Japan

In this briefing:

1. Global-Ex-U.S. Equity Strategy: Add Exposure To Technology, Communications
2. Smartkarma’s Week That Was in JP/​​​​​​​​KR: Semiconductor Warnings, Exit of Chairman Cho, & 청년수당
3. Screening the Silk Road: (Small-)Mid Cap Free Cash Flow
4. Denso Continues to Strengthen Its Investment CASE with Acquisitions
5. Nissan Governance Structure Report Out: Fog Dissipating Slowly. Sunny in Summer. Storms Next Winter?

1. 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.

2. 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

3. 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.

4. 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.

5. Nissan Governance Structure Report Out: Fog Dissipating Slowly. Sunny in Summer. Storms Next Winter?

Six weeks ago I wrote that Nissan’s governance outlook was “Foggy Now, Sunny Later.” I said “Governance changes are afoot, with a steady flow of developments likely coming in March, April, May, and June.”

The last couple of months have seen numerous media articles about the process of Nissan Motor (7201 JP) and Renault SA (RNO FP) rebuilding their relationship. There have been visits to Tokyo by Renault’s new chairman of the board of directors Jean-Dominique Senard, and visits to Paris and Amsterdam by the CEOs of Nissan and Mitsubishi Motors (7211 JP). 

There have been many suggestions in French and European newspapers in the interim that Jean-Dominique Senard would be the obvious choice as a representative director of Nissan. There have been other articles out there in the Japanese press suggesting what conclusions the committee might come to as to what outcomes should result. The difference is notable. The French side still wants control. The Japanese/Nissan/committee side sees the need to fix governance.

Today there was a report in the FT suggesting that Renault “wants” to restart merger talks with Nissan and “aims to restart merger talks with Nissan within 12 months.” It should be noted that these two sentences are not exactly the same. It may still be that France wants Renault to do so, and therefore Renault aims to do so. The same article revealed past talks on Renault merging with FCA but France putting a stop to it and a current desire to acquire another automaker – perhaps FCA – after dealing with Nissan. 

Also today, the long-awaited Nissan Special Committee for Improving Governance (SCIG) report was released. It outlines some of the issues of governance which existed under Ghosn- both the ones which got him the boot, and the structural governance issues which were “discovered” after he got the boot. 

There are clear patches in the fog. Two things shine through immediately. 

1. Governance weaknesses under Ghosn were inexcusably bad. Worse than previously reported.
2. The recommendations to the board now are, on the whole, pretty decent. Some are sine qua non changes – formation of nomination and compensation committees, whistleblower reporting to the audit committee and not the CEO, and greater checks and balances. Some are stronger in terms of the independence of Nissan from Renault: the committee recommends a majority of independent board members, an independent chairman, and no representative directors from Renault, Mitsubishi, or principal shareholders.

There are, however, other issues which were not addressed, which for Nissan’s sake probably should be addressed. Yesterday was a first step on what will be a 3-month procession of news about the way Nissan will address the SCIG report’s recommendations, the process by which it will choose new directors when it does not have an official nomination committee, and the AGM in June to propose and confirm new directors. Then they will start their jobs in July. 

The fog looks to lift slowly. And one may anticipate some better weather beyond. But business concerns remain a threat, and while relations appear to be getting better after the departure of Carlos Ghosn and the arrival of Jean-Dominique Senard, it is not clear that a Franco-Japanese storm is not brewing in the distance.

More below.

In this briefing:

1. Yahoo Japan’s JV with OYO Could Be Big, If Tokyo Is Ready to “Co-Live”
2. 🇯🇵 Japan • Winter Large Cap Results & Revision Scores – Contrarian Buys & Sells/​Peak & Ex-Growth

1. 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.

