Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

NTT (Nippon Telegraph & Telephone) / Event-Driven

<a href="https://www.smartkarma.com/entities/ntt-docomo-inc" target="_blank" data-smartkarma-citation="entities:1089:1">NTT Docomo Inc (9437 JP)</a> announced a <a href="https://www.nttdocomo.co.jp/english/info/media_center/pr/2019/0426_00.html" target="_blank">buyback program</a> when it release earnings at the end of April. The buyback amount of ¥300 billion was as predicted - large enough to matter but a smaller number than the ¥400 billion "Return to Customers" - and given the ¥600 billion tender offer conducted last year, matched what was appropriate from the point of view of buying back two-thirds of the shares bought back from NTT and one-third from the market.The expected evolution (slow and steady throughout the period (May 7, 2019 to April 30, 2020) and basic impact of this buyback was discussed in <a href="https://www.smartkarma.com/insights/ntt-vs-docomo-where-to-from-here" target="_blank" data-smartkarma-citation="insights:29324">NTT Vs Docomo: Where To From Here?</a> and <a href="https://www.smartkarma.com/insights/ntt-docomo-buybacks-to-start-fy19" target="_blank" data-smartkarma-citation="insights:29738">NTT &amp; Docomo Buybacks To Start FY19</a>. At a max buyback of 3.85% of shares out, it wasn't small but wasn't enormous. But as discussed there are other considerations making it worth your attention.On 10 May 2019 when <a href="https://www.smartkarma.com/entities/nippon-telegraph-telephone" target="_blank" data-smartkarma-citation="entities:623:1">NTT (Nippon Telegraph &amp; Telephone) (9432 JP)</a> announced results, the company <a href="http://www.ntt.co.jp/news2019/1905e/190510a.html" target="_blank">announced</a> a 53 million share ¥250 billion buyback program to start the 13th of May and to continue til the end of July 2019. In my pre-earnings piece talking about the balance of forces of the respective buybacks, I had initially expected that near-term pressure would favor NTT Docomo because I expected the NTT buyback of up to ¥200 billion would be for the purpose of buying back shares from the government, which had originally <a href="https://www.nikkei.com/article/DGXMZO39093220Y8A211C1EE8000/" target="_blank">proposed</a> a budgeted amount of ¥160 billion.That is no longer the case as of the May 10 announcement, and now the "calendar" looks different. The NTT/Docomo ratio is now at a high point (1% below a recent high), ~5% below a 5+year high, but NTT remains 2 PE turns cheaper than Docomo, growing faster, and the incremental EPS upside due to buybacks may still belong to NTT this year.

NTT Docomo Inc (9437 JP) announced a buyback program when it release earnings at the end of April. The buyback amount of ¥300 billion was as predicted - large enough to matter but a smaller number than the ¥400 billion "Return to Customers" - and given the ¥600 billion tender offer conducted last year, matched what was appropriate from the point of view of buying back two-thirds of the shares bought back from NTT and one-third from the market.The expected evolution (slow and steady throughout the period (May 7, 2019 to April 30, 2020) and basic impact of this buyback was discussed in NTT Vs Docomo: Where To From Here? and NTT &amp; Docomo Buybacks To Start FY19. At a max buyback of 3.85% of shares out, it wasn't small but wasn't enormous. But as discussed there are other considerations making it worth your attention.On 10 May 2019 when NTT (Nippon Telegraph &amp; Telephone) (9432 JP) announced results, the company announced a 53 million share ¥250 billion buyback program to start the 13th of May and to continue til the end of July 2019. In my pre-earnings piece talking about the balance of forces of the respective buybacks, I had initially expected that near-term pressure would favor NTT Docomo because I expected the NTT buyback of up to ¥200 billion would be for the purpose of buying back shares from the government, which had originally proposed a budgeted amount of ¥160 billion.That is no longer the case as of the May 10 announcement, and now the "calendar" looks different. The NTT/Docomo ratio is now at a high point (1% below a recent high), ~5% below a 5+year high, but NTT remains 2 PE turns cheaper than Docomo, growing faster, and the incremental EPS upside due to buybacks may still belong to NTT this year. 

