Daily Equities Bottom-Up: Arcs, Valor and Retail Partners Form First Nationwide Supermarket Alliance and more

In this briefing:

1. Arcs, Valor and Retail Partners Form First Nationwide Supermarket Alliance
2. Nidec (6594 JP): Big Downward Revision
3. JKN: Prime Content Distributor Eyes Big Opportunities in ASEAN Market
4. Meituan Dianping: Core Business Progress Toward Profitability an Overlooked Story?
5. Onward Quits Zozo: Another Dent in Zozo’s Reputation

1. Arcs, Valor and Retail Partners Form First Nationwide Supermarket Alliance

The supermarket sector is the most fragmented and uncompetitive of all retail sectors, a situation encouraged by major suppliers and not ideal for consumers.

Despite some effort from the likes of Aeon, consolidation has failed to materialise beyond a few in-group mergers.

Yet pressure on supermarkets to consolidate has been building due to depopulation in the regions, competitive pressures from other food retailers such as convenience stores and drugstore chains, as well as the emerging online food services.

Change is now coming. The biggest industry consolidation yet was announced last month, a precedent-setting alliance between three major supermarkets, Arcs Co Ltd (9948 JP), Valor Holdings (9956 JP) and Retail Partners (8167 JP), carving up a large chunk of the country into three regional fiefdoms.

2. Nidec (6594 JP): Big Downward Revision

Nidec has cut FY Mar-19 sales guidance by 9.4%, operating profit guidance by 25.6% and net profit guidance by 23.8% to reflect what management calls unexpectedly weak demand, the need for large inventory adjustments, and anticipated restructuring charges. 

Management attributes this to U.S. – China trade friction, but weak demand for hard disc drives (HDDs) caused by excessive date center investment and falling NAND flash memory prices, and declining auto sales in both China and the U.S., appear to have compounded the problem. 

Nidec’s share price was up ¥60 (+0.49%) today to ¥12,395, but the announcement was made after the market closed. Management plans to discuss the situation at a press conference starting at 18:30 Tokyo time today.

3. JKN: Prime Content Distributor Eyes Big Opportunities in ASEAN Market

We initiate coverage of JKN with a BUY rating, based on a target price of Bt8.80, pegged to the the 14.8xPE’19E mean of the Asia ex-Japan Consumer Discretionary Sector.

The story:

• Plenty of opportunities in the ASEAN market
• Harvest season is imminent
• New contracts with three new channels confirm 2019 domestic growth
• Mild recovery for domestic digital TV industry in 2019E

Risks: Heavy reliance on a few major customers, probability it will have to set provisions for doubtful debts and potential inability to renew contracts with customers.

4. Meituan Dianping: Core Business Progress Toward Profitability an Overlooked Story?

• Our deep-dive segment profitability analysis reveals that Meituan Dianping’s (3690 HK) core business (combined food delivery and in-store, hotel & travel) has made good progress toward profitability.
• The ballooning consolidated operating losses mainly stem from new initiatives (particularly car hailing and Mobike).
• Furthermore, lower S&M expenses to sales ratio plus food delivery’s higher take rate suggests that competition with Ele.me is more manageable than anticipated.
• Our SOTP yields intrinsic value of HK$61.07/share, that represents 37% upside potential. 

5. Onward Quits Zozo: Another Dent in Zozo’s Reputation

ZOZO (3092 JP) has been hit from all sides recently, with a major sell-off by investors disturbed by Zozo’s execution of its private brand launch and the resulting impact on the company’s reputation among merchants and consumers alike.

Last month it launched a new campaign which, on the surface, was all about helping customers give back to society, but which drew an immediate negative response from some merchants.

One of these, Onward Holdings, withdrew all its brands from sale on Zozo. This is another damaging dent in Zozo’s reputation.