Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

<p><a href="https://www.smartkarma.com/entities/owari-precise-products" target="_blank" data-smartkarma-citation="entities:7242:1" rel="noopener">Owari Precise Products (7249 JP)</a> known as <em>Owari Seiki</em> in Japanese makes precision-forged metal parts for the automotive (synchronizer rings for transmissions), aircraft (fasteners), and bicycle (cranks, etc) manufacturing industries. </p><p>The largest corporate shareholders are <a href="https://www.smartkarma.com/entities/hitachi-metals-ltd" target="_blank" data-smartkarma-citation="entities:8561:1" rel="noopener">Hitachi Metals (5486 JP)</a>, <a href="https://www.smartkarma.com/entities/toyota-motor-corp" target="_blank" data-smartkarma-citation="entities:73:1" rel="noopener">Toyota Motor (7203 JP)</a>, <a href="https://www.smartkarma.com/entities/aisin-seiki-co-ltd" target="_blank" data-smartkarma-citation="entities:11809:1" rel="noopener">Aisin Seiki (7259 JP)</a>, and there are several financial crossholders. </p><p>Today it was announced that a fund called Rising Japan Equity Fund 2 would launch a takeover of the company. RJE describes itself as having been founded in 2010 as "5 core members" who have markets experience along with SMBC and Mitsui Sumitomo Trust. </p><p><strong>So... the company which is owned by cross-holders to the level of 57-60% is selling itself to a fund sponsored by one of those cross-holders for.... checks notes... </strong></p><h3>...0.34x Book Value Per Share and 1.9x 5yr EBITDA?</h3><h3> </h3><p>And if you take out the securities and the net receivables (67 days of A/R, 30 days of A/P), it is 0.3x 5yr average EBITDA. </p><p>And the company appears to have net surplus assets connected to its pension benefit obligations which would take that to below zero. And that does not count the fact that it has another 75% of its market cap in &lt;3 months of inventory, where near 40% of sales goes to relatively large and stable customers like Aishin AW, Toyota, and Mazda) on long-term supply contracts. </p><h3>So the purchase price is below net cash, securities, and high-quality receivables. </h3><p></p><p>This is going too cheap. </p><p>And there is probably not much you can do about it except complain.</p><p>Or launch a competing bid.</p><hr><p>Some corporate and financial crossholders should really be ashamed of themselves for allowing this to happen at this price. If a company needs cash, they can sell securities holdings, factor receivables, get some of their customers to pay more quickly, push back payables, sell and lease back real estate, etc. This is being done for virtually free, and the forecast the "fair" value is based on expects to make JPY 500mm a year of OP two years out. </p>

Owari Precise Products (7249 JP) known as Owari Seiki in Japanese makes precision-forged metal parts for the automotive (synchronizer rings for transmissions), aircraft (fasteners), and bicycle (cranks, etc) manufacturing industries. The largest corporate shareholders are Hitachi Metals (5486 JP), Toyota Motor (7203 JP), Aisin Seiki (7259 JP), and there are several financial crossholders. Today it was announced that a fund called Rising Japan Equity Fund 2 would launch a takeover of the company. RJE describes itself as having been founded in 2010 as "5 core members" who have markets experience along with SMBC and Mitsui Sumitomo Trust. So... the company which is owned by cross-holders to the level of 57-60% is selling itself to a fund sponsored by one of those cross-holders for.... checks notes... ...0.34x Book Value Per Share and 1.9x 5yr EBITDA? And if you take out the securities and the net receivables (67 days of A/R, 30 days of A/P), it is 0.3x 5yr average EBITDA. And the company appears to have net surplus assets connected to its pension benefit obligations which would take that to below zero. And that does not count the fact that it has another 75% of its market cap in &lt;3 months of inventory, where near 40% of sales goes to relatively large and stable customers like Aishin AW, Toyota, and Mazda) on long-term supply contracts. So the purchase price is below net cash, securities, and high-quality receivables. This is going too cheap. And there is probably not much you can do about it except complain.Or launch a competing bid.Some corporate and financial crossholders should really be ashamed of themselves for allowing this to happen at this price. If a company needs cash, they can sell securities holdings, factor receivables, get some of their customers to pay more quickly, push back payables, sell and lease back real estate, etc. This is being done for virtually free, and the forecast the "fair" value is based on expects to make JPY 500mm a year of OP two years out. 

