Consumer

In this briefing:

1. Nongshim Holdco/Sub Trade: Current Status & Trade Approach
2. Sony: Mispriced, Misunderstood, or Both?
3. A War Between Netflix & Disney = $$$ for Studio Dragon
4. Maoyan Entertainment (猫眼娱乐) Post-IPO: The CNY Box Office Catalyst Hasn’t Materialized
5. Stake in Quadric.io Following Renesas; Denso Attempts to Keep Chip Makers Close to Achieve AD Aims

1. Nongshim Holdco/Sub Trade: Current Status & Trade Approach

• Nongshim Sub took a beating yesterday. It lost nearly 5%. Holdco stayed flat. This made a 2σ jump. They are now at 253% of σ, nearly 200%p jump from 53% in a single day. It is true that China concerns are again being felt on many Korean F&B stocks. But there is no clear sign that we should seriously worry about Nongshim’s short-term fundamentals.
• Its local rival Ottogi is continuously making strides. But we are yet to see a long-short move on Nongshim Sub and Ottogi. Local institutions are still relatively supportive on Sub. There is no particular move on Sub shorting either. Sub’s 5% loss yesterday shouldn’t be indicative of any structural price correction.
• On a longer horizon (2Y), Holdco is still being undervalued relative to Sub. But this is the first time they are above +2.5σ in 120 days. I expect a quick mean reversion at this point. I’d have a long/short trade with a very short-term horizon. Just, Holdco liquidity can be an issue here again.

2. Sony: Mispriced, Misunderstood, or Both?

• Forward earnings will focus heavily on the debut of PS5, the performance of the new Spider-Man movie and other core content revenue streams for the company this year.
• Some see Sony as coasting on historically successes of the past, others see recent Disney and ATT deals acquiring content competitors, as a prelude to a play on Sony this year.
• Investor pressure to sell or spin off non-content businesses growing due to continued poor performance in mobile and possible profitable departure from semiconductor sector.

3. A War Between Netflix & Disney = $$$ for Studio Dragon

• In this report, we provide an update on Studio Dragon (253450 KS), which has been one of the best IPOs in Korea in the past two years. We believe that the stock is well poised to resume its higher share price in the upcoming months driven by a strong line up of new original dramas & movies in 2019. Studio Dragon (253450 KS) is a key beneficiary of the ultra-aggressive push by major global powerhouses such as Netflix and Disney to expand their OTT streaming services and provide “original” Korean drama contents that have the potential to become globally popular. 
• One of the strong competitive weapons of Studio Dragon is that its main script writers including Park Ji-Eun, Kim Eun-Sook, and Kim Young-Hyun are considered some of the best ones in Korea. The top screenwriters at Studio Dragon are women. It is fair to say that an overwhelming percentage of the Korean TV dramas have women as their key target audience. As such, most of the Korean TV dramas tend not to include too much violence. Most of them have intricate relationship based story lines geared towards the female audience.
• Valuation of the company has become more attractive since the highs in the summer of 2018. Studio Dragon (253450 KS) is currently trading at P/E multiples of 35x in 2019E and 26x in 2020E. If we apply the same 35x P/E to next year’s consensus net profit estimate of 99.6 billion won, this would imply a market cap of 3.5 trillion won, which would be 35% higher than current market cap of 2.6 trillion won. Thus, we remain positive on this stock. 

4. Maoyan Entertainment (猫眼娱乐) Post-IPO: The CNY Box Office Catalyst Hasn’t Materialized

We mentioned in our previous note prior to the listing of Maoyan Entertainment on Feb 4th that Chinese New Year (CNY) Box office from the two movies, namely Pegasus and The New King of Comedy that the company invested could be a catalyst post listing. However, our analysis of CNY box office data suggests although Pegasus reported box office revenues slightly north of RMB 1bn, it is far behind the number one movie, The Wandering Earth’s RMB 2bn box office. In addition to the company-specific movie investment, the overall box office for the CNY holiday has been disappointing, suggesting a challenging year for the movie industry in 2019. 

• Entertainment Plus (猫眼娱乐) IPO: The Engineered Movie Ticketing Leader that Runs Out of Steam (Part 1)
• Entertainment Plus (猫眼娱乐) IPO: The Coming Regulatory Bang Isn’t That Bad (Part 2)
• Maoyan Entertainment (猫眼娱乐) IPO: Turning Profitable, Thoughts on Valuation
• Maoyan Entertainment (猫眼娱乐) IPO: Lackluster Demand but CNY Blockbusters Could Be a Catalyst

5. Stake in Quadric.io Following Renesas; Denso Attempts to Keep Chip Makers Close to Achieve AD Aims

It was reported last Thursday that Denso Corp (6902 JP) through its wholly-owned subsidiary NSITEXE, Inc. acquired a stake in quadric.io, a fabless semiconductor start-up company based in Burlingame, California. It seems that the company has begun its planned investments for 2019. Last year, Denso increased its stake (from 0.5% to 5%) in chipmaker- Renesas Electronics (6723 JP) to support its progress of ADAS and related technology. We also mentioned in our insight, Denso Prepares for the Future; Investments in Tohoku Pioneer EG Following JOLED and ThinCI, that Denso has been making a series of investments to prepare itself for being the leading software solution provider alongside its hardware expertise, supporting its change in business model. Last year, NSITEXE invested in ThinCi, its partner, since 2016, in the development of a Data Flow Processor (DFP) designed to help autonomous vehicles make quick decisions in complicated and fast-evolving situations. Denso/NSITEXE’s investment in quadric.io has a similar goal. The investment in quadric.io is said to help the start-up in its development of edge processing units (EPUs), which are high-performance semiconductors that could be used as a foundation for enabling automated driving technology.

In this briefing:

1. Sony: Mispriced, Misunderstood, or Both?
2. A War Between Netflix & Disney = $$$ for Studio Dragon
3. Maoyan Entertainment (猫眼娱乐) Post-IPO: The CNY Box Office Catalyst Hasn’t Materialized
4. Stake in Quadric.io Following Renesas; Denso Attempts to Keep Chip Makers Close to Achieve AD Aims
5. Catch-Up Session with Intuch Group

1. Sony: Mispriced, Misunderstood, or Both?

• Forward earnings will focus heavily on the debut of PS5, the performance of the new Spider-Man movie and other core content revenue streams for the company this year.
• Some see Sony as coasting on historically successes of the past, others see recent Disney and ATT deals acquiring content competitors, as a prelude to a play on Sony this year.
• Investor pressure to sell or spin off non-content businesses growing due to continued poor performance in mobile and possible profitable departure from semiconductor sector.

2. A War Between Netflix & Disney = $$$ for Studio Dragon

• In this report, we provide an update on Studio Dragon (253450 KS), which has been one of the best IPOs in Korea in the past two years. We believe that the stock is well poised to resume its higher share price in the upcoming months driven by a strong line up of new original dramas & movies in 2019. Studio Dragon (253450 KS) is a key beneficiary of the ultra-aggressive push by major global powerhouses such as Netflix and Disney to expand their OTT streaming services and provide “original” Korean drama contents that have the potential to become globally popular. 
• One of the strong competitive weapons of Studio Dragon is that its main script writers including Park Ji-Eun, Kim Eun-Sook, and Kim Young-Hyun are considered some of the best ones in Korea. The top screenwriters at Studio Dragon are women. It is fair to say that an overwhelming percentage of the Korean TV dramas have women as their key target audience. As such, most of the Korean TV dramas tend not to include too much violence. Most of them have intricate relationship based story lines geared towards the female audience.
• Valuation of the company has become more attractive since the highs in the summer of 2018. Studio Dragon (253450 KS) is currently trading at P/E multiples of 35x in 2019E and 26x in 2020E. If we apply the same 35x P/E to next year’s consensus net profit estimate of 99.6 billion won, this would imply a market cap of 3.5 trillion won, which would be 35% higher than current market cap of 2.6 trillion won. Thus, we remain positive on this stock. 

3. Maoyan Entertainment (猫眼娱乐) Post-IPO: The CNY Box Office Catalyst Hasn’t Materialized

We mentioned in our previous note prior to the listing of Maoyan Entertainment on Feb 4th that Chinese New Year (CNY) Box office from the two movies, namely Pegasus and The New King of Comedy that the company invested could be a catalyst post listing. However, our analysis of CNY box office data suggests although Pegasus reported box office revenues slightly north of RMB 1bn, it is far behind the number one movie, The Wandering Earth’s RMB 2bn box office. In addition to the company-specific movie investment, the overall box office for the CNY holiday has been disappointing, suggesting a challenging year for the movie industry in 2019. 

