Value Investing

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

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.

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

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.

In this briefing:

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

1. 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).

In this briefing:

1. Sunpower: Excellent FY18 Results; Strong Outlook for FY19. Fair Value Remains 1 SGD (70% Upside)
2. Dhanlaxmi Bank- Free from the PCA Stranglehold

1. 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).

2. Dhanlaxmi Bank- Free from the PCA Stranglehold

Dhanlaxmi Bank (DHLBK IN) share price has surged by 10% today on the back of RBI move to take it out of Prompt Corrective Action (PCA) following improvement in its financial ratios. We have mentioned in our earlier reports (please click here, here and here) about the helplessness of the bank as it couldn’t lend due to restrictions from RBI.

Now as the grip is loosened, Dhanlaxmi can resume lending activities and improve its financial ratios without adding any new capital in the near term.

We analyze the implications post PCA through this report.

In this briefing:

1. Billionaire Carl Icahn’s Run at Caesars Has yet to Move Stock. What Doesn’t the Market See?
2. Brazil Politics; The “Noise” On Pension Reform Is an Investor Opportunity
3. Havells India
4. Sony: Yoshida Tightens Discipline as Hirai Steps Away Completely
5. Screening the Silk Road: (Small-)Mid Cap Free Cash Flow

1. Billionaire Carl Icahn’s Run at Caesars Has yet to Move Stock. What Doesn’t the Market See?

• Carl Icahn has built his position since February 7th to where he now controls over 28% of the stock of Caesars Entertainment Corporation.
• He has already put three members on the board and will get a fourth seat if management can’t name a new CEO by April 15th.
• Icahn’s track record in casino deals has made him over $2.5bn since 1998/ Investors who joined him have made solid returns, deal after deals.

2. Brazil Politics; The “Noise” On Pension Reform Is an Investor Opportunity

• Negative press “noise” on the pension reform process, with heightened friction between the Executive and the Legislature, has hit the currency and equity markets
• This reflects the Bolsonaro administration’s limited engagement with the Legislature so far on pension reform
• Finance Minister Paulo Guedes is spearheading the effort on pension reform, and has the support of Rodrigo Maia, the leader of the Chamber of Deputies
• The latest poll on pension reform voting intentions in the Chamber suggest it is heading in the right direction, but that the administration needs to accelerate support to get the legislation approved; we see 3Q19 more likely than 2Q19 for pension reform approval
• We see the equity market and currency corrections as an opportunity, and we highlight our positive view on Banco Do Brasil Sa (BBAS3 BZ)

3. Havells India

As the summer sets in, we visit distributor and retailers of air conditioners in our home town Vadodara, Gujarat where temperatures soar really high in summer and air conditioning is becoming a necessity.  Our checks are focused on Havells India (HAVL IN) and its’ consumer brand Llyod. Our takeaways from visits suggest celebrity endorsements unlikely to work, competition intensifying with the entry of Daikin in the mass premium segment, Ifb Industries (IFBI IN) joins the price war with its ACs, the season is off to a muted start due to prolonged winters.  At current price of INR 776, risk-reward offered is not in favour for Havells investors with a medium-term horizon. Using consensus estimates and average 3 year forward PE of 41x, target price works out to be INR 807. Investors will be better off waiting for an attractive entry point.

4. Sony: Yoshida Tightens Discipline as Hirai Steps Away Completely

Kazuo Hirai, architest of Sony Corp (6758 JP)‘s remarkable recovery, announced today that he would be stepping down as Sony Chairman in Jun this year.  The transition in leadership to former CFO Kenichiro Yoshida has been completed and was accomplished smoothly so we do not see any negative impact.

Recent concerns about Sony’s loss making smartphone unit also appear to be being addressed as the Nikkei reports that Sony would look to cut costs and headcount in half by Mar 2020. The English article is here and the slightly more detailed Japanese version is here.

