Japan

In this briefing:

1. Semiconductor WFE Billings Decline Reverses Course in December, First Bullish Signal in Six Months
2. Global Ex-U.S. Equity Strategy: MSCI EM in Early Stages of Bottoming
3. Japan Stock Weekly
4. GER Upcoming EVENTS and Earnings Calendar
5. LNG Producers Outperform as More LNG from the US Is Coming into the Market

1. Semiconductor WFE Billings Decline Reverses Course in December, First Bullish Signal in Six Months

On January 24’th 2019, SEMI announced that Wafer Fab Equipment (WFE) billings for North America-based manufacturers of semiconductor equipment amounted to $2.11 billion worldwide in December 2018. This represents an 8.5% MoM increase, although still lower YoY by 12.1%. December’s data marks the reversal of a six month long downtrend in monthly billings, a bullish signal that the WFE segment has bottomed and better times lie ahead. 

This latest billings data coincides with WFE bellwether Lam Research (LRCX US)‘s latest earnings report which slightly exceeded guidance with revenues of $2.5 billion, up 8.7% sequentially. On the call, company executives stated that first quarter CY 2019 would mark the trough from a gross margin perspective, strongly implying that it would be the same for revenues. 

LRCX shares surged 15.7% in overnight trading triggering a rising tide that lifted large swathes of semiconductor stocks, particularly those within the WFE sector. Two swallows don’t necessarily mean it’s Spring, but for now, the markets are betting that it does. 

2. Global Ex-U.S. Equity Strategy: MSCI EM in Early Stages of Bottoming

Our overall global outlook remains cautious and continued downward pressure on global equities remains our expectation. One bright spot is EM (more on this below), which continues to give us hope that global equities can bottom out.  We provide a technical appraisal of major markets and highlight actionable setups within the global Utilities and Staples Sectors.

3. Japan Stock Weekly

Tosei (8923) BUY – a very cheap small cap real estate developer 

Hikari Tsushin (9435) BUY – 25% off recent highs, this is essentially a stock business that will continue to add to its installed base and grow profits. 

Don Quijote (7532) BUY – oversold on the failure of FamilyMart bid and poor December sales. 

4. GER Upcoming EVENTS and Earnings Calendar

Next week promises to be a large catalyst driven week, with Apple Inc (AAPL US), NTT Docomo Inc (9437 JP) and Tesla Motors (TSLA US) expected to report results, among others. We have provided a list below of the key equity catalysts for next week as well as potential drivers for M&A deals and stubs. If you are interested in importing this directly into Outlook or have any further requests, please let us know. 

Kind regards, Rickin Arun and Venkat

5. LNG Producers Outperform as More LNG from the US Is Coming into the Market

On the back of a growing LNG global trade volume, LNG producers have outperformed the US market and their E&P peers including the oil majors over the last two years. As global LNG production reaches a record 316m tonnes in 2018, a 9.6% increase year on year, new capacity additions set to come online in the next three years will be dominated by the US. This insight will examine how the recent entry of US LNG in the market is transforming the LNG industry and which emerging players are driving the change.

Exhibit 1: LNG Producers Outperform the US Market

In this briefing:

1. Global Ex-U.S. Equity Strategy: MSCI EM in Early Stages of Bottoming
2. Japan Stock Weekly
3. GER Upcoming EVENTS and Earnings Calendar
4. LNG Producers Outperform as More LNG from the US Is Coming into the Market
5. KDDI Deal for Kabu.com (8703 JP) Coming?

1. Global Ex-U.S. Equity Strategy: MSCI EM in Early Stages of Bottoming

Our overall global outlook remains cautious and continued downward pressure on global equities remains our expectation. One bright spot is EM (more on this below), which continues to give us hope that global equities can bottom out.  We provide a technical appraisal of major markets and highlight actionable setups within the global Utilities and Staples Sectors.

2. Japan Stock Weekly

Tosei (8923) BUY – a very cheap small cap real estate developer 

Hikari Tsushin (9435) BUY – 25% off recent highs, this is essentially a stock business that will continue to add to its installed base and grow profits. 

Don Quijote (7532) BUY – oversold on the failure of FamilyMart bid and poor December sales. 

3. GER Upcoming EVENTS and Earnings Calendar

Next week promises to be a large catalyst driven week, with Apple Inc (AAPL US), NTT Docomo Inc (9437 JP) and Tesla Motors (TSLA US) expected to report results, among others. We have provided a list below of the key equity catalysts for next week as well as potential drivers for M&A deals and stubs. If you are interested in importing this directly into Outlook or have any further requests, please let us know. 

Kind regards, Rickin Arun and Venkat

4. LNG Producers Outperform as More LNG from the US Is Coming into the Market

On the back of a growing LNG global trade volume, LNG producers have outperformed the US market and their E&P peers including the oil majors over the last two years. As global LNG production reaches a record 316m tonnes in 2018, a 9.6% increase year on year, new capacity additions set to come online in the next three years will be dominated by the US. This insight will examine how the recent entry of US LNG in the market is transforming the LNG industry and which emerging players are driving the change.

Exhibit 1: LNG Producers Outperform the US Market

5. KDDI Deal for Kabu.com (8703 JP) Coming?

Yesterday morning, the Nikkei surprised everyone with an article saying KDDI Corp (9433 JP) was holding negotiations to acquire a stake of up to just under 50% in Kabu.Com Securities (8703 JP), which is the online brokerage entity of Mitsubishi UFJ Financial Group (8306 JP) with 1.1 million customers. 

