Japan

• 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

• The FT carries an article this AM saying Elliott Management have built a stake in Mitsui Fudosan (8801 JP) and has asked it to undertake measures to increase ROE.
• Measures requested apparently include a very large buyback and a demand the company sell down its stake in Oriental Land (4661 JP). The article is worth reading.  
• Shares are up sharply on this news. The fund was in the news last year about this time regarding Dai Nippon Printing (7912 JP). I’d expect more noise to come. 

• Isetan Mitsukoshi Holdings Ltd (3099 JP) on Friday announced Q3 results, a huge hike in H2 dividend (from ¥12/share guided to ¥20/share newly guided), and a buyback. 
• 9mo Revenues were up 9.4%yoy (after +16.7% the previous year), OP +66.7%, and Net Profits +59.0%yoy through three quarters. Full-year Revenues, OP, and NP were all revised up slightly.
• The buyback is for up to 11mm shares, spending up to ¥15bn over the next 8 weeks. Looking at details of the shareholder structure is worthwhile.

• Quiddity’s “Who is Ready” series of insights aims to objectively identify names listed on the Tokyo Stock Exchange that are potential additions to the TOPIX Index in future.
• The TOPIX Inclusion events of Visional (4194 JP) and Furuya Metal (7826 JP) took place at the end of January and the price performances were mostly in line with expectations.
• Currently, there are no upcoming TOPIX Inclusion events that have been announced officially but there are couple of pre-event names that should be on your watchlist.

• Yaizu Suisankagaku Industry (2812 JP)/YSK has recommended Inaba’s tender offer of JPY1,350 per share, an 18.7% premium to J-STAR’s failed offer and a 9.8% premium to the last close. 
• J-STAR’s offer failed as shares consistently traded above terms due to Murakami and 3D Investment Partners emerging as substantial shareholders. J-STAR extended the close but did not bump its offer.
• While Inaba’s offer values YSK below book value, Murakami is now supportive. Based on the irrevocables, the minimum acceptance condition requires a 57.2% minority acceptance rate.

• In addition to the large number of micro-caps among companies listed on the Growth Market, another problem is the lack of growth in market capitalization after IPOs. 
• Many managers consider IPO to be the goal, and this is evidenced by the fact that not many companies raise capital at IPO and after listing.
• The government proposed raising the market capitalization criteria for IPOs and revitalizing the secondary market for pre-listed companies. TSE is likely to review its listing criteria as early as 2025.

• JSR Corp (4185 JP)  announced 2 February on its website that the Research Foundation for the State University of New York (“RF SUNY”) filed suit against JSR subsidiary Inpria 25 January.
• JSR claims no wrongdoing. A court order from the US District Court for the Northern District of New York denied RF SUNY’s request for a hearing by 5 February.
• This may put a short-term damper on sentiment in the name, and I expect the JICC people have been working on this for a week. 

• The Research Foundation of the State University of New York (SUNY RF) has filed a patent infringement lawsuit against JSR Corp (4185 JP) and its subsidiary, Inpria.
• SUNY RF claims the “planned tender offer will irreparably harm SUNY RF absent preliminary relief” and filed a motion for a preliminary injunction to stop JSR licensing patents to JIC.
• JSR has yet to file a response, making it hard to judge the lawsuit’s merits. The best case is the PI is not granted, delaying the tender by a month.  

• There are some Japanese stocks that have dropped in price even as the broader market has powered higher. That could lead to the stocks being deleted from global portfolios.
• The deletion from passive portfolios will lead to a liquidity event at the end of February where passive trackers will need to sell multiple days of ADV.
• BayCurrent Consulting (6532 JP) is a dark horse for inclusion in the Nikkei 225 (NKY INDEX) in March and this deletion could take the stock lower before the Nikkei 225 announcement.

• 3QFY23 results reveal losses related to Aozora’s US CRE exposure and securities portfolio; management forecasts a FY23 loss and a 50% cut in the previously forecast FY2023 dividend
• US CRE exposure is 6.6% of total loans and Aozora’s US CRE deterioration propelled the NPL ratio to 2.87% up 162bps QoQ, the worst NPL ratio of the peer group
• The securities portfolio hits are in US MBS and US bond ETFs; SMFG and Mizuho have large relative FX bond exposures, but they have less duration risk

• In mid-January, the TSE announced a “name-and-shame” list where they listed all the companies which had put forth a disclosure about 【資本コストや株価を意識した経営の実現に向けた対応】.  But they did not actually shame.
• The list shows which companies have disclosed a policy/consideration. But no data/links. We have the links. On Feb 1, the TSE put out a presentation and set of case studies.
• Designed to present the “Investor’s Point of View”, they have unexpectedly worthwhile advice/commentary for corporates. The TSE appears to be trying hard to prompt serious consideration rather than box-ticking.

