In this briefing:
- The GER Weekly EVENTS Wrap: Softbank, Xiaomi, Capitaland and Navitas
- TRACKING TRAFFIC/Chinese Express & Logistics: Inter-City Pricing -9.1%
- Hanon Systems (018880): Overvalued Stocks in The Low Margin Sector
- Japan: Fortnightly Update – Nidec Leads the Way
- Tokyo Kiraboshi Financial Group (7173 JP): All That Glitters Is Neither Gold Nor Star Quality
1. The GER Weekly EVENTS Wrap: Softbank, Xiaomi, Capitaland and Navitas
Have nascent bull cases developed for maligned Softbank Group (9984 JP) and Xiaomi Corp (1810 HK)? In this version of the GER weekly events wrap, we asses an interesting debt tender for Softbank Group (9984 JP) which could portend action for the equity. Secondly, we review our long-standing negative stance on Xiaomi Corp (1810 HK) after a very poor recent run. Finally, we are hesitant on the Capitaland Ltd (CAPL SP) acquisition and think a bump is possible for Navitas Ltd (NVT AU)
The rest of our event-driven research can be found below.
Best of luck for the new week – Rickin, Venkat and Arun
2. 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.
3. Hanon Systems (018880): Overvalued Stocks in The Low Margin Sector
The recent negative sales in the Chinese auto industry and Nissan’s case of Carlos Ghosn removal could put additional pressure on the already thin margin of auto supplier industry. One of the Carlos Ghosn early contribution to Nissan was to cut cost and outsource the auto parts maker to a wide variety of suppliers including to Hanon Systems (018880 KS) . Nissan’s new management may want to undo some of Carlos Ghosn’ legacy including changing the selection criteria of parts supplier.
Hanon’s global peers also experienced a decrease in the inventory turnover and most of them have been priced at PER <10 but Hanon is still trading at 24x PER while its sales growth and profitability is still in low single digit? Facing the onset of the slowdown in the Chinese auto industry, won’t it be another headwind for Hanon Systems?
4. Japan: Fortnightly Update – Nidec Leads the Way
“I’ve been a manager for almost half a century, but this is the first time I’ve seen such a large single-month drop in orders for us. What we witnessed in November and December was just extraordinary.”
Nidec CEO – Shigenobu Nagamori
Source: Japan Analytics
BEAR MARKET RALLY ON CUE – The bear market rally we envisaged has seen the Market Composite recover by nearly 5% this year and 10% from the Christmas Day low of ¥533t. Seven of the last nine trading days have been ‘up’, and the Bank of Japan dutifully intervened on one of the two ‘down’ days – January 16th. The US dollar has also retraced three-quarters of the ¥6.5 decline from December 26th to January as concerns over US-China relations temporarily subsided.
5D RSI @75 – The 5-day Relative Strength Index is now at a level that suggests the bulk of this initial move is complete, and a consolidation can be expected in the weeks ahead as the majority of third-quarter earnings are released – particularly if, as we discuss further below, Nidec (6594 JP) has set a trend.
Source: Japan Analytics
VALUE TRADED RATIO – After reaching a three-month high of 64bps on 21st December, the Value Traded Ratio (value traded/total market value) has returned to below-trend levels for the last two days – another indicator of a coming pause in the uptrend.
% ABOVE MOVING AVERAGE – The percentage of stocks trading above a weighted sum of five periods of moving averages has recovered to above ’20’ as measured by market value, although the stock count percentage is still below that level. We expect the pattern of 2016 to be replayed here, which suggests an ultimate ‘low’ in the summer of 2019.
Source: Japan Analytics
TORAKU > 80 – On a further positive note, on Friday the 25-day Toraku advance-decline indicator finally recovered to above the ’80’ level, indicating that the December 25th ‘low’ is unlikely to be breached in the short term.
THE NIDEC CANARY – Despite the market’s nonchalant reaction to Nidec’s downward revision, the company’s revised forecasts have broader implications. For the first time since March 2017, forecasts for our Market Composite for Operating Income are now lower than the trailing-twelve-month (TTM) Operating Income. Also, the ‘gap’ between forecast Net Income and TTM Net Income is now ¥2.9t – the largest such gap in over ten years. Mr. Market is suggesting that Japanese corporate profits are due to fall by 18% on average, to the level last reached in the first quarter of 2017 – implying bottom-line declines of up to 50% for some key ‘global’ sectors such as Autos, Machinery, Chemicals, Electrical Equipment and Technology Hardware, which together comprise one-third of aggregate Net Income.
