Japan

In this briefing:

1. Nexon to Increase Focus on Mobile Gaming Amidst Talks of Possible Sale of the Company
2. Nexon Controlling Stake Sale: Tax Situation Assessment & Tender Implications
3. Bull Or Bear? Latest Global Liquidity Readings
4. Risk of Future LNG Supply Glut as Bubble of New Projects Grows
5. Japan E-Commerce: Digital to Influence 45% of All Retail Sales by 2025

1. Nexon to Increase Focus on Mobile Gaming Amidst Talks of Possible Sale of the Company

• The global gaming market is transitioning towards mobile gaming, which currently captures around 50% of market share. This has resulted in Korean gaming company Nexon slowly shifting its focus towards mobile games.
• Over the year’s Nexon’s mobile gaming segment has grown faster than the PC online segment. When looking at the five-year revenue CAGR between the two business segments, the PC online segment has grown at a CAGR of 9.4% over FY2013-18 while the mobile games segment has grown at a double digit CAGR of 14.1% over the same period.
• For the mobile gaming segment, in the future, Nexon’s primary focus includes developing mobile games based on IPs of older PC games.
• The company has a steady line up of mobile games planned for FY2019, with ten titles set to release in the first half.
• On our estimates, Nexon seems over-valued, currently trading at a FY1 EV/OP of 9.6x compared to its five-year historical median of 7.7x.

2. Nexon Controlling Stake Sale: Tax Situation Assessment & Tender Implications

This post looks at the tax situations that Nexon’s Kim may be facing for each of the two options and the signals that he may be sending with regard to his decision. Also, this post discusses how each option may impact on mandatory tender offer which is a crucial point for current massive short buildup on Nexon Japan shares.

3. Bull Or Bear? Latest Global Liquidity Readings

• Global Liquidity bottoming out, but Central Banks not yet easing
• US Fed only withdrew $30bn in Q1, versus $350 bn in Q4
• PBoC still tightening through OMOs
• ECB  on ‘pause’
• QE4 is coming in 2019, but no evidence it has started yet

4. Risk of Future LNG Supply Glut as Bubble of New Projects Grows

The rapidly improving outlook in the LNG industry over the last few years, reinforced towards the end of 2017 by the unexpected growth of demand from China, has set off a proliferation of new LNG projects especially from the US (Exhibit 1).

In its latest LNG Outlook report, Royal Dutch Shell (RDSA LN) is projecting from 2023 onwards a significant gap between the future LNG demand and the existing supply including the capacity under construction that could require up to 100mtpa of new LNG project sanctions by 2023.

The race to gain market share in the projected LNG demand-supply gap has produced an aggregated capacity of proposed new projects of up to 475mtpa, a number larger than the total LNG traded volume in 2018 of 319mtpa and way above the capacity required to meet the future growth in LNG demand.

Exhibit 1: Funnel of proposed LNG projects getting bigger

5. Japan E-Commerce: Digital to Influence 45% of All Retail Sales by 2025

E-commerce is set to account for 15% of retail sales in 2025, double the size of any other channel, and become the biggest channel for physical merchandise by 2023.

However, recent research, which considers online sales in a store context, suggests that already in 2016-17, 35.3% of all retail sales were at least partly a result of online interactions through an omnichannel process.

By 2024, total EC sales including omnichannel transactions are expected to hit 44.6% of all retail sales or approximately ¥76.4 trillion.

In this briefing:

1. Havells India
2. Sony: Yoshida Tightens Discipline as Hirai Steps Away Completely
3. Japan Stock Weekly
4. SBS (2384) A Great Third Party Logistics Company Seeing Good Organic Growth as Well as Via M&A.
5. The Dollar IS the Story; Gold Confounds, A Brexit Rabbit Hole; EUR Punished

1. Havells India

As the summer sets in, we visit distributor and retailers of air conditioners in our home town Vadodara, Gujarat where temperatures soar really high in summer and air conditioning is becoming a necessity.  Our checks are focused on Havells India (HAVL IN) and its’ consumer brand Llyod. Our takeaways from visits suggest celebrity endorsements unlikely to work, competition intensifying with the entry of Daikin in the mass premium segment, Ifb Industries (IFBI IN) joins the price war with its ACs, the season is off to a muted start due to prolonged winters.  At current price of INR 776, risk-reward offered is not in favour for Havells investors with a medium-term horizon. Using consensus estimates and average 3 year forward PE of 41x, target price works out to be INR 807. Investors will be better off waiting for an attractive entry point.

