Japan

• I got a bunch of questions about my Outsourcing comments yesterday in Outsourcing (2427) – Earnings Delay Causes Consternation. 
• This piece is intended to clarify what I know (still limited), put parameters around what it might be, and draw lines in the sand which I might later erase.
• This may be nothing. But it may not be. I will try to answer the questions I received in a kind of Q&A format, and I hope that helps.

• Two days ago, Japanese manufacturer of ubiquitous office furniture Itoki Corp (7972 JP) announced salutary earnings/presentation(J) results, new MTMP(E) outlines, new shareholder return policy(J), yutai program(J), div hike(J), and buyback(J). 
• It was a big day. The stock went limit up on 14 Feb and is +12% today. +25% in two days.
• No single holder holds that much BUT the parameters tell you how this gets done. It’s interesting, but it is important to read the fine print below!

• BayCurrent Consulting, Open House, Sumitomo Chemical, Koei Tecmo Holdings, Kose Corp, Oji Holdings, Daiwa House Reit Investment and Tosoh Corp will have passive selling at the close on 29 February.
• Short interest has increased on all these stocks over the last few weeks and there has been big underperformance versus the Nikkei 225 Index and TOPIX Index.
• Cumulative excess volume has increased on the stocks and there will be short covering in the last week of the month.

• Industrial & Infrastructure Fund Investment (3249 JP) is looking to raise around US$341m in its primary follow-on offering to acquire 28 properties and an equity interest in a silent partnership. 
• The deal is a somewhat large one to digest, at 83 days of three month ADV and 16.2% dilution.
• In this note, we will talk about the deal dynamics and run the deal through our ECM framework.

• % of independent directors continued a modest rise, and % of women board members still reached 10% level. 6 of 1,788 companies transitioned to Company with US type 3 Committees.
• Growth Policy score improved as more companies included ROIC in their KPIs, and AGM Disclosures score improved as the majority of prime market listed companies joined the voting platform.
• Scores related to the use of cash and IR Disclosures score also didn’t improve noticeably. Companies are not taking action on how to use cash to expand their corporate value.

• Environmental Energy boosting earnings – Q1-3 FY3/24 results were ahead of expectation, with the company upwardly revising FY3/24 guidance.
• Demand remained firm from the automotive sector for the Procurement segment, but trading remained somewhat mixed in the Semiconductor and Electronic Components.
• The positive surprise was the sustained high levels of profitability in the Environmental Energy segment; we have raised our earnings estimates for FY3/24 and beyond to reflect this as a sustainable business. 

• Solid earnings visibility – Q1-3 FY3/24 results were in line with recently revised company guidance, with the core earnings driver being the Profit-Generating Funeral Services segment.
• Positive trends seen in Q2 FY3/24 continued QoQ, with growth in services and high utilization rates from the newly expanded funeral halls.
• The legacy Information segment (print media) relatively underperformed, and the company is continuing cost improvement efforts.

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
• UPL Ltd

• Originally, the MBO for Outsourcing Inc (2427 JP) was expected to get launched end-January 2024. A late-ish filing with regard to the EU’s Foreign Subsidies Regulation regime prompted a delay.
• Yesterday Outsourcing announced a delay its earnings release by 3 business days, the delay “procedures related to impairment losses are continuing.”
• Outsourcing shares are down hard on this. -1.5% as I write. I examine.

• In December 2021, when companies were required to file statements with the TSE as to plans to meet continuing listing requirements, Toei Animation (4816 JP) had a Plan.
• That plan? Get from a then-current 15.5% Tradable Shares level to 25.0% by 31 March 2025. That was “OK” though later, the TSE asked companies to speed it up.
• Today, shareholders Sony and Bandai Namco announced an equity offering to sell down up to 4.48mm shares in a domestic+overseas offering. It’s big, heavy, and there is more to come.

