Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

Hitachi Construction Machinery / Event-Driven

With a relatively full slate of large value takeovers in Developed Asia in the past year - often by parents but also by buyout funds - and the availability of significant credit to finance such takeovers, this Smartkarma Original insight looks at what constitutes an attractive target for takeover, and seeks to construct a framework for screening and filtering companies for further study. 
The filtering is conducted across two basic measures which seek to answer two basic questions:
<ol>
<li>What might supply look like?</li>
<li>What might demand look like?</li>
</ol>
The first basic problem with creating such filters is that on the Supply side, using databases to determine whether a controlling shareholder wants to sell is almost a lost cause from the beginning. But the exercise throws up some interesting case studies, and it is important to understand why such screening could lead to interesting results. 
On the demand side, it is a difficult and complicated exercise because financial data moves around, shifting through time and relative price because competitors also shift in time and price. A clear example of a company which might have been "relatively" attractive vs peers a month ago might not be after the market ructions at the end of February 2020 when this was written. Prices were, of course, lower, which means that a good screening process is dynamic, both in relative and absolute measures. It is also somewhat difficult to create a one-size-fits-all screen for attractive targets because in certain countries, certain industries (telecom, airlines, social infrastructure, defence) are covered by foreign ownership limits, other industries (banks, brokers, insurers) rarely see leveraged buyouts, and takeovers in other industries (Chinese homebuilders) are, for lack of a better word, simply off the table at certain times.
In addition, there are lots of ways in which companies might present themselves as attractive targets. If someone controls a company, and wants to sell it cheaply, there are lots of potential buyers who will fall all over themselves to get in line to buy it. But companies can be attractive targets because of the potential for changing profit metrics and multiples through restructuring, asset reorganisation, industry reorganisation, or simply waiting for the cycle to change. 
Using valuation metrics with a cutoff line can be challenging because common multiples such as PER, PCFR, PBR, EV/EBITDA may ignore significant value available from longer-term securities holdings, non-operating real estate assets which are not managed in optimal fashion, etc. 
In short, screening can only go so far. But we try.
At the end, we take a brief look at 10 companies from Developed Asia which show up as a result of our screening efforts. The resulting list is dominated by Japanese companies because some of the companies which show up from other countries fit the "no-go" categories above (airlines, financial companies, defence technology subject to foreign ownership limits, Chinese homebuilders subject to skepticism, etc.). Some are also clearly Emerging Asia businesses with Developed Asia listings. Screening for Emerging Asia got a few companies which are high on anyone's target list, including one which saw an unsolicited takeover approach earlier this week (end-Feb 2020), and another which has been in acquisition mode for years. 
We find the thinking process and screening technology has thrown up some previously less-than-obvious candidates which deserve further work.

With a relatively full slate of large value takeovers in Developed Asia in the past year - often by parents but also by buyout funds - and the availability of significant credit to finance such takeovers, this Smartkarma Original insight looks at what constitutes an attractive target for takeover, and seeks to construct a framework for screening and filtering companies for further study. 
The filtering is conducted across two basic measures which seek to answer two basic questions:

What might supply look like?
What might demand look like?

