In this briefing:
- Sony: Yoshida Tightens Discipline as Hirai Steps Away Completely
- Screening the Silk Road: (Small-)Mid Cap Free Cash Flow
- Orix Corporation: Osaka Casino Resort Partnership with MGM Stakes Out Earliest Claim Among Peers
- Industrial Bank of Korea: Uninspiringly Cheap
- Ping An Bank: Not Cheap Enough
1. Sony: Yoshida Tightens Discipline as Hirai Steps Away Completely
Kazuo Hirai, architest of Sony Corp (6758 JP)‘s remarkable recovery, announced today that he would be stepping down as Sony Chairman in Jun this year. The transition in leadership to former CFO Kenichiro Yoshida has been completed and was accomplished smoothly so we do not see any negative impact.
Recent concerns about Sony’s loss making smartphone unit also appear to be being addressed as the Nikkei reports that Sony would look to cut costs and headcount in half by Mar 2020. The English article is here and the slightly more detailed Japanese version is here.
2. Screening the Silk Road: (Small-)Mid Cap Free Cash Flow
In April 2018, we published a FCF screen with the sole aim of identifying potential names which could prove to be strong candidates in a Small-Mid Cap portfolio. We move to update this list with a strong bias to the mid-cap stocks appearing.
This screen performs well with markets where the value style is in favour. Given the market appears to be trending back to this style, we believe the Small-Mid Cap universe should capitalise on this over the next 12-months. We identify within the screen some high trading liquidity deep value candidates across the Asia Pacific universe.
Our updated 2019 list of names contains 17 stocks, with a more diversified spread of countries and sectors, compared to April 2018. A point to note is that basic material stocks have strengthened within the composition. Interestingly, the style of stock which has increased its presence amongst the list is the contrarian style, highlighting an opening up in value.
3. Orix Corporation: Osaka Casino Resort Partnership with MGM Stakes Out Earliest Claim Among Peers
- MGM Resorts International announced plans to partner 50/50 with Japan’s financial services operator, Orix, the first such deal made public.
- A bet on both or either company now at near their 52 week lows bears a good risk/yield proposition for investors in the consumer discretionary space.
- Japan’s IR’s will potentially grow into a US$15.8b to US$17.5B industry by 2024/5 or before. We expect the three licenses will go to partnerships between global gaming giants and Japan financial or game manufacturing partners.
4. Industrial Bank of Korea: Uninspiringly Cheap
Industrial Bank of Korea (IBK LX) looks relatively cheap and scores well on our VFM (Valuation, Fundamentals, Momentum) system.
The trademarked PH Score comes in at 8.2. P/Book is a lowly 0.42x. Earnings Yield stands at 20%. Franchise valuation is 7%. Total return Ratio lies at 1.4x. RSI is low.
2018 numbers were solid enough though deeper analysis shows that they were not as good as they seem to be:
- The specific IBK model is reliant on debt to fund SME growth and interest expense growth is running well ahead of expansion in interest income.
- The squeeze on the top-line, despite firm fee income growth, means that “underlying jaws” were negative. The CIR may be declining but OPEX growth remains somewhat elevated, and in excess of “underlying” income.
- PT Profit expansion of 23% YoY is flattered by high contributions from “other non-interest income” and gains on securities. Combined, these lower quality income streams make up 40% of PT Profit. This means that Profitability metrics (which are in excess of the Asian median) may not be as benign as they seem. In fact, we would argue that when one takes the aforementioned items into consideration, PT Profit was essentially flat at best.
- Insurance operations again reported a negative result.
- While Asset Quality looks relatively respectable, we note a 17% increase in “precautionary” or SMLs which were in excess of impaired loans or even NPLs. Regarding the latter, there may be some bad asset migration into the “loss” category: up 12% YoY.
5. Ping An Bank: Not Cheap Enough
Ping An Bank Co Ltd A (000001 CH) results show gradual erosion in fundamental trends. We believe that positive fundamental momentum (within our quantamental approach) leads to higher stock prices.
Behind the headline numbers, there lies an acute rise in funding costs in excess of the growth in interest income on earnings assets. As elsewhere in China, there is a festering asset quality issue too. While not as toxic versus diverse peers, it is notable: the impaired asset portfolio more than doubled YoY.
Valuations are not especially cheap relative to the region (including Japan). Franchise Valuation at 10% and P/Book of 0.94x are at a premium to the regional medians of 8% and 0.77x, respectively. The Total Return Ratio is <1x.
In conclusion, we do not see a lot that has changed for the better at Ping An Bank (funding, liquidity, efficiency, profitability and asset quality) though the headline deterioration is not so drastic. Underlying concerns lie with core interest income generation given sky-high funding expenses and pervasive asset quality issues.
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