'Quantamental' Japan Specialist, LightStream Research

Campbell Gunn

'Quantamental' Japan Specialist

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.

Event-Driven

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/157/903/original/2020-09-09_10-14-19.png?1599614088" class="editor-image img-responsive" data-smartkarma-image-id="157903"></figure><div class="content-caption">Source for all charts: Japan Analytics</div>LISTED RESTAURANTS - Japan currently has 102 listed restaurant companies with an aggregate market value of ¥4.9 trillion, representing 2.6% of all listed companies and 0.9% of total market value. Only thirteen companies are capitalised at over ¥100 billion, and forty-one have a market value of less than ¥10 billion. The Sector is ripe for consolidation and COVID-19 should provide a catalyst for an acceleration of the process.  Both <a href="https://www.smartkarma.com/entities/create-restaurants-holdings-inc" target="_blank" data-smartkarma-citation="entities:11513:1" rel="noopener">create restaurants (3387 JP)</a>, and <a href="https://www.smartkarma.com/entities/colowide-co-ltd" target="_blank" data-smartkarma-citation="entities:13967:1" rel="noopener">Colowide (7616 JP)</a> have positioned themselves as consolidators, but have become highly leveraged in the process.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/157/917/original/File%202020-09-09%2010%2025%2051.jpeg?1599614981" class="editor-image img-responsive" data-smartkarma-image-id="157917"></figure>Also, the Sector is highly fragmented and segmented by type of food and concept. Only nineteen companies can be deemed 'diversified'. Furthermore, there are only five listed take-out/delivery specialists, of which <a href="https://www.smartkarma.com/entities/ride-on-express-co-ltd" target="_blank" data-smartkarma-citation="entities:2812:1" rel="noopener">Ride On Express (6082 JP)</a> has been the best performer. Overall, the Sector has declined by 3.6% over one year and by 3.2% over three months - a third quartile performance. Colowide's 31% rise over the last month has pushed the Sector into fourth place amongst our thirty market Sectors, fueled by the apparent success of the tender offer for <a href="https://www.smartkarma.com/entities/ootoya-holdings-co-ltd" target="_blank" data-smartkarma-citation="entities:7329:1" rel="noopener">OOTOYA (2705 JP)</a>.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/157/928/original/2020-09-09_10-38-37.png?1599615530" class="editor-image img-responsive" data-smartkarma-image-id="157928"></figure>YUTAI KEN - One important consideration for investors to note is the widespread practice of offering kabunushi yutai-ken. In addition to dividends, shareholders are sent coupons that can be redeemed at most of the company's restaurants. Many specialist publications review such programs and offer stock recommendations based on the yutai-yield. As a result, restaurant companies in Japan have some of the highest shareholder counts among listed companies. As coupon-customers normally top-up their spending, this practice helps provide a basic level of cash flow but is a costly exercise to administer. However, there is the added benefit of limiting the number of shares for shorting.<a href="https://www.smartkarma.com/entities/yoshinoya-holdings-co-ltd" target="_blank" data-smartkarma-citation="entities:14630:1" rel="noopener"></a>100,000+ CLUB - <a href="https://www.smartkarma.com/entities/yoshinoya-holdings-co-ltd" target="_blank" data-smartkarma-citation="entities:14630:1" rel="noopener">Yoshinoya (9861 JP)</a>, <a href="https://www.smartkarma.com/entities/atom-corp" target="_blank" data-smartkarma-citation="entities:12420:1" rel="noopener">Atom (7412 JP)</a>, <a href="https://www.smartkarma.com/entities/zensho-holdings-co-ltd" target="_blank" data-smartkarma-citation="entities:4586:1" rel="noopener">Zensho (7550 JP)</a>, <a href="https://www.smartkarma.com/entities/kappa-create-co-ltd" target="_blank" data-smartkarma-citation="entities:19456:1" rel="noopener">Kappa Create (7421 JP)</a>, <a href="https://www.smartkarma.com/entities/komeda-holdings-co-ltd" target="_blank" data-smartkarma-citation="entities:24019:1" rel="noopener">Komeda (3543 JP)</a>, and <a href="https://www.smartkarma.com/entities/create-restaurants-holdings-inc" target="_blank" data-smartkarma-citation="entities:11513:1" rel="noopener">create (3387 JP)</a> are all in the top-fifty listed companies ranked by the number of shareholders. All exceed 100,000 shareholders -  beef-bowl chain Yoshiniya has 308,265 exceeding <a href="https://www.smartkarma.com/entities/mitsui-co-ltd" target="_blank" data-smartkarma-citation="entities:20799:1" rel="noopener">Mitsui (8031 JP)</a> which has twenty-four times the capitalisation.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/157/942/original/2020-09-09_11-15-31.png?1599617746" class="editor-image img-responsive" data-smartkarma-image-id="157942"></figure>In this DETAIL below, we shall review Colowide's long-term performance, returns and valuation and offer a view on the prospects for further consolidation. The Colowide group currently comprises of two listed chains - <a href="https://www.smartkarma.com/entities/kappa-create-co-ltd" target="_blank" data-smartkarma-citation="entities:19456:1" rel="noopener">Kappa Create (7421 JP)</a> and <a href="https://www.smartkarma.com/entities/atom-corp" target="_blank" data-smartkarma-citation="entities:12420:1" rel="noopener">Atom (7412 JP)</a> and the franchise chain Reins International which also operates in Asia and the US.

