Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

NTT (Nippon Telegraph & Telephone) / Event-Driven

<p>On 29 September 2020, <a href="https://www.smartkarma.com/entities/nippon-telegraph-telephone-corporation" target="_blank" data-smartkarma-citation="entities:623:1" rel="noopener">NTT (Nippon Telegraph &amp; Telephone) (9432 JP)</a> announced it would buy out minorities of <a href="https://www.smartkarma.com/entities/ntt-docomo-inc" target="_blank" data-smartkarma-citation="entities:1089:1" rel="noopener">NTT Docomo Inc (9437 JP)</a> in a $40 billion buyout - the biggest Tender Offer Japan had ever seen. </p><p>As it was financed with debt, that constituted the single biggest "stock buyback" that NTT could possibly have executed. Normally, NTT buys back ¥200-350bn of <em>stock</em> per year. With this buyout bought ¥200+bn of <em>net income</em> per year. </p><p>This came on top of previous statements by the CEO of NTT that the company would seek to sell and securitize trillions of yen of assets and return capital to shareholders. </p><p>Shockingly NTT shares fell on the news of the buyout. I could not fathom why. They may have overpaid what they needed to pay to get it done, but it was going to get done. They were going to pay ¥4trln of debt, <em>and zero equity</em>, to get ¥210-250bn in net income and ¥400bn+ of operating cashflow, presumably for a very long time, in exchange for a relatively low interest rate payment.</p><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/169/695/original/Screenshot%202020-11-06%20at%202.31.50%20PM.png?1604644954" class="editor-image img-responsive" data-smartkarma-image-id="169695"></figure></section><div class="content-highlight">
<p>Several people contacted me when this was announced and asked whether I was worried about NTT being too indebted. </p>
<p>My blunt answer to them was that I was not at all worried. This was, in effect, a MAMMOTH BUYBACK and NTT had real estate assets, tower assets, and any number of other hard assets which could be sold or securitized to pay down debt and there was no chance that NTT was going to issue equity. The simple reason why there would be no equity top up was and is that the NTT Law requires that the government hold one-third* of the shares outstanding of NTT and there is no chance that the government is going to be convinced to buy more shares of NTT to maintain their stake. This was pure leverage and pure net income to NTT shareholders. </p>
</div><div class="content-remarks"><p>* It's a little complicated because there is some weirdness where IPO shares are excluded from the calculation, but it comes VERY close to one-third in practical terms.</p></div><h3>The NEW News</h3><p>On Friday 6 November NTT released Q2 earnings. They will not overwhelm anyone and there wasn't much talk about what the plans are for synergies at NTT Docomo, but I think that has to be expected because the Tender Offer, while a foregone conclusion in terms of rights, is not even over yet.</p><p>However I think people STILL do not look at NTT and its results the right way. What we knew Friday? <a href="https://www.smartkarma.com/entities/ntt-docomo-inc" target="_blank" data-smartkarma-citation="entities:1089:1" rel="noopener">NTT Docomo Inc (9437 JP)</a> OP in Q2 was +8.3%yoy. <a href="https://www.smartkarma.com/entities/ntt-data-corp" target="_blank" data-smartkarma-citation="entities:11232:1" rel="noopener">NTT Data Corp (9613 JP)</a> was up 9.5%yoy. What we did <em>not</em> know was that NTT ex-listed subs OP was up 4.7%yoy. That was better than expected. </p><p>NTT ex-listed subs OP has continued to grow over the years. The rolling 4Q total is the blue bars below (the red bars are the implied quarterly OP based on consensus OP annual estimates (out to March 2023) for NTT, NTT Docomo and NTT Data backing out NTT ex-listed subs).</p><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/169/726/original/Screenshot%202020-11-06%20at%205.21.56%20PM.png?1604654537" class="editor-image img-responsive" data-smartkarma-image-id="169726"></figure><p>What was clear from the discussion that NTT led on the day of the announcement of the Tender Offer to buy in minorities of NTT Docomo was that they saw synergies, and they saw lower costs compared to what the Street was expecting. For whatever reason, as will be discussed below, Street consensus for forward years of NTT does not include all of NTT Docomo. And it seems to include no synergies.</p></section><h3>The OTHER NEW News - A Buyback</h3><p>Up to 120mm shares spending up to ¥250bn from 11 March to 31 March 2021. </p><p>THAT was unexpected. </p><p>This deserves a discussion.</p>

