Brief Equities Bottom-Up: BYD: Endless Darkness and more

In this briefing:

1. BYD: Endless Darkness
2. Notes from the Silk Road: Xtep Int’l Holdings (1368 HK) – Confirming a Step Up
3. RHT Health Trust – Cash on Sale
4. Shiseido Co Ltd: Could Become a Victim of Its Own Success

1. BYD: Endless Darkness

Although its monthly sales is trending up, BYD’s worst time isn’t behind us yet. Completely switching to NMC battery for its EV passenger vehicles causes BYD losing its advantage on EV battery technology for passenger vehicles and medium term pain on lower products margins. The expected significant cut on governments’ subsidy on NEVs would further erode its margins seriously in the next two years. The biggest competitor, Tesla’s new plant in Shanghai is on its way. NEV models from local OEMs, such as Baic Motor Corp Ltd H (1958 HK) , Geely Automobile Holdings (175 HK) and Saic Motor Corp Ltd A (600104 CH) , are getting more and more attractive to customers. 

We estimate BYD’s net profit to decrease by 18% yoy and 40% yoy respectively assuming an 40% cut on NEV subsidies in 2019-2020E, after an estimated 35% yoy decline on net profit in 2018E. Its share price, which indicates 50x P/E on our estimated 2019E earnings, still has downward pressure. 

2. Notes from the Silk Road: Xtep Int’l Holdings (1368 HK) – Confirming a Step Up

■ Two positive announcements in quick succession: Xtep International (Xtep) have confirmed our outlook that their turnaround strategy is on track, namely: Same-Store Sales growth in the mid-teens and a positive profit warning. 

■ What this means: The reality is simple for Xtep, its turnaround plan is on track and the group appears to have better control of its distribution network. The 2018 full year numbers should serve to help the company in building investor confidence. Expect 2019 to be another year of consolidation within its retail network, XTEP’s focus is expected to be on driving brand equity, improving working capital terms whilst looking at the next stage of its turnaround story.

■ Our upgrades: Normally, so close to results we would acknowledge them and maintain our forecast. However, they are a confirmation for XTEP and its strategy. With Sales ahead of our previous 18% YoY growth expectation, we have moved them towards the guided 25%. At the same time, we have tweaked our bottom line growth from 55% to 54% to better reflect this guidance. Whilst 2019 will be a year of consolidation, the outlook calls for growth to be in line with our expectations, hence forecasts are largely unchanged. 

■ The next stage of the turnaround program is approaching: Expect the March announcement to allow XTEP to pitch an investment case which delivers investor confidence. With some HK$1.45 per share of net-cash (or circa 32% of market cap) on its balance sheet and a need for better utilisation one strategy may be to look for acquisitions, but it may also prove wise for shareholders to be rewarded for their patience, via some form of capital return. We also anticipate March to see an expansion on its strategic goals for organic growth, which we believe should be centre around how XTEP can continue to improve its retail footprint and build its brand equity.

3. RHT Health Trust – Cash on Sale

On 15^th January 2019, RHT Health Trust (RHT SP) announced the completion of the disposal of RHT’s entire asset portfolio of clinical establishments and hospitals in India to Fortis.

The balance net cash proceeds of S$32.52 mil will be retained as undistributed proceeds to cover on-going expenses of RHT following Completion. This translates to a cash NAV of S$0.04 per unit.

RHT’s closing unit price today was S$0.029 per unit, translating to a 28% discount to its cash NAV of S$0.04 per unit.

Taking Saizen REIT’s premium as a reference, RHT could potentially trade up to a 20% premium to its cash NAV, implying a unit price of S$0.048 per unit, or an upside potential of 65.5% when it announces progress in acquiring new assets/business.

Key risk is the suspension in trading of RHT units if it is unable to acquire new business.

Recommended investment strategy is to acquire RHT at current price (steep discount to cash NAV), hold out till a re-rating upon the announcement of a potential acquisition, and divest at a premium to cash NAV.

4. Shiseido Co Ltd: Could Become a Victim of Its Own Success

Shiseido Co Ltd (4911 JP)  will Struggle to Replicate its Past Success Over FY2018-23E

In the past few years, Shiseido was able to outpace the rest of the Japanese cosmetics market by a significant margin. Shiseido’s Japanese operations benefited from the tailwinds of an increasing Chinese tourist influx while its international operations steadily expanded its footprint in China and other geographies. The company also managed to improve its EBIT margin in FY2017 to 8.0% cf. 4.3% in FY2016. Margin improvement kept going into 3Q of FY2018 and we expect FY2018E margin to be 10.8%.

In our opinion, Shiseido will struggle to maintain its revenue CAGR of 7.5% over FY2013-18E over the next five years. We expect a more modest revenue CAGR of 4.9% over FY2018-23E.

Also, as a result of revenue growth and other cost efficiencies, Shiseido’s EBIT is expected to grow at a CAGR of 43.9% over FY2014-18E. But we expect Shiseido to find it difficult to improve its EBIT margin from the FY2018E level.