Japan

In today’s briefing:

BIG Nippon Electric Glass (5214) Buyback, Possibly Offset by Cross-Holder Selling
Offensively Low-Priced MBO for Teraoka Seisakusho (4987) – Yet Another SmallCap Governance Disaster
Quiddity JPX-Nikkei 400 Rebal 2024: End-Oct 2023
Panasonic (6752) | Panic-Sonic
Meaningful If “P/B Below 1x” Is a Change of Mindset that Makes Managers Decide to Take an MBO
Nihon M&A: Earnings Show Some Recovery; but Could Miss Full-Year OP Guidance

BIG Nippon Electric Glass (5214) Buyback, Possibly Offset by Cross-Holder Selling

Nippon Electric Glass (5214 JP) is going through a rebuilding year. Lots of restructuring expenses and I expect there will be more.
The company today announced the outline of its next Mid-Term Management Plan for the 5 years to 2028. It will announce details in early Feb 2024 with results.
In that, there is ¥50bn of buybacks through Dec2026, of which ¥20bn will be made in the next 4mos. That is about 11-14% of ADV assuming the price jumps.

Offensively Low-Priced MBO for Teraoka Seisakusho (4987) – Yet Another SmallCap Governance Disaster

A small specialty adhesives maker – Teraoka Seisakusho (4987 JP) has had an MBO proposed and approved. At 0.54x book. NetCash+securities+2.5mos of net A/R+inventory = 99% of Takeover Market Cap.
Borrow 2x EBITDA, pay out the cash and securities, and this is being done at <0.3x remaining book. The takeover is 100+% bank funded. It’s ridiculous.
For this to get stopped, however, someone has to go activist on a smallcap where retail owns the entire float and friends and family own 55% to start.

Quiddity JPX-Nikkei 400 Rebal 2024: End-Oct 2023

By Janaghan Jeyakumar, CFA

JPX-Nikkei 400 is composed of common stocks listed on the Tokyo Stock Exchange. It is a free-float-adjusted market-value-weighted (capped) index composed of 400 constituents.
A periodic review is conducted by the Index providers, the JPX Group and Nikkei Inc, in August every year. We look at the potential forward inclusions and removals every month.
Below is a look at potential Inclusions and Removals for the JPX-Nikkei 400 Rebalance to come in August 2024 based on trading data as of end-October 2023.

Panasonic (6752) | Panic-Sonic

By Mark Chadwick

Panasonic’s Q2 results showed flat consolidated sales of Y2,090 billion, with a 24% YoY increase in adjusted operating profit.
FY3/24 outlook was revised down with sales and operating profit reductions across segments, notably in Lifestyle and Energy
Our concerns include the company’s complex structure, low overall profitability, uncertainties about valuing IRA credits, and challenges stemming from economic conditions, leading to pessimism about Panasonic’s stock price

Meaningful If “P/B Below 1x” Is a Change of Mindset that Makes Managers Decide to Take an MBO

By Shifara Samsudeen, ACMA, CGMA

Although it’s important that the quality of companies be maintained and improved through metabolism, the number of listed companies has consistently increased due to the many IPOs and few delistings.
Many founders used IPOs as a tax-saving measure, and many managers were not thoughtful enough to increase shareholder profits, which is why there were many IPOs and few delistings.
Delisting through MBO or TOB for parent and subsidiary listed subsidiaries is much more effective than “TSE request” in reducing the number of companies with P/B below 1x.

Nihon M&A: Earnings Show Some Recovery; but Could Miss Full-Year OP Guidance

Nihon M&A Center (2127 JP) ’s 2Q revenues decreased YoY while OP remained flat. However, both revenue and OP beat consensus estimates driven by improvement in revenue per M&A transaction.
There was strong improvement in revenue per transaction driven by enhanced efforts and growth in no. of large deals, however, M&A revenues declined due to drop in no. of deals.
Nihon has so far achieved only 36% of its OP target and it seems unlikely for the company to reach its full-year OP guidance, suggesting there is further downside.

