Japan

In this briefing:

1. UUUM (3990) Phenomenal Growth but at a Price.
2. Renesas: Factory Stoppage Announcement Should Correct Premature Rebound Expectations
3. Mizuho Financial Group (8411 JP): Writing Off the Past

1. UUUM (3990) Phenomenal Growth but at a Price.

This has been a fantastic performer. Since our buy note one year ago, the shares are up just over 3 times. Earnings growth has been very strong, and much better than we had anticipated. The story is even better now than it was then. Unfortunately, the valuations are not! The company is very focussed on growing revenue for the time being. If one is happy to buy a very fast growing new business, then this is still worth looking at.

2. Renesas: Factory Stoppage Announcement Should Correct Premature Rebound Expectations

We commented previously on 13 Dec 2018 that:

We visited Renesas Electronics (6723 JP) this week to discuss progress on inventory reduction and its likely ramp of utilisation rates/wafer throughput, as well as to gather further details on the IDT acquisition and its long -term strategy. On the whole, we continue to like the long-term picture, consider the stock to be undervalued and believe investors with long time horizons should be looking at the stock on the long side. However, our discussions suggested to us that while production cuts to reduce inventory should be completed this month or at worst in 1Q2019, a ramp in utilisation rates could take longer than is implied by consensus.

Following this comment Renesas Electronics (6723 JP) traded directionally with the market though in very volatile fashion, first dropping 17% before rebounding 69%. Now, with Nikkei reporting that the company would halt production at most facilities during the year and for as much as two months in some cases, the stock is once again giving up its gains and is limit down -14%.  This leaves it just 10% above where we previously commented on the stock and as it approaches the ¥500 level again we feel it is becoming interesting again. We examine the potential financial impact from the production halts below.

3. Mizuho Financial Group (8411 JP): Writing Off the Past

Mizuho Financial Group (8411 JP) (MHFG) has slashed its forecast for FY3/2019 consolidated net profits from ¥570 billion to just ¥80 billion, citing previously-unbudgeted write-downs on physical branch assets and retail banking software, as well as valuation losses on marking to market part of the group’s foreign bond portfolio, especially on derivative products. Total additional costs to be incurred in FY3/2019 are now expected to be around ¥680 billion.

In effect, MHFG is attempting to ‘clear the decks’ of redundant and uneconomic assets  –  a legacy from its 20^th century role as a branch-based deposit taker and lender  –   and is now positioning itself for 21^st century ‘cashless’ banking centred on electronic transaction and payment systems.  While this is a laudable effort, MHFG is late to do this; rivals Mitsubishi Ufj Financial Group (8306 JP) and Sumitomo Mitsui Financial Group (8316 JP)  slimmed down their branch networks in FY3/2018, incurring heavy costs in doing so.

We remain skeptical that this signals the end of MHFG’s problems, and continue to recommend an Underweight position in Japanese bank stocks generally.

MHFG’s uneconomic asset problems are far from unique.  This news may just be the first of a succession of similar announcements from other banks over the next 2-3 years as they face not only an ongoing ultra-low interest rate environment but now also the stark economic realities of a declining local population, high overheads as a result of over-manned and under-utilised branches, a clear shift towards Internet banking and the increasing use of ‘cashless’ alternative payment systems by retail customers.

In this briefing:

1. UUUM (3990) Phenomenal Growth but at a Price.
2. Renesas: Factory Stoppage Announcement Should Correct Premature Rebound Expectations
3. Mizuho Financial Group (8411 JP): Writing Off the Past
4. January Chip Revenues Down 15.6% Year-On-Year

1. UUUM (3990) Phenomenal Growth but at a Price.

This has been a fantastic performer. Since our buy note one year ago, the shares are up just over 3 times. Earnings growth has been very strong, and much better than we had anticipated. The story is even better now than it was then. Unfortunately, the valuations are not! The company is very focussed on growing revenue for the time being. If one is happy to buy a very fast growing new business, then this is still worth looking at.

2. Renesas: Factory Stoppage Announcement Should Correct Premature Rebound Expectations

We commented previously on 13 Dec 2018 that:

We visited Renesas Electronics (6723 JP) this week to discuss progress on inventory reduction and its likely ramp of utilisation rates/wafer throughput, as well as to gather further details on the IDT acquisition and its long -term strategy. On the whole, we continue to like the long-term picture, consider the stock to be undervalued and believe investors with long time horizons should be looking at the stock on the long side. However, our discussions suggested to us that while production cuts to reduce inventory should be completed this month or at worst in 1Q2019, a ramp in utilisation rates could take longer than is implied by consensus.

Following this comment Renesas Electronics (6723 JP) traded directionally with the market though in very volatile fashion, first dropping 17% before rebounding 69%. Now, with Nikkei reporting that the company would halt production at most facilities during the year and for as much as two months in some cases, the stock is once again giving up its gains and is limit down -14%.  This leaves it just 10% above where we previously commented on the stock and as it approaches the ¥500 level again we feel it is becoming interesting again. We examine the potential financial impact from the production halts below.

