Value Investing

In this briefing:

1. Musashino Bank  (8336 JP): Braking Bad
2. Singapore Real Deals (Issue 3): Integrated Mixed-Use Development in Pasir Ris

1. Musashino Bank  (8336 JP): Braking Bad

Musashino Bank (8336 JP) was one of the last regional banks to announce 3Q FY3/2019 results, and they were a nasty surprise: a consolidated net loss for the nine months to 31 December 2018, caused by heavy reserving in Q3 (October-December 2018) against the bank’s exposure to the troubled Akebono Brake Industry Co (7238 JP) .  While the bank has slashed its full-year net profit guidance from ¥11.1 billion to ¥4.5 billion, this would still require an heroic level of profits in Q4 which the bank has never before achieved.  The share price has fallen over 31% in the last twelve months.  Valuations at current levels are still high (FY3/2019 PER is 17.6x) and we consider the share price to be vulnerable to further weakness.  Caveat emptor (May the buyer beware) !

2. Singapore Real Deals (Issue 3): Integrated Mixed-Use Development in Pasir Ris

Singapore Real Deals is a fortnightly property digest that takes you through the peculiarities of Singapore’s real estate market. In this issue, we look into the first white site at Pasir Ris Central launched by the Housing Development Board (HDB). The white site, which is next to the Pasir Ris MRT station on the East-West Line, is to be developed into a mixed-use commercial and residential development and is likely to be also seamlessly connected to the bus interchange and MRT station.  

On 14 December 2018 at the close of the tender, the Pasir Ris white site saw a weak response from developers with only three bids received. This was below expectations given its prime location next to the MRT station and was likely the result of the July 2018 property cooling measures which made developer turn more cautious. The three bidders for the white site were Far East Organization, Singapore Press Holdings (SPH SP) (SPH) and Kajima Developments in a joint bid, and Phoenix Residential and Phoenix Commercial; both owned by Allgreen Properties and Kerry Properties.

On 25 January 2019, the Land Transport Authority (LTA) announced the alignment and 12 station locations for Phase 1 of the Cross Island Line (CRL), Singapore’s eighth MRT line. The CRL Phase 1, to be completed by 2029, is 29-km long and comprises 12 stations from Aviation Park to Bright Hill. The line will pass through the Pasir Ris MRT station, making it into a MRT interchange station. Spanning about 50-km in length in its entirety, the CRL will serve existing and future developments in the eastern, western, and north-eastern corridors, linking major hubs such as Jurong Lake District, Punggol Digital District and Changi region when fully completed.

Now that the Pasir Ris MRT station is being named as an interchange station with the CRL, the potential of a successful integrated mixed-use property development will be greater. According to the LTA, the projected daily ridership of the entire CRL is more than 600,000 in the initial years, increasing to over 1 million in the longer term.

The prices of private homes in the future Pasir Ris Central mixed-use development will very much depend on the land price paid by the winning bidder and also other macro and micro factors including the interest rate environment, product mix, design, and cost of integration with amenities and etc. However, we attempted to predict a reasonable price point for the private homes at this future mixed-use development by using two other integrated mixed-development projects currently under-construction as references. The two references are The Woodleigh Residences above Woodleigh MRT station in the up-and-coming Bidadari estate and Park Place Residences at PLQ in the new business district at Paya Lebar Central. We also work backwards to estimate the bid price. Market conditions are assumed to remain the same two years from now.

In this briefing:

1. Musashino Bank  (8336 JP): Braking Bad
2. Singapore Real Deals (Issue 3): Integrated Mixed-Use Development in Pasir Ris
3. China Rail: Paths to Financial Viability for CRC

1. Musashino Bank  (8336 JP): Braking Bad

Musashino Bank (8336 JP) was one of the last regional banks to announce 3Q FY3/2019 results, and they were a nasty surprise: a consolidated net loss for the nine months to 31 December 2018, caused by heavy reserving in Q3 (October-December 2018) against the bank’s exposure to the troubled Akebono Brake Industry Co (7238 JP) .  While the bank has slashed its full-year net profit guidance from ¥11.1 billion to ¥4.5 billion, this would still require an heroic level of profits in Q4 which the bank has never before achieved.  The share price has fallen over 31% in the last twelve months.  Valuations at current levels are still high (FY3/2019 PER is 17.6x) and we consider the share price to be vulnerable to further weakness.  Caveat emptor (May the buyer beware) !