• The share price was up 4.4% on Friday – and up 2.3x since the end of October – raising forward valuations to the high side of their usual range.
• Management raised FY Mar-24 operating profit guidance slightly after 3Q results that were strong YoY but flat QoQ. 4Q should be better as finished goods inventory is shipped.
• Operating efficiency has improved and a new semiconductor up-cycle has begun, but the numbers suggest caution. Take profits and reassess.

• The review period for a global index and a bunch of local indices ended last week. The announcement of the changes will be made in 1 week to 4 weeks.
• Strike Energy (STX AU) will replace Costa Group Holdings (CGC AU) in the S&P/ASX 200 (AS51 INDEX) at the close on 8 February.
• The inflows to mainland China ETFs continue for another week. There were big inflows to iShares India ETF (INDA US) and Ishares India Small-Cap (SMIN US). 

• I tally 49 – mostly firm, mostly Asia-Pac – transactions currently being discussed and analysed on Smartkarma. Inside is a timetable of upcoming key events for each deal.
• One new deals discussed this week on Smartkarma: The all-scrip Offer for QV Equities Ltd (QVE AU) from WAM Leaders Ltd (WLE AU).
• Key updates took place on: Orecorp Ltd (ORR AU), Benesse Holdings (9783 JP), Glosel (9995 JP) and Outsourcing Inc (2427 JP).

• 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 – Amer Sports (AS US) is up 15% since listing. Ola Electric (1700674D IN) and FirstCry (0172540D IN) IPOs.
• Event-Driven developments – Benefit One Inc (2412 JP), Benesse Holdings (9783 JP), Glosel (9995 JP), Outsourcing Inc (2427 JP), Hollysys Automation Technologies (HOLI US), QV Equities Ltd (QVE AU). 

• Since the introduction of the Corporate Governance Code, the hurdle for listed companies to fulfill their responsibilities has become higher, which is why more managers are choosing to go private.
• While some of companies with large market capitalizations that overseas investor engagement extends to are showing promise for change, many others are failing to step up management to create value.
• TOPIX’s rise has been mainly driven by an increase in the number of companies rather than an increase in stock prices. The market should become higher in quality through de-listing.

• As totally expected, Dai Ichi Life Insurance (8750 JP) extended its expected start date for the Tender Offer on Benefit One Inc (2412 JP).
• The possibility of a fourth Offer attempt by the Queks is raised as Elliott surprisingly exits its position in Guoco Group Ltd (53 HK).
• Outsourcing Inc (2427 JP) is eminently bumpable, But unless investors force the issue, don’t expect a bump.

• Continuing DX tailwinds and developmental hurdles – Q1-2 FY6/2024 results highlighted continued demand for DX solutions, combined with a stable uptick for Consolidated Financial Solutions driven by outsourcing.
• With 11.6% sales growth YoY and operating profit growth YoY at a slower pace of 5.4%, the company is maintaining its course by investing in a software-driven strategy.
• A fundamental element is the development of the Management Solutions segment which currently faces challenges in building up a pipeline, and the company has identified some necessary changes in sales activity. 

• Q1-3 FY3/2024 results were in line with unchanged FY company guidance, with the company displaying 1) sustained growth in Strategic/DX Consulting demand and System Integration, 2) ongoing successful business expansion into new market sectors, and 3) management achieving a delicate equilibrium between actively generating current growth and investing for the long-term success of the business.
• Although DX will remain a structural tailwind for some time to come, the company’s growth potential will be underpinned by access to high-caliber hires at both graduate and mid-career levels.
• We believe the announcement of a business and capital partnership with CIRCULATION (7379) points in the right direction in establishing a channel to a quality talent pool.

• Q1-3 FY3/2024 results were ahead of FY company guidance which remained unchanged, positioning the company for a robust year-end in our view.
• The key earnings drivers remain DX-related, having a positive impact on sales growth and profitability improvements in Cybersecurity, Consulting and Training, and IT Infrastructure segments.
• ID Holdings’ objectives of strengthening its DX-related offerings, developing effective vendor partnerships, optimizing administrative operations, and shifting human resources to profit centers continue to yield positive results. 

• CyberAgent Inc (4751 JP) reported 1QFY09/2024 results yesterday. Revenue increased 15.2% YoY with OP increasing 12.4% QoQ, and beat consensus estimates by a huge margin.
• All three business segments have shown strong improvement, with newly released gaming title  “Jujutsu Kaisen Phantom Parade” driving growth for Games business.
• CyberAgent’s (CA’s) share price moved up by about 4% following earnings announcement and seems that the worst is over for the company.