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Oct 30

Daily Brief Japan: Kenedix Office Investment Co, Nikkei 225, JSR Corp, M3 Inc and more

In today’s briefing:

KDX (8972) – The Kenedix REIT Merger After a Disastrous Index Inclusion Trade
EQD | If the Nikkei Begings to Rally, Where Will It Encounter Resistance?
Merger Arb Mondays (30 Oct) – JSR, Eoflow, Azure Minerals, Symbio, Hollysys, Haitong Intl
M3: Margins Continue to Dip and Likely to Miss Full Year Guidance

KDX (8972) – The Kenedix REIT Merger After a Disastrous Index Inclusion Trade

By Shifara Samsudeen, ACMA, CGMA

The merger between Kenedix Office Investment Co (8972 JP), Kenedix Retail REIT (3453 JP), and Kenedix Residential Investment (3278 JP) is done. Newco starts trading this week as KDX.
The trade was fine until I wrote 9 days ago there was still room to run. It fell the next day, bounced 3%, then got CRUSHED into the index upweight.
NEWREIT is now as cheap relative to its Pro-Forma Peer Group as it was at announcement.

EQD | If the Nikkei Begings to Rally, Where Will It Encounter Resistance?

By Nico Rosti

Last week, the Nikkei closed down at 30991.69 (CC=-2). The index’s sell-off could end in November, marking a temporary bottom from which a rally could start.
MRM models say that if the Nikkei bounces this week, it could rise for 3 weeks and reach a price area between 31624 (Q3/CC=+1) and 32892 (Q3/Gen.Pattern Boxplot).
The upcoming rally comes as a reaction to quite OVERSOLD conditions, as previously discussed, but could be followed by another pullback. This insight points to where the rally may end.

Merger Arb Mondays (30 Oct) – JSR, Eoflow, Azure Minerals, Symbio, Hollysys, Haitong Intl

By Arun George

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 – 111 Inc (YI US), Eoflow (294090 KS), Hollysys Automation Technologies (HOLI US), Symbio Holdings (SYM AU), JSR Corp (4185 JP), Healius (HLS AU), Haitong International.
Lowest spreads – Pact Group Holdings (PGH AU), Origin Energy (ORG AU), Chindata Group (CD US), Allkem Ltd (AKE AU), T&K Toka Co Ltd (4636 JP), Azure Minerals (AZS AU).

M3: Margins Continue to Dip and Likely to Miss Full Year Guidance

M3 Inc (2413 JP) reported 2QFY03/2023 results on Friday. Revenues increased 3.0YoY while OP decreased 7.1% YoY, both revenues and OP fell below consensus estimates by 0.2% and 4.7% respectively.
Medical Platform’s earnings continue to deteriorate while we are yet to see a meaningful improvement in overseas segment’s earnings to drive the next phase of growth for m3.
Given continued decrease in profits, we think the company will struggle to meet its full-year guidance suggesting there is further downside to m3’s share price.

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Oct 29

Daily Brief Japan: GMO Payment Gateway, Kokusai Electric , TSE Tokyo Price Index TOPIX and more

In today’s briefing:

Index Rebalance & ETF Flow Recap: KS200, KQ150, Yuanta Div+, LIT, HSCI, IDX, Japan Positioning
ECM Weekly (29th Oct 2023) – Kokusai, J&T, Midea, Wuxi XDC, Cirrus, Cello World, Honasa, SIA
% of Female Board Members Asks “Seriousness” Of Improving Profitability and Governance Etc.
Only 20% of Current CEOs in Japan Expected to Have a Female CEO Within 10 Years

Index Rebalance & ETF Flow Recap: KS200, KQ150, Yuanta Div+, LIT, HSCI, IDX, Japan Positioning

The coming week has a lot of review periods ending – KOSPI 200, KOSDAQ 150, CSI 300, CSI 500, SSE50, STAR50, ChiNext and SENSEX, among others.
The TOPIX rebalance will be implemented on Monday while the Global X Lithium & Battery Tech ETF (LIT US) and IDX indices will rebalance at the close on Tuesday.
There were outflows from Emerging Market ETFs including iShares Emerging Markets (EEM), iShares Core Emerging Mar (IEMG), Schwab Emerging Markets Equi (SCHE) and IShares Edge Min Vol Emerging Markets ETF (EEMV).