2. Singapore Real Deals (Issue 3): Integrated Mixed-Use Development in Pasir Ris

Singapore Real Deals is a fortnightly property digest that takes you through the peculiarities of Singapore’s real estate market. In this issue, we look into the first white site at Pasir Ris Central launched by the Housing Development Board (HDB). The white site, which is next to the Pasir Ris MRT station on the East-West Line, is to be developed into a mixed-use commercial and residential development and is likely to be also seamlessly connected to the bus interchange and MRT station.  

On 14 December 2018 at the close of the tender, the Pasir Ris white site saw a weak response from developers with only three bids received. This was below expectations given its prime location next to the MRT station and was likely the result of the July 2018 property cooling measures which made developer turn more cautious. The three bidders for the white site were Far East Organization, Singapore Press Holdings (SPH SP) (SPH) and Kajima Developments in a joint bid, and Phoenix Residential and Phoenix Commercial; both owned by Allgreen Properties and Kerry Properties.

On 25 January 2019, the Land Transport Authority (LTA) announced the alignment and 12 station locations for Phase 1 of the Cross Island Line (CRL), Singapore’s eighth MRT line. The CRL Phase 1, to be completed by 2029, is 29-km long and comprises 12 stations from Aviation Park to Bright Hill. The line will pass through the Pasir Ris MRT station, making it into a MRT interchange station. Spanning about 50-km in length in its entirety, the CRL will serve existing and future developments in the eastern, western, and north-eastern corridors, linking major hubs such as Jurong Lake District, Punggol Digital District and Changi region when fully completed.

Now that the Pasir Ris MRT station is being named as an interchange station with the CRL, the potential of a successful integrated mixed-use property development will be greater. According to the LTA, the projected daily ridership of the entire CRL is more than 600,000 in the initial years, increasing to over 1 million in the longer term.

The prices of private homes in the future Pasir Ris Central mixed-use development will very much depend on the land price paid by the winning bidder and also other macro and micro factors including the interest rate environment, product mix, design, and cost of integration with amenities and etc. However, we attempted to predict a reasonable price point for the private homes at this future mixed-use development by using two other integrated mixed-development projects currently under-construction as references. The two references are The Woodleigh Residences above Woodleigh MRT station in the up-and-coming Bidadari estate and Park Place Residences at PLQ in the new business district at Paya Lebar Central. We also work backwards to estimate the bid price. Market conditions are assumed to remain the same two years from now.

3. China Rail: Paths to Financial Viability for CRC

CRC (China Railway Corporation, previously known as MOR) has been questioned about its extremely high liability rate and trillions of debts for years. Some experts believe China shall stop HSR (High Speed Railway) construction to reduce the liability in rail system and lower the financial risk of the society. While others believe a high speed rail transportation system is necessary and would improve the efficiency of the society, because China is the third largest country in the world by geographic area.

In this report, we list three possible solutions for CRC’s liability issue: to increase revenue to cover the Capex; to increase funding from local governments or private sectors; to reduce annual rail investment.

Conclusion:

In our view, China will stop expanding its rail system sooner or later. The main frame of HSR is completed. Only some extension lines are required. If CRC doesn’t start building high speed rails for freight transportation, which was mentioned in 2012-2013, China’s annual rail investment might be reduced after 2023.

Before that, CRC is capable of remain its existing investment amount unchanged, without further increasing the financial risk of China’s banking sector. To reduce its debts, increasing rail investment funding proportion from local governments is still an easier option than increasing CRC’s net profit. Once China reduces its rail investment, CRC would be able to reduce its net gearing significantly. 

In this briefing:

1. Singapore Real Deals (Issue 3): Integrated Mixed-Use Development in Pasir Ris
2. China Rail: Paths to Financial Viability for CRC

1. Singapore Real Deals (Issue 3): Integrated Mixed-Use Development in Pasir Ris

Singapore Real Deals is a fortnightly property digest that takes you through the peculiarities of Singapore’s real estate market. In this issue, we look into the first white site at Pasir Ris Central launched by the Housing Development Board (HDB). The white site, which is next to the Pasir Ris MRT station on the East-West Line, is to be developed into a mixed-use commercial and residential development and is likely to be also seamlessly connected to the bus interchange and MRT station.  

On 14 December 2018 at the close of the tender, the Pasir Ris white site saw a weak response from developers with only three bids received. This was below expectations given its prime location next to the MRT station and was likely the result of the July 2018 property cooling measures which made developer turn more cautious. The three bidders for the white site were Far East Organization, Singapore Press Holdings (SPH SP) (SPH) and Kajima Developments in a joint bid, and Phoenix Residential and Phoenix Commercial; both owned by Allgreen Properties and Kerry Properties.

