Daily TMT & Internet: India Generic Drugs: Antitrust Suit Could Cost Billions and more

In this briefing:

1. India Generic Drugs: Antitrust Suit Could Cost Billions
2. Duzonbizon: Capitalizing on the Growth of Cloud Based CRM Software in Korea
3. Tesla Motors Inc: Come Hell or High Water
4. Nintendo: Is the Hype Surrounding the Switch Slowly Dying Down?
5. Hyosung Holdings: 10%p Drop in Discount to NAV Should Be Reverted Soon

1. India Generic Drugs: Antitrust Suit Could Cost Billions

This Insight builds on our previous Insight, India Generic Drugs: US Antitrust Inquiry Widens by discussing estimated potential liabilities and details contained in court filings. Public comments by one of the plaintiffs (47 states) suggest the defendants’ aggregate liability could exceed US$6 billion, the largest previous settlement on record. There is not enough information to apportion potential liability by company, but some companies are better-positioned to bear the cost of a settlement than others. The process could drag on for an undetermined period of time (which helps the defendants). At the same time, the overhang will keep a lid on generic drug prices in the US market. 

Among Indian generic companies, Dr. Reddy’S Laboratories (DRRD IN), Aurobindo Pharma (ARBP IN),Cadila Healthcare (CDH IN), and Glenmark Pharmaceuticals (GNP IN) have the highest risk based on their market caps and exposure to the US market.       

2. Duzonbizon: Capitalizing on the Growth of Cloud Based CRM Software in Korea

Duzonbizon (012510 KS) (also spelled “Douzonbizon”), is a leading beneficiary of the expanding cloud based CRM software market in Korea. The Korean public cloud market is expected to grow from 2.0 trillion won in 2018 to 2.4 trillion won in 2019. In the case of the domestic public cloud market, SaaS will continue to be strong. One of the catalysts that could positively impact the cloud industry in Korea is that there could be a change in the regulations which may allow many of the government related offices to start using private cloud services starting in 2019. 

The company has very little competition in the Lite ERP segment, where it has a near monopoly position. The customers that use this product are typically small companies with annual sales of less than 10 billion won to 20 billion won. Other major competitors have not chosen to aggressively fight against Duzonbizon in this segment.  The company’s cloud business is based on providing cloud-based ERP products. The company has been able to significantly increase its total sales by providing the ERP products as a cloud based service. The customers can reduce costs on servers and personnel by relying on the company’s cloud based ERP software and services. 

Duzonbizon is currently trading at 29x P/E (2019E) and 24x P/E (2020E), using consensus earnings estimates. The company’s P/E valuation multiples have been rising in the past several years and the valuation multiples have ranged in the 20-40x. While the company’s valuation multiples are relatively higher than the KOSPI market average, they are lower than the global CRM software leaders such as Salesforce.Com Inc (CRM US), which is currently trading at 49x P/E. Despite the recent volatility in Duzonbizon’s share price in the past few months, we are positive on the stock over the next one year and we think the stock could climb by an additional 20-30% over the next year. We believe that the company has a very strong business moat with a very loyal customer base. We want to start 2019 recommending a solid, emerging growth company in the Korean tech space and so we believe that Duzonbizon is a good company to start off with. 

3. Tesla Motors Inc: Come Hell or High Water

It is our view, that come hell or high-water, in 2019, Tesla Motors (TSLA US) will establish itself as the pre-eminent large-cap growth stock. Those that are short would cover the position at a loss and those that are long are looking at another Apple Inc (AAPL US) or Amazon.com Inc (AMZN US) in the making. The ride may be volatile, but will be worth it. 

4. Nintendo: Is the Hype Surrounding the Switch Slowly Dying Down?

Nintendo reported their 2QFY03/19 in October with results showing growth at both the top line and bottom line albeit not living up to consensus expectations. Top line grew by 4.0% YoY to JPY388.9bn in 1H03/19 while OP grew by 53.9% YoY to JPY61.4bn. OP in the last quarter (2QFY03/19) was the second highest the company has experienced over the last five years. This growth has been mainly driven by the sales of Nintendo Switch hardware which sold just over 5m units in 1HFY03/19. However, YoY growth remained at 3.4% compared to 4.9m units sold in 1HFY03/18. This has left investors worried about Nintendo’s aggressive target of selling 20m units of the Switch for FY03/19. Of this target, the company has managed to achieve only around 25.0% in 1H. Nintendo’s financial performance follows a seasonal trend with the December quarter showing stronger performance due to increased sales during Christmas. While the company’s current quarter is likely to show strong results, we remain skeptical about the company reaching the aforementioned target for FY03/19.

Switch Sales Have Caused an Improvement in Nintendo’s OP….

….Despite a Slowdown in the Growth of Units Sales

Nintendo’s Last Quarter Has Also Failed to Live Up To Consensus Expectations

5. Hyosung Holdings: 10%p Drop in Discount to NAV Should Be Reverted Soon

• Hyosung Corporation (004800 KS) had fallen 16% just in two days. Holdco is now at a 50% discount to NAV. This is a 10%p drop from 10 days ago (Dec 19). Holdco price must have been overly corrected. The ongoing police investigation on Cho Hyun-joon’s alleged crime won’t lead to a delisting. 10%p drop in discount to NAV must be a price divergence, not a sensible price correction.
• Trade volume remained steady. Local hedge funds led the selling on Dec 27. Even they changed their position the following day. No short selling spike has been seen either. Hyosung is one of the highest yielding div holdco stocks. Hyosung Capital liquidation and Anyang Plant revaluation would be another short-term plus.
• I’d exploit this price divergence. It would soon revert to the Dec 19 discount level. It should at least stay at the peer average.