Japan

In this briefing:

1. Kosaido (7868 JP) TOB Extended
2. MODEC: Add
3. Indonesia Property – In Search of the End of the Rainbow – Part 2 –  Bumi Serpong Damai (BSDE IJ)

1. 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. 

2. 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.

3. Indonesia Property – In Search of the End of the Rainbow – Part 2 –  Bumi Serpong Damai (BSDE IJ)

In this series under Smartkarma Originals, CrossASEAN Research insight providers Angus Mackintosh and Jessica Irene seek to determine whether or not we are close to the end of the rainbow and to a period of outperformance for the property sector. Our end conclusions will be based on a series of company visits to the major listed property companies in Indonesia, conversations with local banks, property agents, and other relevant channel checks. 

The second company we explore is leading township developer Bumi Serpong Damai (BSDE IJ), with exposure ranging from landed housing, shophouses, condominiums, as well as the defensive and growing buffer of nearly 20% of revenues coming from recurrent rental income.

Bumi Serpong Damai (BSDE IJ) has one of the largest land banks of any developer, with a land bank of over 4,000 ha, more than half of which is in its flagship township of BSD City in Serpong.

Given its breadth of exposure to the property segment, the company has the flexibility to switch its exposure between different segments depending on the health of the overall market. 

Its projects are well connected by toll-roads and railway but it is well positioned to benefit from new infrastructure such as the new MRT, LRT, as well as new toll road extensions, which will enhance the attractiveness of its developments.  

Management suggests that they will take a cautious start to the year ahead of the election but see a window for a pick-up in marketing sales in May, with the potential for a much better 2H19. 

Despite a run-up in the share price since the start of the year, valuations do not look challenging from a historical basis especially looking at its PBV. It also trades at a significant discount to NAV of 67%, as well as being below its 5 yr historical mean on a forward PER basis.

Catalysts ahead include a post-election pick-up in activity leading to more project launches, completion of infrastructure projects, aggressive mortgage lending by the banks, and a more dovish interest rate outlook. Valuations are already attractive but a rise in property market activity should also lead to earnings upgrades, which if sustained, may lead to property prices moving upwards.

In this briefing:

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

1. 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.

2. 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. 

3. 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.

4. 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.

5. 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.

In this briefing:

1. Continuing Positive Outlook for Last Mile Industrial Real Estate Supports New Financings Globally

1. Continuing Positive Outlook for Last Mile Industrial Real Estate Supports New Financings Globally

• We published a series of Insights explaining our positive outlook for the industrial segment of the global Real Estate sector.
• Currently, companies in this segment are capitalizing on strong fundamentals to raise new equity capital. They are using the proceeds from these deals to fund property acquisitions and developments, and to deleverage their balance sheets, thereby setting the stage for continuing growth.
• This trend is especially notable because it is taking place in a range of geographic locations, around the world.

In this briefing:

1. Orix Corporation: Osaka Casino Resort Partnership with MGM Stakes Out Earliest Claim Among Peers
2. Nissan: Atrocious Governance Should Be Rectified Before Even Thinking of a Merger
3. SNK Corp IPO Preview
4. TRADE IDEA – PCCW (8 HK) Stub: The Li Legacy Lives On
5. Cracking the Keyence Conundrum

1. 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.

2. 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.

3. 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.  

4. 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  

5. Cracking the Keyence Conundrum

Keyence Corp (6861 JP) has long been a standout within the Japanese machinery sector for its exceptional margins, with only Fanuc Corp (6954 JP) and perhaps Smc Corp (6273 JP)  really operating in the same the stratosphere. But while Fanuc has faded, with its OPM now struggling to stay over 30% and SMC has only recently peaked its head over the 30% level, Keyence has been powering ahead and is on the cusp of recording five straight years over 50% OPM.

With relatively limited disclosures to go along with such stellar performance it is understandable then that some investors are concerned that the story is too good to be true, and even the FT has written a series of articles with a slightly critical bent: 1 2 34

Having recently visited the company, we analyse below, the nature of its competitive advantages by comparing it with its most similar peer Cognex Corp (CGNX US).

In this briefing:

1. Nissan: Atrocious Governance Should Be Rectified Before Even Thinking of a Merger
2. SNK Corp IPO Preview
3. TRADE IDEA – PCCW (8 HK) Stub: The Li Legacy Lives On
4. Cracking the Keyence Conundrum
5. Japanese Inflation – Much Ado About Nothing

1. 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.

