Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

<p>Today during the lunch session, there were reports across the newswires of <a href="https://www.smartkarma.com/entities/kddi-corp" target="_blank" data-smartkarma-citation="entities:639:1" rel="noopener">KDDI Corp (9433 JP)</a> and other companies (including both <a href="https://www.smartkarma.com/entities/softbank-corp" target="_blank" data-smartkarma-citation="entities:27445:1" rel="noopener">Softbank Corp (9434 JP)</a> and Rakuten Mobile) sending a letter to the Telecommunications Ministry (It was, in fact, addressed to the Ministry of Internal Affairs and Communications). </p><p>The headlines were...</p><div><div><p>*KDDI: NTT TAKEOVER OF DOCOMO WOULD HURT MARKET DEVELOPMENT<br>*KDDI, SOFTBANK AMONG FIRMS SEEKING REVIEW OF NTT DOCOMO DEAL</p></div></div><p>This caused NTT Docomo shares to fall sharply on the PM session open, briefly falling as much as 75bp to ¥3861 (vs the ¥3900 Tender Offer Price) before the shares settled around ¥10 down on the day near ¥3876-3884/share for most of the rest of the day.</p><section class="figure"><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/170/780/original/Screenshot%202020-11-11%20at%202.54.24%20PM.png?1605077689" class="editor-image img-responsive" data-smartkarma-image-id="170780"></figure></section><p>The media said that the letter called on Japan’s Telecommunications Ministry "to ensure a fair market environment amid NTT’s planned takeover of Docomo, arguing the deal could inhibit fair competition and development of the telecom market." (Bloomberg). </p>
<p>The letter, it turns out, is on KDDI's home page in Japanese (<a href="https://news.kddi.com/kddi/corporate/newsrelease/2020/11/11/4779.html" target="_blank" rel="noopener">link</a>).</p>
<p>There are interesting comments within the letter but I am surprised it took this long to produce. This really looks like it is KDDI and others setting the stage to be able to pursue a campaign of harassment against NTT if necessary going forward. <em>Complain about it in general terms before the deal goes through, in order to give yourself room to complain about specifics later. </em></p>
<p>It is what I would do if I were in their shoes. </p>
<p><strong>What was surprising to me was the reaction on NTT Docomo shares.</strong> Given the nature of the document, the nature of JFTC and MIC purview on the transaction, and what must have been reasonably explicit "approval" to get the NTT deal for Docomo done in the first place, if this letter means something about the future competitiveness of the NTT/Docomo/East/West/Com grouping, the stock which should have been negatively impacted was <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>. Indeed, NTT shares ended up "only" 1.4% on the day after starting the day higher, but this was stronger than KDDI on the day.</p>
<p>More commentary about NTT Docomo, NTT, and KDDI below the fold.  </p>
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Today during the lunch session, there were reports across the newswires of KDDI Corp (9433 JP) and other companies (including both Softbank Corp (9434 JP) and Rakuten Mobile) sending a letter to the Telecommunications Ministry (It was, in fact, addressed to the Ministry of Internal Affairs and Communications). The headlines were...*KDDI: NTT TAKEOVER OF DOCOMO WOULD HURT MARKET DEVELOPMENT *KDDI, SOFTBANK AMONG FIRMS SEEKING REVIEW OF NTT DOCOMO DEALThis caused NTT Docomo shares to fall sharply on the PM session open, briefly falling as much as 75bp to ¥3861 (vs the ¥3900 Tender Offer Price) before the shares settled around ¥10 down on the day near ¥3876-3884/share for most of the rest of the day.The media said that the letter called on Japan’s Telecommunications Ministry "to ensure a fair market environment amid NTT’s planned takeover of Docomo, arguing the deal could inhibit fair competition and development of the telecom market." (Bloomberg). 
The letter, it turns out, is on KDDI's home page in Japanese (link).
There are interesting comments within the letter but I am surprised it took this long to produce. This really looks like it is KDDI and others setting the stage to be able to pursue a campaign of harassment against NTT if necessary going forward. Complain about it in general terms before the deal goes through, in order to give yourself room to complain about specifics later. 
It is what I would do if I were in their shoes. 
What was surprising to me was the reaction on NTT Docomo shares. Given the nature of the document, the nature of JFTC and MIC purview on the transaction, and what must have been reasonably explicit "approval" to get the NTT deal for Docomo done in the first place, if this letter means something about the future competitiveness of the NTT/Docomo/East/West/Com grouping, the stock which should have been negatively impacted was NTT (Nippon Telegraph &amp; Telephone) (9432 JP). Indeed, NTT shares ended up "only" 1.4% on the day after starting the day higher, but this was stronger than KDDI on the day.
More commentary about NTT Docomo, NTT, and KDDI below the fold.  



