Telco/Internet specialist

Kirk Boodry

Redex Research

Equity Bottom-Up

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

NTT senior management has been called out for entertaining Ministry of Industry Affairs and Communications (MIC, the regulator) officials at least four times over the last three years. The amounts are not obscene but they do well exceed government limits and the optics are particularly bad for both the regulator (not its first scandal) and NTT (busy shaking up the industry). That does not mean there will be any direct consequences but it does strengthen the case made by rivals <a href="https://www.smartkarma.com/entities/kddi-corp" target="_blank" data-smartkarma-citation="entities:639:1" rel="noopener">KDDI Corp (9433 JP)</a> and <a href="https://www.smartkarma.com/entities/softbank-corp" target="_blank" data-smartkarma-citation="entities:27445:1" rel="noopener">Softbank Corp (9434 JP)</a>  that regulatory proposals from NTT post the DoCoMo buy-in will need to be closely scrutinized.

NTT senior management has been called out for entertaining Ministry of Industry Affairs and Communications (MIC, the regulator) officials at least four times over the last three years. The amounts are not obscene but they do well exceed government limits and the optics are particularly bad for both the regulator (not its first scandal) and NTT (busy shaking up the industry). That does not mean there will be any direct consequences but it does strengthen the case made by rivals KDDI Corp (9433 JP) and Softbank Corp (9434 JP)  that regulatory proposals from NTT post the DoCoMo buy-in will need to be closely scrutinized. 

NTT - Illegally Entertaining Your Regulator Is a Bad Look

Z Holdings has closed its long-awaited merger with LINE and will now step up to battle global Internet challengers. The new company will invest c. $5bn over five years to boost its AI heft to expand its market share in Japan as well as leverage LINE’s overseas footprint. Investors hoping for an upgrade to profitability targets may be disappointed as the FY23 operating income target is unchanged but the top-line targets are aggressive enough and an accelerated investment program is a compelling story.  That is good for Z Holdings and parent Softbank Corp but less so for its main domestic challenger Rakuten as the cost of business in Japan keeps going up.

Z Holdings has closed its long-awaited merger with LINE and will now step up to battle global Internet challengers. The new company will invest c. $5bn over five years to boost its AI heft to expand its market share in Japan as well as leverage LINE’s overseas footprint. Investors hoping for an upgrade to profitability targets may be disappointed as the FY23 operating income target is unchanged but the top-line targets are aggressive enough and an accelerated investment program is a compelling story.  That is good for Z Holdings and parent Softbank Corp but less so for its main domestic challenger Rakuten as the cost of business in Japan keeps going up.  

Z Holdings -  With Merger Close, Investment Will Accelerate

'Quantamental' Japan Specialist, LightStream Research

Campbell Gunn

'Quantamental' Japan Specialist

Long-Short Analysis on Japan, Asia and the World

LightStream Research

LightStream conducts quantitatively rigorous and data-driven analysis with a focus on Japan and Asia.

We consistently cover the Tech, Consumer and Industrial sectors, and provide ECM and Events coverage more broadly.

We supplement traditional qualitative insights from company relationships with a robust quantitative foundation that examines as much historical data as is available.
We further refine the accuracy of our insights and calls through the use of alternative data to flesh out current trends, and through a valuation framework that emphasises non-superficial peer group selection and a proper attempt to understand the metrics and changes that have driven security valuations in the past.

Thematic (Sector/Industry)