2. Sony: Yoshida Tightens Discipline as Hirai Steps Away Completely

Kazuo Hirai, architest of Sony Corp (6758 JP)‘s remarkable recovery, announced today that he would be stepping down as Sony Chairman in Jun this year.  The transition in leadership to former CFO Kenichiro Yoshida has been completed and was accomplished smoothly so we do not see any negative impact.

Recent concerns about Sony’s loss making smartphone unit also appear to be being addressed as the Nikkei reports that Sony would look to cut costs and headcount in half by Mar 2020. The English article is here and the slightly more detailed Japanese version is here.

3. Japan Stock Weekly

SBS (2384) – A great third party logisitcs company seeing good growth both organically and through M&A.

Nikon (7731) – Now very cheap, earnings still weak but time to start to consider this name?

Nidec (6594) – Near term concerns remain, but longer term the business looks to be in good shape.

4. SBS (2384) A Great Third Party Logistics Company Seeing Good Organic Growth as Well as Via M&A.

It is seeing decent organic growth, led by a focus on third party logistics (3PL). This will carry on. The recently acquired Ricoh Logistics should eventually see margins improve as it is integrated into SBS. This year’s operating profit forecast of Y9bn (+10%) is conservative. An increase of Y1bn this year will come from Ricoh Logistics alone, and then we have organic growth. In our view operating profit will be at least Y10bn. There is the unrealised profit on land, which add some Y85bn to a company whose market cap is Y71bn. Despite the outperformance over the last 12 months, this remains a decent long-term domestic buy, and one in which foreigners still own only 12%. The shares trade on 13x 12/19 assuming an operating profit of Y10bn. 

5. The Dollar IS the Story; Gold Confounds, A Brexit Rabbit Hole; EUR Punished

• The dollar IS the story
• EUR punished for negative yields
• Chasing Brexit down a rabbit hole
• Gold confounds
• Bitcoin at an interesting juncture

The fact that the dollar has strengthened despite the dovish turn at the Fed this year and the significant fall in US rates and bond yields has confounded many analysts.

In this briefing:

1. Nexon Valuation Analysis
2. Topcon (7732 JP): Weak 3Q, Likely to Fall Short of FY Mar-19 Guidance

1. Nexon Valuation Analysis

In this report, we provide a valuation analysis of Nexon Co Ltd (3659 JP). A key question is “How much are investors willing to pay for Nexon which would drive higher EV/EBIT multiples and inversely reduce the earnings yield (measured by EBIT/EV)?” 

In our view, we believe that investors would be comfortable with earnings yield (measured by EBIT/EV) of about 7-9% given the risks of operating a global game franchise such as Nexon. This would suggest EV/EBIT of about 11x to 14x, using 2019 estimates. Our sensitivity analysis suggests that at the top end of the EV/EBIT valuation range of 14x, this would imply market cap of 1,905 billion yen, which would be 21% higher than current market cap. As such, despite Nexon’s share price rising 25% YTD, we think there could be further upside in the months ahead. 

Having digested plethora of public information on this deal (but not privy to all the bankers’ discussions) in the past several days, we believe that the US based companies including Amazon and Comcast are better positioned to acquire NXC Corp/Nexon, rather than the consortium led by Tencent. 

We believe there is an intense Chinese government pressure on Tencent to not do this deal. (This is just our guess based on public information). The game industry is not strategically important to China, unlike other industries such as semiconductors, energy, or financial. Depending on how much controlling stake Tencent wants to take, it is likely to involve several billions of dollars ($4 billion to $7 billion for Tencent, for example). This is a lot of money. Plus, China Inc’s balance sheet is not as strong as pre-GFC of 2008. Forking over $4 to $7 billion out of China into Japan/Korea would be meaningful. In short, although Tencent would like to do this deal, we think that behind the scenes, the Chinese government appears to be putting intense pressure on Tencent to not do this deal. 

