In today’s briefing:
- Fast Retailing: Another Beat Would Suggest That FR’s North America & Europe Expansion Is Viable
- Rex: Diversification or Deworsification?
- Xiabuxiabu (520 HK): GA Clean-Up Trade Not a Concern
- China Education Group (CEG) Completed the Placement for Potential M&As
- HRTech Sector Series: Hybrid Work Models and Metaverse to See More Prominence in 2023
- Darktrace: Undervalued Cyber Defense Unicorn. A Steep Discount Is Unjustified
- WDFC: The Floodgates of Inventory
- Creative Technology: After the Passing of Founder, Is the Company’s Independence at Stake?
Fast Retailing: Another Beat Would Suggest That FR’s North America & Europe Expansion Is Viable
- Although it looks quite challenging, we think Fast Retailing (9983 JP) should beat consensus when it reports 1QFY23 results on 12th Jan 2023.
- We think shares could briefly touch 2021 highs on a relatively strong beat as it would suggest that the company’s aggressive expansion plans in North America and Europe are viable.
- Thus, we would look to buy Fast Retailing with a short investment horizon. We see considerable downside risks over a full-year period.
Rex: Diversification or Deworsification?
- Rex International Holding (REXI SP) has announced further investments outside of its core oil&gas portfolio both related to its major shareholder. A major red flag.
- It is unclear whether these investments will bring real value to Rex as minority investors generally hate related party transactions without clear justification.
- The latest drilling campaign in Oman again encountered operational issues giving fuel to the bears that Rex is not capable of successfully operating its own fields.
Xiabuxiabu (520 HK): GA Clean-Up Trade Not a Concern
- Company’s second largest shareholder General Atlantic sold out entire holdings at 5.9% to 6.4% discount to Monday close.
- The placement reflected mainly General Atlantic’s attempt to time market to recoup a 10-year investment instead of any negative read of company fundamentals, in our view.
- Recent newsflow continues pointing to steady recovery in all business lines of Xiabu group. Its valuation discount relative to peers has not captured strong turnaround prospects. Sector top pick.
China Education Group (CEG) Completed the Placement for Potential M&As
- China Education Group (CEG) completed the placement of HKD1.61bn on Jan 9.
- CEG used to do 2-3 M&As per year and had a decent track record.
- CEG also has chances to acquire public companies or their assets.
HRTech Sector Series: Hybrid Work Models and Metaverse to See More Prominence in 2023
- This is the Third of HRTech sector series and the four companies that we have covered under this series have since reported earnings.
- HRTech market has undergone rapid changes and 2023 will bring in more value to the recent transformation such as Hybrid work models and metaverse that the industry has witnessed.
- Of the four companies, except for Recruit, other three continues to perform positively with Visional recording the highest growth among the four.
Darktrace: Undervalued Cyber Defense Unicorn. A Steep Discount Is Unjustified
- Darktrace is a cyber security and AI unicorn backed by leading VC firms. The company was founded in Cambridge, UK, in 2013 and crossed the $500M ARR mark in 2022.
- Darktrace (DARK LN) currently trades at ~4x EV/CY22E revenues, a steep discount relative to other US-based cybersecurity peers that trade at an average of ~9x EV/CY22E revenues.
- The cyber defense company achieved GAAP Op Margin and FCF Margin break-even in FY21 and FY22, with an opportunity to deliver profitable stellar growth in the coming years.
WDFC: The Floodgates of Inventory
- WDFC reported fiscal first quarter (November 2022) results where sales declined more than expected while past price increases helped gross margin rebound from the August quarter
- WDFC’s inventory maintained its incline reaching a new record and is now $119.1 million. We believe WDFC’s inventory hides the true cost of the business
- The lack of demand remains a headwind that is leading to higher inventory levels. The scale of increase in inventory should continue to play a factor on WDFC’s earnings quality
Creative Technology: After the Passing of Founder, Is the Company’s Independence at Stake?
- Sim Wong Hoo, founder, and CEO of Creative Technology (CREAF SP), passed away last week.
- Sim Wong Hoo controls 33% of Creative. He has two children but they are not involved in the company. What will happen to his stake is a big unknown.
- The IP portfolio of Creative Technology (CREAF SP) could be appealing to other technology companies. Given its large cash position, the Enterprise Value is only 34M USD.
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