'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. 

Quantitative Analysis

<div class="content-caption">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/089/325/original/2019-06-01_09-16-25.png?1559348196" class="editor-image img-responsive" data-smartkarma-image-id="89325"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/089/326/original/2019-06-01_09-19-21.png?1559348371" class="editor-image img-responsive" data-smartkarma-image-id="89326"></figure>Source: Japan Analytics
</div>INAUSPICIOUS - Since the beginning of the Reiwa era (令和時代), Japanese equities have fallen by 6.1% and have seen only six 'up' days out of the nineteen trading days so far. The strength of the Yen has cut that decline to -3.2% for the minority of foreign investors that are unhedged. The Bank of Japan has purchased ETFs on ten days in the new era including on each of the last three trading sessions - the largest such intervention this calendar year.  Having reached a new five-month low, a decisive low above that of December 25th is required. The market took only two trading days to descend from the current level to that 2018 low, and a fall of 6.7% from Friday's close would breach that level. For the time being, it pays to be net short.  <figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/089/329/original/2019-06-01_10-10-41.png?1559351453" class="editor-image img-responsive" data-smartkarma-image-id="89329"></figure><div class="content-caption">Source: Japan Analytics</div>CURRENCY RISK? - Much has been made of recent ¥3 move in the US$/JP¥ cross rate in May. The one-year rate of change has been the key driver of the Japanese earnings cycle and, in turn, the market. A rate of ¥108 held through the summer would equate with a breach of the December low and a rate of ¥90 by year-end would be consistent with the low of February 2016 - a 14% decline from the current index level.  <figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/089/330/original/2019-06-01_10-14-50.png?1559351702" class="editor-image img-responsive" data-smartkarma-image-id="89330"></figure><div class="content-caption">Source: Japan Analytics</div>RSI - The five-day Relative Strength Index could well be in single digits on Monday, which would be the second-most oversold level this year. A short-term recovery can be expected later in the week. <figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/089/331/original/2019-06-01_10-28-00.png?1559352497" class="editor-image img-responsive" data-smartkarma-image-id="89331"></figure><div class="content-caption">Source: Japan Analytics</div>TORAKU - The Toraku advance-decline is also back in Oversold territory, but well above the December 2018 low, suggesting further downside to a new cycle low.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/089/333/original/2019-06-01_10-38-19.png?1559353116" class="editor-image img-responsive" data-smartkarma-image-id="89333"></figure><div class="content-caption">Source: Japan Analytics</div>HIGHS - LOWS - The 'spread' between New Highs and New Lows is negative, but has yet to reach the most recent peak of 14th May of -549 and is well above the December 2018 low of -2,741. A spread of at least -1,000 is needed to confirm a new cycle low.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/089/332/original/2019-06-01_10-32-11.png?1559352742" class="editor-image img-responsive" data-smartkarma-image-id="89332"></figure><div class="content-caption">Source: Japan Analytics</div>VOLUME SCORE TIMELINE - Volumes remains concentrated in the Internet, Information Technology, REITs, Electrical Equipment, and Energy Sectors, the Materials,  Restaurants, and Multi-Industry Sectors are the volume laggards.<div class="content-highlight">In the DETAIL section below, we will review Sector performance, scores and valuation, Company Results &amp; Revisions and stock performance over the previous two weeks, as well as adding some brief comments on <a href="https://www.smartkarma.com/entities/kikkoman-corp" target="_blank" data-smartkarma-citation="entities:11720:1">Kikkoman (2801 JP)</a>, <a href="https://www.smartkarma.com/entities/inpex-corp" target="_blank" data-smartkarma-citation="entities:20665:1">Inpex (1605 JP)</a>, <a href="https://www.smartkarma.com/entities/keyence-corp" target="_blank" data-smartkarma-citation="entities:3077:1">Keyence (6861 JP)</a>, <a href="https://www.smartkarma.com/entities/leopalace21-corp" target="_blank" data-smartkarma-citation="entities:8244:1">Leopalace21 (8848 JP)</a>, and <a href="https://www.smartkarma.com/entities/dentsu-inc" target="_blank" data-smartkarma-citation="entities:12434:1">Dentsu (4324 JP)</a>.     </div>


