Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

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<p>Five and a half years ago, after the close of trading just before Golden Week on Tuesday April 28, 2015, <a href="https://www.smartkarma.com/entities/toyota-motor-corp" target="_blank" data-smartkarma-citation="entities:73:1" rel="noopener">Toyota Motor (7203 JP)</a><a href="http://www.toyota-global.com/investors/stock_information_ratings/share_2015/pdf/commonstock_20150428_01.pdf" target="_blank" rel="noopener">announced</a> the board had resolved to submit to shareholders a resolution to partially amend the company's Articles of Incorporation to allow the company to allow issue a new series of shares, which they called "Model AA Shares", so named as the first in a series of preferred shares named after the company's first production car released in 1936.</p>
<p>The announcement noted a first tranche of ¥500 billion, and possible future tranches of this shiny new security. </p>
<section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/178/310/original/Model%20AA%20color.jpg?1607935517" class="editor-image img-responsive" data-smartkarma-image-id="178310"></figure><p></p></section><section class="figure">The securities were to be unlisted, non-transferable, convertible, puttable, and callable. The strike price was up about 30-odd percent - about where a zero coupon convertible bond would have been priced. They were, in effect, a private convertible bond. With voting rights. And a dividend. </section>
</div><div><p>My first reaction was "Huh?"</p></div><div>
<p>After reading all the materials a second, third, and fourth time - in both Japanese and English - given the 15+yrs' experience I then had of looking at the microstructure of Japanese markets, special situations, unusual security issuances, and governance, my reaction evolved to a more considered, and evolved "Huh???"</p>
<h3>They were, unfortunately, a governance disaster.</h3>
<p></p>
<section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/178/311/original/toyota%20model%20AA%20ugly.jpg?1607935529" class="editor-image img-responsive" data-smartkarma-image-id="178311"></figure><p></p></section><p>The excuse used for issuing them was that Toyota needed the ¥500 billion of funding to invest in cutting-edge technology. Somehow the ¥3 trillion net cash position was not enough. Funny enough, the company immediately decided it did not need all that cash or cutting edge technologies and announced a ¥600 billion buyback to go with this issuance. Then they announced <em>another</em> ¥300 billion buyback before it was approved. Raising capital was <em>not</em> the reason why they were issued.</p>
<p>The issuance was UNECONOMIC, ILLOGICAL, UNNECESSARY, and UNFAIR. And I believed it clearly violated the new Japan Corporate Governance Code. Economically, it was issued at worse terms than a convertible bond would have been issued. It also involved relatively significant fees (see <a href="https://www.smartkarma.com/insights/toyota-aa-shares-happy-now-6-10yrs-of-dividend-differentials-paid-in-fees-to-nomura" target="_blank" data-smartkarma-citation="insights:1009" rel="noopener">TOYOTA AA-SHARES: Happy Now? 6-10yrs of dividend differentials paid in fees to Nomura</a>). There was literally no good reason for their issuance.</p>
<h3>Today, Toyota made an <a href="https://global.toyota/en/newsroom/corporate/34508205.html" target="_blank" rel="noopener">announcement</a>.</h3>
<p>The Company effectively seems to take credit for the development of stewardship and governance in Japan. </p>
<section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/178/312/original/Screenshot%202020-12-14%20at%204.48.58%20PM.png?1607935761" class="editor-image img-responsive" data-smartkarma-image-id="178312"></figure></section><p>Harumph. </p>
<p>Not quite. </p>
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Five and a half years ago, after the close of trading just before Golden Week on Tuesday April 28, 2015, Toyota Motor (7203 JP)announced the board had resolved to submit to shareholders a resolution to partially amend the company's Articles of Incorporation to allow the company to allow issue a new series of shares, which they called "Model AA Shares", so named as the first in a series of preferred shares named after the company's first production car released in 1936.
The announcement noted a first tranche of ¥500 billion, and possible future tranches of this shiny new security. 
The securities were to be unlisted, non-transferable, convertible, puttable, and callable. The strike price was up about 30-odd percent - about where a zero coupon convertible bond would have been priced. They were, in effect, a private convertible bond. With voting rights. And a dividend. 
My first reaction was "Huh?"
After reading all the materials a second, third, and fourth time - in both Japanese and English - given the 15+yrs' experience I then had of looking at the microstructure of Japanese markets, special situations, unusual security issuances, and governance, my reaction evolved to a more considered, and evolved "Huh???"
They were, unfortunately, a governance disaster.