2. Topcon (7732 JP): Weak 3Q, Likely to Fall Short of FY Mar-19 Guidance

Topcon’s FY Mar-19 guidance looks over-optimistic. Operating profit was up 8.5% year-on-year on a 1.4% increase in sales in the nine months to December, but down 10.1% on a 2.3% decrease in sales in 3Q. To make management’s full-year targets, it would have to increase by 41.0% on a 6.8% increase in sales in 4Q. The sales of all three major product segments – Smart Infrastructure, Positioning and Eye Care – have been slow. Intra-company eliminations have undercut segment profits.

At ¥1,561 (Friday, March 1, close), the shares are selling at 23.6x our EPS estimate for this fiscal year and 9.8x projected EV/EBITDA. These multiples compare with 5-year historical lows of 16.1x and 6.8x. Japan Analytics’ calculation of Annual No-Growth Valuation shows further downside risk (see chart below). 

In this briefing:

1. Nexon Controlling Stake Sale: Tax Situation Assessment & Tender Implications
2. Bull Or Bear? Latest Global Liquidity Readings
3. Risk of Future LNG Supply Glut as Bubble of New Projects Grows
4. Japan E-Commerce: Digital to Influence 45% of All Retail Sales by 2025
5. Japan Mobile: MVNO Data for Q3 Includes Slowest Growth Since 2014 but that Makes Sense for Rakuten

1. Nexon Controlling Stake Sale: Tax Situation Assessment & Tender Implications

This post looks at the tax situations that Nexon’s Kim may be facing for each of the two options and the signals that he may be sending with regard to his decision. Also, this post discusses how each option may impact on mandatory tender offer which is a crucial point for current massive short buildup on Nexon Japan shares.

2. Bull Or Bear? Latest Global Liquidity Readings

• Global Liquidity bottoming out, but Central Banks not yet easing
• US Fed only withdrew $30bn in Q1, versus $350 bn in Q4
• PBoC still tightening through OMOs
• ECB  on ‘pause’
• QE4 is coming in 2019, but no evidence it has started yet

3. Risk of Future LNG Supply Glut as Bubble of New Projects Grows

The rapidly improving outlook in the LNG industry over the last few years, reinforced towards the end of 2017 by the unexpected growth of demand from China, has set off a proliferation of new LNG projects especially from the US (Exhibit 1).

In its latest LNG Outlook report, Royal Dutch Shell (RDSA LN) is projecting from 2023 onwards a significant gap between the future LNG demand and the existing supply including the capacity under construction that could require up to 100mtpa of new LNG project sanctions by 2023.

The race to gain market share in the projected LNG demand-supply gap has produced an aggregated capacity of proposed new projects of up to 475mtpa, a number larger than the total LNG traded volume in 2018 of 319mtpa and way above the capacity required to meet the future growth in LNG demand.

Exhibit 1: Funnel of proposed LNG projects getting bigger

4. Japan E-Commerce: Digital to Influence 45% of All Retail Sales by 2025

E-commerce is set to account for 15% of retail sales in 2025, double the size of any other channel, and become the biggest channel for physical merchandise by 2023.

However, recent research, which considers online sales in a store context, suggests that already in 2016-17, 35.3% of all retail sales were at least partly a result of online interactions through an omnichannel process.

By 2024, total EC sales including omnichannel transactions are expected to hit 44.6% of all retail sales or approximately ¥76.4 trillion.

5. Japan Mobile: MVNO Data for Q3 Includes Slowest Growth Since 2014 but that Makes Sense for Rakuten

The Ministry of Industry Affairs and Communications (MIC, the regulator) released Q3 (Dec 2018) data for industry mobile virtual network operator (MVNO) subs today (29 March) characterized by continued declines in growth YoY (+15% in Q3 v 18% in Q2) and the lowest absolute net adds (+480K) since Q2 2014.  Growth for the largest consumer-focused MVNO Rakuten Inc (4755 JP) also appears to be the lowest since data has become available but that is not necessarily a sign of strength for the existing network operators as it makes sense for Rakuten to slow MVNO growth before its October real network launch.  

In this briefing:

1. Topcon (7732 JP): Weak 3Q, Likely to Fall Short of FY Mar-19 Guidance

1. Topcon (7732 JP): Weak 3Q, Likely to Fall Short of FY Mar-19 Guidance

Topcon’s FY Mar-19 guidance looks over-optimistic. Operating profit was up 8.5% year-on-year on a 1.4% increase in sales in the nine months to December, but down 10.1% on a 2.3% decrease in sales in 3Q. To make management’s full-year targets, it would have to increase by 41.0% on a 6.8% increase in sales in 4Q. The sales of all three major product segments – Smart Infrastructure, Positioning and Eye Care – have been slow. Intra-company eliminations have undercut segment profits.