3. Mizuho Financial Group (8411 JP): Writing Off the Past

Mizuho Financial Group (8411 JP) (MHFG) has slashed its forecast for FY3/2019 consolidated net profits from ¥570 billion to just ¥80 billion, citing previously-unbudgeted write-downs on physical branch assets and retail banking software, as well as valuation losses on marking to market part of the group’s foreign bond portfolio, especially on derivative products. Total additional costs to be incurred in FY3/2019 are now expected to be around ¥680 billion.

In effect, MHFG is attempting to ‘clear the decks’ of redundant and uneconomic assets  –  a legacy from its 20^th century role as a branch-based deposit taker and lender  –   and is now positioning itself for 21^st century ‘cashless’ banking centred on electronic transaction and payment systems.  While this is a laudable effort, MHFG is late to do this; rivals Mitsubishi Ufj Financial Group (8306 JP) and Sumitomo Mitsui Financial Group (8316 JP)  slimmed down their branch networks in FY3/2018, incurring heavy costs in doing so.

We remain skeptical that this signals the end of MHFG’s problems, and continue to recommend an Underweight position in Japanese bank stocks generally.

MHFG’s uneconomic asset problems are far from unique.  This news may just be the first of a succession of similar announcements from other banks over the next 2-3 years as they face not only an ongoing ultra-low interest rate environment but now also the stark economic realities of a declining local population, high overheads as a result of over-manned and under-utilised branches, a clear shift towards Internet banking and the increasing use of ‘cashless’ alternative payment systems by retail customers.

4. January Chip Revenues Down 15.6% Year-On-Year

The Semiconductor Industry Association in the US released the latest WSTS figures for January chip revenues.  Monthly revenues are down 15.6% from January of 2018.  While this is not a surprise to our clients it is frightening to those who anticipated that 2019 would be a continuation of the bonanza enjoyed in 2018.

In this briefing:

1. Singapore REIT – The Draft Master Plan 2019 Boost and Q1 Scorecard
2. Japan Post Insurance Placement – 3x the IPO Size – Basics and Index Impact
3. More Volatility in the LNG Markets as JKM Drops Below TTF – Oil Majors Increase Exposure to US LNG
4. Nexon Sale: Key Questions at This Point & Most Realistic Answers
5. MTG Co Ltd; Problems Stretch Far Beyond the New Chinese E-Commerce Legislation

1. Singapore REIT – The Draft Master Plan 2019 Boost and Q1 Scorecard

Singapore REITs (S-REITs) are up about 13% year-to-date in 2019 on a total returns basis against the Straits Times Index’s (STI) 8.3%. S-REITs is expected to continue its outperformance on the back of a pause in the US interest rate hike cycle, falling Singapore government bond yields, and improving demand and supply dynamics in the underlying sub-markets. Valuations of many S-REITs, however, may be appearing stretched as S-REITs’ yields have compressed significantly in the last six months, leaving the yield spread over the 10-year Singapore government bond yield at about 350 basis points, which is lower than the historical average spread of about 370 basis points.

Contrary to the popular belief that retail malls are no longer relevant, we view the outlook of the retail space market as positive due to the limited new supply from 2020 and new trend towards omnichannel retailing.  Our preference remains on selected retail REITs with exposure to suburban malls such as Frasers Centrepoint Trust (FCT SP) .

Office REITs are given more legs to run with the new CBD incentive scheme in the URA Draft Master Plan 2019. The sustained office upcycle may also spill over to the business parks and hi-specs industrial space, benefiting some of the business parks/industrial REITs.

We prefer selected industrial REITs with a diversified geographical exposure such as Mapletree Logistics Trust (MLT SP) and those with greater exposure to business parks and high-specs industrial space.

Referring to our earlier report Singapore REIT – Preferred Picks 2019 , two of our preferred picks, Mapletree Logistics Trust and Mapletree Greater China Commercial Trust (MAGIC SP) (now known as Mapletree North Asia Commercial Trust), were among the top five S-REITs performers year-to-date, having achieved the same total return of 17.6%. Manulife Us Reit (MUST SP) and Frasers Centrepoint Trust (FCT SP), also did well, beating the STI with total returns of 10.4% and 9.5%, respectively.

2. Japan Post Insurance Placement – 3x the IPO Size – Basics and Index Impact

Yesterday, post-market close, Japan Post Holdings (6178 JP)(JPH) announced that it will sell 185m shares (including over-allotment) or 30.8% of Japan Post Insurance (7181 JP)(JPI) amounting to US$4bn. JPI plans to buy back up to 50m shares out of these, leaving around US$3.1bn worth of stock to be placed. Out of these 185m shares, 30% will be placed with foreigners.

