Value Investing

In this briefing:

1. Tokyo Kiraboshi Financial Group (7173 JP): Red Dwarf
2. Stake in Quadric.io Following Renesas; Denso Attempts to Keep Chip Makers Close to Achieve AD Aims

1. 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) !

2. Stake in Quadric.io Following Renesas; Denso Attempts to Keep Chip Makers Close to Achieve AD Aims

It was reported last Thursday that Denso Corp (6902 JP) through its wholly-owned subsidiary NSITEXE, Inc. acquired a stake in quadric.io, a fabless semiconductor start-up company based in Burlingame, California. It seems that the company has begun its planned investments for 2019. Last year, Denso increased its stake (from 0.5% to 5%) in chipmaker- Renesas Electronics (6723 JP) to support its progress of ADAS and related technology. We also mentioned in our insight, Denso Prepares for the Future; Investments in Tohoku Pioneer EG Following JOLED and ThinCI, that Denso has been making a series of investments to prepare itself for being the leading software solution provider alongside its hardware expertise, supporting its change in business model. Last year, NSITEXE invested in ThinCi, its partner, since 2016, in the development of a Data Flow Processor (DFP) designed to help autonomous vehicles make quick decisions in complicated and fast-evolving situations. Denso/NSITEXE’s investment in quadric.io has a similar goal. The investment in quadric.io is said to help the start-up in its development of edge processing units (EPUs), which are high-performance semiconductors that could be used as a foundation for enabling automated driving technology.

In this briefing:

1. Tokyo Kiraboshi Financial Group (7173 JP): Red Dwarf
2. Stake in Quadric.io Following Renesas; Denso Attempts to Keep Chip Makers Close to Achieve AD Aims
3. Suruga Bank Bottom Projection

1. 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) !

2. Stake in Quadric.io Following Renesas; Denso Attempts to Keep Chip Makers Close to Achieve AD Aims

It was reported last Thursday that Denso Corp (6902 JP) through its wholly-owned subsidiary NSITEXE, Inc. acquired a stake in quadric.io, a fabless semiconductor start-up company based in Burlingame, California. It seems that the company has begun its planned investments for 2019. Last year, Denso increased its stake (from 0.5% to 5%) in chipmaker- Renesas Electronics (6723 JP) to support its progress of ADAS and related technology. We also mentioned in our insight, Denso Prepares for the Future; Investments in Tohoku Pioneer EG Following JOLED and ThinCI, that Denso has been making a series of investments to prepare itself for being the leading software solution provider alongside its hardware expertise, supporting its change in business model. Last year, NSITEXE invested in ThinCi, its partner, since 2016, in the development of a Data Flow Processor (DFP) designed to help autonomous vehicles make quick decisions in complicated and fast-evolving situations. Denso/NSITEXE’s investment in quadric.io has a similar goal. The investment in quadric.io is said to help the start-up in its development of edge processing units (EPUs), which are high-performance semiconductors that could be used as a foundation for enabling automated driving technology.

3. Suruga Bank Bottom Projection

Daily cycle indicators display a topside cap for Suruga Bank Ltd (8358 JP) and turn barrier to press for new lows with ideal downside projection the focus to align with RSI and MACD targeted supports.

The rise from December 2018 is labeled as corrective and biased for a new low. Price cap will act as resistance for those who favor the short side here.

Previous supports at 603 and 590 have been broken and are now upside hurdles to contend with and use as inflection points.

Oversold cycle readings are taking shape in the form of daily bull divergence from price as the weekly cycle attempts to find a foot hold in coming months.

In this briefing:

1. Stake in Quadric.io Following Renesas; Denso Attempts to Keep Chip Makers Close to Achieve AD Aims
2. Suruga Bank Bottom Projection

1. Stake in Quadric.io Following Renesas; Denso Attempts to Keep Chip Makers Close to Achieve AD Aims

It was reported last Thursday that Denso Corp (6902 JP) through its wholly-owned subsidiary NSITEXE, Inc. acquired a stake in quadric.io, a fabless semiconductor start-up company based in Burlingame, California. It seems that the company has begun its planned investments for 2019. Last year, Denso increased its stake (from 0.5% to 5%) in chipmaker- Renesas Electronics (6723 JP) to support its progress of ADAS and related technology. We also mentioned in our insight, Denso Prepares for the Future; Investments in Tohoku Pioneer EG Following JOLED and ThinCI, that Denso has been making a series of investments to prepare itself for being the leading software solution provider alongside its hardware expertise, supporting its change in business model. Last year, NSITEXE invested in ThinCi, its partner, since 2016, in the development of a Data Flow Processor (DFP) designed to help autonomous vehicles make quick decisions in complicated and fast-evolving situations. Denso/NSITEXE’s investment in quadric.io has a similar goal. The investment in quadric.io is said to help the start-up in its development of edge processing units (EPUs), which are high-performance semiconductors that could be used as a foundation for enabling automated driving technology.

