Industrials: Alliance Aviation Services, Korean Air Lines, Dongfang Electric, Komatsu Ltd, CJ Logistics, Cahya Mata Sarawak, KEC International and more

• Qantas Airways (QAN AU) has entered into a Scheme to buy smaller airline Alliance Aviation Services (AQZ AU).
• Alliance shareholders will receive $4.75 in Qantas shares or a 35% premium to last close. The consideration implies an equity value of A$764.5mn and an enterprise value of A$919.2mn.
• The Scheme is subject to shareholder and ACCC approval. The ACCC recently cleared Qantas’19.9% stake in Alliance after a three-year investigation.

• Korean Air will request the KDB and the KEXIM for early repayment before the step-up kicks in. Then, the creditors  decide conversion using Korean Air’s claim as an excuse.
• This is exactly the same as the case of HMM, whose stock price began to face corrections 7-10 trading days before the conversion announcement and peaked on the announcement date.
• So, aiming at the possibility of a conversion announcement coming out in the third week of May, I recommend gradually building up short positions starting next week.

• Alliance Aviation Services (AQZ AU) entered a SID with Qantas Airways (QAN AU). Shareholders will receive A$4.75 in Qantas shares for each Alliance share, 35.3% premium to 4 May close. 
• The key risk is approval from the ACCC, which will start a public review. On 5 April, the ACCC closed an investigation into Qantas’ acquisition of its 19.9% Alliance stake. 
• Alliance Aviation can pay an additional special cash dividend if ACCC approval takes time. The offer is attractive in the context of historical share prices and multiples.

• The 1Q22 result of Dongfang Electric (1072 HK) kick-started FY22 with an encouraging new record high quarterly profit and a good recovery in YoY new order momentum.
• We are excited to see DEC managed to control its selling, administrative and R&D costs with a slight 2.7% YoY growth, compared with a solid 29.8% revenue increase.
• Recurring pre-tax profit growth is estimated to be over 30% YoY, and its order backlog at around Rmb85.4bn, 1.8x its FY21 revenue. We consider its 7.7x FY22F PER very undemanding. 

• Komatsu reported 4QFY22 results on the 28th of April and recorded revenue of ¥787bn (6.2% above consensus) and OP of ¥94.5bn (13.1% above consensus). 
• They also guided for revenue to increase 7.1% YoY vs. HCM which guided for a 6.3% fall driving a significant and premature share price decline. 
• The market has corrected some of that fall as it appears to increasingly agree with our call that HCM’s guidance was nonsense conservatism.

• CJ Logistics, the largest logistics company in Korea, is facing four major headwinds which are likely to result in further downside risk for the stock in the next 6-12 months.
• The four major headwinds include greater competition from Coupang (CPNG US), lower e-commerce demand (parcel delivery), higher fuel prices, and higher interest rates.
• Amid the four major challenges, we believe the consensus earnings estimates are overly aggressive and they are likely to be revised down further in the next several months. 

• An opportune exit; maintain HOLD
• At USD120m EV (or USD109.5m equity value)
• Decent pricing, based on our estimates
• More details upon execution of definitive agreement

• KEC International (KEC Int) reported a poor set of numbers in Q4FY22 with revenues at Rs 4,275 Cr (down 2% YoY), EBIDTA of Rs 252 Cr ( down 29% YoY), and PAT of Rs 112 Cr (down 42% YoY)
• The company’s EBIDTA Margins declined to 5.9% in Q4FY22 from 7.2% in Q3FY22 and 8.1% in Q4FY21, primarily owing to an increase in material costs as well as interest costs during the quarter
• We value KEC International at 12.5x (14x earlier) FY24E EPS to arrive at a target price of Rs 385/share (Rs.555 earlier) implying an upside of 3% from the CMP and revise our rating from BUY to HOLD.

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