• THE POST-COVID ROTATION •<section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/191/288/original/2021-02-28_08-38-14.png?1614469105" class="editor-image img-responsive" data-smartkarma-image-id="191288"></figure><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/191/290/original/2021-02-28_08-57-32.png?1614470265" class="editor-image img-responsive" data-smartkarma-image-id="191290"></figure></section></section><section class="figure"><div style="text-align: center;" class="content-caption"> Source for all charts &amp; tables: Japan Analytics</div></section>THE 2021 ROTATION ACCELERATES - As we noted in <a href="https://www.smartkarma.com/insights/japan-the-post-covid-rotation-from-growth-to-value-begins-02-05-results-revisions-update" target="_blank" data-smartkarma-citation="insights:47877" rel="noopener">The Post-COVID Rotation from Growth to Value Begins</a>, the Japanese equity market has been led by overvalued and overvalued for most of the last year overbought high-quality growth companies in the Technology Hardware, Electrical Equipment, Internet, and Healthcare Sectors. These companies were deemed to be 'COVID-resistant' and were consistently well-bid regardless of price. The stocks leading this 'charge' were <a href="https://www.smartkarma.com/entities/m3-inc" target="_blank" data-smartkarma-citation="entities:13316:1" rel="noopener">M3 (2413 JP),</a><a href="https://www.smartkarma.com/entities/lasertec-corp" target="_blank" data-smartkarma-citation="entities:4126:1" rel="noopener">Lasertec (6920 JP)</a>, <a href="https://www.smartkarma.com/entities/monotaro-co-ltd" target="_blank" data-smartkarma-citation="entities:15441:1" rel="noopener">MonotaRO (3064 JP)</a>, <a href="https://www.smartkarma.com/entities/chugai-pharmaceutical-co-ltd" target="_blank" data-smartkarma-citation="entities:4489:1" rel="noopener">Chugai Pharmaceutical (4519 JP)</a>, and <a href="https://www.smartkarma.com/entities/nidec-corp" target="_blank" data-smartkarma-citation="entities:7245:1" rel="noopener">Nidec (6594 JP)</a>, while the only cyclical Sector that has seen a major recovery was Energy. Meanwhile, shares in domestically-orientated Sectors and companies heavily exposed to COVID-related delines in business activity languished despite valuations reaching ten or twenty-year lows. PEAKED? - Over the last twenty trading days during which TOPIX reached 1,974.99. The <a href="https://www.smartkarma.com/entities/nikkei-225" target="_blank" data-smartkarma-citation="entities:22909:1" rel="noopener">Nikkei 225 (NKY INDEX)</a> breached 30,000, many of these market leaders have seen a significant correction, while the market has rotated into domestic, cyclical, and financial Sectors - as illustrated by our Sector Relative Price Score timelines in the chart above. In the DETAIL Section below, we will review the current market technicals after Friday's 4% N225 decline and look at the leading stocks on both 'sides' of this rotation trade.

• THE POST-COVID ROTATION • Source for all charts &amp; tables: Japan AnalyticsTHE 2021 ROTATION ACCELERATES - As we noted in The Post-COVID Rotation from Growth to Value Begins, the Japanese equity market has been led by overvalued and overvalued for most of the last year overbought high-quality growth companies in the Technology Hardware, Electrical Equipment, Internet, and Healthcare Sectors. These companies were deemed to be 'COVID-resistant' and were consistently well-bid regardless of price. The stocks leading this 'charge' were M3 (2413 JP),Lasertec (6920 JP), MonotaRO (3064 JP), Chugai Pharmaceutical (4519 JP), and Nidec (6594 JP), while the only cyclical Sector that has seen a major recovery was Energy. Meanwhile, shares in domestically-orientated Sectors and companies heavily exposed to COVID-related delines in business activity languished despite valuations reaching ten or twenty-year lows. PEAKED? - Over the last twenty trading days during which TOPIX reached 1,974.99. The Nikkei 225 (NKY INDEX) breached 30,000, many of these market leaders have seen a significant correction, while the market has rotated into domestic, cyclical, and financial Sectors - as illustrated by our Sector Relative Price Score timelines in the chart above. In the DETAIL Section below, we will review the current market technicals after Friday's 4% N225 decline and look at the leading stocks on both 'sides' of this rotation trade.

🇯🇵 JAPAN • The Post-COVID Rotation Accelerates

Expert on Japan Retail and Consumer Markets, JapanConsuming

Michael Causton

Expert on Japan Retail and Consumer Markets

Real Insight on Japanese Consumer Markets

JapanConsuming

JapanConsuming is a specialist research firm producing intelligence on Japanese retail and consumer markets. Founded in 2000, JapanConsuming has become the leading provider of insights on Japanese retailers and consumer trends to retailers, brands, government agencies and investors. As well as a highly regarded monthly report on the market, JapanConsuming produces in-depth reports on retail sectors, seminars on key trends and telephone consulting to investors on trends and retailers.