On 25 January 2019, the Land Transport Authority (LTA) announced the alignment and 12 station locations for Phase 1 of the Cross Island Line (CRL), Singapore’s eighth MRT line. The CRL Phase 1, to be completed by 2029, is 29-km long and comprises 12 stations from Aviation Park to Bright Hill. The line will pass through the Pasir Ris MRT station, making it into a MRT interchange station. Spanning about 50-km in length in its entirety, the CRL will serve existing and future developments in the eastern, western, and north-eastern corridors, linking major hubs such as Jurong Lake District, Punggol Digital District and Changi region when fully completed.

Now that the Pasir Ris MRT station is being named as an interchange station with the CRL, the potential of a successful integrated mixed-use property development will be greater. According to the LTA, the projected daily ridership of the entire CRL is more than 600,000 in the initial years, increasing to over 1 million in the longer term.

The prices of private homes in the future Pasir Ris Central mixed-use development will very much depend on the land price paid by the winning bidder and also other macro and micro factors including the interest rate environment, product mix, design, and cost of integration with amenities and etc. However, we attempted to predict a reasonable price point for the private homes at this future mixed-use development by using two other integrated mixed-development projects currently under-construction as references. The two references are The Woodleigh Residences above Woodleigh MRT station in the up-and-coming Bidadari estate and Park Place Residences at PLQ in the new business district at Paya Lebar Central. We also work backwards to estimate the bid price. Market conditions are assumed to remain the same two years from now.

2. China Rail: Paths to Financial Viability for CRC

CRC (China Railway Corporation, previously known as MOR) has been questioned about its extremely high liability rate and trillions of debts for years. Some experts believe China shall stop HSR (High Speed Railway) construction to reduce the liability in rail system and lower the financial risk of the society. While others believe a high speed rail transportation system is necessary and would improve the efficiency of the society, because China is the third largest country in the world by geographic area.

In this report, we list three possible solutions for CRC’s liability issue: to increase revenue to cover the Capex; to increase funding from local governments or private sectors; to reduce annual rail investment.

Conclusion:

In our view, China will stop expanding its rail system sooner or later. The main frame of HSR is completed. Only some extension lines are required. If CRC doesn’t start building high speed rails for freight transportation, which was mentioned in 2012-2013, China’s annual rail investment might be reduced after 2023.

Before that, CRC is capable of remain its existing investment amount unchanged, without further increasing the financial risk of China’s banking sector. To reduce its debts, increasing rail investment funding proportion from local governments is still an easier option than increasing CRC’s net profit. Once China reduces its rail investment, CRC would be able to reduce its net gearing significantly. 

In this briefing:

1. Singapore Real Deals (Issue 3): Integrated Mixed-Use Development in Pasir Ris
2. China Rail: Paths to Financial Viability for CRC
3. UG Healthcare: Weak 2Q19 Driven by One-Off Issue, If 10% NPM Achieved in FY20 Trades at 4x FY20 P/E

1. Singapore Real Deals (Issue 3): Integrated Mixed-Use Development in Pasir Ris

Singapore Real Deals is a fortnightly property digest that takes you through the peculiarities of Singapore’s real estate market. In this issue, we look into the first white site at Pasir Ris Central launched by the Housing Development Board (HDB). The white site, which is next to the Pasir Ris MRT station on the East-West Line, is to be developed into a mixed-use commercial and residential development and is likely to be also seamlessly connected to the bus interchange and MRT station.  

On 14 December 2018 at the close of the tender, the Pasir Ris white site saw a weak response from developers with only three bids received. This was below expectations given its prime location next to the MRT station and was likely the result of the July 2018 property cooling measures which made developer turn more cautious. The three bidders for the white site were Far East Organization, Singapore Press Holdings (SPH SP) (SPH) and Kajima Developments in a joint bid, and Phoenix Residential and Phoenix Commercial; both owned by Allgreen Properties and Kerry Properties.

On 25 January 2019, the Land Transport Authority (LTA) announced the alignment and 12 station locations for Phase 1 of the Cross Island Line (CRL), Singapore’s eighth MRT line. The CRL Phase 1, to be completed by 2029, is 29-km long and comprises 12 stations from Aviation Park to Bright Hill. The line will pass through the Pasir Ris MRT station, making it into a MRT interchange station. Spanning about 50-km in length in its entirety, the CRL will serve existing and future developments in the eastern, western, and north-eastern corridors, linking major hubs such as Jurong Lake District, Punggol Digital District and Changi region when fully completed.

Now that the Pasir Ris MRT station is being named as an interchange station with the CRL, the potential of a successful integrated mixed-use property development will be greater. According to the LTA, the projected daily ridership of the entire CRL is more than 600,000 in the initial years, increasing to over 1 million in the longer term.

