The last three years have been characterized by significant M&A activity in the upstream oil and gas industry. As the oil cycle recovered from the price bottom in January 2016, lower asset prices and corporate valuations created opportunities for the companies with a stronger balance sheet to grow inorganically while their weaker competitors were forced to downsize their portfolios. 2018, in particular, has seen a surge of corporate M&A which has been driving consolidation in the industry. This insight examines the trends that have shaped the M&A markets since 2016 with a closer view of 2018 and the outlook for 2019.
Exhibit 1: M&A volume compared to the E&P index and the oil price since 2016
Source: Energy Market Square, Capital IQ. Market value weighted index including independent E&P companies with market value greater than $300m as of 19 April 2018. Data as of 7 March 2019. The M&A volume in September 2018 includes the merger of Wintershall and DEA with an estimated value of $10bn.
We met NTT Docomo Inc (9437 JP) today for a quick chat. Markets are focused on FY19 guidance and the magnitude of price reductions that DoCoMo plans, neither of which were on the table for discussion. We did get a little bit of color on the Q4 competitive environment (not too intense), the mobile payments effort (strategically important but less need to invest heavily like PayPay) and the impending sale of its 34% stake in Sumitomo Mitsui Card.
We recently met with Yahoo Japan (4689 JP) for an update on the company after Q3 results. We thought the financial announcement was positive with encouraging forecasts for profitability, both this year and going forward, and revenue growth potential. In addition, Yahoo Japan reported solid customer growth for mobile payments joint venture PayPay, driven by strong marketing support and an attractive proposition for offline merchants. We think the latter is very important for the development of mobile payments in Japan and PayPay has had a robust start.
The discount and variety retailer just opened its fourth store in South-East Asia, mixing Japanese restaurants and cafes with a Donki store and a range of Japanese speciality tenants. The store has all the high-level retail entertainment that its Japanese stores offer but with the added cachet of being from Japan and mixing in a lot more in-mall tenants and food outlets. PPI now plans 200 overseas stores in the medium-term.
Back home, PPI is creating new small store formats which have the potential to reach into parts of Japan its big box stores cannot.
At the same time, PPI is beginning the conversion of 100 Uny stores to mixed food and variety stores. With the first six conversions showing sales growth of 83% over 10 months and gross margins up 59%, PPI’s expectation of an extra ¥20 billion in operating profit once conversions are complete looks very achievable.
The takeover means PPI is now Japan’s fourth-biggest retailer, up from 15th just three years ago.
These multiple ventures reflect the company’s flexibility, adapting to each local market’s needs with formats to match.
Its recent decision to close down its e-commerce business is not a weakness but a positive move, demonstrating that PPI understands where its strengths lie: in live store entertainment.
An old favorite in the Asian arbitrageur’s investment universe is the Hang Lung stub. The Hang Lung Group acquired Hang Lung Properties (formerly named Amoy Properties) and designated the subsidiary as its property investment arm. After both companies were listed in 1992, the same year that the company entered the mainland with its purchase of the Grand Gateway 66 and Plaza 66 in Shanghai, the pair was open to arbs. The Hang Lung Group now controls over RMB 130 (USD 19.4b) billion of property in Hong Kong and China.
In the wonderful world of Asian holding companies, Hang Lung needs little introduction. However, in this insight I would like to highlight a trade idea. I will detail why I think now is the right time to setup a stub trade and some background information on the company and what assets constitute the stub.
In this insight I will cover:
I. The Trade
II. The Stub Assets
III. My Track Record with Stub Trades
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Since early November, when Chiyoda incurred substantial losses, scant details regarding the structure of the likely capital raise have emerged, except that the components would include additional loans and equity from industrial partners and most likely, main shareholder Mitsubishi Corp (8058 JP).
LightStream Research‘s conversations with the company suggest a high likelihood a deal would not be in place by the end of Mar, though in a one-on-one meeting they said they were in the final stages of discussions. Lightstream believes a deal is almost certain to be in place by the time of the company’s fiscal year earnings announcement which should be in mid May.
Getting injections of debt capital from banks (likely Mitsubishi Ufj Financial (8306 JP)) and equity capital from Mitsubishi are unlikely to be stumbling blocks. It is plausible that Mitsubishi would be keen to retain its current 33.39% stake in the company, so if the capital is in the form of prefs, Lightstream would expect them to be convertible.
As for the industrial partner, Chiyoda noted that there was significant interest due to their long track record as the leading LNG EPC player in the world, and that it was not so much a matter of being able to secure the financing, as it was a matter of finding a partner where there would be mutual benefits without constraining Chiyoda in terms of its business operations. But that implies the stake would be so large as to imply a controlling or heavily influential stake.
In terms of numbers, Lightstream speculates about ¥30bn in debt from banks with MUFG a likely lead candidate given the keiretsu ties. Perhaps ¥75bn in equity (prefs and common) split between Mitsubishi and an industrial partner. More likely, if Mitsubishi opted for pref shares, the industrial partner would end up with a stake of around 20% in Chiyoda, which could mean a ¥25bn injection, with Mitsubishi buying ¥50bn in prefs.
Shin Etsu announced a share buyback program to buy up to 14mn shares for up to ¥100bn. If it were to have bought all 14mn shares, that would be 3.3% of shares outstanding. Simultaneously, it announced a ToSTNeT-3 buyback of 11,001,100 shares at today’s closing price of ¥9,090/share which if all bought would complete the buyback program.
There was some speculation across the Street there would be a buyback because of slowing earnings expectations and a surfeit of capital, which was itself important because of the company’s lack of recent history of buybacks (the last and only time the company has bought back shares (to date) was a repurchase of 3 million shares for ¥13.6 billion in late October 2008 when things were hairy (and cheap))
It was a decent-sized buyback. That by itself is worthwhile. But it is not enormous. And with ¥1tn in net cash, buying back ¥100bn is not huge enough. It reduces the dividend out a little, and lifts EPS a little. But…
The BIG trade here is to identify the seller as quickly as possible – if it is a corporate seller. If it is Hachijuni Bank, buy Hachijuni Bank. If it is another small listed financial for whom the position is meaningful portion of market cap, Travis Lundy would be inclined to buy that one.
