Japan

In today’s briefing:

Revisiting Jafco (8595.T) – Company Reaches An Important Milestone
Komatsu (6301) | 6% TSR and Clean Energy Winner

Revisiting Jafco (8595.T) – Company Reaches An Important Milestone

By Rikki Malik

The company’s management fees now cover the operating costs after many years of losses
Recent fund raising has surpassed expectations for its latest VC fund
The company’s steps towards better capital allocation are trending in the right direction

Komatsu (6301) | 6% TSR and Clean Energy Winner

By Mark Chadwick

Komatsu’s operating profits for FY3/24 of Y607 billion (+24% YoY) surpassed estimates on strong U.S. equipment sales
Komatsu guides for FY3/25 operating profits of ¥557 billion (-8.3% YoY), assuming ¥140/US$
We believe that the market remains too focused on the near-term growth slowdown, while we believe that Komatsu is attractively priced at under 10x EV/EBIT

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May 06

Daily Brief Japan: Shinko Electric Industries, TORIDOLL Holdings Corporation, TSE Tokyo Price Index TOPIX and more

In today’s briefing:

Shinko Electric (6967) – Break/Gap Risk Early May 2024 Update
Toridoll (3397): Restaurant Chain on a Lege
Shareholder Returns Will Increase over June AGM, but Will Companies Hold up with Sluggish ROE?

Shinko Electric (6967) – Break/Gap Risk Early May 2024 Update

When this deal was announced, it was light. But the timing, JSR influence, large-ish float, ensured FUD would make this trade wide. It traded wider.
15wks ago, Shinko had much-underperformed peer Ibiden, meaning downside gap risk from undisturbed was negative as spreads were wide. I reco’d a buy. Then 8wks ago, recommended taking profits.
Shinko had outperformed Ibiden, gross spreads had narrowed 5+% on JSR approval. Spreads are now 3.6% wider than at narrowest, but gap risk has widened as Shinko outperforms, Ibiden.

Toridoll (3397): Restaurant Chain on a Lege

Macro trends for restaurant chains are all negative: Food prices rising faster than restaurant unit prices, part-time wages rising faster than full-time.
Toridoll’s same store sales resuming long-term underperformance trend that was broken only briefly during the pandemic.
Stock trades at 3x the market average PBR, despite merely average RoE. Technical support has broken down.

Shareholder Returns Will Increase over June AGM, but Will Companies Hold up with Sluggish ROE?

In addition to too much cash on hand to begin with, ROE is expected to continue to grow at a sluggish pace, as shareholder returns are less than profit growth.
Given that we expect more companies to have stock price, P/B, and ROE on the agenda for the June AGM, more companies are expected to announce increases in shareholder returns.
However, ROE is unlikely to increase significantly. Shareholder returns are certainly too small, but a more serious problem is the inability to find growth investment opportunities.

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May 05

Daily Brief Japan: West Japan Railway Co and more

In today’s briefing:

Last Week in Event SPACE: Aussie Tax-Loss Selling, Austal, West Japan Railway, PICC/PICC P&C

Last Week in Event SPACE: Aussie Tax-Loss Selling, Austal, West Japan Railway, PICC/PICC P&C

By David Blennerhassett

Tax-Loss Selling‘s a subject of interest in Australia. Retail investors will take gains on stocks which run up in price, or get taken over, then look for losses to offset.
Investors are caught out as the Aussie government “approves” Hanwha Ocean (042660 KS) buyng Austal Ltd (ASB AU). There is evidently a lot more going on in the background.
West Japan Railway Co (9021 JP) announces a biggish buyback. One could buy dips, but one should probably not chase. For that, suggest this acts as a range trade.

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May 04

Daily Brief Japan: Oriental Land, TSE Tokyo Price Index TOPIX and more

In today’s briefing:

Updated Tool (30Apr24) & “Diff File Generator” For TSE “Mgmt Conscious of Capital Cost/Stock Price”
The Raising of Listing Criteria in the Growth Market Will Lead to Increased Investment Opportunities

Updated Tool (30Apr24) & “Diff File Generator” For TSE “Mgmt Conscious of Capital Cost/Stock Price”

In mid-January, the TSE announced a “name-and-shame” list where they listed all the companies which had put forth a disclosure about 【資本コストや株価を意識した経営の実現に向けた対応】. But they did not actually shame.
The list shows which companies have disclosed a policy/consideration. But no data/links. We are weeks ahead of the TSE and we have all the links.
We created a tool to name everyone, show their reports, provide links to every document, and now a new tool. Put in a name, see the difference between the Old/New Reports.

