In this briefing:
- Bharat Heavy Electricals (BHEL IN): Don’t Expect the Share Buy-Back to Help Much
- SVI (SVI TB): Production Capacity Expansion Should Continue to Pay Off
- CKD (6407) Hit Buy China Slowdown. Now Excessively Cheap and Cutting Costs.
- Starbucks (SBUX): China Strategy Reaped by Luckin’s Parasitical Tactic, a Visit and Case Study
- Goldwin Tops Sports Market Growth Through Store Investment
1. Bharat Heavy Electricals (BHEL IN): Don’t Expect the Share Buy-Back to Help Much
Bharat Heavy Electricals (BHEL IN) had announced a sizeable share buyback a couple of weeks ago. This buyback amounting to total Rs16.3 bn has opened yesterday, but we think that it is unlikely to help much. In the coming years, the Indian power distribution companies (DISCOMs) are likely to buy more power from renewable sources and the proposed changes in regulation will expedite the shift. In addition, resolution of power assets in distress continues to remain slow and new orders for Bharat Heavy Electricals (BHEL IN) which is already struggling with slow moving orders, remain sluggish. Another interesting development is shift in interest from company’s key customers. For example, NTPC Ltd (NTPC IN) is exploring acquisition opportunities much more than greenfield expansion. All of this is certainly bad news for the Bharat Heavy Electricals (BHEL IN) stock. While the PAT nos. are small in absolute terms and even a slight positive change will make valuations look attractive for the stock, this will not have a meaningful impact unless things improve structurally for the company.
2. SVI (SVI TB): Production Capacity Expansion Should Continue to Pay Off
- More attractive to analysts, solid short-term earnings momentum, and strong stock price momentum relative to its sector
- Production capacity expansion at Cambodia and Slovakia plants should continue to stimulate sales which was up by 32% in 3Q18 YoY
- SVI’s focus on industrial customers means less volatile sales, and the long selling cycle works against new competitors
- Trades slightly lower at 19CE* PEG ratio of 0.7 compared to Thai Info Tech at 0.8 PEG and SVI is net cash
- Risks: Swift changes in technology
* Consensus Estimates
3. CKD (6407) Hit Buy China Slowdown. Now Excessively Cheap and Cutting Costs.
To us the shares are have now fully discounted the current spate of bad news. The company has a very strong balance sheet and owns 10% in itself. The shares are on 0.9x book, they yield 3.7% and trade on a 3/20 EV/ebitda multiple of 3.8x, assuming ebitda next year of Y16.5bn. Unless one is exceedingly bearish on the outlook for the global economy, then these shares are starting to look attractive here. They have fallen 65% year to date, yet longer term management has a clear strategy with regards to improving profitability.
4. Starbucks (SBUX): China Strategy Reaped by Luckin’s Parasitical Tactic, a Visit and Case Study
- We believe Luckin copies SBUX’s site selection, but chooses low rental places close to Starbucks shops.
- Starbucks plans to add delivery business to raise margins and comparable store sales, but Luckin has focused on delivery since inception.
- Starbucks needs the China market as its growth momentum, but we believe Luckin’s parasitical tactic will be a major resistance.
5. Goldwin Tops Sports Market Growth Through Store Investment
Marketing of sports brands has become increasingly retail-led in the last decade and a focus on retailing has enabled Goldwin (8111 JP) to make serious gains while the two biggest domestic brands, Asics Corp (7936 JP) and Mizuno Corp (8022 JP), have been distracted by overseas expansion.
Goldwin took a close look at its beleaguered business 15 years ago and decided retail could be its salvation.
At current rates it will catch up with Mizuno’s domestic sales in a few years.
Overall, we are bullish about Goldwin but also the wider sports category because sports and sports fashion is in many ways one of the few consumer categories to be largely immune to a demographically challenged market like Japan – all age segments are buying into sports apparel, including the over 60s.
