Japan

• On 14 February, Sony Corp (6758 JP) and Bandai Namco Holdings (7832 JP) announced an equity offering of nearly 4.5mm shares of Toei Animation (4816 JP). 
• Float on Toei Animation (4816 JP) has been low. This would raise it to meet the minimum standard to stay listed on the TSE Standard market section.
• To get to TSE Prime, it needs another offering. And there are lots of cross-holders to go.

• Today, Rakuten Group (4755 JP) announced it would propose an amendment to its Articles at the AGM (28 March) to issue “Bond-Type Class Shares.”   First reaction: You wot, mate?
• The company states it wants to “strengthen its financial base through reducing interesting-bearing debt by equity-related financings and conduct proactive control of debt maturity schedule, etc.”
• Now it wants to issue listed bond-type shares. Dividends not interest. The last Japanese issuer of something similar was NEC in 2001. Few will remember, so we study the situation.

• After an extension due to a European Foreign Subsidies Review filing, and a small ‘accident’ regarding the earnings release, we have a deal. 
• The earnings release itself seemed more innocuous than articles and rumour suggested show the causes of impairments and so it seemed like there was little cause to walk/declare MAC.
• Now it will be done in 20 days. I still think this is cheeky, opportunistic, and low, and it is up to the float to decide what to do.

• Outsourcing Inc (2427 JP) announced that the pre-condition was satisfied, and Bain’s tender offer remains unchanged at JPY1,755 per share, a 52.1% premium to the undisturbed (8 December).
• Shareholders will breathe a sigh of relief as the weak 4Q and significant impairments have raised concerns that Bain would cut its offer or walk away.
• The offer attractiveness has increased partly due to lower consensus. At the last close and for a 3 April payment, the gross/annualised spread is 2.0%/22.8%.

• Restrictions on driver overtime due in April are forcing logistics rationalisation across supply chains.
• Aeon is one of the few retailers that runs its own logistics platforms but, even so, changes to logistics practices will feed through to how stores are merchandised
• This could result in competitive pressure on smaller supermarket chains.

• Olympus Corp (7733 JP) announced disappointing Q3FY24 result. Although revenue increased 7% YoY to ¥239B, beating estimate of ¥236B, operating profit declined 30% YoY to ¥34B, below estimate of ¥43B.
• The company cut FY24 operating profit guidance for second time and reduced revenue guidance after raising it in November. Noto Peninsula earthquake is the main reason for reducing revenue guidance.
• Although both revenue and profits are expected to improve in FY25, it will be difficult to achieve an operating margin of 20% and sales growth of 5%.

• Over the weekend there was an article in the Nikkei saying that Tsuruha Holdings (3391 JP) and Welcia Holdings (3141 JP) were considering a merger. Other media outlets followed.
• This has been a possible outcome. Aeon Co Ltd (8267 JP) owns 51% of Welcia, 13.6% in Tsuruha, and is negotiating to buy another 13% in Tsuruha from Oasis.
• This would create a behemoth. ¥2.2trln in revenues vs ¥1trln for MatsukiyoCocokara (3088 JP). It would be 25% of the market. Questions will be asked about concentration. 

• The Rakuten Bank offering in early December was a great time to buy the dip of you sold end-September. It should have been a good time to buy outright.
• Unfortunately, the stock priced at ¥2,470, then closed that day at ¥2,500. That was the high for the next ten weeks. Two weeks later it was 20% lower. Ouch.
• But it climbed out of the abyss, gained 35% in 8wks, then Thursday the Bank announced a new Shareholder Benefit program. Today the stock was +7%. Worth looking at details.

• Since the US$550 million secondary placement announcement, Toei Animation (4816 JP)’s shares are down 7.0% from the undisturbed price of JPY18,560 per share (14 February).
• Looking at recent large Japanese placements is instructive to understand the potential trading pattern. So far, Toei Animation’s shares have followed the pattern of previous large placements.
• The offering will likely be priced on 27 February. Investors participating in previous large Japanese placements tend to secure positive returns.