The excuse used for issuing them was that Toyota needed the ¥500 billion of funding to invest in cutting-edge technology. Somehow the ¥3 trillion net cash position was not enough. Funny enough, the company immediately decided it did not need all that cash or cutting edge technologies and announced a ¥600 billion buyback to go with this issuance. Then they announced another ¥300 billion buyback before it was approved. Raising capital was not the reason why they were issued.
The issuance was UNECONOMIC, ILLOGICAL, UNNECESSARY, and UNFAIR. And I believed it clearly violated the new Japan Corporate Governance Code. Economically, it was issued at worse terms than a convertible bond would have been issued. It also involved relatively significant fees (see TOYOTA AA-SHARES: Happy Now? 6-10yrs of dividend differentials paid in fees to Nomura). There was literally no good reason for their issuance.
Today, Toyota made an announcement.
The Company effectively seems to take credit for the development of stewardship and governance in Japan. 
Harumph. 
Not quite. 


Toyota Model AA Shares - Good Riddance to Bad Governance

<p>The S&amp;P DJI Global Indices team <a href="https://www.spglobal.com/spdji/en/documents/indexnews/announcements/20201211-1277389/1277389_tes15aircaivspindnkn4.pdf?force_download=true" target="_blank" rel="noopener">confirmed</a> Friday night that <a href="https://www.smartkarma.com/entities/tesla-motors-inc" target="_blank" data-smartkarma-citation="entities:20279:1" rel="noopener">Tesla Motors (TSLA US)</a> would join the S&amp;P500 and the S&amp;P100 at the close of trading on 18 December, with <a href="https://www.smartkarma.com/entities/apartment-invt-mgmt-co-a" target="_blank" data-smartkarma-citation="entities:2193:1" rel="noopener">Apartment Invt &amp; Mgmt Co A (AIV US)</a> coming out of S&amp;P500 and its 14 December spin-out Apartment Income REIT replacing <a href="https://www.smartkarma.com/entities/dunkin-brands-group-inc" target="_blank" data-smartkarma-citation="entities:15866:1" rel="noopener">Dunkin' Brands Group (DNKN US)</a> in the S&amp;P Midcap 400, and <a href="https://www.smartkarma.com/entities/occidental-petroleum-corp" target="_blank" data-smartkarma-citation="entities:17075:1" rel="noopener">Occidental Petroleum (OXY US)</a> coming out of the S&amp;P100 but staying in the S&amp;P500. </p><p>When the S&amp;P announced on the 16th of November that Tesla would be joining the S&amp;P500 in December, it said the pro-forma inclusion weight would be ~1.01% (without measuring what would come out). S&amp;P also said that it would update the pro-forma inclusion weight and trading value impact when the Deletion was announced, but they did not. </p><p>My calc suggests it is 1.47% as of Friday's close. And the two-way trading value based on the S&amp;P's original US$51bn number is, as of today, ~US$152bn.</p><p>Which is a lot.</p><p>The arithmetic, and an explanation of why it matters, follow.</p>

The S&amp;P DJI Global Indices team confirmed Friday night that Tesla Motors (TSLA US) would join the S&amp;P500 and the S&amp;P100 at the close of trading on 18 December, with Apartment Invt &amp; Mgmt Co A (AIV US) coming out of S&amp;P500 and its 14 December spin-out Apartment Income REIT replacing Dunkin' Brands Group (DNKN US) in the S&amp;P Midcap 400, and Occidental Petroleum (OXY US) coming out of the S&amp;P100 but staying in the S&amp;P500. When the S&amp;P announced on the 16th of November that Tesla would be joining the S&amp;P500 in December, it said the pro-forma inclusion weight would be ~1.01% (without measuring what would come out). S&amp;P also said that it would update the pro-forma inclusion weight and trading value impact when the Deletion was announced, but they did not. My calc suggests it is 1.47% as of Friday's close. And the two-way trading value based on the S&amp;P's original US$51bn number is, as of today, ~US$152bn.Which is a lot.The arithmetic, and an explanation of why it matters, follow.