• 12 days ago, JSR Corp (4185 JP) announced that former research collaboration partner Research Foundation of the State University of New York had sued in an intellectual property ownership dispute.
• I wrote about it here to the extent I could. Since then, more information has become available, or available to me.  Some details on the case. Some on lawyers. 
• Since then JSR has reported earnings with unchanged forecast, and major pure play comp Tokyo Ohka Kogyo (4186 JP) today reported earnings; the stock popped 10+% to an all-time high.

• Bandai Namco (7832 JP) and Sony Pictures are looking to raise up to US$525m via selling around 10.66% of Toei Animation (4816 JP) (TA).
• The purpose of the placement is to unwind some of the cross-shareholding, as well as help TA to maintain its listing in the Standard Segment.
• In this note, we will talk about the placement and run the deal through our ECM framework.

• Outsourcing Inc (2427 JP) has delayed the announcement of its 4QFY2023 results from 14 to 19 February as the impairment loss accounting is yet to be completed. 
• Outsourcing has a history of impairments, resulting in missed forecasts, which suggests a weak 4Q. The concern is that a weak 4Q could force Bain to trim its JPY1,755 offer. 
• Persol Holdings (2181 JP) guidance cut today suggests a weak 4Q reflects near-term industry weakness rather than company-specific issues. The weak 4Q is a valuable cover to justify the less-than-stellar offer.

• Toei Animation (4816 JP) has announced a secondary offering of up to 4.5 million shares (including overallotment). Bandai Namco Holdings (7832 JP) and Sony Corp (6758 JP) are the sellers.
• The offering will allow Toei Animation to maintain its listing in the TSE Standard Market and enable Bandai Namco and Sony to reduce and liquidate cross-shareholdings.
• Looking at recent large Japanese placements is instructive for understanding the potential offer price. The pricing date will likely fall between 27 February and 4 March (likely 27 February).

• Freee KK (4478 JP) reported 2QFY06/2024 results today. 2Q revenue increased 35.1% YoY, however, both revenue and operating losses fell below consensus estimates.
• As expected, upfront investment in selling and marketing and personnel expenses prior to the new invoicing system led to an increase in operating losses.
• However, these investments have helped the company acquire a large no. of corporate paying users and we expect losses to decline going forward.

• Q1 FY9/24 results were at a record high for the company for a first quarter period, with the company benefitting from stronger-than-expected demand from the auto sector, together with a forex tailwind from a weak Japanese yen benefitting the Overseas Subsidiaries segment; this business saw a major uplift in profitability YoY with positive trading conditions in the Americas and Thailand for exported Japanese goods.
• Demand also remained firm in the company’s specialist areas of expertise such as bio-related and feed-related areas, and geothermal equipment.
• The company has maintained FY9/24 guidance, which indicates some expectations of auto demand normalizing from pronounced levels in Q1 FY9/24.

• Goldwin has had a remarkable run of record sales and profits, a beneficiary of the continuing growth in the outdoor market as well as its own retail strategy. 
• Although much of its success has come from The North Face, Goldwin is determined to become a more diversified – and global – sports business.
• When we first recommended the stock it was around ¥5,000 and rose to a peak of ¥12,600 but is now about ¥9,000. Will it grow again? We think so.

• With ISS’s plan to resume ROE criteria and TSE’s mention of P/B, more shareholder proposals calling for stronger shareholder returns due to stagnant stock prices and ROEs can be expected.
• Since over 30% of listed companies have major shareholders holding 20% or more of their interests, the voting behavior of domestic institutions is key to the passage of shareholder proposals.
• With TSE’s disclosure request regarding the significance of parent-subsidiary listings, this matter will become another focus of the AGM in business portfolio reform and securing the interests of minority shareholders.

