Value Investing

In this briefing:

1. Banco Do Brasil (BBAS3) – Capital Contributions from Potential Non-Core Disposals
2. Sunpower: Excellent FY18 Results; Strong Outlook for FY19. Fair Value Remains 1 SGD (70% Upside)
3. Dhanlaxmi Bank- Free from the PCA Stranglehold

1. 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

2. 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).

3. 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. Banco Do Brasil (BBAS3) – Capital Contributions from Potential Non-Core Disposals
2. Sunpower: Excellent FY18 Results; Strong Outlook for FY19. Fair Value Remains 1 SGD (70% Upside)
3. Dhanlaxmi Bank- Free from the PCA Stranglehold
4. Procurri: Exit DeClout, Enter Novo Tellus. Company Remains Highly Undervalued at 4.4x 2018 EV/EBITDA

1. 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

2. 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).

3. 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.

4. Procurri: Exit DeClout, Enter Novo Tellus. Company Remains Highly Undervalued at 4.4x 2018 EV/EBITDA

Procurri Corporation (PROC SP) released FY18 results which showed the company growing revenues to 220M SGD (+21% vs FY17), EBITDA to 19.7M SGD (+185% vs FY17), PBT to 10.1M SGD (vs 2.3M loss in 2017) and a small net profit of 5.3M SGD which was artificially low because of an astronomical 47% tax rate. The high tax rate should reverse in 2H19 which would show the reported profitability of Procurri improve substantially. 

Procurri remains deep value trading at just 4.4x 2018 EV/EBITDA and 0.4x 2018 EV/Sales. If we adjust the FY18 net profit figure(assume 30% tax rate vs 47%) the shares trade at a P/E multiple of just 13x.

The shareholder register of Procurri has seen a dramatic change YTD with multiple announcements on SGX. The most significant development is the entry of Singapore PE fund Novo Tellus acquiring a 29.6% stake on 19/2/19. Consequently this means that the biggest corporate overhang on Procurri (read: the control by Declout Ltd (DLL SP) ) is now almost over with their stake reduced to 17% from 47% previously.

Given the well-publicized track record of Novo Tellus at SGX listed Aem Holdings (AEM SP) the question is if Novo Tellus sees another multi-bagger in the making?

While a “10-bagger” type return like AEM is unlikely at Procurri, doubling the market cap from 90M to 180M SGD would not be impossible as Procurri continues to grow in FY19 and the depressed multiple expands modestly.

In this briefing:

1. Screening the Silk Road: (Small-)Mid Cap Free Cash Flow
2. Orix Corporation: Osaka Casino Resort Partnership with MGM Stakes Out Earliest Claim Among Peers
3. Industrial Bank of Korea: Uninspiringly Cheap
4. Ping An Bank: Not Cheap Enough
5. Golden Agri Bull Pivots to Get Involved

1. 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.

2. 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.

3. 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.

4. 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.

5. Golden Agri Bull Pivots to Get Involved

Golden Agri Resources (GGR SP) has started a basing process below pivot support at 0.30 as the daily MACD cycle has not been confirming recent lows for a case of underlying supportive bull divergence (sell pressure dwindling as downside momentum tapers off).

Bull divergence outlined in the MACD is supportive on a macro basis, however there is downside risk stemming from the micro rising wedge. A fresh diverging low is expected to market a price low to work into.

Immediate inflection levels at 0.30 and 0.26 will dictate near term direction out of the micro rising wedge. Ideal downside projections are noted along with a bullish resistance threshold.

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
3. Procurri: Exit DeClout, Enter Novo Tellus. Company Remains Highly Undervalued at 4.4x 2018 EV/EBITDA
4. MODEC: Add

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.

