holt apac viewpoint finding quality & growth opportunities
TRANSCRIPT
Clarity is Confidence
This is market commentary and not a research document. 1
HOLT Market Commentary
February 2017
HOLT APAC Viewpoint Finding Quality & Growth Opportunities
Contacts
Jungwoo Kim, CFA
HOLT
+852 2101 7046
HOLT APAC Sector Specialist Team
What is HOLT?
HOLT is a value-based, return on capital
framework proprietary to Credit Suisse. HOLT provides an objective view of over 20,000 companies in 65 countries using a methodology
that examines accounting information, converts it to cash, and then values that cash, allowing investors to identify key drivers of value. HOLT
uses this framework to help institutional investors across the investment process, from idea generation and company analysis to
portfolio construction and risk management.
HOLT LensTM is the online platform that allows
clients to access the global database and perform custom analysis.
21 February 2017
The APAC ex-Japan region has seen positive CFROI® revisions for six months in
a row, which overlaps with the significant underperformance of the Quality factor,
while Value prevailed in the region.
A recent study by the HOLT Quantitative Strategy team notes that the relative
underperformance of high quality and growth stocks against the low-scoring ones
is widely observed across the global equity markets. Moreover, the magnitude of
underperformance at the present levels has rarely persisted in the past, suggesting
a potential reversal in 2017.
For investors looking for quality laggards or anticipating a rotation back into quality
stocks, HOLT provides a screen for companies with strong quality and growth
characteristics.
Pages 4-6 contain quality growth laggards in both APAC ex-Japan (ex-China-A)
and Japan markets, screened by HOLT Operational Quality and Growth scores.
From this list, the HOLT Sector Specialist team provides individual company
scenarios on Eastern Polymer Group, Fisher & Paykel Healthcare, KDDI, Korea
Kolmar, and YY.
Other large caps companies in this screen include China Resources Gas, China
State Construction, Luye Pharma and Aurobindo Pharma.
The Asia Pacific ex-Japan region has been six months into the cash flow upgrade cycle
(driven by positive consensus EPS revisions)—the first positive trend observed in the
past five years (Figure 1).
Figure 1: I Positive revision cycle for the first time in the past five years
Monthly CFROI revisions (20-year view): APAC ex-Japan, ex-Financials
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1M CFROI Revisions 3M CFROI Revisions
Clarity is Confidence
This is market commentary and not a research document. 2
HOLT Market Commentary
February 2017
Identifying “quality growth” stocks
The HOLT framework systematically ranks companies based on their fundamental characteristics using proprietary data that is free
of accounting and inflation distortions. Single factor scores are combined to form a composite factor score relative to peers; details are below.
Quality: Focuses on a firm’s historical cash flow
return on investment, or CFROI, and management’s capital allocation skill. Firms that earn a high CFROI and reinvest in their business
are wealth-creative and are awarded higher scores relative to their sector and regional peers.
HOLT Quality Score Components: LFY CFROI Level (50%) Managing for Value (30%)
Change in Value Creation (20%) For more information on Quality and the HOLT
alpha factors, see the HOLT Scorecard
Primer.
Growth: A forward-looking metric that measures the degree to which a company is
likely to have higher or lower future cash flow growth than its regional peers. HOLT’s growth score doesn’t rely as heavily on historical levels
of growth or accounting earnings as traditional style rankings. Rather, it focuses on a firm’s ability to grow, the likelihood of pursuing growth,
and the market’s expectations for future growth. HOLT Growth Score Components:
Historical change in cash flow (30%) Forecast CFROI change (30%) Real asset growth rate (15%)
Market implied asset growth (15%) Sales (size) (10%)
More information on the HOLT Growth
Percentile
Monthly CFROI revisions (recent 18 months): APAC ex-Japan, ex-Financials
Source: Credit Suisse HOLT
From a style performance perspective, such period of strong cash flow revisions
overlaps with the outperformance of value over operational quality. As seen from Figure
2, the return difference between the long/short strategy of value and quality was
14.8% in the past twelve months.
Figure 2: I Relative outperformance of value over quality in recent months
Source: Credit Suisse HOLT
The notable underperformance of high quality stocks that also have high growth
characteristics has been widespread across the globe. Furthermore, the degree of its
relative underperformance seems rather rare, breaking through -10% levels for the first
time since the Global Financial Crisis period. In their recent report A Bad Year for Good
Companies, the HOLT Quantitative Strategy team observed that in every region, stocks
with above-average quality and growth characteristics underperformed those with
below-average characteristics by more than 7% (Figure 3).