Tesla Into S&P - Rebal Details, and Implications for Vol and Active Portfolio Reconstruction

David Blennerhassett

Last Week in Event SPACE: Tokyo Dome, LG Corp, Kerry Express, Sogou, Adways

<p><a href="https://www.smartkarma.com/entities/owari-precise-products" target="_blank" data-smartkarma-citation="entities:7242:1" rel="noopener">Owari Precise Products (7249 JP)</a> known as <em>Owari Seiki</em> in Japanese makes precision-forged metal parts for the automotive (synchronizer rings for transmissions), aircraft (fasteners), and bicycle (cranks, etc) manufacturing industries. </p><p>The largest corporate shareholders are <a href="https://www.smartkarma.com/entities/hitachi-metals-ltd" target="_blank" data-smartkarma-citation="entities:8561:1" rel="noopener">Hitachi Metals (5486 JP)</a>, <a href="https://www.smartkarma.com/entities/toyota-motor-corp" target="_blank" data-smartkarma-citation="entities:73:1" rel="noopener">Toyota Motor (7203 JP)</a>, <a href="https://www.smartkarma.com/entities/aisin-seiki-co-ltd" target="_blank" data-smartkarma-citation="entities:11809:1" rel="noopener">Aisin Seiki (7259 JP)</a>, and there are several financial crossholders. </p><p>Today it was announced that a fund called Rising Japan Equity Fund 2 would launch a takeover of the company. RJE describes itself as having been founded in 2010 as "5 core members" who have markets experience along with SMBC and Mitsui Sumitomo Trust. </p><p><strong>So... the company which is owned by cross-holders to the level of 57-60% is selling itself to a fund sponsored by one of those cross-holders for.... checks notes... </strong></p><h3>...0.34x Book Value Per Share and 1.9x 5yr EBITDA?</h3><h3> </h3><p>And if you take out the securities and the net receivables (67 days of A/R, 30 days of A/P), it is 0.3x 5yr average EBITDA. </p><p>And the company appears to have net surplus assets connected to its pension benefit obligations which would take that to below zero. And that does not count the fact that it has another 75% of its market cap in &lt;3 months of inventory, where near 40% of sales goes to relatively large and stable customers like Aishin AW, Toyota, and Mazda) on long-term supply contracts. </p><h3>So the purchase price is below net cash, securities, and high-quality receivables. </h3><p></p><p>This is going too cheap. </p><p>And there is probably not much you can do about it except complain.</p><p>Or launch a competing bid.</p><hr><p>Some corporate and financial crossholders should really be ashamed of themselves for allowing this to happen at this price. If a company needs cash, they can sell securities holdings, factor receivables, get some of their customers to pay more quickly, push back payables, sell and lease back real estate, etc. This is being done for virtually free, and the forecast the "fair" value is based on expects to make JPY 500mm a year of OP two years out. </p>

Owari Precise Products (7249 JP) known as Owari Seiki in Japanese makes precision-forged metal parts for the automotive (synchronizer rings for transmissions), aircraft (fasteners), and bicycle (cranks, etc) manufacturing industries. The largest corporate shareholders are Hitachi Metals (5486 JP), Toyota Motor (7203 JP), Aisin Seiki (7259 JP), and there are several financial crossholders. Today it was announced that a fund called Rising Japan Equity Fund 2 would launch a takeover of the company. RJE describes itself as having been founded in 2010 as "5 core members" who have markets experience along with SMBC and Mitsui Sumitomo Trust. So... the company which is owned by cross-holders to the level of 57-60% is selling itself to a fund sponsored by one of those cross-holders for.... checks notes... ...0.34x Book Value Per Share and 1.9x 5yr EBITDA? And if you take out the securities and the net receivables (67 days of A/R, 30 days of A/P), it is 0.3x 5yr average EBITDA. And the company appears to have net surplus assets connected to its pension benefit obligations which would take that to below zero. And that does not count the fact that it has another 75% of its market cap in &lt;3 months of inventory, where near 40% of sales goes to relatively large and stable customers like Aishin AW, Toyota, and Mazda) on long-term supply contracts. So the purchase price is below net cash, securities, and high-quality receivables. This is going too cheap. And there is probably not much you can do about it except complain.Or launch a competing bid.Some corporate and financial crossholders should really be ashamed of themselves for allowing this to happen at this price. If a company needs cash, they can sell securities holdings, factor receivables, get some of their customers to pay more quickly, push back payables, sell and lease back real estate, etc. This is being done for virtually free, and the forecast the "fair" value is based on expects to make JPY 500mm a year of OP two years out. 