3. Procurri: Exit DeClout, Enter Novo Tellus. Company Remains Highly Undervalued at 4.4x 2018 EV/EBITDA

Procurri Corporation (PROC SP) released FY18 results which showed the company growing revenues to 220M SGD (+21% vs FY17), EBITDA to 19.7M SGD (+185% vs FY17), PBT to 10.1M SGD (vs 2.3M loss in 2017) and a small net profit of 5.3M SGD which was artificially low because of an astronomical 47% tax rate. The high tax rate should reverse in 2H19 which would show the reported profitability of Procurri improve substantially. 

Procurri remains deep value trading at just 4.4x 2018 EV/EBITDA and 0.4x 2018 EV/Sales. If we adjust the FY18 net profit figure(assume 30% tax rate vs 47%) the shares trade at a P/E multiple of just 13x.

The shareholder register of Procurri has seen a dramatic change YTD with multiple announcements on SGX. The most significant development is the entry of Singapore PE fund Novo Tellus acquiring a 29.6% stake on 19/2/19. Consequently this means that the biggest corporate overhang on Procurri (read: the control by Declout Ltd (DLL SP) ) is now almost over with their stake reduced to 17% from 47% previously.

Given the well-publicized track record of Novo Tellus at SGX listed Aem Holdings (AEM SP) the question is if Novo Tellus sees another multi-bagger in the making?

While a “10-bagger” type return like AEM is unlikely at Procurri, doubling the market cap from 90M to 180M SGD would not be impossible as Procurri continues to grow in FY19 and the depressed multiple expands modestly.

4. MODEC: Add

Towards the end of 2018 Modec Inc (6269 JP)‘s share price dropped 46.5% as the price of crude oil also cratered, falling 44.4% . Since that plunge, the stock price has rebounded 53.9% as the company posted excellent results at 4Q and guidance, while conservative, was for continued healthy earnings.

Having visited the company today, we believe earnings should continue to be strong and actually strengthen over the next few years with MODEC likely to start running into capacity constraints over the course of this year.

In this briefing:

1. Orix Corporation: Osaka Casino Resort Partnership with MGM Stakes Out Earliest Claim Among Peers
2. Industrial Bank of Korea: Uninspiringly Cheap
3. Ping An Bank: Not Cheap Enough
4. Golden Agri Bull Pivots to Get Involved
5. China Unicom Weak 4Q18 Mobile Results Offset by Strength in Fixed Line Business

1. 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.

2. 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.

3. 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.

4. Golden Agri Bull Pivots to Get Involved

Golden Agri Resources (GGR SP) has started a basing process below pivot support at 0.30 as the daily MACD cycle has not been confirming recent lows for a case of underlying supportive bull divergence (sell pressure dwindling as downside momentum tapers off).

Bull divergence outlined in the MACD is supportive on a macro basis, however there is downside risk stemming from the micro rising wedge. A fresh diverging low is expected to market a price low to work into.

Immediate inflection levels at 0.30 and 0.26 will dictate near term direction out of the micro rising wedge. Ideal downside projections are noted along with a bullish resistance threshold.

5. China Unicom Weak 4Q18 Mobile Results Offset by Strength in Fixed Line Business

China Unicom’s (762 HK) recent 4Q18 results were not great. The overall figures look ok due to strength in the fixed line business which offset weakness in mobile. However, they were the weakest of the three operators and the stock, which has had a strong run, now looks due for a pause. We have turned more cautious on the Chinese telcos on concerns that 5G spending could be higher than expected. Chris Hoare believes a major reason for the Chinese telcos outperforming in the past year has come from declining capex spending expectations. That trend may now start to reverse. While China Unicom has guided for only modest 5G capex in 2019 the focus will turn to 2020 where it is a much bigger issue and while we expect China Unicom to do a joint roll-out with China Telecom (728 HK) we expect the scale of the spending to be larger than an individual build. 

In this briefing:

1. Dhanlaxmi Bank- Free from the PCA Stranglehold
2. Procurri: Exit DeClout, Enter Novo Tellus. Company Remains Highly Undervalued at 4.4x 2018 EV/EBITDA
3. MODEC: Add
4. Indonesia Property – In Search of the End of the Rainbow – Part 2 –  Bumi Serpong Damai (BSDE IJ)

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.

