Brief Equities Bottom-Up: China Minsheng: Unless There Is Opposing Wind, a Kite Cannot Rise. and more

In this briefing:

1. China Minsheng: Unless There Is Opposing Wind, a Kite Cannot Rise.
2. Rakuten IPO Redux: Pinterest Surfaces More Liquidity but Not Paper Profits
3. Hoya: Future Prospects Remain Positive with More Room for Share Price Growth
4. JD.com (JD): Cancels Delivery Man’s Basic Salary, Adapts to Growth of Commission Business
5. Taiwan Business Bank: Catching the Sun’s Rays

1. China Minsheng: Unless There Is Opposing Wind, a Kite Cannot Rise.

Profitability at China Minsheng Banking A (600016 CH) in 2018 slipped. Similar to other Chinese lenders, rising Loan Loss Provisions exerted a negative pull on the bottom-line, testament to gnawing Asset Quality issues. In addition, similar to some banks, the top-line came under pressure from the rising cost of source of funding. Also the bank was not alone in juicing up its bottom-line with hefty trading gains. Thus Earnings Quality could have been better.

Given the underlying squeeze on core Income, it was encouraging to see management at least restrain OPEX.

Regarding Asset quality, write-offs soared by 153% YoY while substandard and loss Loans jumped by 68% YoY and 14%, respectively, and Loan Loss Provisions rose by 35.6% YoY. It is perhaps a little surprising then that coverage ratios decreased given the trend in credit costs, NPL migration, and charge-offs.

LDR remains quite high though credit growth last year was not gung-ho and broadly in line with Deposit expansion. We do note though a ratcheting up of CRE lending which jumped from 8.8% of the total Loan book to 12.3%.

2. Rakuten IPO Redux: Pinterest Surfaces More Liquidity but Not Paper Profits

Rakuten Inc (4755 JP) investee Pinterest Inc (PINS US)  has filed its IPO prospectus implying a lower valuation than its last venture round but a robust increase in value since Rakuten led the Series C round in May 2012. We think an initial ¥4bn investment could be worth ¥25-30bn at the midpoint of the suggested IPO range.  

• As with Lyft, the absolute value again and shift to greater liquidity are positive as it gives Rakuten more financial flexibility as it ramps up investments in the mobile business. 
• Unlike Lyft, the Pinterest IPO value is down from the latest funding round which impacts paper profits that provide cover for spending on mobile albeit at a fraction of the upside from Lyft.

Pinterest doesn’t generate the same headlines as Lyft but a second IPO of a Rakuten investment as its cash needs expand can only be good news

3. Hoya: Future Prospects Remain Positive with More Room for Share Price Growth

This insight mainly focuses on the key takeaways from our recent visit to Hoya Corporation (7741 JP):

• Hoya will continue to refresh its lineup of endoscopes this year as the company introduces new models once in every five to six years and we believe the company’s existing endoscope systems are nearing the end of their life cycles. We believe, this should result in growth in revenues for the company.
• Hoya was the first company to introduce its Disposable Injector Development system which is one of the fastest growing businesses for Hoya. The global intraocular market is forecasted to grow at a CAGR of 5.4% until 2024 resulting in growth in top-line for Hoya which has been gradually taking share in this market.
• The Luxottica/Essilor merger could pose a significant long-term threat to Hoya and will have a knock-on effect on the rest of the spectacle and eyewear manufacturers due to their market domination. That being said, we forecast the eyeglass and contact lenses to continue to witness growth due to Hoya’s strong presence in the markets in which it operates and a tailwind in the short-term as customers switch to Hoya for diversification reasons. The company’s acquisition of the eyewear business of 3M will also add to the revenue growth.
• Hoya holds a monopoly in the glass HDD substrates market and the market is currently underpenetrated. The superior features of glass substrates compared to aluminum should shift the demand towards glass, which is sold at twice the price of aluminum.
• Hoya Corporation is currently trading at a 1-year forward EV/EBIT multiple of 16.75x, which is close to its 52-week high of 16.79x. When compared with 5 year forward EBIT multiples there is still room for some multiple expansion in the short-term leading to price appreciation.

4. JD.com (JD): Cancels Delivery Man’s Basic Salary, Adapts to Growth of Commission Business

* JD cut delivery men’s salary by 25% last week.

* JD ever generated cash flows by accounts payable in direct sales, but cost control is necessary when the commission business grew faster than the direct sales business.

* We believe that the overwhelming majority of delivery men will stay with JD after the salary cut, as many small delivery companies went bankrupt in 2018.

* we believe JD will be able to control costs well and keep close-to-zero net margin in 2019.

5. Taiwan Business Bank: Catching the Sun’s Rays

Taiwan Business Bank (2834 TT) ticks most of the boxes with a PH Score of 10. This is a top decile performance globally in terms of fundamental trends from our quantamental value-quality gauge.

We would caution that the asset quality is not as crystalline as the reduced NPL ratio indicates given that rising impaired loans represent 5x NPLs. We await greater granularity from further analysis of the NPL breakdown by category. Having said that, the impaired loan ratio is still pretty low and manageable at 1.48% while Provisioning -on an upward trend- should reflect increasing non-NPL but impaired assets.

Results were markedly impacted by a palpable reduction in Loan Loss Provisions which will be a response, we assume, to lower problem loans or NPLs as well as very strong recoveries (net negative charge-offs), rather than higher impaired Loans.

In addition, the trend in Efficiency may not be as good as it appears to be given that OPEX expansion outpaced “Underlying Income” expansion. The latter was impacted by a sharp increase in Interest Expenses from Deposits especially, as well as a tepid Fee Income performance. While Interest Income from non-credit assets rose robustly, the core Interest Income on Loans firmed by 11.4% YoY, for a YoY gain of NT2.3bn, despite a modest decrease in the Loan portfolio in such a low margin environment. Interestingly, Loan recoveries also saw a NT2.3bn gain.

Valuation is quite appealing given the tailwinds of a high PH Score. FV, P/Book, and Earnings Yield stand at 6%, 0.9x, and 10%, respectively.