Equity Bottom-Up

Daily Equities Bottom-Up: TRACKING TRAFFIC/Chinese Tourism: Visits to Macau & HK Surge and more

In this briefing:

  1. TRACKING TRAFFIC/Chinese Tourism: Visits to Macau & HK Surge
  2. Siauliu Bankas: A Baltic Belter
  3. Banco Guayaquil: Off Radar but Surging Higher
  4. EGM Diaries
  5. HCG Q2FY19 Results Update

1. TRACKING TRAFFIC/Chinese Tourism: Visits to Macau & HK Surge

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A year ago we began publishing Tracking Traffic/Chinese Tourism as the hub for all of our research on China’s tourism sector. This monthly report features analysis of Chinese tourism data, notes from our conversations with industry participants, and links to recent company news and thematic pieces. Our aim is to highlight important trends in China’s tourism sector (and changes to those trends).

In this issue readers can find:

  1. A review of China’s outbound tourist traffic in November, which strengthened: Lifted by extraordinarily strong growth in visits to Hong Kong and, to a lesser extent, Macau, Chinese outbound travel demand rebounded strongly in the seven regional destinations we track. But the fact that November’s growth was led overwhelmingly by Hong Kong and Macau — destinations close enough for weekend or day trips from population centers in Southern China — suggests Chinese tourists’ purse strings are still tight.
  2. An analysis of November domestic Chinese travel activity, which turned weaker: November data from China’s three leading airlines and the Ministry of Transport show moderating domestic travel demand. For combined rail, highway, and air travel, November demand grew by less than 3% Y/Y. Along with the change in destination mix for outbound travel (that favors ‘nearby’ destinations), it now appears domestic demand has weakened, too. 
  3. Links to other recent news & research on Chinese tourism: Readers can check out our quick takes on Macau’s December GGR figure, preliminary GTV and revenue figures released by Ctrip.Com International (Adr) (CTRP US), declining US visa issuance to Chinese tourists, and Qatar Airways’ new investment in a leading Chinese airline.

Although we remain positive on the long-term growth of Chinese tourism, it’s clear that near-term demand has weakened substantially. We continue to take a negative view of travel intermediaries like Ctrip, which face intensifying competition from many sources. We are more positive on the prospects of actual owners of Chinese travel and tourism assets, like hotel chain Huazhu Group (HTHT US) and Air China Ltd (H) (753 HK)

2. Siauliu Bankas: A Baltic Belter

Formed in 1992, Siauliu Bankas AB (SAB1L LH) has evolved into the sixth largest Lithuanian bank in terms of Assets and an important provider of banking services to Lithuanian SMEs. SAB1L is based in Siauliai in the north of the country, and in recent years has developed a nationwide franchise. It now has an upgraded network of 43 branches in all regions of Lithuania, and is investing in its digital footprint. SAB1L holds a 9.3% share of the corporate credit market, a 8.7% share of system deposits, and 8.7% of fast-evolving consumer loans. Main peers are SEB, Luminar, and Swedbank.

The bank is generating vibrant non-interest income from settlements and cash office transactions as well as its niche home and multi-apartment improvement revenue stream. The banks commands a 60% share of this energy-efficient focused market.

Constant uncertainty regarding an EBRD loan and conversion terms/dilution  has weighed on shares for some time. This has since cleared. EBRD is now the main shareholder with a 26% stake after a 2013 subordinated loan was recently converted into equity. The decision to strengthen the bank’s capital not only shows that the largest shareholder has a positive view of the bank’s strategy and outlook, but creates conditions for the bank to continue expanding its activities.

The Lithuanian economy represents a relatively solid narrative. Fiscal discipline combines with growth spurred by consumption, credit, firm investment, exports, while inflation and unemployment remain under control. Industrial output soared in October, propped up by a rebound in manufacturing production. In addition, exports climbed in October while upbeat retail sales pointed to strong household consumption. GDP can grow by 2.5-3.0% over the next year barring any unforeseen global ruptures.

