'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. 

Cross Asset Strategy

TW3 NORTH ASIA 22-27 JUNESmartkarma's North Asian Insight providers produced 28 new Insights this week, mostly focused on a deluge of 'events' and the start of the, mostly first quarter, earnings announcements. The tone was overwhelmingly 'bullish' with only six 'bearish' notes, despite the weaker trends in earnings and the simmering trade and reparation disputes between the two nations.EVENT - DRIVEN

Sanghyun Park provides summaries of the rumour mills surrounding Naver Corp (035420 KS), the Naver Financial offering, Jieum and the possible diminution of LINE (3938 JP)'s role in the evolution of the group as well as the potential for  SK Telecom (017670 KS) to acquire the Asiana group companies and the resulting conversion of SKT into a holding company.

Travis Lundy and LightStream Research noted the 'short squeeze' taking place following Chiyoda Corp (6366 JP)'s removal from the Nikkei 225 (NKY INDEX) - the shares rose by 8.7% over the week.
Travis also covered three highly-unusual contested and hostile 'J-on-J" corporate actions currently unfolding. One 'white knight' has already emerged, while another two could be appearing over the horizon - a busy time for Japan's IBs:- 

Askul/Yahoo Japan -  Askul has accused YJ of lying as to its intentions surrounding the future of their JV company LOHACO and their move to have Askul's CEO dismissed - Askul has requested a dissolution of their tie-up and could be seeking a white knight

UNIZO/HIS - UNIZO has, so far, been unable to respond in writing to HIS's Tender Offer of 11th July and requires 'more information' from the Offeror. UNIZO in buying some more time is likely to be preparing a revised RNAV and probably also seeking a white knight given HIS's lack of real estate chops.

Star Asia/Sakura Sogo REIT/Mirai - This J-REIT 'event' is already a 'threesome' however the lack of any merger terms, the nonsense of the potential for abuse in the 'Deemed Approval' of non-voting shareholders and the blatant self-interest of the Sakura Soo sponsors are further glaring lacunae in Japanese corporate governance (sic)


The Asahi Group (2502 JP) acquisition of ABInBev's Australian operation CUB was deemed positive and value accretive by LightStream Research but Arun George points out that the price already factors in ambitious targets for further share gains.
Lastly, Travis Lundy recommends buying the Sanyo Chemical (4471 JP)  / Nippon Shokubai (4114 JP) 'ratio' with upsides ranging from 7% to 34%, while LightStream Research continue to applaud Denso Corp (6902 JP) further moves into autonomous driving after establishing a chip JV with Toyota Motor (7203 JP).
EQUITY BOTTOM-UP    

Douglas Kim explores the three catalysts driving Hite Jinro (000080 KS) at present - a beneficiary of the South Korean boycott of all things Japanese and then correlates Samsung Electronics (SMSD LI) with trends in US bond markets and reaches a bearish conclusion

LightStream Research thinks Money Forward (3994 JP)'s new pricing plan will result in 45% three-year annual compound revenue growth which would take the company to breakeven but would wait before investing.

Kirk Boodry looks at Softbank Group (9984 JP)'s Vision Fund II, while Michael Causton surveys the task ahead for Fast Retailing (9983 JP)'s new and first female CEO and new stores opening in Shibuya and Shinsaibashi for J Front Retailing (3086 JP)

 Lastly, J. Brian Waterhouse looks at the beleaguered Fukushima Bank (8562 JP) whose largest shareholder is another listed company - Prospect Co Ltd (3528 JP) - although they are classified as a 'foreign' shareholder as the shares were originally held in the Prospect Japan Fund which has now been acquired by Prospect
 RESULTS COMMENTARY

LightStream Research maintains their bullish recommendations on both Shin Etsu Chemical (4063 JP) and Nidec (6594 JP), despite the latter's 'underwhelming' results, while also 'staying loyal to Nissan Motor (7201 JP) as they steer well clear of a Renault SA (RNO FP)-led future. They consider Toyota Motor (7203 JP) as they clear leader in the global auto industry.

