Value Investing

In this briefing:

1. Hitachi High Tech’s Ace in the Hole
2. Bank Alfalah: Metrics Point to Falāh
3. Philippines: February Inflation Eases Back to BSP’s Inflation Target Range
4. China Tower Results Confirm Lower Capex Outlook, but Were Otherwise Mixed
5. King’s Town: “The Night Seems to Fade, but the Moonlight Lingers On”

1. Hitachi High Tech’s Ace in the Hole

Last Friday, Hitachi (6501) was reported to be considering selling Hitachi Chemical (4217), according to media sources over the weekend. This has sent Hitachi Chemical and its parent into a frenzy with Hitachi Chemical ADR up 13% last Friday. We believe this news is relevant for Hitachi High Tech because both subsidiaries are 51-52% consolidated by the parent Hitachi, and both have arguably businesses with little synergy with the parent. We believe that Hitachi High Tech is also rumored to be on the block for sale or spin-off.  Media sources say that Hitachi is considering a sale of Hitachi Chemical and would reap Y300bn.  The current value of their 51% ownership in Hitachi Chemical is Y211bn, and thus there is 42% implied upside if the Y300bn figure is achieved.

To recap Q3 results for Hitachi High Tech from January 31, 2019, the numbers were decent with earnings above consensus forecasts by 33% for Q3 (Y15.8bn OP versus Y13.8bn forecast). The profit rise was due to improved margins in medical and continued strength in process semiconductor equipment. The shares are up 20% year-to-date, outperforming the Nikkei by 15%. Some of the fears of a sharp slowdown in semiconductor have been nullified by the continued strength in logic chip investments as well as the improved profitability in medical clinical analyzers. Medical profits soared 46% YoY in Q3 to Y7.6bn on a 13% YoY increase in revenues. OP margin improved from 12.3% to 15.8% YoY.

2. Bank Alfalah: Metrics Point to Falāh

Bank Alfalah (BAFL PA) is heading in the right direction as testified by its metric progression, embodied in its quintile 1 PH Score™.

Valuations are not stretched – especially the Total return Ratio of 1.8x and an Earnings Yield of 14.5%.

Combining the fundamental momentum signals (PH Score™) with franchise valuation, and a low RSI, places BAFL PA in the top decile of bank opportunities globally.

3. Philippines: February Inflation Eases Back to BSP’s Inflation Target Range

• Better-than-expected February inflation of 3.8%YoY wasn’t just a ‘base effect’ result. Broad food and transport CPI readings probably benefited from a year-ago, statistical high. It’s not the same for most of the non-food CPI items like rental & household utilities, and restaurant & miscellaneous goods & services that comprise discretionary expenditures. Lacking the base effect, inflation within this group seemed to have shed off last year’s price catalysts led by TRAIN’s excise hikes, high oil prices and supply shocks. 

• Based on the PSA’s seasonally adjusted data, headline inflation’s annualized pace was a benign 1.2%.

• Our updated monthly time series extrapolation showed headline inflation bottoming out at 1.3%YoY-1.4%YoY in September-October this year.

• Sustained liquidity tightness amid inflation’s benign pace with a trajectory settling in the BSP’s target range could facilitate a staggered bank reserve ratio cut of 2% starting 2Q19.   

• With the pro-growth bias of newly appointed BSP chief Benjamin Diokno (former Budget Secretary), the likelihood of a 25bp policy rate cut has been elevated in 3Q19 when inflation this year is expected to hit rock bottom and the ensuing size of positive, real interest rates could risk threatening growth.
• Considering potential macro upsides this year, e.g., inflation bottoming out alongside consumption recovery, buying risk assets on dips is still the norm.

4. China Tower Results Confirm Lower Capex Outlook, but Were Otherwise Mixed

China Tower (788 HK) reported 4Q18 results that looks slightly disappointing. However, they did deliver strong net profit, confirmation that capex is likely to materially undershoot guidance, and the first dividend for the company. However, while that is positive, there were areas of disappointment, with weaker revenue growth and EBITDA.

Our view remains that China Tower’s shares are relatively undervalued and expect share prices to continue to move higher over time, as the stock reflects its inflecting ROIC. It remains our favored name in China given the risks of policy driven over-investment into 5G (see Chinese Telcos: Rising 5G Capex Risk Leads to Another Downgrade).

5. King’s Town: “The Night Seems to Fade, but the Moonlight Lingers On”

King’S Town Bank (2809 TT) flags up some amber signals with the growth of funding and credit costs, huge asset writedowns on financial assets, and a shrinking bottom line that barely resembles Comprehensive Income.

This all may signal a management team getting to grips with some asset problems and navigating the ship into calmer waters. Or is the bank being cleaned up for sale? The bank was rumoured to be interested in Entie Commercial Bank (2849 TT).

Our PH Score™ (our fundamental trend and value-quality indicator) though is subpar at 2.5 (bottom quintile globally) and the RSI (14 day) is high at 77. We would prefer to see an elevated PH Score™ and a low RSI. “If a business does well, the stock will follow”. We are intrigued.

If the bank was trading on a Franchise Valuation of 8% (Asia Pacific median including Japan), shares might be more compelling. But Market Cap./Deposits stands at 20%. The median P/Book in the region (including Japan) stands at 0.8x versus 1.1x at King’s Town.

In this briefing:

1. Bank Alfalah: Metrics Point to Falāh
2. Philippines: February Inflation Eases Back to BSP’s Inflation Target Range
3. China Tower Results Confirm Lower Capex Outlook, but Were Otherwise Mixed
4. King’s Town: “The Night Seems to Fade, but the Moonlight Lingers On”
5. OCBC – Difficult to Square

1. Bank Alfalah: Metrics Point to Falāh

Bank Alfalah (BAFL PA) is heading in the right direction as testified by its metric progression, embodied in its quintile 1 PH Score™.

Valuations are not stretched – especially the Total return Ratio of 1.8x and an Earnings Yield of 14.5%.

Combining the fundamental momentum signals (PH Score™) with franchise valuation, and a low RSI, places BAFL PA in the top decile of bank opportunities globally.

2. Philippines: February Inflation Eases Back to BSP’s Inflation Target Range

• Better-than-expected February inflation of 3.8%YoY wasn’t just a ‘base effect’ result. Broad food and transport CPI readings probably benefited from a year-ago, statistical high. It’s not the same for most of the non-food CPI items like rental & household utilities, and restaurant & miscellaneous goods & services that comprise discretionary expenditures. Lacking the base effect, inflation within this group seemed to have shed off last year’s price catalysts led by TRAIN’s excise hikes, high oil prices and supply shocks. 

• Based on the PSA’s seasonally adjusted data, headline inflation’s annualized pace was a benign 1.2%.

• Our updated monthly time series extrapolation showed headline inflation bottoming out at 1.3%YoY-1.4%YoY in September-October this year.

• Sustained liquidity tightness amid inflation’s benign pace with a trajectory settling in the BSP’s target range could facilitate a staggered bank reserve ratio cut of 2% starting 2Q19.   

• With the pro-growth bias of newly appointed BSP chief Benjamin Diokno (former Budget Secretary), the likelihood of a 25bp policy rate cut has been elevated in 3Q19 when inflation this year is expected to hit rock bottom and the ensuing size of positive, real interest rates could risk threatening growth.
• Considering potential macro upsides this year, e.g., inflation bottoming out alongside consumption recovery, buying risk assets on dips is still the norm.

3. China Tower Results Confirm Lower Capex Outlook, but Were Otherwise Mixed

China Tower (788 HK) reported 4Q18 results that looks slightly disappointing. However, they did deliver strong net profit, confirmation that capex is likely to materially undershoot guidance, and the first dividend for the company. However, while that is positive, there were areas of disappointment, with weaker revenue growth and EBITDA.

Our view remains that China Tower’s shares are relatively undervalued and expect share prices to continue to move higher over time, as the stock reflects its inflecting ROIC. It remains our favored name in China given the risks of policy driven over-investment into 5G (see Chinese Telcos: Rising 5G Capex Risk Leads to Another Downgrade).