As a follow-up…
the result of the ToSTNeT-3 transaction was that the company bought back 9.84mm shares using 89.5% of the funds. The remaining ¥10.5bn to buy will likely be bought on market. It represents less than one day of volume.
Travis notes that there have been no announcements on TDNET which indicate who the seller might have been. If it had been a life insurer, it would not have made the news because it was portfolio gains, not corporate gains. It is also possible that corporate or bank holders in question would have other sales to offset the gains. We may not know until the yuho.
The previous Friday, the Nikkei announced that because the third party share sale of Pioneer Corp (6773 JP) had been completed, it would be deleted from the Nikkei 225 Average (and the Nikkei 500 Index). Omron will replace Pioneer in the Nikkei 225, with a deemed par value of ¥50 per share. The date for this index deletion and inclusion event was the 15th of March.
The Pioneer exclusion has been known/certain since the deal was approved. The Omron inclusion was less well-flagged. There is a lot of Pioneer stock to come out this week. Because it is so much, and because many people will not want to hold more than 5% of the company, Travis expects there is room for several people to increase their stake for an OK size.
Because of the path of Omron over the past year, Travis expected there would be many foreign holders unwilling to sell their shares at the current price. And they would be ill-prepared to sell large quantities in the market on Friday just because there was a Nikkei 225 inclusion. Travis expected the shares to squeeze. It is not easy to dislodge 25% of the float.
THE HINDSIGHT: As Travis notes in a discussion point appended to his piece, it appears every single buyer post-announcement was down-money by the inclusion, which happened at the lowest price of any traded post-announcement. This indicates substantially more pre-positioning than he thought, and the low volume on the print itself suggests substantially more shorting than might be healthy.
The Daewoo Shipbuilding & Marine Engineering (042660 KS) deal between HHI and KDB is now officially finalised, and it will take the following four-step process: the HHI (to be renamed Korea Shipbuilding & Offshore Engineering, or KSOE) spin-off of the opco (HHI opco); the KDB PIK into HHI; the KSOE rights issue; followed by the DSME rights issue. These details were further elaborated upon in Sanghyun Park‘s prior insight: Hyundai Heavy/DSME Event – Comprehensive Summary.
HHI declined 4% when the deal was finalized while DSME stayed flat. Apparently HHI and Korea Eximbank agreed that the ₩2.3tril CBs wouldn’t be converted into DSME shares and disposed any time soon. Plus, there will be a downward interest adjustment to help ease DSME’s financial burden.
This sparked a speculation that HHI must have pledged Korea Eximbank with some sort of DSME expected valuation. Sanghyun would close the current HHI long/DSME short position. Short-term, he expects DSME will outperform HHI. Longer term, he’d rather stay away from both.
The revision – the divestment on the SPP1 co-generation plant – was a remedial requirement by the ERC regulator. The sale of SPP1 to B Grimm Power (BGRIM TB) for Bt3.3bn was announced on the 22 February and was completed mid-week.
Subsequent to the SPP1 sale, the purchase price under the SPA was adjusted to Bt91.9906/share, a ~3% decline from the initial Bt94.892/share price under the original SPA.
My discussions with GLOW indicate that the 247-4 Tender Offer form may be submitted to the SEC & SEC by GPSC as early as next week, with the Offer open to acceptances shortly after. The ERC signed off on the SPA the previous Friday. Assuming mid-May payment, this is currently trading at a gross/annualised spread of 1.6%/10.8%.
HKICIM announced HNA Finance had entered into a SPA in which Times Holdings, a Blackstone-controlled vehicle, had conditionally agreed to buy 69.54% of HKICIM’s issued shares for HK$3/share in an HK$7bn transaction. Should the SPA complete, Times will make a mandatory unconditional offer – also at $3.00/share (14.5% premium to last close) – for the remaining 30.46% of shares out. This proposal arrives nearly three years after HNA bought a 66% in Tysan Holdings – as HKICIM was previously known – from Blackstone for HK$4.53 per share, triggering an MGO.
After a rapid-fire acquisition spree – at record prices, oddly motivated to “snatch land and pricing power from the city’s real estate cartel” – and similar disposal pace of Kai Tak properties, HNA is presumably recycling these sales proceeds to offset its debt obligations.
This will continue to trade tight to, if not through terms, with an anticipated completion late April. There will be no bump to the Offer. Times does not intend to avail itself to compulsory acquisition and intends to maintain HKICIM’s listing; while both Times and HKICIM will take appropriate steps to maintain a sufficient public float after the close of the Offer.
Iph Ltd (IPH AU) has gate crashed Xenith/Qantm Intellectual Property (QIP AU)‘s marriage of equals, submitting a proposal (by way of a Scheme) for Xenith comprising cash (A$1.28) and IPH shares (0.1056 IPH shares) or A$1.97/share, 23.3% above the implied QANTM all-scrip merger consideration, based on QANTM’s 26 Nov 2016 closing price.
On the same day as the Xenith/QANTM announcement, IPH lobbed a non-binding cash & scrip proposal to acquire QANTM at $1.80/share (including a A$0.05 dividend) by way of a scheme, or a 42% premium to last close. QANTM’s board rejected the proposal due to its highly conditional nature, significant execution risk, and that the offer undervalued the company. So, IPH bought a 19.9% stake in Xenith at $1.85/share (or ~A$33mn) from institutional investors, and further added that is does not support QANTM’s merger and intends to vote against it at the forthcoming scheme meeting on the 3 April.
The key risk to IPH’s proposal is ACCC’s consent – the provisional clearance date for the QANTM/Xenith merger is the 21 March; while IPH/Xenith‘s is the 2 May. IPH, QANTM and Xenith are the only three ASX-listed intellectual property companies, and IPH is the largest (in terms of revenue). However privately owned companies collectively hold a larger market share – and growing – compared to the three listcos. It is not apparent a merger between either of these two listcos would lessen IP service competition in Australia.