5. Screening the Silk Road: (Small-)Mid Cap Free Cash Flow

In April 2018, we published a FCF screen with the sole aim of identifying potential names which could prove to be strong candidates in a Small-Mid Cap portfolio. We move to update this list with a strong bias to the mid-cap stocks appearing.

This screen performs well with markets where the value style is in favour. Given the market appears to be trending back to this style, we believe the Small-Mid Cap universe should capitalise on this over the next 12-months. We identify within the screen some high trading liquidity deep value candidates across the Asia Pacific universe.

Our updated 2019 list of names contains 17 stocks, with a more diversified spread of countries and sectors, compared to April 2018. A point to note is that basic material stocks have strengthened within the composition. Interestingly, the style of stock which has increased its presence amongst the list is the contrarian style, highlighting an opening up in value.

In this briefing:

1. Brazil Politics; The “Noise” On Pension Reform Is an Investor Opportunity
2. Havells India
3. Sony: Yoshida Tightens Discipline as Hirai Steps Away Completely
4. Screening the Silk Road: (Small-)Mid Cap Free Cash Flow
5. Orix Corporation: Osaka Casino Resort Partnership with MGM Stakes Out Earliest Claim Among Peers

1. Brazil Politics; The “Noise” On Pension Reform Is an Investor Opportunity

• Negative press “noise” on the pension reform process, with heightened friction between the Executive and the Legislature, has hit the currency and equity markets
• This reflects the Bolsonaro administration’s limited engagement with the Legislature so far on pension reform
• Finance Minister Paulo Guedes is spearheading the effort on pension reform, and has the support of Rodrigo Maia, the leader of the Chamber of Deputies
• The latest poll on pension reform voting intentions in the Chamber suggest it is heading in the right direction, but that the administration needs to accelerate support to get the legislation approved; we see 3Q19 more likely than 2Q19 for pension reform approval
• We see the equity market and currency corrections as an opportunity, and we highlight our positive view on Banco Do Brasil Sa (BBAS3 BZ)

2. Havells India

As the summer sets in, we visit distributor and retailers of air conditioners in our home town Vadodara, Gujarat where temperatures soar really high in summer and air conditioning is becoming a necessity.  Our checks are focused on Havells India (HAVL IN) and its’ consumer brand Llyod. Our takeaways from visits suggest celebrity endorsements unlikely to work, competition intensifying with the entry of Daikin in the mass premium segment, Ifb Industries (IFBI IN) joins the price war with its ACs, the season is off to a muted start due to prolonged winters.  At current price of INR 776, risk-reward offered is not in favour for Havells investors with a medium-term horizon. Using consensus estimates and average 3 year forward PE of 41x, target price works out to be INR 807. Investors will be better off waiting for an attractive entry point.

3. Sony: Yoshida Tightens Discipline as Hirai Steps Away Completely

Kazuo Hirai, architest of Sony Corp (6758 JP)‘s remarkable recovery, announced today that he would be stepping down as Sony Chairman in Jun this year.  The transition in leadership to former CFO Kenichiro Yoshida has been completed and was accomplished smoothly so we do not see any negative impact.

Recent concerns about Sony’s loss making smartphone unit also appear to be being addressed as the Nikkei reports that Sony would look to cut costs and headcount in half by Mar 2020. The English article is here and the slightly more detailed Japanese version is here.

4. Screening the Silk Road: (Small-)Mid Cap Free Cash Flow

In April 2018, we published a FCF screen with the sole aim of identifying potential names which could prove to be strong candidates in a Small-Mid Cap portfolio. We move to update this list with a strong bias to the mid-cap stocks appearing.

This screen performs well with markets where the value style is in favour. Given the market appears to be trending back to this style, we believe the Small-Mid Cap universe should capitalise on this over the next 12-months. We identify within the screen some high trading liquidity deep value candidates across the Asia Pacific universe.