• The possible merger between Welcia and Tsuruha under Aeon has been talked about for years despite concerns from both drugstores, but may now happen.
• But calling these retailers drugstores is increasingly a misnomer: FMCG-drugstores is better because they and many others in the sector, increasingly compete with FMCG retailers like supermarkets and even CVS.
• This evolution is rapid so the merits of a deal make more sense when we view it from a sector five years in the future than how it is today.

• Keisei Electric (9009 JP) has been an outperformer since activist fund Palliser Capital called on the company sell some Oriental Land (4661 JP) shares. It has now announced another buyback.
• Preceding my comments on Keisei Electric are the current setup/unwind tables for Asia-Pacific Holdcos.
• These relationships trade with a minimum liquidity of US$1mn, and a % market capitalisation >20%.

• Post FY23 results in mid-February, Appier’s stock exhibited significant volatility, despite robust financial performance.
• We believe that Appier is a beneficiary of continued growth in ecommerce and increasing ubiquity of AI solutions for marketing.  
• Appier trades at a significant discount to global peers and domestic SaaS companies, suggesting significant upside

Lucror Analytics Morning Views comprise our fundamental credit analysis, opinions and trade recommendations on high yield issuers in the region, based on key company-specific developments in the past 24 hours. Our Morning Views include a section with a brief market commentary, key market indicators and a macroeconomic and corporate event calendar.

• Rakuten Group

• CARTA HD strives to become “The Evolution Factory” and operates mainly in the digital marketing field.
• The company was established in January 2019 through the merger of the former VOYAGE Group, which had expanded earnings by creating a series of new businesses centered on the ad tech domain, and the former Cyber Communications, the largest media rep firm in Japan.
• CARTA HD holds a 3.9% share in the Japanese online advertising market.

• P/B’s slightly higher valuations in October 2023 while ROE, EPS, and BPS did not change much were due to external factors, not internal factors.
• Clearly, improvements in ROE and ROA are effective in improving stock valuations, but valuations have further increased for companies with higher valuations and profitability for the past year.
• Some of these companies have begun to use cash more effectively for investment and shareholder returns. The gap in market capitalization between these companies and the rest will increasingly widen.

• With an apparel business, product business, and transportation business, MORITO CO.‚ LTD., (Morito) conducts planning, development, and sales of products that reflect market needs and customer demands.
• The products it sells are either produced in house or purchased from suppliers.
• Handling an extremely diverse range of products that total more than 500 thousand, the company sells those products in niche markets.

• Keisei Electric Railway Co (9009 JP) has long been the target of activist-ish-y holders who seek to have the company monetise its 20+% stake in Oriental Land (4661 JP). 
• Last autumn (17-Oct-2023), Keisei was the subject of a presentation by activist-ish-y fund Palliser Capital who called the stock 43% undervalued. They want Keisei to sell some OLC shares.
• Palliser wanted Keisei to use resulting monies for growth capex+shareholder return, improve IR/governance, shrink board, adopt KPIs, etc. Thursday we got an announcement of a 2.9% stock buyback. 

• There is no suggestion of precondition breach attached to Outsourcing Inc (2427 JP)‘s impairment losses. 
• Seven Group, now holding 71.6%, has returned to the well, and made a cash/scrip Offer for shares not owned in Boral (BLD AU), with certain tendering thresholds triggering more cash.
• Itoki Corp (7972 JP)‘s mega ToSTNeT-3 buyback is now done.

• Overseas investors have increased buying Japanese stocks in anticipation of acceleration in profit growth due to the shift to inflation. This is consistent with the trends of ROE and TOPIX.
• As far as ROE trends are concerned, neither share buybacks nor dividends are sufficient. It may be said that many managers are still dominated by a deflationary mindset.
• Companies with high foreign shareholdings are seeing changes that are starting to use cash more effectively. However, it’ll take time, as most companies will start to move after asking around.