2. 🇯🇵 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. A Reality Check for Money Forward (3994 JP): Key Takeaways from Our Recent Visit
2. Orix Corporation: Osaka Casino Resort Partnership with MGM Stakes Out Earliest Claim Among Peers
3. Nissan: Atrocious Governance Should Be Rectified Before Even Thinking of a Merger
4. SNK Corp IPO Preview
5. TRADE IDEA – PCCW (8 HK) Stub: The Li Legacy Lives On

1. 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.

2. 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.

3. 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.

4. 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.  

5. TRADE IDEA – PCCW (8 HK) Stub: The Li Legacy Lives On

Have you ever wondered how a company secures the Chinese lucky number “8” as their ticker in Hong Kong? I’ll explain later on, but let’s just say that being the son of Li Ka Shing helps. 

Li Ka Shing is a name that hardly needs introduction in Hong Kong and Richard Li, Li Ka Shing’s youngest son and Chairman of PCCW Ltd (8 HK), follows suit. After being born into Hong Kong’s richest family, Richard Li was educated in the US where he worked various odd jobs at McDonald’s and as a caddy at a local golf course before enrolling at Menlo College and eventually withdrawing without a degree. As fate would have it, Mr. Li went on to set up STAR TV, Asia’s satellite-delivered cable TV service, at the tender age of 24. Three years after starting STAR TV, Richard Li sold the venture, which had amassed a viewer base of 45 million people, to Rupert Murdoch’s News Corp (NWS AU) for USD 1 billion in 1993. During the same year, Mr. Li founded the Pacific Century Group and began a streak of noteworthy acquisitions. 

You may be starting to wonder what all of this has to do with a trade on PCCW Ltd (8 HK) and I don’t blame you. In the rest of this insight I will:

• finish the historical overview of the Li family and PCCW
• present my trade idea and rationale
• give a detailed overview of the business units of PCCW and the associated performance of each
• recap ALL of my stub trades on Smartkarma and the performance of each  

In this briefing:

1. Smartkarma’s Week That Was in JP/​​​​​​​​KR: Semiconductor Warnings, Exit of Chairman Cho, & 청년수당
2. Screening the Silk Road: (Small-)Mid Cap Free Cash Flow
3. Denso Continues to Strengthen Its Investment CASE with Acquisitions
4. Nissan Governance Structure Report Out: Fog Dissipating Slowly. Sunny in Summer. Storms Next Winter?
5. Climate Action – School Strikes Hit a Spot, Carbon Emitters Face Heat. Investors Take Note

1. 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

2. 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.

3. 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.

4. Nissan Governance Structure Report Out: Fog Dissipating Slowly. Sunny in Summer. Storms Next Winter?

Six weeks ago I wrote that Nissan’s governance outlook was “Foggy Now, Sunny Later.” I said “Governance changes are afoot, with a steady flow of developments likely coming in March, April, May, and June.”

The last couple of months have seen numerous media articles about the process of Nissan Motor (7201 JP) and Renault SA (RNO FP) rebuilding their relationship. There have been visits to Tokyo by Renault’s new chairman of the board of directors Jean-Dominique Senard, and visits to Paris and Amsterdam by the CEOs of Nissan and Mitsubishi Motors (7211 JP). 

There have been many suggestions in French and European newspapers in the interim that Jean-Dominique Senard would be the obvious choice as a representative director of Nissan. There have been other articles out there in the Japanese press suggesting what conclusions the committee might come to as to what outcomes should result. The difference is notable. The French side still wants control. The Japanese/Nissan/committee side sees the need to fix governance.

Today there was a report in the FT suggesting that Renault “wants” to restart merger talks with Nissan and “aims to restart merger talks with Nissan within 12 months.” It should be noted that these two sentences are not exactly the same. It may still be that France wants Renault to do so, and therefore Renault aims to do so. The same article revealed past talks on Renault merging with FCA but France putting a stop to it and a current desire to acquire another automaker – perhaps FCA – after dealing with Nissan. 

Also today, the long-awaited Nissan Special Committee for Improving Governance (SCIG) report was released. It outlines some of the issues of governance which existed under Ghosn- both the ones which got him the boot, and the structural governance issues which were “discovered” after he got the boot. 