Douglas Kim updated us on Naver Corp (035420 KS)'s second quarter and reviewed the Naver Financial spin-off and concludes that 'things are looking up' for the company and the CEO, Han Seong-Sook.
Bearish notes appeared from Kirk Boodry on NTT Docomo Inc (9437 JP) (although he views Docomo's woes as good news for rivals KDDI Corp (9433 JP) and Softbank Group (9984 JP), while Scott Foster highlights the potential 20% downside risk in Keyence (6861 JP) whose first-quarter results sale the first downturn in sales and profits since 2010.
THEMATIC &amp; STRATEGYA somewhat prolific week for Douglas Kim saw him round off with two strategy notes, the first a bullish Insight on Korean telecom companies in light of the rollout of 5G and a reminder that the likely date for the announcement of Sout Korea's exclusion from Japan's 'whitelist' of preferred trading counterparties will be between August 2nd and August 9th. He remains pessimistic on the outlook for the Korean market.      EVENT DRIVEN: BULLISHSanyo Chem - Nippon Shokubai Merger Ratio Is a BUY ASKUL vs Yahoo Japan - Receipts Provided LINE, Naver &amp; LHJ's Jieum: Local Speculations SKT's Asiana Takeover &amp; Intermediate Holdco Conversion Timeframe Chiyoda: Squeeze Coming Through Chiyoda in Full Squeeze - For Now Another Move by Denso to Accelerate Its ADAS Game Asahi to Acquire Carlton &amp; United Breweries: Positive for Asahi Not so for AB InBev UNIZO Board Statement on HIS Tender - No Opinion Yet Naver Financial ECO: Meaning for LINE EVENT DRIVEN: BEARISHAsahi Group: The Acquisition and the Hangover Sakura Sogo/Mirai: White Knight Guess The Ratio Isn't Easy PickingsEQUITY BOTTOM-UP: BULLISHHiteJinro: 3 Catalysts - Japanese Beer Boycott, Soju Price Increase, &amp; "Tesla" The Drink Money Forward’s New Pricing Plan Could Be Its First Step in the Path to Profitability Softbank Group: Another Step Closer to Vision Fund 2 Uniqlo’s First Female CEO Gets the Job of Managing the Cull of Stores at Home J Front Retailing Aims High with New Builds in Shibuya and Shinsaibashi EQUITY BOTTOM-UP: BEARISHKOSPI Vs. Samsung Electronics at Different Stages of the Bond Yield Differentials Fukushima Bank (8562 JP) - Living on the EdgeRESULTS COMMENTARY:  BULLISHNidec: Underwhelming 1Q But OP Recovery in PlaceNaver - The Spin-Off of Naver Financial Business &amp; Major Highlights of 2Q19 Results Shin-Etsu: Solid Growth in Semiconductor Silicon Despite Declining Memory Market Nissan: Nissan Taking Its Medicine Is Making Toyota Healthier MonotaRO (3064 JP): 1H Results on Track, but Margins Declining RESULTS COMMENTARY:  BEARISHDoCoMo Q1 19 - New Tariffs Impact Profit/User Interest Low/Good for KDDI &amp; Softbank Keyence (6861 JP): Downturn Confirmed THEMATIC &amp; STRATEGY: BULLISHThe 5G Service Rollout Update &amp; Earnings Preview of Korean Telcos in 2Q19 THEMATIC &amp; STRATEGY: BEARISHExclusion of South Korea from Japan's "Whitelist" Of Countries: D-Day - August 2nd? 

