Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

Today after the close, the Nikkei Inc announced its "<a href="https://indexes.nikkei.co.jp/en/nkave/archives/news/20190710E_1.pdf" target="_blank" rel="noopener">Changes to the Nikkei Indices</a>" which became inevitable when the Tokyo Stock Exchange announced on the 28th of June that <a href="https://www.smartkarma.com/entities/chiyoda-corp" target="_blank" data-smartkarma-citation="entities:6232:1" rel="noopener">Chiyoda Corp (6366 JP)</a>'s yuho (Annual Securities Report) had shows the company had a negative net worth, requiring a reassignment to the Second Section of the TSE. Nikkei 225 Methodology requires that members be TSE-1 listed. 
The Announcement surprised people. 
As expected, <a href="https://www.smartkarma.com/entities/chiyoda-corp" target="_blank" data-smartkarma-citation="entities:6232:1" rel="noopener">Chiyoda Corp (6366 JP)</a> is out. Unexpectedly, <a href="https://www.smartkarma.com/entities/bandai-namco-holdings-inc" target="_blank" data-smartkarma-citation="entities:13435:1" rel="noopener">Bandai Namco Holdings (7832 JP)</a> is the replacement. 
From what I can gather, Bandai Namco was not on any analysts' lists to replace Chiyoda in the Capital Goods sector. Today will be interesting.

Today after the close, the Nikkei Inc announced its "Changes to the Nikkei Indices" which became inevitable when the Tokyo Stock Exchange announced on the 28th of June that Chiyoda Corp (6366 JP)'s yuho (Annual Securities Report) had shows the company had a negative net worth, requiring a reassignment to the Second Section of the TSE. Nikkei 225 Methodology requires that members be TSE-1 listed. 
The Announcement surprised people. 
As expected, Chiyoda Corp (6366 JP) is out. Unexpectedly, Bandai Namco Holdings (7832 JP) is the replacement. 
From what I can gather, Bandai Namco was not on any analysts' lists to replace Chiyoda in the Capital Goods sector. Today will be interesting.

Nikkei 225 - Bandai Namco IN, Chiyoda OUT

Japan TMT Analyst

Pelham Smithers

Market Intel on Asian Tech with a Japan focus

Pelham Smithers Associates

Founded in 2009, Pelham Smithers Associates (PSA) provides market intelligence on Asian technology, focusing in particular on Japan. The industries covered by our team of specialists are: consumer electronics, telecomms, pharmaceuticals, internet, electronic parts and materials, automotive technology, retail and capital goods. 

Research is provided by the following:
Pelham Smithers: Macro, consumer electronics, telecoms & pharma
Joel Scheiman: Electronics materials / components
Julie Boote: Autos
Will Nestuk: Capital goods, machinery & transportation equipment parts
Thao Nguyen: eCommerce, internet content, marketing & advertising

Equity Bottom-Up

The esports market in 2019 is living up to expectations with prize money running at double last year's levels at this point. However, the rise of the first person shooter is changing who wins and who loses from eSports as it gives console game publishers a competitive edge.

The esports market in 2019 is living up to expectations with prize money running at double last year's levels at this point. However, the rise of the first person shooter is changing who wins and who loses from eSports as it gives console game publishers a competitive edge.

