Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

The Nikkei came out with an article (Japanese, English) at midnight local time last night saying that <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> would seek to buy minorities in 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> in order to invest for growth and streamline management ("speed up decision-making" in Japanese corporate-speak) in the face of the possibility of forced reduction in mobile phone charges at the behest of new Prime Minister Yoshihide Suga. The Nikkei said that it would be announced soon, and if NTT paid a 30% premium to last price, buying out the remaining 34% would come to JPY 4 trillion or more.
By strengthening links with the rest of NTT and streamlining 5G and IoT investments, the apparent hope is that cost cuts will fund price cuts which might lower profits. It would also reduce the "conflict of interest" between shareholders of the parent and shareholders of the subsidiary.
These are all the right words to say. I expect that this may be driven by the goal to provide some measure of satisfaction to Prime Minister Suga without driving the value of Docomo into the ground. Shares in Docomo are already down 9% since PM Abe resigned.  If indeed the level of pricing cuts at mobile carriers desired by PM Suga is the driving force behind this move, that is bearish for everyone, but among carriers, NTT probably comes out OK. I would think Softbank Corp is at some risk. 
As a reminder... when new PM Suga took office, one of his first acts was to instruct Minister of Internal Affairs and Communications Takeda to advance reforms to realize a tariff reduction. The head of KDDI at an event to introduce a new product last Friday said "We are taking the request from the government seriously. There is a request to take into consideration international comparisons. We'd like to respond to the request on the basis of maintaining sustainable growth, working towards future reductions in price. Later in the day, in his afternoon press briefing, Chief Cabinet Secretary said... 
<blockquote>
国際的な料金水準なども参考にしながら、各社において積極的に検討を進めていくことを期待したい。事業者間の健全な競争が働く環境で、納得感のある料金サービスの早期実現に向けての道筋がつけられていくことが大事だ。国民の関心が大変高い事項でもあるので、それを踏まえてできるだけ早期に成果が出るよう努力してほしい.
I hope that each company will actively consider the issue while taking into consideration international tariff levels. We'd like to see them pave a way to a new lower price with an early establishment of a lower fee. It is of great interest to the public. 
</blockquote>
<hr>
Overnight, NTT Docomo ADRs jumped as much as 29% while NTT shares fell in New York. Limit up in Docomo shares in Japan today is +18%. 
If indeed the government is about to force NTT Docomo into a decade of lost growth, it is possible that the "right" price here is less than 30% up. NTT already owns 66.2%. Getting to 66.7% to squeeze out minorities would not take a great deal of effort at all. 
This all seems like a leak too early. The quarter is not even over, Docomo doesn't release H1 for a month, and I expect the impact of NTT Docomo having to suffer further at the hands of PM Suga's passion for lower telecom charges is still being calculated in pencil, not pen. 
This will, however, catch off-guard others than just I. The long NTT short NTT Docomo trade is well-known and well-promoted (including by yours truly) over the past few years, and if you buy the trade, you buy it at the bottom of the range, not the top, and we are near the bottom of the range of the NTT/Docomo ratio. Furthermore, some investors may have shorted or sold Docomo to make room to buy the offering in Softbank Corp (9434) just completed. This will tick some people off.
<div class="content-highlight">
Why doesn't NTT just try to execute a scrip merger? 
BECAUSE THEY CAN'T.
Why then pay a 30% premium for a stock which is on the cusp of being hammered by autocratic decision-making by a new Prime Minister?  We don't yet know it will be 30%. But even if it is, it is not a huge thing given the overall size and existing high level of ownership. +30% would be very generous.
There is a lot we don't know - like almost everything - but by looking at the possibilities and parameters we may be able to prepare ourselves for what may come.
</div>
More below the fold.

The Nikkei came out with an article (Japanese, English) at midnight local time last night saying that NTT (Nippon Telegraph &amp; Telephone) (9432 JP) would seek to buy minorities in subsidiary NTT Docomo Inc (9437 JP) in order to invest for growth and streamline management ("speed up decision-making" in Japanese corporate-speak) in the face of the possibility of forced reduction in mobile phone charges at the behest of new Prime Minister Yoshihide Suga. The Nikkei said that it would be announced soon, and if NTT paid a 30% premium to last price, buying out the remaining 34% would come to JPY 4 trillion or more.
By strengthening links with the rest of NTT and streamlining 5G and IoT investments, the apparent hope is that cost cuts will fund price cuts which might lower profits. It would also reduce the "conflict of interest" between shareholders of the parent and shareholders of the subsidiary.
These are all the right words to say. I expect that this may be driven by the goal to provide some measure of satisfaction to Prime Minister Suga without driving the value of Docomo into the ground. Shares in Docomo are already down 9% since PM Abe resigned.  If indeed the level of pricing cuts at mobile carriers desired by PM Suga is the driving force behind this move, that is bearish for everyone, but among carriers, NTT probably comes out OK. I would think Softbank Corp is at some risk. 
As a reminder... when new PM Suga took office, one of his first acts was to instruct Minister of Internal Affairs and Communications Takeda to advance reforms to realize a tariff reduction. The head of KDDI at an event to introduce a new product last Friday said "We are taking the request from the government seriously. There is a request to take into consideration international comparisons. We'd like to respond to the request on the basis of maintaining sustainable growth, working towards future reductions in price. Later in the day, in his afternoon press briefing, Chief Cabinet Secretary said... 