2. Suruga Bank Bottom Projection

Daily cycle indicators display a topside cap for Suruga Bank Ltd (8358 JP) and turn barrier to press for new lows with ideal downside projection the focus to align with RSI and MACD targeted supports.

The rise from December 2018 is labeled as corrective and biased for a new low. Price cap will act as resistance for those who favor the short side here.

Previous supports at 603 and 590 have been broken and are now upside hurdles to contend with and use as inflection points.

Oversold cycle readings are taking shape in the form of daily bull divergence from price as the weekly cycle attempts to find a foot hold in coming months.

In this briefing:

1. Korea Circuit Long Support for Press Above Overhead Barriers
2. Concordia Financial Group (7186 JP): Out of Focus
3. Chiba Bank (8331 JP):  Top Dog

1. Korea Circuit Long Support for Press Above Overhead Barriers

Korea Circuit (007810 KS) exhibits the ability to make headway through triple resistance barriers on the back of higher degree divergence that has been forming since late 2017.

Overhead resistance barriers, represented by old floor support levels, once cleared, would open up the intermediate up cycle for Korea Circuit. A failure to clear these important levels would induce a fresh test of recent basing lows.

RSI pocket support helps fine tune a pullback level to take a long bet.

Risk to reward is attractive on a dip near support for a 6:1 ratio (reward to risk).

There are some major hurdles on the way up represented by old floor supports.

2. Concordia Financial Group (7186 JP): Out of Focus

CY2018 was not a good year for Concordia Financial Group, Ltd (7186 JP)  (CFG), the holding company for one of Japan’s largest regional banks, the Bank of Yokohama (BoY), and a small secondary regional bank, Higashi-Nippon Bank (HNPB).  Beset by a lending scandal at HNPB, which forced the bank’s president to step down, CFG’s share price remains some 30% below February 2018 levels, and has essentially traded sideways so far this year. 

CFG management’s attempts to placate disgruntled shareholders with stock buybacks and dividend payout increases have largely failed to impress.  3Q FY3/2019 profits declined by 8% year-on-year but relied heavily on non-core profit items: true core earnings collapsed 35.9%.  The Japanese banking sector remains unloved at present.  That said, currently trading on similar valuations to our much-preferred Chiba Bank (8331 JP) , CFG remains a liquid alternative to the ‘crowded trade’ of simply buying megabanks for exposure to the Japanese financial sector.  Patience, however, is the key word for investors here.  No harm in waiting to buy at a better entry price.

3. Chiba Bank (8331 JP):  Top Dog

Chiba Bank (8331 JP) , Japan’s 4^th-largest regional bank in terms of deposits, loans or total assets, reported consolidated recurring profits for the nine months to end-December 2018 (3Q FY3/2019) of ¥59.66 billion (down 10.6% YoY) and net profits of ¥41.44 billion (down 10.8% YoY) on marginally higher revenues of ¥180.20 billion (+1.3% YoY).  Results were influenced by higher funding costs and a sharp rise in credit costs that offset the benefits of strong growth in loan demand.  There was also some improvement in net interest income and securities trading profits, and a reduction in administrative expenses.  The Japanese banking sector is currently unloved by foreign investors. However, trading on a forward-looking PE ratio of 9.1x (using the bank’s own FY3/2019 guidance), a PBR of 0.52x and boasting the highest current market capitalisation of any Japanese regional bank of ¥553.9 billion (US$5.04 billion), Chiba Bank continues to offer good prospects of long-term growth and a strong profits ‘track record’ supported by the underlying strength of the Chiba prefectural economy.