4. King’s Town: “The Night Seems to Fade, but the Moonlight Lingers On”

King’S Town Bank (2809 TT) flags up some amber signals with the growth of funding and credit costs, huge asset writedowns on financial assets, and a shrinking bottom line that barely resembles Comprehensive Income.

This all may signal a management team getting to grips with some asset problems and navigating the ship into calmer waters. Or is the bank being cleaned up for sale? The bank was rumoured to be interested in Entie Commercial Bank (2849 TT).

Our PH Score™ (our fundamental trend and value-quality indicator) though is subpar at 2.5 (bottom quintile globally) and the RSI (14 day) is high at 77. We would prefer to see an elevated PH Score™ and a low RSI. “If a business does well, the stock will follow”. We are intrigued.

If the bank was trading on a Franchise Valuation of 8% (Asia Pacific median including Japan), shares might be more compelling. But Market Cap./Deposits stands at 20%. The median P/Book in the region (including Japan) stands at 0.8x versus 1.1x at King’s Town.

5. OCBC – Difficult to Square

The data and text from Oversea Chinese Banking Corp. (OCBC SP) is difficult to square. It talks about improved credit quality, but its NPLs are up both YoY and QoQ.  In the bank’s Pillar 3 disclosure it notes that ‘risk-weighted assets (RWA) were largely stable in the quarter primarily due to improving asset quality.’ In its financial supplement it reports NPLs of S$3,938m compared with S$3,594m, in 4Q18 and 3Q18. This is nearly 10% higher QoQ.  The reality is that OCBC ramped up credit costs in 4Q18 to nearly 3x its full 9M18 charge and despite this, its NPL cover is now down to 57% from 78% a year ago. To us this appears like marked deterioration.  And even QoQ, where NPL cover was 65% in 3Q18. The risk now is that credit costs during the current year are more like 4Q18 or higher, rather than the paltry figures seen during full year 2018. We do not believe the market is expecting this. 

In this briefing:

1. Philippines: February Inflation Eases Back to BSP’s Inflation Target Range
2. China Tower Results Confirm Lower Capex Outlook, but Were Otherwise Mixed
3. King’s Town: “The Night Seems to Fade, but the Moonlight Lingers On”
4. OCBC – Difficult to Square
5. Mizuho Financial Group (8411 JP): Writing Off the Past

1. Philippines: February Inflation Eases Back to BSP’s Inflation Target Range

• Better-than-expected February inflation of 3.8%YoY wasn’t just a ‘base effect’ result. Broad food and transport CPI readings probably benefited from a year-ago, statistical high. It’s not the same for most of the non-food CPI items like rental & household utilities, and restaurant & miscellaneous goods & services that comprise discretionary expenditures. Lacking the base effect, inflation within this group seemed to have shed off last year’s price catalysts led by TRAIN’s excise hikes, high oil prices and supply shocks. 

• Based on the PSA’s seasonally adjusted data, headline inflation’s annualized pace was a benign 1.2%.

• Our updated monthly time series extrapolation showed headline inflation bottoming out at 1.3%YoY-1.4%YoY in September-October this year.

• Sustained liquidity tightness amid inflation’s benign pace with a trajectory settling in the BSP’s target range could facilitate a staggered bank reserve ratio cut of 2% starting 2Q19.   

• With the pro-growth bias of newly appointed BSP chief Benjamin Diokno (former Budget Secretary), the likelihood of a 25bp policy rate cut has been elevated in 3Q19 when inflation this year is expected to hit rock bottom and the ensuing size of positive, real interest rates could risk threatening growth.
• Considering potential macro upsides this year, e.g., inflation bottoming out alongside consumption recovery, buying risk assets on dips is still the norm.

2. China Tower Results Confirm Lower Capex Outlook, but Were Otherwise Mixed

China Tower (788 HK) reported 4Q18 results that looks slightly disappointing. However, they did deliver strong net profit, confirmation that capex is likely to materially undershoot guidance, and the first dividend for the company. However, while that is positive, there were areas of disappointment, with weaker revenue growth and EBITDA.

Our view remains that China Tower’s shares are relatively undervalued and expect share prices to continue to move higher over time, as the stock reflects its inflecting ROIC. It remains our favored name in China given the risks of policy driven over-investment into 5G (see Chinese Telcos: Rising 5G Capex Risk Leads to Another Downgrade).

3. King’s Town: “The Night Seems to Fade, but the Moonlight Lingers On”

King’S Town Bank (2809 TT) flags up some amber signals with the growth of funding and credit costs, huge asset writedowns on financial assets, and a shrinking bottom line that barely resembles Comprehensive Income.

This all may signal a management team getting to grips with some asset problems and navigating the ship into calmer waters. Or is the bank being cleaned up for sale? The bank was rumoured to be interested in Entie Commercial Bank (2849 TT).

Our PH Score™ (our fundamental trend and value-quality indicator) though is subpar at 2.5 (bottom quintile globally) and the RSI (14 day) is high at 77. We would prefer to see an elevated PH Score™ and a low RSI. “If a business does well, the stock will follow”. We are intrigued.

If the bank was trading on a Franchise Valuation of 8% (Asia Pacific median including Japan), shares might be more compelling. But Market Cap./Deposits stands at 20%. The median P/Book in the region (including Japan) stands at 0.8x versus 1.1x at King’s Town.

4. OCBC – Difficult to Square

The data and text from Oversea Chinese Banking Corp. (OCBC SP) is difficult to square. It talks about improved credit quality, but its NPLs are up both YoY and QoQ.  In the bank’s Pillar 3 disclosure it notes that ‘risk-weighted assets (RWA) were largely stable in the quarter primarily due to improving asset quality.’ In its financial supplement it reports NPLs of S$3,938m compared with S$3,594m, in 4Q18 and 3Q18. This is nearly 10% higher QoQ.  The reality is that OCBC ramped up credit costs in 4Q18 to nearly 3x its full 9M18 charge and despite this, its NPL cover is now down to 57% from 78% a year ago. To us this appears like marked deterioration.  And even QoQ, where NPL cover was 65% in 3Q18. The risk now is that credit costs during the current year are more like 4Q18 or higher, rather than the paltry figures seen during full year 2018. We do not believe the market is expecting this. 

5. Mizuho Financial Group (8411 JP): Writing Off the Past

Mizuho Financial Group (8411 JP) (MHFG) has slashed its forecast for FY3/2019 consolidated net profits from ¥570 billion to just ¥80 billion, citing previously-unbudgeted write-downs on physical branch assets and retail banking software, as well as valuation losses on marking to market part of the group’s foreign bond portfolio, especially on derivative products. Total additional costs to be incurred in FY3/2019 are now expected to be around ¥680 billion.

In effect, MHFG is attempting to ‘clear the decks’ of redundant and uneconomic assets  –  a legacy from its 20^th century role as a branch-based deposit taker and lender  –   and is now positioning itself for 21^st century ‘cashless’ banking centred on electronic transaction and payment systems.  While this is a laudable effort, MHFG is late to do this; rivals Mitsubishi Ufj Financial Group (8306 JP) and Sumitomo Mitsui Financial Group (8316 JP)  slimmed down their branch networks in FY3/2018, incurring heavy costs in doing so.

We remain skeptical that this signals the end of MHFG’s problems, and continue to recommend an Underweight position in Japanese bank stocks generally.

MHFG’s uneconomic asset problems are far from unique.  This news may just be the first of a succession of similar announcements from other banks over the next 2-3 years as they face not only an ongoing ultra-low interest rate environment but now also the stark economic realities of a declining local population, high overheads as a result of over-manned and under-utilised branches, a clear shift towards Internet banking and the increasing use of ‘cashless’ alternative payment systems by retail customers.