Owari Precise Products - Another Tiny Cap Takeover at <0.5 Book

'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)

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/149/834/original/2020-08-02_06-39-22.png?1596317982" class="editor-image img-responsive" data-smartkarma-image-id="149834"></figure><div class="content-caption">Source • Japan Analytics</div><p><strong>CORRECTION</strong> - The last day of July saw the TOPIX index fall by 2.8% to reach a new two-month low, 8.2% below the closing high of June 8th. A combination of a strong yen, peak COVID-19 cases, the continuing unedifying stream of results &amp; revisions, and month-end portfolio 'adjustments' proved toxic. Our Results Score lost a further 57 basis points, while bullish initial full-year forecasts from <a href="https://www.smartkarma.com/entities/takeda-pharmaceutical-co-ltd" target="_blank" data-smartkarma-citation="entities:11747:1" rel="noopener">Takeda Pharmaceutical (4502 JP)</a> and <a href="https://www.smartkarma.com/entities/denso-corp" target="_blank" data-smartkarma-citation="entities:18703:1" rel="noopener">Denso (6902 JP)</a> helped the Forecast/Revision Score recover by 51 basis points. Nevertheless, the market's correlation with earnings and revisions momentum remains distorted by central bank liquidity. As noted in<a href="https://www.smartkarma.com/insights/japan-market-update-tired" target="_blank" data-smartkarma-citation="insights:41562" rel="noopener"> Tired</a>, we expect both our Scores to bottom nearer the 2009 lows, in which case the Bank of Japan's cumulative purchases could reach over 10% of market value.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/149/839/original/2020-08-02_07-35-10.png?1596321328" class="editor-image img-responsive" data-smartkarma-image-id="149839"></figure><div class="content-caption">Source • Japan Analytics</div><p><strong>DOWNFALL</strong> - After one-third of quarterly earnings announcements, at the current pace forward aggregate operating and net income could reach ¥35 trillion and ¥20 trillion, respectively by the end of the month, taking the market multiple to 30x, absent any further correction in share prices. </p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/149/840/original/2020-08-02_07-52-16.png?1596322358" class="editor-image img-responsive" data-smartkarma-image-id="149840"></figure><div class="content-caption">Source • Japan Analytics</div><p><strong>SECTOR SCORES</strong> - As in past cycles, the <strong>Information Technology</strong>,<strong> Internet</strong>, and<strong> Healthcare</strong> Sectors have proved to be the most resilient. On the downside, the breadth of the lowest-scoring Sectors is abnormal, with <strong>Consumer Services</strong> and <strong>Transport &amp; Logistics</strong> joining <strong>Metals</strong>, <strong>Autos</strong>, <strong>Eletcial Equipment</strong> and<strong> Machinery</strong>. The trailing-twelve-month (TTM) results in the table below confirm the chart above but suggests some caution over <strong>Internet</strong> Sector margins.   </p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/149/842/original/2020-08-02_07-59-45.png?1596322803" class="editor-image img-responsive" data-smartkarma-image-id="149842"></figure><div class="content-caption">Source • Japan Analytics</div><hr><p style="text-align: center;"><strong>•BEST &amp; WORST 31st JULY •</strong></p><p style="text-align: left;"><strong>BEST &amp; WORST</strong> - Combining the day's results, revisions and forecasts, we select the 'best' and the 'worst' announcements according to our scoring. On the podium were <a href="https://www.smartkarma.com/entities/takeda-pharmaceutical-co-ltd" target="_blank" data-smartkarma-citation="entities:11747:1" rel="noopener">Takeda Pharmaceutical (4502 JP)</a> and <a href="https://www.smartkarma.com/entities/infocom-corp" target="_blank" data-smartkarma-citation="entities:8412:1" rel="noopener">Infocom (4348 JP)</a>. In the pits were <a href="https://www.smartkarma.com/entities/casio-computer-co-ltd" target="_blank" data-smartkarma-citation="entities:18338:1" rel="noopener">Casio Computer (6952 JP)</a> and three railway lines - <a href="https://www.smartkarma.com/entities/odakyu-electric-railway-co" target="_blank" data-smartkarma-citation="entities:5405:1" rel="noopener">Odakyu (9007 JP)</a>, <a href="https://www.smartkarma.com/entities/west-japan-railway-co" target="_blank" data-smartkarma-citation="entities:12077:1" rel="noopener">West Japan (9021 JP)</a> and <a href="https://www.smartkarma.com/entities/central-japan-railway-co" target="_blank" data-smartkarma-citation="entities:13520:1" rel="noopener">Central Japan (9022 JP)</a> for which we will show the Peer Group's record-low long-term Scores.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/149/913/original/2020-08-02_08-30-42.png?1596324654" class="editor-image img-responsive" data-smartkarma-image-id="149913"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/149/914/original/2020-08-02_08-31-29.png?1596324699" class="editor-image img-responsive" data-smartkarma-image-id="149914"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/149/915/original/2020-08-02_08-33-28.png?1596324818" class="editor-image img-responsive" data-smartkarma-image-id="149915"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/149/916/original/2020-08-02_08-40-22.png?1596325251" class="editor-image img-responsive" data-smartkarma-image-id="149916"></figure><div class="content-caption">Source • Japan Analytics</div><div>
<hr>
<p style="text-align: center;"><strong>DAILY STATS</strong></p>
<p style="text-align: left;"><strong>PERCENTAGES</strong> - <strong>66%</strong> of quarterly results,  <strong>71%</strong> of annual forecasts/revisions and <strong>75%</strong> of interim forecasts have negative Scores and <strong>26%</strong> of companies reporting lost money for the quarter.</p>
</div><hr><div><p style="text-align: center;"><strong>429 Quarterly Results</strong></p></div><div><ul>
<li>
<strong>Results Score:</strong> 28% Positive / 6% Neutral / 66% Negative</li>
<li>
<strong>Average Results Score Change:</strong> -3.1 points</li>
<li>
<strong>Average % Change in Revenue:</strong> -9.3% Quarter YoY / -2.0% Rolling TTM YoY </li>
<li>
<strong>Average Operating Profit Margin Change:</strong> -1.0 ppt</li>
<li>
<strong>Percentage Making Quarterly Losses:</strong> 26%</li>
</ul></div><hr><div><p style="text-align: center;"><br><strong>153 Annual • 115 Interim Forecasts/Revisions</strong></p></div><div><ul>
<li>
<strong>Annual Forecast/Revision Score:</strong> 26% Positive / 3% Neutral / 71% Negative</li>
<li>
<strong>Interim Forecast/Revision Score Change</strong>: 24% Positive / 1% Neutral / 75% Negative</li>
<li>
<strong>Average Forecast/Revision Score Change:</strong> -8.4 points</li>
</ul></div>