🇰🇷🇯🇵 That Was The Week That Was • North Asia 22nd-27th July 2019 @Smartkarma

Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

On May 10th this year, a fund called Lion Partners which is part of the Star Asia Group announced a proposal to merge <a href="https://www.smartkarma.com/entities/star-asia-investment-corp" target="_blank" data-smartkarma-citation="entities:24040:1" rel="noopener">Star Asia Investment (3468 JP)</a> ("Star Asia" or "SAR") with <a href="https://www.smartkarma.com/entities/sakura-sogo-reit" target="_blank" data-smartkarma-citation="entities:23566:1" rel="noopener">Sakura Sogo REIT (3473 JP)</a> ("SSR") to improve its management and governance. Lion Partners - associated with the sponsors of Star Asia Investment - was at the time, and remains, one of the larger shareholders of the Sakura Sogo REIT at roughly 3.6% of units outstanding. 
The <a href="http://starasiamanagement.com/en/file/190510.pdf" target="_blank" rel="noopener">document</a> notes that SSR had lowered its forecast for the year to Dec 2018 from ¥2700 to ¥2600 because it sold properties resulting in a decline in revenues. The REIT did not distribute those monies to unitholders, and instead tried and failed at a follow-on offering. Due to tenant departures, SSR has now lowered its DPU forecast for fiscal period Dec 2019 to ¥2427, which is a 10% decline from the initial forecast.
Since listing, SSR has executed no follow-on offerings and only one property purchase (against two sales) leaving declining AUM, higher-than average management fees, and the manager has taken property sale fees despite AUM dropping.
Star Asia/Lion Partners proposed a merger with Star Asia Group which is roughly 60% larger, to see a higher and more stable DPU, a pattern of expansion, lower management fees and lower average interest rates on debt, and governance which is aligned between unitholder and manager.
No terms were noted. 
Instead, Star Asia called for an EGM which would take place in July 2019 to change the Executive Director of the REIT and to change the Asset Manager of the REIT to Star Asia. The managers of the two REITs (SSR and SAR) would then conduct negotiations to come up with a win-win situation for the unitholders of both REITs, targeting a merger agreement in Sep 2019, unitholder meetings to approve afterwards, and a merger executed in about Feb 2020. 
One week later, Sakura Sogo REIT <a href="http://sakurasogoreit.com/file/en-news-e4c8bfda1488fa634f8eb865a83e1383a76e8536.pdf" target="_blank" rel="noopener">responded</a> and noted that all this had been done with "no request for discussion, consultation or negotiation for a proposed merger prior to their request for an extraordinary unitholders’ meeting." Based on that, SSR assigned a bad intention to SAR. That assignment of bad intention on the part of SAR continued through the document and SSR denied their request for an EGM.
If that weren't clear, they offered a <a href="http://sakurasogoreit.com/file/en-news-ac7441881b965412c0b3c8972ae1022b1e0b00b6.pdf" target="_blank" rel="noopener">presentation deck</a> to go with it. The first page showed how things were going to go:
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/093/955/original/Screenshot%202019-07-24%20at%205.55.13%20PM.png?1564015249" class="editor-image img-responsive" data-smartkarma-image-id="93955"></figure>

It continues on for a few pages and does not get any friendlier than that. There is zero pretext in the document issued seven days after the Star Asia proposal for anything other than blasting Star Asia. 
A week after that, SSR issued a <a href="http://sakurasogoreit.com/file/en-news-057fbdb16097ac7bb90def5d4e354cb6c9ffbd49.pdf" target="_blank" rel="noopener">Further Rebuttal</a>. In this Further Rebuttal presentation, SSR explains why the proposal is deemed hostile and abusive. It is in large part because of the "Deemed Approval" system. 
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/093/954/original/Screenshot%202019-07-24%20at%206.12.45%20PM.png?1564015221" class="editor-image img-responsive" data-smartkarma-image-id="93954"></figure>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/093/956/original/Screenshot%202019-07-24%20at%206.12.59%20PM.png?1564015261" class="editor-image img-responsive" data-smartkarma-image-id="93956"></figure>

