Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

Hitachi Construction Machinery / Event-Driven

With a relatively full slate of large value takeovers in Developed Asia in the past year - often by parents but also by buyout funds - and the availability of significant credit to finance such takeovers, this Smartkarma Original insight looks at what constitutes an attractive target for takeover, and seeks to construct a framework for screening and filtering companies for further study. 
The filtering is conducted across two basic measures which seek to answer two basic questions:
<ol>
<li>What might supply look like?</li>
<li>What might demand look like?</li>
</ol>
The first basic problem with creating such filters is that on the Supply side, using databases to determine whether a controlling shareholder wants to sell is almost a lost cause from the beginning. But the exercise throws up some interesting case studies, and it is important to understand why such screening could lead to interesting results. 
On the demand side, it is a difficult and complicated exercise because financial data moves around, shifting through time and relative price because competitors also shift in time and price. A clear example of a company which might have been "relatively" attractive vs peers a month ago might not be after the market ructions at the end of February 2020 when this was written. Prices were, of course, lower, which means that a good screening process is dynamic, both in relative and absolute measures. It is also somewhat difficult to create a one-size-fits-all screen for attractive targets because in certain countries, certain industries (telecom, airlines, social infrastructure, defence) are covered by foreign ownership limits, other industries (banks, brokers, insurers) rarely see leveraged buyouts, and takeovers in other industries (Chinese homebuilders) are, for lack of a better word, simply off the table at certain times.
In addition, there are lots of ways in which companies might present themselves as attractive targets. If someone controls a company, and wants to sell it cheaply, there are lots of potential buyers who will fall all over themselves to get in line to buy it. But companies can be attractive targets because of the potential for changing profit metrics and multiples through restructuring, asset reorganisation, industry reorganisation, or simply waiting for the cycle to change. 
Using valuation metrics with a cutoff line can be challenging because common multiples such as PER, PCFR, PBR, EV/EBITDA may ignore significant value available from longer-term securities holdings, non-operating real estate assets which are not managed in optimal fashion, etc. 
In short, screening can only go so far. But we try.
At the end, we take a brief look at 10 companies from Developed Asia which show up as a result of our screening efforts. The resulting list is dominated by Japanese companies because some of the companies which show up from other countries fit the "no-go" categories above (airlines, financial companies, defence technology subject to foreign ownership limits, Chinese homebuilders subject to skepticism, etc.). Some are also clearly Emerging Asia businesses with Developed Asia listings. Screening for Emerging Asia got a few companies which are high on anyone's target list, including one which saw an unsolicited takeover approach earlier this week (end-Feb 2020), and another which has been in acquisition mode for years. 
We find the thinking process and screening technology has thrown up some previously less-than-obvious candidates which deserve further work.

With a relatively full slate of large value takeovers in Developed Asia in the past year - often by parents but also by buyout funds - and the availability of significant credit to finance such takeovers, this Smartkarma Original insight looks at what constitutes an attractive target for takeover, and seeks to construct a framework for screening and filtering companies for further study. 
The filtering is conducted across two basic measures which seek to answer two basic questions:

What might supply look like?
What might demand look like?