ECM Weekly (29th Oct 2023) – Kokusai, J&T, Midea, Wuxi XDC, Cirrus, Cello World, Honasa, SIA

By Sumeet Singh

Aequitas Research puts out a weekly update on the deals that were covered by the team recently along with updates for upcoming IPOs.
In the IPO space, Kokusai Electric (6525 JP) provided some relief in the ECM space, even as J&T Global Express (1519 HK) didn’t do much.
Given the earnings seasons, there weren’t any placement during the week. We did look at Singapore Airlines (SIA SP)‘s upcoming placement lockup expiry.

% of Female Board Members Asks “Seriousness” Of Improving Profitability and Governance Etc.

While necessary talent should be sought from both outside and inside the company, it is not good for the company’s future if the most of internal executive directors are male.
The appointment of women and foreign board members is an effective way to transform the board of directors to ensure transparency and objectivity, without compromising the traditional atmosphere of familiarity.
Companies with a higher percentage of female board members tend to be more proactive in their corporate governance practices and more diligent about improving profitability and stock valuation.

Only 20% of Current CEOs in Japan Expected to Have a Female CEO Within 10 Years

The group of companies with lower than 25% female board member will only manage to meet the targets by “matching numbers,” as few companies have high awareness regarding the practice.
Since the government target of 30% female managers was set in 2005, companies’ awareness remains low. It’s not easy to raise the ratio to 30% by the methods so far.
There are a number of initiatives that will not progress unless top management is replaced by women, including accelerated promotion of women to management positions and female board members.

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Oct 28

Daily Brief Japan: Japan Post Bank, Takeda Pharmaceutical, Misumi Group, Resona Holdings, TSE Tokyo Price Index TOPIX and more

In today’s briefing:

Japan Post Bank (7182) October TOPIX FFW Upweight Upon Us
Takeda: Guidance Lowered Due to Setbacks in Clinical Trials but Pipeline Development Continues
Misumi Group (9962 JP): Weak Sales in September, but Most Bad News Discounted
Japanese Banks – Stay the Bullish Course
Remain Overweight and Add Exposure to Japan; Buys in Insurance, Services, Tech, Staples, Utilities

Japan Post Bank (7182) October TOPIX FFW Upweight Upon Us

By Shifara Samsudeen, ACMA, CGMA

Japan Post Bank (7182 JP) gets a dramatic upweight in TOPIX on Monday 30 October. There is a LOT of stock to buy. Call it US$2.2bn.
Shares have to come from someplace. Basically it will all come from retail or from those who pre-positioned themselves in the stock (buying from retail). Some could come from short-sellers.
The stock WAS not cheap vs regional banks (what I see as their best set of comps) and the Q2 Unrealised Loss on Securities has ballooned. But care is needed.

Takeda: Guidance Lowered Due to Setbacks in Clinical Trials but Pipeline Development Continues

Takeda’s 2QFY03/2024 revenues increased 4.1% YoY beating consensus estimates by 6%. However, Takeda reported an operating loss of ¥49.3bn for the quarter due to impairment losses.
As we expected, recent setback in some of Takeda’s clinical trials have led to write-downs and triggered a downward revision to full-year profit guidance.
There has been excessive price reaction to these setbacks, however, Takeda continues to progress with its pipeline development with some newly launched drugs showing great potential.

Misumi Group (9962 JP): Weak Sales in September, but Most Bad News Discounted

By Scott Foster

Total sales remained weak in September, dropping 3.5% YoY. In 1H of FY Mar-24, sales were down 4.3%. Month-to-month, though, they have been trending sideways.
Die Components have been holding up best, followed by Factory Automation. The VONA e-commerce business has been more volatile, but still shows a lack of traction.
Operating profit dropped 31% in 1H, but management is guiding for a 23% increase in 2H. This looks optimistic, but most of the bad news should be in the price.