Source • Japan AnalyticsCORRECTION - The last day of July saw the TOPIX index fall by 2.8% to reach a new two-month low, 8.2% below the closing high of June 8th. A combination of a strong yen, peak COVID-19 cases, the continuing unedifying stream of results &amp; revisions, and month-end portfolio 'adjustments' proved toxic. Our Results Score lost a further 57 basis points, while bullish initial full-year forecasts from Takeda Pharmaceutical (4502 JP) and Denso (6902 JP) helped the Forecast/Revision Score recover by 51 basis points. Nevertheless, the market's correlation with earnings and revisions momentum remains distorted by central bank liquidity. As noted in Tired, we expect both our Scores to bottom nearer the 2009 lows, in which case the Bank of Japan's cumulative purchases could reach over 10% of market value.Source • Japan AnalyticsDOWNFALL - After one-third of quarterly earnings announcements, at the current pace forward aggregate operating and net income could reach ¥35 trillion and ¥20 trillion, respectively by the end of the month, taking the market multiple to 30x, absent any further correction in share prices. Source • Japan AnalyticsSECTOR SCORES - As in past cycles, the Information Technology, Internet, and Healthcare Sectors have proved to be the most resilient. On the downside, the breadth of the lowest-scoring Sectors is abnormal, with Consumer Services and Transport &amp; Logistics joining Metals, Autos, Eletcial Equipment and Machinery. The trailing-twelve-month (TTM) results in the table below confirm the chart above but suggests some caution over Internet Sector margins.   Source • Japan Analytics•BEST &amp; WORST 31st JULY •BEST &amp; WORST - Combining the day's results, revisions and forecasts, we select the 'best' and the 'worst' announcements according to our scoring. On the podium were Takeda Pharmaceutical (4502 JP) and Infocom (4348 JP). In the pits were Casio Computer (6952 JP) and three railway lines - Odakyu (9007 JP), West Japan (9021 JP) and Central Japan (9022 JP) for which we will show the Peer Group's record-low long-term Scores.Source • Japan Analytics

