Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

In May of this year, <a href="https://www.smartkarma.com/entities/shinsei-bank-ltd" target="_blank" data-smartkarma-citation="entities:16897:1" rel="noopener">Shinsei Bank (8303 JP)</a> made an <a href="https://www.release.tdnet.info/inbs/ek/140120200430403171.pdf" target="_blank" rel="noopener">announcement</a> that veteran Japan value/engagement investor Dalton Investments had proposed a measure for the AGM. Coming nine months after JC Flowers exited his position in a public offering, ably discussed by <a href="https://www.smartkarma.com/profiles/mio-kato" target="_blank" data-smartkarma-citation="accounts:713" rel="noopener">Mio Kato</a> in <a href="https://www.smartkarma.com/insights/shinsei-bank-offering-flowers-in-the-wind" target="_blank" data-smartkarma-citation="insights:31638" rel="noopener">Shinsei Bank Offering: Flowers in the Wind</a>, and eleven months after a previous proposal by Dalton which garnered little more than 16% support, this year's proposal was to put Dalton CIO/CEO/head James Rosenwald on the board of Shinsei Bank so as to further his proposal to further align board compensation with shareholder interests, accelerate the exit of unprofitable positions and businesses, and execute a Very Large Buyback of ¥45 billion, so as to accelerate the return of public funds. <section class="figure"><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/179/654/original/Screenshot%202020-12-21%20at%207.48.00%20PM.png?1608551293" class="editor-image img-responsive" data-smartkarma-image-id="179654"></figure></section>Management, as it is wont to do, objected. 
The existing board objected suggesting that the board already had sufficient independent director majority (5 of 7 directors), adding the proposed slate had two women, and replacing one with Mr Rosenwald would not further the goal of a more diverse board. It also noted that the Bank had submitted a Revitalisation Plan ("Plan") to the Financial Services Agency ("FSA") pursuant to the Act on Emergency Measures for Early Strengthening of Financial Functions ("Early Strengthening Act") and the plan required seven directors, not eight, so adding Mr. Rosenwald to the existing slate was not appropriate. The board said that the goal of exiting marginally profitable businesses was indeed not a bad goal, but that in the time of covid-19, "we do not think that it is an appropriate company behavior to take such short-term profit enhancing measures for ourselves at least under the current situation."
The agenda item to elect Mr Rosenwald as a director <a href="https://disclosure.edinet-fsa.go.jp/E01EW/download?uji.verb=W0EZA104CXP001003Action&amp;uji.bean=ee.bean.parent.EECommonSearchBean&amp;PID=W1E63011&amp;SESSIONKEY=1608551363459&amp;lgKbn=2&amp;pkbn=0&amp;skbn=1&amp;dskb=&amp;askb=&amp;dflg=0&amp;iflg=&amp;preId=1&amp;mul=8303&amp;oth=on&amp;cal=1&amp;era=R&amp;yer=&amp;mon=&amp;pfs=4&amp;row=100&amp;idx=0&amp;str=&amp;kbn=1&amp;flg=&amp;syoruiKanriNo=&amp;s=S100ITI7" target="_blank" rel="noopener">received</a> 161,736 votes FOR and 1,867,839 votes AGAINST for a success rate of 7.968%. That was pretty miserable. 
Nevertheless, Shinsei Bank DID <a href="https://pdf.irpocket.com/C8303/yCGV/B6S9/bQ8o.pdf" target="_blank" rel="noopener">announce</a> a Very Large Buyback on the same day that it announced the shareholder proposal, which was the same day as it announced earnings and the AGM agenda. The buyback announced then was to buy back up to 20.5mm shares for up to ¥20.5bn from 14 May to 31 March 2021. That was 8.88% of existing shares ex-Treasury shares. That was pretty big. 
Through end-November, which is 71.4% of the buyback period elapsed, Shinsei had <a href="https://pdf.irpocket.com/C8303/mxGt/rDGI/qr73.pdf" target="_blank" rel="noopener">purchased</a> 11.126mm shares (a bit more than half the max), spending ¥14.67bn, which was 71.5% of the funds allocated. They are on track to complete the amount (buying back less than 8.88%) by end-March. 
This suggests ongoing market support for the shares, which is positive, but now we have a reason to think that the board could act differently next year and possibly approve a bigger, better buyback.  </section>Discussion ensues below.