<div class="content-highlight">
SSR suggests that the process of asking for an EGM is abusive to shareholders. Why?
<ul>
<li>By holding an EGM to change a director and manager, and subsequently pursuing negotiations to merge with SAR, there would be no alternative options remaining for Sakura unitholders.</li>
<li>The election of directors and choice of management company would effectively define what merger and merger terms came afterward.</li>
<li>Sakura unitholders would then have an EGM to decide a merger by two-thirds approval and they would have no alternative other than to accept a forced merger irrespective of terms.</li>
</ul>
To top it off, SAR had the audacity to propose this without providing proposed merger terms.
</div>
Sakura Sogo REIT management has a point to make here. 
But it isn't the one they think they are making.
<div class="content-highlight">
The "Deemed Approval" system is one of the abominations of the legal framework of Japan investment corporations including Japan REITs which means that if a proposal is made, any unitholder not voting is deemed to have voted for the proposal. 
Star Asia owns 3.6%. If 50% of unitholders do not vote, then that 50% will have been deemed to have voted for Star Asia's proposal at an EGM and a proposal to install a new director could be made with the resulting 53.6% "For" vote.
</div>
But that leads to another problem. 
In response to this Sakura Sogo decided it would try find an alternative for SSR investors.
Lion Partners had filed a petition for permission to convoke an SSR unitholders’ meeting with the Director-General of the Kanto Local Finance Bureau. The KLFB came back and said SSR needed to set up an EGM by 30 September. 
So on 28 June, SSR announced that fact, complained about how it was unfair, proposed that unitholders take no action with regard to whatever materials they might receive from Lion Partners, and SSR set up a different EGM for August 30th, a month before the deadline for an EGM to be called by Lion Partners.
SSR management did this to avoid SSR unitholders being subject to an "abusive and hostile merger" which would be foisted upon them by SAR by a captive management team, on yet to be determined terms (which is bad), which might be negotiated between two management teams sometime later. 
Sounds dastardly and awful. 
A week later and Sakura Sogo REIT announced that its management team was negotiating with <a href="https://www.smartkarma.com/entities/mirai-corp" target="_blank" data-smartkarma-citation="entities:27741:1" rel="noopener">Mirai Corp (3476 JP)</a> on a possible merger. With no terms yet announced. And noted that the upcoming EGM would ask unitholders to change directors and assign a new manager to the surviving entity if the merger was approved, using the same captive 50% majority that was bad when Lion Partners suggested changing directors and managers. 
Fast forward two more weeks and on 19 July, Sakura Sogo REIT and <a href="https://www.smartkarma.com/entities/mirai-corp" target="_blank" data-smartkarma-citation="entities:27741:1" rel="noopener">Mirai Corp (3476 JP)</a> <a href="http://sakurasogoreit.com/file/en-news-0324d9fd159eb3e38abf2f3ba6f6299b0d068f0b.pdf" target="_blank" rel="noopener">announced</a> a plan to merge, to be decided in the upcoming EGM on August 30th (which had been prepared especially for Sakura to be able to provide a then un-named alternative to Lion Partners' proposal).
And still no merger terms. Those are still in negotiation. But you are not supposed to listen to Lion Partners because their proposal for a merger with as-yet-undetermined-terms is "abusive and hostile." SSR's proposal for a merger with as-yet-undetermined-terms with a different REIT is obviously fair and good so should benefit from the "Deemed Approval" system. 
<div class="content-highlight">
This is a Guess The Ratio trade.
Before discussing merger terms, I will start by saying that this is a governance nightmare.
<ul>
<li>SSR management appears to have met once with the rep from Lion Partners and their proposed director, on 14 May.</li>
<li>They did not discuss terms. And for that it is "abusive and hostile." </li>
<li>SSR put out much documentation explaining the Deemed Approval system and how approving a director and manager based on a proposal was structurally unfair because non-voters were deemed to approve it. Then SSR proposed doing the same.
</li>
<li>SSR railed on SAR for not providing merger terms, but is effectively proposing a merger now, with no terms.
</li>
</ul>
</div>
<h2>Documents</h2>
The documents related to this situation are available at the following websites:
<ul>
<li>Sakura Sogo REIT Press Release Page (<a href="http://sakurasogoreit.com/en/ir/index.html?cate=all&amp;year=2019" target="_blank" rel="noopener">English</a>, <a href="http://sakurasogoreit.com/ja/ir/index.html?cate=all&amp;year=2019" target="_blank" rel="noopener">Japanese</a>)</li>
<li>Mirai Corporation Press Release Page (<a href="http://3476.jp/en/ir/index.html" target="_blank" rel="noopener">English</a>, <a href="http://3476.jp/ja/ir/index.html" target="_blank" rel="noopener">Japanese</a>)</li>
<li>Star Asia Investment (<a href="http://starasia-reit.com/en/ir/index.html" target="_blank" rel="noopener">English</a>, <a href="http://starasia-reit.com/ja/ir/index.html" target="_blank" rel="noopener">Japanese</a>)</li>
</ul>
<hr>
For other insights on Japanese M&amp;A please check the list of Japan-related Event-Driven insights <a href="https://www.smartkarma.com/insights?collection=all-insights&amp;filters=countries%3AJapan%7Cverticals%3A29" target="_blank" rel="noopener">here</a>. As a reference to Japan M&amp;A rules and practices, please see the <a href="https://www.smartkarma.com/insights/quiddity-japan-m-a-guide-2019" target="_blank" data-smartkarma-citation="insights:28911" rel="noopener">Quiddity Japan M&amp;A Guide 2019</a>.