ESport Prize Money in 2019 Running at 2x 2018 Levels

On Friday 22 February 2019 after the close, <a href="https://www.smartkarma.com/entities/5415" target="_blank" data-smartkarma-citation="entities:5415:1">Nintendo Co Ltd (7974 JP)</a><a href="https://www.nintendo.co.jp/ir/pdf/2019/190222_1.pdf" target="_blank">announced</a> (J) a Secondary Shares Uridashi Offering of 2,428,700 shares by five shareholder banks, with an overallotment of 364,300 shares. This will be a little bit over 2% of shares outstanding. Applying a hypothetical 4% discount to the last traded price of ¥30,030/share, this is an ¥80bn Offering including greenshoe. On the same day, Nintendo <a href="https://www.nintendo.co.jp/ir/pdf/2019/190222_2e.pdf" target="_blank">announced</a> (E) a share buyback program to buy up to 1 million shares or up to ¥33 billion worth (whichever is reached first) to last from the business day immediately following the delivery date of the Offering shares (practically speaking, a day on or between 13 March and 18 March 2019) to 12 April 2019. Based on an average daily volume traded of 2.2mm shares, 10% participation would mean the buyback would take 5 days to complete. 5% would take 9 days. The company also <a href="https://www.nintendo.co.jp/ir/pdf/2019/190222_3e.pdf" target="_blank">announced</a> (E) it would cancel 10 million shares on 29 March 2019. That may only be 45% of the post-buyback treasury share position, but it leads to another event investors should watch.This is the first buyback Nintendo has announced in five years. The Nikkei <a href="https://www.nikkei.com/article/DGXMZO41630980S9A220C1DTA000/" target="_blank">article</a> discussing the situation suggests that the possibility of supply/demand being weak is the reason for the buyback. The stated reason for the Offering as proposed by Nintendo in its Offering announcement, suggested a goal of increasing and diversifying the shareholder base.<div class="content-highlight">
The real reason why this selldown is happening - also noted in the Offering Document "reason for the offering" - is because of the heightened focus on policy cross-holdings highlighted in the changes to the Corporate Governance Code (especially Principle 1.4) which went live June 1 2018. The major changes were discussed in <a href="https://www.smartkarma.com/insights/japan-s-corporate-governance-code-amendments-a-much-bigger-stick-for-activists-and-stewards" target="_blank" data-smartkarma-citation="insights:20961">Japan's Corporate Governance Code Amendments - A Much Bigger Stick for Activists and Stewards</a> at that time, but the hint of how this might play out was discussed in <a href="https://www.smartkarma.com/insights/japan-crossholdings-japan-exchange-s-sale-of-sgx-shares-sets-a-precedent-watch-closely" target="_blank" data-smartkarma-citation="insights:18986">Japan Crossholdings: Japan Exchange's Sale of SGX Shares Sets A Precedent - Watch Closely</a> from 1 April 2018. In an announcement after the close on the last day of the last fiscal year, <a href="https://www.smartkarma.com/entities/11266" target="_blank" data-smartkarma-citation="entities:11266:1">Japan Exchange Group (8697 JP)</a> announced it would sell down its 4.95% stake in <a href="https://www.smartkarma.com/entities/1047" target="_blank" data-smartkarma-citation="entities:1047:1">Singapore Exchange (SGX SP)</a> over the space of three years. 
The fact that JPX was selling the shares was not important. The reasoning was. And JPX provided an example of how it should be done (as explained in the insight). 
My words then still stand.
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/079/871/original/Screenshot%202019-02-23%20at%208.31.13%20PM.png?1550925267" class="editor-image img-responsive" data-smartkarma-image-id="79871"></figure>And JPX provided an example of how it should be done (as explained in the insight). The ramifications are significant.
</div>The ramifications of this Offering are significant too. This is a lot more than just an offering by entities looking to take profits.

