Daily Equities Bottom-Up: New Oriental (EDU): Educator License Not A Concern and more

In this briefing:

1. New Oriental (EDU): Educator License Not A Concern
2. HOYA Corporation: Fairly Priced but Value Accretive M&A Deals Could Support a Higher Price Target
3. Nissan: Overlooked Personnel Moves Suggest the Alliance Will Not Survive Long Term
4. Japanese Telcos: What to Look for in 2019. Earnings May Surprise on the Upside.
5. HK Connect Discovery Weekly: CR Beer, Great Wall Motors, and Kingsoft (2019-01-07)

1. New Oriental (EDU): Educator License Not A Concern

• The Education Ministry of China promulgated Burden Relief Measures for Students in Primary and Secondary Schools (中小学生减负措施).
• The market is concerned about “Article 15” on the educator license.
• We note that a large number of teachers in part-time schools took the educator exam in November 2018.
• We expect that the incremental passers of the educator exam will be many more than the number of EDU’s vacancies, and that most of the passers will prefer to work for giants such as EDU or TAL (TAL) as opposed to other part-time schools.

2. HOYA Corporation: Fairly Priced but Value Accretive M&A Deals Could Support a Higher Price Target

HOYA Corporation is currently trading at JPY6,867 per share which we believe is fairly valued based on our SOTP valuation. The company operates with a few stable businesses and holds solid shares in the markets in which it operates. The company generates nearly 50.0% of its revenue from its core business of selling eyeglass lenses and contact lenses. The advancement in eyeglass and contact lenses technology, the growth in global population with vision-related issues due to increased use of PCs, smartphones and tablets and an ageing population will drive demand for eyeglasses and contact lenses. Although the company’s IT Segment which generates around 33.0% of company revenue is growing slowly, the management has aggressively managed the costs to improve the segment’s pre-tax profit margin to over 40.0%. While the Lifecare segment remains the engine of revenue growth for HOYA, it focuses on the IT segment for profitability. HOYA has grown its businesses, mainly the Lifecare segment through value adding M&A deals. The company has announced that it has entered into definitive agreements to acquire US-based Mid Labs and Germany-based Fritz by the end of FY19 (March 2019). The proposed acquisitions could help HOYA to expand its footprint in the global retinal market and further its Lifecare growth. The company has a strong balance sheet with a debt-to-equity ratio of 0.3% as of 2QFY19 with cash and cash equivalents worth JPY252.3bn (35.2% of total assets).

According to our analysis, HOYA operates solid businesses with impressive ROE and positive FCF, however, we believe, the market has already factored most of this into the share price. Therefore, we believe HOYA is worth looking at on the long side if its management continues to find value adding M&A deals which complement its existing lines of business or new business opportunities which would be transformative for HOYA. Our valuation is neutral, but we favour HOYA within the sector as it has held up relatively well despite the tech sell off due to its attractive health care business and shareholder friendliness which was perhaps underappreciated while the market was in its bull phase.

3. Nissan: Overlooked Personnel Moves Suggest the Alliance Will Not Survive Long Term

While most news coverage is intensely focused on former Chairman Carlos Ghosn’s first public statements, defence strategy and Japan’s rather arcane justice system, we believe that news regarding the sudden “leave” of two Nissan executives is worth paying attention to as it may have ramifications for the fate of the alliance overall. We discuss the details below.

4. Japanese Telcos: What to Look for in 2019. Earnings May Surprise on the Upside.

The Japanese telecom market was more volatile in 2018 than anticipated. However, Chris Hoare remains broadly positive on the sector for 2019. While pressure on the revenue line is intensifying, we do do not expect a price war to break out. In fact, we look for volatility to ease as the year progresses. Operators point to opex reductions and handset subsidy reductions to offset revenue weakness. We think that earnings are likely to surprise on to the upside. Over time we also look for dividend payout ratios to gradually rise, with the Softbank Corp (9434 JP) (KK) listing the long term catalyst.  For Softbank Group (9984 JP) (SB) we look for market confidence to improve on the Vision Fund strategy, as profitable exits/up-valuations of assets such as Uber are announced.

The sector is recovering from NTT Docomo’s (9437 JP) price cut announcements but we don’t think they will slash prices (cuts will be selective). Our top pick is now KDDI (9433 JP) which could actually benefit from Rakuten’s (4755 JP) entry (as the roaming partner). DoCoMo is most affected but there are plenty of cost cutting opportunities. NTT (Nippon Telegraph & Telephone) (9432 JP) has optimistic guidance with substantial opex and capex cost cuts planned. Our order of preference for the stocks is now: KDDI (Buy), followed in order by NTT (Buy), SB Group (Buy), DoCoMo (Buy) and SB Corp (Neutral). We do not currently cover Rakuten. 

5. HK Connect Discovery Weekly: CR Beer, Great Wall Motors, and Kingsoft (2019-01-07)

In our Discover HK Connect series, we aim to help our investors understand the flow of southbound trades via the Hong Kong Connect, as analyzed by our proprietary data engine. We will discuss the stocks that experienced the most inflow and outflow by mainlanders in the past seven days.

We split the stocks eligible for the Hong Kong Connect trade into three groups: those with a market capitalization of above USD 5 billion, those with a market capitalization between USD 1 billion and USD 5 billion, and those with a market capitalization between USD 500 million and USD 1 billion.

In the past week, there were only three and a half days trading on the Hong Kong Stock Exchange last week. Hence the flow numbers were not as significant as a typical 5 trading day week. Having said that, we find it interesting that the Chinese were buying China Resources Beer Holdin (291 HK), Great Wall Motor Company (H) (2333 HK). In addition, Yichang Hec Changjiang Pharm (1558 HK) is a rare health care stock that experienced inflow last week despite overall poor sector performance last week.