Daily Equities Bottom-Up: THK (6481 JP): Downturn Discounted, Recovery Depends on New Orders and more

In this briefing:

1. THK (6481 JP): Downturn Discounted, Recovery Depends on New Orders
2. Tesla Motors Inc: Come Hell or High Water
3. FutureBright (703 HK): Typhoon Dampens 3Q Results
4. Nintendo: Is the Hype Surrounding the Switch Slowly Dying Down?
5. Recruit Holdings Down 30% From October; Still Not Cheap

1. THK (6481 JP): Downturn Discounted, Recovery Depends on New Orders

After dropping 60% from a high of ¥4,830 last February 27 to a 52-week low of ¥1,945 on December 26, THK closed at ¥2,062 on December 28, the last trading day of 2018.  

New orders peaked in the three months to Dec-17. The order backlog peaked in the three months to Mar-18, and so did the share price. Sales and operating profit peaked in the three months to Jun-18. Demand from the company’s top three user categories – electronics (semiconductor production equpment in particular), machine tools, and general industry – has been moving in parallel. By region, new orders from China have dropped most rapidly, followed by orders from Taiwan and Japan. 

After double-digit positive comparisons in the nine months to Sep-18, management is guiding for a 30% year-on-year decline in operating profit in 4Q of FY Dec-18. Judging from the orders trend and economic situation, substantial declines in sales and profits are likely in FY Dec-19. If demand from China picks up following a trade agreement with the U.S. sometime next year, there should be a moderate recovery going into FY Dec-20.

The shares are now selling at 7.7x management’s EPS guidance for FY Dec-18 and 0.9x book value at the end of Sep-18. Our forecast puts the shares on 11.9x earnings for FY Dec-19 and 10.4x earnings for FY Dec-20E. Valuations are at the bottom of their recent historical ranges. When orders recover, the stock price should, too.

2. Tesla Motors Inc: Come Hell or High Water

It is our view, that come hell or high-water, in 2019, Tesla Motors (TSLA US) will establish itself as the pre-eminent large-cap growth stock. Those that are short would cover the position at a loss and those that are long are looking at another Apple Inc (AAPL US) or Amazon.com Inc (AMZN US) in the making. The ride may be volatile, but will be worth it. 

3. FutureBright (703 HK): Typhoon Dampens 3Q Results

We recently met with management to discuss the company’s 3Q results and outlook for the coming year.

There was clear disappointment that goals for 2018 had not been achieved: rising opex dampened the recovery in EBITDA, despite solid SSSg, the Hengqin Land sale is racked with yet further delays, and the key rental property is still untenanted. That said, we feel much of the frustration is due to positive outcomes on all front being just around the corner.

This note aims to give a brief update on the key pillars forming our thesis.

4. Nintendo: Is the Hype Surrounding the Switch Slowly Dying Down?

Nintendo reported their 2QFY03/19 in October with results showing growth at both the top line and bottom line albeit not living up to consensus expectations. Top line grew by 4.0% YoY to JPY388.9bn in 1H03/19 while OP grew by 53.9% YoY to JPY61.4bn. OP in the last quarter (2QFY03/19) was the second highest the company has experienced over the last five years. This growth has been mainly driven by the sales of Nintendo Switch hardware which sold just over 5m units in 1HFY03/19. However, YoY growth remained at 3.4% compared to 4.9m units sold in 1HFY03/18. This has left investors worried about Nintendo’s aggressive target of selling 20m units of the Switch for FY03/19. Of this target, the company has managed to achieve only around 25.0% in 1H. Nintendo’s financial performance follows a seasonal trend with the December quarter showing stronger performance due to increased sales during Christmas. While the company’s current quarter is likely to show strong results, we remain skeptical about the company reaching the aforementioned target for FY03/19.

Switch Sales Have Caused an Improvement in Nintendo’s OP….

….Despite a Slowdown in the Growth of Units Sales

Nintendo’s Last Quarter Has Also Failed to Live Up To Consensus Expectations

5. Recruit Holdings Down 30% From October; Still Not Cheap

The share price of Recruit Holdings (6098 JP) has fallen by around 30% over the past three months from an all-time high of JPY3,826 (on 1^st October 2018) to JPY2,705 on 24^th December 2018. Prior to this, Recruit’s share price saw a strong upward rally during May-September following the company’s announcement that it would acquire Glassdoor Inc. (the company which operates the employment information website glassdoor.com).

We expect Recruit’s consolidated revenue to grow 7.7% and 6.5% YoY in FY03/19E and FY03/20E respectively, driven by the acquisition of Glassdoor and steady growth in Japanese staffing operations, partially offset by a likely slowdown in global labour market activity. We also expect Recruit’s consolidated EBITDA margin to improve by around 50bps due to higher margin from Glassdoor.

Despite the recent dip in share price and steady topline and bottom line growth over the forecast period, at a FY2 EV/EBITDA multiple of 14.0x, Recruit doesn’t look particularly attractive to us. Recruit’s internet advertising business and employment business peers, Yahoo Japan (4689 JP) and Persol Holdings (2181 JP) are trading at FY2 EV/EBITDAs of 7.7x and 9.6x respectively.