Kabu.com shares were bid limit up all day long and closed at ¥462, which is a 10+ year closing high. 

The idea is not a new one. The mobile telecommunications market in Japan is mature, and one of the few ways Type 1 telecom providers can grow is by adding content through the “pipes.” 

KDDI already has an investment in an online banking 50/50 joint venture with MUFG called Jibun Bank (“My Bank” or “Myself Bank”) which it launched in 2008. KDDI established a smartphone-based asset management service with Daiwa Securities Group (8601 JP) just under a year ago, where KDDI owns 66.6% and Daiwa 33.4%. This was to attract younger customers to savings products accessible through an app in order to make those customers stickier over the long-term. KDDI also bought into Lifenet Insurance Co (7157 JP) in 2015 through a capital raise, and is now its largest shareholder at just over 25% (a decent (and recent) presentation of the company is here). About six months ago, KDDI injected ¥6bn (link is Japanese) into Japanese financial services company Finatext to help spark their new service of a ¥0 commission brokerage. I would note that Finatext and partner (now sub) NOWCAST launched an algorithmic personal asset management advisory service using for kabu.com Securities in 2016. 

Owning a stake in a broker would go a long ways towards providing comprehensive financial services access by smartphone under a KDDI-owned profit umbrella.

Is a deal like this feasible? Reasonable? Likely?

The two companies’ first response was pretty standard. This was the version from KDDI:

• 当社は、カブドットコム証券と金融事業においてさまざまな可能性を検討していますが、決まった事柄 はございません. 
• KDDI is considering various possibilities in financial business with kabu.com Securities, however, there is no determined facts. [a better translation of the Japanese is “however… no decisions have been made”]

This is pretty standard in Japanese corporate “clarifications.” There are, in fact, no ‘decisions’ unless a board meeting has been convened and put their stamp on it.

But the Japanese market will look at a comment like this and figure that where there is smoke there is fire.

In this briefing:

1. Japan Post Holdings Basing Cycle with Clear Sell and Buy Levels
2. Recruit Holdings Placement – A Tiny, Long Overdue Sell Down
3. Korean Stubs Spotlight: A Pair Trade Between Amorepacific Group & Shiseido
4. Inventory Clearance and the Semiconductor Cycle
5. Shinmaywa Own Share Tender Offer at Premium

1. Japan Post Holdings Basing Cycle with Clear Sell and Buy Levels

Japan Post Holdings (6178 JP) rise is moving into an exhaustive resistance zone and due for a hard give back cycle.

Tactical buy supports are compelling for a bigger upside drive given the successful macro backswing support test and ascent that very often opens the way for the macro cycle to make headway, once a corrective cycle terminates. It is this corrective cycle that shows promise for an entry point.

Japan Post Holdings (JPH) does have a short history of volatile swings and will be the challenge within an ongoing basing cycle. We have well defined levels to trade this range tactically while aligning some strong risk pivot supports to reign in risk.

Macro pivot support will define the long term trend for JPH.

2. Recruit Holdings Placement – A Tiny, Long Overdue Sell Down

Toppan Printing (7911 JP) is looking to sell 10.5m shares in Recruit Holdings (6098 JP) for about US$263m. Post-placement, Toppan Printing will still have about 6% stake (103m shares) in Recruit Holdings.

The deal scores well on our framework owing to its strong price and earnings momentum and stellar track record. However, it was offset by its relatively expensive valuation compared to peers. The selldown by Toppan Printing is tiny relative to the three-month ADV which the market would likely be able to absorb. The sell down is also long overdue considering that Toppan Printing skipped the 2016 secondary offering in which many shareholders have participated.

3. Korean Stubs Spotlight: A Pair Trade Between Amorepacific Group & Shiseido

In this report, we provide an analysis of our pair trade idea between Amorepacific Group (002790 KS) and Shiseido Co Ltd (4911 JP). Our strategy will be to long Amorepacific Group (APG) and short Shiseido. As mentioned in our report, Korean Stubs Biweekly Sigma σ (#1): The Inaugural Edition, our base case strategy is to achieve gains of 8-10% on this pair trade. Our risk control is to close the trade if it generates 4-5% in combined losses. Cost of commissions are not included in the calculations and closing prices as of January 23rd are used in our pair trade. [Long APG – $0.5 million; Short Shiseido – $0.5 million for total of $1.0 million].

The following are the major catalysts that could boost APG shares higher than Shiseido shares within the next six to twelve months: 

• Amorepacific Group shares are extremely oversold and forming a base
• THAAD is no longer an issue
• Amorepacific Group’s NAV discount 
• Attractive relative valuations
• Amorepacific’s new headquarters building distraction out of the way
• Chinese tourists are coming back to Korea & slower growth rate of visitors to Japan

4. Inventory Clearance and the Semiconductor Cycle

A very normal part of the semiconductor cycle is inventory clearance.  DRAM makers are starting to discuss this in their earnings calls.  What they are NOT telling their investors is how significant this is to the onset of a price collapse, perhaps because they don’t understand it themselves.  This Insight will help readers to learn how and why an inventory clearance helps ratchet a budding oversupply into a full-blown glut.