2. Procurri: Exit DeClout, Enter Novo Tellus. Company Remains Highly Undervalued at 4.4x 2018 EV/EBITDA

Procurri Corporation (PROC SP) released FY18 results which showed the company growing revenues to 220M SGD (+21% vs FY17), EBITDA to 19.7M SGD (+185% vs FY17), PBT to 10.1M SGD (vs 2.3M loss in 2017) and a small net profit of 5.3M SGD which was artificially low because of an astronomical 47% tax rate. The high tax rate should reverse in 2H19 which would show the reported profitability of Procurri improve substantially. 

Procurri remains deep value trading at just 4.4x 2018 EV/EBITDA and 0.4x 2018 EV/Sales. If we adjust the FY18 net profit figure(assume 30% tax rate vs 47%) the shares trade at a P/E multiple of just 13x.

The shareholder register of Procurri has seen a dramatic change YTD with multiple announcements on SGX. The most significant development is the entry of Singapore PE fund Novo Tellus acquiring a 29.6% stake on 19/2/19. Consequently this means that the biggest corporate overhang on Procurri (read: the control by Declout Ltd (DLL SP) ) is now almost over with their stake reduced to 17% from 47% previously.

Given the well-publicized track record of Novo Tellus at SGX listed Aem Holdings (AEM SP) the question is if Novo Tellus sees another multi-bagger in the making?

While a “10-bagger” type return like AEM is unlikely at Procurri, doubling the market cap from 90M to 180M SGD would not be impossible as Procurri continues to grow in FY19 and the depressed multiple expands modestly.

3. MODEC: Add

Towards the end of 2018 Modec Inc (6269 JP)‘s share price dropped 46.5% as the price of crude oil also cratered, falling 44.4% . Since that plunge, the stock price has rebounded 53.9% as the company posted excellent results at 4Q and guidance, while conservative, was for continued healthy earnings.

Having visited the company today, we believe earnings should continue to be strong and actually strengthen over the next few years with MODEC likely to start running into capacity constraints over the course of this year.

4. Indonesia Property – In Search of the End of the Rainbow – Part 2 –  Bumi Serpong Damai (BSDE IJ)

In this series under Smartkarma Originals, CrossASEAN Research insight providers Angus Mackintosh and Jessica Irene seek to determine whether or not we are close to the end of the rainbow and to a period of outperformance for the property sector. Our end conclusions will be based on a series of company visits to the major listed property companies in Indonesia, conversations with local banks, property agents, and other relevant channel checks. 

The second company we explore is leading township developer Bumi Serpong Damai (BSDE IJ), with exposure ranging from landed housing, shophouses, condominiums, as well as the defensive and growing buffer of nearly 20% of revenues coming from recurrent rental income.

Bumi Serpong Damai (BSDE IJ) has one of the largest land banks of any developer, with a land bank of over 4,000 ha, more than half of which is in its flagship township of BSD City in Serpong.

Given its breadth of exposure to the property segment, the company has the flexibility to switch its exposure between different segments depending on the health of the overall market. 

Its projects are well connected by toll-roads and railway but it is well positioned to benefit from new infrastructure such as the new MRT, LRT, as well as new toll road extensions, which will enhance the attractiveness of its developments.  

Management suggests that they will take a cautious start to the year ahead of the election but see a window for a pick-up in marketing sales in May, with the potential for a much better 2H19. 

Despite a run-up in the share price since the start of the year, valuations do not look challenging from a historical basis especially looking at its PBV. It also trades at a significant discount to NAV of 67%, as well as being below its 5 yr historical mean on a forward PER basis.

Catalysts ahead include a post-election pick-up in activity leading to more project launches, completion of infrastructure projects, aggressive mortgage lending by the banks, and a more dovish interest rate outlook. Valuations are already attractive but a rise in property market activity should also lead to earnings upgrades, which if sustained, may lead to property prices moving upwards.

