Japanese Turnaround Situations, Short-Ideas, Azabu Research

Michael Allen

Japanese Turnaround Situations, Short-Ideas

Azabu Research

Azabu Research is a publishing and consulting firm focused on distressed equities in the Japanese market. We specialize in turnaround strategies, corporate combinations, divestitures, and restructuring.

Publisher of the Tokyo Turnaround Letter, which conducts the most thorough research possible of publicly available information, including forensic tests for fraudulent overstatement of assets and understatement of liabilities, as well as rigorous market and industry analysis to assess the underlying strengths of the company’s products or services, the appropriateness of the company’s turnaround strategy, and the skill of its current management team. The average length of a report exceeds 25 pages of text and tables, excluding any disclosures or executive summaries.

We have more than 30 years of experience in applying this process to distressed equities in Japan. Additionally, subscribers have free access to detailed, yet easily navigated earnings models for the target company as well as the top five comparable companies, and unlimited access to the analyst for follow-up questions.

Azabu Research also conducts be-spoke research on a project basis, and provides consulting services to companies looking to restructure, divest, make acquisitions, go public, or improve investor sentiment toward their stock.

Independent Research and Consulting Firm

Equity Bottom-Up

<ul>
<li>Sumitomo Chemical issued new guidance in-line for 3/24 and xx% ahead of consensus for 3/25 EBIT, yet, the shares promptly declined by 10%.</li>
<li>Traders were probably spooked by the company’s booking of ¥340bn in impairments that was ¥200bn more than published consensus, but we argue that this was more than already priced in.</li>
<li>The only reasonable explanation for the reaction is that the market doesn't believe the new guidance for 3/25. This could prove to be a huge mistake.</li>
</ul>


Sumitomo Chemical issued new guidance in-line for 3/24 and xx% ahead of consensus for 3/25 EBIT, yet, the shares promptly declined by 10%.
Traders were probably spooked by the company’s booking of ¥340bn in impairments that was ¥200bn more than published consensus, but we argue that this was more than already priced in.
The only reasonable explanation for the reaction is that the market doesn't believe the new guidance for 3/25. This could prove to be a huge mistake.


Sumitomo Chemical (4005): To Believe Or Not To Believe, That Is the Question

<ul>
<li>Sumitomo issued new guidance for the year to 3/25 that was 40% higher than consensus estimates, but the stock cratered almost 5%.</li>
<li>We were able to think of at least 6 explanations for this odd reaction - all of them irrational.  </li>
<li>A reasonable person listening to the call should have been pleased by almost all that was new information. </li>
</ul>


Sumitomo issued new guidance for the year to 3/25 that was 40% higher than consensus estimates, but the stock cratered almost 5%.
We were able to think of at least 6 explanations for this odd reaction - all of them irrational.  
A reasonable person listening to the call should have been pleased by almost all that was new information. 


<ul>
<li>Sumitomo Chemicals aims to transform from a cyclical company with low market share in declining markets into a focused entity with high market share in secular growth markets.</li>
<li>We estimate that the stock’s fair value is about 140% above the current price.</li>
<li>Results meeting on April 30 should confirm that company is on track in returning to positive cash flow and selling off core assets. </li>
</ul>


Sumitomo Chemicals aims to transform from a cyclical company with low market share in declining markets into a focused entity with high market share in secular growth markets.
We estimate that the stock’s fair value is about 140% above the current price.
Results meeting on April 30 should confirm that company is on track in returning to positive cash flow and selling off core assets. 


Sumitomo Chemical (4005): Potential Posterchild of Japan's Resurgence

Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

<ul>
<li>Today, <a href="https://www.smartkarma.com/entities/jcr-pharmaceuticals-co-ltd" target="_blank" data-smartkarma-citation="entities:20126:1" rel="noopener">Jcr Pharmaceuticals (4552 JP)</a> announced H1 results, with revenue -¥7.6bn ytd vs last year, of which a decrease in contract revenue was -¥7.1bn. Full year guidance remains unchanged.</li>
<li>The expectation was that Contract Revenue (which was basically zero in H1) was going to be backloaded anyway. Historically, seasonality is bumpy on this name. </li>
<li>The company also announced a buyback. We can tell who the seller is likely to be. The buyback event may be gamed. </li>
</ul>


Today, Jcr Pharmaceuticals (4552 JP) announced H1 results, with revenue -¥7.6bn ytd vs last year, of which a decrease in contract revenue was -¥7.1bn. Full year guidance remains unchanged.
The expectation was that Contract Revenue (which was basically zero in H1) was going to be backloaded anyway. Historically, seasonality is bumpy on this name. 
The company also announced a buyback. We can tell who the seller is likely to be. The buyback event may be gamed. 