The Raising of Listing Criteria in the Growth Market Will Lead to Increased Investment Opportunities

Criteria for IPOs aren’t a major issue. TSE is concerned that many companies will be in jeopardy of being delisted if the criteria for maintaining listing are raised.
TSE will likely make “request” to Growth Market listed companies to increase their market capitalization if the criteria for maintaining listing are not raised.
From 2025, delisting and subsequent re-listing through M&A and MBOs is expected to increase, which will lead to more investment opportunities.

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May 03

Daily Brief Japan: Daiichi Sankyo, Lasertec Corp, Sumitomo Pharma and more

In today’s briefing:

Daiichi Sankyo (4568 JP) – We like the Focus on Oncology but Look for a Better Entry Point
Lasertec (6920 JP): Orders Up, Guidance Down
Sumitomo Pharma (4506 JP): FY24 Guidance Revised Lower; Further Cost Cuts in FY25 to Turn Profitable

Daiichi Sankyo (4568 JP) – We like the Focus on Oncology but Look for a Better Entry Point

By Avien Pillay

Cancer is the most common cause of death in Japan, and at 282.9 cases per 100 000 people, it ranks at the upper end of the global recorded range.
In 2020, Daiichi Sankyo embarked on transforming to a leading oncology specialist in terms of new drug development.
Daiichi Sankyo’s ADC pipeline comprises of six higher level drugs with a number of indications (sub-categories). This pipeline is part of a universe of 2499 oncology drugs in development.

Lasertec (6920 JP): Orders Up, Guidance Down

By Scott Foster

The share price has bounced back on strong 3Q orders and long-term optimism, but weak 4Q guidance calls the growth trajectory into question.
Guidance, which has sales dropping to about half what they were a year earlier, is based on the expected timing of customer acceptance of delivered equipment. It could be conservative.
At 75X EPS guidance for FY Jun-24, a rate of growth not visible in current trends has already been discounted. Current orders should translate into sales in 2026.

Sumitomo Pharma (4506 JP): FY24 Guidance Revised Lower; Further Cost Cuts in FY25 to Turn Profitable

By Tina Banerjee

Sumitomo Pharma (4506 JP) cut FY24 revenue guidance by 1% to ¥314.6B (-43% YoY) and raised operating loss guidance by ¥199B to ¥355B. Impairment loss of ¥180B negatively impacted bottomline.
Sumitomo has set FY25 revenue guidance at ¥338B (down 27% from MTBP 2027) and core operating profit at ¥1B (down 98% from MTBP 2027). The company suspended FY25 dividend.
The company will announce FY25 guidance for operating and net profits during the announcement of FY24 result, scheduled for May 14, 2024.

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May 02

Daily Brief Japan: West Japan Railway Co, Chilled & Frozen Logistics Holdings, TSE Tokyo Price Index TOPIX, Peptidream Inc and more

In today’s briefing:

JR West (9021 JP) – Shareholder Structure Means Large-Ish Buyback Could Have Impact
AZ-Com Maruwa Launches Hostile TOB on Chilled & Frozen Logistics (9099) – Expect More Fun To Come
Chilled & Frozen Logistics (9099 JP): AZ-COM Maruwa Calls the Board’s Bluff, Launches the Offer
TSE’s “Request” Is a Catalyst for a Final Decision on the Foundation of Years of Engagement
Peptidream (4587 JP): Steadily Riding the Next Wave of Drug Discovery

JR West (9021 JP) – Shareholder Structure Means Large-Ish Buyback Could Have Impact

Yesterday, West Japan Railway Co (9021 JP) announced FY23 earnings, a higher dividend, an update to the Medium-Term Management Plan (p10~), and a Buyback.
Short & Sweet: Revenues were +17.2%yoy, OP +114.1%, NP +1.6%. OPM was 11.0% and ROE 9.2% (both best since FY18). Guidance is Revenue up, OP down, NP tiny up.
The new FY25 (Mar26) OP guide in the MTMP is the old Mar28 target (mostly inbound tourism-driven). The Buyback is biggish. It is worth looking at the details.

AZ-Com Maruwa Launches Hostile TOB on Chilled & Frozen Logistics (9099) – Expect More Fun To Come

Chilled & Frozen Logistics Holdings (9099 JP) had been sending out questions, and trying to get AZ-Com Maruwa Holdings (9090 JP) to delay the start until at least late-May.
AZ-Com Maruwa answered questions (first and second set) and on the 24th, C&F asked AZ-Com to extend. They did not extend. AZ-Com announced the Tender Offer at ¥3,000 today.
C&F responded today saying the TOB is launched without C&F Board approval. Then they said some other things that might be disclosed when C&F’s Board presents its Target Opinion.