The first basic problem with creating such filters is that on the Supply side, using databases to determine whether a controlling shareholder wants to sell is almost a lost cause from the beginning. But the exercise throws up some interesting case studies, and it is important to understand why such screening could lead to interesting results. 
On the demand side, it is a difficult and complicated exercise because financial data moves around, shifting through time and relative price because competitors also shift in time and price. A clear example of a company which might have been "relatively" attractive vs peers a month ago might not be after the market ructions at the end of February 2020 when this was written. Prices were, of course, lower, which means that a good screening process is dynamic, both in relative and absolute measures. It is also somewhat difficult to create a one-size-fits-all screen for attractive targets because in certain countries, certain industries (telecom, airlines, social infrastructure, defence) are covered by foreign ownership limits, other industries (banks, brokers, insurers) rarely see leveraged buyouts, and takeovers in other industries (Chinese homebuilders) are, for lack of a better word, simply off the table at certain times.
In addition, there are lots of ways in which companies might present themselves as attractive targets. If someone controls a company, and wants to sell it cheaply, there are lots of potential buyers who will fall all over themselves to get in line to buy it. But companies can be attractive targets because of the potential for changing profit metrics and multiples through restructuring, asset reorganisation, industry reorganisation, or simply waiting for the cycle to change. 
Using valuation metrics with a cutoff line can be challenging because common multiples such as PER, PCFR, PBR, EV/EBITDA may ignore significant value available from longer-term securities holdings, non-operating real estate assets which are not managed in optimal fashion, etc. 
In short, screening can only go so far. But we try.
At the end, we take a brief look at 10 companies from Developed Asia which show up as a result of our screening efforts. The resulting list is dominated by Japanese companies because some of the companies which show up from other countries fit the "no-go" categories above (airlines, financial companies, defence technology subject to foreign ownership limits, Chinese homebuilders subject to skepticism, etc.). Some are also clearly Emerging Asia businesses with Developed Asia listings. Screening for Emerging Asia got a few companies which are high on anyone's target list, including one which saw an unsolicited takeover approach earlier this week (end-Feb 2020), and another which has been in acquisition mode for years. 
We find the thinking process and screening technology has thrown up some previously less-than-obvious candidates which deserve further work.

'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. 

Thematic (Sector/Industry)

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/118/403/original/2020-02-18_08-44-22.png?1581983074" class="editor-image img-responsive" data-smartkarma-image-id="118403"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/118/404/original/2020-02-18_08-42-56.png?1581983098" class="editor-image img-responsive" data-smartkarma-image-id="118404"></figure><div class="content-caption">Source • Japan Analytics</div>THREE-YEAR LOW - With <a href="https://www.smartkarma.com/entities/bridgestone-corp" target="_blank" data-smartkarma-citation="entities:8914:1" rel="noopener">Bridgestone (5108 JP)</a>'s results and revision now added, our final tally for this season is a 196 basis point decline in our Results Sore - the lowest since March 2017.  In contrast, the Forecast/Revision Score reached a three-month high as the 470 companies with December year-ends put an optimistic gloss on their medium-term outlook. As we have noted in our recent daily roundups, a normal precondition for a cycle low is for the Forecast/Revision Score to rise above the Results Score. Forecast/Revision Score peaks and troughs usually occur one to two quarters ahead of those for the Results Score.  Covid-19's impact will likely see the 2016 'playbook' repeated next quarter with a lower Results Score and a 'sideways' Forecast/Results Score. The Results Score cycle low point will be reached with the mostly-interim results to be released in six months. <figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/118/405/original/2020-02-18_09-29-28.png?1581985792" class="editor-image img-responsive" data-smartkarma-image-id="118405"></figure><div class="content-caption">Source • Japan Analytics</div>LEADING INDICATOR - By including several momentum factors into our Scoring (see below), we can provide a better indication of future business conditions. Indeed there is a 0.83 correlation between the Cabinet Office's Business Condition Leading Indicator and the Forecast/Revision Score. Reported earnings, as well as company forecasts, are lagging indicators and, as shown in Part 1 of this Insight. Both data series peaked one year after our Scores and the market peaked in early 2018. SCORING METHODOLOGY - For those new to these Insights, we briefly recap our scoring methodology below:-<ul>
<li>Results Scores are calculated using the most recent eight quarters of company data for Revenues, Operating Income and Operating Margin and, for each, measure the rate, degree and consistency of change. The Results Score has a maximum of +30 and a minimum of -30 for each period. Our data series commences from the time a particular company issues quarterly results. The sample size becomes significant from March 2005.</li>
<li>The Forecast/Revision Score is based on both Annual and Interim period company forecasts and compares changes from previous forecasts as well as against the trailing twelve-month (TTM) or previous first-half results, with annual forecasts being double-weighted. This Score also has a maximum of +30 and a minimum of -30 for each period.  For this series, our data samples start from August 2008.</li>
<li>The combined Results &amp; Revision Score (RRS) is the average of the Results Score and the Forecasts/Revision Score.</li>
<li>
All company Scores are then cap-weight-aggregated into Sector, Peer Group and Market Composite Scores for which the seventeen-year monthly and two-year daily track records are shown above. Only currently listed-companies are covered in the aggregate Scores, and the Total Market Capitalisation excludes delisted entities. REITs are not included.
<hr>
• SECTOR SCORES •
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/118/410/original/2020-02-18_09-55-29.png?1581987489" class="editor-image img-responsive" data-smartkarma-image-id="118410"></figure><div class="content-caption">Source • Japan Analytics</div>
In the DETAIL Section below, we provide a detailed breakdown of our RRS Scoring for Sectors, Peer Groups and individual companies, highlighting this quarter's 'winners' and 'losers'. The chart above shows a  seventeen-year 'timeline' of the cap-weight-aggregated Sector RRS Scores and the ebbs and flows around the business cycles. The Metals Sector is the most volatile on the downside and has yet to 'bottom' this cycle. Technology Hardware appears to have already rebounded; however, Covid-19 suggests this Sector may relapse. On the upside, the Information Technology Sector has replaced the Internet and Telecoms Sectors as the contra-cyclical 'champion'. 
</li>
</ul>

