Director | Exposing Creative Accounting, Bucephalus Research Partnership

Robert Medd

Director | Exposing Creative Accounting

Exposing Creative Accounting

Bucephalus Research Partnership

Bucephalus Research Partnership Limited. Exposing Creative Accounting.

At the Bucephalus Research Partnership (BRP) we analyse financial statements using our accountant's practical experience and our own quantitative algorithms for corporate governance, accounting risk and peer performance.

Our thematic research refines our unique algorithms while our single stock research focuses on examples where we discover a significant gap between published accounts and business reality.

​Bucephalus Research Partnership:
- Is an independent fee-based research service
- Does not take proprietary positions, long or short
- Does not solicit business or fees from the corporates we review

Forensic Accounting

Inflated profits, aged assets, negative cashflow
JFE has been inflating profits by under depreciating and cashflow by underinvesting. In FY2019, it will barely breakeven and liabilities may rise by Y400bn. FY2020 will be far worse. Even before COVID, Japanese demand was falling and the steel cycle was turning down. At today’s non trough steel spreads, JFE is lossmaking and business cashflow is structurally negative. By YE FY20, JFE will have raised Y300bn plus the Y30bn of maturing bonds to fund the renewal of its over-valued, aging assets. It has listed non core assets, but debt will be over 8x EBITDA. No covenants mean debt can keep rising, but will never be repaid. Equity holders will be wiped out. SELL.

Inflated profits, aged assets, negative cashflow
JFE has been inflating profits by under depreciating and cashflow by underinvesting. In FY2019, it will barely breakeven and liabilities may rise by Y400bn. FY2020 will be far worse. Even before COVID, Japanese demand was falling and the steel cycle was turning down. At today’s non trough steel spreads, JFE is lossmaking and business cashflow is structurally negative. By YE FY20, JFE will have raised Y300bn plus the Y30bn of maturing bonds to fund the renewal of its over-valued, aging assets. It has listed non core assets, but debt will be over 8x EBITDA. No covenants mean debt can keep rising, but will never be repaid. Equity holders will be wiped out. SELL.

'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. 

Thematic (Sector/Industry)