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Clarity is Confidence
This is market commentary and not a research document. 3
HOLT Market Commentary
February 2017
Figure 3: I The underperformance of high quality and growth stocks
appears widespread and notably poor versus history
Rolling 12-month relative returns of global high quality & growth stocks against global low
quality, low growth stocks
Universe: Largest 1,000 stocks by market cap in each major region. High (low) Quality & Growth = top (bottom) half of regional universe on HOLT Quality and Growth scores.
Source: Credit Suisse HOLT, Data as of 31/12/2016, imported from the report, A Bad Year for Good Companies (HOLT Quantitative Strategy Team, 18 January 2017).
Given that the current weakness of high quality and growth has reached a point of rarity
in history, better quality and growth stocks could potentially be considered to increase
exposure by investors who are wary of near-term market volatilities yet see some
strength in the earnings upgrade cycle.
It should also be noted, however, that more than half of high quality and growth stocks
in the APAC ex-Japan region had negative revisions in recent months, not particularly
related to the region’s upgrade cycle. Among the high quality and growth group in
APAC ex-Japan (defined by top half in both HOLT Quality and Growth score), only
36% stocks have seen positive revisions in the past three months, compared to 64% in
Japan. Therefore, prudence is warranted for investors; the chance of over-correction of
share price and potential inflection of earnings sentiment in the months ahead may
have to be carefully weighed against the potential continuation of the current negative
trend.
In the following pages, stocks with high HOLT Quality and Growth score (both above
60th percentile) which have underperformed their local markets in the past one year are
presented in APAC ex-Japan and Japan, respectively. Note these are long-list of high
quality, high growth laggards, before taking account of recent cash flow revisions or
HOLT warranted upside. Five potentially underappreciated ideas that may see
turnaround in market expectations supported by their healthy quality and growth profile
include EPG, FPH, KDDI, Korea Kolmar, and YY.
Clarity is Confidence
This is market commentary and not a research document. 4
HOLT Market Commentary
February 2017
Figure 4: APAC ex-Japan Quality Growth Laggards List
UNIVERSE : APAC ex-Japan (ex-China A), including ADRs of companies based in China
CRITERIA : Market Cap ≥ $1 bn, Avg. Daily Liquidity ≥ $1 mn, Operational Quality Score > 60, Growth Score > 60, 52W Market Relative Returns < 0
*Sorted by country and then by company name in alphabetical orders
(Continued in the next page)
Symbol NameMarket
Cap ($bn)
Avg. Daily
Liq. ($mn)Country Sector
Operational
Quality
Score
Growth
Score
52W
Market
Relative
Return
ABP ABACUS PROPERTY GROUP 1.3 2.2 AUS Real Estate 66 80 -13.2
BKL BLACKMORES 1.6 5.4 AUS Consumer Staples 95 64 -42.4
BWP BWP TRUST 1.4 3.0 AUS Real Estate 89 65 -21.1