Our updated 2019 list of names contains 17 stocks, with a more diversified spread of countries and sectors, compared to April 2018. A point to note is that basic material stocks have strengthened within the composition. Interestingly, the style of stock which has increased its presence amongst the list is the contrarian style, highlighting an opening up in value.

5. Orix Corporation: Osaka Casino Resort Partnership with MGM Stakes Out Earliest Claim Among Peers

• MGM Resorts International announced plans to partner 50/50 with Japan’s financial services operator, Orix, the first such deal made public.
• A bet on both or either company now at near their 52 week lows bears a good risk/yield proposition for investors in the consumer discretionary space.
• Japan’s IR’s will potentially grow into a US$15.8b to US$17.5B industry by 2024/5 or before. We expect the three licenses will go to partnerships between global gaming giants and Japan financial or game manufacturing partners.

In this briefing:

1. Dhanlaxmi Bank- Free from the PCA Stranglehold

1. Dhanlaxmi Bank- Free from the PCA Stranglehold

Dhanlaxmi Bank (DHLBK IN) share price has surged by 10% today on the back of RBI move to take it out of Prompt Corrective Action (PCA) following improvement in its financial ratios. We have mentioned in our earlier reports (please click here, here and here) about the helplessness of the bank as it couldn’t lend due to restrictions from RBI.

Now as the grip is loosened, Dhanlaxmi can resume lending activities and improve its financial ratios without adding any new capital in the near term.

We analyze the implications post PCA through this report.

In this briefing:

1. Havells India
2. Sony: Yoshida Tightens Discipline as Hirai Steps Away Completely
3. Screening the Silk Road: (Small-)Mid Cap Free Cash Flow
4. Orix Corporation: Osaka Casino Resort Partnership with MGM Stakes Out Earliest Claim Among Peers
5. Industrial Bank of Korea: Uninspiringly Cheap

1. Havells India

As the summer sets in, we visit distributor and retailers of air conditioners in our home town Vadodara, Gujarat where temperatures soar really high in summer and air conditioning is becoming a necessity.  Our checks are focused on Havells India (HAVL IN) and its’ consumer brand Llyod. Our takeaways from visits suggest celebrity endorsements unlikely to work, competition intensifying with the entry of Daikin in the mass premium segment, Ifb Industries (IFBI IN) joins the price war with its ACs, the season is off to a muted start due to prolonged winters.  At current price of INR 776, risk-reward offered is not in favour for Havells investors with a medium-term horizon. Using consensus estimates and average 3 year forward PE of 41x, target price works out to be INR 807. Investors will be better off waiting for an attractive entry point.

2. Sony: Yoshida Tightens Discipline as Hirai Steps Away Completely

Kazuo Hirai, architest of Sony Corp (6758 JP)‘s remarkable recovery, announced today that he would be stepping down as Sony Chairman in Jun this year.  The transition in leadership to former CFO Kenichiro Yoshida has been completed and was accomplished smoothly so we do not see any negative impact.

Recent concerns about Sony’s loss making smartphone unit also appear to be being addressed as the Nikkei reports that Sony would look to cut costs and headcount in half by Mar 2020. The English article is here and the slightly more detailed Japanese version is here.

3. Screening the Silk Road: (Small-)Mid Cap Free Cash Flow

In April 2018, we published a FCF screen with the sole aim of identifying potential names which could prove to be strong candidates in a Small-Mid Cap portfolio. We move to update this list with a strong bias to the mid-cap stocks appearing.

This screen performs well with markets where the value style is in favour. Given the market appears to be trending back to this style, we believe the Small-Mid Cap universe should capitalise on this over the next 12-months. We identify within the screen some high trading liquidity deep value candidates across the Asia Pacific universe.

Our updated 2019 list of names contains 17 stocks, with a more diversified spread of countries and sectors, compared to April 2018. A point to note is that basic material stocks have strengthened within the composition. Interestingly, the style of stock which has increased its presence amongst the list is the contrarian style, highlighting an opening up in value.

