Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

NTT (Nippon Telegraph & Telephone) / Event-Driven

On 29 September 2020, <a href="https://www.smartkarma.com/entities/nippon-telegraph-telephone-corporation" target="_blank" data-smartkarma-citation="entities:623:1" rel="noopener">NTT (Nippon Telegraph &amp; Telephone) (9432 JP)</a> announced it would buy out minorities of <a href="https://www.smartkarma.com/entities/ntt-docomo-inc" target="_blank" data-smartkarma-citation="entities:1089:1" rel="noopener">NTT Docomo Inc (9437 JP)</a> in a $40 billion buyout - the biggest Tender Offer Japan had ever seen. As it was financed with debt, that constituted the single biggest "stock buyback" that NTT could possibly have executed. Normally, NTT buys back ¥200-350bn of stock per year. With this buyout bought ¥200+bn of net income per year. This came on top of previous statements by the CEO of NTT that the company would seek to sell and securitize trillions of yen of assets and return capital to shareholders. Shockingly NTT shares fell on the news of the buyout. I could not fathom why. They may have overpaid what they needed to pay to get it done, but it was going to get done. They were going to pay ¥4trln of debt, and zero equity, to get ¥210-250bn in net income and ¥400bn+ of operating cashflow, presumably for a very long time, in exchange for a relatively low interest rate payment.<section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/169/695/original/Screenshot%202020-11-06%20at%202.31.50%20PM.png?1604644954" class="editor-image img-responsive" data-smartkarma-image-id="169695"></figure></section><div class="content-highlight">
Several people contacted me when this was announced and asked whether I was worried about NTT being too indebted. 
My blunt answer to them was that I was not at all worried. This was, in effect, a MAMMOTH BUYBACK and NTT had real estate assets, tower assets, and any number of other hard assets which could be sold or securitized to pay down debt and there was no chance that NTT was going to issue equity. The simple reason why there would be no equity top up was and is that the NTT Law requires that the government hold one-third* of the shares outstanding of NTT and there is no chance that the government is going to be convinced to buy more shares of NTT to maintain their stake. This was pure leverage and pure net income to NTT shareholders. 
</div><div class="content-remarks">* It's a little complicated because there is some weirdness where IPO shares are excluded from the calculation, but it comes VERY close to one-third in practical terms.</div><h3>The NEW News</h3>On Friday 6 November NTT released Q2 earnings. They will not overwhelm anyone and there wasn't much talk about what the plans are for synergies at NTT Docomo, but I think that has to be expected because the Tender Offer, while a foregone conclusion in terms of rights, is not even over yet.However I think people STILL do not look at NTT and its results the right way. What we knew Friday? <a href="https://www.smartkarma.com/entities/ntt-docomo-inc" target="_blank" data-smartkarma-citation="entities:1089:1" rel="noopener">NTT Docomo Inc (9437 JP)</a> OP in Q2 was +8.3%yoy. <a href="https://www.smartkarma.com/entities/ntt-data-corp" target="_blank" data-smartkarma-citation="entities:11232:1" rel="noopener">NTT Data Corp (9613 JP)</a> was up 9.5%yoy. What we did not know was that NTT ex-listed subs OP was up 4.7%yoy. That was better than expected. NTT ex-listed subs OP has continued to grow over the years. The rolling 4Q total is the blue bars below (the red bars are the implied quarterly OP based on consensus OP annual estimates (out to March 2023) for NTT, NTT Docomo and NTT Data backing out NTT ex-listed subs).<section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/169/726/original/Screenshot%202020-11-06%20at%205.21.56%20PM.png?1604654537" class="editor-image img-responsive" data-smartkarma-image-id="169726"></figure>What was clear from the discussion that NTT led on the day of the announcement of the Tender Offer to buy in minorities of NTT Docomo was that they saw synergies, and they saw lower costs compared to what the Street was expecting. For whatever reason, as will be discussed below, Street consensus for forward years of NTT does not include all of NTT Docomo. And it seems to include no synergies.</section><h3>The OTHER NEW News - A Buyback</h3>Up to 120mm shares spending up to ¥250bn from 11 March to 31 March 2021. THAT was unexpected. This deserves a discussion.