The selldown is part of the government’s plan for privatization under which JPH is supposed to reduce its stake in JPI and Japan Post Bank (7182 JP)(JPB) to around 50%. This was highlighted in the IPO of the three entities in 2015. Thus, the deal is not totally unexpected but the timing of it was never certain. For people interested in more about the history and background, we’ve covered the IPO and JPH sell down in the below series of insights:

• All three IPOs: When the bank is cheap and holdco discount makes the mothership cheaper, then who needs insurance?
• JPI IPO: Three’s a crowd – A minnow amongst giants risks getting lost in the chatter
• JPB IPO: Dividend yield looks enticing versus JGBs yield, while risks are similar
• JPH IPO: Final call to board the mothership. They don’t come much cheaper than this.
• JPH Placement: Japan Post Holdings Placement – Similar Reasons, Similar Price Will Probably Yield Similar Returns

In this insight, I’ll comment on some of the deal dynamics and index weighting impact.

3. More Volatility in the LNG Markets as JKM Drops Below TTF – Oil Majors Increase Exposure to US LNG

The JKM has halved its value since December, continuing its steady decline and dropping below the TTF, the benchmark for European LNG prices. Asian LNG spot prices are now at their lowest level since May 2015. While a prolonged LNG price downturn could force many projects to be cancelled, the winners among the developers are starting to emerge, aggressively pushing ahead their projects closer to the final investment decision.

Both Tellurian Inc (TELL US) and NextDecade Corp (NEXT US) signed high-profile deals, respectively with Total Sa (FP FP) and Royal Dutch Shell (RDSA LN), that could significantly de-risk their proposed LNG projects and increase the probability to reach FID in 2019. In Russia, LNG newcomer Novatek PJSC (NVTK LI) agreed two long-term offtake deals with Repsol SA (REP SM) and Vitol thereby moving a step closer to FID its Arctic LNG 2 project.

4. Nexon Sale: Key Questions at This Point & Most Realistic Answers

This post discusses the key questions on Nexon sale at this point. It then provides the most realistic answers to these questions from various circumstantial aspects. This post is based on the recent news reports and also various local sources.

5. MTG Co Ltd; Problems Stretch Far Beyond the New Chinese E-Commerce Legislation

• MTG revised their original targets for FY2019 and issued revised targets which were significantly below the original targets
• The share price has already been on the decline even prior to the notice of revised targets
• Declining inbound sales of its flagship brand ReFa is the main culprit for guidance reversion
• The impact of Chinese e-commerce legislation was significant due to limited exposure to pure inbound sales
• Parallel buyers, those who buy products to resell them in China: dominates MTG’s inbound sales
• MTG’s price difference in Japan duty-free purchases vs official sales channels in China
• The Troubles of MTG, Causing Panic Among Consensus
• Insider ownership and lack of free float keeping the share price above its fair value
• Price to book approaching 1.0x; limits the immediate downside risk

In this briefing:

1. Renesas: Factory Stoppage Announcement Should Correct Premature Rebound Expectations
2. Mizuho Financial Group (8411 JP): Writing Off the Past
3. January Chip Revenues Down 15.6% Year-On-Year
4. Accordia Golf Trust (AGT): Buy but Please Consider This…

1. Renesas: Factory Stoppage Announcement Should Correct Premature Rebound Expectations

We commented previously on 13 Dec 2018 that:

We visited Renesas Electronics (6723 JP) this week to discuss progress on inventory reduction and its likely ramp of utilisation rates/wafer throughput, as well as to gather further details on the IDT acquisition and its long -term strategy. On the whole, we continue to like the long-term picture, consider the stock to be undervalued and believe investors with long time horizons should be looking at the stock on the long side. However, our discussions suggested to us that while production cuts to reduce inventory should be completed this month or at worst in 1Q2019, a ramp in utilisation rates could take longer than is implied by consensus.

Following this comment Renesas Electronics (6723 JP) traded directionally with the market though in very volatile fashion, first dropping 17% before rebounding 69%. Now, with Nikkei reporting that the company would halt production at most facilities during the year and for as much as two months in some cases, the stock is once again giving up its gains and is limit down -14%.  This leaves it just 10% above where we previously commented on the stock and as it approaches the ¥500 level again we feel it is becoming interesting again. We examine the potential financial impact from the production halts below.

2. Mizuho Financial Group (8411 JP): Writing Off the Past

Mizuho Financial Group (8411 JP) (MHFG) has slashed its forecast for FY3/2019 consolidated net profits from ¥570 billion to just ¥80 billion, citing previously-unbudgeted write-downs on physical branch assets and retail banking software, as well as valuation losses on marking to market part of the group’s foreign bond portfolio, especially on derivative products. Total additional costs to be incurred in FY3/2019 are now expected to be around ¥680 billion.

