This has been a busy week with earnings reports—the bulk of them on the positive side. China and other emerging and international companies seem to be posting good numbers but macro headwinds are weighing on markets for now.
The Hong Kong situation is one issue causing concern so this week we head back to Singapore for a high quality financial play on Asia
Cabot Global Stocks Explorer 692
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Cabot Emerging Markets Timer
The Emerging Markets Timer is our disciplined method for staying on the right side of the emerging markets. The Timer is bullish when the index is above the lower of its two moving averages and that moving average is trending up.
Our Emerging Markets Timer has found support in recent weeks, but that hasn’t been enough to produce a new buy signal. You can see in the chart that the iShares EM Fund (EEM) has actually held up pretty well since the first few days of August, which is encouraging. But with EEM still well below its moving averages, the intermediate-term trend continues to point down.
As we’ve written before, that doesn’t mean doom is just over the horizon—more that a general “risk-off” environment remains in effect for overseas stocks. We still think there are names worth owning and buying, but it’s important to be relatively choosy until the tide starts to come back in.
Positive Earnings At Odds with Media Macro Concern
Our emerging market timer (EEM) is still negative but looking a bit better, trading just below its 20-day moving average.
The earnings numbers coming through from emerging market and international companies are largely positive and contrast sharply with the macro concerns holding back markets.
This highlights a common fallacy that high economic growth always leads to higher stock prices.
For example, in the 11-year period between 2008 and 2019, China’s GDP has grown 300% from $4 trillion to a whopping $12 trillion, while the Shanghai Stock Exchange gained a mere 88% in the same period. There was quite a bit of volatility along the way, with the Shanghai market losing 50% of its value in less than four years at one point.
There is always a premium on stock picking and the need to take profits when you can and limit losses when the overall market moves against you.
And despite all the talk, companies are finding it difficult to move their supply chains out of China to places like Vietnam. The problem is that these markets lack China’s infrastructure and scale and that labor rates are already moving sharply upward.
In contrast, our new recommendation is based in a country with the highest per-capita income in Asia ($58,000).
Featured Stock
DBS Bank (DBSDY)
The “JP Morgan of Singapore”
Wealth is piling up faster in Singapore than anywhere in the world.
Assets under management in the city-state have jumped since 2000 and are on track to overtake Switzerland by 2020, according to the research firm WealthInsight.
It boggles the mind that a country one-fifth the size of Rhode Island can eclipse London, New York, Shanghai and Zurich.
A pure play on this emerging trend is what I refer to as the “J.P. Morgan of Singapore”- the Development Bank of Singapore (DBSDY), better known as DBS.
DBS is one of the largest banks in Southeast Asia, with a presence in 18 markets. It is headquartered in Singapore, with its main listing on the Singapore Stock Exchange, and is the largest constituent of the Singapore Straits Times Index.
The Government of Singapore established DBS in July 1968 and its largest and controlling shareholder is Temasek Holdings, which is one of two large sovereign wealth funds controlled by the Government of Singapore.
DBS has a growing presence in the three key Asian areas of growth, which it defines as Greater China, Southeast Asia, and South Asia, meaning India.
It is the largest and strongest bank in Southeast Asia and the leading consumer bank in both Hong Kong and Singapore.
Its tentacles extend to 200 branches in 50 cities. DBS produces steady profit margins, revenue and earnings and is also increasing market share in consumer and corporate banking.
Wealth management is also a strategic priority and a growing part of its business. Despite all of these strengths, DBS is trading at only 11 times trailing earnings and sports a solid 2.5% dividend yield. Any improvements in the U.S.-China relationship will get this stock moving; in the meantime, it should weather the turbulence.
BUY A HALF POSITION.
DBS Group Holdings (DBSDY)
Tower 3
DBS Asia Central @ Marina Bay Financial Centre 12 Marina Boulevard
Singapore 018982
Singapore
65 6878 8888
http://www.dbs.com
Model Portfolio
Updates
Alibaba (BABA) shares were up 11% in the first three trading days this week as first-quarter revenue jumped 42% over last year, crushing estimates by $880 million, while earnings per share came in at $1.83, beating Wall Street estimates by $0.34.
In addition, BABA posted an increase of 20 million active customers, up 17% since last year, and higher-margin customer management revenue increased 27% over last year. Its all-important cloud revenue saw an increase of 66% since last year.
Alibaba’s business is in good health and though the back-and-forth between the U.S. has hurt its share price, its business is mostly insulated from trade war impacts.
Reported revenue during its last quarter was up 51%, or 39% excluding acquired businesses. The volume of merchandise moved on its platform was up 20% and Alibaba’s mobile monthly actives users was up almost 18%.
The company’s e-commerce business lends itself well to a natural monopoly as BABA has more than a 50% market share. Alibaba’s cloud infrastructure business also benefits from its scale and lower costs.
BABA remains a great core China holding trading at an attractive valuation.
I encourage you to buy this stock if you have not done so. BUY.
