Jardine Cycle and Carriage Presentation

I wrote this article mid 2020 for SeekingAlpha, as a test. However, they did not like it, maybe it was not great, maybe talking about Holding companies in south East Asia does not interest these people too much. I did not resubmit it, this did not interest me at the time, because, while not perfect, this was my thesis. I finally decided to create my own website for Freedom, quicker time to write, and networking.

So here is an outdated article, that still represents my investment thesis in the stock 8 months later.

GO

In this year of unprecedented crisis, some stocks held up well and some got hit hard in terms of performance. This is particularly true of emerging markets stocks and cyclical industries.

My emerging market stock covered in this article is Jardine Cycle & Carriage, listed in Singapore and with its main business interest in Indonesia.

It is 40% down year to date. It fell sharply as soon as the covid crisis hit and did not rise much with the rest of the markets in May-June. When seeing a stock falling hard in one year, one has to analyse what has been happening and decide if they see the investment as still attractive, or if it has been impaired in its intrinsic value and prospects.

Jardine Cycle and Carriage, with a very antique sounding name, is perceived as an Auto stock. In this article, we will see that it is and it is not an Auto stock at the same time.

Introduction to the company

Jardine Cycle & Carriage (“JC&C” or “the Group”) is the investment holding company of the Jardine Matheson Group in Southeast Asia.

JC&C is 75% owned by Jardine Matheson.

Jardine Matheson is a historical family owned business founded in 1832 and based in Hong Kong. it owns stakes in Real Estate, supermarkets, hotels in the region. There are some articles on Seeking Alpha.

JC&C allows to select an investment vehicle that focuses on South East Asia, mainly Indonesia. Here we can see already, that the company is not described as a car manufacturer or distributor, but as an investment holding. Interesting.

It owns and controls 50.1% of Astra International, itself a large business in Indonesia, focusing on manufacture and distribution of motor vehicles, mining equipment, infrastructure, real estate. Astra International makes the majority of its income and assets.

It also has a branch named direct motor interests, distributing cars and trucks in the South East Asia region.

Lately, JC&C has been focusing on diversifying, with the third branch called Other, with investments in Vietnam and Thailand in Cement, Electrical engineering, Milk, and Motor Vehicles.

Badly hit first half results:

Covid made the profit fall by 30% in H1 2020 and underlying profit decreased by 66% (LINK). It impacted vehicles sales and lower commodity prices stopped or delayed mining equipment sales.

This prevented the stock from making a recovery this year. The perspective for the rest of 2020 is also not very positive.

The pandemic is expected to continue to adversely impact performance for at least the rest of 2020

The company is well capitalised but the owner Jardine Matheson could do a rights issue at the worst time. (UPDATE: with all the cash they are using to buy Jardine Strategic, probably they will wait a bit)

I view this risk as plausible due to Jardine Matheson history but also a low impact because it could be a good sign of a right moment to buy, or the capital increased could be passed on to a subsidiary to increase JC&C's stake, making it a neutral operation for the stock holder.

Reason 1- Its better than a auto manufacturer,

It is a long term investment holding

JC&C follows a simple strategy, which is to buy good businesses and support them by cash injections when they have interesting investment opportunities, and keep them a very long time.

It sounds familiar? Yes, it's similar to the Berkshire Hathaway approach. They hold develop the business with a long term strategy.

And over the long term, it grows nicely, with some cyclicality, linked with EM fate:

We can notice that Astra International is a huge part of the earnings of JC&C.

Considering that the Jardine group started investing in 2000, it has benefited from Astra Growth and returns for 20 years now and shows how focused on long term returns the company is.

Astra is an Indonesian motor conglomerate with huge market share. It not only produces vehicles but it distributes foreign brands exclusively such as Toyota, enjoying good margins while the R&D is in Japan. Financial services is Linked to the motor sales.

The market share in Automotive. It is huge, and this plus the distribution business allow a good ROE through the cycle, which is better for shareholders than a standard auto manufacturer and make the stock more attractive.

Recently, Astra has been investing in the local "Uber" and the two companies are developing JVs and services. Astra is expanding its toll road business.

Back to JC&C, it keeps adding to the positions in the "Other" segment, even if slowly.

2-The South East Asia dynamic will make covid effect temporary

This region still has a very low GDP per capita and it is expected to grow with more urbanization and equipment sales in the future. This is a very exciting opportunity.

The underlying fundamentals of Southeast Asia make that the levels of vehicles sales (A large part is 2 wheelers) will recover once we get out of the Covid situation, and it has already started recovering. The people will need to move more and more as their income grows and public transport will not be sufficient in these economies for decades to come. I think the same will happen with Mining equipment, because the next energy revolution, and Indonesia GDP, will use more and more natural resources.

Conclusion: opportunity or falling knife?

The current results do not look good with a reduction in profit by 66% in the first half. The industries it is operating are seeing a reduction in sales (automotive, motorcycles, toll roads, commodities). It is operating in exotic countries that seem far away from the Nasdaq or even from the Alibabas and Tencents of Asia. At first glance it does not appear enticing.

The company now has an attractive valuation based on historical earnings.

The company valuation is about 5B USD, for a historical profit of about 0.8B USD, which makes a P/E ratio between 6 and 7. (NOV 2021: valuation is near $8B, so historical P/E=10)

The company pays a Generous dividend.

But, it has positives that in my view outweigh the negatives. As covered above, the investment holding nature of the business and the long term perspective allow for long term growth and the market share of Astra provides good and steady profitability. On top of that, the inherent dynamic of South East Asia, particularly Indonesia, creates a growing market for the company to grow sales organically for the long term.

All this, combined with the normalized valuation, makes Jardine Cycle and Carriage a company to buy and keep for years to come to benefit from the income growth in South East Asia, at prices that reflect negative growth.

The current negative performance should not persist in the future as the company has the right environment and assets to rebound in 2021 and beyond.