Brief Equities Bottom-Up: Donki (7532 JP) Becomes Japan’s 4th Biggest Retailer and more

In this briefing:

1. Donki (7532 JP) Becomes Japan’s 4th Biggest Retailer
2. Eurobank: Battle-Hardened and Transformation Bound
3. Vodafone Idea Needs a 55% Price Increase to Return to Viability
4. Reason Why Amazon Canceled DRAM Order from Samsung: Short-Term Impact on Samsung
5. UOB – Driving Bad Loans

1. Donki (7532 JP) Becomes Japan’s 4th Biggest Retailer

Pan Pacific International (7532 JP) (Don Quijote) is on a roll at the moment.

The discount and variety retailer just opened its fourth store in South-East Asia, mixing Japanese restaurants and cafes with a Donki store and a range of Japanese speciality tenants. The store has all the high-level retail entertainment that its Japanese stores offer but with the added cachet of being from Japan and mixing in a lot more in-mall tenants and food outlets. PPI now plans 200 overseas stores in the medium-term.

Back home, PPI is creating new small store formats which have the potential to reach into parts of Japan its big box stores cannot.

At the same time, PPI is beginning the conversion of 100 Uny stores to mixed food and variety stores. With the first six conversions showing sales growth of 83% over 10 months and gross margins up 59%, PPI’s expectation of an extra ¥20 billion in operating profit once conversions are complete looks very achievable.

The takeover means PPI is now Japan’s fourth-biggest retailer, up from 15th just three years ago.

These multiple ventures reflect the company’s flexibility, adapting to each local market’s needs with formats to match.

Its recent decision to close down its e-commerce business is not a weakness but a positive move, demonstrating that PPI understands where its strengths lie: in live store entertainment.

2. Eurobank: Battle-Hardened and Transformation Bound

Eurobank Ergasias Sa (EUROB GA) FY18 results were satisfactory. The bank is now weaned off ELA, pays a tax rate of 33% for the first time in many years, generates robust deposit inflows, enhancing the liquidity position, and is actively reducing NPEs. Management foresees the current problem loan ratio at 37.1% easing to 16% in 2019 and 9% by 2021. Problem exposures will be slashed by €10bn in 2019 through securitizations, collateral liquidations, sales, recoveries and charge-offs. Recent data show a much more benign situation regarding negative NPE formation. The worst seems to be behind the Greek Banking System, barring some external global or regional event or domestic policy misstep.

The legal framework for banks has improved with the Katseli Law providing lenders with greater protection for recovering mortgage NPE foreclosures in the event of default on restructured loans. The real estate auction system has also been gaining much greater traction.

Eurobank is engaged in a corporate transformation plan in order to unlock value, improve capitalisation, and manage NPEs. The plan revolves around a merger with Grivalia, “Pillar” (€2bn mortgage NPE securitization), “Cairo” (€7.5bn multi-asset securitization), the creation of a loan servicer, and a hive down. The bank will focus on core banking rather than functioning as a distressed real estate asset manager.

The outlook for the Greek economy has improved somewhat. The 2019 Budget is based on a primary surplus target of 3.5% of GDP. Exports and private consumption are drivers for solid growth of around 2%. The cash buffer of at least EUR26.5 bn is equivalent to 2 years of gross financing needs. Moody’s raised Greece’s issuer rating to B1 from B3 and its outlook to stable from positive (Feb19). The sovereign gained market access with recent 5year €2.5bn and 10year €2.5bn issues. A tailwind will be the resurgence of “animal spirits” under a New Democracy administration after elections later this year.

3. Vodafone Idea Needs a 55% Price Increase to Return to Viability

Underlying profitability continues to deteriorate at Vodafone Idea (IDEA IN) (IDEA). Chris Hoare has updated his liquidity analysis, and estimates that IDEA needs prices to rise by over 50% to hit cash flow break-even in the medium term. That needs market behavior to change from Jio in particular. Bulls will point to IDEA’s current capital raising and the large capital raising planned at Bharti Airtel (BHARTI IN) as signalling a possible end to hostilities. However, the math at IDEA is such that even a $3.5bn injection gives only temporary relief. What they really need are price increases. Without them (and even with the capital increase), Chris thinks IDEA runs out of cash in about 2 years. We retain our Reduce recommendation and cut our price target to INR16.

4. Reason Why Amazon Canceled DRAM Order from Samsung: Short-Term Impact on Samsung

• SamE shocked the market with 4Q results. OP was down nearly 30% YoY and even 20% from the already heavily adjusted street consensus of ₩13.4tril. The main reason was Amazon’s canceled order. Amazon canceled a significant portion of memory chips, mostly DRAM to be used in its IDCs.
• The market guessed that Amazon might have delayed purchase to further capitalize on falling prices. But Amazon had canceled DRAM order because there were fundamental flaws in SamE’s custom DRAM chips at chip design level.
• The street was expecting a bounce back for memory chip ASP in 2H this year. SamE’s technical issue may push it back further. Meanwhile, SamE’s next quarterly profit level can be even worse. Some in the local street already adjusted SamE’s 1Q OP down to slightly above ₩7tril. At this level, SamE’s FY19e PER would be at 11~12x. This is a very aggressive territory for SamE.

5. UOB – Driving Bad Loans

It’s easy to miss. Headline bad loans are down. But United Overseas Bank (UOB SP) saw a surge in newly defaulted loans during 2H18 compared with 1H18.  The bank’s Pillar 3 disclosure reveals this all too clearly, and it goes to true underlying credit metrics. Write-offs flatter figures or loan reschedulings, and high figures here can lead one to believe that companies and consumers are finding it easier to service their loans. This though may not be true. And it may be one of the most important considerations when analyzing any bank.