• Based on the Q3 consolidated financial results announcement for Sony Group Corporation for FY 2023, the company showed considerable resilience against some difficult market conditions.
• One critical highlight was the significant increase of 22% in consolidated sales for the quarter compared to the same quarter the previous fiscal year, reaching a record high of JPY 3,747.5 billion.
• Notably, the operating income and net income also increased substantially year-on-year and reached the second-highest level on a quarterly basis.

• Q423 revenues of ¥105.1 billion, about 5% better than forecasted, up 5% QoQ but down ~10% YoY.
• Q124 revenues forecasted to decline 17% QoQ to ¥87 billion. Not surprisingly, EBITDA will also decline 33% QoQ to ¥22.1 billion.
• On a brighter note, demand growth driven by generative AI will roughly double wafer demand for servers (AI+General) by 2027

• The data in this insight is collated from the “shareholding disclosure” link on the HKEx website.
• Often there is a corresponding HKEx announcement on the increase – or decrease – in the shareholding by directors. Or pledging. However, such disclosures are by no means an absolute.
• The key stocks mentioned in this regular insight are Fast Retailing (9983 JP), Hang Lung (10 HK), Far East Consortium International (35 HK), and Pharmaron Beijing (3759 HK).

• Trial Holdings (5882 JP), a discount store operator in Japan, is seeking to raise US$235 million at the IPO reference price of JPY1,550 per share. Pricing on 11 March.
• Trial aims to act as a one-stop shopping store where consumers can buy whatever they want at a great price. Trial’s basic pricing strategy is Every Day Low Price.
• The investment case rests on steady revenue growth, industry-leading same-store sales growth, solid margin profile and cash generation.

• Heading in a positive direction – we saw the following positives in Q1-3 FY3/24 results; 1) sustained growth trend in quarterly gross profits, 2) all business segments generating positive returns, and 3) signs of progress regarding post-merger integration at Zelto Inc., which recorded strong monthly sales in November 2023.
• The company has maintained FY3/24 guidance, implying an accelerating Q4 sales growth YoY from a seasonal upturn in activity.
• We believe that Zelto Inc. will provide growth opportunities in overseas markets.

• Since many prime market listed companies have already achieved the gender and TCFD criteria, this will unlikely to be a major issue with regard to Glass Lewis’ criteria changes.
• The ROE for the exception rule for companies with large policy shareholdings should have been even higher, not the same as the TSE’s 5-year average ROE of 8%.
• The criteria for maximum tenure of outside directors should not have provided magic number, but rather performance and other factors that would determine whether he/she is qualified for the position.

• Encouraging signs with a positive turnaround in Q4 FY12/23 – Q1-4 FY12/23 results were in line with company guidance, with Q4 FY12/23 demonstrating a major pick-up in LaKeel Product license sales resulting in a recovery in profitability QoQ.
• This was a welcome development from project delays experienced in Q3 FY12/23 and highlights positive underlying demand for LaKeel’s technology.
• Company guidance for FY12/24 reflects expectations of high double-digit sales and earnings growth YoY, and we believe this will be driven by intensifying efforts by LaKeel to increase market penetration of their technology.

• Today after the close, KDDI Corp (9433 JP) and Gree Inc (3632 JP) announced that KDDI would offer its 8,000,000 shares in Gree in an international offering through Mizuho Intl.
• The deal comes at a decently large discount and the stock is quite downtrodden. Especially when compared to its venture assets and cash, assuming invested amount is remotely viable.
• The problem is that too much of revenue isn’t earning much, so this sits in a Value Trap category. Shareholder structure makes it difficult to do buybacks.