2. 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.  

3. 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  

4. Cracking the Keyence Conundrum

Keyence Corp (6861 JP) has long been a standout within the Japanese machinery sector for its exceptional margins, with only Fanuc Corp (6954 JP) and perhaps Smc Corp (6273 JP)  really operating in the same the stratosphere. But while Fanuc has faded, with its OPM now struggling to stay over 30% and SMC has only recently peaked its head over the 30% level, Keyence has been powering ahead and is on the cusp of recording five straight years over 50% OPM.

With relatively limited disclosures to go along with such stellar performance it is understandable then that some investors are concerned that the story is too good to be true, and even the FT has written a series of articles with a slightly critical bent: 1 2 34

Having recently visited the company, we analyse below, the nature of its competitive advantages by comparing it with its most similar peer Cognex Corp (CGNX US).

5. Japanese Inflation – Much Ado About Nothing

Japan’s policymakers continue to fret about the lack of inflation but it is worth remembering the norm globally and historically is for the price of manufactured goods to decline over time. As companies grow, specialise and scale up the cost of production falls and with it final consumer goods prices. Falling retail prices which increase consumer real purchasing power is good news for Japanese households and for discretionary spending. Moreover with labour productivity growth outpacing wages costs by a wide margin, companies can absorb lower prices without sacrificing profitability. Stay overweight Japanese equities.

In this briefing:

1. Kosaido (7868 JP) TOB Extended
2. MODEC: Add
3. Indonesia Property – In Search of the End of the Rainbow – Part 2 –  Bumi Serpong Damai (BSDE IJ)
4. Continuing Positive Outlook for Last Mile Industrial Real Estate Supports New Financings Globally

1. 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. 

2. 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.

3. Indonesia Property – In Search of the End of the Rainbow – Part 2 –  Bumi Serpong Damai (BSDE IJ)

In this series under Smartkarma Originals, CrossASEAN Research insight providers Angus Mackintosh and Jessica Irene seek to determine whether or not we are close to the end of the rainbow and to a period of outperformance for the property sector. Our end conclusions will be based on a series of company visits to the major listed property companies in Indonesia, conversations with local banks, property agents, and other relevant channel checks. 

The second company we explore is leading township developer Bumi Serpong Damai (BSDE IJ), with exposure ranging from landed housing, shophouses, condominiums, as well as the defensive and growing buffer of nearly 20% of revenues coming from recurrent rental income.

Bumi Serpong Damai (BSDE IJ) has one of the largest land banks of any developer, with a land bank of over 4,000 ha, more than half of which is in its flagship township of BSD City in Serpong.

Given its breadth of exposure to the property segment, the company has the flexibility to switch its exposure between different segments depending on the health of the overall market. 

Its projects are well connected by toll-roads and railway but it is well positioned to benefit from new infrastructure such as the new MRT, LRT, as well as new toll road extensions, which will enhance the attractiveness of its developments.  

Management suggests that they will take a cautious start to the year ahead of the election but see a window for a pick-up in marketing sales in May, with the potential for a much better 2H19. 

Despite a run-up in the share price since the start of the year, valuations do not look challenging from a historical basis especially looking at its PBV. It also trades at a significant discount to NAV of 67%, as well as being below its 5 yr historical mean on a forward PER basis.

Catalysts ahead include a post-election pick-up in activity leading to more project launches, completion of infrastructure projects, aggressive mortgage lending by the banks, and a more dovish interest rate outlook. Valuations are already attractive but a rise in property market activity should also lead to earnings upgrades, which if sustained, may lead to property prices moving upwards.

4. Continuing Positive Outlook for Last Mile Industrial Real Estate Supports New Financings Globally

• We published a series of Insights explaining our positive outlook for the industrial segment of the global Real Estate sector.
• Currently, companies in this segment are capitalizing on strong fundamentals to raise new equity capital. They are using the proceeds from these deals to fund property acquisitions and developments, and to deleverage their balance sheets, thereby setting the stage for continuing growth.
• This trend is especially notable because it is taking place in a range of geographic locations, around the world.

In this briefing:

1. SNK Corp IPO Preview
2. TRADE IDEA – PCCW (8 HK) Stub: The Li Legacy Lives On
3. Cracking the Keyence Conundrum
4. Japanese Inflation – Much Ado About Nothing
5. Fujitec (6406) Value Buy

1. 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.  