In this briefing:

1. China Tower Results Confirm Lower Capex Outlook, but Were Otherwise Mixed
2. King’s Town: “The Night Seems to Fade, but the Moonlight Lingers On”
3. OCBC – Difficult to Square
4. Mizuho Financial Group (8411 JP): Writing Off the Past
5. PT Bank Rakyat Indonesia (Persero): Rather Rich for a Bargain Hunter

1. China Tower Results Confirm Lower Capex Outlook, but Were Otherwise Mixed

China Tower (788 HK) reported 4Q18 results that looks slightly disappointing. However, they did deliver strong net profit, confirmation that capex is likely to materially undershoot guidance, and the first dividend for the company. However, while that is positive, there were areas of disappointment, with weaker revenue growth and EBITDA.

Our view remains that China Tower’s shares are relatively undervalued and expect share prices to continue to move higher over time, as the stock reflects its inflecting ROIC. It remains our favored name in China given the risks of policy driven over-investment into 5G (see Chinese Telcos: Rising 5G Capex Risk Leads to Another Downgrade).

2. King’s Town: “The Night Seems to Fade, but the Moonlight Lingers On”

King’S Town Bank (2809 TT) flags up some amber signals with the growth of funding and credit costs, huge asset writedowns on financial assets, and a shrinking bottom line that barely resembles Comprehensive Income.

This all may signal a management team getting to grips with some asset problems and navigating the ship into calmer waters. Or is the bank being cleaned up for sale? The bank was rumoured to be interested in Entie Commercial Bank (2849 TT).

Our PH Score™ (our fundamental trend and value-quality indicator) though is subpar at 2.5 (bottom quintile globally) and the RSI (14 day) is high at 77. We would prefer to see an elevated PH Score™ and a low RSI. “If a business does well, the stock will follow”. We are intrigued.

If the bank was trading on a Franchise Valuation of 8% (Asia Pacific median including Japan), shares might be more compelling. But Market Cap./Deposits stands at 20%. The median P/Book in the region (including Japan) stands at 0.8x versus 1.1x at King’s Town.

3. OCBC – Difficult to Square

The data and text from Oversea Chinese Banking Corp. (OCBC SP) is difficult to square. It talks about improved credit quality, but its NPLs are up both YoY and QoQ.  In the bank’s Pillar 3 disclosure it notes that ‘risk-weighted assets (RWA) were largely stable in the quarter primarily due to improving asset quality.’ In its financial supplement it reports NPLs of S$3,938m compared with S$3,594m, in 4Q18 and 3Q18. This is nearly 10% higher QoQ.  The reality is that OCBC ramped up credit costs in 4Q18 to nearly 3x its full 9M18 charge and despite this, its NPL cover is now down to 57% from 78% a year ago. To us this appears like marked deterioration.  And even QoQ, where NPL cover was 65% in 3Q18. The risk now is that credit costs during the current year are more like 4Q18 or higher, rather than the paltry figures seen during full year 2018. We do not believe the market is expecting this. 

4. Mizuho Financial Group (8411 JP): Writing Off the Past

Mizuho Financial Group (8411 JP) (MHFG) has slashed its forecast for FY3/2019 consolidated net profits from ¥570 billion to just ¥80 billion, citing previously-unbudgeted write-downs on physical branch assets and retail banking software, as well as valuation losses on marking to market part of the group’s foreign bond portfolio, especially on derivative products. Total additional costs to be incurred in FY3/2019 are now expected to be around ¥680 billion.

In effect, MHFG is attempting to ‘clear the decks’ of redundant and uneconomic assets  –  a legacy from its 20^th century role as a branch-based deposit taker and lender  –   and is now positioning itself for 21^st century ‘cashless’ banking centred on electronic transaction and payment systems.  While this is a laudable effort, MHFG is late to do this; rivals Mitsubishi Ufj Financial Group (8306 JP) and Sumitomo Mitsui Financial Group (8316 JP)  slimmed down their branch networks in FY3/2018, incurring heavy costs in doing so.

We remain skeptical that this signals the end of MHFG’s problems, and continue to recommend an Underweight position in Japanese bank stocks generally.

MHFG’s uneconomic asset problems are far from unique.  This news may just be the first of a succession of similar announcements from other banks over the next 2-3 years as they face not only an ongoing ultra-low interest rate environment but now also the stark economic realities of a declining local population, high overheads as a result of over-manned and under-utilised branches, a clear shift towards Internet banking and the increasing use of ‘cashless’ alternative payment systems by retail customers.

5. PT Bank Rakyat Indonesia (Persero): Rather Rich for a Bargain Hunter

Bank Rakyat Indonesia Perser (BBRI IJ) seems to be doing a great deal right to perhaps satisfy a punchy valuation.

Profitability is elevated with chunky NIMs and spreads, fee income and insurance are performing well, and OPEX is under control. Capital Adequacy and CIR look healthy.

However, we are concerned about rising interest costs, at a pace in excess of interest income generation.

The bank also seems to be stretching a little in terms of quality income to reach the Net Profit line with “other non-interest interest income” and gains on securities. The bottom line falls a little short of a comprehensive income assessment.

In addition, asset quality remains a thorny issue. The Balance Sheet continues to be much more toxic than the sedate NPL ratio. This relates to the micro focus.

Debt to Equity is on the rise.

Overall, trends are no better than average – as testified by a PH Score of 5.

Trading on a P/Book of 2.6x and an earnings yield of 7.3%, we believe that valuation is somewhat rich irrespective of the bank’s strengths. A franchise valuation of 52% versus a median of 8% in Asia Pacific seals the deal.

In this briefing:

1. King’s Town: “The Night Seems to Fade, but the Moonlight Lingers On”
2. OCBC – Difficult to Square
3. Mizuho Financial Group (8411 JP): Writing Off the Past
4. PT Bank Rakyat Indonesia (Persero): Rather Rich for a Bargain Hunter
5. Vietnam Market Update: Deep Value Found in Salient Themes

1. King’s Town: “The Night Seems to Fade, but the Moonlight Lingers On”

King’S Town Bank (2809 TT) flags up some amber signals with the growth of funding and credit costs, huge asset writedowns on financial assets, and a shrinking bottom line that barely resembles Comprehensive Income.

This all may signal a management team getting to grips with some asset problems and navigating the ship into calmer waters. Or is the bank being cleaned up for sale? The bank was rumoured to be interested in Entie Commercial Bank (2849 TT).

Our PH Score™ (our fundamental trend and value-quality indicator) though is subpar at 2.5 (bottom quintile globally) and the RSI (14 day) is high at 77. We would prefer to see an elevated PH Score™ and a low RSI. “If a business does well, the stock will follow”. We are intrigued.

If the bank was trading on a Franchise Valuation of 8% (Asia Pacific median including Japan), shares might be more compelling. But Market Cap./Deposits stands at 20%. The median P/Book in the region (including Japan) stands at 0.8x versus 1.1x at King’s Town.

2. OCBC – Difficult to Square

The data and text from Oversea Chinese Banking Corp. (OCBC SP) is difficult to square. It talks about improved credit quality, but its NPLs are up both YoY and QoQ.  In the bank’s Pillar 3 disclosure it notes that ‘risk-weighted assets (RWA) were largely stable in the quarter primarily due to improving asset quality.’ In its financial supplement it reports NPLs of S$3,938m compared with S$3,594m, in 4Q18 and 3Q18. This is nearly 10% higher QoQ.  The reality is that OCBC ramped up credit costs in 4Q18 to nearly 3x its full 9M18 charge and despite this, its NPL cover is now down to 57% from 78% a year ago. To us this appears like marked deterioration.  And even QoQ, where NPL cover was 65% in 3Q18. The risk now is that credit costs during the current year are more like 4Q18 or higher, rather than the paltry figures seen during full year 2018. We do not believe the market is expecting this. 

3. Mizuho Financial Group (8411 JP): Writing Off the Past

Mizuho Financial Group (8411 JP) (MHFG) has slashed its forecast for FY3/2019 consolidated net profits from ¥570 billion to just ¥80 billion, citing previously-unbudgeted write-downs on physical branch assets and retail banking software, as well as valuation losses on marking to market part of the group’s foreign bond portfolio, especially on derivative products. Total additional costs to be incurred in FY3/2019 are now expected to be around ¥680 billion.