• Entertainment Plus (猫眼娱乐) IPO: The Engineered Movie Ticketing Leader that Runs Out of Steam (Part 1)
• Entertainment Plus (猫眼娱乐) IPO: The Coming Regulatory Bang Isn’t That Bad (Part 2)
• Maoyan Entertainment (猫眼娱乐) IPO: Turning Profitable, Thoughts on Valuation
• Maoyan Entertainment (猫眼娱乐) IPO: Lackluster Demand but CNY Blockbusters Could Be a Catalyst

4. Stake in Quadric.io Following Renesas; Denso Attempts to Keep Chip Makers Close to Achieve AD Aims

It was reported last Thursday that Denso Corp (6902 JP) through its wholly-owned subsidiary NSITEXE, Inc. acquired a stake in quadric.io, a fabless semiconductor start-up company based in Burlingame, California. It seems that the company has begun its planned investments for 2019. Last year, Denso increased its stake (from 0.5% to 5%) in chipmaker- Renesas Electronics (6723 JP) to support its progress of ADAS and related technology. We also mentioned in our insight, Denso Prepares for the Future; Investments in Tohoku Pioneer EG Following JOLED and ThinCI, that Denso has been making a series of investments to prepare itself for being the leading software solution provider alongside its hardware expertise, supporting its change in business model. Last year, NSITEXE invested in ThinCi, its partner, since 2016, in the development of a Data Flow Processor (DFP) designed to help autonomous vehicles make quick decisions in complicated and fast-evolving situations. Denso/NSITEXE’s investment in quadric.io has a similar goal. The investment in quadric.io is said to help the start-up in its development of edge processing units (EPUs), which are high-performance semiconductors that could be used as a foundation for enabling automated driving technology.

5. Catch-Up Session with Intuch Group

We caught up with Intuch Group this week to check how things were going on with them and their subsidiaries, AIS and Thaicom. It’s good to touch base, since it’s been a while, and many things have changed in the interim:

• Intuch self-congratulated themselves for a narrowing of their discount to NAV from 28% to 20% in 2018 while introducing three new investments and announced the breakeven of their shopping network, a joint venture with Hyundai.
• Wongnai, an online foodie guide and one of Intuch’s largest investments, underperformed our revenue forecast significantly, but managed to post impressive revenue growth nevertheless. While profitable, their rapid expansion also means they are unlikely to meet their own internal profitability expectations.
• Thaicom posted a loss in Q4 and almost non-existent earnings in 2018 largely due to asset impairments, but there is some hope in the future with the government’s various PPP (public-private partnership) schemes mentioned in the meeting.
• AIS, the Group’s flagship company, posted flat earnings of Bt30bn and is in the process of reversing a decline in revenue market share through aggressive push in enterprise and consumer services.

In this briefing:

1. A War Between Netflix & Disney = $$$ for Studio Dragon
2. Maoyan Entertainment (猫眼娱乐) Post-IPO: The CNY Box Office Catalyst Hasn’t Materialized
3. Stake in Quadric.io Following Renesas; Denso Attempts to Keep Chip Makers Close to Achieve AD Aims
4. Catch-Up Session with Intuch Group

1. A War Between Netflix & Disney = $$$ for Studio Dragon

• In this report, we provide an update on Studio Dragon (253450 KS), which has been one of the best IPOs in Korea in the past two years. We believe that the stock is well poised to resume its higher share price in the upcoming months driven by a strong line up of new original dramas & movies in 2019. Studio Dragon (253450 KS) is a key beneficiary of the ultra-aggressive push by major global powerhouses such as Netflix and Disney to expand their OTT streaming services and provide “original” Korean drama contents that have the potential to become globally popular. 
• One of the strong competitive weapons of Studio Dragon is that its main script writers including Park Ji-Eun, Kim Eun-Sook, and Kim Young-Hyun are considered some of the best ones in Korea. The top screenwriters at Studio Dragon are women. It is fair to say that an overwhelming percentage of the Korean TV dramas have women as their key target audience. As such, most of the Korean TV dramas tend not to include too much violence. Most of them have intricate relationship based story lines geared towards the female audience.
• Valuation of the company has become more attractive since the highs in the summer of 2018. Studio Dragon (253450 KS) is currently trading at P/E multiples of 35x in 2019E and 26x in 2020E. If we apply the same 35x P/E to next year’s consensus net profit estimate of 99.6 billion won, this would imply a market cap of 3.5 trillion won, which would be 35% higher than current market cap of 2.6 trillion won. Thus, we remain positive on this stock. 

2. Maoyan Entertainment (猫眼娱乐) Post-IPO: The CNY Box Office Catalyst Hasn’t Materialized

We mentioned in our previous note prior to the listing of Maoyan Entertainment on Feb 4th that Chinese New Year (CNY) Box office from the two movies, namely Pegasus and The New King of Comedy that the company invested could be a catalyst post listing. However, our analysis of CNY box office data suggests although Pegasus reported box office revenues slightly north of RMB 1bn, it is far behind the number one movie, The Wandering Earth’s RMB 2bn box office. In addition to the company-specific movie investment, the overall box office for the CNY holiday has been disappointing, suggesting a challenging year for the movie industry in 2019. 

• Entertainment Plus (猫眼娱乐) IPO: The Engineered Movie Ticketing Leader that Runs Out of Steam (Part 1)
• Entertainment Plus (猫眼娱乐) IPO: The Coming Regulatory Bang Isn’t That Bad (Part 2)
• Maoyan Entertainment (猫眼娱乐) IPO: Turning Profitable, Thoughts on Valuation
• Maoyan Entertainment (猫眼娱乐) IPO: Lackluster Demand but CNY Blockbusters Could Be a Catalyst

3. Stake in Quadric.io Following Renesas; Denso Attempts to Keep Chip Makers Close to Achieve AD Aims

It was reported last Thursday that Denso Corp (6902 JP) through its wholly-owned subsidiary NSITEXE, Inc. acquired a stake in quadric.io, a fabless semiconductor start-up company based in Burlingame, California. It seems that the company has begun its planned investments for 2019. Last year, Denso increased its stake (from 0.5% to 5%) in chipmaker- Renesas Electronics (6723 JP) to support its progress of ADAS and related technology. We also mentioned in our insight, Denso Prepares for the Future; Investments in Tohoku Pioneer EG Following JOLED and ThinCI, that Denso has been making a series of investments to prepare itself for being the leading software solution provider alongside its hardware expertise, supporting its change in business model. Last year, NSITEXE invested in ThinCi, its partner, since 2016, in the development of a Data Flow Processor (DFP) designed to help autonomous vehicles make quick decisions in complicated and fast-evolving situations. Denso/NSITEXE’s investment in quadric.io has a similar goal. The investment in quadric.io is said to help the start-up in its development of edge processing units (EPUs), which are high-performance semiconductors that could be used as a foundation for enabling automated driving technology.

4. Catch-Up Session with Intuch Group

We caught up with Intuch Group this week to check how things were going on with them and their subsidiaries, AIS and Thaicom. It’s good to touch base, since it’s been a while, and many things have changed in the interim:

• Intuch self-congratulated themselves for a narrowing of their discount to NAV from 28% to 20% in 2018 while introducing three new investments and announced the breakeven of their shopping network, a joint venture with Hyundai.
• Wongnai, an online foodie guide and one of Intuch’s largest investments, underperformed our revenue forecast significantly, but managed to post impressive revenue growth nevertheless. While profitable, their rapid expansion also means they are unlikely to meet their own internal profitability expectations.
• Thaicom posted a loss in Q4 and almost non-existent earnings in 2018 largely due to asset impairments, but there is some hope in the future with the government’s various PPP (public-private partnership) schemes mentioned in the meeting.
• AIS, the Group’s flagship company, posted flat earnings of Bt30bn and is in the process of reversing a decline in revenue market share through aggressive push in enterprise and consumer services.

In this briefing:

1. Maoyan Entertainment (猫眼娱乐) Post-IPO: The CNY Box Office Catalyst Hasn’t Materialized
2. Stake in Quadric.io Following Renesas; Denso Attempts to Keep Chip Makers Close to Achieve AD Aims
3. Catch-Up Session with Intuch Group

1. Maoyan Entertainment (猫眼娱乐) Post-IPO: The CNY Box Office Catalyst Hasn’t Materialized

We mentioned in our previous note prior to the listing of Maoyan Entertainment on Feb 4th that Chinese New Year (CNY) Box office from the two movies, namely Pegasus and The New King of Comedy that the company invested could be a catalyst post listing. However, our analysis of CNY box office data suggests although Pegasus reported box office revenues slightly north of RMB 1bn, it is far behind the number one movie, The Wandering Earth’s RMB 2bn box office. In addition to the company-specific movie investment, the overall box office for the CNY holiday has been disappointing, suggesting a challenging year for the movie industry in 2019. 

