Japan/Asia Long-Short, LightStream Research

Mio Kato

Japan/Asia Long-Short

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.

Thematic (Sector/Industry)

<p>With earnings season coming to a close, content was lighter this week in Japan and Korea. Douglas and Sanghyun provided coverage on the upcoming IPOs of CTK Cosmetics and Jin Air respectively. Meanwhile in Japan, Mio and ZZ covered Sosei's secondary offering, Travis continues to root out underpriced acquisitions with Kenedix Residential Investment the culprit this week, SC Capital examines Sharp's squeeziness, and Thomas Schroeder and Peter Beuttell get all bulled up on Japan's technical picture.</p><h2></h2><div class="content-highlight"><h2>Japan</h2></div><h2>Kenedix Residential Investment Acquisition of Japan Senior Living Investment too Cheap?</h2><p><a href="https://www.smartkarma.com/insights/small-j-reit-merger-small-guy-gets-the-stick-again" target="_blank" data-smartkarma-citation="insights:15251">Small J-REIT Merger - Small Guy Gets The Stick. Again.</a> sees <a href="https://www.smartkarma.com/profiles/25" target="_blank" data-smartkarma-citation="accounts:25">Travis Lundy</a> once again pointing out another lowball acquisition in Japan. Travis points out that while the 0.5 ratio (of <a href="https://www.smartkarma.com/entities/17149" target="_blank" data-smartkarma-citation="entities:17149:1">Kenedix Residential Investment (3278 JP)</a> to <a href="https://www.smartkarma.com/entities/26024" target="_blank" data-smartkarma-citation="entities:26024:1">Japan Senior Living Investment (3460 JP)</a>) comes out in line with advisor calculated ratios and dividend per unit ratios, the ratio of net assets per unit comes close to 0.79. With about 30% of shares held by shareholders with foreign "influence" (by Travis' calculations) and 40% held by retail, Travis feels the deal is likely to go through but with a 4.7-4.8%% dividend yield, he considers a long position in Japan Senior Living to be worth a look although agitation for a higher price will need to be done swiftly with the 30 Nov record date approaching quickly.</p><h2>Nikon Restructuring Driving Share Price Surge</h2><p><a href="https://www.smartkarma.com/profiles/1134" target="_blank" data-smartkarma-citation="accounts:1134">Scott Foster</a> provides an update in <a href="https://www.smartkarma.com/insights/nikon-7731-jp-restructuring-takes-hold-share-price-at-4-year-high" target="_blank" data-smartkarma-citation="insights:15249">Nikon (7731 JP): Restructuring Takes Hold, Share Price at 4-Year High</a>, seeing his restructuring thesis play out as the company's monopoly in 10.5G FPD lithography systems and restructuring of IC lithography and lower end digital camera businesses starts to bear fruit. The company's scalable multi-lens technology generates a 40% OPM and shipments of 10.5G systems are expected to quintuple to 15 units next year helping drive Scott's expected increase in consolidated OPM to 10%.</p><h2>Bullish Technical Picture for Japan</h2><p><a href="https://www.smartkarma.com/profiles/381" target="_blank" data-smartkarma-citation="accounts:381">Thomas Schroeder</a> has been pounding the table on Japan, catching the recent upsurge in a very timely manner and continues to be bullish. In <a href="https://www.smartkarma.com/insights/nikkei-mushroom-part-2-buy-back-levels" target="_blank" data-smartkarma-citation="insights:15350">Nikkei Mushroom Part 2 - Buy Back Levels</a>, have reduced exposure on the short term overbought status he outlines buy levels for some of his key picks such as <a href="https://www.smartkarma.com/entities/14726" target="_blank" data-smartkarma-citation="entities:14726:1">Isuzu