Telco/Internet specialist

Kirk Boodry

Redex Research

Equity Bottom-Up

<p>Rakuten posted Q4/FY19 results including the first annual net loss since FY08 on the back of accelerated investment in mobile and logistics.  That was largely expected however and the big news is that Rakuten will unveil new mobile pricing on 3 March with a commercial launch confirmed for early April.  The latter is a modest positive as it reaches sufficient scale to launch although as we explain in the report below we do not think the initial phase is a worry for incumbents. On the margin, Rakuten's launch should be good for KDDI (roaming fees) but less so for DoCoMo (MVNO subscriber erosion). </p>

Rakuten posted Q4/FY19 results including the first annual net loss since FY08 on the back of accelerated investment in mobile and logistics.  That was largely expected however and the big news is that Rakuten will unveil new mobile pricing on 3 March with a commercial launch confirmed for early April.  The latter is a modest positive as it reaches sufficient scale to launch although as we explain in the report below we do not think the initial phase is a worry for incumbents. On the margin, Rakuten's launch should be good for KDDI (roaming fees) but less so for DoCoMo (MVNO subscriber erosion). 

Rakuten: Q4 Results Takeaways Include Firming up of Mobile Launch Timeline

'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><p><strong>OOOPS!</strong> - 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. </p><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><p><strong>18x EARNINGS</strong> - 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.</p><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><p style="text-align: left;"><strong>TTM RESULTS</strong> - 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.</p><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><p><strong>FORECASTS</strong> - 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. </p>

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

<p>Softbank shares are up 6% on news that Elliott Management has built up a $2.5bn (c. 3%) stake and is talking to management on enhancing value. That would reportedly entail a $20bn share buyback, greater visibility on Vision Fund investments and strengthening independent directors. And as we wrote a few days ago, that is relevant as shares are trading at a historically high discount to fair value. In the past, Softbank has been open to buying back stock at times like this but the WeWork debacle last year and hopes for a Vision Fund 2 had seemingly ruled that out. Elliott thinks Masa can do it by selling some of his Alibaba shares which makes sense to us but has been a red line in the past. All else remaining equal, Softbank could resist this kind of pressure but a failed Sprint/TMUS merger, weakness at WeWork and a need to fund Vision Fund 2 could force Softbank’s hand.  We think chances of a some sort of buyback have risen and a further reduction in the discount to fair value is possible. </p>

Softbank shares are up 6% on news that Elliott Management has built up a $2.5bn (c. 3%) stake and is talking to management on enhancing value. That would reportedly entail a $20bn share buyback, greater visibility on Vision Fund investments and strengthening independent directors. And as we wrote a few days ago, that is relevant as shares are trading at a historically high discount to fair value. In the past, Softbank has been open to buying back stock at times like this but the WeWork debacle last year and hopes for a Vision Fund 2 had seemingly ruled that out. Elliott thinks Masa can do it by selling some of his Alibaba shares which makes sense to us but has been a red line in the past. All else remaining equal, Softbank could resist this kind of pressure but a failed Sprint/TMUS merger, weakness at WeWork and a need to fund Vision Fund 2 could force Softbank’s hand.  We think chances of a some sort of buyback have risen and a further reduction in the discount to fair value is possible. 

Softbank G: Elliott's Activist Intervention Is Well-Timed Especially if the Sprint Merger Is Blocked

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. 

<p><a href="https://www.smartkarma.com/entities/zozo-inc" target="_blank" data-smartkarma-citation="entities:18379:1" rel="noopener">ZOZO's (3092 JP)</a> new alliance with <a href="https://www.smartkarma.com/entities/softbank-corp" target="_blank" data-smartkarma-citation="entities:27445:1" rel="noopener">Softbank (9434 JP)</a>/<a href="https://www.smartkarma.com/entities/z-holdings-corp" target="_blank" data-smartkarma-citation="entities:19603:1" rel="noopener">Z Holdings (4689 JP)</a> is already bearing fruit.</p><p>As well as opening on Z’s PayPay in December, Zozo is taking another stab at the Chinese market, eight years after its last attempt, with help from its new owners.</p><p>While there are worries about brand dilution selling on PayPay Mall, the expansion into new markets reflects a determination to build out beyond Zozo's core customer base, the right move given the increasing difficulty in extracting more sales from that segment.</p><p>That Zozo was right to tie with Softbank/Z is clear from the reaction of competitors who are investing in earnest to improve services and merchant relations.</p>

ZOZO's (3092 JP) new alliance with Softbank (9434 JP)/Z Holdings (4689 JP) is already bearing fruit.As well as opening on Z’s PayPay in December, Zozo is taking another stab at the Chinese market, eight years after its last attempt, with help from its new owners.While there are worries about brand dilution selling on PayPay Mall, the expansion into new markets reflects a determination to build out beyond Zozo's core customer base, the right move given the increasing difficulty in extracting more sales from that segment.That Zozo was right to tie with Softbank/Z is clear from the reaction of competitors who are investing in earnest to improve services and merchant relations.

Zozo Spreads Its Wings at Home and Overseas

Equity Analyst, LightStream Research

Oshadhi Kumarasiri

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.

