In this briefing:
- AFFIN Bank: To Affinity and Beyond
- Thyrocare Technologies: All’s Not Well with This Wellness Pathology Leader
- ATP30: 100% Secured Client Base Prompt 2019 Growth
- Korean Stubs Spotlight: A Pair Trade Between Amorepacific Group & Shiseido
- Panasonic Is Bonding with Toyota- A JV Plan for 2020
1. AFFIN Bank: To Affinity and Beyond
Based in Malaysia, AFFIN Bank Bhd (ABANK MK) is the product of two mergers over the last decade. Today AFFIN is a small-medium-sized financial services group, with 107 branches, combining corporate and SME banking; consumer banking (remittance services, vehicle loans, mortgages, personal loans, credit cards, unit trusts, and bancassurance products); Investment/Merchant Banking via AFFIN Hwang (AHAM), including corporate finance, capital market services and investment management; plus underwriting of general and life insurance (an underpenetrated market) through AAGI and AALI. AFFIN Islamic is a wholly owned subsidiary.
The core shareholders are LTAT (the superannuation fund for the Armed Forces), the Bank of East Asia, and Boustead Holdings which limits the float.
Malaysia has a tailwind of a new administration, vowing to overturn many aspects of its predecessor – including cancelling mega infra projects and reducing the “real” National debt.
The economy is pretty buoyant and is slated to generate an average of 4.75% GDP growth over 2018-2022. Inflation has mellowed, supported by the cut in GST, but will still, once these effects diminish, be modest, at around 2%, this year. The current and trade accounts are in surplus.
Malaysia, however, has a high level (by Asian standards) of household (excluding mortgages) indebtedness, dominated by credit cards, auto/vehicle finance, and personal loans. This had led to a moderately high risk in terms of the credit-to-GDP gap. The corporate sector is not excessively leveraged.
AFFIN trades at a P/B ratio of 0.5x and a Mkt Cap./Deposits of 8%, well below the global and EM medians. Earnings Yield lies at 13.3%. The limited float will have a bearing on the valuation. A quintile 1 PH Score™ of 7.9 captures above-average metric change (though not in asset quality and efficiency) and value-quality attributes. Combining technical momentum, franchise valuation, and the PH Score™, the overall ranking stands in the top decile globally. A RSI of 43 points to potential upside.
2. Thyrocare Technologies: All’s Not Well with This Wellness Pathology Leader
- Thyrocare Technologies (THYROCAR IN) is the fourth largest pathology chain in India and derives 54% of revenues from the wellness/preventive segment (Rs60bn market growing at 20% Cagr). Margins in wellness are ~2x that of illness segment.
- It is positioned as the lowest price provider in the market with some of its tests priced at 50-70% discount to peers.
- It enjoys the highest operating margin in the industry with excellent control of reagent and manpower costs.
- However, hyper competition in the wellness segment is pushing down pricing. Pullback in adspends is leading to loss of market share over FY18-1HFY19.
- Two-thirds of its capital is invested in the radiology business that does not have economies of scale. Business is loss-making and a drag on return ratios.
- We expect Revenue and PAT Cagr of 15% and 12% respectively over FY18-21 in the face of intensified competition against 24% and 19% respectively delivered over FY14-18.
- Softer growth coupled with utilization of free-cash from the clinical pathology business into the capital intensive and loss-making radiology business will weigh on stock performance. We value the stock at 22.5x FY20 EPS- at 25% discount to the industry leader Dr Lal Pathlabs (DLPL IN) . Our target price is Rs 494 implying 10% downside.
3. ATP30: 100% Secured Client Base Prompt 2019 Growth
We maintain a BUY rating for ATP30, based on a target price of Bt2.46 (previous TP: 2.48) and derived from a 30xPE’18E, which is its average trading range in the past one year and 10% discount to Thailand’s transportation sector
The story:
- Active fleet expansion still go on in 2019-20E
- Lower interest expense burden support margin expansion
Risks: Higher than expected in volatility in fuel price and probability that clients will terminate service contracts
4. Korean Stubs Spotlight: A Pair Trade Between Amorepacific Group & Shiseido
In this report, we provide an analysis of our pair trade idea between Amorepacific Group (002790 KS) and Shiseido Co Ltd (4911 JP). Our strategy will be to long Amorepacific Group (APG) and short Shiseido. As mentioned in our report, Korean Stubs Biweekly Sigma σ (#1): The Inaugural Edition, our base case strategy is to achieve gains of 8-10% on this pair trade. Our risk control is to close the trade if it generates 4-5% in combined losses. Cost of commissions are not included in the calculations and closing prices as of January 23rd are used in our pair trade. [Long APG – $0.5 million; Short Shiseido – $0.5 million for total of $1.0 million].
The following are the major catalysts that could boost APG shares higher than Shiseido shares within the next six to twelve months:
- Amorepacific Group shares are extremely oversold and forming a base
- THAAD is no longer an issue
- Amorepacific Group’s NAV discount
- Attractive relative valuations
- Amorepacific’s new headquarters building distraction out of the way
- Chinese tourists are coming back to Korea & slower growth rate of visitors to Japan
5. Panasonic Is Bonding with Toyota- A JV Plan for 2020
It seems that Panasonic Corp (6752 JP) is planning for long term growth by concentrating on building its relationship with Toyota Motor (7203 JP) while witnessing its key customer, Tesla Motors (TSLA US), drifts away. Toyota and Panasonic are in discussion to form a JV by 2020E with the aim of mass manufacturing EV batteries with possible benefits from cost-cutting efforts. We mentioned in Tesla Drifting Away Could Leave Panasonic Struggling to Gain Traction in China, that Tesla is looking for Chinese local players to source its factory in China upon the refusal from Panasonic to join hands with them in investing in their Chinese factory. Panasonic, which seemed to have felt the pressure mounting from Tesla potentially distancing itself from them, given that the majority of their battery sales are currently dependent on Tesla, is now preparing itself for the future by building long terms plans with its not-so-new customer, Toyota. Panasonic entered a partnership agreement with Toyota back in 2017 to develop EV batteries including their traditional prismatic batteries while also aiming to develop new battery solutions for the growing and evolving EV market. Thus, its plan to form a JV with Toyota by 2020E displays the confidence Panasonic has in Toyota while also indicating that the former is paving a path for some steady growth in its battery business being supported by one of the leading automakers.
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