On 29 September 2020, NTT (Nippon Telegraph &amp; Telephone) (9432 JP) announced it would buy out minorities of NTT Docomo Inc (9437 JP) in a $40 billion buyout - the biggest Tender Offer Japan had ever seen. As it was financed with debt, that constituted the single biggest "stock buyback" that NTT could possibly have executed. Normally, NTT buys back ¥200-350bn of stock per year. With this buyout bought ¥200+bn of net income per year. This came on top of previous statements by the CEO of NTT that the company would seek to sell and securitize trillions of yen of assets and return capital to shareholders. Shockingly NTT shares fell on the news of the buyout. I could not fathom why. They may have overpaid what they needed to pay to get it done, but it was going to get done. They were going to pay ¥4trln of debt, and zero equity, to get ¥210-250bn in net income and ¥400bn+ of operating cashflow, presumably for a very long time, in exchange for a relatively low interest rate payment.
Several people contacted me when this was announced and asked whether I was worried about NTT being too indebted. 
My blunt answer to them was that I was not at all worried. This was, in effect, a MAMMOTH BUYBACK and NTT had real estate assets, tower assets, and any number of other hard assets which could be sold or securitized to pay down debt and there was no chance that NTT was going to issue equity. The simple reason why there would be no equity top up was and is that the NTT Law requires that the government hold one-third* of the shares outstanding of NTT and there is no chance that the government is going to be convinced to buy more shares of NTT to maintain their stake. This was pure leverage and pure net income to NTT shareholders. 
* It's a little complicated because there is some weirdness where IPO shares are excluded from the calculation, but it comes VERY close to one-third in practical terms.The NEW NewsOn Friday 6 November NTT released Q2 earnings. They will not overwhelm anyone and there wasn't much talk about what the plans are for synergies at NTT Docomo, but I think that has to be expected because the Tender Offer, while a foregone conclusion in terms of rights, is not even over yet.However I think people STILL do not look at NTT and its results the right way. What we knew Friday? NTT Docomo Inc (9437 JP) OP in Q2 was +8.3%yoy. NTT Data Corp (9613 JP) was up 9.5%yoy. What we did not know was that NTT ex-listed subs OP was up 4.7%yoy. That was better than expected. NTT ex-listed subs OP has continued to grow over the years. The rolling 4Q total is the blue bars below (the red bars are the implied quarterly OP based on consensus OP annual estimates (out to March 2023) for NTT, NTT Docomo and NTT Data backing out NTT ex-listed subs).What was clear from the discussion that NTT led on the day of the announcement of the Tender Offer to buy in minorities of NTT Docomo was that they saw synergies, and they saw lower costs compared to what the Street was expecting. For whatever reason, as will be discussed below, Street consensus for forward years of NTT does not include all of NTT Docomo. And it seems to include no synergies.The OTHER NEW News - A BuybackUp to 120mm shares spending up to ¥250bn from 11 March to 31 March 2021. THAT was unexpected. This deserves a discussion.

Expert on Japan Retail and Consumer Markets, JapanConsuming

Michael Causton

Expert on Japan Retail and Consumer Markets

Real Insight on Japanese Consumer Markets

JapanConsuming

JapanConsuming is a specialist research firm producing intelligence on Japanese retail and consumer markets. Founded in 2000, JapanConsuming has become the leading provider of insights on Japanese retailers and consumer trends to retailers, brands, government agencies and investors. As well as a highly regarded monthly report on the market, JapanConsuming produces in-depth reports on retail sectors, seminars on key trends and telephone consulting to investors on trends and retailers.

JapanConsuming was founded by Michael Causton and Roy Larke. 

