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Investor Notes - Phillip Securities (HK) Ltd
Past Investor Notes  
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6 Aug, 2019 (Tuesday)

            
CANVEST ENV(1381)
Analysis¡G
Canvest Environmental Protection Group (1381) is principally engaged in the construction, management and operation of Waste-to-Energy (WTE) projects. As at late March 2019 when the Group reported its 2018 financial results, the Group has secured 22 WTE projects, with 13 in operation, and the remaining 9 projects are progressing as planned. The total operating, secured, announced and managed daily MSW processing capacity amounted to 32,440 tonnes. Through acquisition, Canvest further expands its foothold to other Chinese provinces and its business along the value chain, enabling it to enter the upstream waste collection business and downstream waste treatment business. (I do not hold the above stock)
Strategy¡G
Buy-in Price: $3.75, Target Price: $3.95, Cut Loss Price: $3.65


CHINA EB INT`L(257)
Analysis¡G
China Everbright International is the first one-stop integrated environmental solution provider in China, it has business presence in more than 150 locations across 20 provinces and municipalities in China, as well as overseas markets such as Germany, Poland and Vietnam. China Everbright International`s 2018 revenue increased 35.8% YoY to HKD27,228 million. Shareholders` net profit increased 23.1% YoY to HKD4,319 million. A final DPS of HK$0.12 was declared, same as last year. Results were in line with expectation. In 2018, the Group secured a total of 58 new projects, signed 6 supplementary agreements for existing projects and undertook 9 environmental remediation services, which in aggregate commanded a total investment of approximately RMB23.7 billion, with the number and investment amount of projects newly secured hitting record highs. To provide sufficient funding to facilitate the rapid business growth, the Group completed a HK$10 billion rights issue within the year. The Group had cash on hand of HK$15.97 billion, its gearing declined from 61% in 2017 to 57% in 2018, maintaining a healthy financial position. The group will increase its investment in R&D in the future, and we expect the performance will maintain rapid growth with new capacity releasing in steady progress.
Strategy¡G
Buy-in Price: $6.60, Target Price: $7.52, Cut Loss Price: $6.35


Kushikatsu Tanaka Holdings Co. (3547.JT)
Kushikatsu Tanaka Holdings Co. was founded in 2002. Based on their aim of ¡§making Osaka's traditional tasting kushikatsu a representative of Japanese food culture¡¨, company expands directly managed and franchise chain restaurants focusing in the Kanto area. It began implementing all non-smoking seats / floorseparated smoking from 6/2018. For IH (2018/12-2019/5) results of FY2019/11 announced on 12/7, net sales increased by 39.8% to 4.682 billion yen compared to the same period the previous year, operating income increased by 41.3% to 303 million yen, and net income increased by 21.0% to 217 million yen. Due to an implementation of non-smoking, although customer transactions in the office worker category decreased, an increase in the number of customers in the family category has secured a 0.5% increase in net sales of their existing stores. For FY2019/11 plan, net sales is expected to increase by 26.5% to 9.7 billion yen compared to the previous year, operating income to increase by 5.4% to 590 million yen, and net income to decrease by 6.4% to 440 million yen. Increase in investment costs for growth are predicted from directly managed store openings and a renovation of deteriorating stores, etc. Company is narrowing down their target to the family category, and in addition to the change to nonsmoking, company has opened a new business category store, which is a family restaurant-type roadside outlet. They will likely garner attention for their various initiatives in managing both nonsmoking and an increase in sales. Recommend to buy at ¥1900, target price ¥2500, cut loss if drop below ¥1750.



Hengan (1044.HK) - Sanitary napkin business is expected to improve in 2H, e-commerce and other businesses grow fast

Investment Summary

Hengan is about to announce its interim result for FY2019. We expect the tissue business will meet the market expectation, but the performance of the sanitary napkin business may be disappointing. This is mainly due to the unsatisfactory performance of the traditional channel which accounts for more than 70% of the sanitary napkin business revenue. Hengan has continued to increase the direct sales ratio through its amoeba teams. But the adjustment has affected the sales performance of the channel. The amoeba attainment rate is also lower than last year's 50%, but the situation is expected to improve in 2H of the year. Besides, the business will be repositioned as a premium personal hygiene business, with new product lines including cotton pads, make-up removers and facial masks will be launched recently.

Due to the lower amoeba attainment rate, we expect that the proportion of overall SG&A expenses to revenue to increase y.o.y. in 1H of the year. At the same time, the fall in the price of wood pulp will have a lagging effect on GPM. GPM in Q1 of the year was still under pressure, but has improved both quarterly and y.o.y. in Q2. Due to the large drop in wood pulp prices in June and July, the improvement of GPM in the Q3 is expected to be more pronounced.

However, the overall GPM of this year needs to take into account of the accelerated growth of other incomes, which is with lower GPM. Revenue from household products segment amounted to only 1.1% in FY2018, including the revenue contribution from the newly acquired Sunway Kordis. Hengan has stepped up its efforts to develop the household products business so as to expand its market coverage in recent years. Sunway Kordis is principally engaged in the manufacturing of food wrap film and plastic bags in the PRC which are sold locally and exported to markets in Europe, Australia, North America and Asia. In 2019, the company plans to further utilise the experience of Sunway Kordis in household product industry and develop the coverage of Hengan's household product. It will also seek to leverage on its overseas sales network to bring Hengan's products to the overseas market.

The management still maintains the growth guidance on the overall revenue and tissue business to be mid-to-high single digit. It does not has the paln to adjust the selling price of ots tissue products this year. However, the price of raw wood pulp is expected to fall, and the price war of low-priced products such as rolled paper will be more intense in 2H of the year. In order to seize the market share, Hengan will launch more promotion activities. According to the management team. It will continue to optimize its product portfolio, introduce new products such as baby wet wipes and large-sized wet wipes for household use in 2H.

The revenue of diaper business is expected to continue dropping y.o.y. in 1H, but turn into positive growth in 2H. According to the management team, during 1H, the penetration of e-commerce has increased, high-end products with high GPM also performed well. The e-commerce business currently accounts for more than 40% of the diaper business revenue and is expected to further increase to 60% in the next three to five years. The overall e-commerce business still maintained a 40 to 50% y.o.y. increase in 1H , and the proportion to total revenue also increased from 14 to 15% last year. It has begun to explore new retail models such as ¡§lingshoutong¡¨ with Jingdong and Alibaba. We maintain Hengan's Buy rating, but with a target P/E of 18x and a target price of 70.6. (current price as of August 1, 2019)

Investment Thesis, Valuation & Risk

We maintain Hengan's Buy rating with a target P/E of 18x and a target price of 70.6.The risks that need to be watched include top-line growth rate missing from expectation, wood pulp prices fluctuating sharply, industry competition increasing significantly, and Ameba units missing sales target. (current price as of 2nd August, 2019)

Financials

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Recommendation on 6-8-2019
RecommendationBuy
Price on Recommendation Date$ 57.700
Suggested purchase priceN/A
Target Price$ 70.600
Writer Info
Tracy Ku
(Research Analyst)
Tel: +852 2277 6516
Email:
tracyku@phillip.com.hk

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