Brief Industrials: Notes from the Silk Road: Smartgroup Corporation Ltd (SIQ.AX) and more

In this briefing:

1. Notes from the Silk Road: Smartgroup Corporation Ltd (SIQ.AX)
2. SK Hynix: Attractive at Current Level
3. Nidec (6594 JP): Recovery to Take Time, Valuations Still High
4. ECM Weekly (26 January 2019) – Maoyan, CStone Pharma, Polycab India, Hujiang Edu
5. Delhi International Airport: INR90 Billion Investment Planned

1. Notes from the Silk Road: Smartgroup Corporation Ltd (SIQ.AX)

• 2018 full results due on the 18^th February 2019: Since our initial report on 3rd September 2018, SIQ’s share price has declined some 21% versus the ASX All Ordinaries fall of circa 8%. With results due, we expect the market to refocus on Smartgroup and its good growth story. This is important as much of the focus for the group in the last two years has been on the acquisitions being made. To see management return focus to organic growth, post these acquisitions should help investor confidence in SIQ. Specifically concentrating on the cross-selling of its services whilst benefiting from Australia’s tight labour market and corporates chasing incremental cost savings can only be positives.
• Review and upgrade to forecasts: With the benefit of further time to review SIQ’s business progress and the composition of our forecasts, we have increased fiscal 2018 and 2019 EPS forecasts 10% and 12% respectively. Much of our thought process is at the SG&A line, whilst the view that the overall trajectory of earnings remains on track. 
• 2019 we expect to be a year of consolidation, with consistent growth: In the two years to the end of fiscal 2017, SIQ had made six acquisitions. These acquisitions were aimed at both industry consolidation, as well as complementary product build out. We expect 2019 to be a year where the benefits from these acquisitions are exhibited in both the bottom and top-line growth. We expect this even though 2019 may present macro challenges. 
• We reiterate our view that SIQ offers Growth at a Reasonable price: SIQ’s forward multiples are positive for a company which has posted a long term book value growth rate of circa 7%  (net of dividend) and is forecast to post a similar rate 2019 and in 2020. Based on our 2019 EPS forecasts SIQ should be able to deliver circa A$0.62/share, which implies 18% YoY growth and a 13 times P/E. 

2. SK Hynix: Attractive at Current Level

Multiple news article mentioned SK Hynix’ weak Q4 2018 numbers due to the slowdown in the smartphone markets but the fact remains that:

1. smartphone is the dominant communication tools
2. smartphone penetration still has room to grow
3. current model of smartphone is likely to remain the same for the next foreseeable future
4. lower end smartphones will likely be the next growth driver

In this report we will discuss the following:

1. Q4 2018 result

2. Price action in 2018

3. Margin comparison with the peers

4. Exposure to the growing affordable smartphone segment

3. Nidec (6594 JP): Recovery to Take Time, Valuations Still High

After dropping to a 52-week low of ¥11,405 on January 17 – the day after management announced a large downward revision to sales and profit guidance – Nidec rebounded to close at ¥13,055 on Friday, January 25. The latter price is 30% below the ¥18,525 peak reached a year earlier. Both the shock of the downward revision and the reflexive optimism of believers in the company now seem to have been discounted.

Consolidated sales and profits dropped abruptly in the three months to December and are expected to drop further in 4Q of FY Mar-19 due to weak demand in most regional markets, inventory write-downs and restructuring costs. Nidec is already reconfiguring its global supply chains, shipping products to the U.S. from Mexico and Europe instead of from China and planning to build factories to make motors for electric vehicles in Mexico and Poland in addition to China.

With most of the one-off expenses out of the way, profits should start to recover in FY Mar-20. Sales, on the other hand, seem likely to decline further due to weak unit demand and pricing for HDD spindle motors, falling auto production in China and elsewhere, and weakness in other industrial and commercial markets. Recovery will depend on U.S.-China trade relations and the state of the world economy, and new acquisitions that cannot be predicted. As things stand now, we expect sales to pick up going into FY Mar-21. In the long run, the company should continue to benefit from the electrification of the auto market and factory automation.

At ¥13,055, the shares are selling at 34x management’s EPS guidance for FY Mar-19, 32x our estimate for FY Mar-20 and 30x our EPS estimate for FY Mar-21. Projected EV/EBITDA multiples for the same three years are 18x, 17x and 15x. Price/book value as of the end of December is 3.9x. The dividend yield is less than 1%. Over the past few years, the P/E has found support at 20x, EV/EBITDA at 10x and the PBR at 2.5x. The January 17 low put the shares on 30x management’s new EPS guidance for this fiscal year.

4. ECM Weekly (26 January 2019) – Maoyan, CStone Pharma, Polycab India, Hujiang Edu

Aequitas Research puts out a weekly update on the deals that have been covered by Smartkarma Insight Providers recently, along with updates for upcoming IPOs.

Accuracy Rate:

Our overall accuracy rate is 71.9% for IPOs and 63.8% for Placements 

(Performance measurement criteria is explained at the end of the note)

No new IPO filings

Below is a snippet of our IPO tool showing upcoming events for the next week. The IPO tool is designed to provide readers with timely information on all IPO related events (Book open/closing, listing, initiation, lock-up expiry, etc) for all the deals that we have worked on. You can access the tool here or through the tools menu.

News on Upcoming IPOs

• Asia’s thirst for beer adds fizz to mega-brewer’s plans for IPO
• Chinese cryptocurrency exchanges seek reverse mergers in Hong Kong
• Market, bankers pin hope on Chalet Hotels for breaking lull in IPO launches
• Hong Kong exchange head clarifies listing rules as IPO hopes dim for cryptocurrency giant Bitmain

Smartkarma Community’s this week Analysis on Upcoming IPO

• CStone Pharma (基石药业) IPO: Strong Assembly and Backing (Part 1)
• Maoyan Entertainment IPO Valuation: Press the Skip Button
• Hujiang Education (沪江教育) Pre-IPO – Spending More than It Earns
• Polycab India Limited Pre-IPO – Market Leader with Steady Growth but with a Few Unanswered Question
• Maoyan Entertainment (猫眼娱乐) IPO: Turning Profitable, Thoughts on Valuation
• Ecopro BM IPO Preview: The World’s #2 Player in the NCA High Nickel-Based Cathode Materials

List of pre-IPO Coverage on Smartkarma

5. Delhi International Airport: INR90 Billion Investment Planned

Delhi International Airport Limited (0180331D IN) has announced that it will be investing INR90 bn in the busiest aerodrome in India over the next three and a half years. This investment is aimed at boosting the passenger handling capacity up to 100 million passengers per year and is expected to be funded using bank loans and new debt instruments. The investment will affect the bond spreads for the company. Nevertheless, a change in regulations means that new baggage charges can be levied on every flight, putting the company in a better position to generate more cash in the future. We maintain our NEUTRAL recommendation.