In this briefing:
- NCsoft – A Strategy for Trading in 1H 2019
- Japan Hotel REIT Placement – Biggish Acquisition, Smallish Accretion
- The GER Weekly EVENTS Wrap: Don Quijote, M1, Healius and Upcoming M&A Catalysts
- Screening the Silk Road: Q1-2019 Small-Mid Cap GARP (Zulu Warrior Screening)
- Japan: Moving Average Outliers – New Year Rally
1. NCsoft – A Strategy for Trading in 1H 2019
In this report, we will explain our strategy for trading NCsoft Corp (036570 KS) shares in 2019. NCsoft is expected to launch five new mobile games in 2019 including “Lineage 2M”, “AION 2”, “Blade & Soul 2”, “Blade & Soul M”, and “Blade & Soul S”. These five new games are based on its existing MMORPG franchise games. The company is hoping to release all five of these new mobile games in 1H 2019.
Lineage 2M, which is perhaps the most anticipated mobile game among these five games, is expected to be launched in 2Q19. Traders are starting to gear up for the launch of this important game in the coming months. Many investors are likely to take the “buy on rumor and sell on news” strategy, which in this case the news would refer to the launch of the Lineage 2M game.
Nonetheless, in this case, we believe that because many investors may be getting ready to sell NCsoft near the launch date of Lineage 2M, many savvy investors are likely to sell their shares a few days/weeks earlier than the actual launch date. At this point, the most likely period as to when Lineage 2M may be launched is in May 2019. As a result, a good time to consider selling NCsoft may be sometime in March/April 2019.
2. Japan Hotel REIT Placement – Biggish Acquisition, Smallish Accretion
Japan Hotel Reit Investment (8985 JP) (JHR) plans to raise around US$300m/JPY33bn to part fund the acquisition of Hilton properties located in Tokyo and Osaka.
We have previously covered four other capital raising by JHR:
- US$170m in Jun 2017, Japan Hotel REIT Placement – An Accretive Acquisition, JGB 10Y Yield Seems Stable
- US$340m in July 2016, Japan Hotel REIT – YEN a Bigger Driver than the Acquisitions,
- US$120m in Jan 2016, Japan Hotel REIT – Acquisition to Aid DPU Growth, but RMB Needs to Hold Up for the Stock to Perform, and
- US$230m in Jan 2015, Japan Hotel REIT (8985 JP) – Acquisition to aid DPU growth; take the deal
The prior-deals have given mixed bag results over the short-term. In this insight, we will run the deal through our framework and analyse past performance.
3. The GER Weekly EVENTS Wrap: Don Quijote, M1, Healius and Upcoming M&A Catalysts
In this week’s GER M&A wrap, we highlight the dwindling likelihood of a follow-on deal for Don Quijote Holdings (7532 JP) , which is now trading below terms. Secondly, we take a contrarian view on the M1 Ltd (M1 SP) deal and contend there is less likely to be a bidding war. Finally, we update on rejected by Healius (HLS AU) and provide a comprehensive list of upcoming catalysts for near-term M&A deals.
The rest of our event-driven research can be found below.
Best of luck for the new week – Rickin, Venkat and Arun
4. Screening the Silk Road: Q1-2019 Small-Mid Cap GARP (Zulu Warrior Screening)
- Value made a comeback, but growth remains core: In May 2018, we examined the divide between value and growth stocks, ( Notes from the Silk Road: Small-Mid Cap Screening for Zulu Warriors). As Q3 unfolded, this eventuated with a +7.5% reversal in favour of value stocks, only to see growth resume dominance in October and November.
- The optimal value/growth style dynamic: We feel exposure to growth at a reasonable price (GARP) coupled with a healthy FCF yield (via our amended Zulu Screen) should provide some healthy medium to long term returns for investors.
- The Screen’s Risk: The Zulu Screen relies on analyst estimates. When market sentiment is weak and forecasts are not amended in a timely manner, the screen is susceptible to mis-selection.
- Q2 2018 screening list succumbed to volatile markets: This was seen in our May screen with our list posting on average a 30% decline in share price, relative to the broader Asia-Pacific Ex-Japan declining 13.6% and the Asia Pacific index by 11.8%.
- Are there reasons for the underperformance? 10 of the 19 stocks in the May screen were from Hong Kong, which saw the Hang Seng Index (HIS) decline 16% over the same period. The decrease seems due to concern over trade wars and doubts about the China economy. Our key approach to stock selection is to take a medium-to-long-term view as well as focus on quality ranked stocks relative to their peers. This is highlighted via the average stock rank of the group declining only 15.8% from 89.6 to 75.5 points.
- Our Q1 2019 screen selected only 9 stocks. Of the 9 stocks identified, the average PEG Ratio was 0.4x, the price to FCF yield was 11% and ROCE was 25%. Stocks were selected from Australia, New Zealand, India, Korea, Japan, Hong Kong, Taiwan and Singapore. Cowell Fashion Company from Korea was the only remaining stock from our May screening.
5. Japan: Moving Average Outliers – New Year Rally
MARKET COMPOSITE
NEW YEAR RALLY – From the December 25th’s lows of 8% by number and 11% by value, the percentages of Japanese stocks above the weighted sum of moving averages have recovered to 14% by number and 20% by value – just on the ‘buying zone’ line. As we expected, the Total Market Value has rallied 8.7% and looks to have some further to run, especially if the Yen reverses some of its recent strength. The Bank of Japan provided a ‘helping hand’ on both 4th and 10th January, the only days this year so far on which the market declined.
SECTORS
SECTOR BREAKDOWN – The top six sectors measured by the percentage above the weighted average of 5-240 Days remain, predictably, domestic and defensive – REITs, Information Technology, Media and Utilities continue from our previous review with Healthcare and Transportation replacing Food, Beverages and Tobacco and Internet Content & Services. Equally predictable is the bottom half-dozen. Banks, Autos, Metals, Electrical Equipment, and Chemicals remain from 23rd December Moving Average Outliers Insight, with Building Materials replacing Non-Bank Finance. Over the last trading five days, however, there has been a noticeable reversal with Autos, Electrical Equipment, and Machinery all over ’55’ while Other Consumer Products, Restaurants, Telecommunications and Food, Beverages & Tobacco are all below ’40’.
COMPANIES
COMPANY MOVING AVERAGE OUTLIERS – As with the market and sectors, our moving average outlier indicator uses a weighted sum of the share price relative to its 5-day, 20-day, 60-day, 120 day and 240-day moving averages. Extreme values are weighted sums greater than 100% and less than -100%. We would caution that this indicator is best used for timing shorter-term reversals and, in many cases, higher highs and lower lows will be seen.
THE +/-100% CLUB – The number of extreme negative outliers reached a peak for 1,352 on December 25th and has since returned to ‘normal’ levels. We suggested in the previous Insight in this series that such an extreme number of extremes was a signal of a short-term bottom, which, so far, has proved to be correct.
In the DETAIL section below, we highlight the current top and bottom twenty-five larger capitalisation outliers as well as those companies that have seen the most significant positive and negative changes in their outlier percentage in the last two weeks and provide short comments on companies of particular note.
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