensus. At this, SamE Common is trading at a 8.73x PER. SamE is scheduled to deliver 1Q19 interim numbers next week on Apr 5.
Chris Hoare downgraded China Mobile (941 HK) some time ago on rising concerns that 5G capex would be higher than expected. While China Unicom (762 HK) and China Telecom (728 HK) both laid out very modest 2019 5G capex plans, China Mobile did not. And despite what we saw as reasonable results, earnings guidance was weak and the lack of a rising dividend payout suggests internal concerns over 5G spending. We had seen China Mobile as a defensive stock, but recent strong performance and rising 5G worries led us to downgrade our recommendation. It remains at Reduce with a HK$75 target.
China Telecom (728 HK), having delivered strong revenue growth but weak margins in 3Q18, delivered better 4Q numbers. Like its peers however, the business is under some pressure with ARPUs weak despite strong data growth. We see the Chinese Telcos as vulnerable to policy demands for accelerated 5G spending. While the market may like the look of a joint roll-out of 5G with China Unicom (762 HK), that may be simplistic. Chris Hoare thinks the cost of a combined roll-out is likely to be even higher than China Mobile (941 HK). Recent price strength makes our Reduce recommendation clearer.
Get Straight to the Source on Smartkarma
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
Investors who have bought CSE Global on dips since my last note would have profited ~18%.
The upbeat guidance by management and supply-demand environment should give some legs to the recent rebound.
While risks of slower global growth may weigh on the stock, the stock is trading below its five-year average PE despite significantly improved cash flow from operations and a healthy order intake (three-year high).
In late January, we upgraded our view on the Malaysian telecom sector after 6 years of being negative. We also and noted that Maxis was best placed to benefit from increased bundling and Enterprise opportunities (due to low cost access to Telekom Malaysia’s (T MK) (TM) fibre infrastructure). We see signs the current round of results (4Q18) as being supportive of this view. While Maxis 4Q numbers were affected by one offs, the key is a return to service revenue growth while we think the market will view Maxis’ long term revenue guidance positively. Longer term, Maxis announced aggressive longer term revenue targets based on a move into Enterprise and fixed connectivity which should deliver significant revenue growth.
On Friday 22 February after the close, Nintendo Co Ltd (7974 JP) announced a buyback (E, J), a share cancellation (E, J), and a public equity offering of secondary shares (J-only). This kind of event is not abnormal in a year when profits are weaker and share prices are down. Cross-holders often sell shares into the end of the year in order to realise profits and let unrealised gains from the balance sheet filter into the income statement.
This time it is five sellers from four banks which all hail from the area: Bank Of Kyoto (8369 JP), Nomura Trust (which holds shares in a trust account for the MUFJ Bank pension fund as a beneficiary), Mitsubishi Ufj Financial (8306 JP)‘s MUFJ Bank, Resona Holdings (8308 JP), and Shiga Bank (8366 JP). The MUFJ Bank holdings likely originate from Sanwa Bank which was Osaka-based before merging with BOT-Mitsubishi almost 15 years ago, and Resona is also from Osaka – next door to Kyoto where Nintendo was founded – and Shiga Bank is the prefecture next door.
This would look like a normal sell-down… except for one thing.
There was a note in the announcement to the effect that “in the context of how companies deal with their policy cross-holdings becoming the subject of greater focus, we confirmed that several shareholders desired to sell shares, and as a company subject to such cross-holdings, we are conducting the above-mentioned Offering.”
In the TSE crossholding of SGX situation, the sale was not the most important part. The explanation of how the Board came to its decision and what they decided to do about it was important.
On the other hand, Japan’s Corporate Governance Code (the Code), which was introduced in 2015, requires listed companies to examine and explain the economic rationale and future outlook of holding shares of other listed companies for reasons other than pure investment purposes. Following a review of the requirements under the Code, JPX reached the conclusion that the existing cooperative relationship with SGX would continue even without holding the shares of SGX. [my bold]
The Japan Exchange Group had now provided the example for why even companies with cooperative business relationships should not own cross-holdings. And it is, if active stewards of capital choose to make it so, more subtle. Shareholders have even an even better pressure point. IF a company’s cooperative relationship with another company would not survive the unwinding of cross-holdings to improve capital efficiency for both sides, is that company truly independent? Is that company beholden to the company whose shares it holds? Is the cross-holding board doing its job?