Japanese Banks – Stay the Bullish Course

By Victor Galliano

So far in 4Q23, Japanese banks’ share prices have registered a mixed performance, in part due to the unsettled global market conditions; yet the Japanese bond yield curve keeps steepening
We assess the top twelve Japanese commercial banks by market capitalisation, and we believe that Japanese banks remain good value with, a rare thing, improving fundamentals
Ahead of the September results, we stick with our buys on Resona, Mizuho and SMFG; Resona has lagged deserving to re-rate further, and we add Hachijuni to our buy list

Remain Overweight and Add Exposure to Japan; Buys in Insurance, Services, Tech, Staples, Utilities

By Joe Jasper

The MSCI ACWI index (ACWI-US) continues to test major support at $90.50-$91.50, though no decisive break yet; as long as this support area holds, we remain constructive on global equities.
MSCI EM (EEM-US) continues to test $37 support, while MSCI ACWI ex-US (ACWX-US) and EAFE (EFA-US) are testing supports at $45 and $65-$66, respectively
Remain overweight and add exposure to Japan; the TOPIX remains in a 1.5-year RS uptrend (vs. MSCI ACWI), and continues to hold above 5-month support at 2200-2215

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Oct 27

Daily Brief Japan: Keisei Electric Railway Co and more

In today’s briefing:

Keisei Electric: Activists Arrive As Expected

Keisei Electric: Activists Arrive As Expected

By Oshadhi Kumarasiri

Just as we suspected earlier in the year, there is now talk of an impending investor activism campaign targeting Keisei Electric Railway Co (9009 JP).
The activist is Palliser Capital, a multi-strategy fund based in London and run by former employees of Elliott Management, a company well-known for its activist campaigns in Japan.
Their proposal is simple and straightforward, requesting for a 35% reduction in Keisei Electric’s Oriental Land holding.

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Oct 26

Daily Brief Japan: Cosmo Energy Holdings , Japan Tobacco, Appier Group, TSE Tokyo Price Index TOPIX and more

In today’s briefing:

Cosmo Energy (5021) – Headed to an EGM Showdown for the Poison Pill
Japan Tobacco High Conviction Call: Could Leave 2023 Guidance in the Dust
Appier (4180) | The Ups and Downs
% of Female Board Members Is a Measure of a Company’s Seriousness About Improving Its Practices

Cosmo Energy (5021) – Headed to an EGM Showdown for the Poison Pill

Japanese activist Murakami-san and Cosmo Energy Holdings (5021 JP) have been duking it out for 18 months. He now has 20%. Wants more. Management wants to exercise the poison pill.
Cosmo’s efforts are not completely honest, but Murakami-san’s efforts are clearly designed to benefit Murakami-san over general shareholders, and Cosmo has finally explained the reasons publicly. Read the doc (Japanese).
At 1.0x book, lower refining margins vs earlier in the year, and difficulty for Murakami-san to force the issue, one must take more care here than one did 40% ago.

Japan Tobacco High Conviction Call: Could Leave 2023 Guidance in the Dust

By Oshadhi Kumarasiri

Despite conservative 2023 guidance last quarter, Japan Tobacco (2914 JP) is primed to exceed expectations in the 3rd quarter of 2023.
Despite no new domestic price hikes, Japan Tobacco’s volume recovery post-hikes is expected to help sustain the revenue and profit growth momentum.
New price increases in the Philippines and the UK, coupled with last year’s hikes spillover, are expected to boost Japan Tobacco’s earnings; and the yen’s depreciation amplifies these gains.

Appier (4180) | The Ups and Downs

By Mark Chadwick

Appier’s stock initially surged 20% following strong Q2 results but later declined 25%, influenced by small-cap stock volatility, AI-induced valuations, and e-commerce sensitivity.
The AI company’s competitive position remains strong compared to Braze; the differing stock price performance and valuation suggests significant upside.
Appier’s thesis remains intact and we expect the company to benefit from key trends in consumer marketing, first-party data and AI solutions.