In May of this year, Shinsei Bank (8303 JP) made an announcement that veteran Japan value/engagement investor Dalton Investments had proposed a measure for the AGM. Coming nine months after JC Flowers exited his position in a public offering, ably discussed by Mio Kato in Shinsei Bank Offering: Flowers in the Wind, and eleven months after a previous proposal by Dalton which garnered little more than 16% support, this year's proposal was to put Dalton CIO/CEO/head James Rosenwald on the board of Shinsei Bank so as to further his proposal to further align board compensation with shareholder interests, accelerate the exit of unprofitable positions and businesses, and execute a Very Large Buyback of ¥45 billion, so as to accelerate the return of public funds. Management, as it is wont to do, objected. 
The existing board objected suggesting that the board already had sufficient independent director majority (5 of 7 directors), adding the proposed slate had two women, and replacing one with Mr Rosenwald would not further the goal of a more diverse board. It also noted that the Bank had submitted a Revitalisation Plan ("Plan") to the Financial Services Agency ("FSA") pursuant to the Act on Emergency Measures for Early Strengthening of Financial Functions ("Early Strengthening Act") and the plan required seven directors, not eight, so adding Mr. Rosenwald to the existing slate was not appropriate. The board said that the goal of exiting marginally profitable businesses was indeed not a bad goal, but that in the time of covid-19, "we do not think that it is an appropriate company behavior to take such short-term profit enhancing measures for ourselves at least under the current situation."
The agenda item to elect Mr Rosenwald as a director received 161,736 votes FOR and 1,867,839 votes AGAINST for a success rate of 7.968%. That was pretty miserable. 
Nevertheless, Shinsei Bank DID announce a Very Large Buyback on the same day that it announced the shareholder proposal, which was the same day as it announced earnings and the AGM agenda. The buyback announced then was to buy back up to 20.5mm shares for up to ¥20.5bn from 14 May to 31 March 2021. That was 8.88% of existing shares ex-Treasury shares. That was pretty big. 
Through end-November, which is 71.4% of the buyback period elapsed, Shinsei had purchased 11.126mm shares (a bit more than half the max), spending ¥14.67bn, which was 71.5% of the funds allocated. They are on track to complete the amount (buying back less than 8.88%) by end-March. 
This suggests ongoing market support for the shares, which is positive, but now we have a reason to think that the board could act differently next year and possibly approve a bigger, better buyback.  Discussion ensues below.

Pan-Asia Index Flows & Special Situations, Quiddity Advisors

Janaghan Jeyakumar, CFA

Pan-Asia Index Flows & Special Situations

On 30th October 2020, Shinsei Bank announced a <a href="https://pdf.irpocket.com/C8303/BYOH/X23a/UgsZ.pdf" target="_blank" rel="noopener">Mandatory Share Sale Request</a> to squeeze out minority shareholders from their 93%+-owned subsidiary, Tokyo-based non-bank consumer finance company <a href="https://www.smartkarma.com/entities/aplus-financial-co-ltd" target="_blank" data-smartkarma-citation="entities:4184:1" rel="noopener">Aplus Financial (8589 JP)</a> in an ¥8.8bn (~US$ 84mn) all-cash squeezeout. It is stated in the Deal Announcement that since the outline of the new market classification on the Tokyo Stock Exchange was announced in February 2020, Shinsei Bank has been considering methods to respond to these changes. This is most probably because it would have been difficult to comply with the new requirements especially due to the very low free float percentage of Aplus Financial. In June 2020, Shinsei Bank began concrete studies on making Aplus Financial a wholly owned subsidiary and taking the company private.Furthermore, according to the Announcement, Shinsei Bank first proposed ¥66/share on 12th August 2020. This was later raised to ¥80/share on 14th October 2020 and after another round of negotiations with the special committee appointed for the purpose of this Transaction, a Deal was agreed at a consideration of ¥85/share on 30th October 2020. Following this, Aplus Financial passed a resolution to approve the Mandatory Share Sale Request at its Board meeting held on the same day. As always, there is more below the fold.

On 30th October 2020, Shinsei Bank announced a Mandatory Share Sale Request to squeeze out minority shareholders from their 93%+-owned subsidiary, Tokyo-based non-bank consumer finance company Aplus Financial (8589 JP) in an ¥8.8bn (~US$ 84mn) all-cash squeezeout. It is stated in the Deal Announcement that since the outline of the new market classification on the Tokyo Stock Exchange was announced in February 2020, Shinsei Bank has been considering methods to respond to these changes. This is most probably because it would have been difficult to comply with the new requirements especially due to the very low free float percentage of Aplus Financial. In June 2020, Shinsei Bank began concrete studies on making Aplus Financial a wholly owned subsidiary and taking the company private.Furthermore, according to the Announcement, Shinsei Bank first proposed ¥66/share on 12th August 2020. This was later raised to ¥80/share on 14th October 2020 and after another round of negotiations with the special committee appointed for the purpose of this Transaction, a Deal was agreed at a consideration of ¥85/share on 30th October 2020. Following this, Aplus Financial passed a resolution to approve the Mandatory Share Sale Request at its Board meeting held on the same day. As always, there is more below the fold. 

