Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

Today after the close the Nikkei Inc <a href="https://indexes.nikkei.co.jp/en/nkave/archives/news/20200715E_1.pdf" target="_blank" rel="noopener">announced</a> that it would delete <a href="https://www.smartkarma.com/entities/sony-financial-holdings-inc" target="_blank" data-smartkarma-citation="entities:564:1" rel="noopener">Sony Financial Holdings (8729 JP)</a> from a few of its indices and in the case of the Nikkei 225, would replace it with <a href="https://www.smartkarma.com/entities/japan-exchange-group-inc" target="_blank" data-smartkarma-citation="entities:11266:1" rel="noopener">Japan Exchange Group (8697 JP)</a>. Changes will be made so that the calculation changes as of the opening price of 29 July, meaning the inclusion event takes place at the close of trading on 28 July. This is a new way of dealing with Securities which will likely be delisted, following the <a href="https://indexes.nikkei.co.jp/en/nkave/archives/news/20200615E_1.pdf" target="_blank" rel="noopener">announcement</a> of a slight change in policy made on 15 June, titled Changes to the Constituents Selection Rules of the Nikkei Stock Average which followed a <a href="https://indexes.nikkei.co.jp/en/nkave/archives/news/20200511E_2.pdf" target="_blank" rel="noopener">consultation</a> starting in early May.This was not that much of a surprise. There were several "top picks" out there, including <a href="https://www.smartkarma.com/entities/seven-bank-ltd" target="_blank" data-smartkarma-citation="entities:16063:1" rel="noopener">Seven Bank Ltd (8410 JP)</a>, the Japan Post names not in already, <a href="https://www.smartkarma.com/entities/orix-corp" target="_blank" data-smartkarma-citation="entities:9936:1" rel="noopener">Orix Corp (8591 JP)</a>, <a href="https://www.smartkarma.com/entities/sbi-holdings-inc" target="_blank" data-smartkarma-citation="entities:10928:1" rel="noopener">Sbi Holdings (8473 JP)</a> and <a href="https://www.smartkarma.com/entities/monex-group-inc" target="_blank" data-smartkarma-citation="entities:14211:1" rel="noopener">Monex Group Inc (8698 JP)</a>. The fact that there were so many top picks indicates three things at the outset.<ol>
<li>Not everyone is in the successful inclusion,</li>
<li>People are in names which were not successful inclusions and will want to exit,</li>
<li>The Nikkei has rules or habits which are vague enough to be considered unreliable. That creates for more surprise when inclusions come, but it also creates for unreliable index construction, which remains a problem. </li>
</ol>However, Japan Exchange Group saw a decent run on excess volume, perhaps partially helped by rising forward Street consensus EBIT. The trade is partially "done" already.The details of the inclusion and exclusion trades, flows, etc are, of course, below.

Today after the close the Nikkei Inc announced that it would delete Sony Financial Holdings (8729 JP) from a few of its indices and in the case of the Nikkei 225, would replace it with Japan Exchange Group (8697 JP). Changes will be made so that the calculation changes as of the opening price of 29 July, meaning the inclusion event takes place at the close of trading on 28 July. This is a new way of dealing with Securities which will likely be delisted, following the announcement of a slight change in policy made on 15 June, titled Changes to the Constituents Selection Rules of the Nikkei Stock Average which followed a consultation starting in early May.This was not that much of a surprise. There were several "top picks" out there, including Seven Bank Ltd (8410 JP), the Japan Post names not in already, Orix Corp (8591 JP), Sbi Holdings (8473 JP) and Monex Group Inc (8698 JP). The fact that there were so many top picks indicates three things at the outset.
Not everyone is in the successful inclusion,
People are in names which were not successful inclusions and will want to exit,
The Nikkei has rules or habits which are vague enough to be considered unreliable. That creates for more surprise when inclusions come, but it also creates for unreliable index construction, which remains a problem. 
However, Japan Exchange Group saw a decent run on excess volume, perhaps partially helped by rising forward Street consensus EBIT. The trade is partially "done" already.The details of the inclusion and exclusion trades, flows, etc are, of course, below.