DAILY STATS
PERCENTAGES - 66% of quarterly results,  71% of annual forecasts/revisions and 75% of interim forecasts have negative Scores and 26% of companies reporting lost money for the quarter.
429 Quarterly Results

Results Score: 28% Positive / 6% Neutral / 66% Negative

Average Results Score Change: -3.1 points

Average % Change in Revenue: -9.3% Quarter YoY / -2.0% Rolling TTM YoY 

Average Operating Profit Margin Change: -1.0 ppt

Percentage Making Quarterly Losses: 26%
 153 Annual • 115 Interim Forecasts/Revisions

Annual Forecast/Revision Score: 26% Positive / 3% Neutral / 71% Negative

Interim Forecast/Revision Score Change: 24% Positive / 1% Neutral / 75% Negative

Average Forecast/Revision Score Change: -8.4 points


🇯🇵 JAPAN • Results & Revisions 31st July - Takeda, Yamato/SG, Seria, FP, Keyence, Dai-Ichi Sankyo

Equity Analyst, LightStream Research

Aqila Ali

Equity Analyst

Equity Bottom-Up

<p><a href="https://www.smartkarma.com/entities/denso-corp" target="_blank" data-smartkarma-citation="entities:18703:1" rel="noopener">Denso Corp (6902 JP)</a> released FY03/20 results last Thursday, which were weak but weren’t particularly disappointing. Revenue and OP both declined YoY during the FY, with 4Q recording a loss according to the company’s revised guidance. The numbers were better than expected on the revenue side, beating consensus by +0.6% and its revised guidance by +0.1%. OP results were in line with the revised guidance and revised consensus estimate.</p><p>While the revenue decline appears reasonable, we have our doubts with regard to the reason for the -80% YoY decline in OP. The company cites provisions for quality costs as the reason for this situation, though we wonder what exactly these costs are for. It could be that Denso has accounted for the COVID impact well ahead of time.</p><p>Our analysis shows that the recent 4Q is similar to 4Q FY03/09, during the GFC. We wonder if the company is accounting for a significant portion of its upcoming expenses in a year that is essentially a write-off (FY03/20), to possibly surprise with better results and signs of recovery in the upcoming quarters, which was the case post-GFC. The company not giving guidance for FY03/21E increases the potential for a positive surprise further.  </p><p>Consensus and our estimates are for a weak 1H FY03/21E while expecting a recovery through FY03/21.</p><p>We go through the details below.</p>

Denso Corp (6902 JP) released FY03/20 results last Thursday, which were weak but weren’t particularly disappointing. Revenue and OP both declined YoY during the FY, with 4Q recording a loss according to the company’s revised guidance. The numbers were better than expected on the revenue side, beating consensus by +0.6% and its revised guidance by +0.1%. OP results were in line with the revised guidance and revised consensus estimate.While the revenue decline appears reasonable, we have our doubts with regard to the reason for the -80% YoY decline in OP. The company cites provisions for quality costs as the reason for this situation, though we wonder what exactly these costs are for. It could be that Denso has accounted for the COVID impact well ahead of time.Our analysis shows that the recent 4Q is similar to 4Q FY03/09, during the GFC. We wonder if the company is accounting for a significant portion of its upcoming expenses in a year that is essentially a write-off (FY03/20), to possibly surprise with better results and signs of recovery in the upcoming quarters, which was the case post-GFC. The company not giving guidance for FY03/21E increases the potential for a positive surprise further.  Consensus and our estimates are for a weak 1H FY03/21E while expecting a recovery through FY03/21.We go through the details below.