With a 19.9% blocking stake, the QANTM/Xenith scheme is toast. 19.9% of institutional investors have already cashed out at $1.85/share. Xenith should engage with IPH.
In the past six months, Hyosung Corp is up 62% while Hyosung TNC is down 12%. Corp’s share price has surged in the past six months on account of excellent dividends, strong financial results and the timing of the increased insider ownerships/completion of tender offers. Douglas Kim believes the market has already factored into Corp’s share price many of these positive factors.
Both TNC and Corp have underperformed the market. However, TNC appears to be a turnaround story driven by a decline in raw material prices, aggressive spandex investment in India, the stabilization of spandex prices in 2H19 and the consolidation of the global spandex industry
Douglas would be long TNC and short Corp on a dollar-for-dollar basis. His base case strategy is to achieve gains of 7-9% on this pair trade. Plugging in Douglas’s numbers results in the discount to NAV at extreme levels. One pushback is that TNC accounts for just 16% of Corps’ NAV. Five other listco holdings total 40% of NAV.
Curtis Lehnert flags this simple holdco structure wherein the bifurcation between the two counters is in excess of 2 STDs. I also touched on this pair last month (StubWorld: Hang Lung’s Implied Stub At Extreme Levels) and this unreasonably wide discount which is made more than unreasonable by the fact that there is very little to distinguish between the two stocks.
Curtis proposes one avenue for narrowing the discount – by HLG divesting its stake in HLP. Maybe. Over a decade ago, HLG’s stake dipped below 50% in HLP, but it still consolidated the accounts.
However the last few years has seen HLG gradually increasing its stake in HLP; and in one instance selling property to HLP (at book), then buying shares in HLP at 0.6x P/B. HLG is cheap, but a catalyst for narrowing the discount remains elusive.
Inputting the latest of Wheelock’s, Wharf’s and WREIC’s FY18’s numbers backs out a discount to NAV of 37.5%, bang in line with its 12-month average. Wheelock is coming up “expensive” vs. Wharf, but Wharf accounts for only 25% and 22% of NAV & GAV respectively.
Wharf’s net profit decreased by 11% in FY18. While the company said cooling measures in China have had minimal impact on demand, it added “the timing of sales launch continued to be dictated by local government approval to sell at full or close to full market price“.
Chairman & MD Stephen Ng said it will sell/reduce its mainland property investments, ruling out any possibility of returning. This suggests the momentum is with non-PRC asset portfolio companies under the Wheelock group, favouring both Wheelock and WREIC.
First Pacific Co (142 HK)exits from the Goodman Fielder JV for US$300mn. First Pac will incur a US$280mn non-cash loss on the sale. Not an ideal return on a five-year investment. Shares closed marginally up suggesting this announcement was largely expected.
MYOB Group Ltd (MYO AU)‘s scheme doc is out. The Scheme meeting is scheduled for 17 April, with an expected implementation date of the 8 May. The independent expert, Grant Samuels, considers the Scheme consideration to be fair & reasonable, with an assessed value range of $3.19-$3.69 vs KKR’s Offer of $3.40.
Trade Me (TME NZ)‘s scheme book is out. The vote will take place on the 3 April. The Independent Adviser concluded that the Scheme consideration of NZ$6.45 is above its valuation range for the shares of NZ$5.93 – NZ$6.39. OIO consent has also been received.
The IFA believesDelta Electronics Thai (DELTA TB)shareholders should accept the Tender Offer of Bt71/share as it is above its fair value range of Bt62.33-Bt67.80/share.
Mastercard’s offer has now lapsed, leaving Visa as the sole bidder for Earthport plc (EPO LN). Visa’s 37 pence offer has been extended for two weeks until the 25 March.
The IFA (UOB) considers the $3.10/share Offer for Kian Joo Can Factory (KJC MK) is “not fair” but “reasonable”. (Best to open the link in Chrome not Edge). UOB considers the Offer price represents a 25 sen or 7.46% discount to the estimated fair value of RM3.35/share. The Offer will be open for acceptances until the 22 March – unless extended.
Australian property developer, Villa World Ltd (VLW AU)announced that it had received an unsolicited proposal from AVID Property Group Australia to acquire all of the company’s shares for A$231/share (a 12% premium to last close) by way of a scheme of arrangement.
CCASS
My ongoing series flags large moves (~10%) in CCASS holdings over the past week or so, moves which are often outside normal market transactions. These may be indicative of share pledges. Or potential takeovers. Or simply help understand volume swings.
Often these moves can easily be explained – the placement of new shares, rights issue, movements subsequent to a takeover, amongst others. For those mentioned below, I could not find an obvious reason for the CCASS move.
For years semiconductor makers and investors have worried that Moore’s Law will end. Although it is not difficult to find proponents of this argument today, this Insight provides evidence that the venerable phenomenon not only is still moving forward, but that it has, in some cases, been moving faster than it has in the past.
Three years ago, Isetan-Mitsukoshi attempted to reverse a strategy of shifting to small format retailing.
At the same time, the department store operator made a final ditch effort to avoid closing department stores and sacked its CEO who had had the temerity to suggest closure was the only way to revive the business.
Last year new management finally realised the old CEO had been right and that culling stores was the only way to improve profit growth.
Now the company is diversifying again but, instead of just small stores, it is planning a big investment into e-commerce with a projected ¥145 billion in sales from personal styling alone.
Hikari Tsushin (9435) – we remain longer term buyers, it will continue to generate good profits growth and valuations are still not unreasonable.
Mercari (4385) – a great domestic business, loads of buy notes but in our mind there are big issues with the US business and shares are almost priced to perfection.
NSK (6471) – given the share price, and the cycle, the question is when to start to buy.
The last three years have been characterized by significant M&A activity in the upstream oil and gas industry. As the oil cycle recovered from the price bottom in January 2016, lower asset prices and corporate valuations created opportunities for the companies with a stronger balance sheet to grow inorganically while their weaker competitors were forced to downsize their portfolios. 2018, in particular, has seen a surge of corporate M&A which has been driving consolidation in the industry. This insight examines the trends that have shaped the M&A markets since 2016 with a closer view of 2018 and the outlook for 2019.
