IPOs and Catalysts/Events, Global Equity Research Ltd

Arun George

IPOs and Catalysts/Events

Uncompromised, Independent, Conflict-Free Research

Global Equity Research Ltd

Global Equity Research was started in 2017 by a group of experienced research professionals. It was founded on a passionate belief in the importance and the need for uncompromised, independent, conflict-free research. We aim to provide differentiated and actionable primary and bottom up fundamental research.

Event-Driven

<ul>
<li>
<a href="https://www.smartkarma.com/entities/i-pex-inc" target="_blank" data-smartkarma-citation="entities:12587:1" rel="noopener">I-PEX (6640 JP)</a> has recommended an MBO at JPY2,950, 85.2% premium to the last close of JPY1,593.</li>
<li>While attractive compared to peer multiples and historical trading ranges, it is light due to an implied P/B below 1x and 11% below the mid-point IFA DCF valuation range.</li>
<li>The lack of activists on the register suggests a done deal.  The tender offer runs from 8 November to 19 December (30 business days), with payment commencing from 26 December. </li>
</ul>



I-PEX (6640 JP) has recommended an MBO at JPY2,950, 85.2% premium to the last close of JPY1,593.
While attractive compared to peer multiples and historical trading ranges, it is light due to an implied P/B below 1x and 11% below the mid-point IFA DCF valuation range.
The lack of activists on the register suggests a done deal.  The tender offer runs from 8 November to 19 December (30 business days), with payment commencing from 26 December. 


I-PEX (6640 JP): MBO at an 85% Takeover Premium but Implies P/B <1x

Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Nec Networks & System Integr / Event-Driven

<ul>
<li>Today, <a href="https://www.smartkarma.com/entities/nec-corp" target="_blank" data-smartkarma-citation="entities:17084:1" rel="noopener">NEC Corp (6701 JP)</a> announced a long-expected and "arbitraged" takeover of <a href="https://www.smartkarma.com/entities/nec-networks-system-integr" target="_blank" data-smartkarma-citation="entities:16396:1" rel="noopener">Nec Networks &amp; System Integr (1973 JP)</a> after the latter reported a delay in earnings and great numbers.</li>
<li>The premium is a bit light, and the internal mechanics to NEC are highly favourable. This was always going to happen this way. It's a pity it took so long.</li>
<li>This gets done easily as active foreign owners, arbs, and crossholders will sell into it, and only 15.3% is needed to get this over the hump.</li>
</ul>


Today, NEC Corp (6701 JP) announced a long-expected and "arbitraged" takeover of Nec Networks &amp; System Integr (1973 JP) after the latter reported a delay in earnings and great numbers.
The premium is a bit light, and the internal mechanics to NEC are highly favourable. This was always going to happen this way. It's a pity it took so long.
This gets done easily as active foreign owners, arbs, and crossholders will sell into it, and only 15.3% is needed to get this over the hump.


NEC Parent Tender Offer for NEC Network & SysInt (1973 JP) - Long Expected, Low Premium (¥3250)

Equity Bottom-Up

<ul>
<li>Kazuo Inamori (稲盛和夫), founder of <a href="https://www.smartkarma.com/entities/kyocera-corp" target="_blank" data-smartkarma-citation="entities:753:1" rel="noopener">Kyocera Corp (6971 JP)</a> and <a href="https://www.smartkarma.com/entities/kddi-corp" target="_blank" data-smartkarma-citation="entities:639:1" rel="noopener">KDDI Corp (9433 JP)</a> precursor company DDI (Dai Ni Den Den), and former chairman of JAL overseeing restructuring, has passed.</li>
<li>In his own name, he owns 10.212mm shares of Kyocera, and likely other assets. Inheritance tax would be due 10 months from now. </li>
<li>Kyocera is not blowing out the lights compared to peers, but it is relatively inexpensive to its history and peers. If the shares are sold, Kyocera can buy them.</li>
</ul>


Kazuo Inamori (稲盛和夫), founder of Kyocera Corp (6971 JP) and KDDI Corp (9433 JP) precursor company DDI (Dai Ni Den Den), and former chairman of JAL overseeing restructuring, has passed.
In his own name, he owns 10.212mm shares of Kyocera, and likely other assets. Inheritance tax would be due 10 months from now. 
Kyocera is not blowing out the lights compared to peers, but it is relatively inexpensive to its history and peers. If the shares are sold, Kyocera can buy them.