• We believe that Arm is now valued as a “growth at any price” stock; with nearly half of SoftBank group’s equity value reliant on Arm, NAV downside risk is rising
• The risk of JPY appreciation is real, whilst SVF2 remains very exposed to financing costs, with 85% of its equity value in private companies
• Softbank shares trade at a 55%+ discount to the estimated NAV; yet the downside risks to Arm’s valuation, along with the potential JPY appreciation, should keep the discount wide

• Recruit Holdings (6098 JP) reported 3QFY03/2024 results on Friday. Revenues decreased YoY due to decline in HR Tech revenues, while Adj. EBITDA for the quarter increased YoY. Both Beat consensus estimates.
• Weakening of labour markets and new pricing model have impacted HR Tech revenues, while cut down on investments have helped improve HR Tech margins.
• The company has launched Indeed Plus to help improve earnings, which we don’t expect to have a major impact on Recruit Holdings (6098 JP) ’s earnings in the near term.

• 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 – Welbe Inc (6556 JP), Probiotec Ltd (PBP AU), JSR Corp (4185 JP), Shinko Electric Industries (6967 JP), Genetron Holdings Ltd (GTH US), Lithium Power International (LPI AU). 
• Lowest spreads – Tietto Minerals Ltd (TIE AU), Orecorp Ltd (ORR AU), QV Equities Ltd (QVE AU), Pact Group Holdings (PGH AU), CPMC Holdings (906 HK), Irc Ltd (1029 HK). 

• The Nikkei 225 (NKY INDEX) has been rising for 2 weeks and it is starting to be overbought.
• The index may rise for another week (this week) according to our models, then the chances for a WEEKLY pullback will become substantial.
• Look at resistance targets in the 37200-37900 price area to place SHORT trades, target 1 week, then close the trade.

• Taiyo Pacific Partners took the original parent company (Roland Corp (7944 JP) of Roland DG Corp (6789 JP) private in 2014. It was re-listed in 2020. 
• Roland DG is one of the world’s leading large format digital printer manufacturers. They also make some interesting medical devices and systemic tools, and 3D milling/printing/engraving/photo impact machines.
• This TOB is at a 30.1% premium. Almost a 10yr high. But it is not expensive. And even if TPP has 20%, there is a LOT of float left over.

• SCREEN Holdings (7735 JP) could be added to a global index at the end of the month and there will be a lot of buying in the stock.
• There is a fair bit of positioning for the potential passive buying and there will be supply in the stock.
• However, the stock trades cheaper than its peers and a correction could provide an opportunity for long-term investors to enter the stock.

• A weekly summary of key developments across ECM and Event-Driven names tracked by us across Hong Kong, Australia, New Zealand, Singapore, Japan, Indonesia, Malaysia, Thailand, Korea, India and Chinese ADRs.
• ECM developments: Ola Electric (1700674D IN) and FirstCry (0172540D IN) IPOs.
• Event-Driven developments: Benefit One Inc (2412 JP), Lawson Inc (2651 JP), Welbe Inc (6556 JP), China Traditional Chinese Medicine (570 HK), L’Occitane (973 HK), Hollysys Automation Technologies (HOLI US). 

• On Thursday after the close, an entity tied to Polaris Capital announced an MBO of Welbe Inc (6556 JP). (Note this is Welbe not Welby Inc (4438 JP)). 
• The MBO by Tender Offer is set at ¥1,089/share is at a 29.952% premium to Thursday’s last trade. Coincidentally. It is well below where it traded 3-5 years ago.
• If large domestic financial investors want a bump, we might see some fun, but I expect there is enough ownership willing to tender to get this over the hump.

• 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, Thai Credit Bank finally ended Thailand’s long dry spell, although it wasn’t a happy ending.
• For placements, REITs appear to be coming back to life with rates now having peaked.

• EPS and BPS had run in parallel since June 2022, but BPS has accelerated at a more rapid pace since May 2023, and TOPIX has risen sharply since April 2023.
• Since TOPIX is more correlated with BPS than EPS, the hypothesis that “stock prices are more reliant on BPS increases, including cash increases, than on EPS” would be considered.
• Investors may believe that Japanese management still needs more time to use cash effectively, and evaluate companies based on their BPS, which indicates a movement toward improved cash flow.

