In this briefing:
- Postcard from Surat (India)
- TRADE IDEA – Hang Lung (10 HK) Stub: A Timeless Arb
- Company Visits: Berli Jucker, M Visions
- Best World (BEST SP): BT Article, Franchise and KOL
- DoubleDragon Properties (DD PM): From Overhyped to Undervalued; Multi-Bagger in the Making?
1. Postcard from Surat (India)
With our Post Card Series, our aim is to bring on-ground realities & perspectives from cities across India. In this insight, we share our takeaways from our visit to Surat, the diamond hub of India. Our focus is Titan Co Ltd (TTAN IN) and the impact on margins.
Studded jewellery has more margins than plain gold jewellery. Part of Titan’s plan is to improve the mix in favour of studded jewellery which could help it command even higher margins. Titan anticipates this mix to improve to 50% by FY2023. Our interactions indicate a limited possibility of this change in mix. Operating leverage may be the only driver that can help in margin expansion.
We revise our FY20 EBIT margin & EPS estimates. Our FY20 EBIT margin is revised from 12.63% to 11.6% for FY20, continues to be higher than consensus which is at 10.82%. While we see limited margin expansion possibility, revenue growth likely to surprise. We introduce our FY21 EPS estimate at INR 28.75 compared to consensus EPS which is at INR 25.50.
Trust is a factor which cannot be easily replicated or acquired. The trust that Titan enjoys argues for a higher PE multiple. Based on a two-year average forward multiple 51x, our target price for Titan is INR 1466 which represents an upside of 37% from the last close price of INR 1070
2. TRADE IDEA – Hang Lung (10 HK) Stub: A Timeless Arb
An old favorite in the Asian arbitrageur’s investment universe is the Hang Lung stub. The Hang Lung Group acquired Hang Lung Properties (formerly named Amoy Properties) and designated the subsidiary as its property investment arm. After both companies were listed in 1992, the same year that the company entered the mainland with its purchase of the Grand Gateway 66 and Plaza 66 in Shanghai, the pair was open to arbs. The Hang Lung Group now controls over RMB 130 (USD 19.4b) billion of property in Hong Kong and China.
In the wonderful world of Asian holding companies, Hang Lung needs little introduction. However, in this insight I would like to highlight a trade idea. I will detail why I think now is the right time to setup a stub trade and some background information on the company and what assets constitute the stub.
In this insight I will cover:
I. The Trade
II. The Stub Assets
III. My Track Record with Stub Trades
3. Company Visits: Berli Jucker, M Visions
We visited one big-cap stock, Berli Jucker, and one pip-squeak recent IPO M Vision today. A couple of highlights:
- Slow revenue growth at BJC at under 5% largely driven by Big C (hypermarket), but earnings growth was strong at 28% mainly due to lower cost of palm oil in the snack business.
- Good progress in Vietnam with expansion of the bottle capacity this year and SABECO increasing purchases of bottles.
- Overall unimpressed. The company isn’t expecting to grow revenues more than 9% this year, and many of the cost cuts we saw in 2018 are clearly one-offs. Higher oil prices are likely to lead to rising palm oil prices this year too, since the two commodities are linked through substitution effect.
- MVP underwent a bad year on the profit level, but their various businesses, at least on the top line level, looks like it could recover quickly this year.
4. Best World (BEST SP): BT Article, Franchise and KOL
Best World International (BEST SP) share price has been hammered due to the recent article in Business Times, although the company has addressed them one by one. The annual meeting that recently took place in their office in Singapore shed some light on the seemingly “new but not so new” franchise business model in China. The company also has started to engage Key Opinion Leaders (KOL) aka social media influencers as part of their social selling campaign.
5. DoubleDragon Properties (DD PM): From Overhyped to Undervalued; Multi-Bagger in the Making?
This Insight was written by Nicolas Van Broekhoven and Lloyd Moffatt.
What is an Orphan Stock?
An attractively valued company with a minimum market cap of USD $1 billion but no sell-side coverage.Doubledragon Properties (DD PM) meets those criteria.
Why Read This Report?
Learn about the Philippines youngest self-made billionaire*, Edgar ‘Injap’ Sia, how he created one of the largest fast-food chains (Mang Inasal) in the country and successfully sold it to Jollibee Foods (JFC PM) for over USD$100 M.
After selling Mang Inasal in 2010, Sia started building DoubleDragon (DD) as he joined hands with Tony Tan (founder of Jollibee Foods (JFC PM) ). DD was listed in 2014 at a market value of USD$85 M (PHP2/share) and reached a market cap of over USD$3 B USD two years after listing (PHP70/share).
DD’s valuation mid-2016 was overhyped and overvalued.
From mid-2016 to late 2018 the share price fell by approximately 75%. Last year the stock bottomed at PHP17.2 despite fundamentals improving drastically between 2016 and 2018.
This has created a unique opportunity to invest in a diversified property company whose main earnings contributor will come from building neighborhood malls in suburban communities outside Metro Manila. It is forecast that 90% of its revenues would be recurring in nature by FY20.
We value DD on a blended a) P/E multiple and b) Cap Rate basis.
DD recently traded around PHP 22/share and is currently valued at 9.5x FY20 P/E, a steep discount to its industry peers. Assuming the company achieves PHP10.8 B in recurring revenues by FY20 the market is currently valuing the company at a 21% Cap Rate vs 7% for its primary peer Sm Prime Holdings (SMPH PM). DD should trade at a discount to SM (long track record, higher liquidity, included in PSE index) but the gap is too wide.
We argue DD should trade at a) 15x P/E and b) 10% cap rate. Combining the two valuation methods we arrive at a blended Fair Value of PHP 40.31/share, or 83% upside from current levels.
Assumptions | Fair Value |
15x 2020 P/E | PHP 35 |
10% Cap Rate | PHP 45.63 |
BLENDED FAIR VALUE | 40.31 PHP |
The founders control 70% of the company and expect to grow the current USD$1.2B market cap exponentially the coming 3-5 years. DoubleDragon is a potential multi-bagger in the making.
Catalysts to unlock value at DoubleDragon would be:
- FY18 results publication by early April 2019
- Delivery of 100 operating CityMalls by FY20
- The passing of workable REIT law
- Delivery of PHP5.5B FY20 profit target
- FCF inflection point coming closer in FY20
- Re-discovery by sell-side firms as index inclusion looms
- Visibility into FY21-FY25 dividend potential
Footnote: *Injap was reported as having USD$1 B in assets by Forbes in 2017, as the share price of DD has fallen we estimate this has dropped to approximately USD$ 400-500 M, which would still rank him among the top-25 wealthiest individuals in the Philippines.
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