Rakuten Group has launched a USD 1.8 bn 144A/RegS three-year notes offering with a coupon of 11.25% at 97.83, yielding 12.125%. The deal was upsized from USD 1.0 bn. Proceeds from the transaction will be used to fund a concurrent tender offer for the company’s two USD 2024 bonds.

The tender offer is for the 10.25% 2024s (USD 950 mn outstanding) and 3.546% 2024s (USD 800 mn). The tender cap is set at the size of the notes offering, which would be enough to buy back all the outstanding 2024 bonds. The tender consideration is USD 1,006.76 per USD 1,000 principal for the 10.25% ’24s, and USD 956.75 for the 3.546% ’24s. The early tender consideration is USD 30 per USD 1,000 principal.

• On 31 January 2024, Outsourcing Inc (2427 JP) put out a notice to the Exchange regarding progress towards Execution of the Tender Offer by Bain.
• All preconditions for the commencement of the Tender Offer except for the acquisition of clearance of EU Regulations on foreign subsidies affecting the EU market. 
• This process appears to be “as expected” given Outsourcing’s multinational presence and the new Foreign Subsidies Regulation which went into effect in the EU 28 weeks ago.

• The fact that only 7% of companies disclosed their cost of capital disappoints investors who had hoped that the “TSE request” would change management’s mindset to become more share-price conscious.
• The average ROE of listed companies declined slightly. This indicates that they haven’t been able to find effective investments to raise business profitability and that shareholder returns have been inadequate.
• The ROE trend does not indicate a significant change in management’s mindset, so this will be a major issue if the stock price moves lower to the June AGM season.

• The review period for the Nikkei 225 (NKY INDEX) March rebalance ends yesterday. There could be three changes at the rebalance with sector balance in focus.
• Depending on the changes, passive trackers will need to buy between 1.3-19x ADV (7.1-24% of real float) on the inclusions and sell between 3.5-47x ADV on the deletions.
• Fast Retailing (9983 JP) avoids capping in March, passives will buy Nitori Holdings (9843 JP), and 25 stocks have over 0.5x ADV to sell as part of the funding trade.

• The Nikkei 225 data for the March 2024 rebalance is a wrap. The names are the same as before but there is likely less DISCO Corp (6146 JP) to buy.
• It’s still big, but smaller than before because of the difference between performance and the change in PAF required to be below 1%. A 4:1 share split would be optimal.
• I recommend a few positioning changes from before, and the Fast Retailing trade loses one short-term option but the longer-term one stays in place.

• Advantest reported strong Q3 results, driven by robust demand for memory testers
• The company raised its full-year guidance for revenue and operating profit to inline with analyst estimates
• Advantest’s stock price remains overvalued on AI-hype. We remain bearish with a potential downside of 25%.

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

• Bain has delayed the Outsourcing Inc (2427 JP) tender start from late January due to more time required to satisfy the European regulatory approval pre-condition.
• Potential reasons for bumping are opportunistic timing, re-rating of Japanese peers, a high minority acceptance rate, and an offer below the mid-point of the IFA DCF valuation range.
• Potential reasons for keeping terms unchanged are no activists, a 52.1% premium to the undisturbed price, and an offer still attractive compared to Japanese peers’ multiples and price ratios.  

• For the month of January 2024, 8 new transactions (firm and non-binding) were discussed on Smartkarma with an overall announced deal size of ~US$2bn.
• The average premium for the new transactions announced (or first discussed) in January was ~34%. 
• This compares to the average premium for transactions in 2023 (117 transactions), 2022 (106), 2021 (165), 2020 (158), and 2019 (145 ) of 39%, 41%, 33%, 31%, and 31% respectively.

• Nihon M&A Center (2127 JP) reported 3QFY03/2024 results yesterday. Both revenue and OP increased 22.5% and 64.6% YoY respectively and were above consensus estimates.
• M&A revenues for the quarter saw significant growth after seeing two consecutive quarters of YoY decline driven by growth in the no. of deals and revenue per transaction.
• The company’s share price has moved up by around 15% following the earnings announcement, however, share price has been down by more than 30% over the last 12-months.  

• ANA has revised its FY24 to March 2024 profit guidance upward on higher revenues; EBIT up from ¥120bn to ¥190bn in line with consensus (AIRCT ¥182bn).
• Air Transportation naturally drives the upgrade, with its EBIT guide up ¥60bn as higher revenues outweigh higher costs.
• This upgrade also has major relevance for JAL, where expect a FY24 EBIT guidance upgrade. We are at ¥177bn versus consensus of ¥142bn/guidance of ¥130bn.

• M3 Inc (2413 JP) reported 3QFY03/2024 results today. Both revenue and OP decreased 1.6% and 7.5% YoY respectively and fell below consensus estimates.
• Medical Platform’s revenues declined YoY while overseas segment’s top line growth has been slowing down raising concerns over m3’s growth prospects.
• Given continued decline in earnings, it seems that m3 will struggle to meet its full-year guidance suggesting there is further downside.

