Japan

In this briefing:

1. Japan Mobile: MVNO Data for Q3 Includes Slowest Growth Since 2014 but that Makes Sense for Rakuten
2. Havells India
3. Sony: Yoshida Tightens Discipline as Hirai Steps Away Completely
4. Japan Stock Weekly
5. SBS (2384) A Great Third Party Logistics Company Seeing Good Organic Growth as Well as Via M&A.

1. 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.  

2. 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.

3. 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.

4. 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.

5. 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. 

In this briefing:

1. Bank Danamon Goes Ex-Rights
2. Memory Chips and the Elasticity Myth
3. Hitachi Chemical (4217) Bad News All in the Price. Outlook on 12 Month View Is Bright. BUY
4. Nexon M&A: Amazon & Comcast Enter the Race – It Ain’t Over Till Its Over!

1. Bank Danamon Goes Ex-Rights

The process of the merger between Bank Danamon Indonesia (BDMN IJ) and Mitsubishi Ufj Financial (8306 JP)‘s local unit Bank Nusantara Parahyangan (BBNP IJ) is proceeding apace.

Today, the shares go ex-rights for shareholders looking to both vote on March 26th and, assuming the vote goes through, to elect to receive cash of IDR 9,590 instead of continuing to hold shares. BDMN shares are trading down, as expected. 

2. Memory Chips and the Elasticity Myth

During recent earnings calls memory chip makers have postulated that the market will return to higher margins once price elasticity causes demand to increase.  This popular myth needs to be treated with great skepticism since, as this Insight will reveal, short-term price elasticity has a negligible impact upon memory chip sales if it has any impact at all.

3. Hitachi Chemical (4217) Bad News All in the Price. Outlook on 12 Month View Is Bright. BUY

After the recent inspection issues, the company clearly needs to tighten compliance issues and is now talking about improving profitability over the next two years by getting rid of low profit and none core businesses.  Given the current valuations, the mid-term outlook and the renewed focus on profitability we would look to buy here. The internal issues that have hit the share price in the past appear behind them. We would look for an operating profit of about Y50bn to 3/20 which would put the shares on an EV/ebitda multiple of about 5x. The shares yield 3% and still trade at book.

4. Nexon M&A: Amazon & Comcast Enter the Race – It Ain’t Over Till Its Over!

In a surprising move, it was reported after the market close today that Amazon.com Inc (AMZN US) (market cap of US$804 billion) and Comcast (US$176 billion) will enter the race and have submitted initial bids to acquire Nexon Co Ltd (3659 JP)/NXC Corp. 

The entrance of Amazon and Comcast is a major positive surprise and it should have a strong positive impact on Nexon’s share price. Prior to the entrance of Amazon and Comcast in this M&A battle, the market was firmly leaning towards the consortium including Tencent, Netmarble Games, and MBK Partners to acquire NXC Corp/Nexon.

Now, Amazon and Comcast’s entrance into this M&A battle has made it a lot more exciting and uncertain. Nexon Co Ltd (3659 JP)‘s share price is up 19% YTD but its share price trend has been flattening out in February. In the next few weeks, we expect further boost to Nexon’s share price (15%+), mainly because a lot more investors will think that the Tencent consortium, Amazon, and Comcast will try to pay higher price to acquire NXC Corp/Nexon. Kudos to Nexon shareholders!

In this briefing:

1. Sony: Yoshida Tightens Discipline as Hirai Steps Away Completely
2. Japan Stock Weekly
3. SBS (2384) A Great Third Party Logistics Company Seeing Good Organic Growth as Well as Via M&A.
4. The Dollar IS the Story; Gold Confounds, A Brexit Rabbit Hole; EUR Punished
5. Global-Ex-U.S. Equity Strategy: Add Exposure To Technology, Communications

1. 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.

2. 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.

3. 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. 

4. 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.

5. Global-Ex-U.S. Equity Strategy: Add Exposure To Technology, Communications

We view weakness in global equity markets over the past week as correcting a significant amount of the excess optimism. We recommend taking advantage of the pullback by adding exposure to our favorite areas – namely Technology. Our overall outlook on global equities (both the MSCI ACWI and ACWI ex-US) remains positive and we continue to expect higher equity prices going forward.  In today’s report we provide a technical appraisal of all major markets and highlight actionable stocks throughout the int’l Technology and Communications sectors.