• Entertainment Plus (猫眼娱乐) IPO: The Engineered Movie Ticketing Leader that Runs Out of Steam (Part 1)
• Entertainment Plus (猫眼娱乐) IPO: The Coming Regulatory Bang Isn’t That Bad (Part 2)
• Maoyan Entertainment (猫眼娱乐) IPO: Turning Profitable, Thoughts on Valuation
• Maoyan Entertainment (猫眼娱乐) IPO: Lackluster Demand but CNY Blockbusters Could Be a Catalyst

2. Stake in Quadric.io Following Renesas; Denso Attempts to Keep Chip Makers Close to Achieve AD Aims

It was reported last Thursday that Denso Corp (6902 JP) through its wholly-owned subsidiary NSITEXE, Inc. acquired a stake in quadric.io, a fabless semiconductor start-up company based in Burlingame, California. It seems that the company has begun its planned investments for 2019. Last year, Denso increased its stake (from 0.5% to 5%) in chipmaker- Renesas Electronics (6723 JP) to support its progress of ADAS and related technology. We also mentioned in our insight, Denso Prepares for the Future; Investments in Tohoku Pioneer EG Following JOLED and ThinCI, that Denso has been making a series of investments to prepare itself for being the leading software solution provider alongside its hardware expertise, supporting its change in business model. Last year, NSITEXE invested in ThinCi, its partner, since 2016, in the development of a Data Flow Processor (DFP) designed to help autonomous vehicles make quick decisions in complicated and fast-evolving situations. Denso/NSITEXE’s investment in quadric.io has a similar goal. The investment in quadric.io is said to help the start-up in its development of edge processing units (EPUs), which are high-performance semiconductors that could be used as a foundation for enabling automated driving technology.

3. Catch-Up Session with Intuch Group

We caught up with Intuch Group this week to check how things were going on with them and their subsidiaries, AIS and Thaicom. It’s good to touch base, since it’s been a while, and many things have changed in the interim:

• Intuch self-congratulated themselves for a narrowing of their discount to NAV from 28% to 20% in 2018 while introducing three new investments and announced the breakeven of their shopping network, a joint venture with Hyundai.
• Wongnai, an online foodie guide and one of Intuch’s largest investments, underperformed our revenue forecast significantly, but managed to post impressive revenue growth nevertheless. While profitable, their rapid expansion also means they are unlikely to meet their own internal profitability expectations.
• Thaicom posted a loss in Q4 and almost non-existent earnings in 2018 largely due to asset impairments, but there is some hope in the future with the government’s various PPP (public-private partnership) schemes mentioned in the meeting.
• AIS, the Group’s flagship company, posted flat earnings of Bt30bn and is in the process of reversing a decline in revenue market share through aggressive push in enterprise and consumer services.

In this briefing:

1. Stake in Quadric.io Following Renesas; Denso Attempts to Keep Chip Makers Close to Achieve AD Aims
2. Catch-Up Session with Intuch Group

1. Stake in Quadric.io Following Renesas; Denso Attempts to Keep Chip Makers Close to Achieve AD Aims

It was reported last Thursday that Denso Corp (6902 JP) through its wholly-owned subsidiary NSITEXE, Inc. acquired a stake in quadric.io, a fabless semiconductor start-up company based in Burlingame, California. It seems that the company has begun its planned investments for 2019. Last year, Denso increased its stake (from 0.5% to 5%) in chipmaker- Renesas Electronics (6723 JP) to support its progress of ADAS and related technology. We also mentioned in our insight, Denso Prepares for the Future; Investments in Tohoku Pioneer EG Following JOLED and ThinCI, that Denso has been making a series of investments to prepare itself for being the leading software solution provider alongside its hardware expertise, supporting its change in business model. Last year, NSITEXE invested in ThinCi, its partner, since 2016, in the development of a Data Flow Processor (DFP) designed to help autonomous vehicles make quick decisions in complicated and fast-evolving situations. Denso/NSITEXE’s investment in quadric.io has a similar goal. The investment in quadric.io is said to help the start-up in its development of edge processing units (EPUs), which are high-performance semiconductors that could be used as a foundation for enabling automated driving technology.

2. Catch-Up Session with Intuch Group

We caught up with Intuch Group this week to check how things were going on with them and their subsidiaries, AIS and Thaicom. It’s good to touch base, since it’s been a while, and many things have changed in the interim:

• Intuch self-congratulated themselves for a narrowing of their discount to NAV from 28% to 20% in 2018 while introducing three new investments and announced the breakeven of their shopping network, a joint venture with Hyundai.
• Wongnai, an online foodie guide and one of Intuch’s largest investments, underperformed our revenue forecast significantly, but managed to post impressive revenue growth nevertheless. While profitable, their rapid expansion also means they are unlikely to meet their own internal profitability expectations.
• Thaicom posted a loss in Q4 and almost non-existent earnings in 2018 largely due to asset impairments, but there is some hope in the future with the government’s various PPP (public-private partnership) schemes mentioned in the meeting.
• AIS, the Group’s flagship company, posted flat earnings of Bt30bn and is in the process of reversing a decline in revenue market share through aggressive push in enterprise and consumer services.

In this briefing:

1. Nissan Governance Outlook – Foggy Now, Sunny Later
2. CyberAgent: Tumbling Dice
3. Itochu and Descente: Gloves Off

1. Nissan Governance Outlook – Foggy Now, Sunny Later

This past week saw developments which put the Nissan Motor (7201 JP) – Renault SA (RNO FP) relationship on a better path.

There are interesting noises around the likely arrival of Jean-Dominique Senard on the board of Nissan which the French state won’t like (because they won’t be getting the pony they want) but which would ultimately serve Renault’s interests better. 

Renault and Nissan are conducting a joint investigation into the Renault-Nissan Alliance BV entity which Carlos Ghosn also chaired, and Renault has passed a dossier of Ghosn’s personal expenses borne by Renault and the Alliance to French investigators.

A trial balloon was floated in the Nikkei suggesting the French government had said to the Japanese government it was open to Renault selling some Nissan shares and perhaps the state could lower its stake in Renault. This was “categorically denied” by the French with some haste but the idea of forming a holding company was categorically denied as acceptable by the French just under a year ago. Things have changed.

Governance changes are afoot, with a steady flow of developments likely coming in March, April, May, and June.

Below, a discussion of what the board looks like, will look like, and could look like in/after June and a discussion of the structure of possible capital changes.

2. CyberAgent: Tumbling Dice

Source: Japan Analytics

TUMBLING DICE – After ZOZO (3092 JP) (-52%) and Mercari (4385 JP) (-50%), CyberAgent (4751 JP) is the worst-performing large-cap Internet stock in Japan over the last seven months.  The company is the sector’s leading foreigner-held stock with over 48% (60%+ of the float) held by institutional investors such as Baillie Gifford (11.9%), JP Morgan AM (6.9%), Tybourne Capital (5.1%) and Blackrock Japan (5.0%). Having outperformed the sector and the market annually over the last nine years by 38% and 25%, respectively, over the seven months since the stock peaked in terms of our Relative Price Score on 13th July, CyberAgent shares have declined by 56%, underperforming the market by 48% and the sector by 37%.

PASSIVE PERILS – We will discuss the ‘perils ‘ of Passive TV in the DETAIL below. However, CyberAgent is yet another good example of the ‘perils’ of passive investing. On September 5th Nikkei Inc. announced that CyberAgent would replace Furukawa (5715 JP) in the Nikkei 225 index, with the inclusion occurring on October 1st. Since the ¥6050 intraday peak of the week before inclusion in the index, the shares have declined by 49% in 90 trading days.   

SUMMARY – CyberAgent’s business has three ‘pillars’, internet advertising, mobile gaming software, and media. The latter now includes the linear free-to-view AbemaTV business, which helped drive the share price to a post-listing high of ¥6930 in July 2018. Since then, business conditions for two of these ‘pillars’ have degraded significantly,  while the fledgeling TV business remains in ‘up-front’ investment mode. To cap what will be a turbulent year for CyberAgent, the company is moving into a new head office building in Shibuya called ‘Abema Towers‘ in March. We shall refrain from making any analogies to the Skyscraper Index. 

VISION SHIFT? – In previous years, CyberAgent had a clear vision statement – ‘To create the 21st century’s leading company’. The company’s recent performance has led to a change of tone, and CyberAgent is now rather more modestly just ‘Aiming to be a company with medium to long-term supporters’.  In the vein of the lyrics from the best song on the best Rolling Stones album, Exile on Main Street, the business has recently been at ‘all sixes and sevens and nines’. In the search for new ‘supporters’, we encourage CyberAgent to just ‘keep on rolling’, letting the dice fall where they may. 

3. Itochu and Descente: Gloves Off

Descente Ltd (8114 JP) issued a 13-page statement yesterday in response to Itochu Corp’s (8001 JP) tender offer to raise its stake in the sports firm from 30.44% to 40%.

