Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

NTT (Nippon Telegraph & Telephone) / Event-Driven

When <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 its takeover 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>, the immediate market reaction was to sell. This was seen as a sign that NTT was going to "take responsibility" for giving money back to customers. I wasn't sure why. Spending ¥4trln to buyback ¥200bn of minority interest net income was the equivalent of an enormous buyback. And given that doing so did not reward the government, which still holds more than one-third of NTT, in any way, NTT had to continue to reward the government through returns to shareholders - i.e. dividends and buybacks. Some of that was going to be supported through higher EPS, allowing continued growth in dividends. However, the government counts on getting an additional few hundred billion yen through sales proceeds every few years to fund its special projects, so the buybacks needed to continue, and as discussed many times on Smartkarma in the past, that only happens if NTT buys back stock from the public first, creating room under the NTT Law to allow NTT to buy back shares from the government while still keeping the government over one-third (or over the complicated and not-exactly-one-third calculation minimum under the law). When shares fell, NTT in November made clear that it was a) going to change things around at the NTT Docomo subsidiary - the CEO was out even before the Tender Offer ended - and b) was going to continue providing returns to shareholders. It announced a buyback on 8 November which was going to have big impact.I discussed in <a href="https://www.smartkarma.com/insights/ntt-go-big-or-go-home" target="_blank" data-smartkarma-citation="insights:44964" rel="noopener">NTT - Go Big Or Go Home</a> then later in <a href="https://www.smartkarma.com/insights/ntt-still-going-big-not-going-home" target="_blank" data-smartkarma-citation="insights:46264" rel="noopener">NTT - Still Going Big, Not Going Home</a>.Yesterday, NTT announced the results of its repurchase for December. It was not subtle. NTT was 18% of volume in December. There may be more impact to come.

When NTT (Nippon Telegraph &amp; Telephone) (9432 JP) announced its takeover of NTT Docomo Inc (9437 JP), the immediate market reaction was to sell. This was seen as a sign that NTT was going to "take responsibility" for giving money back to customers. I wasn't sure why. Spending ¥4trln to buyback ¥200bn of minority interest net income was the equivalent of an enormous buyback. And given that doing so did not reward the government, which still holds more than one-third of NTT, in any way, NTT had to continue to reward the government through returns to shareholders - i.e. dividends and buybacks. Some of that was going to be supported through higher EPS, allowing continued growth in dividends. However, the government counts on getting an additional few hundred billion yen through sales proceeds every few years to fund its special projects, so the buybacks needed to continue, and as discussed many times on Smartkarma in the past, that only happens if NTT buys back stock from the public first, creating room under the NTT Law to allow NTT to buy back shares from the government while still keeping the government over one-third (or over the complicated and not-exactly-one-third calculation minimum under the law). When shares fell, NTT in November made clear that it was a) going to change things around at the NTT Docomo subsidiary - the CEO was out even before the Tender Offer ended - and b) was going to continue providing returns to shareholders. It announced a buyback on 8 November which was going to have big impact.I discussed in NTT - Go Big Or Go Home then later in NTT - Still Going Big, Not Going Home.Yesterday, NTT announced the results of its repurchase for December. It was not subtle. NTT was 18% of volume in December. There may be more impact to come.

NTT's Big Beautiful Buyback Is Not The Only Reason to Own

In <a href="https://www.smartkarma.com/insights/ntt-go-big-or-go-home" target="_blank" data-smartkarma-citation="insights:44964" rel="noopener">NTT - Go Big Or Go Home</a> five weeks ago, I suggested that investors really needed to look at the internal arithmetic of the <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> buyout of subsidiary <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>, which was subsequently completed, and will see the squeezeout take place early. The occasion for that insight was the announcement of a large buyback program by NTT. There had been a fear that the buy-in of Docomo was a "sign" that NTT was being pressured to fund lower Docomo pricing at the expense of NTT shareholder returns. NTT, however, made VERY clear that the company would look to continue its shareholder return policy AND pay down the ¥4+ trillion debt to be incurred buying out the Docomo minorities. The first buyback report came at the beginning of December and the data is interesting. Since I wrote that NTT shares are up 13.4% while <a href="https://www.smartkarma.com/entities/kddi-corp" target="_blank" data-smartkarma-citation="entities:639:1" rel="noopener">KDDI Corp (9433 JP)</a> is down slightly and <a href="https://www.smartkarma.com/entities/softbank-corp" target="_blank" data-smartkarma-citation="entities:27445:1" rel="noopener">Softbank Corp (9434 JP)</a> is up about 8% (though 6% of that has happened in the last few days as news of a "slow-burn" minority buy-in pushes <a href="https://www.smartkarma.com/entities/softbank-group-corp" target="_blank" data-smartkarma-citation="entities:315:1" rel="noopener">Softbank Group (9984 JP)</a> shares.It is worth re-iterating the dynamics here and thinking about the timing of buyback pressure, the timing of comp buyback pressure, and when investors will see newsflow on fundamentals.

