This article first appeared in Capital, The Edge Malaysia Weekly on February 14, 2022 - February 20, 2022

AS part of our annual tradition for the Lunar New Year, we have picked 10 stocks for our virtual global portfolio outside Singapore. The Edge Singapore’s virtual global portfolio of 10 stocks was created in 2020, in which the portfolio averaged 98.1% returns for that year, strongly outperforming comparable benchmarks. In 2021, this portfolio returned 13.1% and although it was not the best performer, it was still ahead of most comparable benchmarks. Since its inception, this global portfolio has been well ahead of comparable benchmarks as illustrated in the chart.

This global portfolio was created not solely to keep up with our yearly traditions but also to empower our investors on how to analyse and value companies. More importantly, we want to enable the content we publish to be actionable by readers. It is important to note that the stock picks are not a call to buy the companies. Instead, they should be used to aid investors to make decisions based on their investor risk profiles and objectives, which we have reiterated in our previous articles. A savvy and intelligent investor must always research and attempt to understand any stock-related information before taking action.

That said, the stock investing world is filled with a plethora of strategies and personalities, mainly divided by whether they are a trader or investor. Both traders and investors have a common goal of making profits in the stock market but it is their method that differs. Our portfolio mainly focuses on valuing companies based on analysing financial statements. If we think a stock is undervalued, which means its trading price is below what we think the share price should be, then that stock would be deemed a buy.

There are many types of stocks and each is suitable for varying investor profiles. Some of the most popular stock categorisations include dividend-yielding stocks, high-growth stocks, stable mature stocks and speculative turnaround stocks. Each type of stock requires a different method of analysing financial statements to determine the value of the company. For example, a dividend play would require investors to look at the balance sheet to determine the company’s ability to pay dividends, while a mature stock would require investors to focus on assessing whether the company can maintain its margins to ensure its scale and competitive advantage in the industry.   

Given this, our portfolio of 10 stocks attempts to cater for investors on both ends of the risk spectrum. Similar to our 2020 and 2021 portfolios, we have highlighted the important features of a stock type that investors should focus on and analyse. We have also learnt from our previous portfolios that just picking the right stocks is not going to cut it — investors need to have the discipline to sell the stocks once price targets have been met or when their business case has changed significantly. This is particularly important for riskier stocks with a shorter-term investment horizon — like companies whose fortunes are turning around.

The 2022 portfolio is similar to the previous portfolios, whereby 10 global stocks are picked and allocated equally. The Edge Singapore’s 2021 portfolio was fully liquidated on Jan 26 and the 2022 portfolio began on Feb 7. Accounting for all returns and cash, the portfolio began with S$224,115 (about RM700,000). As with previous portfolios, the 2022 portfolio will not account for transaction costs and exchange rate fluctuations in tracking the portfolio performance.

Furthermore, in line with being more practical, we will buy, sell, add or reduce stocks based on our view of the company and general market conditions. Also, to make things more organised and transparent, we have a trackable virtual portfolio of our stock picks, which will enable our readers to reallocate their portfolios if they wish to mirror our stock picks and portfolio, which will be published in our pages whenever there are changes to the portfolio mix.

Our 2022 portfolio features eight new stocks. However, we have kept two stocks from our 2021 portfolio, namely CrowdStrike Holdings Inc and Tianneng Power International Ltd. Despite their declines in recent months, we believe these are cheap stocks with great prospects. The new list of eight stocks covers sectors ranging from aerospace to waste management, and is equally balanced in terms of geographical exposure.

(Note: This story was written on Jan 28.)

Thiveyen Kathirrasan is a senior analyst at The Edge Singapore  

Disclaimer: This is a virtual portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy or sell stocks, including the stocks mentioned herein. This portfolio does not take into account the investor’s financial situation, investment objectives, investment horizon, risk profile, risk tolerance and preferences. Any personal investments should be done at the investor’s own discretion and/or after consulting licensed investment professionals, at their own risk.

China Construction Bank Corp (CCB) is a leading commercial bank in China providing a comprehensive range of commercial banking products and services. CCB is one of the largest banks in the world by market cap and Tier 1 capital. It has subsidiaries in various sectors, including fund management, financial leasing, trust, insurance, futures, pension and investment banking, as well as more than 200 overseas entities covering 31 countries and regions.

Our case for CCB is that it is a dividend play. Before looking at its financial statements, its scale as a bank is a reason why it has a higher likelihood of paying dividends, along with its yearly dividend policy. We think that based on its history of paying dividends, and given that its dividend yields have been historically lucrative, it is a great investment for dividend yield investors.

For its most recent 2021 interim results, CCB implemented new business strategies, which resulted in good performance for the period. The company’s balance sheet grew, with total assets reaching close to RMB30 trillion, up 6.1% y-o-y, and total liabilities up by 6.3% to above RMB27 trillion. Net profit recorded was RMB154.1 billion, up 10.9% from the previous comparable period, return on assets  was 1.1%, and return on equity (ROE) was 13.1%. Net interest margin was 2.13% and the capital adequacy ratio was 16.58%. Operating income was up 5.8% y-o-y from RMB360 million to RMB381 million. Around 60% of the bank’s profits are derived from its personal banking business, and around 20% each from its corporate banking business, and treasury and other businesses.