In this briefing:

1. Memory Chips and the Elasticity Myth
2. Hitachi Chemical (4217) Bad News All in the Price. Outlook on 12 Month View Is Bright. BUY
3. Nexon M&A: Amazon & Comcast Enter the Race – It Ain’t Over Till Its Over!

1. Memory Chips and the Elasticity Myth

During recent earnings calls memory chip makers have postulated that the market will return to higher margins once price elasticity causes demand to increase.  This popular myth needs to be treated with great skepticism since, as this Insight will reveal, short-term price elasticity has a negligible impact upon memory chip sales if it has any impact at all.

2. Hitachi Chemical (4217) Bad News All in the Price. Outlook on 12 Month View Is Bright. BUY

After the recent inspection issues, the company clearly needs to tighten compliance issues and is now talking about improving profitability over the next two years by getting rid of low profit and none core businesses.  Given the current valuations, the mid-term outlook and the renewed focus on profitability we would look to buy here. The internal issues that have hit the share price in the past appear behind them. We would look for an operating profit of about Y50bn to 3/20 which would put the shares on an EV/ebitda multiple of about 5x. The shares yield 3% and still trade at book.

3. Nexon M&A: Amazon & Comcast Enter the Race – It Ain’t Over Till Its Over!

In a surprising move, it was reported after the market close today that Amazon.com Inc (AMZN US) (market cap of US$804 billion) and Comcast (US$176 billion) will enter the race and have submitted initial bids to acquire Nexon Co Ltd (3659 JP)/NXC Corp. 

The entrance of Amazon and Comcast is a major positive surprise and it should have a strong positive impact on Nexon’s share price. Prior to the entrance of Amazon and Comcast in this M&A battle, the market was firmly leaning towards the consortium including Tencent, Netmarble Games, and MBK Partners to acquire NXC Corp/Nexon.

Now, Amazon and Comcast’s entrance into this M&A battle has made it a lot more exciting and uncertain. Nexon Co Ltd (3659 JP)‘s share price is up 19% YTD but its share price trend has been flattening out in February. In the next few weeks, we expect further boost to Nexon’s share price (15%+), mainly because a lot more investors will think that the Tencent consortium, Amazon, and Comcast will try to pay higher price to acquire NXC Corp/Nexon. Kudos to Nexon shareholders!

In this briefing:

1. Memory Chips and the Elasticity Myth
2. Hitachi Chemical (4217) Bad News All in the Price. Outlook on 12 Month View Is Bright. BUY
3. Nexon M&A: Amazon & Comcast Enter the Race – It Ain’t Over Till Its Over!
4. Procurri: Exit DeClout, Enter Novo Tellus. Company Remains Highly Undervalued at 4.4x 2018 EV/EBITDA

1. Memory Chips and the Elasticity Myth

During recent earnings calls memory chip makers have postulated that the market will return to higher margins once price elasticity causes demand to increase.  This popular myth needs to be treated with great skepticism since, as this Insight will reveal, short-term price elasticity has a negligible impact upon memory chip sales if it has any impact at all.

2. Hitachi Chemical (4217) Bad News All in the Price. Outlook on 12 Month View Is Bright. BUY

After the recent inspection issues, the company clearly needs to tighten compliance issues and is now talking about improving profitability over the next two years by getting rid of low profit and none core businesses.  Given the current valuations, the mid-term outlook and the renewed focus on profitability we would look to buy here. The internal issues that have hit the share price in the past appear behind them. We would look for an operating profit of about Y50bn to 3/20 which would put the shares on an EV/ebitda multiple of about 5x. The shares yield 3% and still trade at book.

3. Nexon M&A: Amazon & Comcast Enter the Race – It Ain’t Over Till Its Over!

In a surprising move, it was reported after the market close today that Amazon.com Inc (AMZN US) (market cap of US$804 billion) and Comcast (US$176 billion) will enter the race and have submitted initial bids to acquire Nexon Co Ltd (3659 JP)/NXC Corp. 

The entrance of Amazon and Comcast is a major positive surprise and it should have a strong positive impact on Nexon’s share price. Prior to the entrance of Amazon and Comcast in this M&A battle, the market was firmly leaning towards the consortium including Tencent, Netmarble Games, and MBK Partners to acquire NXC Corp/Nexon.