In NTT - Go Big Or Go Home five weeks ago, I suggested that investors really needed to look at the internal arithmetic of the NTT (Nippon Telegraph &amp; Telephone) (9432 JP) buyout of subsidiary NTT Docomo Inc (9437 JP), which was subsequently completed, and will see the squeezeout take place early. The occasion for that insight was the announcement of a large buyback program by NTT. There had been a fear that the buy-in of Docomo was a "sign" that NTT was being pressured to fund lower Docomo pricing at the expense of NTT shareholder returns. NTT, however, made VERY clear that the company would look to continue its shareholder return policy AND pay down the ¥4+ trillion debt to be incurred buying out the Docomo minorities. The first buyback report came at the beginning of December and the data is interesting. Since I wrote that NTT shares are up 13.4% while KDDI Corp (9433 JP) is down slightly and Softbank Corp (9434 JP) is up about 8% (though 6% of that has happened in the last few days as news of a "slow-burn" minority buy-in pushes Softbank Group (9984 JP) shares.It is worth re-iterating the dynamics here and thinking about the timing of buyback pressure, the timing of comp buyback pressure, and when investors will see newsflow on fundamentals.

Telco/Internet specialist

Kirk Boodry

Redex Research

Equity Bottom-Up

KDDI has announced consumer 5G plans including additional content alliances with Amazon and DAZN supported by unlimited data use. There is evidence of industry pricing pressure as introductory offers for unlimited data packs that include streaming video are priced under ¥4,000/month whilst student discount offers are less than ¥2,500. This is a partial answer to NTT DoCoMo’s regulatory-driven price cuts (20 GB for ¥2,980/month) although it has yet to unveil pricing for a 20GB plan at the Au main brand. Rakuten is under the most pressure to address pricing now so KDDI (and Softbank) may wait for that announcement before making their own.

KDDI has announced consumer 5G plans including additional content alliances with Amazon and DAZN supported by unlimited data use. There is evidence of industry pricing pressure as introductory offers for unlimited data packs that include streaming video are priced under ¥4,000/month whilst student discount offers are less than ¥2,500. This is a partial answer to NTT DoCoMo’s regulatory-driven price cuts (20 GB for ¥2,980/month) although it has yet to unveil pricing for a 20GB plan at the Au main brand. Rakuten is under the most pressure to address pricing now so KDDI (and Softbank) may wait for that announcement before making their own.   

KDDI Corp - 5G Consumer Service Plans Indirectly Affected by DoCoMo Price Reduction

Thematic (Sector/Industry)

A new era in the Japanese telecom sector has arrived. If the Abe era was defined by better corporate governance and improved returns to shareholders, with Prime Minister Suga the focus may be shifting to national industrial policy. Reports from the <a href="https://www.nikkei.com/article/DGXMZO66833950Q0A131C2MM8000" target="_blank" rel="noopener">Nikkei</a> that DoCoMo will cut prices for high end plans by c. 50% are disruptive and deliver a political win for the current government just as NTT prepares to argue in front of the Ministry of Internal Affairs and Communications (MIC, the regulator) for deeper integration of its mobile and ICT businesses. Accelerated concerns from competitors in the wake of NTT’s acquisition of DoCoMo minorities makes a lot more sense now as the possibility that the MIC could decide cooperation with NTT to lower mobile prices is as effective as support for MVNOs and Rakuten. Winners include the government, NEC and (possibly) Apple whilst mobile operators get the short end of the stick. In particular, Rakuten looks fragile as its disruptive ¥2,980/month price point has been matched by Japan’s largest mobile operator less than a year after it launched service.

