Senior Bank Analyst - Japanese Banks, Windamee Research

J. Brian Waterhouse

Senior Bank Analyst - Japanese Banks

Windamee Research

Japanese Banks

Equity Bottom-Up

Prestidigitation, or sleight of hand, is what stage magicians use to create their illusions, to the delight of the onlookers who are beguiled into looking elsewhere at a crucial moment in the conjuring trick when they might otherwise spot what the ‘magician’ is really doing.FY3/2021 results for <a href="https://www.smartkarma.com/entities/hachijuni-bank-ltd" target="_blank" data-smartkarma-citation="entities:20244:1" rel="noopener">Hachijuni Bank (8359 JP)</a> are, at first glance, impressive.  In difficult trading conditions, consolidated net profits sailed past the bank’s guidance by over 24% to ¥22.3 billion (a +1.4% YoY improvement over FY3/2020).  Management has generously raised the final dividend by 33% from ¥6/share to ¥8/share. But this was simply continuing a dividend policy that management has practiced most years since FY3/2017: a ¥6/share interim dividend and an ¥8/share final dividend.  Let us not forget that guidance for FY3/2021 was withheld by management until 30 October 2020, so well into the financial year.  And bottom-line profits relied heavily on ¥6.3 billion in 2nd Half gains from  ‘selling the family silver’, namely realizing gains on part of the bank’s share portfolio as global stock markets fortuitously rose.  Moreover, trading gains of ¥9.9 billion were needed to offset a six-fold rise in credit costs from ¥1.4 billion to ¥9.3 billion because the bank’s collection of non-performing loans rose by 29.3% to ¥101.1 billion in a single year: primarily in loans in ‘high risk’ categories.  The quality of reported profits is indeed strained.In terms of balance-sheet efficiency, the bank’s return on assets (RoA) has deteriorated further to just 20bps, while its return on equity (RoE) is a risible 2.70%.  With flat profits being forecast for FY3/2022, and trading on an unremarkable PER of 8.1x, there are far better investments in the Japanese banking sector than this.  For those who are not yet holders of Hachijuni Bank stock but may have noticed the apparent strong recovery in the bank’s profitability according to its FY3/2021 financial statements, our position is clear: Caveat emptor! (May the buyer beware!)

Prestidigitation, or sleight of hand, is what stage magicians use to create their illusions, to the delight of the onlookers who are beguiled into looking elsewhere at a crucial moment in the conjuring trick when they might otherwise spot what the ‘magician’ is really doing.FY3/2021 results for Hachijuni Bank (8359 JP) are, at first glance, impressive.  In difficult trading conditions, consolidated net profits sailed past the bank’s guidance by over 24% to ¥22.3 billion (a +1.4% YoY improvement over FY3/2020).  Management has generously raised the final dividend by 33% from ¥6/share to ¥8/share. But this was simply continuing a dividend policy that management has practiced most years since FY3/2017: a ¥6/share interim dividend and an ¥8/share final dividend.  Let us not forget that guidance for FY3/2021 was withheld by management until 30 October 2020, so well into the financial year.  And bottom-line profits relied heavily on ¥6.3 billion in 2nd Half gains from  ‘selling the family silver’, namely realizing gains on part of the bank’s share portfolio as global stock markets fortuitously rose.  Moreover, trading gains of ¥9.9 billion were needed to offset a six-fold rise in credit costs from ¥1.4 billion to ¥9.3 billion because the bank’s collection of non-performing loans rose by 29.3% to ¥101.1 billion in a single year: primarily in loans in ‘high risk’ categories.  The quality of reported profits is indeed strained.In terms of balance-sheet efficiency, the bank’s return on assets (RoA) has deteriorated further to just 20bps, while its return on equity (RoE) is a risible 2.70%.  With flat profits being forecast for FY3/2022, and trading on an unremarkable PER of 8.1x, there are far better investments in the Japanese banking sector than this.  For those who are not yet holders of Hachijuni Bank stock but may have noticed the apparent strong recovery in the bank’s profitability according to its FY3/2021 financial statements, our position is clear: Caveat emptor! (May the buyer beware!)  