CAR CARSALES.COM 2.1 8.4 AUS Information Technology 98 65 -13.7
CHC CHARTER HALL GROUP 1.6 6.0 AUS Real Estate 81 74 -1.8
CQR CHARTER HALL RETAIL REIT 1.3 3.7 AUS Real Estate 74 60 -12.8
GMG GOODMAN GROUP 9.9 22.3 AUS Real Estate 94 67 -1.1
GOZ GROWTHPOINT PROPERTIES AUSTRALIA 1.4 1.1 AUS Real Estate 85 61 -12.6
LNK LINK ADMINISTRATION HOLDINGS 2.0 7.8 AUS Information Technology 71 90 -13.2
REA REA GROUP 5.5 11.3 AUS Consumer Discretionary 93 70 -7.2
TPM TPG TELECOM 4.1 11.5 AUS Telecommunication Services 100 84 -47.7
VOC VOCUS GROUP 1.7 14.5 AUS Telecommunication Services 100 81 -58.0
CBPO CHINA BIOLOGIC PRODUCTS 3.1 16.0 CHN (ADR) Health Care 98 66 -13.9
VIPS VIPSHOP HOLDINGS 7.3 70.0 CHN (ADR) Consumer Discretionary 99 69 -6.8
YY YY 2.7 41.9 CHN (ADR) Information Technology 85 86 -32.6
1530 3SBIO 2.6 2.9 HKG Health Care 71 99 -31.6
579 BEIJING JINGNENG CLEAN ENERGY 2.1 1.3 HKG Utilities 60 68 -12.9
699 CAR 2.4 3.7 HKG Industrials 64 77 -33.0
165 CHINA EVERBRIGHT 3.4 5.4 HKG Financials 86 82 -14.7
384 CHINA GAS HOLDINGS 7.1 7.0 HKG Utilities 93 80 -1.5
3908 CHINA INTERNATIONAL CAPITAL 3.4 2.0 HKG Financials 62 72 -7.8
1193 CHINA RESOURCES GAS GROUP 6.9 8.5 HKG Utilities 98 84 -0.2
3311 CHINA STATE CONSTRUCTION INT'L 6.9 13.8 HKG Industrials 69 64 -6.6
570 CHINA TRADITIONAL CHINESE MEDICINE 2.3 3.2 HKG Health Care 66 93 -24.2
1363 CT ENVIRONMENTAL GROUP 1.3 4.2 HKG Utilities 100 91 -31.9
3799 DALI FOODS GROUP 7.7 4.2 HKG Consumer Staples 67 78 -16.9
2688 ENN ENERGY HOLDINGS 5.3 9.9 HKG Utilities 89 70 -5.5
1776 GF SECURITIES 17.1 7.7 HKG Financials 95 65 -1.0
6886 HUATAI SECURITIES 15.0 11.4 HKG Financials 76 61 -8.5
2186 LUYE PHARMA GROUP 2.1 7.5 HKG Health Care 65 75 -35.8
1177 SINO BIOPHARMACEUTICAL 6.5 13.7 HKG Health Care 96 78 -8.8
934 SINOPEC KANTONS HOLDINGS 1.2 2.3 HKG Energy 81 81 -12.1
1666 TONG REN TANG TECHNOLOGIES 2.3 1.4 HKG Health Care 67 62 -3.5
933 BRIGHTOIL PETROLEUM HOLDINGS 3.5 1.3 HKG Energy 91 76 -1.6
1 CK HUTCHISON HOLDINGS 46.2 55.7 HKG Industrials 72 66 -22.7
1448 FU SHOU YUAN INTERNATIONAL GROUP 1.2 1.3 HKG Consumer Discretionary 84 92 -39.7
1310 HKBN 1.2 1.4 HKG Telecommunication Services 87 70 -27.3
1970 IMAX CHINA HOLDING 1.6 2.7 HKG Consumer Discretionary 88 76 -40.6
439 KUANGCHI SCIENCE 2.3 1.6 HKG Materials 61 100 -22.9
198 SMI HOLDINGS GROUP 1.3 1.4 HKG Consumer Discretionary 89 83 -26.2
345 VITASOY INTERNATIONAL HOLDINGS 2.0 1.6 HKG Consumer Staples 85 67 -13.0
CTRA CIPUTRA DEVELOPMENT 1.6 2.3 IDN Real Estate 67 74 -9.2
HMSP HANJAYA MANDALA SAMPOERNA 33.8 3.7 IDN Consumer Staples 88 62 -22.3
PTPP PEMBANGUNAN PERUMAHAN 1.4 3.4 IDN Industrials 68 86 -15.8
TBIG TOWER BERSAMA INFRASTRUCTURE 2.0 1.1 IDN Telecommunication Services 97 90 -26.2
ABB ABB INDIA 3.9 1.3 IND Industrials 83 90 -0.9
ASOK ASHOK LEYLAND 4.0 13.5 IND Industrials 71 76 -10.2
ASPN ASIAN PAINTS 13.9 20.8 IND Materials 97 67 -5.8
ARBN AUROBINDO PHARMA 5.8 18.8 IND Health Care 74 70 -19.3
CADI CADILA HEALTHCARE 6.6 5.0 IND Health Care 66 63 -3.1
COLG COLGATE-PALMOLIVE (INDIA) 3.7 3.7 IND Consumer Staples 97 64 -15.3