Chilled & Frozen Logistics (9099 JP): AZ-COM Maruwa Calls the Board’s Bluff, Launches the Offer

AZ-Com Maruwa Holdings (9090 JP) has satisfied the precondition for its hostile Chilled & Frozen Logistics Holdings (9099 JP) JPY3,000 offer. The offer closes on 17 June (31 business days).
AZ-COM Maruwa has called the Board’s bluff by providing sufficient time (extending the offer period from 20 to 31 business days) for a white knight to lob a competing bidder.
While a bump is probable, the shares already factor in a significant bumpitrage premium. A potential bump has a good chance of being lower than the last close.

TSE’s “Request” Is a Catalyst for a Final Decision on the Foundation of Years of Engagement

Many companies have low liquidity since listing, with nearly half of companies having major shareholders with over 20% ownership. Raising listing criteria should considered to improve quality of the market.
TSE seems to raise the listing criteria for Growth Market in 2025, when the transitional measures expire, but for Prime Market, TSE is likely to respond with a “request.”
Although TSE’s “request” may be the catalyst for increasing MBOs and dissolution of parent-subsidiary listings, engagement with overseas investors over years to resolve management issues was foundation of this trend.

Peptidream (4587 JP): Steadily Riding the Next Wave of Drug Discovery

By Tina Banerjee

Peptidream Inc (4587 JP) has obtained first-in-human imaging studies approval for its first in-house peptide radiopharmaceutical therapeutic program, PD-32766 targeting patients with clear cell renal cell carcinoma.
Novartis (NOVN SW) has expanded peptide discovery collaboration with Peptidream. The expanded partnership could bring up to $2.7B in milestone payments plus royalties to Peptidream.
In 2023, Peptidream reported revenue of ¥29B, up 7% YoY, with radiopharmaceutical revenue growing 40% YoY to ¥16B. For 2024, the company guided for revenue of ¥35B, up 22% YoY.

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May 01

Daily Brief Japan: Keisei Electric Railway Co, Sumitomo Chemical, Shin Etsu Chemical, Ono Pharmaceutical and more

In today’s briefing:

Keisei Electric Rail (9009): For Relative Value Trade
Sumitomo Chemical (4005): Up Is Down
Shin-Etsu (4063) – Too High, Too Fast
Ono Pharmaceutical (4528 JP): Deciphera Acquisition Will Not Bring Immediate Respite

Keisei Electric Rail (9009): For Relative Value Trade

By Henry Soediarko

The activist investor is back and has demanded further action to unlock value from Keisei Electric Railway Co (9009 JP) management.
Operational numbers are still healthy, but growth is not as large due to the high base.
Immediate pressure to divest Oriental Land thus short Oriental Land (4661 JP) and long Keisei.

Sumitomo Chemical (4005): Up Is Down

Sumitomo issued new guidance for the year to 3/25 that was 40% higher than consensus estimates, but the stock cratered almost 5%.
We were able to think of at least 6 explanations for this odd reaction – all of them irrational.
A reasonable person listening to the call should have been pleased by almost all that was new information.

Shin-Etsu (4063) – Too High, Too Fast

On April 24, Shin-Etsu (4063) posted its fifth consecutive OP decline and guided for a sixth, but the stock has outperformed Topix by 22% in the past 12 months.
OP for the year ended March 2024 was JPY141.5bn, vs. consensus estimates of JPY168.9bn. This was the fifth consecutive miss, and the fourth of more than 10%.
The Chinese economy is killing the company’s core core Polyvinyl Chloride Resins business and seemingly interminable inventory issues are holding back a recovery in the semiconductor materials business.

Ono Pharmaceutical (4528 JP): Deciphera Acquisition Will Not Bring Immediate Respite

By Tina Banerjee

Ono Pharmaceutical (4528 JP) is acquiring Deciphera Pharmaceuticals (DCPH US) for $25.60/share in cash through a tender offer. The total equity value of the acquisition is approximately $2.4B.
Ono is expected to reap the benefit of Deciphera acquisition earliest from FY27. In the short-run, the company’s major problem of loss of revenue will not be addressed.
Ono needs to stretch its balance sheet to fund Deciphera acquisition. The acquisition will be earnings dilutive for Ono. Pricey valuation of the deal is another deterrent.