Coming with a <a href="https://www.smartkarma.com/entities/sony-corp" target="_blank" data-smartkarma-citation="entities:563:1" rel="noopener">Sony Corp (6758 JP)</a><a href="https://www.sony.net/SonyInfo/IR/library/presen/strategy/" target="_blank" rel="noopener">Corporate Strategy Meeting</a>, there was an announcement of a couple of <a href="https://www.sony.net/SonyInfo/News/Press/202005/20-040E/" target="_blank" rel="noopener">Executive Changes</a> based on a <a href="https://www.sony.net/SonyInfo/News/Press/202005/20-039E/" target="_blank" rel="noopener">New Organizational Structure</a> which, for strategic reasons, means that Sony is obliged to announce a Tender Offer to take full control of <a href="https://www.smartkarma.com/entities/sony-financial-holdings-inc" target="_blank" data-smartkarma-citation="entities:564:1" rel="noopener">Sony Financial Holdings (8729 JP)</a>.So.... Sony takes out Sony Financial. This is an event which special situations investors/analysts/traders have speculated on for years, but this takeover is extremely opportunistic.Today's <a href="https://www.sony.net/SonyInfo/IR/news/20200519_02E.pdf" target="_blank" rel="noopener">announcement</a> is the functional equivalent of a 'Dear John' letter to Sony Financial shareholders.<blockquote>
It's not you - it's me. 
And I want to be fair. 
If there's anything else, please talk to my lawyer. 
</blockquote>To be sure, that is not an actual quote from Sony but it might as well be. Takeout price?    It's at a....    [checks notes]...  three month high? For a cash takeover? Surely you must be joking. Don't read the Tender Offer document. It will just get you upset.The Tender Offer Price is 30% higher than the first offer made by Sony. And Sony made the approach with a share exchange proposal, when the SFH/Sony share price ratio was at the lowest level since SFH was listed. Minority protections like Majority of Minority? Nope. Minimum hurdle?  1.6% of shareholders must tender to make it successful. Post-deal recourse? Not much. Shareholder appraisal rights are effectively impaired since the JCOM decision. This is one of the GREAT failings of experts, authorities, and the Court. Is there a chance upset shareholders could block this? There is a theoretical chance, but it is, in my opinion, improbable in the extreme.<hr>This is going to make some people unhappy. This will go down in the books as a situation where SONY parent should have done better. My constant refrain to shareholders in Japan is...<div class="content-highlight">
If you want takeover prices for minorities to be anywhere near appropriate, you need to make yourself heard. 
"The Rules" enable and support management and incumbent/insider abuse of minorities. 
Demand reasonable, fair, and global standard treatment from your independent directors. Make it known to the parent in situations where the shareholder structure allows abuse that you will exercise your rights where and how necessary. 
</div>In the meantime, we have a risk arb situation to trade...

Coming with a Sony Corp (6758 JP)Corporate Strategy Meeting, there was an announcement of a couple of Executive Changes based on a New Organizational Structure which, for strategic reasons, means that Sony is obliged to announce a Tender Offer to take full control of Sony Financial Holdings (8729 JP).So.... Sony takes out Sony Financial. This is an event which special situations investors/analysts/traders have speculated on for years, but this takeover is extremely opportunistic.Today's announcement is the functional equivalent of a 'Dear John' letter to Sony Financial shareholders.
It's not you - it's me. 
And I want to be fair. 
If there's anything else, please talk to my lawyer. 
To be sure, that is not an actual quote from Sony but it might as well be. Takeout price?    It's at a....    [checks notes]...  three month high? For a cash takeover? Surely you must be joking. Don't read the Tender Offer document. It will just get you upset.The Tender Offer Price is 30% higher than the first offer made by Sony. And Sony made the approach with a share exchange proposal, when the SFH/Sony share price ratio was at the lowest level since SFH was listed. Minority protections like Majority of Minority? Nope. Minimum hurdle?  1.6% of shareholders must tender to make it successful. Post-deal recourse? Not much. Shareholder appraisal rights are effectively impaired since the JCOM decision. This is one of the GREAT failings of experts, authorities, and the Court. Is there a chance upset shareholders could block this? There is a theoretical chance, but it is, in my opinion, improbable in the extreme.This is going to make some people unhappy. This will go down in the books as a situation where SONY parent should have done better. My constant refrain to shareholders in Japan is...
If you want takeover prices for minorities to be anywhere near appropriate, you need to make yourself heard. 
"The Rules" enable and support management and incumbent/insider abuse of minorities. 
Demand reasonable, fair, and global standard treatment from your independent directors. Make it known to the parent in situations where the shareholder structure allows abuse that you will exercise your rights where and how necessary. 
In the meantime, we have a risk arb situation to trade...

