Equity Analyst, LightStream Research

Aqila Ali

Equity Analyst

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.

Event-Driven

In our previous insight, ‘<a href="https://www.smartkarma.com/insights/nissan-shatai-strong-cash-position-and-cash-flows-seem-to-have-attracted-effissimo" target="_blank" data-smartkarma-citation="insights:38067" rel="noopener">Nissan Shatai - Strong Cash Position and Cash Flows Seem to Have Attracted Effissimo</a> ’, we viewed Shatai as a company with potential mainly due to its cash position and its under-developed LCV business. We stated that this makes Shatai a potential candidate for some form of M&amp;A. In this note, we will look at some of the possible M&amp;A scenarios with Shatai.
<table class="table table-striped">
<tbody>
<tr>
<td style="width: 14.48%;">
M&amp; A Scenarios
</td>
<td style="width: 29.22%;">
Why?
</td>
<td style="width: 29.14%;">
How?
</td>
<td style="width: 27.16%;">
Possible Barriers
</td>
</tr>
<tr>
<td style="width: 14.48%;">
<a href="https://www.smartkarma.com/entities/nissan-motor-co-ltd" target="_blank" data-smartkarma-citation="entities:72:1" rel="noopener">Nissan Motor (7201 JP)</a> buying out <a href="https://www.smartkarma.com/entities/nissan-shatai-co-ltd" target="_blank" data-smartkarma-citation="entities:9104:1" rel="noopener">Nissan Shatai (7222 JP)</a>
</td>
<td style="width: 29.22%;">
<ul>
<li>Capture LCV business to boost growth</li>
</ul>
 
<ul>
<li>Use Shatai’s cash position for investments in other core business areas</li>
</ul>
 
<ul>
<li>Strong influence over Shatai</li>
</ul>
</td>
<td style="width: 29.14%;">
<ul>
<li>LBO Style?: Given Shatai’s fundamentals, especially positive FCF and low gearing level, and Nissan’s potential need to shore up cash at the parent level.</li>
<li>Share Swap: A difficult option, given Nissan Group’s current business situation.</li>
</ul>
</td>
<td style="width: 27.16%;">
<ul>
<li>Effissimo’s rising stake in the company could mean that it might demand a higher premium in the event of a buy-out, making the deal expensive for Nissan. It could also oppose non-cash transactions.</li>
</ul>
</td>
</tr>
<tr>
<td style="width: 14.48%;">
Effissimo Buying Out Shatai
 
</td>
<td style="width: 29.22%;">
<ul>
<li>Rising stake in the company</li>
<li>Interest in aiming towards greater growth for Shatai, considering the latter to be an undervalued company whose growth prospects have been overlooked</li>
</ul>
</td>
<td style="width: 29.14%;">
<ul>
<li>Could use Shatai’s strong assets as collateral to raise debt funding.</li>
</ul>
</td>
<td style="width: 27.16%;">
<ul>
<li>Nissan’s willingness to sell and Shatai’s dependence on Nissan for business.</li>
</ul>
</td>
</tr>
<tr>
<td style="width: 14.48%;">
Nissan Withdrawing from the LCV Business
 
</td>
<td style="width: 29.22%;">
<ul>
<li>Group’s desire to primarily focus on core business-PVs</li>
<li>Restructuring of the Shonan plant (the key LCV plant for the group), such that a smaller area is now used for production of LCVs</li>
<li>A need to raise cash to keep the PV business running.</li>
</ul>
</td>
<td style="width: 29.14%;">
<ul>
<li>Sell the company or the LCV plant.</li>
</ul>
</td>
<td style="width: 27.16%;">
<ul>
<li>Closing an appropriate deal for sale, such that Effissimo agrees. Finding a strategic buyer at this time may be difficult and could take time.</li>
</ul>
</td>
</tr>
</tbody>
</table>

In our previous insight, ‘Nissan Shatai - Strong Cash Position and Cash Flows Seem to Have Attracted Effissimo ’, we viewed Shatai as a company with potential mainly due to its cash position and its under-developed LCV business. We stated that this makes Shatai a potential candidate for some form of M&amp;A. In this note, we will look at some of the possible M&amp;A scenarios with Shatai.




M&amp; A Scenarios


Why?


How?


Possible Barriers




Nissan Motor (7201 JP) buying out Nissan Shatai (7222 JP)



Capture LCV business to boost growth

 

Use Shatai’s cash position for investments in other core business areas

 

Strong influence over Shatai




LBO Style?: Given Shatai’s fundamentals, especially positive FCF and low gearing level, and Nissan’s potential need to shore up cash at the parent level.
Share Swap: A difficult option, given Nissan Group’s current business situation.




Effissimo’s rising stake in the company could mean that it might demand a higher premium in the event of a buy-out, making the deal expensive for Nissan. It could also oppose non-cash transactions.





Effissimo Buying Out Shatai
 



Rising stake in the company
Interest in aiming towards greater growth for Shatai, considering the latter to be an undervalued company whose growth prospects have been overlooked




Could use Shatai’s strong assets as collateral to raise debt funding.




Nissan’s willingness to sell and Shatai’s dependence on Nissan for business.





Nissan Withdrawing from the LCV Business
 



Group’s desire to primarily focus on core business-PVs
Restructuring of the Shonan plant (the key LCV plant for the group), such that a smaller area is now used for production of LCVs
A need to raise cash to keep the PV business running.