• I tally 52 – mostly firm, mostly Asia-Pac – transactions currently being discussed and analysed on Smartkarma. Inside is a timetable of upcoming key events for each deal.
• Three new deals discussed this week on Smartkarma: Red 5 (RED AU)/Silver Lake Resources (SLR AU) merger; Ssangyong Cement Industrial (003410 KS)‘s Tender Offer; and Lawson (2651 JP) Tender Offer.
• Key updates took place on: Symbio (SYM AU), Bwp Trust (BWP AU), Vinda (3331 HK), JSR Corp (4185 JP), Benefit One (2412 JP), Kerry Express Thailand (KEX TB), Hollysys (HOLI US) 

• Asics absolutely smashed the last MTP; this year they have a more measured approach
• Full-Year OP guidance for FY24 is a little shy of street expectations, but this should not impact the share price
• Asics has a decent runway for growth ahead and will benefit from channel mix improvements. The stock remains undervalued relative to peers

• Apparently Elliott is requesting Mitsui Fudosan (8801 JP) conduct a very large buyback and to sell down its stake in Oriental Land (4661 JP).
• Some 17 months after the Cheng Family failed to secure 50%+ of Giordano International (709 HK), the family are now calling an SGM to install friendly directors.
• TheLawson (2651 JP) deal is not terribly surprising. It’s not terribly surprising that it is being done cheaply. It IS being done too cheaply. This is bumpable by force. 

• Terumo Corp (4543 JP) posted highest ever quarterly and YTD revenue and operating profit in Q3FY24. Double-digit growth in C&V and TBCT businesses are the main revenue growth driver.
• During 9MFY24, gross profit margin expanded 50bps YoY to 52%, while operating profit margin improved 40bps to 15.5%. Profitability improvement through price increases and cost reduction is on track.
• Terumo has revised both FY24 revenue and profit upward to reflect continuing positive impacts from yen depreciation. The company is aiming for record high revenue and profit in FY24.

• Inflation, having peaked at 4.3% in January 2023, has been on a downward trend throughout the year, with figures dropping to 2.8% in November and further to 2.6% by December.
• In this insight, we analyze the recent quarterly performance of Yakult Honsha (2267 JP), Nissin, and Seven & I, Japanese Consumer Staples companies discussed in our prior Smartkarma Original.
• While Nissin Foods Holdings (2897 JP) showcased excellent performance, Yakult and Seven & I Holdings (3382 JP) faced struggles in their recent quarters.

Softbank Group’s (SBG) Q3/23-24 results were positive as expected, with decent investment gains, a significant increase in NAV, along with stable and healthy LTV. The development came on the back of strong equity markets, at least in the US. Conversely, portfolio diversification has worsened severely. SBG intends to maintain share buybacks while actively making investments.

• Solid execution, high earnings visibility – Q1-3 FY3/2024 results demonstrated a continuation of positive developments in 1) sustained growth in maintenance and repair services, and 2) stronger than expected demand for modernization services.
• We believe JES is providing in-demand high-quality services driven by secular growth as building owners convert to reputable independent providers for cost management, and structural demand driving modernization of aging elevators.
• The company is on track to increase service capacity with the new JES Innovation Center Kansai (JIK) due to commence operations in April 2024.

• There are 167 companies of 1,784 companies in Metrical Universe (12/2023) with major shareholders holding over 50% stake, and 605 companies with major shareholders holding between 20% and 50% stake.
• TSE has requests listed parent companies, listed subsidiaries, and affiliates to disclose the significance of parent-subsidiary (affiliates) listings. This will further increase pressure for the dissolution of parent-subsidiary (affiliates) listings.
• Hitachi’s transformation into value-creating company, which once spawned numerous listed subsidiaries, has been a success story since it began full-fledged “selection and concentration” process through the dissolution of parent-subsidiary listings.

• Post-Close, the Nikkei carried a breathless headline that Dai Ichi Life Insurance (8750 JP) had agreed a deal for Pasona Group (2168 JP)‘s stake in Benefit One Inc (2412 JP). 
• Not long afterwards, TDNet Filings provided Benefit One results, a change to BeneOne’s Opinion on the M3 Offer, and Board Resolution to Support/Recommend DIL’s TOB, now at ¥2,173 and ¥1,526/share.
• Looks like a done deal. And this will also likely delay the start of the DIL Bid to 26-28 February timeframe.

