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Microstrategy Notable Names
Asia’s capital generators and wasters
Capital spending expectations building
Consensus thought slowly appears to be coming round to the idea of an
enlarged capex cycle in 2011. Fundamental analyst expectations for MSCI
Asia ex-Japan’s aggregate Capex-to-Sales ratio in 2011 have slowly been
increasing over the last year as the top chart on the left highlights.
Productive investment means more equity returns for Asia
While increasing capital spend would no doubt drag near term cashflows, the
current conservative gearing of Asian companies - illustrated by the
historically low net debt to equity ratio (middle figure LHS) – and the growing
free-to-invest cash flow (bottom chart RHS), mean they are well positioned to
invest.
Further, investors can be confident that corporations increasing investment
are likely to be indentifying positive-return projects for which returns exceed
their cost of equity. To measure this, we have used the Capital Asset Pricing
Model to calculate a cost of equity in each year over the past five years for
each stock and compared the return on equity generated. For 2010,
consensus forecasts suggest the majority of companies in Asia Ex-Japan will
generate a return on equity that exceeded their cost of capital.
In fact, over the last five years - despite the obvious headwinds – the MSCI
country index’s in China, India, Singapore, Indonesia, and Malaysia have
each delivered a higher return on equity than cost of equity in every year. At a
company level, this translates to about 200 of the 602 companies in the MSCI
Asia ex-Japan consistently generating a return on equity in excess of the cost
of equity.
Consistent and Aspiring Capital Creators
Unsurprisingly, it appears the consistent capital creators command a premium
valuation – of the 200 companies that have generated returns in excess of
their cost of capital for the last five years, less than 50 are trading at lower PB
than the regional average. Amongst these, SK Telecom (017670-KR), Lite-
On Technology (2301-TW) and MTR Corp. (66-HK) are trading at some of
the largest PBV discounts to the region.
Not all companies across Asia are capital creators - if a company generates a
return equal to its cost of equity, it should have book value equal to one.
Theoretically, stocks should only trade at price to book value greater than one
if they can deliver returns above the cost of equity. Despite this, there are very
few companies across the region that trade at a PB Ratio less than one.
Evidence that some companies are unable to earn returns greater than their
cost of equity is mounting against some names. By our estimates, some
companies have not been able earn returns in excess of their cost of equity
for the last five years, yet continue to trade at a premium to book. The stocks
meeting this criteria and trading at some the highest PB multiples include
GMR Infrastructure (532754-IN) and Far Eastern Department Stores
(2903-TW). [See p. 2-3 for full list of consistent and aspiring capital
generators.]
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Microstrategy Notable Names
Asia’s capital generators and wasters
Capital spending expectations building
Consensus thought slowly appears to be coming round to the idea of an
enlarged capex cycle in 2011. Fundamental analyst expectations for MSCI
Asia ex-Japan’s aggregate Capex-to-Sales ratio in 2011 have slowly been
increasing over the last year as the top chart on the left highlights.
Productive investment means more equity returns for Asia
While increasing capital spend would no doubt drag near term cashflows, the
current conservative gearing of Asian companies - illustrated by the
historically low net debt to equity ratio (middle figure LHS) – and the growing
free-to-invest cash flow (bottom chart RHS), mean they are well positioned to
invest.
Further, investors can be confident that corporations increasing investment
are likely to be indentifying positive-return projects for which returns exceed
their cost of equity. To measure this, we have used the Capital Asset Pricing
Model to calculate a cost of equity in each year over the past five years for
each stock and compared the return on equity generated. For 2010,
consensus forecasts suggest the majority of companies in Asia Ex-Japan will
generate a return on equity that exceeded their cost of capital.
In fact, over the last five years - despite the obvious headwinds – the MSCI
country index’s in China, India, Singapore, Indonesia, and Malaysia have
each delivered a higher return on equity than cost of equity in every year. At a
company level, this translates to about 200 of the 602 companies in the MSCI
Asia ex-Japan consistently generating a return on equity in excess of the cost
of equity.
Consistent and Aspiring Capital Creators
Unsurprisingly, it appears the consistent capital creators command a premium
valuation – of the 200 companies that have generated returns in excess of
their cost of capital for the last five years, less than 50 are trading at lower PB
than the regional average. Amongst these, SK Telecom (017670-KR), Lite-
On Technology (2301-TW) and MTR Corp. (66-HK) are trading at some of
the largest PBV discounts to the region.
Not all companies across Asia are capital creators - if a company generates a
return equal to its cost of equity, it should have book value equal to one.
Theoretically, stocks should only trade at price to book value greater than one
if they can deliver returns above the cost of equity. Despite this, there are very
few companies across the region that trade at a PB Ratio less than one.
Evidence that some companies are unable to earn returns greater than their
cost of equity is mounting against some names. By our estimates, some
companies have not been able earn returns in excess of their cost of equity
for the last five years, yet continue to trade at a premium to book. The stocks
meeting this criteria and trading at some the highest PB multiples include
GMR Infrastructure (532754-IN) and Far Eastern Department Stores
(2903-TW). [See p. 2-3 for full list of consistent and aspiring capital
generators.]
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