In this briefing:
- China Meidong (1268 HK): Standout Story in Gloomy Auto Dealership Sector; Luxury Brands Outperform
- Tosei (8923) An Undervalued and Depressed Japanese Property Developer.
- Rakuten (4755 JP) & Yahoo Japan (4689 JP) Are Battling for Share in the Growing Japanese EC Market
- Another Semi-BIGLY Buyback at TOC: STILL an MBO Candidate
- Wanted: A 21st Century Monetary Theory
1. China Meidong (1268 HK): Standout Story in Gloomy Auto Dealership Sector; Luxury Brands Outperform
China Meidong Auto (1268 HK) has been on a rollercoaster ride in 2018. The stock price of Meidong started 2018 around 2.7 HKD and recently has been trading around 2.9 HKD.
Nice and steady ride? Not exactly, as it has swung from 4.3 HKD in June to 2.6 HKD in August. After analyzing how NPAT estimates evolved over the past year there should be no justifications for these wild swings.
Meidong is likely to report solid FY18 results by late March vs industry peers which are expected to report a weak 2H18. While BMW dealers have been reportedly suffering in China during 2018, Meidong was fortunate to have other luxury brands pick up the slack.
FY19 should be another growth year for Meidong as 1) recently acquired BMW showrooms contribute their maiden results and 2) other luxury brands continue to perform despite overall doom and gloom in the Chinese auto market. Should the Chinese government launch car replacement stimulus measures this would be icing on the cake.
Fair Value lowered slightly from 4.7 HKD to 4.4 HKD (10x 2019E) on lower 2019 profit estimates, which leaves 52% upside excluding dividends.
2. Tosei (8923) An Undervalued and Depressed Japanese Property Developer.
The shares are very cheap. They trade at 0.9x book but there is some Y22bn in unrealised profit on land/buildings (vs. the market cap of Y46bn). If adjusted for this, the shares are less that half book. Meanwhile the dividend has been steadily increasing (both payout ratio and in absolute terms). To 11/19 the payout ratio will be 23% and the dividend will rise to Y37 from Y30 last year. At today’s price of Y950, the yield is thus 3.9%. And the shares trade on multiple of 6x. They rose significantly last year on the back of Morgan Stanley BUY note (from Y800 to Y1,500) but with the market’s correction and the tightening of bank lending to individuals (which has no impact on them), the shares have fallen back to Y950. For those looking for a cheap domestic small cap name, this is worth looking at.
3. Rakuten (4755 JP) & Yahoo Japan (4689 JP) Are Battling for Share in the Growing Japanese EC Market
Japan’s B2C e-commerce industry is growing sales volumes close to 10% YoY each year, but the level of online activity remains behind other developed markets. Globally, e-commerce volumes are growing around 20% per year. The Japanese government does not want Japan to be left behind and wishes to see more domestic e-commerce activity as well as strong growth in cross-border e-commerce.
Domestic giants Rakuten (4755 JP) and Yahoo Japan (4689 JP) are growing faster than the overall market. So is global powerhouse Amazon.com (AMZN US) in Japan. Together the three represent nearly half of the market today, up from 40% 4 years ago.
Both Rakuten (4755 JP) and Yahoo Japan (4689 JP) have seen profit margins squeezed in recent years, most notably by increasing competition, including from profit insensitive Amazon Japan. We believe e-commerce profit margins will remain under pressure and note managements’ efforts to diversify.
The upcoming earnings season will provide a once-a-year window into Japan’s e-commerce industry. Amazon.com (AMZN US) will announce its full year results on 31 January 2019, and the company’s filings include annual sales figures for its Japan operations.
4. Another Semi-BIGLY Buyback at TOC: STILL an MBO Candidate
13 months ago, real estate operator TOC Co Ltd (8841 JP) – known for decades in Tokyo as the owner/operator of the largest single building in Tokyo by floor space – launched a Tender Offer to buy up to 20mm shares or 16.4% of the shares outstanding. Effissimo, Mizuho Bank, Mitsubishi UFJ Bank, and Mitsui Sumitomo Bank had each apparently approached the company indicating they were interested in selling.
The Tender Offer resulted in Effissimo selling 17,916,900 shares, leaving them with 4.599mm shares. Combined, other parties sold 800,000 shares.
On the 21st of March 2018, TOC announced it would cancel 33 million shares out (they already had ~14mm shares of Treasury stock prior to launching the Tender Offer). Later they launched another buyback program and the company has 1.847mm shares of Treasury stock as of now, out of 103.88mm shares outstanding.
I wrote about these events last year in TOC’s (8841 JP) BIGLY Buyback and TOC’s BIGLY Buyback Makes It a Takeout Target.
The New News
Yesterday after the close, the company announced a ToSTNeT-3 Buyback this morning, to buy up to 4.6 million shares or 4.49% of shares outstanding at ¥778/share.
That makes the previous argument stronger, not weaker.
To not reinvent the wheel, the second insight is the one with the deep dive information about the company and its assets.
A review of the opportunity continues below.
5. Wanted: A 21st Century Monetary Theory
The globe is facing more than an ordinary business cycle.
Joseph C. Sternberg, editorial-page editor and European political-economy columnist for the Wall Street Journal’s European edition, recently interviewed Claudio Borio, head of the Monetaryand Economic Department of the BIS. Mr. Borio said that politicians have relied far too much on central banks, which are constrained by economic theories that offer little meaningful guidance on how to sustain growth and financial stability. The only tool they have is an interest rate that can affect output in the short run but ends up affecting only inflation in the end.
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