Brief Consumer: Dali Foods (3799:HK): Short on Expected Cost Increases (Summary Note) and more

In this briefing:

1. Dali Foods (3799:HK): Short on Expected Cost Increases (Summary Note)
2. Hyundai Motor Share Class: Long 2PB / Short 1P Amid Restructuring Speculation
3. Pan Pacific International: UNY Acquisition the Bright Spot as SSS and Inbound Decelerate
4. Kao Corporation, 4QFY2018 Results Falls Short of Guidance
5. Baidu: Time to Swoop In, with NAV Discount Widening Substantially

1. Dali Foods (3799:HK): Short on Expected Cost Increases (Summary Note)

Chinese snack food and non-alcoholic beverage maker Dali Foods Group (3799 HK) is well-loved by sell-side analysts. Fully 18 of twenty analysts (including all four of the ‘bulge bracket’ investment banks who cover it) rate the stock ‘Buy’ or ‘Overweight’, and only one analyst gives the shares an ‘Underweight’ rating.

The ‘bull’ case for Dali Foods includes continued strong revenue growth and further margin expansion over the next few years. In contrast, we believe revenue growth is already moderating and that core margins will soon come under pressure due to rising raw materials costs. As a result, our forward earnings estimates are substantially below consensus expectations.

Based on 13.5 times our 2019 EPS estimate, our target price for Dali Foods is HK$4.18, about 23% below its HK$5.41 closing price on February 1st. We suggest investors Short Dali Foods; current holders should consider exiting their positions, in our view.

A longer note that includes company and industry background, plus financial statements and forecasts for Dali Foods, can be found elsewhere here on Smartkarma using the company’s ticker.

2. Hyundai Motor Share Class: Long 2PB / Short 1P Amid Restructuring Speculation

• Hyundai Motor 1P/2PB price ratio is currently at 152% of σ on a 20D MA. This is the highest since late Nov last year. Price ratio wise, they are now slightly above 120D average.
• 1P/2PB div yield difference on FY19e is -0.34%p. This is lower than last year’s yearend level. Hyundai Motor Common has been drifting sideways for a while lately. 2PB has generally been more quickly responding to Common’s price movement. This led to a higher-than-usual price divergence on 1P/2PB. 1P should be following Common/2PB at this point.
• It is locally being speculated that HMG will announce a revised restructuring plan as early as next month. When this happened last time, 2PB responded first and 1P followed suit. This market speculation will also serve to boost 2PB in the short-term. I’d go long 2PB and short 1P.

3. Pan Pacific International: UNY Acquisition the Bright Spot as SSS and Inbound Decelerate

Newly and somewhat boringly renamed  Pan Pacific International Holdings (7532 JP; PPI) (formerly the much more evocative Don Quijote or Donki) announced results yesterday after the close, seeing 11% YoY sales growth for the first half and 14% YoY current profit growth. With the inclusion of the expected contribution from a consolidated Uny Holdings, the company also boosted its FY outlook by 46% at the revenue line and 32% at the NP line.

Results at the 6 converted Uny stores continue to trend well and the company announced its intention to convert a further 19 stores by the end of the calendar year. Familymart Uny Holdings (8028 JP) had been projecting about ¥25bn in OP for Uny and its subsidiary UCS, which combined with PPI’s previous forecast for FY06/19 of ¥53bn would sum to about ¥78bn in OP, in line with consensus for PPI’s FY06/20 OP. Given the store conversions, growth overseas and some modest growth domestically for the mainline Donki stores, the prospects for a significant beat of consensus next year seem good.

4. Kao Corporation, 4QFY2018 Results Falls Short of Guidance

Picking up from where we left off Market Largely Untroubled by Kao’s Troubles, Kao Corp (4452 JP) announced its FY2018 results yesterday (4^th February). Kao’s Revenue grew 1.2% YoY in FY2018 to reach JPY1,508bn, while its EBIT margin improved by 10bps to reach 13.8%. Despite that, both revenue and EBIT fell short of company guidance for FY2018.

5. Baidu: Time to Swoop In, with NAV Discount Widening Substantially

• Our stub valuation analysis reveals that Baidu Inc (ADR) (BIDU US) attractively trades at near 2 SD below its 3-yr average of NAV discount.
• Fundamentally, BIDU’s core business (Baidu Core) has grown healthily, with strong cash flows generation.
• China consumption slowdown is likely to mean modest sales growth deceleration (not a “sales falling off the cliff” scenario) for BIDU in 2019E.
• Implied in the current ADR price, the market is unjustifiably valuing Baidu Core (11.2x 2019E PE) as an “Old economy” company with little to no growth prospect, in our opinion.
• Our PT for next 3-6 mo, assuming 10% holdco discount to NAV, works out to be US$224/ADR, representing a 27% upside potential.