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.

Telco/Internet specialist

Kirk Boodry

Redex Research

Equity Bottom-Up

NTT (Nippon Telegraph & Telephone) / Equity Bottom-Up

NTT posted solid Q2 20 results but the focus is squarely on how the acquisition of DoCoMo minorities will unfold. With the tender still open details are scarce but NTT did unveil a ¥6,000bn, mid-term debt target (2x EBITDA) driven by securitization and debt re-payment. Of more interest, the company says it can achieve this AND maintain returns to shareholders, which it emphasized by announcing a ¥250bn buyback for this year.  Management is keeping its full-year guidance as a strong first-half provides some cushion should there be changes in the operating environment, particularly overseas with a resurgence in Covid-19.

NTT posted solid Q2 20 results but the focus is squarely on how the acquisition of DoCoMo minorities will unfold. With the tender still open details are scarce but NTT did unveil a ¥6,000bn, mid-term debt target (2x EBITDA) driven by securitization and debt re-payment. Of more interest, the company says it can achieve this AND maintain returns to shareholders, which it emphasized by announcing a ¥250bn buyback for this year.  Management is keeping its full-year guidance as a strong first-half provides some cushion should there be changes in the operating environment, particularly overseas with a resurgence in Covid-19. 

NTT - Q2 20 Results: Mixed DoCoMo Update but Strong Message on Shareholder Returns

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

'Quantamental' Japan Specialist, LightStream Research

Campbell Gunn

'Quantamental' Japan Specialist

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)

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/162/891/original/2020-10-01_13-26-50.png?1601526452" class="editor-image img-responsive" data-smartkarma-image-id="162891"></figure>
<div class="content-caption">Source for all charts &amp; tables unless otherwise stated: Japan Analytics</div>
SHORT TENURE - Since 1979 the average prime ministerial tenure in Japan has been 750 days. Excluding the three longest-serving Prime Ministers of the last forty years - Nakasone, Koizumi and Abe 2 - the average is 494 days. The equity market has favoured long-serving Liberal Democratic Party government (marked in light green above) and disliked periods of coalition or opposition (野党 yatō) government and also tenures of less than eighteen months.
PM SUGA - Prime Minister Suga Yoshihide succeeded former Prime Minister Abe on 16th September the latter having stepped down for health reasons. Suga had served as Chief Cabinet Secretary (内閣官房長官, Naikaku-kanbō-chōkan) for all of Abe's premiership. The continuity offered by Suga's elevation provides Japan with the prospect of an extended period of political stability. From his policy statements made during the brief prime-ministerial election campaign, Suga has bold aims for challenging Japan's economic and social ills. Given his previous role and mastery of the balance between political necessities and bureaucratic realities, the Suga era could be as impactful as those of Nakasone, Koizumi and Abe 2. We view such an outcome as bullish for the Japanese economy and stock market.
<hr>
In the DETAIL below, we shall cover the following topics:-
I: SUGA's BACKGROUND &amp; POLITICAL CAREER
II: POLICY PRIORITIES
Defence &amp; Foreign Policy
Economic Policy
Administrative Reform
The Digital Agency
Telecommunications Services
Birth-rate and Fertility Treatment
Regional Revitalisation &amp; Regional Bank Reform
SME restructuring
Carbon Neutrality &amp; A Nuclear Renaissance
III: SUGA STOCKS RECOMMENDATIONS
<hr>
WHAT'S ORIGINAL? - This Insight reviews the implications of PM Suga's policy platform for specific sectors and stocks in the Japanse equity market and concludes with five long and five short recommendations for large-cap growth and value-orientated portfolios.  
<hr>
<blockquote class="">
"Self-help, mutual help, public help, and "kizuna" (bonds) is our vision for society. With that in mind, we firmly believe, overcoming various issues, such as regional revitalization and the shrinking population, as well as the declining birth-rate and aging society, will create dynamism in Japan. To this end, we will meet the people's expectations by giving birth to a "Cabinet that works for the People," which gives its all to advance regulatory reforms without being constrained by the vested interests of the stakeholders, tearing down bureaucratic sectionalism and the notorious habit of following past precedents.
<h3>Statement of the Prime Minister</h3>
September 16th, 2020
</blockquote>


