In this briefing:
- LG Uplus: Risks Now Largely Priced In. Raise to Neutral on CJ Hello Deal Synergies
- Sing Holdings – Surge in Full-Year Earnings with a Surprise Hike in Dividend. 67% Upside. BUY.
- US 10yr Triangle Geared for a Power Breakout
- Value-Enhancing 5G Spectrum Allocations on the Way for KDDI, DoCoMo, Softbank and Rakuten
- Komatsu, HCM, CAT: The Stock Punishment Does Not Match the Outlook Deterioration Crime
1. LG Uplus: Risks Now Largely Priced In. Raise to Neutral on CJ Hello Deal Synergies
LG Uplus (032640 KS) shares have fallen around 20% from the highs of January when the market was excited by 5G. That always seemed overly optimistic given the lack of viable business cases and unknown investment requirements and we were comfortable with our Sell rating from mid October and KRW15,000 target price. Following weak results, an easing of 5G enthusiasm and the recently announced CJ Hello (037560 KS) deal the share price has fallen to around the KRW15,000. Alastair Jones now thinks a lot of bad news is in the price and the available synergies from CJ Hello offset a weaker earnings outlook.
2. Sing Holdings – Surge in Full-Year Earnings with a Surprise Hike in Dividend. 67% Upside. BUY.
Sing Holdings (SING SP) announced its FY18 full-year results this evening.
Results were largely in line with expectations.
Take-up rate at Parc Botannia improved from 62% in 3Q FY19 to 66% in 4Q FY19. With the biggest agency in Singapore marketing the project, sales at Parc Botannia is expected to pick up in 2019.
A key surprise in Sing Holdings’ FY18 results was the 20% hike in its dividend to 1.2 S-cents per share in FY18.
My fair value for SHL is pegged at S$0.66 per share, implying an upside potential of 67%. I maintain my BUY recommendation on Sing Holdings Ltd.
3. US 10yr Triangle Geared for a Power Breakout
Our macro stance touted a bearish yield scenario from 3.26% and again once below 3% with a target of 2.62% and has since been revised lower. Recent yield fade call from 2.80% targets much lower yields and will have a ripple effect globally.
A fresh plunge in yield would favor rate sensitive assets and warn of a harder slow down cycle. The bond market is pounding the table that global growth will slow more dramatically than what is currently priced into market and equities.
The offset is clearly a more dovish CB tone, China stimulus and closing in on sentiment capitulation.
Triangulation breakout will offer a powerful trade. Yields are set for a big move.
4. Value-Enhancing 5G Spectrum Allocations on the Way for KDDI, DoCoMo, Softbank and Rakuten
The Ministry of Industry Affairs and Communications (MIC, the regulator) will allocate 2.2 GHz of new spectrum bandwidth by the end of March equal to 2.8x the existing spectrum base. This is not unexpected but we think this is a good opportunity to re-iterate some of the positive points on 5G spectrum as operators make their final applications this month and we wait for a final decision in six weeks. Importantly, with ten spectrum channels, not everyone will be treated equally although all should benefit. We expect Rakuten Inc (4755 JP) to pick up one-two bands whilst KDDI Corp (9433 JP) , NTT Docomo Inc (9437 JP) and Softbank Corp (9434 JP) should all receive at least two.
5. Komatsu, HCM, CAT: The Stock Punishment Does Not Match the Outlook Deterioration Crime
We have been struck by the degree of underperformance of the construction machinery names despite strong earnings performance. While the cyclical nature of the names makes judging performance purely on earnings results (or even the outlook) hazardous, in this case we believe the market has been premature and excessive in its derating of these stocks which have sold off to similar levels as the WFE names such as Tokyo Electron (8035 JP) and Robotics names such as Fanuc Corp (6954 JP).
While it is possible that Komatsu Ltd (6301 JP), Hitachi Construction Machinery (6305 JP) and Caterpillar Inc (CAT US) have sold off partly due to their China exposure, it needs to be emphasised that 1) these companies are no longer heavily dependent on China and revenue exposure is 12% for HCM, 10% for CAT and 7% for Komatsu, and 2) while the Chinese market at about 60k excavators is probably close to the top of its cycle, it is not a bubble like in 2010 when it 111k units and thus a collapse in demand is unlikely (though a decline is).
As the table below notes, earnings estimates for the construction machinery companies have only tapered marginally from their peaks, and while find the forecasts for continued growth into 2020 somewhat optimistic the resilience of mining demand means we are disinclined to dismiss them out of hand. On the other hand estimates for WFE and Robot names have dropped significantly, but despite this, share price performance is similar for all three categories of stocks. We discuss this stark discrepancy further below.
Change in 2019 OP Estimate Vs. Peak | Peak OP Estimate Date | Peak to Trough Share Price Change | Share Price Vs. Peak | Peak Share Price Date | |
Caterpillar | -6.4% | Aug 18 | -35.2% | -21.4% | Jan 18 |
Komatsu | -2.1% | Dec 18 | -49.7% | -38.8% | Jan 18 |
Hitachi Construction Machinery | -4.6% | Oct 18 | -50.5% | -41.2% | Feb 18 |
Average | -4.4% | -45.1% | -33.8% | ||
ASML | -10.1% | Jan 19 | -31.2% | -14.4% | Jul 18 |
Applied Materials | -38.4% | Apr 18 | -53.2% | -36.8% | Mar 18 |
LAM Research | -28.7% | Apr 18 | -46.4% | -21.3% | Mar 18 |
Tokyo Electron | -36.6% | Jul 18 | -49.9% | -32.4% | Nov 17 |
Average | -28.5% | -45.2% | -26.2% | ||
Fanuc | -44.7% | Mar 18 | -52.9% | -42.4% | Jan 18 |
Yaskawa | -34.7% | Mar 18 | -58.5% | -47.0% | Jan 18 |
Harmonic Drive Systems | -43.2% | May 18 | -65.9% | -49.3% | Jan 18 |
Average | -40.9% | -59.1% | -46.2% |
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