The first basic problem with creating such filters is that on the Supply side, using databases to determine whether a controlling shareholder wants to sell is almost a lost cause from the beginning. But the exercise throws up some interesting case studies, and it is important to understand why such screening could lead to interesting results. 
On the demand side, it is a difficult and complicated exercise because financial data moves around, shifting through time and relative price because competitors also shift in time and price. A clear example of a company which might have been "relatively" attractive vs peers a month ago might not be after the market ructions at the end of February 2020 when this was written. Prices were, of course, lower, which means that a good screening process is dynamic, both in relative and absolute measures. It is also somewhat difficult to create a one-size-fits-all screen for attractive targets because in certain countries, certain industries (telecom, airlines, social infrastructure, defence) are covered by foreign ownership limits, other industries (banks, brokers, insurers) rarely see leveraged buyouts, and takeovers in other industries (Chinese homebuilders) are, for lack of a better word, simply off the table at certain times.
In addition, there are lots of ways in which companies might present themselves as attractive targets. If someone controls a company, and wants to sell it cheaply, there are lots of potential buyers who will fall all over themselves to get in line to buy it. But companies can be attractive targets because of the potential for changing profit metrics and multiples through restructuring, asset reorganisation, industry reorganisation, or simply waiting for the cycle to change. 
Using valuation metrics with a cutoff line can be challenging because common multiples such as PER, PCFR, PBR, EV/EBITDA may ignore significant value available from longer-term securities holdings, non-operating real estate assets which are not managed in optimal fashion, etc. 
In short, screening can only go so far. But we try.
At the end, we take a brief look at 10 companies from Developed Asia which show up as a result of our screening efforts. The resulting list is dominated by Japanese companies because some of the companies which show up from other countries fit the "no-go" categories above (airlines, financial companies, defence technology subject to foreign ownership limits, Chinese homebuilders subject to skepticism, etc.). Some are also clearly Emerging Asia businesses with Developed Asia listings. Screening for Emerging Asia got a few companies which are high on anyone's target list, including one which saw an unsolicited takeover approach earlier this week (end-Feb 2020), and another which has been in acquisition mode for years. 
We find the thinking process and screening technology has thrown up some previously less-than-obvious candidates which deserve further work.

Managing Director, Zero One, Zero One

Vincent Fernando, CFA

Managing Director, Zero One

Zero One

Founded in 2015, Zero One produces independent investment research and provides corporate finance advisory services with a focus on both listed and private technology companies. Founder Vincent Fernando has over 20 years of experience in US and Asia capital markets.

Independent Investment Research

Thematic (Sector/Industry)

Markets plunged overnight as fears rose over COVID-19 potentially becoming a full-blown global pandemic. We highlight several of the most important developments around the world as consumer defer spend and global supply chains look increasingly vulnerable from surging infections outside of China.We continue to advise investors to hold digital tech assets that can benefit from the virus outbreak over traditional offline businesses, and recommend paring down overall equity exposure.

Markets plunged overnight as fears rose over COVID-19 potentially becoming a full-blown global pandemic. We highlight several of the most important developments around the world as consumer defer spend and global supply chains look increasingly vulnerable from surging infections outside of China.We continue to advise investors to hold digital tech assets that can benefit from the virus outbreak over traditional offline businesses, and recommend paring down overall equity exposure.

COVID-19 Sparks Economic Pandemic as Cases Outside China Surge

Asian Insight Provider - Actionable ideas, CrossASEAN Research

Henry Soediarko

Asian Insight Provider - Actionable ideas

CrossASEAN Research

At CrossASEAN Research we strive to produce unbiased and differentiated on the ground insights on companies across South East Asia. Our Research is produced for the most part after face to face meetings and conversations with company management to dig deep into the long term vision and strategy of the companies we cover. We seek to deliver investable and actionable themes on sectors and markets across SE Asia, often in collaboration with other Insight Providers across the region, pooling the vast experience of the analysts within the Smartkarma Ecosystem. We also offer bespoke work and tailor made trips for our clients. 

Insights across South East Asia

Equity Bottom-Up

This is the first part of the two parts of the report detailing how DRB Hi Com is about to unlock its value in the next few months.  
With a low industry growth expectation due to a couple of reasons namely no-end-of-life policy, no scrap policy, combined with high car ownership in Malaysia, the prospect for Malaysia's automotive industry is not that exciting. However, Proton's resurgence in sales volume story thanks to its focus on the SUV segment is a silver lining.

This is the first part of the two parts of the report detailing how DRB Hi Com is about to unlock its value in the next few months.  
With a low industry growth expectation due to a couple of reasons namely no-end-of-life policy, no scrap policy, combined with high car ownership in Malaysia, the prospect for Malaysia's automotive industry is not that exciting. However, Proton's resurgence in sales volume story thanks to its focus on the SUV segment is a silver lining. 