Sell the company or the LCV plant.




Closing an appropriate deal for sale, such that Effissimo agrees. Finding a strategic buyer at this time may be difficult and could take time.






'Quantamental' Japan Specialist, LightStream Research

Campbell Gunn

'Quantamental' Japan Specialist

Thematic (Sector/Industry)

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/126/362/original/File%202020-04-04%208%2045%2047.jpeg?1585957595" class="editor-image img-responsive" data-smartkarma-image-id="126362"></figure><div class="content-caption">Source • stopcovid19.jp</div>OVERSHOOT - This Insight will be longer than usual with more above the paywall 'fold' as Friday saw several significant developments in Japan's response to COVID-19. The English-language word 'overshoot' is used widely in Japan to refer to the situation in which more than 100% of available intensive care hospital beds are in use. Although the occupancy rate for Japan is still only 48%, Kyoto and Kanagawa Prefectures are already in 'overshoot', and Tokyo is again close to being so even after increasing capacity by 50% this week. As can be seen above, the country has sufficient ventilator capacity to deal with ten times the current cases (28,197); the shortage is in hospital beds for infectious diseases (4,089). The Tokyo Metropolitan Government (TMG) is now aiming to secure over 4,000 beds for severe COVID-19 cases, including 3,300 with oxygen. Of the 635 patients currently hospitalised in the capital, 80% do not need intensive care. <figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/126/377/original/IMG_1102.jpg?1585958777" class="editor-image img-responsive" data-smartkarma-image-id="126377"></figure><div class="content-caption">Source • NHK</div>REGIME CHANGE - As we have noted in an earlier <a href="https://www.smartkarma.com/insights/japan-market-update-hit-the-boj-bid-and-wait-for-the-absolute-value-opportunity" target="_blank" data-smartkarma-citation="insights:37670" rel="noopener">Insight</a>, Japan has been slow to increase testing for COVID-19 as there was a Health Ministry guideline that all positive cases were to be hospitalised however mild the symptoms. Large-scale testing would result in the healthcare system being overwhelmed by a large number of relatively-mild cases. Also, the social convention of avoiding 'meiwaku' or trouble to others has resulted in many of those with symptoms avoiding seeking confirmation. The Ministry is also resisting the designation of deaths from pneumonia as related to COVID-19 and is refusing to release data on the number of pneumonia deaths which are rumoured to be 'significantly higher' than in previous years in Tokyo. Whether by design or neglect, Japan lulled itself into a false sense of 'corona-superiority' which has delayed many of the responses that other developed countries have been taking. In the face of increased pressure from the medical profession, the bureaucrats have now relented and, at least in Tokyo, less-severe cases will be able to stay at home or will be billeted in hotels. The rule that patients could only be released from the hospital after two negative tests is also to be 'relaxed'. The rule that new cases must be reported to the Ministry by fax still, however, remains in place.HOTELS &amp; HOMES - Given the size of most homes in the capital, isolation in homes with multiple residents will be hazardous, The TMG is, therefore, moving quickly to requisition or acquire the necessary hotel space.  The infamously-xenophobic APA Hotel chain has been quick to offer their services to lightly-symptomatic patients and is offering a 50% discount to health care workers.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/126/380/original/2020-04-04_10-51-38.png?1585965120" class="editor-image img-responsive" data-smartkarma-image-id="126380"></figure><div class="content-caption">Source outbreak.info</div>ASIAN OUTLIER - Japan is now the outlier in Asia in seeing an increasing rate of daily new cases (353 on April 3rd),  including a six-month-old baby against whom medical staff did not think to take any precautions forcing 44 staff into two weeks of self-isolation. Using a simple measure proposed by Messrs <a href="https://medium.com/@ekohlberg_47501/a-simple-score-to-tell-if-we-are-beating-the-virus-49e74b707e35" target="_blank" rel="noopener">Kohlberg, Neyman, and Tepper</a>, Japan's R Score is 2.09. With both Singapore and Hong Kong introducing stricter social constraints over the last two days, Japan's Swedish-style response is facing increasing domestic criticism. Several LDP politicians and supporters have distanced themselves from PM Abe's two-masks policy. Although far from disinterested parties, <a href="https://www.smartkarma.com/entities/rakuten-inc" target="_blank" data-smartkarma-citation="entities:31:1" rel="noopener">Rakuten (4755 JP)</a>'s @hmikitani and <a href="https://www.smartkarma.com/entities/softbank-group-corp" target="_blank" data-smartkarma-citation="entities:315:1" rel="noopener">Softbank Group (9984 JP)</a>'s @masason have both taken to Twitter to urge for the declaration of a state of emergency. The former has however been slow to prevent price-gouging for masks sold on the Rakuten platform. Even the influential Keidanren business federation has now accepted that a state of emergency is 'acceptable' on condition that 'vital services' are not too severely disrupted.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/126/396/original/File%202020-04-03%2019%2016%2000.jpeg?1585974026" class="editor-image img-responsive" data-smartkarma-image-id="126396"></figure><div class="content-caption">Source • NHK</div>TOKYO AT THE TIPPING POINT - Even the normally-quiescent NHK fired up their graphic team for last night's '7 NEWS'  to illustrate that Tokyo is 18 days away from an exponential explosion unless there is an 80% reduction in social activities. <figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/126/386/original/File%202020-04-04%200%2030%2052.jpeg?1585968614" class="editor-image img-responsive" data-smartkarma-image-id="126386"></figure><div class="content-caption">Source • NHK</div>GOVERNOR KOIKE - Although firmly stating that a full lockdown of Tokyo is legally 'impossible', Gov. Koike is gently prodding the national government towards stricter measures and continues to warn businesses to make the necessary preparations as only grocery stores, bank and medical facilities would remain open. She has requested residents to stay at home this weekend and is recommending avoiding the three "C's" - Crowded, Confined spaces where Conversations take place until further notice. Taking a leaf from Governor Cuomo's book, she is now giving daily updates on YouTube, including one in English. Having harboured ambitions for higher office in the past, the contrast she is drawing with the apparently-hapless Prime Minister is being made abundantly clear. Many LDP officials, however, remain wary of her 'un-Japanese' opportunism and her authoritarian and unpredictable nature. As in the United States, personal and political rivalries are obstructing to sensible policy-making.   <figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/126/387/original/2020-04-04_12-01-17.png?1585969302" class="editor-image img-responsive" data-smartkarma-image-id="126387"></figure><div class="content-caption">Source • Google</div>PARTIAL LOCKDOWN - Many restaurant chains including <a href="https://www.smartkarma.com/entities/torikizoku-co-ltd" target="_blank" data-smartkarma-citation="entities:17718:1" rel="noopener">Torikizoku (3193 JP)</a>, <a href="https://www.smartkarma.com/entities/kushikatsu-tanaka-co" target="_blank" data-smartkarma-citation="entities:26733:1" rel="noopener">Kushikatsu Tanaka (3547 JP)</a>  and <a href="https://www.smartkarma.com/entities/hub-co-ltd" target="_blank" data-smartkarma-citation="entities:11892:1" rel="noopener">Hub (3030 JP)</a> and karaoke and entertainment facilities such as <a href="https://www.smartkarma.com/entities/daiichikosho-co-ltd" target="_blank" data-smartkarma-citation="entities:8629:1" rel="noopener">Daiichikosho (7458 JP)</a>, <a href="https://www.smartkarma.com/entities/koshidaka-holdings-co-ltd" target="_blank" data-smartkarma-citation="entities:14191:1" rel="noopener">Koshidaka (2157 JP)</a> and <a href="https://www.smartkarma.com/entities/round-one-corp" target="_blank" data-smartkarma-citation="entities:7057:1" rel="noopener">Round One (4680 JP)</a> have announced the closure of their facilities for several weeks and join the department stores and cinemas that closed last and will be so again this weekend. Even the Spring Sumo tournament has been delayed for at least two weeks. As confirmed by Google's excellent Community Mobility Reports above, Tokyo is gradually heeding the call. The March Services PMI for Japan suggests a year-on-year contraction of 8%. The onus will now pass to the national government to mitigate the losses.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/126/397/original/2020-04-04_13-51-59.png?1585975942" class="editor-image img-responsive" data-smartkarma-image-id="126397"></figure><div class="content-caption">Source • US Embassy, Tokyo</div>'GET-OUT-OF-EDO-BABY-GO' - The US Embassy in Japan is recommending that any US citizens who are not prepared to stay in Japan for several months or who are concerned about not being able to receive appropriate medical care should leave immediately. Those who do will, however, not be allowed to return for an as-yet-unspecified period.  Even Japanese nationals are now required to spend fourteen days in quarantine. All residence visas that expire before the end of June be extended by three months. From April 3rd and until further notice, non-Japanese of any residence status, including permanent and spouses of Japanese nationals, are to be denied re-entry if they leave Japan. Welcome to the lock-in without a lockdown!RELIEF MEASURES - A potpourri of relief measures and new policies are doing the rounds in government circles including some or all of the following:- <ul>
<li>
¥300,000 - A one-time non-taxable payment will be made to qualified households that are suffering financially from a loss of income. About 10 million households are expected to qualify. It has already been necessary to make clear that the adult entertainment industry will not be eligible for public funds. ¥300,000 is equivalent to the annual amount spent on a pet dog in Japan.</li>
<li>
PREFERENCE SHARES - Large firms such as airlines, shippers and auto manufacturers may be eligible for rescue packages in the form of preference shares issued to the Development Bank of Japan of up to ¥400 billion each. The allocation of such funds will be a subject of much political jostling, while smaller businesses that lack the right connections may not be deemed eligible. We would now be wary of being aggressively 'short' these sectors.</li>
<li>
FIVE-YEAR INTEREST-FREE LOANS - While a welcome measure for some SMEs, this measure may not be sufficient for those already-indebted businesses with large numbers of regular employees operating out of rented accommodation, of which Japan's legion of wholesalers is a prime example.</li>
<li>
TAX MORATORIA - The government is to grant a moratorium on tax payments by companies that have seen their monthly revenues fall by more than 20% from the previous year due to COVID-19.</li>
<li>
WRITE-DOWNS - The Japanese ASB and the FSA have announced that companies will be allowed greater leniency regarding asset writedowns for idle plants and stores</li>
<li>
SUBSIDIES - The government will fully-subsidise the increase in production of <a href="https://www.smartkarma.com/entities/fujifilm-holdings-corp" target="_blank" data-smartkarma-citation="entities:16353:1" rel="noopener">Fujifilm (4901 JP)</a>'s Avigan drug and ventilators from a variety of manufacturers. Avigan will be offered for free to other countries.</li>
<li>
DE-GLOBALISATION - <a href="https://www.smartkarma.com/entities/toyota-motor-corp" target="_blank" data-smartkarma-citation="entities:73:1" rel="noopener">Toyota Motor (7203 JP)</a> and <a href="https://www.smartkarma.com/entities/honda-motor-co-ltd" target="_blank" data-smartkarma-citation="entities:154:1" rel="noopener">Honda Motor (7267 JP)</a> are in talks with the Ministry of Economy, Trade and Industry to move some or all of their supply chains our of China. <a href="https://www.smartkarma.com/entities/nissan-motor-co-ltd" target="_blank" data-smartkarma-citation="entities:72:1" rel="noopener">Nissan Motor (7201 JP)</a> is seemingly no longer considered relevant in this regard. Japanese corporates will also begin a process of unwinding unprofitable overseas operations to support their domestic activities, a move that will help keep the Yen relatively stable over the medium term.</li>
</ul>While large Japanse corporations are relatively well-placed to weather this storm, the Japanese government is fiscally constrained and grossly indebted relative to GDP. Given the now-inflationary global outlook, we would expect the Bank of Japan to be the least generous of the central banks in response to COVID-19, which will also be supportive of the Yen.In the DETAIL section below, we shall review our targets for our Results and Revisions Scores, and the market overall, look at our updated trailing aggregate actual profits and multiples and review Fridays' Results and Revisions. Finally, we shall suggest that Japan is well-placed for the emergent post-COVID economic world order and conclude that we would be buyers of Japanse equities into the second wave of the COVID-19 downturn.