CCB’s fee income growth was boosted and was higher compared to its peers, with its income from agency fund sales and third-party payments growing rapidly. The bank’s asset quality was also manageable, with a non-performing loan (NPL) ratio of 1.53%, a slight improvement from the beginning of the year. Allowances for NPL were high at around 222%, reflecting the bank’s better risk offsetting capacity. The bank’s cost structure was also further optimised, with a smaller proportion of fixed and variable costs and a higher proportion of strategic costs. All these ratios show improvement on the banking front, and further augment its capacity to pay dividends.

In terms of the qualitative part of the bank’s business, its developments include enhancing its FinTech governance and its FinTech core capabilities by utilising AI, blockchain, cloud computing and Big Data, mobile internet platforms and Internet of Things. CCB also focused on internally transforming its business, such as through more targeted marketing services and intelligent risk management.

Other areas of focus by the bank include green financing, financing for housing services and inclusive financing for enterprises, for example.

For the upcoming financial period, CCB will be focusing on a few key areas. These include promoting a higher-quality digitalised operation and reinforcing internal risk control with higher standards.

On the capital management front, the company issued RMB80 billion Tier 2 capital bonds in August 2021 and will issue another RMB80 billion of Tier 2 capital bonds by the end of March this year. CCB also proactively promoted the implementation of the new Basel III Accords on credit risk standards, along with enhancing its internal management capabilities.

Prospects-wise, CCB stands to gain from more reserve-ratio cuts by the central bank, which is likely. A lower reserve ratio enables the bank to deploy the capital to more profitable purposes, and hence will boost margins. Further, the impact of the Evergrande crisis is mostly manageable by CCB, and the NPL ratio for the bank should continue to improve into 2022.

The company’s dividend yield is steadily on the rise and, at current levels, is very lucrative. The bank has consistently paid dividends for over 10 years, and will very likely continue doing so, given its strong balance sheet. The dividend payout ratio for the past 10 years has averaged between 30% and 35%.

The company’s profitability is good, reflected by its strong and consistent double-digit ROE over the past decade. Relative valuation-wise, the bank trades at a 24% discount for its forward P/E compared to domestic peers, and a 61% discount compared to regional peers.

Sentiment-wise, there are 29 “buy” calls, two “hold” calls and no “sell” calls on the company from analysts. The average target price for the company is around 35% above its trading price of HK$5.96 as at Jan 28.

This is a great stock to hold for investors seeking dividend yields. As the share price declines, it is strategic to accumulate shares to capitalise on higher dividend yields. However, if the yield ceases to be attractive, it would be better to dispose of the shares.

Nasdaq-listed Crowdstrike Holdings Inc is a leader in the cloud security space that provides endpoint security, threat intelligence, workload protection and cyber-attack response services. The company offers its cybersecurity services primarily through its CrowdStrike Falcon platform, which leverages the network effect of crowdsourced data.

CrowdStrike offers modules on its Falcon platform through a Software as a Service (SaaS) model that covers multiple large security markets, including corporate workload security and threat intelligence services. Crowdstrike’s SaaS revenue model is similar to most companies that deploy SaaS in the cloud computing industry — it is subscription-based. Crowdstrike offers cybersecurity solutions to customers of various sizes.

This is one of the two stocks from our 2021 portfolio. Our case for the company is still the same. It is a leader in a niche industry set to grow at a strong rate, which should enable it to gain market share. Crowdstrike’s focus on the network effect by offering scalable, subscription-based products and solutions is strategic as companies in the cloud industry are dependent on the network effect for the growth in value of their businesses.

In its most recent 3QFY2022 ended Oct 31, 2021, results, the company posted a 67% y-o-y growth in annual recurring revenue, with 94% of revenues deriving from subscriptions. Having recurring revenue through subscriptions greatly benefits companies such as Crowdstrike as it provides the company with good earnings visibility over the upcoming quarters. The company has a competitive advantage through better offerings in terms of functionality and efficacy due to better technology, with other security products being relatively more expensive and complex. It is also further boosted by its cloud-scale artificial intelligence, which gets smarter as it consumes most data. Given that the company covers a wide range of clients, this technology is likely to be enhanced, further strengthening its moat over competitors.

Crowdstrike also recorded a 75% y-o-y growth in its customer base, which ought to boost its network effect. In terms of prospects, the total addressable market for CrowdStrike’s business is around US$55 billion and is expected to grow by 11% CAGR over the next two years. Further, there is much room for cloud security spending, which is an opportunity for companies such as Crowdstrike. With spending by companies on cloud security projected to hit over US$10 billion by 2023, Crowdstrike should be able to further deepen its moat and its network effect. This should be further augmented by the company’s expansion beyond devices to offering cloud security on all workloads, which should result in better margins.  