Source for all charts: Japan AnalyticsLISTED RESTAURANTS - Japan currently has 102 listed restaurant companies with an aggregate market value of ¥4.9 trillion, representing 2.6% of all listed companies and 0.9% of total market value. Only thirteen companies are capitalised at over ¥100 billion, and forty-one have a market value of less than ¥10 billion. The Sector is ripe for consolidation and COVID-19 should provide a catalyst for an acceleration of the process.  Both create restaurants (3387 JP), and Colowide (7616 JP) have positioned themselves as consolidators, but have become highly leveraged in the process.Also, the Sector is highly fragmented and segmented by type of food and concept. Only nineteen companies can be deemed 'diversified'. Furthermore, there are only five listed take-out/delivery specialists, of which Ride On Express (6082 JP) has been the best performer. Overall, the Sector has declined by 3.6% over one year and by 3.2% over three months - a third quartile performance. Colowide's 31% rise over the last month has pushed the Sector into fourth place amongst our thirty market Sectors, fueled by the apparent success of the tender offer for OOTOYA (2705 JP).YUTAI KEN - One important consideration for investors to note is the widespread practice of offering kabunushi yutai-ken. In addition to dividends, shareholders are sent coupons that can be redeemed at most of the company's restaurants. Many specialist publications review such programs and offer stock recommendations based on the yutai-yield. As a result, restaurant companies in Japan have some of the highest shareholder counts among listed companies. As coupon-customers normally top-up their spending, this practice helps provide a basic level of cash flow but is a costly exercise to administer. However, there is the added benefit of limiting the number of shares for shorting.100,000+ CLUB - Yoshinoya (9861 JP), Atom (7412 JP), Zensho (7550 JP), Kappa Create (7421 JP), Komeda (3543 JP), and create (3387 JP) are all in the top-fifty listed companies ranked by the number of shareholders. All exceed 100,000 shareholders -  beef-bowl chain Yoshiniya has 308,265 exceeding Mitsui (8031 JP) which has twenty-four times the capitalisation.In this DETAIL below, we shall review Colowide's long-term performance, returns and valuation and offer a view on the prospects for further consolidation. The Colowide group currently comprises of two listed chains - Kappa Create (7421 JP) and Atom (7412 JP) and the franchise chain Reins International which also operates in Asia and the US.

