Japanese Turnaround Situations, Short-Ideas, Azabu Research

Michael Allen

Japanese Turnaround Situations, Short-Ideas

Azabu Research

Azabu Research is a publishing and consulting firm focused on distressed equities in the Japanese market. We specialize in turnaround strategies, corporate combinations, divestitures, and restructuring.

Publisher of the Tokyo Turnaround Letter, which conducts the most thorough research possible of publicly available information, including forensic tests for fraudulent overstatement of assets and understatement of liabilities, as well as rigorous market and industry analysis to assess the underlying strengths of the company’s products or services, the appropriateness of the company’s turnaround strategy, and the skill of its current management team. The average length of a report exceeds 25 pages of text and tables, excluding any disclosures or executive summaries.

We have more than 30 years of experience in applying this process to distressed equities in Japan. Additionally, subscribers have free access to detailed, yet easily navigated earnings models for the target company as well as the top five comparable companies, and unlimited access to the analyst for follow-up questions.

Azabu Research also conducts be-spoke research on a project basis, and provides consulting services to companies looking to restructure, divest, make acquisitions, go public, or improve investor sentiment toward their stock.

Independent Research and Consulting Firm

Equity Bottom-Up

ROHM COMPANY LIMITED manufactures custom linear integrated circuits and semiconductor devices for use primarily in consumer electronics.  The Company has plants and sales offices worldwide.  Rohm's subsidiaries include Wako Electric and Apollo Electronics.

<ul>
<li>Rohm’s cyclical turning points in revenue typically lag the turn METI production %YoY less inventory % YoY for electronic devices and components by 12 months.</li>
<li>Investors were disappointed with Q1 results, but the company cleanly outperformed most peers in the power semiconductor space, and recovery now looks inevitable. </li>
<li>We believe the fair value of shares to be around ¥3,300, 2x the current price, but investors should ask, “When?” Not “How much.”</li>
</ul>


Rohm’s cyclical turning points in revenue typically lag the turn METI production %YoY less inventory % YoY for electronic devices and components by 12 months.
Investors were disappointed with Q1 results, but the company cleanly outperformed most peers in the power semiconductor space, and recovery now looks inevitable. 
We believe the fair value of shares to be around ¥3,300, 2x the current price, but investors should ask, “When?” Not “How much.”


NEXTAGE Co., Ltd. operates a used automobile business. Its main line of business is retail of used domestic cars but it also sells imported cars and SUV/vans. In addition, the company also operates an automobile maintenace business.

<ul>
<li>NextAge has, in just two short years, moved from number 3 to number 1 in the used car market in Japan. </li>
<li>It’s market share is still less than 7% and we no longer see any meaningful obstacle in the company’s path to 30% share within the next 8 years. </li>
<li>The stock underperformed Topix by 59% following a series of earnings misses, but we think all issues have been resolved. Fair value could be 3x the current price.</li>
</ul>


NextAge has, in just two short years, moved from number 3 to number 1 in the used car market in Japan. 
It’s market share is still less than 7% and we no longer see any meaningful obstacle in the company’s path to 30% share within the next 8 years. 
The stock underperformed Topix by 59% following a series of earnings misses, but we think all issues have been resolved. Fair value could be 3x the current price.


NextAge (3186):  Disruptive Business Model at Massive Discount

KOBE BUSSAN CO., LTD. is a supermarket franchise store operator which mainly deals in foods stuffs.  The Company also has direct-run stores.

<ul>
<li>Kobe Bussan continues to hit new lows relative to the median Japanese retailer, as cheaper alternatives continue to rebound.</li>
<li>Kobe was one of the greatest beneficiaries in Japan of the Pandemic, but it is stuck at 10% growth which is no longer unusual. </li>
<li>Kobe's wholesale model makes it difficult to benefit from food price inflation like other food retailers. Kobe Bussan could drop another 50% before reaching fair value.</li>
</ul>


Kobe Bussan continues to hit new lows relative to the median Japanese retailer, as cheaper alternatives continue to rebound.
Kobe was one of the greatest beneficiaries in Japan of the Pandemic, but it is stuck at 10% growth which is no longer unusual. 
Kobe's wholesale model makes it difficult to benefit from food price inflation like other food retailers. Kobe Bussan could drop another 50% before reaching fair value.


Lasertec Corporation develops, designs, manufactures and markets photomask inspection systems to make semiconductor devices, confocal scanning laser microscopes and liquid crystal display (LCD) inspection systems.

<ul>
<li>Lasertec shares dropped nearly 8% following a scathing 53-page report by Scorpion Capital, accusing management of “colossal fraud.” </li>
<li>The SC report is shrill, in our view, and therefore, we think we add value by contributing a second opinion. </li>
<li>In our view, Lasertec is due for a correction even if SC’s report is inundated by hyperbole.</li>
</ul>


Lasertec shares dropped nearly 8% following a scathing 53-page report by Scorpion Capital, accusing management of “colossal fraud.” 
The SC report is shrill, in our view, and therefore, we think we add value by contributing a second opinion. 
In our view, Lasertec is due for a correction even if SC’s report is inundated by hyperbole.


Lasertec (6920): Some of the Accusations Are Disgraceful, Some Not

SUMITOMO CHEMICAL COMPANY, LIMITED manufactures chemical products.  The Company specializes in basic chemicals, petrochemicals, fine chemicals such as photo-resists, pharmaceutical intermediates, and agrochemicals.  Sumitomo Chemical operates manufacturing plants and sales offices worldwide.

<ul>
<li>Sumitomo Chemical issued new guidance in-line for 3/24 and xx% ahead of consensus for 3/25 EBIT, yet, the shares promptly declined by 10%.</li>
<li>Traders were probably spooked by the company’s booking of ¥340bn in impairments that was ¥200bn more than published consensus, but we argue that this was more than already priced in.</li>
<li>The only reasonable explanation for the reaction is that the market doesn't believe the new guidance for 3/25. This could prove to be a huge mistake.</li>
</ul>


Sumitomo Chemical issued new guidance in-line for 3/24 and xx% ahead of consensus for 3/25 EBIT, yet, the shares promptly declined by 10%.
Traders were probably spooked by the company’s booking of ¥340bn in impairments that was ¥200bn more than published consensus, but we argue that this was more than already priced in.
The only reasonable explanation for the reaction is that the market doesn't believe the new guidance for 3/25. This could prove to be a huge mistake.


Sumitomo Chemical (4005): To Believe Or Not To Believe, That Is the Question