Sony FINALLY Takes Out Sony Financial in Tender Offer

'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/000/116/923/original/2020-02-08_18-15-45.png?1581196263" class="editor-image img-responsive" data-smartkarma-image-id="116923"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/116/924/original/2020-02-09_06-34-51.png?1581197706" class="editor-image img-responsive" data-smartkarma-image-id="116924"></figure><div class="content-caption">Source • Japan Analytics</div><div class="content-caption"></div>OOOPS! - The 480 quarterly results announced on Friday subtracted a further 20 basis points from our Results Score. If the remaining 38% of companies continue this trend, the current quarter will equal CQ2019-1 and CQ2018-2 in seeing a 200 basis point Results Score decline. 169 forecasts or revision announcements added  5bps to the Forecast/Revision Score, supported by slight upward revisions from <a href="https://www.smartkarma.com/entities/softbank-corp" target="_blank" data-smartkarma-citation="entities:27445:1" rel="noopener">Softbank Corp (9434 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>.  The Results Score has dipped below the Forecast/Revision Score for the first time since July 2016 and is a necessary precursor of the bottoming of the cycle. Japan is now in a recession and could see a decline in GDP for the calendar year. The market's current optimism (aided by the Bank of Japan's buy-the-dips support programme) is more appropriate to the middle of the cycle and, with two further poor earnings quarters ahead, suggests limited further upside. <figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/116/925/original/2020-02-08_10-48-19.png?1581199859" class="editor-image img-responsive" data-smartkarma-image-id="116925"></figure><div class="content-caption">Source • Japan Analytics</div>18x EARNINGS - Trailing-twelve-month (TTM) Operating Income for the composite of listed companies has declined to ¥57.4t, 10% below the peak of early 2019. TTM Net Income has declined by 20% over the same period, resulting in a 6.1 point increase in the market price-earnings ratio to 17.6 times.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/116/927/original/2020-02-08_10-55-21.png?1581200256" class="editor-image img-responsive" data-smartkarma-image-id="116927"></figure><div class="content-caption">Source • Japan Analytics</div>TTM RESULTS - TTM Operating Profits have been declining quarter-on-quarter for five straight quarters, and are 8.1% lower year-on-year. The Operating Margin has declined from 7.45% to 6.80%. TTM Revenues are now also falling and have only increased by 0.7% year-on-year.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/116/928/original/2020-02-08_10-59-00.png?1581200533" class="editor-image img-responsive" data-smartkarma-image-id="116928"></figure><div class="content-caption">Source • Japan Analytics</div>FORECASTS - The year-on-year Operating Profit decline using current forecasts is 8.5%, while Revenues are flat. Revenue forecasts have been falling quarter-on-quarter for three quarters in a row. The 'uplift' from TTM to Forecast is just ¥3t for sales and ¥0.3t for OP.

Source • Japan AnalyticsOOOPS! - The 480 quarterly results announced on Friday subtracted a further 20 basis points from our Results Score. If the remaining 38% of companies continue this trend, the current quarter will equal CQ2019-1 and CQ2018-2 in seeing a 200 basis point Results Score decline. 169 forecasts or revision announcements added  5bps to the Forecast/Revision Score, supported by slight upward revisions from Softbank Corp (9434 JP) and Honda Motor (7267 JP).  The Results Score has dipped below the Forecast/Revision Score for the first time since July 2016 and is a necessary precursor of the bottoming of the cycle. Japan is now in a recession and could see a decline in GDP for the calendar year. The market's current optimism (aided by the Bank of Japan's buy-the-dips support programme) is more appropriate to the middle of the cycle and, with two further poor earnings quarters ahead, suggests limited further upside. Source • Japan Analytics18x EARNINGS - Trailing-twelve-month (TTM) Operating Income for the composite of listed companies has declined to ¥57.4t, 10% below the peak of early 2019. TTM Net Income has declined by 20% over the same period, resulting in a 6.1 point increase in the market price-earnings ratio to 17.6 times.Source • Japan AnalyticsTTM RESULTS - TTM Operating Profits have been declining quarter-on-quarter for five straight quarters, and are 8.1% lower year-on-year. The Operating Margin has declined from 7.45% to 6.80%. TTM Revenues are now also falling and have only increased by 0.7% year-on-year.Source • Japan AnalyticsFORECASTS - The year-on-year Operating Profit decline using current forecasts is 8.5%, while Revenues are flat. Revenue forecasts have been falling quarter-on-quarter for three quarters in a row. The 'uplift' from TTM to Forecast is just ¥3t for sales and ¥0.3t for OP. 