Source: Japan Analytics
Note: The Results & Revision Score is the average of our Results Score and Forecasts/Revision Score for each company. Both scores are cap-weighted and have a maximum of +30 and a minimum of -30 for each period. The Results Score is calculated quarterly, using the most recent eight quarters of company data for revenues, operating income and operating margin and measures the rate, degree and consistency of change for each metric. The Forecast/Revision Score is based on Annual and Interim period company forecasts and compares changes from previous forecasts as well as against the trailing twelve-month (TTM) or previous first-half results, with annual forecasts being double-weighted.
LEADING OR LAGGING? – Our cap-weighted Results & Revision Score bottomed at -2.55 in December 2016 and reached a two-decade high on 16th November 2017, two months before the market peak in January 2018. Since October last year, the market has been leading on the downside. If we are to repeat the relatively-mild cyclical downturn of 2016, the Results & Revision Score will turn negative at the time of the full-year results and forecasts for the new fiscal year, which, for the majority of companies, will be released in May. We expect the market to retest the lows of April 2017 and December 2018 around that time.
OUTLOOK & RECOMMENDATIONS
- We continue to recommend an underweight position in Japan in global portfolios.
- The equity market decline at the end of last year was well in advance of the underlying trends in the economy and corporate profits; the recent 10% rally has corrected that imbalance. Nevertheless, the global cycle has turned down sharply, and many economies will be in a recession by the end of this quarter.
- The Japanese economy is still enjoying a robust domestically-driven growth cycle and is close to full employment. As Nidec and Yaskawa Electric have demonstrated and as other companies will soon confirm, Japan’s globally-orientated manufacturing companies are not immune to global trends. Although some of the coming downturn in earnings has been well-discounted, our Results & Revision Score has yet to turn negative. Accordingly, we expect the market to retest the December 2018 low, probably in May when the FY2020 forecasts are announced.
- In the near term, we continue to favour undervalued domestically-orientated companies in the Information Technology, Internet, Media and Telecommunications sectors.
In the DETAIL section below, we will review Sector performance over the last two weeks, and, in addition to our regular roundup of results, revisions and stock performance including brief comments on Nidec (6594 JP), Yaskawa Electric (6506 JP), Fancl (4921 JP), Shiseido (4911 JP), Kose (4922 JP), Familymart Uny (8028 JP), Fast Retailing (9983 JP), Olympus (7733 JP), Lixil (5938 JP), Nippon Paint (4612 JP), Hoya (7741 JP), Keyence (6861 JP), and Technopro (6028 JP) .
5. Tokyo Kiraboshi Financial Group (7173 JP): All That Glitters Is Neither Gold Nor Star Quality
Since our bearish Insight on Tokyo Kiraboshi Financial Group (7173 JP) issued in November 2018, Tokyo Kiraboshi FG (7173 JP): Shooting Star, the stock’s subsequent performance has fully justified our pessimism, with the share price finishing CY2018 down 47.7% year-on-year (YoY). Having touched a low of ¥1,504 on Christmas Day, the shares have recovered 10.1% to ¥1,656 as of Friday’s close: slightly better than the Topix Bank Index, which closed on Friday at 154.44, up 9.0% over the same period. Trading on a forward-looking price/earnings multiple of 12.5x (using the bank’s current FY3/2019 guidance) and a price/book ratio of 0.21x, TKFG looks cheap. This is deceptive. Adjusting the group’s earnings per share (EPS) for the ¥55 billion (US$507 million) in two still-outstanding preference share issues pushes the PER to over 18x: hardly a bargain. Meanwhile, the group’s RoA and RoE ratios are woefully low, loan growth has collapsed since end-March 2018, deposits have fallen alarmingly, and main bank subsidiary Kiraboshi Bank is struggling to keep its net return on funds deployed (NRFD) in positive territory. A stock best avoided.
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