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/125/157/original/File%202020-03-28%2015%2042%2009.jpeg?1585378270" class="editor-image img-responsive" data-smartkarma-image-id="125157"></figure><div class="content-caption">Source • Mainichi Photography</div>STAY AT HOME (PLEASE) - With the 2020 Olympics now destined for 2021, the authorities can focus on containing Covid-19 which continues to spread in Tokyo.  Governor Koike and the Governors of the surrounding prefectures have responded to the recent growth in cases in the metropolis by requesting that citizens stay at home this weekend. Parks and many shops and restaurants have closed, and inclement weather (it is snowing across most of the Kanto plain this Sunday) has resulted in a high degree of compliance.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/125/263/original/File%202020-03-29%206%2035%2050.jpeg?1585431441" class="editor-image img-responsive" data-smartkarma-image-id="125263"></figure><div class="content-caption">Source • aatishb.com</div>CATCHING UP - Without the implementation of the measures adopted in China and South Korea, Japan is now moving more in line with the global trends shown above in terms of log-scale incremental rate of change. Sixty-three new cases were reported on Saturday, the largest single-day total to date. Over half of the new cases were in the 'Longevity General Hospital' in Taito Ward, taking the total for the capital to 362. For Japan as a whole, the total one cases for Saturday was 194 a 68% one-day increase. Covid-19 fatalities increased by six to 53.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/125/264/original/File%202020-03-29%206%2037%2003.jpeg?1585431468" class="editor-image img-responsive" data-smartkarma-image-id="125264"></figure><div class="content-caption">Source • aatishb.com</div>THE SWEDISH MODEL - PM Abe is concerned that a full societal 'lockdown' would damage the economy and has yet to invoke his newly-minted emergency powers - which, in any case, do not provide for such a measure. For now, Japan is following Sweden's social experiment of permitting life to go on as usual as much as possible. Both countries have been criticised for their 'novel' approach; however, their trajectories are noticeably different from the US and Italy. Let us hope than Japan's remarkably low-incidence of, and CFR from, Covid-19 infection can hold.CORONA 'SHOKKU' - At a press conference yesterday Abe pledged to introduce an economic package that would exceed Japan's response to the "Lehman Shock" with a particular focus on SMEs and distressed households. The details are to be announced in the next ten days.RATIONING BOOK - In other news, Kinokuniya bookstore in Tokyo is limiting purchases of the now-existential necessity Camus' The Plague' to one per person.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/125/256/original/2020-03-28_08-20-51.png?1585429894" class="editor-image img-responsive" data-smartkarma-image-id="125256"></figure><div class="content-caption">Source • Japan Analytics</div>PULLING OUT ALL THE STOPS - On Thursday the Bank of Japan's ETF purchase programme constituted 6% of Value Traded as the total interventions this month now total ¥1.3 trillion has recovered 18% from the last weeks' low and is 'only' 16% below the December high. Our Results Score is now negative, and the Forecast/Revision Score will follow next week. With over 3 billion people around the world in some form of social isolation, we expect both of our Scores to reach new five year lows by May and for equities to follow, despite Governor Kuroda's machinations.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/125/260/original/2020-03-29_06-20-04.png?1585430434" class="editor-image img-responsive" data-smartkarma-image-id="125260"></figure><div class="content-caption">Source • Japan Analytics</div>NO MAN'S LAND - As Aggregate TTM and Forecast Operating and Net Income head lower, the last week's bear-market-bounce has taken multiples back towards the long-term averages. With 3 quarters of results before a possible cycle low, Japanese equities are stuck in no man's land, neither overvalued not undervalued.  <figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/125/158/original/2020-03-28_15-56-17.png?1585378601" class="editor-image img-responsive" data-smartkarma-image-id="125158"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/125/305/original/2020-03-29_08-40-46.png?1585438866" class="editor-image img-responsive" data-smartkarma-image-id="125305"></figure><div class="content-caption">Source • Japan Analytics</div>FRIDAY 27th MARCH - Friday saw six companies reporting results, of which two - <a href="https://www.smartkarma.com/entities/jastec-co-ltd" target="_blank" data-smartkarma-citation="entities:9201:1" rel="noopener">Jastec (9717 JP)</a>- and<a href="https://www.smartkarma.com/entities/niitaka-co-ltd" target="_blank" data-smartkarma-citation="entities:4911:1" rel="noopener">Niitaka (4465 JP)</a> had positive scores. Fifteen companies revised their forecasts, and one - <a href="https://www.smartkarma.com/entities/imv-corp" target="_blank" data-smartkarma-citation="entities:14159:1" rel="noopener">IMV (7760 JP)</a> withdrew its forecast entirely. In terms of our scoring system, the ratio of positive to negative 'scores' was 6:10, with <a href="https://www.smartkarma.com/entities/jfe-holdings-inc" target="_blank" data-smartkarma-citation="entities:210:1" rel="noopener">JFE (5411 JP)</a> being the largest negative-scoring company. High-tech lamp maker <a href="https://www.smartkarma.com/entities/ushio-inc" target="_blank" data-smartkarma-citation="entities:6640:1" rel="noopener">Ushio (6925 JP)</a> cut its forecast for Operating Income to ¥6b - which would be the lowest outcome since 1994 and implies a fourth-quarter operating loss of ¥0.35b.<a href="https://www.smartkarma.com/entities/sony-corp" target="_blank" data-smartkarma-citation="entities:563:1" rel="noopener">Sony (6758 JP)</a>announced that its forecasts made in February are now likely to be revised down and that the company may not be able to release FY2020 earnings as scheduled on 30th April due to delays in accounting procedures. <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>has shut down two plants in Japan, reflecting a weaker sales outlook.

