In today’s briefing:
- Hang Seng Index Rebalance Preview: 80 Member Target Achieved; What Next?
- Costa Group (CGC AU): Paine Schwartz Wants It Back
- Perfect Medical Management FY23 Concall: Highlights Bright Outlook for FY24, Aggressive Expansion
- Kao (4452) | Is It Time to Buy This Dividend Aristocrat?
- Rakuten: An Attractive Value Opportunity After 80% Value Decline in 8 Years
- Yachiyo Industry (7298 JP): Honda’s Pre-Conditional Tender Offer
- Costa Group (CGC AU): Paine Schwartz’s Indicative Proposal
- Shenzhou (2313 HK): Contract Mfr for Leading Sportswear Brands Facing Challenging Demand Outlook.
- Fenbi (2469 HK): Rightfully Sold, Wrongfully Punished
- [PDD (PDD US, BUY, TP US$88) TP Change]: Facing Stiff China Competition and Rising Temu Costs
Hang Seng Index Rebalance Preview: 80 Member Target Achieved; What Next?
- We finally got to 80 Hang Seng Index constituents in June. Now comes the next step of moving up to 100 index constituents though there is no timeline for completion.
- The conclusions of the market consultation on the inclusion of foreign stocks in the Hang Seng Index should be announced soon though implementation could start only in December.
- We highlight 10 potential inclusions to the index with passive trading impact varying from 1.5-5.6 days of ADV. There are large shorts on some of the stocks.
Costa Group (CGC AU): Paine Schwartz Wants It Back
- Costa Group Holdings (CGC AU) listed in 2015 when Paine & Partners sold 40% of its stake in the company.
- Paine Schwartz Partners bought a 13.84% stake last year, increased it in March, and has now made an offer to buy out the remaining shares at A$3.5/share in cash.
- Short interest was over nearly 11 days of ADV to cover and short covering could take the stock higher sooner. This is a buy here.
Perfect Medical Management FY23 Concall: Highlights Bright Outlook for FY24, Aggressive Expansion
- We spoke with the management of Perfect Medical Health (1830 HK). The key highlight is a steady recovery for FY24e and an overall expansion of 60% in three years.
- Expansion plans in HK (75% of revenue) have commenced, with ten centers opening over the year, adding to the existing 22 HK centers (one already opened in June 2023).
- They also highlighted an aggressive long-term goal of making one bn HKD of profit by FY26 (Mkt cap: 4.8 bn HKD) and short-term guidance of 30-40% profit growth for FY24e.
Kao (4452) | Is It Time to Buy This Dividend Aristocrat?
- Kao has the lonest period of consecutive earnings growth in the Nikkei’s new “Consecutive Dividend Growth Stock Index”
- With a 2.8% yield and a long history of raising its dividend, Kao should definitely be on the income investor’s radar screen
- Despite the recent underperformance of the stock (-4% ytd), Kao does not represent compelling valuations
Rakuten: An Attractive Value Opportunity After 80% Value Decline in 8 Years
- Rakuten Group (4755 JP), having experienced an 80% decline in value over the last 8 years, now emerges as an enticing prospect for value investors.
- The combined fair value of Rakuten’s Cards, Bank, and Mobile businesses now surpasses 100% of the company’s market capitalization.
- Rakuten Ichiba, valued at ¥600bn, appears significantly undervalued when compared to ZOZO Inc (3092 JP) and MonotaRO Co Ltd (3064 JP), which hold approximately 2.0x Rakuten Ichiba’s valuation.
Yachiyo Industry (7298 JP): Honda’s Pre-Conditional Tender Offer
- Yachiyo Industry (7298 JP) has recommended Honda Motor (7267 JP)’s pre-conditional tender offer of JPY1,390 per share, a 17.5% premium to the undisturbed price.
- Post-Completion, Honda will transfer a 81% stake to Samvardhana Motherson Automotive Systems Group BV. The pre-conditions relate to various country approvals (China, the US, Brazil, and India).
- The offer is expected to open in October. Achieving the 66.67% minimum ownership ratio requires a 32.6% minority acceptance rate which is doable as the offer is reasonable.
Costa Group (CGC AU): Paine Schwartz’s Indicative Proposal
- Costa Group Holdings (CGC AU) has disclosed an indicative non-binding proposal from Paine Schwartz Partners at A$3.50 per share (A$3.54 including potential interim dividend).
- The Board has granted eight weeks of non-exclusive due diligence. The due diligence, which started on 6 June, ends on 1 August.
- The offer price is attractive compared to peer multiples and historical trading ranges. At the current price of A$3.35, the gross spread is 4.5% (5.7% including dividend).
Shenzhou (2313 HK): Contract Mfr for Leading Sportswear Brands Facing Challenging Demand Outlook.
- Key customers & their retail partners battling excess inventory, waning consumer demand, and market share losses in certain geographies
- Plans for capacity expansion amid demand uncertainties and alt data and macro picture may prove aggressive and along with risks of reshoring/nearshoring & friend-shoring may prove margin dilutive
- Consensus expectations for 2H23 and 2024 appear overly optimistic and valuation is not cheap given the growth profile
Fenbi (2469 HK): Rightfully Sold, Wrongfully Punished
- Fenbi Ltd (2469 HK) is a newly listed China edtech company that focuses on tutoring for China civil servant exams.
- The company’s share price was caught by a perfect storm in June, dropping by as much as 70% during the month.
- Very interesting opportunity to have exposure to a quality company in a sector that is very different from K12 tutoring.
[PDD (PDD US, BUY, TP US$88) TP Change]: Facing Stiff China Competition and Rising Temu Costs
- We expect PDD to report 1Q23’s revenue and non-GAAP net income (5.4%) and (5.6%) vs. consensus, respectively.
- Taobao/Tmall and JD launched more subsidy campaigns in 2Q23 to strengthen their low-cost mindsets among customers, while PDD remains to be more restrained, which might lead to decelerating top-line growth.
- We cut PDD’s FY23 EPS by 3.7% and TP to US$ 88 on slower 2Q23 top-line growth and increasing Temu costs, but maintain its BUY rating.
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