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Apr 30

Daily Brief Japan: Kfc Holdings Japan, Mimasu Semiconductor Industry, Toyo Suisan Kaisha, Mitsubishi Motors, Keisei Electric Railway Co, M3 Inc, Simplex Holdings and more

In today’s briefing:

Carlyle Reportedly To Buy KFC Japan (9873) From MitCorp (8058) – Deal Likely Imminent
KFC Holdings Japan (9873 JP): Carlyle Edging Towards a Tender Offer
Mimasu Semiconductor (8155 JP): Shin-Etsu (4063 JP)’s Pre-Conditional Tender Offer
Toyo Suisan: Activist Advocates For Legacy Divestiture & More Capital for Global Expansion
Quiddity JPX-Nikkei 400 Rebal 2024: End-Apr 2024 Estimates
Keisei Electric Railway’s Problems Are Part of a Cross-Shareholding Dissolution Process
M3 4Q Results: Earnings Miss and Further Slowdown Seems Unavoidable
Simplex Holdings (4373) – Compounding Business with a Consulting Growth Engine

Carlyle Reportedly To Buy KFC Japan (9873) From MitCorp (8058) – Deal Likely Imminent

On 28 Feb, the Nikkei reported (an article I missed) Mitsubishi Corp (8058 JP) would seek to unload its 35% stake in Kfc Holdings Japan (9873 JP)
The stock popped, then continued to rise further. After the close Friday, the Nikkei reported MitCorp was close to a deal with Carlyle. A deal is apparently expected imminently.
I expect this could be a “Split Price Deal” (like Hitachi Transport and Pasona).

KFC Holdings Japan (9873 JP): Carlyle Edging Towards a Tender Offer

The Nikkei reports that Carlyle is in the final stages of buying Mitsubishi Corp (8058 JP)’s 35% stake in Kfc Holdings Japan (9873 JP), which will result in a tender offer.
The structure will likely be similar to the KDDI Corp (9433 JP)/ Lawson Inc (2651 JP) tender, where MitCorp provides an irrevocable NOT to accept but vote for share consolidation.
The shares have been up 33.6% since Nikkei flagged the sale on 28 February. KFC Japan will trade in line with peers’ multiples at a JPY5,700 offer.

Mimasu Semiconductor (8155 JP): Shin-Etsu (4063 JP)’s Pre-Conditional Tender Offer

Mimasu Semiconductor Industry (8155 JP) recommended a pre-conditional tender offer from Shin Etsu Chemical (4063 JP) at JPY3,700, a 14.4% and 35.4% premium to the last close and undisturbed price, respectively.
The pre-condition, which cannot be waived, is approval under the competition laws of Japan and Taiwan. The tender offer is expected to start in late July.
While the offer is below the mid-point of the IFA DCF valuation range and the requested price, it is 7.7% higher than the all-time high of JPY3,435. This is done.

Toyo Suisan: Activist Advocates For Legacy Divestiture & More Capital for Global Expansion

By Oshadhi Kumarasiri

Japanese instant noodle manufacturer Toyo Suisan Kaisha (2875 JP) has become the newest target for activist investors in Japan.
Nihon Global Growth Partners Management, Inc argues that Toyo Suisan’s investments are overly concentrated in its legacy businesses, despite these ventures yielding low returns.
Therefore, they are recommending that Toyo Suisan exit its legacy businesses, increase the payout ratio to 40%, and use some of its excess cash for a share buyback of ¥20bn.

Quiddity JPX-Nikkei 400 Rebal 2024: End-Apr 2024 Estimates

By Janaghan Jeyakumar, CFA

JPX-Nikkei 400 is composed of common stocks listed on the Tokyo Stock Exchange. It is a free-float-adjusted market-value-weighted (capped) index composed of 400 constituents.
A periodic review is conducted by the Index providers, the JPX Group and Nikkei Inc, in August every year. We look at the rankings of the potential ADDs/DELs every month.
Below is a look at potential ADDs/DELs for the JPX-Nikkei 400 index rebal event to come in August 2024 based on trading data as of end-April 2024.

Keisei Electric Railway’s Problems Are Part of a Cross-Shareholding Dissolution Process

By Shifara Samsudeen, ACMA, CGMA

A solution for Keisei, similar to case of parent-subsidiary listing, is cashing OLC shares to raise profitability and growth potential of its business, to eliminate the distortion in market capitalization.
There is a corporate governance issue in that OLC is accepting board members from Keisei, which has below 20% equity and does not clearly explain the synergies of the business.
This can be viewed as part of dissolving cross-shareholdings where the company wants to obtain voting advantage without business synergies and cannot find opportunities to spend the cash it sells.