A new era in the Japanese telecom sector has arrived. If the Abe era was defined by better corporate governance and improved returns to shareholders, with Prime Minister Suga the focus may be shifting to national industrial policy. Reports from the Nikkei that DoCoMo will cut prices for high end plans by c. 50% are disruptive and deliver a political win for the current government just as NTT prepares to argue in front of the Ministry of Internal Affairs and Communications (MIC, the regulator) for deeper integration of its mobile and ICT businesses. Accelerated concerns from competitors in the wake of NTT’s acquisition of DoCoMo minorities makes a lot more sense now as the possibility that the MIC could decide cooperation with NTT to lower mobile prices is as effective as support for MVNOs and Rakuten. Winners include the government, NEC and (possibly) Apple whilst mobile operators get the short end of the stick. In particular, Rakuten looks fragile as its disruptive ¥2,980/month price point has been matched by Japan’s largest mobile operator less than a year after it launched service. 

Japan Telecom Sector: DoCoMo Move Is More than a Price Reduction

Asset Allocation & Fund Positioning, Copley Fund Research

Steven Holden

Asset Allocation & Fund Positioning

Copley Fund Research

Copley Fund Research provide research and data on asset allocation among Global and Emerging Market equity funds.  The analysis details absolute and relative positioning across countries, sectors and industries together with highly granular data on single stock and single fund allocations.  The data is updated monthly with time series going back to January 2011.

Global Research - Analysis of 165 prominent Global equity funds, combined AUM $335bn
GEM Research - Analysis of 127 prominent global EM equity funds, combined AUM $250bn

Asset Allocation - Global and GEM Equity

<a href="https://www.smartkarma.com/entities/sony-corp" target="_blank" data-smartkarma-citation="entities:563:1" rel="noopener">Sony Corp (6758 JP)</a> has seen an upward shift in ownership among active Global fund managers.  The percentage of funds invested in <a href="https://www.smartkarma.com/entities/sony-corp" target="_blank" data-smartkarma-citation="entities:563:1" rel="noopener">Sony Corp (6758 JP)</a>  is at record levels, with weights and overweights continuing to rise. Sony is also moving from being an Aggressive Growth play to a stock more appealing to a wider group of Growth, Value and GARP investors.  Our data also shows that this switch has further to run, with many investors with previous knowledge and exposure to <a href="https://www.smartkarma.com/entities/sony-corp" target="_blank" data-smartkarma-citation="entities:563:1" rel="noopener">Sony Corp (6758 JP)</a> remaining on the sidelines, or at lower levels of exposure, for now. For this reason, we would expect ownership among Global investors to be well supported, which, given the relationship between fund ownership and price, should be supportive of returns going forwards.

Sony Corp (6758 JP) has seen an upward shift in ownership among active Global fund managers.  The percentage of funds invested in Sony Corp (6758 JP)  is at record levels, with weights and overweights continuing to rise. Sony is also moving from being an Aggressive Growth play to a stock more appealing to a wider group of Growth, Value and GARP investors.  Our data also shows that this switch has further to run, with many investors with previous knowledge and exposure to Sony Corp (6758 JP) remaining on the sidelines, or at lower levels of exposure, for now. For this reason, we would expect ownership among Global investors to be well supported, which, given the relationship between fund ownership and price, should be supportive of returns going forwards.

Sony Corp:  Momentum Strong as Global Funds Continue to Add.

Japan

KDDI CORPORATION provides mobile communication services and sells mobile devices.  The Company also is a broadband provider.

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KDDI Corp (9433 JP)

NTT's Big Beautiful Buyback Is Not The Only Reason to Own

NTT's Buyback is big and beautiful, but it is not the only reason to own. There are two other good reasons. But the buyback will still have impact...

Travis Lundy

NTT - Still Going Big, Not Going Home

NTT is under-appreciated - March 2022 forecasts still do not include accretion of the NTT Docomo minority into EPS. The company has responded to...

Travis Lundy

KDDI Corp - 5G Consumer Service Plans Indirectly Affected by DoCoMo Price Reduction

KDDI introduced consumer 5G plans that include alliances with Amazon (Prime) and DAZN. The impact of DoCoMo price reductions are evident as...

Kirk Boodry

Japan Telecom Sector: DoCoMo Move Is More than a Price Reduction

If the Abe era for telcos was defined by better corporate governance and improved returns to shareholders, with Prime Minister Suga the focus may...

Kirk Boodry

Sony Corp: Momentum Strong as Global Funds Continue to Add.

Sony Corp (6758 JP) has seen an upward shift in ownership among active Global fund managers, but is far from over owned...

Steven Holden

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