In this briefing:

1. Industrial Bank of Korea: Uninspiringly Cheap
2. Ping An Bank: Not Cheap Enough
3. Golden Agri Bull Pivots to Get Involved
4. China Unicom Weak 4Q18 Mobile Results Offset by Strength in Fixed Line Business
5. Fujitec (6406) Value Buy

1. 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.

2. 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.

3. Golden Agri Bull Pivots to Get Involved

Golden Agri Resources (GGR SP) has started a basing process below pivot support at 0.30 as the daily MACD cycle has not been confirming recent lows for a case of underlying supportive bull divergence (sell pressure dwindling as downside momentum tapers off).

Bull divergence outlined in the MACD is supportive on a macro basis, however there is downside risk stemming from the micro rising wedge. A fresh diverging low is expected to market a price low to work into.

Immediate inflection levels at 0.30 and 0.26 will dictate near term direction out of the micro rising wedge. Ideal downside projections are noted along with a bullish resistance threshold.

4. China Unicom Weak 4Q18 Mobile Results Offset by Strength in Fixed Line Business

China Unicom’s (762 HK) recent 4Q18 results were not great. The overall figures look ok due to strength in the fixed line business which offset weakness in mobile. However, they were the weakest of the three operators and the stock, which has had a strong run, now looks due for a pause. We have turned more cautious on the Chinese telcos on concerns that 5G spending could be higher than expected. Chris Hoare believes a major reason for the Chinese telcos outperforming in the past year has come from declining capex spending expectations. That trend may now start to reverse. While China Unicom has guided for only modest 5G capex in 2019 the focus will turn to 2020 where it is a much bigger issue and while we expect China Unicom to do a joint roll-out with China Telecom (728 HK) we expect the scale of the spending to be larger than an individual build. 

5. Fujitec (6406) Value Buy

The shares are cheap. The company is cash rich and owns 10% in treasury stock; it owned more last year but has cancelled 4%. It has some Y6bn in long term investment. EV in our view is Y57bn vs the current market cap of Y110bn. With ebitda next year coming in at Y15bn, EV/ebitda is under 4x. The shares yield 3.4% and trade at book. They have slightly underperformed the market over the last 12 months. For now, we view this as a defensive buy. There remain many issues longer term as to its place in the global elevator world. A potential positive, however, is that in May the company will announce a new mid-term plan and in it, they will outline their view as regards to shareholder returns for the next three years. They are aware that they are very over capitalised, so greater returns are a real possibility.

In this briefing:

1. Procurri: Exit DeClout, Enter Novo Tellus. Company Remains Highly Undervalued at 4.4x 2018 EV/EBITDA
2. MODEC: Add
3. Indonesia Property – In Search of the End of the Rainbow – Part 2 –  Bumi Serpong Damai (BSDE IJ)
4. Ho Bee Land – 4Q Earnings Hit by Unexpected Tax Provision

1. Procurri: Exit DeClout, Enter Novo Tellus. Company Remains Highly Undervalued at 4.4x 2018 EV/EBITDA

Procurri Corporation (PROC SP) released FY18 results which showed the company growing revenues to 220M SGD (+21% vs FY17), EBITDA to 19.7M SGD (+185% vs FY17), PBT to 10.1M SGD (vs 2.3M loss in 2017) and a small net profit of 5.3M SGD which was artificially low because of an astronomical 47% tax rate. The high tax rate should reverse in 2H19 which would show the reported profitability of Procurri improve substantially. 

Procurri remains deep value trading at just 4.4x 2018 EV/EBITDA and 0.4x 2018 EV/Sales. If we adjust the FY18 net profit figure(assume 30% tax rate vs 47%) the shares trade at a P/E multiple of just 13x.

The shareholder register of Procurri has seen a dramatic change YTD with multiple announcements on SGX. The most significant development is the entry of Singapore PE fund Novo Tellus acquiring a 29.6% stake on 19/2/19. Consequently this means that the biggest corporate overhang on Procurri (read: the control by Declout Ltd (DLL SP) ) is now almost over with their stake reduced to 17% from 47% previously.