• Today, Dai Ichi Life Insurance (8750 JP) announced a TOB for Benefit One Inc (2412 JP) having agreed a deal with Pasona Group (2168 JP) to sell into a buyback.
• Pasona will get ¥1,526/share, and having agreed, it announced the expected special profit to be booked in the FY to 31 May 2024.
• At ¥113.6bn on a consolidated basis (¥122.3bn on parent), less ¥1.165bn of associated costs, that’s ¥112.4bn at the lower end. That’s ¥2,870/share. Then there’s the rest of the business.

• Benefit One Inc (2412 JP) has recommended Dai Ichi Life Insurance (8750 JP)’s revised offer of JPY2,173, a 2.4% and 90.1% premium to the previous offer and undisturbed price, respectively.
• The Board and Pasona Group (2168 JP) secured the highest price. M3 Inc (2413 JP) tabled an alternative proposal but Pasona had concerns about the plan’s tax treatment.
• Based on the irrevocables, the minimum acceptance condition requires a 31.6% minority acceptance rate, achievable due to the high premium and the competitive bidding process.  

• Welbe Inc (6556 JP) has recommended a Polaris Capital-sponsored MBO tender offer of JPY1,089 per share, a 30.0% premium to the undisturbed price (8 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 46.67% ownership ratio. 
• Based on the irrevocables, the minimum acceptance condition requires a 30.1% minority acceptance rate. While a knockout offer, the acceptance condition is achievable. 

• A couple of weeks ago I wrote here about noted activist Murakami-san and his new 5+% position in Pacific Metals (5541 JP). I warned it might be a rug pull. 
• It turns out, from subsequent filings, that it may have been a rug pull. This isn’t the first time. It isn’t even the first time on this stock. 
• That said, there are goings on here, and it pays to watch them. 

• Dai Ichi (8750 JP) agreed with Pasona (2168 JP) for Pasona to sell its shares back to Benefit One (2412 JP) in a buyback after Dai-Ichi’s Tender Offer for Benefit.
• This process gives Pasona a tax advantage versus selling into a Tender Offer at the same price.
• What does Pasona take home? ~¥2,822/share versus its last price of ¥2,733/share. Then you have stubs ops (conservatively worth up to ~¥1,960/share) and Pasona’s stake in Bewith (9216 JP) (~¥360/share).

• Demonstrating dependable growth – Q1-3 FY3/2024 results were in line with company guidance, driven by a combination of demand recovery in the Americas, sustained growth for Shofu’s competitive Chemical Products (CAD/CAM resin materials and restorative filling materials), and a forex tailwind – overseas sales made up 57.4% of total sales, indicating stable progress towards the long-term target of 66.0%.
• Shofu’s focus on business investment in R&D, recruitment, and sales activities has resulted in a limited growth profile at the operating profit level for the period (+3.9% YoY), but we believe a boost in sales volume will drive a margin enhancement into Q4 FY3/2024 and beyond.

• Americas and China gaining momentum – the highlight for Q1-3 FY3/2024 was sales growth in North America & Latin America growing 4.1% YoY versus a 4.5% decline in Q1-2 FY3/2024. China also maintained strong momentum with sales growth of 16.5% YoY, and Europe remained steady at 16.8% YoY

• Annual sales growth has dropped from 20% or more in recent years to 12.5% in FY Dec-23. The operating margin ticked up last year, but is basically trending sideways.
• The share price has dropped by 35% since April 2023, bringing the projected P/E ratio down to the bottom of its 10-year range. Buy back in for the long term. 
• Guidance, which is usually accurate, is for 12.7% sales growth this year and an operating margin of 12.5%. Growth should continue in future years with flat or better margins.

• A company that is geared to Japan’s macro revival with additional micro catalysts. 
• Ownership of financial companies which are set to benefit from a normalisation of Japanese monetary policy.
• The low Price to Book means the company will need to keep up momentum on its capital management plans to  stay in the Prime Section of Topix.