Source • stopcovid19.jpOVERSHOOT - This Insight will be longer than usual with more above the paywall 'fold' as Friday saw several significant developments in Japan's response to COVID-19. The English-language word 'overshoot' is used widely in Japan to refer to the situation in which more than 100% of available intensive care hospital beds are in use. Although the occupancy rate for Japan is still only 48%, Kyoto and Kanagawa Prefectures are already in 'overshoot', and Tokyo is again close to being so even after increasing capacity by 50% this week. As can be seen above, the country has sufficient ventilator capacity to deal with ten times the current cases (28,197); the shortage is in hospital beds for infectious diseases (4,089). The Tokyo Metropolitan Government (TMG) is now aiming to secure over 4,000 beds for severe COVID-19 cases, including 3,300 with oxygen. Of the 635 patients currently hospitalised in the capital, 80% do not need intensive care. Source • NHKREGIME CHANGE - As we have noted in an earlier Insight, Japan has been slow to increase testing for COVID-19 as there was a Health Ministry guideline that all positive cases were to be hospitalised however mild the symptoms. Large-scale testing would result in the healthcare system being overwhelmed by a large number of relatively-mild cases. Also, the social convention of avoiding 'meiwaku' or trouble to others has resulted in many of those with symptoms avoiding seeking confirmation. The Ministry is also resisting the designation of deaths from pneumonia as related to COVID-19 and is refusing to release data on the number of pneumonia deaths which are rumoured to be 'significantly higher' than in previous years in Tokyo. Whether by design or neglect, Japan lulled itself into a false sense of 'corona-superiority' which has delayed many of the responses that other developed countries have been taking. In the face of increased pressure from the medical profession, the bureaucrats have now relented and, at least in Tokyo, less-severe cases will be able to stay at home or will be billeted in hotels. The rule that patients could only be released from the hospital after two negative tests is also to be 'relaxed'. The rule that new cases must be reported to the Ministry by fax still, however, remains in place.HOTELS &amp; HOMES - Given the size of most homes in the capital, isolation in homes with multiple residents will be hazardous, The TMG is, therefore, moving quickly to requisition or acquire the necessary hotel space.  The infamously-xenophobic APA Hotel chain has been quick to offer their services to lightly-symptomatic patients and is offering a 50% discount to health care workers.Source outbreak.infoASIAN OUTLIER - Japan is now the outlier in Asia in seeing an increasing rate of daily new cases (353 on April 3rd),  including a six-month-old baby against whom medical staff did not think to take any precautions forcing 44 staff into two weeks of self-isolation. Using a simple measure proposed by Messrs Kohlberg, Neyman, and Tepper, Japan's R Score is 2.09. With both Singapore and Hong Kong introducing stricter social constraints over the last two days, Japan's Swedish-style response is facing increasing domestic criticism. Several LDP politicians and supporters have distanced themselves from PM Abe's two-masks policy. Although far from disinterested parties, Rakuten (4755 JP)'s @hmikitani and Softbank Group (9984 JP)'s @masason have both taken to Twitter to urge for the declaration of a state of emergency. The former has however been slow to prevent price-gouging for masks sold on the Rakuten platform. Even the influential Keidanren business federation has now accepted that a state of emergency is 'acceptable' on condition that 'vital services' are not too severely disrupted.Source • NHKTOKYO AT THE TIPPING POINT - Even the normally-quiescent NHK fired up their graphic team for last night's '7 NEWS'  to illustrate that Tokyo is 18 days away from an exponential explosion unless there is an 80% reduction in social activities. Source • NHKGOVERNOR KOIKE - Although firmly stating that a full lockdown of Tokyo is legally 'impossible', Gov. Koike is gently prodding the national government towards stricter measures and continues to warn businesses to make the necessary preparations as only grocery stores, bank and medical facilities would remain open. She has requested residents to stay at home this weekend and is recommending avoiding the three "C's" - Crowded, Confined spaces where Conversations take place until further notice. Taking a leaf from Governor Cuomo's book, she is now giving daily updates on YouTube, including one in English. Having harboured ambitions for higher office in the past, the contrast she is drawing with the apparently-hapless Prime Minister is being made abundantly clear. Many LDP officials, however, remain wary of her 'un-Japanese' opportunism and her authoritarian and unpredictable nature. As in the United States, personal and political rivalries are obstructing to sensible policy-making.   Source • GooglePARTIAL LOCKDOWN - Many restaurant chains including Torikizoku (3193 JP), Kushikatsu Tanaka (3547 JP)  and Hub (3030 JP) and karaoke and entertainment facilities such as Daiichikosho (7458 JP), Koshidaka (2157 JP) and Round One (4680 JP) have announced the closure of their facilities for several weeks and join the department stores and cinemas that closed last and will be so again this weekend. Even the Spring Sumo tournament has been delayed for at least two weeks. As confirmed by Google's excellent Community Mobility Reports above, Tokyo is gradually heeding the call. The March Services PMI for Japan suggests a year-on-year contraction of 8%. The onus will now pass to the national government to mitigate the losses.Source • US Embassy, Tokyo'GET-OUT-OF-EDO-BABY-GO' - The US Embassy in Japan is recommending that any US citizens who are not prepared to stay in Japan for several months or who are concerned about not being able to receive appropriate medical care should leave immediately. Those who do will, however, not be allowed to return for an as-yet-unspecified period.  Even Japanese nationals are now required to spend fourteen days in quarantine. All residence visas that expire before the end of June be extended by three months. From April 3rd and until further notice, non-Japanese of any residence status, including permanent and spouses of Japanese nationals, are to be denied re-entry if they leave Japan. Welcome to the lock-in without a lockdown!RELIEF MEASURES - A potpourri of relief measures and new policies are doing the rounds in government circles including some or all of the following:- 