The customer net retention rate has also been above the 120% benchmark for the company over the past 12 quarters, with most of its subscription customers choosing multiple cloud module subscriptions as opposed to a single offering. Customer growth should also be boosted by the prevalence of high-profile cyber-attacks. CrowdStrike’s competitors, mostly legacy providers such as McAfee and Symantec, are likely to have clients shift to more cloud, behavioural and AI-based offerings such as the ones provided by Crowdstrike. The company targets gross margins to be around 80% and free cash flow margins to be more than 30% over the upcoming financial quarters, which is strong guidance that should boost the share price if achieved.  

Crowdstrike experienced strong cash flow growth in the past 11 quarters.The company is growing, and with good cash flow generating potential, it can look to further strengthen its presence in the cloud platform value chain as seen in its acquisitions of companies over the past few financial periods, for example, SecureCircle, a SaaS-based cybersecurity service company.The company is net cash, unsurprisingly given its strong cash flow generating ability, hence solvency and liquidity should not be a problem for the company in the upcoming financial periods.  

The recent drop in share price was mainly caused by a general sell-off for tech stocks, in which companies such as CrowdStrike were adversely affected. Further, rising interest rates, which was one of the reasons that triggered the sell-off, would less likely be a problem for the company considering that it is net cash.

We think that the company is very cheap based on its current valuations, and will be one of the bigger names in the tech space through market cap growth over the next few years. Demand for cloud-based services will increase, and companies such as CrowdStrike, which are at the forefront of the security niche, should be able to strongly recover once the tech sell-offs reverse.

Sentiment-wise, there are 27 “buy” calls two “hold” calls and one “sell” call on the company from analysts. The average target price for the company is around 75% above its current trading price of US$159.80.

Based on our in-house valuations, we think CrowdStrike has the potential to hit upwards of 50% gains in share price over the next 12 months. This stock is for investors with a relatively lower risk appetite seeking strong growth.

Toronto-listed Magna International Inc, a global mobility technology company, is one of the world’s largest suppliers in the automotive space. Magna makes body, exteriors and chassis, powertrain, active driver assistance, electronics, mechatronics, seating systems, roofing, and lighting systems and mirrors for the automotive industry.

Our case for the company is based on the recovery from the pandemic, which should boost global demand for the automotive industry. The ability to contain the virus should be better in the future, and this should result in less social movement restriction, which would in turn boost vehicle sales. Magna also has a stellar record for financial performance, and is well-positioned to capture growing market opportunities given its business model. Magna’s strategic portfolio positions it for strong free cash flow and sales growth, further aided by its position as a supplier of choice for automakers.

Magna is a key player in the value chain as it does not just manufacture and engineer parts of a vehicle such as mirrors and seats, but also covers the complete vehicle through its integrated systems. The company’s offerings and services are also agnostic to the type of vehicles, as its portfolio covers internal combustion engine (ICE) vehicles to electric vehicles (EVs). Essentially, the company’s portfolio is future-ready as the transition to EVs occurs. Magna’s strategy to drive growth focuses on accelerating the development of capital towards high-growth areas such as contract vehicle manufacturing and electrification, which is aided by its strong competitive position.

On the EV front, the company is well-positioned to capture the growing EV opportunity through increased vehicle content and a larger addressable market compared to ICE. Magna’s flexible production concept and global production network also enable it to scale up to meet volume requirements, optimise future expansion, and localise in key markets.

In terms of capital allocation, Magna is prioritising maintaining a strong balance sheet to preserve its liquidity and high-investment-grade credit ratings, followed by investing for growth through innovation and M&A, and returning capital to shareholders through dividend growth and share repurchases. Magna’s M&A strategy involves achieving the objectives through customer diversification, geographic expansion, complementing and expanding its technology base, and acquiring technologies that enable acceleration in megatrend areas such as electrification.

Another high-growth area is the advanced driver assistance system, where the company expects sales to grow above market rates at a CAGR of 15%-20% from 2023 to 2027. Magna is well positioned to capture this opportunity through ongoing investments and strategic partnerships. Overall, Magna’s business model has a well-developed framework that will enable it to grow strongly.

Some of the challenges that Magna faces is the global shortage of semiconductor chips, which continues to have an adverse effect on global automotive production volumes. This will impact the company’s bottom line as the cost of the chips increase. The global energy shortage could also pose a problem to Magna. However, both these headwinds should be of less concern as the recovery from the pandemic occurs.

The company’s financials for the most recent 3QFY2021 ended Sept 30, 2021, were slightly underwhelming compared to the previous year’s financials, though they were mostly expected.

Global light vehicle production decreased 12% from 3QFY2020, while total sales decreased 13% to US$7.9 billion, from US$9.1 billion in 3QFY2020. The decrease largely reflects lower global light vehicle production and lower assembly volumes, partially offset by the launch of new programmes and net business combinations. Cost of goods sold decreased US$796 million to US$6.89 billion for 3QFY2021, from US$7.68 billion for 3QFY2020, primarily due to lower material costs associated with lower sales, partially offset by higher freight and commodity costs in proportion to sales.