ICICI Bank (IBN) shares moved marginally upward in a difficult week.
This is a good sign for India’s second-largest private lender. The catalyst may still be last week’s earnings report, in which the company reported a quarterly profit compared with a loss a year earlier, helped by lower provisions and higher retail loan growth.
Net profit for the fiscal first quarter was $277 million.
The bank’s corporate loan book grew at a pace of 13% in the quarter, while its retail loan book grew 22% and net non-performing assets (NPA) at the end of the June quarter were down 51%.
IBN is a solid India play and there are still 191 million Indians without a bank account, which means a lot of potential new customers.
This is a quality bank in a promising growth market. BUY A HALF.
Infineon Technologies (IFNNY) shares were back up this week after a dip the previous week.
Infineon, founded when the company was divided from its Siemens parent in 1999, is a leading broad-based European chipmaker with exposure to secular growth drivers in the industrial and automotive chip sectors.
While the company has spun off its low-margin wireless baseband chip business to Intel, Infineon is in the process of acquiring Cypress Semiconductor (CY), with plenty of cross-selling opportunities for these complementary companies.
This is an excellent time to begin building a position in this high-quality stock. BUY A HALF.
LexinFintech (LX) shares have been moving between 10 and 11 over the last few weeks as the market waits out its new earnings report, due out later today.
The company owns and operates a thriving online shopping mall that also offers installment loans. LX acquired nearly 705,000 new active users in its most recently reported quarter while keeping its 90-day delinquency ratio at an ultra-low 1.42%.
The company has signed strategic cooperation agreements with more than 100 national banks, insurance companies and consumer finance companies. LX enjoys a sizable 42% profit margin with a 72% return on equity. On top of it all, this high-growth fintech idea is currently trading at less than 10 times forward earnings projections.
Despite all these positives, LX has not done well on a relative basis (and with earnings looming), so I moved it to a hold pending upcoming earnings. HOLD.
Luckin Coffee (LK) shares have not reacted well to its latest earnings and are trading at 19, just above where we got in at 18.
While its revenue rose 648% annually to $132 million, Luckin posted an adjusted net loss of $89 million, or a net loss of $0.48 per American Depositary Share (ADS), missing expectations by three cents.
The chief culprit is sales and marketing expenses, which surged 119% annually to $57 million during the second quarter.
On the other hand, Luckin keeps expanding its fleet of stores, which grew 375% annually to 2,963 locations. Amazingly, that puts it in striking range of Starbucks, which finished last quarter with 3,922 locations across China. It plans to eclipse Starbucks with 4,500 stores by the end of the year.
This sort of growth comes at a cost as it posted $379 million in operating expenses in the first half of the year while generating $202 million in revenue.
Some big hitters have accumulated substantial ownership of LK.
The American Funds mutual fund company Capital Group has a 15.6% stake, followed by Singapore’s sovereign wealth fund GIC with 13% and Qatar’s Investment Authority at 8.8%. That’s a good sign.
If you have not invested in Luckin, which is an aggressive idea that won’t be posting profits for some time, I encourage you to do so by starting small, up to a half position with a 20% trailing stop loss in place. BUY A HALF.
MakeMyTrip Limited (MMYT) gained some ground this week but has not made any major move since being added to the portfolio.
A play on India’s travel industry as well as digital payments and marketing, the company was founded in 2000 to serve the travel needs of the U.S.-based Indian community.
MakeMyTrip has evolved into a leading travel company as India evolves into a digital marketplace by providing a comprehensive range of travel services.
MakeMyTrip has made key acquisitions and strategic partnerships, and a key alliance is with Ctrip, China’s largest online travel group.
If you have not yet done so, I encourage you to take a half position in this India stock at the heart of a big growth sector. BUY A HALF.
ProShares Short MSCI Emerging Markets (EUM) moves opposite EEM and serves as a bit of shock absorber given the recent volatility in emerging markets. I’m moving this from a buy to a hold given that markets have settled down a bit over the last two weeks. MOVE FROM BUY A FULL POSITION TO HOLD A FULL POSITION.
Rakuten (RKUNY) is the most recent addition to our portfolio.
This week the Japanese e-commerce company announced that Rakuten Wallet, a subsidiary, is set to release a mobile app offering the ability to buy and trade three cryptocurrencies through its online banking platform.
Rakuten is a well-diversified conglomerate with tentacles throughout Japan and has plenty of room for international expansion.
Many of you may not have heard of Rakuten, but I assure you that very few Japanese are not part of its ecosystem in multiple ways.
Its loyalty membership program is more than 100 million strong and it is Japan’s #1 Internet bank, #1 credit card and one of the country’s leading travel platforms.
Rakuten’s core business is as an Internet sales platform akin to Amazon’s.
The company’s market share in Japan is about 25%.
Rakuten is growth conglomerate with multiple drivers and a sterling balance sheet with cash and short-term investments worth roughly $12.5 billion. And the stock is trading at just 10 times trailing earnings, booked a 16% increase in revenue during its latest quarter, and offers an impressive 30% return on equity. BUY A HALF.