'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. 

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/116/923/original/2020-02-08_18-15-45.png?1581196263" class="editor-image img-responsive" data-smartkarma-image-id="116923"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/116/924/original/2020-02-09_06-34-51.png?1581197706" class="editor-image img-responsive" data-smartkarma-image-id="116924"></figure><div class="content-caption">Source • Japan Analytics</div><div class="content-caption"></div>OOOPS! - The 480 quarterly results announced on Friday subtracted a further 20 basis points from our Results Score. If the remaining 38% of companies continue this trend, the current quarter will equal CQ2019-1 and CQ2018-2 in seeing a 200 basis point Results Score decline. 169 forecasts or revision announcements added  5bps to the Forecast/Revision Score, supported by slight upward revisions from <a href="https://www.smartkarma.com/entities/softbank-corp" target="_blank" data-smartkarma-citation="entities:27445:1" rel="noopener">Softbank Corp (9434 JP)</a> and <a href="https://www.smartkarma.com/entities/honda-motor-co-ltd" target="_blank" data-smartkarma-citation="entities:154:1" rel="noopener">Honda Motor (7267 JP)</a>.  The Results Score has dipped below the Forecast/Revision Score for the first time since July 2016 and is a necessary precursor of the bottoming of the cycle. Japan is now in a recession and could see a decline in GDP for the calendar year. The market's current optimism (aided by the Bank of Japan's buy-the-dips support programme) is more appropriate to the middle of the cycle and, with two further poor earnings quarters ahead, suggests limited further upside. <figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/116/925/original/2020-02-08_10-48-19.png?1581199859" class="editor-image img-responsive" data-smartkarma-image-id="116925"></figure><div class="content-caption">Source • Japan Analytics</div>18x EARNINGS - Trailing-twelve-month (TTM) Operating Income for the composite of listed companies has declined to ¥57.4t, 10% below the peak of early 2019. TTM Net Income has declined by 20% over the same period, resulting in a 6.1 point increase in the market price-earnings ratio to 17.6 times.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/116/927/original/2020-02-08_10-55-21.png?1581200256" class="editor-image img-responsive" data-smartkarma-image-id="116927"></figure><div class="content-caption">Source • Japan Analytics</div>TTM RESULTS - TTM Operating Profits have been declining quarter-on-quarter for five straight quarters, and are 8.1% lower year-on-year. The Operating Margin has declined from 7.45% to 6.80%. TTM Revenues are now also falling and have only increased by 0.7% year-on-year.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/116/928/original/2020-02-08_10-59-00.png?1581200533" class="editor-image img-responsive" data-smartkarma-image-id="116928"></figure><div class="content-caption">Source • Japan Analytics</div>FORECASTS - The year-on-year Operating Profit decline using current forecasts is 8.5%, while Revenues are flat. Revenue forecasts have been falling quarter-on-quarter for three quarters in a row. The 'uplift' from TTM to Forecast is just ¥3t for sales and ¥0.3t for OP.

Source • Japan AnalyticsOOOPS! - The 480 quarterly results announced on Friday subtracted a further 20 basis points from our Results Score. If the remaining 38% of companies continue this trend, the current quarter will equal CQ2019-1 and CQ2018-2 in seeing a 200 basis point Results Score decline. 169 forecasts or revision announcements added  5bps to the Forecast/Revision Score, supported by slight upward revisions from Softbank Corp (9434 JP) and Honda Motor (7267 JP).  The Results Score has dipped below the Forecast/Revision Score for the first time since July 2016 and is a necessary precursor of the bottoming of the cycle. Japan is now in a recession and could see a decline in GDP for the calendar year. The market's current optimism (aided by the Bank of Japan's buy-the-dips support programme) is more appropriate to the middle of the cycle and, with two further poor earnings quarters ahead, suggests limited further upside. Source • Japan Analytics18x EARNINGS - Trailing-twelve-month (TTM) Operating Income for the composite of listed companies has declined to ¥57.4t, 10% below the peak of early 2019. TTM Net Income has declined by 20% over the same period, resulting in a 6.1 point increase in the market price-earnings ratio to 17.6 times.Source • Japan AnalyticsTTM RESULTS - TTM Operating Profits have been declining quarter-on-quarter for five straight quarters, and are 8.1% lower year-on-year. The Operating Margin has declined from 7.45% to 6.80%. TTM Revenues are now also falling and have only increased by 0.7% year-on-year.Source • Japan AnalyticsFORECASTS - The year-on-year Operating Profit decline using current forecasts is 8.5%, while Revenues are flat. Revenue forecasts have been falling quarter-on-quarter for three quarters in a row. The 'uplift' from TTM to Forecast is just ¥3t for sales and ¥0.3t for OP. 