Now, Amazon and Comcast’s entrance into this M&A battle has made it a lot more exciting and uncertain. Nexon Co Ltd (3659 JP)‘s share price is up 19% YTD but its share price trend has been flattening out in February. In the next few weeks, we expect further boost to Nexon’s share price (15%+), mainly because a lot more investors will think that the Tencent consortium, Amazon, and Comcast will try to pay higher price to acquire NXC Corp/Nexon. Kudos to Nexon shareholders!

4. Procurri: Exit DeClout, Enter Novo Tellus. Company Remains Highly Undervalued at 4.4x 2018 EV/EBITDA

Procurri Corporation (PROC SP) released FY18 results which showed the company growing revenues to 220M SGD (+21% vs FY17), EBITDA to 19.7M SGD (+185% vs FY17), PBT to 10.1M SGD (vs 2.3M loss in 2017) and a small net profit of 5.3M SGD which was artificially low because of an astronomical 47% tax rate. The high tax rate should reverse in 2H19 which would show the reported profitability of Procurri improve substantially. 

Procurri remains deep value trading at just 4.4x 2018 EV/EBITDA and 0.4x 2018 EV/Sales. If we adjust the FY18 net profit figure(assume 30% tax rate vs 47%) the shares trade at a P/E multiple of just 13x.

The shareholder register of Procurri has seen a dramatic change YTD with multiple announcements on SGX. The most significant development is the entry of Singapore PE fund Novo Tellus acquiring a 29.6% stake on 19/2/19. Consequently this means that the biggest corporate overhang on Procurri (read: the control by Declout Ltd (DLL SP) ) is now almost over with their stake reduced to 17% from 47% previously.

Given the well-publicized track record of Novo Tellus at SGX listed Aem Holdings (AEM SP) the question is if Novo Tellus sees another multi-bagger in the making?

While a “10-bagger” type return like AEM is unlikely at Procurri, doubling the market cap from 90M to 180M SGD would not be impossible as Procurri continues to grow in FY19 and the depressed multiple expands modestly.

In this briefing:

1. Japan Stock Weekly
2. SBS (2384) A Great Third Party Logistics Company Seeing Good Organic Growth as Well as Via M&A.
3. The Dollar IS the Story; Gold Confounds, A Brexit Rabbit Hole; EUR Punished
4. Global-Ex-U.S. Equity Strategy: Add Exposure To Technology, Communications
5. Smartkarma’s Week That Was in JP/​​​​​​​​KR: Semiconductor Warnings, Exit of Chairman Cho, & 청년수당

1. 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.

2. 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. 

3. 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.

4. Global-Ex-U.S. Equity Strategy: Add Exposure To Technology, Communications

We view weakness in global equity markets over the past week as correcting a significant amount of the excess optimism. We recommend taking advantage of the pullback by adding exposure to our favorite areas – namely Technology. Our overall outlook on global equities (both the MSCI ACWI and ACWI ex-US) remains positive and we continue to expect higher equity prices going forward.  In today’s report we provide a technical appraisal of all major markets and highlight actionable stocks throughout the int’l Technology and Communications sectors.

5. Smartkarma’s Week That Was in JP/​​​​​​​​KR: Semiconductor Warnings, Exit of Chairman Cho, & 청년수당

In the past week, there were earnings warnings from three major players in the global semiconductor sector, including Samsung Electronics (005930 KS), Micron Technology (MU US), and Infineon Technologies Ag (IFX GR). 

In Korea, after the collapse of the talks between Trump and KJU, the biggest loser has been President Moon Jae-In whose popularity has been sinking in the past several weeks. Moon Jae-In’s popularity has been sinking from the 80-90% range when he was first elected two years ago to the low-to-mid 40% range now. There has been a tremendous gain of the conservative Liberty Korea Party, led by Hwang Kyo-Ahn. Many people in Korea have become very dissatisfied with failing economic policies of the incumbent Moon Jae-In party and its excessive populism. 

In the past week, the following reports that are relevant for Japan and Korea have received a lot of interest among Smartkarma readers:

• Amarin–Our Talks With The CEO & An Update on New Trial Data Released at ACC Conference
• It’s The Annual Tuesday & Wednesday BUY TOPIX Trade
• Nissan: Atrocious Governance Should Be Rectified Before Even Thinking of a Merger
• Hitachi Bumps Yungtay Bid to NT$65. Take It.
• KOSPI 200 June 2019 Rebalancing: List of Addition/Deletion Candidates
• Samsung Electronics Voluntary Red Flag on 1Q Earnings
• The Final Countdown Between NPS Vs Korean Air Chairman Cho Yang-Ho
• SNK Corp IPO Preview

In this briefing:

1. The Dollar IS the Story; Gold Confounds, A Brexit Rabbit Hole; EUR Punished
2. Global-Ex-U.S. Equity Strategy: Add Exposure To Technology, Communications
3. Smartkarma’s Week That Was in JP/​​​​​​​​KR: Semiconductor Warnings, Exit of Chairman Cho, & 청년수당
4. Screening the Silk Road: (Small-)Mid Cap Free Cash Flow
5. Denso Continues to Strengthen Its Investment CASE with Acquisitions

1. 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.