Motors Ltd (7202 JP)</a>, <a href="https://www.smartkarma.com/entities/22772" target="_blank" data-smartkarma-citation="entities:22772:1">LINE Corp (3938 JP)</a>, <a href="https://www.smartkarma.com/entities/752" target="_blank" data-smartkarma-citation="entities:752:1">Fanuc Corp (6954 JP)</a> and <a href="https://www.smartkarma.com/entities/315" target="_blank" data-smartkarma-citation="entities:315:1">Softbank Group Corp (9984 JP)</a>. We recommend reviewing his insight as well as the accompanying webcast where his thoughts are outlined in a very clear manner.</p><p>In addition to his old favourites, Thomas also highlight another name that we like in  <a href="https://www.smartkarma.com/insights/chiyoda-corp-bullish-lift-off" target="_blank" data-smartkarma-citation="insights:15268">Chiyoda Corp Bullish Lift Off</a>. Thomas highlights bullish long term MACD divergence and outlines his ideal buy zone (just below current levels) and a series of upside price targets leading all the way up to JPY1,250-1,280 which would imply almost 100% upside.</p><p>Fellow technical analyst <a href="https://www.smartkarma.com/profiles/1821" target="_blank" data-smartkarma-citation="accounts:1821">Peter Beuttell</a> likes another one of our favourite names,  <a href="https://www.smartkarma.com/entities/13176" target="_blank" data-smartkarma-citation="entities:13176:1">Nabtesco Corp (6268 JP)</a>. In <a href="https://www.smartkarma.com/insights/nabtesco-another-25-outperformance-to-come" target="_blank" data-smartkarma-citation="insights:15430">Nabtesco - Another 25%+ Outperformance to Come</a>, Peter analyses Nabtesco's performance relative to topix, concluding that its recent breakout of a 5 year head and shoulders pattern could lift the stock to a 3.14 relative ratio to Topix implying about 25% upside.</p><h2>Sosei Secondary Offered Entry Opportunity into Unique Drug Developer</h2><p><a href="https://www.smartkarma.com/entities/770" target="_blank" data-smartkarma-citation="entities:770:1">Sosei Group Corp (4565 JP)</a> which announced a secondary offering last week appears to be gaining investor interest as the share price recovers from a one and a half year slide. <a href="https://www.smartkarma.com/profiles/713" target="_blank" data-smartkarma-citation="accounts:713">Mio Kato, CFA</a> provided background on the company in <a href="https://www.smartkarma.com/insights/sosei-offering-company-history-earnings-structure-business-model-and-use-of-proceeds" target="_blank" data-smartkarma-citation="insights:15381">Sosei Offering: Company History, Earnings Structure, Business Model and Use of Proceeds</a> while <a href="https://www.smartkarma.com/profiles/673" target="_blank" data-smartkarma-citation="accounts:673">Toh Zhen Zhou</a> followed up with a recommendation to take the deal at its 4-6% discount in <a href="https://www.smartkarma.com/insights/sosei-placement-one-year-return-for-its-2015-equity-raise-was-354" target="_blank" data-smartkarma-citation="insights:15401">Sosei Placement - One-Year Return for Its 2015 Equity Raise Was 354%</a>.</p><p>With the company having acquired strong drug development capability in the form of Heptares in 2015 and gearing up for the launch of its first solo drug, the company could be on the verge of starting to display its full potential. Earnings are likely to continue to be volatile in the near term but even for those not involved in the deal, we believe that the company is worth a look as a rather unique opportunity in Japan and one with significant upside potential given its large pipeline of drugs, strong partners and foray into commercialising drugs on its own.