Brief Equities Bottom-Up: Tesla (TSLA): The Cost of Innovation Seems to Be Catching Up and more

In this briefing:

1. Tesla (TSLA): The Cost of Innovation Seems to Be Catching Up
2. Surya Citra Media (SCMA IJ) – Digital Revolution in the Spring – On the Ground in J-Town
3. Telstra: Earnings Under Pressure in FY19 but Move to Mobile Should Lead to Gains from FY20.
4. Subaru: Another Month, Another Recall
5. JD.com (JD): The Real Main Business Grew 46% YoY, and Not 20% YoY in 4Q2018

1. Tesla (TSLA): The Cost of Innovation Seems to Be Catching Up

Tesla’s innovation, as we have been opining in our insights on Smartkarma, rests more on its direct distribution model than on technological innovation.  Tesla’s press release on Thursday, February 28, announcing the new $35,000 Model 3’s came with several other details that have been highlighted in press reports which we also summarize here:

1. Management does not expect to achieve profitability in 1Q19, with a likely 2Q19 profitability according to the press release.
2. According to the announcement, all Tesla sales will move online, first in the U.S. then expanding worldwide.  An unspecified number of sales outlets will also be closed “with a small number of stores in high-traffic locations remaining as galleries, showcases and Tesla information centers.” (see attached copy of the Form 8K).
3. Management promised to increase investments on after service.
4. According to press reports, CEO Elon Musk was also quoted as saying there will be layoffs with the new distribution plan (see https://edition.cnn.com/business/live-news/elon-musk-tesla-announcement/index.html).

The Tesla Model 3

2. Surya Citra Media (SCMA IJ) – Digital Revolution in the Spring – On the Ground in J-Town

A meeting Surya Citra Media Pt Tbk (SCMA IJ) in Jakarta found management in a relatively ebullient mood. The share price performance has been slightly perplexing the fact that its digital strategy is close to coming to fruition, with upcoming acquisitions representing a positive catalyst.

The company will move forward on acquiring controlling stakes in digital streaming player www.vidio.com, internet company www.kapanlagi.com, and out of home media advertising player EYE Indonesia.

Total revenues from the digital and non-TV space will grow from less than 5% of SCMA’s total revenue to nearly 20% of the total, making it the biggest player in both free-to-air and a major player in digital adverting in Indonesia.

Vidio.com is especially interesting given how fragmented that market is currently. Iy=t already has 22m active users viewing its sport and local content but is looking to bring in a major global player to help finance original content and bring in more international content. 

Internet companies represent the biggest and fastest growing advertising customers outside FMCG. They are increasingly paying above market rates for up to two-hour exclusive slots on prime time, where they air their own programming which allows them to engage with the audience. 

The recent Kraft Heinz Co (KHC US) debacle may signal the end of zero-based budgeting, which may mean global players such as Unilever Indonesia (UNVR IJ) start to spend more on advertising. in the meantime, local FMCG players remain more aggressive on advertising their products on TV. 

Surya Citra Media Pt Tbk (SCMA IJ) remains the best quality proxy to the advertising market in Indonesia. The upcoming acquisitions in the digital space represent strong potential catalysts for the stock, which have not yet been factored into valuations. Its core business continues to register stable and rising growth, especially from local FMCG players, with the re-entry of the tobacco companies potentially representing another boon for this year, given there has been no excise tax increase. According to Capital IQ consensus, the company is trading on 15.3x FY19E PER and 13.8x FY20E PER, with forecasts EPS growth of +8.5% and +10.5% for FY19E and FY20E respectively.  The company is forecast to achieve an ROE of 33% in 2019, with a dividend yield of 4.2%. 

3. Telstra: Earnings Under Pressure in FY19 but Move to Mobile Should Lead to Gains from FY20.

Recently, Telstra (TLS AU) reported 1H19 numbers which showed declines in revenue, EBITDA and net profit.  That seems to have put the brakes on a decent share price recovery (Telstra shares had risen 14% to their recent peak YTD). And with the weak numbers, Telstra cut its interim dividend to 8cps. The result was well telegraphed to the market so did not come as a huge surprise, although Ian Martin had hoped the dividend would not be cut. Our view remains that Telstra is working to get through two years of change, with 2019 seen as the bottom for earnings. There are plenty of risks ahead and, with dividend support reduced, we have put Telstra back on a Hold recommendation with a target price of $A$3.30. The three year outlook is promising as Telstra switches the focus to mobile, delivers on its T22 strategy and works through several NBN related issues. 

Telstra summary P&L  – a three year view

4. Subaru: Another Month, Another Recall

Subaru Corp (7270 JP) issued yet another recall notice last night, this time for the Impreza and Forester due to faulty brake lights. The recall affects vehicles manufactured between Sep 2008 and Mar 2017, but is minor in scope relative to the Nov 2018 valve spring recall and thus did not prompt a revision of the company’s guidance.

5. JD.com (JD): The Real Main Business Grew 46% YoY, and Not 20% YoY in 4Q2018

• We believe the real main business line is service (commission), but not product (direct sales).
• In 4Q2018, service revenues grew by 46% YoY, but nominal main business line, product, grew only 20%.
• JD raised its commission rate in 2018, as demonstrating  that the company still has the bargaining power over retailers.
• Historical GMV numbers suggest significant upside.