🇯🇵 Japan • Colowide (7616 JP) - A Bite Too Far

Independent Asian Credit Research, Bondcritic

Warut Promboon

Independent Asian Credit Research

Asian Fixed Income/Frontier Market Research

Bondcritic

Bondcritic, established in 2009, is designed to be an independent credit research voice that helps investors gain insights and unbiased analyses on Asian fixed income market. Our mission is to discover deep-value Asian high-yield and distressed bonds with a bottom-up approach, together with the help of our proprietary ESG (Environmental, Social Development, and Governance) model. At the same time, we focus on bringing investment cases of unrated and unloved issuers to the general public.

Credit

We initiate our coverage of <a href="https://www.smartkarma.com/entities/parkway-pantai-ltd" target="_blank" data-smartkarma-citation="entities:29218:1" rel="noopener">Parkway Pantai Ltd (0794727D SP)</a> (Parkway Pantai), a wholly-owned subsidiary of <a href="https://www.smartkarma.com/entities/ihh-healthcare-bhd" target="_blank" data-smartkarma-citation="entities:876:1" rel="noopener">IHH Healthcare (IHH MK)</a> of which major shareholders include A3-rated Japanese conglomerate <a href="https://www.smartkarma.com/entities/mitsui-co-ltd" target="_blank" data-smartkarma-citation="entities:20799:1" rel="noopener">Mitsui &amp; Co Ltd (8031 JP)</a> and Khazanah Nasional Bhd, Malaysia’s sovereign wealth fund.
1Q20 operating numbers were down and we expect April and May to be worse hit by the COVID19 lockdowns (which began in March). Non-urgent procedures had been postponed while supply chains were disrupted. We believe Singapore and Malaysia have seen their worst, while the worst is not yet over for India, Indonesia, and the Philippines. Other Asian countries like HK, Australia, and Japan are seeing higher COVID19 daily infections after reopening of their borders.
Medical tourists account for only 1/4 of Parkway Pantai’s Singapore revenue (with Indonesians accounting for the bulk of these medical tourists) and 6% for its Malaysia revenue. Semi-electives procedures have already picked up, according to management, despite borders still being closed. Elective procedures are also likely to return soon as there are no major communal spreads of virus in both Singapore and Malaysia, Parkway Pantai’s two key markets. We predict continuation of startup losses, albeit smaller, in Greater China. The possibility of finding a vaccine, hopefully by 1H2021 according to the WHO, may however spell some hope to the end of the havoc caused by the pandemic, but it may still take up till end-2021 or even 2022 to ensure sufficient supply to meet global demand.
We do not doubt Parkway Pantai’s ability to call PARKPT 4.25% Perp (7/22c) due in July 2022 on its financials and shareholders’ backing. The higher reset coupon should incentivize the Company to call, in our view. Based on 4.73% YTC at time of writing, PARKPT 4.25% Perp (7/22c) traded between a “B+” and a “BB-“credit, in our judgment. PARKPT 4.25% Perp deserves at least a “BB” rating, in our view,  on its financials and shareholders’ support which we believe will give the Perp at least a 73-bp upside. While there is an upside to be had, a high-yield perp such as PARKPT 4.25% Perp (7/22c) with a 4.7% yield to call should warrant a NEUTRAL recommendation, in our judgment.