In this briefing:

1. The Downward Revision in FY03/19 Guidance Places Panasonic in Our Worst-Case Scenario

1. The Downward Revision in FY03/19 Guidance Places Panasonic in Our Worst-Case Scenario

• Panasonic Corp (6752 JP)’s 3Q earnings were quite weak, failing to meet both consensus and our estimates. Panasonic reported revenue of JPY2,074.8bn and OP of JPY97.5bn resulting in an OPM of 4.7% compared to 5.8% in the third quarter of last year
• The majority of revenue growth came from the Automotive & Industrial Solution (A&IS) segment which saw the strongest growth in revenue at nearly 8% YoY followed by the Eco Solutions Segment. Despite the steady growth in the A&IS revenue, the segment continued to display a decline in profits by almost 13% YoY.
• A downward revision in targets was made following the weak earnings this quarter. Nine-months cumulative figures weren’t particularly attractive in the OP front as well (Revenue up 3% YoY and OP down -8% YoY as of 3QFY03/19). Panasonic is nearing our modest case scenario, although its downward revised earnings target places it in our worst-case scenario, where we expect Panasonic to be exposed to a high degree of risk, increasing its lookout for other customers. Panasonic has only tied up with Toyota Motor (7203 JP) thus far and may have to diversify its customer base further to bring earnings to a sustainable level.
• After the earnings release and news about Chinese competitor, CATL (A) (300750 CH), collaborating with Honda Motor (7267 JP) ( Honda Chooses CATL as Battery Partner for Their EVs; Panasonic Has Lost the Chance), Tesla Motors (TSLA US) announced that it was acquiring battery company Maxwell Technologies for production of its EV batteries. Panasonic fell almost -5% on Monday’s open.

In this briefing:

1. Auto Earnings: Positive Toyota/Mazda, Negative Subaru/Suzuki
2. Tesla (TSLA): SWOT Analysis Leads To…Rivian

1. Auto Earnings: Positive Toyota/Mazda, Negative Subaru/Suzuki

On a relative basis we have been positive on Toyota Motor (7203 JP)  and negative on Subaru Corp (7270 JP)  since early 2017 as we consider Toyota’s underlying earnings strength to be superior to the majority of its peers and consider hybrids to be moving towards the mass adoption stage while we also feel that Subaru, after a purple patch when it led the automotive industry in terms of margins, is now falling back to Earth and the sell side remains behind the curve on the depth of issues and underspend that needs to be addressed at the company. The ratio between the two returned about 40% in 2018 but is down about 12% so far this year.

In the case of Mazda Motor (7261 JP) and Suzuki Motor (7269 JP), in Mar 2018 we took the contrarian view of preferring Mazda over Suzuki despite earnings momentum being significantly stronger for Suzuki than for Mazda. This proved to be “early” as the ratio declined 16% during the year and at one point fell as much as 30%, but we continue to feel that our thesis has merit and would note that the ratio is now up 2% relative to its value at our initial recommendation. Our thesis is simply that Mazda’s earnings are under pressure due to forward investments in technology (extremely high efficiency gasoline and diesel engines) and distribution and after sales which have traditionally been a Mazda weakness and are in our opinion the main difference between Mazda and a much stronger company like Honda. In the case of Suzuki, while the long-term growth outlook due to the India exposure remains bright, we felt that momentum was likely to decelerate and that Suzuki could face headwinds in the short-term as consumer upgraded from mini-vehicles in which it is dominant, to compact and mid-size cars where Suzuki is strong in India, but not the force of nature that it is in the mini-vehicle segment. While it has taken time, recent results suggest this thesis is starting to play out.

2. Tesla (TSLA): SWOT Analysis Leads To…Rivian

What happens when innovation becomes commoditized?  We believe this is a core concern to every Tesla watcher, bulls and bears so we began our Lunar New Year week (or Pro Am 2019 week in Pebble Beach) with a quick and dirty SWOT analysis of Tesla to see where the next potential existential threat can come from…and we ended up looking at Rivian.  

Rivian is a private company that has not issued public debt so financial information on the company is unavailable in the U.S. public domain, so we poured through strategic investor Sumitomo Corp’s Yuho reports to see if we can find any tidbits in Japan but found nothing there either.  Hence, while we cannot make much financial observations about the company at this point, we do see a number of strategic signs from Rivian’s actions that may indicating that it is most likely improving upon the Tesla experience to avoid the hiccups and the bumps on the road to premium EV segment dominance.