🇯🇵 JAPAN • Results & Revisions Daily Roundup - 7th February ▲2121 7267 5713 ▼ 5401 9616 3407

Senior Bank Analyst - Japanese Banks, Windamee Research

J. Brian Waterhouse

Senior Bank Analyst - Japanese Banks

Windamee Research

Japanese Banks

Equity Bottom-Up

Nara, in the Kinki Region of western Japan surrounding Osaka, is famous for its magnificent temples and its sacred shika spotted deer that roam much of the city.  It is also the home of <a href="https://www.smartkarma.com/entities/nanto-bank-ltd" target="_blank" rel="noopener" data-smartkarma-citation="entities:13217:1">Nanto Bank (8367 JP)</a>, which is the sole regional bank to be based in the prefecture. Nanto Bank’s stock price performance in the first half of FY3/2020 was by some considerable way the best of any Japanese bank, rising over 21% in the six months to the end of September thanks in part to buying by foreign investors.  Yet investor enthusiasm for the stock is not reflected in its fundamentals:  FY3/2019 consolidated net profits were down over 15% YoY and FY3/2020 guidance suggests a further 20% decline in bottom-line profits.  Indeed, results for FY3/2018 and FY3/2019 were so far off management’s current 3-Year Business Plan that its FY3/2020 key operating targets now seem fanciful.
Foreign investors, including the Government of Norway’s sovereign fund, now own almost 15% of the bank, with much of these positions having been taken up in just the last few years.  Why?  Nanto Bank has some serious structural issues that may take years to resolve.  Compared to its peers, Nanto Bank is overstaffed, has too many branches relative to available business, and its operations are inefficient.  Core profitability remains poor.  The bank itself openly admits that it has lost money on its core operations for 11 years straight: in part a reflection of some seriously imprudent investments in foreign securities.  Net operating margins are down to 12 basis points (0.12%pa), while its domestic net return on funds deployed (NRFD) – a key measurement of profitability closely monitored by the Financial Services Agency – is now effectively zero.  Loan growth of 1.9% YoY in FY3/2019 was almost entirely due to an increase in property-related lending, which now represents a red flag-waving 60% of the entire loan portfolio.  Credit costs are on the rise.  Meanwhile, the bank has a woefully low ROE of 3.9% and even worse ROA of just 0.19%: ratios that appear destined to get even worse in FY3/2020.  Caveat emptor!  (May the buyer beware!)

Nara, in the Kinki Region of western Japan surrounding Osaka, is famous for its magnificent temples and its sacred shika spotted deer that roam much of the city.  It is also the home of Nanto Bank (8367 JP), which is the sole regional bank to be based in the prefecture. Nanto Bank’s stock price performance in the first half of FY3/2020 was by some considerable way the best of any Japanese bank, rising over 21% in the six months to the end of September thanks in part to buying by foreign investors.  Yet investor enthusiasm for the stock is not reflected in its fundamentals:  FY3/2019 consolidated net profits were down over 15% YoY and FY3/2020 guidance suggests a further 20% decline in bottom-line profits.  Indeed, results for FY3/2018 and FY3/2019 were so far off management’s current 3-Year Business Plan that its FY3/2020 key operating targets now seem fanciful.
Foreign investors, including the Government of Norway’s sovereign fund, now own almost 15% of the bank, with much of these positions having been taken up in just the last few years.  Why?  Nanto Bank has some serious structural issues that may take years to resolve.  Compared to its peers, Nanto Bank is overstaffed, has too many branches relative to available business, and its operations are inefficient.  Core profitability remains poor.  The bank itself openly admits that it has lost money on its core operations for 11 years straight: in part a reflection of some seriously imprudent investments in foreign securities.  Net operating margins are down to 12 basis points (0.12%pa), while its domestic net return on funds deployed (NRFD) – a key measurement of profitability closely monitored by the Financial Services Agency – is now effectively zero.  Loan growth of 1.9% YoY in FY3/2019 was almost entirely due to an increase in property-related lending, which now represents a red flag-waving 60% of the entire loan portfolio.  Credit costs are on the rise.  Meanwhile, the bank has a woefully low ROE of 3.9% and even worse ROA of just 0.19%: ratios that appear destined to get even worse in FY3/2020.  Caveat emptor!  (May the buyer beware!)