CUMM CUMMINS INDIA 3.7 2.6 IND Industrials 84 63 -20.9
DABU DABUR INDIA 7.0 3.8 IND Consumer Staples 91 65 -15.2
DIVI DIVI S LABORATORIES 2.9 22.7 IND Health Care 87 64 -46.0
EMAM EMAMI 3.7 2.2 IND Consumer Staples 76 76 -13.7
HLL HINDUSTAN UNILEVER 27.4 12.3 IND Consumer Staples 96 71 -17.2
INGL INTERGLOBE AVIATION 4.5 2.2 IND Industrials 91 75 -14.6
Clarity is Confidence
This is market commentary and not a research document. 5
HOLT Market Commentary
February 2017
Source: Credit Suisse HOLT
Symbol NameMarket
Cap ($bn)
Avg. Daily
Liq. ($mn)Country Sector
Operational
Quality
Score
Growth
Score
52W
Market
Relative
Return
MRCO MARICO 5.2 5.6 IND Consumer Staples 94 61 -3.7
PIDI PIDILITE INDUSTRIES 5.1 4.2 IND Materials 99 87 -6.7
REXP RAJESH EXPORTS 2.2 1.3 IND Consumer Discretionary 93 64 -52.1
SIEM SIEMENS INDIA 6.4 3.9 IND Industrials 79 72 -0.3
SUN SUN PHARMACEUTICALS INDUSTRIES 23.4 37.0 IND Health Care 62 63 -44.6
TVEB TV18 BROADCAST 1.0 1.8 IND Consumer Discretionary 84 86 -6.0
UNSP UNITED SPIRITS 5.0 12.2 IND Consumer Staples 69 80 -21.0
WABC WABCO INDIA 1.6 1.1 IND Consumer Discretionary 88 92 -20.2
090430 AMOREPACIFIC 17.3 33.1 KOR Consumer Staples 71 86 -33.5
002790 AMOREPACIFIC GROUP 8.6 16.1 KOR Consumer Staples 63 87 -28.5
078340 COM2US 1.2 7.5 KOR Information Technology 96 72 -27.1
128940 HANMI PHARM 3.0 33.2 KOR Health Care 75 82 -59.2
009240 HANSSEM 3.4 10.0 KOR Consumer Discretionary 94 65 -26.5
047810 KOREA AEROSPACE INDUSTRIES 4.7 23.4 KOR Industrials 75 84 -28.3
161890 KOREA KOLMAR 1.4 9.7 KOR Consumer Staples 84 88 -33.8
051900 LG HOUSEHOLD & HEALTH CARE 12.1 27.6 KOR Consumer Staples 79 86 -12.8
016170 LOEN ENTERTAINMENT 1.7 1.3 KOR Consumer Discretionary 91 64 -9.3
086900 MEDY-TOX 1.9 9.7 KOR Health Care 87 82 -5.7
SGXL SINGAPORE EXCHANGE 5.8 9.5 SGP Financials 80 63 -4.2
EPG EASTERN POLYMER GROUP 1.1 3.2 THA Materials 89 78 -16.3
EA ENERGY ABSOLUTE 2.8 5.5 THA Energy 93 89 -4.9
LH LAND AND HOUSES 3.3 4.9 THA Real Estate 71 72 -3.4
SAWAD SRISAWAD POWER 1979 1.3 8.5 THA Financials 100 90 -20.4
WHA WHA CORPORATION 1.3 6.3 THA Real Estate 94 98 -4.2
9910 FENG TAY ENTERPRISES 2.8 3.8 TWN Consumer Discretionary 88 64 -28.1
1536 HOTA INDUSTRIAL MFG 1.1 7.8 TWN Consumer Discretionary 86 86 -9.5
2915 RUENTEX INDUSTRIES 1.8 11.7 TWN Consumer Discretionary 68 80 -14.7
MSN MASAN GROUP 2.1 1.7 VNM Consumer Staples 67 90 -41.3
Clarity is Confidence
This is market commentary and not a research document. 6
HOLT Market Commentary
February 2017
Figure 5: Japan Quality Growth Laggards List
UNIVERSE : Japan
CRITERIA : Market Cap ≥ $1 bn, Avg. Daily Liquidity ≥ $1 mn, Operational Quality Score > 60, Growth Score > 60, 52W Market Relative Returns < 0
*Sorted by sector and then by company name in alphabetical orders
Source: Credit Suisse HOLT
Symbol NameMarket
Cap ($bn)
Avg. Daily
Liq. ($mn)Sector
Operational
Quality
Score
Growth
Score
52W
Market
Relative
Return
2670 ABC-MART 4.8 14.5 Consumer Discretionary 84 74 -16.2
2685 ADASTRIA 1.3 10.4 Consumer Discretionary 72 60 -16.7
2678 ASKUL 1.5 6.4 Consumer Discretionary 80 76 -4.6