At ¥1,561 (Friday, March 1, close), the shares are selling at 23.6x our EPS estimate for this fiscal year and 9.8x projected EV/EBITDA. These multiples compare with 5-year historical lows of 16.1x and 6.8x. Japan Analytics’ calculation of Annual No-Growth Valuation shows further downside risk (see chart below). 

In this briefing:

1. Topcon (7732 JP): Weak 3Q, Likely to Fall Short of FY Mar-19 Guidance
2. Monthly Geopolitical Comment: Waiting for Trump and Xi to Clinch a Deal

1. Topcon (7732 JP): Weak 3Q, Likely to Fall Short of FY Mar-19 Guidance

Topcon’s FY Mar-19 guidance looks over-optimistic. Operating profit was up 8.5% year-on-year on a 1.4% increase in sales in the nine months to December, but down 10.1% on a 2.3% decrease in sales in 3Q. To make management’s full-year targets, it would have to increase by 41.0% on a 6.8% increase in sales in 4Q. The sales of all three major product segments – Smart Infrastructure, Positioning and Eye Care – have been slow. Intra-company eliminations have undercut segment profits.

At ¥1,561 (Friday, March 1, close), the shares are selling at 23.6x our EPS estimate for this fiscal year and 9.8x projected EV/EBITDA. These multiples compare with 5-year historical lows of 16.1x and 6.8x. Japan Analytics’ calculation of Annual No-Growth Valuation shows further downside risk (see chart below). 

2. Monthly Geopolitical Comment: Waiting for Trump and Xi to Clinch a Deal

In this briefing:

1. Taisho To Launch Another DHG Pharma Tender

1. Taisho To Launch Another DHG Pharma Tender

After the close on 28 February 2019, Taisho Pharmaceutical Holdings (4581 JP)announced it would launch another Tender Offer, this time to purchase up to 21.7% of the Vietnam-listed DHG Pharmaceutical Jsc (DHG VN) a.k.a. Duoc Hau Giang Pharmaceutical JSC.

On 3 July 2018, the company announced that it had received approval from the State Securities Commission (SSC) to raise the foreign ownership limit to 100%, with official disclosure of it going into effect 4 July. Shortly afterwards, Taisho launched a Tender Offer to purchase 7.06% of the shares outstanding of DHG, with the intention to get to 32.00%. Taisho registered to buy more shares last autumn, and bought a further 925,200 shares on 20 February to bring their stake to 34.99%, and now they intend to move to 56.69%.

This next one threatens a much higher minimum pro-ration, BUT it is at the same price as the last one, and while this is at a significant premium to a one-month or three-month average trading price, it is less than a 3.5% premium to Wednesday’s close of VND 116,000/share.

More below the fold.

In this briefing:

1. Taisho To Launch Another DHG Pharma Tender
2. Global Bottoming Process Continues; Remain Overweight China

1. Taisho To Launch Another DHG Pharma Tender

After the close on 28 February 2019, Taisho Pharmaceutical Holdings (4581 JP)announced it would launch another Tender Offer, this time to purchase up to 21.7% of the Vietnam-listed DHG Pharmaceutical Jsc (DHG VN) a.k.a. Duoc Hau Giang Pharmaceutical JSC.

On 3 July 2018, the company announced that it had received approval from the State Securities Commission (SSC) to raise the foreign ownership limit to 100%, with official disclosure of it going into effect 4 July. Shortly afterwards, Taisho launched a Tender Offer to purchase 7.06% of the shares outstanding of DHG, with the intention to get to 32.00%. Taisho registered to buy more shares last autumn, and bought a further 925,200 shares on 20 February to bring their stake to 34.99%, and now they intend to move to 56.69%.

This next one threatens a much higher minimum pro-ration, BUT it is at the same price as the last one, and while this is at a significant premium to a one-month or three-month average trading price, it is less than a 3.5% premium to Wednesday’s close of VND 116,000/share.

More below the fold.