Source for all charts &amp; tables unless otherwise stated: Japan Analytics
SHORT TENURE - Since 1979 the average prime ministerial tenure in Japan has been 750 days. Excluding the three longest-serving Prime Ministers of the last forty years - Nakasone, Koizumi and Abe 2 - the average is 494 days. The equity market has favoured long-serving Liberal Democratic Party government (marked in light green above) and disliked periods of coalition or opposition (野党 yatō) government and also tenures of less than eighteen months.
PM SUGA - Prime Minister Suga Yoshihide succeeded former Prime Minister Abe on 16th September the latter having stepped down for health reasons. Suga had served as Chief Cabinet Secretary (内閣官房長官, Naikaku-kanbō-chōkan) for all of Abe's premiership. The continuity offered by Suga's elevation provides Japan with the prospect of an extended period of political stability. From his policy statements made during the brief prime-ministerial election campaign, Suga has bold aims for challenging Japan's economic and social ills. Given his previous role and mastery of the balance between political necessities and bureaucratic realities, the Suga era could be as impactful as those of Nakasone, Koizumi and Abe 2. We view such an outcome as bullish for the Japanese economy and stock market.

In the DETAIL below, we shall cover the following topics:-
I: SUGA's BACKGROUND &amp; POLITICAL CAREER
II: POLICY PRIORITIES
Defence &amp; Foreign Policy
Economic Policy
Administrative Reform
The Digital Agency
Telecommunications Services
Birth-rate and Fertility Treatment
Regional Revitalisation &amp; Regional Bank Reform
SME restructuring
Carbon Neutrality &amp; A Nuclear Renaissance
III: SUGA STOCKS RECOMMENDATIONS

WHAT'S ORIGINAL? - This Insight reviews the implications of PM Suga's policy platform for specific sectors and stocks in the Japanse equity market and concludes with five long and five short recommendations for large-cap growth and value-orientated portfolios.  


"Self-help, mutual help, public help, and "kizuna" (bonds) is our vision for society. With that in mind, we firmly believe, overcoming various issues, such as regional revitalization and the shrinking population, as well as the declining birth-rate and aging society, will create dynamism in Japan. To this end, we will meet the people's expectations by giving birth to a "Cabinet that works for the People," which gives its all to advance regulatory reforms without being constrained by the vested interests of the stakeholders, tearing down bureaucratic sectionalism and the notorious habit of following past precedents.
Statement of the Prime Minister
September 16th, 2020


🇯🇵 Japan in the Suga Era - Policy Priorities & 'Suga Stocks'

NTT DoCoMo posted results ahead of consensus expectations boosted by steady improvement in mobile service revenue and record profits in its non-telco Smart Life business. The solid quarter provides some relief for parent NTT which is buying in minority shareholders at a premium although concerns on whether DoCoMo will need to aggressively respond to pressure for price reductions will linger.  Continued low churn rates read positively across to fellow incumbents Softbank and KDDI but less so for Rakuten whose impact on the industry has been muted so far.

NTT DoCoMo posted results ahead of consensus expectations boosted by steady improvement in mobile service revenue and record profits in its non-telco Smart Life business. The solid quarter provides some relief for parent NTT which is buying in minority shareholders at a premium although concerns on whether DoCoMo will need to aggressively respond to pressure for price reductions will linger.  Continued low churn rates read positively across to fellow incumbents Softbank and KDDI but less so for Rakuten whose impact on the industry has been muted so far.  

NTT DoCoMo Q2 20 Results: Last Public Report Ends on a Relative High Note

Japan

Nippon Telegraph and Telephone Corporation provides a variety of telecommunication services, including telephone, telegraph, leased circuits, data communication, terminal equipment sales, and related services. The Company provides both local and long distance telephone services within Japan.

NTT (Nippon Telegraph & Telephone) (9432 JP)

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NTT (Nippon Telegraph & Telephone) (9432 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

NTT - Q2 20 Results: Mixed DoCoMo Update but Strong Message on Shareholder Returns

NTT posted strong results and whilst details on what happens with DoCoMo remain scarce the company did unveil de-leveraging targets compatible with...

Kirk Boodry

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

🇯🇵 Japan in the Suga Era - Policy Priorities & 'Suga Stocks'

We believe the Suga era could be as impactful as those of Nakasone, Koizumi and Abe 2. We view such an outcome as bullish for the Japanese economy...

Campbell Gunn

NTT DoCoMo Q2 20 Results: Last Public Report Ends on a Relative High Note

DoCoMo results were ahead of expectations in its last report as a public company. That's good for NTT and there is a positive read across to...

Kirk Boodry

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