Alert: New purchases in the MarketScreener Asia portfolio
|08/20/2020 | 08:06am|
We are conducting arbitrage in MarketScreener's Investor Asia portfolio, with six exits and six newcomers, while rebalancing positions to take into account strong gains in some stocks. Below is a brief description of the new entrants. The companies that we removed are Thai Beverage, Yihai, SSY, SCSK, Luye Pharma and Bandai Namco.
In addition to Sony and Tencent, we are taking a new position in the gaming industry, this time with a player that makes all its sales there, Nexon. The Japanese group, which has more than 20 years of experience in this fast-moving sector, is unique in that it has rapidly specialized in online games, both on computers (75% of its business) and in the dynamic mobile gaming segment (25% of its business).
This specialization, far from the standards of AAA game developers (who are very capital-intensive in terms of investment and distribution expenses), has enabled Nexon to considerably relax its financial situation, as evidenced by its Ebit margin of around 40%. The company realizes the majority of its sales in Asia, particularly in South Korea, which is not surprising since the southern part of the Korean peninsula is considered the epicenter of this fully connected way of consuming video games.
As such, our screening tools highlight the right direction of the earnings revisions for the financial years 2021 and 2022, which gives it, in addition to its strong balance sheet and high margins, solid arguments to integrate our Asian selection.
Let us now leave Japan to join China and its huge cities. While Country Garden develops "green residential complexes" in more than 300 cities, its "Services" branch, which is precisely named Country Garden Services Holdings Company Limited, provides various property management services. These services are extensive, ranging from security management of a residential complex to the maintenance of green spaces, housing rentals and insurance.
The group is growing at a rapid pace, as evidenced by the development of its turnover, which is expected to almost double by 2022. This growth is not artificial, as it is debt-free. Admittedly, the stock is currently trading at high valuation multiples, but in the end, this is the price to pay to acquire good growth prospects that are fully exposed to the huge Chinese market.
Weichai Power is a Chinese company listed on the Hong Kong stock exchange, which operates in the heavy goods vehicle sector. It is notably the Chinese leader in engines for heavy vehicles (trucks, construction, agriculture) and a major bus manufacturer. The company also assembles trucks.
With its focus on international development, Weichai is also investing in new technologies through industrial and capital-intensive agreements with companies such as Ballard (hydrogen) and Ceres Power (fuel cells). It also owns 45% of the German Kion Group, a former subsidiary of Linde specializing in forklift trucks and automated equipment for logistics warehouses. It is therefore exposed to the mobility and logistics challenges of the 21st century. MarketScreener's outperformance ratings show that the stock has some great assets: a low valuation for very favorable earnings revisions and a more than honorable growth. Its positioning on promising long-term themes is not the least of its interests.
Techtronic Industries probably doesn't mean anything to you, but its brands do. The Hong Kong group sells electroportable DIY equipment to a variety of audiences. The professionals with Milwaukee or Hart, the informed amateurs with AEG and the general public via Ryobi or Homelite. The company is also positioned on vacuum cleaners (Hoover, Dirt Devil, Oreck, Vax). Three-quarters of revenues are generated in North America. Techtronic has entered a phase of marked growth and has a robust financial situation. It has a favorable revenue and earnings revision trajectory. Its CEO, Joseph Galli, recently demonstrated his confidence by strengthening innovation and diversifying the production base, so as not to be caught off guard by customs surcharges or the consequences of Covid. Galli is aware of the stakes involved in the commercial arm-wrestling match between China and the United States and has been able to adapt his group's strategy to this new situation, which does not fail to reassure the investors that we are.
Chugai Pharmaceutical will celebrate its centennial in 2025. The company is one of Japan's five largest pharmaceutical companies. Since 2002, it has been part of the Roche Group, which owns nearly 60% of the company. Their joint R&D has led to the launch of RoActemra, a treatment for rheumatoid arthritis. The entry of this company in MarketScreener's Asia Investor portfolio is intended to improve its defensive position, by positioning itself on a solid player with attractive growth prospects and excellent visibility. Chugai has appeared on our radars through the recent positive revisions of earnings per share and short and medium-term sales, visible in the outperformance ratings.
Listed on the Hong Kong Stock Exchange, Xiaomi is valued at CNY 383 billion, the equivalent of EUR 46.8 billion. It is a heavyweight in the mobile phone industry. This player has arrived in European stores with the goal of offering quality mobiles at prices that tend to be lower than its competitors such as Samsung or Apple. Its turnover grew by 80% between 2017 and 2019 and the company shows equivalent growth prospects between now and 2022. Moreover, the Chinese group is in a healthy financial situation with negative financial leverage (-2.3x) underlining a cash surplus and has a free cash flow of CNY20.4bn or EUR2.5bn. On the other hand, Xiaomi is trading on high earnings multiples: 38.1x its estimated net earnings per share for the current financial year. But on several other metrics, valuation remains interesting, especially if growth remains as steep as it is, which is what analysts seem to think.