In this briefing:
- Bank of Zhengzhou: “Bend One Cubit, Make Eight Cubits Straight”
- Tesla (TSLA): 1Q Deliveries – Aging Products or the Impact of Tax Credit Phase Out?
- Jiangxi Bank: “No Sooner Has One Pushed a Gourd Under Water than Another Pops Up”
- British Land (BLND:LN): Retail in Reverse
- MTG Co Ltd; Problems Stretch Far Beyond the New Chinese E-Commerce Legislation
1. Bank of Zhengzhou: “Bend One Cubit, Make Eight Cubits Straight”
Bank Of Zhengzhou (6196 HK) reveals a picture of cascading asset toxicity and subpar earnings quality. As elsewhere in China, it is difficult to decipher whether better NPL recognition is behind this profound asset quality deterioration or poor underwriting practice and discipline combined with troubled debtors: the answer may lie somewhere in between.
While the low PH Score (a value-quality gauge) of 4.7 is supported by a lowly valuation metric (earnings quality is not reassuring), it is more a testament to -and reflection of- core eroding fundamental trends across the board. Regarding trends, Capital Adequacy and Provisioning were the variables to post a positive change. But even then, not all Capitalisation and Provisioning metrics moved in the right direction.
Franchise Valuation at 12% does not indicate that the bank is especially cheap though P/Book of 0.64x is below the regional median of 0.78x.
2. Tesla (TSLA): 1Q Deliveries – Aging Products or the Impact of Tax Credit Phase Out?
Tesla’s 1Q delivery details released yesterday suggests one of three possible reasons for the dramatic drop across the company’s product lineup – either the impact of the federal tax credit phaseout is beginning to hit Tesla’s sales, the sales reflect an aging product portfolio or a combination of both. We suspect that it might be a combination of the two.
Excitement over a new product typically lasts for 6-12 months, then should show a stabilizing pattern. To be honest, the Model 3 should now be a mid-cycle product in the minds of consumers since the car has been around since mid 2017, although analysts’ clock began ticking on the product in 2Q18 given their P&L focus. We are now in the 10th month following normalization of the Model 3 production which would suggest that we should be anticipating a Model 3 delivery range of 50-65,000 units based on delivery patterns for the past 3 quarters, but we also believe investors should keep in mind that for Tesla the federal tax credit phaseout kicked in on January 1, 2019. The combination of these two factors could have very well led to a drop in deliveries in 1Q, with a 4Q18 front-load effect. This seems to be especially noticeable on the drop in the deliveries of Models S&X that few analysts on the street seem to have focused on following Tesla’s press release. We believe what is sorely needed for Tesla as a brand is a product portfolio refresh, not Model Y launch at this point.
Given the above, we would be inclined to model in a 200-250k units of the Model 3 deliveries in 2019 at this point, which would be conservative compared to the 360-400k units that Tesla is currently guiding. The wild card would be if China demand for the Model 3 exceeds the initial indications of about 10k units per quarter (see JL Warren Capital’s Tesla China Q1 Delivery Revision ), which should be included in the 1Q shipment figures that were released by the company.
| Tesla: Global Deliveries 1Q19 | |||||
| (Units) | 1Q18 | 4Q18 | 1Q19 | QoQ | YoY |
| Model 3 | 8,180 | 63,359 | 50,900 | -19.7% | 522.2% |
| Models S&X | 21,800 | 27,550 | 12,100 | -56.1% | -44.5% |
| Total | 29,980 | 90,909 | 63,000 | -30.7% | 110.1% |
U.S. federal tax credit for EVs begin to phase out for EV manufacturers once the OEM hits cumulative sales of 200k units, and Tesla achieved this landmark back in July 2018. The actual phaseout for the company began on January 1, 2019. Granted we have been concerned about Tesla’s aging product portfolio for the past year (see Tesla: A Few Thoughts on Ageing Products Before 1Q Earnings Announcement, April 10, 2018), we also believe that the drop in the Models S&X deliveries in 1Q19 is highly likely to have been exacerbated by the tax credit phaseout and/or other factors.
| Tesla’s Federal Tax Credit Phaseout Schedule | |
| Federal Tax Credit | For Vehicles Delivered |
| $7,500.00 | On or before Dec. 31, 2018 |
| $3,750.00 | Jan 1-Jun 30, 2019 |
| $1,875.00 | Jul 1-Dec 31, 2019 |
3. Jiangxi Bank: “No Sooner Has One Pushed a Gourd Under Water than Another Pops Up”
Jiangxi Bank Co Ltd (1916 HK) initially attracted our attention with a subpar PH Score (a quantamental value-quality gauge). The bank only scored positively on Capital Adequacy and Efficiency trends. The latter is almost certainly not a true picture.
Further analysis reveals a bank ratcheting up the credit spigot exuberantly on the back of poor asset quality fundamentals (booming substandard loans and SML expansion) with ensuing elevated asset writedowns weighing on a reducing bottom-line despite gains from securities and a lower tax provision.
Valuations do not fully reflect a somewhat challenging picture. Shares trade at Book Value vs a regional median of 0.8x, at a Franchise Valuation of 13% vs a regional median of 9%, and at an Earnings Yield of 8.4% vs a regional median of 10%. Based on FY18 data, this is a bank that should trade at a discount rather than at a premium to peers.
4. British Land (BLND:LN): Retail in Reverse
A ‘perfect storm’ is enveloping UK retailers. Brexit uncertainty is reducing footfall and sales and the structural shift to e-commerce continues unabated. But if things are tough for retailers they are equally bad for UK property companies with a significant proportion of retail in their portfolios. Declining rents and rising yields are not positive for valuations. Landlords also have to deal with an increasing incidence of tenant insolvencies.
British Land: what does it do ?
British Land is the third largest property company in the FTSE100 with a market capitalisation of £5.6bn and property portfolio of £12.8bn split almost equally between Retail and Central London offices.
Why is it in the Short portfolio ?
Trading pressure in the retail sector is translating into rent reductions for landlords, or worse, vacant space. Yields are rising due to decreased investment demand. Property consultancies anticipate a double digit decline in retail capital values over the next two years. The consensus expectation is for British Land’s EPRA NAV to decline 8% over the next two years.
5. MTG Co Ltd; Problems Stretch Far Beyond the New Chinese E-Commerce Legislation
- MTG revised their original targets for FY2019 and issued revised targets which were significantly below the original targets
- The share price has already been on the decline even prior to the notice of revised targets
- Declining inbound sales of its flagship brand ReFa is the main culprit for guidance reversion
- The impact of Chinese e-commerce legislation was significant due to limited exposure to pure inbound sales
- Parallel buyers, those who buy products to resell them in China: dominates MTG’s inbound sales
- MTG’s price difference in Japan duty-free purchases vs official sales channels in China
- The Troubles of MTG, Causing Panic Among Consensus
- Insider ownership and lack of free float keeping the share price above its fair value
- Price to book approaching 1.0x; limits the immediate downside risk
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