2. Global-Ex-U.S. Equity Strategy: Add Exposure To Technology, Communications

We view weakness in global equity markets over the past week as correcting a significant amount of the excess optimism. We recommend taking advantage of the pullback by adding exposure to our favorite areas – namely Technology. Our overall outlook on global equities (both the MSCI ACWI and ACWI ex-US) remains positive and we continue to expect higher equity prices going forward.  In today’s report we provide a technical appraisal of all major markets and highlight actionable stocks throughout the int’l Technology and Communications sectors.

3. Smartkarma’s Week That Was in JP/​​​​​​​​KR: Semiconductor Warnings, Exit of Chairman Cho, & 청년수당

In the past week, there were earnings warnings from three major players in the global semiconductor sector, including Samsung Electronics (005930 KS), Micron Technology (MU US), and Infineon Technologies Ag (IFX GR). 

In Korea, after the collapse of the talks between Trump and KJU, the biggest loser has been President Moon Jae-In whose popularity has been sinking in the past several weeks. Moon Jae-In’s popularity has been sinking from the 80-90% range when he was first elected two years ago to the low-to-mid 40% range now. There has been a tremendous gain of the conservative Liberty Korea Party, led by Hwang Kyo-Ahn. Many people in Korea have become very dissatisfied with failing economic policies of the incumbent Moon Jae-In party and its excessive populism. 

In the past week, the following reports that are relevant for Japan and Korea have received a lot of interest among Smartkarma readers:

• Amarin–Our Talks With The CEO & An Update on New Trial Data Released at ACC Conference
• It’s The Annual Tuesday & Wednesday BUY TOPIX Trade
• Nissan: Atrocious Governance Should Be Rectified Before Even Thinking of a Merger
• Hitachi Bumps Yungtay Bid to NT$65. Take It.
• KOSPI 200 June 2019 Rebalancing: List of Addition/Deletion Candidates
• Samsung Electronics Voluntary Red Flag on 1Q Earnings
• The Final Countdown Between NPS Vs Korean Air Chairman Cho Yang-Ho
• SNK Corp IPO Preview

4. Screening the Silk Road: (Small-)Mid Cap Free Cash Flow

In April 2018, we published a FCF screen with the sole aim of identifying potential names which could prove to be strong candidates in a Small-Mid Cap portfolio. We move to update this list with a strong bias to the mid-cap stocks appearing.

This screen performs well with markets where the value style is in favour. Given the market appears to be trending back to this style, we believe the Small-Mid Cap universe should capitalise on this over the next 12-months. We identify within the screen some high trading liquidity deep value candidates across the Asia Pacific universe.

Our updated 2019 list of names contains 17 stocks, with a more diversified spread of countries and sectors, compared to April 2018. A point to note is that basic material stocks have strengthened within the composition. Interestingly, the style of stock which has increased its presence amongst the list is the contrarian style, highlighting an opening up in value.

5. Denso Continues to Strengthen Its Investment CASE with Acquisitions

Denso Corp (6902 JP) announced this month that it has invested in the Seattle-based connected vehicle services pioneer- Airbiquity Inc. Airbiquity is one of the leading companies in the connected vehicle services sector and has been one of the companies that has continuously developed automotive telematics technology. This investment made by Denso follows its investment made in Quadric.io this year ( Stake in Quadric.io Following Renesas; Denso Attempts to Keep Chip Makers Close to Achieve AD Aims). As we previously mentioned, Denso is in full swing in its development in the autonomous driving field and next-generation technologies development. Thus, it wouldn’t be a surprise to see Denso emerge as the first mover in next-generation technologies such as AD and connectivity solutions. According to Denso, its investment worth $5m in Airbiquity is expected to accelerate the development of over-the-air (OTA) systems for wirelessly updating automotive software from a remote location. OTA systems are methods of distributing new software, configuration settings, and providing updates to the electronic device in use, for instance, a car navigation system in a vehicle. These OTA systems which have been increasingly used to update the software of such multimedia products in a vehicle are now gaining more prominence given the emergence of next-generation technologies such as electrification, EV and connectivity. We also believe that Denso’s Stake in Airbiquity is likely to accelerate Denso’s transition in its business model to be a leading software solution provider. Thus, its series of investments such as in Tohoku Pioneer EG, JOLED, ThinCI, Quadric, and now Airbiquity are indicative of the decisiveness of its change in business model and moves towards achieving next-generation technology leadership.