Exhibit 1: M&A volume compared to the E&P index and the oil price since 2016
Source: Energy Market Square, Capital IQ. Market value weighted index including independent E&P companies with market value greater than $300m as of 19 April 2018. Data as of 7 March 2019. The M&A volume in September 2018 includes the merger of Wintershall and DEA with an estimated value of $10bn.
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For years semiconductor makers and investors have worried that Moore’s Law will end. Although it is not difficult to find proponents of this argument today, this Insight provides evidence that the venerable phenomenon not only is still moving forward, but that it has, in some cases, been moving faster than it has in the past.
Three years ago, Isetan-Mitsukoshi attempted to reverse a strategy of shifting to small format retailing.
At the same time, the department store operator made a final ditch effort to avoid closing department stores and sacked its CEO who had had the temerity to suggest closure was the only way to revive the business.
Last year new management finally realised the old CEO had been right and that culling stores was the only way to improve profit growth.
Now the company is diversifying again but, instead of just small stores, it is planning a big investment into e-commerce with a projected ¥145 billion in sales from personal styling alone.
Hikari Tsushin (9435) – we remain longer term buyers, it will continue to generate good profits growth and valuations are still not unreasonable.
Mercari (4385) – a great domestic business, loads of buy notes but in our mind there are big issues with the US business and shares are almost priced to perfection.
NSK (6471) – given the share price, and the cycle, the question is when to start to buy.
The last three years have been characterized by significant M&A activity in the upstream oil and gas industry. As the oil cycle recovered from the price bottom in January 2016, lower asset prices and corporate valuations created opportunities for the companies with a stronger balance sheet to grow inorganically while their weaker competitors were forced to downsize their portfolios. 2018, in particular, has seen a surge of corporate M&A which has been driving consolidation in the industry. This insight examines the trends that have shaped the M&A markets since 2016 with a closer view of 2018 and the outlook for 2019.
Exhibit 1: M&A volume compared to the E&P index and the oil price since 2016
Source: Energy Market Square, Capital IQ. Market value weighted index including independent E&P companies with market value greater than $300m as of 19 April 2018. Data as of 7 March 2019. The M&A volume in September 2018 includes the merger of Wintershall and DEA with an estimated value of $10bn.
We met NTT Docomo Inc (9437 JP) today for a quick chat. Markets are focused on FY19 guidance and the magnitude of price reductions that DoCoMo plans, neither of which were on the table for discussion. We did get a little bit of color on the Q4 competitive environment (not too intense), the mobile payments effort (strategically important but less need to invest heavily like PayPay) and the impending sale of its 34% stake in Sumitomo Mitsui Card.
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Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
Three years ago, Isetan-Mitsukoshi attempted to reverse a strategy of shifting to small format retailing.
At the same time, the department store operator made a final ditch effort to avoid closing department stores and sacked its CEO who had had the temerity to suggest closure was the only way to revive the business.
Last year new management finally realised the old CEO had been right and that culling stores was the only way to improve profit growth.
Now the company is diversifying again but, instead of just small stores, it is planning a big investment into e-commerce with a projected ¥145 billion in sales from personal styling alone.
Hikari Tsushin (9435) – we remain longer term buyers, it will continue to generate good profits growth and valuations are still not unreasonable.
Mercari (4385) – a great domestic business, loads of buy notes but in our mind there are big issues with the US business and shares are almost priced to perfection.
NSK (6471) – given the share price, and the cycle, the question is when to start to buy.
The last three years have been characterized by significant M&A activity in the upstream oil and gas industry. As the oil cycle recovered from the price bottom in January 2016, lower asset prices and corporate valuations created opportunities for the companies with a stronger balance sheet to grow inorganically while their weaker competitors were forced to downsize their portfolios. 2018, in particular, has seen a surge of corporate M&A which has been driving consolidation in the industry. This insight examines the trends that have shaped the M&A markets since 2016 with a closer view of 2018 and the outlook for 2019.
Exhibit 1: M&A volume compared to the E&P index and the oil price since 2016
Source: Energy Market Square, Capital IQ. Market value weighted index including independent E&P companies with market value greater than $300m as of 19 April 2018. Data as of 7 March 2019. The M&A volume in September 2018 includes the merger of Wintershall and DEA with an estimated value of $10bn.
We met NTT Docomo Inc (9437 JP) today for a quick chat. Markets are focused on FY19 guidance and the magnitude of price reductions that DoCoMo plans, neither of which were on the table for discussion. We did get a little bit of color on the Q4 competitive environment (not too intense), the mobile payments effort (strategically important but less need to invest heavily like PayPay) and the impending sale of its 34% stake in Sumitomo Mitsui Card.
We recently met with Yahoo Japan (4689 JP) for an update on the company after Q3 results. We thought the financial announcement was positive with encouraging forecasts for profitability, both this year and going forward, and revenue growth potential. In addition, Yahoo Japan reported solid customer growth for mobile payments joint venture PayPay, driven by strong marketing support and an attractive proposition for offline merchants. We think the latter is very important for the development of mobile payments in Japan and PayPay has had a robust start.
Get Straight to the Source on Smartkarma
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Hikari Tsushin (9435) – we remain longer term buyers, it will continue to generate good profits growth and valuations are still not unreasonable.
Mercari (4385) – a great domestic business, loads of buy notes but in our mind there are big issues with the US business and shares are almost priced to perfection.
NSK (6471) – given the share price, and the cycle, the question is when to start to buy.
The last three years have been characterized by significant M&A activity in the upstream oil and gas industry. As the oil cycle recovered from the price bottom in January 2016, lower asset prices and corporate valuations created opportunities for the companies with a stronger balance sheet to grow inorganically while their weaker competitors were forced to downsize their portfolios. 2018, in particular, has seen a surge of corporate M&A which has been driving consolidation in the industry. This insight examines the trends that have shaped the M&A markets since 2016 with a closer view of 2018 and the outlook for 2019.