🇯🇵 JAPAN • Results & Revisions Daily Roundup - 7th February ▲2121 7267 5713 ▼ 5401 9616 3407

Evidence of an impending global slowdown continues to accumulate as stores remain closed across China, factories reduce capacity, and workers are put on unpaid leave. Moreover, should the virus truly spread to other countries in the west like the USA or in Europe, we see heightened risks of similar measures being implemented there - putting further strain on global growth.We believe investors should use the current market recovery to reduce equity exposure and shift into defensive or digital economy <a href="https://www.smartkarma.com/insights/surging-chinese-demand-for-contactless-delivery-will-accelerate-drone-adoption-in-e-commerce" target="_blank" rel="noopener">"contactless" businesses</a>in order to position prudently for a potential worsening of the epidemic.We cover this in more detail in our note <a href="https://www.smartkarma.com/insights/tencent-the-best-anchor-for-your-portfolio-in-the-coming-coronavirus-storm" target="_blank" data-smartkarma-citation="insights:36346" rel="noopener">Tencent: The Best Anchor for Your Portfolio In the Coming Coronavirus Storm</a>.

Evidence of an impending global slowdown continues to accumulate as stores remain closed across China, factories reduce capacity, and workers are put on unpaid leave. Moreover, should the virus truly spread to other countries in the west like the USA or in Europe, we see heightened risks of similar measures being implemented there - putting further strain on global growth.We believe investors should use the current market recovery to reduce equity exposure and shift into defensive or digital economy "contactless" businessesin order to position prudently for a potential worsening of the epidemic.We cover this in more detail in our note Tencent: The Best Anchor for Your Portfolio In the Coming Coronavirus Storm.

Evidence of Global Slowdown Accumulates as Stores Remain Closed and Supply Chains Are Crippled

Japan

Honda Motor Co., Ltd. develops, manufactures, and distributes motorcycles, automobiles, and power products such as generators and farm machinery. The Company also operates a financial credit business. Honda Motor has manufacturing facilities in the US, Canada, the UK, France, Italy, Spain, Brazil, Mexico, India, and Thailand.

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Honda Motor (7267 JP)

A Potential Asian LBO Screening System

With a relatively full slate of large value takeovers in Developed Asia in the past year - often by parents but also by buyout funds - and the...

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COVID-19 Sparks Economic Pandemic as Cases Outside China Surge

Markets plunged overnight as fears rose over COVID-19 potentially becoming a full-blown global pandemic. We highlight several of the most important...

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This is the first part of the two parts of the report detailing how DRB Hi Com is about to unlock its value in the next few months. With a low...

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🇯🇵 JAPAN • Results & Revisions Daily Roundup - 7th February ▲2121 7267 5713 ▼ 5401 9616 3407

OOOPS! - The 480 quarterly results announced on Friday subtracted a further 20 basis points from our Results Score. If the remaining 38% of...

Campbell Gunn

Evidence of Global Slowdown Accumulates as Stores Remain Closed and Supply Chains Are Crippled

Evidence of an impending global slowdown continues to accumulate as stores remain closed across China, factories reduce capacity, and workers are...

Vincent Fernando, CFA

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