</p><h2>Sharp Squeeze in Sharp?</h2><p><a href="https://www.smartkarma.com/profiles/914" target="_blank" data-smartkarma-citation="accounts:914">SC Capital</a> continues the Smartkarma coverage of the potential move of <a href="https://www.smartkarma.com/entities/391" target="_blank" data-smartkarma-citation="entities:391:1">Sharp Corp (6753 JP)</a> to the first section of the TSE in <a href="https://www.smartkarma.com/insights/sharp-6753-ready-to-list-on-tse-1st-section-could-get-squeezy" target="_blank" data-smartkarma-citation="insights:15392">Sharp (6753) Ready to List on TSE 1st Section--Could Get Squeezy</a>. SC Capital has calculated potential volume to buy as up to 25.5 days of 30 day ADV with 10.5 days of passive buying and up to 19.3 days of short covering offset by 4.2 days of buying from Daiwa PI. He notes that there is a risk that the broker estimates of about 94% of borrow being utilised could be wrong and that dilution from Hon Hai's preferred shares, while unlikely near term, should be accounted for. In the comments, SC Capital discusses recalls of borrow and lending rates going as high as 27%.</p><div class="content-highlight"><h2>Korea</h2></div><h2>Should CTK Cosmetics Trade at a Premium due to High Operational Efficiency?</h2><p>In <a href="https://www.smartkarma.com/insights/ctk-cosmetics-part-2-valuation-analysis-biggest-korean-cosmetics-ipo-in-2017" target="_blank" data-smartkarma-citation="insights:15239">CTK Cosmetics (Part 2) Valuation Analysis - Biggest Korean Cosmetics IPO in 2017</a><a href="https://www.smartkarma.com/profiles/342" target="_blank" data-smartkarma-citation="accounts:342">Douglas Kim</a> argues for a premium valuation for CTK Cosmetics due to its high RoE and profit margins as well as its ability to acquire global leaders such as Estee Lauder, Christian Dior, Chanel and L'Oreal as customers. Douglas calculates potentially 25% upside to the high end of the IPO range at a 27.6x PE multiple (compared to a peer average of 23x). Douglas points out that CTK Cosmetics enjoys an RoE of 42% and OPM of 27.3% compared to its peers which average 11.9% and 8.1% respectively. Thus he believes that a 20% premium for its PE multiple is warranted.</p><h2>Comparing Jin Air and Jeju Air</h2><p>In <a href="https://www.smartkarma.com/insights/jin-air-ipo-valuation-study" target="_blank" data-smartkarma-citation="insights:15253">Jin Air IPO Valuation Study</a>, <a href="https://www.smartkarma.com/profiles/354" target="_blank" data-smartkarma-citation="accounts:354">Sanghyun Park</a> eschews the 6 company peer group used by bankers to focus on the relative merits and demerits of the company compared to <a href="https://www.smartkarma.com/entities/26027" target="_blank" data-smartkarma-citation="entities:26027:1">Jeju Air Co., Ltd. (089590 KS)</a> which Sanghyun considers the only truly suitable peer. He notes that the companies are almost the same size and display similar levels of operating profitability, while operating a relatively similar fleet with both LCCs mainly utilising the 787, Jin Air also operates some 777s.</p><p>Where Sanghyun sees a difference is in the growth rates of the two companies with Jin Air growing revenue 185% over four years while Jeju Air only managed 95%. He also points out that while Jin Air appears financially weaker, this is largely due to using finance leases for a number whereas Jeju Air uses only operating leases. Going into these details, Sanghyun concludes that Jin Air deserves a premium vs. Jeju Air and recommends that investors be more aggressive and bet on the high end of this IPO.</p>