Exhibit 1: M&A volume compared to the E&P index and the oil price since 2016
Source: Energy Market Square, Capital IQ. Market value weighted index including independent E&P companies with market value greater than $300m as of 19 April 2018. Data as of 7 March 2019. The M&A volume in September 2018 includes the merger of Wintershall and DEA with an estimated value of $10bn.
We met NTT Docomo Inc (9437 JP) today for a quick chat. Markets are focused on FY19 guidance and the magnitude of price reductions that DoCoMo plans, neither of which were on the table for discussion. We did get a little bit of color on the Q4 competitive environment (not too intense), the mobile payments effort (strategically important but less need to invest heavily like PayPay) and the impending sale of its 34% stake in Sumitomo Mitsui Card.
We recently met with Yahoo Japan (4689 JP) for an update on the company after Q3 results. We thought the financial announcement was positive with encouraging forecasts for profitability, both this year and going forward, and revenue growth potential. In addition, Yahoo Japan reported solid customer growth for mobile payments joint venture PayPay, driven by strong marketing support and an attractive proposition for offline merchants. We think the latter is very important for the development of mobile payments in Japan and PayPay has had a robust start.
The discount and variety retailer just opened its fourth store in South-East Asia, mixing Japanese restaurants and cafes with a Donki store and a range of Japanese speciality tenants. The store has all the high-level retail entertainment that its Japanese stores offer but with the added cachet of being from Japan and mixing in a lot more in-mall tenants and food outlets. PPI now plans 200 overseas stores in the medium-term.
Back home, PPI is creating new small store formats which have the potential to reach into parts of Japan its big box stores cannot.
At the same time, PPI is beginning the conversion of 100 Uny stores to mixed food and variety stores. With the first six conversions showing sales growth of 83% over 10 months and gross margins up 59%, PPI’s expectation of an extra ¥20 billion in operating profit once conversions are complete looks very achievable.
The takeover means PPI is now Japan’s fourth-biggest retailer, up from 15th just three years ago.
These multiple ventures reflect the company’s flexibility, adapting to each local market’s needs with formats to match.
Its recent decision to close down its e-commerce business is not a weakness but a positive move, demonstrating that PPI understands where its strengths lie: in live store entertainment.
Get Straight to the Source on Smartkarma
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
We met NTT Docomo Inc (9437 JP) today for a quick chat. Markets are focused on FY19 guidance and the magnitude of price reductions that DoCoMo plans, neither of which were on the table for discussion. We did get a little bit of color on the Q4 competitive environment (not too intense), the mobile payments effort (strategically important but less need to invest heavily like PayPay) and the impending sale of its 34% stake in Sumitomo Mitsui Card.
We recently met with Yahoo Japan (4689 JP) for an update on the company after Q3 results. We thought the financial announcement was positive with encouraging forecasts for profitability, both this year and going forward, and revenue growth potential. In addition, Yahoo Japan reported solid customer growth for mobile payments joint venture PayPay, driven by strong marketing support and an attractive proposition for offline merchants. We think the latter is very important for the development of mobile payments in Japan and PayPay has had a robust start.
The discount and variety retailer just opened its fourth store in South-East Asia, mixing Japanese restaurants and cafes with a Donki store and a range of Japanese speciality tenants. The store has all the high-level retail entertainment that its Japanese stores offer but with the added cachet of being from Japan and mixing in a lot more in-mall tenants and food outlets. PPI now plans 200 overseas stores in the medium-term.
Back home, PPI is creating new small store formats which have the potential to reach into parts of Japan its big box stores cannot.
At the same time, PPI is beginning the conversion of 100 Uny stores to mixed food and variety stores. With the first six conversions showing sales growth of 83% over 10 months and gross margins up 59%, PPI’s expectation of an extra ¥20 billion in operating profit once conversions are complete looks very achievable.
The takeover means PPI is now Japan’s fourth-biggest retailer, up from 15th just three years ago.
These multiple ventures reflect the company’s flexibility, adapting to each local market’s needs with formats to match.
Its recent decision to close down its e-commerce business is not a weakness but a positive move, demonstrating that PPI understands where its strengths lie: in live store entertainment.
An old favorite in the Asian arbitrageur’s investment universe is the Hang Lung stub. The Hang Lung Group acquired Hang Lung Properties (formerly named Amoy Properties) and designated the subsidiary as its property investment arm. After both companies were listed in 1992, the same year that the company entered the mainland with its purchase of the Grand Gateway 66 and Plaza 66 in Shanghai, the pair was open to arbs. The Hang Lung Group now controls over RMB 130 (USD 19.4b) billion of property in Hong Kong and China.
In the wonderful world of Asian holding companies, Hang Lung needs little introduction. However, in this insight I would like to highlight a trade idea. I will detail why I think now is the right time to setup a stub trade and some background information on the company and what assets constitute the stub.
Advantest Corporation (6857 JP), based in Japan, manufactures and sells semiconductor testing equipment and electronic measuring systems. The company generates a majority of its revenue outside of Japan, where its products are mostly sold in countries where semiconductor volume production processes are concentrated, including South Korea, Taiwan and China.
The company’s revenues are highly correlated with memory demand and capital expenditure. The current oversupply in the DRAM and NAND memory markets has caused DRAM and NAND prices to decline. This has impacted the capital spending by large memory makers such as Samsung, Micron and SK Hynix.
Advantest has witnessed its revenue and operating profits growing at double digits since the beginning of the current semiconductor cycle. However, with the oversupply, memory price declines and capex halts, we expect the company revenue and profits to deteriorate starting in FY03/2020.
Based on our valuation, we believe Advantest is still overvalued at its current price of JPY2,510 per share. As the memory market has just started decelerating and the current cycle nears its worst, we feel the company share price will decline further with the gloomy outlook for company earnings.
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We recently met with Yahoo Japan (4689 JP) for an update on the company after Q3 results. We thought the financial announcement was positive with encouraging forecasts for profitability, both this year and going forward, and revenue growth potential. In addition, Yahoo Japan reported solid customer growth for mobile payments joint venture PayPay, driven by strong marketing support and an attractive proposition for offline merchants. We think the latter is very important for the development of mobile payments in Japan and PayPay has had a robust start.