In this briefing:

1. Nexon M&A: Amazon & Comcast Enter the Race – It Ain’t Over Till Its Over!
2. Procurri: Exit DeClout, Enter Novo Tellus. Company Remains Highly Undervalued at 4.4x 2018 EV/EBITDA
3. Yahoo Japan’s JV with OYO Could Be Big, If Tokyo Is Ready to “Co-Live”
4. 🇯🇵 Japan • Winter Large Cap Results & Revision Scores – Contrarian Buys & Sells/​Peak & Ex-Growth

1. Nexon M&A: Amazon & Comcast Enter the Race – It Ain’t Over Till Its Over!

In a surprising move, it was reported after the market close today that Amazon.com Inc (AMZN US) (market cap of US$804 billion) and Comcast (US$176 billion) will enter the race and have submitted initial bids to acquire Nexon Co Ltd (3659 JP)/NXC Corp. 

The entrance of Amazon and Comcast is a major positive surprise and it should have a strong positive impact on Nexon’s share price. Prior to the entrance of Amazon and Comcast in this M&A battle, the market was firmly leaning towards the consortium including Tencent, Netmarble Games, and MBK Partners to acquire NXC Corp/Nexon.

Now, Amazon and Comcast’s entrance into this M&A battle has made it a lot more exciting and uncertain. Nexon Co Ltd (3659 JP)‘s share price is up 19% YTD but its share price trend has been flattening out in February. In the next few weeks, we expect further boost to Nexon’s share price (15%+), mainly because a lot more investors will think that the Tencent consortium, Amazon, and Comcast will try to pay higher price to acquire NXC Corp/Nexon. Kudos to Nexon shareholders!

2. Procurri: Exit DeClout, Enter Novo Tellus. Company Remains Highly Undervalued at 4.4x 2018 EV/EBITDA

Procurri Corporation (PROC SP) released FY18 results which showed the company growing revenues to 220M SGD (+21% vs FY17), EBITDA to 19.7M SGD (+185% vs FY17), PBT to 10.1M SGD (vs 2.3M loss in 2017) and a small net profit of 5.3M SGD which was artificially low because of an astronomical 47% tax rate. The high tax rate should reverse in 2H19 which would show the reported profitability of Procurri improve substantially. 

Procurri remains deep value trading at just 4.4x 2018 EV/EBITDA and 0.4x 2018 EV/Sales. If we adjust the FY18 net profit figure(assume 30% tax rate vs 47%) the shares trade at a P/E multiple of just 13x.

The shareholder register of Procurri has seen a dramatic change YTD with multiple announcements on SGX. The most significant development is the entry of Singapore PE fund Novo Tellus acquiring a 29.6% stake on 19/2/19. Consequently this means that the biggest corporate overhang on Procurri (read: the control by Declout Ltd (DLL SP) ) is now almost over with their stake reduced to 17% from 47% previously.

Given the well-publicized track record of Novo Tellus at SGX listed Aem Holdings (AEM SP) the question is if Novo Tellus sees another multi-bagger in the making?

While a “10-bagger” type return like AEM is unlikely at Procurri, doubling the market cap from 90M to 180M SGD would not be impossible as Procurri continues to grow in FY19 and the depressed multiple expands modestly.

3. Yahoo Japan’s JV with OYO Could Be Big, If Tokyo Is Ready to “Co-Live”

• OYO, the largest budget hotel network in India, announced a JV with Yahoo Japan (4689 JP) to expand its co-living rental service, “OYO Living”, to Japan. OYO will own 66.1% while YJ will own the remainder of the JV, named “Oyo Technology & Hospitality Japan”. 

• Rebranded as “OYO Life”, the service would be the first of its kind, in the virtually non-existent co-living market in Japan. In Japan, apartments are usually compact single-occupier units as opposed to shared spaces, which might pose a problem for OYO’s co-living model. 