The prices of private homes in the future Pasir Ris Central mixed-use development will very much depend on the land price paid by the winning bidder and also other macro and micro factors including the interest rate environment, product mix, design, and cost of integration with amenities and etc. However, we attempted to predict a reasonable price point for the private homes at this future mixed-use development by using two other integrated mixed-development projects currently under-construction as references. The two references are The Woodleigh Residences above Woodleigh MRT station in the up-and-coming Bidadari estate and Park Place Residences at PLQ in the new business district at Paya Lebar Central. We also work backwards to estimate the bid price. Market conditions are assumed to remain the same two years from now.

2. China Rail: Paths to Financial Viability for CRC

CRC (China Railway Corporation, previously known as MOR) has been questioned about its extremely high liability rate and trillions of debts for years. Some experts believe China shall stop HSR (High Speed Railway) construction to reduce the liability in rail system and lower the financial risk of the society. While others believe a high speed rail transportation system is necessary and would improve the efficiency of the society, because China is the third largest country in the world by geographic area.

In this report, we list three possible solutions for CRC’s liability issue: to increase revenue to cover the Capex; to increase funding from local governments or private sectors; to reduce annual rail investment.

Conclusion:

In our view, China will stop expanding its rail system sooner or later. The main frame of HSR is completed. Only some extension lines are required. If CRC doesn’t start building high speed rails for freight transportation, which was mentioned in 2012-2013, China’s annual rail investment might be reduced after 2023.

Before that, CRC is capable of remain its existing investment amount unchanged, without further increasing the financial risk of China’s banking sector. To reduce its debts, increasing rail investment funding proportion from local governments is still an easier option than increasing CRC’s net profit. Once China reduces its rail investment, CRC would be able to reduce its net gearing significantly. 

3. UG Healthcare: Weak 2Q19 Driven by One-Off Issue, If 10% NPM Achieved in FY20 Trades at 4x FY20 P/E

UG Healthcare (UGHC SP) showed good topline growth (+15%) but very weak bottom-line performance (-73%) in the second quarter of FY19 (financial year ending June). Weak bottom-line results were caused by delays and cost overruns in opening its latest factory expansion.

While the latest results are a setback I remain a believer in the UG Healthcare story. The eventual goal of reaching 100M SGD in revenues and getting a 10% NPM remains unchanged by the end of FY2020. Should the target be achieved the company trades at 4x 2020 P/E. Competitors in Malaysia trade at mid-teens multiples (or higher) so UG should deserve a significant re-rating the coming two years. Fundamentally, nothing has changed to alter my bear case  (0.24 SGD), base case (0.39 SGD) or blue-sky scenario (0.62 SGD) analysis. Liquidity remains an issue at less than 25K SGD/day. 

In this briefing:

1. China Rail: Paths to Financial Viability for CRC
2. UG Healthcare: Weak 2Q19 Driven by One-Off Issue, If 10% NPM Achieved in FY20 Trades at 4x FY20 P/E
3. Hana Financial: Hand It to Hana

1. China Rail: Paths to Financial Viability for CRC

CRC (China Railway Corporation, previously known as MOR) has been questioned about its extremely high liability rate and trillions of debts for years. Some experts believe China shall stop HSR (High Speed Railway) construction to reduce the liability in rail system and lower the financial risk of the society. While others believe a high speed rail transportation system is necessary and would improve the efficiency of the society, because China is the third largest country in the world by geographic area.

In this report, we list three possible solutions for CRC’s liability issue: to increase revenue to cover the Capex; to increase funding from local governments or private sectors; to reduce annual rail investment.

Conclusion:

In our view, China will stop expanding its rail system sooner or later. The main frame of HSR is completed. Only some extension lines are required. If CRC doesn’t start building high speed rails for freight transportation, which was mentioned in 2012-2013, China’s annual rail investment might be reduced after 2023.

Before that, CRC is capable of remain its existing investment amount unchanged, without further increasing the financial risk of China’s banking sector. To reduce its debts, increasing rail investment funding proportion from local governments is still an easier option than increasing CRC’s net profit. Once China reduces its rail investment, CRC would be able to reduce its net gearing significantly. 

2. UG Healthcare: Weak 2Q19 Driven by One-Off Issue, If 10% NPM Achieved in FY20 Trades at 4x FY20 P/E

UG Healthcare (UGHC SP) showed good topline growth (+15%) but very weak bottom-line performance (-73%) in the second quarter of FY19 (financial year ending June). Weak bottom-line results were caused by delays and cost overruns in opening its latest factory expansion.