In brief: its gloves off and Descente is limbering up for a fight for its independence – an independence it has not had since the 1990s.

Itochu insists it is the answer to Descente’s weaknesses but Descente is having none of it, arguing that it is already implementing the strategies proposed by Itochu.

Descente’s statement of intent was followed by Descente’s labour union, All Descente, supporting Descente, saying Itochu’s bid was contrary to Descente’s long-term interests.

Descente may well hope for an MBO as a way out, and Itochu may want a third party to acquire Descente as Travis Lundy suggests. Either way, a quick resolution is needed if Descente is to take advantage of the upcoming sports boom in Japan.

The question remains as to whether Descente would benefit from independence or control by Itochu. To date, it is arguable that the very tension between Itochu’s demand for faster growth and higher profits and, on the other hand, Descente’s reining in of this demand in favour of long-term brand cultivation that has led to Descente’s recent growth path. Without this delicate balance of tensions, the whole edifice may sag.

In this briefing:

1. Last Week in GER Research: Softbank, Pinduoduo, and Koolearn
2. LG Uplus – CJ Hello Acquisition: Current Status & Trade Approach
3. Shiseido Company Limited: 4QFY2018 Results – Setting Expectations Too High
4. Last Week in Event SPACE: Kosaido, Descente, Panalpina, Ophir, RPC, Baidu, CJ Corp
5. Descente’s Doleful Defense (Dicaeologia)

1. Last Week in GER Research: Softbank, Pinduoduo, and Koolearn

In this version of the GER weekly research wrap, we remind of our work on Softbank Group (9984 JP) before its 20% share rally which may have been prognosticated by its sweeping debt tender. Secondly, Arun updates on his excellent and contrarian call on Pinduoduo (PDD US) after its follow on placement announcement – of which he takes a more moderated view with the shares up 60% since IPO launch. Finally, we update on the IPO of Koolearn (1373356D HK) which provided an update to its prospectus.  A calendar of upcoming catalysts is also attached. 

More details can be found below. 

Best of luck for the new week – Rickin, Venkat and Arun

2. LG Uplus – CJ Hello Acquisition: Current Status & Trade Approach

• LG Uplus is expected to have a BOD this Thursday (Feb 14) to finalize CJ Hello takeover. LG Uplus will pay approximately ₩1tril for a 53.92% controlling stake. This is twice last Friday’s closing price. Unlike the previous deal by SK Telecom, this deal is way much simpler. This is a straight stock acquisition deal. CJ Hello will be a listed subsidiary of LG Uplus. LG Group has no immediate merger plan.

• CJ Hello made a 15.12% gain last Friday. LG Uplus was up only 6.12%. CJ Hello was clearly overshot mainly by local retail. Local institutions did a sell-off in CJ Hello last Friday. Given the complexities of Korea’s local telecom regulations, merger is surely inevitable. However, given the current MC ratio of less than 7.5, it’d be too costly for LG Uplus to go for it at this point.

• LG Uplus needs a small-scale merger. LG Uplus will be exempted from stock purchase duty for its shareholders. For this, LG Uplus needs to keep MC ratio above 10. We should expect to see a consistent pressure on reducing the MC ratio. Relative price wise, this shouldn’t be positive on CJ Hello. I’d go short CJ Hello and long LG Uplus on last Friday’s CJ Hello overheating.

3. Shiseido Company Limited: 4QFY2018 Results – Setting Expectations Too High

Shiseido Co Ltd (4911 JP) reported its FY2018 results on 8^th Feb 2019. Shiseido’s revenue grew 8.9% YoY in FY 2018, marginally above our estimated growth rate of 8.7%. Shiseido’s EBIT increased by 34.7% in FY2018 primarily due to the gains made in the first 9 months of the year. However, in 4Q2018 the EBIT margin dropped to 2.4% from 3.6% in the same period last year. On a QoQ basis, margin drop was far more substantial as it declined more than 8.5% in 4QFY2018. Even though we were forecasting a decline in margins, we expected it to be a bit more gradual. Thus, Shiseido’s FY2018 EBIT fell short of our expectation. On the positive side, Shiseido also guided that they are increasing their semi-annual dividend by another JPY5.0 to JPY30.0 from 1HFY2019.

4. Last Week in Event SPACE: Kosaido, Descente, Panalpina, Ophir, RPC, Baidu, CJ Corp

Last Week in Event SPACE …

• Something is up as Kosaido Co Ltd (7868 JP)‘s shares trade almost 40% through terms and back down – still 18% through terms.
• Descente Ltd (8114 JP)‘s management’s explanation why Itochu owning 40% would be bad is almost a paean to good governance, but the gloves are off.
• Panalpina Welttransport Holding (PWTN SW) is burdened with “social costs” in the near-term.
• Opportunistic yes, but Medco Energi Internasional T (MEDC IJ)‘s proposal for Ophir Energy (OPHR LN) is okay in a less-than-ideal situation.
• A possible last minute counter to Apollo’s disappointing offer for RPC Group PLC (RPC LN).
• The market is valuing Baidu Inc (ADR) (BIDU US) core ops as an “Old Economy” company with little to no growth prospect.
• Plus CCASS movements and expected upcoming events for key M&A transactions.

(This insight covers specific insights & comments involving Stubs, Pairs, Arbitrage, share Classification and Events – or SPACE – in the past week)

Kosaido Co Ltd (7868 JP) (Mkt Cap: $176mn; Liquidity: $1.2mn)

When Bain announced its MBO for Kosaido at ¥610/share, Travis Lundy concluded (in his insight Smallcap Kosaido (7868 JP) Tender Offer: Wrong Price But Whaddya Gonna Do?) that it was a lowball bid and a virtual asset strip in progress. The kind of thing which gives activist hedge funds a bad name, but when cloaked in the finery of “Private Equity”, it looks like the renewal of a business. The share price jumped from the 400s to just under the Tender Offer Price, traded there for several days, then a week after it started trading at or near arb terms, the share price suddenly jumped through terms and headed higher.

• Travis’ inclination at Thursday’s price (¥775/share) is that at a 30% discount to book, there could be enough here to entice someone to split the company up at a slightly better level, but he doubts that it is worth 1x book. Given the headaches involved in making this company worth more than book, it would be worth less than book now. If the Info business can be rescued, then it is cheap. If it cannot, it is not.
• Because “management-friendly” shareholders currently hold at least 40% and probably more like 50+%, Travis thinks Murakami-san will find it really tough to mount, or get someone else to mount, a truly hostile action. 
• Perhaps Murakami-san’s goal here is to block the deal then get management to use debt to buy out other people and expand the funeral parlour business, then get a strategic to buy the whole thing out. It could be, but Travis doesn’t think chasing the market at 25-30% above where Murakami-san got in is a good risk.

Since Travis wrote, Murakami-san’s vehicles have added another 1.24% to reach 9.55% of shares out. The last set of shares was purchased at an average of ¥652/share.

(link to Travis’ insight: Kosaido: Activism Drives Price 30+% Through Terms)

Descente Ltd (8114 JP) (Mkt Cap: $1.8bn; Liquidity: $4.3mn)

This past Thursday 7 February, Descente announced a weak Position Statement (Against) (in Japanese) the Itochu Corp (8001 JP) Tender Offer with a 28-page supporting powerpoint deck (also in Japanese). Descente appears to have no ability to defend itself, and its claim that a large shareholder like Itochu could damage corporate value by weakening governance is effectively a statement that others (like perhaps Wacoal) would too, so only a full takeover makes sense under that defense.

• Descente management’s explanation for why Itochu owning 40% would be bad is almost a paean to good governance. If the influence of suppliers and customers in the shareholder register is bad, it is bad – whether friendly to management or not. Conflict of interest can happen via entrenchment.
• The lack of a white knight proposed and effective “I got nothing, but please don’t tender” response is bearish for the shares. if management is right and Itochu’s presence at 40% will lower corporate value, the back end might be worth less than ¥1,871/share where it was trading pre-tender. That would mean the fair value of shares now would still be below here.
• If Itochu gets its 40% and ANTA votes with Itochu, it is highly possible that the two could effect dramatic change at the management and board level. That would be very hostile and corporate Japan would have something to say about that. Travis says “I am not sure Itochu would go that hostile immediately.”
• Michael Causton just wrote about Descente’s rejection of the Itochu tender saying “The Gloves Are Off”. He notes there is a perception of a cultural difference between Descente’s brand cultivation and Itochu Textile’s hands-off approach to brand management, but notes that the differences between Descente and Itochu need to be resolved quickly in order to optimally ramp up brand awareness and sales points ahead of the Rugby World Cup in Japan this year, the Olympics, next year, and the World Masters Games the year after. 

links to:
Travis’ insight: Descente’s Doleful Defense (Dicaeologia)
Michael’s insight: Itochu and Descente: Gloves Off

ND Software (3794 JP) (Mkt Cap: $212mn; Liquidity: $0.04mn)

ND Software (NDS) announced a MBO sponsored by both the existing president, who owns 20%, and J-Will Partners to take the company private at ¥1700/share, which is a 28.7% premium to last trade and comes out to be ~7.2x trailing 12-month EV/EBITDA. The deal comes with a 66.7% minimum threshold for completion, after which there will be a two-step squeeze-out, as is the norm in deals like this. Looks straightforward, but …

• Sometime activist Symphony Financial Partners (SFP) holds around 20% in NDS. If on board, this this deal is almost done because 31.26% is already pledged to tender, Symphony’s stake would make it 51.5%. Other presumably management-friendly shareholders own another 10%, and employees own about 7%. If Symphony is on board, that easily clears the 67% hurdle. If SFP are not on board, they own about 60% of what is necessary to block this deal.  And they could buy on market to raise their stake further. 
• Travis would not want to sell out his shares tomorrow at ¥1699/share. Or even ¥1701. He thinks there is a chance that the loose float is scooped up by shareholders or players who might want to increase their stake and see if this deal can be bumped. 

