Brief Growth Ideas: Short Haidilao (海底捞) Before Earning & Lock-Up Expiry and more

In this briefing:

1. Short Haidilao (海底捞) Before Earning & Lock-Up Expiry
2. Japan Tobacco: No Dire Consequences Despite Late Entry to Heated Tobacco
3. New Century Hotel (浙江開元酒店) Trading Update – Low Free Float, Poor Liquidity
4. SMC (6273 JP): Profit Decline Accelerates

1. Short Haidilao (海底捞) Before Earning & Lock-Up Expiry

Haidilao International, the largest Chinese cuisine player by valuation, was listed on September 26th last year and lock-up expiry will be on March 26th. The stock has returned 24% since listing. 

• As it heads into lock-up expiry, we will examine Haidilao’s shareholder structure and potential shares up for sale.
• Haidilao was included in the Hong Kong Connect Scheme on December 10th, 2018 and shares held by mainland investors have been consistently increasing.
• But we think Haidilao’s valuation has built in a perfect growth scenario.
• Risk of de-rating for Haidilao warrants a short position.

Our previous coverage on Meituan Dianping

• Haidilao IPO First Glance: Legendary Hot Pot Restaurant that Will Be Hot (Part 1)
• Haidilao (海底捞) IPO: Superior Metrics in a Scalable Segment (Part 2)
• Haidilao (海底捞) IPO: Near Term Rapid Growth but Deceleration Ahead (Part 3)
• Haidilao (海底捞) IPO: Appealing Valuation at the Low End for a Branded National Champion (Part 4) 
• Haidilao (海底捞) Post-IPO Trading Update: Not Much Upside from High End, Lessons from Meituan

2. Japan Tobacco: No Dire Consequences Despite Late Entry to Heated Tobacco

• Late entry to Japanese heated tobacco market resulted in Japan Tobacco (2914 JP) losing market share to peers
• New product launches to give Japan Tobacco a fighting chance against IQOS
• Early maturity of heated tobacco in Japan: a blessing in disguise for Japan Tobacco
• Pricing power is expected to be back on track in future
• PloomTECH will soon be ready to compete with IQOS at a global level
• More product offerings targeting different customer needs in reduced risk products category
• International segment volume growth driven by global flagship brands and acquisitions
• Market unjustly penalising Japan Tobacco for the early maturity of heated tobacco segment
• Transformation of dividend yield from industry worst to industry best
• Undervalued at 10.09x EV/Forward EBIT: DCF target price yields 21.8% upside

3. New Century Hotel (浙江開元酒店) Trading Update – Low Free Float, Poor Liquidity

Zhejiang New Century Hotel Management Group (1158 HK) (NCH) raised about US$136m at HK$16.50 per share, just slightly below the mid point of its IPO price range. We have previously covered the IPO in:

• New Century Hotel (浙江開元酒店) Pre-IPO – Improved Profitability Not Driven by Underlying Operations
• New Century Hotel (浙江開元酒店) IPO Review – Higher ADR and RevPAR than Peers but Margins Fall Short

In this insight, we will update on the deal dynamics, implied valuation, and include a valuation sensitivity table.

4. SMC (6273 JP): Profit Decline Accelerates

Downturns in the semiconductor, auto and other user industries have caught up with SMC. Sales were down 4.0% year-on-year in the three months to December (the first decline in more than two years) and the decline in profits accelerated, with gross profit down 5.4%, operating profit down 10.6% and net profit down 18.8%. Year-on-year comparisons are likely to remain difficult for at least another two quarters.

In December, we wrote: “Management reports that semiconductor-related demand is down in all markets and that auto-related demand is down in the U.S. Auto sales are also declining in China.” (SMC (6273 JP): Profits Start to Decline ) Last week, WSTS reported the first decline in semiconductor sales in 30 months and the Nikkei newspaper reported that “Japanese chipmaker Renesas Electronics will temporarily halt work at 13 of the company’s 14 production facilities, including all nine domestic plants, due to high inventory levels and possible impact as Chinese demand for automotive and machinery tools plummets.” On Friday, March 8, SMC’s share price dropped by 3%. 

SMC has left FY Mar-19 guidance unchanged, implying a 4.1% decline in sales and a 2.9% decline in operating profit in 4Q. In view of current trends, this looks over-optimistic. The shares are now selling at 17.8x our EPS estimate for FY Mar-19 and 18.6x our estimate for FY Mar-20. These multiples compare with a 5-year historical P/E range of 13.8x – 28.5x.