M3 4Q Results: Earnings Miss and Further Slowdown Seems Unavoidable

M3 Inc (2413 JP) reported 4Q and Full-year FY03/2024 results. Earnings missed both guidance as well as consensus due to slowdown in Medical Platform and Overseas businesses.
Medical Platform’s earnings declined further in 4Q with spending cuts by pharma companies, and it seems that the segment’s earnings will further decline going forward.
M3’s share price is down 18% YTD, and we do not see many catalysts to drive a rally in the company’s share price.

Simplex Holdings (4373) – Compounding Business with a Consulting Growth Engine

By Astris Advisory Japan

Positioned for sustained growth – Q1-4 FY3/24 results were in line with guidance, with the company generating consistent and sustainable double-digit growth for sales and earnings demonstrating the company’s characteristics as a compounding business.
We believe its brand, human capital, and technological innovation are competitive advantages that generate shareholder value, with free cash flow recovering YoY to ¥7.34bn from ¥3.26bn in FY3/23.
Future capital allocation points to business investment in staff and R&D and scope for M&A to support growth and improve shareholder returns.

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Apr 29

Daily Brief Japan: Sumitomo Chemical, Kokusai Electric and more

In today’s briefing:

Sumitomo Chemical (4005): Potential Posterchild of Japan’s Resurgence
ECM Weekly (29th Apr 2024) – IDEA, Kokusai, J&T, Krafton, Horizon, Oceana, ChaPanda, 99 Speed, Afcon

Sumitomo Chemical (4005): Potential Posterchild of Japan’s Resurgence

Sumitomo Chemicals aims to transform from a cyclical company with low market share in declining markets into a focused entity with high market share in secular growth markets.
We estimate that the stock’s fair value is about 140% above the current price.
Results meeting on April 30 should confirm that company is on track in returning to positive cash flow and selling off core assets.

ECM Weekly (29th Apr 2024) – IDEA, Kokusai, J&T, Krafton, Horizon, Oceana, ChaPanda, 99 Speed, Afcon

By Sumeet Singh

Aequitas Research puts out a weekly update on the deals that were covered by the team recently along with updates for upcoming IPOs.
On the IPO front, Sichuan Baicha Baidao Industrial (2555 HK) and Mobvoi (2438 HK)‘s listing doesn’t really help the HK sentiment.
On the placement front, Vodafone Idea (IDEA IN) managed to do well, while Krafton (259960 KS) followed Samsung Electronics (005930 KS) footsteps.

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Apr 28

Daily Brief Japan: Roland DG Corp, Nikkei 225, Keisei Electric Railway Co, TSE Tokyo Price Index TOPIX and more

In today’s briefing:

Roland DG (6789 JP): Taiyo Bumps as Brother (6448 JP) Now Faces a Dilemma
EQD | Nikkei’s Downtrend Could Continue in May (But the Bottom Is Near)
Last Week in Event SPACE: HK Southbound, Jardine Cycle, Keisei/Oriental Land, BHP/Anglo American
Few Companies Have Started to Move Yet, but Can They Raise R & D Investment to Regain Pricing Power?

Roland DG (6789 JP): Taiyo Bumps as Brother (6448 JP) Now Faces a Dilemma

Roland DG Corp (6789 JP) has re-recommended Taiyo’s revised offer of JPY5,370, which is 6.7% higher than its previous JPY5,035 offer and 3.3% higher than Brother Industries (6448 JP)’s JPY5,200 offer.
The Board articulates a compelling case on Brother’s offer dis-synergies, which will help swing some shareholder opinion towards Taiyo (irrespective of the price).
Brother could bump, but it would not address the issue of satisfying the condition precedent (non-completion of Taiyo offer) and securing the Board’s recommendation.

EQD | Nikkei’s Downtrend Could Continue in May (But the Bottom Is Near)

By Nico Rosti

The Nikkei 225 (NKY INDEX) is closing the month of April in negative territory, first month down after 3 months up.
Our seasonal model indicates that May could also close down, but the index should find strong support in the 37770-36750 price area.
The month of May is a coin flip: the index could close up or down, caution is advised.

Last Week in Event SPACE: HK Southbound, Jardine Cycle, Keisei/Oriental Land, BHP/Anglo American

By David Blennerhassett

The CSRC has announced five capital market cooperation measures for the Hong Kong Southbound Connect programs including RMB dual counters and REITs.
Jardine Cycle & Carriage (JCNC SP)‘s current implied stub value and simple ratio are both highly elevated.
A simple Keisei Electric Railway Co (9009 JP)model says “this doesn’t present me with enough upside to warrant it unless I am also really bullish Oriental Land (4661 JP).”

Few Companies Have Started to Move Yet, but Can They Raise R & D Investment to Regain Pricing Power?