On May 10th this year, a fund called Lion Partners which is part of the Star Asia Group announced a proposal to merge Star Asia Investment (3468 JP) ("Star Asia" or "SAR") with Sakura Sogo REIT (3473 JP) ("SSR") to improve its management and governance. Lion Partners - associated with the sponsors of Star Asia Investment - was at the time, and remains, one of the larger shareholders of the Sakura Sogo REIT at roughly 3.6% of units outstanding. 
The document notes that SSR had lowered its forecast for the year to Dec 2018 from ¥2700 to ¥2600 because it sold properties resulting in a decline in revenues. The REIT did not distribute those monies to unitholders, and instead tried and failed at a follow-on offering. Due to tenant departures, SSR has now lowered its DPU forecast for fiscal period Dec 2019 to ¥2427, which is a 10% decline from the initial forecast.
Since listing, SSR has executed no follow-on offerings and only one property purchase (against two sales) leaving declining AUM, higher-than average management fees, and the manager has taken property sale fees despite AUM dropping.
Star Asia/Lion Partners proposed a merger with Star Asia Group which is roughly 60% larger, to see a higher and more stable DPU, a pattern of expansion, lower management fees and lower average interest rates on debt, and governance which is aligned between unitholder and manager.
No terms were noted. 
Instead, Star Asia called for an EGM which would take place in July 2019 to change the Executive Director of the REIT and to change the Asset Manager of the REIT to Star Asia. The managers of the two REITs (SSR and SAR) would then conduct negotiations to come up with a win-win situation for the unitholders of both REITs, targeting a merger agreement in Sep 2019, unitholder meetings to approve afterwards, and a merger executed in about Feb 2020. 
One week later, Sakura Sogo REIT responded and noted that all this had been done with "no request for discussion, consultation or negotiation for a proposed merger prior to their request for an extraordinary unitholders’ meeting." Based on that, SSR assigned a bad intention to SAR. That assignment of bad intention on the part of SAR continued through the document and SSR denied their request for an EGM.
If that weren't clear, they offered a presentation deck to go with it. The first page showed how things were going to go:


It continues on for a few pages and does not get any friendlier than that. There is zero pretext in the document issued seven days after the Star Asia proposal for anything other than blasting Star Asia. 
A week after that, SSR issued a Further Rebuttal. In this Further Rebuttal presentation, SSR explains why the proposal is deemed hostile and abusive. It is in large part because of the "Deemed Approval" system. 




SSR suggests that the process of asking for an EGM is abusive to shareholders. Why?

By holding an EGM to change a director and manager, and subsequently pursuing negotiations to merge with SAR, there would be no alternative options remaining for Sakura unitholders.
The election of directors and choice of management company would effectively define what merger and merger terms came afterward.
Sakura unitholders would then have an EGM to decide a merger by two-thirds approval and they would have no alternative other than to accept a forced merger irrespective of terms.

To top it off, SAR had the audacity to propose this without providing proposed merger terms.