Source • Japan AnalyticsTHREE-YEAR LOW - With Bridgestone (5108 JP)'s results and revision now added, our final tally for this season is a 196 basis point decline in our Results Sore - the lowest since March 2017.  In contrast, the Forecast/Revision Score reached a three-month high as the 470 companies with December year-ends put an optimistic gloss on their medium-term outlook. As we have noted in our recent daily roundups, a normal precondition for a cycle low is for the Forecast/Revision Score to rise above the Results Score. Forecast/Revision Score peaks and troughs usually occur one to two quarters ahead of those for the Results Score.  Covid-19's impact will likely see the 2016 'playbook' repeated next quarter with a lower Results Score and a 'sideways' Forecast/Results Score. The Results Score cycle low point will be reached with the mostly-interim results to be released in six months. Source • Japan AnalyticsLEADING INDICATOR - By including several momentum factors into our Scoring (see below), we can provide a better indication of future business conditions. Indeed there is a 0.83 correlation between the Cabinet Office's Business Condition Leading Indicator and the Forecast/Revision Score. Reported earnings, as well as company forecasts, are lagging indicators and, as shown in Part 1 of this Insight. Both data series peaked one year after our Scores and the market peaked in early 2018. SCORING METHODOLOGY - For those new to these Insights, we briefly recap our scoring methodology below:-
Results Scores are calculated using the most recent eight quarters of company data for Revenues, Operating Income and Operating Margin and, for each, measure the rate, degree and consistency of change. The Results Score has a maximum of +30 and a minimum of -30 for each period. Our data series commences from the time a particular company issues quarterly results. The sample size becomes significant from March 2005.
The Forecast/Revision Score is based on both Annual and Interim period company forecasts and compares changes from previous forecasts as well as against the trailing twelve-month (TTM) or previous first-half results, with annual forecasts being double-weighted. This Score also has a maximum of +30 and a minimum of -30 for each period.  For this series, our data samples start from August 2008.
The combined Results &amp; Revision Score (RRS) is the average of the Results Score and the Forecasts/Revision Score.

All company Scores are then cap-weight-aggregated into Sector, Peer Group and Market Composite Scores for which the seventeen-year monthly and two-year daily track records are shown above. Only currently listed-companies are covered in the aggregate Scores, and the Total Market Capitalisation excludes delisted entities. REITs are not included.