The discount and variety retailer just opened its fourth store in South-East Asia, mixing Japanese restaurants and cafes with a Donki store and a range of Japanese speciality tenants. The store has all the high-level retail entertainment that its Japanese stores offer but with the added cachet of being from Japan and mixing in a lot more in-mall tenants and food outlets. PPI now plans 200 overseas stores in the medium-term.
Back home, PPI is creating new small store formats which have the potential to reach into parts of Japan its big box stores cannot.
At the same time, PPI is beginning the conversion of 100 Uny stores to mixed food and variety stores. With the first six conversions showing sales growth of 83% over 10 months and gross margins up 59%, PPI’s expectation of an extra ¥20 billion in operating profit once conversions are complete looks very achievable.
The takeover means PPI is now Japan’s fourth-biggest retailer, up from 15th just three years ago.
These multiple ventures reflect the company’s flexibility, adapting to each local market’s needs with formats to match.
Its recent decision to close down its e-commerce business is not a weakness but a positive move, demonstrating that PPI understands where its strengths lie: in live store entertainment.
An old favorite in the Asian arbitrageur’s investment universe is the Hang Lung stub. The Hang Lung Group acquired Hang Lung Properties (formerly named Amoy Properties) and designated the subsidiary as its property investment arm. After both companies were listed in 1992, the same year that the company entered the mainland with its purchase of the Grand Gateway 66 and Plaza 66 in Shanghai, the pair was open to arbs. The Hang Lung Group now controls over RMB 130 (USD 19.4b) billion of property in Hong Kong and China.
In the wonderful world of Asian holding companies, Hang Lung needs little introduction. However, in this insight I would like to highlight a trade idea. I will detail why I think now is the right time to setup a stub trade and some background information on the company and what assets constitute the stub.
Advantest Corporation (6857 JP), based in Japan, manufactures and sells semiconductor testing equipment and electronic measuring systems. The company generates a majority of its revenue outside of Japan, where its products are mostly sold in countries where semiconductor volume production processes are concentrated, including South Korea, Taiwan and China.
The company’s revenues are highly correlated with memory demand and capital expenditure. The current oversupply in the DRAM and NAND memory markets has caused DRAM and NAND prices to decline. This has impacted the capital spending by large memory makers such as Samsung, Micron and SK Hynix.
Advantest has witnessed its revenue and operating profits growing at double digits since the beginning of the current semiconductor cycle. However, with the oversupply, memory price declines and capex halts, we expect the company revenue and profits to deteriorate starting in FY03/2020.
Based on our valuation, we believe Advantest is still overvalued at its current price of JPY2,510 per share. As the memory market has just started decelerating and the current cycle nears its worst, we feel the company share price will decline further with the gloomy outlook for company earnings.
Yokogawa Electric is one of the world’s leading suppliers of distributed control systems (DCS) used in the LNG, oil & gas, petrochemical and other industries. It is particularly strong in LNG, having provided control systems for dozens of liquefaction trains, LNG carriers and re-gasification plants.
Unlike Chiyoda Corporation (6366 JP) and JGC (1963 JP), which depend on a small number of large engineering, procurement and construction (EPC) orders, which can be as large as ¥500 billion, Yokogawa only rarely receives an order as large as ¥10 billion and most of its orders are less than ¥1 billion. It is geared primarily to ongoing investments and operating expenditures in its user industries, less exposed to highly variable orders for large LNG and other engineering projects, and relatively immune to cost overruns and other problems at projects gone wrong.
Margins have expanded over the past several years due to a combination of restructuring and technological advance. Unprofitable non-core businesses have been abandoned or sold, high-wage domestic employees retired, and administration, manufacturing and logistics rationalized. Enterprise and robotic process automation (RPA) software have been introduced and an Industrial Internet of Things (IIoT) cloud computing platform is under development. Top-line growth has been slow, but the operating margin has risen from from 5.0% in FY Mar-12 to 8.0% in FY Mar-18, and should reach 10% in FY Mar-21, in our estimation.
At ¥2,215 (Wednesday, March 13 closing price), the shares are selling at 23x our EPS estimate for FY Mar-19 and 20x our estimate for FY Mar-21. Projected EV/EBITDA multiples for the same two years are 9.8x and 8.2x. These and other projected valuation multiples are above their recent historical averages, but indicate upside potential of 20% or more if the anticipated upturn in new LNG investments materializes. Investors willing to take on more speculative risk should look at Chiyoda and JGC.
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Japan has a vast number of competing loyalty programmes and until five years ago Japanese consumers would often have as many as 10 loyalty point cards in their wallets.
In recent years consumers have gradually begun to whittle down their choices and today there are clear indications of which schemes will dominate.
Loyalty point schemes have always been key drivers of shopping behaviour but more recently it has become clear that the choice of e-commerce store is often driven by which loyalty point schemes can be used.
At the same time, there are increasing signs that the leading loyalty schemes could take the lead in Japan’s emerging cashless payment sector.
We believe this presents an excellent opportunity to look at the stock on the short side again.
We would also refer readers to an article from Livedoor news which delves into the company’s issues from a local industry insider’s perspective. The article is in Japanese and the google translated version is almost unintelligible but we summarise the salient points and our perspective below.
Our recent conversation with CyberAgent’s IR team suggests that a significant improvement in the OP margin is unlikely in the next few quarters. The OP margins of both Game business and the Internet Advertisement, while likely to improve gradually, are likely to remain low compared to recent history due to higher advertising and personnel costs.
Upfront investments in AbemaTV are likely to continue until the target of 10m Weekly Average Users (WAU) is met, which could take a year or more. The company expects around 50% of AbemaTV revenue to eventually come from premium users, which seems to be a shift in strategy, from a “free” service towards a more hybrid model.