Equity Bottom-Up

The convenience store sector (CVS) is Japan’s most successful retail format and one that has now enjoyed almost 50 years of growth. So the sudden and unprecedented sales declines in 2020, caused by so many people staying away from city centres during the pandemic, are an entirely new test for the sector.Temporary blips aside, this leading position is likely to endure a little longer. Even with e-commerce growing faster and likely to over take CVS as the biggest channel by 2025, CVS will take on a prominent role in the fulfilment model used by many e-commerce companies.In the CVS sector itself, Familymart's delisting and new role spearheading Itochu's retail interests will cause ructions in a sector that has reached saturation and where increased competition will force more change and differentiation.The following is an in-depth review of the state of play in Japan's convenience store sector following the absorption of <a href="https://www.smartkarma.com/entities/familymart-co-ltd" target="_blank" data-smartkarma-citation="entities:320:1" rel="noopener">FamilyMart Co Ltd (8028 JP)</a> by <a href="https://www.smartkarma.com/entities/itochu-corp" target="_blank" data-smartkarma-citation="entities:18448:1" rel="noopener">Itochu Corp (8001 JP)</a>. The review includes:<ul>
<li>Full rankings of all convenience stores including sales, stores, market share, key metrics like sales per store per day etc.</li>
<li>Analysis of the current and future prospects of the big three and the outlook for the smaller players – as much targets for the big three than anything else.</li>
<li>Details on e-commerce initiatives (or the lack of them), store coverage, diversification strategies etc.</li>
<li>Updates on the pressure points of the labour shortage and franchisee rebellions.</li>
</ul>This insight provides a complete review of the sector and a clear picture of where convenience stores are headed in the next three years.

The convenience store sector (CVS) is Japan’s most successful retail format and one that has now enjoyed almost 50 years of growth. So the sudden and unprecedented sales declines in 2020, caused by so many people staying away from city centres during the pandemic, are an entirely new test for the sector.Temporary blips aside, this leading position is likely to endure a little longer. Even with e-commerce growing faster and likely to over take CVS as the biggest channel by 2025, CVS will take on a prominent role in the fulfilment model used by many e-commerce companies.In the CVS sector itself, Familymart's delisting and new role spearheading Itochu's retail interests will cause ructions in a sector that has reached saturation and where increased competition will force more change and differentiation.The following is an in-depth review of the state of play in Japan's convenience store sector following the absorption of FamilyMart Co Ltd (8028 JP) by Itochu Corp (8001 JP). The review includes:
Full rankings of all convenience stores including sales, stores, market share, key metrics like sales per store per day etc.
Analysis of the current and future prospects of the big three and the outlook for the smaller players – as much targets for the big three than anything else.
Details on e-commerce initiatives (or the lack of them), store coverage, diversification strategies etc.
Updates on the pressure points of the labour shortage and franchisee rebellions.
This insight provides a complete review of the sector and a clear picture of where convenience stores are headed in the next three years.

Convenience Stores: Diversification and a Fight for Share as Familymart Delists

Telco/Internet specialist

Kirk Boodry

Redex Research

Rakuten provided an update on the mobile business today including the long-awaited introduction of eKYC (know your customer) and further reductions in fees but network coverage remains its largest challenge and this is unlikely to change in the near- to mid-term. The company also announced that 5G services would not be priced at a premium, in-line with campaign pricing from the incumbents and further evidence that the tech cycle upgrade is not going to generate consumer revenue growth.

Rakuten provided an update on the mobile business today including the long-awaited introduction of eKYC (know your customer) and further reductions in fees but network coverage remains its largest challenge and this is unlikely to change in the near- to mid-term. The company also announced that 5G services would not be priced at a premium, in-line with campaign pricing from the incumbents and further evidence that the tech cycle upgrade is not going to generate consumer revenue growth.   