There are clear patches in the fog. Two things shine through immediately. 

1. Governance weaknesses under Ghosn were inexcusably bad. Worse than previously reported.
2. The recommendations to the board now are, on the whole, pretty decent. Some are sine qua non changes – formation of nomination and compensation committees, whistleblower reporting to the audit committee and not the CEO, and greater checks and balances. Some are stronger in terms of the independence of Nissan from Renault: the committee recommends a majority of independent board members, an independent chairman, and no representative directors from Renault, Mitsubishi, or principal shareholders.

There are, however, other issues which were not addressed, which for Nissan’s sake probably should be addressed. Yesterday was a first step on what will be a 3-month procession of news about the way Nissan will address the SCIG report’s recommendations, the process by which it will choose new directors when it does not have an official nomination committee, and the AGM in June to propose and confirm new directors. Then they will start their jobs in July. 

The fog looks to lift slowly. And one may anticipate some better weather beyond. But business concerns remain a threat, and while relations appear to be getting better after the departure of Carlos Ghosn and the arrival of Jean-Dominique Senard, it is not clear that a Franco-Japanese storm is not brewing in the distance.

More below.

5. 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. 

In this briefing:

1. 🇯🇵 Japan • Winter Large Cap Results & Revision Scores – Contrarian Buys & Sells/​Peak & Ex-Growth
2. Yungtay Noises Haven’t Produced a Result Yet

1. 🇯🇵 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.

2. Yungtay Noises Haven’t Produced a Result Yet

After almost three months of preparation after the initial news came out in October, Hitachi Ltd (6501 JP) launched its Tender Offer for Yungtay Engineering (1507 TT) in mid-January 2019. 

The background of the two companies’ relationship, the board kerfuffle last year, and some detail on the financials and the growth of the Chinese mainland elevator market was discussed extensively in Going Up! Hitachi Tender for Yungtay Engineering (1507 TT)at the end of October. When the Tender Offer was confirmed as launched, additional details were provided in Hitachi Tender for Yungtay Engineering Launches.

Since then, there has been a litany of small “nuisance” events which so far have not resulted in any changes to the terms of the Tender Offer, but keeping a watchful eye is recommended.

In this briefing:

1. 🇯🇵 Japan • Winter Large Cap Results & Revision Scores – Contrarian Buys & Sells/​Peak & Ex-Growth
2. Yungtay Noises Haven’t Produced a Result Yet
3. Kosaido (7868 JP) TOB Extended

1. 🇯🇵 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.

2. Yungtay Noises Haven’t Produced a Result Yet

After almost three months of preparation after the initial news came out in October, Hitachi Ltd (6501 JP) launched its Tender Offer for Yungtay Engineering (1507 TT) in mid-January 2019. 

The background of the two companies’ relationship, the board kerfuffle last year, and some detail on the financials and the growth of the Chinese mainland elevator market was discussed extensively in Going Up! Hitachi Tender for Yungtay Engineering (1507 TT)at the end of October. When the Tender Offer was confirmed as launched, additional details were provided in Hitachi Tender for Yungtay Engineering Launches.

Since then, there has been a litany of small “nuisance” events which so far have not resulted in any changes to the terms of the Tender Offer, but keeping a watchful eye is recommended.

3. Kosaido (7868 JP) TOB Extended

As discussed in previous insights, Kosaido Co Ltd (7868 JP) is currently the subject of a TOB (Takeover Bid) by an SPV established by Bain to acquire all the shares outstanding. This has been discussed in three different insights so far.
  ❖ Smallcap Kosaido (7868 JP) Tender Offer: Wrong Price But Whaddya Gonna Do?
  ❖ Kosaido: Activism Drives Price 30+% Through Terms
  ❖ Kosaido TOB: Situation Gets Weird – Activists+Independent Opposition to MBO 

The TOB started as a lowball price TOB with the explanation that the MBO was needed to rehabilitate the printing/information business which makes up three-quarters of consolidated revenue of the company and is the basis upon which the company was founded decades ago.