Source • Mainichi PhotographySTAY AT HOME (PLEASE) - With the 2020 Olympics now destined for 2021, the authorities can focus on containing Covid-19 which continues to spread in Tokyo.  Governor Koike and the Governors of the surrounding prefectures have responded to the recent growth in cases in the metropolis by requesting that citizens stay at home this weekend. Parks and many shops and restaurants have closed, and inclement weather (it is snowing across most of the Kanto plain this Sunday) has resulted in a high degree of compliance.Source • aatishb.comCATCHING UP - Without the implementation of the measures adopted in China and South Korea, Japan is now moving more in line with the global trends shown above in terms of log-scale incremental rate of change. Sixty-three new cases were reported on Saturday, the largest single-day total to date. Over half of the new cases were in the 'Longevity General Hospital' in Taito Ward, taking the total for the capital to 362. For Japan as a whole, the total one cases for Saturday was 194 a 68% one-day increase. Covid-19 fatalities increased by six to 53.Source • aatishb.comTHE SWEDISH MODEL - PM Abe is concerned that a full societal 'lockdown' would damage the economy and has yet to invoke his newly-minted emergency powers - which, in any case, do not provide for such a measure. For now, Japan is following Sweden's social experiment of permitting life to go on as usual as much as possible. Both countries have been criticised for their 'novel' approach; however, their trajectories are noticeably different from the US and Italy. Let us hope than Japan's remarkably low-incidence of, and CFR from, Covid-19 infection can hold.CORONA 'SHOKKU' - At a press conference yesterday Abe pledged to introduce an economic package that would exceed Japan's response to the "Lehman Shock" with a particular focus on SMEs and distressed households. The details are to be announced in the next ten days.RATIONING BOOK - In other news, Kinokuniya bookstore in Tokyo is limiting purchases of the now-existential necessity Camus' The Plague' to one per person.Source • Japan AnalyticsPULLING OUT ALL THE STOPS - On Thursday the Bank of Japan's ETF purchase programme constituted 6% of Value Traded as the total interventions this month now total ¥1.3 trillion has recovered 18% from the last weeks' low and is 'only' 16% below the December high. Our Results Score is now negative, and the Forecast/Revision Score will follow next week. With over 3 billion people around the world in some form of social isolation, we expect both of our Scores to reach new five year lows by May and for equities to follow, despite Governor Kuroda's machinations.Source • Japan AnalyticsNO MAN'S LAND - As Aggregate TTM and Forecast Operating and Net Income head lower, the last week's bear-market-bounce has taken multiples back towards the long-term averages. With 3 quarters of results before a possible cycle low, Japanese equities are stuck in no man's land, neither overvalued not undervalued.  Source • Japan AnalyticsFRIDAY 27th MARCH - Friday saw six companies reporting results, of which two - Jastec (9717 JP)- andNiitaka (4465 JP) had positive scores. Fifteen companies revised their forecasts, and one - IMV (7760 JP) withdrew its forecast entirely. In terms of our scoring system, the ratio of positive to negative 'scores' was 6:10, with JFE (5411 JP) being the largest negative-scoring company. High-tech lamp maker Ushio (6925 JP) cut its forecast for Operating Income to ¥6b - which would be the lowest outcome since 1994 and implies a fourth-quarter operating loss of ¥0.35b.Sony (6758 JP)announced that its forecasts made in February are now likely to be revised down and that the company may not be able to release FY2020 earnings as scheduled on 30th April due to delays in accounting procedures. Honda Motor (7267 JP)has shut down two plants in Japan, reflecting a weaker sales outlook.

🇯🇵 JAPAN • Revisions & Results Alert - 27th March - A Weekend at Home with the Swedish Model

APAC IPOs & Placements

Zhen Zhou, Toh

IPOs and Placements coverage across Asia Pacific

Aequitas Research

We cover all listing across the Asia Pacific along with follow-up placements. As of Dec 2020, our team had covered 539 IPOs with a hit rate of 73.5% and 685 placements with a hit rate of 66.8%.

We combine fundamental bottom-up views with our proprietary quantitative framework to provide a holistic coverage across new listings and placements. Our coverage includes pre-IPO notes before the deal is launched, follow-up analysis once the deal is live and post-listing trading analysis as well.