¥300,000 - A one-time non-taxable payment will be made to qualified households that are suffering financially from a loss of income. About 10 million households are expected to qualify. It has already been necessary to make clear that the adult entertainment industry will not be eligible for public funds. ¥300,000 is equivalent to the annual amount spent on a pet dog in Japan.

PREFERENCE SHARES - Large firms such as airlines, shippers and auto manufacturers may be eligible for rescue packages in the form of preference shares issued to the Development Bank of Japan of up to ¥400 billion each. The allocation of such funds will be a subject of much political jostling, while smaller businesses that lack the right connections may not be deemed eligible. We would now be wary of being aggressively 'short' these sectors.

FIVE-YEAR INTEREST-FREE LOANS - While a welcome measure for some SMEs, this measure may not be sufficient for those already-indebted businesses with large numbers of regular employees operating out of rented accommodation, of which Japan's legion of wholesalers is a prime example.

TAX MORATORIA - The government is to grant a moratorium on tax payments by companies that have seen their monthly revenues fall by more than 20% from the previous year due to COVID-19.

WRITE-DOWNS - The Japanese ASB and the FSA have announced that companies will be allowed greater leniency regarding asset writedowns for idle plants and stores

SUBSIDIES - The government will fully-subsidise the increase in production of Fujifilm (4901 JP)'s Avigan drug and ventilators from a variety of manufacturers. Avigan will be offered for free to other countries.

DE-GLOBALISATION - Toyota Motor (7203 JP) and Honda Motor (7267 JP) are in talks with the Ministry of Economy, Trade and Industry to move some or all of their supply chains our of China. Nissan Motor (7201 JP) is seemingly no longer considered relevant in this regard. Japanese corporates will also begin a process of unwinding unprofitable overseas operations to support their domestic activities, a move that will help keep the Yen relatively stable over the medium term.
While large Japanse corporations are relatively well-placed to weather this storm, the Japanese government is fiscally constrained and grossly indebted relative to GDP. Given the now-inflationary global outlook, we would expect the Bank of Japan to be the least generous of the central banks in response to COVID-19, which will also be supportive of the Yen.In the DETAIL section below, we shall review our targets for our Results and Revisions Scores, and the market overall, look at our updated trailing aggregate actual profits and multiples and review Fridays' Results and Revisions. Finally, we shall suggest that Japan is well-placed for the emergent post-COVID economic world order and conclude that we would be buyers of Japanse equities into the second wave of the COVID-19 downturn.