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.

'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.

Thematic (Sector/Industry)

<div><p style="text-align: center;"><strong>• BEST &amp; WORST •</strong></p></div><p>Yesterday's best and worst pairing is <a href="https://www.smartkarma.com/entities/softbank-corp" target="_blank" data-smartkarma-citation="entities:27445:1" rel="noopener">Softbank Corp (9434 JP)</a> and <a href="https://www.smartkarma.com/entities/fancl-corp" target="_blank" data-smartkarma-citation="entities:15862:1" rel="noopener">Fancl (4921 JP)</a>.</p><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/169/371/original/2020-11-05_06-10-58.png?1604524271" class="editor-image img-responsive" data-smartkarma-image-id="169371"></figure></section><section class="figure"></section><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/169/367/original/2020-11-05_05-21-58.png?1604521331" class="editor-image img-responsive" data-smartkarma-image-id="169367"></figure></section><div class="content-caption">Source for all charts &amp; tables: Japan Analytics</div><hr><div><p style="text-align: center;"><strong>DAILY STATS</strong></p></div><hr><div><p style="text-align: center;"><strong>108 Quarterly Results</strong></p></div><div><ul style="list-style-type: disc;">
<li><p><strong>Results Score:</strong> 41% Positive / 1% Neutral / 58% Negative</p></li>
<li><p><strong>Average Results Score Change:</strong> -2.0 points</p></li>
<li><p><strong>Average % Change in Revenue:</strong> -9.6% Quarter YoY / -5.7% Rolling TTM YoY </p></li>
<li><p><strong>Average Operating Profit Margin Change:</strong> -1.7ppt</p></li>
<li><p><strong>Percentage Making Quarterly Losses:</strong> 21%</p></li>
</ul></div><hr><div><p style="text-align: center;"><strong>60 Annual • 18 Interim Forecasts/Revisions</strong></p></div><div><ul style="list-style-type: disc;">
<li><p><strong>Annual Forecast/Revision Score:</strong> 35% Positive / 10% Neutral / 55% Negative</p></li>
<li><p style="text-align: left;"><strong>Interim Forecast/Revision Score Change:</strong> 67% Positive / 5% Neutral / 28% Negative</p></li>
<li><p><strong>Average Forecast/Revision Score Change:</strong> -1.6 points</p></li>
</ul></div>

• BEST &amp; WORST •Yesterday's best and worst pairing is Softbank Corp (9434 JP) and Fancl (4921 JP).Source for all charts &amp; tables: Japan AnalyticsDAILY STATS108 Quarterly Results
Results Score: 41% Positive / 1% Neutral / 58% Negative
Average Results Score Change: -2.0 points
Average % Change in Revenue: -9.6% Quarter YoY / -5.7% Rolling TTM YoY 
Average Operating Profit Margin Change: -1.7ppt
Percentage Making Quarterly Losses: 21%
60 Annual • 18 Interim Forecasts/Revisions
Annual Forecast/Revision Score: 35% Positive / 10% Neutral / 55% Negative
Interim Forecast/Revision Score Change: 67% Positive / 5% Neutral / 28% Negative
Average Forecast/Revision Score Change: -1.6 points


🇯🇵 JAPAN • Results & Revisions 11/​​​​​​​​​​​​​​​​​​​​​​04 Softbank Corp., Ricoh, Fancl, Nichirei