2. 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  

3. Cracking the Keyence Conundrum

Keyence Corp (6861 JP) has long been a standout within the Japanese machinery sector for its exceptional margins, with only Fanuc Corp (6954 JP) and perhaps Smc Corp (6273 JP)  really operating in the same the stratosphere. But while Fanuc has faded, with its OPM now struggling to stay over 30% and SMC has only recently peaked its head over the 30% level, Keyence has been powering ahead and is on the cusp of recording five straight years over 50% OPM.

With relatively limited disclosures to go along with such stellar performance it is understandable then that some investors are concerned that the story is too good to be true, and even the FT has written a series of articles with a slightly critical bent: 1 2 34

Having recently visited the company, we analyse below, the nature of its competitive advantages by comparing it with its most similar peer Cognex Corp (CGNX US).

4. Japanese Inflation – Much Ado About Nothing

Japan’s policymakers continue to fret about the lack of inflation but it is worth remembering the norm globally and historically is for the price of manufactured goods to decline over time. As companies grow, specialise and scale up the cost of production falls and with it final consumer goods prices. Falling retail prices which increase consumer real purchasing power is good news for Japanese households and for discretionary spending. Moreover with labour productivity growth outpacing wages costs by a wide margin, companies can absorb lower prices without sacrificing profitability. Stay overweight Japanese equities.

5. Fujitec (6406) Value Buy

The shares are cheap. The company is cash rich and owns 10% in treasury stock; it owned more last year but has cancelled 4%. It has some Y6bn in long term investment. EV in our view is Y57bn vs the current market cap of Y110bn. With ebitda next year coming in at Y15bn, EV/ebitda is under 4x. The shares yield 3.4% and trade at book. They have slightly underperformed the market over the last 12 months. For now, we view this as a defensive buy. There remain many issues longer term as to its place in the global elevator world. A potential positive, however, is that in May the company will announce a new mid-term plan and in it, they will outline their view as regards to shareholder returns for the next three years. They are aware that they are very over capitalised, so greater returns are a real possibility.

In this briefing:

1. MODEC: Add
2. Indonesia Property – In Search of the End of the Rainbow – Part 2 –  Bumi Serpong Damai (BSDE IJ)
3. Continuing Positive Outlook for Last Mile Industrial Real Estate Supports New Financings Globally

1. 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.

2. Indonesia Property – In Search of the End of the Rainbow – Part 2 –  Bumi Serpong Damai (BSDE IJ)

In this series under Smartkarma Originals, CrossASEAN Research insight providers Angus Mackintosh and Jessica Irene seek to determine whether or not we are close to the end of the rainbow and to a period of outperformance for the property sector. Our end conclusions will be based on a series of company visits to the major listed property companies in Indonesia, conversations with local banks, property agents, and other relevant channel checks. 

The second company we explore is leading township developer Bumi Serpong Damai (BSDE IJ), with exposure ranging from landed housing, shophouses, condominiums, as well as the defensive and growing buffer of nearly 20% of revenues coming from recurrent rental income.

Bumi Serpong Damai (BSDE IJ) has one of the largest land banks of any developer, with a land bank of over 4,000 ha, more than half of which is in its flagship township of BSD City in Serpong.

Given its breadth of exposure to the property segment, the company has the flexibility to switch its exposure between different segments depending on the health of the overall market. 

Its projects are well connected by toll-roads and railway but it is well positioned to benefit from new infrastructure such as the new MRT, LRT, as well as new toll road extensions, which will enhance the attractiveness of its developments.  

Management suggests that they will take a cautious start to the year ahead of the election but see a window for a pick-up in marketing sales in May, with the potential for a much better 2H19. 

Despite a run-up in the share price since the start of the year, valuations do not look challenging from a historical basis especially looking at its PBV. It also trades at a significant discount to NAV of 67%, as well as being below its 5 yr historical mean on a forward PER basis.

Catalysts ahead include a post-election pick-up in activity leading to more project launches, completion of infrastructure projects, aggressive mortgage lending by the banks, and a more dovish interest rate outlook. Valuations are already attractive but a rise in property market activity should also lead to earnings upgrades, which if sustained, may lead to property prices moving upwards.

3. Continuing Positive Outlook for Last Mile Industrial Real Estate Supports New Financings Globally

• We published a series of Insights explaining our positive outlook for the industrial segment of the global Real Estate sector.
• Currently, companies in this segment are capitalizing on strong fundamentals to raise new equity capital. They are using the proceeds from these deals to fund property acquisitions and developments, and to deleverage their balance sheets, thereby setting the stage for continuing growth.
• This trend is especially notable because it is taking place in a range of geographic locations, around the world.

