Brief Equities Bottom-Up: Indian Housing Finance Companies-Series 2- LIC Housing Finance and more

In this briefing:

1. Indian Housing Finance Companies-Series 2- LIC Housing Finance
2. ASML. Safe Harbor In A Semi Storm.
3. Spotify: Playbook for Online Platforms to Turn Profitable – Implications for Meituan Dianping
4. MAJOR: Impressive 4Q18 Earnings

1. Indian Housing Finance Companies-Series 2- LIC Housing Finance

We have recently written a report on Housing Finance Industry (please click here) where we delved on the outlook of the industry that has witnessed significant support from the government as it opened up the funding stream for the NBFC sector including HFCs who in the past relied heavily on banks. In addition, the government has also focussed on improving the housing demand through reforms like RERA, Housing For All etc. that has helped revive sales in the recent quarters.

We concluded the report by saying that the forthcoming articles in the form of a series will elaborate on some HFCs that are likely to be the key beneficiaries of an expected revival of the residential real estate. These HFCs have shown high corporate governance standard and their asset quality has not been compromised for growth. And this could be ascertained by the highest credit rating of AAA awarded to these HFCs by the noted credit rating agencies in India.

In continuation of the series, this article provides detail on Lic Housing Finance (LICHF IN) , the second largest HFC in the country. The company has witnessed robust growth in the past with an asset quality that is among the best in class. We initiate coverage on the company through this report that would delve on the outlook of the company along with some glaring risks that have lately emerged and may likely have an impact on the asset quality going forward.

2. ASML. Safe Harbor In A Semi Storm.

Dutch lithography bellwether ASML is unique among its WFE peers in forecasting 2019 as yet another growth year for the company, making it eight such years in a row. While the likes of Applied Materials and Lam Research anticipate YoY revenue declines in the mid-to-high teens, ASML is sheltered from the worst excesses of the downturn by virtue of its technological moat, namely its EUV lithography tools. Customers like Taiwan Semiconductor Manufacturing Company, Samsung Electronics and Intel  are critically depending on ASML to deliver thirty of those tools in 2019 in order to ramp their latest process nodes. 

On the latest earnings call, ASML underscored its confidence in the company’s prospects by proposing a 50% increase in dividends to €2.10 per share. Currently trading at a 17% discount to its 52-week high, ASML is a safe harbor in the current semiconductor storm. 

3. Spotify: Playbook for Online Platforms to Turn Profitable – Implications for Meituan Dianping

• Our analysis of how Spotify Technology Sa (SPOT US) turned profitable in 4Q18 reveals three key ingredients: critical mass in sales, GM progression, and core business diversification.
• With sales reaching critical mass, this would allow fixed costs to be spread out in such a way that opex/unit is lower than GP/unit.
• Progression in GM and core business diversification strategy are worth monitoring.
• Implication: Meituan Dianping’s (3690 HK) core business is ahead of iQIYI Inc (IQ US) in terms of profitability inflection point timeline.

4. MAJOR: Impressive 4Q18 Earnings

MAJOR 4Q18 net profit was Bt259m (+247%YoY, +26%QoQ). The impressive earnings was driven by solid guests admission (+97%YoY).

• 4Q18 revenue was Bt3.0bn (+59%YoY, +44% QoQ). Interesting movies lineup was the factor, pushing admission revenue (+88%YoY) and concession revenue (+70%YoY).
• Gross profit margin was strong at 37.6% from 28.7% in 4Q17 and 30.8% in 3Q18, thank to the higher contribution of concession revenue, which has decent margin.
• SG&A to sales was under control at 27.0%, compared to 34.3% in 4Q17 and 26.7% in 3Q18.

We maintain a BUY rating on MAJOR with 2019E target price of Bt31.00, derived from a PER of 24.2x, which is +1 SD of its 3-year trading average. We expect MAJOR to continuously deliver robust earnings in 2019E, given the fascinating movies lineup and advertising sales model changing from direct selling to selling through agencies.