Equity Capital Markets

Reynolds Consumer Products I / Equity Capital Markets

<p>Reynolds Consumer Products Inc is a leading consumer goods company in the US and it offers products under three broad product categories: cooking products, waste &amp; storage products and tableware. The company owns a portfolio of iconic consumer goods brands and its Reynolds® and Hefty® brands are the preeminent market leaders in their respective product categories. Furthermore, almost all the brands of Reynolds Consumer Products hold either the No. 1 or No. 2 position in their respective product categories, making Reynolds Consumer Products the undisputed leader in the US waste and storage products, food packaging and tableware industries.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/115/019/original/image_50591943541579941441455.png?1579941442" class="editor-image img-responsive" data-smartkarma-image-id="115019"></figure><div class="content-caption"><em>Source: Company Disclosures </em></div><p>Reynolds Group Holdings Limited, the parent company of Reynolds Consumer Products Inc is a New Zealand based consumer goods conglomerate with operations across the world. Reynolds Group Holdings Limited is an asset heavy business largely financed by debt. As of September 2019, the company had a debt balance of more than $10.5bn which was about 63% of its total assets. In a bid to deleverage and provide more financial flexibility, Reynolds Group Holdings Limited has decided to IPO its Consumer Products segment under the name Reynolds Consumer Products Inc.</p><p>There is a lot to like about Reynolds Consumer Products Inc. The company is head and shoulders above the competition in the US waste and storage products and food packaging industries. These industries are less volatile and therefore could attract a lot of interest especially with a potential global market downturn. It has stable top and bottom lines, healthy margins, stable operating cash generation (although operating cash generation looks very attractive on the surface, it is due to related party balances and factoring of the receivables balance and once adjusted, operating cash generation is around 55-60% of EBIT) and low maintenance capex.</p><p>However, all that good gets undone with the assigned valuation of Reynolds Consumer Products Inc. We agree that Reynolds Consumer Products Inc deserves to trade at a premium over peers. The IPO price range suggests that at the lower end, Reynolds Consumer Products will trade at a 12% premium over the current forward EV/EBIT multiples of the US plastic and metal packaging companies and the premium increases to 18% at the higher end of the IPO price range. Peer multiples are currently trading close to their five-year high level. Thus, we feel future multiple expansion will be limited. Additionally, we expect earnings to stagnate and limit any material share price appreciation.</p><p>Furthermore, the dividend yield will be around 3.2% at the lower end of the price range. Although it seems attractive compared to the industry (second best dividend yield among the US plastic and metal packaging companies) we feel the high debt burden assigned to Reynolds Consumer Products Inc by the parent could limit future DPS growth.</p><p>Given all that we feel the IPO valuation is a big a put-off outweighing all the positives of Reynolds Consumer Products.</p>

Reynolds Consumer Products Inc is a leading consumer goods company in the US and it offers products under three broad product categories: cooking products, waste &amp; storage products and tableware. The company owns a portfolio of iconic consumer goods brands and its Reynolds® and Hefty® brands are the preeminent market leaders in their respective product categories. Furthermore, almost all the brands of Reynolds Consumer Products hold either the No. 1 or No. 2 position in their respective product categories, making Reynolds Consumer Products the undisputed leader in the US waste and storage products, food packaging and tableware industries.Source: Company Disclosures Reynolds Group Holdings Limited, the parent company of Reynolds Consumer Products Inc is a New Zealand based consumer goods conglomerate with operations across the world. Reynolds Group Holdings Limited is an asset heavy business largely financed by debt. As of September 2019, the company had a debt balance of more than $10.5bn which was about 63% of its total assets. In a bid to deleverage and provide more financial flexibility, Reynolds Group Holdings Limited has decided to IPO its Consumer Products segment under the name Reynolds Consumer Products Inc.There is a lot to like about Reynolds Consumer Products Inc. The company is head and shoulders above the competition in the US waste and storage products and food packaging industries. These industries are less volatile and therefore could attract a lot of interest especially with a potential global market downturn. It has stable top and bottom lines, healthy margins, stable operating cash generation (although operating cash generation looks very attractive on the surface, it is due to related party balances and factoring of the receivables balance and once adjusted, operating cash generation is around 55-60% of EBIT) and low maintenance capex.However, all that good gets undone with the assigned valuation of Reynolds Consumer Products Inc. We agree that Reynolds Consumer Products Inc deserves to trade at a premium over peers. The IPO price range suggests that at the lower end, Reynolds Consumer Products will trade at a 12% premium over the current forward EV/EBIT multiples of the US plastic and metal packaging companies and the premium increases to 18% at the higher end of the IPO price range. Peer multiples are currently trading close to their five-year high level. Thus, we feel future multiple expansion will be limited. Additionally, we expect earnings to stagnate and limit any material share price appreciation.Furthermore, the dividend yield will be around 3.2% at the lower end of the price range. Although it seems attractive compared to the industry (second best dividend yield among the US plastic and metal packaging companies) we feel the high debt burden assigned to Reynolds Consumer Products Inc by the parent could limit future DPS growth.Given all that we feel the IPO valuation is a big a put-off outweighing all the positives of Reynolds Consumer Products.

Reynolds Consumer Products IPO: Excessive Valuation for a Stagnant Cash Cow

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)

Rakuten: Q4 Results Takeaways Include Firming up of Mobile Launch Timeline

Rakuten posted Q4/FY19 results including the first annual net loss since FY08 on the back of accelerated investment in mobile and logistics. That...

Kirk Boodry

🇯🇵 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

Softbank G: Elliott's Activist Intervention Is Well-Timed Especially if the Sprint Merger Is Blocked

Softbank shares are up 6% on news that Elliott Management has built up a $2.5bn (c. 3%) stake and is talking to management on enhancing value. That...

Kirk Boodry

Zozo Spreads Its Wings at Home and Overseas

ZOZO's (3092 JP) new alliance with Softbank (9434 JP)/Z Holdings (4689 JP) is already bearing fruit.As well as opening on Z’s PayPay in December,...

Michael Causton

Reynolds Consumer Products IPO: Excessive Valuation for a Stagnant Cash Cow

Reynolds Consumer Products Inc is a leading consumer goods company in the US and it offers products under three broad product categories: cooking...

Oshadhi Kumarasiri

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