Given the well-publicized track record of Novo Tellus at SGX listed Aem Holdings (AEM SP) the question is if Novo Tellus sees another multi-bagger in the making?

While a “10-bagger” type return like AEM is unlikely at Procurri, doubling the market cap from 90M to 180M SGD would not be impossible as Procurri continues to grow in FY19 and the depressed multiple expands modestly.

2. MODEC: Add

Towards the end of 2018 Modec Inc (6269 JP)‘s share price dropped 46.5% as the price of crude oil also cratered, falling 44.4% . Since that plunge, the stock price has rebounded 53.9% as the company posted excellent results at 4Q and guidance, while conservative, was for continued healthy earnings.

Having visited the company today, we believe earnings should continue to be strong and actually strengthen over the next few years with MODEC likely to start running into capacity constraints over the course of this year.

3. Indonesia Property – In Search of the End of the Rainbow – Part 2 –  Bumi Serpong Damai (BSDE IJ)

In this series under Smartkarma Originals, CrossASEAN Research insight providers Angus Mackintosh and Jessica Irene seek to determine whether or not we are close to the end of the rainbow and to a period of outperformance for the property sector. Our end conclusions will be based on a series of company visits to the major listed property companies in Indonesia, conversations with local banks, property agents, and other relevant channel checks. 

The second company we explore is leading township developer Bumi Serpong Damai (BSDE IJ), with exposure ranging from landed housing, shophouses, condominiums, as well as the defensive and growing buffer of nearly 20% of revenues coming from recurrent rental income.

Bumi Serpong Damai (BSDE IJ) has one of the largest land banks of any developer, with a land bank of over 4,000 ha, more than half of which is in its flagship township of BSD City in Serpong.

Given its breadth of exposure to the property segment, the company has the flexibility to switch its exposure between different segments depending on the health of the overall market. 

Its projects are well connected by toll-roads and railway but it is well positioned to benefit from new infrastructure such as the new MRT, LRT, as well as new toll road extensions, which will enhance the attractiveness of its developments.  

Management suggests that they will take a cautious start to the year ahead of the election but see a window for a pick-up in marketing sales in May, with the potential for a much better 2H19. 

Despite a run-up in the share price since the start of the year, valuations do not look challenging from a historical basis especially looking at its PBV. It also trades at a significant discount to NAV of 67%, as well as being below its 5 yr historical mean on a forward PER basis.

Catalysts ahead include a post-election pick-up in activity leading to more project launches, completion of infrastructure projects, aggressive mortgage lending by the banks, and a more dovish interest rate outlook. Valuations are already attractive but a rise in property market activity should also lead to earnings upgrades, which if sustained, may lead to property prices moving upwards.

4. Ho Bee Land – 4Q Earnings Hit by Unexpected Tax Provision

Ho Bee Land Ltd (HOBEE SP) (“HBL”) reported it 4Q 2018 financial results this evening.

PATMI for 4Q18 dropped 20.5% YoY to S$81.4 mil. Excluding the impact of the tax provision for Hotel Windsor, underlying PATMI would have remained stable at approximately S$101.7 mil.

HBL’s real estate business had performed within expectations. There were also improvements in the financial position of HBL, such as the increase in cash balance, lower net gearing ratio, refinancing of bridging loan and extension of debt maturity.

Fair value of HBL is pegged at S$3.32 per share, translating to an upside of 32%. REIT listing remains a potential catalyst. I maintain my BUY rating on HBL.

In this briefing:

1. Bank of Kyoto – Nintendo Sale A Portent of Changes To Come?

1. Bank of Kyoto – Nintendo Sale A Portent of Changes To Come?

On Friday 22 February after the close, Nintendo Co Ltd (7974 JP) announced a buyback (E, J), a share cancellation (E, J), and a public equity offering of secondary shares (J-only). This kind of event is not abnormal in a year when profits are weaker and share prices are down. Cross-holders often sell shares into the end of the year in order to realise profits and let unrealised gains from the balance sheet filter into the income statement.

