Daily Industrials: Chalet Hotels IPO Review – Backed up into a Corner and more

In this briefing:

1. Chalet Hotels IPO Review – Backed up into a Corner
2. Hyundai Heavy Holdco Trade: Long Holdco / Short HHI (30%) & SKI (70%) On Aramco Deal
3. TRACKING TRAFFIC/Containers & Air Cargo: December Box Rates & Volume Firm
4. Notes from the Silk Road: Smartgroup Corporation Ltd (SIQ.AX)
5. SK Hynix: Attractive at Current Level

1. Chalet Hotels IPO Review – Backed up into a Corner

Chalet Hotels Limited (CHALET IN) is looking to raise up to US$234m in its upcoming IPO.

Chalet Hotels (Chalet) is an owner, developer, and asset manager of luxury hotels. The company has grown its revenue and EBITDA at 15.8% and 22.8% CAGR from FY2016 to FY2018. The growth has been driven by the consistent improvement of its average occupancy rate which in turn drove RevPAR higher.

However, the company is embroiled in litigation with Hindustan Aeronautics (HNAL IN) which could result in the company incurring significant costs. Along with the impending renewal of the licensing agreement in 2020 and 2021, there is much to be worried about the company’s near-term outlook and its highly leveraged balance sheet may leave the company backed up into a corner.

In this insight, we will look at the company financial and operating performance, compare hotels’ operating metrics to the industry average, and compare its valuation to other Indian hotel peers. We will also run the deal through our IPO framework.

2. Hyundai Heavy Holdco Trade: Long Holdco / Short HHI (30%) & SKI (70%) On Aramco Deal

• Korea’s local news outlet reported that Saudi Aramco agrees to buy a 15~20% stake in Hyundai Oilbank Co Ltd (1082Z KS) in a pre-IPO deal. Aramco has reported priced Oilbank at ₩10tril. Hyundai Heavy Industries Holdings (267250 KS) is currently at a 50% discount to NAV. Assuming no change in Oilbank’s ₩10tril value reaffirmed by Aramco, this is like a 6%p drop in two months.
• At this much holdco discount, I’d go long HHIH on the Aramco deal. This will make enough cash injection to Holdco. Oilbank’s ₩10tril valuation stays intact despite the recent de-valuation of the local peers on falling oil prices.
• Holdco is basically 70% Oilbank and 30% HHI. I’d first pick Hyundai Heavy Industries (009540 KS) for 30%. The HHIH/HHI duo is at 20D MA. But on 120D horizon, they are pretty closer to the lowest. For the other 70%, I’d short SK Innovation (096770 KS). SK Innovation has been less price corrected lately compared with S Oil. On a 20D MA, the HHIH/SK Innovation duo is close to -1σ.

3. TRACKING TRAFFIC/Containers & Air Cargo: December Box Rates & Volume Firm

Tracking Traffic/Containers & Air Cargo is the hub for all of our research on container shipping and air cargo, featuring analysis of monthly industry data, notes from our conversations with industry participants, and links to recent company and thematic pieces. 

Tracking Traffic/Containers & Air Cargo aims to highlight changes to existing trends, relationships, and views affecting the leading Asian companies in these two sectors. This month’s note includes data from about twenty different sources.

In this issue readers will find:

Although slowing demand growth is unlikely to generate impressive top-line improvements, firmer pricing combined with lower fuel costs should support an ongoing improvement in profitability for container carriers in the near-term. Meanwhile, the slump in air cargo demand has not yet hit air cargo yields, but it’s becoming clearer that an economic slowdown is hurting demand for this relatively expensive mode of transport.

4. 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. 

5. 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