Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Thematic (Sector/Industry)

It has been another great week for risk in otherwise low volatility and low volumes across most markets in the world. In Asia, only Australia, Korea, and the Philippines were down. Large-cap SOE-centric China was also down tiny (A50 and HSCEI). Elsewhere, markets were strong with S&amp;P500 (and TOPIX Smallcap) up every day this week and TOPIX and many other major indices up 4 days during the week. Bitcoin was up 12.7%.The Big Stories This Week HURRICANE HARVEY: The big stories this week obviously included Hurricane Harvey in the US which has helped perpetrate the "broken window fallacy" in certain corners of the research world. A vast number of flooded automobiles may mean that insurers pay to reduce the extremely high inventory levels in the US market, but I'd note insurers pay owners on book value - not purchase value - so replacement monies are somewhat limited - and the deductibles on dealer inventory are relatively high. Further, like Sandy, one may find a fair bit of fraud perpetrated on the used automobile market. What is less obvious to many is that India and Bangladesh are also suffering from record floods which will impact Q3 and Q4 in those economies, and cause untold misery to large numbers of people. NORTH KOREA: Tuesday saw North Korea's 22nd missile launch of the year, this time with an overflight of Japan with the missile landing in the waters off Hokkaido. That understandably upset some people and there were hurried phone calls among major affected and involved parties (US, Japan, South Korea, China). The weekend saw North Korean assertions of a newly-developed H-bomb and after weeks of warnings from specialists that a nuclear test was being prepared, Sunday saw one, with initial estimates saying the output was 5-10x the last one, which would put it squarely in "big bomb" territory. More hurried phone calls and threats of response. So far, South Korea, Japan, the US, and China have condemned the test SOUTH KOREA: Meanwhile, there are reports out of the White House that Donald Trump, against the recommendations of all his senior policy advisors, has instructed his advisors to prepare for US withdrawal of its free-trade agreement with South Korea, with a possible announcement as early as Tuesday. The BEA's most recent data continues to show a bilateral US deficit in trade in goods and services with South Korea. It's been there for years. It will continue. Notably, the entire deficit is in automobiles and parts. To see the most recent version of the table below, go to the BEA website on International Data, click on "International Transactions (ITA), go to Table 1.3 (Expanded Detail by Area and Country), then click on Korea. You can "Modify" the data presentation (or download it) at the upper right of the data table.source: BEA, International Transactions DetailsWhat the data suggests is that of the $70+bn of US exports to South Korea each year, $40+bn is of exports of goods - especially industrial goods, capital goods, and foods, feeds &amp; beverages. That's 85% of the total. Unfortunately for Donald Trump, most of that is made in red states. And the US has a real advantage because of its trade agreement, because bilateral tariffs are quite low, but if the US pulls out of KORUS and turns to existing bilateral tariffs under MFN status at WTO, US exporters will be in a world of hurt because the increase in tariffs favors Korea, not the US. A table of Korean tariffs by product under MFN status is on p104 of UNCTAD's World Tariff Profiles publication. And it is to note that the absolute numbers won't get better because materially the entire difference in trade now is in autos, and US import tariffs under WTO rules for autos are reasonably low.  US companies and Chambers of Commerce are against US withdrawal from KORUS, but Donald Trump has been looking for some kind of "action" on trade other than against NAFTA and China for months to shore up his "America First credentials." The critique is that since implementation, the US deficit against Korea has gone up. US exports have gone up $1bn. US imports have gone up $12.5bn, with 90% of that increase in autos/related and consumer goods like electronics. And given that neither are really addressed by KORUS, the increase in US imports of these items is really down to US consumer preferences.The fact that the US (in the form of GM Korea) has substantial local market share (earlier this year was expected to be greater than 10%) whereas US-made Korean cars have a lower market share in the US.I don't know what The Donald thinks he is going to get out of this, but starting a trade skirmish with South Korea just as North Korea is becoming a larger perceived threat, and Japan and China are involved, does not seem like an ideal way to improve US influence in the political goings on. Trade expert Scott Lincicome at the CATO Institute (@scottlincicome on Twitter) has suggested there are two legs to the deal - the agreement which President Obama signed and the bill which Congress passed to make it law. But enough commentary... on to the nitty-gritty.INSIGHTS ON IPOS &amp; EVENTSSanghyun Park wrote on Mplus Corp and Pearl Abyss. Toh Zhen Zhou wrote on Ain Holdings Inc. (9627 JP). Details can be found in TZZ's Smartkarma: ECM Coverage Weekly Update (1 September 2017).Travis Lundy wrote about Sumitomo Rubber's merger announcement for Dunlop Sports, and Sanghyun wrote a Summary of LG Electronics’ ZKW Acquisition News, and about Lotte Restructuring, and on Innox' Tender Offer, all of which are discussed in David Blennerhassett's Last Week in Event SPACE - Clariant, KBANK, Innox, Shun Tak. JAPANMio Kato, CFA and Andrew Lu wrote on Toshiba Corp (6502 JP). Andrew commented that Bain/SK looked like it was out, and WDC in, but later in the week the situation seemed to have become clearer in that Toshiba's demands are still tough for WDC to accept, and indeed on Aug31 Toshiba said it was not ready to decide. A reverse breakup fee for non-completion by March-end and unilateral dropping of WD's arbitration suits seem to be total non-starters. WD's idea that it wants more control of the entity later is probably also a non-starter. Late in the week, Bain came out with a new deal proposal which ticks more of Toshiba's boxes, but is likely economically non-viable because it would require too much cash on the barrelhead for Toshiba. On Saturday, Reuters reported that WD CEO Milligan had apologized to Toshiba for the difficulties. This may go some way to papering over differences, but the banks are reported to still be upset, and have given Toshiba another "week or two" according to comments in the local media. Mio's comments on the China Antitrust Review Implications are worth