With earnings season coming to a close, content was lighter this week in Japan and Korea. Douglas and Sanghyun provided coverage on the upcoming IPOs of CTK Cosmetics and Jin Air respectively. Meanwhile in Japan, Mio and ZZ covered Sosei's secondary offering, Travis continues to root out underpriced acquisitions with Kenedix Residential Investment the culprit this week, SC Capital examines Sharp's squeeziness, and Thomas Schroeder and Peter Beuttell get all bulled up on Japan's technical picture.JapanKenedix Residential Investment Acquisition of Japan Senior Living Investment too Cheap?Small J-REIT Merger - Small Guy Gets The Stick. Again. sees Travis Lundy once again pointing out another lowball acquisition in Japan. Travis points out that while the 0.5 ratio (of Kenedix Residential Investment (3278 JP) to Japan Senior Living Investment (3460 JP)) comes out in line with advisor calculated ratios and dividend per unit ratios, the ratio of net assets per unit comes close to 0.79. With about 30% of shares held by shareholders with foreign "influence" (by Travis' calculations) and 40% held by retail, Travis feels the deal is likely to go through but with a 4.7-4.8%% dividend yield, he considers a long position in Japan Senior Living to be worth a look although agitation for a higher price will need to be done swiftly with the 30 Nov record date approaching quickly.Nikon Restructuring Driving Share Price SurgeScott Foster provides an update in Nikon (7731 JP): Restructuring Takes Hold, Share Price at 4-Year High, seeing his restructuring thesis play out as the company's monopoly in 10.5G FPD lithography systems and restructuring of IC lithography and lower end digital camera businesses starts to bear fruit. The company's scalable multi-lens technology generates a 40% OPM and shipments of 10.5G systems are expected to quintuple to 15 units next year helping drive Scott's expected increase in consolidated OPM to 10%.Bullish Technical Picture for JapanThomas Schroeder has been pounding the table on Japan, catching the recent upsurge in a very timely manner and continues to be bullish. In Nikkei Mushroom Part 2 - Buy Back Levels, have reduced exposure on the short term overbought status he outlines buy levels for some of his key picks such as Isuzu Motors Ltd (7202 JP), LINE Corp (3938 JP), Fanuc Corp (6954 JP) and Softbank Group Corp (9984 JP). We recommend reviewing his insight as well as the accompanying webcast where his thoughts are outlined in a very clear manner.In addition to his old favourites, Thomas also highlight another name that we like in  Chiyoda Corp Bullish Lift Off. Thomas highlights bullish long term MACD divergence and outlines his ideal buy zone (just below current levels) and a series of upside price targets leading all the way up to JPY1,250-1,280 which would imply almost 100% upside.Fellow technical analyst Peter Beuttell likes another one of our favourite names,  Nabtesco Corp (6268 JP). In Nabtesco - Another 25%+ Outperformance to Come, Peter analyses Nabtesco's performance relative to topix, concluding that its recent breakout of a 5 year head and shoulders pattern could lift the stock to a 3.14 relative ratio to Topix implying about 25% upside.Sosei Secondary Offered Entry Opportunity into Unique Drug DeveloperSosei Group Corp (4565 JP) which announced a secondary offering last week appears to be gaining investor interest as the share price recovers from a one and a half year slide. Mio Kato, CFA provided background on the company in Sosei Offering: Company History, Earnings Structure, Business Model and Use of Proceeds while Toh Zhen Zhou followed up with a recommendation to take the deal at its 4-6% discount in Sosei Placement - One-Year Return for Its 2015 Equity Raise Was 354%.With the company having acquired strong drug development capability in the form of Heptares in 2015 and gearing up for the launch of its first solo drug, the company could be on the verge of starting to display its full potential. Earnings are likely to continue to be volatile in the near term but even for those not involved in the deal, we believe that the company is worth a look as a rather unique opportunity in Japan and one with significant upside potential given its large pipeline of drugs, strong partners and foray into commercialising drugs on its own.Sharp Squeeze in Sharp?SC Capital continues the Smartkarma coverage of the potential move of Sharp Corp (6753 JP) to the first section of the TSE in Sharp (6753) Ready to List on TSE 1st Section--Could Get Squeezy. SC Capital has calculated potential volume to buy as up to 25.5 days of 30 day ADV with 10.5 days of passive buying and up to 19.3 days of short covering offset by 4.2 days of buying from Daiwa PI. He notes that there is a risk that the broker estimates of about 94% of borrow being utilised could be wrong and that dilution from Hon Hai's preferred shares, while unlikely near term, should be accounted for. In the comments, SC Capital discusses recalls of borrow and lending rates going as high as 27%.KoreaShould CTK Cosmetics Trade at a Premium due to High Operational Efficiency?In CTK Cosmetics (Part 2) Valuation Analysis - Biggest Korean Cosmetics IPO in 2017Douglas Kim argues for a premium valuation for CTK Cosmetics due to its high RoE and profit margins as well as its ability to acquire global leaders such as Estee Lauder, Christian Dior, Chanel and L'Oreal as customers. Douglas calculates potentially 25% upside to the high end of the IPO range at a 27.6x PE multiple (compared to a peer average of 23x). Douglas points out that CTK Cosmetics enjoys an RoE of 42% and OPM of 27.3% compared to its peers which average 11.9% and 8.1% respectively. Thus he believes that a 20% premium for its PE multiple is warranted.Comparing Jin Air and Jeju AirIn Jin Air IPO Valuation Study, Sanghyun Park eschews the 6 company peer group used by bankers to focus on the relative merits and demerits of the company compared to Jeju Air Co., Ltd. (089590 KS) which Sanghyun considers the only truly suitable peer. He notes that the companies are almost the same size and display similar levels of operating profitability, while operating a relatively similar fleet with both LCCs mainly utilising the 787, Jin Air also operates some 777s.Where Sanghyun sees a difference is in the growth rates of the two companies with Jin Air growing revenue 185% over four years while Jeju Air only managed 95%. He also points out that while Jin Air appears financially weaker, this is largely due to using finance leases for a number whereas Jeju Air uses only operating leases. Going into these details, Sanghyun concludes that Jin Air deserves a premium vs. Jeju Air and recommends that investors be more aggressive and bet on the high end of this IPO.