A read between the lines showed quite quickly that the more ostensible reason for taking the company private was to be able to own 61% of the company which provided the other 25% of consolidated revenue and made up materially all of the operating profit of Kosaido over the past few years. And that business was being bought at just over half of book while the rest of the business was being bought for effectively zero.

My first insight questioned that despite “independent directors” not doing so, and an activist in the form of Yoshiaki Murakami’s firm Reno KK did something about it, quickly buying just under 10% of the company in the two weeks after announcement. On that news, the stock shot up to 30-40% through terms, and fell back, but since it started rising above terms and peaking, it has not fallen below about 15% through terms.

The New News

YESTERDAY, the directors of Kosaido released an amendment to their Statement of Support of the Tender Offer adding a phrase to the effect that “subsequent to the initial meeting where all the statutory auditors had expressed support, at the Board Meeting on the 25th of February, Independent Statutory Auditor Nakatsuji-[san] expressed his opposition to the Tender Offer.” This follows his notice of opposition on the 19th.

TODAY, the Offeror announced an Amendment to the Tender Offer and was extending its Tender Offer by 7 business days – from 30 business days to 37 business days – which has the effect of changing the Closing Date from March 1 to March 12.

With the shares 20% through terms (¥738/share as I write) despite what appears to be no increase by the main activist in the last two weeks, the likelihood retail will tender at ¥610/share this looks like a situation where the deal may fail unless there is a bump.

But it would still be up for grabs. 

In this briefing:

1. 🇯🇵 Japan • Winter Large Cap Results & Revision Scores – Contrarian Buys & Sells/​Peak & Ex-Growth
2. Yungtay Noises Haven’t Produced a Result Yet
3. Kosaido (7868 JP) TOB Extended
4. MODEC: Add

1. 🇯🇵 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.

2. Yungtay Noises Haven’t Produced a Result Yet

After almost three months of preparation after the initial news came out in October, Hitachi Ltd (6501 JP) launched its Tender Offer for Yungtay Engineering (1507 TT) in mid-January 2019. 

The background of the two companies’ relationship, the board kerfuffle last year, and some detail on the financials and the growth of the Chinese mainland elevator market was discussed extensively in Going Up! Hitachi Tender for Yungtay Engineering (1507 TT)at the end of October. When the Tender Offer was confirmed as launched, additional details were provided in Hitachi Tender for Yungtay Engineering Launches.

Since then, there has been a litany of small “nuisance” events which so far have not resulted in any changes to the terms of the Tender Offer, but keeping a watchful eye is recommended.

3. Kosaido (7868 JP) TOB Extended

As discussed in previous insights, Kosaido Co Ltd (7868 JP) is currently the subject of a TOB (Takeover Bid) by an SPV established by Bain to acquire all the shares outstanding. This has been discussed in three different insights so far.
  ❖ Smallcap Kosaido (7868 JP) Tender Offer: Wrong Price But Whaddya Gonna Do?
  ❖ Kosaido: Activism Drives Price 30+% Through Terms
  ❖ Kosaido TOB: Situation Gets Weird – Activists+Independent Opposition to MBO 

The TOB started as a lowball price TOB with the explanation that the MBO was needed to rehabilitate the printing/information business which makes up three-quarters of consolidated revenue of the company and is the basis upon which the company was founded decades ago.

A read between the lines showed quite quickly that the more ostensible reason for taking the company private was to be able to own 61% of the company which provided the other 25% of consolidated revenue and made up materially all of the operating profit of Kosaido over the past few years. And that business was being bought at just over half of book while the rest of the business was being bought for effectively zero.

My first insight questioned that despite “independent directors” not doing so, and an activist in the form of Yoshiaki Murakami’s firm Reno KK did something about it, quickly buying just under 10% of the company in the two weeks after announcement. On that news, the stock shot up to 30-40% through terms, and fell back, but since it started rising above terms and peaking, it has not fallen below about 15% through terms.