Sea Limited (SE) lost some ground this week but is still up 150% since we recommended it in April.
Its ‘Free Fire’ survival game is a star performer in Asia, though the stock is down a bit since reporting earnings on Tuesday.
Still, Sea’s e-commerce platform is doing well as JPMorgan reports that some of their Shopee Mall’s platforms have raised their seller commissions from 1% to 5%.
SE benefits from high-growth target markets outside of China in gaming, e-commerce and digital payments, primarily in seven Southeast Asian markets. Its gaming segment is the key driver and the other is e-commerce, which is equally robust.
No doubt, some profit taking is going on so depending on your entry point, I encourage you to take some profits off the table. Longer-term investors can continue to accumulate shares. BUY A HALF.
Tencent (TCEHY) reported year-over-year 20.6% revenue growth for its latest quarter while its net profit surged 35%. Its leading gaming business (accounting for 30% of total revenue) was up 8%— a big improvement after three consecutive quarters of negative comparisons.
Tencent’s monthly active users (MAUs) on WeChat, the top messaging platform in China, rose 7% annually to 1.13 billion. WeChat is used for basically everything: communicating with friends and family, ordering a cab, making payments.
Tencent’s total online advertising revenue rose 16% annually to 16.4 billion RMB and accounted for 18% of its top line, but that marked a deceleration from its 25% growth in the first quarter.
Its operating revenue comes primarily from gaming and its social networks. More and more, however, the company has been investing into other tech companies and is evolving into a diversified tech fund.
Tencent’s numbers, while encouraging, failed to move the stock much. I believe this is largely due to the tough environment for Chinese and emerging market stocks, but the clouds seem to be parting on that front. BUY A HALF.
ZTO Express (ZTO) shares are up 12% over the past two weeks and got a bit of a boost from the company’s latest earnings. Revenue grew 24.6% to $790 million while parcel volume jumped 49% to 3.1 million.
Based in Shanghai, ZTO is one of the largest express delivery companies, not just in China but globally.
It offers services to millions of traditional merchants, e-commerce sites, and online sellers using a proprietary tracking system, a state-of-the-art transportation management system, and more than 5,000 trucks, as well as hundreds of business partners. And ZTO serves foreign customers through partnerships with many international express delivery companies.
I’m keeping this at hold pending any visible progress on U.S.-China trade talks. HOLD A HALF.
Speculative Portfolio Recommendation
Largo Resources (LGORF) shares were flat this week and while we have some profits, we need some positive news on the vanadium front to push this stock higher. The company recently announced that it is now debt free after paying over its convertible bonds. Shares now trade at less than five times earnings.
Rare metals are once again in the media spotlight as China threatens to keep more of these key materials at home and potentially deny access to international companies.
Please keep in mind that this is a speculative play on vanadium, which is used to strengthen steel, and is a key ingredient in large-scale grid electrical energy storage batteries. HOLD A HALF.
Watch List
Baidu (BIDU) shares have increased more than 15% to 116 over the past week on the back of some unexpectedly strong profits.
BIDU reported adjusted second-quarter 2019 earnings of $1.47 per share, handily beating the consensus estimate of $0.94.
Total revenue was $3.84 billion, up only 1% year over year while revenues from iQIYI membership services grew 38% year over year.
In our previous issue BIDU was at 99 and are trading at less than 8 times forward earnings. Baidu’s net cash as well as stakes in iQIYI and Ctrip.com represent more than half its market capitalization.
There was bound to be a bounce in this stock but if it pulls back a bit with profit taking, I may put this back into the portfolio.
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Send questions or comments to carl@cabotwealth.com.
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All Cabot Global Stocks Explorer buy and sell recommendations are made in issues or updates and posted on the Cabot subscribers’ website. Sell recommendations may also be sent to subscribers as special alerts via email. To calculate the performance of the hypothetical portfolio, Cabot “buys” and “sells” at the midpoint of the high and low prices of the stock on the day following the recommendation. Cabot’s policy is to sell any stock that shows a loss of 20% in a bull market (15% in a bear market) from our original buy price, calculated using the current closing (not intra-day) price. Subscribers should apply loss limits based on their own personal purchase prices.
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Cabot Global Stocks Explorer is published by Cabot Wealth Network, an independent publisher of investment advice since 1970. Neither Cabot Wealth Network, nor our employees, are compensated in any way by the companies whose stocks we recommend. Sources of information are believed to be reliable, but they are in no way guaranteed to be complete or without error. Recommendations, opinions or suggestions are given with the understanding that subscribers acting on information assume all risks involved. © Cabot Wealth Network 2019. Copying and/or electronic transmission of this report is a violation of the copyright law. For the protection of our subscribers, if copyright laws are violated, the subscription will be terminated. To subscribe or for information on our privacy policy, visit www.cabotwealth.com, write to support@cabotwealth.com or call 978-745-5532.
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