In today’s briefing:
- Perfect Medical: Correction Provides An Opportunity For Entry
- A Pair Trade Between LG Corp & LG Electronics
- Recruit Buyback – A Temporary Support to Falling Share Price
- Softbank Group – The Most Important Number in Q2 Results May Be ARM Royalty Revenue
- CanSino Biologics Inc (688185.CH/6185.HK) – Some Positive Progress in Business
- Energy China (3996 HK): Positive Developments in All Fronts
- Oil India (OINL IN): Value Trap, Avoid
- Sumitomo Dainippon Pharma Co (4506 JP): Myovant Is Crucial for Post-Latuda Growth Momentum
- Viavi Solutions Inc.: The Jackson Labs Acquisition & Other Drivers
- ARLO: Disconnected to Ongoing Growth
Perfect Medical: Correction Provides An Opportunity For Entry
- Post the massive correction in the China market, Perfect Medical Health (1830 HK) trades at 9.6x/6.9x PE FY23e/24e with a 10.4%/14.6% dividend yield assuming a 100% payout ratio.
- From interactions with the management, HK’s operations are in good health, with Q2 revenues normalizing to precovid levels. China has yet to recover as intermittent lockdowns plague its operations.
- With cash and financial investments over 550 mn HKD ( 16% of market capitalization ), the company has the opportunity to make accretive acquisitions to grow its business.
A Pair Trade Between LG Corp & LG Electronics
- In this insight, we discuss a pair trade between LG Corp (003550 KS) (go long) and LG Electronics (066570 KS) (go short).
- LG Electronics is likely to have continued weakening results, due to rising interest rates on the household disposable income in major countries.
- Our base case valuation analysis of LG Corp suggests an implied price of 93,905 won per share, representing 19% upside from current levels.
Recruit Buyback – A Temporary Support to Falling Share Price
- Recruit Holdings (6098 JP) announced a buyback yesterday for a maximum of 42m (2.55% of total shares outstanding) shares for an aggregate of JPY150bn from the market.
- Recruit’s shares closed at JPY4,257 per share at the end of yesterday’s trading, and shares have moved up almost 5% during today’s trade following the buyback announcement.
- This is Recruit’s second buyback in 2022 where some of its shareholders reduced their stakes during the previous buyback (tender offer agreements) in January this year.
Softbank Group – The Most Important Number in Q2 Results May Be ARM Royalty Revenue
- We’ve been pessimistic on prospects for ARM and recent news flow and share price performance hasn’t helped but a decent report from TSMC eases some of our concerns
- Softbank needs high teens royalty revenue growth for ARM and TSMC as a bellwether (+30% for Q3 and Q4 guidance) is better than AMD or Nvidia
- We remain more conservative on valuation ($37bn) than Softbank assuming high single-digit growth and c. 43% EBITDA margins
CanSino Biologics Inc (688185.CH/6185.HK) – Some Positive Progress in Business
- CanSino Biologics Inc (688185 CH)’s business has made some positive progress recently, including the launch of COVID-19 Vaccine for Inhalation, commercialization and development progress of MCV4/PCV13i, etc.
- CanSino’s technology platforms are very valuable and are above average level. Currently, there’re little potential domestic competitors, because CanSino’s products are newer, better and safer than domestic homogenized products.
- Even based on conservative forecast, CanSino’s valuation in HKEX is “ridiculously low”. Considering the downside risk in HKEX, CanSino A-share could be better option before valuation in HKEX becomes reasonable.
Energy China (3996 HK): Positive Developments in All Fronts
- China Energy Engineering (3996 HK) witnessed a good acceleration in quarterly new contracts in this year. We estimate current backlog equals to 6.4x its FY21 revenue.
- It is well geared towards China’s new energy development, as reflected by a 108.3% YoY surge in new energy contracts. Its pumped storage new contract value leaped 144x in 1H22.
- The spin-off of Gezhouba Explosive in the A-share market is progressing well with approval from shareholders in Sep. The stock’s 4.1x PER and 0.33x P/B look undemanding.
Oil India (OINL IN): Value Trap, Avoid
- Low valuations (3x Earnings, 8% cash yield) and an under supplied Oil market, nice value concoction
- However, large part of value hinges on growth beyond FY25E, execution challenges and regulatory intervention may necessitate additional debt to fund ongoing capex
- Thus deleveraging unlikely, narrowing TV for traditional fuels – risks both earnings and valuations
Sumitomo Dainippon Pharma Co (4506 JP): Myovant Is Crucial for Post-Latuda Growth Momentum
- Sumitomo Dainippon Pharma Co (4506 JP) offered to acquire Myovant Sciences (MYOV US), which was rejected due to low valuation. The company is unlikely to revise its offer for Myovant.
- As Sumitomo’s in-house drug candidates are still in clinical stages, the company needs Myovant’s already marketed products to maintain its growth momentum post Latuda patent expiry.
- Sumitomo is not expected to sell its existing 52% stake in Myovant. This will ensure that Myovant’s marketed products Orgovyx and Myfembree should continue to remain as Sumitomo’s growth drivers.
Viavi Solutions Inc.: The Jackson Labs Acquisition & Other Drivers
- Viavi had a strong performance in the final quarter of its fiscal year 2022 and the company delivered an all-around beat.
- For fiscal Q4 2022, the SE business’s revenue was constant from year to year.
- Strong NE bookings during the fiscal fourth quarter led to a seasonally stronger Q1 backlog and demand visibility.
ARLO: Disconnected to Ongoing Growth
- ARLO has the help of a product purchase agreement to smooth out lumpiness in consumer spending in the current macroenvironment
- While ARLO is targeting a higher income consumer with products that are priced higher than competition, there is still a risk that could have played out in September.
- Number of paid subscribers should continue to rise in the third quarter with possibility it could be materially higher than our forecast
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