The New News

YESTERDAY, the directors of Kosaido released an amendment to their Statement of Support of the Tender Offer adding a phrase to the effect that “subsequent to the initial meeting where all the statutory auditors had expressed support, at the Board Meeting on the 25th of February, Independent Statutory Auditor Nakatsuji-[san] expressed his opposition to the Tender Offer.” This follows his notice of opposition on the 19th.

TODAY, the Offeror announced an Amendment to the Tender Offer and was extending its Tender Offer by 7 business days – from 30 business days to 37 business days – which has the effect of changing the Closing Date from March 1 to March 12.

With the shares 20% through terms (¥738/share as I write) despite what appears to be no increase by the main activist in the last two weeks, the likelihood retail will tender at ¥610/share this looks like a situation where the deal may fail unless there is a bump.

But it would still be up for grabs. 

4. MODEC: Add

Towards the end of 2018 Modec Inc (6269 JP)‘s share price dropped 46.5% as the price of crude oil also cratered, falling 44.4% . Since that plunge, the stock price has rebounded 53.9% as the company posted excellent results at 4Q and guidance, while conservative, was for continued healthy earnings.

Having visited the company today, we believe earnings should continue to be strong and actually strengthen over the next few years with MODEC likely to start running into capacity constraints over the course of this year.

In this briefing:

1. Screening the Silk Road: (Small-)Mid Cap Free Cash Flow
2. Denso Continues to Strengthen Its Investment CASE with Acquisitions
3. Nissan Governance Structure Report Out: Fog Dissipating Slowly. Sunny in Summer. Storms Next Winter?
4. Climate Action – School Strikes Hit a Spot, Carbon Emitters Face Heat. Investors Take Note
5. A Reality Check for Money Forward (3994 JP): Key Takeaways from Our Recent Visit

1. 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.

2. 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.

3. Nissan Governance Structure Report Out: Fog Dissipating Slowly. Sunny in Summer. Storms Next Winter?

Six weeks ago I wrote that Nissan’s governance outlook was “Foggy Now, Sunny Later.” I said “Governance changes are afoot, with a steady flow of developments likely coming in March, April, May, and June.”

The last couple of months have seen numerous media articles about the process of Nissan Motor (7201 JP) and Renault SA (RNO FP) rebuilding their relationship. There have been visits to Tokyo by Renault’s new chairman of the board of directors Jean-Dominique Senard, and visits to Paris and Amsterdam by the CEOs of Nissan and Mitsubishi Motors (7211 JP). 

There have been many suggestions in French and European newspapers in the interim that Jean-Dominique Senard would be the obvious choice as a representative director of Nissan. There have been other articles out there in the Japanese press suggesting what conclusions the committee might come to as to what outcomes should result. The difference is notable. The French side still wants control. The Japanese/Nissan/committee side sees the need to fix governance.

Today there was a report in the FT suggesting that Renault “wants” to restart merger talks with Nissan and “aims to restart merger talks with Nissan within 12 months.” It should be noted that these two sentences are not exactly the same. It may still be that France wants Renault to do so, and therefore Renault aims to do so. The same article revealed past talks on Renault merging with FCA but France putting a stop to it and a current desire to acquire another automaker – perhaps FCA – after dealing with Nissan. 

Also today, the long-awaited Nissan Special Committee for Improving Governance (SCIG) report was released. It outlines some of the issues of governance which existed under Ghosn- both the ones which got him the boot, and the structural governance issues which were “discovered” after he got the boot. 

There are clear patches in the fog. Two things shine through immediately. 

1. Governance weaknesses under Ghosn were inexcusably bad. Worse than previously reported.
2. The recommendations to the board now are, on the whole, pretty decent. Some are sine qua non changes – formation of nomination and compensation committees, whistleblower reporting to the audit committee and not the CEO, and greater checks and balances. Some are stronger in terms of the independence of Nissan from Renault: the committee recommends a majority of independent board members, an independent chairman, and no representative directors from Renault, Mitsubishi, or principal shareholders.

