Brief Industrials: U.S. Equity Strategy: Positive Outlook Intact; Tech Leading and more

In this briefing:

1. U.S. Equity Strategy: Positive Outlook Intact; Tech Leading
2. China Tower. How Far Will It Rally?
3. Hyundai Autoever IPO Bookbuilding: Surprising Results, Local Street Bets on Autoever/Glovis Merger
4. Kosaido (7868 JP) – Reno Goes Bigger But TOB Price (This Time) Is Final So What Next?
5. Re-Launching Coverage of ZTO Express with Sell Rating and US$13.31 Target Price

1. U.S. Equity Strategy: Positive Outlook Intact; Tech Leading

The S&P 500 is working through 2,817 resistance and our technical work continues to support an overall positive outlook. As markets improve in Europe and in EM countries, U.S. markets in turn should get a tailwind of improved global equity market conditions.  In today’s report we highlight attractive Groups and stocks within Technology: Large- and Mid-Cap Semiconductors Large/Mid-Cap Semi Equip. (TE-04), Software, Enterprise Applications (TE-42), and Software, Design Solutions (TE-46). List of charts included: Intel Corp (INTC US) $TSM, Texas Instruments (TXN US), Analog Devices (ADI US)  Xilinx Inc (XLNX US)  Advanced Micro Devices (AMD US)  Microchip Technology (MCHP US)  Skyworks Solutions (SWKS US)  Marvell Technology Group Ltd (MRVL US)  On Semiconductor (ON US)  Monolithic Power Systems, Inc (MPWR US)  ASML Holding NV (ASML NA) , Applied Materials (AMAT US)Lam Research (LRCX US)  Teradyne Inc (TER US)Mks Instruments (MKSI US)Microsoft Corp (MSFT US)Oracle Corp (ORCL US)Sap Se Sponsored Adr (SAP US)Now Inc (DNOW US)Workday Inc Class A (WDAY US) .

2. China Tower. How Far Will It Rally?

China Tower (788 HK) has rallied strongly in recent months and the question raised repeatedly in recent client meetings was “how much further is China Tower likely to rally?”. Chris Hoare sees China Tower’s position as unusual as the price moves are not driven by earnings upgrades or changed 5G expectations. Rather is is a sustained move post the IPO when the information in the market was incomplete and expectations were much lower. We were negative at the time of the IPO but changed our views as more information became available.  We remain positive on the scope for revaluation in China Tower given its rapid revenue growth and low valuations vs EM peers. While the recent results were somewhat disappointing, we see good upside as the market factors is lower capex and higher returns.

3. Hyundai Autoever IPO Bookbuilding: Surprising Results, Local Street Bets on Autoever/Glovis Merger

• Subscription rate is 797 to 1. Offer price was fixed at ₩48,000, substantially higher than the upper end. Deal size is now ₩168.5bil. Company value is put at slightly higher than ₩1tril. Demands are spread out pretty well between long-term funds and hot money and local and foreign investors as well. All of the orders are universally placed at 75% of upper end or higher.
• Local street is betting on Autoever/Glovis merger not long after this IPO. That is, HMG is still wanting the initial Glovis/Mobis merger plan. To better manage to win shareholder support, they must be thinking that bigger Glovis can be an answer. This means HMG should do whatever it takes to make Autoever bigger in the immediate future.
• This is what local street is betting on and why they went really aggressive on this IPO. As witnessed in the bookbuilding results, this street mentalitywon’t be changed any time soon. We should expect even stronger prices after new shares are listed on Mar 28.

4. Kosaido (7868 JP) – Reno Goes Bigger But TOB Price (This Time) Is Final So What Next?

The quietly disputed Tender Offer MBO for Kosaido Co Ltd (7868 JP) continues on its merry way. 

Originally scheduled to close March 1st, near the end of February 2019, Bain Capital Japan’s acquisition vehicle (BCJ-34) extended the ¥610/share Tender Offer MBO deadline by 11 days from March 1st to March 11th. Of course, that was something of a moot point – by that time, the shares hadn’t traded at less than a 15% premium to terms for a week after well-known local activist Yoshiaki Murakami’s vehicle Reno KK and affiliates had taken a stake of just below 10%. 

On the 8th of March, BCJ-34 raised its Tender Offer Price by 14.8% to ¥700/share and extended the Tender Offer by almost two weeks to the 25th of March. It also lowered the amount which needs to be bought to 50.1% from 66.67%. In that amended filing the buyer included words 「公開買付者は、本開買付条件の変更後の本公開買付価格を最終的なものとし、今後、本公開買付価格を一切変更しないことの決定をしております。」which roughly translates to “The Offeror, having changed the terms, has made This Tender Offer Price final, and from this point onward, has decided to absolutely not raise the Tender Offer Price.”

That’s that, but since then, the shares have not traded as low as the newly raised Tender Offer Price.

With one week to go, Aoyama Fudosan yesterdat announced it had lifted its stake to 747,800 shares or 3.00% of shares out, which brings the combined Reno KK/Aoyama Fudosan stake to 11.71%. 

Given the 1.1mm shares traded since the 11th (i.e. shares which if Murakami-san had bought he would not have to report until the 19th (today)) and that the share price was up sharply in decent volume this afternoon, it would not be difficult to imagine a higher stake being reported in the days ahead.

Murakami-san is not going away. This is starting to look a bit like another Murakami situation of recent. And that one turned out well.

5. Re-Launching Coverage of ZTO Express with Sell Rating and US$13.31 Target Price

ZTO Express (ZTO US)‘s earnings will fail to meet the high expectations of sell-side analysts and investors who seeit as a cheap proxy for Chinese e-commerce activity.

China’s express sector revenue grew 43.5% YoY in 2016, the year ZTO went public. Last year, revenue growth was just half that (21.8%), and we expect the sector’s growth to continue to moderate over the next few years.

The express sector is also evolving in ways that will put downward pressure on profitability and require greater investment from the express companies.

We expect the profitability of ZTO’s express business to decline in the medium-term as the company adjusts to slowing demand and emerging sector trends. Our earnings estimates, which are far below consensus figures, reflect these challenges.

ZTO suffers from declining earnings quality and two accounting issues that we feel make it a risky, unattractive investment. Our 12-month target price for ZTO is US$13.31, based on 16 times our blended 2019-20 EPS estimates. We rate the stock Sell.