• Assuming the model is a success and OYO Life could ramp up its capacity to around 150,000 beds in Tokyo, which is around 5% of the total apartment stock in central Tokyo, this would contribute around ¥3bn (2% of net income in FY03/18) to Yahoo Japan’s net income. There is potential for further gains, however, this would depend on how ready Tokyo is to move into a “Co-Living” culture in masses.

4. 🇯🇵 Japan • Winter Large Cap Results & Revision Scores – Contrarian Buys & Sells/​Peak & Ex-Growth

Source: Japan Analytics

LARGE CAP RESULTS & REVISION SCORES – The final instalment of our series of reviews of Japan’s most recent earnings and revisions announcements covers the Results & Revision Scores for Japan’s 785 larger capitalisation companies with a market capitalisation of over ¥100b.

In the DETAIL section below we look at:- 

• The 30 top and bottom-ranked companies by Results & Revision Score as well as the top and bottom thirty ranked by change in score over the last quarter and provide brief comments on companies and topics of note.
• By comparing Results Scores and Forecast/Revision Scores, we sort companies into‘Optimists’, ‘Pessimists’, ‘Increasingly Optimistic’ and ‘Increasingly Pessimistic‘ categories.
• As shown above, the relationship between the Results & Revision Score (RRS) and our Relative Price Score (RPS) for each company and divide the large-cap universe into four ‘quadrants’ – ‘Contrarian Buy’ (Low RRS & Low RPS) , ‘Contrarian Sell’ (High RRS & High RPS), ‘Peak Growth’ (High RRS & Low RPS) and ‘Ex-Growth/Turnaround’  (Low RRS & High RPS), highlighting the outliers in each quadrant.
  • In the two ‘Contrarian‘ quadrants, the market is aligned with the current earnings momentum of the companies suggesting opportunities exist only for those willing or brave enough to take a contrarian view. 
  • For ‘Peak Growth‘, the market is calling for a downturn in momentum that has yet to be reflected in quarterly earnings. Where the cycle is more prolonged than expected, there are often opportunities for short-term rebounds in what are normally relatively-inexpensive companies.
  • The ‘Ex-Growth‘ quadrant often consists of former ‘Contrarian Sell‘s where the market is reluctant to acknowledge that the cycle has turned. This quadrant can also contain ‘Turnarounds‘ – formerly ‘Contrarian Buys‘ where the market is correctly anticipating a change in fortunes.   
• Finally, we provide tables of the top and bottom five ranked companies in each of our 30 Sectors.

In this briefing:

1. Climate Action – School Strikes Hit a Spot, Carbon Emitters Face Heat. Investors Take Note
2. A Reality Check for Money Forward (3994 JP): Key Takeaways from Our Recent Visit
3. Orix Corporation: Osaka Casino Resort Partnership with MGM Stakes Out Earliest Claim Among Peers
4. Nissan: Atrocious Governance Should Be Rectified Before Even Thinking of a Merger
5. SNK Corp IPO Preview

1. Climate Action – School Strikes Hit a Spot, Carbon Emitters Face Heat. Investors Take Note

On Friday, March 15th, an estimated 1.6 million students in over 120 countries (source: Time magazine) walked out of classrooms and took to streets demanding radical climate action. Climate change activism rarely grabbed headlines or wider public attention as it is doing now. Rising climate activism will continue to train the spotlight on industries/businesses associated with carbon-emission making it increasingly difficult for them to expand capacities or secure funding. Large institutional investors – sovereign funds, pension funds, insurance companies – have begun to incorporate climate risk into investment policy and are limiting exposure to sectors that directly contribute to carbon emissions – primarily coal, crude oil producers and power plants based on them. Expect sector devaluation; active investors may well look beyond juicy near term earnings and dividend yield.

Even as scientists and meteorological organisations keep warning of dire consequences unless concrete action is taken to limit carbon emissions to stall climate change, political establishment/regulators in most countries are in denial while others are doing little more than lip service.  If so, should corporates care? even though businesses are the ones that play a direct role in escalating carbon emissions. With rising consumer awareness and activism, several industries associated with carbon emissions are already facing operational and funding challenges; we believe, it pays for all businesses to be above par on ‘climate action’ – it would be in their own self-interest, not just general good. And do Investors bother? Under the aegis of Climate Action 100+, an investor initiative with 320 signatories having more than USD33 trillion in assets collectively under management, they have been engaging companies on improving governance, curbing emissions and strengthening climate-related financial disclosures. It has listed out Oil & Gas, Mining, Utilities and Auto manufacturers as target sectors. Investors have already been making an impact – by vote or exit. It sure makes logical sense to effect positive change and minimise climate risk when you have a long term investment horizon.