5. Shinmaywa Own Share Tender Offer at Premium

On 21 January 2019, my favorite manufacturer of garbage trucks, vertical carousel parking infrastructure, sea planes, and jetways – Shinmaywa Industries (7224 JP) – announced a share buyback. This was not unusual. The company bought back shares last year and indicated earlier this year it would seek a relatively high return of capital to shareholders.  In the last five months of 2018, the company bought back 3.6% of shares outstanding, and cancelled those shares at the end of December 2018). 

Indeed, the company on January 9th this year announced a revised dividend forecast for the year ending March 2019. The dividend was lifted by 1 yen. 

The company also announced a new policy of shareholder returns for the year starting April 1. 

While taking into consideration strategic business investment for the future and the internal reserves required for maintaining and expanding the Company’s management foundation, we are aware that appropriate return of profit to shareholders is an important management issue. In that regard, in our Medium-term Management Plan for the three years to the end of the fiscal year ending March 31, 2021, “Change for Growing, 2020,” (the “Medium-term Management Plan”), which was announced in May 2018, we set up a basic payout ratio on a consolidated basis of 40-50% and carrying out flexible acquisition of treasury shares with a focus on improvement of capital efficiency as basic shareholder return policies.

The company acknowledged the above and announced it would seek to add a commemorative (70th anniversary of incorporation and 100th anniversary of being in business) special dividend of ¥45/share, on top of the normal interim dividend (which is likely to be ¥18-19/share) paid to shareholders as of the end of September 2019.

That was nice, but that was little preparation for the news of 21 January.

• On that day, the company announced yet another increase in dividend forecast for the current fiscal year, raising the H2 dividend – which had just been raised from ¥18/share to ¥19/share less than two weeks ago – to ¥27/share.
• The company also announced a Tender Offer to buy back 26.666mm its own shares at a roughly 10.5% premium to last trade.  

That’s a big tender offer. It is ¥40bn and 29.0% of shares outstanding. 

Regular readers of Smartkarma will know that I will have comments on situations like these. 

In this briefing:

1. Japan: What to Buy & Sell if the ¥ Rises to 90

1. Japan: What to Buy & Sell if the ¥ Rises to 90

Source: Japan Analytics

CURRENCY DRIVER – The ¥/US$ cross rate has strengthened by 5.3% since the recent US$ peak of ¥114.20 on November 12th 2018, which has led some FX and technical specialists (including Thomas Schroeder  here on Smartkarma) to call for a more sustained bout of US$ weakness. A period of Yen strength is far from a consensus forecast for most Japanese equity investors, and historically a stronger Yen has resulted in a weaker Japanese equity market. The three Yen ‘peaks’ highlighted by the vertical lines in the chart above all coincided with medium-term lows in TOPIX.  

¥ < 100 – If we isolate only the 1,484 days in the last forty years when the USDJPY cross has traded above ¥100, the average TOPIX index is 975, which would imply 36% downside for Japanese equities were the Yen to rise above ¥90. Nevertheless, the three Yen peaks we have isolated have proved to be excellent entry points with the subsequent trough-to-peak performance being 28% in 1995~1996, 108% in 2011~2015 and 48% in 2016~2018. Long-term Japan ‘bulls’ should welcome the coming US dollar bear market. 

EARNINGS DRIVER – The USDJPY cross remains an important driver of earnings and earnings momentum in Japan. As measured by our Results and Revision Scores, there is a good correlation between the trends in both scores and the year-on-year change in USDJPY lagged by six months, especially around significant turning points for the cross rate (marked by the vertical lines). The Results and Revision Scores have declined since January 2018 in line with the stronger Yen. A move up to above the ¥90 level would, without doubt, take both scores into negative territory again- the only question being, are we replaying 2009/10 or 2016/17? 

CURRENCY CORRELATIONS – In the DETAIL below, we list the larger capitalisation companies whose share price performance most closely correlated with the dollar-yen cross rate. As a preview, the most correlated larger capitalisation company that has been listed since 2006 is, unsurprisingly, Toyota Motor (7203 JP).

THE FOREIGN CURRENCY TRANSLATION ADJUSTMENT – We also go one step further and use the ‘Foreign Currency Translation Adjustment’ that forms part of Other Comprehensive Income (which has been disclosed in corporate balance sheets and income statements since 2001 and 2011, respectively) to measure the extent of each company’s global business and the embedded currency risk. The correlation of the aggregate FCTA for all non-financial companies is, as would be expected, reasonably tight after adding two-month lag for the reporting cycle. As these amounts are directly deducted from Net Assets for companies adopting JGAAP and from Shareholders’ Equity for those companies reporting under SEC or IFRS standards, the impact on valuations cannot be ignored.

In this briefing:

1. Smartkarma’s Week that Was in JP/​KR: BGF, Japan Telcos, NCSoft, Nissan, and Nexon
2. TRADE IDEA: Amorepacific (002790 KS) Stub: A Beautiful Opportunity
3. Prored Partners (7034) – A Fast Growing Recent Listing in Japan.
4. Ten Years On – Asia’s Time Is Coming, Don’t Miss The Boat
5. NTT Buyback Almost Done

1. Smartkarma’s Week that Was in JP/​KR: BGF, Japan Telcos, NCSoft, Nissan, and Nexon

After a holiday hiatus where markets were slow and somewhat quiet and the number of insights published and read dipped, we resume your regularly scheduled service.

Smartkarma saw just over 110 insights published last week, with an additional 35 published between Friday afternoon and Sunday evening. The pace is picking up. 

Across the platform, almost four dozen thematic, macro, and economics pieces were published by 30 insight providers, and two dozen-plus insights were published on Japan and Korea (note that the prior week, Japan was effectively on holiday the whole week).  