In effect, MHFG is attempting to ‘clear the decks’ of redundant and uneconomic assets  –  a legacy from its 20^th century role as a branch-based deposit taker and lender  –   and is now positioning itself for 21^st century ‘cashless’ banking centred on electronic transaction and payment systems.  While this is a laudable effort, MHFG is late to do this; rivals Mitsubishi Ufj Financial Group (8306 JP) and Sumitomo Mitsui Financial Group (8316 JP)  slimmed down their branch networks in FY3/2018, incurring heavy costs in doing so.

We remain skeptical that this signals the end of MHFG’s problems, and continue to recommend an Underweight position in Japanese bank stocks generally.

MHFG’s uneconomic asset problems are far from unique.  This news may just be the first of a succession of similar announcements from other banks over the next 2-3 years as they face not only an ongoing ultra-low interest rate environment but now also the stark economic realities of a declining local population, high overheads as a result of over-manned and under-utilised branches, a clear shift towards Internet banking and the increasing use of ‘cashless’ alternative payment systems by retail customers.

4. PT Bank Rakyat Indonesia (Persero): Rather Rich for a Bargain Hunter

Bank Rakyat Indonesia Perser (BBRI IJ) seems to be doing a great deal right to perhaps satisfy a punchy valuation.

Profitability is elevated with chunky NIMs and spreads, fee income and insurance are performing well, and OPEX is under control. Capital Adequacy and CIR look healthy.

However, we are concerned about rising interest costs, at a pace in excess of interest income generation.

The bank also seems to be stretching a little in terms of quality income to reach the Net Profit line with “other non-interest interest income” and gains on securities. The bottom line falls a little short of a comprehensive income assessment.

In addition, asset quality remains a thorny issue. The Balance Sheet continues to be much more toxic than the sedate NPL ratio. This relates to the micro focus.

Debt to Equity is on the rise.

Overall, trends are no better than average – as testified by a PH Score of 5.

Trading on a P/Book of 2.6x and an earnings yield of 7.3%, we believe that valuation is somewhat rich irrespective of the bank’s strengths. A franchise valuation of 52% versus a median of 8% in Asia Pacific seals the deal.

5. Vietnam Market Update: Deep Value Found in Salient Themes

My previous insight Top Consumer Themes in Vietnam notes the clear cut strategy of investing in consumer growth stocks at reasonable valuation, while avoiding some of the over-hyped momentum names that trade at unreasonable multiples.  Another interesting trend to note in the market includes the lower valuation of select stocks that are positioned in key, high growth sectors, which are by no means value traps.  After eliminating value traps and overvalued momentum names, it is clear to see the VN Index offers asymmetric value for investors.  The attractively priced consumer growth stocks and value names are both relatively favorable compared to that of other frontier markets ( less favorable macro picture but similar valuation in many cases).

Some of the themes mentioned in this insight are an indirect play on China’s economic transformation, as it chooses to “export” some of its less sophisticated economic activities to other frontier markets ( ie. coal in Mongolia and textiles in other frontier markets).  This has intensified recently on the back of trade war tension.  Stocks in Vietnam that are in sectors positioned to benefit from this trade at relatively depressed valuations.

I included an overview of the following themes and some stocks positioned in these areas:

• Power is an appropriate way to access Vietnam’s broad based economic growth: Investment in power stocks is an indirect play on Vietnam’s continued growth in manufacturing and the country’s improved standards of living.
• Industrial park operators are attractively priced and offer exposure to Vietnam’s manufacturing narrative, which is a very straight forward growth narrative: Industrial park operators have relatively guaranteed success and have been able to attract large names such as Samsung and LG.
• Vietnam’s textile industry will be a key driver of growth moving forward: Vietnam’s textile industry has continued its course of growth, even though it has been moving into electronics exports and also facing increased competition from lower cost countries such as Bangladesh.
• Port stocks are extremely cheap, as perceived risk is greater than actual risk: The valuation for port operators has also become very depressed in recent years, though this is clearly a strong long term growth areas for Vietnam’s stock market.
• Vietnam’s agriculture growth recently reached a 7 year high, though growth still remains in the lower single digits and below the country’s average GDP growth.
• Plastic and steel stand out as high growth areas, though margins are sensitive to commodity price movements.

In this briefing:

1. OCBC – Difficult to Square
2. Mizuho Financial Group (8411 JP): Writing Off the Past
3. PT Bank Rakyat Indonesia (Persero): Rather Rich for a Bargain Hunter
4. Vietnam Market Update: Deep Value Found in Salient Themes
5. Bharti Airtel Buy on Short Lived Breach Below Support

1. OCBC – Difficult to Square

The data and text from Oversea Chinese Banking Corp. (OCBC SP) is difficult to square. It talks about improved credit quality, but its NPLs are up both YoY and QoQ.  In the bank’s Pillar 3 disclosure it notes that ‘risk-weighted assets (RWA) were largely stable in the quarter primarily due to improving asset quality.’ In its financial supplement it reports NPLs of S$3,938m compared with S$3,594m, in 4Q18 and 3Q18. This is nearly 10% higher QoQ.  The reality is that OCBC ramped up credit costs in 4Q18 to nearly 3x its full 9M18 charge and despite this, its NPL cover is now down to 57% from 78% a year ago. To us this appears like marked deterioration.  And even QoQ, where NPL cover was 65% in 3Q18. The risk now is that credit costs during the current year are more like 4Q18 or higher, rather than the paltry figures seen during full year 2018. We do not believe the market is expecting this. 

2. Mizuho Financial Group (8411 JP): Writing Off the Past

Mizuho Financial Group (8411 JP) (MHFG) has slashed its forecast for FY3/2019 consolidated net profits from ¥570 billion to just ¥80 billion, citing previously-unbudgeted write-downs on physical branch assets and retail banking software, as well as valuation losses on marking to market part of the group’s foreign bond portfolio, especially on derivative products. Total additional costs to be incurred in FY3/2019 are now expected to be around ¥680 billion.

In effect, MHFG is attempting to ‘clear the decks’ of redundant and uneconomic assets  –  a legacy from its 20^th century role as a branch-based deposit taker and lender  –   and is now positioning itself for 21^st century ‘cashless’ banking centred on electronic transaction and payment systems.  While this is a laudable effort, MHFG is late to do this; rivals Mitsubishi Ufj Financial Group (8306 JP) and Sumitomo Mitsui Financial Group (8316 JP)  slimmed down their branch networks in FY3/2018, incurring heavy costs in doing so.

We remain skeptical that this signals the end of MHFG’s problems, and continue to recommend an Underweight position in Japanese bank stocks generally.

MHFG’s uneconomic asset problems are far from unique.  This news may just be the first of a succession of similar announcements from other banks over the next 2-3 years as they face not only an ongoing ultra-low interest rate environment but now also the stark economic realities of a declining local population, high overheads as a result of over-manned and under-utilised branches, a clear shift towards Internet banking and the increasing use of ‘cashless’ alternative payment systems by retail customers.

3. PT Bank Rakyat Indonesia (Persero): Rather Rich for a Bargain Hunter

Bank Rakyat Indonesia Perser (BBRI IJ) seems to be doing a great deal right to perhaps satisfy a punchy valuation.

Profitability is elevated with chunky NIMs and spreads, fee income and insurance are performing well, and OPEX is under control. Capital Adequacy and CIR look healthy.

However, we are concerned about rising interest costs, at a pace in excess of interest income generation.

The bank also seems to be stretching a little in terms of quality income to reach the Net Profit line with “other non-interest interest income” and gains on securities. The bottom line falls a little short of a comprehensive income assessment.

In addition, asset quality remains a thorny issue. The Balance Sheet continues to be much more toxic than the sedate NPL ratio. This relates to the micro focus.

Debt to Equity is on the rise.

Overall, trends are no better than average – as testified by a PH Score of 5.