On 29 September 2020, NTT (Nippon Telegraph &amp; Telephone) (9432 JP) announced it would buy out minorities of NTT Docomo Inc (9437 JP) in a $40 billion buyout - the biggest Tender Offer Japan had ever seen. As it was financed with debt, that constituted the single biggest "stock buyback" that NTT could possibly have executed. Normally, NTT buys back ¥200-350bn of stock per year. With this buyout bought ¥200+bn of net income per year. This came on top of previous statements by the CEO of NTT that the company would seek to sell and securitize trillions of yen of assets and return capital to shareholders. Shockingly NTT shares fell on the news of the buyout. I could not fathom why. They may have overpaid what they needed to pay to get it done, but it was going to get done. They were going to pay ¥4trln of debt, and zero equity, to get ¥210-250bn in net income and ¥400bn+ of operating cashflow, presumably for a very long time, in exchange for a relatively low interest rate payment.
Several people contacted me when this was announced and asked whether I was worried about NTT being too indebted. 
My blunt answer to them was that I was not at all worried. This was, in effect, a MAMMOTH BUYBACK and NTT had real estate assets, tower assets, and any number of other hard assets which could be sold or securitized to pay down debt and there was no chance that NTT was going to issue equity. The simple reason why there would be no equity top up was and is that the NTT Law requires that the government hold one-third* of the shares outstanding of NTT and there is no chance that the government is going to be convinced to buy more shares of NTT to maintain their stake. This was pure leverage and pure net income to NTT shareholders. 
* It's a little complicated because there is some weirdness where IPO shares are excluded from the calculation, but it comes VERY close to one-third in practical terms.The NEW NewsOn Friday 6 November NTT released Q2 earnings. They will not overwhelm anyone and there wasn't much talk about what the plans are for synergies at NTT Docomo, but I think that has to be expected because the Tender Offer, while a foregone conclusion in terms of rights, is not even over yet.However I think people STILL do not look at NTT and its results the right way. What we knew Friday? NTT Docomo Inc (9437 JP) OP in Q2 was +8.3%yoy. NTT Data Corp (9613 JP) was up 9.5%yoy. What we did not know was that NTT ex-listed subs OP was up 4.7%yoy. That was better than expected. NTT ex-listed subs OP has continued to grow over the years. The rolling 4Q total is the blue bars below (the red bars are the implied quarterly OP based on consensus OP annual estimates (out to March 2023) for NTT, NTT Docomo and NTT Data backing out NTT ex-listed subs).What was clear from the discussion that NTT led on the day of the announcement of the Tender Offer to buy in minorities of NTT Docomo was that they saw synergies, and they saw lower costs compared to what the Street was expecting. For whatever reason, as will be discussed below, Street consensus for forward years of NTT does not include all of NTT Docomo. And it seems to include no synergies.The OTHER NEW News - A BuybackUp to 120mm shares spending up to ¥250bn from 11 March to 31 March 2021. THAT was unexpected. This deserves a discussion.

Telco/Internet specialist

Kirk Boodry

Redex Research

Equity Bottom-Up

<p style="text-align: justify;"><strong>Z Holdings posted Q2 20 results that were modestly ahead of consensus but its first pass at full-year guidance fell well short of analyst expectations. The difference is renewed investment to leverage solid H1 growth in eCommerce/fintech users. That makes sense but it is harder to justify a 57% YTD run in the shares with FY20 operating income growth of only 5%. Operationally, some moderation in merchandise eCommerce and sluggish ad sales was more than offset by a massive rebound in online travel and continued momentum for cashless payments.  </strong></p>

Z Holdings posted Q2 20 results that were modestly ahead of consensus but its first pass at full-year guidance fell well short of analyst expectations. The difference is renewed investment to leverage solid H1 growth in eCommerce/fintech users. That makes sense but it is harder to justify a 57% YTD run in the shares with FY20 operating income growth of only 5%. Operationally, some moderation in merchandise eCommerce and sluggish ad sales was more than offset by a massive rebound in online travel and continued momentum for cashless payments.  

Z Holdings - Q2 20 Results: Travel Business Amazes but Guidance May Be Less Appealing

Equity Analyst, LightStream Research

Supun Walpola

Equity Analyst

Long-Short Analysis on Japan, Asia and the World

LightStream Research

LightStream conducts quantitatively rigorous and data-driven analysis with a focus on Japan and Asia.

We consistently cover the Tech, Consumer and Industrial sectors, and provide ECM and Events coverage more broadly.

We supplement traditional qualitative insights from company relationships with a robust quantitative foundation that examines as much historical data as is available.
We further refine the accuracy of our insights and calls through the use of alternative data to flesh out current trends, and through a valuation framework that emphasises non-superficial peer group selection and a proper attempt to understand the metrics and changes that have driven security valuations in the past.