Hachijuni Bank (8359 JP):  A Case of Prestidigitation?

Concordia Financial Group, Ltd / Equity Bottom-Up

<a href="https://www.smartkarma.com/entities/concordia-financial-group-ltd" target="_blank" data-smartkarma-citation="entities:22704:1" rel="noopener">Concordia Financial Group, Ltd (7186 JP)</a>, or CFG, has slashed its FY3/3021 guidance by 36.7% to ¥25.3 billion and is now expecting EPS of just ¥20.97 against previous guidance of ¥33.15.  There are two principal causes: writing down an investment in a bear fund that went dramatically wrong in a rising market to the tune of ¥16.1 billion; and a significant increase in credit costs of ¥9.0 billion, largely at subsidiary Higashi-Nippon Bank (HNPB).Lingering investor memories of past management scandals and disappointing financial performance at HNPB in particular have caused CFG to significantly underperform its peers over the last 12 months, with its stock price up only +23.5% against an average of 35.5% for the other Top 5 regional banks in terms of market capitalisation.Yet aggregate foreign ownership in CFG remains high at around 31.5%.  Foreign investors view CFG as a liquid alternative to the ‘crowded trade’ of simply buying megabanks for exposure to the Japanese financial sector.  Moreover, CFG offers a cash dividend payment policy of 33% of net profits, a total shareholder return policy target of 50%, conducts frequent share buybacks, and regularly cancels part of its Treasury Stock to boost overall shareholder returns.  Even so, within the regional banking sector, we much prefer <a href="https://www.smartkarma.com/entities/chiba-bank-ltd" target="_blank" data-smartkarma-citation="entities:1048:1" rel="noopener">Chiba Bank (8331 JP)</a> and <a href="https://www.smartkarma.com/entities/iyo-bank-ltd" target="_blank" data-smartkarma-citation="entities:6869:1" rel="noopener">Iyo Bank (8385 JP)</a> for their strong management and stable fundamentals, or <a href="https://www.smartkarma.com/entities/bank-of-kyoto-ltd" target="_blank" data-smartkarma-citation="entities:5248:1" rel="noopener">Bank Of Kyoto (8369 JP)</a> as an interesting thematic play.

Concordia Financial Group, Ltd (7186 JP), or CFG, has slashed its FY3/3021 guidance by 36.7% to ¥25.3 billion and is now expecting EPS of just ¥20.97 against previous guidance of ¥33.15.  There are two principal causes: writing down an investment in a bear fund that went dramatically wrong in a rising market to the tune of ¥16.1 billion; and a significant increase in credit costs of ¥9.0 billion, largely at subsidiary Higashi-Nippon Bank (HNPB).Lingering investor memories of past management scandals and disappointing financial performance at HNPB in particular have caused CFG to significantly underperform its peers over the last 12 months, with its stock price up only +23.5% against an average of 35.5% for the other Top 5 regional banks in terms of market capitalisation.Yet aggregate foreign ownership in CFG remains high at around 31.5%.  Foreign investors view CFG as a liquid alternative to the ‘crowded trade’ of simply buying megabanks for exposure to the Japanese financial sector.  Moreover, CFG offers a cash dividend payment policy of 33% of net profits, a total shareholder return policy target of 50%, conducts frequent share buybacks, and regularly cancels part of its Treasury Stock to boost overall shareholder returns.  Even so, within the regional banking sector, we much prefer Chiba Bank (8331 JP) and Iyo Bank (8385 JP) for their strong management and stable fundamentals, or Bank Of Kyoto (8369 JP) as an interesting thematic play.

Concordia Financial Group (7186 JP): Asset Quality Issues

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.