Insights published on Japan include…

And on Korea….

2. TRADE IDEA: Amorepacific (002790 KS) Stub: A Beautiful Opportunity

Take out an ad in a magazine or pay a one of the Wondergirls to post an Instagram photo of herself using our makeup? How do we get Americans and Europeans to want our bubble tea sleeping packs and panda-shaped palettes? All valid questions for K-beauty companies in the midst of a global expansion.

Korean beauty products powerhouse, Amorepacific is going through some growing pains at the moment. In the 3Q18 the group reported a YoY sales increase of 6% but OP tumbled 24% due to increased personnel and marketing costs. In a management policy statement last week, Chairman Suh outlined the problems the group is encountering as it copes with reaching customers in a world where online and offline customer interaction is changing. 

The stub is now trading at its widest discount to NAV in at least 3 years and has reached 22% discount to its Sum of the Parts NAV by my calculations. This level represents a level 1.5 standard deviations below its long-term average and also offers compelling value. 

In this insight I will detail:

• an actionable market-neutral trade idea
• an analysis of the various business units of Amorepacific
• reasons for the under-performance of Amorepacific parent and a sign of a rebound
• a recap of ALL my stub trade ideas on Smartkarma, including track record of performance

3. Prored Partners (7034) – A Fast Growing Recent Listing in Japan.

Prored Partners is a business consulting company founded in 2009 by the CEO, Mr Satani (who retains 60% of the equity). Prior to setting up Prored, he worked as a business consultant at a consultancy firm subsequently acquired by PwC Consulting. The shares were registered on the Mother’s exchange at the end of July 2018. Unfortunately, it is a micro-cap (market cap Y24bn) but should be of interest to those looking for a very fast growing small cap name. It trades on 17x our forecasts for this year to 10/19.  The company has been growing at a fast pace over the last few years. We expect this strong rate of growth to continue, see below.

4. Ten Years On – Asia’s Time Is Coming, Don’t Miss The Boat

We noted in   Ten Years On – Asia Outperforms Advanced Economies Asia’s economies and companies have outperformed advanced country peers in the ten years to 2017.  Growing by 6.8%, real, through the crisis the region is 188% larger in US dollar terms while US dollar per capita incomes 170% higher compared with 2007. In this note we argue even though Asian stock markets have underperformed since 2010 and the bulk of global capital flows have gone to advanced countries, Asia’s time is coming. Valuations are cheap. Growth fundamentals strong. There are few external or internal imbalances. Macroeconomic management has been better than in advanced economies and the scope to ease policy to ward off headwinds in 2019 is greater. China has already started.

5. NTT Buyback Almost Done

On November 6th, NTT (Nippon Telegraph & Telephone) (9432 JP)announced a ¥150 billion buyback program, and NTT Docomo Inc (9437 JP)announced that its very large ¥600 billion buyback program presented days before would be done through a single below-market-price Tender Offer where NTT was expected to be the only seller.  That left NTT buying shares on market and NTT Docomo buying shares off-market in the immediate future. 

The Tender Offer went through as planned (though NTT sold a tiny trifle less than expected). 

On January 7th, NTT announced it had repurchased 8.4mm shares for ¥38.8 billion, leaving only ¥15.35 billion to repurchase in this program. That is worth about 7-8 trading days of buying. The buyback is therefore almost done. 

A hint as to the future came in a Nikkei article in December. It may be many months before we see more NTT on-market buybacks. 

In this briefing:

1. NCsoft – A Strategy for Trading in 1H 2019
2. Japan Hotel REIT Placement – Biggish Acquisition, Smallish Accretion
3. The GER Weekly EVENTS Wrap: Don Quijote, M1, Healius and Upcoming M&A Catalysts
4. Screening the Silk Road: Q1-2019 Small-Mid Cap GARP (Zulu Warrior Screening)
5. Japan: Moving Average Outliers – New Year Rally

1. NCsoft – A Strategy for Trading in 1H 2019

In this report, we will explain our strategy for trading NCsoft Corp (036570 KS) shares in 2019. NCsoft is expected to launch five new mobile games in 2019 including “Lineage 2M”, “AION 2”, “Blade & Soul 2”, “Blade & Soul M”, and “Blade & Soul S”. These five new games are based on its existing MMORPG franchise games. The company is hoping to release all five of these new mobile games in 1H 2019. 

Lineage 2M, which is perhaps the most anticipated mobile game among these five games, is expected to be launched in 2Q19. Traders are starting to gear up for the launch of this important game in the coming months. Many investors are likely to take the “buy on rumor and sell on news” strategy, which in this case the news would refer to the launch of the Lineage 2M game. 

Nonetheless, in this case, we believe that because many investors may be getting ready to sell NCsoft near the launch date of Lineage 2M, many savvy investors are likely to sell their shares a few days/weeks earlier than the actual launch date. At this point, the most likely period as to when Lineage 2M may be launched is in May 2019. As a result, a good time to consider selling NCsoft may be sometime in March/April 2019. 

2. Japan Hotel REIT Placement – Biggish Acquisition, Smallish Accretion

Japan Hotel Reit Investment (8985 JP) (JHR) plans to raise around US$300m/JPY33bn to part fund the acquisition of Hilton properties located in Tokyo and Osaka.