🇯🇵 JAPAN MARKET UPDATE 5th April 2020 • Overshoot

Equity Bottom-Up

This insight takes a look at the fundamentals of <a href="https://www.smartkarma.com/entities/nissan-shatai-co-ltd" target="_blank" data-smartkarma-citation="entities:9104:1" rel="noopener">Nissan Shatai (7222 JP)</a> (will also be referred to as Shatai) -the passenger vehicle and LCV manufacturer for <a href="https://www.smartkarma.com/entities/nissan-motor-co-ltd" target="_blank" data-smartkarma-citation="entities:72:1" rel="noopener">Nissan Motor (7201 JP)</a>.
Our key points are:
<ul>
<li>The company’s revenue growth has been fairly stable over the past five years. However, given the economic conditions in its key markets (the U.S., China, and Japan), the company expects a decline in revenue for FY03/20. This is the case with most automakers.</li>
<li>We expect Shatai’s LCV segment to be its key growth driver over the long term. However, the company might need to invest appropriately to capitalise on the opportunities in the commercial vehicle (CV) industry.</li>
<li>Given the absence of close local players, we have compared Shatai with two Chinese peers- <a href="https://www.smartkarma.com/entities/jiangling-motors-corp-ltd" target="_blank" data-smartkarma-citation="entities:28250:1" rel="noopener">Jiangling Motors Corp Ltd (000550 CH)</a> and <a href="https://www.smartkarma.com/entities/beiqi-foton-motor-co-ltd" target="_blank" data-smartkarma-citation="entities:4732:1" rel="noopener">Beiqi Foton Motor Co Ltd A (600166 CH)</a>.</li>
<li>During the recent quarters, Shatai has been underperforming these peers on revenue growth rates. However, historically, when market conditions have been good, Shatai has been able to generate growth rates close to these peers (sometimes better).</li>
<li>Profitability has declined on both gross and operating levels. However, Shatai’s OPM has been relatively less volatile when compared to its peers.</li>
<li>The company enjoys a strong cash position (with positive FCF over the past five years), with net cash at almost 77% of its market cap.</li>
<li>The company is trading below the historical median of its peers on EV/EBIT, but looks quite expensive on PE. That said, we think that EV/EBIT is a better metric to value Shatai as the PE multiple does not price in the company’s strong cash position.</li>
<li>We note Effissimo Capital’s (the second major shareholder) rising stake in the company, with ownership being held since 2007. Thus, Effissimo possibly thinks that Shatai is likely to report better results as it focuses on LCVs or is probably interested in buying out Shatai or being bought out of it by Nissan.</li>
<li>We also note that Shatai’s relationship with Nissan is similar to that which Toyota Auto Body Co. had with <a href="https://www.smartkarma.com/entities/toyota-motor-corp" target="_blank" data-smartkarma-citation="entities:73:1" rel="noopener">Toyota Motor (7203 JP)</a>.  Given that Toyota Auto Body was eventually bought by Toyota in 2011, we feel that a similar scenario might be possible with Shatai.</li>
</ul>
<div class="content-highlight">
In short, Shatai seems to be a company with potential, and its cash-rich position would make it an attractive acquisition target via an LBO if Nissan were willing to sell. We will be following up on this, looking at the possible ways Shatai could be bought (or sold) and if Nissan or Effissimo will be interested in doing so.
</div>

This insight takes a look at the fundamentals of Nissan Shatai (7222 JP) (will also be referred to as Shatai) -the passenger vehicle and LCV manufacturer for Nissan Motor (7201 JP).
Our key points are:

The company’s revenue growth has been fairly stable over the past five years. However, given the economic conditions in its key markets (the U.S., China, and Japan), the company expects a decline in revenue for FY03/20. This is the case with most automakers.
We expect Shatai’s LCV segment to be its key growth driver over the long term. However, the company might need to invest appropriately to capitalise on the opportunities in the commercial vehicle (CV) industry.
Given the absence of close local players, we have compared Shatai with two Chinese peers- Jiangling Motors Corp Ltd (000550 CH) and Beiqi Foton Motor Co Ltd A (600166 CH).
During the recent quarters, Shatai has been underperforming these peers on revenue growth rates. However, historically, when market conditions have been good, Shatai has been able to generate growth rates close to these peers (sometimes better).
Profitability has declined on both gross and operating levels. However, Shatai’s OPM has been relatively less volatile when compared to its peers.
The company enjoys a strong cash position (with positive FCF over the past five years), with net cash at almost 77% of its market cap.
The company is trading below the historical median of its peers on EV/EBIT, but looks quite expensive on PE. That said, we think that EV/EBIT is a better metric to value Shatai as the PE multiple does not price in the company’s strong cash position.
We note Effissimo Capital’s (the second major shareholder) rising stake in the company, with ownership being held since 2007. Thus, Effissimo possibly thinks that Shatai is likely to report better results as it focuses on LCVs or is probably interested in buying out Shatai or being bought out of it by Nissan.
We also note that Shatai’s relationship with Nissan is similar to that which Toyota Auto Body Co. had with Toyota Motor (7203 JP).  Given that Toyota Auto Body was eventually bought by Toyota in 2011, we feel that a similar scenario might be possible with Shatai.


In short, Shatai seems to be a company with potential, and its cash-rich position would make it an attractive acquisition target via an LBO if Nissan were willing to sell. We will be following up on this, looking at the possible ways Shatai could be bought (or sold) and if Nissan or Effissimo will be interested in doing so.