• Canon Inc (7751 JP) announced 2023 full-year results on 30 January. Results were mixed. Revenues did OK. Net Profit underperformed expectations. 2024 Net Profit Guidance is 1% higher than consensus.
• Canon has a 15yr history of one kind of buyback. ¥50bn every time. 19 times in a row. Short (10 weeks max), sharp, executions (executed in 3-5 weeks). Every time. 
• This time offers a new buyback. ¥100bn. Over the space of a year. That’s only 3% of ADV but the shareholder structure is different than you think it is.

• If the ISS ROE criteria, which seems somewhat slow, were to be resumed, many companies would still be below 5%. However, how many companies are feeling threatened?
• About 40% of the companies have large shareholders holding more than 20% of their shares, which is one reason why many companies do not feel a sense of threat.
• Domestic institutional investors should apply the Proxy Voting Guidelines more strictly to companies that do not make maximum efforts to increase their ROE.

• Aeon Co Ltd (8267 JP) owns 13% of Tsuruha Holdings (3391 JP). Oasis owns 13% too. Oasis ran a governance campaign but lost last summer’s AGM. Aeon supported Tsuruha.
• Tsuruha shares popped in November when Tsuruha said it was looking at its strategic options. BBG reported PE firms were circling. Now Aeon wants to buy Oasis’ stake. 
• That would put Aeon in a near-blocking position without consolidating. And it would mean minorities stayed minorities. The real question is whether this is what Tsuruha wants.

• The “MBO” for Benesse traded through terms from the 6th day post-announcement onwards. 37% total traded since announcement, 20% since that 6th day. 
• The deal as announced 10 November was entirely too cheap. It was somewhat egregious if you look through the balance sheet. Plus there was a free museum on top.
• But to no avail. There is no bump. There have been no activists peeping above the parapet (yet). It isn’t impossible to block, but if nobody shows their face…

• Two months ago, Macnica Holdings Inc (3132 JP) launched a tender on semiconductor trading house Glosel (9995 JP). OK, but… it was too cheap at 0.71x book. Why?  
• Glosel is special because it has three main assets. 1) 61% of net assets are inventory (<3mos), 2) 34% of net assets are net receivables (<3mos), 3) 8+% is securities.
• It took two months to get approvals in place and two months of trading well through terms, and so now the terms have been bumped 16%. Thank Murakami-san.

• Benesse Holdings (9783 JP) notes that the pre-condition for EQT-backed MBO has been satisfied. The offer price remains unchanged at JPY2,600 per share, a 45.1% premium to the undisturbed price.
• EQT has noted a possibility of extending the tender offer close from 4 to 13 March, which suggests a limited appetite to bump the offer.
• The shares are trading 1.3% above terms. A 51% minority acceptance rate and no competing bidder indicate an unfavourable risk/reward profile – a 27% downside on deal break. 

• In 3QFY24, Oriental Land (4661 JP)‘s revenue may fall short of the consensus estimate by approximately 3%, and its OP could be about 6% below the consensus.
• Despite revising up its annual guidance in October 2023, the share price has not surpassed its previous highs since June of last year.
• As such, a minor deviation from consensus, as we anticipate, has the potential to significantly impact price perfromance.

• Glosel (9995 JP) has recommended Macnica Holdings Inc (3132 JP)’s revised tender offer of JPY750 per share, a 16.3% premium to the previous JPY645 offer. 
• Murakami’s clever manoeuvring to build a 12.67% stake and propose a JPY750 competing offer has forced Macnica to bump its offer. 
• The minimum acceptance condition requires a 66.7% minority acceptance rate. This acceptance rate is achievable because the offer is attractive and Murakami is supportive. 

• Paltac Corporation (8283 JP) is a good candidate to boost its shareholder value via share buybacks as it net cash and has fairly low P/BV and PE 
• Management has elaborated a detailed plan to boost its P/BV ratio, with targets to boost revenues and profit margins, as well as a 30% dedicated payout for dividends 
• Our fair value is JPY4750 (3% UPSIDE) pegged to 14.7x (its LT mean) FY2024 earnings; as FY2024 earnings guidance is a lowly 5%. Management needs to do more  

• Looking at BOJ’s fund flows for private non-financial corporations for 4 cumulative quarters, Cash and Deposits have increased, and Outward Direct Investment has increased steadily as a destination for cash.
• The average dividend payout ratio for listed companies has remained flat, while both ROE and DOE have declined slightly, which may reinforce the view that shareholder returns are not sufficient.
• With cash on hand still increasing while capital expenditures have not grown much, the use of cash is expected to remain a focus of discussion next fiscal year.