We have previously covered four other capital raising by JHR:

• US$170m in Jun 2017, Japan Hotel REIT Placement – An Accretive Acquisition, JGB 10Y Yield Seems Stable
• US$340m in July 2016, Japan Hotel REIT – YEN a Bigger Driver than the Acquisitions,
• US$120m in Jan 2016, Japan Hotel REIT – Acquisition to Aid DPU Growth, but RMB Needs to Hold Up for the Stock to Perform, and
• US$230m in Jan 2015, Japan Hotel REIT (8985 JP) – Acquisition to aid DPU growth; take the deal

The prior-deals have given mixed bag results over the short-term. In this insight, we will run the deal through our framework and analyse past performance.

3. The GER Weekly EVENTS Wrap: Don Quijote, M1, Healius and Upcoming M&A Catalysts

In this week’s GER M&A wrap, we highlight the dwindling likelihood of a follow-on deal for Don Quijote Holdings (7532 JP) , which is now trading below terms. Secondly, we take a contrarian view on the M1 Ltd (M1 SP) deal and contend there is less likely to be a bidding war. Finally, we update on rejected by Healius (HLS AU) and provide a comprehensive list of upcoming catalysts for near-term M&A deals. 

The rest of our event-driven research can be found below. 

Best of luck for the new week – Rickin, Venkat and Arun

4. Screening the Silk Road: Q1-2019 Small-Mid Cap GARP (Zulu Warrior Screening)

• Value made a comeback, but growth remains core: In May 2018, we examined the divide between value and growth stocks, ( Notes from the Silk Road: Small-Mid Cap Screening for Zulu Warriors). As Q3 unfolded, this eventuated with a +7.5% reversal in favour of value stocks, only to see growth resume dominance in October and November.
• The optimal value/growth style dynamic: We feel exposure to growth at a reasonable price (GARP) coupled with a healthy FCF yield (via our amended Zulu Screen) should provide some healthy medium to long term returns for investors.
• The Screen’s Risk: The Zulu Screen relies on analyst estimates. When market sentiment is weak and forecasts are not amended in a timely manner, the screen is susceptible to mis-selection.
• Q2 2018 screening list succumbed to volatile markets: This was seen in our May screen with our list posting on average a 30% decline in share price, relative to the broader Asia-Pacific Ex-Japan declining 13.6% and the Asia Pacific index by 11.8%.
• Are there reasons for the underperformance? 10 of the 19 stocks in the May screen were from Hong Kong, which saw the Hang Seng Index (HIS) decline 16% over the same period. The decrease seems due to concern over trade wars and doubts about the China economy. Our key approach to stock selection is to take a medium-to-long-term view as well as focus on quality ranked stocks relative to their peers. This is highlighted via the average stock rank of the group declining only 15.8% from 89.6 to 75.5 points.
• Our Q1 2019 screen selected only 9 stocks. Of the 9 stocks identified, the average PEG Ratio was 0.4x, the price to FCF yield was 11% and ROCE was 25%. Stocks were selected from Australia, New Zealand, India, Korea, Japan, Hong Kong, Taiwan and Singapore. Cowell Fashion Company from Korea was the only remaining stock from our May screening.

5. Japan: Moving Average Outliers – New Year Rally

MARKET COMPOSITE

NEW YEAR RALLY – From the December 25th’s lows of 8% by number and 11% by value, the percentages of Japanese stocks above the weighted sum of moving averages have recovered to 14% by number and 20% by value – just on the ‘buying zone’ line. As we expected, the Total Market Value has rallied 8.7% and looks to have some further to run, especially if the Yen reverses some of its recent strength. The Bank of Japan provided a ‘helping hand’ on both 4th and 10th January, the only days this year so far on which the market declined. 

SECTORS

SECTOR BREAKDOWN – The top six sectors measured by the percentage above the weighted average of 5-240 Days remain, predictably, domestic and defensive – REITs, Information Technology, Media and Utilities continue from our previous review with Healthcare and Transportation replacing Food, Beverages and Tobacco and Internet Content & Services. Equally predictable is the bottom half-dozen. Banks, Autos, Metals, Electrical Equipment, and Chemicals remain from 23rd December Moving Average Outliers Insight, with Building Materials replacing Non-Bank Finance. Over the last trading five days, however, there has been a noticeable reversal with Autos, Electrical Equipment, and Machinery all over ’55’ while Other Consumer Products, Restaurants, Telecommunications and Food, Beverages & Tobacco are all below ’40’.

COMPANIES

COMPANY MOVING AVERAGE OUTLIERS – As with the market and sectors, our moving average outlier indicator uses a weighted sum of the share price relative to its 5-day, 20-day, 60-day, 120 day and 240-day moving averages. Extreme values are weighted sums greater than 100% and less than -100%. We would caution that this indicator is best used for timing shorter-term reversals and, in many cases, higher highs and lower lows will be seen. 

THE +/-100% CLUB – The number of extreme negative outliers reached a peak for 1,352 on December 25th and has since returned to ‘normal’ levels. We suggested in the previous Insight in this series that such an extreme number of extremes was a signal of a short-term bottom, which, so far, has proved to be correct.