On Friday 22 February 2019 after the close, Nintendo Co Ltd (7974 JP)announced (J) a Secondary Shares Uridashi Offering of 2,428,700 shares by five shareholder banks, with an overallotment of 364,300 shares. This will be a little bit over 2% of shares outstanding. Applying a hypothetical 4% discount to the last traded price of ¥30,030/share, this is an ¥80bn Offering including greenshoe. On the same day, Nintendo announced (E) a share buyback program to buy up to 1 million shares or up to ¥33 billion worth (whichever is reached first) to last from the business day immediately following the delivery date of the Offering shares (practically speaking, a day on or between 13 March and 18 March 2019) to 12 April 2019. Based on an average daily volume traded of 2.2mm shares, 10% participation would mean the buyback would take 5 days to complete. 5% would take 9 days. The company also announced (E) it would cancel 10 million shares on 29 March 2019. That may only be 45% of the post-buyback treasury share position, but it leads to another event investors should watch.This is the first buyback Nintendo has announced in five years. The Nikkei article discussing the situation suggests that the possibility of supply/demand being weak is the reason for the buyback. The stated reason for the Offering as proposed by Nintendo in its Offering announcement, suggested a goal of increasing and diversifying the shareholder base.
The real reason why this selldown is happening - also noted in the Offering Document "reason for the offering" - is because of the heightened focus on policy cross-holdings highlighted in the changes to the Corporate Governance Code (especially Principle 1.4) which went live June 1 2018. The major changes were discussed in Japan's Corporate Governance Code Amendments - A Much Bigger Stick for Activists and Stewards at that time, but the hint of how this might play out was discussed in Japan Crossholdings: Japan Exchange's Sale of SGX Shares Sets A Precedent - Watch Closely from 1 April 2018. In an announcement after the close on the last day of the last fiscal year, Japan Exchange Group (8697 JP) announced it would sell down its 4.95% stake in Singapore Exchange (SGX SP) over the space of three years. 
The fact that JPX was selling the shares was not important. The reasoning was. And JPX provided an example of how it should be done (as explained in the insight). 
My words then still stand.
And JPX provided an example of how it should be done (as explained in the insight). The ramifications are significant.
The ramifications of this Offering are significant too. This is a lot more than just an offering by entities looking to take profits.

Nintendo Offering & Buyback: The Import & The Dynamics

'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

<div class="content-caption">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/075/837/original/2019-01-18_11-35-42.png?1547778954" class="editor-image img-responsive" data-smartkarma-image-id="75837"></figure>
Source: Japan Analytics
</div>
RELATIVE PRICE SCORE - The Relative Price Score (RPS) measures stock price performance relative to TOPIX and is calculated by comparing the current deviation with the mean absolute deviation of monthly and daily relative share prices. As all companies are, as a result, on a comparable scale, 'overbought' and 'oversold' outliers and changes in scoring can reveal short-term and longer-term trading opportunities. This insight updates our list of overbought and oversold companies, reviews the best and worst performing companies by RPS over the last two months and adds some specific comments on stocks on each category.
RPS STATISTICS - The Company 'outlier' thresholds are set to "+4" for overbought and "-2" for oversold.  Currently, of the 3,686 listed companies for which monthly data is available, 91 companies are 'Overbought', and 120 are 'Oversold' - 2.5% and 3.2%, respectively of the total. For companies with a market capitalisation of over ¥100b, there are 35 'Overbought' and 24 'Oversold' companies. 
RPS 'TOPS' - In the last two years, 445 companies have achieved an RPS of '4' or more. 80% have seen their RPS fall to below '4' within the following two months. For companies with a market capitalisation higher than ¥100b, the numbers are 95 companies and 63% - demonstrating the superior persistence of large capitalisation companies in this regard. Some examples of RPS mean reversion in the last two months have been <a href="https://www.smartkarma.com/entities/8225" target="_blank" data-smartkarma-citation="entities:8225:1">Descente (8114 JP)</a>,  <a href="https://www.smartkarma.com/entities/4908" target="_blank" data-smartkarma-citation="entities:4908:1">Ariake Japan (2815 JP)</a>, <a href="https://www.smartkarma.com/entities/15862" target="_blank" data-smartkarma-citation="entities:15862:1">Fancl (4921 JP)</a>, <a href="https://www.smartkarma.com/entities/13435" target="_blank" data-smartkarma-citation="entities:13435:1">Bandai Namco (7832 JP)</a>, <a href="https://www.smartkarma.com/entities/13475" target="_blank" data-smartkarma-citation="entities:13475:1">Don Quijote (7532 JP)</a>, and <a href="https://www.smartkarma.com/entities/1492" target="_blank" data-smartkarma-citation="entities:1492:1">Gmo Payment Gateway (3769 JP)</a>.
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/075/838/original/2019-01-18_11-36-19.png?1547778995" class="editor-image img-responsive" data-smartkarma-image-id="75838"></figure>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/075/839/original/2019-01-18_11-37-01.png?1547779035" class="editor-image img-responsive" data-smartkarma-image-id="75839"></figure>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/075/840/original/2019-01-18_11-37-37.png?1547779070" class="editor-image img-responsive" data-smartkarma-image-id="75840"></figure>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/075/841/original/2019-01-18_11-38-07.png?1547779100" class="editor-image img-responsive" data-smartkarma-image-id="75841"></figure>
<div class="content-caption">
Source: Japan Analytics
</div>
RPS 'BOTTOMS' - 296 companies have seen their RPS fall to '-2' or below in the last two years. 58% have seen their RPS recover to above '-2' within three to six months. For larger capitalisation companies, the numbers are 72 companies and 67%. Some recent examples of positive RPS mean reversion in the last two months have been <a href="https://www.smartkarma.com/entities/22772" target="_blank" data-smartkarma-citation="entities:22772:1">LINE Corp (3938 JP)</a> - a 'contrarians only' selection in our last <a href="https://www.smartkarma.com/insights/japan-relative-price-score-update-overbought-and-oversold-companies" target="_blank" data-smartkarma-citation="insights:25849">Insight</a>, and <a href="https://www.smartkarma.com/entities/15457" target="_blank" data-smartkarma-citation="entities:15457:1">Tokyo Electric Power (9501 JP)</a>.
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/075/842/original/2019-01-18_11-39-56.png?1547779218" class="editor-image img-responsive" data-smartkarma-image-id="75842"></figure>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/075/843/original/2019-01-18_11-42-06.png?1547779350" class="editor-image img-responsive" data-smartkarma-image-id="75843"></figure>
<div class="content-caption">Source: Japan Analytics</div>
<div class="content-highlight">
In the DETAIL section below we list the current very overbought (RPS&gt;5), too late to buy (RPS &gt;4&lt;5) and oversold (RPS &lt;-2) stocks as well as the largest two-month positive and negative changes in RPS.
NB - All data is as of January 17th close.
</div>