CyberAgent’s share price closed at ¥4,050 on Tuesday, up 7.1% from its previous close, following the news that the stock was added to the Goldman Sachs’ conviction list with a reiterated buy rating. However, even before this, CyberAgent’s share price had been on a steady increase over the past two weeks (+29.0%), recovering from a one-year low in early February. This increase, despite rather mediocre 1Q results, a downward revision of OP guidance, and lack of any major short term catalysts is an indication that the market deems CyberAgent to be undervalued – mainly on the AbemaTV front.
On 12 March 2019 after the close, Shin Etsu Chemical (4063 JP)announced a share buyback program to buy up to 14 million shares for up to ¥100 billion. If it bought all 14 million shares, that would be 3.3% of shares outstanding. Simultaneously, it announced a ToSTNeT-3 buyback of 11,001,100 shares at today’s closing price of ¥9,090/share which if all bought would complete the buyback program.
As I write, the shares are up 4-6% in thin trading in the ADRs.
There was some speculation across the Street there would be a buyback because of slowing earnings expectations and a surfeit of capital, which was itself important because of the company’s lack of recent history of buybacks (the last and only time the company has bought back shares (to date) was a repurchase of 3 million shares for ¥13.6 billion in late October 2008 when things were hairy (and cheap)).
The shares are down over the past year, but the price in the past few days is not dramatically at the low end of the range of the past six months or so.
There may be some information in the context and structure of this buyback which tells you something different than people’s first reaction.
The key point of interest for investors regarding Chiyoda Corp (6366 JP) continues to be details surrounding its upcoming capital raise. The company has, since early November when it incurred these losses, offered scant details regarding the structure of the capital raise, except to note that the components would include additional loans and equity from industrial partners and most likely, main shareholder Mitsubishi Corp (8058 JP).
We visited the company to gather as much information as possible on the potential structure of the capital increase and to update the order outlook and reasons for further cost overruns.
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The discount and variety retailer just opened its fourth store in South-East Asia, mixing Japanese restaurants and cafes with a Donki store and a range of Japanese speciality tenants. The store has all the high-level retail entertainment that its Japanese stores offer but with the added cachet of being from Japan and mixing in a lot more in-mall tenants and food outlets. PPI now plans 200 overseas stores in the medium-term.
Back home, PPI is creating new small store formats which have the potential to reach into parts of Japan its big box stores cannot.
At the same time, PPI is beginning the conversion of 100 Uny stores to mixed food and variety stores. With the first six conversions showing sales growth of 83% over 10 months and gross margins up 59%, PPI’s expectation of an extra ¥20 billion in operating profit once conversions are complete looks very achievable.
The takeover means PPI is now Japan’s fourth-biggest retailer, up from 15th just three years ago.
These multiple ventures reflect the company’s flexibility, adapting to each local market’s needs with formats to match.
Its recent decision to close down its e-commerce business is not a weakness but a positive move, demonstrating that PPI understands where its strengths lie: in live store entertainment.
An old favorite in the Asian arbitrageur’s investment universe is the Hang Lung stub. The Hang Lung Group acquired Hang Lung Properties (formerly named Amoy Properties) and designated the subsidiary as its property investment arm. After both companies were listed in 1992, the same year that the company entered the mainland with its purchase of the Grand Gateway 66 and Plaza 66 in Shanghai, the pair was open to arbs. The Hang Lung Group now controls over RMB 130 (USD 19.4b) billion of property in Hong Kong and China.
In the wonderful world of Asian holding companies, Hang Lung needs little introduction. However, in this insight I would like to highlight a trade idea. I will detail why I think now is the right time to setup a stub trade and some background information on the company and what assets constitute the stub.
Advantest Corporation (6857 JP), based in Japan, manufactures and sells semiconductor testing equipment and electronic measuring systems. The company generates a majority of its revenue outside of Japan, where its products are mostly sold in countries where semiconductor volume production processes are concentrated, including South Korea, Taiwan and China.
The company’s revenues are highly correlated with memory demand and capital expenditure. The current oversupply in the DRAM and NAND memory markets has caused DRAM and NAND prices to decline. This has impacted the capital spending by large memory makers such as Samsung, Micron and SK Hynix.
Advantest has witnessed its revenue and operating profits growing at double digits since the beginning of the current semiconductor cycle. However, with the oversupply, memory price declines and capex halts, we expect the company revenue and profits to deteriorate starting in FY03/2020.
Based on our valuation, we believe Advantest is still overvalued at its current price of JPY2,510 per share. As the memory market has just started decelerating and the current cycle nears its worst, we feel the company share price will decline further with the gloomy outlook for company earnings.
Yokogawa Electric is one of the world’s leading suppliers of distributed control systems (DCS) used in the LNG, oil & gas, petrochemical and other industries. It is particularly strong in LNG, having provided control systems for dozens of liquefaction trains, LNG carriers and re-gasification plants.
Unlike Chiyoda Corporation (6366 JP) and JGC (1963 JP), which depend on a small number of large engineering, procurement and construction (EPC) orders, which can be as large as ¥500 billion, Yokogawa only rarely receives an order as large as ¥10 billion and most of its orders are less than ¥1 billion. It is geared primarily to ongoing investments and operating expenditures in its user industries, less exposed to highly variable orders for large LNG and other engineering projects, and relatively immune to cost overruns and other problems at projects gone wrong.
Margins have expanded over the past several years due to a combination of restructuring and technological advance. Unprofitable non-core businesses have been abandoned or sold, high-wage domestic employees retired, and administration, manufacturing and logistics rationalized. Enterprise and robotic process automation (RPA) software have been introduced and an Industrial Internet of Things (IIoT) cloud computing platform is under development. Top-line growth has been slow, but the operating margin has risen from from 5.0% in FY Mar-12 to 8.0% in FY Mar-18, and should reach 10% in FY Mar-21, in our estimation.
At ¥2,215 (Wednesday, March 13 closing price), the shares are selling at 23x our EPS estimate for FY Mar-19 and 20x our estimate for FY Mar-21. Projected EV/EBITDA multiples for the same two years are 9.8x and 8.2x. These and other projected valuation multiples are above their recent historical averages, but indicate upside potential of 20% or more if the anticipated upturn in new LNG investments materializes. Investors willing to take on more speculative risk should look at Chiyoda and JGC.