Owari Precise Products - Another Tiny Cap Takeover at <0.5 Book

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<p>This week in StubWorld ...</p>
<p><a href="https://www.smartkarma.com/entities/toyota-industries-corp" target="_blank" data-smartkarma-citation="entities:4500:1" rel="noopener">Toyota Industries (6201 JP)</a> is up 37% in the past six months compared to ~4% for 8.5%-held <a href="https://www.smartkarma.com/entities/toyota-motor-corp" target="_blank" data-smartkarma-citation="entities:73:1" rel="noopener">Toyota Motor (7203 JP)</a> and ~13% for the TOPIX. As a result, the implied stub is at a decade high.</p>
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<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/175/733/original/image_39133792071606794763925.png?1606794767" class="editor-image img-responsive" data-smartkarma-image-id="175733"></figure>
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<div class="content-caption">Source: CapIQ. Lines for 6201 &amp; 7203 are base 100 from 10 years ago</div>
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<p>The stub expansion is likely driven by the demand for materials handling equipment, such as forklifts. Yet the implied stub ops have increased ¥482bn in value since late August. This is excessive. </p>
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<p>More below the fold.</p>
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<p>Preceding my comments on Toyota are the weekly setup/unwind tables for Asia-Pacific Holdcos.</p>
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<p>These relationships trade with a minimum liquidity threshold of US$1mn on a 90-day moving average, and a % market capitalisation threshold - the $ value of the holding/opco held, over the parent’s market capitalisation, expressed in percent - of at least 20%.</p>
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This week in StubWorld ...
Toyota Industries (6201 JP) is up 37% in the past six months compared to ~4% for 8.5%-held Toyota Motor (7203 JP) and ~13% for the TOPIX. As a result, the implied stub is at a decade high.





Source: CapIQ. Lines for 6201 &amp; 7203 are base 100 from 10 years ago


The stub expansion is likely driven by the demand for materials handling equipment, such as forklifts. Yet the implied stub ops have increased ¥482bn in value since late August. This is excessive. 


More below the fold.

Preceding my comments on Toyota are the weekly setup/unwind tables for Asia-Pacific Holdcos.




These relationships trade with a minimum liquidity threshold of US$1mn on a 90-day moving average, and a % market capitalisation threshold - the $ value of the holding/opco held, over the parent’s market capitalisation, expressed in percent - of at least 20%.





StubWorld: Toyota Industries Unjustified Outperformance Vs. Toyota Motors

Japan

Toyota Motor Corporation manufactures, sells, leases, and repairs passenger cars, trucks, buses, and their related parts worldwide. The Company also operates financing services through their subsidiaries. Toyota Motor builds homes, produces pleasure boats, and develops intelligent transportation systems including radar cruise control and electronic toll collection systems.

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Toyota Motor (7203 JP)

Toyota Model AA Shares - Good Riddance to Bad Governance

The Model AA Shares were UNECONOMIC, ILLOGICAL, UNNECESSARY, and UNFAIR. Toyota bought votes for money. Toyota is redeeming them, but investors...

Travis Lundy

Tesla Into S&P - Rebal Details, and Implications for Vol and Active Portfolio Reconstruction

The TSLA S&P500 inclusion involves $150bn of direct flows and perhaps another $200-300bn indirect flows. It really is a MAMMOTH trade. And index...

Travis Lundy

Last Week in Event SPACE: Tokyo Dome, LG Corp, Kerry Express, Sogou, Adways

The weekend is here! Pour yourself a coffee, grab a comfortable seat, and sift through a brief summary of insights on various events discussed...

David Blennerhassett

Owari Precise Products - Another Tiny Cap Takeover at <0.5 Book

A largely cross-held microcap gets a Tender Offer proposal at a 34% premium which takes the company out at 0.34x book, and 0.0-2.0x EV/EBITDA...

Travis Lundy

StubWorld: Toyota Industries Unjustified Outperformance Vs. Toyota Motors

If you are in the Stub, unwind it here (sell 6201 buy back 7203). If you are not in the Stub/Holdco Trade, put it on in reverse. At least, it...

David Blennerhassett

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