% of Female Board Members Is a Measure of a Company’s Seriousness About Improving Its Practices

The groups with over 30% female board members and 25%-30% have higher percentage of foreign shareholders, suggesting that overseas investor engagement drives raising the ratio and that awareness is high.
Groups with 0% female board members include small companies and are distant from overseas investor engagement, but are unlikely to improve practices substantially, given that they have no female executives.
The group with over 30% female board members had noticeably higher ROE and Tobin’sQ than those with 25%-30%, which suggests that the high ROE was highly valued by overseas investors.

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Oct 25

Daily Brief Japan: Kokusai Electric , Gs Yuasa Corp, Shimano Inc, Ryohin Keikaku and more

In today’s briefing:

Kokusai Electric IPO: Trading Debut
Solactive Global Lithium Index Rebalance: 45% Turnover & US$980m Trade
Shimano (7309) | A Clear Road Ahead
Ryohin Keikaku: Finally Fixing Its Biggest Weakness?

Kokusai Electric IPO: Trading Debut

By Arun George

Kokusai Electric (6525 JP) priced its IPO at JPY1,840 per share to raise secondary proceeds of US$723 million. The shares will start trading on 25 October.
We previously discussed the IPO in Kokusai Electric IPO: The Bull Case, Kokusai Electric IPO: The Bear Case and Kokusai Electric IPO: Lower Price Range Is Reasonable.
The peers have modestly derated since the lowered IPO price range was announced on 10 October. However, the IPO price remains attractive. Our DCF valuation is JPY2,058.

Solactive Global Lithium Index Rebalance: 45% Turnover & US$980m Trade

Solactive has announced the constituent changes for the Global Lithium Index. There are 8 adds and 9 deletes with implementation at the close on 31 October.
Estimated one-way turnover is in excess of 22% and will result in a one-way trade of US$490m. There are 11 stocks with estimated passive flows greater than 1x ADV.
The index is not very widely tracked and there could be big moves in stocks today and over the next few days – especially where there is multiple days ADV.

Shimano (7309) | A Clear Road Ahead

By Mark Chadwick

Shimano Q3 results show a 32% YoY net sales decline, led by a 38% drop in bike component sales, BUT both sales and profit beat expectations
The company maintains cost control, sees improving gross margins, and reduces inventories, while cash flow and balance sheet remain strong
With the upward revision in full-year guidance, we believe the market will look through the still challenging Q4 outlook and focus instead on 2024 normalization and relatively low valuation

Ryohin Keikaku: Finally Fixing Its Biggest Weakness?

By Michael Causton

Ryohin Keikaku’s biggest weakness is its unwieldy and expensive supply chains, with hundreds of suppliers across its three main categories of household, apparel and food.
The Muji operator just acquired a large team from one of its principle clothing supply partners, Mitsubishi, to finally streamline its supply chains and improve cost performance in clothing.
This should have a positive impact on its cost of goods, margins and inventory levels, allowing for quicker responses to trends at a lower price at home and overseas.

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Oct 24

Daily Brief Japan: Oriental Land, Nikkei 225, Kokusai Electric , TSE Tokyo Price Index TOPIX and more

In today’s briefing:

Oriental Land: Google Search Signals Potential Miss; Guidance Could Challenge Consensus Optimism
EQD | Nikkei 225 MONTHLY Rally May Be Finally Coming
Kokusai Electric IPO Trading – Decent Demand, Now for the Real Test
Companies with over 50% Independent Directors Have High Profitability and Stock Valuations

Oriental Land: Google Search Signals Potential Miss; Guidance Could Challenge Consensus Optimism

By Oshadhi Kumarasiri

During 2QFY24, Tokyo Disneyland and Tokyo DisneySea both saw a QoQ decline in Google search interest.
This suggests to us that there might be an earnings miss when Oriental Land (4661 JP) reports its FQ2 results on October 30, 2023.
Additionally, there are potential downside risks to both FY24 and medium-term consensus projections following a revised FY24 guidance announcement.