<p>In our previous note, <a href="https://www.smartkarma.com/insights/zozo-nice-results-but-it-s-just-a-covid-bump" target="_blank" data-smartkarma-citation="insights:41718" rel="noopener">Zozo – Nice Results but It’s Just a COVID Bump</a>, we suggested that <a href="https://www.smartkarma.com/entities/zozo-inc" target="_blank" data-smartkarma-citation="entities:18379:1" rel="noopener">ZOZO Inc (3092 JP)</a>'s strong 1Q results could be a temporary bump due to the stay-at-home demand, and the company could quickly return to its decelerating growth post-lockdowns. ZOZO's 2Q results show early signs of this happening and we expect a correction over the next few quarters as the impact of the stay-at-home demand further subsides and potentially weak winter sales are booked.</p>

In our previous note, Zozo – Nice Results but It’s Just a COVID Bump, we suggested that ZOZO Inc (3092 JP)'s strong 1Q results could be a temporary bump due to the stay-at-home demand, and the company could quickly return to its decelerating growth post-lockdowns. ZOZO's 2Q results show early signs of this happening and we expect a correction over the next few quarters as the impact of the stay-at-home demand further subsides and potentially weak winter sales are booked.

Expert on Japan Retail and Consumer Markets, JapanConsuming

Michael Causton

Expert on Japan Retail and Consumer Markets

Real Insight on Japanese Consumer Markets

JapanConsuming

JapanConsuming is a specialist research firm producing intelligence on Japanese retail and consumer markets. Founded in 2000, JapanConsuming has become the leading provider of insights on Japanese retailers and consumer trends to retailers, brands, government agencies and investors. As well as a highly regarded monthly report on the market, JapanConsuming produces in-depth reports on retail sectors, seminars on key trends and telephone consulting to investors on trends and retailers.

JapanConsuming was founded by Michael Causton and Roy Larke. 

<p>Another case of hubris in Japanese e-commerce? Shoplist operator, Crooz, made a big splash about its plans to build wa ¥100 billion fashion platform three years ago but made a thumping loss in 2018 and then sales actually fell last year, proving just how hard it is for smaller e-commerce platforms to shine in the shadow of the big three.</p>

Another case of hubris in Japanese e-commerce? Shoplist operator, Crooz, made a big splash about its plans to build wa ¥100 billion fashion platform three years ago but made a thumping loss in 2018 and then sales actually fell last year, proving just how hard it is for smaller e-commerce platforms to shine in the shadow of the big three.

<div>
<p>As reported previously, <a href="https://www.smartkarma.com/entities/zozo-inc" target="_blank" data-smartkarma-citation="entities:18379:1" rel="noopener">ZOZO (3092 JP)'s</a> new plan to create a direct-to-consumer (DtoC) e-commerce platform, and fund the brands sold on it, is much more than just a major fashion retailer piling into the latest trend of exploiting social media influencer followships.</p>
<p>Given the control Zozo will have over the brands, it is, in effect, revisiting its old ambition to launch private brands.</p>
</div><div>
<p>Zozo has now launched 18 of these new brands, all targeting diverse segments with a social influencer or other talent fronting the brand. The model being used is just like a music company promoting diverse musicians and bands, with Zozo very much in control, and could transform Zozo's private brand programme.</p>
<p>Zozo also continues to widen the number of categories sold on Zozo.</p>
</div>


As reported previously, ZOZO (3092 JP)'s new plan to create a direct-to-consumer (DtoC) e-commerce platform, and fund the brands sold on it, is much more than just a major fashion retailer piling into the latest trend of exploiting social media influencer followships.
Given the control Zozo will have over the brands, it is, in effect, revisiting its old ambition to launch private brands.

Zozo has now launched 18 of these new brands, all targeting diverse segments with a social influencer or other talent fronting the brand. The model being used is just like a music company promoting diverse musicians and bands, with Zozo very much in control, and could transform Zozo's private brand programme.
Zozo also continues to widen the number of categories sold on Zozo.


ZOZO Launches 18 New Brands, Adds Golf Section

Japan

ZOZO Inc operates internet shopping sites for apparel.  The Company also provides communication services relating to apparel such as blogs by fashion moguls and internet chat room for users.

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ZOZO Inc (3092 JP)

NTT - Go Big Or Go Home

Hot on the heels of announcing a $40bn buyout of Docomo minorities - effectively a giant buyback - NTT announced a buyback of its own stock. It...

Travis Lundy

Z Holdings - Q2 20 Results: Travel Business Amazes but Guidance May Be Less Appealing

Newly issued full-year guidance is well below market expectations and driven by renewed investment to build eCommerce and fintech. That is sensible...

Kirk Boodry

ZOZO: Return to Collapsing Growth

ZOZO's 2Q results show early signs of returning to decelerating growth. We expect a correction over the next few quarters as the impact of the stay...

Supun Walpola

Shoplist Promise Withers on the Web

Crooz promised sales of ¥100 billion within a few years and a long-term target of a ¥1 trillion capitalisation. Its early promise has withered...

Michael Causton

ZOZO Launches 18 New Brands, Adds Golf Section

Zozo failed first time with its own private brand but today launched 18 brands. This time it is developing them with social influencers and other...

Michael Causton

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