In this briefing:
- Matahari Department Store (LPPF IJ) – A Retail Conundrum
- January Chip Revenues Down 15.6% Year-On-Year
- Futures and Spot Opportunities
- China A Share: Near-Term Momentum, but Time to Start Taking Profits
- Sea Ltd (SE US): The Bear Case – A One-Hit Wonder?
1. Matahari Department Store (LPPF IJ) – A Retail Conundrum
Pt Matahari Department Store (LPPF IJ)‘s FY18 results call was an interesting combination of kitchen sinking, a cautious outlook, combined with some more optimistic strategies on specialty stores with new brands and smaller format stores for regional expansion. The big question is whether these strategies will win out or will the company continue to underwhelm on its growth prospects?
Pt Matahari Department Store (LPPF IJ) remains a market leader in its space with 159 departments stores across Indonesia selling affordable fashion to the middle classes but it has underwhelmed on a few occasions on its growth and guidance. It is reducing its dividend payout to facilitate the build-out of specialty stores with new brands on board.
Valuations do now look interesting with the company trading on 6.0x FY19E PER and 5.4x FY20E PER. It generates a forecast ROE of 70% and ROE of 30%, which is extremely high for a retailer. The question is how much analysts will downgrade and whether investors will look through its Lippo connection. After another 9% fall in the share price today after 22% yesterday, a lot does seem to have been factored in already.
2. January Chip Revenues Down 15.6% Year-On-Year
The Semiconductor Industry Association in the US released the latest WSTS figures for January chip revenues. Monthly revenues are down 15.6% from January of 2018. While this is not a surprise to our clients it is frightening to those who anticipated that 2019 would be a continuation of the bonanza enjoyed in 2018.
3. Futures and Spot Opportunities
Liquidity is driving the futures market to push up iron ore. We know futures trading is very active. This tells us we are not the only ones who noticed the divergence and are looking to capitalize.The fundamental issue is that we expect the futures and spot are back together after being seeing a gap.
4. China A Share: Near-Term Momentum, but Time to Start Taking Profits
Bottoming out (albeit marginal) of investor confidence drove the market rally YTD. News on 28th Feb that MSCI decides to quadruple China A-Shares inclusion in emerging market index is further boosting the market. Positive signals from Government Work Report might keep the market rally going for a while.
However, stake sale plans of listed companies’ major shareholders, who own 53% of A-share free-floating market cap, are on the way. This might be the catalyst for the rally to end as attracting new investors into the market is going to be tough. Institutional investors’ share positions are close to their historical high after keeping buying in the past few weeks and have limit cash for buying more. There are also no signal signs individual investors are increasing their capital allocation for stock investment. In addition the aggressive stake reduction plans of major shareholders might be taken by other market participants to indicate negative expectations on their companies’ earnings this year.
We think it’s time to turn cautious on A-shares: take profit and wait for the next buying opportunity for value investors.
5. Sea Ltd (SE US): The Bear Case – A One-Hit Wonder?
Despite burning through $700mn in cash in 2018, investors decided to give another $1.3bn to Sea Ltd (SE US) . We believe investors should treat Sea Ltd with caution for the following reasons:
A significant slowdown in e-commerce
Is the gaming division a one-hit wonder?
Expecting another 800mn cash burn into 2019
Consensus has priced in further upgrades while cash flow metrics worst in the sector
NB. Our team has taken both sides of the Sea Ltd investment case as we think this makes for better decision making and encourages unique thinking within our team. We strongly recommend that investors read my colleague Arun’s positive notes on the company listed below, if you have not already done so.
Sea Ltd (SE US): Placing Price Leaves Money on the Table
Sea Ltd (SE US): Placement a Good Opportunity to Enter an Attractive Story
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