And the Japan Exchange Group had said it would unwind its holdings of SGX over three years, so as not to overly impact the market for SGX shares. This provided an example of HOW to unwind, in addition to the WHY to unwind announced above.
The BIG QUESTION (And Nothing Else Matters)
The big question here is whether the reasoning for selling is really because of the new focus on policy cross-holdings, or it is just Bank of Kyoto and other banks trying to top up profit before the end of the fiscal year, using heretofore unrealised gains.
In this version of the GER weekly research wrap, we assess the controversy surrounding potentially inflated revenue concerns for Best World International (BEST SP) . Secondly, we dig into the latest M&A situation for Graincorp Ltd A (GNC AU) amidst a testy AGM and a slow resolution to a binding bid which may limit a bump. In addition, we update on the KKR bid for MYOB Group Ltd (MYO AU) which Arun contends is unlikely to receive a counter bid due to KKR’s blocking stake. Finally, we initiate on the IPO of hotelier Zhejiang New Century Hotel Management Group (ZHEKAIH HK). A calendar of upcoming catalysts is also attached.
More details can be found below.
Best of luck for the new week – Rickin, Venkat and Arun
Get Straight to the Source on Smartkarma
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
SamE voluntarily red flagged its 1Q19 earnings even before 1Q ends. SamE mentioned two things: 1. Falling memory chip prices and 2. slowing demand for display panels. Given the ‘usual’ profit size of DP business, this should be all about memory chips, specifically server DRAM.
Memory chip price falling should not be enough to explain this much 1Q profit loss. It must be that SamE has decided to reflect huge inventory losses and pay bills from Amazon and Google on the book in this first quarter. Of course, SamE wouldn’t want to talk about this explicitly.
SamE shares aren’t reacting to this a lot right now. It is mainly because local street already heavily adjusted 1Q OP to as low as ₩6.5~7tril. This 1Q earnings shock factor must have been already reflected into the price. Even below ₩6tril level wouldn’t be taken as a huge surprise.
SamE said last month that memory sales would be revived starting 2H this year. I think this is still a valid and crucial point. This suggests that server DRAM demand from Amazon and Google will likely be back starting 3Q19. This means SamE is confident that it can handle the server DRAM optimization issue by then.
I’m still sticking to my previous OP forecast for FY19. It should be ₩8tril more than the current street consensus. At this, SamE Common is trading at a 8.73x PER. SamE is scheduled to deliver 1Q19 interim numbers next week on Apr 5.
Chris Hoare downgraded China Mobile (941 HK) some time ago on rising concerns that 5G capex would be higher than expected. While China Unicom (762 HK) and China Telecom (728 HK) both laid out very modest 2019 5G capex plans, China Mobile did not. And despite what we saw as reasonable results, earnings guidance was weak and the lack of a rising dividend payout suggests internal concerns over 5G spending. We had seen China Mobile as a defensive stock, but recent strong performance and rising 5G worries led us to downgrade our recommendation. It remains at Reduce with a HK$75 target.
China Telecom (728 HK), having delivered strong revenue growth but weak margins in 3Q18, delivered better 4Q numbers. Like its peers however, the business is under some pressure with ARPUs weak despite strong data growth. We see the Chinese Telcos as vulnerable to policy demands for accelerated 5G spending. While the market may like the look of a joint roll-out of 5G with China Unicom (762 HK), that may be simplistic. Chris Hoare thinks the cost of a combined roll-out is likely to be even higher than China Mobile (941 HK). Recent price strength makes our Reduce recommendation clearer.
China Unicom’s (762 HK) recent 4Q18 results were not great. The overall figures look ok due to strength in the fixed line business which offset weakness in mobile. However, they were the weakest of the three operators and the stock, which has had a strong run, now looks due for a pause. We have turned more cautious on the Chinese telcos on concerns that 5G spending could be higher than expected. Chris Hoare believes a major reason for the Chinese telcos outperforming in the past year has come from declining capex spending expectations. That trend may now start to reverse. While China Unicom has guided for only modest 5G capex in 2019 the focus will turn to 2020 where it is a much bigger issue and while we expect China Unicom to do a joint roll-out with China Telecom (728 HK) we expect the scale of the spending to be larger than an individual build.
Get Straight to the Source on Smartkarma
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
