In today’s briefing:
- The BIG March 2023 “Wednesday Thursday Trade”
- S.M. Entertainment: Proration Musings
- 1373 HK: Value Play 8x PE, Dividend Yield ~10%, 20% of Mkt Cap in Cash
- Del Monte Pacific (DELM SP): Deep in Debt, Slipping Margins, Rising Rates – Perfect Storm?
- Mitsubishi Motors (7211) | Modelling the Mid Term Plan
- Korea Kolmar: When Will People in Korea Stop Wearing Masks?
- Pinduoduo: Cost Cutting Wearing Out, Margins Heading Towards Our Steady State Target of 6-7%
- Shortlist of High Conviction Ideas – Income, Value, Margin of Safety
- Russell 2000 (IWM) Testing $170; Downgrading Energy; 10-Yr Treasury Yield Testing 3.4% Support
- Fu Shou Yuan (1448.HK) – 2022 Results Missed Expectations, but the Outlook Remains Positive
The BIG March 2023 “Wednesday Thursday Trade”
- Every year it’s the same trade. But it isn’t really. But it kinda is. This year it is Wednesday and Thursday. There are risks to the analysis – notably allocation.
- But, ceteris paribus, it is still possibly a ¥1,580,876,450,407 buying spree to take place on one day into the close later this month. Or something close to it.
- And for a two-day period, over the last ten years, the average return is 1.60% on these two days with a 9:1 win ratio. Lots of angles here.
S.M. Entertainment: Proration Musings
- After HYBE (352820 KS) conceded to Kakao Corp (035720 KS) earlier this month, S.M.Entertainment Co (041510 KS)‘s shares have declined 23%.
- Kakao’s Partial Offer of ₩150,000/share closes on the 26 March.
- Unadjusted proration is 36.8%, conservatively rising to 48.5%. It may settle at 61% if HYBE maintains its position – but that is probably a tad optimistic.
1373 HK: Value Play 8x PE, Dividend Yield ~10%, 20% of Mkt Cap in Cash
- International Housewares Retail (1373 HK) is an interesting value/growth (5-10% CAGR) play with a high-dividend yield of >10%, trading at 8.1x FY23 PE.
- The claim to fame for this company is the investment of legendary HK mid/small cap investor David Webb (who has a 6.9% stake in this company).
- At a market cap of 2 bn HKD, the company has about 400 mn HKD net cash (20% of market cap), making it 6.9x ex-cash PE.
Del Monte Pacific (DELM SP): Deep in Debt, Slipping Margins, Rising Rates – Perfect Storm?
- Del Monte Pacific reported a steep decline in profits led by a fall in gross margins and a steep rise in interest costs for the quarter ending 31st Jan 2023.
- The company’s gearing has risen to 5.8x led by (1) the refinancing of preference shares and expensive debt (2) acquisition of the Kitchen basics brand (3) increased working capital loan.
- Del Monte’s precariously bloated debt levels and tighter operating conditions, given inflation-led cost pressures and moderating demand, in the current high-interest rate environment heightens the company’s financial risk.
Mitsubishi Motors (7211) | Modelling the Mid Term Plan
- The stock is down sharply over the past few weeks as investors price in higher interest rates and weaker spending on durables
- Mitsubishi recently unveiled its mid-term plan and further details on its electrification strategy
- If management can hit its targets, the stock would have significant upside. We have our doubts
Korea Kolmar: When Will People in Korea Stop Wearing Masks?
- The Korean government removed mask mandates for public transportation in Korea as of Monday, 20 March including in buses, taxis, and subways.
- There are four major reasons why it will take much longer time for most people in Korea to stop wearing masks.
- As millions of people stop wearing masks in the coming year, there will be clear, visible higher demand for cosmetics, which should benefit companies such as Korea Kolmar.
Pinduoduo: Cost Cutting Wearing Out, Margins Heading Towards Our Steady State Target of 6-7%
- With the impact of cost-cutting and monetisation wearing out, consensus looks overly aggressive to expect revenue and OP CAGRs of 24% and 35% respectively over the next two years.
- Based on Pinduoduo (PDD US)’s revenue and cost trends discussed below, we think the steady state OP margin could be substantially lower than consensus.
- Expecting consensus to downgrade expectations, we don’t think it is worthwhile paying up to 45.0x FY+2 OP (on our steady-state OP margin) for Pinduoduo at its current EV of $80.5bn.
Shortlist of High Conviction Ideas – Income, Value, Margin of Safety
- Over the past 12 months, we have written insights on 14 stocks in the small/mid-cap space with high dividend yields, inexpensive valuations, and a great margin of safety.
- We re-examine these to shortlist 3-4 names of our highest conviction amidst the current macroeconomic climate.
- Our high conviction shortlist includes Water Oasis (1161 HK), Perfect Medical Health (1830 HK), The Keepers Holdings (KEEPR PM), and Taste Gourmet (8371 HK).
Russell 2000 (IWM) Testing $170; Downgrading Energy; 10-Yr Treasury Yield Testing 3.4% Support
- Our 2023 outlook remains unchanged; we see the market indexes consolidating within broad horizontal ranges, and we expect the top-end of the range to be 4165-4200 on the S&P 500.
- The bottom-end of the range is at the 2022 lows (3490). Another possible support level we are monitoring is at the December 2022 lows (3765).
- The Russell 2000 (IWM) is testing important support at $170 (the Dec. 2022 lows and the prior downtrend from 2022), suggesting this is a logical time for an oversold bounce.
Fu Shou Yuan (1448.HK) – 2022 Results Missed Expectations, but the Outlook Remains Positive
- Fu Shou Yuan (1448 HK)’s 2022 results were below our expectations. Affected by the 22Q4 pandemic, the performance recovery in 22H2 was lower than expected.
- The high demand due to soaring death rate since 22Q4 would be reflected in 23H1 results. Together with low base last year, strong performance rebound in 23H1 is worth expecting.
- The reason behind short-term trade and long-term hold is different. But considering the Company has no obvious flaws in its long logic, every pullback can be a good buying opportunity.
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