reading.Pelham Smithers wrote about Chugai Pharma and Cyberdyne early in the week and Hitachi and MHI later in the week. On Cyberdyne, PSA noted that while Q1 OP was better than a year ago, it was still burning cash (of which it has a lot) and so the shares continued to drift downwards. He notes it is probably more of an "avoid" than a short sell because "once it does turn the corner, it could get very exciting."On Chugai, PSA noted that the FDA had approved its Biologics License Application for emicizumab which is potentially quite bullish as it is a solid potential competitor to Shire's Baxalta unit. While the shares didn't pop just after the announcement the details were not bearish at all. His piece Chugai Pharmaceutical (4519 JP): Emicizumab Gets PDUFA Data is worth a read if you want the details. Most interesting to my mind in Pelham Smithers' space was a long and detailed piece on Mitsubishi Heavy Industries (7011 JP)'s request to Hitachi Ltd (6501 JP) for arbitration of a transfer price adjustment claim related to its Mitsubishi Hitachi Power Systems JV in South Africa. This has been an awful saga which is a complete political hot potato and has been for years. And there is a lot of detail here. The numbers involved (US$7bn) are huge, but not incomprehensible given how big the reported cost overruns have been. If you have not been following the situation but are at all interested in the two stocks, it is worth a read.Japan Corporate Governance expert Nicholas Benes has some choice words for the drafters of the reform of Company Law in Company Law Reform in Japan: Losing Its Mojo? Corporate Governance reform is seen as a key ongoing catalyst for investors in Japan, so progress would be desirable. This year, Japan’s governance reform drive will either keep going, or run out of steam. Judging from the amendment of the Company Law that is now underway by an advisory council of the Ministry of Justice (MOJ), the latter is likely.  Silver Point had an interesting piece on the internal capital and funding issues of Mitsubishi UFJ Financial Group (8306 JP)'s US units in Mitsubishi UFJ Financial Holdings – USD Shortfall Implies Major American Restructure. While the solution is probably a transfer or injection of equity (or an assignment of loans?), the shorter-term issue is the need to rely on expensive wholesale funding. Any more and I'm saying too much!Separately, Japan-based Scott Foster wrote on Hamamatsu Photonics Kk (6965 JP) and Rohm Co Ltd (6963 JP). Scott's comments in Rohm (6963 JP): Strategic Success in the Japanese Semiconductor Industry suggest that Rohm is worth a look as he sees sales and OP up strongly for the year. I'd note that the stock price hasn't done much in several months, while consensus estimates for March 2018 OP continue to rise (see chart).source: BloombergINSIGHTS ON KOREATo see all insights on Korea, go to All Insights on your Reading List and use the Refine drop down set to Country=South Korea and save it as a preset to go back to it. It's here.This past week, newcomer William Keating wrote A Brief Analysis Of The Current Semiconductor Growth Cycle which is a great overview of the industry from a long-time industry participant. Very informative!In addition, as usual, Sanghyun Park and Douglas Kim were prolific if not prolix. In Thematic coverage, Douglas Kim discussed the Tuesday firing of a North Korean missile over Japan in North Korea Fires a Long Range Missile Over Japan - Crossing the Red Line? and also discussed The Growth of North Korean Refugees in South Korea. In addition, he also talked about The Power of Chinese Daigou on the Korean Cosmetics and Duty-Free Shops (daigou = independent Chinese travelers to Korea) noting that the ban on group travel had lifted the impact of independent travelers who suddenly have been buying more Korean cosmetics at duty-free shops. Douglas Kim also wrote his Korea Stock Market Monthly Recap #17 - (August 2017)Sanghyun Park wrote several pieces this week on Event-Driven and IPO/Placement subjects, which means they are generally covered already in other weekly writeups as noted above. My personal favorites of his this week are a discussion of whether to short Short Samsung C&amp;T? SamE Spinoff-Based C&amp;T Holdco Conversion Is Still A Real Possibility. He goes into some detail on the continuing question of a Samsung holdco and looks at the shareholder breakdowns of Samsung Electronics Co Ltd (005930 KS).I also liked Sanghyun's Summary of LG Electronics’ ZKW Acquisition News. Federico Bagiotti, CFA at Amareos discussed a (Short Term) Bear Case for Posco based off the firm's proprietary sentiment indicators. The conclusion was that the sentiment indicators do not suggest further bullishness is necessarily warranted.And for a List...This Week's Insights Related to Japan and KoreaInsight ProvidertickerTitlePelham SmithersThematicNegative Readthrough from WPP’s Outlook Warning for Japanese Advertisers, Global Consumer TechPelham SmithersChugai PharmChugai Pharmaceutical (4519 JP): Emicizumab Gets PDUFA DataPelham SmithersCyberdyne IncCyberdyne (7779 JP): Still Awaiting Turning PointSanghyun ParkLotte ShoppingLotte Group Restructuring Part 4 - Estimations on Voting Results at Aug 29 EGMDouglas KimSK InnovationMPlus Corp IPO Preview (Part 1) - Rechargeable Batteries Assembly Equipment ManufacturerAndrew LuToshiba CorpToshiba Memory Corp Sales: WD/KKR In, Bain/Hynix Out?Toh Zhen ZhouAin HoldingsAIN HOLDINGS Placement - Good Track Record and Extended Trading HelpsNicholas BenesMSCI Japan ETFCompany Law Reform in Japan: Losing Its Mojo?Pelham SmithersHitachi LtdHitachi (6501) - MHI Requests US$7 Billion Arbitration Claim as Chancellor Scandal Is RevivedFederico D'IncaKia MotorsKIA Motors Corp: 10% UpsideSanghyun ParkLG ElecSummary of LG Electronics’ ZKW Acquisition NewsMio Kato, CFAToshiba CorpToshiba: China Antitrust Review ImplicationsSanghyun ParkInnox CorpInnox Corp’s Tender Offer SummaryScott FosterRohm Co LtdRohm (6963 JP): Strategic Success in the Japanese Semiconductor IndustryFederico Bagiotti, CFAPOSCO(Short Term) Bear Case for PoscoPelham SmithersToyota MotorTime to Panic About China EV Sales Quota? – Automakers Hope for Less Stringent RulesEuromonitorThematicIndustrial Capsule: Agriculture in JapanSanghyun ParkPearl AbyssPearl Abyss IPO Part 3 - Bookbuilding ResultsCustom ProductsJapanNames with Too Much “Other” On the Balance Sheet....Travis LundyDunlop SportsDunlop Sports Merger with Parent Sumitomo RubberSanghyun ParkSamsung ElecShort Samsung C&amp;T? SamE Spinoff-Based C&amp;T Holdco Conversion Is Still A Real PossibilitySilver PointMUFGMitsubishi UFJ Financial Holdings – USD Shortfall Implies Major American RestructureScott FosterHamamatsu Phot.Hamamatsu Photonics (6965 JP): Raising Estimates and Price Target