Denso: Weak 4Q FY03/20 Resembles GFC Times- Is Recovery Around the Corner?

Japan/Asia Long-Short, LightStream Research

Mio Kato

Japan/Asia Long-Short

<p>On Thursday we highlighted a number of stock pairs that had seen extreme levels of relative performance dislocations, speculating that this was due to relative value unwinds that were being rushed for completion prior to the long weekend. This morning the skews are reversing and with Nikkei now outperforming Topix (+02.7% vs. -0.87% at the time of this writing) we believe this opportunity is being realised quickly. Our thoughts on next steps below.</p>

On Thursday we highlighted a number of stock pairs that had seen extreme levels of relative performance dislocations, speculating that this was due to relative value unwinds that were being rushed for completion prior to the long weekend. This morning the skews are reversing and with Nikkei now outperforming Topix (+02.7% vs. -0.87% at the time of this writing) we believe this opportunity is being realised quickly. Our thoughts on next steps below.

Japan Long Weekend Portfolio Blowout Theme Is Working Quickly

<p>We previously highlighted the strong skew between names which have a heavy weighting in Topix vs. those which have a heavy weighting in the Nikkei. Given extreme looking skews even in individual names it does not seem unreasonable that some relative value fund(s) are exiting positions aggressively prior to what could be a key long weekend for Japan with potentially heavy volatility on Monday. We examine some striking performance discrepancies below.</p>

We previously highlighted the strong skew between names which have a heavy weighting in Topix vs. those which have a heavy weighting in the Nikkei. Given extreme looking skews even in individual names it does not seem unreasonable that some relative value fund(s) are exiting positions aggressively prior to what could be a key long weekend for Japan with potentially heavy volatility on Monday. We examine some striking performance discrepancies below.

What Is Getting Blown Out of Portfolios Before the Long Weekend in Japan?

Japan

Aisin Corporation manufactures and distributes motor vehicle parts. The Company produces drive train, transmissions, clutches, disc brakes, anti-skid brake system, suspensions, oil pumps, power windows, power door locks, and more. Aisin operates sales and production subsidiaries worldwide.

Price Gauge
52-week Range	0.00 - 0.00
Market Cap (USDm)	0.00
P/E	0.00
Dividend (Yield)	0.00

Aisin (7259 JP)

Owari Precise Products - Another Tiny Cap Takeover at <0.5 Book

A largely cross-held microcap gets a Tender Offer proposal at a 34% premium which takes the company out at 0.34x book, and 0.0-2.0x EV/EBITDA...

Travis Lundy

🇯🇵 JAPAN • Results & Revisions 31st July - Takeda, Yamato/SG, Seria, FP, Keyence, Dai-Ichi Sankyo

CORRECTION - The last day of July saw the TOPIX index fall by 2.8% to reach a new two-month low, 8.2% below the closing high of June 8th. A...

Campbell Gunn

Denso: Weak 4Q FY03/20 Resembles GFC Times- Is Recovery Around the Corner?

Denso Corp (6902 JP) released FY03/20 results last Thursday, which were weak but weren’t particularly disappointing. Revenue and OP both declined...

Aqila Ali

Japan Long Weekend Portfolio Blowout Theme Is Working Quickly

On Thursday we highlighted a number of stock pairs that had seen extreme levels of relative performance dislocations, speculating that this was due...

Mio Kato

What Is Getting Blown Out of Portfolios Before the Long Weekend in Japan?

We previously highlighted the strong skew between names which have a heavy weighting in Topix vs. those which have a heavy weighting in the Nikkei....

Mio Kato

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)