• SECTOR SCORES •
Source • Japan Analytics
In the DETAIL Section below, we provide a detailed breakdown of our RRS Scoring for Sectors, Peer Groups and individual companies, highlighting this quarter's 'winners' and 'losers'. The chart above shows a  seventeen-year 'timeline' of the cap-weight-aggregated Sector RRS Scores and the ebbs and flows around the business cycles. The Metals Sector is the most volatile on the downside and has yet to 'bottom' this cycle. Technology Hardware appears to have already rebounded; however, Covid-19 suggests this Sector may relapse. On the upside, the Information Technology Sector has replaced the Internet and Telecoms Sectors as the contra-cyclical 'champion'. 



🇯🇵 JAPAN • IT’S A WRAP! Part 2: 2020-Q1 Results & Revision Scores

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/115/715/original/2020-01-31_05-07-06.png?1580414848" class="editor-image img-responsive" data-smartkarma-image-id="115715"></figure><div class="content-caption">Source • Japan Analytics</div>30TH JANUARY ROUNDUP - Thre were 194 results and 64 forecasts or revisions announcements yesterday. Of the 85 larger-cap companies reporting results, 18 saw year-on-year declines in their quarterly OP of greater than 25%, while 10 saw improvements of more than 25%. Our Results Sore tumbled 22bps to 0.77, the second-lowest Score in three years while the Forecast/Revision Score lost almost all of yesterday's gain and is 9bps away from a three-year low.

Source • Japan Analytics30TH JANUARY ROUNDUP - Thre were 194 results and 64 forecasts or revisions announcements yesterday. Of the 85 larger-cap companies reporting results, 18 saw year-on-year declines in their quarterly OP of greater than 25%, while 10 saw improvements of more than 25%. Our Results Sore tumbled 22bps to 0.77, the second-lowest Score in three years while the Forecast/Revision Score lost almost all of yesterday's gain and is 9bps away from a three-year low.

🇯🇵 JAPAN • Results & Revisions Daily Roundup - 30th January ▲ 8316•6702•8604 ▼ 6770•9064•4661

David Blennerhassett

<div>
Last Week in Event SPACE ...
</div>
<div>
<ul>
<li>A potential win-win as <a href="https://www.smartkarma.com/entities/j-front-retailing-co-ltd" target="_blank" data-smartkarma-citation="entities:8947:1" rel="noopener">J Front Retailing (3086 JP)</a> mops up the remaining shares in <a href="https://www.smartkarma.com/entities/parco-co-ltd" target="_blank" data-smartkarma-citation="entities:8431:1" rel="noopener">Parco Co Ltd (8251 JP)</a><a href="https://www.smartkarma.com/entities/parco-co-ltd" target="_blank" data-smartkarma-citation="entities:8431:1" rel="noopener"></a>.</li>
<li>Expect <a href="https://www.smartkarma.com/entities/nomura-holdings-inc" target="_blank" data-smartkarma-citation="entities:742:1" rel="noopener">Nomura Holdings (8604 JP)</a> to underperform <a href="https://www.smartkarma.com/entities/daiwa-securities-group-inc" target="_blank" data-smartkarma-citation="entities:8389:1" rel="noopener">Daiwa Securities Group (8601 JP)</a> as its buyback comes to an end.</li>
<li>What does one do when the total value attributable to a company based on the market capitalisation of its listed investments is more than five times above the Offer Price? One must conclude it lacks any significant validity. Or so says the IFA in the <a href="https://www.smartkarma.com/entities/avic-international-holding-h" target="_blank" data-smartkarma-citation="entities:3287:1" rel="noopener">Avic International Holding-H (161 HK)</a> Offer.</li>
<li>
<a href="https://www.smartkarma.com/entities/excel-co-ltd" target="_blank" data-smartkarma-citation="entities:12635:1" rel="noopener">Excel Co Ltd (7591 JP)</a> is a small company with really only about 40% of the company in float. For that, the takeover is of little interest to most. But it is a highly unusual structure.
</li>
<li>
<a href="https://www.smartkarma.com/entities/fujifilm-holdings-corp" target="_blank" data-smartkarma-citation="entities:16353:1" rel="noopener">Fujifilm Holdings (4901 JP)</a> will dissolve a contract with <a href="https://www.smartkarma.com/entities/xerox-corp" target="_blank" data-smartkarma-citation="entities:17585:1" rel="noopener">Xerox Corp (XRX US)</a> on sales cooperation and the right to use Xerox’s brand, and will now enter the U.S. and European markets with its own brand.</li>
<li>Plus, other events, CCASS movements - including a summary of large moves in 2019 - and Mood Spins.</li>
</ul>
</div>
<div>
(This insight covers specific insights &amp; comments involving Stubs, Pairs, Arbitrage, share Classifications, and Events - or SPACE - in the past week)
</div>