SAB1L stands out trading at a 8% discount to Book Value and lies on a low Mkt Cap./Deposits rating of 12%, well below the global and EM median. SAB1L commands a huge dividend-adjusted PEG of >4x with recurring growth more than 4x  its lowly PER. Earnings Yield is 23%. A quintile 1 PH Score™ of 8.9 captures the valuation dynamic while metric change is impressive. Combining franchise valuation and PH Score™, SAL1L stands in the top decile of opportunity globally. With a ROE in excess of 20%, an Efficiency Ratio below 40%, and double-digit B/S growth, shares should command a much higher multiple. With dilution issues regarding an ERBD behind it, shares can move higher.

3. Banco Guayaquil: Off Radar but Surging Higher

Banco Guayaquil SA (GYL ED) commands Ecuador’s most extensive network of 5,732 points of sale, incorporating branches, ATMs, neighbourhood units, as well as a virtual mobile bank, plus telephone and mobile banking. The bank commands 10.5% and 10.3% of the system credit and deposit markets.

Contrary to perception, Ecuador’s financial system appears relatively sound. It is well-capitalised, with solid credit quality, and high levels of liquidity. Private credit is still growing quite robustly. The supervision of the cooperatives should be strengthened though this is not a systemic risk. Removing barriers to financial intermediation, enhancing risk management, and improving oversight and contingency planning could help fortify the system further.

Ecuador’s economy though remains fragile and speculative. The administration of Lenin Moreno cannot be faulted for not grappling with some of the main issues confronting the country after years of chronic mismanagement by Correa. While growth still remains moderate, limited by structural bottlenecks, inflation and unemployment are under control though the fiscal deficit, debt burden, and paltry reserves represent huge challenges, not aided by recent oil sell-off. For this reason, CDS is sky-high – at similar levels to Argentina at 750bps.

But unlike Argentina, deep value can be found in Ecuador’s Banking Sector. At least investors are compensated, in great part, for country risk unlike elsewhere.

And, arguably, the time to buy oil-related proxies is when the commodity price is low, not high.

GYSE shares went on a tear in 2018, not even halted by oil volatility at Q3. But there could be more to come as they are moving off extremely depressed levels. Shares still trade at a 65% discount to Book Value and lie on a low Mkt Cap./Deposits rating of 5%, far  below the global and EM median. GYSE commands a dividend-adjusted PEG of 9x. Earnings and Dividend Yields stand at 34% and 18%. A quintile 1 PH Score™ of 10 captures the valuation dynamic while metric change is impressive. Combining franchise valuation and PH Score™, GYSE stands in the top decile of opportunity globally though we are mindful of country risk and interrelated oil volatility.

4. EGM Diaries

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We recently attended the extraordinary general meeting (EGM) of Zydus Wellness (ZYWL IN). The primary agenda for the EGM was to approve the issue of fresh equity and raise debt to finance the acquisition of Kraft Heinz Co (KHC US) ‘s Indian subsidiary Heinz India Private Limited jointly with Cadila Healthcare (CDH IN). This will include the brands Complan (Health Food Drink), Glucon D (Glucose Powder), Nycil (Talcum Power) and Sampriti Ghee. We believe the deal is in sync with management’s vision of developing Pharma oriented consumer brands. However with recent acquisition of Glaxosmithkline Consumer Healthcare (SKB IN) by  Hindustan Unilever (HUVR IN) the competition in the health food drink market may get intense. Having said that, the largest brand Glucon D will likely continue market leadership along with Everyuth and Nycil which will be a good addition to the Zydus Portfolio. Any attempt for market share gains with Complan and Sampriti ghee will be futile and may come at a cost of margins. Based on preliminary, we expect full effect of the deal to appear on FY 2020 financials. Our preliminary estimates indicate a FY 2021 EPS of 51.68, which with a average PE multiple of 34.56 leads to a price target of INR 1809 per share implying an upside of 35% from latest close price of INR 1342. We will revisit our estimates post Q4 FY19 numbers when a much clearer picture is likely to emerge. 

5. HCG Q2FY19 Results Update

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Healthcare Global Enterprises (HCG IN) , a leading cancer care hospital network’s (please click here for detailed report) Q2 FY19 results were inline with our expectations. Revenues grew by 16% YoY in Q2 FY19 due to strong growth from the HCG centres , EBITDA grew by only 8% in the same period due to operating losses reported by the new centers that dragged the overall profits.  We analyze the results.

 

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