In the detailed note below we

• discuss how rising consumer/investor activism and/or political/regulatory changes are posing challenges to key sectors –Coal, Oil & Gas, Automobiles/Aviation, Consumer goods –  that are associated with carbon emissions. 
• analyse how rising climate activism is negatively impacting growth prospects and valuation of companies in these sectors.
• highlight the opportunities for businesses to capitalise on changing consumer preferences for products that minimise carbon footprint and differentiate themselves by being on the right side of climate action.
• present a quick primer on climate change and lay down the key facts and data on climate change as presented by World Meteorological Organisation, NASA and IPCC. 

2. A Reality Check for Money Forward (3994 JP): Key Takeaways from Our Recent Visit

In our previous note, Money Forward (3994 JP): Solid Mid-Term Prospects for the Fintech Pro, but Overvalued, published July last year (2018), we suggested that Money Forward (3994 JP) (MF) was overvalued despite its strong growth profile. MF’s share price, which was at an all-time high (close to JPY6,000) around this time, fell below its IPO price (JPY3,000) in December, reinforcing our bearish view.

Since then, Money Forward’s share price has picked up (closing at JPY4,400 on 26th March 2019), on the back of strong topline guidance for FY11/19E (+55%-65% YoY growth) and “aggressive” medium-term profit targets (positive EBITDA by FY11/21E).

However, following our recent conversation with MF’s IR team, we believe that the above guidance needs to be slightly toned down.

3. Orix Corporation: Osaka Casino Resort Partnership with MGM Stakes Out Earliest Claim Among Peers

• MGM Resorts International announced plans to partner 50/50 with Japan’s financial services operator, Orix, the first such deal made public.
• A bet on both or either company now at near their 52 week lows bears a good risk/yield proposition for investors in the consumer discretionary space.
• Japan’s IR’s will potentially grow into a US$15.8b to US$17.5B industry by 2024/5 or before. We expect the three licenses will go to partnerships between global gaming giants and Japan financial or game manufacturing partners.

4. Nissan: Atrocious Governance Should Be Rectified Before Even Thinking of a Merger

Today Nissan Motor (7201 JP) released its report from the Special Committee for Improving Governance. The FT also reported that Renault SA (RNO FP) (i.e. the French government) was keen to restart merger talks within twelve months with an eye towards then acquiring Fiat Chrysler Automobiles Nv (FCAU US).

The details of the former are unsurprising but disappointing, while Renault’s M&A ambitions just seem delusional at this point.

5. SNK Corp IPO Preview

SNK Corp (950180 KS), a Japanese game company founded in 1978, is trying to complete its IPO in the Korean stock market (KOSDAQ) in April. SNK is well known its The King of Fighters game. The IPO price range is between 30,800 won and 40,400 won. The IPO base deal size ranges from $114 million to $150 million. 

This is the second time that SNK Corp is trying to complete the IPO after a failed attempt in late 2018. The company has reduced the average IPO price range by 12% this time compared to the first try in late 2018.

The bankers used four comparable companies including Webzen, NCsoft, Pearl Abyss, and Netmarble Games to value SNK Corp. Using P/B valuation method, the bankers derived an average P/B multiple of 4.1x. The bankers then took the applied equity (controlling interest) of the company and applied the P/B multiple of 4.1x to derive an implied value of the company. After applying additional 8.57% to 32.99% IPO discount, the bankers derived an IPO price range of 34,300 – 46,800 won.  

In this briefing:

1. Procurri: Exit DeClout, Enter Novo Tellus. Company Remains Highly Undervalued at 4.4x 2018 EV/EBITDA
2. Yahoo Japan’s JV with OYO Could Be Big, If Tokyo Is Ready to “Co-Live”
3. 🇯🇵 Japan • Winter Large Cap Results & Revision Scores – Contrarian Buys & Sells/​Peak & Ex-Growth

1. Procurri: Exit DeClout, Enter Novo Tellus. Company Remains Highly Undervalued at 4.4x 2018 EV/EBITDA

Procurri Corporation (PROC SP) released FY18 results which showed the company growing revenues to 220M SGD (+21% vs FY17), EBITDA to 19.7M SGD (+185% vs FY17), PBT to 10.1M SGD (vs 2.3M loss in 2017) and a small net profit of 5.3M SGD which was artificially low because of an astronomical 47% tax rate. The high tax rate should reverse in 2H19 which would show the reported profitability of Procurri improve substantially. 

