In this briefing:
- Universal, SegaSammy & Dynam Sit Best Positioned Among Japan Companies in Race for IR Partnerships
- Time-Out Not Time up for Trade War
- Semiconductor WFE Outlook. Things Just Got Really Ugly
- Thailand: The Sandbox
- Small Cap Diary: MEGA, Eastwater
1. Universal, SegaSammy & Dynam Sit Best Positioned Among Japan Companies in Race for IR Partnerships
- We’ve reviewed 10 companies in the sector. Of those, three are the consensus favorites of our Tokyo based panel of industry, financial and economics observers of the IR initiative over many years.
- Based on pachinko alone, the stocks of these companies are fully valued. Based on potential tailwind from a license award within 6 months, they could be vastly undervalued.
- Each of the three noted here brings strength to a bid less based on financials than corporate focus, outlook and experience in the field.
2. Time-Out Not Time up for Trade War
- Xi and Trump walk away from Buenos Aires with something to sell at home
- But trade negotiations will be dominated by fraught disagreements
- After 90-day negotiations, further delays to tariff escalation are likely
3. Semiconductor WFE Outlook. Things Just Got Really Ugly
SEMI, the global industry association serving the manufacturing supply chain for the electronics industry, published three different forecasts for wafer fab equipment (WFE) sales in the past week. While the forecasts differ in approach and detail, they all agree on one thing, WFE revenues are continuing to fall and the outlook for 2019 is sharply down on previous estimates.
Specifically, Q4 2018 WFE revenues are set to decline 20.8% or $3.3 billion QoQ and the forecast which had just six months ago predicted 7% growth in 2019 is now calling for an 8% decline next year.
These latest forecasts cast a dark shadow over the predictions of the leading WFE manufacturers that H1 2019 would be stronger than H2 2018 and we anticipate a strong downward revision of forward guidance in the upcoming earnings season.
There may be a glimmer of hope on the horizon however as SEMI forecasts a strong rebound in the second half of 2019 leading to a return to growth of ~20% in 2020. Let’s see.
4. Thailand: The Sandbox
5. Small Cap Diary: MEGA, Eastwater
Small caps have an easier time scaling up in good times, but can get hit much harder by liquidity in the bear markets. Anyway, it’s still good to check how some of the better-know small cap names like MEGA and Eastwater even if they are not doing particularly well.
Here’s some highlights:
- MEGA hasn’t done quite as well. Their earnings growth has slowed to under 10% this year despite an average of 19% between 2014 and 2017. It doesn’t seem like there’s anything wrong with the business model or even execution, just Law of Large Numbers and running out of near-term opportunities.
- Interestingly, the company’s biggest market outside ASEAN is Africa (eg. Nigeria, Ethiopia), which accounts for 12% of their branded product revenues, and that’s declined 4.2%, hence dragging down the company’s performance.
- East Water realized healthy and stable gross margin of 50% and ROE of 10.9% while maintaining a strong credit rating of A+, allowing them to finance aggressive capex cheaply.
- The company generates over half of its revenues from raw water, which is more profitable than tap and industrial, and has had a recent change in strategic shareholder from EGCO to Manila Water.