This time it is five sellers from four banks which all hail from the area: Bank Of Kyoto (8369 JP), Nomura Trust (which holds shares in a trust account for the MUFJ Bank pension fund as a beneficiary), Mitsubishi Ufj Financial (8306 JP)‘s MUFJ Bank, Resona Holdings (8308 JP), and Shiga Bank (8366 JP). The MUFJ Bank holdings likely originate from Sanwa Bank which was Osaka-based before merging with BOT-Mitsubishi almost 15 years ago, and Resona is also from Osaka – next door to Kyoto where Nintendo was founded – and Shiga Bank is the prefecture next door.

This would look like a normal sell-down… except for one thing.

There was a note in the announcement to the effect that “in the context of how companies deal with their policy cross-holdings becoming the subject of greater focus, we confirmed that several shareholders desired to sell shares, and as a company subject to such cross-holdings, we are conducting the above-mentioned Offering.”

The “greater focus” comes from the both the change in the Japan Corporate Governance Code which was introduced last spring and went live June 1st (discussed in Japan’s Corporate Governance Code Amendments – A Much Bigger Stick for Activists and Stewards) which raised the bar for disclosure of reasons, and results, of such policy crossholdings in a revised version of Principle 1.4, and an example of how a board should make decisions and execute an unwind of corporate crossholdings. This example was given by Japan Exchange Group (8697 JP) itself regarding the TSE’s stake of 4.95% in Singapore Exchange (SGX SP) and was discussed in Japan Crossholdings: Japan Exchange’s Sale of SGX Shares Sets A Precedent – Watch Closely.  

In the TSE crossholding of SGX situation, the sale was not the most important part. The explanation of how the Board came to its decision and what they decided to do about it was important. 

On the other hand, Japan’s Corporate Governance Code (the Code), which was introduced in 2015, requires listed companies to examine and explain the economic rationale and future outlook of holding shares of other listed companies for reasons other than pure investment purposes. Following a review of the requirements under the Code, JPX reached the conclusion that the existing cooperative relationship with SGX would continue even without holding the shares of SGX.       [my bold]

The Japan Exchange Group had now provided the example for why even companies with cooperative business relationships should not own cross-holdings. And it is, if active stewards of capital choose to make it so, more subtle. Shareholders have even an even better pressure point. IF a company’s cooperative relationship with another company would not survive the unwinding of cross-holdings to improve capital efficiency for both sides, is that company truly independent? Is that company beholden to the company whose shares it holds? Is the cross-holding board doing its job?

And the Japan Exchange Group had said it would unwind its holdings of SGX over three years, so as not to overly impact the market for SGX shares. This provided an example of HOW to unwind, in addition to the WHY to unwind announced above.

The BIG QUESTION (And Nothing Else Matters)

The big question here is whether the reasoning for selling is really because of the new focus on policy cross-holdings, or it is just Bank of Kyoto and other banks trying to top up profit before the end of the fiscal year, using heretofore unrealised gains.

The Nintendo-specific situation is discussed in Nintendo Offering & Buyback: The Import & The Dynamics. 

An analysis of the Bank of Kyoto-specific situation is discussed below.

In this briefing:

1. Bank of Kyoto – Nintendo Sale A Portent of Changes To Come?
2. BBTN: Indonesia Has Special Mention Problems Too

1. Bank of Kyoto – Nintendo Sale A Portent of Changes To Come?

On Friday 22 February after the close, Nintendo Co Ltd (7974 JP) announced a buyback (E, J), a share cancellation (E, J), and a public equity offering of secondary shares (J-only). This kind of event is not abnormal in a year when profits are weaker and share prices are down. Cross-holders often sell shares into the end of the year in order to realise profits and let unrealised gains from the balance sheet filter into the income statement.