In this briefing:

1. Mapletree Industrial Trust Deal Underscores Data Centres’ Impact on Global Industrial Real Estate
2. Yaskawa Electric: We Are Probably Now Close to the Bottom for This LT Structural Growth Story
3. Much Ado About Credit
4. Ayala Corp Placement – Selldown by Mitsubishi Likely to Reignite Overhang Worries
5. Tsuruha Holdings/Toyota Motor Pair on a Stronger JPY

1. Mapletree Industrial Trust Deal Underscores Data Centres’ Impact on Global Industrial Real Estate

• While the amount of real estate needed by data centres is small in comparison with the volumes required for e-commerce, we are seeing that data centres are also impacting the market for industrial real estate in locations around the world. 
• Cloud and mobile computing, plus the Internet of Things are driving demand in the data center industry. According to Cushman & Wakefield, revenue growth at multi-tenant data centres will be 12% to 14% each year for the next two to five years.
• The data centres industry is having, and is positioned to continue to have, a material positive impact on pricing for industrial real estate in many markets around the world. 
• Real estate firm Cushman & Wakefield evaluated ten Asia Pacific markets for a range of factors. Singapore emerged as one of the two most attractive Asia Pacific locations for data centres. Over the past five months, Singapore has seen more than its share of significant data centre announcements. Most recently, Mapletree Industrial Trust disclosed that it would lease one of its buildings to global data centre company Equinix for 25 years.

2. Yaskawa Electric: We Are Probably Now Close to the Bottom for This LT Structural Growth Story

Following Yaskawa’s second downward revision at 3Q earnings, we are shifting towards a more positive stance on the stock, even from a long-term perspective. We had been negative on the stock from late 2017 and as the stock tumbled we maintained that it was still too early buy for the long-term, though by mid-late 2018 we did (incorrectly) feel that there was the potential for a short term rally due to the severity of underperformance.

With the stock selling off harshly in the recent market fall but rebounding following its weak earnings we feel that much of the bad news is now priced in and expectations have corrected to the point where this is once again interesting on the long side.

3. Much Ado About Credit

• Global financing conditions could tighten further
• Credit demand is deteriorating; credit risks are rising; Eurodollar costs are edging higher
• A de-escalation in trade tensions and a Fed pause could ease the pain
• Will Fed recently turning more dovish (possible shift to slower QT & Fed rate cut in 2019?) + concomitant USD drift provide sufficient respite to put a floor under risk assets?

4. Ayala Corp Placement – Selldown by Mitsubishi Likely to Reignite Overhang Worries

Mitsubishi Corp (8058 JP) is looking to sell 9m shares of Ayala Corporation (AC PM) for approximately US$155m. Post-placement, Mitsubishi Corp will still hold 7.2% of Ayala Corp if the upsize option is not exercised.

The deal scores poorly on our framework owing to its the large deal size relative to its three-month ADV. The company is also slightly more leveraged than its peers. However, it was offset by cheaper valuation and a strong track record. 

But, our deal breaker here is the fact that the selldown one year after 2018’s selldown may signal that Mitsubishi Corp. may return to sell more on the market again in the near-term. While Mitsubishi, in the past, has reaffirmed that their partnership with AC will likely continue, it should not serve as a reassurance that it will continue to hold shares in AC.

5. Tsuruha Holdings/Toyota Motor Pair on a Stronger JPY

Running thorough ideas presented by Campbell Gunn in his stronger yen insight Japan: What to Buy & Sell if the ¥ Rises to 90 , we found a compelling pair trade set up in the form of long Tsuruha Holdings (3391 JP) and short Toyota Motor (7203 JP) as the relative chart is moving into an exhaustive low that sets up a good reaction rise to the tune of 20%.

In absolute terms we see Toyota Motor moving into a top while Tsuruha shows risk of a final low to work into this pair position but has a very compelling bullish chart set up as Toyota fade from resistance.

In this briefing:

1. Debt Ratios Do Matter
2. Workman Vs. Decathlon: The Upcoming Battle for Japan’s Sports Market
3. Mitsui Fudosan Logistics Park Placement – Accretive and Well-Flagged
4. Pasona : Interim Update – Still More Upside
5. Khi (7012) Given Expected Recovery in Profits, Shares Are Now Too Cheap.

1. Debt Ratios Do Matter

Monetary diarrhoea has inflated the debt structure.

The death of the Bretton Woods monetary system in 1971 paved the way for unbridled money printing. The resulting Great Inflation inflicted huge negative real returns on bondholders and stockholders until 1982. Thereafter, many countries, especially EMs, linked their exchange rates to the dollar, resulting in the fastest ever-growth in global foreign exchange reserves. In addition, central bank puts and then extraordinary fiscal and monetary policies turned it into the most virulent asset bubble in history, despite monetary mayhem, exemplified by numerous banking crises and three big stock market drawdowns. 

2. Workman Vs. Decathlon: The Upcoming Battle for Japan’s Sports Market

Decathlon is a category killer sans pareil and will finally open its first store in Japan in March. If Decathlon implements its store roll out well, the French sports retailer will cause a major disruption in Japan’s sports market.

Large domestic sports retailers like Xebio Holdings (8281 JP) and Alpen Co Ltd (3028 JP) will be gearing up to compete in some categories but are far behind in private label development and cost performance, and the major sports brands will have to accelerate their plans for retail stores while reviewing pricing (downwards). Sports firms like Mizuno (8022 JP), with relatively low perceived brand value, could face challenges in the newly polarised market that will emerge from Decathlon’s entry.

A major source of competition for Decathlon will come from a more unlikely retailer: the uniforms to outdoor apparel/gear firm, Workman (7564 JP). While still small, Workman is already manoeuvring to hinder Decathlon’s growth in Japan, and looks like having establishment backing to do so – and echoes the growth of Uniqlo after Gap entered the Japanese market in the 1990s and the rise and rise of Nitori (9843 JP) after IKEA’s launch in 2006.

