Daily Equities Bottom-Up: Start Your Engines: SoftBank Corp (9434 JP) Is Off to the Races and more

In this briefing:

1. Start Your Engines: SoftBank Corp (9434 JP) Is Off to the Races
2. Lawson’s New Online Service Is Working, Doubles Coverage
3. MCX: The Pieces of the Puzzle Have Fallen in Place, BUY for 32% Upside
4. Snippets #17: PTTEP’s Winner Curse, Huawei’s Crisis
5. SMC (6273 JP): Profits Start to Decline

1. Start Your Engines: SoftBank Corp (9434 JP) Is Off to the Races

The price has been set. The book building is done. Like watching a sleek race car aligned on the starting grid, the world eagerly awaits the start of trading for Softbank Corp (9434 JP) on Wednesday, 19 December. 

We are also eager to see the stock go live. It’s not only nostalgia for the stock code “9434” to be brought back into the race, but it will be helpful to be able to compare the stock and to gain better insights into the domestic Japanese telecom industry.

That said, the past few weeks have been full of drama, and some of the drama has longer-term implications. In this insight, we take a more detailed look at some of the challenges facing SoftBank Corp. and some of the concerns that may give investors pause, or at least some things to keep in mind, over the months ahead.

Specifically, we look at issues related to:

• Network outages
• Huawei network equipment
• Corporate governance
• Regulatory headwinds
• Competitive threats

2. Lawson’s New Online Service Is Working, Doubles Coverage

Lawson (2651 JP) Fresh Pick is the convenience store operator’s new e-commerce solution for food launched earlier this year, and replacing various other less successful experiments.

Unlike competing services, Lawson’s service is limited to just 600 SKUs (stock keeping units), all fresh foods, and Lawson offers no home delivery, only click-and-collect.

In the nine months since launch, the service has expanded from 200 to 1,200 stores, currently concentrated in west Tokyo and Kanagawa.

It is a model that will expand rapidly across the rest of the country because Lawson has to invest so little to make this happen.

3. MCX: The Pieces of the Puzzle Have Fallen in Place, BUY for 32% Upside

• Multi Commodity Exch India (MCX IN) is the leading commodity futures exchange in India with ~90% market share. It enjoys ~100% market share in each of the top 7 products traded on its exchange.
• Average Daily Turnover (ADT) is up 24% YoY over YTD-Nov-18 after 4 years of stagnation on the back of increase in volatility of key commodity prices.
• We see 50-60% increase in ADT over FY18-21 on the back of Mutual Funds entering commodity futures trading creating enough liquidity for large industries like refineries shifting to MCX for hedging, bank distribution of commodity trading products and monetization of commodity options trading.
• MCX’s volumes are unlikely to be impacted by new entrants like NSE and BSE since none of the new entrants can offer any meaningful improvement over MCX’s offering in terms of lower cost, higher speed or tax friendliness. This makes MCX a ripe acquisition candidate going by global experience.
• We expect 16% Revenue Cagr, 20% EPS Cagr over FY18-21. Our target price for MCX at 28x Dec-20 EPS is Rs 950- implying 32% upside.

4. Snippets #17: PTTEP’s Winner Curse, Huawei’s Crisis

December turned out to be more eventful than expected. Guess not everyone is waiting peacefully at home for Santa to hop by. Here’s a quick run-down on stories that have impact (at least indirectly) on Thai equities.

• Winning bids, losing confidence. PTTEP crushes Chevron in a mighty bid to secure the Bongkot and Erawan fields, but investors responded by driving their shares down 6%. Energy guru Manoon Siriwan pushes back on the bears saying that while costs are high, getting Erawan field on a greenfield basis should more than outweigh the negatives.
• Huawei and trade wars. Trump’s trade wars take a strange turn following the arrests of Huawei CFO and Canadian citizens in China. As commerce and politics gets mixed up, talks abound about Apple moving production to Vietnam or…Thailand?
• ERC puts the final nail to Glow’s coffin. This is lamest ruling ever! ERC rejects GPSC’s appeal saying that other industrial estates are already monopolies, and they don’t wanna turn MapTaPhut into another one. Their reasoning defies logic and forced us to capitulate on our Glow position.
• End of the LTF era. As the tax exemptions from LTFs are phased out, critics point that equities-based programs favor the rich over the poor, while the Puay Ungpakorn Institute points out that insurance companies could benefit from this unfortunate event.
• CP Group Routs the Mighty BTS in its bid for the high speed railway project, though their victory still predicates on the terms of government subsidy. Though this CP Group entity isn’t listed and many consortium members are foreign, two listed Thai consortium members include BEM and ITD, the country’s biggest construction company.

5. SMC (6273 JP): Profits Start to Decline

SMC’s year-on-year profit comparisons have turned negative. In the three months to September (Q2 of FY Mar-19), gross profit was down 3.7% year-on-year, operating profit was down 8.8% and net profit was down 9.6%. Operating profit was down 15.1% from Q1. Sales were up only 0.4% year-on-year in Q2, compared with 29.0% growth a year earlier, and down 7.5% from Q1. Management responded by cutting full-year guidance, implicitly changing anticipated 2H operating profit growth from +3.0% to -9.3% year-on-year.

This has all been discounted. The share price dropped 43% from its 52-week and all-time high of ¥55,830 on January 18 to a 52-week low of ¥31,580 on October 28, then rebounded to ¥40,000 in early December. Last Friday, December 14, it closed at ¥34,840. 

What happens next? The share price trend suggests that because year-on-year profit comparisons have finally turned negative, it’s time to start anticipating recovery. But the  fundamentals indicate that profit comparisons are likely to remain very difficult and most probably negative for at least three more quarters. Management reports that semiconductor-related demand is down in all markets and that auto-related demand is down in the U.S. Auto sales are also declining in China. The length and depth of the downturn and the timing and strength of recovery are both unclear. Any positive news on the trade front should support the share price, but while trade friction aggravates the cyclical downturns in the semiconductor and auto industries, it is not their cause.

At ¥34,840, the shares are selling at 17.0x our EPS estimate for FY Mar-19 and 17.7x our estimate for FY Mar-20. These multiples compare with a 5-year historical range of 13.8x – 28.5x. Our projected EV/EBITDA multiples for the same two years are 8.7x and 8.1x, which compare with a 5-year historical range of 7.0x – 15.1x. This should help put a floor under the share price. Interestingly, Japan Analytics’ chart analysis indicates that SMC has never been seriously overbought (see chart below).