Research and consultancy, Tabbush Report

Daniel Tabbush

Research and consultancy

Tabbush Report

We provide research and consultancy on Asian banks. Our focus is on what we call “Asian bank research, without the noise.” We are interested in the most critical swing-factors for banks, the NPL and credit cycle, and where we believe there is a gap between perception and reality. We often focus on the less studied components of bank financial statements.  Our research is highly thematic, sometimes examining unlisted banks and companies as a window on mainstream banks. 

Being independent allows us to look at smaller banks, often overlooked by others. Analysis of BIS bank guidelines in the context of Asia, is also a focal point, while we also analyze global banks operating in the region. We use what we believe is the most comprehensive, reliable financials database, SNL Financial. S&P Capital IQ augments our database, with corporate data and CEIC, with economics. 

Asian bank research, without the noise.

<a href="https://www.smartkarma.com/entities/20097" target="_blank" data-smartkarma-citation="entities:20097:1">Krungthai Card (KTC TB)</a> shows all too clearly how to keep profit growth high, rising from 20%, to 33% and to 56%, from 2016 through 2018. There are few financial companies that can compare to the persistent and high and improving rate of profit growth. We must remember that late in 2017, regulations changed lowering the maximum rate on credit card loans and limiting facilities based on a more stringent policy relating to income. Ironically, we believe this supports performance. Customers may have become more careful on defaulting, running the risk of getting cut off and having to re-apply for a personal loan or a credit card. And under new regulations, customers can not receive as high a credit limit as in the past, if their income is less than Bt30,000 or Bt50,000 per month.

Krungthai Card (KTC TB) shows all too clearly how to keep profit growth high, rising from 20%, to 33% and to 56%, from 2016 through 2018. There are few financial companies that can compare to the persistent and high and improving rate of profit growth. We must remember that late in 2017, regulations changed lowering the maximum rate on credit card loans and limiting facilities based on a more stringent policy relating to income. Ironically, we believe this supports performance. Customers may have become more careful on defaulting, running the risk of getting cut off and having to re-apply for a personal loan or a credit card. And under new regulations, customers can not receive as high a credit limit as in the past, if their income is less than Bt30,000 or Bt50,000 per month.

Japan

Seven Bank, Ltd. provides banking services mainly through Automated Teller Machine (ATM) across Japan. The bank cooperates with affiliated financial institutions to establish the nationwide ATM network and provide remote banking services, including deposits and loans.

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Seven Bank Ltd (8410 JP)

Nikkei 225 - JPX IN, Sony Financial OUT

Today after the close the Nikkei Inc announced that it would delete Sony Financial Holdings (8729 JP) from a few of its indices and in the case of...

Travis Lundy

Sony FINALLY Takes Out Sony Financial in Tender Offer

Coming with a Sony Corp (6758 JP)Corporate Strategy Meeting, there was an announcement of a couple of Executive Changes based on a New...

Travis Lundy

🇯🇵 JAPAN • Results & Revisions Daily Roundup - 7th February ▲2121 7267 5713 ▼ 5401 9616 3407

OOOPS! - The 480 quarterly results announced on Friday subtracted a further 20 basis points from our Results Score. If the remaining 38% of...

Campbell Gunn

Nanto Bank (8367 JP): Deer Prudence

Nara, in the Kinki Region of western Japan surrounding Osaka, is famous for its magnificent temples and its sacred shika spotted deer that roam...

J. Brian Waterhouse

Thailand – KTC Defies the Sceptics

Krungthai Card (KTC TB) shows all too clearly how to keep profit growth high, rising from 20%, to 33% and to 56%, from 2016 through 2018. There are...

Daniel Tabbush

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