Source: Japan Analytics
INAUSPICIOUS - Since the beginning of the Reiwa era (令和時代), Japanese equities have fallen by 6.1% and have seen only six 'up' days out of the nineteen trading days so far. The strength of the Yen has cut that decline to -3.2% for the minority of foreign investors that are unhedged. The Bank of Japan has purchased ETFs on ten days in the new era including on each of the last three trading sessions - the largest such intervention this calendar year.  Having reached a new five-month low, a decisive low above that of December 25th is required. The market took only two trading days to descend from the current level to that 2018 low, and a fall of 6.7% from Friday's close would breach that level. For the time being, it pays to be net short.  Source: Japan AnalyticsCURRENCY RISK? - Much has been made of recent ¥3 move in the US$/JP¥ cross rate in May. The one-year rate of change has been the key driver of the Japanese earnings cycle and, in turn, the market. A rate of ¥108 held through the summer would equate with a breach of the December low and a rate of ¥90 by year-end would be consistent with the low of February 2016 - a 14% decline from the current index level.  Source: Japan AnalyticsRSI - The five-day Relative Strength Index could well be in single digits on Monday, which would be the second-most oversold level this year. A short-term recovery can be expected later in the week. Source: Japan AnalyticsTORAKU - The Toraku advance-decline is also back in Oversold territory, but well above the December 2018 low, suggesting further downside to a new cycle low.Source: Japan AnalyticsHIGHS - LOWS - The 'spread' between New Highs and New Lows is negative, but has yet to reach the most recent peak of 14th May of -549 and is well above the December 2018 low of -2,741. A spread of at least -1,000 is needed to confirm a new cycle low.Source: Japan AnalyticsVOLUME SCORE TIMELINE - Volumes remains concentrated in the Internet, Information Technology, REITs, Electrical Equipment, and Energy Sectors, the Materials,  Restaurants, and Multi-Industry Sectors are the volume laggards.In the DETAIL section below, we will review Sector performance, scores and valuation, Company Results &amp; Revisions and stock performance over the previous two weeks, as well as adding some brief comments on Kikkoman (2801 JP), Inpex (1605 JP), Keyence (6861 JP), Leopalace21 (8848 JP), and Dentsu (4324 JP).     

🇯🇵 JAPAN • Market Update - Retesting the Low

Asia Long-Short PM/Analyst

Curtis Lehnert

The old Asian holding company trades are still going strong - producing annualized returns in excess of 20% in many cases. This particular trade is a good example of why it still makes sense to track these situations and why combining fundamental insight into statistically deviated relationships can generate alpha in a long/short portfolio. 
In my original insight on December 5, 2018 <a href="https://www.smartkarma.com/insights/trade-idea-first-pacific-stub-142-hk-taming-the-beast" target="_blank" data-smartkarma-citation="insights:26364">TRADE IDEA - First Pacific Stub (142 HK): Taming the Beast</a>, I proposed setting up a stub trade to profit from the mis-priced stub business of First Pacific that was trading in excess of a 50% discount to NAV. During the 177 calendar days that followed, <a href="https://www.smartkarma.com/entities/173" target="_blank" data-smartkarma-citation="entities:173:1">First Pacific Co (142 HK)</a> has outperformed <a href="https://www.smartkarma.com/entities/1053" target="_blank" data-smartkarma-citation="entities:1053:1">Indofood Sukses Makmur Tbk P (INDF IJ)</a> by nearly 13% in local currency terms, driven by an announcement at the end of March stating it is selling its 50% stake in Australasian food producer, Goodman Fielder. 
The trade has swung from the -2 Z-score level to +1.7 Z-scores according to the Smartkarma Holdco Monitor. The expected mean reversion has been realized and I now close my trade due to the statistical thesis no longer providing support for the trade.
In this insight I will discuss:
<ul class="">
<li>Performance of ALL my recommended stub trades</li>
<li>a post-trade analysis on the First Pacific stub</li>
</ul>

