Brief Consumer: Nongshim Stub Trade: Sub Moving Up on New Hit Product, Now at Near -2σ and more

In this briefing:

1. Nongshim Stub Trade: Sub Moving Up on New Hit Product, Now at Near -2σ
2. HK Connect Discovery Weekly: PICC, Xinyi Solar (2019-03-08)
3. Short Haidilao (海底捞) Before Earning & Lock-Up Expiry
4. Japan Tobacco: No Dire Consequences Despite Late Entry to Heated Tobacco
5. Tesla’s Plan B 2.0; Y Not

1. Nongshim Stub Trade: Sub Moving Up on New Hit Product, Now at Near -2σ

• Shin Ramyun non-frying noodle dramatically reversed Sub’s fortune. Local street starts believing Sub will hit a ₩100bil OP milestone this year. Local institutions began to scoop up Sub shares since a week ago. Yesterday, local pension/foreign money came in. This led to the largest Sub pushing in many weeks. Holdco/Sub are not at near -2σ.
• Street consensus on Sub’s FY19e OP is already upwardly adjusted to ₩106bil. On this, Sub is already at a 17x earnings. ₩106bil OP is immaturely aggressive. 17x isn’t particularly cheap given Sub’s FY18 year-end PER (18.4x).
• Valuation wise, Sub price should be pressed down at this level until more dramatic and tangible sales data come out. Holdco discount is still hovering at 50% to NAV. I’d make a stub trade here. Holdco liquidity can be an issue.

2. HK Connect Discovery Weekly: PICC, Xinyi Solar (2019-03-08)

In our Discover HK Connect series, we aim to help our investors understand the flow of southbound trades via the Hong Kong Connect, as analyzed by our proprietary data engine. We will discuss the stocks that experienced the most inflow and outflow by mainland investors in the past seven days.

We split the stocks eligible for the Hong Kong Connect trade into three groups: component stocks in the HSCEI index, stocks with a market capitalization between USD 1 billion and USD 5 billion, and stocks with a market capitalization between USD 500 million and USD 1 billion.

In this insight, we will highlight PICC and Xinyi Solar.

3. Short Haidilao (海底捞) Before Earning & Lock-Up Expiry

Haidilao International, the largest Chinese cuisine player by valuation, was listed on September 26th last year and lock-up expiry will be on March 26th. The stock has returned 24% since listing. 

• As it heads into lock-up expiry, we will examine Haidilao’s shareholder structure and potential shares up for sale.
• Haidilao was included in the Hong Kong Connect Scheme on December 10th, 2018 and shares held by mainland investors have been consistently increasing.
• But we think Haidilao’s valuation has built in a perfect growth scenario.
• Risk of de-rating for Haidilao warrants a short position.

Our previous coverage on Meituan Dianping

• Haidilao IPO First Glance: Legendary Hot Pot Restaurant that Will Be Hot (Part 1)
• Haidilao (海底捞) IPO: Superior Metrics in a Scalable Segment (Part 2)
• Haidilao (海底捞) IPO: Near Term Rapid Growth but Deceleration Ahead (Part 3)
• Haidilao (海底捞) IPO: Appealing Valuation at the Low End for a Branded National Champion (Part 4) 
• Haidilao (海底捞) Post-IPO Trading Update: Not Much Upside from High End, Lessons from Meituan

4. Japan Tobacco: No Dire Consequences Despite Late Entry to Heated Tobacco

• Late entry to Japanese heated tobacco market resulted in Japan Tobacco (2914 JP) losing market share to peers
• New product launches to give Japan Tobacco a fighting chance against IQOS
• Early maturity of heated tobacco in Japan: a blessing in disguise for Japan Tobacco
• Pricing power is expected to be back on track in future
• PloomTECH will soon be ready to compete with IQOS at a global level
• More product offerings targeting different customer needs in reduced risk products category
• International segment volume growth driven by global flagship brands and acquisitions
• Market unjustly penalising Japan Tobacco for the early maturity of heated tobacco segment
• Transformation of dividend yield from industry worst to industry best
• Undervalued at 10.09x EV/Forward EBIT: DCF target price yields 21.8% upside

5. Tesla’s Plan B 2.0; Y Not

Employees, customers, suppliers, and investors still are reeling over Tesla’s startling decision, announced February 28th, to move immediately to online-only sales, a dramatic reversal of strategy still in place as of the 2018 10-K filing on February 19th in which the company had touted growth via recent store expansions and substantial additions planned globally going forward. 

Tesla explained that even with now three substantial price cuts on all its cars and now three significant layoffs since last summer, it must slash costs even more to support the launch of its long overdue $35,000 base version of the flagship Model 3 (see my report Tesla’s New Plan: Buy Before You Try).

I warned clients that Tesla’s stunning strategy reversal seemed driven more by alarming cash consumption plus much weaker than expected sales and profit margins already apparent in what is shaping up to be a disastrous first quarter–troubling trends that may continue. However, as I noted, it also costs money to close stores, get out of leases (good luck with that), fire employees and redistribute remaining staff, and sell off fairly new equipment at steep losses.

Not to mention that shiny new Tesla stores suddenly going dark may appear ominously similar to retail stores going out of business seen increasingly all over the country–a bad look for Tesla, especially given customers already are spooked by its escalating quality, reliability, and service problems (see “Musk and Weird Q3 Developments Are Driving Investors to Telsa’s Rivals” and “Tesla – Dave’s Not Here, and Musk Won’t Leave” and “Tesla: Down to the Wire” and Tesla – Truth and Consequences).

Tesla probably hasn’t seen the light–it’s just received as of March 1st a desperately needed cash infusion by finally securing overdue funding for Tesla Shanghai Gigafactory 3 which has been under construction since January (see Tesla – Shanghai Surprise). Unfortunately, the four banks in Tesla’s new “China Loan Agreement,” which the company announced on Thursday with a rare 8-K filing, committed only to fund a one-year limited purpose loan for up to 3.5 billion yuan ($521 million). This is barely enough time or cash to get the Shanghai assembly plant up and running–much less also stave off the current cash crunch.

But Tesla must keep up appearances as well as bolster its liquidity through at least the end of the quarter as it gets ready to reveal Thursday evening the long-awaited Model Y–though I suspect this won’t result in a massive burst of cash from new reservations as Tesla hopes.

Years of robbing Peter to pay Paul hasn’t produced a sustainable growth model for Tesla, mostly because its business strategy still is better described as, “Wow, we didn’t see that coming.”

Continue reading for Bond Angle analysis.