Brief Equities Bottom-Up: Sea Ltd: Further Share Re-Rating After a 35% Daily Gain? Why Not? and more

In this briefing:

1. Sea Ltd: Further Share Re-Rating After a 35% Daily Gain? Why Not?
2. Notes from the Silk Road: Smartgroup Corporation Ltd (SIQ.AX) – Multiple Expansion Potential
3. Banco Do Brasil (BBAS3) – Capital Contributions from Potential Non-Core Disposals
4. KDDI: Key Takeaways from Company Visit Are Mostly Positive
5. Harmonic Drive: Measuring the Potential Downside Risk

1. Sea Ltd: Further Share Re-Rating After a 35% Daily Gain? Why Not?

• The biggest positive surprise from Sea Ltd’s (SE US) conference call is strong 2019 adjusted sales guidance: 82%-97% YoY growth for Garena (digital entertainment division) and 117-127% YoY growth for Shopee (e-commerce arm).
• Management expects first positive quarterly EBITDA for Shopee Taiwan operations in 1Q19, indicating there is a path to profitability for Shopee’s business model.
• Another great news: management expresses high confidence that Shopee’s S&M expenses in terms of absolute dollars would trend down in 2019, vs. 2018.
• After a 35% daily share gain on 27 Feb, SE trades at 4.1x 2019E P/adjusted revenue excl. 1P sales, yet still a whopping 49% discount to Pinduoduo’s (PDD US) 8.1x P/S.

2. Notes from the Silk Road: Smartgroup Corporation Ltd (SIQ.AX) – Multiple Expansion Potential

Whilst Smartgroup Corporation Limited (SIQ) has reported a  solid set of 2018 earnings, the real story is not the results, but the outlook.

We examine the potential for the company to simply deliver a multiple expansion. If SIQ succeeds with some further consolidation of acquisitions. The potential for this Event-driven upside is significant if this is combined with additional earnings trends. 

Furthermore, the stock rank system which the company is benchmarked against suggests potential to post an upgrade, which inevitably fuels share price performance. 

3. Banco Do Brasil (BBAS3) – Capital Contributions from Potential Non-Core Disposals

• Banco Do Brasil Sa (BBAS3 BZ) management is exploring non-core disposals, across its investment portfolio
• Its stakes in Banco Votorantim, utility holding Neoenergia and its Argentinian subsidiary Banco Patagonia Sa (BPAT AR) have been most readily mentioned, and are the most likely candidates, in our view
• The disposal timings, we expect, could be nearer term for domestic, Brazilian assets, with Banco Patagonia more likely to be a longer term project (2020?); still, we see such potential disposals as positive catalysts for Banco do Brasil shares
• We estimate that the CET1 accretion from disposals could total 73-80bps, of which the net gain from these potential disposals could add between 10-17 bps , with the risk weighted asset (RWA) reduction expected to free up an additional 63bps of CET1

4. KDDI: Key Takeaways from Company Visit Are Mostly Positive

We expect the Q4 18 report in mid-May will be pivotal for sentiment on KDDI Corp (9433 JP) as the results for its current mid-term plan are announced and new targets for the next three years are set. This plays against a backdrop of moderately higher competitive intensity both in the near-term on cheap handsets and longer-term with Rakuten Inc (4755 JP)  market entry. Shares are down 15% from highs in September 2018 as markets have factored in the new state of affairs but coming out of our meeting with the company today we feel more confident in how they are positioned. 

5. Harmonic Drive: Measuring the Potential Downside Risk

With Harmonic Drive Systems (6324 JP) having rebounded as much as 56% from its trough this year, risk-reward looks decidedly less attractive now. While we had been somewhat constructive on the name due to order looking like they have a hit bottom, a closer analysis of the breakdown of orders has us thinking that a potential rebound could underwhelm relative to the markets revenue expectations and that the stock’s premium multiple could leave it more vulnerable than more modestly priced peers.