Astonishing as it may seem but 80% of all retail transactions in Japan are made with cash and 88% if you include the cash stored in so-called ‘smart wallets’ – essentially cash stored in plastic.
Just like much of Japan’s service sector, payments is a classic example of the sector’s capacity to resist change, resist still more and finally, with much knocking of heads in Kasumigaseki, race to modernise in a very short period of time.
That Japan will switch to cashless payments in the next three years is not in doubt – not least because of Japan’s fear of Chinese payments systems gaining too much share – but with so many competing payments services available and still being launched, the big question is who will win. Given their deep data, consumer loyalty and brand names, it is likely that the current kings of loyalty points will take the biggest share alongside some of the biggest retailers meaning Rakuten (4755 JP), Softbank (9434 JP), NTT Docomo (9437 JP) and the three convenience store schemes backed by banks.
While the use of cash may decline, households still keep an average of ¥830,000 in cash (8% of GDP in total) under the futon and are unlikely to change that particular habit given the frequency of earthquakes and other natural disasters.
Get Straight to the Source on Smartkarma
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
An old favorite in the Asian arbitrageur’s investment universe is the Hang Lung stub. The Hang Lung Group acquired Hang Lung Properties (formerly named Amoy Properties) and designated the subsidiary as its property investment arm. After both companies were listed in 1992, the same year that the company entered the mainland with its purchase of the Grand Gateway 66 and Plaza 66 in Shanghai, the pair was open to arbs. The Hang Lung Group now controls over RMB 130 (USD 19.4b) billion of property in Hong Kong and China.
In the wonderful world of Asian holding companies, Hang Lung needs little introduction. However, in this insight I would like to highlight a trade idea. I will detail why I think now is the right time to setup a stub trade and some background information on the company and what assets constitute the stub.
Advantest Corporation (6857 JP), based in Japan, manufactures and sells semiconductor testing equipment and electronic measuring systems. The company generates a majority of its revenue outside of Japan, where its products are mostly sold in countries where semiconductor volume production processes are concentrated, including South Korea, Taiwan and China.
The company’s revenues are highly correlated with memory demand and capital expenditure. The current oversupply in the DRAM and NAND memory markets has caused DRAM and NAND prices to decline. This has impacted the capital spending by large memory makers such as Samsung, Micron and SK Hynix.
Advantest has witnessed its revenue and operating profits growing at double digits since the beginning of the current semiconductor cycle. However, with the oversupply, memory price declines and capex halts, we expect the company revenue and profits to deteriorate starting in FY03/2020.
Based on our valuation, we believe Advantest is still overvalued at its current price of JPY2,510 per share. As the memory market has just started decelerating and the current cycle nears its worst, we feel the company share price will decline further with the gloomy outlook for company earnings.
Yokogawa Electric is one of the world’s leading suppliers of distributed control systems (DCS) used in the LNG, oil & gas, petrochemical and other industries. It is particularly strong in LNG, having provided control systems for dozens of liquefaction trains, LNG carriers and re-gasification plants.
Unlike Chiyoda Corporation (6366 JP) and JGC (1963 JP), which depend on a small number of large engineering, procurement and construction (EPC) orders, which can be as large as ¥500 billion, Yokogawa only rarely receives an order as large as ¥10 billion and most of its orders are less than ¥1 billion. It is geared primarily to ongoing investments and operating expenditures in its user industries, less exposed to highly variable orders for large LNG and other engineering projects, and relatively immune to cost overruns and other problems at projects gone wrong.
Margins have expanded over the past several years due to a combination of restructuring and technological advance. Unprofitable non-core businesses have been abandoned or sold, high-wage domestic employees retired, and administration, manufacturing and logistics rationalized. Enterprise and robotic process automation (RPA) software have been introduced and an Industrial Internet of Things (IIoT) cloud computing platform is under development. Top-line growth has been slow, but the operating margin has risen from from 5.0% in FY Mar-12 to 8.0% in FY Mar-18, and should reach 10% in FY Mar-21, in our estimation.
At ¥2,215 (Wednesday, March 13 closing price), the shares are selling at 23x our EPS estimate for FY Mar-19 and 20x our estimate for FY Mar-21. Projected EV/EBITDA multiples for the same two years are 9.8x and 8.2x. These and other projected valuation multiples are above their recent historical averages, but indicate upside potential of 20% or more if the anticipated upturn in new LNG investments materializes. Investors willing to take on more speculative risk should look at Chiyoda and JGC.
Astonishing as it may seem but 80% of all retail transactions in Japan are made with cash and 88% if you include the cash stored in so-called ‘smart wallets’ – essentially cash stored in plastic.
Just like much of Japan’s service sector, payments is a classic example of the sector’s capacity to resist change, resist still more and finally, with much knocking of heads in Kasumigaseki, race to modernise in a very short period of time.
That Japan will switch to cashless payments in the next three years is not in doubt – not least because of Japan’s fear of Chinese payments systems gaining too much share – but with so many competing payments services available and still being launched, the big question is who will win. Given their deep data, consumer loyalty and brand names, it is likely that the current kings of loyalty points will take the biggest share alongside some of the biggest retailers meaning Rakuten (4755 JP), Softbank (9434 JP), NTT Docomo (9437 JP) and the three convenience store schemes backed by banks.
While the use of cash may decline, households still keep an average of ¥830,000 in cash (8% of GDP in total) under the futon and are unlikely to change that particular habit given the frequency of earthquakes and other natural disasters.
Japan has a vast number of competing loyalty programmes and until five years ago Japanese consumers would often have as many as 10 loyalty point cards in their wallets.
In recent years consumers have gradually begun to whittle down their choices and today there are clear indications of which schemes will dominate.
Loyalty point schemes have always been key drivers of shopping behaviour but more recently it has become clear that the choice of e-commerce store is often driven by which loyalty point schemes can be used.
At the same time, there are increasing signs that the leading loyalty schemes could take the lead in Japan’s emerging cashless payment sector.
Get Straight to the Source on Smartkarma
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