Aplus Financial (8589 JP) Minority Squeeze-Out: Done Deal. Short-Term Arb.

Research and consultancy, Tabbush Report

Daniel Tabbush

Research and consultancy

Tabbush Report

We provide research and consultancy on Asian banks. Our focus is on what we call “Asian bank research, without the noise.” We are interested in the most critical swing-factors for banks, the NPL and credit cycle, and where we believe there is a gap between perception and reality. We often focus on the less studied components of bank financial statements.  Our research is highly thematic, sometimes examining unlisted banks and companies as a window on mainstream banks. 

Being independent allows us to look at smaller banks, often overlooked by others. Analysis of BIS bank guidelines in the context of Asia, is also a focal point, while we also analyze global banks operating in the region. We use what we believe is the most comprehensive, reliable financials database, SNL Financial. S&P Capital IQ augments our database, with corporate data and CEIC, with economics. 

Asian bank research, without the noise.

Thematic (Sector/Industry)

It is rare for Japan’s banks to shine. We wonder if this is now their time and even if only fleetingly so? Credit costs are down substantially for almost every reporting bank in the June quarter, at least so far. Most will recognize by now that this crisis is not like past crises, and that as we turn economies back on, together with unprecedented stimulus, low interest rates, the recovery profile can also be very different. We are seeing this within many economies and Japan’s banks stand out, globally. Their credit cost delta is generally higher than others and what matters more is that some have seen their previous six months’ credit costs still far higher than recent years. This can mean substantially lower provisions in coming quarters, leading to substantially higher profit.

It is rare for Japan’s banks to shine. We wonder if this is now their time and even if only fleetingly so? Credit costs are down substantially for almost every reporting bank in the June quarter, at least so far. Most will recognize by now that this crisis is not like past crises, and that as we turn economies back on, together with unprecedented stimulus, low interest rates, the recovery profile can also be very different. We are seeing this within many economies and Japan’s banks stand out, globally. Their credit cost delta is generally higher than others and what matters more is that some have seen their previous six months’ credit costs still far higher than recent years. This can mean substantially lower provisions in coming quarters, leading to substantially higher profit.

Silver Point

Thomas J. Monaco

Independent Insight Provider

Silver Point is a boutique research firm that focuses on the broader financial services sector, with a particular focus on troubled institutions globally. 

Asia Ex Japan

Equity Bottom-Up

<ul><li>
Monthly Business Data Release Was Boring: ACOM released its monthly business data for February 2020, where the last week of the month witnessed the first week of self quarantine for the corona virus. Much to our chagrin, as yet there appears to be no discernible impact of the corona virus on growth and/or credit quality. </li></ul><ul><li>
Other Negative Factors:Inability of ACOM to further reduce funding costs in this even lower interest rate environment; kaburai claims to reverse course; and IFRS 9 impact on credit costs at Thai subsidiary. </li></ul>


Monthly Business Data Release Was Boring: ACOM released its monthly business data for February 2020, where the last week of the month witnessed the first week of self quarantine for the corona virus. Much to our chagrin, as yet there appears to be no discernible impact of the corona virus on growth and/or credit quality. 
Other Negative Factors:Inability of ACOM to further reduce funding costs in this even lower interest rate environment; kaburai claims to reverse course; and IFRS 9 impact on credit costs at Thai subsidiary. 

ACOM - Slowing Vice Spend & Kaburai Claim Trend Reversals

'Quantamental' Japan Specialist, LightStream Research

Campbell Gunn

'Quantamental' Japan Specialist

ja research

ja research is an independent research platform focused exclusively on Japanese equities. Leveraging data and graphic analysis provided by Japan Analytics, we provide insights on small and medium-sized companies that have been ignored by the sell-side as well as challenging conventional wisdom on larger companies. We also offer analyst and corporate access, the latter with translation if required. 