Rakuten - Mobile Update: E-KYC Enables Faster Migration but Network Coverage Challenging

On 30 October, <a href="https://www.smartkarma.com/entities/kddi-corp" target="_blank" data-smartkarma-citation="entities:639:1" rel="noopener">KDDI Corp (9433 JP)</a> announced its Q2 earnings and <a href="https://www.smartkarma.com/profiles/kirk-boodry" target="_blank" data-smartkarma-citation="accounts:1920" rel="noopener">Kirk Boodry</a> ably takes an initial crack at them in <a href="https://www.smartkarma.com/insights/kddi-q2-20-results-embracing-the-industry-s-new-look" target="_blank" data-smartkarma-citation="insights:44747" rel="noopener">KDDI - Q2 20 Results: Embracing the Industry’s New Look</a>.The big news of the day was that KDDI <a href="https://news.kddi.com/kddi/corporate/english/ir-news/2020/10/30/4757.html" target="_blank" rel="noopener">announced</a> a ¥200bn buyback. This is big for a couple of reasons. <ol>
<li>This is the first telco buyback in Japan announced since the administration changed. The pressure exerted by and to be exerted by the new Suga administration to lower costs to consumers (and therefore pressure returns to shareholders) is not seen as being great enough to not buy back shares. </li>
<li>Other than Softbank, which also announced buybacks (having sold significant assets) after covid-19 became a problem, this is a significantly large buyback among Japanese corporations.</li>
<li>This continues KDDI's trend of buying back large amounts of stock for a fifth year in a row.</li>
</ol>The buyback was accompanied by <a href="https://www.kddi.com/extlib/files/english/corporate/ir/library/presentation/2021/pdf/kddi_201030_e_statement_full_xzE6ba.pdf" target="_blank" rel="noopener">slightly-ahead-of-consensus earnings</a> (and no change in full-year guidance) and a planned <a href="https://news.kddi.com/kddi/corporate/english/ir-news/2020/10/30/4756.html" target="_blank" rel="noopener">share placement</a> to <a href="https://www.smartkarma.com/entities/toyota-motor-corp" target="_blank" data-smartkarma-citation="entities:73:1" rel="noopener">Toyota Motor (7203 JP)</a> of 18.3mm shares for ¥52.2bn to further promote the relationship, create a <a href="https://news.kddi.com/kddi/corporate/english/ir-news/2020/10/30/4755.html" target="_blank" rel="noopener">business alliance</a>, and further R&amp;D into next-gen connected cars and more, shown on p16 of the <a href="https://www.kddi.com/extlib/files/english/corporate/ir/library/presentation/2021/pdf/kddi_201030_e_main_S7bBS2.pdf" target="_blank" rel="noopener">Q2 presentation</a>. Toyota, of course, has been one of KDDI's largest shareholders since KDDI was formed from the three-way merger of KDDI, IDO, and Dai-Ni Denden twenty years ago. <div class="content-highlight">
Below I look at the share buyback dynamics. 
In this case, the buyback is about 8-9% of ADV over the expected buyback period. The impact on volume during the day, however, is different, and buyback programmes change the VWAP curve, sometimes significantly. 
As a result, it is worth understanding the impact against float and investor positioning, and it may be worth altering execution strategy during the buyback period to take advantage of the impact on the VWAP curve.
</div>