Procurri remains deep value trading at just 4.4x 2018 EV/EBITDA and 0.4x 2018 EV/Sales. If we adjust the FY18 net profit figure(assume 30% tax rate vs 47%) the shares trade at a P/E multiple of just 13x.

The shareholder register of Procurri has seen a dramatic change YTD with multiple announcements on SGX. The most significant development is the entry of Singapore PE fund Novo Tellus acquiring a 29.6% stake on 19/2/19. Consequently this means that the biggest corporate overhang on Procurri (read: the control by Declout Ltd (DLL SP) ) is now almost over with their stake reduced to 17% from 47% previously.

Given the well-publicized track record of Novo Tellus at SGX listed Aem Holdings (AEM SP) the question is if Novo Tellus sees another multi-bagger in the making?

While a “10-bagger” type return like AEM is unlikely at Procurri, doubling the market cap from 90M to 180M SGD would not be impossible as Procurri continues to grow in FY19 and the depressed multiple expands modestly.

2. Yahoo Japan’s JV with OYO Could Be Big, If Tokyo Is Ready to “Co-Live”

• OYO, the largest budget hotel network in India, announced a JV with Yahoo Japan (4689 JP) to expand its co-living rental service, “OYO Living”, to Japan. OYO will own 66.1% while YJ will own the remainder of the JV, named “Oyo Technology & Hospitality Japan”. 

• Rebranded as “OYO Life”, the service would be the first of its kind, in the virtually non-existent co-living market in Japan. In Japan, apartments are usually compact single-occupier units as opposed to shared spaces, which might pose a problem for OYO’s co-living model. 

• Assuming the model is a success and OYO Life could ramp up its capacity to around 150,000 beds in Tokyo, which is around 5% of the total apartment stock in central Tokyo, this would contribute around ¥3bn (2% of net income in FY03/18) to Yahoo Japan’s net income. There is potential for further gains, however, this would depend on how ready Tokyo is to move into a “Co-Living” culture in masses.

3. 🇯🇵 Japan • Winter Large Cap Results & Revision Scores – Contrarian Buys & Sells/​Peak & Ex-Growth

Source: Japan Analytics

LARGE CAP RESULTS & REVISION SCORES – The final instalment of our series of reviews of Japan’s most recent earnings and revisions announcements covers the Results & Revision Scores for Japan’s 785 larger capitalisation companies with a market capitalisation of over ¥100b.

In the DETAIL section below we look at:- 

• The 30 top and bottom-ranked companies by Results & Revision Score as well as the top and bottom thirty ranked by change in score over the last quarter and provide brief comments on companies and topics of note.
• By comparing Results Scores and Forecast/Revision Scores, we sort companies into‘Optimists’, ‘Pessimists’, ‘Increasingly Optimistic’ and ‘Increasingly Pessimistic‘ categories.
• As shown above, the relationship between the Results & Revision Score (RRS) and our Relative Price Score (RPS) for each company and divide the large-cap universe into four ‘quadrants’ – ‘Contrarian Buy’ (Low RRS & Low RPS) , ‘Contrarian Sell’ (High RRS & High RPS), ‘Peak Growth’ (High RRS & Low RPS) and ‘Ex-Growth/Turnaround’  (Low RRS & High RPS), highlighting the outliers in each quadrant.
  • In the two ‘Contrarian‘ quadrants, the market is aligned with the current earnings momentum of the companies suggesting opportunities exist only for those willing or brave enough to take a contrarian view. 
  • For ‘Peak Growth‘, the market is calling for a downturn in momentum that has yet to be reflected in quarterly earnings. Where the cycle is more prolonged than expected, there are often opportunities for short-term rebounds in what are normally relatively-inexpensive companies.
  • The ‘Ex-Growth‘ quadrant often consists of former ‘Contrarian Sell‘s where the market is reluctant to acknowledge that the cycle has turned. This quadrant can also contain ‘Turnarounds‘ – formerly ‘Contrarian Buys‘ where the market is correctly anticipating a change in fortunes.   
• Finally, we provide tables of the top and bottom five ranked companies in each of our 30 Sectors.