Nissan Shatai - Strong Cash Position and Cash Flows Seem to Have Attracted Effissimo

Pan-Asia Catalysts/Events, Quiddity Advisors

David Blennerhassett

Pan-Asia Catalysts/Events

Quiddity Advisors

<div>
Last Week in Event SPACE ...
</div>
<div>
<ul>
<li>
<a href="https://www.smartkarma.com/entities/singapore-airlines-ltd" target="_blank" data-smartkarma-citation="entities:74:1" rel="noopener">Singapore Airlines (SIA SP)</a> announces a substantial rights/MCB issue. If you are an arb, look to own the borrow. If you are a tax-efficient long-only investor, be on the watch for the rights trading cheaply. You can replace your current position with more cheaply-traded rights, especially if you are a smaller investor.</li>
<li>
<a href="https://www.smartkarma.com/entities/softbank-group-corp" target="_blank" data-smartkarma-citation="entities:315:1" rel="noopener">Softbank Group (9984 JP)</a> announced plans to raise as much as $41bn to buy back shares and cut debt.</li>
<li>
<a href="https://www.smartkarma.com/entities/dp-world" target="_blank" data-smartkarma-citation="entities:22734:1" rel="noopener">DP World (DPW DU)</a>'s Scheme Doc is out. This is still, as Stephen Fry might say, A Good Deal. </li>
<li>Arbs will be happy as <a href="https://www.smartkarma.com/entities/showa-denko-k-k" target="_blank" data-smartkarma-citation="entities:1496:1" rel="noopener">Showa Denko K K (4004 JP)</a> announced its Tender offer for <a href="https://www.smartkarma.com/entities/hitachi-chemical-co-ltd" target="_blank" data-smartkarma-citation="entities:14457:1" rel="noopener">Hitachi Chemical (4217 JP)</a> will commence.</li>
<li>At a 53% look-through discount, now is the time for <a href="https://www.smartkarma.com/entities/naspers-ltd" target="_blank" data-smartkarma-citation="entities:21085:1" rel="noopener">Naspers (NPN SJ)</a> to use the proceeds from its recent sale in <a href="https://www.smartkarma.com/entities/prosus-nv" target="_blank" data-smartkarma-citation="entities:28104:1" rel="noopener">Prosus (PRX NA)</a> to buy back its shares.</li>
<li>Anything which makes the Alliance seem more solid should be good for share prices. That could come in the form of <a href="https://www.smartkarma.com/entities/mitsubishi-corp" target="_blank" data-smartkarma-citation="entities:20668:1" rel="noopener">Mitsubishi Corp (8058 JP)</a> buying a stake in <a href="https://www.smartkarma.com/entities/renault-sa" target="_blank" data-smartkarma-citation="entities:21536:1" rel="noopener">Renault SA (RNO FP)</a>, but Travis has another solution which would be easier, cheaper, and would make Nissan happier. 
</li>
</ul>
</div>
<div>
<ul>
<li>Plus, other events, CCASS movements and Mood Spins.</li>
</ul>
</div>
(This insight covers specific insights &amp; comments involving Stubs, Pairs, Arbitrage, share Classifications, and Events - or SPACE - in the past week)


Last Week in Event SPACE ...




Singapore Airlines (SIA SP) announces a substantial rights/MCB issue. If you are an arb, look to own the borrow. If you are a tax-efficient long-only investor, be on the watch for the rights trading cheaply. You can replace your current position with more cheaply-traded rights, especially if you are a smaller investor.

Softbank Group (9984 JP) announced plans to raise as much as $41bn to buy back shares and cut debt.

DP World (DPW DU)'s Scheme Doc is out. This is still, as Stephen Fry might say, A Good Deal. 
Arbs will be happy as Showa Denko K K (4004 JP) announced its Tender offer for Hitachi Chemical (4217 JP) will commence.
At a 53% look-through discount, now is the time for Naspers (NPN SJ) to use the proceeds from its recent sale in Prosus (PRX NA) to buy back its shares.
Anything which makes the Alliance seem more solid should be good for share prices. That could come in the form of Mitsubishi Corp (8058 JP) buying a stake in Renault SA (RNO FP), but Travis has another solution which would be easier, cheaper, and would make Nissan happier.  





Plus, other events, CCASS movements and Mood Spins.


(This insight covers specific insights &amp; comments involving Stubs, Pairs, Arbitrage, share Classifications, and Events - or SPACE - in the past week)

Last Week in Event SPACE: Singapore Air, Softbank, DP World, Hitachi Chem, Naspers/Tencent, Renault