The company has a solid track record of positive net income, operating cash flow and free cash flow over the past 10 years. In terms of financial safety, the company has a current ratio of 1.4 times, and a net debt to equity ratio of 0.23, hence liquidity and solvency is not a significant concern. Magna has relatively attractive yields, as its earnings yield, operating cash flow yield, free cash flow yield and dividend yield are 8.6%, 15.5%, 10.4% and 2.2% respectively, compared to the risk-free rate of 1.8%.

Sentiment-wise, there are 15 “buy” calls, three “hold” calls and one “sell” call on the company from analysts. The average target price for the company is around 20% above its current trading price of C$100.38. Our in-house valuations indicate that the company is worth at least 25% above its current trading price. We think that it can contain the pandemic-related headwinds and given its strong financials and position within the value chain, Magna is a company for lower-risk investors seeking medium- to long-term growth.

New York-listed Avantor Inc is a global provider of mission-critical products and services to customers in the biopharma, healthcare, education and government, and advanced technologies and applied materials industries. Its products and services are used in virtually every stage of the R&D and production activities of the industries it has a presence in. Avantor also supplies chemicals for vaccine development and manufacturing, including solutions that support Covid-19 vaccines.

Our case for Avantor is that it not only benefits from the pandemic as being part of the vaccine value chain, but it also has a strong business with good prospects stemming from demand within the biopharma sector. Besides supplying products and services to its customers, Avantor is involved every step of the way, from scientific discovery to commercial delivery. The company’s business model includes high recurring revenues and strong cash flow generation through its customised solutions to clients and its e-commerce platform.

Avantor mainly segments its revenue geographically for its quarterly earnings. In its most recent 3Q2021 earnings, 60% of earnings were derived from the Americas region, 30% from the Europe region and the rest from the Africa, Middle East and Asia region.

Product group-wise, 35% is derived from proprietary materials and consumables, 40% from third-party materials and consumables, around 10% from services and specialty procurement, and the rest from equipment and instrumentation.

Customer group-wise, in the latest FY report, 50% of its revenue comes from the biopharma industry, 25% from advanced technologies and applied materials, 15% from education and government, and the remaining 10% from healthcare.

The company’s business model is well diversified not just geographically, but also product- and customer group-wise. We believe this feature is important for companies such as Avantor, to not rely solely on a single source of income due to the network effect.

For Avantor’s year-to-date key financial performance metrics comparison, adjusted Ebitda was up 32.5%, adjusted EPS 75.5% and free cash flow 4.1%. Guidance-wise, for the full FY2021, it was revised upwards after the most recent quarter for all three financial metrics; with organic sales growth from mid-single digit to double digits, adjusted EPS from 30% growth to 55% growth, and free cash flow from US$800 million to US$850 million.

Avantor’s strategy includes M&A of companies within the value chain, for example the most recent announcement about its acquisition of Masterflex. Masterflex is a global leader in peristaltic instruments and aseptic single-use fluid transfer technologies for bioproduction. Avantor deployed US$4 billion of capital for this purpose during 2021, and is expected to deploy twice the amount through 2025.

Avantor’s core business is led by biopharma, with Covid-19 serving as a tailwind, driven by vaccine contributions. Its growing order book provides good earnings visibility, aided by its global presence — with market intelligence indicating a forecast of over 7% CAGR through 2026 for the biopharma industry.

Along with Masterflex, Avantor’s acquisition of RIM Bio and Ritter GmbH recently is expected to aid in margin expansion over the upcoming financial periods.

Some of the potential headwinds for Avantor include supply chain shortages and logistic delays, which have been a recurring concern especially during the pandemic. The company’s management has, however, said that they have this problem under control and have seen continued success in navigating these issues, demonstrated by a healthy level of order book acceleration, which should also provide better earnings visibility in the upcoming periods. The company’s focus on M&A should also address this problem as it solidifies itself within the value chain.

The company has strong cash flow margins which, along with its operating margins, indicate that Avantor has a good competitive edge. In terms of financial safety, it has a net debt to equity of 1.8 times, which could be a cause for concern. However, given the company’s strategy of deleveraging and its ability to generate cash, its financial safety should improve in the upcoming quarters.

Yield-wise, Avantor has an earnings yield, operating cash flow yield and free cash flow yield of 2.8%, 5.7% and 4.3% respectively, which is attractive compared to the risk-free rate of 1.9%. Compared to regional peers, the company trades at a 20% discount for its forward PE, and a 22% discount for its forward EV/Ebitda. Globally, it trades at a 27% discount for its forward P/E and 26% discount for its forward EV/Ebitda, implying that the stock is trading at an attractive price. Avantor has a stock beta of 1.11 times, indicating that the company is slightly volatile, and we think this is good for strong cash-flow-generating companies to realise their potential target prices.

Sentiment-wise, there are 16 “buy” calls and no “hold” or “sell” calls on the company from analysts. The average target price for the company is around 35% above its current trading price of US$34.74 as of Jan 28.