In this briefing:

1. MODEC: Add
2. Indonesia Property – In Search of the End of the Rainbow – Part 2 –  Bumi Serpong Damai (BSDE IJ)
3. Continuing Positive Outlook for Last Mile Industrial Real Estate Supports New Financings Globally
4. Asia’s External Balances Signal Safety for Investors

1. 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.

2. Indonesia Property – In Search of the End of the Rainbow – Part 2 –  Bumi Serpong Damai (BSDE IJ)

In this series under Smartkarma Originals, CrossASEAN Research insight providers Angus Mackintosh and Jessica Irene seek to determine whether or not we are close to the end of the rainbow and to a period of outperformance for the property sector. Our end conclusions will be based on a series of company visits to the major listed property companies in Indonesia, conversations with local banks, property agents, and other relevant channel checks. 

The second company we explore is leading township developer Bumi Serpong Damai (BSDE IJ), with exposure ranging from landed housing, shophouses, condominiums, as well as the defensive and growing buffer of nearly 20% of revenues coming from recurrent rental income.

Bumi Serpong Damai (BSDE IJ) has one of the largest land banks of any developer, with a land bank of over 4,000 ha, more than half of which is in its flagship township of BSD City in Serpong.

Given its breadth of exposure to the property segment, the company has the flexibility to switch its exposure between different segments depending on the health of the overall market. 

Its projects are well connected by toll-roads and railway but it is well positioned to benefit from new infrastructure such as the new MRT, LRT, as well as new toll road extensions, which will enhance the attractiveness of its developments.  

Management suggests that they will take a cautious start to the year ahead of the election but see a window for a pick-up in marketing sales in May, with the potential for a much better 2H19. 

Despite a run-up in the share price since the start of the year, valuations do not look challenging from a historical basis especially looking at its PBV. It also trades at a significant discount to NAV of 67%, as well as being below its 5 yr historical mean on a forward PER basis.

Catalysts ahead include a post-election pick-up in activity leading to more project launches, completion of infrastructure projects, aggressive mortgage lending by the banks, and a more dovish interest rate outlook. Valuations are already attractive but a rise in property market activity should also lead to earnings upgrades, which if sustained, may lead to property prices moving upwards.

3. Continuing Positive Outlook for Last Mile Industrial Real Estate Supports New Financings Globally

• We published a series of Insights explaining our positive outlook for the industrial segment of the global Real Estate sector.
• Currently, companies in this segment are capitalizing on strong fundamentals to raise new equity capital. They are using the proceeds from these deals to fund property acquisitions and developments, and to deleverage their balance sheets, thereby setting the stage for continuing growth.
• This trend is especially notable because it is taking place in a range of geographic locations, around the world.

4. Asia’s External Balances Signal Safety for Investors

Asian currencies are, in general, well supported by economic fundamentals in the form of external surpluses and interest rate differentials. Indeed, most Asian currencies display an appreciating bias, contrary to perceptions in 2018 when all of them lost ground to the US dollar. Over the last year the underlying external strength has been reflected in Asian currency appreciation against the US dollar.

In this briefing:

1. Smartkarma’s Week That Was in JP/​​​​​​​KR: Aruhi, Rakuten-Lyft, Ecopro BM, & English Annual Reports

1. Smartkarma’s Week That Was in JP/​​​​​​​KR: Aruhi, Rakuten-Lyft, Ecopro BM, & English Annual Reports

KOSPI is up 9.4% and Nikkei is up 7.8% YTD. It has been an active first two months of 2019. Many stocks have retraced to the previous resistance levels in November/December 2018. In the past week, the following reports that are relevant for Japan and Korea have received a lot of interest among Smartkarma readers:

• Will Rakuten Get A Near-Term Lyft? 
• Value-Enhancing 5G Spectrum Allocations on the Way for KDDI, DoCoMo, Softbank and Rakuten
• Aruhi Placement – Bigger than the IPO but Good Track Record and Price Performance Should Help
• Nintendo Offering & Buyback: The Import & The Dynamics
• Celltrion Healthcare: Well, We Were Warned
• DHICO (Doosan Heavy) Rights Offer: Conditions & Timetable
• A Trading Strategy for EcoproBM Post IPO
• Korean Stubs Spotlight: Close the Pair Trade Between BGF Co. & BGF Retail