4324 DENTSU 14.8 55.2 Consumer Discretionary 94 66 -17.2
7532 DON QUIJOTE HOLDINGS 5.5 17.6 Consumer Discretionary 63 65 -2.2
7988 NIFCO 2.5 8.9 Consumer Discretionary 67 90 -3.1
4755 RAKUTEN 13.3 53.2 Consumer Discretionary 82 83 -9.3
7453 RYOHIN KEIKAKU 5.1 37.1 Consumer Discretionary 79 83 -20.6
7309 SHIMANO 13.8 30.8 Consumer Discretionary 97 70 -7.8
2229 CALBEE 4.4 22.1 Consumer Staples 85 81 -36.2
4922 KOSE 4.6 21.9 Consumer Staples 94 94 -6.6
3549 KUSURI NO AOKI HOLDINGS 1.3 5.3 Consumer Staples 99 69 -19.2
2659 SAN-A 1.5 1.9 Consumer Staples 62 64 -6.8
9989 SUNDRUG 3.8 14.0 Consumer Staples 91 66 -14.4
8570 AEON FINANCIAL SERVICE 4.0 20.3 Financials 82 74 -20.2
8424 FUYO GENERAL LEASE 1.4 2.0 Financials 67 80 -4.0
8439 TOKYO CENTURY 3.6 5.1 Financials 84 87 -12.3
7164 ZENKOKU HOSHO 2.2 11.1 Financials 93 95 -0.2
7747 ASAHI INTECC 2.6 8.0 Health Care 93 85 -17.0
4521 KAKEN PHARMACEUTICAL 2.1 9.9 Health Care 92 67 -31.9
4536 SANTEN PHARMACEUTICAL 5.9 27.3 Health Care 62 78 -18.3
4555 SAWAI PHARMACEUTICAL 1.9 15.3 Health Care 90 65 -33.7
6869 SYSMEX 12.0 37.7 Health Care 97 89 -5.7
9787 AEON DELIGHT 1.6 1.9 Industrials 89 63 -23.7
6465 HOSHIZAKI 5.6 16.3 Industrials 78 77 -0.3
1812 KAJIMA 6.8 39.5 Industrials 76 70 -2.2
9375 KINTETSU WORLD EXPRESS 1.1 3.3 Industrials 71 69 -3.0
1861 KUMAGAI GUMI 1.1 9.1 Industrials 96 62 -14.8
9744 MEITEC 1.1 5.2 Industrials 69 84 -7.7
6005 MIURA 1.7 5.3 Industrials 63 73 -23.3
1802 OBAYASHI 6.8 27.3 Industrials 65 79 -12.7
4666 PARK24 4.0 20.5 Industrials 90 80 -12.9
1801 TAISEI 8.2 39.4 Industrials 80 71 -3.8
9697 CAPCOM 1.1 14.7 Information Technology 77 87 -2.4
3668 COLOPL 1.1 19.2 Information Technology 98 72 -60.9
2371 KAKAKU.COM 3.1 20.2 Information Technology 99 97 -36.4
4307 NOMURA RESEARCH INSTITUTE 8.5 14.6 Information Technology 82 76 -1.8
4684 OBIC 4.2 9.3 Information Technology 86 78 -13.7
7701 SHIMADZU 4.9 17.0 Information Technology 62 67 -4.6
4704 TREND MICRO 5.3 27.5 Information Technology 72 82 -4.9
7947 FP 1.9 3.4 Materials 78 70 -4.1
3291 IIDA GROUP HOLDINGS 4.7 11.6 Real Estate 81 62 -7.2
3249 INDUSTRIAL & INFRASTRUCTURE FUND 1.6 4.7 Real Estate 69 88 -19.7
8985 JAPAN HOTEL REIT INVESTMENT 2.5 9.7 Real Estate 90 78 -28.0
3283 NIPPON PROLOGIS REIT 3.9 12.7 Real Estate 64 92 -13.0
9433 KDDI 63.8 174.3 Telecommunication Services 73 64 -9.8
Clarity is Confidence
This is market commentary and not a research document. 7
HOLT Market Commentary
February 2017
Eastern Polymer Group PCL (EPG): Priced for minimal top-line growth
Scorecard rating: 77th percentile Sector specialist: Sonia Mak
Market cap.: US$1.1 bn Daily liquidity: US$3.2 mn
Principally engaged in three businesses (rubber insulation, auto parts, and decorations and plastic packaging), Eastern
Polymer Group (EPG)’s CFROI more than doubled in 2015 thanks to buoyant sales growth from all three segments. As
stated in its annual report, this was due to (i) robust domestic packaging demand, (ii) the acquisition of TJM Products
(Australian auto parts) and (iii) increase in sales volume for insulators especially from USA.