Based on our in-house valuations, we think Avantor has the potential to hit upwards of 40% gains in share price over the next 12 months. It is rare that companies with strong cash-flow-generating potential trade at attractive valuations, and we think that Avantor’s main red flag of debt will be less of a concern in the upcoming quarters. This stock is for investors with a medium-risk appetite who are seeking growth.

Bumi Armada  Bhd, an international offshore services provider to the oil and gas industry, owns and operates offshore support vessels for exploration, development and production activities in the offshore oil and gas industry. The company has two main reporting segments, which are the floating production and operations (FPO) and offshore marine services (OMS). It derives almost 90% of its revenue from the FPO segment, and is currently in the process of exiting its offshore marine services business. Under its FPO segment, the company currently operates four wholly owned FPSOs, three jointly owned FPSOs, one liquefied natural gas floating storage unit and one partially owned FPSO under construction.

Our case for Bumi Armada is that it is a play on the commodities sector, specifically oil. We think that this company is a good diversification tool — although a risky one — given its stock beta of 2.0. The recovery of oil price should see increasing amounts of activity within the oil and gas sector, and as such, companies within the value chain such as Bumi Armada stand to benefit from it.

For its most recent 3QFY2021 ended Sept 30, 2021, results, the company’s net profits increased 5% to RM249 million, though revenue fell 11% to RM546 million. Revenue fell mainly due to lower vessel availability from the unexpected shutdown of one of the components at its Armada Kraken vessel. Net profits after impairment increased by 10% to RM153 million, while the company’s cash holdings rose 4% to RM909 million. As part of its plans to exit the OMS business, Bumi Armada disposed of its four overseas subsidiaries with the rationale of generating cash inflow to repay its corporate debt, and plans to redeploy the capital into its FPO business.

Trade receivables — which is one of the key metrics for companies within this industry — also saw an improvement, whereby it declined 22% mainly due to higher receipts from customers and lower revenue recognised for one of its vessels. It is important to note that trade receivables should be as low as possible, while cash flow is key in assessing the true impact to the company’s financials. Other developments for the quarter include a total debt repayment amounting to US$101 million. The company’s order book as at 3QFY2021 stood at RM14.6 billion, and upon the expiration of the contract period, some contracts have the option to be extended, which are also renewable on an annual basis. The potential value of this order book amounts to RM9.6 billion over the extension period.

Bumi Armada’s performance over the past quarters has also shown great progress in terms of reducing its leverage. For example, its debt to equity reduced from 3 times in 1QFY2019 to 1.96 times in 3QFY2021, while net debt to trailing Ebitda also improved from 10.5 times in 3QFY2020 to 3QFY2021. The company’s operating profit before impairment has also seen relatively decent growth with the exception of one quarter, rising from RM167 million in 1QFY2019 to RM245 million in 3QFY2021. Overall, the business is growing more profitable and is improving on its financial safety front.

Bumi Armada’s focus over the next few quarters will be to monetise its surplus assets which should bring in more revenue and provide earnings visibility. Its focus also covers maintaining crucial relationships with clients and partners, which should aid in improving its trade receivables. Furthermore, the scope of its focus covers improving its balance sheet, which should further decrease the liquidity and solvency risk of the company. Also, with the company exiting its OMS business, its focus now is to improve the operational performance of its FPO division — which is good since the company can solely focus on this division to further develop its moat.

The company’s leverage ratio has seen good progress over time.  The company is also relatively much cheaper compared to regional peers, as it trades at a 70%, 30% and 64% discount for its forward P/E, EV/Ebitda and P/B respectively.

Globally, Bumi Armada trades at a 48%, 9% and 55% discount respectively for the valuation ratios. The company’s yields are very attractive compared to the benchmark risk-free rate of 3.8%, with an earnings yield, operating cash flow yield and free cash flow yield of 18.7%, 46.8% and 44.9% respectively.

Sentiment-wise, there are 12 “buy” calls, four “hold” calls and no “sell” calls on the company from analysts. The average target price for the company is around 15% above its current trading price of 55 sen. Based on our in-house valuations, we think Bumi Armada has the potential to produce a double-digit return over the next 12 months. However, this stock would mostly serve as a good diversification company for the portfolio if commodity prices continue to rise, and is suitable for investors with a relatively high risk profile seeking exposure to the commodities sector.

Hong Kong-listed Tianneng Power International Ltd is a leader in the Chinese new energy battery industry and is labelled as a large high-tech energy group focusing on the manufacturing and provision of services of environmentally-friendly products, particularly batteries for electric vehicles.

Tianneng’s main products and services include power storage ancillary services, production and sale of lithium batteries for new energy vehicles, start-and-stop batteries, wind power and solar power storage batteries, the recycling and cyclic utilisation of waste batteries and construction of smart-micro grids in cities across the nation, along with the building of green and smart industrial parks.

Tianneng is a key player in the value chain of China’s goal in becoming environmentally friendly in the future. The company reports two segments: First, the sales of batteries and battery-related products, the other is the trading of new energy materials. The company is the other stock from our 2021 portfolio, and we believe the stock is trading cheaply. The general decline of the benchmark Hang Seng Index has to a certain extent affected the company, as companies with no news will generally tend to follow the movement of benchmarks.

