Brief Equities Bottom-Up: Tochigi Bank (8550JP): Red Flags but No White Flags (Yet) and more

In this briefing:

1. Tochigi Bank (8550JP): Red Flags but No White Flags (Yet)
2. This Week in Blockchain & Cryptos: Revisiting LINE’s Crypto Plans
3. LG Uplus: Risks Now Largely Priced In. Raise to Neutral on CJ Hello Deal Synergies
4. Indian Housing Finance Companies-Series 2- LIC Housing Finance
5. ASML. Safe Harbor In A Semi Storm.

1. Tochigi Bank (8550JP): Red Flags but No White Flags (Yet)

If one were looking for evidence of the inherent dangers of risk concentration in the banking industry, one need only look to tiny secondary regional bank Tochigi Bank (8550 JP), which reported its earnings for the nine months to end-December 2018 on 31 January 2019.  Having made consolidated net profits of ¥1.57 billion in 1H FY3/2019, the bank plunged into the red in 3Q by ¥1.80 billion as a result of losses on disposing of fixed-rate US$-denominated securities.  Rather surprisingly, foreign investors own just over 21% of outstanding shares.  Tochigi Bank may not be the only small Japanese bank to run into trouble with its foreign securities portfolio in CY2019.  Caveat emptor!  (May the buyer beware)!

2. This Week in Blockchain & Cryptos: Revisiting LINE’s Crypto Plans

LINE Corp (3938 JP) is one of the top Japanese names in our “Watchlist” of listed companies in Japan and South Korea that are adopting blockchain technologies or have exposure to cryptocurrencies. 

Since being added to the “Watchlist” in May last year (2018), LINE has launched a cryptocurrency, a cryptocurrency exchange, and a blockchain venture fund. In this note, we revisit LINE’s blockchain and cryptocurrency plans.

3. LG Uplus: Risks Now Largely Priced In. Raise to Neutral on CJ Hello Deal Synergies

LG Uplus (032640 KS) shares have fallen around 20% from the highs of January when the market was excited by 5G. That always seemed overly optimistic given the lack of viable business cases and unknown investment requirements and we were comfortable with our Sell rating from mid October and KRW15,000 target price.  Following weak results, an easing of 5G  enthusiasm and the recently announced CJ Hello (037560 KS) deal the share price has fallen to around the KRW15,000. Alastair Jones now thinks a lot of bad news is in the price and the available synergies from CJ Hello offset a weaker earnings outlook. 

4. 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.

5. 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.