(link to Travis’ insight: ND Software (3794 JP) TOB for an MBO – Fireworks a Possibility)

Panalpina Welttransport Holding (PWTN SW) (Mkt Cap: $4.1bn; Liquidity: $20mn)

Palpina confirmed that the Ernst Göhner Foundation, Panalpina’s largest shareholder (46% of shares out) does not support the current non-binding proposal from DSV and that it supports Panalpina’s Board of Directors in pursuing an independent growth strategy that includes M&A. Panalpina’a stock tanked, but is trading only 3% below DSV’s indicative offer, and 20.5% above where the stock was trading in mid-January before DSV’s indicative non-binding proposal. 

• If management had said that they have a plan which is to grow themselves out of their current doldrums, and their largest shareholder supports that plan to stick with management and go slow, nothing will get done until the new chairman is installed in May at the AGM, and even then, given the Foundation’s position that they support management’s “independent growth strategy”, there is not much minority shareholders can do.
• This is an ongoing issue of governance. If the directors are effectively chosen by the Ernst Göhner Foundation, which supports the company’s independence, so they do too, minority shareholders serve no purpose other than to provide capital for the foundation to keep Panalpina listed.
• This doesn’t mean that there will be no deal, but it does mean there will be a lull unless someone else comes up with a more aggressive offer. Travis expects this is eventually worth another go but he would want to reload lower and/or later, or when Panalpina is in a better position after the full IT package is deployed.

Since Travis wrote, DSV has released earnings and said it is still significantly engaged in the bid, and comments from the chairman of the Ernst Göhner Foundation has made comments suggesting it is not wedded to the idea, so it comes down to price – someone has to pay now to get the benefits expected from the full IT package.

Travis pointed out in the discussions that interestingly, when DSV released earnings it did not announce a buyback, which would have been normal, leading some to speculate the company is saving its cash for another go at it.

(link to Travis’ insight: Largest Panalpina Shareholder to Other Shareholders: Get Stuffed) 

Ophir Energy (OPHR LN) (Mkt Cap: $204mn; Liquidity: $3mn)

On its fourth attempt Medco Energi Internasional T (MEDC IJ) receives board approval for its £0.55/share (66% premium to the closing price) offer for Ophir. The deal is conditional on receiving 75% shareholder approval, approval from the relevant authorities in Tanzania and Ophir not losing all or substantially all of its Bualuang interests in Thailand. It is expected that the Scheme will become effective in the first half of 2019.

• There is an opportunistic element to Medco’s tilt after Ophir recently announced the denial of the license extension for the Fortuna project by the Equatorial Guinea Ministry of Mines and Hydrocarbons. This resulted in a $300mn non-cash impairment. Ophir had previously written down $310mn on the same project back in September.
• Shareholders such as Petrus (~2.8% stake) won’t support the offer having announced in mid-Jan that Medco’s earlier £0.485/share proposal “massively under-values” Ophir.
• Reg approvals are not expected to be an issue  – the stake in Tanzania is for a 20% non-controlling interest, a similar % approved in a prior sale to Pavilion in 2015. There is no approval/consent required from the Thai authorities – it is in there really to cover the unlikely situation that for some reason the Thai authorities raise an objection.

• Ophir’s shares are trading at or close to terms. Given Medco’s numerous proposals in short succession – four in three months – a bump cannot be dismissed. And the recent disclosure of a new shareholder (Sand Grove) may warrant such an outcome. A firm offer is on the table backed by the Ophir’s board. I’d look to get involved a spread or two below terms. 

(link to my insight: Medco’s “Okay” Offer For Ophir After Fortuna Setback)

RPC Group PLC (RPC LN) (Mkt Cap: $4.2bn; Liquidity: $43mn)

On January 23, after months of media speculation, RPC announced a final cash offer by a unit of Apollo Global Management for £7.82/share by way of a scheme. Two institutional shareholders, Aviva, with 1.93% and Royal London Asset Management, with 1.44%, immediately expressed disappointment with the offer valuation.

• On January 31, Berry Global Group, a former Apollo  portfolio company, announced it was considering a possible cash offer for RPC and has requested due diligence. RPC responded with a release confirming it will engage with Berry in order to advance discussions in the interests of delivering best value to shareholders.
• The price being paid by Apollo is not very generous, though RPC’s sale process has been widely reported since September, 2018. Apollo’s ‘no increase’ declaration has made it easy for BERY to win this, provided no one else comes to the party. (I reached out to RPC who confirmed Apollo is restricted from countering a higher bid as it is bound by the language in the Offer announcement that the offer of £7.82 per share is final and will not be increased.) So there is limited upside from here unless you think someone else could join BERY as a late gatecrasher.
• Apollo’s offer provides an effective floor so there is limited downside from here, especially under strict UK rules which make it difficult for an acquirer to walk. John DeMasi recommend buying RPC on the possibility BERY comes out with a generous offer or another buyer shows up due to the undemanding valuation of Apollo’s offer.

(link to John’s insight: RPC Group PLC – It Ain’t Over ’til It’s Over)

Baidu Inc (ADR) (BIDU US) (Mkt Cap: $60.6bn; Liquidity: $490mn)

Johannes Salim, CFA tackled Baidu which he estimates is trading at a discount to NAV of 29% or ~2 SD below its 3-yr average NAV discount.

• It’s a weak-ish stub with 57%-owned video streaming subsidiary iQIYI Inc (IQ US) (which went public in 1Q18) and 19%-owned online travel agency, Ctrip.Com International (Adr) (CTRP US), together accounting  for 14% of NAV.
• BIDU’s core business (primarily online/mobile search services plus new initiatives such as Baidu Cloud and autonomous driving), accounts for 78% of NAV, with net cash a further 8% of NAV.
• Fundamentally, BIDU’s core business has grown healthily, with strong cash flows generation. Johannes estimates the market is unjustifiably valuing this business at US$49.3bn, or 8.7x 2019E EV/EBITDA or 11.2x 2019P, suggesting little to no growth prospect.

(link to Johannes’ insight: Baidu: Time to Swoop In, with NAV Discount Widening Substantially)

CJ Corp (001040 KS) (Mkt Cap: $3bn; Liquidity: $7.5mn)

Sanghyun Park recommends long Holdco and short the synthetic sub ((Cj Cheiljedang (097950 KS), CJ ENM (035760 KS), CJ CGV Co Ltd (079160 KS) and Cj Freshway (051500 KS) on a ratio of 50:40:7:3 ) at this point.

• By my calcs, CJ Corp is trading at a 52% discount to NAV compared to a 52-week average of 41%. CJ C and CJ ENM comprise 63% of NAV.
• Of note, the stub ops still account for 29% of NAV and primarily comprises the 55.13% stake in CJ Olive Networks and brand royalty, each accounting for ~13% of NAV.

(link to Sanghyun’s insight: CJ Corp Holdco/Synthetic Sub Trade: Current Status & Trade Approach)

Toyota Industries (6201 JP)(Mkt Cap: $15.8bn; Liquidity: $24mn)

Curtis Lehnert recommends closing the Toyota set-up trade, which hasn’t exactly been a storming one (4% or 1.96% on the gross notional).

• Toyota announced earning recently which (slightly) beat expectations slightly and the stock rallied in response. This move brought the discount to NAV in line with its 6-month average and has eroded the statistical edge of staying in the trade.
• The fundamentals for Toyota are still attractive, therefore it could be argued to hold the stub beyond these levels. However, Curtis has opted for the tactical route in the current environment and take profits when a statistical edge disappears.

