In this briefing:
- Japan Display: Squeezing Up 36% As Chinese Investment Could Solve Balance Sheet Troubles
- BreadTalk (BREAD SP): As Din Tai Fung Opens in London, CEO Puts Out Target to Double Mkt Cap
- Renesas: Visit Suggests Utilisation Rate Rebound Could Take Longer Than Sell-Side Expects
- Tobacco: A Framework for Analyzing the Sin Sector from an ESG Perspective, with a Focus on ITC
- DeNA (2432): Undervalued Internet Stock
1. Japan Display: Squeezing Up 36% As Chinese Investment Could Solve Balance Sheet Troubles
As we mentioned in a comment in Japan Display: Cost Structure Improvement Is Good but Shipment Delay and IPhone XR Cloud Outlook the NHK reported last night that JDI was in talks with a Chinese consortium to secure something in the region of ¥50bn in funding (more than its market cap yesterday) for a more than 33% stake in the company. The Nikkei shed light on the identities of some of the consortium this morning mentioning investment fund Silk Road, Minth Group Ltd (425 HK) and Shenzhen O Film Tech Co A (002456 CH). Bloomberg has also mentioned that the consortium could invest a further ¥500bn to establish a new facility in China for the production of OLED panels.
We spoke to the company this morning to get colour on these announcements.
2. BreadTalk (BREAD SP): As Din Tai Fung Opens in London, CEO Puts Out Target to Double Mkt Cap
Breadtalk (BREAD SP) has been a great Singapore Inc story since its founding in 2000. The company, under the leadership of George Quek, has grown from a few bakery outlets to hundreds of outlets across Asia. Profitability at Breadtalk has been lackluster but shares remain cheap on an EV/EBITDA basis.
Meanwhile, the group has an aggressive target to achieve 8% NPM by 2020 which not a single sell-side analyst believes they can achieve. Over the past week, the CEO was quoted in a Business Times article saying that he wants to achieve a “1 billion SGD market cap” vs the 480 million SGD market cap currently. While this could be easily dismissed as marketing talk, this target is not unrealistic at all.
With the launch of its first Din Tai Fung outlet in London investors better take notice. One of the drivers of upside surprises might be the rapid roll-out of Din Tai Fung in the UK and the rest of Europe. The CEO is even keen to explore expansion in the US market and has done research trips to Texas, LA and New York.
With the shares having derated from 1.16 SGD in early August to 0.86 SGD recently the valuation (6.8x 2019 EV/EBITDA) is now attractive once again. My Fair Value estimate remains at 1.25 SGD (47% upside).
3. Renesas: Visit Suggests Utilisation Rate Rebound Could Take Longer Than Sell-Side Expects
We visited Renesas Electronics (6723 JP) this week to discuss progress on inventory reduction and its likely ramp of utilisation rates/wafer throughput, as well as to gather further details on the IDT acquisition and its long -term strategy. On the whole, we continue to like the long-term picture, consider the stock to be undervalued and believe investors with long time horizons should be looking at the stock on the long side. However, our discussions suggested to us that while production cuts to reduce inventory should be completed this month or at worst in 1Q2019, a ramp in utilisation rates could take longer than is implied by consensus.
4. Tobacco: A Framework for Analyzing the Sin Sector from an ESG Perspective, with a Focus on ITC
Contrary to the perception that the rising adoption of socially responsible investment practices has caused Big Tobacco to be shunned by portfolio managers, our shareholding analysis shows that institutional holding in most of these ‘sin’ stocks has increased in the last 4 and 8 quarters.
Nevertheless, Big Tobacco suffered a pounding in 2018. Investors had bought into tobacco premising reduced risk products (Eg: e-cigarettes, Heat Not Burn products) would reduce regulatory risk and reverse decades of sales decline. As it turned out, regulators frowned at the popularity of vaping amongst teens in the US, calling out companies for baiting youngsters into long-term smoking habits. Regulators also told off companies for marketing e-cigarettes and HNBs as healthier options, as tobacco still kills.
Ethical portfolios with negative screens (for example, ones that will not invest in tobacco stocks) have underperformed in the long-term past. There is a growing tribe of funds committed to responsible investing with positive ESG screens. For such funds, we present in this insight a framework for analyzing the sector from an ESG perspective. A deep dive into ITC Ltd (ITC IN), the only cigarette major to turn in a positive performance this year, vindicates, in our view, its efforts to materially de-risk its asset and revenue profile, coupled with very high levels of commitment towards community development.
5. DeNA (2432): Undervalued Internet Stock
Dena Co Ltd (2432 JP) used to be the GO-GO internet stock for both retail and institutional investors in Japan during the previous bull run before 2008 and trading at 40-50x PER. The multiples have since then collapsed to 10-20x PER although the business prospect remains solid if not better. Benefiting from the increasing regulation in China, DeNA signed an agreement with Tencent Holdings (700 HK) to distribute Arena of Valor in Japan which will boost revenue and improve margin. At 14x PER and 1.2x PBR, DeNA looks attractive.