国際的な料金水準なども参考にしながら、各社において積極的に検討を進めていくことを期待したい。事業者間の健全な競争が働く環境で、納得感のある料金サービスの早期実現に向けての道筋がつけられていくことが大事だ。国民の関心が大変高い事項でもあるので、それを踏まえてできるだけ早期に成果が出るよう努力してほしい.
I hope that each company will actively consider the issue while taking into consideration international tariff levels. We'd like to see them pave a way to a new lower price with an early establishment of a lower fee. It is of great interest to the public. 


Overnight, NTT Docomo ADRs jumped as much as 29% while NTT shares fell in New York. Limit up in Docomo shares in Japan today is +18%. 
If indeed the government is about to force NTT Docomo into a decade of lost growth, it is possible that the "right" price here is less than 30% up. NTT already owns 66.2%. Getting to 66.7% to squeeze out minorities would not take a great deal of effort at all. 
This all seems like a leak too early. The quarter is not even over, Docomo doesn't release H1 for a month, and I expect the impact of NTT Docomo having to suffer further at the hands of PM Suga's passion for lower telecom charges is still being calculated in pencil, not pen. 
This will, however, catch off-guard others than just I. The long NTT short NTT Docomo trade is well-known and well-promoted (including by yours truly) over the past few years, and if you buy the trade, you buy it at the bottom of the range, not the top, and we are near the bottom of the range of the NTT/Docomo ratio. Furthermore, some investors may have shorted or sold Docomo to make room to buy the offering in Softbank Corp (9434) just completed. This will tick some people off.

Why doesn't NTT just try to execute a scrip merger? 
BECAUSE THEY CAN'T.
Why then pay a 30% premium for a stock which is on the cusp of being hammered by autocratic decision-making by a new Prime Minister?  We don't yet know it will be 30%. But even if it is, it is not a huge thing given the overall size and existing high level of ownership. +30% would be very generous.
There is a lot we don't know - like almost everything - but by looking at the possibilities and parameters we may be able to prepare ourselves for what may come.

More below the fold. 

NTT Docomo SHOCKER - Nikkei Says Parent NTT To Buy Out Docomo Minorities

Equity Capital Markets

When the <a href="https://www.smartkarma.com/entities/softbank-corp" target="_blank" data-smartkarma-citation="entities:27445:1" rel="noopener">Softbank Corp (9434 JP)</a> block was announced on 28 August after the close, it was one of the larger secondary blocks ever placed in Japan, and it was underwritten.It was always going to get sold rather than bought, and it appears that it has been sold. For some reason I could not figure out, the shares only fell 3-4% or so on the first day and then stayed stable for a few days. I thought it needed more of a wallop to see pricing come out right. It has, in the interim, been walloped. Now is the time to cover that sale in the market if you shorted, and to buy back if you sold long. The implied dividend yield on the offering is now (as I write) above 7%. Suganomics may not favor telcos but I expect the telcos probably have enough leverage to push back from time to time. More below the fold.

When the Softbank Corp (9434 JP) block was announced on 28 August after the close, it was one of the larger secondary blocks ever placed in Japan, and it was underwritten.It was always going to get sold rather than bought, and it appears that it has been sold. For some reason I could not figure out, the shares only fell 3-4% or so on the first day and then stayed stable for a few days. I thought it needed more of a wallop to see pricing come out right. It has, in the interim, been walloped. Now is the time to cover that sale in the market if you shorted, and to buy back if you sold long. The implied dividend yield on the offering is now (as I write) above 7%. Suganomics may not favor telcos but I expect the telcos probably have enough leverage to push back from time to time. More below the fold.

Japan/Asia Long-Short, LightStream Research

Mio Kato

Japan/Asia Long-Short

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.

The <a href="https://asia.nikkei.com/Politics/Japan-after-Abe/Japan-phone-carriers-fear-rate-cuts-under-a-Prime-Minister-Suga" target="_blank" rel="noopener">Nikkei has highlighted potential risks to Japan’s telcos</a> if Chief Cabinet Minister Yoshihide Suga becomes Japan’s next prime minister as is now widely expected.  While this trade follows on from pressure applied by Suga over the last couple of years and is unlikely to surprise investors we believe the context is important to note and discuss it briefly below.