Trading on a P/Book of 2.6x and an earnings yield of 7.3%, we believe that valuation is somewhat rich irrespective of the bank’s strengths. A franchise valuation of 52% versus a median of 8% in Asia Pacific seals the deal.

4. Vietnam Market Update: Deep Value Found in Salient Themes

My previous insight Top Consumer Themes in Vietnam notes the clear cut strategy of investing in consumer growth stocks at reasonable valuation, while avoiding some of the over-hyped momentum names that trade at unreasonable multiples.  Another interesting trend to note in the market includes the lower valuation of select stocks that are positioned in key, high growth sectors, which are by no means value traps.  After eliminating value traps and overvalued momentum names, it is clear to see the VN Index offers asymmetric value for investors.  The attractively priced consumer growth stocks and value names are both relatively favorable compared to that of other frontier markets ( less favorable macro picture but similar valuation in many cases).

Some of the themes mentioned in this insight are an indirect play on China’s economic transformation, as it chooses to “export” some of its less sophisticated economic activities to other frontier markets ( ie. coal in Mongolia and textiles in other frontier markets).  This has intensified recently on the back of trade war tension.  Stocks in Vietnam that are in sectors positioned to benefit from this trade at relatively depressed valuations.

I included an overview of the following themes and some stocks positioned in these areas:

• Power is an appropriate way to access Vietnam’s broad based economic growth: Investment in power stocks is an indirect play on Vietnam’s continued growth in manufacturing and the country’s improved standards of living.
• Industrial park operators are attractively priced and offer exposure to Vietnam’s manufacturing narrative, which is a very straight forward growth narrative: Industrial park operators have relatively guaranteed success and have been able to attract large names such as Samsung and LG.
• Vietnam’s textile industry will be a key driver of growth moving forward: Vietnam’s textile industry has continued its course of growth, even though it has been moving into electronics exports and also facing increased competition from lower cost countries such as Bangladesh.
• Port stocks are extremely cheap, as perceived risk is greater than actual risk: The valuation for port operators has also become very depressed in recent years, though this is clearly a strong long term growth areas for Vietnam’s stock market.
• Vietnam’s agriculture growth recently reached a 7 year high, though growth still remains in the lower single digits and below the country’s average GDP growth.
• Plastic and steel stand out as high growth areas, though margins are sensitive to commodity price movements.

5. Bharti Airtel Buy on Short Lived Breach Below Support

Bharti Airtel (BHARTI IN) corrective cycle does not appear complete with risk of a final spike lower  below key pivot support. It is this crack lower that we want to take advantage of.

Sell volume spike implies the flat range will break lower. 

Daily cycle triangulation sides with a press below pivot support. An upside break of this triangle would trigger a tactical long but would lack needed gas for a sustainable drive.

Weekly MACD is seeking a bottoming/basing cycle that will turn the cycle higher once we see a final capitulation spike below pivot support as we did back in 2008, 2010 and 2012.

In this briefing:

1. Mizuho Financial Group (8411 JP): Writing Off the Past
2. PT Bank Rakyat Indonesia (Persero): Rather Rich for a Bargain Hunter
3. Vietnam Market Update: Deep Value Found in Salient Themes
4. Bharti Airtel Buy on Short Lived Breach Below Support
5. BIMB: Market Gives Thumbs-Up to Results

1. Mizuho Financial Group (8411 JP): Writing Off the Past

Mizuho Financial Group (8411 JP) (MHFG) has slashed its forecast for FY3/2019 consolidated net profits from ¥570 billion to just ¥80 billion, citing previously-unbudgeted write-downs on physical branch assets and retail banking software, as well as valuation losses on marking to market part of the group’s foreign bond portfolio, especially on derivative products. Total additional costs to be incurred in FY3/2019 are now expected to be around ¥680 billion.

In effect, MHFG is attempting to ‘clear the decks’ of redundant and uneconomic assets  –  a legacy from its 20^th century role as a branch-based deposit taker and lender  –   and is now positioning itself for 21^st century ‘cashless’ banking centred on electronic transaction and payment systems.  While this is a laudable effort, MHFG is late to do this; rivals Mitsubishi Ufj Financial Group (8306 JP) and Sumitomo Mitsui Financial Group (8316 JP)  slimmed down their branch networks in FY3/2018, incurring heavy costs in doing so.

We remain skeptical that this signals the end of MHFG’s problems, and continue to recommend an Underweight position in Japanese bank stocks generally.

MHFG’s uneconomic asset problems are far from unique.  This news may just be the first of a succession of similar announcements from other banks over the next 2-3 years as they face not only an ongoing ultra-low interest rate environment but now also the stark economic realities of a declining local population, high overheads as a result of over-manned and under-utilised branches, a clear shift towards Internet banking and the increasing use of ‘cashless’ alternative payment systems by retail customers.

2. PT Bank Rakyat Indonesia (Persero): Rather Rich for a Bargain Hunter

Bank Rakyat Indonesia Perser (BBRI IJ) seems to be doing a great deal right to perhaps satisfy a punchy valuation.

Profitability is elevated with chunky NIMs and spreads, fee income and insurance are performing well, and OPEX is under control. Capital Adequacy and CIR look healthy.

However, we are concerned about rising interest costs, at a pace in excess of interest income generation.

The bank also seems to be stretching a little in terms of quality income to reach the Net Profit line with “other non-interest interest income” and gains on securities. The bottom line falls a little short of a comprehensive income assessment.

In addition, asset quality remains a thorny issue. The Balance Sheet continues to be much more toxic than the sedate NPL ratio. This relates to the micro focus.

Debt to Equity is on the rise.

Overall, trends are no better than average – as testified by a PH Score of 5.

Trading on a P/Book of 2.6x and an earnings yield of 7.3%, we believe that valuation is somewhat rich irrespective of the bank’s strengths. A franchise valuation of 52% versus a median of 8% in Asia Pacific seals the deal.

3. Vietnam Market Update: Deep Value Found in Salient Themes

My previous insight Top Consumer Themes in Vietnam notes the clear cut strategy of investing in consumer growth stocks at reasonable valuation, while avoiding some of the over-hyped momentum names that trade at unreasonable multiples.  Another interesting trend to note in the market includes the lower valuation of select stocks that are positioned in key, high growth sectors, which are by no means value traps.  After eliminating value traps and overvalued momentum names, it is clear to see the VN Index offers asymmetric value for investors.  The attractively priced consumer growth stocks and value names are both relatively favorable compared to that of other frontier markets ( less favorable macro picture but similar valuation in many cases).

Some of the themes mentioned in this insight are an indirect play on China’s economic transformation, as it chooses to “export” some of its less sophisticated economic activities to other frontier markets ( ie. coal in Mongolia and textiles in other frontier markets).  This has intensified recently on the back of trade war tension.  Stocks in Vietnam that are in sectors positioned to benefit from this trade at relatively depressed valuations.

I included an overview of the following themes and some stocks positioned in these areas:

• Power is an appropriate way to access Vietnam’s broad based economic growth: Investment in power stocks is an indirect play on Vietnam’s continued growth in manufacturing and the country’s improved standards of living.
• Industrial park operators are attractively priced and offer exposure to Vietnam’s manufacturing narrative, which is a very straight forward growth narrative: Industrial park operators have relatively guaranteed success and have been able to attract large names such as Samsung and LG.
• Vietnam’s textile industry will be a key driver of growth moving forward: Vietnam’s textile industry has continued its course of growth, even though it has been moving into electronics exports and also facing increased competition from lower cost countries such as Bangladesh.
• Port stocks are extremely cheap, as perceived risk is greater than actual risk: The valuation for port operators has also become very depressed in recent years, though this is clearly a strong long term growth areas for Vietnam’s stock market.
• Vietnam’s agriculture growth recently reached a 7 year high, though growth still remains in the lower single digits and below the country’s average GDP growth.
• Plastic and steel stand out as high growth areas, though margins are sensitive to commodity price movements.