JapanConsuming was founded by Michael Causton and Roy Larke. 

Zozo promised significant category expansion 18 months ago and it has delivered.Last year, the online mall added a dedicated footwear section complete with measuring tool and then a new section offering a large line up of DtoC brands.This Spring it will add cosmetics alongside yet another data collection tool, this time for skin analysis, as well as a new premium and luxury section with 70 brands.Zozo expects to become the biggest online cosmetics store within a year, a realistic goal (Zozo customers spend ¥82,200 a year on cosmetics, 2.2 times the average for Japan as a whole).In the meantime, GMVs and OP are improving strongly – while Zozo still has some headwinds in the form of competition and falling shipment values, the strong impetus from the consumer shift to digital, a decent management team, and its category and territory expansion bode well for the immediate future.

Zozo promised significant category expansion 18 months ago and it has delivered.Last year, the online mall added a dedicated footwear section complete with measuring tool and then a new section offering a large line up of DtoC brands.This Spring it will add cosmetics alongside yet another data collection tool, this time for skin analysis, as well as a new premium and luxury section with 70 brands.Zozo expects to become the biggest online cosmetics store within a year, a realistic goal (Zozo customers spend ¥82,200 a year on cosmetics, 2.2 times the average for Japan as a whole).In the meantime, GMVs and OP are improving strongly – while Zozo still has some headwinds in the form of competition and falling shipment values, the strong impetus from the consumer shift to digital, a decent management team, and its category and territory expansion bode well for the immediate future.

<a href="https://www.smartkarma.com/entities/rakuten-inc" target="_blank" data-smartkarma-citation="entities:31:1" rel="noopener">Rakuten Inc (4755 JP)</a>  posted a sharp improvement in sales at Rakuten Ichiba in 2020 as customers flocked to the e-commerce platform in lieu of shopping at physical stores. Based on our estimates, Rakuten and Amazon are pretty much neck and neck for leadership in e-commerce in Japan.
Going forward, Rakuten is hoping that the growth in cross-use of its e-commerce service by its new mobile subscriber base will continue as it works further to improve fulfilment reliability and coverage both alone and through its new joint venture with Japan Post.
In recognition of the increasing diversity of the company’s businesses, Rakuten will change its name to Rakuten Group from April.

Rakuten Inc (4755 JP)  posted a sharp improvement in sales at Rakuten Ichiba in 2020 as customers flocked to the e-commerce platform in lieu of shopping at physical stores. Based on our estimates, Rakuten and Amazon are pretty much neck and neck for leadership in e-commerce in Japan.
Going forward, Rakuten is hoping that the growth in cross-use of its e-commerce service by its new mobile subscriber base will continue as it works further to improve fulfilment reliability and coverage both alone and through its new joint venture with Japan Post.
In recognition of the increasing diversity of the company’s businesses, Rakuten will change its name to Rakuten Group from April.

Japan

Softbank Corporation provides mobile phone telecommunication and networking services. The Company offers mobile communication opening, short messaging function opening, video function opening, and other services. Softbank also provides mobile phones.

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Softbank Corp (9434 JP)

NTT - Illegally Entertaining Your Regulator Is a Bad Look

NTT management has been called out for illegally entertaining regulatory officials. There is probably little direct consequence but it is a bad look

Kirk Boodry

Z Holdings - With Merger Close, Investment Will Accelerate

The biggest takeaway from the merger close is the ¥500bn investment program. If it fuels stronger revenue growth then profits should follow over...

Kirk Boodry

🇯🇵 JAPAN • The Post-COVID Rotation Accelerates

Over the last 20 trading days during which TOPIX reached 1,974.99, many market leaders have seen a significant correction, and there has been a...

Campbell Gunn

Zozo on the March Again

Zozo is back with a stronger, more cohesive and collegiate management team, clear focus and the backing of Softbank to make it happen. The future...

Michael Causton

Rakuten Surges in 2020

Rakuten's Ichiba online shopping platform had a great year based on early numbers coming from CEO Mikitani and looks to have plenty to look forward...

Michael Causton

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