While the latest results are a setback I remain a believer in the UG Healthcare story. The eventual goal of reaching 100M SGD in revenues and getting a 10% NPM remains unchanged by the end of FY2020. Should the target be achieved the company trades at 4x 2020 P/E. Competitors in Malaysia trade at mid-teens multiples (or higher) so UG should deserve a significant re-rating the coming two years. Fundamentally, nothing has changed to alter my bear case  (0.24 SGD), base case (0.39 SGD) or blue-sky scenario (0.62 SGD) analysis. Liquidity remains an issue at less than 25K SGD/day. 

3. Hana Financial: Hand It to Hana

Fundamental trends at Hana Financial (086790 KS) are benign and stand out within South Korea’s improving and deep value banking universe. Key metrics/signal at 12M18 positive fundamental momentum and value-quality trends embodied in a high PH Score™.

Hana is an important constituent of South Korea’s Banking Sector, holding approximately 13% of the system total loans, 15% of deposits and about 40% of the nation’s trade finance due to the bank’s entrenched foreign-currency clearing system. This valuable franchise is backed by strengthening capitalisation, improving asset quality after a difficult period for banks grappling with corporate exposures, and discrete gains on Efficiency and Profitability post sizeable merger and integration costs.

Corporate governance remains an issue to monitor after the nepotism scandal of recent years and was covered by Douglas Kim last year.

Having said that, Hana is a slightly higher risk than peers with a HY profile given its default rating.

In this briefing:

1. China Rail: Paths to Financial Viability for CRC
2. UG Healthcare: Weak 2Q19 Driven by One-Off Issue, If 10% NPM Achieved in FY20 Trades at 4x FY20 P/E
3. Hana Financial: Hand It to Hana
4. Valuetronics (VALUE SP): Trade War Uncertainty Continues, Downside Supported by Large Cash Position

1. China Rail: Paths to Financial Viability for CRC

CRC (China Railway Corporation, previously known as MOR) has been questioned about its extremely high liability rate and trillions of debts for years. Some experts believe China shall stop HSR (High Speed Railway) construction to reduce the liability in rail system and lower the financial risk of the society. While others believe a high speed rail transportation system is necessary and would improve the efficiency of the society, because China is the third largest country in the world by geographic area.

In this report, we list three possible solutions for CRC’s liability issue: to increase revenue to cover the Capex; to increase funding from local governments or private sectors; to reduce annual rail investment.

Conclusion:

In our view, China will stop expanding its rail system sooner or later. The main frame of HSR is completed. Only some extension lines are required. If CRC doesn’t start building high speed rails for freight transportation, which was mentioned in 2012-2013, China’s annual rail investment might be reduced after 2023.

Before that, CRC is capable of remain its existing investment amount unchanged, without further increasing the financial risk of China’s banking sector. To reduce its debts, increasing rail investment funding proportion from local governments is still an easier option than increasing CRC’s net profit. Once China reduces its rail investment, CRC would be able to reduce its net gearing significantly. 

2. UG Healthcare: Weak 2Q19 Driven by One-Off Issue, If 10% NPM Achieved in FY20 Trades at 4x FY20 P/E

UG Healthcare (UGHC SP) showed good topline growth (+15%) but very weak bottom-line performance (-73%) in the second quarter of FY19 (financial year ending June). Weak bottom-line results were caused by delays and cost overruns in opening its latest factory expansion.

While the latest results are a setback I remain a believer in the UG Healthcare story. The eventual goal of reaching 100M SGD in revenues and getting a 10% NPM remains unchanged by the end of FY2020. Should the target be achieved the company trades at 4x 2020 P/E. Competitors in Malaysia trade at mid-teens multiples (or higher) so UG should deserve a significant re-rating the coming two years. Fundamentally, nothing has changed to alter my bear case  (0.24 SGD), base case (0.39 SGD) or blue-sky scenario (0.62 SGD) analysis. Liquidity remains an issue at less than 25K SGD/day. 

3. Hana Financial: Hand It to Hana

Fundamental trends at Hana Financial (086790 KS) are benign and stand out within South Korea’s improving and deep value banking universe. Key metrics/signal at 12M18 positive fundamental momentum and value-quality trends embodied in a high PH Score™.

Hana is an important constituent of South Korea’s Banking Sector, holding approximately 13% of the system total loans, 15% of deposits and about 40% of the nation’s trade finance due to the bank’s entrenched foreign-currency clearing system. This valuable franchise is backed by strengthening capitalisation, improving asset quality after a difficult period for banks grappling with corporate exposures, and discrete gains on Efficiency and Profitability post sizeable merger and integration costs.

Corporate governance remains an issue to monitor after the nepotism scandal of recent years and was covered by Douglas Kim last year.

