Brief Equities Bottom-Up: Zozo: Never Meet a Margin Call and more

In this briefing:

1. Zozo: Never Meet a Margin Call
2. China New Higher Education: Negatives Mostly Baked-In
3. Indonesia Property – In Search of the End of the Rainbow – Part 5 –  Summarecon Agung (SMRA IJ)
4. Kosmos Energy: The Standout Internationally-Focused E&P Company
5. Tesla: Would the Last One Off the Sinking Ship Please Turn Off the Lights?

1. Zozo: Never Meet a Margin Call

Yusaku Maezawa is once again in the news. This time due to speculation that he is auctioning off at least part of his art collection at Sotheby’s in Hong Kong on April 1st.

Following on from the share buyback that was conducted in May last year which:

• Allowed Maezawa to sell 6m out of his then 118.227m shares into a buyback that totalled just 6.35m shares.
• Led to a ¥38.3bn swing in net cash from +¥24.6bn to -¥13.8bn (the buyback totaled ¥24.4bn)
• Was conducted at the same time that share options for up to 31m shares were issued, of which Maezawa could have been allocated more than 90%.

this looks a lot like a sudden need to raise cash.

2. China New Higher Education: Negatives Mostly Baked-In

• China New Higher Education’s (CNHE) share price has more than halved since my bearish note in June last year.
• The fall in share price was caused by a few factors, namely uncertainties caused by regulations, a negative report by a short-seller, and below-consensus earnings.
• Market expectations of the education provider’s growth have come down, providing us an opportunity to relook at the stock.

3. Indonesia Property – In Search of the End of the Rainbow – Part 5 –  Summarecon Agung (SMRA IJ)

In this series under Smartkarma Originals, CrossASEAN insight providers AngusMackintosh and Jessica Irene seek to determine whether or not we are close to the end of the rainbow and to a period of outperformance for the property sector. Our end conclusions will be based on a series of company visits to the major listed property companies in Indonesia, conversations with local banks, property agents, and other relevant channel checks. 

The fifth company that we explore is Summarecon Agung (SMRA IJ), a township developer with over 40 years of track record and a combined development area of over 2,700ha. The company benefits from its exposure to the popular Serpong district, but an over expansion, coupled with tightening property regulations caused its balance sheet to suffer in the following years. Earnings have declined by -19% Cagr over the past five years as a consequence of lower margins and burgeoning debt levels.

The company has plans to divest its retail mall division, which can serve as a positive catalyst in the near term. Improving sentiment and better interest rate environment, as well as positive regulatory tailwinds should be a driver to SMRA’s share price this year. We see a 44% upside to our target price of IDR1,408 per share.

Summary of this insight:

• The success of SMRA’s first township, Kelapa Gading, paved way for the next six township development. The same township model is replicated to its Serpong, Bekasi, Bandung, Karawang, Makassar, and soon Bogor. 
• During the height of the property boom, every cluster launch in the Serpong area is 2-3x oversubscribed. Buyers were a mix of speculators and end-users, and both were happy customers benefiting from over 400% land price appreciation over the course of 2009-2013. Land ASP in 2009 was just below IDR3mn versus IDR12-15mn in 2013.
• Driven by the positive momentum of the property boom, SMRA ambitiously launched three new townships at the trough of the property market (2015-2018), growing its total township development area by more than a third. Poor cashflow management, stemming from the over-expansion during the property downturn took a massive toll on the balance sheet. SMRA turned from net cash in 2013 to holding IDR8.6tn of debt in 9M18 (1.2x gearing) with interest costs making up a chunky 49% of EBIT. 
• We have also seen a massive shift to the end-user market since 2014, as the company started to sell more smaller houses and affordable apartments rather than land lots and shophouses. At the peak, shophouses and land lots made up more than 50% of the company’s development revenues. As of 9M18, that number has declined to a mere 7% of revenues, while 93% comes from houses and apartments. Housing units launched in 2016-2017 are 36% cheaper than units launched in 2011-2014, as the company downsized in the area.

• SMRA has the second biggest retail mall portfolio in our coverage after Pakuwon Jati (PWON IJ) with 258,000sqm net leasable area (NLA). The three malls generate about IDR1.3tn revenue per year, returning 42% EBITDA margin. About 40% of tenants in Bekasi and Serpong are up for a rental renewal in the next three years, and this could serve as a potential upside on the average rental rates. 

• Pros: Bank Indonesia (BI)’s move to loosen mortgage regulations last year, and plans to reduce luxury taxes and allow for friendlier foreign ownership scheme should give a breath of fresh air over the medium term. SMRA targets 18% presales growth in 2019, but they have been missing their presales target by an average of 22% over the past three years. We expect a more modest 5% presales recovery this year.
• Pros: Margin on houses show a massive improvement from 51% in 2014 to 59% in 9M18. The improvement brings up the consolidated property development margin by 600bps YoY. As a segment, this is the first margin uptick since 2014, leading to 44% YoY EBIT growth and 115% YoY NPAT growth in 9M18.
• Cons: The stellar property development growth, however, is diluted by the poor performances from the investment property division that recorded 14% YoY EBIT decline. Despite some improvements on the gross margin level and healthy topline growth, opex has doubled YoY, leading to 700bps reduction in the EBITDA margin. 
• Recommendation & catalyst: SMRA has underperformed the JCI by a steep 71% over the past 36 months as earnings and presales continue to disappoint. Discount to NAV, PE, and PB valuation are standing at -1 standard deviation below mean. Improving risk appetite for high beta stocks, better interest rate environment, accomodative policies from the government, and potential pick up of activity after the election are a few of the key catalysts for the stock and sector re-rating. The divestment of its retail arm should also help to clear some debt off the balance sheet and unlock value. We have a BUY recommendation.

4. Kosmos Energy: The Standout Internationally-Focused E&P Company

We think that Kosmos Energy (KOS US) offers everything that is required from an internationally focused E&P company. It has a highly rated management team, strong balance sheet and free cash flow generation from its existing producing assets, low risk / high value near field exploration potential, selective high risk / reward frontier exploration in which it has a proven track record, it has done recent value accretive acquisitions with room for more, it has demonstrated the ability to farm-down its assets on multiple occasions and is currently in the process of a major asset sell down, which could surprise the market to the upside. Despite this the stock trades on a significant discount to risked NAV, making it a potential acquisition target and has plenty of catalysts coming up this year to close the valuation gap.  

5. Tesla: Would the Last One Off the Sinking Ship Please Turn Off the Lights?

Roughly nine months ago, as Elon Musk was bizarrely attacking one of the heroes of the Thai rescue mission, we noted in Tesla: As Musk’s Reputation Disintegrates, The Only Positive for the Stock Is Disappearing that

We think it is pertinent to identify the moment when the crowd turns… and we think it just happened.

concluding that

Our main point is that there is now significantly more risk of being long and wrong on Tesla, not just in terms of portfolio performance, but in terms of career risk. With Tesla’s rising profile and increasingly bizarre behaviour the ability to justify being long and wrong is diminishing rapidly.

Since then, the roller-coaster ride has, if anything, been even more volatile and the vehemence of both bulls and bears has not decreased.

With recent developments such as the collapse in unit volumes following the reduction of subsidies for Tesla, the departure of CFO Deepak Ahuja and the underwhelming Model Y reveal, we highlight what we believe are the most important indicators of failure amongst the deluge of bad news, below.