In this briefing:
- Meituan Dianping 4Q2018 Quick Read: Monetization Rate and Margins Disappointed
- Nsk (6471) Conditions Have Deteriorated Significantly but Given Valuations, This Is Now in the Price
- New J. Hutton Exploration Report (Weeks Ending 08/03/19)
- NIO (NIO): NIO Is Essentially a Distributor, Not an OEM…3 Things to Keep in Mind at Lock-Up Expiry
1. Meituan Dianping 4Q2018 Quick Read: Monetization Rate and Margins Disappointed
Meituan Dianping reported 4Q2018 numbers last night. As we covered the company’s IPO and lock-up expiry, we took a close look the company 4Q2018 results and listened in the conference call. While we are encouraged by the company’s strong transaction volume and revenue growth in 4Q2018, we are less bullish given the deceleration of monetization growth. We also note that the company trimmed down the details of reporting, in particular, the operation of its New Initiative segment and hence results were less transparent.
2. Nsk (6471) Conditions Have Deteriorated Significantly but Given Valuations, This Is Now in the Price
Over the last 12 months, these shares have been a dreadful performer (as have the other ball bearing makers), both in absolute terms (-36%) and on a relative basis (underperformed TOPIX by 30%). Operating profits for the full year have recently been revised down (for the second time). The operating environment has deteriorated markedly into 4Q. It would appear to us that the market, and analysts, are aware of the current poor trading conditions. The question is when will conditions start to improve. The first half of next year will be very poor indeed with profits down perhaps 35% year-on-year. And it now appears that some analyst’s numbers do not assume recovery for any of next fiscal year, which we believe as too harsh.
Clearly the first half of next year (3/20) is going to show very poor year on year comparisons. This will be unavoidable given a good first half this year and business conditions now. The company itself is now forecasting a 4Q operating profit of Y16.7bn (-40%) having made Y24.8bn in 1Q, Y20.2bn in 2Q and Y21.3bn in 3Q. Assuming this level carries on into the first half of next year before starting a gradual recovery in the second half, then first half operating profit may well come in at about Y32-33bn, a 35% year-on-year fall. The consensus for the full year is currently about Y70bn with the lowest number being Y64bn. Sell recommendations have also begun to appear. To us this appear to be a bit after the event given where earnings are now and where the shares are trading.
The shares currently yield 4.2% and the pay-out ratio this year is 36%. Management’s target is for 30% but at the same time they are reluctant to cut the dividend going forward. This may well prove some support. Meanwhile the company owns 7% of itself and on our calculation is trading on an EV/ebitda of just under 4x. Finally, its book value (0.9x) relative to the market’s book value is now at a very depressed level (see chart below) which suggests to us that although there may be some short term down side risk, we would look to buy on a longer term.
3. New J. Hutton Exploration Report (Weeks Ending 08/03/19)
- Coverage now expanded to 730 mining companies
- Retain Peel Mining Ltd (PEX AU) as a Speculative Buy
- Current drilling infill only
- Est. A$4-4.5m cash with capital raising soon
- Very solid geological genetic model honing future extensional exploration efforts
- Expect maiden Resource computation to commence after next three hole assays released
- Aeon Metals Ltd (AML AU), Blackearth Minerals NL (BEM AU), Boss Resources (BOE AU), Centaurus Metals (CTM AU), Catalyst Metals (CYL AU), Amur Minerals (AMC LN), Patagonia Gold (PGD LN), Tyranna Resources (TYX AU), Gladiator Resources (GLA AU), King River Resources (KRR AU), Vango Mining (VAN AU), Hummingbird Resources (HUM LN), Caravel Minerals (CVV AU), Lefroy Exploration Ltd (LEX AU), Millennium Minerals (MOY AU), Northern Minerals (NTU AU), Blackham Resources (BLK AU), Avz Minerals (AVZ AU), Orocobre Ltd (ORE AU), Serabi Gold plc (SRB LN), Paringa Resources (PNL AU), Artemis Resources (ARV AU), Centrex Metals (CXM AU), Great Boulder Resources Ltd (GBR AU), Superior Lake Resources (SUP AU), Cora Gold Ltd (CORA LN), European Metals Holdings Ltd (EMH LN), Savannah Resources PLC (SAV LN) , IronRidge Resources Ltd (IRR LN)
4. NIO (NIO): NIO Is Essentially a Distributor, Not an OEM…3 Things to Keep in Mind at Lock-Up Expiry
NIO’s 6-month Lock-up expires today and as of the time of this writing the stock is down by 6.6% from the closing price on Friday, March 8. The stock’s share overhang issue have been well covered on the Smartkarma platform by other analysts (see NIO Post-CBS Rally Making TSLA Valuation a Grand Bargain (Price Target =$3) , NIO (NIO US): Lock-Up Expiry – This Could Get Messy) so while we do not see a need to rehash those details in this insight, here are 3 things that we believe every NIO investor and would-be investor should keep in mind about the company especially if one wants to play the Tesla vs. NIO scenario:
- Licensing/Regulatory Risk – NIO has an autonomous driving testing license but no EV manufacturing license. An EV manufacturing license issued by the NDRC is required for EV manufacturers to market and sell their products but a 100k unit scale is a main prerequisite. This is a key reason why NIO entered into a 5-year outsourcing relationship with JAC. While this relationship was assumed to be temporary, there could be many hurdles for NIO to actually obtain a license in the coming years should it decide to invest in production facilities again.
- Core IP Held by Suppliers – Powertrain technology is held by CATL and the State-owned JAC is listed as the ES8’s manufacturer on the Ministry of Information and Technology website. Continental AG designs NIO’s vehicle suspension and chassis. It is also unclear how much actual development work other than exterior/cockpit design is done in-house at NIO based on publicly available information. Without scale and IP we believe NIO’s bargaining position with its suppliers is weak and displays stronger characteristics of a distributor than a final assembler.
- Low ASP, low margins – NIO’s ASP on the ES8 from what we have seen was $64k per unit in 2018 and $63k per unit in 1Q19 while Tesla’s Model X ASP is about $100k per unit. There is a reason why gross margin at NIO is razor thin and it has more to do with low price point than low volumes in our view.
Given differences between the U.S. and China operating environment for EV makers, we believe Tesla is not a good equity valuation comp for NIO, which is basically a distributor in our view. As such, long term value drivers would most likely come from aftermarket and service revenues, while short-mid term value drivers seem elusive especially in the aftermath of the company’s decision to scrap its production plant investment plans in Shanghai.
The NIO ES8
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