• As discussed in Itoki (7972) Mammoth Buyback Coming Imminently After 35% Jump, the company was going to do a mega ToSTNeT-3 buyback between then and end-Feb. That happened this morning.
• The company bought back 7.966mm shares (13.96%) for ¥15.9bn. That should have cleared out the bulk of the risk of the original warrant holders who bought in 2020. But…
• The dilution/accretion don’t offset perfectly, and there is a clause suggesting how this might play out from here. But we can infer things from other data we now have.

• Trial Holdings (5882 JP) (TH) is now looking to raise around US$234m in its Japan IPO, after having canceled its prior listing attempt last year.
• TH operates a network of retail stores that offer one-stop shopping under its everyday low price model, across a variety of daily necessities, food items and other products.
• We have looked at the company’s past performance in our previous notes. In this note, we provide our updated thoughts on valuation.

• Asahi Kagaku Kogyo’s Facility in Kunshan, China Asahi Kagaku Kogyo (TYO 7928) is a $12m market cap net-net industrial plastics manufacturer that over the last 10 years mostly operates around breakeven.
• The business itself isn’t interesting, but it’s a positive that they aren’t losing money.
• There also isn’t a single writeup on this company or any mentions of it on X/Twitter, so it’s definitely under the radar.

• Low cost apparel retailers have enjoyed a significant uptick in the past few years as consumers look to polarise their spending further between cheaper basics and luxury treats. 
• But the real change is in improving profitability. One the biggest beneficiaries has been Honeys, a low cost womenswear retailer that has seen a revival in the past few years.
• Operating profit has tripled since 2018. Can it last? Work on creating its own low cost manufacturing base suggests it can.

• In 2023, % Woman Board Members increased progressively even in companies with lower corporate governance scores. Many companies are unanimous in their commitment to appointing women board members.
• Together with the fact that business challenges have not been solved by only having people who think alike, 90% of institutional investors said that information on women’s activities is important.
• Companies with over 25% women on their boards have superior values in profitability and stock valuation. Managers should implement the promotion of women in order to transition to value-creating management.

• Q1-4 FY12/23 results were weaker than our estimates with the company revising down FY guidance.
• Orders for the mainstay electric discharge machines fell 24% YoY in Q4 FY12/23 with China demand remaining sluggish.
• However, there are positive indications that the company aims to transform its business model by conducting cost reductions, streamlining the balance sheet, and bringing greater focus to its business strategy. 

• Takara Bio Inc (4974 JP) reported massive decline of 50%, 98%, and 99%, YoY, in revenue, operating profit, and net profit, respectively during the first nine months of FY24.
• Reagents revenue decline 56% YoY to ¥23 billion, due to decrease of sales of COVID-19 test-related reagents. Japan, which contributed 23% of reagents revenue, reported revenue decline of 83% YoY.
• Takara Bio anticipates a sluggish life science R&D market globally. FY24 revenue, operating profit, and net profit are expected to decline 42%, 85%, and 88%, YoY, respectively.

• The possibility/likelihood of a “¥50bn MBO” for Snow Peak Inc (7816 JP) was leaked in a Nikkei article last Friday. It went limit up two days in a row. 
• That TOB price is more than 70% off its three-year high. That will certainly disappoint some. Separately, the price seems a bit low given growth. 
• The family and friends own ~42% so if someone gets upset, or uppity, there could be a challenge. Just because an MBO exists doesn’t mean people have to tender in.

• Snow Peak Inc (7816 JP) has recommended a Bain Capital-sponsored MBO tender offer at JPY1,250 per share, a 58.0% premium to the undisturbed price (15 February). 
• The transaction is a two-step acquisition through a cash tender offer and subsequent squeeze-out. The lower limit of the tender offer is set at a 38.13% ownership ratio.
• Based on the irrevocables, the minimum acceptance condition requires a 52.8% minority acceptance rate. While not a knockout offer, the acceptance condition is achievable.  

• Pal Group’s founder retired last month after 50 years at the helm. 
• Since 2001, the fashion to variety store business has grown from ¥10 billion to a forecast ¥184 billion this year.
• There remains growth potential in the variety store chain, 3Coins, as well as a revival in the fashion side.

