Brief Equities Bottom-Up: Ctrip (CTRP): Overcame Two Difficulties in Q4, But Market Over-Reacted to “Global No. 1” and more

In this briefing:

1. Ctrip (CTRP): Overcame Two Difficulties in Q4, But Market Over-Reacted to “Global No. 1”
2. Tesla (TSLA): Model Y to Be Unveiled in L.A. On March 14 – What We Know So Far
3. Rakuten: Lyft IPO Provides Timely Support for Mobile Deployment
4. HSBC – Meteoric Rise in Credit Costs

1. Ctrip (CTRP): Overcame Two Difficulties in Q4, But Market Over-Reacted to “Global No. 1”

* The recovery in 4Q2018 shows that CTRP has already survived the new law and the new competitor in 2018.
* We believe EPS will grow 12% in 2019.
* However, we believe the market has already over-reacted to the news last November that CTRP became the largest online travel agency.
* We set a target price of USD23.80, which is 32% below the market price.

2. Tesla (TSLA): Model Y to Be Unveiled in L.A. On March 14 – What We Know So Far

Other than CEO Elon Musk’s tweets, there is not a whole lot that has been announced about the Model Y other than that it will be unveiled at the company’s L.A. Design Studio on March 14.  Here is a brief list of what we know so far about the Model Y:

• Musk indicated during the 4Q earnings analyst call that Models 3&Y will have a 78% shared content ratio (see Tesla (TSLA): 4Q Earnings and First Impressions on the Company’s Strategy ), with media reports quoting Musk also referring to a 75% shared content ratio in other forums (see, e.g., https://electrek.co/2019/02/07/tesla-casting-lines-gigafactory-model-y-production/).
• Musk also had stated during the 4Q earnings call that the Model Y will begin production at the Shanghai Gigafactory 3 which is projected to be completed at the end of 2019.  The company has not confirmed that commercial production of the Y will begin in the U.S. simultaneously.
• There are no changes or additions in Musk’s tweets to previously announced commercialization target dates for the Model Y.  

Tesla’s new product launches historically have been mired in delays.  Assuming management does not repeat its assembly line prototyping mistakes prior to the Model 3 launch there should not be an issue currently with meeting its production target timeline of 1H20.  However, we also believe any such concerns would be legitimate given Tesla’s history.

A Tesla Model Y Teaser Shot

3. Rakuten: Lyft IPO Provides Timely Support for Mobile Deployment

The publication of Lyft’s IPO prospectus is a clear positive for Rakuten Inc (4755 JP) . As a pure investment, Rakuten’s return on its Lyft investments could be 273-366% or ¥101-136 per share based on the $20-25bn valuation range reported by the press. There has been a lot of focus on the investment gains Rakuten should accrue but the real upside is a timely boost to liquidity plus accounting cover as mobile investment accelerates.  Whether one believes Rakuten can succeed in mobile or not, it has the capital and paper profits to support a splashy introduction and spending is already accelerating.

4. HSBC – Meteoric Rise in Credit Costs

The five-fold rise in HSBC Holdings (5 HK)’s latest quarterly credit costs compared with the first quarter of the year should not surprise our readers.  It was always the case that the bank’s provision expenses were too low, not only in the first quarter of the year, but even through the third quarter. This is where following of lower headline bad loan figures wholly misleads. What really matters now is where credit costs will move in coming quarters and years. We offer long-perspective on this suggesting sizeable costs in 2019, where HSBC is now indicating “normalisation of credit costs going forward.” We note further observations from the bank’s granular disclosures that point toward worsening credit metrics, further supporting the notion of ‘normalisation’ or what we can simply call far higher credit costs. In any case, we do not believe most are expecting a wholesale rise in provision costs at HSBC, from current levels.