The old Asian holding company trades are still going strong - producing annualized returns in excess of 20% in many cases. This particular trade is a good example of why it still makes sense to track these situations and why combining fundamental insight into statistically deviated relationships can generate alpha in a long/short portfolio. 
In my original insight on December 5, 2018 TRADE IDEA - First Pacific Stub (142 HK): Taming the Beast, I proposed setting up a stub trade to profit from the mis-priced stub business of First Pacific that was trading in excess of a 50% discount to NAV. During the 177 calendar days that followed, First Pacific Co (142 HK) has outperformed Indofood Sukses Makmur Tbk P (INDF IJ) by nearly 13% in local currency terms, driven by an announcement at the end of March stating it is selling its 50% stake in Australasian food producer, Goodman Fielder. 
The trade has swung from the -2 Z-score level to +1.7 Z-scores according to the Smartkarma Holdco Monitor. The expected mean reversion has been realized and I now close my trade due to the statistical thesis no longer providing support for the trade.
In this insight I will discuss:

Performance of ALL my recommended stub trades
a post-trade analysis on the First Pacific stub


TRADE IDEA - First Pacific (142 HK) Stub: Parent Pops, Close the Trade

Differentiated global TMT & Internet Research

New Street Research Insights

New Street Research

Research is provided by our team of experienced analysts. Our work is idea driven, based on independence of thought, sector expertise, and firmly focused on fundamentals and valuation of telecoms and internet names globally. New Street is headquartered in London with offices in New York, Singapore and Australia. 

New Street Research is an independent, partner-owned, research firm specialising in equity and debt research. Our equity research embraces the following sectors:

Pan European Telecom Services and Cable
US Telecoms, Cable, Satellite and Towers
Global Emerging Market Telecoms
Japan Telecoms
Asian Internet
Pan European Healthcare
US Healthcare
Japanese Healthcare

We also provide debt research on:
Pan European Telecom Services and Cable

Equity Bottom-Up

Lots has been written on this site about the Japanese telecom market recently. The view at New Street Research has been and remains positive on the sector. The most recent set of results shows growth is surprising to the upside while guidance has also been positive, esp the longer term. <a href="https://www.smartkarma.com/profiles/1917" target="_blank" data-smartkarma-citation="accounts:1917">Chris Hoare</a> thinks lower handset sales, part of what New Street Research's Tech team terms refers to as an Apple air-pocket, have the potential to feed into sharply higher FCF, further boosting shareholder returns (something other writers have previously discussed). In any case shareholder returns are being boosted by ongoing buy backs by <a href="https://www.smartkarma.com/entities/623" target="_blank" data-smartkarma-citation="entities:623:1">NTT (Nippon Telegraph &amp; Telephone) (9432 JP)</a>, <a href="https://www.smartkarma.com/entities/639" target="_blank" data-smartkarma-citation="entities:639:1">KDDI (9433 JP)</a>, and <a href="https://www.smartkarma.com/entities/1089" target="_blank" data-smartkarma-citation="entities:1089:1">NTT Docomo (9437 JP)</a> , while KDDI also boosted dividends and <a href="https://www.smartkarma.com/entities/27445" target="_blank" data-smartkarma-citation="entities:27445:1">Softbank KK (9434 JP)</a> dividend guidance was above expectations.The round of price cutting heralded by DoCoMo seems to have been taken in the operators' stride and the outlook remains positive. Our preferred name here is KDDI.

