In today’s briefing:
- Square Enix – Eidos Sale Removes Downside Risks
- Japan Tobacco High Conviction Update: Russia Is Less Than Markets Feared & There’s Upside to DPS Est
- HSBC – Will All Cylinders Ever Fire?
- Novatek (3034.TT): 1Q22 Results/ 2Q22 Outlook- The Outlook Seems Better than Feared in 2022. .
- Kunlun Energy (135 HK): A Record Quarter for Kunlun Gas
- China Comm Const (1800 HK): Grossly Undervalued by the Market
- BGF Retail & GS Retail: Korean CVS Plays Likely to Better Withstand Higher Inflation
- SHEN: Rising Costs, Declining Cash
- Shenzhen Mindray Bio-Medical Electronics (300760.CH) – Still a “Safe Play” Despite Growth Slowdown
- ATNI: Sustaining Growth for Free Cash Flow
Square Enix – Eidos Sale Removes Downside Risks
- Square Enix announced the of sale Eidos Interactive, Crystal Dynamics, Square Enix Montreal and associated IPs to Embracer for $300m.
- We had been puzzling over Square Enix’s strangely low guidance despite excellent momentum in its MMO business for some time.
- Considering the underperformance in HD Games profitability and this sale we think we can now put two and two together.
Japan Tobacco High Conviction Update: Russia Is Less Than Markets Feared & There’s Upside to DPS Est
- Japan Tobacco (2914 JP)’s 1Q22 was stronger than expected with revenue and OP surpassing consensus by 5.2% and 20.0% respectively despite the Russia Ukraine war situation.
- Although the company has maintained the semi-annual dividend at ¥75.0 per share, we predict there could be an upside to the DPS guidance during the next three quarters.
- With OP guidance of ¥534.0bn next year, we think Japan Tobacco should trade around ¥4,000-4,500 per share, indicating an upside of around 82-104%.
HSBC – Will All Cylinders Ever Fire?
- Latest earning show all of margin gain offset by worsening impairment costs
- One may argue that in the coming year the bank will finally fire on all cylinders
- It is not clear if recommended break-up of HSBC will come through or if it would help
Novatek (3034.TT): 1Q22 Results/ 2Q22 Outlook- The Outlook Seems Better than Feared in 2022. .
- Novatek’s revenue was NT$36.512bn in 1Q22, which was 38.5% YoY and 62.6% QoQ. It was 50.73%/36.73%/30.5% GM/OPM/NM in 1Q22, which was higher than our prior expectation of 43.6%/27.3%/22.3% in GM/OPM/NM.
- In our views, we revise up to be revenue/GM as NT$38.7bn/50.98% in 2Q20.
- As the inflation, 5G, Russia-Ukraine war did change the landscape, the outlook seems not that so much worse in 2022.
Kunlun Energy (135 HK): A Record Quarter for Kunlun Gas
- Healthy 17.2% growth in 1Q22 net profit of Kunlun Gas, the most important subsidiary of Kunlun Energy (135 HK), provides a welcoming evidence to ease market concerns on costs.
- While gross margin was down 0.2pp YoY, it expanded by 0.4pp QoQ. Key cost items including selling, administrative and R&D are all under control, boosting EBIT margin by 0.5pp YoY.
- 1Q22 is a record quarter for Kunlun Gas, and gearing stays comfortable with strong operating cash flow. We believe such set of result signals good 1Q22 for Kunlun Energy.
China Comm Const (1800 HK): Grossly Undervalued by the Market
- China Communications Construction (1800 HK) has bucked the trend of weaker earnings growth in the last two quarters by posting a healthy 17.7% YoY net profit growth for 1Q22.
- While gross margin contracted slightly, the good control on selling and administrative expenses have partly absorbed margin contraction. Its new contract value for 1Q22 has also reached record high.
- With government’s aggressive special purpose bond issue and infrastructure investment, we expect new contract momentum to pick up. Trading at 3.2x PER and 0.22x P/B, CCCC is massively undervalued.
BGF Retail & GS Retail: Korean CVS Plays Likely to Better Withstand Higher Inflation
- We believe BGF Retail and GS Retail are strong turnaround plays amid the end of the social distancing policies in Korea.
- These CVS plays are well positioned to withstand higher inflation rates and higher product price increases among the various retail channels in Korea.
- Valuation multiples of GS Retail have declined significantly in the past five years. Their valuations have become more attractive as compared to lofty levels 4-5 years ago.
SHEN: Rising Costs, Declining Cash
- SHEN reported an unexpected loss for the first quarter due to new system upgrades and the cost structure could remain elevated for the next 20 months
- SHEN’s revenue is pacing ahead of expectations on higher Glo Fiber subscription numbers. SHEN’s business plan requires additional capital expenditure spending to expand the fiber network for Glo Fiber
- The higher expenses in the quarter reflect SHEN implementing upgrades to multiple systems companywide. The new software would save $2 million annually after the 20-month phase-in process is concluded
Shenzhen Mindray Bio-Medical Electronics (300760.CH) – Still a “Safe Play” Despite Growth Slowdown
- In 2021/22Q1, Mindray’s 20%+ growth rate is not easy in this difficult/complicated environment, but the market hopes to see stronger data and a fresh logic of growth to restore confidence.
- After China’s “new infrastructure” projects finish, how to maintain its 20%+ growth could be a challenge in the long term if Mindray couldn’t make breakthrough in internationalization or innovation.
- However, Mindray is still a “safe play”. Its current PE/TTM is also more reasonable, but definitely not undervalued. It would be much better to long Mindray at a lower valuation.
ATNI: Sustaining Growth for Free Cash Flow
- ATNI reported first quarter results where a seasonal decline in managed services (low margin equipment) had an impact on revenue, but adjusted EBITDA remained on track with our estimates
- ATNI is investing in its fiber network to grow the number of subscribers. ATNI’s Alaskan business should continue to maintain an uptrend in the number of subscribers throughout the year
- ATNI is reiterating full year adjusted EBITDA of $165 million to $170 million. We have increased our forecast to $167 million from $166 million
Related tickers: Square Enix Holdings (9684.T), Japan Tobacco (2914.T), HSBC Holdings (HSBA.L), Novatek Microelectronics Corp (3034.TW), Kunlun Energy (0135.HK), China Communications Construction (1800.HK), GS Retail (007070.KS), Shenandoah Telecommunications Company (SHEN.O), Shenzhen Mindray Bio-Medical Electronics (300760.SZ), ATN International (ATNI.O)
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