Having said that, Hana is a slightly higher risk than peers with a HY profile given its default rating.

4. Valuetronics (VALUE SP): Trade War Uncertainty Continues, Downside Supported by Large Cash Position

Valuetronics reported its 3Q19 figures this week which showed a 7.5% decline in revenues but a small (+2.6%) increase in bottom line profits. Stronger margins in its ICE segment offset weakness in its CE segment.

Valuetronics Holdings (VALUE SP) remains a solid company run by a good management team with interesting clients in consumer electronics and automotive. The valuation of the company is cheap (5x ex-cash 2019 P/E) and the balance sheet is rock solid.

All these positives are currently being overshadowed by the US-China trade war as the company has 100% of its production in China and does 45.7% of its sales in North-America. While many companies try to downplay the impact of the trade-war Valuetronics cannot hide and the alternatives it is working on to offset the tariff impact will surely cause short-term disruption and increased costs.

YTD the share price is +12% as the market is hoping for a positive resolution to the US-China trade war. Management is cautious on macro political improvements as trade war friction is unlikely to dissipate soon. Given the weak outlook for its CE segment and no significant new customer wins in its ICE segment risk/reward does not seem very attractive despite good dividend yield and cheap valuation.

In this briefing:

1. UG Healthcare: Weak 2Q19 Driven by One-Off Issue, If 10% NPM Achieved in FY20 Trades at 4x FY20 P/E
2. Hana Financial: Hand It to Hana
3. Valuetronics (VALUE SP): Trade War Uncertainty Continues, Downside Supported by Large Cash Position

1. UG Healthcare: Weak 2Q19 Driven by One-Off Issue, If 10% NPM Achieved in FY20 Trades at 4x FY20 P/E

UG Healthcare (UGHC SP) showed good topline growth (+15%) but very weak bottom-line performance (-73%) in the second quarter of FY19 (financial year ending June). Weak bottom-line results were caused by delays and cost overruns in opening its latest factory expansion.

While the latest results are a setback I remain a believer in the UG Healthcare story. The eventual goal of reaching 100M SGD in revenues and getting a 10% NPM remains unchanged by the end of FY2020. Should the target be achieved the company trades at 4x 2020 P/E. Competitors in Malaysia trade at mid-teens multiples (or higher) so UG should deserve a significant re-rating the coming two years. Fundamentally, nothing has changed to alter my bear case  (0.24 SGD), base case (0.39 SGD) or blue-sky scenario (0.62 SGD) analysis. Liquidity remains an issue at less than 25K SGD/day. 

2. Hana Financial: Hand It to Hana

Fundamental trends at Hana Financial (086790 KS) are benign and stand out within South Korea’s improving and deep value banking universe. Key metrics/signal at 12M18 positive fundamental momentum and value-quality trends embodied in a high PH Score™.

Hana is an important constituent of South Korea’s Banking Sector, holding approximately 13% of the system total loans, 15% of deposits and about 40% of the nation’s trade finance due to the bank’s entrenched foreign-currency clearing system. This valuable franchise is backed by strengthening capitalisation, improving asset quality after a difficult period for banks grappling with corporate exposures, and discrete gains on Efficiency and Profitability post sizeable merger and integration costs.

Corporate governance remains an issue to monitor after the nepotism scandal of recent years and was covered by Douglas Kim last year.

Having said that, Hana is a slightly higher risk than peers with a HY profile given its default rating.

3. Valuetronics (VALUE SP): Trade War Uncertainty Continues, Downside Supported by Large Cash Position

Valuetronics reported its 3Q19 figures this week which showed a 7.5% decline in revenues but a small (+2.6%) increase in bottom line profits. Stronger margins in its ICE segment offset weakness in its CE segment.

Valuetronics Holdings (VALUE SP) remains a solid company run by a good management team with interesting clients in consumer electronics and automotive. The valuation of the company is cheap (5x ex-cash 2019 P/E) and the balance sheet is rock solid.

All these positives are currently being overshadowed by the US-China trade war as the company has 100% of its production in China and does 45.7% of its sales in North-America. While many companies try to downplay the impact of the trade-war Valuetronics cannot hide and the alternatives it is working on to offset the tariff impact will surely cause short-term disruption and increased costs.

YTD the share price is +12% as the market is hoping for a positive resolution to the US-China trade war. Management is cautious on macro political improvements as trade war friction is unlikely to dissipate soon. Given the weak outlook for its CE segment and no significant new customer wins in its ICE segment risk/reward does not seem very attractive despite good dividend yield and cheap valuation.