JCR Pharma (4552) - Uglyish In-Line Results But a Buyback Opportunity for Someone

Pan-Asia Index Rebalances/ Events/ Delta One, Periscope Analytics

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Periscope Analytics

Periscope Analytics focuses on event-driven trades across Asia Pacific and provides comprehensive, timely and systematic coverage of index changes to major Asia Pacific indices in a structured manner.

The analysis includes forecasted inclusions and exclusions to all major Asian indices that have significant amount of tracking assets, including estimates of passive buy/sell flow on the stocks. The service also provides commentary and impact of market consultations, ground rule changes, and other events (IPOs, spin-offs, M&A) that could lead to index changes and passive flow.

Periscope Analytics works with multi-strategy hedge funds, proprietary trading firms, stat arb trading groups and long-only investors that invest and trade in the Asia Pacific region with the data being used to trade index rebalances, avoid pre-positioning and passive flow, and to time entry into and exit from stocks.

Event-Driven Trades Across Asia Pacific

<ul>
<li>There are 44 adds/41 deletes for the JPX Nikkei 400 Index to bring the number of index constituents back to 400. There are stocks with multiple days ADV to trade.</li>
<li>Based on the adds, deletes and capping changes, we estimate one way turnover of 7.9% and a round-trip trade of JPY 880bn (US$6bn).</li>
<li>The adds have outperformed the deletes over the last year though that has been faded over the last couple of months. Breaking with history, there could be outperformance near-term.</li>
</ul>


There are 44 adds/41 deletes for the JPX Nikkei 400 Index to bring the number of index constituents back to 400. There are stocks with multiple days ADV to trade.
Based on the adds, deletes and capping changes, we estimate one way turnover of 7.9% and a round-trip trade of JPY 880bn (US$6bn).
The adds have outperformed the deletes over the last year though that has been faded over the last couple of months. Breaking with history, there could be outperformance near-term.


JPX Nikkei 400 Index Rebalance: A Bunch of Chunky Adds & US$6bn Trade

Japan

SUMITOMO CHEMICAL COMPANY, LIMITED manufactures chemical products.  The Company specializes in basic chemicals, petrochemicals, fine chemicals such as photo-resists, pharmaceutical intermediates, and agrochemicals.  Sumitomo Chemical operates manufacturing plants and sales offices worldwide.

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Sumitomo Chemical (4005 JP)

Sumitomo Chemical (4005): To Believe Or Not To Believe, That Is the Question

When Sumitomo Chemical announced a JPY200bn increase in impairment losses, the market was already discounting twice that much. More positive...

Michael Allen

Sumitomo Chemical (4005): Up Is Down

Sumitomo's share price dropped 5% on new guidance that was 40% higher than consensus. That's exactly as crazy as it sounds.

Michael Allen

Sumitomo Chemical (4005): Potential Posterchild of Japan's Resurgence

If you are buying Japanese stocks because of a belief in the turnaround in corporate governance, Sumitomo Chemical has the potential to become the...

Michael Allen

JCR Pharma (4552) - Uglyish In-Line Results But a Buyback Opportunity for Someone

Contract pharmaceutical smallcap sponsored by Medipal and crossholders JCR Pharma produces ugly H1 results, but they appear "in-line." Guidance is...

Travis Lundy

JPX Nikkei 400 Index Rebalance: A Bunch of Chunky Adds & US$6bn Trade

There are 44 adds/41 deletes for the JPX Nikkei 400 Index resulting in a one-way turnover of 7.9% and a round-trip trade of JPY 880bn (US$6bn)....

Brian Freitas

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