Looking ahead, management is committed to grow the company both organically (e.g. expand production capacity for
packaging business) and inorganically (e.g. planning to acquire a domestic auto business), as discussed in earnings
briefing. Despite the slight miss in 3Q16 figures, consensus appears to be growing more constructive on EPG’s outlook
as CFROI revisions finally turn positive after several months of earnings downgrades.
CFROI revisions finally turning positive after months of earnings downgrades
Source: Credit Suisse HOLT Lens™
Leveraging IBES consensus for the next three years, EPG is priced for minimal top-line growth of 2% and stable margins
at 23% till FY20. Implied sales growth does not appear demanding as it is lower than its 5Y median of 5% and has not
factored in any potential growth prospects despite its rosy outlook and strong management commitment. Using the same
margin assumption and increasing the sales growth to 6.6% (in line with FY18 level) will warrant a 16% upside (link to
HOLT LensTM).
Market-Implied scenario: Priced for minimal top-line growth (2%) and stable margins
Source: Credit Suisse HOLT Lens™
Clarity is Confidence
This is market commentary and not a research document. 8
HOLT Market Commentary
February 2017
Fisher & Paykel Healthcare (FPH AU): High quality growth at a reasonable price
Scorecard rating: 60th percentile Sector specialist: Peter Jabour
Market cap.: US$3.6 bn Daily liquidity: US$8.0 mn
Primarily engaged in the design, manufacture and marketing of medical devices used in respiratory and acute care (RAC),
and the treatment of sleep apnoea (OSA), Fisher & Paykel Healthcare has delivered four successive years of CFROI®
expansion on the back of sustained margin improvement and strong sales growth helping fuel greater asset efficiency.
With around half of the company's sales originated in the United States (Europe 30%, APAC 20%), currency headwinds
in 3Q16 contributed to relatively modest earnings downgrades over the same period. However, with the US dollar
strengthening against the NZ dollar during 4Q16 and new applications within Fisher & Paykel's RAC business expected
to deliver 20% p.a. revenue growth through to 2020 (report), market sentiment is likely to improve.
CFROI momentum has improved in recent months
Source: Credit Suisse HOLT Lens™
Applying key IBES consensus estimates for three-years before holding margins flat, Fisher & Paykel is priced to generate
8% sales growth over the subsequent seven years; for context, this is around two-thirds the company's five-year median
rate of growth and contrary to near-term "sell-side" estimates (link to HOLT Lens™).
Adopting the same key estimates but holding sales growth flat at the company's five year median instead (12%)
generates almost 30% potential upside.
Market implied scenario: Priced to generate high-single-digit sales growth in a stable margin environment
Source: Credit Suisse HOLT Lens ™
Clarity is Confidence
This is market commentary and not a research document. 9
HOLT Market Commentary
February 2017
KDDI (9433): Best in class with improving CFROI next year
Scorecard rating: 100th percentile Sector specialist: Shinya Takamura
Market cap.: US$67.7 bn Daily liquidity: US$188.8 mn
KDDI is one of the largest telecommunication companies in Japan. KDDI provides wireless voice and mobile internet
services, fixed line broadband services, traditional international long-distance connection and cable television services.
Due to the stable and robust business model, KDDI has delivered stable CFROI® with over 7% for a long time.
Looking at the next year’s IBES consensus estimates, KDDI would deliver positive sales growth and improving margins.
In result, its CFROI would improve to 9% level. KDDI’s competitors as NTT Docomo and Softbank are also expected to
deliver improving CFROI next year. But the expectation on KDDI is lowest among peers.