4. Orix Corporation: Osaka Casino Resort Partnership with MGM Stakes Out Earliest Claim Among Peers

• MGM Resorts International announced plans to partner 50/50 with Japan’s financial services operator, Orix, the first such deal made public.
• A bet on both or either company now at near their 52 week lows bears a good risk/yield proposition for investors in the consumer discretionary space.
• Japan’s IR’s will potentially grow into a US$15.8b to US$17.5B industry by 2024/5 or before. We expect the three licenses will go to partnerships between global gaming giants and Japan financial or game manufacturing partners.

5. Industrial Bank of Korea: Uninspiringly Cheap

Industrial Bank of Korea (IBK LX) looks relatively cheap and scores well on our VFM (Valuation, Fundamentals, Momentum) system.

The trademarked PH Score comes in at 8.2. P/Book is a lowly 0.42x. Earnings Yield stands at 20%. Franchise valuation is 7%. Total return Ratio lies at 1.4x. RSI is low.

2018 numbers were solid enough though deeper analysis shows that they were not as good as they seem to be:

• The specific IBK model is reliant on debt to fund SME growth and interest expense growth is running well ahead of expansion in interest income.
• The squeeze on the top-line, despite firm fee income growth, means that “underlying jaws” were negative. The CIR may be declining but OPEX growth remains somewhat elevated, and in excess of “underlying” income.
• PT Profit expansion of 23% YoY is flattered by high contributions from “other non-interest income” and gains on securities. Combined, these lower quality income streams make up 40% of PT Profit. This means that Profitability metrics (which are in excess of the Asian median) may not be as benign as they seem. In fact, we would argue that when one takes the aforementioned items into consideration, PT Profit was essentially flat at best.
• Insurance operations again reported a negative result.
• While Asset Quality looks relatively respectable, we note a 17% increase in “precautionary” or SMLs which were in excess of impaired loans or even NPLs. Regarding the latter, there may be some bad asset migration into the “loss” category: up 12% YoY.

In this briefing:

1. WABCO Confirms Being a Takeover Target of The Private German Auto Parts Maker, ZF
2. Banco Do Brasil (BBAS3) – Capital Contributions from Potential Non-Core Disposals
3. Sunpower: Excellent FY18 Results; Strong Outlook for FY19. Fair Value Remains 1 SGD (70% Upside)
4. Dhanlaxmi Bank- Free from the PCA Stranglehold

1. 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.

2. 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

3. 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).

4. Dhanlaxmi Bank- Free from the PCA Stranglehold

Dhanlaxmi Bank (DHLBK IN) share price has surged by 10% today on the back of RBI move to take it out of Prompt Corrective Action (PCA) following improvement in its financial ratios. We have mentioned in our earlier reports (please click here, here and here) about the helplessness of the bank as it couldn’t lend due to restrictions from RBI.

Now as the grip is loosened, Dhanlaxmi can resume lending activities and improve its financial ratios without adding any new capital in the near term.

We analyze the implications post PCA through this report.

In this briefing:

1. Sony: Yoshida Tightens Discipline as Hirai Steps Away Completely
2. Screening the Silk Road: (Small-)Mid Cap Free Cash Flow
3. Orix Corporation: Osaka Casino Resort Partnership with MGM Stakes Out Earliest Claim Among Peers
4. Industrial Bank of Korea: Uninspiringly Cheap
5. Ping An Bank: Not Cheap Enough

1. Sony: Yoshida Tightens Discipline as Hirai Steps Away Completely

Kazuo Hirai, architest of Sony Corp (6758 JP)‘s remarkable recovery, announced today that he would be stepping down as Sony Chairman in Jun this year.  The transition in leadership to former CFO Kenichiro Yoshida has been completed and was accomplished smoothly so we do not see any negative impact.