To reiterate, Tianneng is in the right industry, manufacturing the right products, for the right geographical segment. It is a high-growth company with solid historical fundamentals and profitability. The reason supporting our case is that the company has strong government backing for its business, given the Chinese government’s one-track goal of becoming environmentally-friendly.

Furthermore, Tianneng’s main business involves the manufacture of high-end eco-friendly batteries, which has had a strong track record of providing the company with good cash flow. Tianneng also has superior technology for lead batteries supplemented by lithium batteries. Lead batteries have a strong competitive edge compared to alternatives such as nickel-cadmium batteries as they have higher safety, recyclability, and performance. Lead batteries have a leading position in the global rechargeable batteries market and are the most commonly used batteries in vehicles and equipment such as light electric vehicles (EVs), special EVs and start-stop systems in automobiles.

The growth prospects for these batteries are expected to be strong, as catalysts such as the in-depth application of the 5G mobile network in lead batteries could give them additional features such as identifiability and traceability, remote controllability and connectivity to the Internet of Things (IoT), which describes physical objects that are embedded with sensors and other technologies that exchange data with other devices and systems over the internet.

In the company’s latest 1HFY2021 ended June 30, 2021 interim report, Tianneng’s revenue increased by 60% y-o-y. However, its gross margins dropped from 9.3% to 5.3%, which led to a decline of 8.6% for its earnings. Tianneng’s operating cash flow turned negative from the previous year, mostly because of the increase in inventories and accounts receivables.

As a result, Tianneng’s share price was hit significantly, as the company has had a long record of positive operating cash flow and free cash flow. Looking deeper into these figures, for inventories, raw materials roughly increased by 40%, work in progress by almost 50% and finished goods by 20%. This indicates that the increase in inventory was not mainly caused by finished goods that are unable to be sold, but mostly work in progress and raw materials.

The increase in accounts receivables shows that the company’s capacity to collect cash for products and services sold is eroding, but it does not mean all receivables will be lost, it merely denotes payment at a later date which will improve the company’s cash flow standing. The business in itself — on the demand front — is still very much profitable, and a 50% drop in share price from six months ago is overdone. Once the company posts positive cash flow, the share price will rebound sharply.

Moving forward, the company intends to further focus on developing its lithium-ion battery business while adhering to green, low carbon requirements. Tianneng also intends to widen the application fields of lead batteries through expanding segments such as start-stop and smart energy storage on the basis of consolidating its leading position in lead motive batteries, and strive to develop its business in China and overseas.

The company’s profitability, as reflected by its return on equity and assets, has been mostly strong. In terms of financial safety, the company has a current ratio of 1.5 times, and is net cash, implying that the company will unlikely face any liquidity or solvency related issues in the near future. Domestically, Tianneng is one of the cheaper companies compared to peers, as it trades at a 83%, 81% and 71% discount for its forward P/E, forward Ebitda and P/B ratios respectively. Globally, these figures are 82%, 92% and 79% discounts respectively for the given valuation ratios.  

Sentiment-wise, there are four “buy” calls, one “hold” call and no “sell” calls on the company from analysts. The average target price for the company is around 60% above its current trading price of HK$8. This stock is trading at a great bargain, and we think that it is worth at least twice its current trading price based on in-house valuations. This stock is suitable for investors with a medium risk profile seeking beaten down growth companies.

New York-listed Waste Management Inc (WM) provides waste management services including collection, transfer, recycling, resource recovery and disposal services, and operates waste-to-energy facilities. The company serves municipal, commercial, industrial and residential customers throughout North America.

Our case for investing in the company is simple — it is a business that will always have demand and be profitable. Waste management is essential to the population and as the population grows, so will the amount and type of waste. This means waste management companies like WM can expand their business and grow earnings. WM has the largest and most diverse asset and customer base as an industry leader. WM is able to drive efficiency through technology and leverage its industry-leading asset network to achieve revenue growth goals. Its business is recession-resilient and — to a certain extent — pandemic-resilient compared to other industries.

WM’s largest revenue driver is its collection operations. Collection involves picking up solid waste and recyclables from where they were generated and transporting them to a transfer station, material recovery facility or landfills. About 40% of collection contracts are based on pricing that fluctuates with an index while the remaining 60% periodically increases with market prices. Generally, contracts based on an index are municipal contracts or franchise agreements. Commercial and industrial customer churn is about 9%, implying that customers stay with the company for more than 10 years on average.

The second-largest revenue driver for WM is its landfill operations. The operation and closure activities of a solid waste landfill include excavation, construction of liners and complex air and liquid monitoring and control systems, continuous spreading and compaction of waste, application of approved daily cover, and final capping and monitoring of the landfill. There are different types of landfills to handle different types of waste. The most abundant type handled by WM is municipal solid waste (MSW), which is the trash generated by people and businesses. MSW landfills produce landfill gas and the majority of WM’s MSW landfills have gas-to-energy facilities to convert this gas to electricity that can be sold to many types of customers. Some convert landfill gas to renewable natural gas.

