In this briefing:
- MonotaRO (3064 JP): Slow March, Strong 1Q
- Yaskawa: Results Confirm Bottoming Out Despite Weakness, but the Stock Has Run Too Far
- Agricultural Bank of China: It Takes More than One Cold Day for a River to Freeze a Meter Deep.
- Maybe Koito’s Premium Can Be Justified
- CHG: Short-Term Cost Pressures Create an Opportunity to Invest
1. MonotaRO (3064 JP): Slow March, Strong 1Q
MonotaRO’s domestic (parent company) sales growth rate declined in March, but was up in 1Q as a whole. We expect no change to FY Dec-19 guidance when consolidated results are announced at the end of April.
Parent company data for March show sales up 17.4% year-on-year in nominal terms, but up 23.3% when adjusted for the number of working days in the month. The adjusted figures for January and February were 30.5% and 26.6%. In the three months to March, adjusted sales were up 26.5% vs. 24.2% growth in 4Q of FY Dec-18 and 26.2% a year earlier.
At ¥2,366 (Thursday, April 11, close), the shares are selling at 51x our estimate for FY Dec-19 and 44x our estimate for FY Dec-20. Price/sales multiples for the same two years are 4.5x and 3.9x. Projected valuations look high, but are on the low side of their recent historical ranges. Continuing double-digit growth should support the share price.
2. Yaskawa: Results Confirm Bottoming Out Despite Weakness, but the Stock Has Run Too Far
Yaskawa Electric (6506 JP) reported FY03/19 results yesterday where OP of ¥49.8bn missed guidance of ¥53bn (-6.0% miss) and consensus of ¥52.1bn. Guidance of ¥46.5bn OP for FY02/20 was light relative to consensus at ¥48.7bn and our own expectations for about ¥50bn in OP but we believe guidance looks a little conservative and consider it to be mostly in line. The main concern was 4Q orders which were down 17% YoY and 10% QoQ with both Motion Control and Robotics displaying weakness.
The company also announced a buyback of 0.76% of outstanding shares for ¥9bn which we feel is a little small and also somewhat poorly timed given the 50% rally in the stock price in the last three months.
3. Agricultural Bank of China: It Takes More than One Cold Day for a River to Freeze a Meter Deep.
Agricultural Bank Of China (1288 HK) reported stolid numbers for 2018. A PH Score of 7.6 encapsulates positive change in variables such as Capitalisation, Asset Quality, Margin, Efficiency, and Provisioning though Profitability and Liquidity gauges slipped somewhat. The attractive valuation variable contributes to the score.
Underlying top-line growth of 8%, supported by low double-digit credit growth from moderate deposit expansion, was matched by OPEX increment.
The increase in Interest Income on earning Assets was relatively synchronised to the rise in Interest Expenses on interest-bearing Liabilities.
We mention this as too often in China of late we have seen OPEX growth far outstripping underlying Income gains and Funding cost expansion rise well in excess of Interest Income growth.
Asset Quality was quite stable. Despite lingering SMLs and a double-digit rise in substandard Loans, NPLs actually decreased YoY. The bank though boosted Loan Loss Provisions by 40% YoY and Loan Loss reserve ratios were tightened. A monumental increase in Loan recoveries generated net negative charge-offs. This shows that the bank is pulling no punches with debtors.
Capitalisation ratios were fortified.
A concern would be the increased exposure to CRE which accounts for 31% of the Loan portfolio. This is the greatest risk in the grand scheme of things and has generated much comment given real estate values and the pace of appreciation. (Is a 5-6x increase since the creation of a private market so elevated? Prices are still well below levels of India).
Shares trade at an Earnings and Dividend Yield of 19% and 5.5%, at a P/Book of 0.7x, at a Franchise Valuation of 8%, and with a Total Return Ratio of 1.5x. Thus the bank can be deemed an Income opportunity.
4. Maybe Koito’s Premium Can Be Justified
We mentioned in Koito Outperforms in 3Q While Stanley Disappoints; Latter Still on Track to Achieve FY03/19E Target, that Koito Manufacturing (7276 JP) has managed to beat consensus estimates in 3Q after a series of disappointing results in the previous quarters. This was despite the weak nine-month ended results. The company cited the loss in sales from China (as a result of the deconsolidation of the Shanghai unit) alongside unfavourable economic conditions especially in China and Europe as key reasons for the decline in earnings. Our visit to Koito in March, gave us more insight on the effect of its deconsolidated Shanghai unit and its future plans in China, alongside their investment for capacity expansions and new products. Following these insights, we have revised our view on Koito in a slightly positive manner.
5. CHG: Short-Term Cost Pressures Create an Opportunity to Invest
We initiate coverage of CHG with a BUY rating and a 2019E target price of Bt2.53, derived from a discounted cash flow valuation (WACC of 6.2% and terminal growth of 2.0%). This is equivalent to 44.5 PE’19E, which is near its five-year trading average of 43.7x.
The story:
- Competitive player in a key strategic location
- Pressures from launch of new greenfield hospitals should be short term
- Recent share price retreat opens an investment opportunity
- Expected flat earnings in 2019E and growth at a 19% CAGR in 2020-21E
Risks: Medical personnel shortage
Litigation for medical services
Change in social security policy
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