In this briefing:
- Chinese Telcos: 5G Launches in 2019. Buy the 5G Beneficiary (China Tower).
- Global Banks: Some New Year Pointers
- Jamuna Bank: Clearing Electoral Uncertainties
- A Pricey Deal in Hindsight, Walmart? India Reviews Policy – Amazon, Walmart May Need to Rejig Model
- Geely: Worst Case Priced In, Waiting for Sector Headwinds to Abate
1. Chinese Telcos: 5G Launches in 2019. Buy the 5G Beneficiary (China Tower).
We highlighted in a recent note Chris Hoare‘s positive outlook for China Tower (788 HK). Our view takes into account the 5G build-out commencing this year, improved capex efficiency from using “social resources”, the rapid growth in non-tower businesses that lie outside the Master Services Agreement (MSA), and the valuation benefit from what looks like surprisingly investor friendly management.
This note focuses on four key issues facing the Chinese telcos in 2019:
- 5G capex (March) (this is by far the most important),
- Regulatory newsflow (February/ March),
- Operating trend improvements (August), and
- Emerging business opportunities driving future growth (August).
We remain positive on the telcos which trade at low multiples. China Unicom (762 HK) continues to trade at a discount, yet is most exposed to the positive story emerging at China Tower. We switch our top pick among the telcos from China Mobile (941 HK) back to China Unicom as a result. Alastair Jones thinks China Telecom’s (728 HK) premium multiple is at risk if management execution on the cost base doesn’t improve. It is our least preferred telco at this stage. Overall, we expect China Tower to outperform all telcos and it is our top pick. The upgrade to China Tower flows through the telcos (valuation and costs) and our new target prices are as follows: China Unicom to HK$14.4, China Telecom to HK$5.4 and China Mobile to HK$96.
2. Global Banks: Some New Year Pointers
Here is a look at how regions fare regarding key indicators.
- PH Score = value-quality (10 variables)
- FV=Franchise Valuation
- RSI
- TRR= Dividend-adjusted PEG factor
- ROE
- EY=Earnings Yield
We have created a model that incorporates these components into a system that covers>1500 banks.
3. Jamuna Bank: Clearing Electoral Uncertainties
The Jamuna Bank Ltd (JAMUNABA BD) narrative is underpinned by a quintile 1 global PH Score™ and a low franchise valuation as well as a high Earnings Yield by global standards.
Established by a group of local entrepreneurs in 2001, experienced in trade, commerce, and industry, Jamuna Bank Ltd is the only Bengali named 3rd generation private commercial bank. JBL. has exhibited vibrant growth over 18 years. The Credit Rating Agency of Bangladesh classifies JBL as AA2 [very strong capacity and very high quality] for Long Term and ST-2 for Short Term.
JBL offers both conventional and Islamic banking. The Bank provides diverse services, encompassing trade, commerce, and manufacturing. The traditional focus has been on the corporate sector (especially textiles and manufacturing services) though SME lending and retail are fast-expanding. JBL is engaged with entrepreneurs in setting up enterprise ventures and BMRE of existing industrial units. Operations are centred on Dhaka and Chittagong though Rajshahi is an important market too.
All 122 branches are running with real-time online capacity while the bank has 243 ATMs, sharing with other partner banks and consortium throughout Bangladesh. In addition, JBL is a Primary Dealer of government. securities.
While the economy is in a relatively stable state, the Banking Sector presents a highly mixed picture. Funding and liquidity are adequate in the Banking System in general. At the main listed entities, ROA and ROE stand at around 1% and 12%. Capitalisation targets are moving in the right direction though there is a shortfall at a number of lenders. The sector is weighed down by SOCB asset quality and poor governance which needs to be addressed as it exerts a distortionary impact across the system. SOCB NPL Ratio stands at around 30% and is probably worse than this versus around 10% for the system in general. The system stressed Loan/Investment Ratio is probably double this level. Worryingly, private sector bank defaults are rising at a fast clip as LDRs climb at the same time.
Shares of JBL stand on an Earnings Yield of 17.7%, a P/B of 0.94x, and a FV at 9%, below EM and global medians. A quintile 1 PH Score™ of 7.9 captures value-quality attributes. Combining franchise valuation and PH Score™, Jamuna Bank stands in the top decile of opportunity globally. Recent strong share performance is not unrelated to the clearing of electoral uncertainty. And there seems a real tailwind behind these shares of late.
4. A Pricey Deal in Hindsight, Walmart? India Reviews Policy – Amazon, Walmart May Need to Rejig Model
Would Wal Mart Stores (WMT US) have paid USD16 bn last year for Flipkart, a leading online Indian retailer, if the recent clarification on India’s policy on FDI in e-commerce were in place back then? Foreign owned online retailers in India ( Amazon.com Inc (AMZN US) , Wal Mart Stores (WMT US) and Alibaba Group Holding (BABA US) ) will need to rejig their operating models and may face prospects of slower growth and even more distant breakeven targets, if the Indian Government is indeed determined to enforce its policy that e-commerce ‘Marketplaces’ operate only as platforms for third party vendors. Unsurprisingly, Amazon.com Inc (AMZN US) and Wal Mart Stores (WMT US) have reportedly teamed up to lobby the government on these regulations.
The Indian Government had posted a one-page circular on Dec 26th giving further clarifications to its existing policy on foreign owned e-commerce entities. The detailing of policy specifics seems to be an attempt to enforce the existing policy restrictions on foreign owned online retailers; compliance has so far been sketchy. India do not allow majority foreign ownership in multi brand retail stores and online retailers are allowed to operate only as ‘Marketplaces’ and not as B2C entities. With national elections due in next few months, the Government cannot ignore demands from domestic lobby groups to reign in free play by deep pocketed foreign operators that have been hurting local retailers.
In the detailed note below, we present (1) an overview of the regulatory framework and restrictions under which online retailers operate in India (2) the updated policy and its impact on operating models of Amazon and Walmart in India (3) expectations for India’s e-commerce players. Also, there is a likely gainer from all these – a listed Indian player aspiring to trump global majors in India’s online retail turf.
5. Geely: Worst Case Priced In, Waiting for Sector Headwinds to Abate
Geely announced its Dec 2018 car sales volume at 93,333 units (down 39% yoy) and its FY2018 sales volume at 1.5mn units, 6% lower than our estimate of 1.59mn units.
Meanwhile management sets its FY2019 sales target at 1.51mn units, which surprised the market as the market consensus stood at around 1.8mn units. The stock price corrected by 11.3% on Jan 8th, right after the announcement.
In our view, it is reasonable for the management to give a cautious guidance for 2019E. After all, 2019E China’s auto sales volume might drop by 8% yoy.( China Auto Outlook 2019 – Keep Warm, Winter Is Here! )
However, would Geely’s aggressive new model launches sales offset the weak demand on existing models in 2019E? If not how bad it could be? In this report, we have done a scenario analysis. Our analysis shows that the possibility that Geely missing its 2019E guidance is low. Even assuming our worst case scenario, the stock would be at 7.1x P/E and no medium term downside from current levels.
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