Market expectation on KDDI is the lowest among peers
Source: Credit Suisse HOLT Lens™
Applying IBES consensus estimates through 2018, KDDI is priced to earn a 6.2% CFROI by 2020 on 2.8% annual
sales growth, 25.5% margins and 0.53x asset turns. The implied CFROI level is the lowest in the past 15 years (link to
HOLT Lens™). 19% potential upside is warranted if KDDI could maintain 2015 margin level of 30.5% until 2020.
Market implied scenario: Priced to deliver the lowest CFROI in the past 15 years
Source: Credit Suisse HOLT Lens ™
Clarity is Confidence
This is market commentary and not a research document. 10
HOLT Market Commentary
February 2017
Korea Kolmar (161890): Fallen implied expectations while forecasts has remained unabated
Scorecard rating: 29th percentile Sector specialist: Jungwoo Kim
Market cap.: US$1.4 bn Daily liquidity: US$9.7 mn
Korea Kolmar, an OEM/ODM cosmetics manufacturer, which also makes pharmaceutical products and quasi-drugs, has
suffered from falling market expectations over the past year as both businesses saw industry-wide multiple contractions
(both Personal Products and Pharmaceutical industry aggregate Economic P/E fell from the peak of 40+ times in mid-
2015 to 24-25x currently), which contributed to the notable weakness of quality and growth themes in Korea.
While Korea Kolmar saw similar contraction in valuation, the stock has seen more cash flow upgrades than downgrades in
the past 18 months, with IBES consensus top-line growth still forecasts 28% in 2017 on sustained margins.
Market-implied vs. Forecast CFROI gap has continued to fall to 0 levels over the past year
*Note: thefall in forecast and market-implied CFROI in the current month is mainly due to change in asset growth forecast, not negative CFROI revisions Source: Credit Suisse HOLT Lens™
Leveraging IBES key estimates of top-line growth, margins, and capex for 2016-18, the implied expectations at current
share price can be translated into 21.5% top-line growth combined with flat margins and asset efficiency by 2020 (link to
HOLT Lens™). While the implied sales growth rate does not necessarily appear conservative, it also has to be considered
that the stock has historically traded at demanding assumption of 200-300bp CFROI improvement. Then a bull-case
scenario could be that the CFROI rise implied at share price could recover to such levels (potentially helped by unabated
growth trend), i.e. through EBITDA margins advance to 15%, which warrants 21% upside potential.
Market-implied Scenario: Priced for CFROI 21.5% top-line growth coupled with flat margins and asset efficiency
Source: Credit Suisse HOLT Lens™
Clarity is Confidence
This is market commentary and not a research document. 11
HOLT Market Commentary
February 2017
YY Inc. (YY US): Market leadership may be underappreciated
Scorecard rating: 99th percentile Sector specialist: Shawn Lee
Market cap.: US$2.7 bn Daily liquidity: US$42.3 mn
YY’s shares endured somewhat of a turbulent 2016 before ending the year down nearly 37%, underperforming the S&P
500 index. Despite the poor price momentum, YY screens as a Best in Class company on HOLT due to its high
operational quality, attractive valuation, and strong CFROI revision trend.
YY has a more established CFROI profile compared to peer MOMO due to its proven track record and recurring cash flow
from PC livestreaming (CS initiation report, 15 Sep 2016). The company has delivered average CFROI of 22% over the
past three years, underpinning its high operational quality score. In contrast, MOMO’s last reported CFROI in 2015 was
5%, although it is still in the early stages of mobile livestreaming growth.
YY vs. MOMO
Source: Credit Suisse HOLT Lens™
While MOMO’s mobile platform has appealed to investors, YY’s resilient market leading position may be
underappreciated given the stickiness of its users as well as strong track record (according to CS research). At the
current share price, YY is priced for no growth with EBITDA margins dropping by over 700 bp to 13% beyond FY18E
consensus forecasts. Even if the company is able to maintain at low double-digit growth of 10% with a similar decline in
margins, the HOLT warranted price is $71 (46% potential upside) (link to the upside scenario in HOLT Lens™).
46% potential upside even if growth slows to 10% along with lower margins of 13%
Source: Credit Suisse HOLT Lens™
YY INC MOMO INC
Clarity is Confidence
This is market commentary and not a research document. 12
HOLT Market Commentary
February 2017
New annual data
Companies with a market cap above US$1 bn that have been updated with latest annual data in the previous week.