There are, however, other issues which were not addressed, which for Nissan’s sake probably should be addressed. Yesterday was a first step on what will be a 3-month procession of news about the way Nissan will address the SCIG report’s recommendations, the process by which it will choose new directors when it does not have an official nomination committee, and the AGM in June to propose and confirm new directors. Then they will start their jobs in July. 

The fog looks to lift slowly. And one may anticipate some better weather beyond. But business concerns remain a threat, and while relations appear to be getting better after the departure of Carlos Ghosn and the arrival of Jean-Dominique Senard, it is not clear that a Franco-Japanese storm is not brewing in the distance.

More below.

4. 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. 

5. 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.

In this briefing:

1. Yungtay Noises Haven’t Produced a Result Yet
2. Kosaido (7868 JP) TOB Extended
3. MODEC: Add

1. Yungtay Noises Haven’t Produced a Result Yet

After almost three months of preparation after the initial news came out in October, Hitachi Ltd (6501 JP) launched its Tender Offer for Yungtay Engineering (1507 TT) in mid-January 2019. 

The background of the two companies’ relationship, the board kerfuffle last year, and some detail on the financials and the growth of the Chinese mainland elevator market was discussed extensively in Going Up! Hitachi Tender for Yungtay Engineering (1507 TT)at the end of October. When the Tender Offer was confirmed as launched, additional details were provided in Hitachi Tender for Yungtay Engineering Launches.

Since then, there has been a litany of small “nuisance” events which so far have not resulted in any changes to the terms of the Tender Offer, but keeping a watchful eye is recommended.

2. Kosaido (7868 JP) TOB Extended

As discussed in previous insights, Kosaido Co Ltd (7868 JP) is currently the subject of a TOB (Takeover Bid) by an SPV established by Bain to acquire all the shares outstanding. This has been discussed in three different insights so far.
  ❖ Smallcap Kosaido (7868 JP) Tender Offer: Wrong Price But Whaddya Gonna Do?
  ❖ Kosaido: Activism Drives Price 30+% Through Terms
  ❖ Kosaido TOB: Situation Gets Weird – Activists+Independent Opposition to MBO 

The TOB started as a lowball price TOB with the explanation that the MBO was needed to rehabilitate the printing/information business which makes up three-quarters of consolidated revenue of the company and is the basis upon which the company was founded decades ago.

A read between the lines showed quite quickly that the more ostensible reason for taking the company private was to be able to own 61% of the company which provided the other 25% of consolidated revenue and made up materially all of the operating profit of Kosaido over the past few years. And that business was being bought at just over half of book while the rest of the business was being bought for effectively zero.

My first insight questioned that despite “independent directors” not doing so, and an activist in the form of Yoshiaki Murakami’s firm Reno KK did something about it, quickly buying just under 10% of the company in the two weeks after announcement. On that news, the stock shot up to 30-40% through terms, and fell back, but since it started rising above terms and peaking, it has not fallen below about 15% through terms.

The New News

YESTERDAY, the directors of Kosaido released an amendment to their Statement of Support of the Tender Offer adding a phrase to the effect that “subsequent to the initial meeting where all the statutory auditors had expressed support, at the Board Meeting on the 25th of February, Independent Statutory Auditor Nakatsuji-[san] expressed his opposition to the Tender Offer.” This follows his notice of opposition on the 19th.

TODAY, the Offeror announced an Amendment to the Tender Offer and was extending its Tender Offer by 7 business days – from 30 business days to 37 business days – which has the effect of changing the Closing Date from March 1 to March 12.

With the shares 20% through terms (¥738/share as I write) despite what appears to be no increase by the main activist in the last two weeks, the likelihood retail will tender at ¥610/share this looks like a situation where the deal may fail unless there is a bump.