Travis Lundy

Les Echos, the French media outlet with probably the most access to Bercy when it comes to <a href="https://www.smartkarma.com/entities/renault-sa" target="_blank" data-smartkarma-citation="entities:21536:1" rel="noopener">Renault SA (RNO FP)</a>/government/Alliance news, but also occasionally seen as the avenue for floating trial balloons, <a href="https://www.lesechos.fr/industrie-services/automobile/exclusif-renault-le-scenario-dune-entree-de-mitsubishi-corp-au-capital-sur-la-table-1189255" target="_blank" rel="noopener">reports</a> this morning that among the possible methods for putting the Alliance back on track would be to have <a href="https://www.smartkarma.com/entities/mitsubishi-corp" target="_blank" data-smartkarma-citation="entities:20668:1" rel="noopener">Mitsubishi Corp (8058 JP)</a> buy a 10% stake in Renault. 
This is quite along the lines of what I have long suggested for the past couple of years. There are good reasons for this. One is that <a href="https://www.smartkarma.com/entities/nissan-motor-co-ltd" target="_blank" data-smartkarma-citation="entities:72:1" rel="noopener">Nissan Motor (7201 JP)</a>'s 15% stake in Renault doesn't vote.  Another is that Mitsubishi Corp was effectively banished from control of <a href="https://www.smartkarma.com/entities/mitsubishi-motors-corp" target="_blank" data-smartkarma-citation="entities:794:1" rel="noopener">Mitsubishi Motors (7211 JP)</a> in 2016 after the third major scandal in 15 years practically necessitated a governance rescue. At the time, I proposed it would be Nissan and sure enough...
The goal here would be to effectively increase Japanese capital control of Renault so that there would be more seats on the board who could act against French state (l'APE) whim, and who could, in a pinch, sell a block to Nissan so Nissan would own 25% and allow them to block Renault's voting rights in Nissan. For Renault it would give them a different large holder near but not in the Alliance. 
Renault shares jumped 7% in the five minutes after the article came out. The shares still trade at a tiny fraction of book value. 
What remains odd is that Nissan - Renault's partner and the more profitable carmaker over the past nearly 20 years since the Renault capital injection into Nissan - still can't vote its shares. But an outside Japanese trading company would buy 10% and make it all better because they had voting rights? I think this is an interesting step in the right direction, but not all the way there by any stretch. 
<div class="content-highlight">
There is one relatively easy technical construction of capital holding that Renault could undertake to make life easier all around. It would not require Renault selling Nissan shares cheaply, and it would not require anyone to put up any more capital. Renault would keep the economic interest in its full stake, but doing this would get Nissan the vote on its Renault shares, making the entire Alliance cross-holding construct much more equitable.
I remain surprised they have not done so yet. 
As it is, I think the idea of MitCorp buying 10% of Renault is an interesting step in the right direction, but it is not all the way there by any stretch.
The OTHER step noted above would be all the way there.
</div>
As always, more below the fold.

Les Echos, the French media outlet with probably the most access to Bercy when it comes to Renault SA (RNO FP)/government/Alliance news, but also occasionally seen as the avenue for floating trial balloons, reports this morning that among the possible methods for putting the Alliance back on track would be to have Mitsubishi Corp (8058 JP) buy a 10% stake in Renault. 
This is quite along the lines of what I have long suggested for the past couple of years. There are good reasons for this. One is that Nissan Motor (7201 JP)'s 15% stake in Renault doesn't vote.  Another is that Mitsubishi Corp was effectively banished from control of Mitsubishi Motors (7211 JP) in 2016 after the third major scandal in 15 years practically necessitated a governance rescue. At the time, I proposed it would be Nissan and sure enough...
The goal here would be to effectively increase Japanese capital control of Renault so that there would be more seats on the board who could act against French state (l'APE) whim, and who could, in a pinch, sell a block to Nissan so Nissan would own 25% and allow them to block Renault's voting rights in Nissan. For Renault it would give them a different large holder near but not in the Alliance. 
Renault shares jumped 7% in the five minutes after the article came out. The shares still trade at a tiny fraction of book value. 
What remains odd is that Nissan - Renault's partner and the more profitable carmaker over the past nearly 20 years since the Renault capital injection into Nissan - still can't vote its shares. But an outside Japanese trading company would buy 10% and make it all better because they had voting rights? I think this is an interesting step in the right direction, but not all the way there by any stretch. 

There is one relatively easy technical construction of capital holding that Renault could undertake to make life easier all around. It would not require Renault selling Nissan shares cheaply, and it would not require anyone to put up any more capital. Renault would keep the economic interest in its full stake, but doing this would get Nissan the vote on its Renault shares, making the entire Alliance cross-holding construct much more equitable.
I remain surprised they have not done so yet. 
As it is, I think the idea of MitCorp buying 10% of Renault is an interesting step in the right direction, but it is not all the way there by any stretch.
The OTHER step noted above would be all the way there.

As always, more below the fold.

Renault-Nissan-MitMot Alliance: MitCorp to Buy 10% of Renault? There's An Easier Way

Japan

NISSAN MOTOR CO., LTD. manufactures and distributes automobiles and related parts. It also provides financing services. Nissan delivers a comprehensive range of products under various brands. The Company manufactures in Japan, the United States, Mexico, the United Kingdom and many other countries.

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Nissan Motor (7201 JP)

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Campbell Gunn

Nissan Shatai - Strong Cash Position and Cash Flows Seem to Have Attracted Effissimo

This insight takes a look at the fundamentals of Nissan Shatai (7222 JP) (will also be referred to as Shatai) -the passenger vehicle and LCV...

Aqila Ali

Last Week in Event SPACE: Singapore Air, Softbank, DP World, Hitachi Chem, Naspers/Tencent, Renault

Last Week in Event SPACE ... Singapore Airlines (SIA SP) announces a substantial rights/MCB issue. If you are an arb, look to own the borrow....

David Blennerhassett

Renault-Nissan-MitMot Alliance: MitCorp to Buy 10% of Renault? There's An Easier Way

Les Echos, the French media outlet with probably the most access to Bercy when it comes to Renault SA (RNO FP)/government/Alliance news, but also...

Travis Lundy

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