The Week That Was in NorthAsia@Smartkarma: Japan Technical Bulls, Sosei & Jin Air/CTK Cosmetics IPOs

Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

Japan Senior Living Investment / Event-Driven

<p>On the 11th of November after the close, J-REITs <a href="https://www.smartkarma.com/entities/17149" target="_blank" data-smartkarma-citation="entities:17149:1">Kenedix Residential Investment (3278 JP)</a> ("KDR") and <a href="https://www.smartkarma.com/entities/26024" target="_blank" data-smartkarma-citation="entities:26024:1">Japan Senior Living Investment (3460 JP)</a> ("JSL") (US$100mm market cap) <a href="http://www.kdr-reit.com/english/news/20171110_Notice%20of%20Conclusion%20of%20Merger%20Agreement.pdf" target="_blank">announced</a> the two REITs boards had agreed on an absorption-type merger as of March 1st 2018 - a scant 3.5 months away - whereby KDR will issue shares to JSL shareholders.</p><p>KDR was originally a resi-only REIT, but earlier this year expanded its mandate to include hotels because of anexpected increase in foreign visitors in…</p>

On the 11th of November after the close, J-REITs Kenedix Residential Investment (3278 JP) ("KDR") and Japan Senior Living Investment (3460 JP) ("JSL") (US$100mm market cap) announced the two REITs boards had agreed on an absorption-type merger as of March 1st 2018 - a scant 3.5 months away - whereby KDR will issue shares to JSL shareholders.KDR was originally a resi-only REIT, but earlier this year expanded its mandate to include hotels because of anexpected increase in foreign visitors in…

Small J-REIT Merger - Small Guy Gets The Stick. Again.

Japan

Kenedix Residential Investment Corporation is a real estate investment trust. The company invests in residential properties such as apartment buildings.

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Kenedix Residential Investment (3278 JP)

The Week That Was in NorthAsia@Smartkarma: Japan Technical Bulls, Sosei & Jin Air/CTK Cosmetics IPOs

With earnings season coming to a close, content was lighter this week in Japan and Korea. Douglas and Sanghyun provided coverage on the upcoming...

Mio Kato

Small J-REIT Merger - Small Guy Gets The Stick. Again.

On the 11th of November after the close, J-REITs Kenedix Residential Investment (3278 JP) ("KDR") and Japan Senior Living Investment (3460 JP)...

Travis Lundy

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