Source: Japan Analytics

RELATIVE PRICE SCORE - The Relative Price Score (RPS) measures stock price performance relative to TOPIX and is calculated by comparing the current deviation with the mean absolute deviation of monthly and daily relative share prices. As all companies are, as a result, on a comparable scale, 'overbought' and 'oversold' outliers and changes in scoring can reveal short-term and longer-term trading opportunities. This insight updates our list of overbought and oversold companies, reviews the best and worst performing companies by RPS over the last two months and adds some specific comments on stocks on each category.
RPS STATISTICS - The Company 'outlier' thresholds are set to "+4" for overbought and "-2" for oversold.  Currently, of the 3,686 listed companies for which monthly data is available, 91 companies are 'Overbought', and 120 are 'Oversold' - 2.5% and 3.2%, respectively of the total. For companies with a market capitalisation of over ¥100b, there are 35 'Overbought' and 24 'Oversold' companies. 
RPS 'TOPS' - In the last two years, 445 companies have achieved an RPS of '4' or more. 80% have seen their RPS fall to below '4' within the following two months. For companies with a market capitalisation higher than ¥100b, the numbers are 95 companies and 63% - demonstrating the superior persistence of large capitalisation companies in this regard. Some examples of RPS mean reversion in the last two months have been Descente (8114 JP),  Ariake Japan (2815 JP), Fancl (4921 JP), Bandai Namco (7832 JP), Don Quijote (7532 JP), and Gmo Payment Gateway (3769 JP).





Source: Japan Analytics

RPS 'BOTTOMS' - 296 companies have seen their RPS fall to '-2' or below in the last two years. 58% have seen their RPS recover to above '-2' within three to six months. For larger capitalisation companies, the numbers are 72 companies and 67%. Some recent examples of positive RPS mean reversion in the last two months have been LINE Corp (3938 JP) - a 'contrarians only' selection in our last Insight, and Tokyo Electric Power (9501 JP).