This time it is five sellers from four banks which all hail from the area: Bank Of Kyoto (8369 JP), Nomura Trust (which holds shares in a trust account for the MUFJ Bank pension fund as a beneficiary), Mitsubishi Ufj Financial (8306 JP)‘s MUFJ Bank, Resona Holdings (8308 JP), and Shiga Bank (8366 JP). The MUFJ Bank holdings likely originate from Sanwa Bank which was Osaka-based before merging with BOT-Mitsubishi almost 15 years ago, and Resona is also from Osaka – next door to Kyoto where Nintendo was founded – and Shiga Bank is the prefecture next door.

This would look like a normal sell-down… except for one thing.

There was a note in the announcement to the effect that “in the context of how companies deal with their policy cross-holdings becoming the subject of greater focus, we confirmed that several shareholders desired to sell shares, and as a company subject to such cross-holdings, we are conducting the above-mentioned Offering.”

The “greater focus” comes from the both the change in the Japan Corporate Governance Code which was introduced last spring and went live June 1st (discussed in Japan’s Corporate Governance Code Amendments – A Much Bigger Stick for Activists and Stewards) which raised the bar for disclosure of reasons, and results, of such policy crossholdings in a revised version of Principle 1.4, and an example of how a board should make decisions and execute an unwind of corporate crossholdings. This example was given by Japan Exchange Group (8697 JP) itself regarding the TSE’s stake of 4.95% in Singapore Exchange (SGX SP) and was discussed in Japan Crossholdings: Japan Exchange’s Sale of SGX Shares Sets A Precedent – Watch Closely.  

In the TSE crossholding of SGX situation, the sale was not the most important part. The explanation of how the Board came to its decision and what they decided to do about it was important. 

On the other hand, Japan’s Corporate Governance Code (the Code), which was introduced in 2015, requires listed companies to examine and explain the economic rationale and future outlook of holding shares of other listed companies for reasons other than pure investment purposes. Following a review of the requirements under the Code, JPX reached the conclusion that the existing cooperative relationship with SGX would continue even without holding the shares of SGX.       [my bold]

The Japan Exchange Group had now provided the example for why even companies with cooperative business relationships should not own cross-holdings. And it is, if active stewards of capital choose to make it so, more subtle. Shareholders have even an even better pressure point. IF a company’s cooperative relationship with another company would not survive the unwinding of cross-holdings to improve capital efficiency for both sides, is that company truly independent? Is that company beholden to the company whose shares it holds? Is the cross-holding board doing its job?

And the Japan Exchange Group had said it would unwind its holdings of SGX over three years, so as not to overly impact the market for SGX shares. This provided an example of HOW to unwind, in addition to the WHY to unwind announced above.

The BIG QUESTION (And Nothing Else Matters)

The big question here is whether the reasoning for selling is really because of the new focus on policy cross-holdings, or it is just Bank of Kyoto and other banks trying to top up profit before the end of the fiscal year, using heretofore unrealised gains.

The Nintendo-specific situation is discussed in Nintendo Offering & Buyback: The Import & The Dynamics. 

An analysis of the Bank of Kyoto-specific situation is discussed below.

2. BBTN: Indonesia Has Special Mention Problems Too

Bank Tabungan Negara Persero (BBTN IJ) appears to have a nasty combination of high Special Mention Loans (SMLs) and elevated “past due but unimpaired Loans”.

The implication is that provisioning levels are insufficient in an environment of eroding asset quality.

But the bank continues to grow credit by around 20% YoY.

The bank is hugely exposed to the retail real estate market (91% of Loans).

In fact, the Indonesian Banking Sector is rife with high SMLs and in some cases elevated “past due but unimpaired Loans”.

SMLs are traditionally associated with Chinese under-reporting of underlying bad loans, and hence the production of a somewhat flattering Asset Quality picture.

Maybe, the health and valuation of the Indonesian Banking Sector needs to be reassessed with implications for IDR.