In effect, MHFG is attempting to ‘clear the decks’ of redundant and uneconomic assets  –  a legacy from its 20^th century role as a branch-based deposit taker and lender  –   and is now positioning itself for 21^st century ‘cashless’ banking centred on electronic transaction and payment systems.  While this is a laudable effort, MHFG is late to do this; rivals Mitsubishi Ufj Financial Group (8306 JP) and Sumitomo Mitsui Financial Group (8316 JP)  slimmed down their branch networks in FY3/2018, incurring heavy costs in doing so.

We remain skeptical that this signals the end of MHFG’s problems, and continue to recommend an Underweight position in Japanese bank stocks generally.

MHFG’s uneconomic asset problems are far from unique.  This news may just be the first of a succession of similar announcements from other banks over the next 2-3 years as they face not only an ongoing ultra-low interest rate environment but now also the stark economic realities of a declining local population, high overheads as a result of over-manned and under-utilised branches, a clear shift towards Internet banking and the increasing use of ‘cashless’ alternative payment systems by retail customers.

3. January Chip Revenues Down 15.6% Year-On-Year

The Semiconductor Industry Association in the US released the latest WSTS figures for January chip revenues.  Monthly revenues are down 15.6% from January of 2018.  While this is not a surprise to our clients it is frightening to those who anticipated that 2019 would be a continuation of the bonanza enjoyed in 2018.

4. Accordia Golf Trust (AGT): Buy but Please Consider This…

Accordia Golf Trust (AGT SP) is the second largest golf course operator in Japan that offers stable DPU with assets that are less correlated to the global economic cycle but they have their own challenges; aging demographics that makes the number of games played lower over time, volatile weather in Japan (unlike in Singapore where it’s sunny summer all year long), limited upside impact from automation initiative and golf tax. 

In this briefing:

1. Japan Post Insurance Placement – 3x the IPO Size – Basics and Index Impact
2. More Volatility in the LNG Markets as JKM Drops Below TTF – Oil Majors Increase Exposure to US LNG
3. Nexon Sale: Key Questions at This Point & Most Realistic Answers
4. MTG Co Ltd; Problems Stretch Far Beyond the New Chinese E-Commerce Legislation
5. Naspers: Addressing the Discount (Again). New Moves to Realize Value Are Having an Impact

1. Japan Post Insurance Placement – 3x the IPO Size – Basics and Index Impact

Yesterday, post-market close, Japan Post Holdings (6178 JP)(JPH) announced that it will sell 185m shares (including over-allotment) or 30.8% of Japan Post Insurance (7181 JP)(JPI) amounting to US$4bn. JPI plans to buy back up to 50m shares out of these, leaving around US$3.1bn worth of stock to be placed. Out of these 185m shares, 30% will be placed with foreigners.

The selldown is part of the government’s plan for privatization under which JPH is supposed to reduce its stake in JPI and Japan Post Bank (7182 JP)(JPB) to around 50%. This was highlighted in the IPO of the three entities in 2015. Thus, the deal is not totally unexpected but the timing of it was never certain. For people interested in more about the history and background, we’ve covered the IPO and JPH sell down in the below series of insights:

• All three IPOs: When the bank is cheap and holdco discount makes the mothership cheaper, then who needs insurance?
• JPI IPO: Three’s a crowd – A minnow amongst giants risks getting lost in the chatter
• JPB IPO: Dividend yield looks enticing versus JGBs yield, while risks are similar
• JPH IPO: Final call to board the mothership. They don’t come much cheaper than this.
• JPH Placement: Japan Post Holdings Placement – Similar Reasons, Similar Price Will Probably Yield Similar Returns

In this insight, I’ll comment on some of the deal dynamics and index weighting impact.

2. More Volatility in the LNG Markets as JKM Drops Below TTF – Oil Majors Increase Exposure to US LNG

The JKM has halved its value since December, continuing its steady decline and dropping below the TTF, the benchmark for European LNG prices. Asian LNG spot prices are now at their lowest level since May 2015. While a prolonged LNG price downturn could force many projects to be cancelled, the winners among the developers are starting to emerge, aggressively pushing ahead their projects closer to the final investment decision.

Both Tellurian Inc (TELL US) and NextDecade Corp (NEXT US) signed high-profile deals, respectively with Total Sa (FP FP) and Royal Dutch Shell (RDSA LN), that could significantly de-risk their proposed LNG projects and increase the probability to reach FID in 2019. In Russia, LNG newcomer Novatek PJSC (NVTK LI) agreed two long-term offtake deals with Repsol SA (REP SM) and Vitol thereby moving a step closer to FID its Arctic LNG 2 project.

3. Nexon Sale: Key Questions at This Point & Most Realistic Answers

This post discusses the key questions on Nexon sale at this point. It then provides the most realistic answers to these questions from various circumstantial aspects. This post is based on the recent news reports and also various local sources.