2. Global Bottoming Process Continues; Remain Overweight China

The MSCI ACWI and ACWI ex-US have managed to break above their respective 200-day moving averages, and are now bumping up against overhead resistance.  Supportive of a bottoming global market, cyclical Sectors are emerging as leadership. We examine the technical state of major developed and EM markets and highlight in today’s report and highlight attractive and actionable stocks within the Materials, Manufacturing, and Technology sectors.

In this briefing:

1. Bull Or Bear? Latest Global Liquidity Readings
2. Risk of Future LNG Supply Glut as Bubble of New Projects Grows
3. Japan E-Commerce: Digital to Influence 45% of All Retail Sales by 2025
4. Japan Mobile: MVNO Data for Q3 Includes Slowest Growth Since 2014 but that Makes Sense for Rakuten
5. Havells India

1. Bull Or Bear? Latest Global Liquidity Readings

• Global Liquidity bottoming out, but Central Banks not yet easing
• US Fed only withdrew $30bn in Q1, versus $350 bn in Q4
• PBoC still tightening through OMOs
• ECB  on ‘pause’
• QE4 is coming in 2019, but no evidence it has started yet

2. Risk of Future LNG Supply Glut as Bubble of New Projects Grows

The rapidly improving outlook in the LNG industry over the last few years, reinforced towards the end of 2017 by the unexpected growth of demand from China, has set off a proliferation of new LNG projects especially from the US (Exhibit 1).

In its latest LNG Outlook report, Royal Dutch Shell (RDSA LN) is projecting from 2023 onwards a significant gap between the future LNG demand and the existing supply including the capacity under construction that could require up to 100mtpa of new LNG project sanctions by 2023.

The race to gain market share in the projected LNG demand-supply gap has produced an aggregated capacity of proposed new projects of up to 475mtpa, a number larger than the total LNG traded volume in 2018 of 319mtpa and way above the capacity required to meet the future growth in LNG demand.

Exhibit 1: Funnel of proposed LNG projects getting bigger

3. Japan E-Commerce: Digital to Influence 45% of All Retail Sales by 2025

E-commerce is set to account for 15% of retail sales in 2025, double the size of any other channel, and become the biggest channel for physical merchandise by 2023.

However, recent research, which considers online sales in a store context, suggests that already in 2016-17, 35.3% of all retail sales were at least partly a result of online interactions through an omnichannel process.

By 2024, total EC sales including omnichannel transactions are expected to hit 44.6% of all retail sales or approximately ¥76.4 trillion.

4. Japan Mobile: MVNO Data for Q3 Includes Slowest Growth Since 2014 but that Makes Sense for Rakuten

The Ministry of Industry Affairs and Communications (MIC, the regulator) released Q3 (Dec 2018) data for industry mobile virtual network operator (MVNO) subs today (29 March) characterized by continued declines in growth YoY (+15% in Q3 v 18% in Q2) and the lowest absolute net adds (+480K) since Q2 2014.  Growth for the largest consumer-focused MVNO Rakuten Inc (4755 JP) also appears to be the lowest since data has become available but that is not necessarily a sign of strength for the existing network operators as it makes sense for Rakuten to slow MVNO growth before its October real network launch.  

5. Havells India

As the summer sets in, we visit distributor and retailers of air conditioners in our home town Vadodara, Gujarat where temperatures soar really high in summer and air conditioning is becoming a necessity.  Our checks are focused on Havells India (HAVL IN) and its’ consumer brand Llyod. Our takeaways from visits suggest celebrity endorsements unlikely to work, competition intensifying with the entry of Daikin in the mass premium segment, Ifb Industries (IFBI IN) joins the price war with its ACs, the season is off to a muted start due to prolonged winters.  At current price of INR 776, risk-reward offered is not in favour for Havells investors with a medium-term horizon. Using consensus estimates and average 3 year forward PE of 41x, target price works out to be INR 807. Investors will be better off waiting for an attractive entry point.

In this briefing:

1. Global Bottoming Process Continues; Remain Overweight China

1. Global Bottoming Process Continues; Remain Overweight China

The MSCI ACWI and ACWI ex-US have managed to break above their respective 200-day moving averages, and are now bumping up against overhead resistance.  Supportive of a bottoming global market, cyclical Sectors are emerging as leadership. We examine the technical state of major developed and EM markets and highlight in today’s report and highlight attractive and actionable stocks within the Materials, Manufacturing, and Technology sectors.