From an APAC stock market perspective, we see LG Chem and Sumitomo Corp as two entities that could potentially see financial impact from Rivian in the next several years. Teslerati has made an educated guess on LG Chem as Rivian’s cell supplier which we believe to be reasonable, although Rivian and LG Chem have neither confirmed nor denied the relationship (https://insideevs.com/new-details-rivian-battery-pack-design/, https://www.teslarati.com/rivian-battery-lab-irvine-california-megapack-production/).  Current investment in Rivian by Sumitomo Corp is most likely an insignificant amount from the latter’s perspective but could perhaps grow into something bigger at some point in the future.  

The Rivian R1S

In this briefing:

1. Tesla (TSLA): SWOT Analysis Leads To…Rivian
2. MODEC: 17% Price Jump as Results Beat, Guidance Is Lowballed

1. Tesla (TSLA): SWOT Analysis Leads To…Rivian

What happens when innovation becomes commoditized?  We believe this is a core concern to every Tesla watcher, bulls and bears so we began our Lunar New Year week (or Pro Am 2019 week in Pebble Beach) with a quick and dirty SWOT analysis of Tesla to see where the next potential existential threat can come from…and we ended up looking at Rivian.  

Rivian is a private company that has not issued public debt so financial information on the company is unavailable in the U.S. public domain, so we poured through strategic investor Sumitomo Corp’s Yuho reports to see if we can find any tidbits in Japan but found nothing there either.  Hence, while we cannot make much financial observations about the company at this point, we do see a number of strategic signs from Rivian’s actions that may indicating that it is most likely improving upon the Tesla experience to avoid the hiccups and the bumps on the road to premium EV segment dominance.

From an APAC stock market perspective, we see LG Chem and Sumitomo Corp as two entities that could potentially see financial impact from Rivian in the next several years. Teslerati has made an educated guess on LG Chem as Rivian’s cell supplier which we believe to be reasonable, although Rivian and LG Chem have neither confirmed nor denied the relationship (https://insideevs.com/new-details-rivian-battery-pack-design/, https://www.teslarati.com/rivian-battery-lab-irvine-california-megapack-production/).  Current investment in Rivian by Sumitomo Corp is most likely an insignificant amount from the latter’s perspective but could perhaps grow into something bigger at some point in the future.  

The Rivian R1S

2. MODEC: 17% Price Jump as Results Beat, Guidance Is Lowballed

Modec Inc (6269 JP) reported strong 2018 results as operations for the year went smoothly and gross margin recovered to double digits in the fourth quarter with the company also releasing its contingency reserves resulting in a large uptick in SPC related earnings below the operating line.

Like last year however, guidance disappointed as the company released what we consider to be lowball estimates. Nevertheless, the stock reacted positively as the strong results offset some of the recent negativity from the large fall in crude prices. We examine the degree of conservatism we see in guidance below.

In this briefing:

1. Yapi Ve Kredi Bankasi: Inexpensive but Consumer Exposures May Be the Next Shoe to Drop

1. Yapi Ve Kredi Bankasi: Inexpensive but Consumer Exposures May Be the Next Shoe to Drop

Key metrics/signals at Yapi Ve Kredi Bankasi As (YKBNK TI) underline positive fundamental momentum and quality-value, embodied in a high PH Score™ despite macro imbalances, asset quality stress, and structural challenges. The bank mostly exceeded its 2018 targets, especially on profitability, efficiency, and non-interest income, though loan growth was reined in as cost of risk and asset quality deteriorated. Improvement was helped by a TL4.1bn rights issue in June, 2018. For 2019, YKBNK targets continued cost-growth below CPI, mid-teen fee income expansion, an NPL ratio <7%, CoR at <300bps, stable liquidity (LDR at 105%), a somewhat surprising pick-up in lending (+15%), and a modestly higher CAR (>15%).

Banks have been bearing the brunt of government interventions to bolster the economy for awhile now. The sizeable expansion of state loan guarantees was the main driver behind the acceleration of bank credit growth (now sharply moderating given elevated lending rates and tighter standards), largely funded externally and with a partially dollarized deposit base, resulting in a deterioration of the gross FX position. In addition, the relaxation of macroprudential measures was a driver of rampant asset growth. Steps have been taken to enhance risk management, report quasi-fiscal operations, including CGF, and limit borrowing in foreign currency. (There is some USD360 bn of non-financial corporate debt, half of which is external). Banks have been active in equity and FI markets of late to plug the gaps caused by capital and asset quality erosion. In Q418, three state banks were subject to what looked like a back-door recapitalisation when the lenders sold TL11bn of subordinated debt, reportedly to a government unemployment fund. Akbank has since boosted its capital base too with a rights issue and a syndicated loan.