4. MTG Co Ltd; Problems Stretch Far Beyond the New Chinese E-Commerce Legislation

• MTG revised their original targets for FY2019 and issued revised targets which were significantly below the original targets
• The share price has already been on the decline even prior to the notice of revised targets
• Declining inbound sales of its flagship brand ReFa is the main culprit for guidance reversion
• The impact of Chinese e-commerce legislation was significant due to limited exposure to pure inbound sales
• Parallel buyers, those who buy products to resell them in China: dominates MTG’s inbound sales
• MTG’s price difference in Japan duty-free purchases vs official sales channels in China
• The Troubles of MTG, Causing Panic Among Consensus
• Insider ownership and lack of free float keeping the share price above its fair value
• Price to book approaching 1.0x; limits the immediate downside risk

5. Naspers: Addressing the Discount (Again). New Moves to Realize Value Are Having an Impact

Naspers (NPN SJ) recently announced another attempt to reduce the holdco discount which has remained stubbornly high despite previous attempts by management to reduce it. Since the announcement there has been movement, so perhaps this time it really is different!

So what is being done? Naspers will spin off its international internet assets, which account for >99% of its value, into a newco. They will then list 25% of newco on the Euronext in Amsterdam by issuing these shares to Naspers’ shareholders. The intention is to create a vehicle which can attract increased foreign and tech investors without the complication of a South African listing. The company believes this has been a key factor behind the wide holdco discount. The move also reduces Naspers weighting in South African indices which is another contributing factor.

Alastair Jones sees the announcement as a positive, although there are still issues with the main listing being in South Africa. He still believes a buyback would be the most effective way to reduce the discount, but Naspers is also keen to keep investing. 

In this briefing:

1. Mizuho Financial Group (8411 JP): Writing Off the Past
2. January Chip Revenues Down 15.6% Year-On-Year
3. Accordia Golf Trust (AGT): Buy but Please Consider This…

1. Mizuho Financial Group (8411 JP): Writing Off the Past

Mizuho Financial Group (8411 JP) (MHFG) has slashed its forecast for FY3/2019 consolidated net profits from ¥570 billion to just ¥80 billion, citing previously-unbudgeted write-downs on physical branch assets and retail banking software, as well as valuation losses on marking to market part of the group’s foreign bond portfolio, especially on derivative products. Total additional costs to be incurred in FY3/2019 are now expected to be around ¥680 billion.

In effect, MHFG is attempting to ‘clear the decks’ of redundant and uneconomic assets  –  a legacy from its 20^th century role as a branch-based deposit taker and lender  –   and is now positioning itself for 21^st century ‘cashless’ banking centred on electronic transaction and payment systems.  While this is a laudable effort, MHFG is late to do this; rivals Mitsubishi Ufj Financial Group (8306 JP) and Sumitomo Mitsui Financial Group (8316 JP)  slimmed down their branch networks in FY3/2018, incurring heavy costs in doing so.

We remain skeptical that this signals the end of MHFG’s problems, and continue to recommend an Underweight position in Japanese bank stocks generally.

MHFG’s uneconomic asset problems are far from unique.  This news may just be the first of a succession of similar announcements from other banks over the next 2-3 years as they face not only an ongoing ultra-low interest rate environment but now also the stark economic realities of a declining local population, high overheads as a result of over-manned and under-utilised branches, a clear shift towards Internet banking and the increasing use of ‘cashless’ alternative payment systems by retail customers.

2. January Chip Revenues Down 15.6% Year-On-Year

The Semiconductor Industry Association in the US released the latest WSTS figures for January chip revenues.  Monthly revenues are down 15.6% from January of 2018.  While this is not a surprise to our clients it is frightening to those who anticipated that 2019 would be a continuation of the bonanza enjoyed in 2018.

3. Accordia Golf Trust (AGT): Buy but Please Consider This…

Accordia Golf Trust (AGT SP) is the second largest golf course operator in Japan that offers stable DPU with assets that are less correlated to the global economic cycle but they have their own challenges; aging demographics that makes the number of games played lower over time, volatile weather in Japan (unlike in Singapore where it’s sunny summer all year long), limited upside impact from automation initiative and golf tax. 

In this briefing:

1. More Volatility in the LNG Markets as JKM Drops Below TTF – Oil Majors Increase Exposure to US LNG
2. Nexon Sale: Key Questions at This Point & Most Realistic Answers
3. MTG Co Ltd; Problems Stretch Far Beyond the New Chinese E-Commerce Legislation
4. Naspers: Addressing the Discount (Again). New Moves to Realize Value Are Having an Impact
5. Sony Corp: Key Takeaways from Our Recent Meeting with IR Team

1. More Volatility in the LNG Markets as JKM Drops Below TTF – Oil Majors Increase Exposure to US LNG

The JKM has halved its value since December, continuing its steady decline and dropping below the TTF, the benchmark for European LNG prices. Asian LNG spot prices are now at their lowest level since May 2015. While a prolonged LNG price downturn could force many projects to be cancelled, the winners among the developers are starting to emerge, aggressively pushing ahead their projects closer to the final investment decision.