Last Week in Event SPACE ...



A potential win-win as J Front Retailing (3086 JP) mops up the remaining shares in Parco Co Ltd (8251 JP).
Expect Nomura Holdings (8604 JP) to underperform Daiwa Securities Group (8601 JP) as its buyback comes to an end.
What does one do when the total value attributable to a company based on the market capitalisation of its listed investments is more than five times above the Offer Price? One must conclude it lacks any significant validity. Or so says the IFA in the Avic International Holding-H (161 HK) Offer.

Excel Co Ltd (7591 JP) is a small company with really only about 40% of the company in float. For that, the takeover is of little interest to most. But it is a highly unusual structure.


Fujifilm Holdings (4901 JP) will dissolve a contract with Xerox Corp (XRX US) on sales cooperation and the right to use Xerox’s brand, and will now enter the U.S. and European markets with its own brand.
Plus, other events, CCASS movements - including a summary of large moves in 2019 - 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: Parco, AVIC, Excel, Nomura/Daiwa, Fujifilm/Xerox, CCASS

Financials Credit Analyst

Hank Calenti, CFA

Credit

Risk-wait, risk-on and new issue markets impacted Asian bank bonds over the geo-politically eventful week ending 10 January 2020. After a slow start, risk-on sentiment pushed Asian bank High Yield and X-over Subordinated US$-bond spreads slightly tighter. In contrast, High Yield Asian bank Senior Unsecured US$-bonds slightly underperformed. The YESIN 3.75% ’23 <a href="https://www.smartkarma.com/entities/yes-bank-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:767:1">Yes Bank (YES IN)</a> bond remained the one to avoid. The bond lagged the market as an independent board member flamed the bank while resigning and details on an anticipated capital raise proved non-existent. Across the rest of Asia, the news-flow was less dramatic as quiet periods kicked-in for some issuers and all eyes focused on developments in the Middle East. As the week ended, US non-farm payrolls missed slightly at 145,000 but we see no need for alarm in the financials space, as a one-month miss is unlikely to move the Fed.
Negative concessions from sovereigns launched the issuance market in Asia, confirming a healthy start to the new year, while Bank of China <a href="https://www.smartkarma.com/entities/bank-of-china-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:24574:1">Bank Of China (601988 CH)</a> brought a solid deal that could have positive implications for its higher yielding bonds. Otherwise, Asian banks generally watched from the side-lines as the new issue market opened with a roar across Europe, particularly in Tier 2 subordinated debt issues. EU banks may be getting ahead of anticipated rules that allow these bonds for Pillar 2 capital needs. This weekly focuses on the new issue market and the potential implications for Asian bank debt issuers. 
Looking forward, Indusind Bank (IIBIN) <a href="https://www.smartkarma.com/entities/indusind-bank-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:1558:1">Indusind Bank (IIB IN)</a> and US money center banks are scheduled to report earnings next week.  IIBIN’s US$-bond has plenty of upside potential as its 3 7/8% coupon US$-bond maturing in 2022 trades at around T+167bp, just behind ICICI’s <a href="https://www.smartkarma.com/entities/icici-bank-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:547:1">ICICI Bank Ltd (ICICIBC IN)</a>  bond maturing five years later. We suspect that the 14 Jan. Indusind Bank earnings report may prove the most interesting earning release of the week to come.