WM’s next significant revenue-generating segment is transfer operations. Transfer stations consolidate waste so that it can be compacted and transported to disposal sites. WM has a network of more than 300 transfer stations where they and third-party hauliers deposit waste. Access to transfer stations is critical to hauliers who collect waste in areas where there are no disposal sites. Fees charged to third-party hauliers are based on the type and volume or weight of the waste deposited, distance to the disposal site, and market rates for disposal costs. WM’s transfer station network allows it to improve internationalisation and manage disposal costs.

WM performed strongly for the 3QFY2021 ended Sept 30, 2021, as the company saw more than a 14% increase in adjusted operating Ebitda and 15% increase in operating cash flow, mainly driven by strong organic growth and integration from the US$5 billion ($6.78 billion) acquisition of Advanced Disposal, which further strengthened its position in the solid waste industry and increased its market share to 25% in the markets it has a presence in. For the same period, net cash provided by operating activities was US$1.18 billion compared to US$1.03 billion in 3QFY2020, while free cash flow was US$773 million compared to US$691 million in 3QFY2020.

The full-year FY2021 outlook guided by management is also promising, with a 17% revenue growth and free cash flow of around US$2.5 billion. The company also expects cost savings of over US$150 million from the acquisition of Advanced Disposal and is projected to repurchase an additional US$350 million of its common stock for the full year.

The company’s operating and net margins reflect the company’s strong moat in the business. This is expected as WM has a strong presence in the waste management value chain. The company has a strong track record of positive net income, operating cash flow and free cash flow over the past 10 years as well. WM has relatively attractive yields, as its earnings yield, operating cash flow yield and free cash flow yields are 3.2%, 6.8% and 4.2% respectively, compared to the risk-free rate of 1.8%. WM also trades at a discount compared to regional peers for its forward P/E and forward EV/Ebit at a 16% and 15% discount respectively.

Sentiment-wise, there are eight “buy” calls, seven “hold” calls and two “sell” calls on the company from analysts. The average target price for the company is around 17% above its current trading price of US$146.25. Our in-house valuations indicate that the company is worth at least 15% above its current trading price. WM is a stock to buy and hold, and is suitable for long-term investors with low risk tolerance.

Tokyo-listed Ohsho Food Service Corp (Ohsho) is a Kansai-based operator of directly-run restaurants in the Kansai, Chubu and Kanto regions of Japan. Ohsho also sells food material wholesale to franchise stores. The company mainly sells noodles and gyoza dumplings, and has over 730 outlets in Japan. It is currently developing three stores in Taiwan.

Our case for the company is its comprehensive business model, from acquiring ingredients to pricing and food delivery services, coupled with strong fundamentals. The company’s strategy of bulk-purchasing ingredients and intensive primary processing enables good quality control and lowers production costs. Open kitchens in its outlets enable customers to witness food preparation and cooking, while the food menu has local and regional specialities that meet the preferences of all patrons, and prices are on average 10%-30% lower than its competitors’. A takeout service is available for all menu items, along with a delivery service in response to the pandemic and customer needs.

All these features enable Ohsho to have a competitive edge, reflected by strong profits and steady growth, despite the relatively stagnant business environment of the food and restaurant sector as a whole.

For Ohsho’s latest 2QFY2022 ended September 2021, the company performed strongly, with a 3.4%, 33.5% and 121.3% increase in its net sales, operating profit and net income respectively, compared to the same quarter in the previous year. The sales increase was mainly due to record sales of takeout and delivery services for directly operated stores and record in-store sales despite shortened operating hours. The increase in operating profits was mostly due to an increase in net sales as well as efforts to keep personnel expenses under control by reorganising work shifts in a more efficient way and to cut down utilities expenses. Net profits were boosted by subsidy income for reduced operating hours and other factors.

The pandemic affected Ohsho’s operations as restaurants were mandated to shorten operating hours and suspend sales of items such as alcohol, which caused a substantial drop in restaurant footfall. Ohsho was able to mitigate the negative impact of these changes by developing and tapping the strong demand for takeout and delivery services during the pandemic. Production efficiency was also increased within shorter operating hours, and sales promotions were conducted in a timely manner, which helped boost its revenue and profit for the year.

On the store network front, Ohsho opened four directly operated stores and three franchise stores, and closed one directly operated store and five franchise stores. The result was a total network of 531 directly operated stores and 204 franchise stores at the end of 2QFY2022.

Apart from expanding its takeout and delivery services, the company has also adopted initiatives such as online cooking training for employees and provided a variety of curricula covering cleaning to cooking takeout orders. Online customer service training programmes were also improved, and new items were added to the delivery menu. The number of stores that provide delivery services were increased for both directly operated stores and franchise stores.

The restaurant has been finding ways to broaden the appeal of its food and beverages to reach out to both drinkers and non-drinkers. Cashless payment methods were also improved through the introduction of QR payment codes in the company’s stores.