Both Tellurian Inc (TELL US) and NextDecade Corp (NEXT US) signed high-profile deals, respectively with Total Sa (FP FP) and Royal Dutch Shell (RDSA LN), that could significantly de-risk their proposed LNG projects and increase the probability to reach FID in 2019. In Russia, LNG newcomer Novatek PJSC (NVTK LI) agreed two long-term offtake deals with Repsol SA (REP SM) and Vitol thereby moving a step closer to FID its Arctic LNG 2 project.

2. Nexon Sale: Key Questions at This Point & Most Realistic Answers

This post discusses the key questions on Nexon sale at this point. It then provides the most realistic answers to these questions from various circumstantial aspects. This post is based on the recent news reports and also various local sources.

3. MTG Co Ltd; Problems Stretch Far Beyond the New Chinese E-Commerce Legislation

• MTG revised their original targets for FY2019 and issued revised targets which were significantly below the original targets
• The share price has already been on the decline even prior to the notice of revised targets
• Declining inbound sales of its flagship brand ReFa is the main culprit for guidance reversion
• The impact of Chinese e-commerce legislation was significant due to limited exposure to pure inbound sales
• Parallel buyers, those who buy products to resell them in China: dominates MTG’s inbound sales
• MTG’s price difference in Japan duty-free purchases vs official sales channels in China
• The Troubles of MTG, Causing Panic Among Consensus
• Insider ownership and lack of free float keeping the share price above its fair value
• Price to book approaching 1.0x; limits the immediate downside risk

4. Naspers: Addressing the Discount (Again). New Moves to Realize Value Are Having an Impact

Naspers (NPN SJ) recently announced another attempt to reduce the holdco discount which has remained stubbornly high despite previous attempts by management to reduce it. Since the announcement there has been movement, so perhaps this time it really is different!

So what is being done? Naspers will spin off its international internet assets, which account for >99% of its value, into a newco. They will then list 25% of newco on the Euronext in Amsterdam by issuing these shares to Naspers’ shareholders. The intention is to create a vehicle which can attract increased foreign and tech investors without the complication of a South African listing. The company believes this has been a key factor behind the wide holdco discount. The move also reduces Naspers weighting in South African indices which is another contributing factor.

Alastair Jones sees the announcement as a positive, although there are still issues with the main listing being in South Africa. He still believes a buyback would be the most effective way to reduce the discount, but Naspers is also keen to keep investing. 

5. Sony Corp: Key Takeaways from Our Recent Meeting with IR Team

This article is a round up of the key takeaways from our recent meeting with Sony’s IR team. Our main focus was on the PlayStation and subsequent hardware and software developments, the company’s mobile phones business unit, the pictures unit as well as the semiconductor business.

• In the gaming segment, Sony doesn’t see Stadia as a threat since Sony mainly caters to the core gaming segment. Sony does not expect cloud gaming to offer the same quality that consoles offer to core gamers anytime soon. For the time being, Stadia will most likely appeal to casual gamers.
• In the pictures segment, Sony is developing a Spider-Verse sequel. A definite release date is yet to be confirmed, however, looking at the first movie’s success, we can expect a similar result for the sequel upon release.
• The company also plans to hold onto its mobile communications segment even though it is expected to make losses in FY03/19 as well. For Sony, this segment is crucial in developing 5G technologies.
• In the semiconductors segment, Sony expects a demand hike from the number of cameras used per phone. This is in spite of the mobile phone market itself slowing down. Sony expects to increase the ASPs of these sensors going forward as well.

In this briefing:

1. Nexon Sale: Key Questions at This Point & Most Realistic Answers
2. MTG Co Ltd; Problems Stretch Far Beyond the New Chinese E-Commerce Legislation
3. Naspers: Addressing the Discount (Again). New Moves to Realize Value Are Having an Impact
4. Sony Corp: Key Takeaways from Our Recent Meeting with IR Team
5. What Next in the Inflation / Deflation Debate and What Does It Mean for Asset Prices?

1. Nexon Sale: Key Questions at This Point & Most Realistic Answers

This post discusses the key questions on Nexon sale at this point. It then provides the most realistic answers to these questions from various circumstantial aspects. This post is based on the recent news reports and also various local sources.

2. MTG Co Ltd; Problems Stretch Far Beyond the New Chinese E-Commerce Legislation

• MTG revised their original targets for FY2019 and issued revised targets which were significantly below the original targets
• The share price has already been on the decline even prior to the notice of revised targets
• Declining inbound sales of its flagship brand ReFa is the main culprit for guidance reversion
• The impact of Chinese e-commerce legislation was significant due to limited exposure to pure inbound sales
• Parallel buyers, those who buy products to resell them in China: dominates MTG’s inbound sales
• MTG’s price difference in Japan duty-free purchases vs official sales channels in China
• The Troubles of MTG, Causing Panic Among Consensus
• Insider ownership and lack of free float keeping the share price above its fair value
• Price to book approaching 1.0x; limits the immediate downside risk

3. Naspers: Addressing the Discount (Again). New Moves to Realize Value Are Having an Impact

Naspers (NPN SJ) recently announced another attempt to reduce the holdco discount which has remained stubbornly high despite previous attempts by management to reduce it. Since the announcement there has been movement, so perhaps this time it really is different!