Telco/Internet specialist

Kirk Boodry

Redex Research

Equity Bottom-Up

<p style="text-align: justify;"><strong>Softbank Corp. posted a solid Q2 helped by Internet upside, a one-time gain from how it accounts for handset instalment plans and solid upside in enterprise sales as telework/WFH trends boost sales. The company kept FY guidance intact despite H1 outperformance as there could be headwinds from mobile pricing changes and higher spending at Z Holdings but management confidence on the analyst call was high.  Importantly, the company also provided reassurance on the dividend and reduced regulatory exposure. </strong></p>

Softbank Corp. posted a solid Q2 helped by Internet upside, a one-time gain from how it accounts for handset instalment plans and solid upside in enterprise sales as telework/WFH trends boost sales. The company kept FY guidance intact despite H1 outperformance as there could be headwinds from mobile pricing changes and higher spending at Z Holdings but management confidence on the analyst call was high.  Importantly, the company also provided reassurance on the dividend and reduced regulatory exposure. 

Softbank Corp - Q2 20 Results: Positive Financial Report and Dividend Reassurance

<p style="text-align: justify;"><strong>Rakuten provided an update on the mobile business today including the long-awaited introduction of eKYC (know your customer) and further reductions in fees but network coverage remains its largest challenge and this is unlikely to change in the near- to mid-term. The company also announced that 5G services would not be priced at a premium, in-line with campaign pricing from the incumbents and further evidence that the tech cycle upgrade is not going to generate consumer revenue growth.   </strong></p>

Rakuten provided an update on the mobile business today including the long-awaited introduction of eKYC (know your customer) and further reductions in fees but network coverage remains its largest challenge and this is unlikely to change in the near- to mid-term. The company also announced that 5G services would not be priced at a premium, in-line with campaign pricing from the incumbents and further evidence that the tech cycle upgrade is not going to generate consumer revenue growth.   

Rakuten - Mobile Update: E-KYC Enables Faster Migration but Network Coverage Challenging

Japan

Softbank Corporation provides mobile phone telecommunication and networking services. The Company offers mobile communication opening, short messaging function opening, video function opening, and other services. Softbank also provides mobile phones.

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Softbank Corp (9434 JP)

NTT/Docomo - The KDDI Quibble

KDDI and two dozen other telecom operators today revealed a letter protesting future NTT/Docomo market dominance. This isn't an attempt to block...

Travis Lundy

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

🇯🇵 JAPAN • Results & Revisions 11/04 Softbank Corp., Ricoh, Fancl, Nichirei

• BEST & WORST • Yesterday's best and worst pairing is Softbank Corp (9434 JP) and Fancl (4921 JP)._______________________________

Campbell Gunn

Softbank Corp - Q2 20 Results: Positive Financial Report and Dividend Reassurance

For Q2 20, Softbank beat financial expectations, reassured on the dividend and highlighted how diversification has lowered regulatory exposure.

Kirk Boodry

Rakuten - Mobile Update: E-KYC Enables Faster Migration but Network Coverage Challenging

Rakuten provided an update on the mobile business including the launch of eKYC functionality but comments on network coverage clearly show this...

Kirk Boodry

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NTT/Docomo - The KDDI Quibble

KDDI and two dozen other telecom operators today revealed a letter protesting future NTT/Docomo market dominance. This isn't an attempt to block...

Travis Lundy

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

🇯🇵 JAPAN • Results & Revisions 11/​​​​​​​​​​​​​​​​​​​​​​04 Softbank Corp., Ricoh, Fancl, Nichirei

• BEST & WORST • Yesterday's best and worst pairing is Softbank Corp (9434 JP) and Fancl (4921 JP)._______________________________

Campbell Gunn

Softbank Corp - Q2 20 Results: Positive Financial Report and Dividend Reassurance

For Q2 20, Softbank beat financial expectations, reassured on the dividend and highlighted how diversification has lowered regulatory exposure.

Kirk Boodry

Rakuten - Mobile Update: E-KYC Enables Faster Migration but Network Coverage Challenging

Rakuten provided an update on the mobile business including the launch of eKYC functionality but comments on network coverage clearly show this...

Kirk Boodry

🇯🇵 JAPAN • Results & Revisions 11/04 Softbank Corp., Ricoh, Fancl, Nichirei