(link to Curtis’ insight: TRADE IDEA – Toyota Industries (6201 JP): Close the Stub Trade)

Briefly …

• Sanghyun recommended a long 2PB and short 1P, after Hyundai Motor Co (005380 KS)‘s 1P/2PB price ratio touched 152% of σ on a 20D MA. This is the highest since late Nov last year. Hyundai Motor Share Class: Long 2PB / Short 1P Amid Restructuring Speculation
• Sanghyun also recommended go long Samsung Electronics (005930 KS)‘s1P and short Common, for a short term reversion as we enter the March shareholder meeting phase. Samsung Electronics Share Class: Long 1P / Short Common on BlackRock Showing

• Greencross Ltd (GXL AU) shareholders have approved the scheme of arrangement.

• MYOB Group Ltd (MYO AU) trades through terms after announcing Vinva is a new substantial holder.

My ongoing series flags large moves (~10%) in CCASS holdings over the past week or so, moves which are often outside normal market transactions.  These may be indicative of share pledges.  Or potential takeovers. Or simply help understand volume swings. 

Often these moves can easily be explained – the placement of new shares, rights issue, movements subsequent to a takeover, amongst others. For those mentioned below, I could not find an obvious reason for the CCASS move.   

5. Descente’s Doleful Defense (Dicaeologia)

The new Takeover Rules enacted in December 2006 (with one amendment to the SEL made in 2005 in direct reaction to the loophole used by Livedoor to acquire large stakes of Nippon Broadcasting System off-market to reach a level above one-third) are enshrined in the Financial Instruments and Exchange Act/Law (normally called “FIE”, “FIEA”, or “FIEL”), with the most relevant portions commencing with Article 27-2. These “TOB Rules” outlawed stealth acquisition off-market to “suddenly acquire” a large stake without passing through the market mechanism or conducting a Tender Offer. The principle of this was a sense of “fairness” such that minority investors had an equal opportunity to sell to someone who sought to have control or influence, and that it could not simply be arranged through collusive behavior. 

The first rule which mattered to Descente Ltd (8114 JP) was that the Board of the “Subject Company”, according to Article 27-10…

shall, pursuant to the provisions of a Cabinet Office Ordinance, submit a document which states its opinion on the Tender Offer and other matters specified by a Cabinet Office Ordinance (hereinafter referred to as the “Subject Company’s Position Statement”) to the Prime Minister within a period specified by a Cabinet Order from the date when the Public Notice for Commencing Tender Offer is made.

That period specified is 10 business days.

So by Thursday 14 February, Descente’s board was obliged to release a “Subject Company Position Statement” (意見表明報告書) saying whether it was for or against (or neutral or withholding an opinion about) the bid. It also had to state the reasons for its opinion, the process it took to come to those opinions, and whether it would take defensive measures against the bid (and other measures specified in the relevant Cabinet Order. This reporting obligation would allow Descente’s board to ask questions of the acquiror (to which the acquiror would be required to respond within five business days) and to ask for an extension of the Offer (which has a legal enforcement under certain conditions, which are not that difficult to meet).

Several days before that deadline, on Thursday 7 February, Descente Ltd (8114 JP announced its Position Statement (Against) (in Japanese) the Itochu Corp (8001 JP)‘s Tender Offer with a 28-page supporting powerpoint deck (also in Japanese).

The shares were down Thursday and Friday for a reason. 

If Descente Management and the Board hope that nobody will tender, because Itochu’s presence will cause harm to the medium-long-term corporate value of the company, Management and the Board are putting investors on the spot.

Shares were trading in the ¥1870s and Itochu is offering 50% more than that. Descente saying that corporate value in the medium-long term will be damaged means that should show up in the share price, and investors at the close Friday – after a day to digest the Descente response – believed ¥2520 was the right price if one included the economic effects of the Itochu tender offer. Obviously, that means they think it was worth less if they were not going to tender. 

Investors who want to sell all of their shares now could possibly do so at a 33% premium to where their shares were trading. 

Management and the Board proposing investors not avail themselves of an opportunity to sell shares to someone willing to pay 50% more than pre-tender price for a portion of their shares (or perhaps 33% more than pre-tender as of Friday’s close for more or all of it) needed to explain their own value proposition. Descente had an opportunity to present a “fair value” number from a valuation expert and hints at why they think the shares are worth as much or more over the medium-long term, giving economically-minded investors a reason not to tender. 

The “Subject Company Position Statement” did not do that. 

In this briefing:

1. Huayi Brothers: Their Move to Theme Part Echoes A Disney Business Model Worth a Hard Look

1. Huayi Brothers: Their Move to Theme Part Echoes A Disney Business Model Worth a Hard Look

• Movie World park is first stage in long term plan for 20 “movie theme” cities in China.
• Jack Ma’s investment in company has grown since 2015: Its film finance.
• Company sees licensing of intellectual property rather than brick and mortar as key to best asset deployment as they diversify.

The Walt Disney Company’s just released 1Q19 earnings report held an upside surprise of $1.84 a share beating consensus of $1.57. Revenues of US$15.5bn also beat analysts expectations of US$15.180bn. Filmed entertainment was down due to tough comps from last year’s blockbuster releases. Network TV was up. But what commands our attention in this insight is results from Disney theme parks: All units showed flat to modest growth in attendance, with revenue up primarily due to raised prices. Disney Shanghai was softer than last year attributed to the economic slowdown. Yet theme parks continue to lead the Disney business units year in and year out.

 Reviewing that result in the light of ongoing research I have been working at on Asia theme park prospects, I focused in on Huayi Brothers. Their movie themed park at Suzhou opened last July. While it is too early to make a long term call on the film company’s diversification into theme parks, their move to monetize their intellectual property in that space foretells more diversification ahead.

 The Disney business model appears to be proceeding.

 Huayi Brothers Media Corporation (SHE: 300027)

(All amounts shown in CNY except where otherwise noted).

 Since an ebullient IPO debut in 2009, when on October 23^rd, HB stock skyrocketed to 63.66yuan trading was halted, the stock price has since been both spiked and rocked by events. Most recently, it fell 21% last June when news of the details of a sketchy performance contract for one of HB’s top female stars made headlines. She appeared to have made an effort to disguise her salary. The scandal broke on television. It has triggered an investigation by Beijing officials. Promptly HB founder and Chairman Dennis Wang pledged US$16m to bolster confidence the shares amid continuing disputations between the parties to the scandal.

 On a positive note, during the last five year period, Alibaba’s (NYSE:BABA) Jack Ma announced he was investing US$103M over 5 years to finance the production of 10 HB films. On that news the shares had spiked 6.6%. There are also standing deals with real estate operator Evergrande Group (HK3333) and Tencent Holding(OTC) to deploy HB intellectual property names and brands into theme parks and online social gaming.

 Out of this mix of headwinds and tailwinds in the already volatile China entertainment/film sector, we arrive at a point where HB shares have taken a long, sustained beating. We are moved to believe that now rubbing up against a 5 year low, is the stock its worthy of attention for investors who have a risk profile. One needs to be comfortable with HB’s gyrating past trading patterns to see opportunity in its future as a “Disney in the making” in the words of a film executive friend from Hong Kong.

 Price at writing: 4.51 (52wk low 4.06)

5 year high: June 5 2015: 23.26

1 year high: (2018): 10.14

3 year high: May 23 2016: 14.30

3 year low: 4.70

 Market cap at writing: 12.61bn

P/E 15.11

EPS: 0.30

Revenue: 3.93bn

Revenue growth: 12.7%

EBITDA: 625m

LTD AT WRITING: 5.92bn

Equity: 10.5bn

Book value: 3.58bn

 To get a sense of how major institutional investors were responding to the roller coaster rides of the HB trade we note here that Vanguard International Stock Index Emerging Market Fund, one of HB’s biggest investors, is still holding its position at writing 2,727,202 shares of valued at 23,567,346bn cny.

 The Disney strategy

 The company began as a film production studio in 1994 and has since expanded its TV, internet, movie theaters, talent agencies and more recently, theme parks.

 It is its foray into the theme park space that is the clearest expression of its “Disneyesque” business model. Last July HB opened a 400,000 square meter theme park at Suzhou called “Movie World”. They announced it was the first in a series of 20 “film cities parks” they would create by providing intellectual property from their film hits partnered with realty developers.

 In a study of the China film industry from Deloite Global published in 2017, the researchers noted, “With Disney as its model, HB has launched a “de-cinematic” strategy that integrates the traditional film business, internet entertainment, location-based entertainment, expanding to upstream and downstream industry chains to alleviate dependence on the film industry.”

 Current estimates are that HB revenues continue heavily in film with over 85.% of its total sales from that sector, another 7.8% from internet entertainment, and 6.6.% from brand licensing. All others contribute 0.8%.

 However its going forward strategy is not to deploy hard capex on actually building theme parks but to partner with such realty operators like Evergrande as an intellectual property provider. This veers from a Disney formula since that company has financed and developed its theme parks internally from land acquisition to design, construction and operations. But it does comport with the core Disney strategy of monetizing intellectual property sprung from its films.