Bloomberg has reported on a number of developments for Nintendo and the Switch recently. It has highlighted the <a href="https://www.bloomberg.com/news/articles/2021-03-04/nintendo-plans-switch-model-with-bigger-samsung-oled-display" target="_blank" rel="noopener">procurement of OLED panels from Samsung</a>, the <a href="https://www.bloomberg.com/news/articles/2021-03-23/nintendo-to-use-new-nvidia-graphics-chip-in-2021-switch-upgrade" target="_blank" rel="noopener">implementation of DLSS in the new “Switch Pro”</a> (which we flagged in <a href="https://www.smartkarma.com/insights/nintendo-pay-attention-to-nvidia-and-dlss-as-well-as-switch-momentum-and-pokemon" target="_blank" rel="noopener">Jun last year</a>) and that <a href="https://www.bloomberg.com/news/articles/2021-03-15/nintendo-is-said-to-target-record-year-in-switch-game-sales" target="_blank" rel="noopener">Nintendo is targeting positive growth for HW and SW next year</a>.

Bloomberg has reported on a number of developments for Nintendo and the Switch recently. It has highlighted the procurement of OLED panels from Samsung, the implementation of DLSS in the new “Switch Pro” (which we flagged in Jun last year) and that Nintendo is targeting positive growth for HW and SW next year.

Nintendo – Reviewing Prospects for a Peak in Light of Bloomberg’s Recent Coverage

Consensus is at ¥40bn. Consensus is Jon Snow.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/197/968/original/image_86592491321617026335735.png?1617026336" class="editor-image img-responsive" data-smartkarma-image-id="197968"></figure>We believe that not only will Monster Hunter Rise demonstrate strong "legs" and continue to sell in large volumes well into 2021, but that RE8 will make a run at becoming the best selling RE title ever, AND that Monster Hunter Stories 2 will set right many of the mistakes of its predecessor.

Consensus is at ¥40bn. Consensus is Jon Snow.We believe that not only will Monster Hunter Rise demonstrate strong "legs" and continue to sell in large volumes well into 2021, but that RE8 will make a run at becoming the best selling RE title ever, AND that Monster Hunter Stories 2 will set right many of the mistakes of its predecessor.

Capcom – We Are Starting to Think… ¥100bn in OP Is Not Impossible Next Year

Our sceptical position on the elevated multiples for tech stocks has been relatively consistent over time. As with all bubbles, despite valuations clearly being out of touch with reality, markets have continued to trend upwards, and in many cases the least attractive stocks have done the best. We would argue that signs of liquidity issues at Ark and the rapid implosion of Archegos herald the beginning of the end.

Our sceptical position on the elevated multiples for tech stocks has been relatively consistent over time. As with all bubbles, despite valuations clearly being out of touch with reality, markets have continued to trend upwards, and in many cases the least attractive stocks have done the best. We would argue that signs of liquidity issues at Ark and the rapid implosion of Archegos herald the beginning of the end.

Softbank – Is Archegos the Bear Stearns CDO Funds in the Coalmine?

Japan

Nintendo Co., Ltd. globally develops, manufactures and sells home-use video game hardware and software in home entertainment business.  The company also produces home-game products including cards.

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Nintendo (7974 JP)

Hachijuni Bank (8359 JP): A Case of Prestidigitation?

Prestidigitation, or sleight of hand, is what magicians use to create their illusions. Onlookers are beguiled into looking elsewhere at a crucial...

J. Brian Waterhouse

Concordia Financial Group (7186 JP): Asset Quality Issues

Concordia Financial Group (7186 JP) has slashed its FY3/3021 guidance by 36.7% to ¥25.3 billion on higher credit costs and after writing down a...

J. Brian Waterhouse

Nintendo – Reviewing Prospects for a Peak in Light of Bloomberg’s Recent Coverage

We review recent Nintendo news regarding OLED panel procurement from Samsung, incorporating Nvidia's DLSS in the New Switch and bullish volume...

Mio Kato

Capcom – We Are Starting to Think… ¥100bn in OP Is Not Impossible Next Year

We believe that Monster Hunter Rise, Resident Evil Village and Monster Hunter Stories 2 could combine to drive unprecedented profitability at...

Mio Kato

Softbank – Is Archegos the Bear Stearns CDO Funds in the Coalmine?

With a lot of signs of market stress emerging following a truly bubbly run up in 2020 we examine the prospects for a stock that has traditionally...

Mio Kato

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