We initiate our coverage of Parkway Pantai Ltd (0794727D SP) (Parkway Pantai), a wholly-owned subsidiary of IHH Healthcare (IHH MK) of which major shareholders include A3-rated Japanese conglomerate Mitsui &amp; Co Ltd (8031 JP) and Khazanah Nasional Bhd, Malaysia’s sovereign wealth fund.
1Q20 operating numbers were down and we expect April and May to be worse hit by the COVID19 lockdowns (which began in March). Non-urgent procedures had been postponed while supply chains were disrupted. We believe Singapore and Malaysia have seen their worst, while the worst is not yet over for India, Indonesia, and the Philippines. Other Asian countries like HK, Australia, and Japan are seeing higher COVID19 daily infections after reopening of their borders.
Medical tourists account for only 1/4 of Parkway Pantai’s Singapore revenue (with Indonesians accounting for the bulk of these medical tourists) and 6% for its Malaysia revenue. Semi-electives procedures have already picked up, according to management, despite borders still being closed. Elective procedures are also likely to return soon as there are no major communal spreads of virus in both Singapore and Malaysia, Parkway Pantai’s two key markets. We predict continuation of startup losses, albeit smaller, in Greater China. The possibility of finding a vaccine, hopefully by 1H2021 according to the WHO, may however spell some hope to the end of the havoc caused by the pandemic, but it may still take up till end-2021 or even 2022 to ensure sufficient supply to meet global demand.
We do not doubt Parkway Pantai’s ability to call PARKPT 4.25% Perp (7/22c) due in July 2022 on its financials and shareholders’ backing. The higher reset coupon should incentivize the Company to call, in our view. Based on 4.73% YTC at time of writing, PARKPT 4.25% Perp (7/22c) traded between a “B+” and a “BB-“credit, in our judgment. PARKPT 4.25% Perp deserves at least a “BB” rating, in our view,  on its financials and shareholders’ support which we believe will give the Perp at least a 73-bp upside. While there is an upside to be had, a high-yield perp such as PARKPT 4.25% Perp (7/22c) with a 4.7% yield to call should warrant a NEUTRAL recommendation, in our judgment.

Parkway Pantai: Good Brand with Limited Upside

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. 

Itochu's plans for Familymart are about a lot more than control – it has had effective control for years anyway.
There is a much bigger story: the fact that food is the one last hold out of traditional distribution practices with multiple layers of importers, wholesalers and a fragmented retail sector, resulting in gross inefficiencies. 
Japan's biggest trading companies, particularly <a href="https://www.smartkarma.com/entities/itochu-corp" target="_blank" data-smartkarma-citation="entities:18448:1" rel="noopener">Itochu Corp (8001 JP)</a> and <a href="https://www.smartkarma.com/entities/mitsubishi-corp" target="_blank" data-smartkarma-citation="entities:20668:1" rel="noopener">Mitsubishi Corp (8058 JP),</a> have been major beneficiaries of this system, capturing margins at all stages of the channel, from raw material imports to retail. 
Pressure on the food sector to modernise has been building for a decade and this is now happening in the form of retailers building to national scale to finally take on this supply-side dominance and also learning to source direct, cutting out wholesalers. The trading companies know this and are themselves beginning to build what are in effect vertically integrated food distribution businesses, at the same time as pivoting themselves as the main suppliers to Japan's biggest food-based retailers.
Itochu and Mitsubishi are spearheading this change. This rivalry in the food sector between the two venerable trading firms is as important as the rivalry between their proxies in convenience store retailing, Familymart and Lawson.
Absorbing Familymart is the basis for a much bigger consolidation of Itochu's interests which include stakes in numerous food retailers as well as role as the biggest food wholesaler when all its subsidiaries are taking into account.
Sadly, current Familymart shareholders won't benefit from this consolidation nor the likely spike in operating margins as some of the fat in food distribution is finally cut.
In Japan, where food prices have been kept so high for so long by entrenched interests (Japanese love food but the 24% of consumption budgets spent on food (much, much higher than most  equivalent markets) is much more about high prices than being a gourmet nation), the potential to cut costs is staggeringly large.
Even within CVS retailing, Itochu will likely benefit from the continued growth of the big three retailers – despite format saturation.
For the sector as a whole, 2019 saw the highest average daily sales per store so far of ¥590,794, a 12.1% increase on 2010. In the same decade, total store numbers increased by 33.4%, but total sales increased by 50.2%.
CVS have not just expanded in number, but their position and ability to exploit the market have improved dramatically too. Based on METI figures, CVS market share of retailing has expanded from 6% to 8.4% in the same period.
In other words, saturation is important but not that important because CVS are finding new ways to expand both their share of retailing and influence.

