In this briefing:
- Share Classifications: Mid-December 2018 Snapshot
- Idemitsu Kosan Tactical Support with Macro Cycle Drag
- Renesas: Visit Suggests Utilisation Rate Rebound Could Take Longer Than Sell-Side Expects
- Tobacco: A Framework for Analyzing the Sin Sector from an ESG Perspective, with a Focus on ITC
- GMO Internet Inc. – Limited Downside as Crypto Business Weighs Little on Consolidated Performance
1. Share Classifications: Mid-December 2018 Snapshot
This weekly share class summary is a companion insight to Travis Lundy‘s H/A Spread & Southbound Monitor – most recently discussed in H/A Spread & Southbound Monitor – Going Into Year End.
This share class monitor provides a snapshot of the premium/discounts for various share classifications around the region, and comprises four sets of data:
1. 82 ADRs
2. 105 Korean Prefs
3. 22 Regional Dual Classes
4. 7 Foreign/Local Thai shares
The average premium/discount for each set over a one-year period is graphed below.
For a granular breakdown of each set, PDFs are attached at the bottom of this insight.
2. Idemitsu Kosan Tactical Support with Macro Cycle Drag
Idemitsu Kosan (5019 JP) decline is nearing exhaustion support and sets up a tactical trade higher.
MACD breach of floor support now turns this key pivot level into a cap resistance on a recovery cycle. It also calls for a new and lower trading range.
Macro support breaks must be mended to turn the cycle from bearish back to neutral and will require a series of positive rally cycles for basing to unfold.
Tactical buy supports are outlined along with our tactical rally target, macro pivot resistance and the stop level.
3. Renesas: Visit Suggests Utilisation Rate Rebound Could Take Longer Than Sell-Side Expects
We visited Renesas Electronics (6723 JP) this week to discuss progress on inventory reduction and its likely ramp of utilisation rates/wafer throughput, as well as to gather further details on the IDT acquisition and its long -term strategy. On the whole, we continue to like the long-term picture, consider the stock to be undervalued and believe investors with long time horizons should be looking at the stock on the long side. However, our discussions suggested to us that while production cuts to reduce inventory should be completed this month or at worst in 1Q2019, a ramp in utilisation rates could take longer than is implied by consensus.
4. Tobacco: A Framework for Analyzing the Sin Sector from an ESG Perspective, with a Focus on ITC
Contrary to the perception that the rising adoption of socially responsible investment practices has caused Big Tobacco to be shunned by portfolio managers, our shareholding analysis shows that institutional holding in most of these ‘sin’ stocks has increased in the last 4 and 8 quarters.
Nevertheless, Big Tobacco suffered a pounding in 2018. Investors had bought into tobacco premising reduced risk products (Eg: e-cigarettes, Heat Not Burn products) would reduce regulatory risk and reverse decades of sales decline. As it turned out, regulators frowned at the popularity of vaping amongst teens in the US, calling out companies for baiting youngsters into long-term smoking habits. Regulators also told off companies for marketing e-cigarettes and HNBs as healthier options, as tobacco still kills.
Ethical portfolios with negative screens (for example, ones that will not invest in tobacco stocks) have underperformed in the long-term past. There is a growing tribe of funds committed to responsible investing with positive ESG screens. For such funds, we present in this insight a framework for analyzing the sector from an ESG perspective. A deep dive into ITC Ltd (ITC IN), the only cigarette major to turn in a positive performance this year, vindicates, in our view, its efforts to materially de-risk its asset and revenue profile, coupled with very high levels of commitment towards community development.
5. GMO Internet Inc. – Limited Downside as Crypto Business Weighs Little on Consolidated Performance
GMO Internet is currently trading at JPY1,485 per share which is just 7.6% above its 12-month low of JPY1,380 per share. The Group’s share price reached an all-time high of JPY3,020 in June 2018, however, it has declined by more than 50% since then following the company’s poor performance in its cryptocurrency and mining related segment led by stagnant crypto prices coupled with negative news on issues concerning advertising fraud in its Online Advertising & Media segment. This was further exacerbated by news that there will be delays in shipments of two bitcoin mining rig lines with refunds already issued in November. However, we believe, the downside is limited as the weaknesses of its crypto related business will weigh little on the consolidated earnings of the business. GMO’s business is structured in a way that its two main segments, namely, the Internet Infrastructure and Online Advertising and Media businesses are not prone to much volatility with recurring revenues. Therefore, we believe the negativity surrounding the company is exhausted and we expect the company to continue its strong growth trajectory.