Both Gap and IKEA have relatively small operations in Japan today compared to their early potential. Decathlon will need to expand rapidly if it is to gain sufficient share to stop Workman emerging with a clear lead in its market. 

3. Mitsui Fudosan Logistics Park Placement – Accretive and Well-Flagged

Mitsui Fudosan Logistics Park Inc (3471 JP) is looking to raise about US$289m in its placement to funds the acquisition of properties.

The deal scores well on our framework owing to strong price momentum and lower leverage relative to peers. Even though the REIT has a short history (listed since 2016), it has shown a decent track record of creating shareholder value. The acquisition of the properties has also been well-flagged in the company’s September presentation.

4. Pasona : Interim Update – Still More Upside

INTERIM UPDATE – Pasona Group (2168 JP) released their second-quarter results on January 11th. This Insight updates our recent Insight Pasona Non-Grata and re-iterates our buy recommendation. Pasona shares have risen by 15% this year to the intra-say high last Friday. Our target price remains ¥1,500 – a further 18% upside from today’s level. 

5. Khi (7012) Given Expected Recovery in Profits, Shares Are Now Too Cheap.

The shares have underperformed TOPIX by 25% over the last 12 months and in terms of book, see chart below, are trading at near 5 year lows. Earnings for 3/19 were revised down after 1Q (operating profit from Y75bn to Y66bn due to write-off in the rolling stock division). The current forecast in our view is achievable and next year, in the absence of further write-off and growth in other parts of the business, we would expect operating profits to recover to the Y80bn level. This is a big conglomerate with many moving parts, some good and some not so good, but there is a price for everything and given where the shares are now, and where we think earnings are going, we are happy to buy here with the company trading at 0.9x book and the shares yielding just under 3%.

In this briefing:

1. Nidec (6594 JP): Big Downward Revision
2. Global Indexes Approaching Major Resistance
3. Hitachi Tender for Yungtay Engineering Launches
4. Softbank – A Sizeable and Tactical Tender?
5. Onward Quits Zozo: Another Dent in Zozo’s Reputation

1. Nidec (6594 JP): Big Downward Revision

Nidec has cut FY Mar-19 sales guidance by 9.4%, operating profit guidance by 25.6% and net profit guidance by 23.8% to reflect what management calls unexpectedly weak demand, the need for large inventory adjustments, and anticipated restructuring charges. 

Management attributes this to U.S. – China trade friction, but weak demand for hard disc drives (HDDs) caused by excessive date center investment and falling NAND flash memory prices, and declining auto sales in both China and the U.S., appear to have compounded the problem. 

Nidec’s share price was up ¥60 (+0.49%) today to ¥12,395, but the announcement was made after the market closed. Management plans to discuss the situation at a press conference starting at 18:30 Tokyo time today.

2. Global Indexes Approaching Major Resistance

Broad global indexes are bumping up against logical downtrend resistance. As a result, our outlook remains cautious and our baseline expectation for continued downward pressure on global equities remains intact. At the same time, we are seeing signs that the worst of the declines may be behind us as global cyclical Sectors show RS improvements while defensive Sectors display early signs of RS deterioration.  In this report we review important technical levels for developed and EM indexes, and highlight a number of attractive opportunities across markets and sectors.

3. Hitachi Tender for Yungtay Engineering Launches

Hitachi Ltd (6501 JP)announced today after the close that it had received approvals from the relevant government organs for its proposed Tender Offer for Yungtay Engineering (1507 TT) and that the Tender Offer would be launched through Hitachi Elevator Taiwan Co. Ltd at TWD 60/share starting tomorrow. The statement filed by Yungtay on the TWSE website is linked here.

The Tender Offer will go through March 7th 2019 with the target of reaching 100% ownership. Son of the founder, former CEO, and Honorary Chairman Hsu Tso-Li (Chou-Li) of Yungtay has agreed to tender his 4.27% holding. The main difference is a minimum threshold for success of reaching just over one-third of the shares outstanding, with a minimum to buy of 88,504,328 shares (21.66%, including the 4.27% to be tendered by Hsu Tso-Li).

This one detail is different from the original announcement in October, which had set a minimum of 50.1% holding after the tender. 

The other details of the Tender Offer are the same as described in Going Up! Hitachi Tender for Yungtay Engineering (1507 TT) from when the deal was announced last October. 

Since the announcement of a deal at a 22% premium, the stock has risen gently from about TWD 56 to just below the TWD 60 Tender Offer price in ever-decreasing volume.

There has been little to no news on the stock regarding the deal in English, and only limited news in Chinese since the announcement of the deal. 

The price evolution makes it look like a pretty straightforward deal. The lowered threshold for success obviously increases the likelihood of success. Weaker markets may also contribute. 

But there is a reason why the threshold was lowered. 

4. Softbank – A Sizeable and Tactical Tender?

Post the close of market, Softbank Group (9984 JP) announced a $750mn USD tender offer through an unmodified Dutch auction to purchase a portion of its outstanding USD and EUR senior notes. This could be an interesting deal from a timing perspective and could portend action for the equity – more details below.

5. Onward Quits Zozo: Another Dent in Zozo’s Reputation

ZOZO (3092 JP) has been hit from all sides recently, with a major sell-off by investors disturbed by Zozo’s execution of its private brand launch and the resulting impact on the company’s reputation among merchants and consumers alike.