Equity Capital Markets

Bloomberg reported <a href="https://www.smartkarma.com/entities/27445" target="_blank" data-smartkarma-citation="entities:27445:1">Softbank Corp (9434 JP)</a>'s international bookbuild was 2 - 3x covered while retail offering was at almost 2x. There were other reports of bookrunners struggling to sell shares to retail investors.
In this insight, we will look at how peers and market have performed since bookbuild and provide a sensitivity table with implied valuations for different price points and thoughts on the price range for near-term trading. 
<hr>
We have already covered most aspects of <a href="https://www.smartkarma.com/entities/27445" target="_blank" data-smartkarma-citation="entities:27445:1">Softbank Corp (9434 JP)</a> 's IPO in our previous insights:
<ul class="">
<li>Valuation from a retail investor POV -  <a href="https://www.smartkarma.com/insights/softbank-ipo-review-attractive-from-a-retail-perspective-could-provide-short-term-upside" target="_blank" data-smartkarma-citation="insights:26422">Softbank IPO Review - Attractive from a Retail Perspective, Could Provide Short-Term Upside</a>
</li>
<li>Valuation from an institutional investor POV - <a href="https://www.smartkarma.com/insights/softbank-corp-ipo-review-yield-ensured-demand-may-not-guarantee-performance" target="_blank" data-smartkarma-citation="insights:26280">Softbank Corp IPO Review - Yield Ensured Demand May Not Guarantee Performance</a>
</li>
<li>Updates from prospectus - <a href="https://www.smartkarma.com/insights/softbank-corp-ipo-review-updates-from-the-prospectus-segment-breakdown-capex-and-risks" target="_blank" data-smartkarma-citation="insights:25943">Softbank Corp IPO Review - Segment Breakdown, Capex, and Risks</a>
</li>
<li>Operating metric comparison - <a href="https://www.smartkarma.com/insights/softbank-telecom-pre-ipo-higher-yield-to-compensate-for-poorer-metrics" target="_blank" data-smartkarma-citation="insights:25842">Softbank Telecom Pre-IPO - Higher Yield to Compensate for Poorer Metrics</a>
</li>
<li>Impact of Rakuten entry and FCF and dividend sustainability analysis - <a href="https://www.smartkarma.com/insights/softbank-telecom-pre-ipo-all-about-the-yield" target="_blank" data-smartkarma-citation="insights:25756">Softbank Telecom Pre-IPO - All About the Yield</a>
</li>
<li>Company background and overview - <a href="https://www.smartkarma.com/insights/softbank-telecom-pre-ipo-review-vision-is-needed-to-arrive-at-us-90bn-valuation" target="_blank" data-smartkarma-citation="insights:25289">Softbank Telecom Pre-IPO Review - Vision Is Needed to Arrive at US$90bn Valuation</a>
</li>
</ul>

Bloomberg reported Softbank Corp (9434 JP)'s international bookbuild was 2 - 3x covered while retail offering was at almost 2x. There were other reports of bookrunners struggling to sell shares to retail investors.
In this insight, we will look at how peers and market have performed since bookbuild and provide a sensitivity table with implied valuations for different price points and thoughts on the price range for near-term trading. 

We have already covered most aspects of Softbank Corp (9434 JP) 's IPO in our previous insights:

Valuation from a retail investor POV -  Softbank IPO Review - Attractive from a Retail Perspective, Could Provide Short-Term Upside

Valuation from an institutional investor POV - Softbank Corp IPO Review - Yield Ensured Demand May Not Guarantee Performance

Updates from prospectus - Softbank Corp IPO Review - Segment Breakdown, Capex, and Risks

Operating metric comparison - Softbank Telecom Pre-IPO - Higher Yield to Compensate for Poorer Metrics

Impact of Rakuten entry and FCF and dividend sustainability analysis - Softbank Telecom Pre-IPO - All About the Yield

Company background and overview - Softbank Telecom Pre-IPO Review - Vision Is Needed to Arrive at US$90bn Valuation