The Week That Was in NorthAsia@Smartkarma: Korea, Toshiba, and Korea

Event-Driven

<p>On the 29th of August after the close, <a href="https://www.smartkarma.com/entities/7555" target="_blank" data-smartkarma-citation="entities:7555:1">Sumitomo Rubber Industries (5110 JP)</a><a href="http://www.srigroup.co.jp/english/news/2017/2017_084.html" target="_blank">announced</a> (and <a href="http://www.srigroup.co.jp/data/open/cnt/3/7502/1/2017_084_01.pdf" target="_blank">full document</a>) that it and 60.37% subsidiary <a href="https://www.smartkarma.com/entities/7586" target="_blank" data-smartkarma-citation="entities:7586:1">Dunlop Sports Co Ltd (7825 JP)</a>, would merge as of January 1st 2018 - a scant four months away. SRI will also purchase Dunlop's minority stake in Dunlop Sports International Ltd (DICL) at the end of December, and merge DICL and Dunlop Sports on January 1st. </p><p>Dunlop was originally spun out of SRI in July 2003. It was then listed in October 2006. The stock fell on…</p>

On the 29th of August after the close, Sumitomo Rubber Industries (5110 JP)announced (and full document) that it and 60.37% subsidiary Dunlop Sports Co Ltd (7825 JP), would merge as of January 1st 2018 - a scant four months away. SRI will also purchase Dunlop's minority stake in Dunlop Sports International Ltd (DICL) at the end of December, and merge DICL and Dunlop Sports on January 1st. Dunlop was originally spun out of SRI in July 2003. It was then listed in October 2006. The stock fell on…

Dunlop Sports Merger with Parent Sumitomo Rubber

Japan

DUNLOP SPORTS CO. LTD.is a manufacturer of sporting goods specializing in Dunlop brand golf and tennis products.  The Company also runs golf country clubs and operates golf and tennis schools for beginners to advanced players. SRI Sports plans and runs amateur and professional tournaments and other sporting events.

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Dunlop Sports (7825 JP)

The Week That Was in NorthAsia@Smartkarma: Korea, Toshiba, and Korea

It has been another great week for risk in otherwise low volatility and low volumes across most markets in the world. In Asia, only Australia,...

Travis Lundy

Dunlop Sports Merger with Parent Sumitomo Rubber

On the 29th of August after the close, Sumitomo Rubber Industries (5110 JP)announced (and full document) that it and 60.37% subsidiary Dunlop...

Travis Lundy

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