Brief Consumer: Valuetronics (VALUE SP): Trade War Uncertainty Continues, Downside Supported by Large Cash Position and more

In this briefing:

1. Valuetronics (VALUE SP): Trade War Uncertainty Continues, Downside Supported by Large Cash Position
2. FRETAIL IN
3. Puregold Price Club: Steady Grower with Provincial Expansion Story
4. Nongshim Holdco/Sub Trade: Current Status & Trade Approach
5. Sony: Mispriced, Misunderstood, or Both?

1. Valuetronics (VALUE SP): Trade War Uncertainty Continues, Downside Supported by Large Cash Position

Valuetronics reported its 3Q19 figures this week which showed a 7.5% decline in revenues but a small (+2.6%) increase in bottom line profits. Stronger margins in its ICE segment offset weakness in its CE segment.

Valuetronics Holdings (VALUE SP) remains a solid company run by a good management team with interesting clients in consumer electronics and automotive. The valuation of the company is cheap (5x ex-cash 2019 P/E) and the balance sheet is rock solid.

All these positives are currently being overshadowed by the US-China trade war as the company has 100% of its production in China and does 45.7% of its sales in North-America. While many companies try to downplay the impact of the trade-war Valuetronics cannot hide and the alternatives it is working on to offset the tariff impact will surely cause short-term disruption and increased costs.

YTD the share price is +12% as the market is hoping for a positive resolution to the US-China trade war. Management is cautious on macro political improvements as trade war friction is unlikely to dissipate soon. Given the weak outlook for its CE segment and no significant new customer wins in its ICE segment risk/reward does not seem very attractive despite good dividend yield and cheap valuation.

2. FRETAIL IN

We visit the large format stores of Future Retail (FRETAIL IN) fbb, Big Bazaar and Big Bazaar Gen Next, along with visiting stores run by Future Lifestyle Fashions (FLFL IN) Brand Factory and Central in Ahmedabad, Gujarat to understand some of the drivers behind SSSG of over 10% over the last 15 consecutive quarters. Our regional checks indicate the large format growth might be maintained in the future driven by loyalty programs like Future Pay. Interestingly the group has resorted to using its stores to mobilise funds for its fixed deposits, which could be a final indication that the planned of deal with Amazon.com Inc (AMZN US) is finally being called off.

3. Puregold Price Club: Steady Grower with Provincial Expansion Story

• Conference call with the IR of Puregold Price Club (PGOLD PM) reveals that SSSG grew healthily at 6.5% YoY in 9M18, thanks to personal income tax cut.
• The bigger growth driver is provincial expansion (outside Metro Manila), which would allow PGOLD to achieve mid-teen sales growth.
• There has been little to no sales impact from e-commerce as e-commerce penetration in Philippines is lagging even in the ASEAN context. 
• PGOLD trades at 18.3x 2019E PE, a 15% discount to peers average of 21.6x

4. Nongshim Holdco/Sub Trade: Current Status & Trade Approach

• Nongshim Sub took a beating yesterday. It lost nearly 5%. Holdco stayed flat. This made a 2σ jump. They are now at 253% of σ, nearly 200%p jump from 53% in a single day. It is true that China concerns are again being felt on many Korean F&B stocks. But there is no clear sign that we should seriously worry about Nongshim’s short-term fundamentals.
• Its local rival Ottogi is continuously making strides. But we are yet to see a long-short move on Nongshim Sub and Ottogi. Local institutions are still relatively supportive on Sub. There is no particular move on Sub shorting either. Sub’s 5% loss yesterday shouldn’t be indicative of any structural price correction.
• On a longer horizon (2Y), Holdco is still being undervalued relative to Sub. But this is the first time they are above +2.5σ in 120 days. I expect a quick mean reversion at this point. I’d have a long/short trade with a very short-term horizon. Just, Holdco liquidity can be an issue here again.

5. Sony: Mispriced, Misunderstood, or Both?

• Forward earnings will focus heavily on the debut of PS5, the performance of the new Spider-Man movie and other core content revenue streams for the company this year.
• Some see Sony as coasting on historically successes of the past, others see recent Disney and ATT deals acquiring content competitors, as a prelude to a play on Sony this year.
• Investor pressure to sell or spin off non-content businesses growing due to continued poor performance in mobile and possible profitable departure from semiconductor sector.