In this briefing:

1. Hana Financial: Hand It to Hana
2. Valuetronics (VALUE SP): Trade War Uncertainty Continues, Downside Supported by Large Cash Position

1. Hana Financial: Hand It to Hana

Fundamental trends at Hana Financial (086790 KS) are benign and stand out within South Korea’s improving and deep value banking universe. Key metrics/signal at 12M18 positive fundamental momentum and value-quality trends embodied in a high PH Score™.

Hana is an important constituent of South Korea’s Banking Sector, holding approximately 13% of the system total loans, 15% of deposits and about 40% of the nation’s trade finance due to the bank’s entrenched foreign-currency clearing system. This valuable franchise is backed by strengthening capitalisation, improving asset quality after a difficult period for banks grappling with corporate exposures, and discrete gains on Efficiency and Profitability post sizeable merger and integration costs.

Corporate governance remains an issue to monitor after the nepotism scandal of recent years and was covered by Douglas Kim last year.

Having said that, Hana is a slightly higher risk than peers with a HY profile given its default rating.

2. Valuetronics (VALUE SP): Trade War Uncertainty Continues, Downside Supported by Large Cash Position

Valuetronics reported its 3Q19 figures this week which showed a 7.5% decline in revenues but a small (+2.6%) increase in bottom line profits. Stronger margins in its ICE segment offset weakness in its CE segment.

Valuetronics Holdings (VALUE SP) remains a solid company run by a good management team with interesting clients in consumer electronics and automotive. The valuation of the company is cheap (5x ex-cash 2019 P/E) and the balance sheet is rock solid.

All these positives are currently being overshadowed by the US-China trade war as the company has 100% of its production in China and does 45.7% of its sales in North-America. While many companies try to downplay the impact of the trade-war Valuetronics cannot hide and the alternatives it is working on to offset the tariff impact will surely cause short-term disruption and increased costs.

YTD the share price is +12% as the market is hoping for a positive resolution to the US-China trade war. Management is cautious on macro political improvements as trade war friction is unlikely to dissipate soon. Given the weak outlook for its CE segment and no significant new customer wins in its ICE segment risk/reward does not seem very attractive despite good dividend yield and cheap valuation.

In this briefing:

1. Hana Financial: Hand It to Hana
2. Valuetronics (VALUE SP): Trade War Uncertainty Continues, Downside Supported by Large Cash Position
3. Tokyo Kiraboshi Financial Group (7173 JP): Red Dwarf

1. Hana Financial: Hand It to Hana

Fundamental trends at Hana Financial (086790 KS) are benign and stand out within South Korea’s improving and deep value banking universe. Key metrics/signal at 12M18 positive fundamental momentum and value-quality trends embodied in a high PH Score™.

Hana is an important constituent of South Korea’s Banking Sector, holding approximately 13% of the system total loans, 15% of deposits and about 40% of the nation’s trade finance due to the bank’s entrenched foreign-currency clearing system. This valuable franchise is backed by strengthening capitalisation, improving asset quality after a difficult period for banks grappling with corporate exposures, and discrete gains on Efficiency and Profitability post sizeable merger and integration costs.

Corporate governance remains an issue to monitor after the nepotism scandal of recent years and was covered by Douglas Kim last year.

Having said that, Hana is a slightly higher risk than peers with a HY profile given its default rating.

2. Valuetronics (VALUE SP): Trade War Uncertainty Continues, Downside Supported by Large Cash Position

Valuetronics reported its 3Q19 figures this week which showed a 7.5% decline in revenues but a small (+2.6%) increase in bottom line profits. Stronger margins in its ICE segment offset weakness in its CE segment.

Valuetronics Holdings (VALUE SP) remains a solid company run by a good management team with interesting clients in consumer electronics and automotive. The valuation of the company is cheap (5x ex-cash 2019 P/E) and the balance sheet is rock solid.

All these positives are currently being overshadowed by the US-China trade war as the company has 100% of its production in China and does 45.7% of its sales in North-America. While many companies try to downplay the impact of the trade-war Valuetronics cannot hide and the alternatives it is working on to offset the tariff impact will surely cause short-term disruption and increased costs.

YTD the share price is +12% as the market is hoping for a positive resolution to the US-China trade war. Management is cautious on macro political improvements as trade war friction is unlikely to dissipate soon. Given the weak outlook for its CE segment and no significant new customer wins in its ICE segment risk/reward does not seem very attractive despite good dividend yield and cheap valuation.