4. Bharti Airtel Buy on Short Lived Breach Below Support

Bharti Airtel (BHARTI IN) corrective cycle does not appear complete with risk of a final spike lower  below key pivot support. It is this crack lower that we want to take advantage of.

Sell volume spike implies the flat range will break lower. 

Daily cycle triangulation sides with a press below pivot support. An upside break of this triangle would trigger a tactical long but would lack needed gas for a sustainable drive.

Weekly MACD is seeking a bottoming/basing cycle that will turn the cycle higher once we see a final capitulation spike below pivot support as we did back in 2008, 2010 and 2012.

5. BIMB: Market Gives Thumbs-Up to Results

Malaysia has a tailwind of a new administration, vowing to overturn many aspects of its predecessor – including cancelling mega infra projects and reducing the “real” National debt.

The economy is relatively buoyant and is slated to generate an average of 4.75% GDP growth over 2018-2022. Private consumption will remain the main driver of growth, still the domestic economy continues to face downside risks stemming from any further escalation in trade tensions and commodity related shocks. Inflation has mellowed, supported by the cut in GST, but will still, once these effects diminish, be modest, at around 2%. Unemployment is low and there is a current account surplus.

Bimb Holdings (BIMB MK) or BHB commands two subsidiaries, Bank Islam and Takaful Malaysia. Bank Islam is a niche consumer-centred lender with a focus on mortgages: the largest component of the loan book and growing at a double-digit pace. Loans are therefore >5 years while funding tends to be <1 year. The insurance operation is BIMB’s most profitable revenue stream though. There is a concerted focus on the brand, on strategic bank partnerships, and on digitalisation. Both subsidiaries are rooted in Shariah-compliance. (Islamic Finance is a fast-growing market share in Malaysia). We do not rule out corporate reorganisation initiatives to unlock further value. The main shareholder is Lembaga Tabung Haji, a religious pilgrim fund board.

While BIMB is less sensitive to government actions on sovereign guarantees for infra projects, the bank is mainly exposed to consumer credit trends and cycle. Malaysia has a high level (by Asian standards) of household (excluding mortgages) indebtedness, dominated by credit cards, auto finance, and personal loans. Some areas of consumer banking reflect a stretched DSR, underpinning a moderately high risk by credit-to-GDP gap. The corporate sector is not excessively leveraged. BIMB though commands strong asset quality, provisioning, and capitalisation levels.

In this briefing:

1. PT Bank Rakyat Indonesia (Persero): Rather Rich for a Bargain Hunter
2. Vietnam Market Update: Deep Value Found in Salient Themes
3. Bharti Airtel Buy on Short Lived Breach Below Support
4. BIMB: Market Gives Thumbs-Up to Results
5. WABCO Confirms Being a Takeover Target of The Private German Auto Parts Maker, ZF

1. PT Bank Rakyat Indonesia (Persero): Rather Rich for a Bargain Hunter

Bank Rakyat Indonesia Perser (BBRI IJ) seems to be doing a great deal right to perhaps satisfy a punchy valuation.

Profitability is elevated with chunky NIMs and spreads, fee income and insurance are performing well, and OPEX is under control. Capital Adequacy and CIR look healthy.

However, we are concerned about rising interest costs, at a pace in excess of interest income generation.

The bank also seems to be stretching a little in terms of quality income to reach the Net Profit line with “other non-interest interest income” and gains on securities. The bottom line falls a little short of a comprehensive income assessment.

In addition, asset quality remains a thorny issue. The Balance Sheet continues to be much more toxic than the sedate NPL ratio. This relates to the micro focus.

Debt to Equity is on the rise.

Overall, trends are no better than average – as testified by a PH Score of 5.

Trading on a P/Book of 2.6x and an earnings yield of 7.3%, we believe that valuation is somewhat rich irrespective of the bank’s strengths. A franchise valuation of 52% versus a median of 8% in Asia Pacific seals the deal.

2. Vietnam Market Update: Deep Value Found in Salient Themes

My previous insight Top Consumer Themes in Vietnam notes the clear cut strategy of investing in consumer growth stocks at reasonable valuation, while avoiding some of the over-hyped momentum names that trade at unreasonable multiples.  Another interesting trend to note in the market includes the lower valuation of select stocks that are positioned in key, high growth sectors, which are by no means value traps.  After eliminating value traps and overvalued momentum names, it is clear to see the VN Index offers asymmetric value for investors.  The attractively priced consumer growth stocks and value names are both relatively favorable compared to that of other frontier markets ( less favorable macro picture but similar valuation in many cases).

Some of the themes mentioned in this insight are an indirect play on China’s economic transformation, as it chooses to “export” some of its less sophisticated economic activities to other frontier markets ( ie. coal in Mongolia and textiles in other frontier markets).  This has intensified recently on the back of trade war tension.  Stocks in Vietnam that are in sectors positioned to benefit from this trade at relatively depressed valuations.

I included an overview of the following themes and some stocks positioned in these areas:

• Power is an appropriate way to access Vietnam’s broad based economic growth: Investment in power stocks is an indirect play on Vietnam’s continued growth in manufacturing and the country’s improved standards of living.
• Industrial park operators are attractively priced and offer exposure to Vietnam’s manufacturing narrative, which is a very straight forward growth narrative: Industrial park operators have relatively guaranteed success and have been able to attract large names such as Samsung and LG.
• Vietnam’s textile industry will be a key driver of growth moving forward: Vietnam’s textile industry has continued its course of growth, even though it has been moving into electronics exports and also facing increased competition from lower cost countries such as Bangladesh.
• Port stocks are extremely cheap, as perceived risk is greater than actual risk: The valuation for port operators has also become very depressed in recent years, though this is clearly a strong long term growth areas for Vietnam’s stock market.
• Vietnam’s agriculture growth recently reached a 7 year high, though growth still remains in the lower single digits and below the country’s average GDP growth.
• Plastic and steel stand out as high growth areas, though margins are sensitive to commodity price movements.

3. Bharti Airtel Buy on Short Lived Breach Below Support

Bharti Airtel (BHARTI IN) corrective cycle does not appear complete with risk of a final spike lower  below key pivot support. It is this crack lower that we want to take advantage of.

Sell volume spike implies the flat range will break lower. 

Daily cycle triangulation sides with a press below pivot support. An upside break of this triangle would trigger a tactical long but would lack needed gas for a sustainable drive.

Weekly MACD is seeking a bottoming/basing cycle that will turn the cycle higher once we see a final capitulation spike below pivot support as we did back in 2008, 2010 and 2012.

4. BIMB: Market Gives Thumbs-Up to Results

Malaysia has a tailwind of a new administration, vowing to overturn many aspects of its predecessor – including cancelling mega infra projects and reducing the “real” National debt.

The economy is relatively buoyant and is slated to generate an average of 4.75% GDP growth over 2018-2022. Private consumption will remain the main driver of growth, still the domestic economy continues to face downside risks stemming from any further escalation in trade tensions and commodity related shocks. Inflation has mellowed, supported by the cut in GST, but will still, once these effects diminish, be modest, at around 2%. Unemployment is low and there is a current account surplus.

Bimb Holdings (BIMB MK) or BHB commands two subsidiaries, Bank Islam and Takaful Malaysia. Bank Islam is a niche consumer-centred lender with a focus on mortgages: the largest component of the loan book and growing at a double-digit pace. Loans are therefore >5 years while funding tends to be <1 year. The insurance operation is BIMB’s most profitable revenue stream though. There is a concerted focus on the brand, on strategic bank partnerships, and on digitalisation. Both subsidiaries are rooted in Shariah-compliance. (Islamic Finance is a fast-growing market share in Malaysia). We do not rule out corporate reorganisation initiatives to unlock further value. The main shareholder is Lembaga Tabung Haji, a religious pilgrim fund board.