Quantitative Analysis

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<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/080/230/original/2019-02-26_16-49-25.png?1551182690" class="editor-image img-responsive" data-smartkarma-image-id="80230"></figure>
Source: Japan Analytics
</div>
LARGE CAP RESULTS &amp; REVISION SCORES - The final instalment of our series of reviews of Japan's most recent earnings and revisions announcements covers the Results &amp; Revision Scores for Japan's 785 larger capitalisation companies with a market capitalisation of over ¥100b.
In the DETAIL section below we look at:- 
<ul>
<li>The 30 top and bottom-ranked companies by Results &amp; Revision Score as well as the top and bottom thirty ranked by change in score over the last quarter and provide brief comments on companies and topics of note.</li>
<li>By comparing Results Scores and Forecast/Revision Scores, we sort companies into'Optimists', 'Pessimists', 'Increasingly Optimistic' and 'Increasingly Pessimistic' categories.</li>
<li>As shown above, the relationship between the Results &amp; Revision Score (RRS) and our Relative Price Score (RPS) for each company and divide the large-cap universe into four 'quadrants' - 'Contrarian Buy' (Low RRS &amp; Low RPS) , 'Contrarian Sell' (High RRS &amp; High RPS), 'Peak Growth' (High RRS &amp; Low RPS) and 'Ex-Growth/Turnaround'  (Low RRS &amp; High RPS), highlighting the outliers in each quadrant.
<ul>
<li>In the two 'Contrarian' quadrants, the market is aligned with the current earnings momentum of the companies suggesting opportunities exist only for those willing or brave enough to take a contrarian view. </li>
<li>For 'Peak Growth', the market is calling for a downturn in momentum that has yet to be reflected in quarterly earnings. Where the cycle is more prolonged than expected, there are often opportunities for short-term rebounds in what are normally relatively-inexpensive companies.</li>
<li>The 'Ex-Growth' quadrant often consists of former 'Contrarian Sell's where the market is reluctant to acknowledge that the cycle has turned. This quadrant can also contain 'Turnarounds' - formerly 'Contrarian Buys' where the market is correctly anticipating a change in fortunes.   </li>
</ul>
</li>
<li>Finally, we provide tables of the top and bottom five ranked companies in each of our 30 Sectors.</li>
</ul>



Source: Japan Analytics

LARGE CAP RESULTS &amp; REVISION SCORES - The final instalment of our series of reviews of Japan's most recent earnings and revisions announcements covers the Results &amp; Revision Scores for Japan's 785 larger capitalisation companies with a market capitalisation of over ¥100b.
In the DETAIL section below we look at:- 

The 30 top and bottom-ranked companies by Results &amp; Revision Score as well as the top and bottom thirty ranked by change in score over the last quarter and provide brief comments on companies and topics of note.
By comparing Results Scores and Forecast/Revision Scores, we sort companies into'Optimists', 'Pessimists', 'Increasingly Optimistic' and 'Increasingly Pessimistic' categories.
As shown above, the relationship between the Results &amp; Revision Score (RRS) and our Relative Price Score (RPS) for each company and divide the large-cap universe into four 'quadrants' - 'Contrarian Buy' (Low RRS &amp; Low RPS) , 'Contrarian Sell' (High RRS &amp; High RPS), 'Peak Growth' (High RRS &amp; Low RPS) and 'Ex-Growth/Turnaround'  (Low RRS &amp; High RPS), highlighting the outliers in each quadrant.

In the two 'Contrarian' quadrants, the market is aligned with the current earnings momentum of the companies suggesting opportunities exist only for those willing or brave enough to take a contrarian view. 
For 'Peak Growth', the market is calling for a downturn in momentum that has yet to be reflected in quarterly earnings. Where the cycle is more prolonged than expected, there are often opportunities for short-term rebounds in what are normally relatively-inexpensive companies.
The 'Ex-Growth' quadrant often consists of former 'Contrarian Sell's where the market is reluctant to acknowledge that the cycle has turned. This quadrant can also contain 'Turnarounds' - formerly 'Contrarian Buys' where the market is correctly anticipating a change in fortunes.   


Finally, we provide tables of the top and bottom five ranked companies in each of our 30 Sectors.


🇯🇵 Japan • Winter Large Cap Results & Revision Scores - Contrarian Buys & Sells/​Peak & Ex-Growth

Japan

APLUS FINANCIAL Co., Ltd. provides consumer credit card services.  The Company' services include consumer installment credits, loan guarantees, loans, leasing, and other financial services.

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Aplus Financial (8589 JP)

2021 High Conviction - Shinsei Bank

Shinsei Bank has a particular capital structure different from many other banks. This is due to shareholder register, and capital itself. A new...

Travis Lundy