6 Asia-Pacific picks for your watchlist
These additions to Morningstar's list of undervalued companies across its Asia Pacific equity research coverage includes names from the automotive, energy, financial and pharmaceuticals sectors.
Mentioned: Japan Tobacco Inc (2914), Nissan Motor Co Ltd (7201), Sumitomo Mitsui Financial Group Inc (8316), Dai-ichi Life Holdings Inc (8750), Baidu Inc (BIDU), Tata Motors Ltd (TATAMOTORS)
These additions to Morningstar's list of undervalued companies across its Asia Pacific equity research coverage includes names from the automotive, energy, financial and pharmaceuticals sectors.
The following list highlights our most undervalued stocks within the Morningstar Asia Large-Mid Cap Index, which rose 5 per cent in June. Standout names include Indian car giant Tata Motors, which is trading at 67 per discount and Chinese online giant Baidu, which is at a 50 per discount.
On a broad basis, companies within Morningstar's Asia coverage are currently undervalued relative to our analysts' fair value estimates, trading at an average discount of 7 per cent at the end of June 2019.
Looking at specific sectors, healthcare services offered the greatest discount, at 15 per cent.
On the other hand, energy was the most expensive, trading at an average 6 per cent premium to our fair value estimate.
The overall pick list traded at about 25 per cent below Morningstar's fair value as at the end of June, and the consumer defensive sector did better still, trading at a discount of about 35 per cent.
Additions to the list include the following companies, each of which hold five stars - which means Morningstar believes there is a very strong chance the stock is highly likely to appreciate over the next few years.
Tata Motors (XNSE: Tatamotors)
Tata, the largest commercial vehicle manufacturer in India, is trading at a 66 discount. It carries a Morningstar fair value estimate of US$33 but was trading at US$11.28 at the market close on 19 July.
Tata also owns premium automotive brands Jaguar and Land Rover, which have fallen on hard times largely because of declining margins linked to the rising roll-out of electrified powertrains and autonomous technologies.
"However, since fiscal 2009, when Tata acquired the luxury automaker, JLR’s revenue has risen at a compound annual growth rate of 14 per cent, with global volume growing 8 per cent," says Morningstar equity analyst Richard Hilgert.
"In our view, Tata is positioned to gain from the continued growth in Indian automotive sales and the expansion of luxury markets in emerging economies, especially China."
Nissan Motor (XTKS\JPY: 7201)
Hilgert also singles out Nissan's cross-ownership with Renault as a rare, international alliance success story in the global automotive industry.
Renault owns 43.4 per cent of Nissan, while Nissan owns 15 per cent of Renault, and the Renault-Nissan Alliance jointly owns 73.3 per cent of the parent of Russian automaker AvtoVAZ, which makes Lada, the country's best-selling brand.
Renault also owns 99.4 per cent of Romanian automaker Dacia, 80.1 per cent of Samsung Motors, 3.1 per cent of Daimler, while Nissan holds a controlling 34 per cent stake in Mitsubishi Motors.
"However, discontent in leadership between Nissan and Renault became evident with the dismissal of Carlos Ghosn, on allegations of misconduct, as Nissan's and Mitsubshi's chairman. Ghosn remains Renault CEO and chairman and chairman of the alliance pending further investigation,” says Hilgert
Japan Tobacco (XTKS\JPY: 2914)
Morningstar's fair value estimate of 3,600 yen places Japan Tobacco (JT) at a discount of about 32 per cent, its share price having closed at 2,435 yen on 19 July.
JT has a chance to regain share in the domestic e-cigarette market after PloomTech’s capacity constraints are resolved in late 2018, says Morningstar equity analyst Jeanie Chen. PloomTech is JT's line of tobacco vapor devices.
The company has seen some signs of improving its share in Russia and the UK, two of its largest overseas markets, after the headwinds of a price war and downtrading triggered by a sizable tax hike and tightened regulations.
Chen sees ample room for JT to lift margins through continuous price hikes and "premiumisation in emerging markets, where income is rising and selling prices of cigarettes remain low.
More cautious observers point to risks around volume declines in the sale of traditional cigarettes, the rising popularity of e-cigarettes, and proposed changes in the tax treatment of this relatively new segment of tobacco products.
Sumitomo Mitsui Financial Group (XTKS\JPY: 8316)
This Japanese financial firm holds a 49 per cent in UBS's Japan wealth management business, which is in the process of splitting off from UBS Securities Japan in a new joint venture.
Though Morningstar recently reiterated its no-moat rating for Sumitomo (SMTH), it notes strong opportunities present in Japan, which has traditionally been largely excluded from global surveys of high-net worth individuals because of the closed nature of the market.
But the likes of Credit Suisse, Nomura and UBS are showing signs of losing some of their dominance in Japan. SMTH has one of the highest proportions of recurring fee income to total revenue among Japanese banks, says Morningstar equity analyst Michael Makdad.
"These changes present an opportunity for SMTH that an alliance with UBS could help to exploit," Makdad says.
Dai-ichi Life Holdings (XTKS\JPY: 8750)
Morningstar initiated coverage on Dai-ichi – one of Japan's four largest listed insurance companies – in mid-June, with a fair value estimate of 2,400 yen. It closed at 1,604 yen on 19 July – a 33 per cent discount.
"Japan is the third-largest insurance market in the world, accounting for around 10 per cent of global premiums, compared with around 30 per cent in the US and slightly over 10 per cent in China," says Makdad.
He notes that penetration of life insurance is rather high in Japan, with premiums amounting to nearly 10 per cent of GDP, as life insurance products play a major role in household savings.
"Conversely, penetration of property and casualty insurance is relatively low relative to many other developed markets, with non-life premiums of around 2.4 per cent of GDP, reflecting cultural factors such as relative absence of corporate litigation and economic factors such as a high degree of self-insurance."
Baidu (XNAS: 41078)
Chinese technology firm Baidu specialises in internet-related services and artificial intelligence. Its flagship Baidu app is positioned as a "super" app, spanning articles, videos, shopping, ticketing, food services and more.
"In the near term, Baidu will invest heavily in its mobile business in terms of sales and marketing, and traffic acquisition,” says Morningstar equity analyst Chelsey Tam.
"While meaningful monetisation is uncertain, we expect Baidu to increase or maintain its research and development expenditure.”
Baidu closed at US$112.25 on Friday – a 50 discount to Morningstar's US$225 fair value estimate.
Tam also notes Baidu's newsfeed feed service could boost revenue through increased advertising.