• While many companies have disclosed enhanced shareholder returns, dividend payout ratio in 30% range and no increase, and 4% increase in total dividends from the previous year, is not enough.
• Since DOE remains at just under 3% same as the previous year, few companies allocate enough cash to dividend to reduce Shareholder’s Equity, and consequently ROE is expected to lower.
• Cash on hand in September is at all-time high. Behind the ROE, which shows no sign of rising, is the psychology of managers who want to keep cash on hand.

• Chugai Pharmaceutical (4519 JP) reported 5% YoY decline in core revenue in 2023, due to the decrease in the supply of COVID-19 treatment Ronapreve to the government.
• For 2024, Chugai expects core revenue to decline mainly due to the absence of Ronapreve revenue and decline in Actemra export. However, operating and net profits are expected to increase.
• Hemlibra export and new launches such as Vabysmo, Phesgo, Polivy, and Alecensa are expected to drive long-term growth of the company.

• Today, just before the close, the Nikkei sprung a headline saying KDDI Corp (9433 JP) would take over Lawson Inc (2651 JP). The stock immediately headed to limit up. 
• Post-Close, details emerged. KDDI will buy the 50% that MitCorp does not own, this will become a 50/50 JV. TOB launch at ¥10,360 will be in April. Squeezeout in September.
• This appears to be the Next Step in Lawson’s Big Boots Adventure. The premium is too light. The price is too low. And that is not counting the synergies.

• Lawson Inc (2651 JP) has recommended a pre-conditional tender offer from KDDI Corp (9433 JP) at JPY10,360 per share, an 18.8% premium to the undisturbed (5 February). 
• The pre-conditions relate to regulatory approvals in Japan, China, South Korea, and the EU. The offer is expected to start in April, suggesting no significant issues, particularly with SAMR approval.
• Based on the irrevocables, the minimum acceptance condition requires a 30.2% minority acceptance rate, achievable as the offer represents an all-time high. 

• Activist investor, Elliott Management has acquired over a 2% stake in Mitsui Fudosan (8801 JP) and is urging it to sell its 6% stake in Oriental Land (4661 JP).
• Elliott appears to have identified the path of least resistance, as Mitsui Fudosan had already indicated a willingness to sell its Oriental Land shares last year.
• If Elliott’s campaign proves successful, it will inadvertently benefit Palliser, which is currently challenging Keisei Electric Railway Co (9009 JP) with a similar proposal.

• Shiseido Company (4911 JP) relies heavily on Japan and China, each making up over one quarter of sales. 
• The long thesis is simple – I expect improvement in both regions in the near future, and the valuation is very attractive.
• Blackstone just announced a potential bid for L’Occitane (973 HK), which I have written extensively about.  We could potentially see a pickup in interest in the sector.

• KDDI’s agreement with Lawson and Mitsubishi to make a tender offer for the convenience store chain is a game-changer for what has become a slow growth convenience store sector.
• There are myriad potential synergies across e-commerce, new store types and also the promising new revenue stream of retail media. Lawson may be worth more than KDDI’s offer suggests.
• And while Lawson may be behind Seven Eleven and Familymart, on some KPIs, like HQ revenues, it is No. 1 and also matches Seven Eleven on same-store sales.

• One year ago we looked at the arrangement between Nissan (7201 JP) and Renault (RNO FP) regarding their relationship, which left Renault with a 28% Nissan stake to be sold.
• Since then, Renault has undertaken one selldown but its recent announcement of Ampere’s listing cancellation once again raises the possibility of a further selldown of Nissan’s stake by Renault.
• In this note, we talk about the updates since our previous note and the impact of the Ampere listing delay.

• KLA had a rare miss. The guidance was a bit light for the inspection execution machine.
• KLA rarely misses and is by far the best financially managed of the large-cap semicap companies.
• KLA reports Q2 EPS $6.16 ex-items vs FactSet $5.91