3. Tokyo Kiraboshi Financial Group (7173 JP): Red Dwarf

Tokyo Kiraboshi Financial Group (7173 JP) (TKFG) progresses from bad to worse, and its stock price is behaving accordingly.  Amidst volatile trading, the share price is gradually sinking back towards the 52-week intra-day low of ¥1,454 that was reached on Christmas Day 2018 before closing that day at ¥1,504.  3Q FY3/2019 (9 months to 31 December 2018) consolidated results represented a decline of over 56% YoY at the recurring profit level, with net profits down 34% YoY after tax adjustments.  On a quarterly basis, Q3 (October-December 2018) net operating profits collapsed 96% to just ¥66 million, while recurring profits fell 68% YoY to just ¥565 million with a small net loss of ¥9 million as a result of lower fee income and sharply higher credit costs.  Hardly a ‘glittering’ performance.

Trading on a forward-looking price/earnings multiple of 11.7x (using the bank’s current FY3/2019 guidance) and a price/book ratio of 0.19x, TKFG is expensive compared to peer regional banks.  Indeed, adjusting the group’s earnings per share (EPS) for the ¥55 billion (US$507 million) in two still-outstanding preference share issues raises the annualised PER to over 19x: roughly twice that of peer banks.  TKFG’s RoA and RoE ratios are woefully low at 0.09% and 1.71% respectively, loan growth has shrunk to just +0.5% YoY, deposits have fallen alarmingly (down 4.5% YoY), and the overhead ratio has shot up to 95% in Q3.  Yet, despite all these ‘red flags’, TKFG still managed to attract an aggregate foreign ownership of 17.4% as of 31 March 2018 (the most recent data publicly available): a strange choice.  Caveat emptor (may the buyer beware) !

In this briefing:

1. Valuetronics (VALUE SP): Trade War Uncertainty Continues, Downside Supported by Large Cash Position
2. Tokyo Kiraboshi Financial Group (7173 JP): Red Dwarf

1. Valuetronics (VALUE SP): Trade War Uncertainty Continues, Downside Supported by Large Cash Position

Valuetronics reported its 3Q19 figures this week which showed a 7.5% decline in revenues but a small (+2.6%) increase in bottom line profits. Stronger margins in its ICE segment offset weakness in its CE segment.

Valuetronics Holdings (VALUE SP) remains a solid company run by a good management team with interesting clients in consumer electronics and automotive. The valuation of the company is cheap (5x ex-cash 2019 P/E) and the balance sheet is rock solid.

All these positives are currently being overshadowed by the US-China trade war as the company has 100% of its production in China and does 45.7% of its sales in North-America. While many companies try to downplay the impact of the trade-war Valuetronics cannot hide and the alternatives it is working on to offset the tariff impact will surely cause short-term disruption and increased costs.

YTD the share price is +12% as the market is hoping for a positive resolution to the US-China trade war. Management is cautious on macro political improvements as trade war friction is unlikely to dissipate soon. Given the weak outlook for its CE segment and no significant new customer wins in its ICE segment risk/reward does not seem very attractive despite good dividend yield and cheap valuation.

2. Tokyo Kiraboshi Financial Group (7173 JP): Red Dwarf

Tokyo Kiraboshi Financial Group (7173 JP) (TKFG) progresses from bad to worse, and its stock price is behaving accordingly.  Amidst volatile trading, the share price is gradually sinking back towards the 52-week intra-day low of ¥1,454 that was reached on Christmas Day 2018 before closing that day at ¥1,504.  3Q FY3/2019 (9 months to 31 December 2018) consolidated results represented a decline of over 56% YoY at the recurring profit level, with net profits down 34% YoY after tax adjustments.  On a quarterly basis, Q3 (October-December 2018) net operating profits collapsed 96% to just ¥66 million, while recurring profits fell 68% YoY to just ¥565 million with a small net loss of ¥9 million as a result of lower fee income and sharply higher credit costs.  Hardly a ‘glittering’ performance.

Trading on a forward-looking price/earnings multiple of 11.7x (using the bank’s current FY3/2019 guidance) and a price/book ratio of 0.19x, TKFG is expensive compared to peer regional banks.  Indeed, adjusting the group’s earnings per share (EPS) for the ¥55 billion (US$507 million) in two still-outstanding preference share issues raises the annualised PER to over 19x: roughly twice that of peer banks.  TKFG’s RoA and RoE ratios are woefully low at 0.09% and 1.71% respectively, loan growth has shrunk to just +0.5% YoY, deposits have fallen alarmingly (down 4.5% YoY), and the overhead ratio has shot up to 95% in Q3.  Yet, despite all these ‘red flags’, TKFG still managed to attract an aggregate foreign ownership of 17.4% as of 31 March 2018 (the most recent data publicly available): a strange choice.  Caveat emptor (may the buyer beware) !