In this briefing:
- Zozo: Zo Far Zo Bad
- BTPS – Sharia Lender Improves High Returns
- The War on Huawei, Its Impact on TSMC, and the Invincible Spanish Armada
- Yapi Ve Kredi Bankasi: Inexpensive but Consumer Exposures May Be the Next Shoe to Drop
- Yellow Cake (YCA) – Great Idea, Wrong Time!
1. Zozo: Zo Far Zo Bad
Just a day after the publication of a deep dive Smartkarma Originals report (Zozo: A Shooting Star Shooting Itself in the Foot) on ZOZO Inc (3092 JP) by Michael Causton and ourselves, the company announced moderate 3Q results, a 34% downgrade to its current year OP forecast and a cut to its year-end dividend from ¥22 to ¥10, bringing its full year payout down from ¥36 to ¥24.
At the results meeting questions focused on the fallout of Zozo’s new Zozo Arigatou initiative which prompted some brands to discontinue sales on the Zozotown Mall, the reason for such a large downgrade just after the announcement of a very bullish medium-term plan, and even management compensation given such a disappointment.
We feel that the results underscore the issues raised in our previous report and that the stock could remain under pressure in-spite of how far it has already fallen.
2. BTPS – Sharia Lender Improves High Returns
Bank Tabungan Pensiunan Nasional Syariah (BTPS IJ) is 70%-owned by Bank Tabungan Pensiunan Nasional (BTPN IJ), the specialized pension lender in Indonesia. The focus of BTPS is small-sized loans, under Sharia law and primarily to women and the under-banked. The business is fairly new, but credit metrics and returns have been exceptional for the past five years, and rising. The company has seen its ROA rise from 4.54% to 9.11%, from 2014 to 2018, which ranks it as one of the most profitable lenders in Asia, and likely anywhere.
3. The War on Huawei, Its Impact on TSMC, and the Invincible Spanish Armada
Huawei is one of the largest telecom equipment companies in the world and it is also one of the top customers of Taiwan Semiconductor Manufacturing Company (TSMC) (2330 TT). There has been a war waged on Huawei by the US government administration. Most recently in January 2019, the US Justice Department announced 23 counts of indictments on Huawei related to the intellectual property theft, obstruction of justice, and fraud related to its evasion of US sanctions against Iran. The following are the major reasons why the US government has become so aggressive in targeting Huawei to prevent this company from selling its telecom equipment products in the US and in other allied countries:
- Serious concerns about Huawei’s equipment which can be used to conduct espionage
- The quest for 5G
- Beyond 5G & Global technology leadership
HiSilicon Technologies, which is a fully owned company of Huawei, is one of the top five customers of TSMC. Of TSMC’s top five customers, both Apple and Huawei face significant headwinds which could reduce their sales growth rates. Although we do not have an exact figure of what percentage of TSMC’s sales that Apple and Huawei represent, we believe that is closer to about 25-30%.
The current US administration is trying to slow down this excessive outsourcing of manufacturing out of the US. The US government’s war on Huawei is a reflection of the US government’s desire to slow down the progress of Huawei and China’s dominance of 5G services combined with threats of potential espionage. In the midst of all these intricate battles and concerns involving Huawei, TSMC is becoming negatively impacted as one of the main companies that produce chips for Huawei’s Hisilicon.
4. Yapi Ve Kredi Bankasi: Inexpensive but Consumer Exposures May Be the Next Shoe to Drop
Key metrics/signals at Yapi Ve Kredi Bankasi As (YKBNK TI) underline positive fundamental momentum and quality-value, embodied in a high PH Score™ despite macro imbalances, asset quality stress, and structural challenges. The bank mostly exceeded its 2018 targets, especially on profitability, efficiency, and non-interest income, though loan growth was reined in as cost of risk and asset quality deteriorated. Improvement was helped by a TL4.1bn rights issue in June, 2018. For 2019, YKBNK targets continued cost-growth below CPI, mid-teen fee income expansion, an NPL ratio <7%, CoR at <300bps, stable liquidity (LDR at 105%), a somewhat surprising pick-up in lending (+15%), and a modestly higher CAR (>15%).
In 2018, the banking sector grew its deposit base and credit portfolios by 19% and 14% YoY. Profitability was high with ROATE at 14%. CAR stood at 16.9%. NPL ratio at 3.8% understates eroding asset quality in the system as a broader definition of loan impairment signals emerging loan quality weakness, capital stress, and difficulties at this stage mainly for large corporate borrowers though we are concerned that this may morph into a broader asset quality imbroglio with the economic slowdown and elevated unemployment. Turkey is though a growth market for finance: mortgages at 4% of GDP and household liabilities/GDP at 16% point to potential. But that growth is best balanced.
Banks have been bearing the brunt of government interventions to bolster the economy for awhile now. The sizeable expansion of state loan guarantees was the main driver behind the acceleration of bank credit growth (now sharply moderating given elevated lending rates and tighter standards), largely funded externally and with a partially dollarized deposit base, resulting in a deterioration of the gross FX position. In addition, the relaxation of macroprudential measures was a driver of rampant asset growth. Steps have been taken to enhance risk management, report quasi-fiscal operations, including CGF, and limit borrowing in foreign currency. (There is some USD360 bn of non-financial corporate debt, half of which is external). Banks have been active in equity and FI markets of late to plug the gaps caused by capital and asset quality erosion. In Q418, three state banks were subject to what looked like a back-door recapitalisation when the lenders sold TL11bn of subordinated debt, reportedly to a government unemployment fund. Akbank has since boosted its capital base too with a rights issue and a syndicated loan.
Renewed FX volatility arising from policy missteps, such as electoral-induced easing, and a subsequent pass-through to already high cost-push inflation, would deepen the slowdown and destabilize the fragile macro situation. Tight monetary policy (one-week repo rate at 24 per cent), lower global oil prices, weaker domestic demand and a stronger Lira can moderate Inflation towards <15% though high food prices are exerting an upward impact on prices. The current account is stabilizing.
The KOC Group and Unicredit are YKBNK’s main shareholders. Energy, finance, and auto are the main contributors to KOC Group Profit, representing 87% of the bottom line in 2018.
Post rights-issue shares of YKBNK are not unattractively priced, trading on an earnings yield of 30.5%, a P/B of 0.42,and a franchise value of 8% with the tailwinds of a quintile 1 PH Score™. Shares seem to be catching up with peers of late, buoyed by an improved B/S and FY18 results. We are though concerned about further asset quality deterioration as the corporate debt malaise is joined inevitably by greater consumer stress and toxicity. Free Float stands at 18%.
5. Yellow Cake (YCA) – Great Idea, Wrong Time!
- Yellow Cake PLC (YCA LN) is a pure play on the uranium price
- Spot Price $28.90/lb U3O8 & L.T. Price remains $32/lb U3O8
- Share price trading at ~2% discount to NPV
- Despite recent production cuts, primary & secondary supplies cover world demand
- Est. surplus ~500ktU, representing six years of global primary production
- Global nuclear generation peaked in 2006
- Forecast world uranium demand to decline between 25% and 40% by 2050
- 1-year Target Price £1.98-2.02 ps NPV4% assuming $24/lb U3O8
- 3-year Target Price £1.57-1.77 ps NPV4% assuming $21/lb U3O
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