Source: Japan Analytics

In the DETAIL section below we list the current very overbought (RPS&gt;5), too late to buy (RPS &gt;4&lt;5) and oversold (RPS &lt;-2) stocks as well as the largest two-month positive and negative changes in RPS.
NB - All data is as of January 17th close.


Japan: Relative Price Scores - Overbought and Oversold Companies - Calling 'Tops' & 'Bottoms'

Korea / Special Sits, Pairs, Index Rebalancing, Clepsydra Capital

Sanghyun Park

Korea / Special Sits, Pairs, Index Rebalancing

Equity Capital Markets

<ul>
<li>
<a href="https://www.smartkarma.com/entities/27805" target="_blank" data-smartkarma-citation="entities:27805:1">SNK Corp (951104 KS)</a> bookbuilding begins this Tuesday (Dec 4-5). Shares are preliminary priced at a ₩34,300-46,800 range, which values the company at ₩771bil-1.05tril.</li>
<li>There is no clear valuation peer in the Korean game space. They even used PBR to justify their target valuation. Using the same valuation peers, SNK should be given a 22.59x PER. Per share, it should be priced at ₩25,228. High end is at a 42.15% premium to this. Low end is a 17.72% premium.</li>
<li>Bandai, Square Enix and Konami are more sensible valuation peers. Their LTM PER average is 20.33x. This puts high end at a 47.08% premium. Valuation premium can be granted on higher profit margin. But even at a 30x PER, high end is at a 25.99% premium.</li>
<li>General consensus is that game IP business is capped at a 25x PER. This should be applied to SNK as well. Even at a 30x PER, highest bid should be limited to the low end of the indicative price band.</li>
</ul>



SNK Corp (951104 KS) bookbuilding begins this Tuesday (Dec 4-5). Shares are preliminary priced at a ₩34,300-46,800 range, which values the company at ₩771bil-1.05tril.
There is no clear valuation peer in the Korean game space. They even used PBR to justify their target valuation. Using the same valuation peers, SNK should be given a 22.59x PER. Per share, it should be priced at ₩25,228. High end is at a 42.15% premium to this. Low end is a 17.72% premium.
Bandai, Square Enix and Konami are more sensible valuation peers. Their LTM PER average is 20.33x. This puts high end at a 47.08% premium. Valuation premium can be granted on higher profit margin. But even at a 30x PER, high end is at a 25.99% premium.
General consensus is that game IP business is capped at a 25x PER. This should be applied to SNK as well. Even at a 30x PER, highest bid should be limited to the low end of the indicative price band.


SNK Corp IPO Pricing: No Higher than Low End

Japan

Bandai Namco Holdings Inc is a holding company established through merger of Bandai and Namco.  The Group manufactures toys, stuffed animals, character goods, video games, commercial- and home-use game equipment and software. Namco Bandai also operates video game arcades and theme parks.

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Bandai Namco Holdings (7832 JP)

Nikkei 225 - Bandai Namco IN, Chiyoda OUT

Today after the close, the Nikkei Inc announced its "Changes to the Nikkei Indices" which became inevitable when the Tokyo Stock Exchange announced...

Travis Lundy

ESport Prize Money in 2019 Running at 2x 2018 Levels

The esports market in 2019 is living up to expectations with prize money running at double last year's levels at this point. However, the rise of...

Pelham Smithers Associates

Nintendo Offering & Buyback: The Import & The Dynamics

On Friday 22 February 2019 after the close, Nintendo Co Ltd (7974 JP)announced (J) a Secondary Shares Uridashi Offering of 2,428,700 shares by five...

Travis Lundy

Japan: Relative Price Scores - Overbought and Oversold Companies - Calling 'Tops' & 'Bottoms'

RELATIVE PRICE SCORE - The Relative Price Score (RPS) measures stock price performance relative to TOPIX and is calculated by comparing the...

Campbell Gunn

SNK Corp IPO Pricing: No Higher than Low End

SNK Corp (951104 KS) bookbuilding begins this Tuesday (Dec 4-5). Shares are preliminary priced at a ₩34,300-46,800 range, which values the...

Sanghyun Park

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52-week Range

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