In this briefing:
- TRACKING TRAFFIC/Chinese Express & Logistics: Inter-City Pricing -9.1%
- Hyosung Holdings: Current Status & Trade Approach
- Ecopro BM IPO Preview: The World’s #2 Player in the NCA High Nickel-Based Cathode Materials
- Mitsubishi Selling off Stake in Aeon, Ministop in Limbo
- Arcs, Valor and Retail Partners Form First Nationwide Supermarket Alliance
1. TRACKING TRAFFIC/Chinese Express & Logistics: Inter-City Pricing -9.1%
Tracking Traffic/Chinese Express & Logistics is the hub for our research on China’s express parcels and logistics sectors. Tracking Traffic/Chinese Express & Logistics features analysis of monthly Chinese express and logistics data, notes from our conversations with industry players, and links to company and thematic notes.
This month’s issue covers the following topics:
- December express parcel pricing fell by over 9% Y/Y. Average pricing per express parcel fell by 9.1% Y/Y, the worst decline since Q216 (excluding January/February figures distorted by the Lunar New Year holiday).
- Express parcel revenue growth remained well below 20% last month. Weak pricing dragged sector revenue growth down to 17% in December, the 4th consecutive month of sub-20% growth.
- Intra-city pricing (ie, local delivery) was strong in 2018. Relative to weak inter-city pricing (down 3.1% Y/Y in 2018), pricing for intra-city express shipments was firm, rising by 0.1% last year. In fact, average pricing for intra-city express shipments has risen in four of the last five years.
- Underlying domestic transport demand remained firm in December. Although demand for inter-city express shipments appears to be moderating (from high levels), underlying transportation activity in December remained firm. The three modes of freight transport we track (rail, highway, air) in aggregate rose 6.6% Y/Y in December, even as the growth of air freight slowed.
We retain a negative view of China’s express industry’s fundamentals: demand growth is slowing and pricing for inter-city shipments appears to be falling faster than costs can be cut, leading to margin compression.
2. Hyosung Holdings: Current Status & Trade Approach
- Local institutions are busy scooping up Hyosung Corporation (004800 KS) shares lately. The owner risk is now gone. There are increasing signs of improving fundamentals on all of the four major subs. Some are already expecting ₩5,000 per share. This is a 9.2% annual div yield at the last closing price.
- Discount is also attractive. It is now at 46% to NAV. With this much div yield, discount should be much below the local peer average of 40%.
- I’d continue to long Holdco. Hedge would be tricky. Heavy is up 15% YTD. I admit that there is no clear cointegrated relationship between them. But Heavy’s recent rally is more of a speculative money pushing up on the hydrogen vehicle theme. I’d pick Heavy for a hedge.
3. Ecopro BM IPO Preview: The World’s #2 Player in the NCA High Nickel-Based Cathode Materials
- Ecopro BM Co Ltd (247540 KS) specializes in making cathode active materials for rechargeable batteries that are used in EVs and electrical energy storage systems (ESS). Ecopro BM Co Ltd (247540 KS) is expected to complete its IPO in late February 2019. The institutional book building starts on February 14th, 2019. The IPO deal base size ranges from $96 million to $115 million. According to the bankers’ valuation, the expected market cap after the IPO would range from 796 billion won to 957 billion won.
- The bankers selected two stocks including L&F Co Ltd (066970 KS) and Cosmoam&T (005070 KS) as comparable companies to Ecopro BM. An IPO discount of 27.2% to 36.4%, the bankers derived an IPO price range of 37,500 – 42,900 won. The company’s sales and profits have been surging in the past three years. In 1Q-3Q18, it generated sales of 406 billion won (up 107.6% YoY) and operating profit of 36.1 billion won (up 108.5% YoY).
- Ecopro BM Co Ltd (247540 KS) was spun off from its parent company Ecopro Co Ltd (086520 KS) in May 2016. Currently Ecopro Co Ltd (086520 KS) owns a 68.6% of Ecopro BM Co Ltd (247540 KS).
- Ecopro BM has the second largest market share in the world after Sumitomo in the NCA high nickel-based cathode materials. Ecopro BM’s major customers include Samsung SDI and Murata Manufacturing Plant (TMM) (Japan).
4. Mitsubishi Selling off Stake in Aeon, Ministop in Limbo
Mitsubishi has finally given up its hope of convincing Aeon to merge Ministop (9946 JP) with Lawson and is selling its stake in the largest retail group.
There will be no change to the extensive supply relationship between the two companies and Mitsubishi’s food wholesale arm, Mitsubishi Shokuhin (7451 JP).
While Aeon seems to have spurned Mitsubishi for now, it is hard to see how Aeon will progress in the convenience store sector without Mitsubishi’s help. In the short-term Ministop looks like a poor investment but Aeon may have to sell to Mitsubishi eventually and will want a good price for it.
5. Arcs, Valor and Retail Partners Form First Nationwide Supermarket Alliance
The supermarket sector is the most fragmented and uncompetitive of all retail sectors, a situation encouraged by major suppliers and not ideal for consumers.
Despite some effort from the likes of Aeon, consolidation has failed to materialise beyond a few in-group mergers.
Yet pressure on supermarkets to consolidate has been building due to depopulation in the regions, competitive pressures from other food retailers such as convenience stores and drugstore chains, as well as the emerging online food services.
Change is now coming. The biggest industry consolidation yet was announced last month, a precedent-setting alliance between three major supermarkets, Arcs Co Ltd (9948 JP), Valor Holdings (9956 JP) and Retail Partners (8167 JP), carving up a large chunk of the country into three regional fiefdoms.
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