Daily Brief Industrials: Polycab India , Taiwan High Speed Rail, Chemring Group PLC, XP Power Ltd, Amaero International Ltd and more

• Polycab India (POLYCAB IN) is in the limelight on the back of Income Tax investigation carried in December 2023 which revealed several accounted transactions.
• In a circular, it is hinted that the IT department has detected unaccounted cash sales worth INR 10 bn, unaccounted cash payments made by distributors, and some non-genuine expenses.
• However our forensics framework does not hint at any alarming red flags, apart from low FA turnover ratio, stock with third parties and board composition.

• Taiwan High Speed Rail (2633 TT) (THSR) solid traffic growth and high utilization rate are driving strong profits and cashflows which will be mostly paid out as dividends       
• We view THSR as a government-backed perpetual bond masked as equity as it has a minimum profit guarantee, a firm dividend mandate, and impetus to disperse excess cash to shareholders 
• The current yield margin against the 10-year bond is the widest since its IPO and is forecasted to widen further with strong profit growth. Attractive for alternative fixed-income investors 

• I continue to believe events in Ukraine, Israel, and China have broader implications than are appreciated by markets today.
• For now, my takeaways are simple (from most to least confident): own defense stocks and broad reshoring winners, and don’t get caught off-guard by tail events.
• Some notable additions (all long): Chemring (UK-based defense company that Upslope previously owned and re-added), North West Co (Canadian specialty retailer), nVent Electric (electrical connection/protection supplier), and Intel (leading semiconductor device manufacturer). Upslope also exited Man Group (UK-based alt. asset manager).

XP Power closed FY23 with higher-than-expected revenue, benefiting from the delay to relocation of its California facility, which pulled shipments worth c £5m into Q423 and pushed c £12m capex into Q124. Q423 order intake was higher than we forecast, with upside from semiconductor equipment customers partially offset by weaker demand from healthcare and industrial customers. Timing issues and currency resulted in lower-than-expected gearing at end-FY23, although it is expected to rise in H124 before reducing again in H224. Management expects market conditions to improve through 2024, with results weighted to H2. We maintain our forecasts pending FY23 results in March.

• Amaero International Ltd (ASX:3DA) is a global specialist in advanced materials manufacturing for the defence, aerospace, and other industrial sectors.
• The company is developing an 800+-tonne a year critical metals alloy powder manufacturing facility in Tennessee, USA, with the initial focus on producing refractory alloy powder, C103, a critical metal powder used in hypersonics weaponry, strategic metals and satellites.
• The company is moving apace with its planned commercialisation, recently announcing it had secured A$7.5m in corporate financing and that it had executed a binding purchase order for its second gas atomiser, the next generation Electrode Induction Melting Inert Gas Atomiser (or EIGA premium).