In this briefing:
- China Tower: Changing Our View to Positive. Low Cost Expansion Should Generate Better Returns
- TRADE IDEA – Toyota Industries (6201 JP) Stub: Riding the Automation Wave
- Doosan Bobcat – Negative on the North American Housing Market Turning Downwards
- HDC Holdings Holdco Trade: Status Update & Recommended Action
- Revisiting the Renewable Energy Space
1. China Tower: Changing Our View to Positive. Low Cost Expansion Should Generate Better Returns
At the time of the IPO we were quite negative on China Tower (788 HK) prospects. However, in recent calls and meetings our view has changed and become more constructive. Chris Hoare now believes that China Tower is managing to generate co-location growth outside the Master Services Agreement (MSA) and at a much lower level of capital intensity (perhaps up to 50%) than indicated in the IPO. Management has also proven to be more open to shareholders than expected and with lower capex, higher FCF generation we upgrade to a BUY with a HK$1.60 target price. The stock has started to move as the market has begun to understand the more positive outlook. It will be interesting to see if China Tower is allowed to retain these benefits long term.
Summary China Tower forecasts:
2. TRADE IDEA – Toyota Industries (6201 JP) Stub: Riding the Automation Wave
If ever there was a stub business that is poised to capitalize on global trends of factory automation, automated logistics handling and electric vehicle prevalence, it is that of Toyota Industries (6201 JP). In August, I took an in-depth look at the major businesses of Toyota Industries and concluded that the market was not giving the company credit for the global leadership it has established in the forklifts and automobile A/C compressor businesses, nor for the progress it has made in the logistics equipment business. While the market’s oversight appeared to have corrected in September and October as the discount to NAV contracted from 34% to 25%, the trend has since reversed and the discount is back at trough levels of 35%. In August, I implied that this would be a good trading opportunity. Today, I explicitly recommend going long the stub.
In this insight I will cover:
- A market-neutral trade setup
- A review of the core unlisted businesses
- Alternative data used to gauge performance in the core business
- Risks of the trade
- A recap of ALL my stub trade ideas on Smartkarma, including track record of performance
3. Doosan Bobcat – Negative on the North American Housing Market Turning Downwards
We believe that the consensus earnings estimates of Doosan Bobcat Inc (241560 KS) are likely to revised down by 10-15% in the next 6-12 months, negatively impacted by the faster than expected downturn in the North American housing construction market. Currently, Doosan Bobcat stock price is at 32,900 won. We expect 15% or more downside risk on this stock over the next 6-12 months.
The US is the biggest market for the company. The US housing starts is an important indicator for the company since the US housing starts has a big impact on the demand for compact construction equipment. You could see from the charts below that US housing starts has been on a strong rebound since 2009. However, since early part of this year, there are signs that the US housing starts is beginning to soften and turn down.
Home prices are starting to decline in the US – Most recently in 3Q18, the median sales price of houses sold in the US was $325,700, down 3.6% from the peak of $337,900 in 4Q17. The list of cities/regions with recent declining home prices in North America are as follows: Vancouver (Canada), Manhattan, NYC, Seattle, WA, San Francisco, CA, San Diego, CA, Toronto (Canada), and Los Angeles, CA.
4. HDC Holdings Holdco Trade: Status Update & Recommended Action
- HDC Holdings (012630 KS) / HDC-OP (294870 KS) stub trade yield is now 0.38%. Price ratio is still below -1 σ. It is close to yearly low. Holdco discount now stands at 47.92% to NAV.
- The major shareholder Chung Mong-kyu bought an additional 0.63% stake for ₩16.1bil from Dec 6~10. I didn’t expect it. But it now seems that the owner buying factor is truly over.
- I’d wait a bit longer to capitalize on this newly developed situation. Price ratio is close to yearly low. Yearend dividend factor should be helping the situation.
5. Revisiting the Renewable Energy Space
We checked on two stocks today that are well-known in the renewable energy space, namely solar and wind power, to see how things were going. We may not be tree huggers ourselves, but it’s fair to say that sustainable investing is pretty big these days. Here’s some run-down.
- GUNKUL posting impressive earnings growth of 57% (normalized) on the back of a 30% revenue growth, and they’re still hoping to see another 25% revenue growth in 2019 as new projects in Japan and Thailand (floating panel) start operations soon.
- DEMCO also growing earnings 23% on the back of more modest revenue growth of just 6%, but management is far less confident on this front having faced issues with land reclamation rights and design changes.
- An interesting point in the visit was the fact that GUNKUL wants to establish a very large base of solar roofs by the time prices become competitive. Solar panel prices have fallen tenfold since they were first introduced in Thailand.