The Nikkei has highlighted potential risks to Japan’s telcos if Chief Cabinet Minister Yoshihide Suga becomes Japan’s next prime minister as is now widely expected.  While this trade follows on from pressure applied by Suga over the last couple of years and is unlikely to surprise investors we believe the context is important to note and discuss it briefly below.

Softbank Corp – A Simple Suga PM Telco Trade

NTT (Nippon Telegraph & Telephone) / Event-Driven

Friday saw the announcement of a large offering by <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> of <a href="https://www.smartkarma.com/entities/softbank-corp" target="_blank" data-smartkarma-citation="entities:27445:1" rel="noopener">Softbank Corp (9434 JP)</a> shares. 
The dynamics of the offering itself - its internal flow dynamics (who buys? why? when? and who else buys later?) - were discussed in <a href="https://www.smartkarma.com/insights/softbank-corp-9434-bigger-block-offering" target="_blank" data-smartkarma-citation="insights:42689" rel="noopener">Softbank Corp (9434) BIGGER Block Offering</a>. This came a day after it was announced that <a href="https://www.smartkarma.com/entities/kioxia" target="_blank" data-smartkarma-citation="entities:29243:1" rel="noopener">Kioxia (6600 JP)</a> would sell nearly ¥400bn in an IPO to be launched in September 2020, discussed in <a href="https://www.smartkarma.com/insights/kioxia-ipo-the-flow-dynamics" target="_blank" data-smartkarma-citation="insights:42648" rel="noopener">Kioxia IPO - The Flow Dynamics</a>. 
What is not discussed is the significantly large funding trade which has to come.
There is  ¥1.47trln of Softbank Corp shares to be bought at last trade, and if the stock falls to its March low and trades at a 3% discount from there, there is still near ¥1.35trln of stock to buy. There is another ¥378bn of Kioxia to buy at the indicative IPO price. All together it is probably ¥1.7trln of stock to buy. 
That's enough money that it comes from savings rather than sofa cushions and while it is enticing to think that Japan's savers will pull $15bn from bank deposits earning 0.001% a year, what usually needs to happen is investors pull money from shares where they have a profit, and sell those to buy the next new thing.
So Japan's retail savers will have to cough up nearly ¥1.2trln for those two deals, and foreign institutional investors will have to fork over ¥600bn. 
For foreigners, that is less than 0.5% of all Japanese stock held. For retail holders, it is about 1.3% of what they hold. It is big enough to matter. 
So the question is what will they sell and what are trades we can do around that?

Friday saw the announcement of a large offering by Softbank Group (9984 JP) of Softbank Corp (9434 JP) shares. 
The dynamics of the offering itself - its internal flow dynamics (who buys? why? when? and who else buys later?) - were discussed in Softbank Corp (9434) BIGGER Block Offering. This came a day after it was announced that Kioxia (6600 JP) would sell nearly ¥400bn in an IPO to be launched in September 2020, discussed in Kioxia IPO - The Flow Dynamics. 
What is not discussed is the significantly large funding trade which has to come.
There is  ¥1.47trln of Softbank Corp shares to be bought at last trade, and if the stock falls to its March low and trades at a 3% discount from there, there is still near ¥1.35trln of stock to buy. There is another ¥378bn of Kioxia to buy at the indicative IPO price. All together it is probably ¥1.7trln of stock to buy. 
That's enough money that it comes from savings rather than sofa cushions and while it is enticing to think that Japan's savers will pull $15bn from bank deposits earning 0.001% a year, what usually needs to happen is investors pull money from shares where they have a profit, and sell those to buy the next new thing.
So Japan's retail savers will have to cough up nearly ¥1.2trln for those two deals, and foreign institutional investors will have to fork over ¥600bn. 
For foreigners, that is less than 0.5% of all Japanese stock held. For retail holders, it is about 1.3% of what they hold. It is big enough to matter. 
So the question is what will they sell and what are trades we can do around that?

Softbank & Kioxia "Replacement Trades" Iffy. Buy NTT Vs Docomo Instead

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.