Kyocera (6971 JP) Founder Kazuo Inamori Passes - Implications for Holdings

Every year (usually in the beginning of September), the Nikkei Inc Index team conducts an annual review of the major price-weighted Nikkei indices - the most important being the Nikkei 225 Average - and adds and subtracts constituents according to the Rules.
Today, they announced the 2021 version of the changes (<a href="https://indexes.nikkei.co.jp/nkave/archives/news/20210906E_1.pdf" target="_blank" rel="noopener">announcement</a>, <a href="https://indexes.nikkei.co.jp/nkave/archives/news/20210906E_3.pdf" target="_blank" rel="noopener">PAF changes</a>).
Below is Some Background. If you want to skip ahead to the juicy analysis, you can jump ahead to the Changes Announced section just below, and then more below the fold.
<h3>Some Background</h3>
The Nikkei 225, well-known globally as "the Nikkei" is a price-weighted index, originally started nearly 70 years ago as an average of a selected number of stocks listed on the TSE First Section. Later, it became 225 members. 
Because it is price-weighted, and because for a long time it made no divisor adjustments for stock splits (so when a stock split 2:1 its weight fell by half because price fell by half and trackers had to sell half their shares in that stock), and the price multiplier was determined by the par value of a company, then they later they started adjusting for splits, stocks which are old, never split, AND have a high price end up having a high weight in the index. 
There was a huge reshuffle in April 2000 when the Nikkei decided that the system needed rebalancing to include more tech, so they changed the Rules. They pushed 30 names out and 30 names in, and the 30 names added were 50% of the new index. 
Twenty one years after the prior change in methodology, this past May 10 the Nikkei Inc Index Team announced new changes to the Rules. There was a <a href="https://indexes.nikkei.co.jp/nkave/archives/news/20210510E_1.pdf" target="_blank" rel="noopener">proposal</a>, with an <a href="https://indexes.nikkei.co.jp/nkave/archives/news/20210510E_3.pdf" target="_blank" rel="noopener">FAQ</a>, and <a href="https://indexes.nikkei.co.jp/nkave/archives/news/20210510E_2.pdf" target="_blank" rel="noopener">supplemental data</a>. On 5 July, the Nikkei confirmed the proposal with a new <a href="https://indexes.nikkei.co.jp/nkave/archives/news/20210705E_1.pdf" target="_blank" rel="noopener">Guidebook</a>.
When I wrote about this on 10 May in <a href="https://www.smartkarma.com/insights/after-20yrs-nikkei-225-proposes-minor-impact-rule-changes-nintendo-disappointment" target="_blank" data-smartkarma-citation="insights:51277" rel="noopener">After 20yrs, Nikkei 225 Proposes Minor Impact Rule Changes (Nintendo Disappointment?)</a> I said I thought the changes disappointing. There are real problems with the index and this did not do much; the changes are evolutionary rather than revolutionary, with the only interesting change being that constituents are added with a weight no greater than 1%. If the normal price adjustment factor would allow a constituent to enter at a weight greater than 1%, the Price Adjustment Factor (base 1) is lowered in increments of 0.1 so that the deemed inclusion weight on Base Date (end of July) is no more than 1%. There is no change to the idea that the Nikkei Index Team can override their rankings at any time as they see fit.
Because the Nikkei Index Team had let the sector balances and rankings slide quite a bit over the years (not adding "obvious" names and not deleting names which should probably have been deleted, and not rebalancing the sectors as the rules say they should), the possibility was that some names like <a href="https://www.smartkarma.com/entities/nintendo-co-ltd" target="_blank" data-smartkarma-citation="entities:5415:1" rel="noopener">Nintendo Co Ltd (7974 JP)</a> and similar high-price-low-share-count names which "deserved" to be included were not simply because their very high price would create undue impact (it was undue impact and the lack of incremental float for high-weight low-share-count names which caused the BOJ to lower, then eventually cease their buying of Nikkei 225 ETFs). This rule on capping inclusions at 1% would go a ways to mitigating that problem so that would allow the Nikkei to add previously un-addable names. Expectations were high on a group of names, with <a href="https://www.smartkarma.com/entities/nintendo-co-ltd" target="_blank" data-smartkarma-citation="entities:5415:1" rel="noopener">Nintendo Co Ltd (7974 JP)</a>, <a href="https://www.smartkarma.com/entities/keyence-corp" target="_blank" data-smartkarma-citation="entities:3077:1" rel="noopener">Keyence Corp (6861 JP)</a>, <a href="https://www.smartkarma.com/entities/zozo-inc" target="_blank" data-smartkarma-citation="entities:18379:1" rel="noopener">ZOZO Inc (3092 JP)</a>, and probably <a href="https://www.smartkarma.com/entities/oriental-land-co-ltd" target="_blank" data-smartkarma-citation="entities:13517:1" rel="noopener">Oriental Land (4661 JP)</a>, with the latter two likely to create some real froth if actually selected. 
<h2>The Changes Announced</h2>
Today after the close, the Nikkei Index Team announced the following changes to the Nikkei 225 Average as a result of the Annual Review:
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</section>
The changes will be made on the last trading day of September, at the close. I expect to see $10bn trade on that day.
The new rules allow the Nikkei Index team to not do a lot to the sector mix if the additions are made because of "High Liquidity" because while the sector mix would normally mean more than three deleted, the new rules cap changes at 3 per annual rebalance (which is not enough).
As noted above, <a href="https://www.smartkarma.com/entities/zozo-inc" target="_blank" data-smartkarma-citation="entities:18379:1" rel="noopener">ZOZO Inc (3092 JP)</a> and <a href="https://www.smartkarma.com/entities/oriental-land-co-ltd" target="_blank" data-smartkarma-citation="entities:13517:1" rel="noopener">Oriental Land (4661 JP)</a> were among names which were expected as possible inclusions and therefore a certain amount of pre-positioning may be in place. They may get somewhat hurt tomorrow.
<div class="content-highlight">
There are a LOT of moving parts here. There are 3 ADDs, 3 DELETIONS, 1 Price Adjustment Factor moved sharply higher and one moved somewhat lower (a list of all the PAFs announced by the Nikkei is <a href="https://indexes.nikkei.co.jp/nkave/archives/news/20210906E_3.pdf" target="_blank" rel="noopener">here</a>), then there are another 220 stocks which will see selling on 30 September at the rebalance. 
</div>
For more detailed analysis of the stocks, their positioning, how much to buy, etc, please read on.
<hr>
For more about passive tracking in Japan, please refer to <a href="https://www.smartkarma.com/insights/japan-passive-who-owns-what-2021" target="_blank" data-smartkarma-citation="insights:55008" rel="noopener">JAPAN PASSIVE: Who Owns What 2021?</a>