But it would still be up for grabs. 

3. MODEC: Add

Towards the end of 2018 Modec Inc (6269 JP)‘s share price dropped 46.5% as the price of crude oil also cratered, falling 44.4% . Since that plunge, the stock price has rebounded 53.9% as the company posted excellent results at 4Q and guidance, while conservative, was for continued healthy earnings.

Having visited the company today, we believe earnings should continue to be strong and actually strengthen over the next few years with MODEC likely to start running into capacity constraints over the course of this year.

In this briefing:

1. Denso Continues to Strengthen Its Investment CASE with Acquisitions
2. Nissan Governance Structure Report Out: Fog Dissipating Slowly. Sunny in Summer. Storms Next Winter?
3. Climate Action – School Strikes Hit a Spot, Carbon Emitters Face Heat. Investors Take Note
4. A Reality Check for Money Forward (3994 JP): Key Takeaways from Our Recent Visit
5. Orix Corporation: Osaka Casino Resort Partnership with MGM Stakes Out Earliest Claim Among Peers

1. 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.

2. Nissan Governance Structure Report Out: Fog Dissipating Slowly. Sunny in Summer. Storms Next Winter?

Six weeks ago I wrote that Nissan’s governance outlook was “Foggy Now, Sunny Later.” I said “Governance changes are afoot, with a steady flow of developments likely coming in March, April, May, and June.”

The last couple of months have seen numerous media articles about the process of Nissan Motor (7201 JP) and Renault SA (RNO FP) rebuilding their relationship. There have been visits to Tokyo by Renault’s new chairman of the board of directors Jean-Dominique Senard, and visits to Paris and Amsterdam by the CEOs of Nissan and Mitsubishi Motors (7211 JP). 

There have been many suggestions in French and European newspapers in the interim that Jean-Dominique Senard would be the obvious choice as a representative director of Nissan. There have been other articles out there in the Japanese press suggesting what conclusions the committee might come to as to what outcomes should result. The difference is notable. The French side still wants control. The Japanese/Nissan/committee side sees the need to fix governance.

Today there was a report in the FT suggesting that Renault “wants” to restart merger talks with Nissan and “aims to restart merger talks with Nissan within 12 months.” It should be noted that these two sentences are not exactly the same. It may still be that France wants Renault to do so, and therefore Renault aims to do so. The same article revealed past talks on Renault merging with FCA but France putting a stop to it and a current desire to acquire another automaker – perhaps FCA – after dealing with Nissan. 

Also today, the long-awaited Nissan Special Committee for Improving Governance (SCIG) report was released. It outlines some of the issues of governance which existed under Ghosn- both the ones which got him the boot, and the structural governance issues which were “discovered” after he got the boot. 

There are clear patches in the fog. Two things shine through immediately. 

1. Governance weaknesses under Ghosn were inexcusably bad. Worse than previously reported.
2. The recommendations to the board now are, on the whole, pretty decent. Some are sine qua non changes – formation of nomination and compensation committees, whistleblower reporting to the audit committee and not the CEO, and greater checks and balances. Some are stronger in terms of the independence of Nissan from Renault: the committee recommends a majority of independent board members, an independent chairman, and no representative directors from Renault, Mitsubishi, or principal shareholders.

There are, however, other issues which were not addressed, which for Nissan’s sake probably should be addressed. Yesterday was a first step on what will be a 3-month procession of news about the way Nissan will address the SCIG report’s recommendations, the process by which it will choose new directors when it does not have an official nomination committee, and the AGM in June to propose and confirm new directors. Then they will start their jobs in July. 

The fog looks to lift slowly. And one may anticipate some better weather beyond. But business concerns remain a threat, and while relations appear to be getting better after the departure of Carlos Ghosn and the arrival of Jean-Dominique Senard, it is not clear that a Franco-Japanese storm is not brewing in the distance.

More below.

3. 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. 

4. 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.

5. 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.