Dentsu’s FY23 net revenue was a touch above guidance at Q3, with a better-than-expected operating margin reflecting a good Q4 in Japan, further boosted by a short delay in an IT project pushed out to Q124. The results were accompanied by the news of a change in global CFO, with the role reverting to Yushin Soga, who held the role until January 2023. As anticipated, net revenue outside Japan declined, although there was some trading improvement in the US in Q4. A thorough business review is now in progress, with the next mid-term plan due early in H2. In the meantime, the balance sheet is strong, with leverage reduced to 0.6x EBITDA, and share buybacks will be resumed. We regard the rating as undemanding.

• Otsuka Holdings (4578 JP) ended 2023 on a mixed note. Both revenue and business profit were ahead of guidance. However, operating and net profits missed guidance, dragged by impairment loss.
• Four global pharmaceutical products as well as the nutraceuticals business led the business performance. Even after excluding the impact of foreign exchange, the business remained above plan.
• The company has guided for 6% YoY growth in 2024 revenue and business profit to ¥2,140B and ¥330B, respectively. 2024 net profit is expected to jump 106% YoY to ¥250B.

• Hotel demand ahead of expectations – Q1-3 FY3/2024 results were driven by strong underlying demand for hotel operations.
• The domestic business was boosted by a robust market environment where visitor numbers for domestic and overseas customers exceeded pre-pandemic levels, helping drive Q3 FY3/2024 RevPAR by 43.5% YoY.
• Despite a high run rate versus company guidance for sales and exceeding recurring profit and net income, there has been no revision from the company, indicating a potential for an overshoot in our view. We believe inbound and domestic demand will be sustained.

• SENKO Group Holdings Co., Ltd. (9069 JP) today announced large financial institutional cross-holders would sell shares in a Secondary Offering. There’s a buyback on the back end.
• Cross-Holding unwinding is the subject of the moment. It will continue to be so. It will involve selldowns, and buybacks. Study the model of what companies must do what. 
• In this case, Senko has a LOT of cross-holders and minimal excess cash. So investors buy more shares. But there is a buyback and index demand to come.

• Outsourcing Inc (2427 JP) delayed its earnings from 14 February to 19 February on tardiness in calculating impairment losses. That caused a short sharp shock in share price.
• An article came out suggesting it was a small number, and domestic biz EAS-related. Results today do not suggest EAS-related, and half is overseas. But no suggestion of precondition breach.
• For that, I think this probably goes through, and the EC FSR review period should end on 20 Feb so a deal announcement by Friday is eminently possible.

• Heiwado Co Ltd (8276 JP) today announced a Secondary Offering sell-down by cross-holders, combined with a buyback post-offering to mitigate some of the effects of overhang.
• Banks and insurers are selling, and that will leave the stock with a lot of cross-holders left, but investors should look at the model given he zeitgeist. 
• Companies with lots of cross-holders have to be “fair” to them. Those without copious cash have to spread it around so this transaction model looks likely to be continued.

• Outsourcing Inc (2427 JP) has disclosed a weak 4Q materially below guidance due to cost overruns and JPY6,875 million in impairments. The results did not provide an update on Bain’s tender.
• The weak 4Q has raised concerns that Bain would reconsider terms. Our take is that the results will not warrant a change in the DCF valuation or breach a pre-condition. 
• Bain is likely to consider the results a reflection of near-term industry weakness rather than company-specific issues. The annualised spread for a March-end completion is 9.8%.

• Nintendo’s share price fell ~6% on rumours of Switch 2 delay, wiping around $4 billion of the market cap
• We do not believe that a one quarter delay will have any impact on the console’s long-term sell-through or the stock’s valuation
• With Sony’s PS5 faltering, Nintendo is launching at an opportune time. We turn bullish on the stock with ~25% upside from here

• Trial Holdings (5882 JP) (TH) is now looking to raise around US$234m in its Japan IPO, after having canceled its prior listing attempt last year.
• TH operates a network of retail stores that offer one-stop shopping under its everyday low price model, across a variety of daily necessities, food items and other products.
• We have looked at the past performance in our previous notes. In this note, we talk about the updates from its recent filings.