Itochu's plans for Familymart are about a lot more than control – it has had effective control for years anyway.
There is a much bigger story: the fact that food is the one last hold out of traditional distribution practices with multiple layers of importers, wholesalers and a fragmented retail sector, resulting in gross inefficiencies. 
Japan's biggest trading companies, particularly Itochu Corp (8001 JP) and Mitsubishi Corp (8058 JP), have been major beneficiaries of this system, capturing margins at all stages of the channel, from raw material imports to retail. 
Pressure on the food sector to modernise has been building for a decade and this is now happening in the form of retailers building to national scale to finally take on this supply-side dominance and also learning to source direct, cutting out wholesalers. The trading companies know this and are themselves beginning to build what are in effect vertically integrated food distribution businesses, at the same time as pivoting themselves as the main suppliers to Japan's biggest food-based retailers.
Itochu and Mitsubishi are spearheading this change. This rivalry in the food sector between the two venerable trading firms is as important as the rivalry between their proxies in convenience store retailing, Familymart and Lawson.
Absorbing Familymart is the basis for a much bigger consolidation of Itochu's interests which include stakes in numerous food retailers as well as role as the biggest food wholesaler when all its subsidiaries are taking into account.
Sadly, current Familymart shareholders won't benefit from this consolidation nor the likely spike in operating margins as some of the fat in food distribution is finally cut.
In Japan, where food prices have been kept so high for so long by entrenched interests (Japanese love food but the 24% of consumption budgets spent on food (much, much higher than most  equivalent markets) is much more about high prices than being a gourmet nation), the potential to cut costs is staggeringly large.
Even within CVS retailing, Itochu will likely benefit from the continued growth of the big three retailers – despite format saturation.
For the sector as a whole, 2019 saw the highest average daily sales per store so far of ¥590,794, a 12.1% increase on 2010. In the same decade, total store numbers increased by 33.4%, but total sales increased by 50.2%.
CVS have not just expanded in number, but their position and ability to exploit the market have improved dramatically too. Based on METI figures, CVS market share of retailing has expanded from 6% to 8.4% in the same period.
In other words, saturation is important but not that important because CVS are finding new ways to expand both their share of retailing and influence.

Keeping It in the Family: Why Familymart Is Worth so Much More to Itochu

Equity Bottom-Up

As reported in an earlier insight (<a href="https://www.smartkarma.com/insights/big-apparel-in-trouble-onward-to-close-1-400-stores" target="_blank" rel="noopener">Big Apparel in Trouble: Onward to Close 1,400 stores</a>), Japan's big apparel firms were already fighting for survival before March and now even more so.
<a href="https://www.smartkarma.com/entities/sanyo-shokai-ltd" target="_blank" data-smartkarma-citation="entities:12308:1" rel="noopener">Sanyo Shokai (8011 JP)</a> is in worse shape than most because it lost the license for <a href="https://www.smartkarma.com/entities/burberry-group-plc" target="_blank" data-smartkarma-citation="entities:21849:1" rel="noopener">Burberry (BRBY LN)</a> in 2015 and not only failed to set up replacement licenses or brands in the years leading up to that loss, but has failed spectacularly ever since.
Not surprisingly, a US shareholder, RMB Capital, has been putting pressure on the apparel firm to get its house in order after years of empty promises about profit recovery. At the shareholder's meeting in late May, Japanese shareholders closed ranks, however.
While Sanyo Shokai may have won this round, in the longer-term battle for survival, it looks worryingly vulnerable to the same fate as <a href="https://www.smartkarma.com/entities/renown-inc" target="_blank" data-smartkarma-citation="entities:10158:1" rel="noopener">Renown Inc (3606 JP). </a>