Thematic (Sector/Industry)

In this Smartkarma Original, we seek to study how diversity and incentives influence stock performance and profitability. We tallied diversity and incentive data related to the board of directors, management, and employees across major economies in Asia and picked top 10 companies of each country in terms of market capitalization. We chose to exclude major companies listed in exchanges of other economies such as Tencent and Alibaba to limit our sample size.
Then we devised diversity and incentive scores to assign to those companies and compare those scores against a 5-year trend of their return on shareholders’ equity (ROE) ratios and 1-year stock performance from 1-July-19 to 30-June-20 over its corresponding exchange indices.
The report covers diversity vs. incentives in Asia, diversity score vs. 1-year stock performance and ROE trend, incentives vs. 1-year stock performance and ROE trend, diversity + incentives scores vs. 1-year stock performance and ROE trend, companies with top and bottom diversity + incentive scores, countries with top and bottom average diversity + incentive scores, and incentive score vs. staffing cost trend. 
The results show that companies with high diversity scores do perform well. A high diversity score also has a positive impact on the ROE trend, based on our regression analysis at 95% confidence level. We found that employee incentives are not significant as staff diversity but they can still have an influence on company performances at a lower 90% confidence level.
We note that this study is at the preliminary stage and stock performance is a function of many factors, not only the diversity scores that we concluded. Needless to say, our diversity and incentive scores also reflect the level of disclosures by selected companies, not necessarily the actual practice within each company. Our diversity and incentive scores are also not a credit rating or ranking with peers and, hence, do not reflect default probability of selected companies.
We caution that in Asia, many diversity trends in the West may not apply. The fact that many Asian business communities may remain less sensitive to equal opportunities for females, disabled persons, or LGBTQ communities could make returns of Asian companies less correlated to diversity than in the West. Likewise, additional incentives in some countries in Asia may not be necessary as employees’ strong performance (i.e. in Japan) is a norm, according to the prevalent work culture.
Bondcritic is developing a scoring model, which includes environment, social development, and corporate governance; the last of which cover diversity and incentives. This report is the first of the series to uncover shenanigans in the Asian corporate sector.

In this Smartkarma Original, we seek to study how diversity and incentives influence stock performance and profitability. We tallied diversity and incentive data related to the board of directors, management, and employees across major economies in Asia and picked top 10 companies of each country in terms of market capitalization. We chose to exclude major companies listed in exchanges of other economies such as Tencent and Alibaba to limit our sample size.
Then we devised diversity and incentive scores to assign to those companies and compare those scores against a 5-year trend of their return on shareholders’ equity (ROE) ratios and 1-year stock performance from 1-July-19 to 30-June-20 over its corresponding exchange indices.
The report covers diversity vs. incentives in Asia, diversity score vs. 1-year stock performance and ROE trend, incentives vs. 1-year stock performance and ROE trend, diversity + incentives scores vs. 1-year stock performance and ROE trend, companies with top and bottom diversity + incentive scores, countries with top and bottom average diversity + incentive scores, and incentive score vs. staffing cost trend. 
The results show that companies with high diversity scores do perform well. A high diversity score also has a positive impact on the ROE trend, based on our regression analysis at 95% confidence level. We found that employee incentives are not significant as staff diversity but they can still have an influence on company performances at a lower 90% confidence level.
We note that this study is at the preliminary stage and stock performance is a function of many factors, not only the diversity scores that we concluded. Needless to say, our diversity and incentive scores also reflect the level of disclosures by selected companies, not necessarily the actual practice within each company. Our diversity and incentive scores are also not a credit rating or ranking with peers and, hence, do not reflect default probability of selected companies.
We caution that in Asia, many diversity trends in the West may not apply. The fact that many Asian business communities may remain less sensitive to equal opportunities for females, disabled persons, or LGBTQ communities could make returns of Asian companies less correlated to diversity than in the West. Likewise, additional incentives in some countries in Asia may not be necessary as employees’ strong performance (i.e. in Japan) is a norm, according to the prevalent work culture.
Bondcritic is developing a scoring model, which includes environment, social development, and corporate governance; the last of which cover diversity and incentives. This report is the first of the series to uncover shenanigans in the Asian corporate sector.

Asian Governance: Diversity & Incentives Through the Cultural Lens

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 Docomo SHOCKER - Nikkei Says Parent NTT To Buy Out Docomo Minorities

The Nikkei came out with an article at midnight local time last night saying that NTT (Nippon Telegraph Telephone) (9432 JP) would seee

Travis Lundy

Softbank Corp (9434) - Time To Cover

When the Softbank Corp (9434 JP) block was announced on 28 August after the close, it was the

Travis Lundy

Softbank Corp – A Simple Suga PM Telco Trade

The Nikkei has highlighted potential risks to Japan’s telcos if Chief Cabinet Minister Yoshihide Suga becomes Japan’s next prime minister as is now...

Mio Kato

Softbank & Kioxia "Replacement Trades" Iffy. Buy NTT Vs Docomo Instead

Friday saw the announcement of a large offering by Softbank Group (9984 JP) of Softbank Corp (9434 JP) shares. The dynamics of the offering itself...

Travis Lundy

Asian Governance: Diversity & Incentives Through the Cultural Lens

In this Smartkarma Original, we seek to study how diversity and incentives influence stock performance and profitability. We tallied diversity and...

Bondcritic

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