So what is being done? Naspers will spin off its international internet assets, which account for >99% of its value, into a newco. They will then list 25% of newco on the Euronext in Amsterdam by issuing these shares to Naspers’ shareholders. The intention is to create a vehicle which can attract increased foreign and tech investors without the complication of a South African listing. The company believes this has been a key factor behind the wide holdco discount. The move also reduces Naspers weighting in South African indices which is another contributing factor.

Alastair Jones sees the announcement as a positive, although there are still issues with the main listing being in South Africa. He still believes a buyback would be the most effective way to reduce the discount, but Naspers is also keen to keep investing. 

4. Sony Corp: Key Takeaways from Our Recent Meeting with IR Team

This article is a round up of the key takeaways from our recent meeting with Sony’s IR team. Our main focus was on the PlayStation and subsequent hardware and software developments, the company’s mobile phones business unit, the pictures unit as well as the semiconductor business.

• In the gaming segment, Sony doesn’t see Stadia as a threat since Sony mainly caters to the core gaming segment. Sony does not expect cloud gaming to offer the same quality that consoles offer to core gamers anytime soon. For the time being, Stadia will most likely appeal to casual gamers.
• In the pictures segment, Sony is developing a Spider-Verse sequel. A definite release date is yet to be confirmed, however, looking at the first movie’s success, we can expect a similar result for the sequel upon release.
• The company also plans to hold onto its mobile communications segment even though it is expected to make losses in FY03/19 as well. For Sony, this segment is crucial in developing 5G technologies.
• In the semiconductors segment, Sony expects a demand hike from the number of cameras used per phone. This is in spite of the mobile phone market itself slowing down. Sony expects to increase the ASPs of these sensors going forward as well.

5. What Next in the Inflation / Deflation Debate and What Does It Mean for Asset Prices?

Despite some signs of stabilization in China’s factory gauges the primary trend is still weakness and it might be rash for investors to read too much into the recent data given the apparent weakness in the Eurozone and the moderation form a high level of growth in the United States.  Quantitative tightening is on hold in the United States but a sharp “U-turn” to easing has not happened yet and is politically embarrassing. As inflation falls real rates are rising. Housing markets are showing signs of price weakness. Investors need to watch for signs of credit quality decay that could be an indicator of the next period of severe financial distress. 

In this briefing:

1. Toyota: Hitting the Hybrid Accelerator and Towing Suzuki and Mazda in Its Wake
2. Monthly Geopolitical Comment: Markets Are Still Waiting for the Result of US-China Trade Talks
3. Japanese Banks:  Beyond the Ides of March
4. Japan Display: Deal to Raise JPY110bn from China-Taiwan Consortium and Japanese Investment Fund
5. TSE’s Market Structure Review: Public Comments As Expected, But Miss The Mark

1. Toyota: Hitting the Hybrid Accelerator and Towing Suzuki and Mazda in Its Wake

The Nikkei announced this morning that Toyota Motor (7203 JP) was considering opening up its portfolio of hybrid patents for outside use, possibly for free.

We recently visited Toyota at its Toyota city headquarters and spent some time discussing this very topic. We believe this move is being made with an eye towards China in particular and to an extent the US. We would also highlight the continuing development of Toyota’s relationship with Suzuki. As the automakers move slowly towards what is likely to be an eventual union, the sharing of hybrid technology with Suzuki could have a significant impact on the medium-term prospects of both automakers.

2. Monthly Geopolitical Comment: Markets Are Still Waiting for the Result of US-China Trade Talks

3. Japanese Banks:  Beyond the Ides of March

“Beware the Ides of March”: the soothsayer’s repeated warning to ancient Rome’s most famous emperor in William Shakespeare’s play ‘Julius Caesar’.  Caesar ignores the warning and is assassinated later that day by his colleagues on the steps of the Senate.  We have been warning investors in Japanese bank stocks for the last few years to “beware the Ides of March”, advising them to be very underweight in the sector (or preferably out of the sector entirely) by 15 March each year to avoid the risk of incurring a similar fate at the hands of their investment colleagues as befell Julius Caesar on 15 March 44BC.  We are now well past the Ides of March and, true to form, the sector has already peaked and lost momentum after a brief post-Santa rally.  ‘Caveat emptor! (May the buyer beware!)’ remains our Caesarean soothsayer warning to would-be investors in Japanese bank stocks in 2019.