While BIMB is less sensitive to government actions on sovereign guarantees for infra projects, the bank is mainly exposed to consumer credit trends and cycle. Malaysia has a high level (by Asian standards) of household (excluding mortgages) indebtedness, dominated by credit cards, auto finance, and personal loans. Some areas of consumer banking reflect a stretched DSR, underpinning a moderately high risk by credit-to-GDP gap. The corporate sector is not excessively leveraged. BIMB though commands strong asset quality, provisioning, and capitalisation levels.

5. WABCO Confirms Being a Takeover Target of The Private German Auto Parts Maker, ZF

Last morning the listed brake supplier, Wabco Holdings (WBC US) confirmed that it is in takeover talks with one of the leading auto parts suppliers in Germany, ZF Friedrichshafen AG. Following the news of being possibly bought by a private company, WABCO’s stock surged almost 10% during the day, reaching USD130.5 by the day’s close.  This positive market reaction for WABCO was purely based on its confirmation about having preliminary takeover discussions with its rival company, ZF. There were no further details released on the possible deal price or about the plans that either company has after the takeover. Further, ZF in a news report stated that no decision has been taken yet and that it was the preliminary discussions that were being done. However, we do note the following:

• ZF is known to have made such strategic acquisitions in aiding the long-term development of the company. A similar strategic move was made by ZF back in 2015, when it took over TRW Automotive Holding to expand its exposure to sensors and electronic components.
• In June last year, ZF stated in a news report that it is not prioritising interest in brake suppliers, as its focus is to pursue investments in developing components to support next generation technologies and reported its plan to further invest more than EUR12bn into e-mobility and the autonomous driving field. This could indicate that WABCO takeover discussions may involve reasonable price discipline from ZF, and we would note that ZF had previously desired to acquire Wabco for about €6-8bn. However, we believe that the buyout does look attractive for both companies, especially for ZF, given the possible synergistic effects that could support ZF’s next gen technologies.
• In the last go around, ZF had just completed its acquisition of TRW and the balance sheet made a further large acquisition difficult. Now, much of the additional debt from the TRW has been digested and although levering up again could place considerable financial pressure on ZF in the short term, the company’s history makes up believe that it has the capability to handle any such pressure once synergies kick-in and restore its balance sheet in short order.

In this briefing:

1. Vietnam Market Update: Deep Value Found in Salient Themes
2. Bharti Airtel Buy on Short Lived Breach Below Support
3. BIMB: Market Gives Thumbs-Up to Results
4. WABCO Confirms Being a Takeover Target of The Private German Auto Parts Maker, ZF
5. Banco Do Brasil (BBAS3) – Capital Contributions from Potential Non-Core Disposals

1. Vietnam Market Update: Deep Value Found in Salient Themes

My previous insight Top Consumer Themes in Vietnam notes the clear cut strategy of investing in consumer growth stocks at reasonable valuation, while avoiding some of the over-hyped momentum names that trade at unreasonable multiples.  Another interesting trend to note in the market includes the lower valuation of select stocks that are positioned in key, high growth sectors, which are by no means value traps.  After eliminating value traps and overvalued momentum names, it is clear to see the VN Index offers asymmetric value for investors.  The attractively priced consumer growth stocks and value names are both relatively favorable compared to that of other frontier markets ( less favorable macro picture but similar valuation in many cases).

Some of the themes mentioned in this insight are an indirect play on China’s economic transformation, as it chooses to “export” some of its less sophisticated economic activities to other frontier markets ( ie. coal in Mongolia and textiles in other frontier markets).  This has intensified recently on the back of trade war tension.  Stocks in Vietnam that are in sectors positioned to benefit from this trade at relatively depressed valuations.

I included an overview of the following themes and some stocks positioned in these areas:

• Power is an appropriate way to access Vietnam’s broad based economic growth: Investment in power stocks is an indirect play on Vietnam’s continued growth in manufacturing and the country’s improved standards of living.
• Industrial park operators are attractively priced and offer exposure to Vietnam’s manufacturing narrative, which is a very straight forward growth narrative: Industrial park operators have relatively guaranteed success and have been able to attract large names such as Samsung and LG.
• Vietnam’s textile industry will be a key driver of growth moving forward: Vietnam’s textile industry has continued its course of growth, even though it has been moving into electronics exports and also facing increased competition from lower cost countries such as Bangladesh.
• Port stocks are extremely cheap, as perceived risk is greater than actual risk: The valuation for port operators has also become very depressed in recent years, though this is clearly a strong long term growth areas for Vietnam’s stock market.
• Vietnam’s agriculture growth recently reached a 7 year high, though growth still remains in the lower single digits and below the country’s average GDP growth.
• Plastic and steel stand out as high growth areas, though margins are sensitive to commodity price movements.

2. Bharti Airtel Buy on Short Lived Breach Below Support

Bharti Airtel (BHARTI IN) corrective cycle does not appear complete with risk of a final spike lower  below key pivot support. It is this crack lower that we want to take advantage of.

Sell volume spike implies the flat range will break lower. 

Daily cycle triangulation sides with a press below pivot support. An upside break of this triangle would trigger a tactical long but would lack needed gas for a sustainable drive.

Weekly MACD is seeking a bottoming/basing cycle that will turn the cycle higher once we see a final capitulation spike below pivot support as we did back in 2008, 2010 and 2012.

3. BIMB: Market Gives Thumbs-Up to Results

Malaysia has a tailwind of a new administration, vowing to overturn many aspects of its predecessor – including cancelling mega infra projects and reducing the “real” National debt.

The economy is relatively buoyant and is slated to generate an average of 4.75% GDP growth over 2018-2022. Private consumption will remain the main driver of growth, still the domestic economy continues to face downside risks stemming from any further escalation in trade tensions and commodity related shocks. Inflation has mellowed, supported by the cut in GST, but will still, once these effects diminish, be modest, at around 2%. Unemployment is low and there is a current account surplus.

Bimb Holdings (BIMB MK) or BHB commands two subsidiaries, Bank Islam and Takaful Malaysia. Bank Islam is a niche consumer-centred lender with a focus on mortgages: the largest component of the loan book and growing at a double-digit pace. Loans are therefore >5 years while funding tends to be <1 year. The insurance operation is BIMB’s most profitable revenue stream though. There is a concerted focus on the brand, on strategic bank partnerships, and on digitalisation. Both subsidiaries are rooted in Shariah-compliance. (Islamic Finance is a fast-growing market share in Malaysia). We do not rule out corporate reorganisation initiatives to unlock further value. The main shareholder is Lembaga Tabung Haji, a religious pilgrim fund board.

While BIMB is less sensitive to government actions on sovereign guarantees for infra projects, the bank is mainly exposed to consumer credit trends and cycle. Malaysia has a high level (by Asian standards) of household (excluding mortgages) indebtedness, dominated by credit cards, auto finance, and personal loans. Some areas of consumer banking reflect a stretched DSR, underpinning a moderately high risk by credit-to-GDP gap. The corporate sector is not excessively leveraged. BIMB though commands strong asset quality, provisioning, and capitalisation levels.

4. WABCO Confirms Being a Takeover Target of The Private German Auto Parts Maker, ZF

Last morning the listed brake supplier, Wabco Holdings (WBC US) confirmed that it is in takeover talks with one of the leading auto parts suppliers in Germany, ZF Friedrichshafen AG. Following the news of being possibly bought by a private company, WABCO’s stock surged almost 10% during the day, reaching USD130.5 by the day’s close.  This positive market reaction for WABCO was purely based on its confirmation about having preliminary takeover discussions with its rival company, ZF. There were no further details released on the possible deal price or about the plans that either company has after the takeover. Further, ZF in a news report stated that no decision has been taken yet and that it was the preliminary discussions that were being done. However, we do note the following:

• ZF is known to have made such strategic acquisitions in aiding the long-term development of the company. A similar strategic move was made by ZF back in 2015, when it took over TRW Automotive Holding to expand its exposure to sensors and electronic components.
• In June last year, ZF stated in a news report that it is not prioritising interest in brake suppliers, as its focus is to pursue investments in developing components to support next generation technologies and reported its plan to further invest more than EUR12bn into e-mobility and the autonomous driving field. This could indicate that WABCO takeover discussions may involve reasonable price discipline from ZF, and we would note that ZF had previously desired to acquire Wabco for about €6-8bn. However, we believe that the buyout does look attractive for both companies, especially for ZF, given the possible synergistic effects that could support ZF’s next gen technologies.
• In the last go around, ZF had just completed its acquisition of TRW and the balance sheet made a further large acquisition difficult. Now, much of the additional debt from the TRW has been digested and although levering up again could place considerable financial pressure on ZF in the short term, the company’s history makes up believe that it has the capability to handle any such pressure once synergies kick-in and restore its balance sheet in short order.