JAPAN AS NUMBER TWO - Japan is the second largest global market for share buybacks both in terms of number and percentage usage. However, gross buybacks have never exceeded more than one per cent of revenues, compared with a range of 2-6% in the US and, in terms of overall capital deployment since 1985, buybacks have never represented more than 6% of the total and are clearly more cyclical than dividends which are relative 'sticky' and only cut 'in extremis'.
MOTIVATION - Buybacks can usually be placed into one of three categories - as exercises in financial engineering, as attempts to time the purchase of undervalued stock or as part of a regular programme that complements cash dividends. With only a few exceptions, Japanese companies do not fall into any one of these three categories. It is rare for Japanese boards to be incentivised with share options, concepts such as ‘intrinsic value’ are foreign to almost all and very few Japanese companies have adopted regular buy-back programmes.  The motivation and stated aims for most buyback programmes in Japan are often vague or opaque, particularly as regards creating value for continuing shareholders. 
GAMING ROE - We would suggest that much of the increase in buyback activity from 2014 to its recent peak in 2016 was driven by a desire to improve RoE. For many companies, reducing the 'E' was easier to achieve than increasing the 'R' especially in short-order, and coincided with a period when many companies were being criticised for holding too much cash.  Having achieved the 8% target, business investment has become the main priority once more.
FREQUENCY - This 'ad hoc' approach to buybacks is clear from the frequency histogram below. Using changes in Net Shares Outstanding (Common and Preference Shares less Treasury Stock) of more than one per cent as a proxy for capital increases and reductions, only 18% of 3,513 currently listed Japanese companies have carried out more than one reduction over the last 27 quarters whereas 82% have increased capital by more than one per cent. Only forty companies have, on average, reduced their Net Shares Outstanding at least once a year.  
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/060/781/original/2018-08-15_13-00-21.png?1534388345" class="editor-image img-responsive" data-smartkarma-image-id="60781"></figure>
<div class="content-caption">Source: Japan Analytics</div>
AVERAGE 'BUYBACK' SIZE IS DECLINING - Since 1999, the average percentage reduction in Net Shares Outstanding for companies that have engaged in buybacks has been 4%. However, this has declined to 3.1% in the last two years.
NET BUYBACKS LESS THAN 5% OF FREE CASH FLOW - Over the last seven years, the number of buybacks has increased, partly due to pressure from non-resident shareholders. 17 of the last 27 quarters have seen negative equity cash flows with the peak being in '2016-Q4' which was the first calendar quarter of 2016 when TOPIX was last at its long-term average.  Nevertheless, cumulative net equity cash flows since 2012 amount to only ¥4 trillion or less than 5% of Free Cash Flow. Cumulative dividends amounted to ¥52 trillion or 55% of Free Cash Flow.  
BUYBACKS ARE BACK - The last reported quarter, which for most companies ended in March 2018, saw a return to net share buybacks. The amount (¥766 billion) was the largest in seven quarters and was the first sizeable net buyback quarter in a period when TOPIX exceeded its long-term average. The trend has continued into the quarter currently being reported with over ¥2 trillion of buybacks announced in April and May to be completed over the balance of the year. With cash flow at record highs and after paying down over ¥10 trillion in debt over the last five quarters, Japanese companies, it appears, have begun to adopt a more flexible approach to shareholder returns.
MIXED SIGNALS - MUTED RESPONSE - It is clear that the response to buyback announcements and the impact that the actual buybacks have on subsequent share price performance has become more muted in recent years. Part of this is due to the types of companies that have been engaging in buybacks and their motivation for doing so. If the shares are being purchased due to a substantial undervaluation, the signalling of such directly from the management should result in a profitable investment opportunity.  Investors must, however, be careful. As can be seen from the current holding in the Solactive index and the tables of buyback 'champions' below, many share buybacks in Japan are just distributions of cash from mature companies that no longer have investment opportunities, examples being <a href="https://www.smartkarma.com/entities/19603" target="_blank" data-smartkarma-citation="entities:19603:1">Yahoo Japan (4689 JP)</a> and <a href="https://www.smartkarma.com/entities/602" target="_blank" data-smartkarma-citation="entities:602:1">Mixi Inc (2121 JP)</a>.  Alternatively, for companies that have become more frequent players, buybacks are in effect dividend substitutes and, as such, have nothing to do with value creation. Mechanically buying shares in Japanese companies that have announced or are conducting share buybacks is unlikely to lead to outperformance.    
BUYBACK 'CHAMPIONS', 'NO-CHANGERS', 'CAPITAL JUNKIES' AND 'ROLL-UP ARTISTS' - we have provided in the detail below lists of companies measured by both change in Net Shares Outstanding and Equity Cash Flow and have labeled them based on the percentage changes in shares both negative and positive as well as highlighting those companies with little or no change.
<div class="content-highlight">
CONCLUSION -  Buybacks in Japan are are the smallest component of the capital allocation menu for Japanese management and many of those companies that are buying back stock do so for a variety of reasons, most of which do not involve a signal that the shares are undervalued. In many cases, a buyback may be seen as a sign of capitulation, either due to pressure from activist shareholders or due to a lack of investment opportunities. For many companies, the Bank of Japan ETF purchases have had and will continue to have more of an impact. 
</div>