As reported in an earlier insight (Big Apparel in Trouble: Onward to Close 1,400 stores), Japan's big apparel firms were already fighting for survival before March and now even more so.
Sanyo Shokai (8011 JP) is in worse shape than most because it lost the license for Burberry (BRBY LN) in 2015 and not only failed to set up replacement licenses or brands in the years leading up to that loss, but has failed spectacularly ever since.
Not surprisingly, a US shareholder, RMB Capital, has been putting pressure on the apparel firm to get its house in order after years of empty promises about profit recovery. At the shareholder's meeting in late May, Japanese shareholders closed ranks, however.
While Sanyo Shokai may have won this round, in the longer-term battle for survival, it looks worryingly vulnerable to the same fate as Renown Inc (3606 JP). 

Big Apparel in Trouble: Sanyo Shokai Slashes Stores and Fights off Shareholder Pressure

We initiate our coverage of <a href="https://www.smartkarma.com/entities/thomson-medical-group-limited" target="_blank" data-smartkarma-citation="entities:8495:1" rel="noopener">Thomson Medical Group Limited (ROWS SP)</a> (TMG). The acquisition of a profitable Thomson Medical Centre (TMC) together with <a href="https://www.smartkarma.com/entities/tmc-life-sciences-bhd" target="_blank" data-smartkarma-citation="entities:12066:1" rel="noopener">Tmc Life Sciences (TMCL MK)</a> (TMCLS) by Rowsley Ltd. in 1Q’18 has changed the fortune and checkered past of Rowsley, in our view. With the divestment of its loss-making real estate investments in January 2019 and name changed to TMG, TMG is now a pure healthcare play on a clean slate.TMG’s strength lies in TMC/TMLCS as one of Asia’s largest healthcare players with a focus in the Obstetrics &amp; Gynaecology (O&amp;G) markets in Singapore and Malaysia. Revenue drivers going forward include (1) its premier private hospital status in Singapore, (2) TMSCL’s expansion in Kuala Lumpur, and (3) the new hospital development in Johor Bharu.We see the first driver as a cash cow on TMC’s focus on oncology and preventive health as the next pillar of growth in the medical industry. COVID-19 patients could have further complication due to diabetes, high blood pressure, or heart problems. Thus, we expect preventive healthcare to grow in importance whether or not COVID-19 stays with us. We see the latter two drivers as promising in Malaysia’s much larger market (compared to Singapore) with the triple expansion of capacity at Thomson Hospital Kota Damansara near Kuala Lumpur to generate revenue by 2021, and the potential to draw Singaporeans to visit hospital facilities in Johor Bharu when the facility will be completed in 2026. We like the long-term prospect but are cautious in the next 2-3 years as capex for the Malaysian projects can worsen the liquidity situation at TMG. Our base-case scenario calls for patients worldwide to be postponing non-essential medical procedures and even parenthood that could reduce TMG’s revenue growth, to say the least.TMG’s balance sheet is highly levered stemming from the side effect of the acquisition which, in our view, encouraged management to maximize return on shareholders’ equity for the publicly-listed stocks with additional leverage. We expect its liquidity and EBITDA to just sufficiently cover its cash outflow and would see additional capital injection as credit-positive in the future.Overall, we like TMG’s leveraged growth story but believe the story is geared to benefit shareholders more than bondholders. Clearly, Rowsley’s management realized the potential of TMC’s cashflow, and decided to maximize shareholders’ value through borrowing. As far as bondholders are concerned, this is about balancing liquidity risk with recurring revenue. In our judgment, its debt level would put the group in the “B“ category had it not been for its recurring revenue in the healthcare industry. We believe the bonds are fully-valued versus peers and see limited upside in the near term while we do not recommend selling either as we believe the TMGSP complex still offers a fair carry for its recurring cashflow . As such, we assign a NEUTRAL recommendation on the TMGSP complex.