Company Name Ticker Country Mkt Cap Current
USD (bn) Price Before After Before After Change (%) FY-1 FY0
GPT GROUP GPT AUS 6.73 4.88 11.49 8.23 5.40 5.28 (2.20) 5.00 5.45
SANTOS LIMITED STO AUS 6.37 3.99 84.21 93.92 7.21 7.74 7.34 (1.12) (0.58)
SYDNEY AIRPORT HOLDINGS LTD SYD AUS 10.29 6.02 (49.49) (45.94) 3.12 3.25 4.35 6.85 7.30
BANK RAKYAT INDONESIA (PERSERO) TBK PT BBRI IDN 21.45 11,700.00 3.00 6.33 12,401.36 12,440.41 0.31 14.05 11.45
ASAHI GLASS COMPANY, LIMITED(C) 5201 JPN 9.39 917.00 29.26 42.74 1,170.44 1,308.95 11.83 (2.09) (0.91)
COCA-COLA WEST COMPANY, LIMITED(C) 2579 JPN 3.02 3,130.00 (15.21) (13.90) 2,702.89 2,694.78 (0.30) (2.53) (3.63)
DMG MORI CO., LTD.(C) 6141 JPN 1.80 1,697.00 (76.27) (40.23) 352.18 1,014.31 188.01 5.87 (0.25)
JAPAN TOBACCO INC.(C) 2914 JPN 59.76 3,768.00 (2.25) 4.96 3,585.98 3,954.97 10.29 19.86 20.72
KURARAY CO., LTD.(C) 3405 JPN 5.35 1,719.00 38.35 34.04 2,302.90 2,304.10 0.05 3.01 3.04
LION CORPORATION(C) 4912 JPN 4.89 1,900.00 (53.24) (46.13) 976.25 1,023.62 4.85 2.56 5.35
MODEC, INC.(C) 6269 JPN 1.23 2,461.00 (33.68) (20.80) 1,533.29 1,949.00 27.11 (0.30) 11.35
NABTESCO CORPORATION(C) 6268 JPN 3.55 3,245.00 (40.32) (30.99) 1,798.46 2,239.24 24.51 5.49 6.22
NAKANISHI INC.(C) 7716 JPN 1.08 4,230.00 (4.21) (20.78) 4,069.45 3,350.97 (17.66) 10.08 7.71
NEXON CO., LTD.(C) 3659 JPN 7.50 1,947.00 11.41 3.60 2,001.02 2,017.17 0.81 13.72 3.76
RENESAS ELECTRONICS CORPORATION(C) 6723 JPN 15.28 1,035.00 (29.51) (42.73) 716.89 592.78 (17.31) 1.24 2.54
SHISEIDO COMPANY, LIMITED(C) 4911 JPN 10.03 2,837.50 (49.36) (55.30) 1,476.84 1,268.23 (14.13) 6.57 5.54
SKYLARK CO., LTD.(C) 3197 JPN 2.75 1,593.00 (81.79) (75.90) 282.49 383.89 35.89 6.55 6.50
SUMCO CORPORATION(C) 3436 JPN 4.58 1,762.00 (20.33) (8.96) 1,449.96 1,604.19 10.64 (7.97) (10.04)
TOAGOSEI CO., LTD.(C) 4045 JPN 1.49 1,275.00 32.97 35.00 1,668.91 1,721.26 3.14 1.16 2.53
TOKYO TATEMONO CO., LTD.(C) 8804 JPN 3.04 1,582.00 21.27 38.87 1,959.29 2,196.96 12.13 2.91 2.77
YAMAHA MOTOR CO., LTD.(C) 7272 JPN 7.97 2,578.00 35.89 36.86 3,420.56 3,528.19 3.15 4.44 4.71
PAKISTAN PETROLEUM LIMITED PPL PAK 3.30 175.50 62.25 126.31 289.77 397.18 37.07 11.05 5.31
WINBOND ELECTRONICS CORPORATION 2344 TWN 1.36 11.75 96.53 106.87 22.71 24.31 7.05 3.75 2.64
Default Warranted Value CFROI / CFROE(%)Percent to Best
Clarity is Confidence
This is market commentary and not a research document. 13
HOLT Market Commentary
February 2017
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