Another of Ohsho’s strategies involves restaurant opening, whereby it opened stores in a new format, which specialise in takeout and delivery services as opposed to dine-in.

Ohsho’s operating margins reflect its competitive advantage in the relatively saturated restaurant business. In terms of financial safety, the company has a current ratio of 2.1 times, and is net cash, which implies that the company has its liquidity and solvency risk well managed. It also has a good record of positive net income, operating cash flow and free cash flow over the past five years.

Ohsho has relatively attractive yields, as its earnings yield, operating cash flow yield, free cash flow yields and dividend yields are 6.3%, 5.3%, 7.3% and 1.7% respectively, compared to the risk-free rate of 0.2%. Ohsho trades at a discount compared to domestic peers for its forward P/E and price to book, at a 26% and 39% discount respectively.

Sentiment-wise, there are three “buy” calls, and no “hold” and “sell” calls on the company from analysts. The average target price for the company is around 25% above its trading price of ¥5,850 as at Jan 28. Our in-house valuations indicate that the company is worth at least 15% above its current trading price. Ohsho is a stock for investors with a relatively lower risk profile who are seeking stable growth.

Portal to growth

Korea-listed Naver Corp is the global ICT company behind South Korea’s number one search portal, Naver, and its subsidiaries and affiliates provide services which include Line messenger, Snow camera app and metaverse platform Zepeto. Naver conducts R&D on artificial intelligence, robotics, autonomous driving, mobility and other technology trends through its Naver Labs. In addition to operations in South Korea, the company has a presence in other Asian countries as well as in the US and France.

Our case for this company is that it is investing in the right businesses for both short-term and long-term growth, with good business fundamentals. Naver’s investment in its content, cloud and FinTech segments should provide near-term earnings visibility, while its commerce segment is expected to provide support for its long-term growth due to the shift to online services caused by the pandemic. Given that the company runs a search platform, it should be able to study user patterns better to provide more personalised ads that would result in more paid clicks and conversion, which bodes well for the rest of its business segments.

Naver Corp operates five main business segments, which includes its search platform, commerce, FinTech, content and cloud. For the company’s most recent FY2021 ended Dec 31, 2021, it performed well compared to FY2020. Operating revenue was up 28.5%, operating income rose by 9.1%, while adjusted Ebitda increased 22.2%.

In terms of the segment breakdown, the search platform revenue increased 17.4% y-o-y as business queries increased with technology improvement, aided by its peak seasonality, continued performance ads growth and line-up addition including premium video ads for major brands. The commerce revenue grew 35.4% due to an increase in the number of brands stores along with an increase in monthly average sellers on its ecommerce platform. The FinTech segment rose 44.5%, mainly attributable to its Pay service, which saw 60% y-o-y total payment volume growth, along with an increase in QR-based offline payment partners. The contents segment grew 50.6%, driven by growth in its cross-border content and IP business, while the cloud segment grew 38.9%, attributable to new orders from major clients and the unveiling of a metaverse ecosystem connecting real and virtual worlds.

Moving forward, the company’s long-term sales growth is expected to be strong, aided by its large portfolio of products such as Naver Pay and Naver Shopping. Also, for its search platform, sales growth is expected to rise as the company improves its ad coverage and domestic market strength. The company could also engage in M&A to expand its global footprint of newer businesses, and Naver’s financials are expected to improve over the next few quarters from better synergy through the integration of its Line business with Z Holdings in March last year.

 The structural shift towards online retail is further expected to benefit Naver, as its share of South Korea’s online retail market is expected to grow strongly. Naver has shown good progress in this domain, whereby its e-commerce market share in Korea rose from 7% to 17% from 2016 to 2020.

The company’s advances in AI are expected to aid its business segments. This factor should enhance the user experience and further strengthen its proprietary edge over competitors and preserve its market share. For its search platform business segment, personalised ads are able to be generated as Naver uses deep learning technology to analyse its users’ browsing and purchasing patterns. These ads should be monetised better through more paid clicks and conversions, and more importantly, through optimising search results to improve user experience. This would help in retaining the company’s market share.

Sustained investments in its financial services would further provide long-term earnings visibility as the company plans to launch services such as credit card recommendations and insurance products, and this is further supported by the fact that it runs a search platform business with personalised ads, which implies a large user base.

The company has strong profitability, as is evident from its operating margins. In terms of financial safety, the company has a current ratio of 1.3 times, and is net cash, implying that the liquidity and solvency risk is not a cause for concern.

The company also has a good record of positive net income, operating cash flow and free cash flow over the past five years. Naver has a relatively attractive earning yield and operating cash flow yield, which are 3.1% and 3.4% respectively, compared to the risk-free rate of 2.6%.

Sentiment-wise, there are 36 “buy” calls, and no “hold” and “sell” calls on the company from analysts. The average target price for the company is around 50% above its trading price of KRW333,000 as at Jan 22. Our in-house valuations indicate that the company is worth around 50% above its current trading price. Naver is the stock to buy for investors with a relatively medium-risk appetite who are seeking growth.

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