 The China film industry is notably dominated by the top 15 companies, among which is HB. The sector is at the same time without a dominant cluster of “major” studios as is the case in the US and other markets. The division of market share among the top players run from the biggest, China Film, at about 4.3% to HB which at 1.3% clusters in the same area between 1% and 2% with at least 8 other producers. This is rooted in the global nature of the film business today where a given year or given share is not necessarily a function of financial or asset deployment power. It reflects in China as everywhere else, the success or failure of individual films from the number of blockbusters to the number of flops it may release in a given year.

 As Disney’s 1Q19 results show, its filmed entertainment unit was down y/y 2% in operating income largely due to 2018 comps that included several blockbuster films. At the same time, its theme parks were up 13%—almost entirely due to a 7% increase in average visitor spend. And that increase we learn, came almost entirely from raised prices. So the key here is the price elasticity in the theme park business that filmed entertainment does not necessarily provide.

 In China there is also a wrinkle to the film business that links box office grosses to the trade in studio stocks. Over the years there has been considerable concern as to the accuracy of box office grosses reported by some studios. Our Hong Kong associate in that field outlined the problem. This quote is a translation.

 “You have instances where studios or theater operators buy up seats in off peak times and theaters that are fundamentally empty. You have ghost grosses. They then report a film has done much bigger business than it actually has because they know that reports of big grosses have a direct effect on the trade of movie stocks. And you get this bizarre situation where the move guys produce phantom grosses to pump up their stock”.

 “Much of this practice has been cleaned up, particularly among the top companies like HB. But in an economic environment where there are still observers in the financial sector that are not entirely comfortable that Beijing’s own economic GDP, trade and monetary numbers are all that accurate, anything is possible”. One of the priorities long expressed by Xi Jinping has been to end the lack of confidence in government numbers. Clearly such practices as ghost numbers can migrate to the private sector.

 In any event, estimated ticket sales in 2018 are believed to be relatively accurate rising to nearly US$9bn.

 Theme Parks forward look: Aging out and creating new

 Theme parks in China are currently showing a 13% rate of growth through 2017 totaling 190m admissions. According to a theme park engineers AECOM study, China will surpass the US as the globe’s biggest theme park market by 2020. Pipeline projects, of which HB projects it will participate with movie themes, continue to dominate in south and east China locations with 42% of all projects scheduled to open there covering a population base of 528m.

Over 27% of all current pipeline projects are themed to fantasy/cartoon/movie media intellectual property bases. Projected Capex total for the theme part pipeline from 2018 through 2025 is 280bn.

 Investors in the theme park space also need to understand the ongoing need to keep pop culture icons sprung out of film blockbusters as fresh as possible. The reason is the inevitable “aging out” of the biggest, most formidable themes. Disney characters such as Mickey Mouse made their first appearances in films in the 1920’s US and did not go global until the 1960s-70s. The company has reworked the theming several times.

 Yet its newest attractions are those like Star Wars Galaxy Edge due to go live at Disney Parks by Q3 this year. The first Star Wars movie debuted in 1977. In brief, children in the 8 to 16 year old demographic cohort back then are now in their fifties. A long list of sequels through last year have kept the imagery and characters refreshed through successive generations.

 What Disney has done well is to package and repackage its core intellectual property stars like Mickey Mouse, Donald Duck and Toy Story characters like the cowboy to keep younger generations eager to experience the live attractions. This is the core dilemma of investing in any sector heavily dependent on creativity.

 The takeaway: An investment theory even based on shifting sands can sometime produce powerful results. Facing a fading film business, Walt Disney literally went into deep debt to develop the first Disneyland in 1955. Linked to a television series, the park had a built in marketing engine. Yet by the early 1980s, the aging out of the company’s core characters and poor results from its efforts in non-cartoon films, the stock had taken a hit. The board brought in a new executive team that repurposed its intellectual property, reimagined its animation business and went on to acquire valuable properties from third parties.

 So our conclusion is that the heart of an entertainment company lies in the capacity to reinvent its character stable and repurpose its original form to a diverse downstream set of revenue producing units. That is what we see in HB.

 Even though they began business in 1994, as far as their diversification strategy goes, its early stages. If they succeed in their theme park initiatives and other related businesses beyond filmed entertainment, their valuation could surge given the starting point of an effective 5 year low.

 Part of the forward valuation consideration needs to be the partnerships thus far achieved with Jack Ma ,Tencent, and Evergrande. Do these sophisticated investors see a potential Disney model flourishing downstream?

So the question is this: Beyond standard investing metrics applied to HB, do investors need to consider a broader conception of how to value a company’s future. You can’t really measure a forward EBITDA number, or pluck a one year estimated PT out of what may spring from the imagination of the creative community where blockbuster ideas are generated.

 In the end, at its current low, HB may be a very cheap entry point if it can execute a “Disney-like strategy” over the next five to seven years as its theme park plans spread across the proposed 20 China cities.

 And the model is Disney. Every time the company appeared to run out of creative gas, it managed to find new inspired

properties within the minds of its key creative people.

So at its five year low we raise the question: Does the investment community see big rewards for HB exchanged for the risks implicit in the shifting sands of artists as opposed to projectable earnings metrics?

In this briefing:

1. Nissan Governance Outlook – Foggy Now, Sunny Later
2. CyberAgent: Tumbling Dice
3. Itochu and Descente: Gloves Off
4. Homeplus REIT IPO – The Largest Ever REIT IPO in Korea
5. ECM Weekly (9 February 2019) – Pinduoduo, Homeplus, PNB Metlife, Cal-Comp Tech

1. Nissan Governance Outlook – Foggy Now, Sunny Later

This past week saw developments which put the Nissan Motor (7201 JP) – Renault SA (RNO FP) relationship on a better path.

There are interesting noises around the likely arrival of Jean-Dominique Senard on the board of Nissan which the French state won’t like (because they won’t be getting the pony they want) but which would ultimately serve Renault’s interests better. 

Renault and Nissan are conducting a joint investigation into the Renault-Nissan Alliance BV entity which Carlos Ghosn also chaired, and Renault has passed a dossier of Ghosn’s personal expenses borne by Renault and the Alliance to French investigators.

A trial balloon was floated in the Nikkei suggesting the French government had said to the Japanese government it was open to Renault selling some Nissan shares and perhaps the state could lower its stake in Renault. This was “categorically denied” by the French with some haste but the idea of forming a holding company was categorically denied as acceptable by the French just under a year ago. Things have changed.

Governance changes are afoot, with a steady flow of developments likely coming in March, April, May, and June.

Below, a discussion of what the board looks like, will look like, and could look like in/after June and a discussion of the structure of possible capital changes.

2. CyberAgent: Tumbling Dice

Source: Japan Analytics

TUMBLING DICE – After ZOZO (3092 JP) (-52%) and Mercari (4385 JP) (-50%), CyberAgent (4751 JP) is the worst-performing large-cap Internet stock in Japan over the last seven months.  The company is the sector’s leading foreigner-held stock with over 48% (60%+ of the float) held by institutional investors such as Baillie Gifford (11.9%), JP Morgan AM (6.9%), Tybourne Capital (5.1%) and Blackrock Japan (5.0%). Having outperformed the sector and the market annually over the last nine years by 38% and 25%, respectively, over the seven months since the stock peaked in terms of our Relative Price Score on 13th July, CyberAgent shares have declined by 56%, underperforming the market by 48% and the sector by 37%.

PASSIVE PERILS – We will discuss the ‘perils ‘ of Passive TV in the DETAIL below. However, CyberAgent is yet another good example of the ‘perils’ of passive investing. On September 5th Nikkei Inc. announced that CyberAgent would replace Furukawa (5715 JP) in the Nikkei 225 index, with the inclusion occurring on October 1st. Since the ¥6050 intraday peak of the week before inclusion in the index, the shares have declined by 49% in 90 trading days.   

SUMMARY – CyberAgent’s business has three ‘pillars’, internet advertising, mobile gaming software, and media. The latter now includes the linear free-to-view AbemaTV business, which helped drive the share price to a post-listing high of ¥6930 in July 2018. Since then, business conditions for two of these ‘pillars’ have degraded significantly,  while the fledgeling TV business remains in ‘up-front’ investment mode. To cap what will be a turbulent year for CyberAgent, the company is moving into a new head office building in Shibuya called ‘Abema Towers‘ in March. We shall refrain from making any analogies to the Skyscraper Index. 

VISION SHIFT? – In previous years, CyberAgent had a clear vision statement – ‘To create the 21st century’s leading company’. The company’s recent performance has led to a change of tone, and CyberAgent is now rather more modestly just ‘Aiming to be a company with medium to long-term supporters’.  In the vein of the lyrics from the best song on the best Rolling Stones album, Exile on Main Street, the business has recently been at ‘all sixes and sevens and nines’. In the search for new ‘supporters’, we encourage CyberAgent to just ‘keep on rolling’, letting the dice fall where they may. 

