Brief Industrials: HK Connect Discovery – January Snapshot and more

In this briefing:

1. HK Connect Discovery – January Snapshot
2. MacroAsia (MAC PM) – Company Visit Highlights Short-Term Headwinds but Core Business on Solid Ground
3. Hyundai Heavy/DSME Event – Comprehensive Summary
4. SCSK (9719 JP) Launches Buyout of Subsidiary VeriServe (3724 JP)
5. Misumi Group (9962 JP): Another Downward Revision

1. HK Connect Discovery – January Snapshot

This is a monthly version of our HK Connect Weekly note, in which I highlight Hong Kong-listed companies leading the southbound flow weekly. Over the past month, we have seen the flow turning from outflow to inflow. Our previous insights published in Jan can be found in the links below. In this insight, we will focus on the month flow to get a bigger picture vs the weekly flow.

Our January Coverage of Hong Kong Connect southbound flow

• HK Connect Discovery Weekly: CR Beer, Great Wall Motors, and Kingsoft (2019-01-07)
• HK Connect Discovery Weekly: China Tower, Tencent, New China Life (2019-01-11)
• HK Connect Discovery Weekly: Tencent, Kingsoft, and Yichang HEC (2019-01-18)
• HK Connect Discovery Weekly: CRRC, Car Inc/ UCar (2019-01-25)

2. MacroAsia (MAC PM) – Company Visit Highlights Short-Term Headwinds but Core Business on Solid Ground

We met with MacroAsia management in Manila to discuss their most recent 3Q18 results and outlook for the coming year. The key takeaways were that: growth from LTP would be underpinned by business from PAL Express’s new A321 Neo and turboprop fleet; the ground handling and catering businesses will see growth from mid-March as PAL contracts with Sky Kitchen and Sky Logistics are terminated and awarded to MacroAsia; and lastly, that margin pressure due to cost inflation in the catering business should normalize during the second half as agreements are renegotiated.

Our estimated FY18 NPAT of P948mn is broadly in-line with management guidance and implies a valuation of 23.5x trailing P/E. We still that despite the recent fall in share price, this valuation will come under pressure until the company can demonstrate a return to earnings growth after a challenging year.

3. Hyundai Heavy/DSME Event – Comprehensive Summary

• Below is a comprehensive summary of the Hyundai Heavy/DSME event that engulfed the Korean market yesterday. This is a multi step process. Details of most events will be determined after one month of holdback period.
• I will provide a trade approach on each name in a follow-up post.

4. SCSK (9719 JP) Launches Buyout of Subsidiary VeriServe (3724 JP)

Today after the close, Sumitomo Corp (8053 JP) consolidated subsidiary SCSK Corp (9719 JP) announced a Tender Offer to buy out minorities in Veriserve Corp (3724 JP).

SCSK currently holds 2,900,000 shares or 55.59% of voting rights. 

The Tender Offer is at ¥6,700/share which is a 43.6% premium to the last traded price of the day before the announcement (¥4,665), a 44.6% premium to the one-month average, a 28.3% premium to the 3-month average, and a 36.6% premium to the 6-month average.

The price does not seem egregiously unfair, but for investors who own it who think it has another double in it this year they might get upset.

This is one of those situations with which the currently underway METI M&A Fairness enquiry might have a problem.

And if you care about the fairness of the M&A bidding and response process, and ensuring that minority investors get their interests defended by process, have a look at the METI Fair M&A panel and its consultation paper and by all means offer your comments. 

5. Misumi Group (9962 JP): Another Downward Revision

Misumi Group sold off after announcing poor 3Q results and another downward revision to FY Mar-19 sales and profit guidance, but bounced right back to finish at ¥2,480 yesterday (January 31), which is 30x management’s new EPS estimate for this fiscal year. Price/book value (as of the end of December) is 3.6x. The indicated dividend was cut in line with guidance, maintaining management’s 25% payout ratio target but resulting in a dividend yield of 0.8%.

Operating and net profits are now expected to decline. Management is guiding for a 7.1% increase in sales in FY Mar-19 as a whole, but monthly data shows year-on-year growth dropping to 5.2%  in November and 3.1% in December. Factory Automation sales were unchanged in November and down 1.3% in December, 

In the three months to December, operating profit dropped 17.8% year-on-year on a 5.7% increase in sales, with Factory Automation profit down 16.9% and VONA profit down 35.4%. Inventory was up while receivables were down. Sales growth in China turned negative. 

The company continues to invest in production capacity, logistics and IT, aiming to expand its Factory Automation and VONA e-commerce businesses in Japan, Asia, America and Europe. The goal is to create a unified, cloud-based, rapid-response distribution system with the world’s largest components and production materials database. The anticipated success of this plan appears to explain both the rebound in the share price and relatively high current valuation, but with the China growth trajectory broken and the economic outlook uncertain, it may take longer and come with lower margins than originally expected.