Last month it launched a new campaign which, on the surface, was all about helping customers give back to society, but which drew an immediate negative response from some merchants.

One of these, Onward Holdings, withdrew all its brands from sale on Zozo. This is another damaging dent in Zozo’s reputation. 

In this briefing:

1. Business Happenings in the Americas that May Be “Below the Radar” – Week Ending January 17, 2019
2. Japan: Relative Price Scores – Overbought and Oversold Companies – Calling ‘Tops’ & ‘Bottoms’
3. Courts Asia To Be Taken Over By Nojima
4. The Burden of Too Big Government
5. Arcs, Valor and Retail Partners Form First Nationwide Supermarket Alliance

1. Business Happenings in the Americas that May Be “Below the Radar” – Week Ending January 17, 2019

Highlights of significant recent happenings include:

2. Japan: Relative Price Scores – Overbought and Oversold Companies – Calling ‘Tops’ & ‘Bottoms’

Source: Japan Analytics

RELATIVE PRICE SCORE – The Relative Price Score (RPS) measures stock price performance relative to TOPIX and is calculated by comparing the current deviation with the mean absolute deviation of monthly and daily relative share prices. As all companies are, as a result, on a comparable scale, ‘overbought’ and ‘oversold’ outliers and changes in scoring can reveal short-term and longer-term trading opportunities. This insight updates our list of overbought and oversold companies, reviews the best and worst performing companies by RPS over the last two months and adds some specific comments on stocks on each category.

RPS STATISTICS – The Company ‘outlier’ thresholds are set to “+4” for overbought and “-2” for oversold.  Currently, of the 3,686 listed companies for which monthly data is available, 91 companies are ‘Overbought’, and 120 are ‘Oversold’ – 2.5% and 3.2%, respectively of the total. For companies with a market capitalisation of over ¥100b, there are 35 ‘Overbought’ and 24 ‘Oversold’ companies. 

RPS ‘TOPS’ – In the last two years, 445 companies have achieved an RPS of ‘4’ or more. 80% have seen their RPS fall to below ‘4’ within the following two months. For companies with a market capitalisation higher than ¥100b, the numbers are 95 companies and 63% – demonstrating the superior persistence of large capitalisation companies in this regard. Some examples of RPS mean reversion in the last two months have been Descente (8114 JP),  Ariake Japan (2815 JP), Fancl (4921 JP), Bandai Namco (7832 JP), Don Quijote (7532 JP), and Gmo Payment Gateway (3769 JP).

RPS ‘BOTTOMS’ – 296 companies have seen their RPS fall to ‘-2’ or below in the last two years. 58% have seen their RPS recover to above ‘-2’ within three to six months. For larger capitalisation companies, the numbers are 72 companies and 67%. Some recent examples of positive RPS mean reversion in the last two months have been LINE Corp (3938 JP) – a ‘contrarians only’ selection in our last Insight, and Tokyo Electric Power (9501 JP).

3. Courts Asia To Be Taken Over By Nojima

Courts Asia Ltd (COURTS SP), a leading electrical, consumer electronics and furniture retailer in predominantly Singapore and Malaysia, has announced a voluntary conditional offer from Nojima Corp (7419 JP) at $0.205/share, a 34.9% premium to the last closing price.

The key condition to the Offer is the valid acceptances of 50% of shares out. Singapore Retail Group, with 73.8%, has given an irrevocable to tender. Once tendered, this offer will become unconditional.

CAL’s share price has endured a steady decline since touching $1.14 back in May 2015. It traded above the Offer price as recently as late-July 2018.

However, the controlling shareholder, which has maintained its stake since CAL’s listing in 2012, is cashing in. Nojima has stated it will exercise its right to compulsorily acquisition if acceptances reach 90%; and it does not intend to support any action or take steps to maintain the listing status of the company in the event its suspended due to free float requirements. I would look to cash out also. Consideration under the Offer may be remitted as early as the fourth week of Feb.

4. The Burden of Too Big Government

From our very own “Austrian” Leigh Skene:

Wars in old times were made to get slaves. The modern implement of imposing slavery is debt. Ezra Pound

Governments used public sector balance sheets to bail out private financial institutions and assist private companies to emerge from bankruptcy in the GFC. These actions transferred credit risk from the private to the public sector, yet falling nominal interest rates minimised, and in some cases froze, the cost of servicing the mounting government debt until late 2016. Since then, many borrowers have paid rising  interest rates on increasing amounts of debt. Debt service charges are rising faster than nominal GDP in a growing number of nations as a result. It is estimated that the US federal funding requirement will rise from minus US$ 700bn to US$ 2tr in 2022.

5. Arcs, Valor and Retail Partners Form First Nationwide Supermarket Alliance

The supermarket sector is the most fragmented and uncompetitive of all retail sectors, a situation encouraged by major suppliers and not ideal for consumers.

Despite some effort from the likes of Aeon, consolidation has failed to materialise beyond a few in-group mergers.

Yet pressure on supermarkets to consolidate has been building due to depopulation in the regions, competitive pressures from other food retailers such as convenience stores and drugstore chains, as well as the emerging online food services.

Change is now coming. The biggest industry consolidation yet was announced last month, a precedent-setting alliance between three major supermarkets, Arcs Co Ltd (9948 JP), Valor Holdings (9956 JP) and Retail Partners (8167 JP), carving up a large chunk of the country into three regional fiefdoms.