3. Itochu and Descente: Gloves Off

Descente Ltd (8114 JP) issued a 13-page statement yesterday in response to Itochu Corp’s (8001 JP) tender offer to raise its stake in the sports firm from 30.44% to 40%.

In brief: its gloves off and Descente is limbering up for a fight for its independence – an independence it has not had since the 1990s.

Itochu insists it is the answer to Descente’s weaknesses but Descente is having none of it, arguing that it is already implementing the strategies proposed by Itochu.

Descente’s statement of intent was followed by Descente’s labour union, All Descente, supporting Descente, saying Itochu’s bid was contrary to Descente’s long-term interests.

Descente may well hope for an MBO as a way out, and Itochu may want a third party to acquire Descente as Travis Lundy suggests. Either way, a quick resolution is needed if Descente is to take advantage of the upcoming sports boom in Japan.

The question remains as to whether Descente would benefit from independence or control by Itochu. To date, it is arguable that the very tension between Itochu’s demand for faster growth and higher profits and, on the other hand, Descente’s reining in of this demand in favour of long-term brand cultivation that has led to Descente’s recent growth path. Without this delicate balance of tensions, the whole edifice may sag.

4. Homeplus REIT IPO – The Largest Ever REIT IPO in Korea

The Homeplus REIT (“Korea Retail Homeplus #1 REIT”), which is expected to be completed by end of March, will be the biggest ever REIT IPO in Korea. The key investment merit of this Homeplus REIT is that it offers a stable dividend yield of about 6-7%. We expect a very strong demand for this Homeplus REIT IPO. 

Homeplus is the second largest retailer in Korea, after E Mart Inc (139480 KS). Homeplus REIT will use 51 Homeplus stores (out of total of 141 stores) located throughout Korea as its base assets. Homeplus REIT is expected to raise between 1.5 trillion won and 1.7 trillion won in this IPO, of which the allocation between institutional and retail is set at 80:20. The IPO price range is between 4,530 won to 5,000 won. 

Rising interest rates also pose a concern for the company. Of the company’s total long term debt, about 61% are floating rate based so higher interest rates could result in higher interest payments for the company. 

Overall, this Homeplus REIT IPO is likely to attract high interests among overseas institutional investors. However, there are some concerns that this deal could have relatively lower local institutions interest. One of the main reasons for this is because many large local institutions including the NPS have already invested in Homeplus as a consortium of MBK Partners. Although there is no public market value of Homeplus right now, many investors believe that the consortium led by MBK Partners overpaid for Homeplus back in 2015. As a result, these local institutions that have already invested stakes in Homeplus are less likely to further invest in the Homeplus REIT IPO. 

5. ECM Weekly (9 February 2019) – Pinduoduo, Homeplus, PNB Metlife, Cal-Comp Tech

Aequitas Research puts out a weekly update on the deals that have been covered by Smartkarma Insight Providers recently, along with updates for upcoming IPOs.

Accuracy Rate:

Our overall accuracy rate is 72.1% for IPOs and 63.8% for Placements 

(Performance measurement criteria is explained at the end of the note)

No new IPO filings

Below is a snippet of our IPO tool showing upcoming events for the next week. The IPO tool is designed to provide readers with timely information on all IPO related events (Book open/closing, listing, initiation, lock-up expiry, etc) for all the deals that we have worked on. You can access the tool here or through the tools menu.

News on Upcoming IPOs

• PineBridge-backed Uniparts gets SEBI nod to float IPO
• Cal-Comp Philippines eyes IPO by third quarter
• JERA new president says IPO is an option
• Singapore’s Zalora explores listing to fuel expansion
• S. Korea’s Homeplus files for up to $1.5 bln REIT IPO
• Korean bio unicorn in the making, Voronoi, to join the Kosdaq this year

Smartkarma Community’s this week Analysis on Upcoming IPO

• Koolearn: Losses in Full View
• Koolearn: Marketing Expenses Have Taken Operating Profits Down the Drain

List of pre-IPO Coverage on Smartkarma

In this briefing:

1. Sony Revises FY03/19 Guidance Downwards; Management Announces a Surprise Buyback
2. Mitra Adiperkasa (MAPI IJ) – Retail Therapy Is Alive and Well – On the Ground in J-Town
3. Meiji Holdings 3QFY2019 Results On Track to Meet Guidance, Dark Clouds Loom Over Its Mid Term Target
4. Zozo: At First the Fit Was Bad but Now the Threads Are Unravelling

1. Sony Revises FY03/19 Guidance Downwards; Management Announces a Surprise Buyback

• Sony’s revenue for the quarter fell by 10.1% YoY to JPY2,401.8bn while company’s OP saw a 7.5% YoY growth in 3QFY03/19. 
• Sony downgraded its FY03/19 revenue guidance following the third quarter’s earnings results. The company expects to make revenue worth JPY8,500bn for FY03/19, a 2.3% decrease from the October forecast. Sony’s OP forecast for the year still remains at JPY870.0bn.
• Following the 3QFY03/19 earnings release, the company announced that it would buyback JPY100bn worth of its own stock starting Tuesday and lasting until the 22nd of March. 
• As per consensus expectations, Sony is currently trading at a FY1 PE multiple of 7.6x, significantly lower than its historical median of 19.7x.

2. Mitra Adiperkasa (MAPI IJ) – Retail Therapy Is Alive and Well – On the Ground in J-Town

With the huge investment that has been going into e-commerce in Indonesia, especially in the consumer space, there are doomsayers out there crying out that the end is nigh for traditional offline retail as we know it.

Anyone who has actually visited popular destination Jakarta malls such as Grand Indonesia or Kota Kassablanca with their eyes open would almost certainly take a different view. 

A visit to Mitra Adiperkasa (MAPI IJ) management in Jakarta last week confirmed that middle-class retail therapy in Indonesia is alive and well and the company is well positioned to take advantage.  

Mitra Adiperkasa (MAPI IJ) finished 2019 with +8% Same Store Sales Growth (SSSG), with a particularly strong performance from its Sports Station Stores within Ramayana Lestari Sentosa (RALS IJ) stores. 

The company continues to expand its footprint in Indonesia, with plans to increase its floor area by 60,000 sqm in 2019 and a focus on MAP Active, Fashion, and Starbucks. 

MAP continues to take an omnichannel approach to sales, working with all the major online marketplaces and selling through its own Mapemall.com. Online sales only account for around 1% of total sales currently. 

Mitra Adiperkasa (MAPI IJ) remains a key proxy for middle-class consumption in Indonesia, with an increasingly broad spectrum of exposure through alliances with other retailers such as Ramayana Lestari Sentosa (RALS IJ) and Pt Matahari Department Store (LPPF IJ), as well as through its Starbucks expansion. After a few years of restructuring, the company is now harvesting on its transformation, with its specialty business now growing at a faster pace, its department stores in much better shape, and Starbucks enjoying better scale benefits. The company’s margins have improved, it has a stronger balance sheet and more efficient working capital management. According to Capital IQ, the company is trading on 19.6x FY19E PER and 16.5x FY20E PER, with forecast EPS growth of +14.0% and +18.2% for FY19E and FY20E respectively, which continues to look attractive in valuation terms. 

3. Meiji Holdings 3QFY2019 Results On Track to Meet Guidance, Dark Clouds Loom Over Its Mid Term Target

Meiji Holdings (2269 JP) recorded revenue growth of 4.1% in 3QFY2019. The food segment which produces yoghurt, drinking milk, cheese, ice cream, chocolate, nutritional products and sports nutrients came short of the expectations as it recorded a 1.1% drop in revenue. The pharmaceutical segment grew by 35.9% during the quarter allowing Meiji to maintain overall revenue growth in line with FY2019E guidance.

In contrast, EBIT turned out better than expected as it grew 32.6% in 3QFY2019. Both the food and pharmaceutical segments reported significant margin gains, thus the overall EBIT margin of Meiji improved by 227bps cf. 3Q2018.

4. Zozo: At First the Fit Was Bad but Now the Threads Are Unravelling

Just a day after a pledge from CEO Maekawa to stop tweeting sent ZOZO Inc (3092 JP)‘s stock up 8% intraday, the Nikkei reported that United Arrows (7606 JP) would be parting ways with Zozotown and bringing their e-commerce business in-house from October. This comes just days after United Arrows affirmed their desire to continue working with Zozo casting doubt on the positive noises coming from Zozo itself.

As we have pointed out previously, this is the big risk for Zozo and with arguably the company that granted Zozo credibility when it was a startup leaving, a dark cloud has settled over the company’s mid-term future.