JAPAN AS NUMBER TWO - Japan is the second largest global market for share buybacks both in terms of number and percentage usage. However, gross buybacks have never exceeded more than one per cent of revenues, compared with a range of 2-6% in the US and, in terms of overall capital deployment since 1985, buybacks have never represented more than 6% of the total and are clearly more cyclical than dividends which are relative 'sticky' and only cut 'in extremis'.
MOTIVATION - Buybacks can usually be placed into one of three categories - as exercises in financial engineering, as attempts to time the purchase of undervalued stock or as part of a regular programme that complements cash dividends. With only a few exceptions, Japanese companies do not fall into any one of these three categories. It is rare for Japanese boards to be incentivised with share options, concepts such as ‘intrinsic value’ are foreign to almost all and very few Japanese companies have adopted regular buy-back programmes.  The motivation and stated aims for most buyback programmes in Japan are often vague or opaque, particularly as regards creating value for continuing shareholders. 
GAMING ROE - We would suggest that much of the increase in buyback activity from 2014 to its recent peak in 2016 was driven by a desire to improve RoE. For many companies, reducing the 'E' was easier to achieve than increasing the 'R' especially in short-order, and coincided with a period when many companies were being criticised for holding too much cash.  Having achieved the 8% target, business investment has become the main priority once more.
FREQUENCY - This 'ad hoc' approach to buybacks is clear from the frequency histogram below. Using changes in Net Shares Outstanding (Common and Preference Shares less Treasury Stock) of more than one per cent as a proxy for capital increases and reductions, only 18% of 3,513 currently listed Japanese companies have carried out more than one reduction over the last 27 quarters whereas 82% have increased capital by more than one per cent. Only forty companies have, on average, reduced their Net Shares Outstanding at least once a year.  

Source: Japan Analytics
AVERAGE 'BUYBACK' SIZE IS DECLINING - Since 1999, the average percentage reduction in Net Shares Outstanding for companies that have engaged in buybacks has been 4%. However, this has declined to 3.1% in the last two years.
NET BUYBACKS LESS THAN 5% OF FREE CASH FLOW - Over the last seven years, the number of buybacks has increased, partly due to pressure from non-resident shareholders. 17 of the last 27 quarters have seen negative equity cash flows with the peak being in '2016-Q4' which was the first calendar quarter of 2016 when TOPIX was last at its long-term average.  Nevertheless, cumulative net equity cash flows since 2012 amount to only ¥4 trillion or less than 5% of Free Cash Flow. Cumulative dividends amounted to ¥52 trillion or 55% of Free Cash Flow.  
BUYBACKS ARE BACK - The last reported quarter, which for most companies ended in March 2018, saw a return to net share buybacks. The amount (¥766 billion) was the largest in seven quarters and was the first sizeable net buyback quarter in a period when TOPIX exceeded its long-term average. The trend has continued into the quarter currently being reported with over ¥2 trillion of buybacks announced in April and May to be completed over the balance of the year. With cash flow at record highs and after paying down over ¥10 trillion in debt over the last five quarters, Japanese companies, it appears, have begun to adopt a more flexible approach to shareholder returns.
MIXED SIGNALS - MUTED RESPONSE - It is clear that the response to buyback announcements and the impact that the actual buybacks have on subsequent share price performance has become more muted in recent years. Part of this is due to the types of companies that have been engaging in buybacks and their motivation for doing so. If the shares are being purchased due to a substantial undervaluation, the signalling of such directly from the management should result in a profitable investment opportunity.  Investors must, however, be careful. As can be seen from the current holding in the Solactive index and the tables of buyback 'champions' below, many share buybacks in Japan are just distributions of cash from mature companies that no longer have investment opportunities, examples being Yahoo Japan (4689 JP) and Mixi Inc (2121 JP).  Alternatively, for companies that have become more frequent players, buybacks are in effect dividend substitutes and, as such, have nothing to do with value creation. Mechanically buying shares in Japanese companies that have announced or are conducting share buybacks is unlikely to lead to outperformance.    
BUYBACK 'CHAMPIONS', 'NO-CHANGERS', 'CAPITAL JUNKIES' AND 'ROLL-UP ARTISTS' - we have provided in the detail below lists of companies measured by both change in Net Shares Outstanding and Equity Cash Flow and have labeled them based on the percentage changes in shares both negative and positive as well as highlighting those companies with little or no change.

CONCLUSION -  Buybacks in Japan are are the smallest component of the capital allocation menu for Japanese management and many of those companies that are buying back stock do so for a variety of reasons, most of which do not involve a signal that the shares are undervalued. In many cases, a buyback may be seen as a sign of capitulation, either due to pressure from activist shareholders or due to a lack of investment opportunities. For many companies, the Bank of Japan ETF purchases have had and will continue to have more of an impact. 


