In this briefing:
- Auto Earnings: Positive Toyota/Mazda, Negative Subaru/Suzuki
- Tesla (TSLA): SWOT Analysis Leads To…Rivian
- Dali Foods (3799:HK): Short to HK$4.18 on Expected Cost Increases (Full Note)
- TRACKING TRAFFIC/Chinese Tourism: HK & Macau Gained ‘Share’ in December, Continuing H218 Trend
- Amorepacific Corp Fresh Basing Levels
1. Auto Earnings: Positive Toyota/Mazda, Negative Subaru/Suzuki
On a relative basis we have been positive on Toyota Motor (7203 JP) and negative on Subaru Corp (7270 JP) since early 2017 as we consider Toyota’s underlying earnings strength to be superior to the majority of its peers and consider hybrids to be moving towards the mass adoption stage while we also feel that Subaru, after a purple patch when it led the automotive industry in terms of margins, is now falling back to Earth and the sell side remains behind the curve on the depth of issues and underspend that needs to be addressed at the company. The ratio between the two returned about 40% in 2018 but is down about 12% so far this year.
In the case of Mazda Motor (7261 JP) and Suzuki Motor (7269 JP), in Mar 2018 we took the contrarian view of preferring Mazda over Suzuki despite earnings momentum being significantly stronger for Suzuki than for Mazda. This proved to be “early” as the ratio declined 16% during the year and at one point fell as much as 30%, but we continue to feel that our thesis has merit and would note that the ratio is now up 2% relative to its value at our initial recommendation. Our thesis is simply that Mazda’s earnings are under pressure due to forward investments in technology (extremely high efficiency gasoline and diesel engines) and distribution and after sales which have traditionally been a Mazda weakness and are in our opinion the main difference between Mazda and a much stronger company like Honda. In the case of Suzuki, while the long-term growth outlook due to the India exposure remains bright, we felt that momentum was likely to decelerate and that Suzuki could face headwinds in the short-term as consumer upgraded from mini-vehicles in which it is dominant, to compact and mid-size cars where Suzuki is strong in India, but not the force of nature that it is in the mini-vehicle segment. While it has taken time, recent results suggest this thesis is starting to play out.
2. Tesla (TSLA): SWOT Analysis Leads To…Rivian
What happens when innovation becomes commoditized? We believe this is a core concern to every Tesla watcher, bulls and bears so we began our Lunar New Year week (or Pro Am 2019 week in Pebble Beach) with a quick and dirty SWOT analysis of Tesla to see where the next potential existential threat can come from…and we ended up looking at Rivian.
Tesla: A SWOT Analysis
Tesla’s key strengths that we see are Elon Musk’s charismatic personality that lends to fund raising capability and marketing prowess. The company’s weakness lies in its collective inexperience in the automotive industry, and the fact that the car business is a mere component in Musk’s vision of a vertically integrated, electrified future. This has created and continues to exert tremendous amount of pressure on management. We believe opportunities for new entrants are that EVs are not as difficult to design and produce, as well as to finance, as Tesla fanboys in the financial industry and media make it sound. A key Threat to Tesla could be companies like Rivian, a U.S. BEV light truck dedicated OEM based in Detroit, which is currently taking customer deposits on 2020 deliveries of its R1S SUV and the R1T pickup truck (https://preorders.rivian.com/2322956400/checkouts/29de1808b812748f8fe476718e460bea).
Rivian is a private company that has not issued public debt so financial information on the company is unavailable in the U.S. public domain, so we poured through strategic investor Sumitomo Corp’s Yuho reports to see if we can find any tidbits in Japan but found nothing there either. Hence, while we cannot make much financial observations about the company at this point, we do see a number of strategic signs from Rivian’s actions that may indicating that it is most likely improving upon the Tesla experience to avoid the hiccups and the bumps on the road to premium EV segment dominance.
From an APAC stock market perspective, we see LG Chem and Sumitomo Corp as two entities that could potentially see financial impact from Rivian in the next several years. Teslerati has made an educated guess on LG Chem as Rivian’s cell supplier which we believe to be reasonable, although Rivian and LG Chem have neither confirmed nor denied the relationship (https://insideevs.com/new-details-rivian-battery-pack-design/, https://www.teslarati.com/rivian-battery-lab-irvine-california-megapack-production/). Current investment in Rivian by Sumitomo Corp is most likely an insignificant amount from the latter’s perspective but could perhaps grow into something bigger at some point in the future.
The Rivian R1S
3. Dali Foods (3799:HK): Short to HK$4.18 on Expected Cost Increases (Full Note)
Chinese snack food and beverage maker Dali Foods Group (3799 HK) is well-loved by sell-side analysts, with 18 of 20 analysts rating the stock ‘Buy’ or ‘Overweight’.
In contrast to the consensus ‘bull’ view of the company, we believe revenue growth is slowing and that core margins will soon come under intense pressure due to rising raw materials costs. As a result, our earnings estimates for Dali Foods are substantially lower than consensus.
Based on 13.5 times our 2019 EPS estimate, our target price for Dali Foods’ shares is HK$4.18, about 23% below the closing price of HK$5.41 on February 1st.
4. TRACKING TRAFFIC/Chinese Tourism: HK & Macau Gained ‘Share’ in December, Continuing H218 Trend
Tracking Traffic/Chinese Tourism is 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:
- As it has throughout the latter half of 2018, HK & Macau traffic boomed in December: Over the last several months, we believe Chinese tourists have been staying ‘closer to home’, for a variety of reasons. December’s Chinese outbound tourist figures support this idea, as visits to nearby Hong Kong and Macau surged, and trips to destinations farther afield moderated.
- An analysis of December domestic Chinese travel activity, which remained subdued: Overall domestic travel demand, measured in passenger-kms, grew by 3.4% in December, similar to H118 growth. But while rail and highway travel growth held up relatively well compared to earlier in 2018, air travel in December was again weak relative to H118’s strength, up 9.1% after climbing 13.8% in the first half of the year.
- China-to-USA travel activity continued to weaken in December: US tourist and student visa issuance and visits to Hawaii all declined again in December. We think the declines reflect some Chinese tourists turning cautious on the economy (and thus disposable income), but the declines may also reflect changing Chinese policy.
Although we remain positive on the long-term growth of Chinese tourism, it’s clear that near-term demand growth has slowed, and that Chinese tourists are generally staying closer to home and probably spending less than they were a year ago.
Happy New Year (of the Pig)!
5. Amorepacific Corp Fresh Basing Levels
Amorepacific Corp (090430 KS) break below 248k triple low support induced a hard cycle lower that needs more time to base before mending the technical damage.
Our last update Working Back into Amorepacific Long outlined a buy near 255k support with a stop at 248k. That break of 248k set in motion a bigger down cycle.
Recent rise has been on deteriorating volumes which aligns with current bounce attempts falling into the corrective camp with the major trend still remains down.
In this webcast we outline Ideal downside projections and support that would initiate a fresh basing cycle ahead of a new up cycle. More time is needed.
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