Recent concerns about Sony’s loss making smartphone unit also appear to be being addressed as the Nikkei reports that Sony would look to cut costs and headcount in half by Mar 2020. The English article is here and the slightly more detailed Japanese version is here.

2. Screening the Silk Road: (Small-)Mid Cap Free Cash Flow

In April 2018, we published a FCF screen with the sole aim of identifying potential names which could prove to be strong candidates in a Small-Mid Cap portfolio. We move to update this list with a strong bias to the mid-cap stocks appearing.

This screen performs well with markets where the value style is in favour. Given the market appears to be trending back to this style, we believe the Small-Mid Cap universe should capitalise on this over the next 12-months. We identify within the screen some high trading liquidity deep value candidates across the Asia Pacific universe.

Our updated 2019 list of names contains 17 stocks, with a more diversified spread of countries and sectors, compared to April 2018. A point to note is that basic material stocks have strengthened within the composition. Interestingly, the style of stock which has increased its presence amongst the list is the contrarian style, highlighting an opening up in value.

3. Orix Corporation: Osaka Casino Resort Partnership with MGM Stakes Out Earliest Claim Among Peers

• MGM Resorts International announced plans to partner 50/50 with Japan’s financial services operator, Orix, the first such deal made public.
• A bet on both or either company now at near their 52 week lows bears a good risk/yield proposition for investors in the consumer discretionary space.
• Japan’s IR’s will potentially grow into a US$15.8b to US$17.5B industry by 2024/5 or before. We expect the three licenses will go to partnerships between global gaming giants and Japan financial or game manufacturing partners.

4. Industrial Bank of Korea: Uninspiringly Cheap

Industrial Bank of Korea (IBK LX) looks relatively cheap and scores well on our VFM (Valuation, Fundamentals, Momentum) system.

The trademarked PH Score comes in at 8.2. P/Book is a lowly 0.42x. Earnings Yield stands at 20%. Franchise valuation is 7%. Total return Ratio lies at 1.4x. RSI is low.

2018 numbers were solid enough though deeper analysis shows that they were not as good as they seem to be:

• The specific IBK model is reliant on debt to fund SME growth and interest expense growth is running well ahead of expansion in interest income.
• The squeeze on the top-line, despite firm fee income growth, means that “underlying jaws” were negative. The CIR may be declining but OPEX growth remains somewhat elevated, and in excess of “underlying” income.
• PT Profit expansion of 23% YoY is flattered by high contributions from “other non-interest income” and gains on securities. Combined, these lower quality income streams make up 40% of PT Profit. This means that Profitability metrics (which are in excess of the Asian median) may not be as benign as they seem. In fact, we would argue that when one takes the aforementioned items into consideration, PT Profit was essentially flat at best.
• Insurance operations again reported a negative result.
• While Asset Quality looks relatively respectable, we note a 17% increase in “precautionary” or SMLs which were in excess of impaired loans or even NPLs. Regarding the latter, there may be some bad asset migration into the “loss” category: up 12% YoY.

5. Ping An Bank: Not Cheap Enough

Ping An Bank Co Ltd A (000001 CH) results show gradual erosion in fundamental trends. We believe that positive fundamental momentum (within our quantamental approach) leads to higher stock prices.

Behind the headline numbers, there lies an acute rise in funding costs in excess of the growth in interest income on earnings assets. As elsewhere in China, there is a festering asset quality issue too. While not as toxic versus diverse peers, it is notable: the impaired asset portfolio more than doubled YoY.

Valuations are not especially cheap relative to the region (including Japan). Franchise Valuation at 10% and P/Book of 0.94x are at a premium to the regional medians of 8% and 0.77x, respectively. The Total Return Ratio is <1x.

In conclusion, we do not see a lot that has changed for the better at Ping An Bank (funding, liquidity, efficiency, profitability and asset quality) though the headline deterioration is not so drastic. Underlying concerns lie with core interest income generation given sky-high funding expenses and pervasive asset quality issues.