4. Japan Display: Deal to Raise JPY110bn from China-Taiwan Consortium and Japanese Investment Fund

• It was reported over the weekend that the troubled display supplier to iPhone maker Apple, Japan Display (JDI) has almost finalized a deal to raise more than JPY110bn (US$990m) from a China-Taiwan consortium and Japanese public-private fund INCJ Ltd.
• The China-Taiwan consortium is expected to secure some 50% stake in Japan Display while the top shareholder INCJ’s current stake of 25.3% is expected to be halved.
• The consortium is aiming to restructure JDI’s remaining debt payments of about JPY100bn from Apple for the construction of its plant while it also aims to procure parts for the latest iPhone. In addition, the consortium is also trying to modify a contract stipulating that Apple can seize plants if JDI’s cash and deposits fall below a certain amount.
• The consortium along with JDI is planning to build an OLED panel plant in China with JDI providing the technological know-how while the consortium partners invest in capital expenditures and equity.
• Japan Display has been struggling to navigate its display business due to the slowdown in iPhone sales, falling behind competition on OLED technology and facing stiff price competition from Chinese panel makers.
• We expect the proposed OLED plant in China could help the company stabilize its panel business with Chinese smartphone makers Huawei and Xiaomi who prefer to source panels locally from domestic panel makers such as BOE Technology and Tianma.

5. TSE’s Market Structure Review: Public Comments As Expected, But Miss The Mark

Late last December after a Nikkei article on 21 December titled  Tokyo Stock Exchange’s big board about to get a lot smaller suggested the TSE would boot up to 1500 stocks from TOPIX, which now boasts 2130+ members – far more than major indices in other developed markets.

The same day, the TSE released a  Consultation Paper “Review of the TSE Cash Equity Market Structure” (Paper, and Data presentation).

My conclusion (in Big Trouble in Little Stocks? TSE Mulls Changing TOPIX almost three months ago) was that there was no good news to be had in bulk on small cap stocks relative to large cap stocks unless they made it clear they’d use the opportunity to buy back stock, etc.

In the interim, there has been considerable speculation about the eventual disposition of smallcap stocks. There was an extensive Toyo Keizai article in early March which pointed to stocks below a market cap of ¥100 billion being possibly excluded from the “step-up” market. There was a Nikkei article on March 15 which suggested that the “limit” might be considerably lower – perhaps ¥25 billion – and that the limit might have other softer elements such as a requirement to deliver or release company reports in English. There have been other ‘non-financial elements’ suggested as well, such as independent director count, cross-holding policies, etc. 

It is not clear whether the substantially different reports are the rival speculations of different media enterprises, or the rival agendas of different factions within the power structures who may care (the TSE, FSA, Keidanren, JPFA, JSDA, brokers themselves, a whole raft of small companies, the Securities documentation printing houses, etc).

There are theoretically a lot of vested interests in keeping a very large number of companies listed, and a very large number of companies in widely-followed/tracked indices. Brokers get money from being underwriters on deals. The more companies there are the more deals there are. Brokers also make money by providing the stock loan access for investors who want to go short stocks. If 1500 small stocks are removed from a broad index, it will become incrementally more difficult to borrow them – to make markets or go short. The documentation printing houses charge each company for adapting their financial statements and reports into the regulator-mandated formats and uploading them, running the IR sections of their websites, etc. On the other hand, if half the listed companies in Japan were simply to decide that they’d be better off if they merged into other large companies, then those providers would lose big. Some of the more aggressive local stewards and governance hounds are all for much more rigorous standards. 

The New News

Last week the TSE released a document outlining the Comments Received from Market Participants in Response to the Review of the TSE Cash Equity Market Structure along with their version of a Summary.

The two-page Summary is actually not a bad recap of the issues, BUT… there’s more.

There is a fair bit of pent-up expectation that there will be selling of small caps. There is a need to see improvement in governance, independence, board structure, and capital stewardship by a very large number of companies in Japan, and small companies outside MOTHERS are often viewed as lacking in effort to improve governance so the reason why there could be selling.

However, it is not clear there needs to be any selling, which is somewhat counterintuitive.

In this briefing:

1. January Chip Revenues Down 15.6% Year-On-Year
2. Accordia Golf Trust (AGT): Buy but Please Consider This…

1. January Chip Revenues Down 15.6% Year-On-Year

The Semiconductor Industry Association in the US released the latest WSTS figures for January chip revenues.  Monthly revenues are down 15.6% from January of 2018.  While this is not a surprise to our clients it is frightening to those who anticipated that 2019 would be a continuation of the bonanza enjoyed in 2018.

2. Accordia Golf Trust (AGT): Buy but Please Consider This…

Accordia Golf Trust (AGT SP) is the second largest golf course operator in Japan that offers stable DPU with assets that are less correlated to the global economic cycle but they have their own challenges; aging demographics that makes the number of games played lower over time, volatile weather in Japan (unlike in Singapore where it’s sunny summer all year long), limited upside impact from automation initiative and golf tax.