EQD | Nikkei 225 MONTHLY Rally May Be Finally Coming

By Nico Rosti

The Nikkei 225 (NKY) INDEX closed last week down at 31259.36. It’s currently trading between the Q2 and Q3 WEEKLY support levels and down for 4 months, so it’s OVERSOLD.
The index could reverse this week, or fall more into the end of October, but if this week closes down, the odds are very good for a rally in November.
Consider going LONG between here and supports in the 30600-30400 price area, a MONTHLY reversal could last at least 2-4 weeks (a month).

Kokusai Electric IPO Trading – Decent Demand, Now for the Real Test

By Sumeet Singh

KKR raised around US$730m via selling a stake in Kokusai Electric’s (6525 JP) (KE) Japan IPO.
KE main business activities consist of the manufacturing, sales and maintenance service of semiconductor manufacturing equipment.
In our previous notes we have looked at the company’s past performance, undertaken a peer comparison and looked at valuations. In this note, we talk about the trading dynamics.

Companies with over 50% Independent Directors Have High Profitability and Stock Valuations

While the number of companies with majority of independent directors is still small (15.7% of the Metrical Universe as of September 2023), the number of those companies is steadily increasing.
The group of companies with over 50% independent director are superior in market capitalization, ratio of foreign shareholders, ratio of female board members, ROE, ROA, Tobin’s Q, and Metrical Score.
Given that the presence of overseas investors remains high, profitability, share price valuation, and corporate governance practices such as independent director ratios will continue to improve in the future.

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Oct 23

Daily Brief Japan: Persol Holdings and more

In today’s briefing:

Japan – Increase in Shorts on Some Interesting** Stocks

Japan – Increase in Shorts on Some Interesting** Stocks

CyberAgent, Lixil Group, Hakuhodo Dy Holdings, Kobayashi Pharmaceutical, Welcia Holdings, Persol Holdings, Kurita Water Industries, GMO Payment Gateway, Keio Corp and NGK Insulators have underperformed the Nikkei225 over the recent past.
The underperformance could lead to adjustments in global passive portfolios and liquidity events on some of the stocks.
Short interest has increased on some stocks and there could be more pre-positioning to come over the next few weeks.

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Oct 22

Daily Brief Japan: Kurita Water Industries, Shinko Electric Industries, TSE Tokyo Price Index TOPIX and more

In today’s briefing:

Index Rebalance & ETF Flow Recap: NKY, ASX, Liontown, J&T Express, JP/IN Positioning, IndusInd Bank
Last Week In Event SPACE: Shinko Electric Industries, MGM China, Decente, Sankei Real Estate,
Challenge Is to Simultaneously Reduce Cash on Hand and Achieve Profitability over Cost of Capital

Index Rebalance & ETF Flow Recap: NKY, ASX, Liontown, J&T Express, JP/IN Positioning, IndusInd Bank

Light & Wonder (LNW US)/ Light & Wonder (LNW AU) replaced United Malt Group Ltd (UMG AU) in the S&P/ASX 200 (AS51 INDEX) last week.
Newcrest Mining (NCM AU) stops trading this week and should be replaced by Newmont Mining (NEM US) CDIs in the ASX indices.
Another week of ETF outflows for China with the largest outflows from trackers benchmarked to the CSI 1000 Index.

Last Week In Event SPACE: Shinko Electric Industries, MGM China, Decente, Sankei Real Estate,

By David Blennerhassett

If Descente Ltd (8114 JP) earnings disappoints, buy the dip. Itochu Corp (8001 JP) is buying for the long-term.
MGM China Holdings (2282 HK) has gained market share in mass table market, VIP, and total revenue. Yet MGM’s FY24E EV/EBITDA is ~40% below its two-year forward average EV/EBITDA pre-Covid.
If you had a J-REIT portfolio, Sankei Real Estate (2972 JP) would go in and push something else out or smaller. I think one gets beta-plus, which is usually called alpha.

Challenge Is to Simultaneously Reduce Cash on Hand and Achieve Profitability over Cost of Capital