5. Banco Do Brasil (BBAS3) – Capital Contributions from Potential Non-Core Disposals

• Banco Do Brasil Sa (BBAS3 BZ) management is exploring non-core disposals, across its investment portfolio
• Its stakes in Banco Votorantim, utility holding Neoenergia and its Argentinian subsidiary Banco Patagonia Sa (BPAT AR) have been most readily mentioned, and are the most likely candidates, in our view
• The disposal timings, we expect, could be nearer term for domestic, Brazilian assets, with Banco Patagonia more likely to be a longer term project (2020?); still, we see such potential disposals as positive catalysts for Banco do Brasil shares
• We estimate that the CET1 accretion from disposals could total 73-80bps, of which the net gain from these potential disposals could add between 10-17 bps , with the risk weighted asset (RWA) reduction expected to free up an additional 63bps of CET1

In this briefing:

1. Bharti Airtel Buy on Short Lived Breach Below Support
2. BIMB: Market Gives Thumbs-Up to Results
3. WABCO Confirms Being a Takeover Target of The Private German Auto Parts Maker, ZF
4. Banco Do Brasil (BBAS3) – Capital Contributions from Potential Non-Core Disposals
5. Sunpower: Excellent FY18 Results; Strong Outlook for FY19. Fair Value Remains 1 SGD (70% Upside)

1. Bharti Airtel Buy on Short Lived Breach Below Support

Bharti Airtel (BHARTI IN) corrective cycle does not appear complete with risk of a final spike lower  below key pivot support. It is this crack lower that we want to take advantage of.

Sell volume spike implies the flat range will break lower. 

Daily cycle triangulation sides with a press below pivot support. An upside break of this triangle would trigger a tactical long but would lack needed gas for a sustainable drive.

Weekly MACD is seeking a bottoming/basing cycle that will turn the cycle higher once we see a final capitulation spike below pivot support as we did back in 2008, 2010 and 2012.

2. BIMB: Market Gives Thumbs-Up to Results

Malaysia has a tailwind of a new administration, vowing to overturn many aspects of its predecessor – including cancelling mega infra projects and reducing the “real” National debt.

The economy is relatively buoyant and is slated to generate an average of 4.75% GDP growth over 2018-2022. Private consumption will remain the main driver of growth, still the domestic economy continues to face downside risks stemming from any further escalation in trade tensions and commodity related shocks. Inflation has mellowed, supported by the cut in GST, but will still, once these effects diminish, be modest, at around 2%. Unemployment is low and there is a current account surplus.

Bimb Holdings (BIMB MK) or BHB commands two subsidiaries, Bank Islam and Takaful Malaysia. Bank Islam is a niche consumer-centred lender with a focus on mortgages: the largest component of the loan book and growing at a double-digit pace. Loans are therefore >5 years while funding tends to be <1 year. The insurance operation is BIMB’s most profitable revenue stream though. There is a concerted focus on the brand, on strategic bank partnerships, and on digitalisation. Both subsidiaries are rooted in Shariah-compliance. (Islamic Finance is a fast-growing market share in Malaysia). We do not rule out corporate reorganisation initiatives to unlock further value. The main shareholder is Lembaga Tabung Haji, a religious pilgrim fund board.

While BIMB is less sensitive to government actions on sovereign guarantees for infra projects, the bank is mainly exposed to consumer credit trends and cycle. Malaysia has a high level (by Asian standards) of household (excluding mortgages) indebtedness, dominated by credit cards, auto finance, and personal loans. Some areas of consumer banking reflect a stretched DSR, underpinning a moderately high risk by credit-to-GDP gap. The corporate sector is not excessively leveraged. BIMB though commands strong asset quality, provisioning, and capitalisation levels.

3. WABCO Confirms Being a Takeover Target of The Private German Auto Parts Maker, ZF

Last morning the listed brake supplier, Wabco Holdings (WBC US) confirmed that it is in takeover talks with one of the leading auto parts suppliers in Germany, ZF Friedrichshafen AG. Following the news of being possibly bought by a private company, WABCO’s stock surged almost 10% during the day, reaching USD130.5 by the day’s close.  This positive market reaction for WABCO was purely based on its confirmation about having preliminary takeover discussions with its rival company, ZF. There were no further details released on the possible deal price or about the plans that either company has after the takeover. Further, ZF in a news report stated that no decision has been taken yet and that it was the preliminary discussions that were being done. However, we do note the following:

• ZF is known to have made such strategic acquisitions in aiding the long-term development of the company. A similar strategic move was made by ZF back in 2015, when it took over TRW Automotive Holding to expand its exposure to sensors and electronic components.
• In June last year, ZF stated in a news report that it is not prioritising interest in brake suppliers, as its focus is to pursue investments in developing components to support next generation technologies and reported its plan to further invest more than EUR12bn into e-mobility and the autonomous driving field. This could indicate that WABCO takeover discussions may involve reasonable price discipline from ZF, and we would note that ZF had previously desired to acquire Wabco for about €6-8bn. However, we believe that the buyout does look attractive for both companies, especially for ZF, given the possible synergistic effects that could support ZF’s next gen technologies.
• In the last go around, ZF had just completed its acquisition of TRW and the balance sheet made a further large acquisition difficult. Now, much of the additional debt from the TRW has been digested and although levering up again could place considerable financial pressure on ZF in the short term, the company’s history makes up believe that it has the capability to handle any such pressure once synergies kick-in and restore its balance sheet in short order.

4. Banco Do Brasil (BBAS3) – Capital Contributions from Potential Non-Core Disposals

• Banco Do Brasil Sa (BBAS3 BZ) management is exploring non-core disposals, across its investment portfolio
• Its stakes in Banco Votorantim, utility holding Neoenergia and its Argentinian subsidiary Banco Patagonia Sa (BPAT AR) have been most readily mentioned, and are the most likely candidates, in our view
• The disposal timings, we expect, could be nearer term for domestic, Brazilian assets, with Banco Patagonia more likely to be a longer term project (2020?); still, we see such potential disposals as positive catalysts for Banco do Brasil shares
• We estimate that the CET1 accretion from disposals could total 73-80bps, of which the net gain from these potential disposals could add between 10-17 bps , with the risk weighted asset (RWA) reduction expected to free up an additional 63bps of CET1

5. Sunpower: Excellent FY18 Results; Strong Outlook for FY19. Fair Value Remains 1 SGD (70% Upside)

Sunpower Group (SPWG SP) has seen an incredible transformation over the past 24 months. Since the entry of two respected PE funds (DCP and CDH) the company has de-emphasized its historical M&S business and pushed full throttle on its GI (Green Investments) portfolio.

The efforts of this shift to GI are now bearing fruit with FY18 revenues increasing by 66% to 3.26 billion RMB, EBITDA rising by 113.5% to 496 million RMB (15.2% EBITDA margin) and underlying NPAT rising by 87% to 268 million RMB. Most importantly, the quality and visibility of its cash flows have improved.

It is rare to find companies that give you 3-year NPAT forecasts but Sunpower did this with the issuance of its second CB late 3Q18. Instead of using stale sell-side consensus forecasts we now focus on these public forecasts to guide investors what Sunpower’s fair value is depending on the PE multiple that investors apply.

My Fair Value estimate of 1 SGD remains unchanged (based on 15x FY21 EPS and company meeting its FY21 NPAT targets as communicated in CB2 prospectus).