Sakura Sogo REIT management has a point to make here. 
But it isn't the one they think they are making.

The "Deemed Approval" system is one of the abominations of the legal framework of Japan investment corporations including Japan REITs which means that if a proposal is made, any unitholder not voting is deemed to have voted for the proposal. 
Star Asia owns 3.6%. If 50% of unitholders do not vote, then that 50% will have been deemed to have voted for Star Asia's proposal at an EGM and a proposal to install a new director could be made with the resulting 53.6% "For" vote.

But that leads to another problem. 
In response to this Sakura Sogo decided it would try find an alternative for SSR investors.
Lion Partners had filed a petition for permission to convoke an SSR unitholders’ meeting with the Director-General of the Kanto Local Finance Bureau. The KLFB came back and said SSR needed to set up an EGM by 30 September. 
So on 28 June, SSR announced that fact, complained about how it was unfair, proposed that unitholders take no action with regard to whatever materials they might receive from Lion Partners, and SSR set up a different EGM for August 30th, a month before the deadline for an EGM to be called by Lion Partners.
SSR management did this to avoid SSR unitholders being subject to an "abusive and hostile merger" which would be foisted upon them by SAR by a captive management team, on yet to be determined terms (which is bad), which might be negotiated between two management teams sometime later. 
Sounds dastardly and awful. 
A week later and Sakura Sogo REIT announced that its management team was negotiating with Mirai Corp (3476 JP) on a possible merger. With no terms yet announced. And noted that the upcoming EGM would ask unitholders to change directors and assign a new manager to the surviving entity if the merger was approved, using the same captive 50% majority that was bad when Lion Partners suggested changing directors and managers. 
Fast forward two more weeks and on 19 July, Sakura Sogo REIT and Mirai Corp (3476 JP) announced a plan to merge, to be decided in the upcoming EGM on August 30th (which had been prepared especially for Sakura to be able to provide a then un-named alternative to Lion Partners' proposal).
And still no merger terms. Those are still in negotiation. But you are not supposed to listen to Lion Partners because their proposal for a merger with as-yet-undetermined-terms is "abusive and hostile." SSR's proposal for a merger with as-yet-undetermined-terms with a different REIT is obviously fair and good so should benefit from the "Deemed Approval" system. 

This is a Guess The Ratio trade.
Before discussing merger terms, I will start by saying that this is a governance nightmare.

SSR management appears to have met once with the rep from Lion Partners and their proposed director, on 14 May.
They did not discuss terms. And for that it is "abusive and hostile." 
SSR put out much documentation explaining the Deemed Approval system and how approving a director and manager based on a proposal was structurally unfair because non-voters were deemed to approve it. Then SSR proposed doing the same.

SSR railed on SAR for not providing merger terms, but is effectively proposing a merger now, with no terms.



Documents
The documents related to this situation are available at the following websites:

Sakura Sogo REIT Press Release Page (English, Japanese)
Mirai Corporation Press Release Page (English, Japanese)
Star Asia Investment (English, Japanese)


For other insights on Japanese M&amp;A please check the list of Japan-related Event-Driven insights here. As a reference to Japan M&amp;A rules and practices, please see the Quiddity Japan M&amp;A Guide 2019.

Sakura Sogo/Mirai: White Knight Guess The Ratio Isn't Easy Pickings

Japan

MIRAI Corporation operates as a real estate investment trust. The Company invests in office and commercial buildings and hotels. MIRAI serves customers in Japan.

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Mirai Corp (3476 JP)

🇰🇷🇯🇵 That Was The Week That Was • North Asia 22nd-27th July 2019 @Smartkarma

TW3 NORTH ASIA 22-27 JUNESmartkarma's North Asian Insight providers produced 28 new Insights this week, mostly focused on a deluge of 'events' and...

Campbell Gunn

Sakura Sogo/Mirai: White Knight Guess The Ratio Isn't Easy Pickings

On May 10th this year, a fund called Lion Partners which is part of the Star Asia Group announced a proposal to merge Star Asia Investment (3468...

Travis Lundy

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