Lots has been written on this site about the Japanese telecom market recently. The view at New Street Research has been and remains positive on the sector. The most recent set of results shows growth is surprising to the upside while guidance has also been positive, esp the longer term. Chris Hoare thinks lower handset sales, part of what New Street Research's Tech team terms refers to as an Apple air-pocket, have the potential to feed into sharply higher FCF, further boosting shareholder returns (something other writers have previously discussed). In any case shareholder returns are being boosted by ongoing buy backs by NTT (Nippon Telegraph &amp; Telephone) (9432 JP), KDDI (9433 JP), and NTT Docomo (9437 JP) , while KDDI also boosted dividends and Softbank KK (9434 JP) dividend guidance was above expectations.The round of price cutting heralded by DoCoMo seems to have been taken in the operators' stride and the outlook remains positive. Our preferred name here is KDDI. 

Japanese Telcos Show Resilient Revenue And Focus on Shareholder Returns

Telco/Internet specialist

Kirk Boodry

Redex Research

<a href="https://www.smartkarma.com/entities/31" target="_blank" data-smartkarma-citation="entities:31:1">Rakuten Inc (4755 JP)</a> hosted a call with CTO Tareq Amin to update analysts and investors on recent progress. The company says cell site acquisition is moving ahead quickly and it an end-October mobile launch remains the target. As discussed previously, the next major milestone is the start of 1 July beta-testing so there was little that could be added this week although management did again run through key success factors like cost and operational efficiency from its cloud-based integrated network architecture. Mr. Amin teased a possible game-changing announcement next week, which is likely to come from the vendor side and we suspect has to do with 5G turnkey solutions. Coming out of quarterly results for all companies, the outlook has not meaningfully changed with incumbents confident that pricing changes are sufficient even with Rakuten promising disruption from a unique network and installed base of eCommerce/fintech users.

Rakuten Inc (4755 JP) hosted a call with CTO Tareq Amin to update analysts and investors on recent progress. The company says cell site acquisition is moving ahead quickly and it an end-October mobile launch remains the target. As discussed previously, the next major milestone is the start of 1 July beta-testing so there was little that could be added this week although management did again run through key success factors like cost and operational efficiency from its cloud-based integrated network architecture. Mr. Amin teased a possible game-changing announcement next week, which is likely to come from the vendor side and we suspect has to do with 5G turnkey solutions. Coming out of quarterly results for all companies, the outlook has not meaningfully changed with incumbents confident that pricing changes are sufficient even with Rakuten promising disruption from a unique network and installed base of eCommerce/fintech users. 

Rakuten: Update on the Mobile Business Generally Positive

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/Docomo Ratio & Buyback Progress

NTT Docomo Inc (9437 JP) announced a buyback program when it release earnings at the end of April. The buyback amount of ¥300 billion was as...

Travis Lundy

🇯🇵 JAPAN • Market Update - Retesting the Low

INAUSPICIOUS - Since the beginning of the Reiwa era (令和時代), Japanese equities have fallen by 6.1% and have seen only six 'up' days out of the...

Campbell Gunn

TRADE IDEA - First Pacific (142 HK) Stub: Parent Pops, Close the Trade

The old Asian holding company trades are still going strong - producing annualized returns in excess of 20% in many cases. This particular trade is...

Curtis Lehnert

Japanese Telcos Show Resilient Revenue And Focus on Shareholder Returns

Lots has been written on this site about the Japanese telecom market recently. The view at New Street Research has been and remains positive on the...

New Street Research

Rakuten: Update on the Mobile Business Generally Positive

Rakuten Inc (4755 JP) hosted a call with CTO Tareq Amin to update analysts and investors on recent progress. The company says cell site acquisition...

Kirk Boodry

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