Risk-wait, risk-on and new issue markets impacted Asian bank bonds over the geo-politically eventful week ending 10 January 2020. After a slow start, risk-on sentiment pushed Asian bank High Yield and X-over Subordinated US$-bond spreads slightly tighter. In contrast, High Yield Asian bank Senior Unsecured US$-bonds slightly underperformed. The YESIN 3.75% ’23 Yes Bank (YES IN) bond remained the one to avoid. The bond lagged the market as an independent board member flamed the bank while resigning and details on an anticipated capital raise proved non-existent. Across the rest of Asia, the news-flow was less dramatic as quiet periods kicked-in for some issuers and all eyes focused on developments in the Middle East. As the week ended, US non-farm payrolls missed slightly at 145,000 but we see no need for alarm in the financials space, as a one-month miss is unlikely to move the Fed.
Negative concessions from sovereigns launched the issuance market in Asia, confirming a healthy start to the new year, while Bank of China Bank Of China (601988 CH) brought a solid deal that could have positive implications for its higher yielding bonds. Otherwise, Asian banks generally watched from the side-lines as the new issue market opened with a roar across Europe, particularly in Tier 2 subordinated debt issues. EU banks may be getting ahead of anticipated rules that allow these bonds for Pillar 2 capital needs. This weekly focuses on the new issue market and the potential implications for Asian bank debt issuers. 
Looking forward, Indusind Bank (IIBIN) Indusind Bank (IIB IN) and US money center banks are scheduled to report earnings next week.  IIBIN’s US$-bond has plenty of upside potential as its 3 7/8% coupon US$-bond maturing in 2022 trades at around T+167bp, just behind ICICI’s ICICI Bank Ltd (ICICIBC IN)  bond maturing five years later. We suspect that the 14 Jan. Indusind Bank earnings report may prove the most interesting earning release of the week to come.

Asian Bank HY Credit Weekly: New Year / New Issue Market

Japan

Nomura Holdings, Inc. is a holding company which manages financial operations for its subsidiaries.  As a group, the Company provides a variety of financial services such as dealing, brokerage, underwriting, and asset management. Nomura Securities Co., a registered member of the New York and London Stock Exchanges, has branches around the world.

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Nomura Holdings (8604 JP)

A Potential Asian LBO Screening System

With a relatively full slate of large value takeovers in Developed Asia in the past year - often by parents but also by buyout funds - and the...

Travis Lundy

🇯🇵 JAPAN • IT’S A WRAP! Part 2: 2020-Q1 Results & Revision Scores

THREE-YEAR LOW - With Bridgestone (5108 JP)'s results and revision now added, our final tally for this season is a 196 basis point decline in our...

Campbell Gunn

🇯🇵 JAPAN • Results & Revisions Daily Roundup - 30th January ▲ 8316•6702•8604 ▼ 6770•9064•4661

30TH JANUARY ROUNDUP - Thre were 194 results and 64 forecasts or revisions announcements yesterday. Of the 85 larger-cap companies reporting...

Campbell Gunn

Last Week in Event SPACE: Parco, AVIC, Excel, Nomura/Daiwa, Fujifilm/Xerox, CCASS

Last Week in Event SPACE ... A potential win-win as J Front Retailing (3086 JP) mops up the remaining shares in Parco Co Ltd (8251 JP). Expect...

David Blennerhassett

Asian Bank HY Credit Weekly: New Year / New Issue Market

Risk-wait, risk-on and new issue markets impacted Asian bank bonds over the geo-politically eventful week ending 10 January 2020. After a slow...

Hank Calenti, CFA

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52-week Range

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