Brief Equities Bottom-Up: Ghabbour Auto: Hyundai Motor’s Gateway to Egypt & A Major Turnaround Story and more

In this briefing:

1. Ghabbour Auto: Hyundai Motor’s Gateway to Egypt & A Major Turnaround Story
2. Korean & Taiwanese Governments May Restrict the Use of Huawei Telecom Equipment Products
3. Auto Earnings: Positive Toyota/Mazda, Negative Subaru/Suzuki
4. New J. Hutton Exploration Report (Week Ending 01/02/19)
5. Tesla (TSLA): SWOT Analysis Leads To…Rivian

1. Ghabbour Auto: Hyundai Motor’s Gateway to Egypt & A Major Turnaround Story

• This is a follow-up report to Dylan Waller‘s note Egypt Travel Report: Stock Market Discount Widens Despite Numerous Recovery Signals. This report is the first of several company-specific series of reports on the Egyptian companies. Although I have taken a first crack at analyzing Ghabbour Auto (AUTO EY) (also called GB Auto), most of the other Egyptian company specific reports will be done by Dylan Waller. 
• In this report, I provide an analysis about Ghabbour Auto, which is the largest auto manufacturing company Egypt, and it is also a distributor of Hyundai Motor vehicles. This report is aimed at investors with very long-term investment perspectives (3 to 5+ years), rather than those with shorter investment horizons. 
• Established in 1960, the Ghabbour Group is an Egyptian manufacturer of automobiles, buses, and motorcycles, with headquarters in Cairo. Ghabbour Auto has partnerships with numerous global auto makers including Hyundai Motor, Mazda, Geely, and Volvo. The company has the exclusive license to assemble and distribute Hyundai and Geely passenger cars. GB Auto is the largest company in the Egyptian passenger car market in terms of market share, sales, and production capacity.  

2. Korean & Taiwanese Governments May Restrict the Use of Huawei Telecom Equipment Products

• It was announced on February 7th that the South Korean National Assembly will start to discuss the threats that Huawei’s products may pose on the South Korean national security. The National Assembly will specifically discuss about banning all Huawei products for government telecommunication networks. This is the first time that the issue of Huawei products potentially posing a national security threat will be discussed in the South Korea National Assembly. 
• Taiwan is also another major country that is seriously thinking about banning all Huawei’s 5G related telecom equipment. In late January, the local Taiwanese news outlets reported that the Taiwanese government may announce a ban of Huawei’s telecom equipment by the end of March. At this time, the Taiwanese government may also announce a “blacklist” of Chinese companies that may pose national security threat. The companies that could potentially be included in this “blacklist” include Huawei, Hikvision, Lenovo, and Zhejiang Dahua Technology Co. 
• It remains to be seen how the Taiwanese government may decide on this case but this could have an enormous repercussion on not just on Huawei but also on Taiwan Semiconductor Manufacturing Company (TSMC) (2330 TT) since Huawei is a major customer of TSMC. 

3. Auto Earnings: Positive Toyota/Mazda, Negative Subaru/Suzuki

On a relative basis we have been positive on Toyota Motor (7203 JP)  and negative on Subaru Corp (7270 JP)  since early 2017 as we consider Toyota’s underlying earnings strength to be superior to the majority of its peers and consider hybrids to be moving towards the mass adoption stage while we also feel that Subaru, after a purple patch when it led the automotive industry in terms of margins, is now falling back to Earth and the sell side remains behind the curve on the depth of issues and underspend that needs to be addressed at the company. The ratio between the two returned about 40% in 2018 but is down about 12% so far this year.

In the case of Mazda Motor (7261 JP) and Suzuki Motor (7269 JP), in Mar 2018 we took the contrarian view of preferring Mazda over Suzuki despite earnings momentum being significantly stronger for Suzuki than for Mazda. This proved to be “early” as the ratio declined 16% during the year and at one point fell as much as 30%, but we continue to feel that our thesis has merit and would note that the ratio is now up 2% relative to its value at our initial recommendation. Our thesis is simply that Mazda’s earnings are under pressure due to forward investments in technology (extremely high efficiency gasoline and diesel engines) and distribution and after sales which have traditionally been a Mazda weakness and are in our opinion the main difference between Mazda and a much stronger company like Honda. In the case of Suzuki, while the long-term growth outlook due to the India exposure remains bright, we felt that momentum was likely to decelerate and that Suzuki could face headwinds in the short-term as consumer upgraded from mini-vehicles in which it is dominant, to compact and mid-size cars where Suzuki is strong in India, but not the force of nature that it is in the mini-vehicle segment. While it has taken time, recent results suggest this thesis is starting to play out.

4. New J. Hutton Exploration Report (Week Ending 01/02/19)

• Gold Road Resources (GOR AU) Recommend BUY
• Gruyere JV (50/50) 91% complete, on schedule and budget
• 150koz pa Au attributable production to GOR, first bullion pour Q219
• Forecast EBIT $A74-84m pa, substantial cashflows starting Q419
• Price/EBIT ratio 8 to 9.1, A$44m cash – no debt
• Own virtually the entire Yamarna Greenstone Belt (~ 6,500km²) 
• A$20m 2019 exploration budget – exceptional prospectivity
• Corporate takeover target likely by Gold Fields Ltd (GFI SJ)
• Aura Energy Ltd (AEE AU), Catalyst Metals (CYL AU), Liontown Resources (LTR AU), Millennium Minerals (MOY AU), Southern Gold (SAU AU), Azumah Resources (AZM AU), Focus Minerals (FML AU), Oklo Resources (OKU AU), Red 5 Ltd (RED AU), Troy Resources (TRY AU)

5. Tesla (TSLA): SWOT Analysis Leads To…Rivian

What happens when innovation becomes commoditized?  We believe this is a core concern to every Tesla watcher, bulls and bears so we began our Lunar New Year week (or Pro Am 2019 week in Pebble Beach) with a quick and dirty SWOT analysis of Tesla to see where the next potential existential threat can come from…and we ended up looking at Rivian.  

Rivian is a private company that has not issued public debt so financial information on the company is unavailable in the U.S. public domain, so we poured through strategic investor Sumitomo Corp’s Yuho reports to see if we can find any tidbits in Japan but found nothing there either.  Hence, while we cannot make much financial observations about the company at this point, we do see a number of strategic signs from Rivian’s actions that may indicating that it is most likely improving upon the Tesla experience to avoid the hiccups and the bumps on the road to premium EV segment dominance.

From an APAC stock market perspective, we see LG Chem and Sumitomo Corp as two entities that could potentially see financial impact from Rivian in the next several years. Teslerati has made an educated guess on LG Chem as Rivian’s cell supplier which we believe to be reasonable, although Rivian and LG Chem have neither confirmed nor denied the relationship (https://insideevs.com/new-details-rivian-battery-pack-design/, https://www.teslarati.com/rivian-battery-lab-irvine-california-megapack-production/).  Current investment in Rivian by Sumitomo Corp is most likely an insignificant amount from the latter’s perspective but could perhaps grow into something bigger at some point in the future.  

The Rivian R1S