Renewed FX volatility arising from policy missteps, such as electoral-induced easing, and a subsequent pass-through to already high cost-push inflation, would deepen the slowdown and destabilize the fragile macro situation. Tight monetary policy (one-week repo rate at 24 per cent), lower global oil prices, weaker domestic demand and a stronger Lira can moderate Inflation towards <15% though high food prices are exerting an upward impact on prices. The current account is stabilizing.

The KOC Group and Unicredit are YKBNK’s main shareholders.  Energy, finance, and auto are the main contributors to KOC Group Profit, representing 87% of the bottom line in 2018.

In this briefing:

1. Yapi Ve Kredi Bankasi: Inexpensive but Consumer Exposures May Be the Next Shoe to Drop
2. Real Estate – Theme of the Year

1. Yapi Ve Kredi Bankasi: Inexpensive but Consumer Exposures May Be the Next Shoe to Drop

Key metrics/signals at Yapi Ve Kredi Bankasi As (YKBNK TI) underline positive fundamental momentum and quality-value, embodied in a high PH Score™ despite macro imbalances, asset quality stress, and structural challenges. The bank mostly exceeded its 2018 targets, especially on profitability, efficiency, and non-interest income, though loan growth was reined in as cost of risk and asset quality deteriorated. Improvement was helped by a TL4.1bn rights issue in June, 2018. For 2019, YKBNK targets continued cost-growth below CPI, mid-teen fee income expansion, an NPL ratio <7%, CoR at <300bps, stable liquidity (LDR at 105%), a somewhat surprising pick-up in lending (+15%), and a modestly higher CAR (>15%).

Banks have been bearing the brunt of government interventions to bolster the economy for awhile now. The sizeable expansion of state loan guarantees was the main driver behind the acceleration of bank credit growth (now sharply moderating given elevated lending rates and tighter standards), largely funded externally and with a partially dollarized deposit base, resulting in a deterioration of the gross FX position. In addition, the relaxation of macroprudential measures was a driver of rampant asset growth. Steps have been taken to enhance risk management, report quasi-fiscal operations, including CGF, and limit borrowing in foreign currency. (There is some USD360 bn of non-financial corporate debt, half of which is external). Banks have been active in equity and FI markets of late to plug the gaps caused by capital and asset quality erosion. In Q418, three state banks were subject to what looked like a back-door recapitalisation when the lenders sold TL11bn of subordinated debt, reportedly to a government unemployment fund. Akbank has since boosted its capital base too with a rights issue and a syndicated loan.

Renewed FX volatility arising from policy missteps, such as electoral-induced easing, and a subsequent pass-through to already high cost-push inflation, would deepen the slowdown and destabilize the fragile macro situation. Tight monetary policy (one-week repo rate at 24 per cent), lower global oil prices, weaker domestic demand and a stronger Lira can moderate Inflation towards <15% though high food prices are exerting an upward impact on prices. The current account is stabilizing.

The KOC Group and Unicredit are YKBNK’s main shareholders.  Energy, finance, and auto are the main contributors to KOC Group Profit, representing 87% of the bottom line in 2018.

2. Real Estate – Theme of the Year

The budget 2019 was indeed a tax-payers budget in which the main focus, of course, was on the lower and middle-class consumers. Out of all the tax proposals, the limelight was on the keen real estate sector in which there were substantial amendments made which in turn will act as a Santa to troubled Real Estate sector especially for the companies who are into the business of construction of affordable housing and low to mid-income housing.

In this briefing:

1. Real Estate – Theme of the Year

1. Real Estate – Theme of the Year

The budget 2019 was indeed a tax-payers budget in which the main focus, of course, was on the lower and middle-class consumers. Out of all the tax proposals, the limelight was on the keen real estate sector in which there were substantial amendments made which in turn will act as a Santa to troubled Real Estate sector especially for the companies who are into the business of construction of affordable housing and low to mid-income housing.