• There was modest improvements in corporate governance in 2023, without any Code revisions. About two thirds of companies showed little improvement in their corporate governance practices over the past year.
• However, the increase in % Woman Board Members, a touchstone for measuring the improvement attitude of some companies that have shown improvement, gives us hope for the future.
• Companies with Metrical CG scores rising below 2.5 points and those with declines have challenges with their use of cash, along with their stock repurchase and dividend policies.

• Mercard, the credit card launched by Mercari in late 2022, is a success, helping the the CtoC platform grow its user base and help add to Mercari’s financial services business.
• The rate of growth in online flea markets has slowed and competition has increased so relying on the CtoC platform alone won’t deliver sufficient growth.
• Mercari will introduce a new gig-work service this Spring to further differentiate its business from the likes of Rakuma and Yahoo Flea Market.

• The Nikkei reports that Snow Peak Inc (7816 JP) is set to disclose a Bain-sponsored MBO this week “in the range of 1,200 yen per share.”
• Mergermarket first disclosed a potential MBO on Friday. Snow Peak responded that while it is true that we are considering going private, no decision has been made at this time.
• The rumoured JPY1,200 offer price is light vs historical trading ranges but attractive vs peer and historical multiples. The probability of an offer materialising is high. 

• We summarise the latest spreads and newsflow of merger arb situations we cover across Hong Kong, Australia, New Zealand, Singapore, Japan, Indonesia, Malaysia, Philippines, Thailand and Chinese ADRs.
• Highest spreads – Probiotec Ltd (PBP AU), Shinko Electric Industries (6967 JP), Genetron Holdings Ltd (GTH US), JSR Corp (4185 JP), Lithium Power International (LPI AU), Altium Ltd (ALU AU). 
• Lowest spreads – Tietto Minerals Ltd (TIE AU), Pact Group Holdings (PGH AU), Orecorp Ltd (ORR AU), QV Equities Ltd (QVE AU), Yaizu Suisankagaku Industry (2812 JP). 

• Shiseido Company (4911 JP) reported 4Q23 results last week.  Overall, operating profit of Y40bn in FY23 was Y5bn higher than previous company guidance of Y35bn.
• However, Shiseido’s China business weakened materially in 4Q23, and 2024/25 guidance seems a bit light. 
• I believe FY24 should not be used as a base for valuation because the nuclear wastewater impact is likely to linger a while longer during FY24. 

• 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, Trial Holdings (5882 JP) was back in the market, a year after ditching its previous attempt, while Juniper Hotels is trying to ride the India wave.
• For placements, more signs of REIT coming back to life, this time in Japan. A relatively large deal in Toei Animation (4816 JP) as well was launched.

• Keisei Electric Railway Co (9009 JP) share price has increased but not run ahead of its fundamentals.
• Weak Yen, COVID rebound, friendlier visa policy by the Japanese government, and the potential for more Chinese tourists visiting Japan are tailwinds for Keisei.
• Valuation may look expensive, but with the high growth rate, investors should consider to use PEG rather than PER or PBR.

• Kyowa Kirin Co Ltd (4151 JP) has announced partnership with Bridgebio Pharma Inc (BBIO US) for an exclusive license on infigratinib for achondroplasia, hypochondroplasia, and other skeletal dysplasias in Japan.
• This month, Kyowa Kirin has enrolled first patient in a Phase 2 clinical trial evaluating tivozanib eye drops (KHK4951) in patients with diabetic macular edema (DME).
• The company’s top selling drug Crysvita is growing steadily since launch. Crysvita led to better-than-expected result in 2023. However, higher R&D expenses will negatively impact 2024 operating profit.