Every year (usually in the beginning of September), the Nikkei Inc Index team conducts an annual review of the major price-weighted Nikkei indices - the most important being the Nikkei 225 Average - and adds and subtracts constituents according to the Rules.
Today, they announced the 2021 version of the changes (announcement, PAF changes).
Below is Some Background. If you want to skip ahead to the juicy analysis, you can jump ahead to the Changes Announced section just below, and then more below the fold.
Some Background
The Nikkei 225, well-known globally as "the Nikkei" is a price-weighted index, originally started nearly 70 years ago as an average of a selected number of stocks listed on the TSE First Section. Later, it became 225 members. 
Because it is price-weighted, and because for a long time it made no divisor adjustments for stock splits (so when a stock split 2:1 its weight fell by half because price fell by half and trackers had to sell half their shares in that stock), and the price multiplier was determined by the par value of a company, then they later they started adjusting for splits, stocks which are old, never split, AND have a high price end up having a high weight in the index. 
There was a huge reshuffle in April 2000 when the Nikkei decided that the system needed rebalancing to include more tech, so they changed the Rules. They pushed 30 names out and 30 names in, and the 30 names added were 50% of the new index. 
Twenty one years after the prior change in methodology, this past May 10 the Nikkei Inc Index Team announced new changes to the Rules. There was a proposal, with an FAQ, and supplemental data. On 5 July, the Nikkei confirmed the proposal with a new Guidebook.
When I wrote about this on 10 May in After 20yrs, Nikkei 225 Proposes Minor Impact Rule Changes (Nintendo Disappointment?) I said I thought the changes disappointing. There are real problems with the index and this did not do much; the changes are evolutionary rather than revolutionary, with the only interesting change being that constituents are added with a weight no greater than 1%. If the normal price adjustment factor would allow a constituent to enter at a weight greater than 1%, the Price Adjustment Factor (base 1) is lowered in increments of 0.1 so that the deemed inclusion weight on Base Date (end of July) is no more than 1%. There is no change to the idea that the Nikkei Index Team can override their rankings at any time as they see fit.
Because the Nikkei Index Team had let the sector balances and rankings slide quite a bit over the years (not adding "obvious" names and not deleting names which should probably have been deleted, and not rebalancing the sectors as the rules say they should), the possibility was that some names like Nintendo Co Ltd (7974 JP) and similar high-price-low-share-count names which "deserved" to be included were not simply because their very high price would create undue impact (it was undue impact and the lack of incremental float for high-weight low-share-count names which caused the BOJ to lower, then eventually cease their buying of Nikkei 225 ETFs). This rule on capping inclusions at 1% would go a ways to mitigating that problem so that would allow the Nikkei to add previously un-addable names. Expectations were high on a group of names, with Nintendo Co Ltd (7974 JP), Keyence Corp (6861 JP), ZOZO Inc (3092 JP), and probably Oriental Land (4661 JP), with the latter two likely to create some real froth if actually selected. 
The Changes Announced
Today after the close, the Nikkei Index Team announced the following changes to the Nikkei 225 Average as a result of the Annual Review:







The changes will be made on the last trading day of September, at the close. I expect to see $10bn trade on that day.
The new rules allow the Nikkei Index team to not do a lot to the sector mix if the additions are made because of "High Liquidity" because while the sector mix would normally mean more than three deleted, the new rules cap changes at 3 per annual rebalance (which is not enough).
As noted above, ZOZO Inc (3092 JP) and Oriental Land (4661 JP) were among names which were expected as possible inclusions and therefore a certain amount of pre-positioning may be in place. They may get somewhat hurt tomorrow.

There are a LOT of moving parts here. There are 3 ADDs, 3 DELETIONS, 1 Price Adjustment Factor moved sharply higher and one moved somewhat lower (a list of all the PAFs announced by the Nikkei is here), then there are another 220 stocks which will see selling on 30 September at the rebalance. 

For more detailed analysis of the stocks, their positioning, how much to buy, etc, please read on.

For more about passive tracking in Japan, please refer to JAPAN PASSIVE: Who Owns What 2021? 

2021 Nikkei 225 Rebalance: Nintendo, Murata, Keyence IN; Nisshinbo, Toyo Seikan, 'Skupper' OUT

Senior Technology Analyst, Japanese Equities, LightStream Research

Scott Foster

Senior Technology Analyst, Japanese Equities

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.

Japan Aviation Electronics / Equity Bottom-Up

Most of JAE's profits come from sales of connectors to makers of mobile devices and automotive electronics. Both of these markets began to recover in the three months to September (2Q of FY Mar-21) and should continue to improve in the coming year.There  were sharp rebounds in total sales and gross profit in 2Q and the company made an operating profit after only one quarter in the red.Management's guidance for 2H of FY Mar-21 looks conservative. If profits regain the levels recorded over the past three fiscal years, the P/E would drop to 10x - 12x.New smartphone models, 5G and advances in automotive electronics, factory automation and robotics should drive long-term growth. A resurgent virus and trade war appear to be the primary risks.

Most of JAE's profits come from sales of connectors to makers of mobile devices and automotive electronics. Both of these markets began to recover in the three months to September (2Q of FY Mar-21) and should continue to improve in the coming year.There  were sharp rebounds in total sales and gross profit in 2Q and the company made an operating profit after only one quarter in the red.Management's guidance for 2H of FY Mar-21 looks conservative. If profits regain the levels recorded over the past three fiscal years, the P/E would drop to 10x - 12x.New smartphone models, 5G and advances in automotive electronics, factory automation and robotics should drive long-term growth. A resurgent virus and trade war appear to be the primary risks.

Japan Aviation Electronics (6807 JP): Laggard Parts Maker Cheap in a Recovery Scenario

Japan

Japan Aviation Electronics Industry, Limited. manufactures and markets electronic devices and parts such as connectors, switches, system equipment, fiber optic devices, and aerospace electronic devices.  The Company's products include PC cards, sockets, fiber optic couplers, Liquid Crystal Displays (LCD), and acceleration sensors.

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Japan Aviation Electronics (6807 JP)

I-PEX (6640 JP): MBO at an 85% Takeover Premium but Implies P/B <1x

While attractive compared to peer multiples and historical trading ranges, it is light due to an implied P/B below 1x and 11% below the mid-point...

Arun George

NEC Parent Tender Offer for NEC Network & SysInt (1973 JP) - Long Expected, Low Premium (¥3250)

NEC buys out minorities in NEC Network and SysInt. The process is inadequate, the price is light, and doesn't get to the midway on the DCF and...

Travis Lundy

Kyocera (6971 JP) Founder Kazuo Inamori Passes - Implications for Holdings

Kyocera founder and KDDI "co-founder" Kazuo Inamori has passed away. He has a ¥80bn stake in Kyocera, and Kyocera owns 15% of KDDI. But overhang is...

Travis Lundy

2021 Nikkei 225 Rebalance: Nintendo, Murata, Keyence IN; Nisshinbo, Toyo Seikan, 'Skupper' OUT

The Nikkei 225 Rebalance is here. A small surprise in the ADDs. No surprises on the DELETEs. A couple of housekeeping changes, and 600 baskets to...

Travis Lundy

Japan Aviation Electronics (6807 JP): Laggard Parts Maker Cheap in a Recovery Scenario

Sales and profits are rebounding with new cell phone models and rising automotive and industrial demand. The share price has lagged, making the...

Scott Foster

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