We initiate our coverage of Thomson Medical Group Limited (ROWS SP) (TMG). The acquisition of a profitable Thomson Medical Centre (TMC) together with Tmc Life Sciences (TMCL MK) (TMCLS) by Rowsley Ltd. in 1Q’18 has changed the fortune and checkered past of Rowsley, in our view. With the divestment of its loss-making real estate investments in January 2019 and name changed to TMG, TMG is now a pure healthcare play on a clean slate.TMG’s strength lies in TMC/TMLCS as one of Asia’s largest healthcare players with a focus in the Obstetrics &amp; Gynaecology (O&amp;G) markets in Singapore and Malaysia. Revenue drivers going forward include (1) its premier private hospital status in Singapore, (2) TMSCL’s expansion in Kuala Lumpur, and (3) the new hospital development in Johor Bharu.We see the first driver as a cash cow on TMC’s focus on oncology and preventive health as the next pillar of growth in the medical industry. COVID-19 patients could have further complication due to diabetes, high blood pressure, or heart problems. Thus, we expect preventive healthcare to grow in importance whether or not COVID-19 stays with us. We see the latter two drivers as promising in Malaysia’s much larger market (compared to Singapore) with the triple expansion of capacity at Thomson Hospital Kota Damansara near Kuala Lumpur to generate revenue by 2021, and the potential to draw Singaporeans to visit hospital facilities in Johor Bharu when the facility will be completed in 2026. We like the long-term prospect but are cautious in the next 2-3 years as capex for the Malaysian projects can worsen the liquidity situation at TMG. Our base-case scenario calls for patients worldwide to be postponing non-essential medical procedures and even parenthood that could reduce TMG’s revenue growth, to say the least.TMG’s balance sheet is highly levered stemming from the side effect of the acquisition which, in our view, encouraged management to maximize return on shareholders’ equity for the publicly-listed stocks with additional leverage. We expect its liquidity and EBITDA to just sufficiently cover its cash outflow and would see additional capital injection as credit-positive in the future.Overall, we like TMG’s leveraged growth story but believe the story is geared to benefit shareholders more than bondholders. Clearly, Rowsley’s management realized the potential of TMC’s cashflow, and decided to maximize shareholders’ value through borrowing. As far as bondholders are concerned, this is about balancing liquidity risk with recurring revenue. In our judgment, its debt level would put the group in the “B“ category had it not been for its recurring revenue in the healthcare industry. We believe the bonds are fully-valued versus peers and see limited upside in the near term while we do not recommend selling either as we believe the TMGSP complex still offers a fair carry for its recurring cashflow . As such, we assign a NEUTRAL recommendation on the TMGSP complex.

Thomson Medical Group: Medicated by Leverage

Japan

MITSUI & CO., LTD. is a general trading company.  The Company has operating groups including Iron and Steel, Non-Ferrous Metals, Machinery, Chemicals, Foods, Energy, Textiles, and General Merchandise.  Mitsui also operates real estate and overseas development projects.

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Mitsui & Co Ltd (8031 JP)

🇯🇵 Japan • Colowide (7616 JP) - A Bite Too Far

LISTED RESTAURANTS

Campbell Gunn

Parkway Pantai: Good Brand with Limited Upside

We initiate our coverage of Parkway Pantai Ltd (0794727D SP) (Parkway Pantai), a wholly-owned subsidiary of IHH Healthcare (IHH MK) of which major...

Bondcritic

Keeping It in the Family: Why Familymart Is Worth so Much More to Itochu

Itochu's plans for Familymart are about a lot more than control – it has had effective control for years anyway. There is a much bigger story: the...

Michael Causton

Big Apparel in Trouble: Sanyo Shokai Slashes Stores and Fights off Shareholder Pressure

As reported in an earlier insight (Big Apparel in Trouble: Onward to Close 1,400 stores), Japan's big apparel firms were already fighting for...

Michael Causton

Thomson Medical Group: Medicated by Leverage

We initiate our coverage of Thomson Medical Group Limited (ROWS SP) (TMG). The acquisition of a profitable Thomson Medical Centre (TMC) together...

Bondcritic

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