On 30 October, KDDI Corp (9433 JP) announced its Q2 earnings and Kirk Boodry ably takes an initial crack at them in KDDI - Q2 20 Results: Embracing the Industry’s New Look.The big news of the day was that KDDI announced a ¥200bn buyback. This is big for a couple of reasons. 
This is the first telco buyback in Japan announced since the administration changed. The pressure exerted by and to be exerted by the new Suga administration to lower costs to consumers (and therefore pressure returns to shareholders) is not seen as being great enough to not buy back shares. 
Other than Softbank, which also announced buybacks (having sold significant assets) after covid-19 became a problem, this is a significantly large buyback among Japanese corporations.
This continues KDDI's trend of buying back large amounts of stock for a fifth year in a row.
The buyback was accompanied by slightly-ahead-of-consensus earnings (and no change in full-year guidance) and a planned share placement to Toyota Motor (7203 JP) of 18.3mm shares for ¥52.2bn to further promote the relationship, create a business alliance, and further R&amp;D into next-gen connected cars and more, shown on p16 of the Q2 presentation. Toyota, of course, has been one of KDDI's largest shareholders since KDDI was formed from the three-way merger of KDDI, IDO, and Dai-Ni Denden twenty years ago. 
Below I look at the share buyback dynamics. 
In this case, the buyback is about 8-9% of ADV over the expected buyback period. The impact on volume during the day, however, is different, and buyback programmes change the VWAP curve, sometimes significantly. 
As a result, it is worth understanding the impact against float and investor positioning, and it may be worth altering execution strategy during the buyback period to take advantage of the impact on the VWAP curve.


This was an interesting (and busy) report. KDDI addressed recent industry trends like new revenue streams (Toyota agreement), regulatory change (a new, eSIM focused MVNO), and new technology (all 5G handset lineup). Meanwhile, confirmation it will buy back shares (c. ¥150bn net) boosts its shareholder return profile vs NTT and signals regulatory pressure is easing. As with DoCoMo, user churn was near record lows highlighting the relatively soft impact from Rakuten’s network launch on the incumbents.

This was an interesting (and busy) report. KDDI addressed recent industry trends like new revenue streams (Toyota agreement), regulatory change (a new, eSIM focused MVNO), and new technology (all 5G handset lineup). Meanwhile, confirmation it will buy back shares (c. ¥150bn net) boosts its shareholder return profile vs NTT and signals regulatory pressure is easing. As with DoCoMo, user churn was near record lows highlighting the relatively soft impact from Rakuten’s network launch on the incumbents.  

KDDI - Q2 20 Results: Embracing the Industry’s New Look

Japan

KDDI CORPORATION provides mobile communication services and sells mobile devices.  The Company also is a broadband provider.

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KDDI Corp (9433 JP)

NTT - Go Big Or Go Home

Hot on the heels of announcing a $40bn buyout of Docomo minorities - effectively a giant buyback - NTT announced a buyback of its own stock. It...

Travis Lundy

Rakuten - Mobile Update: E-KYC Enables Faster Migration but Network Coverage Challenging

Rakuten provided an update on the mobile business including the launch of eKYC functionality but comments on network coverage clearly show this...

Kirk Boodry

New KDDI (9433 JP) Buyback Dynamics

KDDI has announced earnings, a new strategic tieup with Toyota, and a buyback to continue its now 5-year tradition. It is 8% of ADV for 7 months,...

Travis Lundy

KDDI - Q2 20 Results: Embracing the Industry’s New Look

At Q2 results, KDDI addressed recent industry trends like new revenue streams, regulatory change, and new technology. A share buyback boosts...

Kirk Boodry

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52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)

NTT - Go Big Or Go Home

Hot on the heels of announcing a $40bn buyout of Docomo minorities - effectively a giant buyback - NTT announced a buyback of its own stock. It...

Travis Lundy

Convenience Stores: Diversification and a Fight for Share as Familymart Delists

If you are looking for a full in-depth review and analysis of Japan's convenience stores sector and how things will shape up now that Familymart is...

Michael Causton

Rakuten - Mobile Update: E-KYC Enables Faster Migration but Network Coverage Challenging

Rakuten provided an update on the mobile business including the launch of eKYC functionality but comments on network coverage clearly show this...

Kirk Boodry

New KDDI (9433 JP) Buyback Dynamics

KDDI has announced earnings, a new strategic tieup with Toyota, and a buyback to continue its now 5-year tradition. It is 8% of ADV for 7 months,...

Travis Lundy

KDDI - Q2 20 Results: Embracing the Industry’s New Look

At Q2 results, KDDI addressed recent industry trends like new revenue streams, regulatory change, and new technology. A share buyback boosts...

Kirk Boodry