Japan: Share Buybacks - Less Than Meets the Eye

Doing bespoke work since 2002....., Custom Products Group

Patrick Hansen

Doing bespoke work since 2002.....

Custom Products Group

Custom Products was started 14 years ago at Lehman Brothers by current co-founder Patrick Hansen, CFA. After 3 years at Lehman, Patrick moved the team to Macquarie Securities where Simon Rigney (co-founder) joined. 3 years ago we took Custom Products independent. 

Our core strength can be summed up three words. 1- Customization - we have very little off the shelf products and most work is done on a one on one bespoke basis. 2- Speed - We pride ourselves in our ability to get requests back to the client very quickly. 3- Confidentiality - We do not redistribute. There is no grace period where we wait a week and then mass blast. Any request stops with that client.

With summer starting to wind down, we put together a screen looking at names that have historically done the best from September through the end of the year. Please make no mistake, seasonality exists in Japan. We calculated the returns from September 1st to December 31st going back to 1996.  <a href="https://www.smartkarma.com/entities/7245" target="_blank" data-smartkarma-citation="entities:7245:1">Nidec Corp (6594 JP)</a> top the list with an 82% success rate and an average return of 13%. <a href="https://www.smartkarma.com/entities/17620" target="_blank" data-smartkarma-citation="entities:17620:1">JSR Corp (4185 JP)</a> is next also with an 82% success rate and a median return of 13%. <a href="https://www.smartkarma.com/entities/14457" target="_blank" data-smartkarma-citation="entities:14457:1">Hitachi Chemical (4217 JP)</a> also…

With summer starting to wind down, we put together a screen looking at names that have historically done the best from September through the end of the year. Please make no mistake, seasonality exists in Japan. We calculated the returns from September 1st to December 31st going back to 1996.  Nidec Corp (6594 JP) top the list with an 82% success rate and an average return of 13%. JSR Corp (4185 JP) is next also with an 82% success rate and a median return of 13%. Hitachi Chemical (4217 JP) also…

Japan

JFE Holdings, Inc. is a holding company which was established through the merger of NKK Corp and Kawasaki Steel Corp.  The Company manages and conducts its subsidiaries' business, which is steel production and integrated engineering services.

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JFE Holdings (5411 JP)

JFE Holdings: Off to the Scrap Heap

Inflated profits, aged assets, negative cashflow JFE has been inflating profits by under depreciating and cashflow by underinvesting. In FY2019, it...

Bucephalus Research Partnership

🇯🇵 JAPAN • Revisions & Results Alert - 27th March - A Weekend at Home with the Swedish Model

STAY AT HOME (PLEASE) - With the 2020 Olympics now destined for 2021, the authorities can focus on containing Covid-19 which continues to spread in...

Campbell Gunn

Softbank Corp IPO - Trading Strategies

Bloomberg reported Softbank Corp (9434 JP)'s international bookbuild was 2 - 3x covered while retail offering was at almost 2x. There were other...

Zhen Zhou, Toh

Best Japanese Performers in the Fall....

With summer starting to wind down, we put together a screen looking at names that have historically done the best from September through the end of...

Custom Products Group

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JFE Holdings: Off to the Scrap Heap

Inflated profits, aged assets, negative cashflow JFE has been inflating profits by under depreciating and cashflow by underinvesting. In FY2019, it...

Bucephalus Research Partnership

🇯🇵 JAPAN • Revisions & Results Alert - 27th March - A Weekend at Home with the Swedish Model

STAY AT HOME (PLEASE) - With the 2020 Olympics now destined for 2021, the authorities can focus on containing Covid-19 which continues to spread in...

Campbell Gunn

Softbank Corp IPO - Trading Strategies

Bloomberg reported Softbank Corp (9434 JP)'s international bookbuild was 2 - 3x covered while retail offering was at almost 2x. There were other...

Zhen Zhou, Toh

Japan: Share Buybacks - Less Than Meets the Eye

JAPAN AS NUMBER TWO - Japan is the second largest global market for share buybacks both in terms of number and percentage usage. However, gross...

Campbell Gunn

Best Japanese Performers in the Fall....

With summer starting to wind down, we put together a screen looking at names that have historically done the best from September through the end of...

Custom Products Group